KRNY 10-K 6/30/2009
Section 1: 10-K (FORM 10-K 6-30-09 KEARNY FINANCIAL CORP.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
xxxx
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended June 30, 2009
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to __________________
or
Commission File Number: 0-51093
KEARNY FINANCIAL CORP.
(Exact name of Registrant as specified in its Charter)
United States
(State or Other Jurisdiction of
Incorporation or Organization)
120 Passaic Avenue, Fairfield, New Jersey
(Address of Principal Executive Offices)
22-3803741
(I.R.S. Employer
Identification No.)
07004
(Zip Code)
Registrant’s telephone number, including area code: (973) 244-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.10 par value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o YES
x NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. o YES
x NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. x YES o NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). o YES o NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Accelerated filer x
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o YES
x NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant
on December 31, 2008 (the last business day of the Registrant’s most recently completed second fiscal quarter)
was $215.7 million. Solely for purposes of this calculation, shares held by directors, executive officers and greater
than 10% stockholders are treated as shares held by affiliates.
As of September 4, 2009 there were outstanding 69,176,900 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the definitive Proxy Statement for the Registrant’s 2009 Annual Meeting of Stockholders.
(Part III)
KEARNY FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2009
INDEX
PART I
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director
Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits, Financial Statement Schedules
PART IV
SIGNATURES
i
Page
3
45
50
51
53
53
54
57
59
88
95
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96
96
96
97
97
98
Forward-Looking Statements
Kearny Financial Corp. (the “Company” or the “Registrant”) may from time to time make written or oral
“forward-looking statements”, including statements contained in the Company’s filings with the Securities and
Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good faith by the Company
pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as statements of the
Company’s plans, objectives, expectations, estimates and intentions that are subject to change based on various
important factors (some of which are beyond the Company’s control). In addition to the factors described under
Item 1A. Risk Factors, the following factors, among others, could cause the Company’s financial performance to
differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-
looking statements: the strength of the United States economy in general and the strength of the local economy
in which the Company conducts operations; the effects of and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation,
interest rates, market and monetary fluctuations; the impact of changes in financial services laws and regulations
(including laws concerning taxation, banking, securities and insurance); changes in accounting policies and
practices, as may be adopted by regulatory agencies, the Financial Accounting Standards Board (“FASB”) or
the Public Company Accounting Oversight Board; technological changes; competition among financial services
providers; and the success of the Company at managing the risks involved in the foregoing and managing its
business.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does
not undertake to update any forward-looking statement, whether written or oral, that may be made from time to
time by or on behalf of the Company.
2
PART I
Item 1. Business
General
The Company is a federally-chartered corporation that was organized on March 30, 2001 for the purpose
of being a holding company for Kearny Federal Savings Bank (the “Bank”), a federally-chartered stock savings
bank. On February 23, 2005, the Company completed a minority stock offering in which it sold 21,821,250 shares,
representing 30% of its outstanding common stock upon completion of the offering. The remaining 70% of the
outstanding common stock, totaling 50,916,250 shares, were retained by Kearny MHC (the “MHC”). The MHC is
a federally-chartered mutual holding company and so long as the MHC is in existence, it will at all time own a
majority of the outstanding common stock of the Company. The stock repurchase programs conducted by the
Company since the offering have reduced the total number of shares outstanding. The 50,916,250 shares held by
the MHC represented 73.5% of the total shares outstanding as of the Company’s June 30, 2009 fiscal year end.
The MHC and the Company are regulated by the Office of Thrift Supervision (“OTS”).
The Company is a unitary savings and loan holding company and conducts no significant business or
operations of its own. References in this Annual Report on Form 10-K to the Company or Registrant generally
refer to the Company and the Bank, unless the context indicates otherwise. References to “we”, “us”, or “our”
refer to the Bank or Company, or both, as the context indicates.
The Bank was originally founded in 1884 as a New Jersey mutual building and loan association. It
obtained federal insurance of accounts in 1939 and received a federal charter in 1941. The Bank’s deposits are
federally insured by the Deposit Insurance Fund as administered by the Federal Deposit Insurance Corporation
(“the FDIC”) and the Bank is regulated by the OTS and the FDIC.
The Company’s primary business is the ownership and operation of the Bank. The Bank is principally
engaged in the business of attracting deposits from the general public in New Jersey and using these deposits,
together with other funds, to originate or purchase loans for its portfolio and invest in securities. Loans
originated or purchased by the Bank generally include loans collateralized by residential and commercial real
estate augmented by secured and unsecured loans to businesses and consumers. The investment securities
purchased by the Bank generally include U.S. agency mortgage-backed securities, U.S. government and agency
debentures and bank-qualified municipal obligations. The Bank maintains a small balance of single issuer trust
preferred securities and non-agency mortgage-backed securities which were acquired through the Company’s
purchase of other institutions and does not actively purchase such securities. At June 30, 2009, net loans
receivable comprised 48.9% of our total assets while securities (mortgage-backed securities and non-mortgage-
backed) comprised 33.7% of our total assets. By comparison, at June 30, 2008, net loans receivable comprised
49.0% of our total assets while securities comprised 36.7% of our total assets. It is our intention to continue
increasing the balance of our loan portfolio relative to the size of our securities portfolio.
We operate from an administrative headquarters in Fairfield, New Jersey and as of June 30, 2009 had 26
branch offices. We also operate an Internet website at www.kearnyfederalsavings.com. As of June 30, 2009, we
had 263 full-time employees and 21 part-time employees.
Market Area. Our primary market area consists of the New Jersey counties in which we currently
operate branches: Bergen, Essex, Hudson, Middlesex, Morris, Ocean, Passaic and Union Counties. We also
consider Monmouth County, New Jersey to be part of our market area. Our lending is
3
concentrated in these nine counties and our predominant sources of deposits are the communities in which our
offices are located as well as the neighboring communities.
Our primary market area is largely urban and suburban with a broad economic base as is typical within
the New York metropolitan area. Service jobs represent the largest employment sector followed by
wholesale/retail trade.
Our business of attracting deposits and making loans is primarily conducted within our market area. A
downturn in the local economy could reduce the amount of funds available for deposit and the ability of
borrowers to repay their loans which would adversely affect our profitability.
Competition. We operate in a market area with a high concentration of banking and financial
institutions and we face substantial competition in attracting deposits and in originating loans. A number of our
competitors are significantly larger institutions with greater financial and managerial resources and lending limits.
Our ability to compete successfully is a significant factor affecting our growth potential and profitability.
Our competition for deposits and loans historically has come from other insured financial institutions
such as local and regional commercial banks, savings institutions and credit unions located in our primary market
area. We also compete with mortgage banking and finance companies for real estate loans and with commercial
banks and savings institutions for consumer loans and we face competition for funds from investment products
such as mutual funds, short-term money market funds and corporate and government securities. There are large
competitors operating throughout our total market area, including Bank of America, Citibank, Hudson City
Savings Bank, JP Morgan Chase Bank, PNC Bank, TD Bank, and Wells FargoBank and we face strong
competition from other community-based financial institutions. Based on data compiled by the FDIC as of June
30, 2008, the latest date for which such data is available, Kearny Federal Savings Bank was ranked 17th of 115
depository institutions operating in the eight counties in which it has branches with 0.97% of total FDIC-insured
deposits. By comparison, as of June 30, 2007, the Bank was ranked 20th of 119 depository institutions.
4
Lending Activities
General. We have traditionally focused on the origination of one-to-four family loans, which comprise a
significant majority of our total loan portfolio. Our next largest category of lending is commercial real estate,
which includes multi-family dwellings, mixed-use properties and other commercial properties. We also offer
consumer loans (primarily composed of home equity loans and home equity lines of credit), construction loans
(to builders and developers as well as to individual homeowners) and commercial business loans, generally
secured by real estate. Substantially all of our borrowers are residents of our primary market area and would be
expected to be similarly affected by economic and other conditions in that area. Since May 2007, we have been
purchasing out-of-state one-to-four family first mortgage loans to supplement our in-house originations, as
discussed on Page 12.
2009
2008
At June 30,
2007
2006
2005
Amount
Percent Amount
Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
$
689,317 65.97% $
687,679
66.99% $ 559,306
64.66% $ 465,822
65.80% $ 382,766 68.03%
197,379 18.89
1.42
14,812
178,588
8,735
17.40 159,147
4,205
0.85
18.40 107,111
3,208
0.48
15.13 96,685 17.19
0.52
0.45
2,930
113,387 10.85
1.16
12,116
0.28
2,922
0.15
1,585
1.28
13,367
9.63
2.64
0.50
0.05
1.44
1,044,885 100.00% 1,026,514 100.00% 865,031 100.00% 707,977 100.00% 562,619 100.00%
12.08 113,624
1.12 12,748
3,250
0.26
0.13
1,391
1.17 11,360
13.23 54,199
1.83 14,850
2,831
0.41
264
0.03
8,094
3.12
13.14 93,639
1.47 12,988
2,884
0.38
0.16
247
1.31 22,078
123,978
11,478
2,662
1,332
12,062
Real estate mortgage:
One-to-four family
Multi-family and
commercial
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Passbook or certificate
Other
Construction
Total loans
Less:
Allowance for loan losses
Deferred loan (costs)
and fees, net
6,434
(962)
5,472
6,104
(1,276)
4,828
6,049
(1,511)
4,538
5,451
(1,087)
4,364
5,416
(815)
4,601
Total loans, net
$ 1,039,413
$ 1,021,686
$ 860,493
$ 703,613
$ 558,018
5
Loan Maturity Schedule. The following table sets forth the maturities of our loan portfolio at June 30,
2009. Demand loans, loans having no stated maturity and overdrafts are shown as due in one year or less. Loans
are stated in the following table at contractual maturity and actual maturities could differ due to prepayments.
Real estate
mortgage:
One-to-four
family
Real estate
mortgage:
Multi-family
and
commercial
Commercial
business
Home
equity
loans
Home
equity
lines of
credit
(In Thousands)
Passbook
or
certificate Other Construction
Total
$
38 $
371 $
5,484 $
230 $
3 $
1,319 $
96 $
13,367 $
20,908
1,082
9,731
72,634
140,839
464,993
198
1,277
8,750
34,016
152,767
426
—
97
2,964
5,841
2,416
145
4,603 —
30,083 2,723
37,529 8,358
887
38,526
174 —
9
24
— —
— —
1,405 1,480
—
—
—
—
—
4,441
15,644
114,287
223,706
665,899
689,279
197,008
9,328
113,157 12,113
1,603 1,489
—
1,023,977
Amounts Due:
Within 1 Year
After 1 year:
1 to 3 years
3 to 5 years
5 to 10 years
10 to 15 years
Over 15 years
Total due after one
year
Total amount due
$
689,317 $
197,379 $
14,812 $ 113,387 $ 12,116 $
2,922 $
1,585 $
13,367 $
1,044,885
6
The following table shows the dollar amount of loans as of June 30, 2009 due after June 30, 2010
according to rate type and loan category.
Real estate mortgage:
One-to-four family
Multi-family and commercial
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Passbook or certificate
Other
Construction
Total
Fixed Rates
Floating or
Adjustable
Rates
(In Thousands)
$
$
$
612,361
167,575
6,275
113,157
2,866
—
307
—
76,918
29,433
3,053
—
9,247
1,603
1,182
—
Total
689,279
197,008
9,328
113,157
12,113
1,603
1,489
—
$
902,541
$
121,436
$
1,023,977
One-to-Four Family Mortgage Loans. Our primary lending activity consists of the origination of one-
to-four family first mortgage loans, of which approximately $583.5 million or 84.7% are secured by properties
located within New Jersey as of June 30, 2009. By comparison, at June 30, 2008 approximately $618.8 million or
90.0% of loans were secured by New Jersey properties. During the year ended June 30, 2009, the Bank originated
$79.4 million of one-to-four family first mortgage loans within New Jersey compared to $99.1 million in the year
ended June 30, 2008. The decrease in one-to-four family first mortgage loan originations year-over-year, was due
primarily to the lack of demand resulting from the troubled economy as well as management’s decision to
maintain a disciplined pricing policy, which may have caused some potential borrowers to seek financing with
more aggressive lenders. To supplement originations, we also purchased one-to-four family first mortgages
totaling $67.7 million during the year ended June 30, 2009, compared to $102.2 million during the year ended June
30, 2008.
We will originate a one-to-four family mortgage loan on an owner-occupied property with a principal
amount of up to 95% of the lesser of the appraised value or the purchase price of the property, with private
mortgage insurance required if the loan-to-value ratio exceeds 80%. Our loan-to-value limit on a non-owner-
occupied property is 75%. Loans in excess of $1.0 million are handled on a case-by-case basis and are subject to
lower loan-to-value limits, generally no more than 50%.
Our fixed-rate and adjustable-rate residential mortgage loans on owner-occupied properties have terms
of ten to 30 years. Residential mortgage loans on non-owner-occupied properties have terms of up to 15 years
for fixed-rate loans and terms of up to 20 years for adjustable-rate loans. We also offer ten-year balloon
mortgages with a thirty-year amortization schedule on owner-occupied properties and a twenty-year amortization
schedule on non-owner-occupied properties.
Our adjustable-rate loan products provide for an interest rate that is tied to the one-year Constant
Maturity U.S. Treasury index and have terms of up to 30 years with initial fixed-rate periods of one, three, five,
seven, or ten years according to the terms of the loan and annual rate adjustment thereafter. We also offer an
adjustable-rate loan with a term of up to 30 years with a rate that adjusts every five years to the
7
five-year Constant Maturity U.S. Treasury index. There is a 200 basis point limit on the rate adjustment in any
adjustment period and the rate adjustment limit over the life of the loan is 600 basis points.
We offer a first-time homebuyer program for persons who have not previously owned real estate and
are purchasing a one-to-four family property in Bergen, Passaic, Morris, Essex, Hudson, Middlesex, Monmouth,
Ocean and Union Counties, New Jersey for use as a primary residence. This program is also available outside
these areas only to persons who are existing deposit or loan customers of Kearny Federal Savings Bank and/or
members of their immediate families. The financial incentives offered under this program are a one-eighth of one
percent rate reduction on all first mortgage loan types and the refund of the application fee at closing.
The fixed-rate mortgage loans that we originate generally meet the secondary mortgage market
standards of the Federal Home Loan Mortgage Corporation (“Freddie Mac”). However, as our focus is on
increasing the size of the loan portfolio, we generally do not sell loans in the secondary market and do not
currently anticipate that we will commence doing so in any large capacity. There were no residential mortgage
loan sales in the secondary market during the last three fiscal years.
Substantially all of our residential mortgages include “due on sale” clauses, which give us the right to
declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a
third party. Property appraisals on real estate securing our one-to-four family first mortgage loans are made by
state certified or licensed independent appraisers approved by the Bank’s Board of Directors. Appraisals are
performed in accordance with applicable regulations and policies. We require title insurance policies on all first
mortgage real estate loans originated. Homeowners, liability and fire insurance and, if applicable, flood insurance,
are also required.
Multi-Family and Commercial Real Estate Mortgage Loans. We also originate mortgage loans on
multi-family and commercial real estate properties, including loans on apartment buildings, retail/service
properties and other income-producing properties, such as mixed-use properties combining residential and
commercial space. The Bank originated $36.7 million of multi-family and commercial real estate mortgages during
the year ended June 30, 2009, compared to $44.9 million during the year ended June 30, 2008. Though the Bank’s
business plan calls for an increased emphasis on originating these types of mortgages, the lack of demand due
to the troubled economy resulted in a decrease in originations, year-over-year. Since our prepayments were not
excessive, the portfolio continued to grow despite a decrease in the volume of originations.
We generally require no less than a 25% down payment or equity position for mortgage loans on multi-
family and commercial real estate properties. For such loans, we generally require personal guarantees. Currently,
these loans are made with a maturity of up to 25 years. We also offer a five-year balloon loan with a twenty five-
year amortization schedule. Our multi-family and commercial real estate mortgage loans are secured by properties
located in New Jersey.
Multi-family and commercial real estate mortgage loans generally are considered to entail significantly
greater risk than that which is involved with one-to-four family, owner-occupied real estate lending. The
repayment of these loans typically is dependent on the successful operations and income stream of the borrower
and the real estate securing the loan as collateral. These risks can be significantly affected by economic
conditions. In addition, multi-family and commercial real estate mortgage loans generally carry larger balances to
single borrowers or related groups of borrowers than one-to-four family mortgage loans. Multi-family and
commercial real estate lending typically requires substantially greater evaluation and oversight efforts compared
to residential real estate lending.
8
Commercial Business Loans. We also originate commercial term loans and lines of credit to a variety of
professionals, sole proprietorships and small businesses in our market area. During the year ended June 30, 2009,
the Bank originated $8.0 million of commercial business loans compared to $7.6 million during the year ended
June 30, 2008. The Bank’s business plan also calls for an increased emphasis on originating these types of
mortgages; despite the troubled economy, there was a nominal increase in commercial business loan originations
reflecting a favorable pricing environment for these types of loans.
These loans are normally secured by real estate and we require personal guarantees on all commercial
loans. Approximately 74.3% of our commercial business loans are secured by one-to-four family properties and
approximately 25.5% are secured by commercial real estate and other forms of collateral. Only 0.2% of the loans
are unsecured. Marketable securities may also be accepted as collateral on lines of credit, but with a loan to
value limit of 50%. The loan to value limit on secured commercial lines of credit and term loans is otherwise
generally limited to 70%. We also make unsecured commercial loans in the form of overdraft checking
authorization up to $25,000 and unsecured lines of credit up to $25,000.
Our commercial term loans generally have terms of up to 20 years and are mostly fixed-rate loans. Our
commercial lines of credit have terms of up to two years and are generally adjustable-rate loans. We also offer a
one-year, interest-only commercial line of credit with a balloon payment.
Unlike single-family, owner-occupied residential mortgage loans, which generally are made on the basis
of the borrower’s ability to make repayment from his or her employment and other income and which are secured
by real property whose value tends to be more easily ascertainable, commercial business loans typically are
made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As
a result, the availability of funds for the repayment of commercial business loans may be substantially dependent
on the success of the business itself and the general economic environment. Commercial business loans,
therefore, have greater credit risk than residential mortgage loans. In addition, commercial loans generally carry
larger balances to single borrowers or related groups of borrowers than one-to-four family first mortgage loans.
Commercial lending requires substantially greater evaluation and oversight efforts compared to residential or
commercial real estate lending.
Home Equity Loans and Lines of Credit. Our home equity loans are fixed-rate loans for terms of
generally up to 20 years. We also offer fixed-rate and adjustable-rate home equity lines of credit with terms of up
to 15 years. During the year ended June 30, 2009, the Bank originated $31.0 million of home equity loans and
home equity lines of credit compared to $45.0 million in the year ended June 30, 2008. The decrease in
originations was due primarily to the depressed economy as well as a general decline in the value of residential
real estate.
Collateral value is determined through an automated valuation module, specifically, Freddie Mac’s
Home Valuation Explorer, or property value analysis report provided by a state certified or licensed independent
appraiser. In some cases, we determine collateral value by a full appraisal performed by a state certified or
licensed independent appraiser. Home equity loans and lines of credit do not require title insurance but do
require homeowner, liability and fire insurance and, if applicable, flood insurance.
Home equity loans and fixed-rate home equity lines of credit are generally originated in our market area
and are generally made in amounts of up to 80% of value on term loans and of up to 75% of value on home
equity adjustable-rate lines of credit. We originate home equity loans secured by either a first lien or a second
lien on the property.
9
Other Consumer Loans. In addition to home equity loans and lines of credit, our consumer loan
portfolio includes loans secured by savings accounts and certificates of deposit on deposit with the Bank,
automobile loans and unsecured personal overdraft loans. We will generally lend up to 90% of the account
balance on a loan secured by a savings account or certificate of deposit.
Consumer loans entail greater risks than residential mortgage loans, particularly consumer loans that are
unsecured. Consumer loan repayment is dependent on the borrower’s continuing financial stability and is more
likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The application of various
federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be
recovered on consumer loans in the event of a default.
Our underwriting standards for consumer loans include a determination of the applicant’s credit history
and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.
The stability of the applicant’s monthly income may be determined by verification of gross monthly income from
primary employment and any additional verifiable secondary income.
Construction Lending. Our construction lending includes loans to individuals for construction of one-
to-four family residences or for major renovations or improvements to an existing dwelling. Our construction
lending also includes loans to builders and developers for multi-unit buildings or multi-house projects. All of our
construction lending is in New Jersey. During the year ended June 30, 2009, construction loan originations
and/or disbursements were $5.4 million compared to $5.6 million during the year ended June 30, 2008. For the
thirdyear in a row, there was a decrease in construction loan originations and/or disbursements year-over-year,
due to the lack of demand resulting from the depressed economy.
Construction borrowers must hold title to the land free and clear of any liens. Financing for
construction loans is limited to 80% of the anticipated appraised value of the completed property. Disbursements
are made in accordance with inspection reports by our approved appraisal firms. Terms of financing are limited to
one year with an interest rate tied to the prime rate published in the Wall Street Journal and may include a
premium of one or more points. In some cases, we convert a construction loan to a permanent mortgage loan
upon completion of construction.
We have no formal limits as to the number of projects a builder has under construction or development
and make a case-by-case determination on loans to builders and developers who have multiple projects under
development. The Board of Directors reviews the Bank’s business relationship with a builder or developer prior
to accepting a loan application for processing. We generally do not make construction loans to builders on a
speculative basis. There must be a contract for sale in place. Financing is provided for up to two houses at a time
in a multi-house project, requiring a contract on one of the two houses before financing for the next house may
be obtained.
Construction lending is generally considered to involve a higher degree of credit risk than mortgage
lending. If the initial estimate of construction cost proves to be inaccurate, we may be compelled to advance
additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate
project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a
project prior to completion, there is no assurance that we will be able to recover the entire unpaid portion of the
loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the
property for an indeterminate period.
Loans to One Borrower. Federal law generally limits the amount that a savings institution may lend to
one borrower to the greater of $500,000 or 15% of the institution’s unimpaired capital and surplus. Accordingly,
as of June 30, 2009, our loans-to-one-borrower limit was approximately $54.1 million.
10
At June 30, 2009, our largest single borrower had an aggregate loan balance of approximately $14.0
million, representing four mortgage loans secured by commercial real estate. Our second largest single borrower
had an aggregate loan balance of approximately $11.0 million, representing nine loans secured by commercial real
estate, two residential construction loans and one residential loan. Our third largest borrower had an aggregate
loan balance of approximately $10.0 million, representing two loans secured by commercial real estate. At June
30, 2009, all of these lending relationships were current and performing in accordance with the terms of their loan
agreements. By comparison, at June 30, 2008, loans outstanding to the Bank’s three largest borrowers totaled
approximately $14.9 million, $10.7 million and $10.0 million, respectively.
Loan Originations, Purchases, Sales, Solicitation and Processing. The following table shows total
loans originated, purchased and repaid during the periods indicated.
Loan originations and purchases:
Loan originations:
Real estate mortgage:
One-to-four family
Multi-family and commercial
Commercial business
Construction
Consumer:
Home equity loans and lines of credit
Passbook or certificate
Other
Total loan originations
Loan purchases:
Real estate mortgage:
One-to-four family
Multi-family and commercial
Total loan purchases
Loan principal repayments
Increase due to other items
For the Years Ended June 30,
2009
2008
2007
(In Thousands)
$
79,413 $
36,700
8,002
5,374
99,113 $
44,854
7,622
5,569
31,034
1,506
792
162,821
67,698
—
67,698
(213,131)
339
44,992
1,504
334
203,988
102,228
—
102,228
(145,959)
936
67,158
62,948
4,604
6,268
51,437
1,802
1,553
195,770
97,521
—
97,521
(136,669)
258
Net increase in loan portfolio
$
17,727 $
161,193 $
156,880
Our customary sources of loan applications include repeat customers, referrals from realtors and other
professionals and “walk-in” customers. Our residential loan originations are largely advertising driven.
We primarily originate our own loans and retain them in our portfolio. Gross loan originations totaled
$162.8 million for the year ended June 30, 2009. Principal repayments exceeded originations by $50.3 million
during fiscal 2009 due primarily to the lack of demand resulting from the troubled economy as well as
management’s decision to maintain a disciplined pricing policy, which may have caused some potential
borrowers to seek financing with more aggressive lenders. As part of our loan growth strategy, we generally do
not sell loans in the secondary market and do not currently anticipate that we will commence doing so in any
large capacity. During the year ended June 30, 2009, we were approached by
11
a financial institution currently servicing loans for the Bank, which was interested in terminating the servicing
arrangement. The servicer agreed to repurchase the small portfolio of mortgages totaling $8.4 million at par. The
repurchased loans are reported in the “loan principal repayments” line in the table on Page 11.
The Bank maintains loan purchase and servicing agreements with three large nationwide lenders, in
order to supplement the Bank’s loan production pipeline. The original agreements called for the purchase of loan
pools that contain mortgages on residential properties in our lending area. Subsequently, we expanded our loan
purchase and servicing agreements with the same nationwide lenders to include mortgage loans secured by
residential real estate located outside of New Jersey. We have procedures in place for purchasing these
mortgages such that the underwriting guidelines are consistent with those used in our in-house loan origination
process. The evaluation and approval process ensures that the purchased loans generally conform to our normal
underwriting guidelines. Our due diligence process includes full credit reviews and an examination of the title
policy and associated legal instruments. We recalculate debt service and loan-to-value ratios for accuracy and
review appraisals for reasonableness. All loan packages presented to the Bank must meet the Bank’s
underwriting requirements as outlined in the purchase and servicing agreements and are subject to the same
review process outlined above. Furthermore, there are stricter underwriting guidelines in place for out-of-state
mortgages, including higher minimum credit scores. During the year ended June 30, 2009, we purchased a total of
$50.3 million fixed-rate loans from these sellers.
Once we purchase the loans, we continually monitor the seller’s performance by thoroughly reviewing
portfolio balancing reports, remittance reports, delinquency reports and other data supplied to us on a monthly
basis. We also review the seller’s financial statements and documentation as to their compliance with the
servicing standards established by the Mortgage Bankers Association of America.
Since May 2007, we have been purchasing out-of-state one-to-four family first mortgage loans to
supplement our in-house originations. As of June 30, 2009, our portfolio of out-of-state loans included
mortgages in 30 states and totaled $105.8 million. The largest concentrations of loans at June 30, 2009 are located
in the states of Washington and Georgia, totaling $11.7 million and $10.3 million, respectively.
The Bank also enters into purchase agreements with a limited number of smaller, local mortgage
companies to supplement the Bank’s loan production pipeline. These agreements call for the purchase, on a flow
basis, of one-to-four family first mortgage loans with servicing released to the Bank. During the year ended June
30, 2009, we purchased a total of $7.8 million adjustable-rate loans, $9.1 million of fixed-rate loans and $480,000 of
balloon loans from these companies.
In addition to purchasing one-to-four family loans, we also occasionally purchase participations in
loans originated by other banks and through the Thrift Institutions Community Investment Corporation of New
Jersey (“TICIC”), a subsidiary of the New Jersey Bankers Association. Our TICIC participations generally
include multi-family and commercial real estate properties. The aggregate balance of TICIC participations at June
30, 2009 was $8.5 million and the average balance of a single participation was approximately $259,000. Both were
virtually unchanged from June 30 2008, with additional loan disbursements generally offset by principal
repayments. At June 30, 2009, we had five non-TICIC participations with an aggregate balance of $11.3 million,
consisting of loans on commercial real estate properties, including a medical center, a self-storage facility, a
shopping plaza and commercial buildings with a combination of retail and office space and a construction loan to
build townhouses. By comparison, at June 30, 2008 non-TICIC participations totaled $14.2 million. During the
year ended June 30, 2009, the Bank did not purchase any loan participations originated by other banks.
12
Loan Approval Procedures and Authority. Senior management recommends and the Board of
Directors approves our lending policies and loan approval limits. Our Chief Lending Officer may approve loans
up to $750,000. Loan department personnel of the Bank serving in the following positions may approve loans as
follows: mortgage loan managers, mortgage loans up to $500,000; mortgage loan underwriters, mortgage loans up
to $250,000; consumer loan managers, consumer loans up to $250,000; and consumer loan underwriters,
consumer loans up to $150,000. In addition to these principal amount limits, there are established limits for
different levels of approval authority as to minimum credit scores and maximum loan to value ratios and debt
ratios. Our Chief Executive Officer, Chief Financial Officer and Chief Investment Officer have authorization to
countersign loans for amounts that exceed $750,000 up to a limit of $1.0 million. Our Chief Lending Officer must
approve loans between $750,000 and $1.0 million along with one of these designated officers. Non-conforming
mortgage loans and loans over $1.0 million require the approval of the Board of Directors.
Asset Quality
Loan Delinquencies and Collection Procedures. The Company regularly monitors the payment status
of all loans within its portfolio and promptly initiates collections efforts on past due loans in accordance with
applicable policies and procedures. Delinquent borrowers are notified by both mail and telephone when a loan is
30 days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower
and additional collection notices and letters are sent. All reasonable attempts are made to collect from borrowers
prior to referral to an attorney for collection. However, when a loan is 90 days delinquent, it is our general
practice to refer it to an attorney for repossession, foreclosure or other form of collection action, as appropriate.
In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his or her financial affairs and we attempt to work with the borrower to establish a
repayment schedule to cure the delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or
refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to
satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified
as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded
at its fair market value less estimated selling costs. The initial write-down of the property, if necessary, is charged
to the allowance for loan losses. Adjustments to the carrying value of the properties that result from subsequent
declines in value are charged to operations in the period in which the declines are identified. At June 30, 2009, we
held real estate owned totaling $109,000, consisting of one parcel of vacant land currently under a contract of
sale. The buyer is awaiting site plan approvals.
Loans are generally placed on non-accrual status when they are more than 90 days delinquent, with the
exception of passbook loans. When a passbook loan becomes 120 days delinquent, we collect the outstanding
balance of the loan from the related passbook account along with accrued interest (and a penalty is charged if
the account securing the loan is a certificate of deposit). Loans may be placed on a non-accrual status at any
time if, in the opinion of management, repayment of the loan in accordance with its stated terms is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.
Subsequent payments are applied in accordance with the promissory note. At June 30, 2009, we had
approximately $8.1 million of loans that were held on a non-accrual basis compared to $1.6 million at June 30,
2008.
13
Non-Performing Assets. The following table provides information regarding the Bank’s non-performing
loans and real estate owned. At each of the dates indicated, we did not have any troubled debt restructurings.
At June 30,
2009
2008
2007
2006
2005
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Real estate mortgage:
One- to four-family
Multi-family and commercial
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Other
Construction
Total
Accruing loans which are contractually
past due 90 days or more:
Real estate mortgage:
One- to four-family
Multi-family and commercial
Commercial business
Consumer:
Home equity loans and lines of credit
Passbook or certificate
Other
Construction
Total
$ 2,120
5,626
—
$
530
1,012
—
$
472
1,017
—
$
329
592
—
$
846
1,004
31
27
—
—
362
8,135
5,017
—
—
—
—
—
—
—
5,017
31
—
—
—
1,573
—
—
—
—
—
—
—
—
—
—
—
—
—
1,489
—
—
—
—
—
—
—
—
21
—
—
—
942
—
—
—
—
—
—
—
—
20
17
4
—
1,922
—
—
—
—
—
—
—
—
Total non-performing loans
Real estate owned
Other non-performing assets
Total non-performing assets
Total non-performing loans to total loans
Total non-performing loans to total assets
Total non-performing assets to total assets
$ 13,152
$
109
$ —
$ 13,261
$
$
$
$
1,573
109
—
1,682
$
$
$
$
1,489
109
—
1,598
$
$
$
$
942
109
—
1,051
$
$
$
$
1,922
209
—
2,131
1.26 %
0.62 %
0.62 %
0.15%
0.08%
0.08%
0.17%
0.08%
0.08%
0.13%
0.05%
0.05%
0.34%
0.09%
0.10%
Non-performing assets increased by $11.6 million from $1.7 million at June 30, 2008 to $13.3 million at
June 30, 2009 and comprised a net increase in non-accrual loans of $6.6 million plus the addition of $5.0 million of
loans 90 days or more past due and still accruing. For those same comparative periods, the number of nonaccrual
loans increased by eight from 13 to 21 loans while the number of loans 90 days or more past due and still
accruing increased to 12 loans from none reported in the earlier comparative period.
14
The net increase in number and balance of nonaccrual loans was primarily attributable to the addition of
three commercial mortgage loans with total outstanding balances of $4.6 million at June 30, 2009. The increase in
nonaccrual loans also included the addition of nine residential mortgage loans and two construction loans with
outstanding balances of $2.0 million and $362,000, respectively, at June 30, 2009. The additional nonaccrual loans
are in various stages of collection, workout or foreclosure and are secured by New Jersey properties whose
values at June 30, 2009 are estimated to equal or exceed the outstanding balances of the loans at that date.
Partially offsetting this increase were six loans reported as nonaccrual at June 30, 2008 that either reinstated or
paid off during the year.
As noted, the additions to nonperforming loans also include 12 accruing loans totaling $5.0 million
reported as 90 days or more past due. These loans represent residential mortgage loans secured by New Jersey
properties that were purchased from a nationwide mortgage loan originator and continue to be serviced by that
organization. In accordance with our agreement, the servicer advances scheduled principal and interest
payments to the Bank when such payments are not made by the borrower. The timely receipt of principal and
interest from the servicer ensures the continued accrual status of the Bank’s loan. However, the delinquency
status reported for these nonperforming loans reflects the borrower’s actual delinquency irrespective of the
Bank’s receipt of advances which will be recouped by the servicer from the Bank in the event the borrower does
not reinstate the loan. Based upon updated collateral valuations, the Bank has established specific valuation
allowances of $150,000 for the identified impairment attributable to two of these 12 loans at June 30, 2009.
During the years ended June 30, 2009, 2008 and 2007, gross interest income of $591,000, $105,000 and
$111,000, respectively, would have been recognized on loans accounted for on a non-accrual basis if those loans
had been current. Interest income recognized on such loans of $134,000, $47,000 and $45,000 was included in
income for the years ended June 30, 2009, 2008 and 2007, respectively.
Loan Review System. The Company maintains a loan review system consisting of several related
functions including, but not limited to, classification of assets, calculation of the allowance for loan losses,
independent credit file review as well as internal audit and lending compliance reviews. The Company utilizes
both internal and external resources, where appropriate, to perform the various loan review functions. For
example, the Company has engaged the services of a third party firm specializing in loan review and analysis to
perform several loan review functions. This firm reviews the loan portfolio in accordance with the scope and
frequency determined by senior management and the Asset Quality Committee of the Board of Directors. The
third party loan review firm assists senior management and the board of directors in identifying potential credit
weaknesses; in appropriately grading or adversely classifying loans; in identifying relevant trends that affect the
collectability of the portfolio and identify segments of the portfolio that are potential problem areas; in verifying
the appropriateness of the allowance for loan losses; in evaluating the activities of lending personnel including
compliance with lending policies and the quality of their loan approval, monitoring and risk assessment; and by
providing an objective assessment of the overall quality of the loan portfolio. Currently, independent loan
reviews are being conducted quarterly and include non-performing loans as well as samples of performing loans
of varying types within the Company’s portfolio.
15
The Company’s loan review system also includes the internal audit and compliance functions, which
operate in accordance with a scope determined by the Audit and Compliance Committees of the Board of
Directors. Internal audit resources assess the adequacy of, and adherence to, internal credit policies and loan
administration procedures. Similarly, the Company’s compliance resources monitor adherence to relevant
lending-related and consumer protection-related laws and regulations. The loan review system is structured in
such a way that the internal audit function maintains the ability to independently audit other risk monitoring
functions without impairing its independence with respect to these other functions.
As noted, the loan review system also comprises the Company’s policies and procedures relating to the
regulatory classification of assets and the allowance for loan loss functions each of which are described in
greater detail below.
Classification of Assets. Management, in compliance with the OTS guidelines has instituted an internal
loan review program, whereby non-performing loans are classified special mention, substandard, doubtful or
loss. It is our policy to review the loan portfolio in accordance with regulatory classification procedures,
generally on a monthly basis. When a loan is classified as substandard or doubtful, management is required to
evaluate the loan for impairment. When management classifies a portion of a loan as loss, a specific valuation
allowance equal to 100% of the loss amount must be established or the loan is charged-off against an
existing specific valuation allowance.
An asset is classified as “Substandard” if it is inadequately protected by the paying capacity and net
worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the
distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets
classified as “Doubtful” have all of the weaknesses inherent in those classified as “Substandard”, with the
added characteristic that the weaknesses present make collection or liquidation in full highly questionable and
improbable, on the basis of currently existing facts, conditions and values. Assets, or portions thereof, classified
as “Loss” are considered uncollectible or of so little value that their continuance as assets is not warranted.
Assets classified as “Loss” are either charged off against an existing specific valuation allowance or a specific
valuation allowance equal to 100% of the loss amount must be established.
Assets which do not currently expose the Company to a sufficient degree of risk to warrant an adverse
classification but have some credit deficiencies or other potential weaknesses are designated as “Special
Mention” by management. Adversely classified assets, together with those rated as “Special Mention”, are
generally referred to as “Classified Assets”. Non-classified assets are rated as either “Pass” or “Watch” with the
latter denoting a potential deficiency or concern that warrants increased oversight or tracking by management
until remediated.
Management performs a classification of assets review, including the regulatory classification of assets,
generally on a monthly basis. The results of the classification of assets review are validated by the Company’s
third party loan review firm during their quarterly, independent review. In the event of a difference in rating or
classification between those assigned by the internal and external resources, the Company will generally utilize
the more critical or conservative rating or classification. Final loan ratings and regulatory classifications are
presented monthly to the Board of Directors and are reviewed by regulators during the examination process.
16
The following table discloses our designation of certain loans as special mention or adversely classified
during each of the five years presented. See Page 30 for a discussion on classified securities.
At June 30,
2009
2008
2007
2006
2005
(Dollars in Thousands)
Special Mention
Substandard
Doubtful
Loss
Total
$
$
$
3,506
14,891
817
—
—
749
1,871
—
$
$
736
1,470
1,881
—
236
1,448
2,001
—
3,161
2,343
1,936
6
$ 19,214
$
2,620
$
4,087
$
3,685
$
7,446
The balance of “Special Mention” loans included a total of nine loans whose entire outstanding
balances were classified in that manner at June 30, 2009. The balance of “Substandard” loans included a total of
34 loans. Of these “Substandard” loans, the entire balances of 29 loans totaling $11.8 million were classified in
that manner. The remaining five loans had total outstanding balances of $3.5 million of which $3.1 million was
classified as “Substandard” with the remaining $393,000 classified as “Loss”. The balance of “Doubtful” loans
included two loans that had total outstanding balances of $1.1 million of which $817,000 were classified as
“Doubtful” and $274,000 were classified as “Loss”. In addition to the seven loans with portions of their balances
classified as “Loss”, the entire balances of three additional loans totaling $763,000 were also classified as
“Loss”. In total, the outstanding balance of loans, or portions thereof, classified as “Loss” totaled $1.4 million at
June 30, 2009. As seen on Page 23, specific valuation allowances have been established against 100% of these
estimated losses in accordance with the Company’s allowance for loan loss methodology. Consistent with
regulatory reporting requirements, the balance of classified assets are reported in the table above net of any
applicable specific valuation allowances resulting in the zero net balance for assets classified as “Loss”.
Of the 34 loans classified as Substandard, either in whole or in part, 30 loans with outstanding balances
of $12.4 million were reported as nonperforming in the table on Page 14. Nonperforming loans also included the
three loans totaling $763,000 that were wholly classified as “Loss”. The loans reported as “Doubtful” represent
two TICIC loans that are currently performing, but considered impaired and therefore adversely classified.
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects the
Company’s estimation of the losses in its loan portfolio to the extent they are both probable and reasonable to
estimate. The balance of the allowance is generally maintained through provisions for loan losses that are
charged to income in the period that estimated losses on loans are identified by the Company’s loan review
system. The Company charges losses on loans against the allowance as such losses are actually incurred.
Recoveries on loans previously charged-off are added back to the allowance.
In accordance with generally accepted accounting principles (“GAAP”) and supporting regulatory
guidelines, the balance of our allowance for loan losses generally comprises two components. The first
represents specific valuation allowances that we have established in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan”, for identified
losses on certain loans that have been individually reviewed for impairment. The second component represents
the general valuation allowances that we have established in accordance with SFAS No. 5, “Accounting for
Contingencies”,for estimated losses on homogenous groups of loans sharing similar risk characteristics. The
following narrative describes the specific manner in which the Company
17
calculates and records its allowance for loan losses within the framework of its integrated loan review system.
The Company’s allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement
process that is performed monthly. Based upon the results of the classification of assets and credit file review
processes described earlier, the Company first identifies the loans that must be reviewed individually for
impairment in accordance with SFAS No. 114. Loans eligible for individual impairment review generally represent
the Company’s larger and/or more complex loans including commercial mortgage loans, comprising multi-family,
nonresidential real estate and construction loans, as well as the Company’s commercial business loans.
However, the Company may also evaluate certain individual one-to-four family mortgage loans, home equity
loans and home equity lines of credit for impairment based upon certain risk factors. Factors considered in
identifying individual loans to be reviewed include, but may not be limited to, delinquency status, size of loan,
type and condition of collateral and the financial condition of the borrower.
A reviewed loan is deemed to be impaired when, based on current information and events, it is probable
that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a
loan is determined to be impaired, management measures the amount of impairment associated with that loan.
Impairment is generally defined as the difference between the carrying value and fair value of a loan where former
exceeds the latter. For the collateral dependent mortgage loans that comprise the large majority of the Company’s
portfolio, the fair value of the real estate collateralizing the loan serves as a practical expedient for that of the
impaired loan itself. Such values are generally determined based upon a discounted market value obtained
through an automated valuation module or prepared by a qualified, independent real estate appraiser. As
supported by the accounting and regulatory guidance, the fair value of the collateral is further reduced by
estimated selling costs when such costs are expected to reduce the cash flows available to repay the loan.
The Company establishes specific valuation allowances in the fiscal period during which the loan
impairments are identified. The results of management’s specific loan impairment evaluation are validated by the
Company’s third party loan review firm during their quarterly, independent review. Such valuation allowances
are adjusted in subsequent fiscal periods, where appropriate, to reflect any changes in carrying value or fair
value identified during subsequent impairment evaluations which are updated monthly by management.
The second tier of the loss measurement process involves estimating the probable and estimable losses
in accordance with SFAS No. 5 which addresses loans not otherwise reviewed for impairment in accordance with
SFAS No. 114. Such loans generally comprise large groups of smaller-balance homogeneous loans, such as one-
to-four family mortgage loans, home equity loans and home equity lines of credit and consumer loans, that may
generally be excluded from individual impairment analysis and instead collectively evaluated for impairment.
Such loans also include the remaining non-impaired loans of the larger and/or more complex types, such as the
Company’s commercial mortgage and business loans, which were not individually reviewed for impairment.
Valuation allowances established in accordance with SFAS No. 5 utilize historical and environmental
loss factors to collectively estimate the level of probable losses within defined segments of the Company’s loan
portfolio. These segments aggregate homogeneous subsets of loans with similar risk characteristics based upon
loan type. For allowance for loan loss calculation and reporting purposes, the Company currently stratifies its
loan portfolio into four primary categories: Real estate mortgage loans, consumer loans, commercial business
loans and construction loans. Within these broad categories, the Company defines certain segments. For
example, the real estate mortgage loan category comprises three primary segments including one-to-four family
mortgage loans, TICIC participations in commercial real
18
estate loans and other (non-TICIC) commercial real estate loans. Commercial real estate loans comprise both
multi-family and nonresidential mortgage loans. The consumer loan category includes several segments
including home equity loans, home equity lines of credit, passbook or certificate account loans and other
consumer-related loans which include, but may not be limited to, home improvement loans and overdraft
checking loans. The commercial business loan and construction loan categories require no further delineation
with each representing a defined segment of the loan portfolio for allowance for loan loss calculation and
reporting purposes.
In regard to historical loss factors, the Company’s allowance for loan loss calculation calls for an
analysis of historical charge-offs and recoveries for each of the defined segments within the loan portfolio. The
Company generally utilizes a minimum five-year moving average of annual net charge-off rates (charge-offs net
of recoveries) by loan segment, where available, to calculate its actual, historical loss experience. Additional
years of charge-off history may be considered in the calculation to reflect an appropriate historical basis for the
calculation. The outstanding principal balance of each loan segment is multiplied by the applicable historical loss
factor to estimate the level of probable losses based upon the Company’s historical loss experience.
As noted, the Company’s allowance for loan loss calculation also utilizes environment loss factors to
estimate the probable losses within the loan portfolio. Environmental loss factors are based upon specific
qualitative criteria representing key sources of risk within the loan portfolio. Such risk criteria includes the level
of and trends in delinquencies and non-accrual loans; the effects of changes in credit policy; the experience,
ability and depth of the lending function’s management and staff; national and local economic trends and
conditions; credit risk concentrations and changes in local and regional real estate values. For each segment of
the loan portfolio, a level of risk, developed from a number of internal and external resources, is assigned to each
of the qualitative criteria utilizing a scale ranging from zero (negligible risk) to 15 (high risk). The sum of the risk
values, expressed as a whole number, is multiplied by .01% to arrive at an overall environmental loss factor,
expressed in basis points, for each segment. The outstanding principal balance of each loan segment is
multiplied by the applicable environmental loss factor to estimate the level of probable losses based upon the
qualitative risk criteria.
The sum of the probable and estimable loan losses calculated in accordance with SFAS No. 114 and
SFAS No. 5, as described above, represents the total targeted balance for the Company’s allowance for loan
losses at the end of a fiscal period. As noted earlier, the Company establishes all additional specific valuation
allowances in the fiscal period during which additional loan impairments are identified. This step is generally
performed by transferring the required additions to specific valuation allowances on impaired loans from the
balance of Company’s general valuation allowances. After establishing all specific valuation allowances relating
to impaired loans, the Company then compares the remaining actual balance of its general valuation allowance to
the targeted balance calculated at the end of the fiscal period. The Company’s policy regarding the allowance for
loan losses requires that its actual balance of general valuation allowances be maintained at a level within a
threshold of +/- 15% of the targeted balance. The Company utilizes the allowable threshold to acknowledge and
account for the relative imprecision of the environmental loss factors used in the calculation of the targeted
balance of general valuation allowances. Any balance of general valuation allowances in excess of the targeted
balance is reported as unallocated with such balances attributable to probable losses within the loan portfolio
relating to environmental factors within one or more non-specified loan segments. The Company adjusts its
balance of general valuation allowances through the provision for loan losses as required to ensure that the
balance of the allowance for loan losses reflects all probable and estimable loans losses at the close of the fiscal
period. Notwithstanding calculation methodology and the noted distinction between specific and general
valuation allowances,the Company’s entire allowance for loan losses is available to cover all charge-offs that
arise from the loan portfolio.
19
Finally, the labels “specific” and “general” used herein to define and distinguish the Company’s
valuation allowances have substantially the same meaning as those used in the regulatory nomenclature
applicable to the valuation allowances of insured financial institutions. As such, the portion of the allowance for
loan losses categorized herein as “general valuation allowance” is considered “supplemental capital” for the
regulatory capital calculations applicable to the Company and its wholly owned bank subsidiary. By contrast,
the Company’s “specific valuation allowance” maintained against impaired loans is excluded from all forms of
regulatory capital and is instead netted against the balance of the applicable assets for regulatory reporting
purposes.
Our focus has consistently been to maintain an allowance for loan losses that represents our best
estimate of probable losses within the Company’s loan portfolio given current facts and economic circumstances
as of the evaluation date. For fiscal years ended June 30, 2007 and prior, the Company had utilized a loan
classification-based methodology to estimate the allowance for loan losses. The loan classification methodology
utilized benchmarks to establish the allowance for loan losses based upon their classification within the
Company’s classification of assets process described earlier. For example, the prior methodology generally
required that the Company maintain a minimum level of general valuation allowances ranging from 0.30% to
1.00% of the outstanding principal balance of loans graded as “Pass” or “Watch”. Similarly, general valuation
allowances of 5%, 25% and 50%, respectively, were also established and maintained against the outstanding
balance of all classified loans rated as “Special Mention”, “Substandard” and “Doubtful”. Where appropriate,
additional general valuation allowance percentages were established and maintained against certain categories
of commercial loans. The prior methodology also required that the Company maintain a specific valuation
allowance in the amount of 100% of the outstanding balance of all loans, or portions thereof, classified as Loss
which is consistent with the current allowance calculation methodology and regulatory requirements.
Like the current allowance for loan loss calculation methodology, the Company’s prior practice also
allowed for the balance of the allowance to be maintained within a reasonable threshold of the balance targeted
by the calculation methodology in place at that time. Calculation methodology notwithstanding, the Company
consistently determined that the overall balance of the allowance for loan losses at the close of each reporting
period was being maintained within a range consistent with that required by GAAP.
During the fiscal year ended June 30, 2008, the Company revised its allowance for loan loss calculation
methodology to that described in the preceding discussion. Doing so resulted in a more precise measurement of
estimated probable losses consistent with the Interagency Policy Statement on the Allowance for Loan and
Lease Losses that had been recently updated by bank regulators. Through this policy statement, bank regulators
clarified the applicable regulatory guidance regarding the allowance for loan loss and emphasized the
requirement that insured institutions adhere to the applicable accounting standards, including SFAS No. 114 and
SFAS No. 5, in calculating the appropriate level for the allowance for loan loss.
As discussed in greater detail below, the use of this new methodology did not result in a material
change in the overall level of the allowance for loan losses. Moreover, the provision recorded during the year
ended June 30, 2008, which was determined based on the newly implemented methodology, was not materially
different, on an overall basis, from what would have been required under the prior methodology. However, the
change in methodology did increase the precision of the calculation supporting the component balances of the
Company’s allowance for loan losses while resulting in a noteworthy reallocation between loan segments and
the general and specific valuation allowances applicable to each. In particular, eliminating the use of loan
classification benchmarks to estimate the allowance for loan losses corrected a tendency to overweight the
allocation towards multi-family and commercial mortgages during prior periods in favor of a greater allocation
toward one-to-four family
20
mortgage loans. Moreover, the change in underlying methodology converted what had been general valuation
allowances, previously established and maintained on certain TICIC participations based upon their adverse
loan classification, into more precisely defined specific and general valuation allowances attributable to those
same loans, albeit in a lesser aggregate amount. The remainder was largely reallocated toward the general
valuation allowances required by the historical and environmental loss factors utilized in the revised calculation.
The following table sets forth information with respect to activity in the allowance for loan losses for
the periods indicated.
Allowance balance (at beginning of period)
Provision for loan losses
Charge-offs:
Real estate mortgage – One-to-four family
Commercial business
Other
Total charge-offs
Recoveries:
Real estate mortgage – One-to-four family
Commercial business
Total recoveries
Net (charge-offs) recoveries
For the Years Ended June 30,
2009
2008
2007
2006
2005
(Dollars in Thousands)
$
$
6,104
317
6,049 $
94
$
5,451
571
5,416 $
72
5,144
68
2
—
3
5
—
18
18
13
30
—
9
39
—
—
—
(39)
—
—
—
—
—
27
27
27
—
30
12
42
—
5
5
(37)
—
5
4
9
213
—
213
204
Allowance balance (at end of period)
Total loans outstanding
Average loans outstanding
Allowance for loan losses as a percent
of total loans outstanding
Net loan charge-offs as a percent
of average loans outstanding
Allowance for loan losses to non-performing loans
6,434
$
$ 1,044,885
$ 1,064,019
$
$
$
6,104 $
1,026,514 $
951,019 $
6,049
865,031
785,210
$
$
$
5,451 $
707,977 $
633,758 $
5,416
562,619
523,029
0.62%
0.00%
48.92%
0.59%
0.00%
0.70%
0.00%
388.05%
406.25%
0.77%
0.01%
578.66%
0.96%
0.00%
281.79%
21
Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the total
allowance for loan losses by loan category and segment and the percent of loans in each category’s segment to
total net loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan
segment does not represent the total available for future losses which may occur within a particular loan segment
since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
2009
2008
At June 30,
2007
2006
2005
Amount
Percent of
Loans to
Total Loans
Amount
Percent of
Loans to
Total
Loans
Percent of
Loans to
Total
Loans
Percent of
Loans to
Total
Loans
Percent of
Loans to
Total
Loans
Amount
Amount
Amount
(Dollars in Thousands)
$
3,254
65.97% $
2,979
66.99% $
1,854
64.66% $
1,582
65.80% $
1,510
68.03%
2,181
73
18.89
1.42
1,841
44
17.40
0.85
3,602
27
18.40
0.48
3,133
34
15.13
0.45
510
10.85
719
12.08
356
13.14
286
13.23
1.16
0.28
0.15
1.28
55
—
24
106
6,203
231
1.12
0.26
0.13
1.17
67
—
41
118
5,809
295
1.47
0.38
0.16
1.31
46
—
34
130
6,049
—
1.83
0.41
0.03
3.12
39
—
27
350
5,451
—
17.19
0.52
9.63
2.64
0.50
0.05
1.44
3,359
50
182
47
—
120
135
5,403
13
At end of period allocated
to:
Real estate mortgage:
One-to-four family
Multi-family and
commercial
Commercial business
Consumer:
Home equity loans
Home equity lines
of credit
Passbook or certificate
Other
Construction
Unallocated
Total
$
6,434
100.00% $
6,104
100.00% $
6,049
100.00% $
5,451
100.00% $
5,416
100.00%
22
The following table sets forth the allocation of the allowance for loan losses by loan category and
segment within each valuation allowance category at the dates indicated. The valuation allowance categories
presented reflect the allowance for loan loss calculation methodology in effect at the time.
Specific valuation allowance:
Real estate mortgage:
One-to-four family
Multi-family and commercial (TICIC
Participations)
Multi-family and commercial (Non-TICIC)
Commercial business
Total specific valuation allowance
General valuation allowance (Factors based):
Historical loss factors
Environmental loss factors:
Real estate mortgage:
One-to-four family
Multi-family and commercial
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Other
Construction
Total environmental loss factors
2009
2008
2007
2006
2005
At June 30,
(Dollars in Thousands)
$
150 $
— $
— $
— $
—
1,046
232
2
1,430
1,160
—
3
1,163
—
—
—
—
—
—
—
—
—
—
—
—
30
33
—
—
—
3,098
901
71
2,972
679
41
—
—
—
—
—
—
510
55
8
100
4,743
719
67
23
112
4,613
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total (Factors based)
4,773
4,646
—
—
—
General valuation allowance (Loan
classifications based):
Real estate mortgage:
One-to-four family
Multi-family and commercial (TICIC
Participations)
Multi-family and commercial (Non-TICIC)
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Other
Construction
Total (Loan classifications based)
—
—
1,854
1,582
1,510
—
—
—
—
—
—
2,014
1,588
27
2,105
1,028
34
—
—
—
—
—
—
—
—
—
—
356
46
34
130
6,049
286
39
27
350
5,451
1,990
1,369
50
182
47
120
135
5,403
Unallocated general valuation allowance
231
295
—
—
13
Total allowance for loan losses
$ 6,434 $
6,104 $
6,049 $
5,451 $
5,416
23
As reported in the tables above, the balance of the allowance for loan losses increased by
approximately $330,000 to $6.4 million at June 30, 2009 from $6.1 million at June 30, 2008. The increase resulted
from additional provisions of $317,000 combined with net recoveries of $13,000 during fiscal 2009. The increase
reflects net additions to specific valuation allowances of approximately $267,000 relating to impaired loans
coupled with net additions to general valuation allowances, including unallocated amounts, of approximately
$63,000 arising from the application of the historical and environmental loss factors to the outstanding balance of
the remaining, non-impaired loans within the Company’s portfolio.
With regard to the reported net additions to specific valuation allowances at June 30, 2009, the
Company reported a total of 19 impaired loans with a total outstanding balance of $11.1 million compared to a
total of nine impaired loans with a total outstanding balance of $2.5 million at June 30, 2008. As of June 30, 2009,
the portion of the total allowance for loan losses specifically attributable to impaired loans totaled $1.4 million
representing the specific valuation allowances on ten impaired loans with a total outstanding balance of $5.4
million. The remaining nine impaired loans with a total outstanding balance of $5.7 million did not require specific
impairment allowances at June 30, 2009. By comparison, as of June 30, 2008, the portion of the total allowance for
loan losses specifically attributable to impaired loans totaled approximately $1.2 million representing specific
valuation allowances attributable to six impaired loans with a total outstanding balance of $1.9 million. The
increases in specific valuation allowances reported in fiscal 2009 generally resulted from reductions in the fair
value of the real estate securing the collateral dependent loans that were individually evaluated for impairment in
accordance with the Company’s allowance for loan loss calculation methodology described earlier.
The balance of the Company’s general valuation allowances, including unallocated amounts, increased
$63,000 from $4.9 million at June 30, 2008 to $5.0 million at June 30, 2009. The reported net additions to general
valuation allowances during fiscal 2009 were primarily attributable to the application of the Company’s historical
and environment loss factors to the “non-impaired” portion of the loan portfolio during the year. Management’s
review and update of the historical and environmental loss factors during fiscal 2009 resulted in a nominal
increase to the Company’s historical and environmental factors from June 30, 2008 to June 30, 2009. This increase
was partly responsible for the growth in general valuation allowances during fiscal 2009 with the remaining
growth attributable to the net growth of the Company’s loan portfolio during the year.
With specific regard to historical loss factors, the Company’s commercial and residential mortgage loan
portfolios have each experienced net charge-offs of less than $100,000 over the past five years while net charge-
offs of commercial business loans and consumer loans have been negligible over that same time frame. As a
result, the Company’s general valuation allowances are derived largely from environmental loss factors with a
significantly lesser portion of the allowance attributable to historical loss factors. Of the balance of general
valuation allowances reported at June 30, 2009 and June 30, 2008, $30,000 and $33,000, respectively, were
attributable to historical loss factors. Notwithstanding its low level of historical charge-offs, however, there can
be no assurance that the Company’s net charge-off rate will remain at these levels given the current downturn in
the economy and its potential effect on the future performance of the Company’s loan portfolio.
At June 30, 2009 and June 30, 2008, the portion of the Company’s general valuation allowances
attributable to environmental factors totaled $4.7 million and $4.6 million, respectively. As noted above, the net
increase in this portion of the general valuation allowance reflects a nominal net increase in the overall level of
environmental loss factors applied to the Company’s “non-impaired” loan portfolio coupled with such factors
being applied to the net growth within that same portfolio during the year. Loans receivable, excluding the
allowance for loan loss, increased $18.0 million from $1.03 billion at June 30, 2008 to $1.05 billion at June 30, 2009.
Along with this growth, however, impaired loans
24
increased $8.6 million from $2.5 million at June 30, 2008 to $11.1 million at June 30, 2009. Therefore, net growth in
the “non-impaired” loan portfolio totaled approximately $9.4 million for the year ended June 30, 2009.
Finally, the increase to general valuation allowances was partially offset by a reduction of $64,000 in the
balance of the unallocated allowance to $231,000 at June 30, 2009 from $295,000 at June 30, 2008. As noted earlier,
the balance of the unallocated general allowance represents the amount established and maintained for probable
losses attributable to environmental factors within one or more non-specified segments within the loan portfolio.
In accordance with the Company’s allowance for loan loss methodology, changes in the targeted balance of
general valuation allowances attributable to modifications in environmental loss factors may, in whole or in part,
be transferred to and from the unallocated allowance subject to the thresholds outlined in the earlier discussion
concerning allowance for loan loss calculation methodology.
The balance of the allowance for loan losses included in the tables above for the three years ended
June 30, 2005, 2006 and 2007 reflect the Company’s prior calculation methodology described in the earlier
section. As noted in that discussion, prior to the fiscal year ended June 30, 2008, the Company had utilized a loan
classification-based methodology to estimate the allowance for loan losses. This prior methodology utilized
benchmarks to establish the allowance for loan losses based upon the Company’s classification of assets
process.
During those three fiscal years, the balance of the Company’s allowance for loan losses comprised
general valuation allowances only. The Company maintained no specific valuation allowances on loans, or
portions thereof, resulting from its classification of assets process. This was consistent with the Company’s
reporting of no impaired loans during those same years.
As noted earlier, loan classification-based methodology in use by the Company during that time
resulted in a total balance of the allowance that was within a range consistent with that required by GAAP.
However, the balance of the Company’s allowance fluctuated within that acceptable range based upon the
methodology and its application given certain corporate events affecting the loan portfolio.
Specifically, the Company acquired two banks, one in October 2002 and the other in July 2003. The
Bank’s allowance for loan losses, when combined with the allowance for loan losses from each of the
acquisitions, as required by GAAP at the time, resulted in an allowance for loan losses that generally reflected a
margin for imprecision and uncertainty that is inherent in estimates of probable credit losses. Included in the loan
portfolios of both acquired institutions were several loan participations of questionable credit quality originated
by TICIC. TICIC enables financial institutions to pool their individual resources into a single facility designed to
provide long-term financing for affordable and senior housing in New Jersey while supporting the participating
institutions’ Community Reinvestment Act (“CRA”) lending objectives. Based upon the Company’s
understanding of the facts, economic circumstances and probable loss exposure relating to the TICIC loans
following the acquisitions, the Company increased the applicable general valuation allowances to approximately
$2.0 million in accordance with the loan classification-based allowance methodology in use during that time. As
described in the table above, the Company maintained the balance of the general valuation allowances
attributable to the TICIC loans within a range of $2.0 million to $2.1 million during the three years ended June 30,
2005, 2006 and 2007 based upon their adverse classification during those years.
Loan loss provisions were minimal during the fiscal years ended June 30, 2005 and 2006 due largely to
targeted additions to valuation allowances attributable to net loan growth during those periods being largely
offset by reductions in required valuation allowances on diminishing balances of classified assets. Specifically,
total loans outstanding increased $145.4 million from $562.6 million at June 30,
25
2005 to $708.0 million at June 30, 2006. During that same timeframe, total classified assets declined by $3.7 million
from $7.4 million to $3.7 million, respectively. Based upon the allowance calculation methodology in use during
that time, the balance of the Company’s valuation allowances was $5.4 million at both June 30, 2005 and June 20,
2006 reflecting the partially offsetting effects of net loan growth and net reductions in classified assets. In total,
net growth in the Company’s loan portfolio outpaced that of the allowance for loan losses during those periods.
Consequently, the ratio of allowance for loan losses to total loans decreased from 0.96% at June 30, 2005 to
0.77% at June 30, 2006.
By the fiscal year ended June 30, 2007, net growth in the loan portfolio necessitated a comparatively
larger provision of $571,000 to increase the allowance to the level targeted by the Company’s allowance
calculation methodology. The net growth in the allowance during fiscal 2007 also reflected a modest increase in
the balance of classified assets. Specifically, total loans outstanding increased by $157.0 million from $708.0
million at June 30, 2006 to $865.0 million at June 30, 2007. During that same timeframe, total classified assets
increased by $402,000 from $3.7 million to $4.1 million, respectively. Based upon the allowance calculation
methodology in use during that time, the balance of the Company’s valuation allowances increased by $598,000
from $5.4 million at June 30, 2006 to $6.0 million at June 30, 2007 reflecting the combined effects of net loan
growth and an increase in the balance of classified assets. As in prior years, the overall growth in the loan
portfolio during fiscal 2007 outpaced that of the allowance. Consequently, the ratio of the allowance for loan
losses to total loans continued to decline to 0.70% at June 30, 2007.
As noted earlier, during the fiscal year ended June 30, 2008, the Company revised its allowance for loan
loss calculation to the methodology currently in use. Doing so resulted in a more precise measurement of
estimated probable losses that was consistent with the Interagency Policy Statement on the Allowance for Loan
and Lease Losses updated by bank regulators and more closely aligned the Company’s calculation methodology
to that required by the applicable accounting standards, including SFAS No. 114 and SFAS No. 5.
As supported by the tables above, the change in underlying calculation methodology did not result in a
material change in the overall level of the allowance for loan losses from year to year. Rather, the implementation
of the revised methodology largely reallocated what had been the Company’s balance of general valuation
allowances, calculated in accordance with the prior loan classification-based methodology at June 30, 2007, into
more precisely defined specific valuation allowances for individually identified loan impairments and general
valuation allowances based upon historical and environmental loss factors, as reported at June 30, 2008.
In total, the balance of the allowance for loan losses increased $55,000 from $6.0 million at June 30, 2007
to $6.1 million at June 30, 2008 reflecting additional provisions of $94,000 partially offset by net charge-offs of
$39,000 during fiscal 2008. This net provision for fiscal 2008 reflected the Company’s implementation of the new
allowance for loan loss calculation methodology coupled with the effects of continued net loan growth and a
further reduction in the balance of total classified assets. Specifically, total loans outstanding increased $161.5
million from $865.0 million at June 30, 2007 to $1.03 billion at June 30, 2008. The additions to general valuation
allowances attributable to this net growth in loans, as calculated by the revised methodology, were largely offset
by decreases in the required level of valuation allowances attributable to the TICIC loan participations discussed
earlier. Specifically, reviewing the individual TICIC loans for impairment, in accordance with the Company’s
revised allowance calculation methodology, resulted in a lower, albeit more precise, estimate of probable losses
associated with those loans than had been calculated based upon the Company’s prior allowance calculation
methodology. At June 30, 2007, the outstanding balance of the Company’s TICIC participations totaled $9.0
million against which the Company maintained general valuation allowances of $2.0 million based upon the
allowance calculation methodology in use by the Company at that time. By comparison, at June 30,
26
2008, the outstanding balance of the Company’s TICIC participations totaled $8.5 million against which the
Company maintained total valuation allowances of $1.19 million.
The total amount of valuation allowances attributable to the TICIC participations at June 30, 2008
included $1.16 million of specific valuation allowances attributable to impairments identified on loans that were
individually reviewed in accordance with revised allowance calculation methodology implemented by the
Company during fiscal 2008. This amount was effectively reallocated from the general valuation allowances that
had previously been established and maintained against the TICIC loans in accordance with the prior allowance
calculation methodology. The remaining $33,000 of TICIC valuation allowances at June 30, 2008 represented
general valuation allowances arising from the identification of probable losses using the applicable historical and
environmental loss factors on the “non-impaired” TICIC participations. This amount was similarly reallocated
within the balance of general valuation allowances attributable to the TICIC loan participations.
Having established the required level of specific and general valuation allowances against the TICIC
loan participations in accordance with its revised allowance calculation methodology, the Company reallocated
the remaining $821,000 of general valuation allowances previously attributable to the TICIC loan participations to
other probable losses identified by that revised methodology including, but not limited to, that required by the
net growth in the loan portfolio during fiscal 2008.
The Company’s historical loan loss experience throughout the past twenty years generally reflects a
period of unprecedented and sustained economic expansion that continued through fiscal 2007. The strong
economic and real estate market conditions during that time have resulted in minimal loan charge-offs through
the current year ended June 30, 2009. Accordingly, the Company did not consider the formal validation of the
current allowance for loan loss methodology via comparison to our actual charge-off history through June 30,
2009 as necessary or useful. Notwithstanding the Company’s low historical charge-off rates, however, economic
and market conditions deteriorated significantly during fiscal 2008 and 2009. As such, the Company expects that
probable loan losses estimated by its current allowance for loan loss methodology, particularly those attributable
to specific impairments, will be realized through actual charge-offs in the foreseeable future. As such, the
Company intends to validate the results of its allowance for loan loss calculations based upon historical data as
such data builds in the future. Notwithstanding this future analysis, the Company will continue to regularly
update the historical loss factors used to estimate probable losses within its portfolio based upon its actual
charge-offs.
Finally, the calculation of probable losses within a loan portfolio and the resulting allowance for loan
losses is subject to estimates and assumptions that are susceptible to significant revisions as more information
becomes available and as events or conditions effecting individual borrowers and the marketplace as a whole
change over time. Future additions to the allowance for loan losses will likely be necessary if economic and
market conditions do not improve in the future from those currently prevalent in the marketplace. In addition, the
OTS, as an integral part of its examination process, periodically reviews our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS
may require the allowance for loan losses or the valuation allowance for foreclosed real estate to be increased
based on its review of information available at the time of the examination, which may negatively affect our
earnings.
27
Securities Portfolio
Our deposits and borrowings have traditionally exceeded our outstanding balance of loans receivable.
We generally invest excess funds into investment securities with an emphasis on agency mortgage-backed
securities. At June 30, 2009, our securities portfolio totaled $716.1 million and comprised 33.7% of our total
assets. By comparison, at June 30, 2008, our securities portfolio totaled $764.2 million and comprised 36.7% of
our total assets.
As contemplated in our strategic business plan, we have increased the balance of our loan portfolio
relative to the size of our securities portfolio in recent years in order to improve earnings. We intend to continue
shifting the mix of our earning assets toward greater balances of loans and lesser balances of investment
securities. However, in the foreseeable future, securities will remain a significant component of our earning
assets. Management generally intends to continue investing in mortgage-backed securities to the extent the
funds are not needed for loan originations.
Our investment policy, which is approved by the Board of Directors, is designed to foster earnings and
manage cash flows within prudent interest rate risk and credit risk guidelines. Generally, our investment policy is
to invest funds in various categories of securities and maturities based upon our liquidity needs, asset/liability
management policies, investment quality, and marketability and performance objectives. Our Chief Executive
Officer, Chief Financial Officer and Chief Investment Officer are designated by the Board of Directors as the
officers responsible for securities investment transactions and all transactions require the approval of at least
two of these designated officers. The Interest Rate Risk Management Committee, currently composed of
Directors Hopkins, Regan, Aanensen, Mazza and Parow, with our Chief Investment Officer and Chief Financial
Officer participating as management’s liaison to the committee, is responsible for oversight of the securities
portfolio. This committee meets quarterly to review the securities portfolio. The results of the committee’s
quarterly review are reported to the full Board, which adjusts the investment policy and strategies, as it
considers necessary and appropriate.
Federally chartered savings banks have the authority to invest in various types of liquid assets. The
investments authorized under the investment policy approved by our Board of Directors include U.S.
government and government agency obligations, municipal securities (consisting of bank qualified municipal
bond obligations of state and local governments) and mortgage-backed securities of various U.S. government
agencies or government-sponsored entities. On a short-term basis, our investment policy authorizes investment
in securities purchased under agreements to resell, federal funds, certificates of deposits of insured banks and
savings institutions and FHLB term deposits.
As of June 30, 2009, mortgage-backed securities represented approximately 96.1% of our total
investment in securities, compared to 95.0% as of June 30, 2008. Mortgage-backed securities generally include
mortgage pass-through securities and collateralized mortgage obligations which are typically issued with stated
principal amounts and backed by pools of mortgage loans. Collateralized mortgage obligations represented less
than 1.0% of total mortgage-backed securities at both June 30, 2009 and 2008. Mortgage originators use
intermediaries (generally government agencies and government-sponsored enterprises, but also a variety of non-
agency corporate issuers) to pool and package mortgage loans into mortgage-backed securities. The cash flow
and re-pricing characteristics of a mortgage pass-through security generally approximate those of the underlying
mortgages. By comparison, the cash flow and re-pricing characteristics of collateralized mortgage obligations are
determined by those assigned to an individual security, or “tranche”, within the terms of a larger investment
vehicle which allocates cash flows to its component tranches based upon a predetermined structure as payments
are received from the underlying mortgagors.
28
We generally invest in mortgage-backed securities issued by U.S. government agencies or government-
sponsored entities, such as the Government National Mortgage Association (“Ginnie Mae”), Freddie Mac and
the Federal National Mortgage Association (“Fannie Mae”). Mortgage-backed securities issued or sponsored
by U.S. government agencies and government-sponsored entities are guaranteed as to the payment of principal
and interest to investors. Mortgage-backed securities generally yield less than the mortgage loans underlying
such securities because of the costs of servicing and of their payment guarantees or credit enhancements which
minimize the level of credit risk to the security holder.
In addition to our investments in agency mortgage-backed securities, we formerly had an investment in
the AMF Ultra Short Mortgage Fund (“AMF Fund”), a mutual fund acquired during 2002 as the result of a
merger, which invested primarily in agency and non-agency mortgage-backed securities of short duration. The
housing and credit crises negatively impacted the market value of certain securities in the fund’s portfolio
resulting in a continuing decline in the net asset value of this fund. In addition, the fund’s manager instituted a
temporary prohibition against cash redemptions to protect shareholders against the possibility that the fund
might be forced to liquidate securities at distressed price levels to satisfy redemption requests. In light of these
factors, the Company recognized an impairment charge of $659,000 during the prior fiscal year ended June 30,
2008 due to other-than-temporary declines in the fund’s net asset value.
Due to a continuing decline in the net asset value of the AMF Fund, the Company elected to withdraw
its investment in the fund by invoking a redemption-in-kind option during the first quarter of fiscal 2009 in lieu of
cash. The shares redeemed for cash and the shares redeemed for the underlying securities were written down to
fair value as of the trade date resulting in an additional pre-tax charge to operations of $415,000 during the
quarter ended September 30, 2008. Through March 31, 2009, the Company recognized an additional $570,000 of
other-than-temporary impairments through earnings attributable to further declines in the value of the non-
agency collateralized mortgage obligations acquired through the AMF Fund redemption-in-kind. The Company
adopted FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 115-2 and FAS 124-2 “Recognition
and Presentation of Other-than-temporary Impairments”, effective April 1, 2009. As a result, that impairment was
bifurcated into credit-related and noncredit-related components of $290,000 and $280,000, respectively. Further
credit-related and noncredit-related other-than-temporary impairments relating to these securities totaling
$144,000 and $274,000, respectively, were recognized during the last fiscal quarter ended June 30, 2009.
SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, requires that
securities be categorized as “held to maturity”, “trading securities” or “available for sale”, based on
management’s intent as to the ultimate disposition of each security. SFAS No. 115 allows debt securities to be
classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity
has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other
similar factors cannot be classified as “held to maturity”.
We do not currently use or maintain a trading account. Securities not classified as “held to maturity”
are classified as “available for sale”. These securities are reported at fair value and unrealized gains and losses
on the securities are excluded from earnings and reported, net of deferred taxes, as adjustments to Accumulated
Other Comprehensive Income, a separate component of equity. As of June 30, 2009, all securities acquired
through the AMF Fund redemption-in-kind, including both agency and non-agency mortgage-backed securities,
were classified as held to maturity. The remainder of Company’s portfolio, including all other agency mortgage
backed securities, agency debentures; municipal obligations and single issuer trust preferred securities were
classified as available for sale.
29
Other than mortgage-backed securities issued or guaranteed by the U.S. government or its agencies, we
did not hold securities of any one issuer having an aggregate book value in excess of 10% of our equity at June
30, 2009. All of our securities carry market risk insofar as increases in market rates of interest may cause a
decrease in their market value. Purchases of securities are made based on certain considerations, which include
the interest rate, tax considerations, volatility, yield, settlement date and maturity of the security, our liquidity
position and anticipated cash needs and sources. The effect that the proposed security would have on our credit
and interest rate risk and risk-based capital is also considered. We do not currently participate in hedging
programs, interest rate caps, floors or swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Excluding certain non-agency mortgage-backed securities acquired through the
aforementioned AMF Fund redemption-in-kind, we do not purchase securities that are not rated investment
grade.
During the years ended June 30, 2009, 2008 and 2007, proceeds from sales of securities available for sale
totaled $7.3 million, $48.5 million and $131.4 million and resulted in gross gains of $-0-, $57,000 and $1.3 million
and gross losses of $415,000, $57,000 and $1.3 million, respectively.
As of June 30, 2009, $5.8 million of securities were classified as “Substandard”, including $4.9 million of
trust preferred securities and $920,000 of non-agency collateralized mortgage obligations.
30
The following table sets forth the carrying value of our securities portfolio at the dates indicated. The
table reflects the reclassification of securities held to maturity and mortgage-backed securities held to maturity to
available for sale during the year ended June 30, 2006.
2009
2008
2007
2006
2005
At June 30,
(In Thousands)
Securities Available for Sale:
U.S. government obligations
Obligations of states and political
subdivisions
Mutual funds (1)
Common stock (2)
Trust preferred securities
Total securities available for sale
Securities Held to Maturity:
U.S. government obligations
Obligations of states and political
subdivisions
Total securities held to maturity
$
4,557 $
5,513 $
6,864 $
8,786 $
18,340
—
—
5,130
28,027
17,757
7,545
—
7,368
38,183
—
—
—
—
—
—
65,333
7,795
—
8,877
88,869
—
—
—
—
—
14,140
8,551
10,900
33,591
195,661
7,424
—
10,922
222,793
—
—
—
265,469
204,629
470,098
Mortgage-Backed Securities Available for
Sale:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage-backed securities
available for sale
18,431
289,468
375,886
21,930
317,448
386,645
29,540
252,497
361,742
42,646
256,036
371,647
683,785
726,023
643,779
670,329
—
—
—
—
Mortgage-Backed Securities Held to
Maturity:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Collateralized Mortgage Obligations
Total mortgage-backed securities
held to maturity
—
198
409
3,714
4,321
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
63,399
305,059
389,663
—
758,121
Total
(1)
(2)
$ 716,133 $
764,206 $
732,648 $
893,122 $
1,261,810
As of June 30, 2008, 2007 and 2006, our mutual fund investment consisted of shares issued by the AMF
Fund. Our mutual fund investment in prior years also included shares in a government income fund.
As of June 30, 2005 our common stock investment consisted of shares of Freddie Mac common stock.
31
The following table sets forth certain information regarding the carrying values, weighted average
yields and maturities of our securities portfolio at June 30, 2009. This table shows contractual maturities and
does not reflect re-pricing or the effect of prepayments. Actual maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without prepayment penalties. At June
30, 2009, securities with a carrying value of $5.1 million are callable within one year.
One Year or Less
One to Five Years
Five to Ten Years
More Than Ten Years
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Total Securities
Weighted
Average
Yield
Carrying
Value
Market
Value
At June 30, 2009
(Dollars in Thousands)
$
Trust preferred securities
U.S. government obligations
Obligations of states and
political subdivisions
Mortgage-backed securities:
Government National
Mortgage Association
Federal Home Loan
Mortgage Corporation
Federal National Mortgage
Association
Collateralized mortgage
obligations
—
—
—
3
1
356
—
— % $
— %
—
—
— % $
— %
—
398
— % $
1.40%
5,130
4,159
3.14% $
0.68%
5,130
4,557
3.14% $
0.74%
5,130
4,557
— %
3,508
3.26%
14,219
3.53%
613
3.60%
18,340
3.48%
18,340
12.29%
8.68%
193
510
11.64%
271
9.16%
17,964
5.83%
18,431
5.94%
18,431
3.71%
40,932
4.71%
248,223
4.96% 289,666
4.92%
289,668
4.44%
15,205
5.48%
61,059
4.87%
299,675
4.93% 376,295
4.94%
376,296
— %
—
— %
—
— %
3,714
5.89%
3,714
5.89%
3,068
Total
$
360
4.51% $
19,416
5.09% $ 116,879
4.65% $ 579,478
4.93% $ 716,133
4.89% $
715,490
32
Sources of Funds
General. Deposits are our major source of funds for lending and other investment purposes. In
addition, we derive funds from loan and mortgage-backed securities principal repayments and proceeds from the
maturities and calls of securities. Loan and securities payments are a relatively stable source of funds, while
deposit inflows are significantly influenced by general interest rates and money market conditions. Borrowings
(principally from the FHLB of New York) are also used to supplement the amount of funds for lending and
investment.
Deposits. Our current deposit products include interest-bearing and non-interest-bearing checking
accounts, money market deposit accounts, savings accounts and certificates of deposit accounts ranging in
terms from 30 days to five years. Certificates of deposit with terms ranging from one year to five years are
available for individual retirement account plans. Deposit account terms vary, primarily as to the required
minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest
rate.
Deposits are obtained primarily from within New Jersey. Traditional methods of advertising are used to
attract new customers and deposits, including radio, print media, direct mail and inserts included with customer
statements. We do not utilize the services of deposit brokers or Internet listing services. Premiums or incentives
for opening accounts are sometimes offered. Our primary retail product is Star Banking, which bundles a number
of banking services and products together for those customers with a checking account with direct deposit and
combined deposits of $20,000 or more, including Internet banking, bill pay, telephone banking, reduced rates on
home equity loans and a 25 basis point premium on certificates of deposit with a term of at least one year,
excluding special promotions. We may also offer a 25 basis point premium on certificate of deposit accounts with
a term of at least one year, excluding special promotions, to certificate of deposit accountholders that have
$200,000 or more on deposit with the Bank. Though certificates of deposit with non-standard maturities are
popular in our market, we generally promote certificates of deposit with traditional maturities, including three and
six months and one, two, three and five years. We do offer the opportunity one time during the term of the
certificate to “step up” the rate paid on 17-month and 29-month certificates of deposit from the rate set on such
certificate to the current rate being offered by the Bank on certificates of that particular maturity.
The determination of interest rates is based upon a number of factors, including: (1) our need for funds
based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a
selected group of competitors’ rates for similar products; (3) our current cost of funds, yield on assets and
asset/liability position; and (4) the alternate cost of funds on a wholesale basis, in particular the cost of
borrowing from the FHLB. Interest rates are reviewed by senior management on a weekly basis and rates are set
generally with the intent to be in the top five to ten percent of the competition.
A large percentage of our deposits are in certificates of deposit, which represented 63.7% and 63.3% of
total deposits at June 30, 2009 and 2008, respectively. Our liquidity could be reduced if a significant amount of
certificates of deposit maturing within a short period were not renewed. At June 30, 2009 and 2008, certificates of
deposit maturing within one year were $740.4 million and $710.0 million, respectively. Historically, a significant
portion of the certificates of deposit remain with us after they mature and we believe that this will continue. At
June 30, 2009, $275.9 million or 30.5% of our certificates of deposit were certificates of $100,000 or more compared
to $236.7 million or 27.1% at June 30, 2008. General interest rates and money market conditions significantly
influence deposit inflows and outflows. The inflow of $100,000 or more certificates of deposit and the retention
of such deposits upon maturity are particularly sensitive to general interest rates and money market conditions,
making $100,000 or more certificates of deposit traditionally a more volatile source of funding than core deposits.
In order to retain $100,000 or more certificates of deposit, we may have to pay a premium rate, resulting
33
in an increase in our cost of funds. In a rising rate environment, we may be unwilling or unable to pay a
competitive rate. To the extent that such deposits do not remain with us, they may need to be replaced with
borrowings, which could increase our cost of funds and negatively impact our interest rate spread and our
financial condition.
The following table sets forth the distribution of average deposits for the periods indicated and the
weighted average nominal interest rates for each period on each category of deposits presented.
For the Years Ended June 30,
2009
Average
Balance
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
2008
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
2007
Average
Balance
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
(Dollars in Thousands)
Non-interest-bearing
demand
Interest-bearing demand
Savings and club
Certificates of deposit
51,132
$
156,883
293,483
873,257
3.72% 0.00%
11.41
21.35
63.52
1.34
1.05
3.50
59,169
$
149,871
303,818
830,726
$
4.40% 0.00%
1.81
11.16
1.08
22.61
4.49
61.83
57,226
136,622
336,067
932,901
3.91%
9.34
22.97
63.78
0.00%
1.91
1.11
4.39
Total deposits
$ 1,374,755
100.00% 2.60% $ 1,343,584
100.00% 3.22% $ 1,462,816
100.00%
3.23%
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
2009
At June 30,
2008
(In Thousands)
2007
$
$
$
190,949
182,588
417,596
106,994
6,616
$
2,235
91,937
298,819
473,649
6,969
32
17,451
131,375
488,520
250,682
904,743
$
873,609
$
888,060
Interest Rate
0.00-1.99%
2.00-2.99%
3.00-3.99%
4.00-4.99%
5.00-5.99%
Total
The following table shows the amount of certificates of deposit of $100,000 or more by time remaining
until maturity as of the date indicated.
Maturity Period
Within three months
Three through six months
Six through twelve months
Over twelve months
34
At June 30, 2009
(In Thousands)
$
74,240
79,096
75,460
47,124
$
275,920
The following table sets forth the amount and maturities of certificates of deposit at June 30, 2009.
Within
1 year
1-2 years 2-3 years
3-4 years 4-5 years
After 5
years
Total
Amount Due
0.00-1.99%
2.00-2.99%
3.00-3.99%
4.00-4.99%
5.00-5.99%
$
181,785 $
135,461
356,144
66,782
211
9,164 $
36,840
48,800
16,282
—
(In Thousands)
— $
8,261
5,656
8,785
1,615
— $
—
3,249
15,142
4,790
— $
2,026
3,746
—
—
— $
—
1
3
—
190,949
182,588
417,596
106,994
6,616
Total
$
740,383 $
111,086 $
24,317 $
23,181 $
5,772 $
4 $
904,743
Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow
funds in the form of advances from the FHLB of New York. We make use of FHLB advances as part of our
interest rate risk management, primarily to extend the duration of funding to match the longer-term fixed-rate
loans and mortgage-backed securities.
Advances from the FHLB are typically secured by the FHLB capital stock we own and mortgage-backed
securities we hold in safekeeping there. Additional information regarding our FHLB advances is included under
Note 12 to consolidated financial statements.
Short-term FHLB advances generally have original maturities of less than one year. Typically, our short-
term advances are in the form of overnight borrowings. Available overnight lines of credit at the FHLB at June
30, 2009 were $200.0 million.
At June 30, 2009, long-term FHLB advances totaled $210.0 million. Long-term advances consist of fixed-
rate advances that will mature after one year. The advances are collateralized by FHLB capital stock and certain
mortgage-backed securities. These advances had a weighted average interest rate of 3.87% at June 30, 2009.
As of June 30, 2009, long-term advances mature as follows:
Maturing in Years Ending June 30,
2011
2018
Total
35
(In Thousands)
$
10,000
200,000
$
210,000
Subsidiary Activity
Kearny Financial Corp. has two wholly owned subsidiaries: Kearny Federal Savings Bank and Kearny
Financial Securities, Inc.
Kearny Financial Securities, Inc. was organized in April 2005 under Delaware law as a Delaware
Investment Company primarily to hold securities and mortgage-backed securities. At June 30, 2009, it held assets
totaling $7,000 and was considered inactive.
Kearny Federal Savings Bank has two wholly owned subsidiaries: KFS Financial Services, Inc. and KFS
Investment Corp. A third subsidiary, Kearny Federal Investment Corp. was dissolved in fiscal 2008.
KFS Financial Services, Inc. was incorporated as a New Jersey corporation in 1994 under the name of
South Bergen Financial Services, Inc., was acquired in Kearny’s merger with South Bergen Savings Bank in 1999
and was renamed KFS Financial Services, Inc. in 2000. It is a service corporation subsidiary organized for selling
insurance products, including annuities, to Bank customers and the general public through a third party
networking arrangement. KFS Financial Services, Inc. is not a licensed insurance agency and it may only offer
insurance products through an agreement with a licensed insurance agency. KFS Financial Services, Inc. has
entered into an agreement with The Savings Bank Life Insurance Company of Massachusetts, a licensed
insurance agency, through which it offers insurance products. At June 30, 2009, it held assets totaling $313,000.
KFS Investment Corp. was organized in October 2007 under New Jersey law as a New Jersey
Investment Company to potentially replace Kearny Federal Investment Corp. At June 30, 2009, KFS Investment
Corp. held no assets and was considered inactive.
Kearny Federal Investment Corp. was organized in May 2004 under New Jersey law as a New Jersey
Investment Company primarily to hold securities and mortgage-backed securities. In June 2008, Kearny Federal
Investment Corp. was formally dissolved and its assets returned to its parent, the Bank.
36
REGULATION
The Bank and the Company operate in a highly regulated industry. This regulation establishes a
comprehensive framework of activities in which a savings and loan holding company and federal savings bank
may engage and is intended primarily for the protection of the deposit insurance fund and depositors. Set forth
below is a brief description of certain laws that relate to the regulation of the Bank and the Company. The
description does not purport to be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement
activities, including the imposition of restrictions on the operation of an institution and its holding company, the
classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any
change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation,
including changes in the regulations governing mutual holding companies, could have a material adverse impact
on the Company, the Bank and their operations. The adoption of regulations or the enactment of laws that
restrict the operations of the Bank and/or the Company or impose burdensome requirements upon one or both of
them could reduce their profitability and could impair the value of the Bank’s franchise, resulting in negative
effects on the trading price of the Company’s common stock.
Regulation of the Bank
General. As a federally chartered, Federal Deposit Insurance Corporation-insured savings bank, the
Bank is subject to extensive regulation by the OTS and the FDIC. This regulatory structure gives the regulatory
authorities extensive discretion in connection with their supervisory and enforcement activities and examination
policies, including policies regarding the classification of assets and the level of the allowance for loan losses.
The activities of federal savings banks are subject to extensive regulation including restrictions or requirements
with respect to loans to one borrower, the percentage of non-mortgage loans or investments to total assets,
capital distributions, permissible investments and lending activities, liquidity, transactions with affiliates and
community reinvestment. Federal savings banks are also subject to reserve requirements imposed by the Board
of Governors of the Federal Reserve System. Both state and federal law regulate a federal savings bank’s
relationship with its depositors and borrowers, especially in such matters as the ownership of savings accounts
and the form and content of the bank’s mortgage documents.
The Bank must file reports with the OTS concerning its activities and financial condition and must
obtain regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of
other financial institutions. The OTS regularly examines the Bank and prepares reports to the Bank’s Board of
Directors on deficiencies, if any, found in its operations. The OTS has substantial discretion to impose
enforcement action on an institution that fails to comply with applicable regulatory requirements, particularly
with respect to its capital requirements. In addition, the FDIC has the authority to recommend to the Director of
the OTS to take enforcement action with respect to a particular federally chartered savings bank and, if the
Director does not take action, the FDIC has authority to take such action under certain circumstances.
Deposit Insurance. The Bank’s deposits are insured to applicable limits by the FDIC. The maximum
deposit insurance amount has been increased from $100,000 to $250,000 until December 31, 2013. On October 13,
2008, the FDIC established a Temporary Liquidity Guarantee Program under which the FDIC will fully guarantee
all non-interest-bearing transaction accounts until December 31, 2009 (the “Transaction Account Guarantee
Program”) and all senior unsecured debt of insured depository
37
institutions or their qualified holding companies issued between October 14, 2008 and October 31, 2009 that
matures prior to December 31, 2012 (the “Debt Guarantee Program”). Senior unsecured debt would include
federal funds purchased and certificates of deposit standing to the credit of the bank. After November 12, 2008,
institutions that did not opt out of the Programs by December 5, 2008 are assessed at the rate of ten basis points
for transaction account balances in excess of $250,000 and at a rate between 50 and 100 basis points of the
amount of debt issued. Participating holding companies that have not issued FDIC-guaranteed debt prior to
April 1, 2009 must apply to remain in the Debt Guarantee Program. Participating institutions will be subject to
surcharges for debt issued after that date. The Transaction Account Guarantee Program has been extended until
June 30, 2010 but after January 1, 2010, participating institutions will be assessed at a rate between 15 and 25
basis points on transaction account balances in excess of $250,000. Institutions currently participating in the
Transaction Account Guarantee Program will be able to opt of the extended program until November 2, 2009. The
Bank is participating in the Transaction Account Guarantee Program. The Company and the Bank have opted
out of the Debt Guarantee Program.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the FDIC is
authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of
estimated insured deposits. If the Deposit Insurance Fund’s reserves exceed the designated reserve ratio, the
FDIC is required to pay out all or, if the reserve ratio is less than 1.5%, a portion of the excess as a dividend to
insured depository institutions based on the percentage of insured deposits held on December 31, 1996 adjusted
for subsequently paid premiums. Insured depository institutions that were in existence on December 31, 1996
and paid assessments prior to that date (or their successors) are entitled to a one-time credit against future
assessments based on their past contributions to the predecessor to the Deposit Insurance Fund.
The FDIC has set the designated reserve ratio at 1.25% of estimated insured deposits. The FDIC has
also adopted a risk-based premium system that provides for quarterly assessments based on an insured
institution’s ranking in one of four risk categories based on their examination ratings and capital ratios. Well-
capitalized institutions with the CAMELS ratings of 1 or 2 are grouped in Risk Category I and have been
assessed for deposit insurance at an annual rate of between five and seven basis points with the assessment
rate for an individual institution determined according to a formula based on a weighted average of the
institution’s individual CAMELS component ratings plus either five financial ratios or the average ratings of its
long-term debt. Institutions in Risk Categories II, III and IV are currently assessed at annual rates of 10, 28 and 43
basis points, respectively. The Bank used its remaining special assessment credit of $579,000 to offset the cost
of its deposit insurance premium, which was fully utilized by March 31, 2009.
Due to recent bank failures, the FDIC has determined that the reserve ratio was 1.01% as of June 30,
2008. In accordance with the Reform Act, the FDIC must establish and implement a plan within 90 days to restore
the reserve ratio to 1.15% within five years (subject to extension due to extraordinary circumstances). For the
quarter beginning January 1, 2009, the FDIC raised the base annual assessment rate for institutions in Risk
Category I to between 12 and 14 basis points while the base annual assessment rates for institutions in Risk
Categories II, III and IV were increased to 17, 35 and 50 basis points, respectively. For the quarter beginning
April 1, 2009 the FDIC has set the base annual assessment rate for institutions in Risk Category I to between 12
and 16 basis points and the base annual assessment rates for institutions in Risk Categories II, III and IV at 22,
32 and 45 basis points, respectively. An institution’s assessment rate could be lowered by as much as five basis
points based on the ratio of its long-term unsecured debt to deposits or, for smaller institutions based on the
ratio of certain amounts of Tier 1 capital to deposits. The assessment rate would be adjusted for Risk Category I
institutions that have a high level of brokered deposits and have experienced higher levels of asset growth
(other than through acquisitions) and could be increased by as much as ten basis points for institutions in Risk
38
Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10% of assets. Reciprocal deposit
arrangements like CDARS® would be treated as brokered deposits for Risk Category II, III and IV institutions
but not for institutions in Risk Category I. An institution’s base assessment rate would also be increased if an
institution’s ratio of secured liabilities (including FHLB advances and repurchase agreements) to deposits
exceeds 25%. The maximum adjustment for secured liabilities for institutions in Risk Categories I, II, III and IV
would be 8, 11, 16 and 22.5 basis points, respectively, provided that the adjustment may not increase an
institution’s base assessment rate by more than 50%. The FDIC has further imposed a special assessment equal
to five basis points of assets less Tier 1 capital as of June 30, 2009 payable on September 30, 2009 and may
impose additional special assessments.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest
payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government
established to recapitalize the Federal Savings and Loan Insurance Corporation. The FICO assessment rates,
which are determined quarterly, averaged 0.0108% of insured deposits, respectively, in fiscal year 2009. These
assessments will continue until the FICO bonds mature in 2017.
Regulatory Capital Requirements. The OTS capital regulations require savings institutions to meet
three minimum capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) “Tier 1” or “core”
capital equal to at least 4% of total adjusted assets and (3) risk-based capital equal to 8% of total risk-weighted
assets. For information on the Bank’s compliance with these regulatory capital standards, see Note 14 to
consolidated financial statements. In assessing an institution’s capital adequacy, the OTS takes into
consideration not only these numeric factors but also qualitative factors as well and has the authority to
establish higher capital requirements for individual institutions where necessary.
In addition, the OTS may require that a savings institution that has a risk-based capital ratio of less than
8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total adjusted
assets of less than 4% take certain action to increase its capital ratios. If the savings institution’s capital is
significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios,
the OTS may restrict its activities.
For purposes of the OTS capital regulations, tangible capital is defined as core capital less all intangible
assets except for certain mortgage servicing rights. Tier 1 or core capital is defined as common stockholders’
equity, non-cumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of
consolidated subsidiaries and certain non-withdrawable accounts and pledged deposits of mutual savings
banks. The Bank does not have any non-withdrawable accounts or pledged deposits. Tier 1 and core capital are
reduced by an institution’s intangible assets, with limited exceptions for certain mortgage and non-mortgage
servicing rights and purchased credit card relationships. Both core and tangible capital are further reduced by an
amount equal to the savings institution’s debt and equity investments in “non-includable” subsidiaries engaged
in activities not permissible for national banks other than subsidiaries engaged in activities undertaken as agent
for customers or in mortgage banking activities and subsidiary depository institutions or their holding
companies.
The risk-based capital standard for savings institutions requires the maintenance of total capital of 8%
of risk-weighted assets. Total capital equals the sum of core and supplementary capital. The components of
supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated
debt, mandatory convertible subordinated debt and intermediate-term preferred stock, the portion of the
allowance for loan losses not designated for specific loan losses and up to 45% of unrealized gains on equity
securities. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to
a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. For
purposes of determining total capital, a savings institution’s assets are reduced by the amount of capital
instruments held by other depository institutions pursuant to
39
reciprocal arrangements and by the amount of the institution’s equity investments (other than those deducted
from core and tangible capital) and its high loan-to-value ratio land loans and commercial construction loans.
A savings institution’s risk-based capital requirement is measured against risk-weighted assets, which
equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item
after being multiplied by an assigned risk weight. These risk weights range from 0% for cash to 100% for
delinquent loans, property acquired through foreclosure, commercial loans and certain other assets.
Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or
requirements on the ability of savings institutions to make capital distributions, including cash dividends.
A savings institution that is a subsidiary of a savings and loan holding company, such as the Bank,
must file an application or a notice with the OTS at least thirty days before making a capital distribution, such as
paying a dividend to the Company. A savings institution must file an application for prior approval of a capital
distribution if: (i) it is not eligible for expedited treatment under the applications processing rules of the OTS; (ii)
the total amount of all capital distributions, including the proposed capital distribution, for the applicable
calendar year would exceed an amount equal to the savings institution’s net income for that year to date plus the
institution’s retained net income for the preceding two years; (iii) it would not adequately be capitalized after the
capital distribution; or (iv) the distribution would violate an agreement with the OTS or applicable regulations.
The OTS may disapprove a notice or deny an application for a capital distribution if: (i) the savings
institution would be undercapitalized following the capital distribution; (ii) the proposed capital distribution
raises safety and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in
any statute, regulation or agreement.
In June 2007, the Bank applied to the OTS for approval to distribute $19.0 million to the Company. In
August 2007, the Bank received approval from the OTS and the cash dividend was paid in November 2007.
During the approval process, the OTS noted that future dividend requests will require closer scrutiny by the
OTS due to the Bank’s compressed earnings at the time.
Qualified Thrift Lender Test. Federal savings institutions must meet a qualified thrift lender test or
they become subject to the business activity restrictions and branching rules applicable to national banks. To
qualify as a qualified thrift lender, a savings institution must either (i) be deemed a “domestic building and loan
association” under the Internal Revenue Code by maintaining at least 60% of its total assets in specified types of
assets, including cash, certain government securities, loans secured by and other assets related to residential
real property, educational loans and investments in premises of the institution or (ii) satisfy the statutory
qualified thrift lender test set forth in the Home Owners’ Loan Act by maintaining at least 65% of its portfolio
assets in qualified thrift investments (defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and credit card loans). For purposes of
the statutory qualified thrift lender test, portfolio assets are defined as total assets minus goodwill and other
intangible assets, the value of property used by the institution in conducting its business and specified liquid
assets up to 20% of total assets. A savings institution must maintain its status as a qualified thrift lender on a
monthly basis in at least nine out of every twelve months.
A savings bank that fails the qualified thrift lender test and does not convert to a bank charter generally
will be prohibited from: (1) engaging in any new activity not permissible for a national bank; (2) paying dividends
not permissible under national bank regulations; and (3) establishing any new branch
40
office in a location not permissible for a national bank in the institution’s home state. In addition, if the
institution does not requalify under the qualified thrift lender test within three years after failing the test, the
institution would be prohibited from engaging in any activity not permissible for a national bank and would have
to repay any outstanding advances from the FHLB as promptly as possible.
Community Reinvestment Act. Under the CRA, every insured depository institution, including the
Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the
credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that it believes are best suited to its particular
community. The CRA requires the OTS to assess the depository institution’s record of meeting the credit needs
of its community and to consider such record in its evaluation of certain applications by such institution, such
as a merger or the establishment of a branch office by the Bank. The OTS may use an unsatisfactory CRA
examination rating as the basis for the denial of an application. The Bank received a satisfactory CRA rating in its
most recent CRA examination by the OTS.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of
twelve regional Federal Home Loan Banks. Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from funds deposited by financial institutions and proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to members pursuant to policies
and procedures established by the board of directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of New York in an
amount equal to the greater of 1% of our aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year or 5% of our outstanding FHLB advances. The FHLB
imposes various limitations on advances such as limiting the amount of certain types of real estate related
collateral to 30% of a member’s capital and limiting total advances to a member.
The Federal Home Loan Banks are required to provide funds for the resolution of troubled savings
institutions and to contribute to affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the
future. In addition, these requirements could result in the Federal Home Loan Banks imposing a higher rate of
interest on advances to their members.
The USA Patriot Act. The Bank is subject to the OTS regulations implementing the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001, or the USA Patriot Act. The USA Patriot Act gives the federal government powers to address terrorist
threats through enhanced domestic security measures, expanded surveillance powers, increased information
sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act,
Title III of the USA Patriot Act takes measures intended to encourage information sharing among bank
regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions,
money transfer agents and parties registered under the Commodity Exchange Act.
41
Among other requirements, Title III of the USA Patriot Act and the related regulations of the OTS
impose the following requirements with respect to financial institutions:
•
•
•
•
Establishment of anti-money laundering programs that include, at minimum: (i) internal policies,
procedures and controls; (ii) specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an independent audit function to
test the anti-money laundering program.
Establishment of a program specifying procedures for obtaining identifying information from
customers seeking to open new accounts, including verifying the identity of customers within
a reasonable period.
Establishment of appropriate, specific and, where necessary, enhanced due diligence policies,
procedures and controls designed to detect and report money laundering.
Prohibitions on establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence in any country)
and compliance with certain record keeping obligations with respect to correspondent
accounts of foreign banks.
Bank regulators are directed to consider a holding company’s effectiveness in combating money
laundering when ruling on Federal Reserve Act and Bank Merger Act applications.
Regulation of the Company
General. The Company is a savings and loan holding company within the meaning of Section 10 of the
Home Owners’ Loan Act. It is required to file reports with the OTS and is subject to regulation and examination
by the OTS. The Company must also obtain regulatory approval from the OTS before engaging in certain
transactions, such as mergers with or acquisitions of other financial institutions. In addition, the OTS has
enforcement authority over the Company and any non-savings institution subsidiaries. This permits the OTS to
restrict or prohibit activities that it determines to be a serious risk to the Bank. This regulation is intended
primarily for the protection of the depositors and not for the benefit of stockholders of the Company.
Activities Restrictions. As a savings and loan holding company and as a subsidiary holding company
of a mutual holding company, the Company is subject to statutory and regulatory restrictions on its business
activities. The non-banking activities of the Company and its non-savings institution subsidiaries are restricted
to certain activities specified by the OTS regulation, which include performing services and holding properties
used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987 and non-banking activities permissible for bank holding companies pursuant to the Bank Holding
Company Act of 1956 or authorized for financial holding companies pursuant to the Gramm-Leach-Bliley Act.
Before engaging in any non-banking activity or acquiring a company engaged in any such activities, the
Company must file with the OTS either a prior notice or (in the case of non-banking activities permissible for
bank holding companies) an application regarding its planned activity or acquisition.
Mergers and Acquisitions. The Company must obtain approval from the OTS before acquiring, directly
or indirectly, more than 5% of the voting stock of another savings institution or savings and loan holding
company or acquiring such an institution or holding company by merger, consolidation, or purchase of its
assets. Federal law also prohibits a savings and loan holding company from acquiring
42
more than 5% of a company engaged in activities other than those authorized for savings and loan holding
companies by federal law; or acquiring or retaining control of a depository institution that is not insured by the
FDIC. In evaluating an application for the Company to acquire control of a savings institution, the OTS would
consider the financial and managerial resources and future prospects of the Company and the target institution,
the effect of the acquisition on the risk to the insurance funds, the convenience and the needs of the community
and competitive factors.
Waivers of Dividends by Kearny MHC. The OTS regulations require the MHC to notify the OTS of any
proposed waiver of its receipt of dividends from the Company. The OTS reviews dividend waiver notices on a
case-by-case basis and, in general, does not object to any such waiver if: (i) the mutual holding company’s
board of directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual
holding company’s members and (ii) the waiver would not be detrimental to the safe and sound operations of the
subsidiary savings association.
During the year ended June 30, 2009, the MHC waived its right, upon non-objection from the OTS, to
receive cash dividends of $10.2 million declared during the year.
Conversion of the MHC to Stock Form. The OTS regulations permit the MHC to convert from the
mutual form of organization to the capital stock form of organization, commonly referred to as a second step
conversion. In a second step conversion a new holding company would be formed as the successor to the
Company, the MHC’s corporate existence would end and certain depositors of the Bank would receive the right
to subscribe for shares of the new holding company. In a second step conversion, each share of common stock
held by stockholders other than the MHC would be automatically converted into a number of shares of common
stock of the new holding company determined pursuant to an exchange ratio that ensures that the Company’s
stockholders own the same percentage of common stock in the new holding company as they owned in the
Company immediately prior to the second step conversion. Under the OTS regulations, the Company’s
stockholders would not be diluted because of any dividends waived by the MHC (and waived dividends would
not be considered in determining an appropriate exchange ratio), in the event the MHC converts to stock form.
The total number of shares held by the Company’s stockholders after a second step conversion also would be
increased by any purchases by the Company’s stockholders in the stock offering of the new holding company
conducted as part of the second step conversion.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to
the OTS if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings
and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of
10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise
defined by the OTS. Under the Change in Bank Control Act, the OTS has 60 days from the filing of a complete
notice to act, taking into consideration certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition. Any company that so acquires control is then subject to
regulation as a savings and loan holding company.
Emergency Economic Stabilization Act of 2008
In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act
(“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to
$700.0 billion in troubled assets from financial institutions under the Troubled Asset Relief Program or (“TARP”).
Troubled assets include residential or commercial mortgages and related instruments originated prior to March
14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of
the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial
stability. If the Secretary exercises his authority under TARP,
43
EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued
prior to March 14, 2008. The Secretary is authorized to purchase up to $250.0 billion in troubled assets
immediately and up to $350.0 billion upon certification by the President that such authority is needed. The
Secretary’s authority will be increased to $700.0 billion if the President submits a written report to Congress
detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving
such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on
December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his
authority may not be extended beyond October 3, 2010.
Institutions selling assets under TARP will be required to issue warrants for common or preferred stock
or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a
bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more
than $300.0 million in troubled assets from an institution regardless of method, the institution will be required to
meet certain standards for executive compensation and corporate governance, including a prohibition against
incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on
materially inaccurate earnings or other statements and a prohibition against agreements for the payment of
golden parachutes. Institutions that sell more than $300.0 million in assets under TARP auctions will not be
entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial
official or any of its other three most highly compensated officers. In addition, any severance paid to such
officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject
to the golden parachute rules under the Internal Revenue Code.
EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and
removes the statutory limits on the FDIC’s ability to borrow from the Treasury during this period. The FDIC may
not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA
allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage
Association (“Fannie Mae”) or Freddie Mac as an ordinary loss for tax purposes. This provision was effective
October 3, 2008.
Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital
Purchase Plan under which the Treasury Department will invest up to $250.0 billion in senior preferred stock of
U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue
senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the
lesser of $25.0 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the rate of
5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior
preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock
or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior
preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial
institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred
stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be
required for any increase in the dividends on the common stock or for any stock repurchases unless the senior
preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties.
The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any
preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would
adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have
not been paid for six periods. The senior preferred will be freely transferable and participating institutions will be
required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the
Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers
must modify or terminate all benefit
44
plans and arrangements to comply with EESA. Senior executives must also waive any claims against the
Department of Treasury.
In connection with the issuance of the senior preferred, participating publicly traded institutions must
issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate
market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the
market price of the common stock on the date of the investment. The Secretary may only exercise or transfer one-
half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has
received proceeds equal to the senior preferred investment from one or more offerings of common or preferred
stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of
common stock acquired through exercise of the warrants. The financial institution must file a shelf registration
statement covering the warrants and underlying common stock as soon as practicable after issuance and grant
piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution
raises capital equal to the amount of the senior preferred through one or more offerings of common stock or
preferred stock qualifying as Tier 1 capital. If the financial institution does not have sufficient authorized shares
of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the
financial institution must call a meeting of shareholders for that purpose as soon as practicable after the date of
investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before
shareholder approval subject to a maximum reduction of 45%.
The recently enacted American Recovery and Reinvestment Act of 2009 (“ARRA”) has imposed
additional compensation restrictions on companies participating in the TARP Capital Purchase Program. ARRA
directs the Secretary of the Treasury to adopt standards for executive compensation that include limits on
compensation that exclude incentives to take unnecessary and excessive risks that threaten the value of the
participant while any assistance remains outstanding and provision for recovery by the participant of any
bonus, retention award or incentive compensation paid to any senior executive office and up to 20 next mostly
highly compensated employees of the participant based on statements of earnings, revenues, gains or other
criteria that are later found to be materially inaccurate. The board of directors of any TARP participant must
adopt policies on excessive or luxury expenditures, as identified by the Secretary. TARP participants will be
required to annually allow shareholders to have a separate non-binding vote on executive compensation while a
TARP investment is outstanding.
Due to its strong capital position the Company did not participate in the Treasury’s Capital Purchase
Plan.
Item 1A. Risk Factors
The following is a summary of what management, in its opinion, currently believes to be the material
risks related to an investment in the Company’s securities.
Recent negative developments in the financial services industry and the domestic and international credit
markets may continue to adversely affect our operations and results.
Negative developments in the global credit and securitization markets during the latter half of 2007 and
2008 have resulted in uncertainty and volatility in U.S. financial markets that contributed significantly to the
general economic downturn which has continued into 2009. Asset quality has deteriorated at many financial
institutions resulting in additional loan loss provisions and increased recognition of impairments in securities
portfolios. In particular, the continuing decline in the value of real estate collateral supporting many commercial
and residential mortgage loans has contributed significantly to these results. The effects of declining real estate
values on asset quality has been exacerbated by rising unemployment resulting in
45
increased levels of loan delinquencies, foreclosures and bankruptcies. These factors affecting the general
marketplace have had an adverse impact on the Company’s earnings and operations through an increase in the
level of nonperforming loans and associated provisions to the allowance for loan losses. The Company has also
recognized an increased level of other-than-temporary security impairments recorded through earnings and other
comprehensive income. Moreover, the Company has recognized additional FDIC insurance costs resulting from
the agency’s need to replenish the fund for charges associated with recent bank failures.
In general, thrift and thrift holding company stock prices have been negatively affected, as has their
general ability to raise capital or borrow in the debt markets. The potential exists for new federal or state laws and
regulations regarding lending and funding practices, liquidity standards, and minimum capital levels.
Continued negative developments in the financial services industry and the domestic and international
credit markets, and the impact of new legislation in response to those developments, may negatively impact our
operations by restricting our business operations, including our ability to originate or sell loans, and adversely
impact our financial performance. In addition, the adverse economic conditions noted earlier could continue to
adversely affect the performance and value of our loan and investment portfolios which would also negatively
affect our financial performance.
Changes in interest rates may adversely affect our net interest rate spread and net interest margin, which
would hurt our earnings.
We derive our income mainly from the difference or “spread” between the interest earned on loans,
securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing
liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest
we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our
spread and can adversely affect our income.
From an interest rate risk perspective, the Company is liability sensitive, which indicates that liabilities
generally re-price faster than assets. The timing mismatch of the re-price of interest-earning assets and interest-
bearing liabilities is referred to as the gap position. The most common measurement interval is one year. At June
30, 2008, the Company’s one-year gap position was –9.5% and at June 30, 2009 it was -5.2%. During the fiscal
year it fluctuated from -14.7% at September 30, 2008 to -10.7% at December 31, 2008 to -6.8% at March 31, 2009.
The improvement in the one-year gap position resulted primarily from the increase in cash and cash equivalents,
year-over-year.
In response to negative economic developments, the Federal Open Market Committee has steadily
reduced its federal funds rate target from 5.25% in September 2007 to between 0.00% and 0.25% currently which
has had the effect of reducing our cost of funds. However, the benefits to earnings arising from the reduction in
our cost of interest-cost liabilities have been partially offset by reduced yields on the Company’s short-term,
interest-earning assets whose balances have grown significantly during the year. Notwithstanding reduced
yields on short-term interest-earning assets, the Company’s net interest rate spread and margin improved from
1.81% to 2.25% and 2.54% to 2.81%, respectively, year-over-year.
As of June 30, 2009, $740.4 million or 81.8% of our certificates of deposit mature within one year. During
the year ending June 30, 2010, $200.0 million of FHLB advances are callable, but based on the interest rate
environment as of June 30, 2009 it appears unlikely that they will be called. With respect to re-pricing assets, at
June 30, 2009, the Company maintained balances of short term, liquid assets of $211.5 million. During the year
ending June 30, 2010, $20.9 million of loans will reach their contractual maturity dates. The effect of subsequent
interest rate changes will be reflected in the re-pricing of $121.4
46
million of loans maturing after June 30, 2010 and $311.5 million of mortgage-backed securities and non-mortgage-
backed securities with floating or adjustable rates.
Interest rates also affect how much money we lend. For example, when interest rates rise, the cost of
borrowing increases and loan originations tend to decrease. In addition, changes in interest rates can affect the
average life of loans and securities. A reduction in interest rates generally results in increased prepayments of
loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost.
This causes reinvestment risk, because we generally are not able to reinvest prepayments at rates that are
comparable to the rates we earned on the prepaid loans or securities. Changes in market interest rates could also
reduce the value of our financial assets. If we are unsuccessful in managing the effects of changes in interest
rates, our financial condition and profitability could suffer.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
We make various assumptions and judgments about the collectibility of our loan portfolio, including
the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for
the repayment of many of our loans. In determining the required amount of the allowance for loan losses, we
evaluate certain loans individually and establish specific loan loss allowances for identified impairments. For all
non-impaired loans, including those not individually reviewed, we estimate losses and establish general loan
loss allowances based upon historical and environmental loss factors. If the assumptions used in our calculation
methodology are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our
loan portfolio, resulting in further additions to our allowance. While our allowance for loan losses was 0.62% of
total loans at June 30, 2009, material additions to our allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for loan losses and may require us to
increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for
loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect
on our financial condition and results of operations.
We may be required to record additional impairment charges with respect to our investment securities
portfolio.
We review our securities portfolio at the end of each quarter to determine whether the fair value is
below the current carrying value. When the fair value of any of our investment securities has declined below its
carrying value, we are required to assess whether the impairment is other than temporary. If we conclude that the
impairment is other than temporary, we are required to write down the value of that security. The “credit-related”
portion of the impairment is recognized through earnings whereas the “noncredit-related” portion is generally
recognized through other comprehensive income in the circumstances where the future sale of the security is
unlikely. During the year ended June 30, 2008, we determined that the decline in the fair value of our investment
in the AMF Fund was other-than-temporary and recorded a pre-tax impairment charge of approximately $659,000
on this investment. Due to continuing declines in the value of this Fund, we decided to invoke the payment-in-
kind redemption option (which was the only redemption option available) on this Fund during the quarter ended
September 30, 2008 and received $1.4 million in cash and $6.0 million in mortgage-backed securities including $4.6
million in non-agency collateralized mortgage obligations that we carry as held to maturity. During the remainder
of fiscal 2009, we recognized pre-tax other-than-temporary impairment charges of $988,000 ($714,000 recognized
in earnings and $274,000 recorded in other comprehensive income) on these non-agency securities. At June 30,
2009, we had approximately $68.3 million in investment securities on
47
which we had approximately $5.5 million in gross unrealized losses. If changes in the expected cash flows of
these securities and/or prolonged price declines result in our concluding in future periods that the impairment of
these securities is other than temporary, we will be required to record an impairment charge against income equal
to the credit-related impairment.
Strong competition within our market area may limit our growth and profitability.
Competition is intense within the banking and financial services industry in New Jersey. In our market
area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors have substantially greater resources, higher lending limits and offer
services that we do not or cannot provide. This competition makes it more difficult for us to originate new loans
and retain and attract new deposits. Price competition for loans may result in originating fewer loans, or earning
less on our loans and price competition for deposits may result in a reduction of our deposit base or paying more
on our deposits.
Our business is geographically concentrated in New Jersey and a downturn in economic conditions within the
state could adversely affect our profitability.
A substantial majority of our loans are to individuals and businesses in New Jersey. The decline in the
economy of the state could continue to have an adverse impact on our earnings. We have a significant amount
of real estate mortgages, such that a decrease in local real estate values may adversely affect the value of
property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of
our borrowers to make timely repayments of their loans, which may adversely influence our profitability.
Our return on equity compares unfavorably to other companies. This could negatively influence the price of
our stock.
The net proceeds from our initial public offering in February 2005 substantially increased our equity
capital. We expect to take time to invest this capital prudently. As a result, our return on equity, which is the
ratio of earnings divided by average equity capital, is lower than that of many similar companies. To the extent
that the stock market values a company based in part on its return on equity, our low return on equity relative to
our peer group could negatively affect the trading price of our common stock. During the year ended June 30,
2009, there was ongoing evaluation and implementation of growth and diversification strategies related to
execution of the Company’s business plan. The Company expects to continue these efforts to grow and
diversify the balance sheet with the goals of improving profitability.
The costs of our stock compensation plans are a significant expense and funding of the plans may dilute
shareholders’ ownership interest in Kearny Financial Corp.
Effective upon completion of the Company’s initial public offering, the Bank established an Employee
Stock Ownership Plan (“ESOP”). We currently recognize compensation expense for the ESOP as shares are
committed for release to the participants’ accounts each month based on the monthly average market price of the
shares. We currently recognize additional annual employee compensation and benefit expenses and directors’
compensation expense stemming from stock options granted and restricted stock awarded to directors and
officers under the 2005 Stock Compensation and Incentive Plan. We expense the fair value of all options over
their vesting periods and the fair value of restricted shares over the requisite service periods, in both cases five
years. These additional expenses adversely affect our profitability and stockholders’ equity.
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The Company utilized open market purchases of common stock to fund restricted stock awards;
however, funding of stock options exercised will come either through open market purchases, the issuance of
shares from the Company’s treasury account or from the issuance of authorized but un-issued shares. Existing
shareholders will experience a dilution in ownership interest in the event the Company relies on the issuance of
shares from the Company’s treasury account or from the issuance of authorized but un-issued shares rather than
open market purchases to fund stock options.
Shareholders own a minority of Kearny Financial Corp.’s common stock and are not able to exercise voting
control over most matters put to a vote of stockholders.
Kearny MHC owns a majority of Kearny Financial Corp.’s common stock, 73.5% at June 30, 2009 and is
able to exercise voting control over most matters put to a vote of shareholders, including the election of
directors. Kearny MHC may also exercise its voting control to prevent a sale or merger transaction in which
stockholders could receive a premium for their shares. The Board of Directors of Kearny MHC is also the Board
of Directors of Kearny Financial Corp.
The Office of Thrift Supervision’s policy on remutualization transactions could prohibit acquisition of Kearny
Financial Corp., which may adversely affect our stock price.
The OTS regulations permit the acquisition of a mutual holding company by a mutual institution in a
remutualization transaction. Current OTS policy, however, views remutualization transactions as raising
significant issues concerning disparate treatment of minority stockholders and mutual members of the target
entity and raising issues concerning the effect on the mutual members of the acquiring entity. The OTS may give
these issues special scrutiny and reject applications providing for the remutualization of a mutual holding
company unless the applicant can clearly demonstrate that there is no cause for OTS’s concerns in the particular
case. Should the OTS prohibit or otherwise restrict these transactions in the future, our stock price may be
adversely affected.
Proposed legislation would eliminate our primary federal regulator, require Kearny Federal Savings Bank to
convert to a bank, and require Kearny MHC and Kearny Financial Corp. to become bank holding companies.
The U.S. Treasury Department recently released a legislative proposal that would implement sweeping
changes to the current federal bank regulatory structure. The proposal would merge our current primary federal
regulator, the OTS, and the Office of the Comptroller of the Currency (the primary federal regulator for national
banks) into a new federal banking regulator, the National Bank Supervisor. The proposal would also eliminate the
federal thrift charter and require all federal savings associations, such as the Bank, to elect, within six months of
the effective date of the legislation, to convert to either a national bank, state bank or state savings association.
A federal savings association that does not make the election would, by operation of law, be converted into a
national bank within one year of the effective date of the legislation.
If the Bank is required to convert to a bank charter, Kearny MHC and the Company would be required
to become bank holding companies subject to regulation and supervision by the Board of Governors of the
Federal Reserve System (the “Federal Reserve”), which differs from that of the OTS in certain important respects,
particularly with respect to mutual holding companies. While the OTS regulations permit mutual holding
companies to waive the receipt of dividends, subject to notice to and non-objection by the OTS, the Federal
Reserve’s current policy is to prohibit mutual holding companies from waiving the receipt of dividends so long
as the subsidiary savings bank is well capitalized. Moreover, the OTS regulations provide that waived dividends
will not be taken into account in
49
determining an appropriate exchange ratio for minority shares in the event of the conversion of a mutual holding
company to stock form. If the OTS is eliminated, the Federal Reserve becomes the exclusive regulator of mutual
holding companies, and the Federal Reserve retains its current policy regarding dividend waivers by mutual
holding companies, Kearny MHC would not be permitted to waive the receipt of dividends declared by Kearny
Financial Corp. This would have an adverse impact on our ability to pay dividends.
Item 1B. Unresolved Staff Comments
Not applicable.
50
Item 2. Properties
The Company and the Bank conduct business from their administrative headquarters at 120 Passaic
Avenue in Fairfield, New Jersey and 26 branch offices located in Bergen, Essex, Hudson, Middlesex, Morris,
Ocean, Passaic and Union Counties, New Jersey. Six of our offices are leased with remaining terms between one
and nine years. At June 30, 2009, our net investment in property and equipment totaled $35.5 million. The
following table sets forth certain information relating to our properties as of June 30, 2009.
Office Location
Executive Office:
120 Passaic Avenue
Fairfield, New Jersey
Main Office:
614 Kearny Avenue
Kearny, New Jersey
Branches:
425 Route 9 & Ocean Gate Drive
Bayville, New Jersey
417 Bloomfield Avenue
Caldwell, New Jersey
20 Willow Street
East Rutherford, New Jersey
534 Harrison Avenue
Harrison, New Jersey
1353 Ringwood Avenue
Haskell, New Jersey
718B Buckingham Drive
Lakewood, New Jersey
630 North Main Street
Lanoka Harbor, New Jersey
307 Stuyvesant Avenue
Lyndhurst, New Jersey
270 Ryders Lane
Milltown, New Jersey
339 Main Road
Montville, New Jersey
119 Paris Avenue
Northvale, New Jersey
Year
Opened
Net Book Value as of
June 30, 2009
Square
Footage
Owned/Leased
(In Thousands)
2004
$10,773
53,000
Owned
1928
387
6,764
Owned
29
183
31
277
—
51
3,500
Leased
4,400
Owned
3,100
Owned
3,000
Owned
2,500
Leased
2,800
Leased
1,589
3,200
Owned
31
7
—
3,338
Owned
3,600
Leased
1,850
Leased
162
1,750
Owned
1973
1968
1969
1995
1996
2008
2005
1970
1989
1996
1965
51
Office Location
80 Ridge Road
North Arlington, New Jersey
510 State Highway 34
Old Bridge Township, New Jersey
207 Old Tappan Road
Old Tappan, New Jersey
267 Changebridge Road
Pine Brook, New Jersey
653 Westwood Avenue
River Vale, New Jersey
252 Park Avenue
Rutherford, New Jersey
520 Main Street
Spotswood, New Jersey
130 Mountain Avenue
Springfield, New Jersey
827 Fischer Boulevard
Toms River, New Jersey
2100 Hooper Avenue
Toms River, New Jersey
487 Pleasant Valley Way
West Orange, New Jersey
216 Main Street
West Orange, New Jersey
250 Valley Boulevard
Wood-Ridge, New Jersey
661 Wyckoff Avenue
Wyckoff, New Jersey
Year
Opened
Net Book Value
as of
June 30, 2009
(In Thousands)
Square
Footage
Owned/Leased
1952
2002
1973
1974
1965
1974
1979
1991
1996
2008
1971
1975
1957
2002
$ 28
3,500
Owned
799
583
110
591
423
278
974
558
108
67
66
2,400
Owned
2,160
Owned
3,600
Owned
1,600
Owned
1,984
Owned
2,400
Owned
6,480
Owned
3,500
Owned
2,000
Leased
3,000
Owned
2,400
Owned
1,459
9,500
Owned
1,892
6,300
Owned
The Bank expects to open a new 2,900 square foot full-service branch at 917 Route 23 South, Pompton
Plains, New Jersey during the quarter ending December 31, 2009. The Bank’s net investment in this owned
property is expected to be approximately $1.4 million.
52
Item 3. Legal Proceedings
The Bank, from time to time, is a party to routine litigation, which arises in the normal course of
business, such as claims to enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and other issues incident to our
business. There were no lawsuits pending or known to be contemplated against the Company or the Bank at
June 30, 2009 that would be expected to have a material effect on operations or income.
Item 4. Submission of Matters to a Vote of Security Holders
None.
53
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
(a) Market Information. The Company’s common stock trades on The NASDAQ Global Select
Market under the symbol “KRNY”. The table below shows the reported high and low closing prices of the
common stock and dividends paid per public share for each quarter during the last two fiscal years. Kearny MHC
has waived receipt of all dividends paid during each of the periods presented.
Fiscal Year 2009
Quarter ended September 30, 2008
Quarter ended December 31, 2008
Quarter ended March 31, 2009
Quarter ended June 30, 2009
Fiscal Year 2008
Quarter ended September 30, 2007
Quarter ended December 31, 2007
Quarter ended March 31, 2008
Quarter ended June 30, 2008
High
Low
Dividends
$
$
$
$
$
$
$
$
13.95
12.86
12.80
12.22
13.90
13.31
11.98
11.64
$
$
$
$
$
$
$
$
10.78
10.69
7.80
10.28
11.45
11.90
9.98
10.65
$
$
$
$
$
$
$
$
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Declarations of dividends by the Board of Directors depend on a number of factors, including
investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum
capital requirements, regulatory limitations, stock market characteristics and general economic conditions. The
timing, frequency and amount of dividends are determined by the Board.
The Company’s ability to pay dividends may also depend on the receipt of dividends from the Bank,
which is subject to a variety of limitations under the regulations of the OTS on the payment of dividends.
As of September 4, 2009 there were 4,254 registered holders of record of the Company’s common stock,
plus approximately 2,882 beneficial (street name) owners.
(b)
Use of Proceeds. Not applicable.
54
(c) Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s
stock repurchases during the fourth quarter of the fiscal year ended June 30, 2009.
Issuer Purchases of Equity Securities
Total
Number
of Shares
(or Units)
purchased
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs *
Average
Price Paid
Per Share
(or Unit)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under the
Plans or Programs
April 1 – April 30, 2009
May 1 – May 31, 2009
June 1 – June 30, 2009
—
123,400
165,300
$
—
10.90
11.12
Total
288,700
$
11.03
—
123,400
165,300
288,700
823,923
700,523
535,223
535,223
* On March 3, 2009, the Company announced the authorization of a fourth stock repurchase program for up
to 936,323 shares or 5% of shares outstanding.
Stock Performance Graph. Set forth on Page 56 is a stock performance graph comparing the
cumulative total shareholder return on the Company’s common stock with (a) the cumulative total shareholder
return on stocks included in the NASDAQ Composite Index, (b) the cumulative total shareholder return on
stocks included in the SNL Thrift $1 Billion - $5 Billion Index and (c) the cumulative total shareholder return on
stocks included in the SNL Thrift MHC Index, in each case assuming an investment of $100.00 as of February 24,
2005 (the date the Company’s common stock began trading on the NASDAQ Stock Market following the closing
of the Company’s initial public stock offering). The cumulative total returns for the indices and the Company are
computed assuming the reinvestment of dividends that were paid during the period. It is assumed that the
investment in the Company’s common stock was made at the initial public offering price of $10.00 per share.
55
KEARNY FINANCIAL CORP.
Index
2/24/05
6/30/05
6/30/06
6/30/07
6/30/08
6/30/09
Kearny Financial Corp.
NASDAQ Composite
SNL Thrift $1 B - $5 B Index
SNL Thrift MHC Index
$100
100
100
100
$118
100
103
104
$150
106
112
121
$139
127
109
138
$115
112
83
128
$122
89
68
117
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type
stocks listed on The NASDAQ Stock Market. The SNL indices were prepared by SNL Financial LC,
Charlottesville, Virginia. The SNL Thrift $1 Billion - $5 Billion Index includes all thrift institutions with total assets
between $1.0 billion and $5.0 billion. The SNL Thrift MHC Index includes all publicly traded mutual holding
companies.
There can be no assurance that the Company’s future stock performance will be the same or similar to
the historical stock performance shown in the graph above. The Company neither makes nor endorses any
predictions as to stock performance.
56
Item 6. Selected Financial Data
The following financial information and other data in this section are derived from the Company’s
audited consolidated financial statements and should be read together therewith.
Balance Sheet Data:
Assets
Net loans receivable
2009
2008
At June 30,
2007
(In Thousands)
2006
2005
$ 2,124,921 $ 2,083,039 $ 1,917,253 $ 1,991,773 $ 2,107,005
558,018
1,021,686
1,039,413
860,493
703,613
Mortgage-backed securities available for
sale
Mortgage-backed securities held to
maturity
Securities available for sale
Securities held to maturity
Cash and cash equivalents
Goodwill
Deposits
Federal Home Loan Bank advances
Total stockholders’ equity
683,785
726,023
643,779
670,329
—
4,321
28,027
—
211,525
82,263
1,421,201
210,000
476,720
—
38,183
—
131,723
82,263
1,379,032
218,000
471,371
—
88,869
—
163,341
82,263
1,411,713
28,488
462,592
—
222,793
—
230,279
82,263
1,443,738
61,105
475,134
758,121
33,591
470,098
139,865
82,263
1,528,777
61,687
505,482
For the Years Ended June 30,
2009
2008
2007
2006
2005
(In Thousands, Except Percentage and Per Share Amounts)
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provisionfor
loan losses
Non-interest income, excluding (loss)
gain on securities
Non-interest income from (loss) gain on
sale of securities
Loss on impairment of securities
Non-interest expenses
Income before income taxes
Provisions for income taxes
Net income
Share and Per Share Data:
Net income per share – basic
Net income per share – diluted
Weighted average number of common
shares outstanding – basic
Weighted average number of common
shares outstanding – diluted
Cash dividends per share (1)
Dividend payout ratio (2)
$
$
$
$
97,908 $
44,200
53,708
317
53,391
2,648
(415)
(714)
43,922
10,988
4,597
6,391 $
97,367 $
50,528
46,839
94
46,745
2,708
—
(659)
40,939
7,855
1,951
5,904 $
95,561 $
50,468
45,093
571
44,522
2,434
55
—
44,856
2,155
221
1,934 $
89,323 $
38,645
50,678
72
50,606
2,302
1,023
—
42,046
11,885
2,277
9,608 $
82,441
30,422
52,019
68
51,951
1,798
7,705
—
34,862
26,592
7,694
18,898
0.09 $
0.09 $
0.09 $
0.09 $
0.03 $
0.03 $
0.14 $
0.14 $
0.33
0.33
68,111
68,223
68,675
68,789
69,242
69,581
70,904
70,982
$
0.20 $
54.91 %
0.20 $
62.47%
0.20 $
192.61%
0.19 $
49.30%
57,963
57,963
—
0.00%
57
At or For the Years Ended June 30,
2009
2008
2007
2006
2005
Performance Ratios:
Return on average assets (net income divided
by average total assets)
0.31%
0.29%
0.10%
0.47%
0.94%
Return on average equity (net income divided
by average equity)
Net interest rate spread
Net interest margin
Average interest-earning assets to average
interest-bearing liabilities
Efficiency ratio (Non-interest expense divided
by the sum of net interest income and
non-interest income)
Non-interest expense to average assets
Asset Quality Ratios:
Non-performing loans to total loans
Non-performing assets to total assets
Net charge-offs to average loans outstanding
Allowance for loan losses to total loans
Allowance for loan losses to non-performing
loans
Capital Ratios:
1.35
2.25
2.81
1.26
1.81
2.54
0.41
1.70
2.43
1.94
2.10
2.67
5.40
2.51
2.79
124.16
126.49
126.82
127.82
116.93
79.53
2.11
1.26
0.62
0.00
0.62
83.74
2.04
0.15
0.08
0.00
0.59
94.27
2.23
0.17
0.08
0.00
0.70
77.86
2.05
0.13
0.05
0.01
0.77
56.67
1.73
0.34
0.10
0.00
0.96
48.92
388.05
406.25
578.66
281.79
Average equity to average assets
Equity to assets at period end
Tangible equity to tangible assets at period
end
22.73
22.43
18.98
23.41
22.63
19.51
23.56
24.13
21.10
24.16
23.85
21.19
17.36
23.99
20.66
(1) Represents dividends paid per public share. Kearny MHC has waived receipt of all cash dividends declared
to date.
(2) Represents cash dividends paid on public shares divided by net income.
58
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
This discussion and analysis reflects Kearny Financial Corp.’s consolidated financial statements and
other relevant statistical data. We include it to enhance your understanding of our financial condition and
results of operations. You should read the information in this section in conjunction with Kearny Financial
Corp.’s consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K and
the other statistical data provided herein.
Overview
Financial Condition. Total assets increased $41.9 million to $2.12 billion at June 30, 2009 from $2.08
billion at June 30, 2008. The increase was due primarily to increases in cash and cash equivalents and, to a lesser
degree, net loans receivable, partially offset by decreases in non-mortgage-backed and mortgage-backed
securities.
During the year ended June 30, 2009, per the Company’s business plan, management continued to
focus on changing the Bank’s asset mix, increasing the loan portfolio while reducing the relative size of the
securities portfolio. From a historical perspective, our loan portfolio now represents a greater percentage of our
interest-earning assets than our securities portfolio; however, the portfolio relative to assets decreased year-
over-year due in part to the economic downturn. At June 30, 2009, net loans receivable comprised 48.9% of total
assets compared to 49.0% a year earlier while securities comprised 33.7% of total assets compared to 36.7% a
year earlier. Between June 30, 2008 and June 30, 2009, net loans receivable increased $17.7 million, or 1.7%, while
securities decreased $48.1 million, or 6.3%. Generally, cash flows from investing activities were used to fund loan
originations and deposit outflows early in the year; however, thereafter deposits began to increase while loan
demand dropped significantly leading to a buildup of cash.
At June 30, 2009, our total deposits were $1.42 billion, compared to $1.38 billion at June 30, 2008. Year-
over-year, certificates of deposit and core deposits increased $31.1 million and $11.0 million, respectively.
Beginning during the quarter ended December 31, 2008, deposits began to increase reversing the trend of
deposit outflows experienced by the Bank since the quarter ended December 31, 2006. Reductions in the federal
funds rate amounting to a 525 basis point cut in aggregate between September 2007 and December 2008 have
had a significant effect on interest rates, particularly lowering the rates paid on certificates of deposit, which has
made the Bank’s rate offerings more competitive in the marketplace while also helping to lower the cost of
deposits.
FHLB of New York borrowings decreased $8.0 million to $210.0 million at June 30, 2009 from $218.0
million a year earlier. Due to continuing deposit inflows and flagging loan demand, there was no need for
additional borrowing during fiscal 2009.
Stockholders’ equity increased $5.3 million to $476.7 million at June 30, 2009, from $471.4 million at June
30, 2008. The increase was primarily the result of a $10.0 million increase in accumulated other comprehensive
income, net of income taxes, due to mark-to-market adjustments to the available for sale non-mortgage-backed
securities and mortgage-backed securities portfolios and benefit plan adjustments pursuant to SFAS No. 158.
Results of Operations. Our results of operations depend primarily on our net interest income. Net
interest income is the difference between the interest income we earn on our interest-earning assets and the
interest we pay on our interest-bearing liabilities. It is a function of the average balances of loans
59
and investments versus deposits and borrowed funds outstanding in any one period and the yields earned on
those loans and investments and the cost of those deposits and borrowed funds. Our results of operations are
also affected by our provision for loan losses, non-interest income and non-interest expense.
Net income for the fiscal year ended June 30, 2009 was $6.4 million, or $0.09 per diluted share; an
increase of $487,000 from $5.9 million, or $0.09 per diluted share for the fiscal year ended June 30, 2008. The
increase in net income year-over-year resulted primarily from an increase in net interest income, partially offset
by increases in impairment losses on securities, non-interest expense and income taxes as well as an increase in
provision for loan losses and a decrease in non-interest income (excluding loss on securities).
Our net interest income increased by $6.9 million to $53.7 million during the fiscal year ended June 30,
2009 from $46.8 million during the fiscal year ended June 30, 2008. The net interest rate spread increased to 2.25%
for fiscal 2009 from 1.81% for fiscal 2008 as the cost of average interest-bearing liabilities fell to 2.87% from 3.46%
while the yield on average interest-earning assets decreased to 5.12% from 5.27%. Total interest income
increased to $97.9 million during the fiscal year ended June 30, 2009 from $97.4 million during the fiscal year
ended June 30, 2008 due to an increase in average interest-earning assets, partially offset by a decrease in
average yield. Total interest expense decreased to $44.2 million, year-over-year, due to a decrease in the average
cost, partially offset by an increase in volume of interest-bearing liabilities.
Non-interest expense increased $3.0 million to $43.9 million during the fiscal year ended June 30, 2009,
from $40.9 million during the fiscal year ended June 30, 2008. The increase in non-interest expense resulted
primarily from increases in salaries and employee benefits expense, net occupancy expense of premises, federal
deposit insurance premium expense and miscellaneous expense, partially offset by a decrease in amortization of
intangible assets expense.
Non-interest income, excluding loss on sales and impairments of securities, decreased $60,000 to $2.6
million during the fiscal year ended June 30, 2009 compared to $2.7 million during the fiscal year ended June 30,
2008 due to a $139,000 decrease in miscellaneous income, partially offset by a $79,000 increase in fees and service
charges. Total non-interest income, including loss on securities, decreased $530,000 to $1.5 million from $2.0
million, year-over-year.
The provision for loan losses was $317,000 for fiscal 2009 compared to $94,000 for fiscal 2008. The
increase in the provision was due primarily to the adjustment of the environmental factors component of the
Bank’s analysis of probable loan losses to reflect current economic conditions as well as an increase in non-
performing assets.
Business Strategy. Our current business strategy is to seek to grow and improve our profitability by:
•
•
•
increasing the volume of our loan originations and the size of our loan portfolio relative to our
securities portfolio;
increasing the origination of multi-family and commercial real estate loans and commercial
business loans;
building our core banking business through internal growth and de novo branching, as well as
actively considering expansion opportunities such as the acquisition of branches and other
financial institutions;
60
•
•
developing a sales culture by training and encouraging our branch personnel to promote our
existing products and services to our customers; and
maintaining high asset quality.
Our deposits have traditionally exceeded our loan originations and we have invested these deposits
primarily in mortgage-backed securities and non-mortgage-backed securities. Following our acquisition of South
Bergen Savings Bank in 1999, we began to emphasize increasing the size of our loan portfolio. Prior to that time,
we focused our efforts on obtaining deposits from the communities in which we operated our five branch offices
in Bergen and Hudson counties and investing those funds in mortgage-backed and non-mortgaged-backed
securities. The focal point of our current business strategy is to increase our volume of loan originations and the
size of our loan portfolio, which we fund by gathering deposits through our 26 branches located in eight
counties. Since June 1999, the Company has nearly doubled in terms of assets while the loan portfolio has grown
by more than three and one-half times, from $283.0 million at June 30, 1999 to $1.04 billion at June 30, 2009. At
June 30, 2009, mortgage-backed securities and non-mortgage-backed securities have fallen to 33.7% of assets,
compared to 67.2% at June 30, 1999. Our residential loan originations have traditionally been largely advertising
driven, but we also utilize regional loan advisors who specialize in residential mortgage loan originations and are
available to meet with prospective loan customers wherever it is most convenient for them.
An important component of our business plan calls for expanding our presence in the commercial
marketplace. We expect to increase the size of our commercial lending staff, particularly by adding experienced
commercial lenders in order to increase the size of the commercial loan portfolio. Internet banking and cash
management products are now available for commercial customers and we anticipate adding remote deposit
capture to our commercial product line during fiscal 2010.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. We describe them in detail in
Note 1 to the Company’s consolidated financial statements beginning on Page F-9 of this document. In
preparing the consolidated financial statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial
condition and revenues and expenses for the periods then ended. Actual results could differ significantly from
those estimates. Material estimates that are particularly susceptible to significant changes relate to the
determination of the allowance for loan losses, the evaluation of securities impairment and the impairment testing
of goodwill.
Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects the
Company’s estimation of the losses in its loan portfolio to the extent they are both probable and reasonable to
estimate. The balance of the allowance is generally maintained through provisions for loan losses that are
charged to income in the period that estimated losses on loans are identified by the Company’s loan review
system. The Company charges losses on loans against the allowance as such losses are actually incurred.
Recoveries on loans previously charged-off are added back to the allowance.
As described in greater detail in the notes to consolidated financial statements, the Company’s
allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement process that is performed
quarterly. Through the first tier of the process, the Company first identifies the loans that must be reviewed
individually for impairment in accordance with SFAS No. 114. Such loans generally represent the Company’s
larger and/or more complex loans including commercial mortgage loans, but may also include certain individual
one-to-four family mortgage loans, home equity loans and home equity lines of credit. A reviewed loan is
deemed to be impaired when, based on current information and
61
events, it is probable that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Once a loan is determined to be impaired, management measures the amount of the
estimated impairment associated with that loan which is generally defined as the amount by which the carrying
value of a loan exceeds its fair value. The Company establishes specific valuation allowances for loan
impairments in the fiscal period during which they are identified.
The second tier of the loss measurement process involves estimating the probable and estimable losses
in accordance with SFAS No. 5 which addresses loans not otherwise reviewed for impairment in accordance with
SFAS No. 114. Such loans generally comprise large groups of smaller-balance homogeneous loans, such as one-
to-four family mortgage loans, home equity loans and lines of credit and consumer loans, but also include the
remaining non-impaired loans of the larger and/or more complex types that were not individually reviewed for
impairment.
Valuation allowances established in accordance with SFAS No. 5 utilize historical and environmental
loss factors to collectively estimate the level of probable losses within defined segments of the Company’s loan
portfolio. To calculate its historical loss factors, the Company’s allowance for loan loss methodology generally
utilizes a minimum five-year moving average of annual net charge-off rates (charge-offs net of recoveries) by
loan segment, where available, to calculate its actual, historical loss experience. The outstanding principal
balance of each loan segment is multiplied by the applicable historical loss factor to estimate the level of
probable losses based upon the Company’s historical loss experience.
Environmental loss factors are based upon specific qualitative criteria representing key sources of risk
within the loan portfolio. Such risk criteria includes the level of and trends in delinquencies and non-accrual
loans; the effects of changes in credit policy; the experience, ability and depth of the lending function’s
management and staff; national and local economic trends and conditions; credit risk concentrations and
changes in local and regional real estate values. The outstanding principal balance of each loan segment is
multiplied by the applicable environmental loss factor to estimate the level of probable losses based upon the
qualitative risk criteria.
The sum of the probable and estimable loan losses calculated in accordance with SFAS No. 114 and
SFAS No. 5, as described above, represents the total targeted balance for the Company’s allowance for loan
losses at the end of a fiscal period. A more detailed discussion of the Company’s allowance for loan loss
calculation methodology is presented in Note 1 of the Company’s consolidated financial statements.
Impairment Testing of Goodwill. We record goodwill, representing the excess of amounts paid over
the fair value of net assets of the institutions acquired in purchase transactions, at its fair value at the date of
acquisition. Through June 30, 2002, we amortized goodwill using the straight-line method over 15 years. Effective
July 1, 2002, we adopted the FASB’s SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and
Other Intangible Assets”. Goodwill is tested and deemed impaired when the carrying value of goodwill exceeds
its implied fair value. Goodwill was most recently tested as of June 30, 2009, at which time no impairment was
indicated. At June 30, 2009, we reported goodwill of $82.3 million. The value of the goodwill can change in the
future. We expect the value of the goodwill to decrease if there is a significant decrease in the franchise value of
the Bank. If an impairment loss is determined in the future, we will reflect the loss as an expense for the period in
which the impairment is determined, leading to a reduction of our net income for that period by the amount of the
impairment loss.
Other-than-Temporary Impairment of Securities. If the fair value of a security is less than its amortized
cost, the security is deemed to be impaired. Management evaluates all securities with unrealized losses quarterly
to determine if such impairments are “temporary” or “other-than-temporary”
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in accordance with applicable accounting guidance including, but not limited to, SFAS No. 115 “Accounting for
Certain Investments in Debt and Equity Securities”, as amended, and EITF Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be
Held by a Transferor in Securitized Financial Asset”, as amended.
The Company accounts for temporary impairments based upon their classification as either available for
sale, held to maturity or managed within a trading portfolio. Temporary impairments on “available for sale”
securities are recognized, on a tax-effected basis, through accumulated other comprehensive income with
offsetting entries adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the
Company does not adjust the carrying value of “held to maturity” securities for temporary impairments, although
information concerning the amount and duration of impairments on held to maturity securities is generally
disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio is adjusted
to their fair value through earnings on a daily basis. However, the Company maintained no securities in trading
portfolios at or during the periods presented in these financial statements.
The Company accounts for other-than-temporary impairments (“OTTI”) based upon several
considerations. First, OTTI on securities that the Company has decided to sell as of the close of a fiscal period,
or will, more likely than not, be required to sell prior to the full recovery of their fair value to a level equal to or
exceeding their amortized cost, are recognized in earnings. If neither of these conditions regarding the likelihood
of the securities’ sale is applicable, then the OTTI is bifurcated into credit-related and noncredit-related
components. A credit-related impairment generally represents the amount by which the present value of the cash
flows that are expected to be collected on an other-than-temporarily impaired security fall below its amortized
cost. The noncredit-related component represents the remaining portion of the impairment not otherwise
designated as credit-related. The Company recognizes credit-related, OTTI in earnings. However, noncredit-
related, other-than-temporary impairments on debt securities are recognized in accumulated other comprehensive
income.
Comparison of Financial Condition at June 30, 2009 and June 30, 2008
General. Total assets increased $41.9 million to $2.12 billion at June 30, 2009 from $2.08 billion at June
30, 2008. The increase in total assets was due primarily to an increase in cash and cash equivalents and, to a
lesser degree, net loans receivable, partially offset by decreases in non-mortgage-backed securities and
mortgage-backed securities.
Cash and Cash Equivalents. Cash and cash equivalents, consisting primarily of interest-bearing
deposits in other banks increased $79.8 million to $211.5 million at June 30, 2009 from $131.7 million at June 30,
2008. During the quarters ended September 30 and December 31, 2008 liquidity decreased as cash and cash
equivalents were redeployed to fund loan originations, loan purchases or deposit outflows. However, by
December cash and cash equivalents began to build as the competition reduced their deposit account rates
bringing them in line with those offered by the Bank. Despite several rounds of interest rate cuts by the Bank
during the quarters ended March 31 and June 30, 2009, deposits continued to increase as loan demand declined
contributing to a significant increase in cash and cash equivalents. With the federal funds rate hovering between
0.00% and 0.25% the average yield on cash and cash equivalents was only 0.74% during fiscal 2009.
At June 30, 2009, interest-bearing deposits included $25.6 million on deposit with a money center bank
and $160.0 million on deposit with the FHLB of New York. Management routinely transfers funds between the
two depository institutions to maximize the return on the funds, with the former pricing off of 30-day Libor and
the latter off of the federal funds rate.
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Securities Available for Sale. Non-mortgage-backed securities, all of which are classified as available
for sale, decreased $10.2 million to $28.0 million at June 30, 2009 compared to $38.2 million at June 30, 2008. The
decrease resulted primarily from the redemption-in-kind of the AMF Fund as well as principal repayments
totaling $907,000 and a $1.5 million decrease in the fair value of the portfolio. The shares of the AMF Fund,
which management redeemed for the underlying securities, were written down to fair value as of the trade date
resulting in a pre-tax charge to earnings of $415,000 during the quarter ended September 30, 2008. Following the
redemption-in-kind, the underlying securities were reclassified to mortgage-backed securities held to maturity.
At June 30, 2009, the non-mortgage-backed securities portfolio consisted of $4.6 million of Small
Business Loan (“SBA”) pass-through certificates, $18.3 million of municipal bonds and $5.1 million of single
issuer trust preferred securities with amortized costs of $4.6 million, $18.2 million and $8.8 million, respectively.
The net unrealized loss for this portfolio was $3.6 million as of June 30, 2009. Management has concluded based
on its evaluation of this portfolio that no other-than-temporary impairment is present for individual securities in a
loss position at June 30, 2009. (For additional information refer to Note 6 to consolidated financial statements.)
Loans Receivable. Loans receivable, net of unamortized premiums, deferred costs and the allowance for
loan losses, increased $17.7 million to $1.04 billion at June 30, 2009 from $1.02 billion at June 30, 2008. Following a
strong first quarter, lending activity was significantly lower during the second and third quarters, but began to
improve during the fourth quarter of fiscal 2009. Management allowed loan rates to lag the market, therefore, the
Bank did not experience the same level of refinancing activity as other lenders. During the quarter ended
September 30, 2008, loan originations and purchases totaled $92.0 million, but decreased to $36.8 million and
$26.2 million during the quarters ending December 31, 2008 and March 31, 2009, respectively, followed by an
increase to $75.5 million during the quarter ended June 30, 2009. Although the Bank continued to adhere to
reasonably disciplined loan pricing, residential loan applications began to increase during the quarter ended
June 30, 2009. As the economic downturn became more firmly entrenched, residential lending activity dropped
off significantly, however, commercial lending remained relatively stable throughout fiscal 2009.
Residential first mortgages, home equity loans and home equity lines of credit increased in the
aggregate $47.0 million during the quarter ended September 30, 2008, but decreased $771,000, $36.5 million and
$18.0 million during the quarters ended December 31, 2008, March 31 and June 30, 2009, respectively. By
comparison, nonresidential mortgages, multi-family mortgages and commercial business loans increased in the
aggregate $5.2 million, $5.3 million, $6.5 million and $7.9 million during each of the four quarters, respectively,
reflecting a better pricing environment for these loans. Residential first mortgages, home equity loans and home
equity lines of credit in the aggregate totaled $814.8 million at June 30, 2009 compared to $823.1 million at June 30,
2008. Nonresidential mortgages, multi-family mortgages and commercial business loans in the aggregate totaled
$212.2 million at June 30, 2009 compared to $187.3 million at June 30, 2008, which is consistent with the
Company’s business plan. Construction loan disbursements increased $1.3 million to $13.4 million at June 30,
2009 compared to $12.1 million at June 30, 2008. Construction loans were virtually unchanged at $21.0 million,
year-over-year. The distribution of construction loans by collateral type at June 30, 2009 was $16.0 million of
residential properties, $4.5 million of nonresidential properties and $500,000 of multi-family properties. Other loan
categories totaled $4.5 million at June 30, 2009 compared to $4.0 million at June 30, 2008.
Mortgage-backed Securities Available for Sale. Mortgage-backed securities available for sale, all of
which are government agency pass-through certificates, decreased $42.2 million to $683.8 million at June 30, 2009
compared to $726.0 million at June 30, 2008. The decrease resulted from principal repayments and maturities
totaling $137.7 million partially offset by an $18.7 million increase in the fair
64
value of the portfolio and purchases of $77.4 million, which for the most part were 30-year fixed-rate CRA eligible
issues used to meet CRA investment requirements. The net unrealized gain for this portfolio was $18.7 million as
of June 30, 2009. Management has concluded based on its evaluation of this portfolio that no other-than-
temporary impairment is present for individual securities in a loss position at June 30, 2009. (For additional
information refer to Note 6 to consolidated financial statements.) Cash flows from the portfolio were generally
used to fund loan originations, loan purchases or deposit outflows during the first six months of the fiscal year,
but for the most part contributed to the increase in cash and cash equivalents during the remainder of the year.
Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity totaled
$4.3 million at June 30, 2009 compared to none at June 30, 2008. Due to a continuing decline in the net asset value
of the AMF Fund, the Company decided in July 2008 to withdraw its investment in this AMF Fund by invoking a
redemption-in-kind option after the fund’s manager instituted a temporary prohibition against cash redemptions.
As a result of the redemption-in-kind, the Bank received its pro-rata share of cash assets and the mortgage-
backed securities in the fund, which totaled approximately $1.4 million and $6.0 million, respectively.
Approximately 90% of the mortgage-backed securities received in the redemption were collateralized mortgage
obligations, a mix of agency and non-agency issues. Upon redemption, this portfolio was written down to fair
value and classified as held-to-maturity. At June 30, 2009, the portfolio included non-agency collateralized
mortgage obligations with an amortized cost of $2.5 million and estimated fair value of $1.8 million. Furthermore,
the portfolio also included agency mortgage-backed securities and collateralized mortgage obligations with an
amortized cost of $1.8 million and estimated fair value of $1.9 million.
During the first nine months of fiscal 2009, the Company had recognized other-than-temporary
impairments attributed to the non-agency collateralized mortgage obligations of $570,000, all of which were
recorded through earnings. Of that balance, approximately $290,000 was determined by the Company to be
“credit-related” with the remaining $280,000 attributed to noncredit-related factors. In accordance with its
adoption of FSP FAS 115-2 and FAS 124-2, the Company recorded a cumulative effect of adoption adjustment
effective April 1, 2009 between retained earnings and accumulated other comprehensive income totaling $165,000
representing the after-tax effect of the adoption. The Company also identified an additional $144,000 of credit-
related, other-than-temporary impairments that were recognized through earnings during the quarter ended June
30, 2009. An additional $274,000 on noncredit-related other-than-temporary impairments were identified and
recorded through accumulated other comprehensive income on a tax effected basis during that same quarter.
(For additional information refer to Note 6 to consolidated financial statements.)
Other Assets. Premises and equipment increased $545,000 to $35.5 million at June 30, 2009 from $35.0
million at June 30, 2008 due primarily to renovations in the Fairfield administrative building for purposes of
accommodating the relocation of the Company’s commercial lending department and construction costs
associated with a new retail branch in Pequannock, New Jersey.
FHLB of New York capital stock decreased $126,000 to $13.0 million at June 30, 2009 due to a reduction
in borrowings during fiscal 2009. Bank owned life insurance increased $558,000, to $16.3 million at June 30, 2009
due to an increase in the cash surrender value of the underlying insurance policies.
Deferred income tax assets, net, decreased $7.6 million to $1.4 million at June 30, 2009 due primarily to
increased deferred tax liabilities related to increased unrealized gains on available for sale securities.
65
Deposits. Deposits increased $42.2 million to $1.42 billion at June 30, 2009 from $1.38 billion at June 30,
2008. During the quarter ended September 30, 2008, deposits decreased $30.0 million, but increased by $2.3
million, $53.3 million and $16.6 million each quarter thereafter, respectively. During fiscal 2009, interest-bearing
demand deposits increased $11.9 million to $163.6 million, savings deposits increased $1.2 million to $301.6
million, certificates of deposit increased $31.1 million to $904.7 million and non-interest-bearing demand deposits
decreased $2.1 million to $51.2 million.
During the first two quarters of the fiscal year, the Bank priced deposit interest rates at levels
management considered to be reasonably competitive in the marketplace. The Bank determined that there was no
need to increase interest rates to attract deposits since cash flows from investing activities were adequate to
fund loan demand and deposit outflows. During that period, deposit pricing in the marketplace was reasonably
disciplined, but there continued to be fierce competition for certificates of deposit and interest-bearing demand
deposits emanating from those financial institutions receiving negative publicity due to asset quality problems.
Also contributing to the competition for deposits, some financial institutions attempted to lock in depositors at
current interest rates for longer terms as a hedge against future rate increases and, notwithstanding the FDIC’s
increase in insurance of deposit accounts, some depositors spread funds to other financial institutions to reduce
their risk of loss on uninsured deposits following the collapse of several major banks. During the quarter ended
December 31, 2008, deposit rates in the marketplace began to pull back in conjunction with the additional 200
basis point decrease in the federal funds rate. By December 2008, the Bank’s deposit flows turned positive as the
competition lowered their rates bringing them in line with those offered by the Bank. Since there was little
demand for loans and virtually no return on cash and cash equivalents, management attempted to slow deposit
inflows by cutting the Bank’s deposit pricing several times, particularly for certificates of deposit. Nevertheless,
deposits continued to build throughout the quarters ended March 31 and June 30, 2009. Depositors have been
lengthening the maturities on their certificates of deposit, particularly by transferring maturing accounts to 24-
month and 36-month certificates of deposit in order to improve the yield.
In October 2008, the Bank’s Franklin Lakes, New Jersey retail branch was closed upon expiration of its
lease and the deposits transferred to the nearby Wyckoff branch. In December 2008, $8.4 million of deposits in
the Irvington, New Jersey branch were sold to another financial institution.
Advances from FHLB. FHLB advances decreased $8.0 million to $210.0 million at June 30, 2009 from
$218.0 million at June 30, 2008. For the most part there was no need to borrow during fiscal 2009; therefore, the
Bank repaid maturing advances totaling $8.0 million with a weighted average cost of 5.47%.
Stockholders’ Equity. During the fiscal year ended June 30, 2009, stockholders’ equity increased $5.3
million to $476.7 million from $471.4 million at June 30, 2008. The increase was primarily the result of a $10.0
million increase in accumulated other comprehensive income, net of income taxes, for the most part due to mark-
to-market adjustments to the available for sale non-mortgage-backed securities and mortgage-backed securities
portfolios as well as benefit plan related adjustments to equity per SFAS No. 158. Also contributing to the
increase was net income of $6.4 million, $1.7 million of ESOP shares earned, $3.1 million of restricted stock plan
shares earned and an adjustment to equity of $1.9 million for expensing stock options. Partially offsetting these
increases were a $14.0 million increase in treasury stock due to the purchase of 1,247,403 shares of the
Company’s common stock and cash dividends of $3.5 million or $0.20 per share, declared for payment to minority
shareholders.
66
Comparison of Operating Results for the Years Ended June 30, 2009 and June 30, 2008
General. Net income for the fiscal year ended June 30, 2009 was $6.4 million, or $0.09 per diluted share;
an increase of $487,000 compared to $5.9 million, or $0.09 per diluted share for the fiscal year ended June 30, 2008.
The increase in net income year-over-year resulted primarily from an increase in net interest income, partially
offset by increases in loss on sales and impairments of securities, non-interest expense and income taxes as well
as an increase in provision for loan losses and a decrease in non-interest income (excluding loss on securities).
Net Interest Income.Net interest income for the fiscal year ended June 30, 2009 was $53.7 million, an
increase of $6.9 million compared to $46.8 million for the fiscal year ended June 30, 2008. Net interest income
increased year-over-year due to an increase in interest income and a decrease in interest expense.
The Company’s net interest rate spread increased 44 basis points to 2.25% during the fiscal year ended
June 30, 2009 from 1.81% during the fiscal year ended June 30, 2008. The 525 basis point reduction in the federal
funds rate between September 2007 and December 2008 has had a significant effect on the Company’s cost of
funds and return on earning assets. The Bank’s cumulative gap position or timing mismatch of potential re-
pricing of assets and liabilities continued to be liability sensitive. As a result, the Bank’s cost of funds declined
more rapidly than the yield on its earning assets during the first half of the year. However, that trend started to
change during the quarter ended March 31, 2009 such that the decrease in the yield on earning assets began to
accelerate leading to a more rapid decline relative to the decrease in the cost of funds, due primarily to the
accumulation of cash and cash equivalents. Year-over-year, the yield on average interest-earning assets
decreased 15 basis points to 5.12% while the cost of average interest-bearing liabilities decreased 59 basis points
to 2.87%. The average return on earning assets decreased due to decreases in the yields on average loans
receivable, non-mortgage-backed securities and other interest-earning assets, partially offset by an increase in
the yield on average mortgage-backed securities. During the same period, the average cost of funds decreased
due to decreases in both the cost of average interest-bearing deposits and the cost of average borrowed money.
The Bank anticipates that there will be further reductions in the cost of funds to the extent maturing certificates
of deposit re-price lower.
The Company’s net interest margin increased 27 basis points to 2.81% during the fiscal year ended
June 30, 2009, compared to 2.54% during the fiscal year ended June 30, 2008. The ratio of average interest-
earning assets to average interest-bearing liabilities was 124.2% during the fiscal year ended June 30, 2009,
compared to 126.5% during the fiscal year ended June 30, 2008. Average interest-earning assets during the fiscal
year ended June 30, 2009 were $1.91 billion, an increase of $64.3 million compared to $1.85 billion during the fiscal
year ended June 30, 2008. Year-over-year, the increase in average interest-earning assets resulted from an
increase in average loans receivable, partially offset by decreases in average mortgage-backed securities, non-
mortgage-backed securities and other interest-earning assets. Average interest-bearing liabilities during the
fiscal year ended June 30, 2009 were $1.54 billion, an increase of $79.2 million compared to $1.46 billion during the
fiscal year ended June 30, 2008. Year-over-year, the increase in average interest-bearing liabilities resulted from
increases in average interest-bearing deposits and average borrowed money. During the prior fiscal year,
management considered FHLB advances to be a favorable alternative to certificates of deposit as a funding
source given the interest rate environment at the time.
Interest Income. Total interest income increased $541,000 to $97.9 million during the fiscal year ended
June 30, 2009, from $97.4 million during the fiscal year ended June 30, 2008 due to an increase in average interest-
earning assets, partially offset by a decrease in average yield. The increase in interest income resulted primarily
from an increase in interest on loans receivable and to a lesser degree
67
mortgage-backed securities, partially offset by decreases in interest from non-mortgage-backed securities and
other interest-earning assets.
Interest income from loans receivable increased $5.5 million to $60.6 million during the fiscal year ended
June 30, 2009 from $55.1 million during the fiscal year ended June 30, 2008 due to growth in the average loan
portfolio, partially offset by a decrease in average yield. In keeping with the Company’s business plan, the loan
portfolio continues to generate an increasing proportion of the Company’s interest income. Average loans
receivable constituted 55.7% of average interest-earning assets during the fiscal year ended June 30, 2009,
compared to 51.5% during the fiscal year ended June 30, 2008. Average loans receivable increased $113.0 million
to $1.06 billion during the fiscal year ended June 30, 2009, compared to $951.0 million during the fiscal year ended
June 30, 2008. The steady decline in short-term interest rates since September 2007 contributed to a decrease in
the average yield on loans receivable, which decreased 11 basis points to 5.69% during the fiscal year ended
June 30, 2009, compared to 5.80% during the fiscal year ended June 30, 2008. The average yield has been
decreasing as higher coupon mortgages are replaced by new loans with lower coupons. Also contributing to the
decrease in the loan portfolio’s yield year-over-year was the increase in average residential first mortgages, home
equity loans and home equity lines of credit relative to higher yielding nonresidential and multi-family mortgages
and commercial business loans. During the fiscal year ended June 30, 2009, average residential first mortgages,
home equity loans and home equity lines of credit in aggregate totaled $846.6 million, an increase of $97.8 million
from $748.8 million during the fiscal year ended June 30, 2008. By comparison, average nonresidential and multi-
family mortgages and commercial business loans in aggregate totaled $198.1 million during the fiscal year ended
June 30, 2009, an increase of $13.2 million from $184.9 million during the fiscal year ended June 30, 2008.
Interest income from mortgage-backed securities increased $171,000 to $34.9 million during the fiscal
year ended June 30, 2009 compared to $37.8 million during the fiscal year ended June 30, 2008 due to an increase
in average yield, partially offset by a decrease in average mortgage-backed securities. The average yield on
mortgage-backed securities increased five basis points to 5.02% during the fiscal year ended June 30, 2009 from
4.97% during the fiscal year ended June 30, 2008. Average mortgage-backed securities decreased $3.2 million to
$696.7 million during the fiscal year ended June 30, 2009 compared to $699.9 million during the fiscal year ended
June 30, 2008. For the most part, rate adjustments on pass-through certificates containing adjustable-rate
mortgages and discount accretion attributed to the addition of the mortgage-backed securities received from the
AMF Fund were responsible for the increase in average yield. However, the average yield has been decreasing
recently due to an increase in prepayments within the underlying mortgage portfolios as refinancing activity
accelerates. Reinvestment of principal payments was limited to the purchase of $77.4 million of new securities
compared to repayments totaling $138.5 million, contributing to the decrease in average mortgage-backed
securities. Generally, management was reluctant to reinvest in additional mortgage-backed securities due to the
low interest rate environment. To the extent that the Bank did not need the funds for loan originations the cash
flows accumulated in cash and cash equivalents. Partially offsetting the decrease in the average balance was the
addition of the mortgage-backed securities received from the AMF Fund during the quarter ended September 30,
2008.
Interest income from non-mortgage-backed securities decreased $1.3 million to $1.0 million during the
fiscal year ended June 30, 2009 from $2.3 million during the fiscal year ended June 30, 2008 due to a decrease in
average securities as well as a decrease in average yield. Average non-mortgage-backed securities decreased
$19.5 million to $33.9 million during the fiscal year ended June 30, 2009 compared to $53.4 million during the fiscal
year ended June 30, 2008. Average taxable securities decreased $7.5 million to $15.7 million during the fiscal year
ended June 30, 2009 compared to $23.2 million during the fiscal year ended June 30, 2008 due primarily to the
redemption-in-kind of the AMF Fund, which resulted in the reclassification of the underlying mortgage-backed
instruments to mortgage-
68
backed securities during the quarter ended September 30, 2008. Average tax-exempt securities decreased $12.0
million to $18.2 million during the fiscal year ended June 30, 2009 from $30.2 million during the fiscal year ended
June 30, 2008 due primarily to the sales of municipal bonds during the prior fiscal year. The average yield on non-
mortgage-backed securities fell 116 basis points to 3.07% during the fiscal year ended June 30, 2009 from 4.23%
during the fiscal year ended June 30, 2008 due primarily to the year-over-year decrease in the yield on taxable
securities. The average yield on taxable securities decreased 251 basis points to 2.60%, while the average yield
on tax-exempt securities decreased only seven basis points to 3.49%, year-over-year. Contributing to the
decrease in the average yield on taxable securities was the effect of falling interest rates on SBA variable-rate
pass-through certificates and variable-rate trust preferred securities as well as the redemption-in-kind of the
AMF Fund.
Interest income from other interest-earning assets decreased $3.8 million to $1.4 million during the fiscal
year ended June 30, 2009 from $5.2 million during the fiscal year ended June 30, 2008. The decrease was due to
decreases in average other interest-earning assets, primarily interest-earning deposits, and in the average yield
on those assets. Average other interest-earning assets decreased $26.0 million to $115.8 million during the fiscal
year ended June 30, 2009 from $141.8 million during the fiscal year ended June 30, 2008. Average interest-earning
deposits decreased $28.1 million to $102.8 million during the fiscal year ended June 30, 2009 from $130.9 million
during the fiscal year ended June 30, 2008, partially offset by a $2.1 million increase in average FHLB capital
stock to $13.0 million from $10.9 million, year-over-year. Following the addition of $200.0 million in FHLB
advances during fiscal year 2008, cash and cash equivalents were redeployed to fund loan originations and
purchases and was the primary factor contributing to the decrease in average other interest-earning assets until
cash began to build in December 2008 and thereafter. The 525 basis point reduction in the federal funds rate
between September 2007 and December 2008 was primarily responsible for the decrease in the yield on average
other interest-earning assets, which fell 250 basis points from 3.68% during the fiscal year ended June 30, 2008 to
1.18% during the fiscal year ended June 30, 2009, including a 270 basis point decrease to 0.74% in the average
yield on average interest-earning deposits.
Interest Expense. Total interest expense decreased $6.3 million to $44.2 million during the fiscal year
ended June 30, 2009 compared to $50.5 million during the fiscal year ended June 30, 2008 due to a decrease in the
average cost of funds, partially offset by an increase in average interest-bearing liabilities. The decrease in
interest expense resulted from a decrease in interest expense from deposits, partially offset by an increase in
interest expense from borrowings.
Interest expense attributed to deposits decreased $7.6 million to $35.7 million during the fiscal year
ended June 30, 2009 from $43.3 million during the fiscal year ended June 30, 2008. The decrease resulted primarily
from a decrease in the average cost of deposits, partially offset by an increase in average interest-bearing
deposits. The average cost of interest-bearing deposits decreased 67 basis points to 2.70% during the fiscal year
ended June 30, 2009 compared to 3.37% during the fiscal year ended June 30, 2008 due primarily to the decrease
in the average cost of certificates of deposit. Average interest-bearing deposits increased $39.2 million to $1.32
billion during the fiscal year ended June 30, 2009 from $1.28 billion during the fiscal year ended June 30, 2008.
Year-over-year, average interest-bearing demand deposit accounts increased $7.0 million to $156.9 million due
primarily to an increase in tiered money market deposit accounts, while their average cost decreased 47 basis
points to 1.34%, in conjunction with falling short-term interest rates. The tiered money market deposit accounts
were introduced during the prior year in an attempt to attract core deposits as well as to keep savings deposits
from leaving the institution. Average savings accounts decreased $10.3 million to $293.5 million while their
average cost decreased three basis points to 1.05%, as depositors transferred funds to alternative investments,
including certificates of deposit and tiered money market deposit accounts. Average certificates of deposit
increased $42.6 million to $873.3 million, while their average cost decreased 99 basis points to 3.50%. During the
quarter ended December 31, 2008, deposit rates in the marketplace
69
began to pull back in conjunction with falling interest rates. As a result, the Bank’s deposit flows turned positive
as the competition lowered their rates bringing them in line with those offered by the Bank. Since there was little
demand for loans and virtually no return on cash and cash equivalents, management attempted to control
deposit inflows by cutting the Bank’s deposit pricing several times, particularly for certificates of deposit.
Nevertheless, deposits continued to build throughout the quarter ended June 30, 2009. As of June 30, 2009,
approximately 81.8% of certificates of deposit mature within one year. Given the Bank’s liability sensitive interest
rate risk profile, further reductions in the Bank’s cost of funds are possible to the extent maturing certificates of
deposit re-price lower.
Interest expense attributed to FHLB advances increased $1.3 million to $8.5 million during the fiscal year
ended June 30, 2009 from $7.2 million during the fiscal year ended June 30, 2008 due to an increase in average
borrowings, partially offset by a decrease in the average cost of borrowings. Average borrowings increased
$40.0 million to $215.1 million during the fiscal year ended June 30, 2009 from $175.1 million during the fiscal year
ended June 30, 2008. The average cost of borrowings decreased 17 basis points to 3.95% during the fiscal year
ended June 30, 2009 from 4.12% during the fiscal year ended June 30, 2008. The Bank borrowed $200.0 million
during the fiscal year ended June 30, 2008 at a weighted average cost of 3.79% contributing to the decrease in
the cost of average borrowings. The increase in borrowings during the prior period resulted primarily from a need
to replenish liquidity utilized to fund loan originations and fund deposit outflows and make cash available for
potential implementation of growth and diversification strategies related to execution of the Company’s business
plan. The advances were determined to be a cheaper funding source compared to certificates of deposit. Due to
the Bank’s excess liquidity, management repaid maturing advances totaling $8.0 million with a weighted average
cost of 5.47% during the fiscal year ended June 30, 2009.
Provision for Loan Losses. For the year ended June 30, 2009, the Company recorded a provision for
loan losses of approximately $317,000 representing an increase of $223,000 from a provision of $94,000 recorded
during fiscal 2008. The provision during fiscal 2009 was augmented by approximately $13,000 in net recoveries
resulting in a net increase in the allowance for loan losses of approximately $330,000 to $6.4 million at June 30,
2009 from $6.1 million at June 30, 2008.
This increase to the allowance during fiscal 2009 reflects net additions to specific valuation allowances
of approximately $267,000 relating to impaired loans coupled with net additions to general valuation allowances
of approximately $63,000 arising from the application of the historical and environmental loss factors to the
outstanding balance of the remaining, non-impaired loans within the Company’s portfolio.
By comparison, during fiscal 2008 the balance of the allowance for loan losses increased $55,000 from
$6.0 million at June 30, 2007 to $6.1 million at June 30, 2008 reflecting additional provisions of $94,000 partially
offset by net charge-offs of $39,000. The provision for fiscal 2008 reflected the Company’s implementation of a
new allowance for loan loss calculation methodology coupled with the effects of continued net loan growth and
a reduction in the balance of total classified assets from the earlier year.
A detailed discussion concerning the activity in the Company’s allowance for loan loss, including the
basis for the Company’s provisions to the allowance for the fiscal years ended June 30, 2009 and June 30, 2008,
is presented in the Lending Activity section of this document under the heading Allowance for Loan Losses
located within the Asset Quality discussion.
Non-Interest Income. Non-interest income, excluding loss on sales and impairments of securities,
decreased $60,000 to $2.6 million during the fiscal year ended June 30, 2009 from $2.7 million during the fiscal year
ended June 30, 2008. Fees and service charges increased $79,000 to $1.4 million
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during the fiscal year ended June 30, 2009 compared to $1.3 million during the fiscal year ended June 30, 2008 due
primarily to an increase in fees from retail operations. Miscellaneous income decreased $139,000 to $1.2 million
during the fiscal year ended June 30, 2009 from $1.4 million during the fiscal year ended June 30, 2008 due
primarily to a $235,000 decrease in income from the Bank’s official check clearing agent, partially offset by a
$132,000 gain realized from the sale of deposits in the Bank’s Irvington, New Jersey retail branch. The official
check clearing agent is no longer able to compensate its clients at a meaningful level for use of the float on
official checks due to significant losses in its mortgage-backed securities portfolio.
Loss on sales and impairments of securities totaled $1.13 million during fiscal 2009 compared to $659,000
during the prior fiscal year. As a result of the redemption-in-kind of the AMF Fund in July 2008, the underlying
securities were written down to fair value as of the trade date resulting in a pre-tax charge to earnings of
$415,000. During the quarter ended March 31, 2009, the Company recognized other-than-temporary impairments
attributed to the non-agency collateralized mortgage obligations received from the fund totaling $570,000, all of
which were recorded through earnings. Of that balance, approximately $290,000 was subsequently determined by
the Company to be “credit-related” with the remaining $280,000 attributed to noncredit-related factors. In
accordance with its adoption of FSP FAS 115-2 and FAS 124-2, the Company recorded a cumulative effect of
adoption adjustment effective April 1, 2009 between retained earnings and accumulated other comprehensive
income totaling $165,000 representing the after-tax effect of the adoption. The Company also identified an
additional $144,000 of credit-related, other-than-temporary impairments that were recognized through earnings
during the quarter ended June 30, 2009. An additional $274,000 on noncredit-related other-than-temporary
impairments were identified and recorded through accumulated other comprehensive income on a tax effected
basis during that same quarter. During the prior fiscal year, an other-than-temporary impairment pre-tax charge of
$659,000 was recorded for the AMF Fund. Other gain/loss on sales of securities recorded during the fiscal year
ended June 30, 2008 netted to zero.
Non-Interest Expense. Non-interest expense increased $3.0 million, or 7.3% to $43.9 million during the
fiscal year ended June 30, 2009 from $40.9 million during the fiscal year ended June 30, 2008. Year-over-year the
increase in non-interest expense was primarily the result of increases in salaries and employee benefits expense,
net occupancy expense of premises, federal deposit insurance premium expense and miscellaneous expense,
partially offset by a decrease in amortization of intangible assets expense. Federal deposit insurance premium
expense represented $1.7 million, or 56.7% of the total increase in non-interest expense, year-over-year. All other
elements of non-interest expense decreased in the aggregate by $61,000, or 0.8%.
Salaries and employee benefits expense increased $771,000 to $25.4 million during the fiscal year ended
June 30, 2009 compared to $24.7 million during the fiscal year ended June 30, 2008. The increase in salaries and
employee benefits was due primarily to a $935,000 increase in compensation expense to $14.7 million year-over
year due primarily to normal salary increases, additions to the staff and payment of non-recurring severance
packages totaling $80,000. There was a $650,000 reduction to $262,000 in pension plan expense, year-over-year,
primarily related to reduced contributions required by the Bank’s multiple-employer pension plan. Also
contributing to the increase was a $489,000 increase in benefits expense to $4.1 million, which resulted from a
non-recurring dividend of $253,000 the Bank received from its health insurance carrier during the comparative
period as well as the year-over-year increase in health insurance costs. All other elements of salaries and
employee expense which totaled $6.4 million; including ESOP expense, stock benefit plans expense and payroll
taxes expense, decreased in the aggregate by $3,000.
71
Net occupancy expense of premises increased $389,000 to $4.1 million during the fiscal year ended June
30, 2009 compared to $3.7 million during the fiscal year ended June 30, 2008. Rent expense, net, increased $79,000
to $354,000 due primarily to additional leased space occupied by new retail branches, which opened in Brick
Township, New Jersey during March 2008 and Lakewood, New Jersey during May 2008. An increase of $147,000
to $1.04 million in repairs and maintenance expense was attributed to generally higher costs to maintain the
Bank’s facilities, including a $100,000 increase in snow removal costs, year-over-year. Property taxes,
depreciation, utilities and other expenses increased in the aggregate by $163,000 to $2.7 million during the fiscal
year ended June 30, 2009. Contributing to the increase in net occupancy expense of premises was the relocation
of personnel to the second floor of the Company’s administrative headquarters building in Fairfield, New Jersey,
which had been previously unoccupied.
Federal deposit insurance premium expense increased $1.7 million to $1.9 million during the fiscal year
ended June 30, 2009 compared to $186,000 during the fiscal year ended June 30, 2008. The Bank used its
remaining special assessment credit of $579,000 to offset the cost of its deposit insurance premium, which was
fully utilized by March 31, 2009. The FDIC’s assessment for deposit insurance increased $806,000 to $992,000
during the fiscal year ended June 30, 2009 compared to $186,000 during the fiscal year ended June 30, 2008 due
primarily to an increase in the assessment rate. The final rule for the quarter ended March 31, 2009 raised the
assessment rate for the most highly rated institutions to between 12 and 14 basis points, which increased the
Bank’s assessment rate five basis points to 12 basis points (annualized). An additional significant contributing
factor to the increase was the FDIC’s special assessment of $872,000, which was based on the Bank’s June 30,
2009 Total Assets minus Tier 1 Capital multiplied by five basis points.
Amortization of intangible assets expense decreased $212,000 to $29,000 during the fiscal year ended
June 30, 2009 compared to $241,000 during the fiscal year ended June 30, 2008. The decrease was due to the
completion in October 2007 of amortization of an intangible asset acquired during the purchase of West Essex
Bank in 2003.
Miscellaneous expense increased $418,000 to $4.9 million during the fiscal year ended June 30, 2009
compared to $4.4 million during the fiscal year ended June 30, 2008. Of note, fiscal 2009 included a $75,000 non-
recurring payment made to an information technology service provider for purpose of hiring the provider’s
employee, a $106,000 increase in loan expense due primarily to higher servicing fees resulting from an increase in
the Bank’s serviced mortgage portfolio and a $138,000 increase in correspondent bank service charges. The
higher correspondent bank service charges were primarily attributed to costs associated with implementation of
digitally imaged customer check deposits.
Provision for Income Taxes. The provision for income taxes increased $2.6 million to $4.6 million
during the fiscal year ended June 30, 2009 from $2.0 million during the fiscal year ended June 30, 2008. The
Company’s effective tax rate was approximately 41.8% during the fiscal year ended June 30, 2009 compared to
24.8% during the fiscal year ended June 30, 2008. The effective tax rate increased due to an increase in pre-tax
income as well as a reduction in income from tax-exempt instruments as a percentage of pre-tax income as pre-tax
income increased. Tax-exempt interest was 10.8% of income before taxes during the fiscal year ended June 30,
2009 compared to 20.7% of income before taxes during the fiscal year ended June 30, 2008. Also contributing to
the higher effective tax rate year-over-year was a $1.2 million income tax benefit recognized during the year ended
June 30, 2008 attributable to the reversal of a previously established valuation allowance related to state net
operating loss carryforwards.
72
Comparison of Operating Results for the Years Ended June 30, 2008 and June 30, 2007
General. Net income for the fiscal year ended June 30, 2008 was $5.9 million or $0.09 per diluted share,
an increase of $4.0 million from $1.9 million or $0.03 per diluted share for the fiscal year ended June 30, 2007. The
increase in net income year-over-year resulted primarily from a decrease in non-interest expense as well as an
increase in net interest income, a decrease in the provision for loan losses and an increase in non-interest
income, partially offset by an increase in income taxes and a loss on impairment of securities. The decrease in
non-interest expense was attributable primarily to a decrease in salaries and employee benefits expense.
Net Interest Income.Net interest income for the fiscal year ended June 30, 2008 was $46.8 million, an
increase of $1.7 million or 3.8%, compared to $45.1 million for the fiscal year ended June 30, 2007. The increase in
net interest income was due to an increase in interest income, partially offset by a nominal increase in interest
expense.
The Company’s net interest rate spread increased eleven basis points to 1.81% during the fiscal year
ended June 30, 2008 from 1.70% during the fiscal year ended June 30, 2007. Year-over-year, the yield on average
interest-earning assets increased 12 basis points to 5.27% while the cost of average interest-bearing liabilities
increased one basis point to 3.46%. 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 non-mortgage-backed
securities, partially offset by a decrease in the yield on other interest-earning assets. The yield on average
interest-earnings assets improved due to the redeployment of cash and cash equivalents to loans receivable and
mortgage-backed securities; however, the 325 basis point reduction in the federal funds rate between September
2007 and May 2008 had a negative impact on interest income derived from cash and cash equivalents and
interest income overall until the funds were redeployed. The cost of average interest-bearing liabilities remained
virtually unchanged. While the cost of average interest-bearing deposits remained steady at 3.37% for both
years, average borrowing costs declined to 4.12% from 5.51%, with overall cost changed little due to an
increased level of borrowings. Year-over-year, the Bank’s one-year cumulative gap or the mismatch between re-
pricing assets and liabilities continued to be liability sensitive. At June 30, 2008, the Bank’s one-year cumulative
gap was approximately -9.5% compared to approximately -20.9% at June 30, 2007. As a result of being liability
sensitive, the Company was positioned to realize an increase in net interest income since the cost of funds were
declining by more than the decline in the yield on earning assets as the fiscal year drew to a close.
The Company’s net interest margin increased eleven basis points to 2.54% during the fiscal year ended
June 30, 2008, compared with 2.43% during the fiscal year ended June 30, 2007. Average interest-earning assets
during the fiscal year ended June 30, 2008 were $1.85 billion, virtually unchanged from the fiscal year ended June
30, 2007. Average loans receivable and mortgage-backed securities increased, virtually offset by decreases in
average non-mortgage-backed securities and other interest-earning assets, which had a favorable impact on
yield. Average interest-bearing liabilities during the fiscal year ended June 30, 2008 were $1.46 billion, also
virtually unchanged from the fiscal year ended June 30, 2007. Average borrowings increased, virtually offset by a
decrease in average interest-bearing deposits. As a result of the interest rate environment during the first six
months of the fiscal year, management considered FHLB advances to be a favorable alternative to certificates of
deposit as a funding source. The ratio of average interest-earning assets to average interest-bearing liabilities
was 126.5% during the fiscal year ended June 30, 2008, compared to 126.8% during the fiscal year ended June 30,
2007.
Interest Income. Total interest income increased $1.8 million or 1.9%, to $97.4 million during the fiscal
year ended June 30, 2008, from $95.6 million during the fiscal year ended June 30, 2007. The increase in interest
income resulted from increases in interest on loans receivable and mortgage-backed securities partially offset by
decreases in interest from non-mortgage-backed securities and other interest-earning assets.
73
Interest income from loans receivable increased $10.1 million or 22.4%, to $55.1 million during the fiscal
year ended June 30, 2008, from $45.0 million during the fiscal year ended June 30, 2007 due primarily to growth in
the portfolio as well as an improvement in average yield. Average loans receivable increased $165.8 million to
$951.0 million during the fiscal year ended June 30, 2008, from $785.2 million during the fiscal year ended June 30,
2007. In implementing the Bank’s business plan, management continued to focus on increasing the size of the
loan portfolio. Average loans receivable constituted 51.5% of average interest-earning assets during the fiscal
year ended June 30, 2008, compared to 42.3% during the fiscal year ended June 30, 2007. The yield on average
loans receivable increased seven basis points to 5.80% during the fiscal year ended June 30, 2008, compared to
5.73% during the fiscal year ended June 30, 2007. The improvement in yield was due in part to growth in the
nonresidential and multi-family mortgage categories, with the average balance increasing in aggregate $39.9
million to $178.9 million, a change of 28.7% year-over-year. By comparison, the average balances outstanding of
one-to-four family mortgages increased $110.5 million or 21.8%, to $617.1 million, year-over-year. Rate
adjustments on adjustable-rate mortgages as well as higher interest rates on loans closed during the current
period compared to loans closed during the comparative period also contributed to the improvement in yield,
though falling interest rates during the second half of the fiscal year have negatively impacted the portfolio
yield. The weighted average nominal rate of the loans in the portfolio was 5.79% as of June 30, 2008, compared to
5.81% at June 30, 2007.
Interest income from mortgage-backed securities increased $2.6 million or 8.1%, to $34.8 million during
the fiscal year ended June 30, 2008, compared to $32.2 million during the fiscal year ended June 30, 2007 due to an
increase in average mortgage-backed securities and an increase in the average yield. Average mortgage-backed
securities increased $26.0 million to $699.9 million during the fiscal year ended June 30, 2008 compared to $673.9
million during the fiscal year ended June 30, 2007. To the extent that the Bank did not need the funds for loan
originations, management reinvested cash flows from principal and interest payments into additional mortgage-
backed securities, which contributed to the increase in the average balance year-over-year. The yield on average
mortgage-backed securities increased 19 basis points to 4.97% during the fiscal year ended June 30, 2008, from
4.78% during the fiscal year ended June 30, 2007. During the quarter ending September 30, 2007, management
implemented a nominal leverage strategy utilizing a part of the proceeds from FHLB 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. The leverage strategy was expanded to include the purchase of an additional $19.7 million of
20-year fixed-rate product during the quarter ended March 31, 2008. Rate adjustments on pass-through
certificates containing adjustable-rate mortgages and higher coupons on securities purchased during the fiscal
year ended June 30, 2008 compared to purchases during the fiscal year ended June 30, 2007 also contributed to
the increase in yield. During the year ending June 30, 2008, $142.6 million or 63.6% of the mortgage-backed
securities purchased were adjustable-rate product. Though lower interest rates could negatively impact the
portfolio yield in the future due to the emphasis on purchasing adjustable-rate product, this was not a factor
during the fiscal year as the weighted average nominal rate of the mortgage-backed securities in the portfolio
was 5.13% as of June 30, 2008, compared to 4.94% at June 30, 2007.
Interest income from non-mortgage-backed securities decreased $3.9 million or 62.9%, to $2.3 million
during the fiscal year ended June 30, 2008, from $6.2 million during the fiscal year ended June 30, 2007 due to a
decrease in average securities partially offset by an improvement in average yield. Average securities decreased
$97.9 million to $53.4 million during the fiscal year ended June 30, 2008, compared to $151.3 million during the
fiscal year ended June 30, 2007. The decrease in the average balance was due primarily to the sales of municipal
bonds, totaling $48.5 million during the fiscal year ended June 30, 2008. Average tax-exempt securities decreased
$95.9 million to $30.2 million while average taxable securities decreased $2.0 million to $23.2 million, year-over-
year. Management
74
continued to sell municipal bonds due to a preference for securities that provide a steady cash flow. 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
13 basis points from 4.10% for the fiscal year ended June 30, 2007, to 4.23% for the fiscal year ended June 30,
2008. The higher yield on the securities portfolio resulted primarily from the sale of the lower yielding municipal
bonds partially offset by downward rate adjustments on pass-through certificates containing Small Business
Administration adjustable-rate loans and adjustable-rate trust preferred securities beginning during the quarter
ended December 31, 2007.
Interest income from other interest-earning assets decreased $7.0 million or 57.4%, to $5.2 million during
the fiscal year ended June 30, 2008, from $12.2 million during the fiscal year ended June 30, 2007. The decrease
was due to a decrease in average other interest-bearing assets, primarily interest-earning deposits, as well as a
decrease in average yield. There was a $102.1 million decrease in average other interest-earning assets to $141.8
million during the fiscal year ended June 30, 2008, from $243.9 million during the fiscal year ended June 30, 2007.
For the most part, management utilized the cash and cash equivalents to fund loan originations and loan
purchases and fund deposit outflows. During the prior year, to the extent that the Bank did not need the funds
for loan originations, management maintained liquidity at an elevated level to take advantage of high short-term
interest rates resulting from the inverted Treasury yield curve at the time. Partially offsetting the $107.7 million
decrease in interest-earning deposits, average FHLB capital stock increased $5.6 million due to the increase in
FHLB advances during the first six months of the fiscal year. The 325 basis point reduction in the federal funds
rate between September 2007 and May 2008 was primarily responsible for the decrease in the yield on average
interest-earning assets, which fell 131 basis points from 4.99% to 3.68%. The yield on interest-earnings deposits
decreased 151 basis points to 3.44% and the return on FHLB capital stock decreased twelve basis points to
6.56%, year-over-year.
Interest Expense. Total interest expense increased $60,000 or 0.1%, virtually unchanged at $50.5 million
during the fiscal year ended June 30, 2008 compared to the fiscal year ended June 30, 2007. The cost of average
interest-bearing liabilities was virtually unchanged, increasing one basis point to 3.46% and average interest-
bearing liabilities was unchanged at $1.46 billion, year-over-year.
Interest expense from deposits decreased $4.1 million or 8.6%, to $43.3 million during the fiscal year
ended June 30, 2008, from $47.3 million during the fiscal year ended June 30, 2007. The decrease resulted from a
decrease in average interest-bearing deposits, with no increase in the average cost of deposits. The cost of
average interest-bearing deposits was unchanged at 3.37% during the fiscal year ended June 30, 2008, compared
to the fiscal year ended June 30, 2007. Average interest-bearing deposits decreased $121.2 million to $1.28 billion
during the fiscal year ended June 30, 2008, from $1.41 billion during the fiscal year ended June 30, 2007. Average
interest-bearing demand deposit accounts increased $13.2 million to $149.9 million due to an increase in tiered
money market deposit accounts, which became a popular substitute for traditional passbook and statement
savings accounts, while their average cost decreased ten basis points to 1.81% following other short-term
interest rates lower. Average savings accounts decreased $32.2 million to $303.8 million, while their average cost
decreased three basis points to 1.08% as depositors transferred funds to alternative investments. Average
certificates of deposit decreased $102.2 million to $830.7 million, while their cost increased ten basis points to
4.49%. Given the Bank’s interest rate risk profile, management expects a reduction in interest rates and
restoration of a more normal yield curve to improve the Company’s profitability. With approximately 81.3% of
certificates of deposit maturing within one year, the recent reductions in the federal funds rate are expected to
contribute to a subsequent decrease in the cost of deposits. A significant trend is evident when comparing the
current year’s interest rate stratification for certificates of deposit to that of the prior year: At June 30, 2008, the
Bank had $91.9 million of certificates of deposit with interest rates between 2.00% and 2.99%, compared to $17.5
million at June 30, 2007; at June 30, 2008, the Bank had $298.8
75
million of certificates of deposit with interest rates between 3.00% and 3.99%, compared to $131.4 million at June
30, 2007; at June 30, 2008, the Bank had $473.6 million of certificates of deposit with interest rates between 4.00%
and 4.99%, compared to $488.5 million at June 30, 2007; and most importantly, at June 30, 2008 the Bank had $7.0
million of certificates of deposit with interest rates between 5.00% and 5.99%, compared to $250.7 million at June
30, 2007. Overall, the average interest rate on certificates of deposit declined to 3.93% at June 30, 2008 from 4.55%
at June 30, 2007.
Interest expense from FHLB advances increased $4.1 million or 132.3%, to $7.2 million during the fiscal
year ended June 30, 2008, from $3.1 million during the fiscal year ended June 30, 2007. Average borrowings
increased $118.5 million to $175.1 million during the fiscal year ended June 30, 2008, from $56.6 million during the
fiscal year ended June 30, 2007. The cost of average borrowings decreased 139 basis points to 4.12% during the
fiscal year ended June 30, 2008 from 5.51% during the fiscal year ended June 30, 2007. The increase in borrowings
resulted primarily from a need to replenish liquidity utilized to fund loan originations and fund deposit outflows
and make cash available for potential implementation of growth and diversification strategies related to execution
of the Company’s business plan. The Bank borrowed $200.0 million during the fiscal year ended June 30, 2008 at
a weighted average cost of 3.79% resulting in the decrease in the cost of average borrowings. The advances
were determined to be a cheaper funding source compared to certificates of deposit. Management did not renew
a $10.0 million advance, which carried an interest rate of 5.59% when it matured in March 2008. An amortizing
advance with an original face value of $5.0 million and an interest rate of 6.03% was also paid in full during
February 2008.
Provision for Loan Losses. The provision for loan losses decreased $477,000, to $94,000 during the
fiscal year ended June 30, 2008, from a $571,000 provision recorded during the fiscal year ended June 30, 2007.
Management attributes the decrease principally to the absence of any material change in asset quality. Non-
performing loans were $1.6 million or 0.15% of total loans of $1.03 billion at June 30, 2008 compared to $1.5 million
or 0.17% of total loans of $865.0 million at June 30, 2007. Net charge-offs during the fiscal year ended June 30,
2008 were $39,000 compared to $-0- during the fiscal year ended June 30, 2007, but as a percentage of average
loans net charge-offs were zero percent during each of the comparative periods. The allowance for loan losses as
a percentage of total loans outstanding was 0.59% at June 30, 2008 and 0.70% at June 30, 2007, reflecting
allowance balances of $6.1 million and $6.0 million, respectively. The allowance for loan losses as a percentage of
non-performing loans was 388.1% at June 30, 2008 and 406.3% at June 30, 2007. There were no recoveries during
the fiscal year ended June 30, 2008 compared to a recovery of $27,000 during the fiscal year ended June 30, 2007.
Non-Interest Income. Non-interest income, excluding gain/loss on securities, increased $274,000 or
11.4%, to $2.7 million during the fiscal year ended June 30, 2008 compared to $2.4 million during the fiscal year
ended June 30, 2007 due to a $344,000 increase in fees and service charges, partially offset by a $70,000 decrease
in miscellaneous income. Total non-interest income decreased $440,000 or 18.3%, to $2.0 million from $2.4 million,
year-over-year.
Fees and service charges from branch retail operations increased $384,000 due primarily to the overdraft
privilege program introduced in May 2007, partially offset by a $39,000 decrease in other fees and service
charges, due primarily to a $41,000 decrease in mortgage loan fees.
Miscellaneous income decreased $70,000, due primarily to a $68,000 decrease in income from the Bank’s
official check clearing agent and a $30,000 decrease in income from miscellaneous nonrecurring sources, partially
offset by a $29,000 increase in the cash surrender value of bank owned life insurance. The Bank is compensated
for use of the float on our official checks by the clearing agent, whose primary source of income was a portfolio
of mortgage-backed instruments, which was negatively impacted by the housing and credit crises.
76
There was no non-interest income attributed to the gain on sale of securities available for sale during
the fiscal year ended June 30, 2008 compared to a $55,000 net gain on the sale of municipal bonds recorded
during the fiscal year ended June 30, 2007. As described in the Securities Portfolio section of Part I. Item 1., the
Company recognized a pre-tax non-cash charge to earnings of $659,000 as a result of other-than-temporary
impairment in the value of the Bank’s investment in the AMF Fund, during the quarter ended June 30, 2008.
Non-Interest Expense. Non-interest expense decreased $4.0 million or 8.9%, to $40.9 million during the
fiscal year ended June 30, 2008, from $44.9 million during the fiscal year ended June 30, 2007. The decrease in
non-interest expense resulted primarily from a decrease in salaries and employee benefits expense of $2.9 million.
Also contributing were decreases in equipment expense, advertising expense and amortization of intangible
assets expense of $139,000, $648,000 and $395,000, respectively, and reductions in federal deposit insurance
premiums expense and directors’ compensation expense totaling $81,000 in aggregate. Partially offsetting the
decrease was an increase in net occupancy expense of premises and miscellaneous expense of $280,000 and
$55,000, respectively.
Salaries and employee benefits decreased $2.9 million or 10.5%, to $24.7 million during the fiscal year
ended June 30, 2008, compared to $27.6 million during the fiscal year ended June 30, 2007. Pension plan expense
contributed the most significant reduction, decreasing $1.8 million year-over-year to $913,000. 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. The freeze provides additional flexibility in controlling
the costs associated with the plans while still preserving the participants’ earned and vested benefits. Benefits
expense decreased $448,000 to $3.7 million due primarily to a non-recurring dividend of $253,000 received from
the Bank’s health insurer based on the ratio of earned premiums to premiums paid during 2006, a savings of
$92,000 resulting from the implementation of contributory health insurance for employees beginning during the
quarter ended March 31, 2008 and savings of $82,000 due to a change in the accounting treatment of dividends
on unvested restricted stock. ESOP expense, including the expense of the ESOP Benefit Equalization Plan,
decreased $444,000 to $1.8 million due to a decrease in the average market price of the Company’s common stock
during the fiscal year ended June 30, 2008 compared to the prior period. Stock benefits plan expense decreased
$128,000 to $3.4 million due to a forfeiture of unvested restricted stock and unvested stock options in the prior
year. Compensation and payroll tax expenses remained virtually unchanged at $13.7 million and $1.1 million,
respectively. Normal salary increases were partially offset by a decision by the President and CEO of the
Company and the Bank, John N. Hopkins, that he would voluntarily forgo the cash bonus payment
recommended by the Compensation Committee and approved by the Board of Directors in December 2007. Mr.
Hopkins was motivated to do so as part of the Company’s overall cost cutting effort. Mr. Hopkins previously
received a cash bonus payment of $90,000 in December 2006. A combination of lower payments to non-exempt
employees for unused vacation days during the prior calendar year and a reduction in staff due to routine
attrition also contributed to offsetting normal salary increases. Compensation expense in the current year
included $33,000 in overtime paid to personnel involved in reconciling differences resulting from system
problems at the Bank’s data processing provider, which was subsequently reimbursed during fiscal 2009.
Net occupancy expense of premises increased $280,000 or 8.1%, to $3.7 million during the fiscal year
ended June 30, 2008 from $3.5 million during the fiscal year ended June 30, 2007. Rent expense, net, increased
$85,000 to $275,000 due primarily to additional leased space occupied by new retail branches, which opened in
Brick Township, New Jersey during March 2008 and Lakewood, New Jersey during May 2008. Increases in rental
income from surplus Bank space leased to others generally offset annual increases in rent expense. Repairs and
maintenance expense increased $58,000 to $889,000 due primarily to higher costs incurred to maintain the Bank’s
retail branch network. Property taxes expense
77
and utilities expense increased $91,000 to $954,000 and $82,000 to $680,000, respectively. Partially offsetting the
increases were decreases in depreciation expense and other expenses of $20,000 to $892,000 and $16,000 to
$54,000, respectively.
Equipment expense decreased $139,000 or 3.0%, to $4.5 million during the fiscal year ended June 30,
2008 from $4.6 million during the fiscal year ended June 30, 2007. Furniture, fixtures and equipment maintenance
expense and depreciation expense decreased $103,000 to $787,000 and $54,000 to $914,000, respectively. Service
bureau expense was virtually unchanged at $2.8 million, year-over-year. Increases attributed to peripheral EDP
service providers including network administration, records retention, Internet banking and bill pay, ATM and
debit card processing and merchant processing were partially offset by a decrease in data communication costs
between the Bank and its core processor and the prior year included a nonrecurring charge of $88,000 resulting
from the settlement of a dispute with an electronic data processing service provider.
Advertising expense decreased $648,000 or 43.2%, to $852,000 during the fiscal year ended June 30,
2008 from $1.5 million during the fiscal year ended June 30, 2007. Expenditures for all forms of media advertising
were lower, particularly newspaper ads, which decreased approximately $485,000, year-over-year. There were
significant decreases in the marketing of deposit products, which had been the focal point of an extensive
advertising campaign during the prior fiscal year. Advertising during the fiscal year ended June 30, 2008 was
generally limited to marketing loan products.
Amortization of intangible assets expense decreased $395,000 or 62.1%, to $241,000 during the fiscal
year ended June 30, 2008 compared to $636,000 during the fiscal year ended June 30, 2007. The decrease was due
to the completion of amortization of an intangible asset acquired during the purchase of West Essex Bank in
2003, during the quarter ended December 31, 2007.
Provision for Income Taxes. The provision for income taxes increased $1.73 million to $1.95 million
during the fiscal year ended June 30, 2008, from $221,000 during the fiscal year ended June 30, 2007.
During the fiscal year ended June 30, 2008, the Company reversed the valuation allowances totaling $1.2
million for the state alternative minimum assessment and the benefit to be derived from utilization of the state net
operating loss carryforward for the fiscal year ended June 30, 2006 and the benefit to be derived from utilization
of the state net operating loss carryforward for the fiscal year ended June 30, 2007. With the dissolution of
Kearny Federal Investment Corp. and the transfer of its assets to the Bank, the Bank is projected to have
sufficient future taxable income to effectively utilize its state net operating loss carryforwards. Accordingly, the
related deferred tax assets are now considered to be more likely than not to be realized. During the fiscal year
ended June 30, 2008, the Company established a valuation allowance for other-than-temporary impairment of the
Bank’s AMF Fund for the fiscal year ended June 30, 2008, as this deferred tax asset is not more likely than not to
be realized. Having subsequently invoked a redemption-in-kind provision in July 2008, however, both the
Company and the Bank are now positioned to recognize benefits for federal and state income tax purposes
during the quarter ending September 30, 2008. The pre-tax impairment charges of $659,000 recorded during the
quarter ended June 30, 2008 and $415,000 resulting from the redemption-in-kind in July became, upon the
redemption-in-kind, subject to income tax benefits of approximately $140,000 and $25,000, respectively.
The Company’s effective tax rate was approximately 24.8% during the fiscal year ended June 30, 2008,
compared to 10.3% during the fiscal year ended June 30, 2007. The effective tax rate increased due to a reduction
in income from tax-exempt instruments as a percentage of pre-tax income as pre-tax income increased. Tax-exempt
interest was 20.7% of income before taxes during the fiscal year ended June 30, 2008 compared to 242.9% of
income before taxes during the fiscal year ended June 30, 2007.
78
Average Balance Sheet. The following table sets forth certain information relating to Kearny Financial
Corp. at and for the periods indicated. We derived the average yields and costs by dividing income or expense
by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to
derive average balances.
Interest-earning assets:
Loans receivable(1)
Mortgage-backed securities(2)
Securities:(2)
Tax-exempt
Taxable
Other interest-earning assets(3)
Total interest-earning assets
Non-interest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing demand
Savings and club
Certificates of deposit
Federal Home Loan Bank advances
Total interest-bearing liabilities
Non-interest-bearing liabilities (4)
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income
Interest rate spread(5)
Net yield on interest-earning assets(6)
Ratio of interest-earning assets to interest-
bearing liabilities
At June 30,
2009
2009
2008
2007
For the Years Ended June 30,
Actual
Balance
Actual
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
(Dollars in Thousands)
$ 1,045,847
688,106
5.74% $ 1,064,019 $ 60,559
34,944
696,672
4.96
5.69% $
5.02
951,019 $
699,942
55,123
34,773
5.80% $
4.97
785,210 $
673,904
44,972
32,222
5.73%
4.78
634
408
1,363
97,908
2,098
3,072
30,524
8,506
44,200
3.49
2.60
1.18
5.12
1.34
1.05
3.50
3.95
2.87
18,340
9,687
198,505
1,960,485
164,436
$ 2,124,921
$
163,611
301,637
904,743
210,000
1,579,991
68,210
1,648,201
476,720
$ 2,124,921
3.48
2.01
0.43
4.89
1.09
1.02
2.97
3.87
2.52
18,183
15,721
115,806
1,910,401
169,408
$ 2,079,809
$
156,883
293,483
873,257
215,077
1,538,700
68,441
1,607,141
472,668
$ 2,079,809
1,074
1,186
5,211
97,367
30,200
23,191
141,792
1,846,144
158,737
2,004,881
$
2,714
3,272
37,322
7,220
50,528
$
149,871
303,818
830,726
175,081
1,459,496
75,976
1,535,472
469,409
2,004,881
$
$ 53,708
$
46,839
2.37%
2.25%
2.81%
4,708
1,492
12,167
95,561
2,612
3,740
40,999
3,117
50,468
126,095
25,240
243,867
1,854,316
152,926
2,007,242
136,622
336,067
932,901
56,615
1,462,205
72,094
1,534,299
472,943
2,007,242
$
45,093
3.56
5.11
3.68
5.27
1.81
1.08
4.49
4.12
3.46
$
$
$
1.81%
2.54%
3.73
5.91
4.99
5.15
1.91
1.11
4.39
5.51
3.45
1.70%
2.43%
1.24x
1.24x
1.26x
1.27x
(1)
(2)
(3)
(4)
(5)
(6)
Non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for loan losses has
been included in non-interest-earning assets.
Mark to market valuation allowances have been excluded in the average balances of interest-earning assets.
Includes interest-bearing deposits at other banks and Federal Home Loan Bank of New York capital stock.
Includes average balances of non-interest-bearing deposits of $51,132, $59,169 and $57,226, for the years ended June 30, 2009, 2008 and
2007, respectively.
Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
Net yield on interest-earning assets represents net interest income as a percentage of interest-earning assets.
79
Rate/Volume Analysis. The following table reflects the sensitivity of Kearny Financial Corp.’s interest
income and interest expense to changes in volume and in prevailing interest rates during the periods indicated.
Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate
(changes in rate multiplied by old volume); and (3) net change. The net change attributable to the combined
impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.
Years Ended June 30,
2009 vs. 2008
Increase (Decrease)
Due to
Years Ended June 30,
2008 vs. 2007
Increase (Decrease)
Due to
Volume
Rate
Net
Volume
Rate
Net
(In Thousands)
Interest and dividend income:
Net loans receivable
Mortgage-backed securities
Securities:
Tax-exempt
Taxable
Other interest-earning assets
Total interest-earning assets
Interest expense:
Interest-bearing demand
Savings and club
Certificates of deposit
Federal Home Loan Bank advances
Total interest-bearing liabilities
Change in net interest income
$
$
$
$
$
6,492 $
(168)
(419)
(308)
(1,056) $
339
5,436
171
$
9,596 $
1,257
555 $
1,294
10,151
2,551
(21)
(470)
(818)
4,779 $
(3,030)
(4,238) $
121 $
(110)
1,818
1,593
3,422 $
(737) $
(90)
(8,616)
(307)
(9,750) $
(440)
(778)
(3,848)
541
(616)
(200)
(6,798)
1,286
(6,328)
(3,429)
(115)
(4,275)
3,034 $
(205)
(191)
(2,681)
(1,228) $
$
$
244 $
(142) $
(365)
(4,588)
5,066
(103)
911
(963)
$
357 $
(297) $
(3,634)
(306)
(6,956)
1,806
102
(468)
(3,677)
4,103
60
1,357 $
5,512 $
6,869
$
2,677 $
(931) $
1,746
80
Liquidity and Commitments
Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing and
financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of
mortgage-backed securities and outstanding loans, maturities and calls of securities and funds provided from
operations. In addition, we invest excess funds in short-term interest-earning assets such as overnight deposits
or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from
the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are
relatively predictable sources of funds, general interest rates, economic conditions and competition greatly
influence deposit flows and prepayments on loans and mortgage-backed securities.
The Bank is required to have enough investments that qualify as liquid assets in order to maintain
sufficient liquidity to ensure a safe operation. Liquidity may increase or decrease depending upon the availability
of funds and comparative yields on investments in relation to the return on loans. We attempt to maintain
adequate but not excessive liquidity and liquidity management is both a daily and long-term function of business
management.
Cash and cash equivalents, consisting primarily of interest-bearing deposits in other banks increased
$79.8 million to $211.5 million at June 30, 2009 from $131.7 million at June 30, 2008. During the quarters ended
September 30 and December 31, 2008 liquidity decreased as cash and cash equivalents were redeployed to fund
loan originations, loan purchases or deposit outflows. However, by December cash and cash equivalents began
to increase as the competition reduced their deposit account rates bringing them in line with those offered by the
Bank. Despite several rounds of interest rate cuts by the Bank during the quarters ended March 31 and June 30,
2009, deposits continued to increase as loan demand declined contributing to a significant increase in cash and
cash equivalents. At June 30, 2009, interest-bearing deposits included $25.6 million on deposit with a money
center bank and $160.0 million on deposit with the FHLB of New York. Management routinely transfers funds
between the two depository institutions to maximize the return on the funds, with the former pricing off of 30-day
Libor and the latter off of the federal funds rate.
Management reviews cash flow projections regularly and updates them quarterly 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. Commitments at the
close of fiscal 2009 were not materially different from commitments at the close of the prior fiscal year. At June 30,
2009, the Bank had outstanding commitments to originate loans of $35.0 million compared to $39.4 million at June
30, 2008. Construction loans in process and unused lines of credit were $7.6 million and $24.9 million,
respectively, at June 30, 2009 compared to $9.1 million and $27.3 million, respectively, at June 30, 2008. At June
30, 2009, the Bank had $740.4 million of certificates of deposit maturing in one year compared to $710.0 million at
June 30, 2008.
At June 30, 2009, the Bank had agreements to fund the purchase of loans on a flow basis of $8.7 million
compared to $13.2 million at June 30, 2008. The Bank periodically enters into purchase agreements with a limited
number of smaller, local mortgage companies to supplement the Bank’s loan production pipeline. These
agreements call for the purchase, on a flow basis, of mortgage loans with servicing released to the Bank.
Deposits increased $42.2 million to $1.42 billion at June 30, 2009 from $1.38 billion at June 30, 2008.
During the quarter ended September 30, 2008, deposits decreased $30.0 million, but increased by $2.3 million,
$53.3 million and $16.6 million each quarter thereafter, respectively. During the fiscal 2009, interest-bearing
demand deposits increased $11.9 million to $163.6 million, savings deposits
81
increased $1.2 million to $301.6 million, certificates of deposit increased $31.1 million to $904.7 million and non-
interest-bearing demand deposits decreased $2.1 million to $51.2 million.
During the first two quarters of the fiscal year, the Bank priced deposit interest rates at levels
management considered to be reasonably competitive in the marketplace. The Bank determined that there was no
need to increase interest rates to attract deposits since cash flows from investing activities were adequate to
fund loan demand and deposit outflows. During that period, deposit pricing in the marketplace was reasonably
disciplined, but there continued to be fierce competition for certificates of deposit and interest-bearing demand
deposits emanating from those financial institutions receiving negative publicity due to asset quality problems.
Also contributing to the competition for deposits, some financial institutions attempted to lock in depositors at
current interest rates for longer terms as a hedge against future rate increases and, notwithstanding the FDIC’s
increase in insurance of deposit accounts, some depositors spread funds to other financial institutions to reduce
their risk of loss on uninsured deposits following the collapse of several major banks. During the quarter ended
December 31, 2008, deposit rates in the marketplace began to pull back in conjunction with the additional 200
basis point decrease in the federal funds rate. By December 2008, the Bank’s deposit flows turned positive as the
competition lowered their rates bringing them in line with those offered by the Bank. Since there was little
demand for loans and virtually no return on cash and cash equivalents, management attempted to slow deposit
inflows by cutting the Bank’s deposit pricing several times, particularly for certificates of deposit. Nevertheless,
deposits continued to build throughout the quarters ended March 31 and June 30, 2009.
Borrowings from the 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, management may replace the funds with advances. 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 Bank borrowed $200.0 million during fiscal
2008 to replenish liquidity previously depleted by loan originations and deposit outflows and make cash
available for potential implementation of growth and diversification strategies related to execution of the
Company’s business plan. As of June 30, 2009, the Bank’s borrowing potential was $23.5 million without
pledging additional collateral. For the most part there was no need to borrow during fiscal 2009; therefore, the
Bank repaid maturing advances totaling $8.0 million.
The following table discloses our contractual obligations and commitments as of June 30, 2009.
Total
Less Than
1 Year
1-3 Years 4-5 Years
Operating lease obligations
Certificates of deposit
Federal Home Loan Bank advances
$
3,945 $
904,743
210,000
495 $
(In Thousands)
782
135,403
10,000
740,383
—
$
492 $
28,953
—
After
5 Years
2,176
4
200,000
Total
$
1,118,688 $
740,878 $
146,185
$
29,445 $ 202,180
Total
Committed
Less Than
1 Year
1-3 Years 4-5 Years
After
5 Years
(In Thousands)
Undisbursed funds from approved lines of
credit(1)
Construction loans in process
Other commitments to extend credit(1)
$
24,901 $
7,574
34,965
2,145 $
7,574
32,638
— $
—
2,327
— $
—
—
22,756
—
—
Total
$
67,440 $
42,357 $
2,327 $
— $
22,756
(1) Represents amounts committed to customers.
82
Our material capital expenditure plans for the year ending June 30, 2010 include extensive renovations
and improvements to one Bank property. We expect work to begin this year at our existing retail branch in
Lyndhurst and anticipate approximately $1.3 million in funds will be required for the plan related to this location.
The general business purpose of these expenditures is to maintain and improve the Bank’s facilities. We
anticipate that cash flows from our normal operations will be sufficient for these expenditure plans.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of our business
of investing in loans and securities as well as in the normal course of maintaining and improving the Bank’s
facilities. These financial instruments include significant purchase commitments, such as commitments related to
capital expenditure plans and commitments to purchase securities or mortgage-backed securities and
commitments to extend credit to meet the financing needs of our customers. At June 30, 2009, we had no
significant off-balance sheet commitments to purchase securities or for capital expenditures
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Our exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is represented by the contractual
notional amount of those instruments. We use the same credit policies in making commitments and conditional
obligations as we do for on-balance-sheet instruments. At June 30, 2009, outstanding loan commitments totaled
$67.4 million compared to $75.7 million at June 30 2008. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
For additional information regarding our outstanding lending commitments at June 30, 2009, see Note 16 to
consolidated financial statements contained in this Annual Report on Form 10-K.
Capital
Consistent with its goals to operate a sound and profitable financial organization, the Bank actively
seeks to maintain its well capitalized status in accordance with regulatory standards. As of June 30, 2009, the
Bank exceeded all capital requirements of the OTS. The Bank’s regulatory capital ratios at June 30, 2009 were as
follows: core capital 17.8%; Tier I risk-based capital 38.3%; and total risk-based capital 38.8%. The regulatory
capital requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%, respectively. For additional
information regarding regulatory capital at June 30, 2009, see Note 14 to consolidated financial statements
contained in this Annual Report on Form 10-K.
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting
principles generally accepted in the United States of America. These principles require the measurement of
financial position and operating results in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do
not necessarily move in the same direction or with the same magnitude as the price of goods and services, since
such prices are affected by inflation. In a period of rapidly rising interest rates, the
83
liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of
non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and
equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the
possible increase in the dollar value of the collateral securing loans that we have made. We are unable to
determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
SFAS No. 141(R) “Business Combinations” was issued in December of 2007. SFAS No. 141(R)
establishes principles and requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. The guidance will become
effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company’s accounting for business combinations completed after the effective
date.
In February 2008, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard
(“FAS”) 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”. This
FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or
as one "linked" transaction. The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for
fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early
adoption will not be allowed. The Company expects that FAS 140-3 will not have an impact on its consolidated
financial statements.
In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157”, that
permits a one-year deferral in applying the measurement provisions of SFAS No. 157 to non-financial assets and
non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s
financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-
financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more
frequently, the effective date of application of SFAS No. 157 to that item is deferred until fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to
an entity that applied SFAS No. 157 in interim or annual financial statements prior to the issuance of FAS 157-2.
The Company expects that FSP FAS 157-2 will not have an impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS
No. 161 also requires entities to disclose additional information about the amounts and location of derivatives
located within the financial statements, how the provisions of SFAS No. 133 has been applied, and the impact
that hedges have on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after November 15,
84
2008, with early application encouraged. The Company expects that SFAS No. 161 will not have an impact on its
consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets”.
This FSP amends the factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R), and other GAAP. This FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited.
The implementation of this standard will not have a material impact on the Company’s consolidated financial
position or results of operations.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-
Based Payment Transactions Are Participating Securities”. This FSP clarifies that all outstanding unvested
share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed
earnings with common shareholders. Awards of this nature are considered participating securities and the two-
class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal
years beginning after December 15, 2008. The implementation of this standard will not have a material impact on
the Company’s consolidated financial position or results of operations.
In September 2008, the FASB issued FSP FAS 133-1 and FASB Interpretation (“FIN”) 45-4, “Disclosures
about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP FAS 133-1 and
FIN 45-4). FSP FAS 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit
derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are
effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods.
FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The
implementation of this standard did not have a material impact on the Company’s consolidated financial position
or results of operations.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active”. FSP FAS 157-3 clarifies the application of SFAS No. 157, “Fair
Value Measurements”, in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was
effective upon issuance. Adoption of FSP FAS 157-3 did not have a material impact on the Company’s
consolidated financial statements.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities”. FSP FAS 140-4 and
FIN 46(R)-8 amends FASB SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, to require public entities to provide additional disclosures about transfers of
financial assets. It also amends FIN 46(R), “Consolidation of Variable Interest Entities”, to require public
enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional
disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain
disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity
(SPE) that holds a variable interest in the qualifying SPE but was not the transferor of financial assets to the
qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying
SPE but was not the transferor of financial assets to the qualifying SPE. The disclosures required by FSP FAS
140-4 and FIN 46(R)-8 are intended
85
to provide greater transparency to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying SPEs.
FSP FAS 140-4 and FIN 46(R) is effective for reporting periods (annual or interim) ending after December 15,
2008. The implementation of this standard did not have a material impact on the Company’s consolidated
financial position or results of operations.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF
Issue No. 99-20”. FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be
Held by a Transferor in Securitized Financial Assets”, to achieve more consistent determination of whether an
other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”, and other related guidance. FSP EITF 99-
20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied
prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The
implementation of this standard did not have a material impact on the Company’s consolidated financial position
or results of operations.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”. FASB SFAS No. 157, “Fair Value Measurements”, defines fair value as the price that would be received
to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed
sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4
provides additional guidance on determining when the volume and level of activity for the asset or liability has
significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may
not be considered orderly.
FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether
there has been a significant decrease in the volume and level of activity for the asset or liability in relation to
normal market activity for the asset or liability. When the reporting entity concludes there has been a significant
decrease in the volume and level of activity for the asset or liability, further analysis of the information from that
market is needed and significant adjustments to the related prices may be necessary to estimate fair value in
accordance with SFAS No. 157.
This FSP clarifies that when there has been a significant decrease in the volume and level of activity for
the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the
weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances
that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair value.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. Adoption of
FSP FAS 157-4 did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-
Than-Temporary Impairments”. FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should
be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities,
management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it
will be required to sell the security prior to its anticipated recovery. These steps are done before assessing
whether the entity will recover the cost basis of the investment.
86
Previously, this assessment required management to assert it has both the intent and the ability to hold a
security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an
other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the
security through either cash flows or market price.
In instances when a determination is made that an other-than-temporary impairment exists but the
investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell
the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and
amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary
impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-
than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment
related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment
related to all other factors is recognized in other comprehensive income.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption
of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial
statements.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB
28-1 amend FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, to require
disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting”,
to require those disclosures in summarized financial information at interim reporting periods.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption
of FSP FAS 107-1 and APB 28-1 did not have a material impact on the Company’s consolidated financial
statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an
Amendment of FASB Statement No. 140”. This statement prescribes the information that a reporting entity must
provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial
assets. Specifically, among other aspects, SFAS No. 166 amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” by removing the concept of a qualifying
special-purpose entity from SFAS No. 140 and removes the exception from applying FIN 46(R) to variable
interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach
used in SFAS No. 140. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the potential impact the new pronouncement will have on its consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”.This
statement amends FIN. 46, “Consolidation of Variable Interest Entities (revised December 2003) — an
interpretation of ARB No. 51”, to require an enterprise to determine whether its variable interest or interests give
it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity
is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that
could potentially be significant to the variable interest entity or the right to
87
receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167
also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. SFAS No. 167 is effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the potential impact the new pronouncement will have on its consolidated
financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”. SFAS No.
168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”to establish the
“FASB Accounting Standards Codification” as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with
generally accepted accounting principles in the United States. SFAS No. 168 is effective for interim and annual
periods ending after September 15, 2009. The Company expects that SFAS No. 168 will not have an impact on its
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
Qualitative Analysis. The majority of our assets and liabilities are sensitive to changes in interest rates.
Consequently, interest rate risk is a significant form of business risk that must be managed by the Company.
Interest rate risk is generally defined in regulatory nomenclature as the risk to the Company’s earnings or capital
arising from the movement of interest rates. It arises from several risk factors including: the differences between
the timing of rate changes and the timing of cash flows (re-pricing risk); the changing rate relationships among
different yield curves that affect bank activities (basis risk); the changing rate relationships across the spectrum
of maturities (yield curve risk); and the interest-rate-related options embedded in bank products (option risk).
Regarding the risk to the Company’s earnings, movements in interest rates significantly influence the
amount of net interest income recognized by the Company. Net interest income is the difference between:
•
•
.
the interest income recorded on our earning assets, such as loans, securities and other
interest-earning assets; and,
the interest expense recorded on our costing liabilities, such as interest-bearing deposits and
borrowings.
Net interest income is, by far, the Company’s largest revenue source to which the Company adds its
noninterest income and from which it deducts its noninterest expense and income taxes to calculate net income.
Movements in market interest rates, and the effect of such movements on the risk factors noted above,
significantly influence the “spread” between the interest earned by the Company on its loans, securities and
other interest-earning assets and the interest paid on its deposits and borrowings. Movements in interest rates
that increase, or “widen”, that net interest spread enhance the Company’s net income. Conversely, movements
in interest rates that reduce, or “tighten”, that net interest spread adversely impact the Company’s net income.
For any given movement in interest rates, the resulting degree of movement in an institution’s yield on
interest earning assets compared with that of its cost of interest-bearing liabilities determines if an institution is
deemed “asset sensitive” or “liability sensitive”. An asset sensitive institution is one whose yield on interest-
earning assets reacts more quickly to movements in interest rates than its cost of
88
interest-bearing liabilities. In general, the earnings of asset sensitive institutions are enhanced by upward
movements in interest rates through which the yield on its earning assets increases faster than its cost of
interest-bearing liabilities resulting in a widening of its net interest spread. Conversely, the earnings of asset
sensitive institutions are adversely impacted by downward movements in interest rates through which the yield
on its earning assets decreases faster than its cost of interest-bearing liabilities resulting in a tightening of its net
interest spread.
In contrast, a liability sensitive institution is one whose cost of interest-bearing liabilities reacts more
quickly to movements in interest rates than its yield on interest-earning assets. In general, the earnings of
liability sensitive institutions are enhanced by downward movements in interest rates through which the cost of
interest-bearing liabilities decreases faster than its yield on its earning assets resulting in a widening of its net
interest spread. Conversely, the earnings of liability sensitive institutions are adversely impacted by upward
movements in interest rates through which the cost of interest-bearing liabilities increases faster than its yield on
its earning assets resulting in a tightening of its net interest spread.
The degree of an institution’s asset or liability sensitivity is traditionally represented by its “gap
position”. In general, gap is a measurement that describes the net mismatch between the balance of an
institution’s earning assets that are maturing and/or re-pricing over a selected period of time compared to that of
its costing liabilities. Positive gaps represent the greater dollar amount of earning assets maturing or re-pricing
over the selected period of time than costing liabilities. Conversely, negative gaps represent the greater dollar
amount of costing liabilities maturing or re-pricing over the selected period of time than earning assets. The
degree to which an institution is asset or liability sensitive is reported as a negative or positive percentage of
assets, respectively. The industry commonly focuses on cumulative one-year and three-year gap percentages as
fundamental indicators of interest rate risk sensitivity.
Based upon the findings of the Company’s internal interest rate risk analysis, which are corroborated
by the independent analysis performed by its primary regulator as described below, the Company is considered
to be liability sensitive. Liability sensitivity characterizes the balance sheets of many thrift institutions and is
generally attributable to the comparatively shorter contractual maturity and/or re-pricing characteristics of the
institution’s deposits and borrowings versus those of its loans and investment securities.
With respect to the maturity and re-pricing of its interest-bearing liabilities, at June 30, 2009, $740.4
million or 81.8% of our certificates of deposit mature within one year with an additional $111.1 million or 12.3%
maturing in greater than one year but less than or equal to two years. Based on current market interest rates, the
majority of these certificates are projected to re-price downward to the extent they remain with the Bank at
maturity. Of the $210.0 million of FHLB borrowings at June 30, 2009, all have fixed interest rates with $200.0
million maturing during fiscal 2018, but callable on a quarterly basis prior to maturity. Given current market
interest rates, the call options are not currently expected to be exercised by the FHLB. The remaining $10.0
million of FHLB borrowings are non-callable and mature during fiscal 2011.
With respect to the maturity and re-pricing of the Company’s interest-earning assets, at June 30, 2009,
$20.9 million, or 2.0% of our total loans will reach their contractual maturity dates within one year with the
remaining $1.02 billion, or 98.0% of total loans having remaining terms to contractual maturity in excess of one
year. Of loans maturing after one year, $902.5 million or 88.1% had fixed rates of interest while the remaining
$121.4 million or 11.9% had adjustable rates of interest.
Regarding investment securities, at June 30, 2009, only $360,000 of our securities will reach their
contractual maturity dates within one year with the remaining $715.8 million, or virtually 100% of total
89
securities, having remaining terms to contractual maturity in excess of one year. Of the latter category, $311.5
million comprising 43.5% of our total securities had fixed rates of interest while the remaining $404.3 million
comprising 56.5% of our total securities had adjustable or floating rates of interest.
At June 30, 2009, mortgage-related assets, including mortgage loans and mortgage-backed securities,
total $1.73 billion and comprise 88.1% of total earning assets. In addition to remaining term to maturity and
interest rate type as discussed above, other factors contribute significantly to the level of interest rate risk
associated with mortgage-related assets. In particular, the scheduled amortization of principal and the borrower’s
option to prepay any or all of a mortgage loan’s principal balance, where applicable, has a significant effect on
the average lives of such assets and, therefore, the interest rate risk associated with them. In general, the
prepayment rate on lower yielding assets tends to slow as interest rates rise due to the reduced financial
incentive for borrowers to refinance their loans. By contrast, the prepayment rate of higher yielding assets tends
to accelerate as interest rates decline due to the increased financial incentive for borrowers to prepay or
refinance their loans to comparatively lower interest rates. These characteristics tend to diminish the benefits of
falling interest rates to liability sensitive institutions while exacerbating the adverse impact of rising interest
rates.
While the Company retained its liability sensitivity during fiscal 2009, the degree of that sensitivity, as
measured internally by the institution’s one-year and three-year gap percentages, has declined during fiscal
2009. Specifically, the Company’s cumulative one-year gap percentage improved from -9.47% at June 30, 2008 to -
5.17% at June 30, 2009. Moreover, the Company’s cumulative three-year gap percentage changed from -0.63% to
3.47% over those same comparative periods.
As a liability sensitive institution, the Company’s net interest spread is generally expected to benefit
from overall reductions in market interest rates. Conversely, its net interest spread is generally expected to be
adversely impacted by overall increases in market interest rates. However, the general effects of movements in
market interest rates can be diminished or exacerbated by “nonparallel” movements in interest rates across a
yield curve. Nonparallel movements in interest rates generally occur when shorter term and longer term interest
rates move disproportionately in a directionally consistent manner. For example, shorter term interest rates may
decrease faster than longer term interest rates which would generally result in a “steeper” yield curve.
Alternately, nonparallel movements in interest rates may also occur when shorter term and longer term interest
rates move in a directionally inconsistent manner. For example, shorter term interest rates may rise while longer
term interest rates remain steady or decline which would generally result in a “flatter” yield curve.
At its extreme, a yield curve may become “inverted” for a period of time during which shorter term
interest rates exceed longer term interest rates. While inverted yield curves do occasionally occur, they are
generally considered a “temporary” phenomenon portending a change in economic conditions that will restore
the yield curve to its normal, positively sloped shape.
In general, the interest rates paid on the Company’s deposits tend to be determined based upon the
level of shorter term interest rates. By contrast, the interest rates earned on the Company’s loans and investment
securities tend to be based upon the level of longer term interest rates. As such, the overall “spread” between
shorter term and longer interest rates when earning assets and costing liabilities re-price greatly influences the
Company’s overall net interest spread over time. In general, a wider spread between shorter term and longer term
interest rates, implying a “steeper” yield curve, is beneficial to the Company’s net interest spread. By contrast, a
narrower spread between shorter term and longer term interest rates, implying a “flatter” yield curve, or a
negative spread between those measures, implying an inverted yield curve, adversely impacts the Company’s
net interest spread.
90
The effects of interest rate risk on the Company’s earnings are best demonstrated through a review of
changes in market interest rates over the past several years and their impact on the Company’s net interest
spread. Following a period of historically low interest rates, the Federal Reserve Board of Governors steadily
increased its target federal funds rate by 425 basis points from 1.00% in June, 2004 to 5.25% in June, 2007. During
that three-year period, federal funds rate and other shorter term market interest rates increased by a far greater
degree than longer term market interest rates. For example, the market yield on the one-year U.S. Treasury
increased 282 basis points from 2.07% at June 30, 2004 to 4.91% at June 30, 2007. By comparison, the market yield
on the 10-year U.S. Treasury increased by only 41 basis points from 4.62% to 5.03% over those same time
periods. The flattening yield curve during that three year period had an adverse impact on the Company’s net
interest spread which decreased 67 basis points from 2.37% for the year ended June 30, 2004 to 1.70% for the
year ended June 30, 2007.
The upward trend in shorter term interest rates was reversed in September, 2007 as the Federal Reserve
began to lower the target rate for federal funds in reaction to the threat of a looming recession triggered by
growing volatility and instability in the housing and credit markets. The effects of those isolated crises rapidly
grew to threaten the viability of the domestic and international financial markets as a whole. In reaction to that
larger threat, the Federal Reserve reduced the target federal funds rate by a total of over 500 basis points from
5.25% at June, 2007 to a range between 0.00% and 0.25% which remains in effect at June 30, 2009. During that
two-year period, federal funds rate and other shorter term market interest rates decreased by a far greater degree
than longer term market interest rates. For example, the market yield on the one-year U.S. Treasury decreased 435
basis points from 4.01% at June 30, 2007 to 0.56% at June 30, 2009. By comparison, the market yield on the 10-
year U.S. Treasury decreased by only 150 basis points from 5.03% to 3.53% over those same time periods. The
steepening yield curve during that two year period had a beneficial impact on the Company’s net interest spread
which increased 55 basis points from 1.70% for the year ended June 30, 2007 to 2.25% for the year ended June 30,
2009.
The Board of Directors has established an Interest Rate Risk Management Committee, currently
comprised of Directors Hopkins, Regan, Aanensen, Mazza and Parow, which is responsible for monitoring the
Company’s interest rate risk. Our Chief Financial Officer and Chief Investment Officer also participate as
management’s liaison to the committee. The committee meets quarterly to address management of our assets and
liabilities, including review of our short term liquidity position; loan and deposit pricing and production volumes
and alternative funding sources; current investments; average lives, durations and re-pricing frequencies of
loans and securities; and a variety of other asset and liability management topics. The results of the committee’s
quarterly review are reported to the full Board, which adjusts the investment policy and strategies, as it
considers necessary and appropriate.
Quantitative Analysis. Management utilizes a combination of internal and external analyses to
quantitatively model, measure and monitor the Company’s exposure to interest rate risk. The external
quantitative analysis is based upon the OTS interest rate risk model which utilizes data submitted on the Bank’s
quarterly Thrift Financial Reports. The model estimates the change in the Bank’s net portfolio value (“NPV”)
ratio throughout a series of interest rate scenarios. NPV, sometimes referred to as the economic value of equity,
represents the present value of the expected cash flows from the Bank’s assets less the present value of the
expected cash flows arising from its liabilities adjusted for the value of off-balance sheet contracts. The NPV
ratio represents the dollar amount of the Bank’s NPV divided by the present value of its total assets for a given
interest rate scenario. In essence, NPV attempts to quantify the economic value of the Bank using a discounted
cash flow methodology while the NPV ratio reflects that value as a form of capital ratio. The degree to which the
NPV ratio changes for any hypothetical interest rate scenario from its “base case” measurement is a reflection of
an institution’s sensitivity to interest rate risk.
91
The internal quantitative analysis utilized by management measures interest rate risk from both a capital
and earnings perspective. Like the OTS model noted above, the Bank’s internal interest rate risk analysis
calculates sensitivity of the Bank’s NPV ratio to movements in interest rates. Both the OTS and internal models
measure the Bank’s NPV ratio in a “base case” scenario that assumes no change in interest rates as of the
measurement date. Both models measure the change in the NPV ratio throughout a series of interest rate
scenarios representing immediate and permanent, parallel shifts in the yield curve up and down 100, 200 and 300
basis points. Both models generally require that interest rates remain positive for all points along the yield curve
for each rate scenario which may preclude the modeling of certain “down rate” scenarios during periods of lower
market interest rates. The Bank’s interest rate risk management policy establishes acceptable floors for the NPV
ratio and caps for the maximum change in the NPV ratio throughout the scenarios modeled.
As illustrated in the tables below, the Bank’s NPV would be negatively impacted by an increase in
interest rates. This result is expected given the Bank’s liability sensitivity noted earlier. Specifically, based upon
the comparatively shorter maturity and/or re-pricing characteristics of its interest-bearing liabilities compared
with that of the Bank’s interest-earning assets, an upward movement in interest rates would have a
disproportionately adverse impact on the present value of the Bank’s assets compared to the beneficial impact
arising from the reduced present value of its liabilities. Hence, the Bank’s NPV and NPV ratio decline in the
increasing interest rate scenarios. Historically low interest rates at June 30, 2009 preclude the modeling of certain
scenarios as parallel downward shifts in the yield curve of 100 basis points or more would result in negative
interest rates for many points along that curve.
The following tables present the results of the external OTS NPV analysis as of June 30, 2009 and June
30, 2008, respectively.
Net Portfolio Value
At June 30, 2009
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Basis Point
Changes in Rates (1)
$ Amount
$ Change
% Change
Value Ratio
Change
+300 bps
+200 bps
+100 bps
0 bps
-100 bps
(In Thousands)
303,185
340,570
372,549
395,580
406,049
-92,395
-55,010
-23,031
-
10,469
-23%
-14%
-6%
-
+3%
15.39%
16.90%
18.11%
18.90%
19.17%
-350 bps
-200 bps
-79 bps
-
+27 bps
Net Portfolio Value
At June 30, 2008
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Basis Point
Changes in Rates (1)
$ Amount
$ Change
% Change
Value Ratio
Change
+300 bps
+200 bps
+100 bps
0 bps
-100 bps
(In Thousands)
265,006
305,498
343,129
376,336
398,540
-111,329
-70,838
-33,207
-
22,205
-30%
-19%
-9%
-
+6%
14.07%
15.82%
17.36%
18.63%
19.39%
-456 bps
-281 bps
-127 bps
-
+76 bps
(1) The -200 bps and -300 bps scenarios are not shown due to the low prevailing interest rate environment.
A comparative industry benchmark regarding interest rate risk is the “sensitivity measure” which is
generally defined by bank regulators as the change in an institution’s NPV ratio, measured in basis
92
points, in an immediate and permanent, adverse parallel shift in interest rates of plus or minus 200 basis points.
Based upon the tables above, the Bank’s sensitivity measure improved by 81 basis points from -281 basis points
at June 30, 2008 to -200 basis points at June 30, 2009 which indicates an aggregate reduction in the Bank’s
sensitivity to movements in interest rates from period to period.
There are numerous internal and external factors that may contribute to changes in an institution’s
sensitivity measure. Internally, changes in the composition and allocation of an institution’s balance sheet and
the interest rate risk characteristics of its components can significantly alter the exposure to interest rate risk as
quantified by the changes in the sensitivity measure. However, changes to certain external factors, most notably
changes in the level of market interest rates and overall shape of the yield curve, can significantly alter the
projected cash flows of the institutions interest-earning assets and interest-costing liabilities and the associated
present values thereof. Changes in internal and external factors from period to period can complement one
another’s effects to reduce overall sensitivity, partly or wholly offset one another’s effects, or exacerbate one
another’s adverse effects and thereby increase the institution’s exposure to interest rate risk as quantified by the
sensitivity measure.
While several internal and external factors working in concert contributed to the reported change in the
Bank’s sensitivity measure, the Bank primarily attributes the net improvement in that measure from year to year
to the comparative increase in its balance of short term, liquid assets. Specifically, the Company’s cash and cash
equivalents increased $79.8 million from $131.7 million or 6.3% of total assets at June 30, 2008 to $211.5 million or
10.0% of total assets at June 30, 2009. The growth in short term liquid assets, which are re-priced on a day-to-day
basis to reflect current market interest rates, was primarily funded through a net reduction in the outstanding
balance of investment securities and net growth in deposits partially offset by a net increase in loans receivable.
Taken together, this change in balances sheet allocation reduced the aggregate longevity of the Bank’s interest-
earning assets in relation to its interest-bearing liabilities and, thereby, reduced the sensitivity to interest rate risk
as quantified by the Bank’s sensitivity measure.
Because the Bank’s sensitivity measure and NPV ratio in the +200 bps scenario exceeded the thresholds
established by its primary regulator, the Bank’s “TB 13a Level of Risk” was rated as “Minimal” based upon the
results of the OTS interest rate risk model as of June 30, 2009 and June 30, 2008. TB-13a is the OTS’s primary
regulatory guidance concerning the management of interest rate risk.
The results of the Bank’s internal “NPV-based” analysis are generally consistent with those of the
external analysis prepared by OTS as presented in summary form above. As noted earlier, the Bank’s internal
interest rate risk analysis also includes an “earnings-based” component. A quantitative, earnings-based
approach to measuring interest rate risk is strongly encouraged by bank regulators as a complement to the
“NPV-based” methodology. Notwithstanding, there is currently no external “earnings-based” interest rate risk
analysis prepared by OTS for the institutions within its oversight. As such, institutions must utilize internal
models and analysis to gauge the sensitivity of their earnings to movements in interest rates. Regarding such
internal modeling, however, there are no commonly accepted “industry best practices” that specify the manner in
which “earnings-based” interest rate risk analysis should be performed with regard to certain key modeling
variables. Such variables include, but are not limited to, those relating to rate scenarios (e.g., immediate and
permanent rate “shocks” versus gradual rate change “ramps”, “parallel” versus “nonparallel” yield curve
changes), measurement periods (e.g., one year versus two year, cumulative versus noncumulative), measurement
criteria (e.g., net interest income versus net income) and balance sheet composition and allocation (“static”
balance sheet, reflecting reinvestment of cash flows into like instruments, versus “dynamic” balance sheet,
reflecting internal budget and planning assumptions).
93
The Company is aware that the absence of an industry-standard, external analysis to measure interest
rate risk from an earnings perspective or, at a minimum, a commonly shared set of analysis criteria and
assumptions on which to base an internal analysis, could result in inconsistent or misinterpreted disclosure
concerning an institution’s level of interest rate risk. Consequently, the Company limits the presentation of its
earnings-based interest rate risk analysis to the internally modeled scenarios presented in the table below.
Consistent with the NPV analysis above, such scenarios utilize immediate and permanent rate “shocks” that
result in parallel shifts in the yield curve. For each scenario, projected net interest income is measured over a one
year period utilizing a static balance sheet assumption through which incoming and outgoing asset and liability
cash flows are reinvested into the same instruments. Product pricing and earning asset prepayment speeds are
appropriately adjusted for each rate scenario.
As illustrated in the table below, the Bank’s net interest income would be negatively impacted by an
increase in interest rates. Like the NPV results presented earlier, this result is expected given the Bank’s liability
sensitivity noted earlier.
At June 30, 2009
Yield
Curve
Shift
Balance Sheet
Composition &
Allocation
Changes in
Rates
Measurement
Period
Net
Interest
Income
Change
in Net
Interest
Income
Change
in Net
Interest
Income
(In Thousands)
-
Parallel
Parallel
Static
Static
Static
0 bps
One Year
$
55,610 $
-
-%
+100 bps
One Year
54,642
-968
-1.74
+200 bps
One Year
52,932
-2,678
-4.82
Rate Change
Type
Base case
(No change)
Immediate and
permanent
Immediate and
permanent
Notwithstanding the rate change scenarios presented in the NPV and earnings-based analyses above,
future interest rates and their effect on net portfolio value or net interest income are not predictable.
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in this type of computation. Although certain
assets and liabilities may have similar maturity or periods of re-pricing, they may react at different times and in
different degrees to changes in market interest rates. The interest rate on certain types of assets and liabilities,
such as demand deposits and savings accounts, may fluctuate in advance of changes in market interest rates,
while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain
assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early
withdrawal levels could deviate significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
94
Item 8. Financial Statements and Supplementary Data
The Company’s financial statements are contained in this Annual Report on Form 10-K immediately
following Item 15.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a)
Disclosure Controls and Procedures
Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s
principal executive officer and principal financial officer have concluded that as of the end of the period covered
by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms and is accumulated and communicated to the Company’s management, including
the principal executive and principal financial officer, as appropriate to allow timely decisions regarding required
disclosures.
(b)
Internal Control over Financial Reporting
1.
Management’s Annual Report on Internal Control Over Financial Reporting.
Management’s report on the Company’s internal control over financial reporting appears in the
Company’s consolidated financial statements that are contained in this Annual Report on Form 10-K immediately
following Item 15. Such report is incorporated herein by reference.
2.
Report of Independent Registered Public Accounting Firm.
The report of Beard Miller Company LLP on the Company’s internal control over financial reporting
appears in the Company’s consolidated financial statements that are contained in this Annual Report on Form
10-K immediately following Item 15. Such report is incorporated herein by reference.
3.
Changes in Internal Control Over Financial Reporting.
During the last quarter of the year under report, there was no change in the Company’s internal control
over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item 9B. Other Information
None.
95
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information that appears under the headings “Section 16(a) Beneficial Ownership Reporting
Compliance”, “Information Regarding Directors and Executive Officers” and “Operation of the Board of
Directors” in the Registrant’s definitive proxy statement for the Registrant’s 2009 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal
year end (the “Proxy Statement”) is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer, principal
financial officer and principal accounting officer. A copy of the code of ethics is available without charge upon
request to the Corporate Secretary, Kearny Financial Corp., 120 Passaic Avenue, Fairfield, New Jersey 07004.
Item 11. Executive Compensation
The information that appears under the headings “Board of Directors and Executive Officer
Compensation” and “Compensation Discussion and Analysis” in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)
(b)
(c)
Security Ownership of Certain Beneficial Owners. Information required by this item is
incorporated herein by reference to the section captioned “Voting Securities and Principal
Holders Thereof” in the Proxy Statement.
Security Ownership of Management. Information required by this item is incorporated herein
by reference to the section captioned “Information Regarding Directors and Executive
Officers” in the Proxy Statement.
Changes in Control. Management of the Company knows of no arrangements, including any
pledge by any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the registrant.
96
(d)
Securities Authorized for Issuance Under Equity Compensation Plans. Set forth below is
information as of June 30, 2009 with respect to compensation plans under which equity
securities of the Registrant are authorized for issuance.
Equity Compensation Plan Information
(A)
(B)
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(C)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding Securities
Reflected in Column (A))
3,225,740
$
12.33
N/A
N/A
3,225,740
$
12.33
475,856
N/A
475,856
Equity compensation plans
approved by shareholders:
2005 Stock Compensation
and Incentive Plan (1)
Equity compensation plans not
approved by stockholders:
None.
Total
(1)
In addition to 3,225,740 options outstanding under this plan as of June 30, 2009, restricted stock awards of
501,078 shares were non-vested under this plan as of June 30, 2009. Such awards are earned at the rate of
20% one year after the date of the grant and 20% annually thereafter. As of June 30, 2009, there were 155,959
shares remaining available for restricted share awards under this plan and these shares are included under
column (C) as securities remaining available for future issuance under this plan along with 319,897 options
remaining available for award.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information that appears under the subheading “Certain Relationships and Related Transactions”
under the heading “Information Regarding Directors and Executive Officers” in the Proxy Statement is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information relating to this item is incorporated herein by reference to the information contained
under the section captioned “Information Regarding Independent Auditor” in the Proxy Statement.
97
Item 15. Exhibits, Financial Statement Schedules
PART IV
(1) The following financial statements and the independent auditors’ report appear in this Annual
Report on Form 10-K immediately after this Item 15:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of
June 30, 2009 and 2008
Consolidated Statements of Income For the Years Ended
June 30, 2009, 2008 and 2007
Consolidated Statements of Changes in Stockholders’ Equity
for the Years Ended June 30, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or applicable, or the required information
is shown in the consolidated financial statements or the notes thereto.
(3)
The following exhibits are filed as part of this report:
3.1
3.2
4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
11
Charter of Kearny Financial Corp.*
Bylaws of Kearny Financial Corp. **
Stock Certificate of Kearny Financial Corp*
Employment Agreement between Kearny Federal Savings Bank and John N.
Hopkins**†
Employment Agreement between Kearny Federal Savings Bank and Albert E.
Gossweiler**†
Employment Agreement between Kearny Federal Savings Bank and Sharon Jones**†
Employment Agreement between Kearny Federal Savings Bank and William C.
Ledgerwood**†
Employment Agreement between Kearny Federal Savings Bank and Erika K. Parisi**†
Employment Agreement between Kearny Federal Savings Bank and Patrick M.
Joyce**†
Employment Agreement between Kearny Federal Savings Bank and Craig
Montanaro**†
Employment Agreement between Kearny Financial Corp. and John N. Hopkins***†
Directors Consultation and Retirement Plan*†
Benefit Equalization Plan*†
Benefit Equalization Plan for Employee Stock Ownership Plan*†
Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan ****†
Kearny Federal Savings Bank Director Life Insurance Agreement*****†
Kearny Federal Savings Bank Executive Life Insurance Agreement*****†
Kearny Financial Corp. Directors Incentive Compensation Plan******†
Statement regarding computation of earnings per share
98
21
23
31
32
Subsidiaries of the Registrant
Consent of Beard Miller Company LLP
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certification
__________
†
*
**
***
****
*****
Management contract or compensatory plan or arrangement required to be filed as an exhibit.
Incorporated by reference to the exhibits to the Registrant’s Registration Statement on Form S-1
(File No. 333-118815).
Incorporated by reference to the identically numbered exhibit to the Registrant’s Annual Report on
Form 10-K for the year ended June 30, 2008 (File No. 000-51093)
Incorporated by reference to the exhibit to the Registrant’s Form 8-K filed on June 19, 2008.
(File No. 000-51093).
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8
(File No. 333-130204)
Incorporated by reference to the exhibits to the Registrant’s Form 8-K filed on August 18, 2005.
(File No. 000-51093).
****** Incorporated by reference to the exhibit to the Registrant’s Form 8-K filed on December 9, 2005.
(File No. 000-51093).
99
120 PASSAIC AVENUE * FAIRFIELD, NJ 07004-3510 * 973-244-4500
September 10, 2009
Beard Miller Company LLP
100 Walnut Avenue
Suite 200
Clark, NJ 07061
Management Report on Internal Control over Financial Reporting
The management of Kearny Financial Corp. and Subsidiaries (collectively the “Company”) is
responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control system is a process designed to provide reasonable assurance to the management and board of
directors regarding the preparation and fair presentation of published consolidated financial statements.
The Company’s internal control over financial reporting includes policies and procedures that pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions
of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with U.S. generally accepted accounting principles and that
receipts and expenditures are being made only in accordance with authorizations of management and the
directors of the Company; and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our
consolidated financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to consolidated
financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of internal control over financial reporting as
of June 30, 2009. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on its
assessment, management believes that, as of June 30, 2009, the Company’s internal control over financial
reporting is effective based on those criteria.
The Company’s independent registered public accounting firm that audited the consolidated financial
statements has issued an audit report on the effective operation of the Company’s internal control over financial
reporting as of June 30, 2009, a copy of which is included in this annual report.
/s/ John N. Hopkins
/s/ William C. Ledgerwood
John N. Hopkins
President and Chief Executive Officer
William C. Ledgerwood
Senior Vice President and Chief
Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kearny Financial Corp.
We have audited Kearny Financial Corp.’s (the “Company”) internal control over financial reporting
as of June 30, 2009, based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
To the Board of Directors and Stockholders
Kearny Financial Corp.
2.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2009, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial condition and the related consolidated
statements of income, changes in stockholders’ equity, and cash flows of the Company, and our report dated
September 10, 2009 expressed an unqualified opinion thereon.
Beard Miller Company, LLP
Clark, New Jersey
September 10, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kearny Financial Corp.
We have audited the accompanying consolidated statements of financial condition of Kearny Financial
Corp. and Subsidiaries (collectively the “Company”) as of June 30, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year
period ended June 30, 2009. The Company’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company as of June 30, 2009 and 2008, and the consolidated
results of their operations and cash flows for each of the years in the three-year period ended June 30, 2009, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Company’s internal control over financial reporting as of June 30, 2009, based on the
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated September 10, 2009, expressed an
unqualified opinion thereon.
Beard Miller Company LLP
Clark, New Jersey
September 10, 2009
F-1
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
Cash and amounts due from depository institutions
Interest-bearing deposits in other banks
Assets
Cash and Cash Equivalents
Securities available for sale (amortized cost 2009 $31,658; 2008 $40,305)
Loans receivable, including net premiums and deferred loan costs 2009 $962; 2008 $1,276
Less allowance for loan losses
Net Loans Receivable
Mortgage-backed securities available for sale (amortized cost 2009 $665,127; 2008 $726,037)
Mortgage-backed securities held to maturity (estimated fair value 2009 $3,678; 2008 $0)
Premises and equipment
Federal Home Loan Bank of New York (“FHLB”) stock
Interest receivable
Goodwill
Bank owned life insurance
Deferred income tax assets, net
Other assets
Liabilities and Stockholders’ Equity
$ 2,124,921 $
2,083,039
Total Assets
Liabilities
Deposits:
Non-interest bearing
Interest-bearing
Total Deposits
Advances from FHLB
Advance payments by borrowers for taxes
Other liabilities
Total Liabilities
Stockholders’ Equity
Preferred stock, $0.10 par value; 25,000,000 shares authorized; none issued and
outstanding
Common stock, $0.10 par value; 75,000,000 shares authorized; 72,737,500 shares issued;
2009 69,241,600 outstanding; 2008 70,489,003 outstanding
Paid-in capital
Retained earnings
Unearned Employee Stock Ownership Plan shares; 2009 1,115,308 shares; 2008 1,260,783
shares
Treasury stock, at cost; 2009 3,495,900 shares; 2008 2,248,497 shares
Accumulated other comprehensive income (loss)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See notes to consolidated financial statements.
F-2
June 30,
2009
2008
(In Thousands, Except Share
and Per Share Data)
$
25,970 $
185,555
19,864
111,859
211,525
131,723
28,027
1,045,847
(6,434)
1,039,413
38,183
1,027,790
(6,104)
1,021,686
683,785
4,321
35,495
12,950
8,237
82,263
16,267
1,395
1,243
726,023
—
34,950
13,076
8,949
82,263
15,709
9,028
1,449
$
51,210 $
1,369,991
53,349
1,325,683
1,421,201
1,379,032
210,000
5,714
11,286
218,000
5,849
8,787
1,648,201
1,611,668
—
7,274
208,577
309,687
(11,153)
(45,985)
8,320
—
7,274
203,266
307,186
(12,608)
(32,023)
(1,724)
476,720
$ 2,124,921 $
471,371
2,083,039
Kearny Financial Corp. and
Subsidiaries
Consolidated Statements of Income
Interest Income
Loans
Mortgage-backed securities
Securities:
Taxable
Tax-exempt
Other interest-earning assets
Total Interest Income
Interest Expense
Deposits
Borrowings
Total Interest Expense
Net Interest Income
Provision for Loan Losses
Years Ended June 30,
2009
2008
2007
(In Thousands, Except Per Share Data)
$
60,559 $
34,944
55,123 $
34,773
408
634
1,363
1,186
1,074
5,211
44,972
32,222
1,492
4,708
12,167
97,908
97,367
95,561
35,694
8,506
43,308
7,220
47,351
3,117
44,200
50,528
50,468
53,708
46,839
45,093
317
94
571
Net Interest Income after Provision for Loan Losses
53,391
46,745
44,522
Non-Interest Income
Fees and service charges
(Loss) gain on sale of securities
Other-than-temporary security impairment:
Total
Less: Portion recognized in other comprehensive income
Portion recognized in earnings
Miscellaneous
Total Non-Interest Income
Non-Interest Expenses
Salaries and employee benefits
Net occupancy expense of premises
Equipment
Advertising
Federal deposit insurance premium
Amortization of intangible assets
Directors’ compensation
Miscellaneous
Total Non-Interest Expenses
Income before Income Taxes
Income Taxes
Net Income
Net Income per Common Share (EPS)
Basic and Diluted
1,415
(415)
(988)
274
(714)
1,233
1,519
25,449
4,135
4,487
900
1,864
29
2,200
4,858
1,336
—
(659)
—
(659)
1,372
2,049
24,678
3,746
4,546
852
186
241
2,250
4,440
992
55
—
—
—
1,442
2,489
27,553
3,466
4,685
1,500
208
636
2,313
4,495
43,922
40,939
44,856
10,988
4,597
7,855
1,951
2,155
221
$
6,391 $
5,904 $
1,934
$
0.09 $
0.09 $
0.03
Weighted Average Number of Common Shares Outstanding
Basic
68,111
68,675
69,242
Diluted
68,223
68,789
69,581
See notes to consolidated financial statements.
F-3
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2009, 2008 and 2007
Common Stock
Shares
Amount Capital
Paid-In
Retained
Earnings
Unearned
ESOP
Shares
Accumulated
Other
Treasury Comprehensive
Income (Loss)
Stock
Total
Balance - June 30, 2006
Comprehensive income:
Net income
Realized gain on securities available for sale, net of
income tax expense of $19
Unrealized gain on securities available for sale, net of
deferred income tax expense of $3,628
Total Comprehensive Income
Adjustment to initially apply FASB Statement No. 158,
net of deferred income tax of $727
ESOP shares committed to be released (144 shares)
Stock option expense
Treasury stock purchases
Treasury stock reissued
Restricted stock plan shares purchased (54 shares)
Restricted stock plan shares earned (258 shares)
Tax effect from stock based compensation
Cash dividends declared ($0.20/public share)
Balance - June 30, 2007
Comprehensive income:
Net income
Loss on impairment of securities available for sale, net
of income tax benefit of $0
Unrealized gain on securities available for sale, net of
deferred income tax expense of $4,091
See notes to consolidated financial statements.
F-4
(In Thousands, Except Per Share Data)
72,738
$
7,274 $
192,534
$
306,728
$
(15,517)
$
— $
(15,885 )
$ 475,134
—
—
—
—
—
—
(1,608)
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
716
1,942
—
(40)
(789)
3,179
434
—
1,934
—
—
—
—
—
—
—
—
—
—
(3,692 )
—
—
—
—
1,454
—
—
—
—
—
—
—
—
—
—
—
—
—
(24,573)
212
—
—
—
—
—
(36 )
7,810
(1,093 )
—
—
—
—
—
—
—
—
1,934
(36)
7,810
9,708
(1,093)
2,170
1,942
(24,573)
172
(789)
3,179
434
(3,692)
71,143
7,274
197,976
304,970
(14,063)
(24,361)
(9,204 )
462,592
—
—
—
—
—
—
—
—
—
5,904
—
—
—
—
—
—
—
—
—
659
6,169
5,904
659
6,169
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2009, 2008 and 2007
Benefit plans, net of deferred income tax expense of
$433
Total Comprehensive Income
ESOP shares committed to be released (144 shares)
Dividends contributed for payment of ESOP loan
Stock option expense
Treasury stock purchases
Treasury stock reissued
Restricted stock plan shares earned (252 shares)
Tax effect from stock based compensation
Cash dividends declared ($0.20/public share)
Balance - June 30, 2008
Comprehensive income:
Net income
Realized loss on securities available, for sale, net of
income tax benefit of $170
Unrealized gain on securities available for sale, net of
deferred income tax expense of $6,821
Non-credit related other-than-temporary impairment
losses
on securities held to maturity, net of deferred income
tax
benefit of $113
Benefit plans, net of deferred income tax expense of
$116
Total Comprehensive Income
See notes to consolidated financial statements.
F-5
Common Stock
Paid-In
Shares
Amount Capital
Retained
Earnings
Unearned
ESOP
Shares
Accumulated
Other
Treasury Comprehensive
Income (Loss)
Stock
Total
(In Thousands, Except Per Share Data)
—
—
—
—
—
—
653
652
—
—
—
(659)
5
—
—
—
—
—
—
—
—
—
—
—
278
54
1,908
—
(13)
3,084
(21)
—
—
—
—
—
—
—
—
(3,688)
1,455
—
—
—
—
—
—
—
—
—
—
(7,738)
76
—
—
—
13,384
1,733
54
1,908
(7,738)
63
3,084
(21)
(3,688)
—
—
—
—
—
—
—
—
70,489
7,274
203,266
307,186
(12,608)
(32,023)
(1,724 )
471,371
—
—
—
—
—
—
—
—
—
—
—
—
6,391
—
—
—
—
—
—
—
—
—
—
—
—
245
6,391
245
9,925
9,925
(161 )
184
(161)
184
16,584
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2009, 2008 and 2007
Adjustment to initially apply FASB Statement No. 158,
measurement date provisions, net of income tax
benefit
of $34
Cumulative-effect adjustment to initially apply EITF
Issue No. 06-4
Cumulative-effect adjustment to initially apply FSP
FAS 115-2 and FAS 124-2
ESOP shares committed to be released (145 shares)
Dividends contributed for payment of ESOP loan
Stock option expense
Treasury stock purchases
Restricted stock plan shares earned (251 shares)
Tax effect from stock based compensation
Cash dividends declared ($0.20/public share)
Common Stock
Paid-In
Shares
Amount Capital
Retained
Earnings
Unearned
ESOP
Shares
Accumulated
Other
Treasury Comprehensive
Income (Loss)
Stock
Total
(In Thousands, Except Per Share Data)
—
—
—
—
—
—
(1,247)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
236
81
1,906
—
3,086
2
—
(66)
(480)
165
—
—
—
—
—
—
(3,509)
—
—
—
1,455
—
—
—
—
—
—
—
—
—
—
—
—
(13,962)
—
—
—
16
—
(165 )
—
—
—
—
—
—
—
(50)
(480 )
—
1,691
81
1,906
(13,962 )
3,086
2
(3,509 )
Balance - June 30, 2009
69,242
$
7,274 $ 208,577
$ 309,687
$ (11,153)
$ (45,985) $
8,320
$ 476,720
See notes to consolidated financial statements.
F-6
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment
Net amortization of premiums, discounts and loan fees and costs
Deferred income taxes
Amortization of intangible assets
Amortization of benefit plans’ unrecognized net loss, net of
gain from curtailment
Provision for loan losses
Realized loss (gain) on sale of securities available for sale
Loss on other-than-temporary impairment of securities
Realized gain on sale of deposits
Realized loss (gain) on disposition of premises and equipment
Increase in cash surrender value of bank owned life insurance
ESOP, stock option plan and restricted stock plan expenses
Decrease (increase) in interest receivable
Decrease (increase) in other assets
(Decrease) increase in interest payable
Increase (decrease) in other liabilities
Years Ended June 30,
2009
2008
2007
(In Thousands)
$
6,391 $
5,904 $
1,934
1,777
722
673
29
207
317
415
714
(132)
7
(558)
6,683
712
170
(72)
2,101
1,856
839
(1,950)
241
224
94
—
659
—
—
(555)
6,725
(921)
2,503
878
(249)
1,934
946
(1,621)
636
—
571
(55)
—
—
(3)
(526)
7,291
808
(9)
(68)
718
Net Cash Provided by Operating Activities
20,156
16,248
12,556
Cash Flows from Investing Activities
Purchases of securities available for sale
Proceeds from sales of securities available for sale
Proceeds from calls and maturities of securities available for sale
Proceeds from repayments of securities available for sale
Purchases of loans
Net decrease (increase) in loans receivable
Purchases of mortgage-backed securities available for sale
Principal repayments on mortgage-backed securities available for sale
Principal repayments on mortgage-backed securities held to maturity
Additions to premises and equipment
Proceeds from cash settlement on premises and equipment
Purchases of FHLB stock
Redemptions of FHLB stock
—
1,353
35
872
(67,698)
49,348
(77,364)
137,741
780
(2,328)
—
(459)
585
(357)
48,476
661
838
(102,228)
(59,319)
(224,188)
152,694
—
(1,437)
—
(9,386)
472
(388)
131,383
4,229
1,861
(97,521)
(60,218)
(104,756)
138,926
—
(1,380)
21
(223)
1,467
Net Cash Provided by (Used in) Investing Activities
42,865
(193,774)
13,401
See notes to consolidated financial statements.
F-7
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Cash Flows from Financing Activities
Net increase (decrease) in deposits
Payment in connection with sale of deposits
Repayment of long-term FHLB advances
Long-term FHLB advances
(Decrease) increase in advance payments by borrowers for taxes
Dividends paid to minority stockholders of Kearny Financial Corp.
Purchase of common stock of Kearny Financial Corp. for treasury
Treasury stock reissued
Purchase of common stock of Kearny Financial Corp. for restricted stock plan
Dividends contributed for payment of ESOP loan
Tax benefit (expense) from stock based compensation
Years Ended June 30,
2009
2008
2007
(In Thousands)
$
50,615 $
(8,254)
(8,000)
—
(135)
(3,566)
(13,962)
—
—
81
2
(32,639) $
—
(10,488)
200,000
389
(32,052)
—
(32,617)
—
228
(3,712)
(7,738)
63
—
54
(21)
(3,698)
(24,573)
172
(789)
—
434
Net Cash Provided by (Used in) Financing Activities
16,781
145,908
(92,895)
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
79,802
(31,618)
(66,938)
131,723
163,341
230,279
Cash and Cash Equivalents - Ending
$ 211,525 $
131,723 $
163,341
Supplemental Disclosures of Cash Flows Information
Cash paid during the year for:
Income taxes, net of refunds
Interest
Non-cash investing activities:
$
3,854 $
1,946 $
1,490
$
44,272 $
49,650 $
50,536
Mortgage-backed securities held to maturity received in exchange for
equity security available for sale
$
5,972 $
— $
—
See notes to consolidated financial statements.
F-8
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements include the accounts of 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., Kearny Federal Investment Corp.
and KFS Investment Corp., have been prepared in conformity with accounting principles generally accepted
in the United States of America (“GAAP”). All significant intercompany accounts and transactions have
been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated
statements of financial condition and revenues and expenses for the periods then ended. Actual results
could differ significantly from those estimates. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan losses, the evaluation of goodwill for
impairment, identification of other-than-temporary impairment of securities and the determination of the
amount of deferred tax assets which are more likely than not to be realized. Management believes that the
allowance for loan losses represents its best estimate of losses known and inherent in the loan portfolio that
are both probable and reasonable to estimate, impairment testing of goodwill and evaluation for other-than-
temporary impairment of securities are done in accordance with GAAP; and deferred tax assets are properly
recognized. While management uses available information to recognize losses on loans, future additions to
the allowance for loan losses may be necessary based on changes in economic conditions in the market
area. Moreover, various regulatory agencies, as an integral part of their examination process, periodically
review the Bank’s allowance for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them at the time of their examination.
Additionally, subsequent evaluations of the Company’s goodwill that originated from the application of
purchase accounting associated with the Company’s prior acquisition of three community banks, could
identify impairments to the intangible asset that would result in future charges to earnings. Finally, the
determination of the amount of deferred tax assets more likely than not to be realized is dependent on
projections of future earnings, which are subject to frequent change.
Business of the Company and Subsidiaries
The Company’s primary business is the ownership and operation of the Bank. The Bank is principally
engaged in the business of attracting deposits from the general public at its 26 locations in New Jersey and
using these deposits, together with other funds, to originate or purchase loans for its portfolio and invest in
securities. Loans originated or purchased by the Bank generally include loans collateralized by residential
and commercial real estate augmented by secured and unsecured loans to businesses and consumers. The
investment securities purchased by the Bank generally include U.S. agency mortgage-backed securities,
U.S. government and agency debentures and bank-qualified municipal obligations. The Bank maintains a
small balance of single issuer trust preferred securities and non-agency mortgage-backed securities which
were acquired through the Company’s purchase of other institutions and does not actively purchase such
securities.
The Company’s other subsidiary, Kearny Financial Securities, Inc., was organized in April 2005 under
Delaware law as a Delaware Investment Company primarily to hold investment and mortgage-backed
securities. At June 30, 2009 and during the three-year period then ended, Kearny Financial Securities, Inc.
was considered inactive.
The Bank has three wholly owned subsidiaries: KFS Financial Services, Inc., Kearny Federal Investment
Corp. and KFS Investment Corp. KFS Financial Services, Inc. was incorporated as a New Jersey corporation
in 1994 under the name of South Bergen Financial Services, Inc., was acquired in Kearny’s merger with
F-9
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
South Bergen Savings Bank in 1999 and was renamed KFS Financial Services, Inc. in 2000. It is a service
corporation subsidiary organized for selling insurance products to Bank customers and the general public
through a third party networking arrangement.
Kearny Federal Investment Corp. was organized in July 2004 under New Jersey law as a New Jersey
Investment Company primarily to hold investment and mortgage-backed securities. In June 2008, Kearny
Federal Investment Corp. was formally dissolved and its assets returned to its parent company, the Bank.
KFS Investment Corp. was organized in October 2007 under New Jersey law as a New Jersey Investment
Company to potentially replace Kearny Federal Investment Corp. At June 30, 2009 and during the two-year
period then ended, KFS Investment Corp. was considered inactive.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing
deposits in other banks, all with original maturities of three months or less.
Securities
In accordance with Statement of Financial Standards (“SFAS”) issued by the Financial Accounting
Standards Board (“FASB”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities,” as
amended, the Company classifies its investment securities into one of three portfolios: held to maturity,
available for sale or trading. Investments in debt securities that we have the positive intent and ability to
hold to maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized holding gains and losses included in
earnings. Debt and equity securities not classified as trading securities or as held to maturity securities are
classified as available for sale securities and reported at fair value, with unrealized holding gains or losses,
net of deferred income taxes, reported in the accumulated other comprehensive income (“OCI”) component
of stockholders’ equity.
If the fair value of a security is less than its amortized cost, the security is deemed to be impaired.
Management evaluates all securities with unrealized losses quarterly to determine if such impairments are
“temporary” or “other-than-temporary” in accordance with applicable accounting guidance including, but
not limited to, SFAS No. 115 and Emerging Issues Task Force (“EITF”) Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to
be Held by a Transferor in Securitized Financial Asset,” as amended.
The Company accounts for temporary impairments based upon their classification as either available for
sale, held to maturity or managed within a trading portfolio. Temporary impairments on “available for sale”
securities are recognized, on a tax-effected basis, through OCI with offsetting entries adjusting the carrying
value of the security and the balance of deferred taxes. Conversely, the Company does not adjust the
carrying value of “held to maturity” securities for temporary impairments, although information concerning
the amount and duration of impairments on held to maturity securities is generally disclosed in periodic
financial statements. The carrying value of securities held in a trading portfolio is adjusted to their fair value
through earnings on a daily basis. However, the Company maintained no securities in trading portfolios at
or during the periods presented in these financial statements.
The Company accounts for other-than-temporary impairments based upon several considerations. First,
other-than-temporary impairments on securities that the Company has decided to sell as of the close of a
fiscal period, or will, more likely than not, be required to sell prior to the full recovery of the their fair value to
a
F-10
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
level equal to or exceeding their amortized cost, are recognized in earnings. If neither of these conditions
regarding the likelihood of the securities’ sale are applicable, then, for debt securities, the other-than-
temporary impairment is bifurcated into credit-related and noncredit-related components. A credit-related
impairment generally represents the amount by which the present value of the cash flows that are expected
to be collected on an debt security fall below its amortized cost. The noncredit-related component
represents the remaining portion of the impairment not otherwise designated as credit-related. The Company
recognizes credit-related, other-than-temporary impairments in earnings. However, noncredit-related, other-
than-temporary impairments on debt securities are recognized in OCI.
Premiums and discounts on all securities are amortized/accreted to maturity by use of the level-yield method
considering the impact of principal amortization and prepayments on mortgage-backed securities. Premiums
and discounts on callable securities are generally amortized/accreted on a “yield to worst” basis. That is,
premiums on callable securities are amortized to the call date whereas discounts on such securities are
accreted to the maturity date. Gain or loss on sales of securities is based on the specific identification
method.
Concentration of Risk
Financial instruments which potentially subject the Company and its subsidiaries to concentrations of credit
risk consist of cash and cash equivalents, loans receivable and mortgage-backed securities. Cash and cash
equivalents include deposits placed in other financial institutions. At June 30, 2009, the Company had
$25,587,000 and $159,968,000 on deposit with a money center bank and the Federal Home Loan Bank (“the
FHLB”) of New York, respectively. Securities include concentrations of investments backed by U.S.
government agencies, including the Federal National Mortgage Association (“Fannie Mae”), the Federal
Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association
(“Ginnie Mae”) and the Small Business Administration (“SBA”). Lesser concentration risk exists in the
Bank’s municipal obligations, non-agency mortgage-backed securities and single issuer trust preferred
securities due to comparatively lower total balances of such securities held by the Bank and the variety of
issuers represented. The Bank’s lending activity is primarily concentrated in loans collateralized by real
estate in the State of New Jersey. As a result, credit risk is broadly dependent on the real estate market and
general economic conditions in the state. Additionally, the Bank’s lending policies limit the amount of credit
extended to any single borrower and their related interests thereby limiting the concentration of credit risk to
any single borrower.
Loans Receivable
Loans receivable, net are stated at unpaid principal balances, net of deferred loan origination fees and costs,
purchased discounts and premiums and the allowance for loan losses. Certain direct loan origination costs
net of loan origination fees, are deferred and amortized, using the level-yield method, as an adjustment of
yield over the contractual lives of the related loans. Unearned premiums and discounts are amortized or
accreted by use of the level-yield method over the contractual lives of the related loans.
Recognition of interest by the accrual method is generally discontinued when interest or principal payments
are ninety days or more in arrears on a contractual basis, or when other factors indicate that the collection of
such amounts is doubtful. At the time a loan is placed on nonaccrual status, an allowance for uncollected
interest is recorded in the current period for previously accrued and uncollected interest. Interest on such
loans, if appropriate, is recognized as income when payments are received. A loan is returned to accrual
status when interest or principal payments are no longer ninety days or more in arrears on a contractual
basis and factors indicating doubtful collectibility no longer exist.
F-11
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Allowance for Loan Losses
The allowance for loan losses is a valuation account that reflects the Company’s estimation of the losses in
its loan portfolio to the extent they are both probable and reasonable to estimate. The balance of the
allowance is generally maintained through provisions for loan losses that are charged to income in the
period that estimated losses on loans are identified by the Company’s loan review system. The Company
charges losses on loans against the allowance as such losses are actually incurred. Recoveries on loans
previously charged-off are added back to the allowance.
The Company’s allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement
process that is performed quarterly. The Company first identifies the loans that must be reviewed
individually for impairment in accordance with SFAS No. 114. Loans eligible for individual impairment review
generally represent the Company’s larger and/or more complex loans including commercial mortgage loans,
comprising multifamily, nonresidential real estate and construction loans, as well as the Company’s
commercial business loans. However, the Company may also evaluate certain individual one-to-four family
mortgage loans, home equity loans and home equity lines of credit for impairment based upon certain risk
factors. Factors considered in identifying individual loans to be reviewed include, but may not be limited to,
delinquency status, size of loan, type and condition of collateral and the financial condition of the borrower.
A reviewed loan is deemed to be impaired when, based on current information and events, it is probable that
we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a
loan is determined to be impaired, management measures the amount of impairment associated with that
loan. Impairment is generally defined as the difference between the carrying value and fair value of a loan
where former exceeds the latter. For the collateral dependent mortgage loans that comprise the large majority
of the Company’s portfolio, the fair value of the real estate collateralizing the loan serves as a practical
expedient for the fair value of the impaired loan itself. Such values are generally determined based upon a
discounted market value prepared by a qualified, independent real estate appraiser. As supported by the
accounting and regulatory guidance, the fair value of the collateral is further reduced by estimated selling
costs when such costs are expected to reduce the cash flows available to repay the loan.
The Company establishes specific valuation allowances in the fiscal period during which loan impairments
are identified. Such valuation allowances are adjusted in subsequent fiscal periods, where appropriate, to
reflect any changes in carrying value or fair value identified during subsequent impairment evaluations
which are updated quarterly by management.
The second tier of the loss measurement process involves estimating the probable and estimable losses in
accordance with SFAS No. 5 which addresses loans not otherwise reviewed for impairment in accordance
with SFAS No. 114. Such loans generally comprise large groups of smaller-balance homogeneous loans,
such as one-to-four family mortgage loans, home equity loans and lines of credit and consumer loans, that
may generally be excluded from individual impairment analysis and instead collectively evaluated for
impairment. Such loans also include non-impaired loans of the larger and/or more complex types, such as the
Company’s commercial mortgage and business loans.
Valuation allowances established in accordance with SFAS No. 5 utilize historical and environmental loss
factors to collectively estimate the level of probable losses within defined segments of the Company’s loan
portfolio. These segments aggregate homogeneous subsets of loans with similar risk characteristics based
upon loan type. For allowance for loan loss calculation and reporting purposes, the Company currently
stratifies its loan portfolio into four primary categories: Real estate mortgage loans, consumer loans,
F-12
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
commercial business loans and construction loans. Within these broad categories, the Company defines
certain segments. For example, the real estate mortgage loan category comprises three primary segments
including one-to-four family mortgage loans, TICIC participations in commercial real estate loans and other
(non-TICIC) commercial real estate loans. Commercial real estate loans comprise both multi-family and non-
residential mortgage loans. The consumer loan category includes several segments including home equity
loans, home equity lines of credit, passbook or certificate account loans and other consumer-related loans
which include, but may not be limited to, bridge loans, home improvement loans and overdraft checking
loans. The commercial business loan and construction loan categories require no further delineation with
each representing a defined segment of the loan portfolio for allowance for loan loss calculation and
reporting purposes.
In regard to historical loss factors, the Company’s allowance for loan loss calculation calls for an analysis of
historical charge-offs and recoveries for each of the defined segments within the loan portfolio. The
Company generally utilizes a minimum five-year moving average of annual net charge-off rates (charge offs
net of recoveries) by loan segment, where available, to calculate its actual historical loss experience.
Additional years of charge off history may be considered in the calculation to reflect an appropriate
historical basis for the calculation. The outstanding principal balance of each loan segment is multiplied by
the applicable historical loss factor to estimate the level of probable losses based upon the Company’s
historical loss experience.
As noted, the Company’s allowance for loan loss calculation also utilizes environment loss factors to
estimate the probable losses within the loan portfolio. Environmental loss factors are based upon specific
qualitative criteria representing key sources of risk within the loan portfolio. Such risk criteria includes the
level of and trends in delinquencies and non-accrual loans; the effects of changes in credit policy; the
experience, ability and depth of the lending function’s management and staff; national and local economic
trends and conditions; credit risk concentrations and changes in local and regional real estate values. For
each segment of the loan portfolio, a level of risk, developed from a number of internal and external
resources, is assigned to each of the qualitative criteria utilizing a six-point scale ranging from zero
(negligible risk) to 15 (high risk). The sum of the risk values, expressed as a whole number, is multiplied
by .01% to arrive at an overall environmental loss factor, expressed in basis points, for each segment. The
outstanding principal balance of each loan segment is multiplied by the applicable environmental loss factor
to estimate the level of probable losses based upon the qualitative risk criteria.
The sum of the calculations based on historical and environmental loss factors represents the total targeted
balance for the Company’s allowance for general loan losses at the end of a fiscal period. The Company’s
policy regarding the allowance for loan losses requires that its actual balance of general valuation
allowances be maintained at a level within a threshold of +/- 15% of the targeted balance. The Company
utilizes the allowable threshold to acknowledge and account for the relative imprecision of the
environmental loss factors used in the calculation of the targeted balance of general valuation allowances.
Any balance of general valuation allowances in excess of the targeted balance is considered as unallocated
with such balances attributable to probable losses within the loan portfolio relating to environmental factors
within one or more non-specified loan segments. The Company adjusts its balance of general valuation
allowances through the provision for loan losses as required to ensure that the balance of the allowance for
loan losses reflects all probable and estimable loans losses at the close of the fiscal period.
Although management believes that specific and general loan losses are established in accordance with
management’s best estimate, actual losses are dependent upon future events and, as such, further additions
to the level of loan loss allowances may be necessary.
F-13
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Premises and Equipment
Land is carried at cost. Buildings and improvements, furnishings and equipment and leasehold
improvements are carried at cost, less accumulated depreciation and amortization computed on the straight-
line method over the following estimated useful lives:
Building and improvements
Furnishings and equipment
Leasehold improvements
Years
10 - 50
4 - 20
Shorter of useful lives or
lease term
Construction in progress primarily represents facilities under construction for future use in our business and
includes all costs to acquire land and construct buildings, as well as capitalized interest during the
construction period. Interest is capitalized at the Bank’s average cost of interest-bearing liabilities.
Significant renewals and betterments are charged to the property and equipment account. Maintenance and
repairs are charged to operations in the year incurred. Rental income is netted against occupancy costs in
the consolidated statements of income.
Federal Home Loan Bank Stock
Federal law requires a member institution of the FHLB system to hold restricted stock of its district FHLB
according to a predetermined formula. The restricted stock is carried at cost, less any applicable impairment.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets principally represent the excess cost over the fair value of the net
assets of the institutions acquired in purchase transactions. Goodwill is evaluated annually by reporting
unit and an impairment loss recorded if indicated. The impairment test is performed in two phases. The first
step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its
fair value, an additional procedure must be performed. That additional procedure compares the implied fair
value of the reporting unit’s goodwill (as defined in SFAS No. 142), with the carrying amount of that
goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its
implied fair value. No impairment charges were required to be recorded in the years ended June 30, 2009,
2008 or 2007. If an impairment loss is determined to exist in the future, such loss will be reflected as an
expense in the consolidated statements of income in the period in which the impairment loss is determined.
Separate intangible assets, including core deposit intangibles that are not deemed to have indefinite lives,
continue to be amortized over their useful lives, which is estimated to be ten years.
Bank Owned Life Insurance
Bank owned life insurance is accounted for using the cash surrender value method and is recorded at its
realizable value. The change in the net asset value is recorded as a component of non-interest income.
F-14
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Effective July 1, 2008, the Company adopted the provisions of EITF No. 06-4 “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements” (“EITF 06-4”). The Company recognized the cumulative effect of adopting the consensus by
recording a deferred liability of approximately $480,000, representing the estimated cost of postretirement life
insurance benefits accruing to applicable employees and directors covered by an endorsement split-dollar
life insurance arrangement, offset by an equivalent adjustment to retained earnings. The Company recorded
additional expense of approximately $33,000 for the year ended June 30, 2009 attributable to the increase in
the deferred liability for fiscal 2009.
Income Taxes
The Company and its subsidiaries file consolidated federal income tax returns. Federal income taxes are
allocated to each entity based on their respective contributions to the taxable income of the consolidated
income tax returns. Separate state income tax returns are filed for the Company and each of its subsidiaries
on an unconsolidated basis.
Federal and state income taxes have been provided on the basis of the Company’s income or loss as
reported in accordance with GAAP. The amounts reflected on the Company’s state and federal income tax
returns differ from these provisions due principally to temporary differences in the reporting of certain items
for financial statement reporting and income tax reporting purposes. The tax effect of these temporary
differences is accounted for as deferred taxes applicable to future periods. Deferred income tax expense or
benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets
is assessed and a valuation allowance provided for the full amount which is not more likely than not to be
realized.
Effective July 1, 2007, the Company adopted the provisions of FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes.” The Interpretation provides clarification on accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No.
109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
The Company’s indentified no significant income tax uncertainties through the evaluation of its income tax
positions for the year ended June 30, 2009. Therefore, the Company recognized no adjustment for
unrecognized income tax benefits during fiscal 2009. Our policy is to recognize interest and penalties on
unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. The Company
recognized interest and penalties of $-0-, $45,000 and $-0- during the years ended June 30, 2009, 2008 and
2007, respectively. The tax years subject to examination by the taxing authorities are the years ended June
30, 2008, 2007 and 2006.
Other Comprehensive Income
The Company records unrealized gains and losses, net of deferred income taxes, on available for sale
securities and mortgage-backed securities in accumulated other comprehensive income. Unrealized losses
on available for sale securities recorded through OCI are generally considered “temporary” security
impairments. However, the Company also records noncredit-related, “other-than-temporary” security
impairments on both
F-15
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
the available for sale and held to maturity debt securities, where applicable, through OCI in circumstances
where the sale of the security is unlikely. Realized gains and losses, if any, are reclassified to non-interest
income upon sale of the related securities The Company has elected to report the effects of OCI in the
consolidated statements of stockholders’ equity.
OCI also includes benefit plans amounts recognized under SFAS No. 158. This adjustment to OCI reflects,
net of tax, transition obligations, prior service costs and unrealized net losses that had not been recognized
in the consolidated financial statements prior to the implementation of SFAS No. 158.
Interest Rate Risk
The Bank is principally engaged in the business of attracting deposits from the general public and using
these deposits, together with other funds, to originate or purchase loans for its portfolio and invest in
securities. Taken together, these activities present interest rate risk to the Company’s earnings and capital
that generally arise from differences between the timing of rate changes and the timing of cash flows (re-
pricing risk); from changing rate relationships among yield curves that affect bank activities (basis risk);
from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-rate-
related options embedded in bank products (option risk).
In particular, interest rate risk within the Bank’s balance sheet results from the generally shorter duration of
its interest-sensitive liabilities compared to the generally longer duration of its interest-sensitive assets. In a
rising rate environment, liabilities will re-price faster than assets. As a result, the Bank’s cost of interest-
bearing liabilities will increase faster than its yield on interest-earning assets, thereby reducing the Bank’s
net interest rate spread and net interest margin and adversely impacting net income. A similar result occurs
when the interest rate yield curve “flattens”; that is, when increases in shorter term market interest rates
outpace the change in longer term market interest rates or when decreases in longer term interest rates
outpace the change in shorter term interest rates. In both cases, the re-pricing characteristics of the Bank’s
assets and liabilities result in a decrease in the Bank’s net interest rate spread and net interest margin.
Conversely, an overall reduction in market interest rates, or a “steepening” of the yield curve, generally
enhances the Bank’s net interest rate spread and net interest margin which, in turn, enhances net income.
However, the positive effect on earnings from such movements in interest rates may be diminished as the
pace of borrower refinancing increases resulting in the Company’s higher yielding loans and mortgage-
backed securities being replaced with lower yielding assets at an accelerated rate.
For these reasons, management regularly monitors the maturity and re-pricing structure of the Bank’s assets
and liabilities throughout a variety of interest rate scenarios in order to measure and manage its level of
interest-rate risk in relation to the goals and objectives of its strategic business plan.
Net Income per Common Share (“EPS”)
Basic EPS is based on the weighted average number of common shares actually outstanding adjusted for
the Employee Stock Ownership Plan (“the 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.
F-16
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Compensation Plans
The Company adopted SFAS No. 123(R) upon approval of the Kearny Financial Corp. 2005 Stock
Compensation and Incentive Plan on October 24, 2005, and, accordingly, expenses the fair value of all
options granted over their vesting periods and the fair value of all share-based compensation granted over
the requisite service periods.
Advertising
The Company expenses advertising and marketing costs as incurred.
Reclassification
Certain amounts as of and for the years ended June 30, 2008 and 2007 have been reclassified to conform to
the current year’s presentation.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of
June 30, 2009, for items that should potentially be recognized or disclosed in these financial statements. The
evaluation was conducted through September 14, 2009, the date these financial statements were issued.
Note 2 - Recent Accounting Pronouncements
SFAS No. 141(R) “Business Combinations” was issued in December of 2007. SFAS No. 141(R) establishes
principles and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The guidance will become effective as of
the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will
impact the Company’s accounting for business combinations completed after the effective date.
In February 2008, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 140-3,
“Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses
the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked”
transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning
after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be
allowed. The Company expects that FAS 140-3 will not have an impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and strategies for using such instruments,
as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also
requires entities to disclose additional information about the amounts and location of derivatives located within
the financial statements, how the provisions of SFAS No. 133 has been applied, and the impact that hedges have
on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application encouraged. The Company expects
that SFAS No. 161 will not have an impact on its consolidated financial statements.
In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP
amends the factors that should be considered in developing renewal or extension assumptions used to
F-17
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Recent Accounting Pronouncements (Continued)
determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R), and other GAAP. This FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited.
The implementation of this standard will not have a material impact on the Company’s consolidated financial
position or results of operations.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” This FSP clarifies that all outstanding unvested share-based
payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with
common shareholders. Awards of this nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning
after December 15, 2008. The implementation of this standard will not have a material impact on the Company’s
consolidated financial position or results of operations.
In September 2008, the FASB issued FSP FAS 133-1 and FASB Interpretation (“FIN”) 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP FAS 133-1 and FIN 45-4). FSP
FAS 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and
financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly
periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is
effective for reporting periods (annual or interim) ending after November 15, 2008. The implementation of this
standard did not have a material impact on the Company’s consolidated financial position or results of
operations.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities”. FSP FAS 140-4 and
FIN 46(R)-8 amends FASB SFAS 140 “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities”, to require public entities to provide additional disclosures about transfers of
financial assets. It also amends FIN 46(R), “Consolidation of Variable Interest Entities”, to require public
enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional
disclosures about their involvement with variable interest entities. Additionally, this FSP requires certain
disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying special purpose entity
(SPE) that holds a variable interest in the qualifying SPE but was not the transferor of financial assets to the
qualifying SPE and (b) a servicer of a qualifying SPE that holds a significant variable interest in the qualifying
SPE but was not the transferor of financial assets to the qualifying SPE. The disclosures required by FSP FAS
140-4 and FIN 46(R)-8 are intended to provide greater transparency to financial statement users about a
transferor’s continuing involvement with transferred financial assets and an enterprise’s involvement with
variable interest entities and qualifying SPEs. FSP FAS 140-4 and FIN 46(R) is effective for reporting periods
(annual or interim) ending after December 15, 2008. The implementation of this standard did not have a material
impact on the Company’s consolidated financial position or results of operations.
In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue
No. 99-20”. FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a
Transferor in Securitized Financial Assets”, to achieve more consistent determination of whether an other-than-
temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-
temporary impairment assessment and the related disclosure requirements in SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities”, and other related guidance. FSP EITF 99-
F-18
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Recent Accounting Pronouncements (Continued)
20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied
prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The
implementation of this standard did not have a material impact on the Company’s consolidated financial position
or results of operations.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-
Temporary Impairments”. FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be
considered when determining whether a debt security is other-than-temporarily impaired. For debt securities,
management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it
will be required to sell the security prior to its anticipated recovery. These steps are done before assessing
whether the entity will recover the cost basis of the investment. Previously, this assessment required
management to assert it has both the intent and the ability to hold a security for a period of time sufficient to
allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This
change does not affect the need to forecast recovery of the value of the security through either cash flows or
market price.
In instances when a determination is made that an other-than-temporary impairment exists but the investor does
not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt
security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of
the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment
is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows
expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-
temporary impairment related to all other factors. The amount of the total other-than-temporary impairment
related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment
related to all other factors is recognized in other comprehensive income.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP
FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB
28-1 amend FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” to require
disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as
well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,”
to require those disclosures in summarized financial information at interim reporting periods.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP
FAS 107-1 and APB 28-1 did not have a material impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of
FASB Statement No. 140.” This statement prescribes the information that a reporting entity must provide in its
financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial
performance and cash flows; and a transferor’s continuing involvement in transferred financial assets.
Specifically, among other aspects, SFAS No. 166 amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” by removing the concept of a qualifying
special-purpose entity from SFAS No. 140 and removes the exception from applying FIN 46(R) to variable
interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach
used in SFAS No. 140. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the potential impact the new pronouncement will have on its consolidated
financial statements.
F-19
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 - Recent Accounting Pronouncements (Continued)
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”This statement
amends FIN. 46, “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB
No. 51,” to require an enterprise to determine whether its variable interest or interests give it a controlling
financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise
that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the
entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be
significant to the variable interest entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments
of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for
fiscal years beginning after November 15, 2009. The Company is currently evaluating the potential impact the
new pronouncement will have on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” SFAS No. 168
replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” to establish the “FASB
Accounting Standards Codification” as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with
generally accepted accounting principles in the United States. SFAS No. 168 is effective for interim and annual
periods ending after September 15, 2009. The Company expects that SFAS No. 168 will not have an impact on its
consolidated financial statements.
F-20
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Stock Offering and Stock Repurchase Plans
On June 7, 2004, the Board of Directors of the Company and the Bank adopted a plan of stock issuance pursuant
to which the Company subsequently sold common stock representing a minority ownership of the estimated pro
forma market value of the Company to eligible depositors of the Bank. Kearny MHC (the “MHC”) retained 70%
of the outstanding common stock, or 50,916,250 shares. The MHC is a federally-chartered mutual holding
company organized on March 30, 2001, and is subject to regulation by the Office of Thrift Supervision. So long
as the MHC is in existence, it will continue to own a majority of the outstanding common stock of the Company.
On November 9, 2005, the Company announced that it received regulatory approval to begin the purchase of up
to 1,425,655 shares or approximately 2% of the outstanding shares of its common stock in open market
transactions for use in funding the Company’s 2005 Stock Compensation and Incentive Plan previously
approved by stockholders. During the year ended June 30, 2006, the Company purchased 1,371,341 shares at a
total cost of $18,941,000, or approximately $13.81 per share. During the year ended June 30, 2007, the Company
completed this process, purchasing in the open market 54,314 shares at a total cost of $789,000, or approximately
$14.52 per share
On July 18, 2006, the Company announced that the Board of Directors authorized a stock repurchase plan to
acquire up to 1,091,063 shares, or 5% of the Company’s outstanding common stock held by persons other than
Kearny MHC. During the year ended June 30, 2007, a total of 1,091,063 shares were purchased under the plan at a
cost of $17,398,000, or approximately $15.95 per share.
On January 18, 2007, the Company announced that the Board of Directors authorized a second 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. During the year ended June 30, 2007, the Company purchased in the open market 516,600 shares at
a cost of $7,175,000, or approximately $13.89 per share. During the year ended June 30, 2008, the Company
completed this stock purchase plan, purchasing in the open market 520,034 shares at a total cost of $6,194,000, or
approximately $11.91 per share.
On April 23, 2008, the Company announced that the Board of Directors authorized a third stock repurchase plan
to acquire up to 985,603 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny
MHC. During the year ended June 30, 2008, the Company purchased in the open market 139,300 shares at a cost
of $1,544,000, or approximately $11.09 per share. During the year ended June 30, 2009, the Company completed
this stock purchase plan, purchasing in the open market 846,303 shares at a total cost of $9,787,000, or
approximately $11.56 per share.
On March 3, 2009, the Company announced that the Board of Directors authorized a fourth stock repurchase
plan to acquire up to 936,323 shares, or 5% of the Company’s outstanding stock held by persons other than
Kearny MHC. During the year ended June 30, 2009, the Company purchased in the open market 401,100 shares at
a cost of $4,175,000, or approximately $10.41 per share.
During the years ended June 30, 2009, 2008 and 2007, the federally chartered mutual holding company of the
Company, Kearny MHC, waived its right, upon non-objection from the Office of Thrift Supervision, to receive
cash dividends of $10,183,000, $10,183,000 and $10,183,000, respectively, declared by the Company during the
year.
F-21
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Securities Available for Sale
The amortized cost, gross unrealized gains and losses, estimated fair value and stratification by contractual
maturity of securities available for sale at June 30, 2009 and 2008 are presented below:
Securities:
Debt securities:
Trust preferred securities
U.S. agency securities
Obligations of state and political subdivisions
Amortized
Cost
June 30, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
$
8,846 $
4,645
18,167
40 $
—
237
3,756 $
88
64
5,130
4,557
18,340
Total Securities
31,658
277
3,908
28,027
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
17,620
282,068
365,439
861
7,980
10,723
50
580
276
18,431
289,468
375,886
Total Mortgage-backed Securities
665,127
19,564
906
683,785
Total Securities Available for Sale
$
696,785 $
19,841 $
4,814 $
711,812
Debt securities:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
At June 30, 2009
Amortized
Cost
Fair
Value
(In Thousands)
$
—
3,427
14,524
13,707
$
—
3,508
14,617
9,902
Total
$
31,658
$
28,027
F-22
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Securities Available for Sale (Continued)
Securities:
Equity securities:
Mutual Fund
Debt securities:
Trust preferred securities
U.S. agency securities
Obligations of state and political subdivisions
Total Debt Securities
Total Securities
Mortgage-backed securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total Mortgage-backed Securities
Amortized
Cost
June 30, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
$
7,740 $
— $
195 $
7,545
8,838
5,523
18,204
32,565
40,305
21,246
316,955
387,836
726,037
44
1
5
50
50
792
2,261
2,302
5,355
1,514
11
452
1,977
2,172
108
1,768
3,493
7,368
5,513
17,757
30,638
38,183
21,930
317,448
386,645
5,369
726,023
Total Securities Available for Sale
$
766,342 $
5,405 $
7,541 $
764,206
During the years ended June 30, 2009, 2008 and 2007, proceeds from sales of securities available for sale totaled
$7,325,000, $48,476,000 and $131,383,000 and resulted in gross gains of $-0-, $57,000 and $1,342,000 and gross
losses of $415,000, $57,000 and $1,287,000, respectively.
At June 30, 2009 and 2008, mortgage-backed securities available for sale with carrying value of approximately
$245,238,000 and $244,880,000, respectively, were utilized as collateral for borrowings via repurchase agreements
through the FHLB of New York. As of those same dates, mortgage-backed securities available for sale with
carrying value of approximately $1,634,000 and $1,831,000, respectively, were pledged to secure public funds on
deposit.
At June 30, 2009 and 2008, all obligations of states and political subdivisions were guaranteed by insurance
policies issued by various insurance companies.
The Company’s available for sale mortgage-backed securities are generally secured by residential mortgage
loans with contractual maturities of 15 years or greater. However, the effective lives of those securities are
generally shorter than their contractual maturities due to principal amortization and prepayment of the mortgage
loans comprised within those securities. Investors in mortgage pass-though securities generally share in the
receipt of principal repayments on a pro-rata basis as paid by the borrowers.
F-23
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Securities Held to Maturity
The amortized cost, gross unrealized gains and losses and estimated fair value of securities held to maturity at
June 30, 2009 are as follows:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total Collateralized Mortgage Obligations
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total Mortgage-backed Securities
Carrying
Value
June 30, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Estimated
Fair Value
$
175 $
1,030
2,509
3,714
198
409
607
14 $
72
2
— $
3
731
189
1,099
1,780
88
734
3,068
2
2
4
—
1
1
200
410
610
Total Securities Held to Maturity
$
4,321 $
92 $
735 $
3,678
The Company had no held to maturity securities at or during the fiscal year ended June 30, 2008.
There were no sales of securities from the held to maturity portfolio during the fiscal year ended June 30, 2009.
Held to maturity securities were not utilized as collateral for borrowings nor pledged to secure public funds on
deposit during the fiscal year ended June 30, 2009.
The Company’s held to maturity collateralized mortgage obligations and mortgage-backed securities are
generally secured by residential mortgage loans with contractual maturities of 15 years or greater. However, the
effective lives of those securities are generally shorter than their contractual maturities due to principal
amortization and prepayment of the mortgage loans comprised within those securities. Investors in mortgage
pass-though securities generally share in the receipt of principal repayments on a pro-rata basis as paid by the
borrowers. In addition to mortgage pass-through securities, the held to maturity portfolio also contains
collateralized mortgage obligations. Such securities generally represent individual tranches within a larger
investment vehicle that is designed to distribute cash flows received on securitized mortgage loans to investors
in a manner determined by the overall terms and structure of the investment vehicle and those applying to the
individual tranches within that structure.
F-24
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities
In accordance with GAAP, if the fair value of a debt security is less than its amortized cost, the security is
deemed to be impaired. In such circumstances, an entity is generally required to evaluate the impairment to
determine if it is “temporary” or “other-than-temporary”.
The Company accounts for temporary impairments based upon the guidance codified in SFAS No. 115
“Accounting for Certain Investments in Debt and Equity Securities,” as amended, which addresses, in part, the
appropriate accounting for changes in the fair value of debt securities based upon their classification as either
available for sale, held to maturity or managed within a trading portfolio. In general, the temporary impairments
on “available for sale” securities are recognized, on a tax-effected basis, through OCI with offsetting entries
adjusting the carrying value of the security and the balance of deferred taxes. Conversely, the Company is not
required to recognize temporary impairments of value on “held to maturity” securities, although such information
is generally disclosed in periodic financial statements. The carrying value of securities held in a trading portfolio
is adjusted to their fair value through earnings on a daily basis. However, the Company currently maintains no
securities in trading portfolios.
Through March 31, 2009, the accounting for other-than-temporary impairments was generally addressed by
SFAS No. 115, as amended by FASB’s issuance of FSP No. FAS 115-1 and FAS 124-1, “The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investment”and EITF Issue No. 99-20, “Recognition
of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to
be Held by a Transferor in Securitized Financial Asset,” as amended by FASB’s issuance of FSP EITF 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20.”
Through these statements, the FASB provided guidance on determining when an investment is considered
impaired, when an impairment is other-than-temporary and the manner in which an entity should measure and
account for other-than-temporary impairment. In general, the guidance in effect through March 31, 2009 required
that all other-than-temporary impairments identified on debt and equity securities be recognized in earnings with
no differentiation in accounting between the components of the identified impairment arising from different
causes.
for
During the fourth fiscal quarter ended June 30, 2009, the Company adopted FSP FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments” which introduced a distinction in the
accounting
the “credit-related” versus “noncredit-related” components of an other-than-temporary
impairment under certain circumstances. Consistent with prior guidance, all other-than-temporary impairments,
both credit-related and noncredit-related, identified on securities that the Company intends to sell or would, more
likely than not, be required to sell before the recovery of its amortized basis, continue to be recognized through
earnings.
However, if neither of the conditions regarding the likelihood of the security’s sale apply, then the other than
temporary impairment is to be bifurcated into credit-related and noncredit-related components. In brief, a credit-
related impairment generally represents the amount by which the present value of the cash flows that are
expected to be collected on an other-than-temporarily impaired security fall below its amortized cost. The
noncredit-related component represents the remaining portion of the impairment not otherwise designated as
credit-related. As in the past, credit-related other-than-temporary impairments continue to be recognized in
earnings. However, the staff position further amended SFAS No. 115 to require that noncredit-related, other-
than-temporary impairment on debt securities be recognized in OCI.
F-25
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
At March 31, 2009, the Company had accumulated other-than-temporary impairments of investment securities
totaling $570,000, all of which were recorded through earnings during fiscal 2009. Of that balance, approximately
$290,000 was determined by the Company to be “credit-related” with the remaining $280,000 attributed to
noncredit-related factors. In accordance with its adoption of FSP FAS 115-2 and FAS 124-2, the Company
recorded a cumulative effect of adoption adjustment effective April 1, 2009 between retained earnings and
accumulated other comprehensive income totaling $165,000 representing the after-tax effect of the adoption.
The Company identified an additional $418,000 in other-than-temporary impairments, $144,000 of which was
considered to be credit-related, other-than-temporary impairments that were recognized through earnings during
the quarter ended June 30, 2009 and $274,000 considered noncredit-related other-than-temporary impairments
recorded through OCI on a tax effected basis during that same quarter.
In total, the Company recognized other-than-temporary impairment charges through earnings of $714,000 and
$659,000 for the years ended June 30, 2009 and June 30, 2008, respectively. There were no other-than-temporary
impairment charges recognized during the fiscal year ended June 30, 2007.
The other-than-temporary impairment charges recorded during the year ended June 30, 2008 were attributable to
the AMF Ultra Short Mortgage Fund, a mutual fund that experienced ongoing losses in net asset value which
were determined by management to be other-than-temporary during the prior fiscal year.
Due to continued declines in net asset value, the Company withdrew its investment in the fund in July, 2008 by
invoking a redemption-in-kind option. Specifically, cash redemptions had been temporarily prohibited by the
fund manager to protect shareholders from forced liquidations at distressed price levels that had adversely
impacted the fund’s net asset value. Through this transaction, the Company exchanged its investment in the
mutual fund for its pro-rata portion of the its assets in lieu of a cash redemption. The assets acquired through the
redemption-in-kind transaction included $6.0 million of mortgage-backed securities and $1.3 million of cash held
by the fund. Of the mortgage-backed securities, $4.0 million represented non-agency collateralized mortgage
obligations and $2.0 million represented U.S. agency mortgage pass-through securities and collateralized
mortgage obligations.
The shares redeemed for cash and underlying securities were written down to fair value as of the trade date
resulting in a loss on sale of the mutual fund totaling $415,000 during the quarter ended September 30, 2008. As
discussed in greater detail above, the impairment charges recognized through earnings and OCI during the
remainder of fiscal 2009 totaling $988,000 were fully attributable to additional other-than-temporary declines in
the fair value of the securities acquired through the mutual fund redemption-in-kind.
The following three tables summarize the fair values and gross unrealized losses within the available for sale and
held to maturity portfolios at June 30, 2009 and June 30, 2008. The gross unrealized losses, presented by security
type, represent temporary impairments of value within each portfolio as of the dates presented. Temporary
impairments within the available for sale portfolio have been recognized through OCI as reductions in
stockholders’ equity on a tax-effected basis.
The tables are followed by a discussion that summarizes the Company’s rationale for recognizing the certain
impairments as “temporary” versus those identified as “other-than-temporary”. Such rationale is presented by
investment type and generally applies consistently to both the “available for sale” and “held to maturity”
portfolios, except where specifically noted. As noted earlier, the Company’s mortgage-backed securities held in
the available for sale and held to maturity portfolios are generally secured by residential mortgage loans.
F-26
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
Securities Available for Sale:
June 30, 2009:
Trust preferred securities
U.S. agency securities
Obligations of state and political
subdivisions
Mortgage-backed securities
Total
June 30, 2008:
Mutual fund
Trust preferred securities
U.S. agency securities
Obligations of state and political
subdivisions
Mortgage-backed securities
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(In Thousands)
$
— $
79
— $
1
4,090 $
4,451
3,756 $
87
4,090 $
4,530
—
31,356
—
546
3,767
22,085
64
360
3,767
53,441
3,756
88
64
906
$ 31,435 $
547 $ 34,393 $
4,267 $ 65,828 $
4,814
$
— $
2,765
—
—
82,426
— $
619
—
7,545 $
3,559
5,422
195 $
895
11
7,545 $
6,324
5,422
—
1,032
17,677
222,169
452
4,337
17,677
304,595
195
1,514
11
452
5,369
Total
$ 85,191 $
1,651 $ 256,372 $
5,890 $ 341,563 $
7,541
The number of available for sale securities with unrealized losses at June 30, 2009 totaled 82 and included four
trust preferred securities, eight U.S. agency securities, 12 obligations of state and political subdivisions and 56
mortgage-backed securities. The number of available for sale securities with unrealized losses at June 30, 2008
totaled 224 and included one mutual fund, four trust preferred securities, seven U.S. agency securities, 43
obligations of state and political subdivisions and 169 mortgage-backed securities.
Less than 12 Months
Unrealized
Losses
Fair
Value
12 Months or More
Unrealized
Losses
Fair
Value
Total
Fair
Value
Unrealized
Losses
(In Thousands)
Securities Held to Maturity:
June 30, 2009:
Collateralized mortgage obligations
Mortgage-backed securities
$ 1,570 $
120
734
1
Total
$ 1,690 $
735
—
—
—
—
—
$ 1,570 $
120
—
$ 1,690 $
734
1
735
F-27
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
The number of held to maturity securities with unrealized losses at June 30, 2009 totaled 47 and included seven
mortgage-backed securities and 40 collateralized mortgage obligations.
U.S. Agency Mortgage-backed Securities
The carrying value of the Company’s agency mortgage-backed securities totaled $685.6 million including
collateralized mortgage obligations of $1.2 million at June 30, 2009 and comprised 95.7% of total investments
and 32.3% of total assets as of that date. This category of securities generally includes mortgage pass-
through securities and collateralized mortgage obligations issued by U.S. government-sponsored entities
such as Ginnie Mae, Fannie Mae and Freddie Mac who guarantee the contractual cash flows associated
with those securities. Those guarantees were strengthened during the 2008-2009 financial crisis during
which time Fannie Mae and Freddie Mac were placed into receivership by the federal government. Through
those actions, the U.S. government effectively reinforced the guarantees of their agencies thereby assuring
the creditworthiness of the mortgage-backed securities issued by those agencies.
With credit risk being reduced to negligible levels due to the U.S. government’s support of these agencies,
the unrealized losses on the Company’s investment in U.S. agency mortgage-backed securities are due
largely to the combined effects of several market-related factors. First, movements in market interest rates
significantly impact the average lives of mortgage-backed securities by influencing the rate of principal
prepayment attributable to refinancing activity. Changes in the expected average lives of such securities
significantly impact their fair values due to the extension or contraction of the cash flows that an investor
expects to receive over the life of the security.
Historically, lower market interest rates generally prompt greater refinancing activity thereby shortening the
average lives of mortgage-backed securities and vice-versa. However, prepayment rates are also influenced
by fluctuating real estate values and the overall availability of credit in the marketplace which significantly
impacts the ability of borrowers to refinance. The deteriorating real estate market values and reduced
availability of credit that has characterized the residential real estate marketplace over the past two years has
significantly slowed both real estate purchase and refinancing activities. Consequently, prepayment rates
on mortgage-backed securities have generally slowed thereby extending their average lives.
The market price of mortgage-backed securities, being the key measure of the fair value to an investor in
such securities, is also influenced by the overall supply and demand for such securities in the marketplace.
Absent other factors, an increase in the demand for, or a decrease in the supply of a security increases its
price. Conversely, a decrease in the demand for, or an increase in the supply of a security decreases its
price. The recent volatility and uncertainty in the marketplace has reduced the overall level of demand for
mortgage-backed securities which has generally had an adverse impact on their prices in the open market.
This has been further exacerbated by many larger institutions shedding mortgage-related assets to shrink
their balance sheets for capital adequacy purposes thereby increasing the supply of such securities.
In sum, the factors influencing the fair value of the Company’s U.S. agency mortgage-backed securities, as
described above, generally result from movements in market interest rates and changing real estate and
financial market conditions which affect the supply and demand for such securities. Inasmuch as such
market conditions fluctuate over time, the impairments of value arising from these changing market
conditions are both “noncredit-related” and “temporary” in nature.
The Company has the stated ability and intent to “hold-to-maturity” those securities so designated.
Moreover, the Company has both the ability and intent, as of the periods presented, to hold the temporarily
impaired “available for sale” securities until the fair value of the securities recover to a level equal to or
greater than the
F-28
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
Company’s amortized cost. More specifically, as of June 30, 2009 the Company has not decided to sell the
securities. Additionally, the Company has concluded that the possibility of being required to sell the
securities prior to their anticipated recovery is unlikely based upon its strong liquidity, asset quality and
capital position as of that date.
Finally, the Company purchased these securities at either discounts or nominal premiums relative to their par
amounts. Accordingly, the Company expects that the securities will not be settled for a price less than their
amortized cost.
In light of the factors noted above, the Company does not consider its U.S. agency mortgage-backed
securities with unrealized losses at June 30, 2009 to be “other-than-temporarily” impaired as of that date.
Non-agency Mortgage-backed Securities
The outstanding balance of the Company’s non-agency mortgage-backed securities totaled $2.5 million at
June 30, 2009 and comprised less than one percent of total investments and total assets as of that date. All
such securities were acquired during fiscal 2009 when the Company invoked a redemption-in-kind relating to
its prior investment in the AMF Ultra Short Mortgage Fund, as described earlier.
Unlike agency mortgage-backed securities, non-agency collateralized mortgage obligations are not explicitly
guaranteed by a U.S. government sponsored entity. Rather, such securities generally utilize the structure of
the larger investment vehicle to reallocate credit risk among the individual tranches comprised within that
vehicle. Through this process, investors in different tranches are subject to varying degrees of risk that the
cash flows of their tranche will be adversely impacted by borrowers defaulting on the underlying mortgage
loans. The creditworthiness of certain tranches may also be further enhanced by additional credit insurance
protection embedded within the terms of the total investment vehicle.
The Company monitors the general level of credit risk for each of its non-agency mortgage-backed securities
based upon the ratings assigned to its specific tranches by one or more credit rating agencies. The level of
such ratings, and changes thereto, is one of several factors considered by the Company in identifying those
securities that may be other-than-temporarily impaired. For example, all impaired non-agency mortgage
backed securities that are rated below investment grade are reviewed individually to determine if such
impairment is other-than temporary.
Additional factors considered by the Company in identifying its other-than-temporarily impaired securities
include, but are not limited to, the severity and duration of the impairment, the payment performance of the
underlying mortgage loans and trends relating thereto, the original terms of the underlying loans regarding
credit quality (ex. Prime, Alt-A), the geographic distribution of the real estate collateral supporting those
loans and any current or anticipated declines in associated collateral values, as well as the degree of
protection against credit losses afforded to the Company’s security through the structural characteristics of
the larger investment vehicle as noted above. Based upon these additional factors, the impairment of certain
investment grade securities may also be reviewed for other-than-temporary impairment.
Securities determined to be potentially other-than-temporarily impaired are individually analyzed to
determine the “credit-related” and “noncredit-related” portions of the impairment. As noted earlier, a credit-
related impairment generally represents the amount by which the present value of the cash flows that are
expected to be collected on an other-than-temporarily impaired security fall below its amortized cost.
Projected cash flows for the Company’s non-agency mortgage-backed securities are modeled using an
automated securities analytics system that is commonly used by institutional investors and the
broker/dealer
F-29
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
community. The system generates an individual tranche’s projected cash flows based upon several input
assumptions regarding the payment performance of the mortgage loans underlying the larger investment
vehicle of which the Company’s tranche is a part. Such assumptions include, but may not be limited to, loan
prepayment rates, loan default rates, and the severity of actual losses on defaulting loans. The Company
generally bases the input values for these assumptions on historical data reported by the analytics system.
The Company then calculates the present value of those cash flows based upon the appropriate discount
rate required by the applicable accounting guidance.
The impairments of those securities whose cash flows, when present valued, fall below the Company’s
carrying value due to expected principal losses are identified as other-than-temporary. The amount by which
the present value of the expected cash flows falls below the Company’s carrying value of the security is
identified as the credit-related portion of the other-than-temporary impairment. The remaining portion, where
applicable, is identified as noncredit-related, other-than-temporary impairment.
The impairments of those individually analyzed securities whose cash flows, when present valued, exceed
the Company’s carrying value or otherwise reflect no expected principal losses, are generally identified as
temporary. Similarly, the impairments associated with those securities that have generally retained their
investment-grade credit rating and whose additional factors, as noted above, are not characterized by
potentially adverse attributes, are also generally identified as temporary. In such cases, the Company
attributes the unrealized losses to the same fluctuating market-related factors as those affecting agency
mortgage-backed securities, noting, in particular, the comparatively greater temporary adverse effect on fair
value arising from the general illiquidity of non-agency, investment grade mortgage-backed securities in the
marketplace compared to agency-guaranteed mortgage-backed securities. In light of these factors, the
related impairments are defined as “temporary”.
The classification of impairment as “temporary” is further reinforced by the Company’s stated intent and
ability to “hold-to-maturity” all of its non-agency mortgage-backed securities which allows for an adequate
timeframe during which the fair values of the impaired securities are expected to recover to the level of their
amortized cost. More specifically, as of June 30, 2009 the Company has not decided to sell the securities.
Additionally, the Company has concluded that the possibility of being required to sell the securities prior to
their anticipated recovery is unlikely based upon the its strong liquidity, asset quality and capital position
as of that date.
In light of the factors noted above, the Company concluded that 21 of its 59 non-agency mortgage-backed
securities with amortized costs, excluding impairments, totaling approximately $1.3 million were “other-than-
temporarily” impaired by approximately $988,000 as of June 30, 2009 comprising $434,000 and $554,000 of
credit-related and non-credit related impairments, respectively. The Company does not consider the
remaining 38 non-agency mortgage-backed securities with amortized costs of approximately $2.2 million to
be “other-than-temporarily” impaired as of that date.
U.S. Agency Securities
The outstanding balance of the Company’s U.S. agency debt securities totaled $4.6 million at June 30, 2009
and comprised less than one percent of total investments and total assets as of that date. Such securities are
comprised entirely of securitized pools of loans issued and fully guaranteed by the SBA, a U.S. government
sponsored entity.
With credit risk being reduced to negligible levels due to the issuer’s guarantee, the unrealized losses on the
Company’s investment in U.S. agency debt securities are due largely to the combined effects of several
F-30
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
market-related factors including movements in market interest rates and general level of liquidity of such
securities in the marketplace based on supply and demand. With regard to interest rates, the Company’s
SBA securities are variable rate investments whose interest coupons are generally based on the Prime index
minus a margin. Based upon the historically low level of short term market interest rates, of which the Prime
index is one measure, the current yields on these securities are comparatively low. Consequently, the fair
value of the securities, as determined based upon the market price of these securities, reflects the adverse
effects of the historically low market interest rates at June 30, 2009.
Like the mortgage-backed securities described earlier, the currently diminished fair value of these securities
also reflects the extended average lives of the underlying loans resulting from loan prepayment prohibitions
that may be embedded in the underlying loans coupled with the generally reduced availability of credit in
the marketplace reducing borrower refinancing opportunities. Such influences extend the timeframe over
which an investor would anticipate holding the security at a “below market” yield. Similarly, the price of
securitized SBA loan pools, also reflects the reduced demand and increased supply in the marketplace
attributable to similar factors as those applying to mortgage-backed securities, as presented above.
In sum, the factors influencing the fair value of the Company’s U.S. agency securities, as described above,
generally result from movements in market interest rates and changing market conditions which affect the
supply and demand for such securities. Inasmuch as such market conditions fluctuate over time, the
“noncredit-related” impairments of value arising from these changing market conditions are “temporary” in
nature.
While all of its securitized SBA loan pools are classified as “available-for-sale”, the Company has both the
ability and intent, as of the periods presented, to hold the temporarily impaired securities until the fair value
of the securities recover to a level equal to or greater than the Company’s amortized cost. More specifically,
as of June 30, 2009 the Company has not decided to sell the securities. Additionally, the Company has
concluded that the possibility of being required to sell the securities prior to their anticipated recovery is
unlikely based upon the its strong liquidity, asset quality and capital position as of that date. Moreover, the
Company purchased these securities at either par or nominal premiums. Accordingly, the Company expects
that the securities will not be settled for a price less than its amortized cost.
In light of the factors noted above, the Company does not consider its U.S. agency securities with
unrealized losses at June 30, 2009 to be “other-than-temporarily” impaired as of that date. As such, the
temporary impairments associated with these available for sale securities continue to be recognized through
OCI.
Obligations of States and Political Subdivisions
The outstanding balance of the Company’s securities representing obligations of state and political
subdivisions totaled $18.3 million at June 30, 2009 and comprised 2.6% of total investments and 0.9% of total
assets as of that date. Such securities are generally comprised of bank qualified securities representing
general obligations of New Jersey municipalities or the obligations of their related entities such as boards of
education or utility authorities.
The Company generally evaluates the level of credit risk for each of the securities within this category based
upon ratings assigned by one or more credit rating agencies. Currently, all securities within this category are
investment grade with ratings of AA+ or higher by Fitch Ratings (“Fitch”) and Aa3 or higher by Moody’s
Investors Service (“Moody’s).
F-31
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
In light of their strong credit ratings, the unrealized losses on the Company’s investment in municipal
obligations are due largely to the combined effects of several market-related factors including movements in
market interest rates and general level of liquidity of such securities in the marketplace based on overall
supply and demand. Notwithstanding the strong credit ratings of the Company’s specific municipal
securities, the market prices of bank-qualified municipal obligations, in general, currently reflect the effect of
reduced demand for such securities given the increasingly credit risk-averse nature of financial institutions
in the current marketplace. Additionally, such prices reflect the effects of increased supply arising from
financial institutions selling investments and reducing assets for capital adequacy purposes, as noted
earlier.
In sum, the factors influencing the fair value of the Company’s municipal obligations, as described above,
generally result from movements in market interest rates and changing market conditions which affect the
supply and demand for such securities. Inasmuch as such market conditions fluctuate over time, the
“noncredit-related” impairments of value arising from these changing market conditions are “temporary” in
nature.
While all of its municipal obligations are classified as “available-for-sale”, the Company has both the ability
and intent, as of the periods presented, to hold the temporarily impaired securities until the fair value of the
securities recover to a level equal to or greater than the Company’s amortized cost. More specifically, as of
June 30, 2009 the Company has not decided to sell the securities. Additionally, the Company has concluded
that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely based
upon the its strong liquidity, asset quality and capital position as of that date. Moreover, the Company
purchased these securities at either par or nominal premiums. Call provisions, where applicable, require full
repayment of principal at par by the issuer. Accordingly, the Company expects that the securities will not be
settled for a price less than its amortized cost.
In light of the factors noted above, the Company does not consider its investments in municipal obligations
with unrealized losses at June 30, 2009 to be “other-than-temporarily” impaired as of that date. As such, the
temporary impairments associated with these available for sale securities continue to be recognized through
OCI.
Trust Preferred Securities
The outstanding balance of the Company’s trust preferred securities totaled $5.1 million at June 30, 2009 and
comprised less than one percent of total investments and total assets as of that date. The category
comprises a total of five “single-issuer” (i.e. non-pooled) trust preferred securities, four of which are
impaired as of June 30, 2009, that were originally issued by four separate financial institutions. As a result of
bank mergers involving the issuers of these securities, the Company’s five trust preferred securities
currently represent the de-facto obligations of three separate financial institutions.
The Company generally evaluates the level of credit risk for each of its trust preferred securities based upon
ratings assigned by one or more credit rating agencies where such ratings are available. For those trust
preferred securities that are impaired, the Company uses such ratings as a practical expedient to identify
those securities whose impairments are potentially “credit-related” versus “noncredit-related”.
Specifically, impairments associated with investment-grade trust preferred securities are generally
categorized as “noncredit-related” given the nominal level of credit losses that would be expected based
upon such ratings. At June 30, 2009, the Company owned two securities at an amortized cost of $2.9 million
that were uniformly rated as investment grade by Moody’s, Fitch and Standard & Poor’s Financial Services
(“S&P”).
F-32
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
The securities were originally issued through Chase Capital II and currently represent de-facto obligations
of JPMorgan Chase & Co.
The Company has attributed the unrealized losses on these securities to the combined effects of several
market-related factors including movements in market interest rates and general level of liquidity of such
securities in the marketplace based on overall supply and demand.
With regard to interest rates, the Company’s impaired trust preferred securities are variable rate securities
whose interest rates generally float with three month Libor plus a margin. Based upon the historically low
level of short term market interest rates, the current yield on these securities is comparatively low.
Consequently, the fair value of the securities, as determined based upon their market price, reflects the
adverse effects of the historically low market interest rates at June 30, 2009.
More significantly, the market prices of the impaired trust preferred securities also currently reflect the effect
of reduced demand for such securities given the increasingly credit risk-averse nature of financial
institutions in the current marketplace. Additionally, such prices reflect the effects of increased supply
arising from financial institutions selling such investments and reducing assets for capital adequacy
purposes, as noted earlier.
In sum, the factors influencing the fair value of the Company’s investment-grade trust preferred securities,
as described above, generally result from movements in market interest rates and changing market
conditions which affect the supply and demand for such securities. Inasmuch as such market conditions
fluctuate over time, the “noncredit-related” impairments of value arising from these changing market
conditions are “temporary” in nature.
In light of the factors noted above, the Company does not consider its investments in those trust preferred
securities with unrealized losses at June 30, 2009 that were uniformly rated as investment grade to be “other-
than-temporarily” impaired for “credit-related” reasons as of that date.
The impairments of the Company’s trust preferred securities with one or more non-investment grade ratings
are further evaluated to determine if such impairments are “credit-related”. Factors considered in this
evaluation include, but may not be limited to, the financial strength and viability of the issuer and its parent
company, the security’s historical performance through prior business and economic cycles, rating
consistency or variability among rating companies, the security’s current and anticipated status regarding
payment default or deferral of contractual payments to investors and the impact of these factors on the
present value of the security’s expected future cash flows in relation to its amortized cost basis.
At June 30, 2009, the Company owned two securities at an amortized cost of $4.9 million that were rated as
investment grade by Moody’s, but below investment grade by Fitch and S&P. The securities were originally
issued through BankBoston Capital Trust IV and MBNA Capital B and currently represent de-facto
obligations of Bank of America Corporation.
In evaluating the impairment associated with these securities, the Company noted the overall financial
strength and continuing expected viability of the issuing entity’s parent, particularly given their
systemically critical role in the marketplace. The Company noted the security’s absence of historical defaults
or payment deferrals throughout prior business cycles and continued performance throughout the current
fiscal crisis. The Company also noted the disparity between investment-grade and non-investment grade
ratings for the securities among rating companies which demonstrates the current level of uncertainty
regarding credit-risk in
F-33
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
the marketplace. Given these factors, the Company had no basis upon which to estimate an adverse change
in the expected cash flows over the securities’ remaining terms to maturity.
In light of the factors noted above, the Company does not consider its investments in those trust preferred
securities with unrealized losses at June 30, 2009 that were characterized by one or more non-investment
grade ratings to be “other-than-temporarily” impaired for “credit-related” reasons as of that date.
While all of its trust preferred securities are classified as “available-for-sale”, the Company has both the
ability and intent, as of the periods presented, to hold the impaired securities until their fair values recover to
a level equal to or greater than the Company’s amortized cost. More specifically, as of June 30, 2009 the
Company has not decided to sell the securities. Additionally, the Company has concluded that the
possibility of being required to sell the securities prior to their anticipated recovery is unlikely based upon
the its strong liquidity, asset quality and capital position as of that date. Moreover, the Company purchased
these securities at either par or nominal premiums. Call provisions, where applicable, require full repayment
of principal at par or higher by the issuer. Accordingly, the Company expects that the securities will not be
settled for a price less than its amortized cost.
In light of the factors noted above, the Company does not consider its investments in trust preferred
securities with unrealized losses at June 30, 2009 to be “other-than-temporarily” impaired as of that date. As
such, the temporary impairments associated with these available for sale securities continue to be
recognized through OCI.
The following table presents roll forwards of OTTI recognized in earnings due to credit-related losses. At June
30, 2009, all OTTI are attributed to credit-related factors and have been recognized through earnings.
Cumulative
balance of
credit-
related
OTTI
recognized
in earnings
through
March 31,
2009
Activity in credit-related other-than-temporary
impairment (“OTTI”) recognized through earnings for
the
three months ended June 30, 2009
Additions
to existing
OTTI for
further
credit-
related
declines in
fair value
Additions for
newly
identified
credit-
related OTTI
Reductions in
credit –
related OTTI
for security
sale
(In Thousands)
Reductions
in credit-
related
OTTI due to
accretion of
impairment
into
interest
income
Cumulative
balance of
credit-related
OTTI
recognized in
earnings
through
June 30, 2009
Collateralized mortgage
obligations:
Non-agency securities
$570
$92
F-34
$52
$ -
$ -
$714
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 - Loans Receivable
Real estate mortgage
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Passbook or certificate
Other
Construction
Total Loans
Unamortized net premiums on purchased loans
Deferred loan costs and fees, net
June 30,
2009
2008
(In Thousands)
$
886,696
$
866,267
14,812
8,735
113,387
12,116
2,922
1,585
123,978
11,478
2,662
1,332
130,010
139,450
13,367
12,062
1,044,885
1,026,514
389
573
416
860
$
1,045,847
$
1,027,790
At June 30, 2009 and 2008, real estate mortgage loans included $689,317,000 and $687,679,000, respectively, of
loans secured by one-to-four-family residential properties.
The Bank has granted loans to officers and directors of the Company and its Subsidiaries and to their associates.
Related party loans are made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal
risk of collectibility. As of June 30, 2009 and 2008 such loans totaled approximately $5,161,000 and $5,220,000,
respectively. During the year ended June 30, 2009, new loans to related parties totaled $2,240,000 and repayments
totaled approximately $2,299,000.
F-35
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 7 - Loans Receivable (Continued)
The activity in the allowance for loan losses is as follows:
Years Ended June 30,
2009
2008
2007
(In Thousands)
Balance – beginning
Provisions charged to operations
Loans charged off
Loans recovered
$
$
6,104
317
(6)
19
$
6,049
94
(39)
—
5,451
571
—
27
Balance – ending
$
6,434
$
6,104
$
6,049
At June 30, 2009, 2008 and 2007, non-accrual loans for which the accrual of interest had been discontinued
totaled approximately $8,135,000, $1,573,000 and $1,489,000, respectively. Had these loans been performing in
accordance with their original terms, the interest income recognized for the years ended June 30, 2009, 2008 and
2007, would have been $591,000, $105,000, and $111,000, respectively. Interest income recognized on such loans
was $134,000, $47,000, and $45,000, respectively.
At June 30, 2009, 2008 and 2007, accruing loans which are contractually past due 90 days or more totaled
approximately $5,017,000, $-0- and $-0-, respectively. The loans identified as such are mortgages serviced by
others for which the servicer has advanced all delinquent principal and interest payments. The Bank may
be obligated to reimburse the servicer for some or all of those funds depending upon the final disposition of
each loan.
At June 30, 2009, 2008 and 2007, impaired loans were $11,075,000, $2,485,000 and $-0-, respectively, and the
related allowance for loan losses totaled $1,430,000, $1,163,000 and $-0-, respectively. Impaired loans which did
not have a specific allocation of the allowance for loan losses totaled $5,696,000 and $596,000 at June 30, 2009
and 2008, respectively. During the years ended June 30, 2009, 2008 and 2007, the average balance of impaired
loans was $5,546,000, $2,519,000 and $-0-, respectively, and interest income recognized during the periods of
impairment totaled $113,000, $117,000 and $-0-, respectively.
F-36
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8 - Premises and Equipment
Land
Buildings and improvements
Leasehold improvements
Furnishings and equipment
Construction in progress
Less accumulated depreciation and amortization
$
June 30,
2009
2008
(In Thousands)
$
8,964
31,395
577
11,124
2,003
54,063
18,568
8,964
30,247
642
11,009
1,261
52,123
17,173
$
35,495
$
34,950
Land included properties held for future branch expansion totaling $2,419,000 at both years ended June 30, 2009
and 2008.
Note 9 - Interest Receivable
Loans
Mortgage-backed securities
Debt securities
June 30,
2009
2008
(In Thousands)
$
$
4,485
3,533
219
4,594
4,070
285
$
8,237
$
8,949
F-37
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 - Goodwill and Other Intangible Assets
Goodwill
Core Deposit
Intangibles
(In Thousands)
Balance at June 30, 2006
Amortization
Balance at June 30, 2007
Amortization
Balance at June 30, 2008
Amortization
$
82,263
—
$
82,263
—
82,263
—
Balance at June 30, 2009
$
82,263
$
928
(636)
292
(241)
51
(29)
22
The gross carrying amount of core deposit intangibles was $5,987,000 at both June 30, 2009 and 2008, while
accumulated amortization totaled $5,965,000 and $5,936,000 at June 30, 2009 and 2008, respectively. Amortization
is expected to total $22,000 in the year ending June 30, 2010. Core deposit intangibles are included in other assets
in the consolidated statements of financial condition.
Note 11 - Deposits
June 30,
2009
2008
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Amount
Non-interest bearing demand
Interest-bearing demand
Savings and club
Certificates of deposit
$
51,210
163,611
301,637
904,743
(Dollars in Thousands)
— % $
1.09
1.02
2.97
53,349
151,677
300,397
873,609
$ 1,421,201
2.23% $
1,379,032
— %
1.46
1.04
3.99
2.91%
Certificates of deposit with balances of $100,000 or more at June 30, 2009 and 2008, totaled approximately
$275,920,000 and $236,727,000, respectively. The Bank’s deposits are insurable to applicable limits by the Federal
Deposit Insurance Corporation. The maximum deposit insurance amount has been increased from $100,000 to
$250,000 until December 31, 2013. (The expiration date does not apply to retirement accounts, which are generally
insured up to $250,000 per plan participant.)
F-38
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - Deposits (Continued)
A summary of certificates of deposit by maturity follows:
One year or less
After one to two years
After two to three years
After three to four years
After four to five years
After five years
June 30,
2009
2008
(In Thousands)
$
$
740,383
111,086
24,317
23,181
5,772
4
709,989
102,303
28,086
10,480
22,747
4
$
904,743
$
873,609
Interest expense on deposits consists of the following:
Demand
Savings and clubs
Certificates of deposits
Years Ended June 30,
2009
2008
2007
(In Thousands)
$
$
2,714
3,272
37,322
43,308
$
$
2,612
3,740
40,999
47,351
$
2,098
3,072
30,524
$
35,694
Note 12 - Advances from FHLB
Fixed rate advances from FHLB of New York mature as follows:
Maturing in years ending June 30:
2009
2011
2018
June 30,
2009
2008
Weighted
Average
Interest
Rate
Weighted
Average
Interest
Rate
Amount
Amount
(Dollars in Thousands)
$
—
10,000
200,000
$
— %
5.40%
3.79%
8,000
10,000
200,000
$
210,000
3.87%
$
218,000
5.47%
5.40%
3.79%
3.93%
F-39
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Advances from FHLB (Continued)
At June 30, 2009, of the $210,000,000 in advances due after one year, $200,000,000 are callable within one year.
FHLB advances at June 30, 2009 and 2008 are collateralized by the FHLB capital stock owned by the Bank and
mortgage-backed securities available for sale with carrying values totaling approximately $245,238,000 and
$244,880,000, respectively.
Note 13 - Benefit Plans
Employee Stock Ownership Plan
Effective upon completion of the Company’s initial public offering in February 2005, the Bank established an
Employee Stock Ownership Plan (“ESOP”) for all eligible employees who complete a twelve-month period of
employment with the Bank, have attained the age of 21 and complete at least 1,000 hours of service in a plan
year. The ESOP used $17,457,000 in proceeds from a term loan obtained from the Company to purchase
1,745,700 shares of Company common stock. Effective October 1, 2006 an addendum to the ESOP
promissory note changed the payments from monthly to quarterly. As a result, the remaining term loan
principal is payable over 42 equal installments through March 31, 2017. The interest rate on the term loan is
5.50%. Each year, the Bank intends to make discretionary contributions to the ESOP, which will be equal to
principal and interest payments required on the term loan. The Bank may substitute dividends paid, if any,
on the Company common stock held by the ESOP for discretionary contributions.
Shares purchased with the loan proceeds provide collateral for the term loan and are held in a suspense
account for future allocations among participants. Contributions to the ESOP and shares released from the
suspense account are to be allocated among the participants on the basis of compensation, as described by
the Plan, in the year of allocation.
The ESOP is accounted for in accordance with Statement of Position 93-6, “Accounting for Employee Stock
Ownership Plans,” which was issued by the American Institute of Certified Public Accountants.
Accordingly, ESOP shares pledged as collateral were initially recorded as unearned ESOP shares in the
consolidated statements of financial condition. Thereafter, on a monthly basis, 12,123 shares are committed
to be released, compensation expense is recorded equal to the number of shares committed to be released
times the monthly average market price of the shares, and the committed shares become outstanding for
basic net income per common share computations. ESOP compensation expense was approximately
$1,691,000, $1,733,000 and $2,170,000 for the years ended June 30, 2009, 2008 and 2007, respectively.
F-40
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Employee Stock Ownership Plan (Continued)
At June 30, 2009 and 2008, the ESOP shares were as follows:
Allocated shares
Distribution of shares due to employee
resignations/terminations
Shares committed to be released
Unearned shares
June 30,
2009
2008
518,291
27,775
84,330
1,115,304
390,736
9,920
84,264
1,260,780
Total ESOP Shares
1,745,700
1,745,700
Fair value of unearned shares
$12,759,078
$13,868,580
Employee Stock Ownership Plan Benefit Equalization Plan (“ESOP BEP”)
The Bank has a non-qualified plan to compensate senior officers of the bank who participate in the Bank’s
ESOP for certain benefits lost under such plan by reason of benefit limitations imposed by the Internal
Revenue Code. The ESOP BEP expense was approximately $44,000, $48,000 and $54,000 for the years ended
June 30, 2009, 2008 and 2007, respectively. The liability totaled approximately $26,000 and $30,000 at June 30,
2009 and 2008, respectively.
Thrift Plan
The Bank sponsors the Employees’ Savings and Profit Sharing Plan and Trust (the “Plan”), pursuant to
Section 401(k) of the Internal Revenue Code, for all eligible employees. Employees may elect to save up to
20% of their compensation. The Bank will contribute a matching contribution up to 3% of the employee
annual compensation. The Plan expense amounted to approximately $337,000, $324,000, and $320,000 for the
years ended June 30, 2009, 2008 and 2007, respectively.
Retirement Plan
The Bank has a non-contributory multiple-employer pension plan covering all eligible employees. The
actuarial valuation at July 1, 2008 for the plan year July 1, 2008 to June 30, 2009 is the first governed by the
Pension Protection Act of 2006. As such, several significant actuarial assumptions changed. The projected
unit credit cost valuation method was replaced by the traditional unit credit valuation method. The annual
investment rate, which was 7.75% for the two plan years ended June 30, 2008 and 2007, respectively, was
replaced by the corporate bond yield curve for June 2008 for the plan year ended June 30, 2009. At the date
of latest plan review, the net assets available for plan benefits exceeded the actuarial present value of
accumulated plan benefits. Data for the actuarial present value of accumulated vested and non-vested
benefits is not determinable for this multiple-employer retirement plan. During the years ended June 30, 2009,
2008 and 2007, total pension plan expense, contributions to the plan and administrative expenses and
Pension Benefit Guaranty Corporation premium were approximately $41,000, $650,000, and $2,244,000,
respectively.
On April 16, 2007, the Board of Directors of the Bank approved, effective July 1, 2007, “freezing” all future
benefit accruals under the Bank’s defined benefit pension plan. This action was intended to provide the
Bank
F-41
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Retirement Plan (Continued)
with additional flexibility in managing the costs associated with the benefit plans provided to its employees
while still preserving all retirement plan participants’ earned and vested benefits.
Benefit Equalization Plan (“BEP”)
The Bank has an unfunded non-qualified plan to compensate senior officers of the Bank who participate in
the Bank’s qualified defined benefit plan for certain benefits lost under such plans by reason of benefit
limitations imposed by Sections 415 and 401 of the Internal Revenue Code. There were approximately
$62,000, $61,000 and $61,000 in contributions made to and benefits paid under the BEP during each of the
years ended June 30, 2009, 2008 and 2007, respectively. The valuation measurement date was June 30 for
2009 and 2008.
The following table sets forth the BEP’s funded status and components of net periodic pension cost:
Change in benefit obligation:
Benefit obligation - beginning
Interest cost
Amendments – Curtailment
Actuarial loss
Benefit payments
Decrease due to an increase in the discount rate
Benefit obligation - ending
Change in plan assets:
Fair value of assets - beginning
Settlements
Contributions
Fair value of assets - ending
Reconciliation of funded status:
Accumulated benefit obligation
Projected benefit obligation
Fair value of assets
Accrued pension cost included in other liabilities
Valuation assumptions:
Discount rate
Salary increase rate
F-42
$
$
$
$
$
$
$
June 30,
2009
2008
(Dollars in Thousands)
2,560
164
—
17
(62)
(111)
2,568
—
(62)
62
—
(2,568)
(2,568)
—
$
$
$
$
$
$
3,097
152
(682)
54
(61)
—
2,560
—
(61)
61
—
(2,560)
(2,560)
—
(2,568)
$
(2,560)
6.25%
N/A
6.75%
N/A
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Benefit Equalization Plan (“BEP”) (Continued)
Net periodic pension expense:
Service cost
Interest cost
Curtailment
Amortization of past service costs
Amortization of net actuarial loss
Valuation assumptions:
Discount rate
Salary increase rate
Years Ended June 30,
2009
2008
2007
(Dollars in Thousands)
$
$
—
164
—
—
98
$
—
152
(35)
—
146
$
262
$
263
$
69
180
—
(12)
204
441
6.75%
N/A
6.25%
N/A
6.25%
5.50%
It is estimated that contributions of approximately $82,000 will be made during the year ending June 30, 2010.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2010
2011
2012
2013
2014
2015-2019
(In Thousands)
$ 82
118
274
248
247
1,202
On April 16, 2007, the Board of Directors of the Bank approved, effective July 1, 2007, “freezing” all future
benefit accruals under the BEP related to the Bank’s defined benefit pension plan. This action was intended
to provide the Bank with additional flexibility in managing the costs associated with the benefit plans
provided to its employees while still preserving all retirement plan participants’ earned and vested benefits.
At June 30, 2009, unrecognized net loss of $345,000 was included in accumulated other comprehensive loss
in accordance with SFAS No. 158. As required under SFAS No. 158, for the fiscal year ending June 30, 2010,
$80,000 of recognized net loss is expected to be recognized as a component of net periodic pension cost.
F-43
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Postretirement Welfare Plan
The Bank has an unfunded postretirement group term life insurance plan covering all eligible employees.
The benefits are based on age and years of service. During the years ended June 30, 2009, 2008 and 2007,
contributions and benefits paid totaled $6,000, $4,000, and $4,000, respectively. The valuation measurement
date was June 30 for 2009 and April 1 for 2008.
The following table sets forth the accrued accumulated postretirement benefit obligation and the net
periodic postretirement benefit cost:
Change in benefit obligation:
Benefit obligation - beginning
Service cost
Interest cost
Actuarial gain
Premiums/claims paid
Adjustment for change in measurement date
Benefit obligation - ending
Change in plan assets:
Fair value of assets - beginning
Premiums/claims paid
Contributions
Fair value of assets - ending
Reconciliation of funded status:
Accumulated benefit obligation
Fair value of assets
Accrued postretirement benefit cost included
in other liabilities
Valuation assumptions:
Discount rate
Salary increase rate
F-44
$
$
$
$
$
$
June 30,
2009
2008
(Dollars in Thousands)
491 $
25
33
—
(6)
15
558 $
— $
(6)
6
— $
(558) $
—
(558) $
6.50%
4.00%
535
24
34
(98)
(4)
—
491
—
(4)
4
—
(491)
—
(491)
7.00%
4.25%
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Postretirement Welfare Plan (Continued)
Net periodic postretirement benefit cost:
Service cost
Interest cost
Amortization of past service liability
Amortization of unrecognized gain
Valuation assumptions:
Discount rate
Salary increase rate
Years Ended June 30,
2009
2008
2007
(Dollars in Thousands)
$
$
25 $
33
10
(6)
62 $
24 $
34
10
—
68 $
31
28
10
—
69
7.00%
4.25%
6.38%
3.75%
6.25%
3.25%
It is estimated that contributions of approximately $8,000 will be made during the year ending June 30, 2010.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2010
2011
2012
2013
2014
2015-2019
(In Thousands)
$ 8
9
10
11
11
59
At June 30, 2008, unrecognized net gain of $112,000 and unrecognized past service cost of $22,000 were
included in accumulated other comprehensive loss in accordance with SFAS No. 158. As required under
SFAS No. 158, for the fiscal year ending June 30, 2010, $8,000 of unrecognized net gain and $10,000 of
unrecognized past service cost is expected to be recognized as a component of net periodic pension cost.
Directors’ Consultation and Retirement Plan (“DCRP”)
The Bank has an unfunded retirement plan for non-employee directors. The benefits are payable based on
term of service as a director. During each of the years ended June 30, 2009, 2008 and 2007, contributions and
benefits paid totaled $89,000. The valuation measurement date was June 30 for 2009 and April 1 for 2008.
F-45
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Directors’ Consultation and Retirement Plan (“DCRP”) (Continued)
The following table sets forth the DCRP’s funded status and components of net periodic cost:
Change in benefit obligation:
Projected benefit obligation - beginning
Service cost
Interest cost
Actuarial gain
Annuity payments
Adjustment for a change in measurement date
Projected benefit obligation - ending
Change in plan assets:
Fair value of assets - beginning
Settlements
Contributions
Fair value of assets - ending
Reconciliation of funded status:
Accumulated benefit obligation
Projected benefit obligation
Fair value of assets
Accrued cost included in other liabilities
Valuation assumptions:
Discount rate
Fee increase rate
F-46
$
$
$
$
$
$
$
June 30,
2009
2008
(Dollars in Thousands)
2,301 $
121
156
—
(89)
69
2,558 $
— $
(89)
89
— $
2,250
134
139
(133)
(89)
—
2,301
—
(89)
89
—
(2,089) $
(1,913)
(2,558) $
—
(2,558) $
(2,301)
—
(2,301)
6.50%
4.00%
7.00%
4.25%
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Directors’ Consultation and Retirement Plan (“DCRP”) (Continued)
Net periodic plan cost:
Service cost
Interest cost
Amortization of transition obligation
Amortization of past service liability
Valuation assumptions:
Discount rate
Fee increase rate
Years Ended June 30,
2009
2008
2007
(Dollars in Thousands)
$
121 $
156
43
61
$
381 $
134 $
139
44
61
378 $
135
138
44
61
378
7.00%
4.25%
6.38%
3.75%
6.25%
3.25%
It is estimated that contributions of approximately $194,000 will be made during the year ending June 30,
2010.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2010
2011
2012
2013
2014
2015-2019
(In Thousands)
$ 194
208
186
201
175
1,170
At June 30, 2009, unrecognized net gain of $230,000 and unrecognized past service cost of $385,000 were
included in accumulated other comprehensive loss in accordance with SFAS No. 158. As required under
SFAS No. 158, for the fiscal year ending June 30, 2010, $61,000 of unrecognized past service cost is expected
to be recognized as a component of net periodic pension cost.
F-47
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Stock Compensation Plans
The Company has two stock-related compensation plans: stock options and restricted stock awards. The
plans authorized the award of up to 3,564,137 shares as stock option grants and 1,425,655 shares as
restricted stock awards. At June 30, 2009, there were 319,897 shares remaining available for future option
grants and 155,959 shares remaining available for future restricted stock awards under the plans.
Employee options and non-employee director options generally vest over a five-year service period and
have a contractual maturity of ten years. The Company recognizes compensation expense for the fair values
of these awards, which have graded vesting, on a straight-line basis over the requisite service period of the
awards. There were no options granted during the years ended June 30, 2009, 2008 and 2007.
Restricted shares generally vest in full after five years. Management recognizes compensation expense for
the fair value of restricted shares on a straight-line basis over the requisite service period of five years.
There were no restricted stock awards during the years ended June 30, 2009, 2008 and 2007.
During the years ended June 30, 2009, 2008 and 2007, the Company recorded $4,992,000, $4,992,000 and
$5,121,000, respectively of share-based compensation expense, comprised of stock option expense of
$1,906,000, $1,908,000 and $1,942,000, respectively, and restricted stock expense of $3,086,000, $3,084,000 and
$3,179,000, respectively.
During the years ended June 30, 2009, 2008 and 2007, the income tax benefit attributed to non-qualified stock
options expense was approximately $533,000, $521,000 and $532,000, respectively, and attributed to
restricted stock expense was approximately $1,260,000, $1,232,000 and $1,269,000, respectively.
The following is a summary of the Company’s stock option activity and related information for its option
plans for the year ended June 30, 2009:
Options
(In Thousands)
Outstanding at June 30, 2008
Exercised
Forfeited
Outstanding at June 30, 2009
3,226
-
-
3,226
Weighted
Average
Remaining
Contractual
Term
Range of
Prices
$11.55 - $12.71
7.4 years
Weighted
Average
Exercise
Price
$12.33
-
-
$12.33
$11.55 - $12.71
6.4 years
Exercisable at June 30, 2009
1,932
$12.32
$11.55 - $12.71
6.4 years
Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.
As of June 30, 2009, the Company has 3,495,900 shares of treasury stock. There were no vested options
exercised during the year ended June 30, 2009. The aggregate intrinsic values of exercised vested options
F-48
Aggregate
Intrinsic
Value
(In Thousands)
-
-
-
-
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Stock Compensation Plans (Continued)
during the years ended June 30, 2008 and 2007 were $3,000 and $28,000, respectively. Expected future
compensation expense relating to the 1,293,696 unexercisable options outstanding as of June 30, 2009 is
$2,652,000 over a weighted average period of 1.4 years.
The following is a summary of the status of the Company’s non-vested restricted share awards as of June
30, 2009 and changes during the year ended June 30, 2009:
Non-vested at June 30, 2008
Vested
Non-vested at June 30, 2009
Restricted
Shares
(In Thousands)
752
(251)
501
Weighted
Average
Grant Date
Fair Value
$12.31
$12.31
$12.31
During the years ended June 30, 2009, 2008 and 2007, the total fair value of vested restricted shares were
$3,048,000, $3,154,000 and $4,347,000, respectively. Expected future compensation expense relating to the
501,078 non-vested restricted shares at June 30, 2009 is $4,284,000 over a weighted average period of 1.4
years.
Note 14 - Stockholders’ Equity and Regulatory Capital
The Office of Thrift Supervision (the “OTS”) imposes various restrictions or requirements on the ability of
savings institutions to make capital distributions, including cash dividends. A savings institution that is a
subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the
OTS at least thirty days before making a capital distribution. A savings institution must file an application for
prior approval of a capital distribution if: (i) it is not eligible for expedited treatment under the applications
processing rules of the OTS; (ii) the total amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to the savings institution’s net
income for that year to date plus the institution’s retained net income for the preceding two years; (iii) it would
not adequately be capitalized after the capital distribution; or (iv) the distribution would violate an agreement
with the OTS or applicable regulations.
In June 2007, the Bank applied to the OTS for approval to distribute $19,000,000 to the Company. In August 2007,
the Bank received approval from the OTS and the cash dividend was paid in November 2007. During the
approval process, the OTS noted that future dividend requests will require closer scrutiny by the OTS due to the
Bank’s compressed earnings at the time.
F-49
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Stockholders’ Equity and Regulatory Capital (Continued)
The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary –
actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
The OTS may disapprove a notice or deny an application for a capital distribution if: (i) the savings institution
would be undercapitalized following the capital distribution; (ii) the proposed capital distribution raises safety
and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in any statute,
regulation or agreement. The capital distributions by Kearny Financial Corp., as a savings and loan holding
company, will not be subject to the OTS capital distribution rules.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain
minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital to adjusted total assets (as defined). The following tables present a reconciliation
of capital per GAAP and regulatory capital and information as to the Bank’s capital levels at the dates presented:
GAAP capital:
Consolidated capital
Less: Unconsolidated capital of the Company
Bank capital
Less: Unrealized (gain) loss on securities
Noncredit-related other-than-temporary impairment
losses on securities held to maturity
Net benefit plan change per FASB Statement No. 158
Goodwill
Intangible assets
Add: Unrealized loss on equity securities
Core and tangible capital
Add: General valuation allowance for loan losses
Less: Low level recourse and residual interest
June 30,
2009
2008
(In Thousands)
$
476,720
(25,658)
$
471,371
(39,779)
451,062
431,592
(8,710)
161
242
(82,263)
(22)
—
1,283
—
441
(82,263)
(51)
(117)
360,470
350,885
5,004
(417)
4,941
—
Total Regulatory Capital
$
365,057
$
355,826
F-50
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Stockholders’ Equity and Regulatory Capital (Continued)
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount Ratio
(Dollars in Thousands)
To be Well Capitalized under
Prompt Corrective Action
Provisions
Amount
Ratio
As of June 30, 2009:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total assets)
Tangible capital (to adjusted total assets)
As of June 30, 2008:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Core (Tier 1) capital (to adjusted total assets)
Tangible capital (to adjusted total assets)
$365,057
360,470
360,470
360,470
$355,826
350,885
350,885
350,885
38.80% ³ $75,267
³ 37,634
38.27
³ 80,814
17.84
³ 30,305
17.84
³ 8.00%
³ 4.00
³ 4.00
³ 1.50
³ $94,084
³ 56,450
³ 101,018
³
-
38.43% ³ $74,081
³ 37,041
37.89
³ 79,012
17.76
³ 29,629
17.76
³ 8.00%
³ 4.00
³ 4.00
³ 1.50
³ $92,601
³ 55,561
³ 98,765
³
-
³
³
³
³
³
³
³
³
10.00%
6.00
5.00
—
10.00%
6.00
5.00
—
On December 3, 2008, the most recent notification from the OTS, the Bank was categorized as well capitalized as
of June 30, 2008, under the regulatory framework for prompt corrective action. There are no conditions existing or
events which have occurred since notification that management believes have changed the Bank’s category.
F-51
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 - Income Taxes
The Bank qualifies as a savings institution under the provisions of the Internal Revenue Code (the “IRC”).
Retained earnings at June 30, 2009, includes approximately $30.5 million of bad debt allowance, pursuant to the
IRC, for which income taxes have not been provided. If such amount is used for purposes other than to absorb
bad debts, including distributions in liquidation, it will be subject to income tax at the then current rate.
The components of income taxes are as follows:
Current tax expense (benefit):
Federal income
State income
$
Deferred tax (benefit) expense:
Federal income
State income
Valuation allowance
2009
Years Ended June 30,
2008
(In Thousands)
2007
3,988
(64)
3,924
(457)
1,142
685
(12)
$
2,948
953
3,901
741
(511)
230
(2,180)
$
880
962
1,842
(1,410)
(2,174)
(3,584)
1,963
$
4,597
$
1,951
$
221
F-52
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 - Income Taxes (Continued)
The following table presents a reconciliation between the reported income taxes and the income taxes which
would be computed by applying the normal federal income tax rate of 35% to income before income taxes for the
year ended June 30, 2009 and 34% to the years ended June 30, 2008 and 2007:
Federal income tax expense
(Reductions) increases in income taxes
resulting from:
Tax exempt interest
New Jersey state tax, net of federal
income tax effect
ESOP market value adjustment
Qualified stock options compensation
expense
Income from BOLI
Employee compensation
Other items, net
Years Ended June 30,
2009
2008
2007
(In Thousands)
$
3,846
$
2,671
$
733
(193)
721
83
211
(182)
166
(43)
4,609
(310)
1,108
94
204
(189)
376
177
4,131
(1,384)
(1,467)
243
208
(179)
—
104
(1,742)
1,963
Valuation allowance
(12)
(2,180)
Total income tax expense
$
4,597
$
1,951
$
221
Effective income tax rate
41.84%
24.84%
10.26%
The effective income tax rate represents total income tax expense divided by income before income taxes.
At June 30, 2009, the Bank (on an unconsolidated basis) had a net operating loss carryforward of approximately
$15,203,000 expiring in the years 2013 through 2015 for state income tax purposes.
During the year ended June 30, 2008, the Company reversed the valuation allowances for the state alternative
minimum assessment and the benefit to be derived from utilization of the state net operating loss carryforward
for the year ended June 30, 2006 and the benefit to be derived from utilization of the state net operating loss
carryforward for the year ended June 30, 2007. With the dissolution of Kearny Federal Investment Corp. and the
transfer of its assets to the Bank, the Bank is projected to have sufficient future taxable income to effectively
utilize its state net operating loss carryforwards. Accordingly, the related deferred tax assets are now considered
to be more likely than not to be realized.
During the year ended June 30, 2009, the Company reversed a valuation allowance on other-than-temporary
impairment as a result of a redemption-in-kind transaction of a mutual fund. As a result of the same redemption-
in-kind transaction, the Company incurred a realized capital loss which was partially utilized as a capital loss
carry back against capital gains in the three preceding years. The Company established a deferred tax asset for
the remaining capital loss carry forward. Since it is not currently more likely than not that the deferred tax asset
will be realized, the Company established a valuation allowance during the year ended June 30, 2009.
F-53
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15 - Income Taxes (Continued)
The tax effects of existing temporary differences that give rise to deferred income tax assets and liabilities are as
follows:
June 30,
2009
2008
(In Thousands)
Deferred income tax assets:
Unrealized loss on securities available for sale
$
—
$
Noncredit-related other-than-temporary impairment on securities
held to maturity
Accumulated other comprehensive income - Defined benefit plans
Allowance for loan losses
Benefit plans
Compensation
Stock based compensation
Alternative minimum tax
Net operating loss carryforward
Other-than-temporary impairment
Capital loss carryover
Uncollected interest
Other
Valuation allowance
Deferred income tax liabilities:
Depreciation
Goodwill
Unrealized gain on securities available for sale
Other
228
167
2,628
2,208
142
3,262
160
889
177
272
273
20
853
—
294
2,438
1,818
143
2,591
997
1,738
284
—
91
4
10,426
11,251
(272)
(284)
10,154
10,967
74
2,489
6,138
58
8,759
252
1,627
—
60
1,939
Net deferred income tax assets
$
1,395
$
9,028
F-54
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Commitments
The Bank has non-cancelable operating leases for branch offices. The following is a schedule by years of future
minimum rental payments required under operating leases that have initial or remaining non-cancelable lease
terms in excess of one year as of June 30, 2009:
Years Ending June 30:
(In Thousands)
2010
2011
2012
2013
2014
Thereafter
Total Minimum Payments Required
$
$
495
496
286
240
252
2,176
3,945
The following schedule shows the composition of total rental expense for all operating leases:
2009
June 30,
2008
(In Thousands)
2007
Minimum rentals
$
524
$
466
$
364
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include commitments to extend credit. The
Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
The outstanding loan commitments are as follows:
June 30,
2009
2008
(In Thousands)
Mortgage loans
Home equity loans
Construction loans
$
Construction loans in process
Undisbursed funds from approved lines of credit
Commercial line of credit
26,653
4,535
2,727
7,574
24,901
1,050
$
30,940
4,732
3,459
9,078
27,288
225
$
67,440
$
75,722
F-55
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Commitments (Continued)
At June 30, 2009, the outstanding mortgage loan commitments include $23,478,000 for fixed rate loans with
interest rates ranging from 4.00% to 6.50% and $3,175,000 for adjustable rate loans with initial rates ranging from
5.75% to 6.00%. Home equity loan commitments include $4,385,000 for fixed rate loans with interest rates ranging
from 5.25% to 5.875% and $150,000 for adjustable rate loans with an initial rate of 5.00%. Construction loan
commitments are for loans with floating interest rates ranging from 1.25% below to 2.50% above the prime rate
published in the Wall Street Journal. Undisbursed funds from approved lines of credit are adjustable rate loans
with interest rates ranging from 1.25% below to 2.50% above the prime rate published in the Wall Street Journal.
At June 30, 2008, the outstanding mortgage loan commitments include $26,880,000 for fixed rate loans with
interest rates ranging from 4.50% to 6.50% and $4,060,000 for adjustable rate loans with initial rates ranging from
5.25% to 6.00%. Home equity loan commitments include $4,672,000 for fixed rate loans with interest rates ranging
from 5.625% to 6.00% and $60,000 for adjustable rate loans with an initial rate of 7.25%. Construction loan
commitments are for loans with floating interest rates ranging from 1.25% below to 2.50% above the prime rate
published in the Wall Street Journal. Undisbursed funds from approved lines of credit are adjustable rate loans
with interest rates ranging from 1.25% below to 4.25% above the prime rate published in the Wall Street Journal.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management’s credit evaluation of the
counterparty.
The Bank has established an overnight line of credit and companion (DRA) commitment, each in the amount of
$100,000,000, with the Federal Home Loan Bank of New York, which expire on July 31, 2009. As of June 30, 2009,
no funds were drawn against these credit lines.
At June 30, 2009, the Bank has commitments for building improvements in the amount of $322,000. In addition,
the Bank also has, in the normal course of business, commitments for servicers and supplies. Management does
not anticipate losses on any of these transactions.
The Company and subsidiaries are also party to litigation which arises primarily in the ordinary course of
business. In the opinion of management, the ultimate disposition of such litigation should not have a material
adverse effect on the consolidated financial position of the Company.
F-56
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments
Effective July 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new fair value measurements. The definition of fair value
retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price
is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the
market in which the reporting entity would transact for the asset or liability. The definition focuses on the price
that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be
paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair
value is a market-based measurement, not an entity-specific measurement.
FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” issued in February 2008, delays the effective date
of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in an entity’s statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. The Company expects that FSP FAS 157-2
will not have an impact on its consolidated financial statements.
In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.” FSP FAS 157-3 clarifies the application of SFAS No. 157, “Fair Value
Measurements”, in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was
effective upon issuance. Adoption of FSP FAS 157-3 did not have a material impact on the Company’s
consolidated financial statements.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”.
FASB SFAS No. 157, “Fair Value Measurements,” defines fair value as the price that would be received to sell
the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides
additional guidance on determining when the volume and level of activity for the asset or liability has
significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may
not be considered orderly.
FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has
been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market
activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the
volume and level of activity for the asset or liability, further analysis of the information from that market is
needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance
with SFAS No. 157.
This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset
or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may
indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is
given little, if any, weight when estimating fair value.
This FSP is effective for interim and annual reporting periods ending after June 15, 2009. Adoption of FSP FAS
157-4 did not have a material impact on the Company’s consolidated financial statements.
F-57
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
SFAS No. 157 describes three levels of inputs that may be used to measure fair value:
Level 1:
Level 2:
Level 3:
Quoted prices in active markets for identical assets or liabilities.
Observable inputs other than Level 1 prices, such as quoted for similar assets or
liabilities; quoted prices in markets that are not active; or inputs that are observable or
can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash
flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant management judgment or estimation.
In addition, SFAS No. 157 requires the Company to disclose the fair value for financial assets on both a recurring
and non-recurring basis.
Those assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at June 30, 2009, Using
Quoted Prices in
Active Markets for
Identical Assets (Level
1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Balance as of
June 30, 2009
(In Thousands)
Securities available for
sale
Mortgage-backed
securities available for
sale
$
—
—
$
26,987
$
1,040
$
28,027
683,785
—
683,785
The fair values of securities available for sale (carried at fair value) or held to maturity (carried at amortized cost)
are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The
Company holds a trust preferred security with a par value of $1.0 million, a de-facto obligation of Mercantil
Commercebank Florida Bancorp, Inc., whose fair value has been determined by using Level 3 inputs. It is a part
of a $40.0 million private placement with a coupon of 8.90% issued in 1998 and maturing in 2028. Generally
management has been unable to obtain a market quote due to a lack of trading activity for this security;
therefore, it has been valued using its call price, which is on a sliding scale adjusting lower each June 15th until
2018 when the call price settles at 100% of par. The aforementioned security was most recently re-priced as of
June 15, 2009.
F-58
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
Those assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at June 30, 2009, Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Impaired loans
Other-than-temporarily
impaired securities
held to maturity
$
—
—
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
Balance as of
June 30, 2009
(In Thousands)
$
—
$
3,949
$
3,949
274
—
274
An impaired loan is evaluated and valued at the time the loan is identified as impaired at the lower of cost or
market value. Loans for which it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered impaired. Market value is measured based on the
value of the collateral securing the loan and is classified at a Level 3 in the fair value hierarchy. Once a loan is
identified as individually impaired, management measures impairment in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan” with the fair value estimated using the market value of the
collateral reduced by estimated disposal costs. Those impaired loans not requiring an allowance represent loans
for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans.
Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted
accordingly. Impaired loans valued using Level 3 inputs had principal balances totaling $5,379,000 at June 30,
2009 with valuation allowances of $1,430,000.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments at June 30, 2009 and 2008:
Cash and Cash Equivalents, Interest Receivable and Interest Payable
The carrying amounts for cash and cash equivalents, interest receivable and interest payable approximate
fair value because they mature in three months or less.
Securities
See the discussion presented on Page F-58 concerning assets measured at fair value on a recurring basis.
Loans Receivable
The fair value of loans receivable is estimated by discounting the future cash flows, using the current rates
at which similar loans would be made to borrowers with similar credit ratings and for the same remaining
maturities, of such loans.
Deposits
The fair value of demand, savings and club accounts is equal to the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits
of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-
cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.
Advances from FHLB
Fair value is estimated using rates currently offered for advances of similar remaining maturities.
F-59
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
Commitments
The fair value of commitments to fund credit lines and originate or participate in loans is estimated using
fees currently charged to enter into similar agreements taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed rate loans commitments, fair
value also considers the difference between current levels of interest and the committed rates. The carrying
value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the commitment using fees
currently charged to enter into similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments are presented in Note 16.
The carrying amounts and estimated fair values of financial instruments are as follows:
June 30,
2009
2008
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(In Thousands)
Financial assets:
Cash and cash equivalents
Securities available for sale
Loans receivable
Mortgage-backed securities available for sale
Mortgage-backed securities held to maturity
Interest receivable
Financial liabilities:
Deposits (A)
Advances from FHLB
Interest payable on FHLB advances
$
211,525
28,027
1,039,413
683,785
4,321
8,237
$
211,525
28,027
1,048,219
683,785
3,678
8,237
$
131,723
38,183
1,021,686
726,023
—
8,949
$
131,723
38,183
1,010,789
726,023
—
8,949
1,421,201
210,000
1,058
1,430,796
238,714
1,058
1,379,032
218,000
1,070
1,383,721
238,455
1,070
(A) Includes accrued interest payable on deposits of $125 and $185, respectively.
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and
information about the financial instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial instrument, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instrument and other factors. These estimates are subjective in nature, involve
uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
The fair value estimates are based on existing on-and-off balance sheet financial instruments without
attempting the value of anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities that are not considered financial
F-60
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
assets and liabilities include premises and equipment, and advances from borrowers for taxes and insurance.
In addition, the ramifications related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
Note 18 – Comprehensive Income
The components of accumulated other comprehensive income (loss) included in stockholders’ equity are as
follows:
Net unrealized gain (loss) on securities available for sale
Tax effect
Net of tax amount
Noncredit-related other-than-temporary impairment of securities
held to maturity
Tax effect
Net of tax amount
Benefit plan adjustments
Tax effect
Net of tax amount
June 30,
2009
2008
(In Thousands)
$ 15,027
(6,138)
$
(2,136)
853
8,889
(1,283)
(554)
228
(326)
(410)
167
(243)
—
—
—
(735)
294
(441)
Accumulated other comprehensive income (loss)
$
8,320
$
(1,724)
F-61
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 – Comprehensive Income (Continued )
Other comprehensive income and related tax effects are presented in the following table:
Years Ended June 30,
2009
2008
2007
(In Thousands)
Realized loss (gain) on securities available for sale:
Realized loss (gain) arising during the year
$
415
$
—
$
(55)
Loss on impairment of securities available for sale:
Realized loss arising during the year
Unrealized holding gain on securities available for sale:
—
659
—
Unrealized gain arising during the year
16,746
10,260
11,438
Noncredit-related other-than-temporary impairment losses
on securities held to maturity
Benefit plans:
Amortization of:
Transition obligation
Actuarial loss
Past service cost
New actuarial gain during the year
Effects of curtailment
Net change in benefit plans accrued expense
Other comprehensive income before taxes
Tax effect
(274)
43
92
71
94
—
300
17,187
(6,994)
—
44
146
71
177
647
1,085
12,004
(4,524)
—
—
—
—
—
—
—
11,383
(3,609)
Other comprehensive income
$
10,193
$
7,480
$
7,774
F-62
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Parent Only Financial Information
Kearny Financial Corp. operates its wholly owned subsidiaries, Kearny Financial Securities, Inc. and Kearny
Federal Savings Bank and the Bank’s wholly-owned subsidiaries. The consolidated earnings of the subsidiaries
are recognized by the Company using equity method of accounting. Accordingly, the consolidated earnings of
the subsidiaries are recorded as increase in the Company’s investment in the subsidiaries. The following are the
condensed financial statements for Kearny Financial Corp. (Parent Company only) as June 30, 2009 and 2008,
and for each of the years in the three-year period ended June 30, 2009.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
June 30,
2009
2008
(In Thousands)
Assets
Cash and amounts due from depository institutions
$
ESOP loan receivable
Mortgage-backed securities available for sale (amortized cost
2009 $4,415; 2008 $0)
Interest receivable
Investment in subsidiaries
Due from subsidiaries
Other assets
9,598
12,533
4,436
18
451,069
—
233
Liabilities and Stockholders’ Equity
Other liabilities
Stockholders’ equity
$
477,887
$
1,167
476,720
$
477,887
F-63
$
$
$
$
26,271
13,797
—
—
431,597
771
247
472,683
1,312
471,371
472,683
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary
Interest income
Equity in undistributed earnings of subsidiaries
Directors’ compensation
Other expenses
Income before Income Taxes
Income tax expense
Net income
Years Ended June 30,
2009
2008
2007
(In Thousands)
$
—
1,017
6,226
$
19,000
1,303
(13,408)
$
15,000
1,631
(13,525)
7,243
6,895
3,106
122
614
736
134
648
782
130
728
858
6,507
6,113
2,248
116
209
314
$ 6,391
$
5,904
$
1,934
CONDENSED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of the subsidiaries
Amortization of premiums
(Increase) decrease in interest receivable
Decrease in intercompany accounts
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Years Ended June 30,
2009
2008
2007
(In Thousands)
$ 6,391
$
5,904
$
1,934
(6,226)
12
(18)
3,857
10
(80)
13,408
—
69
7,354
46
92
13,525
—
4
377
(76)
(669)
Net Cash Provided by Operating Activities
3,946
26,873
15,095
F-64
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30,
2009
2008
2007
(In Thousands)
Cash Flows from Investing Activities
Repayment of loan to ESOP
Purchases of mortgage-backed securities available for sale
Principal repayments on mortgage-backed securities available for sale
Capital contributions to subsidiaries
$
1,264 $
(4,913)
487
(10)
1,197 $
—
—
—
Net Cash (Used in) Provided by Investing Activities
(3,172)
1,197
802
—
—
(10)
792
Cash Flows from Financing Activities
Dividends paid to minority stockholders of Kearny Financial Corp.
Purchase of common stock of Kearny Financial Corp. for treasury
Treasury stock reissued
Dividends contributed for payment of ESOP loan
Purchase of common stock of Kearny Financial Corp. for restricted stock
plan
(3,566)
(13,962)
—
81
(3,712)
(7,738)
63
54
(3,698)
(24,573)
172
—
—
—
(789)
Net Cash Used in Financing Activities
(17,447)
(11,333)
(28,888)
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
(16,673)
16,737
(13,001)
26,271
9,534
22,535
Cash and Cash Equivalents - Ending
$
9,598 $
26,271 $
9,534
F-65
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 - Net Income per Common Share (EPS)
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share
computations:
Net income
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Restricted stock awards
Diluted earnings per share
Net income
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Restricted stock awards
Diluted earnings per share
Net income
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Restricted stock awards
Diluted earnings per share
Year Ended June 30, 2009
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
$
$
$
$
$
$
$
$
6,391
6,391
68,111 $
0.09
—
—
—
112
6,391
68,223 $
0.09
Year Ended June 30, 2008
5,904
5,904
68,675 $
0.09
—
—
—
114
5,904
68,789 $
0.09
Year Ended June 30, 2007
1,934
1,934
69,242 $
0.03
—
—
92
247
$
1,934
69,581 $
0.03
During the years ended June 30, 2009, 2008 and 2007, the average number of options which were anti-dilutive
totaled 3,225,740, 3,227,388 and 1,006,464, respectively.
F-66
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 - Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for the years ended June 30, 2009 and
2008:
First
Quarter
Year Ended June 30, 2009
Second
Quarter
Third
Quarter
Fourth
Quarter
(In Thousands, Except Per Share Data)
Interest income
Interest expense
$
25,160 $
11,917
24,917 $
11,248
24,248 $
10,772
23,583
10,263
Net Interest Income
13,243
13,669
13,476
13,320
Provision for loan losses
—
109
208
—
Net Interest Income after Provision for Loan
Losses
13,243
13,560
13,268
13,320
Non-interest income
Non-interest expenses
308
10,618
736
10,553
18
10,954
457
11,797
Income before Income Taxes
2,933
3,743
2,332
1,980
Income taxes
Net Income
Net income per common share:
Basic
Diluted
Dividends declared per common share
Weighted Average Number of Common Shares
Outstanding:
Basic
Diluted
1,197
1,505
1,028
867
$
1,736 $
2,238 $
1,304 $
1,113
$
$
$
0.03 $
0.03 $
0.02 $
0.02
0.03 $
0.03 $
0.02 $
0.02
0.05 $
0.05 $
0.05 $
0.05
68,454
68,190
67,984
67,809
68,686
68,316
68,007
67,915
F-67
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 - Quarterly Results of Operations (Unaudited) (Continued)
First
Quarter
Year Ended June 30, 2008
Second
Quarter
Third
Quarter
Fourth
Quarter
(In Thousands, Except Per Share Data)
Interest income
Interest expense
$
23,413 $
12,041
24,611 $
12,948
24,554 $
12,943
24,789
12,596
Net Interest Income
11,372
11,663
11,611
12,193
Provision for loan losses
94
—
—
—
Net Interest Income after Provision for Loan
Losses
11,278
11,663
11,611
12,193
Non-interest income
Non-interest expenses
712
10,361
669
10,099
670
10,070
(2)
10,409
Income before Income Taxes
1,629
2,233
2,211
1,782
Income taxes
599
857
(462)
Net Income
$
1,030 $
1,376 $
2,673 $
Net income per common share:
Basic
Diluted
Dividends declared per common share
Weighted Average Number of Common Shares
Outstanding:
Basic
Diluted
957
825
0.01
0.01
0.05
$
$
$
0.01 $
0.02 $
0.04 $
0.01 $
0.02 $
0.04 $
0.05 $
0.05 $
0.05 $
68,718
68,808
68,625
68,548
68,933
68,957
68,646
68,634
F-68
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: September 14, 2009
KEARNY FINANCIAL CORP.
By:
/s/ John N. Hopkins
John N. Hopkins
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by
the following persons on September 14, 2009 on behalf of the Registrant and in the capacities indicated.
/s/ John N. Hopkins
John N. Hopkins
President and Chief Executive Officer
(Principal Executive Officer)
/s/ William C. Ledgerwood
William C. Ledgerwood
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
/s/ Theodore J. Aanensen
Theodore J. Aanensen
Director
/s/ Joseph P. Mazza
Joseph P. Mazza
Director
/s/ John F. McGovern
John F. McGovern
Director
/s/ Henry S. Parow
Henry S. Parow
Director
/s/ John J. Mazur, Jr.
John J. Mazur, Jr.
Director
/s/ Mathew T. McClane
Mathew T. McClane
Director
/s/ Leopold W. Montanaro
Leopold W. Montanaro
Director
/s/ John F. Regan
John F. Regan
Director
(Back To Top)
Section 2: EX-11 (EXHIBIT 11)
EXHIBIT 11
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Year Ended
June 30, 2009
Year Ended
June 30, 2008
(In Thousands, Except Per Share Data, Unaudited)
Year Ended
June 30, 2007
Income available to common stockholders
$
6,391
Weighted average shares outstanding
Basic earnings per share
Income for diluted earnings per share
68,111
0.09
6,391
$
$
Total weighted average common shares and
equivalents outstanding for diluted computation
68,223
Diluted earnings per share
$
0.09
$
$
$
$
5,904
68,675
0.09
5,904
68,789
0.09
$
$
$
$
1,934
69,242
0.03
1,934
69,581
0.03
(Back To Top)
Section 3: EX-21 (EXHIBIT 21)
Subsidiaries of the Registrant
Parent
Kearny Financial Corp.
Subsidiaries
Kearny Federal Savings Bank
Kearny Financial Securities, Inc.
Subsidiaries of Kearny Federal Savings Bank
KFS Financial Services, Inc.
KFS Investment Corp.
State or Other
Jurisdiction of
Incorporation
United States
Delaware
New Jersey
New Jersey
(Back To Top)
Section 4: EX-23 (EXHIBIT 23)
Exhibit 21
Percentage
Ownership
100%
100%
100%
100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Kearny Financial Corp.
Fairfield, New Jersey
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.
333-130203 and 333-130204) of Kearny Financial Corp. (the “Company”) of our reports dated September 10, 2009,
relating to the Company’s consolidated financial statements and the effectiveness of the Company’s internal
control over financial reporting, which appear in this Annual Report on Form 10-K.
Beard Miller Company LLP
Clark, New Jersey
September 11, 2009
(Back To Top)
Section 5: EX-31 (EXHIBIT 31)
CERTIFICATION
I, John N. Hopkins, President and Chief Executive Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of Kearny Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of
directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the issuer’s internal control over financial reporting.
Date: September 14, 2009
By:
/s/ John N. Hopkins
John N. Hopkins
President and Chief Executive Officer
CERTIFICATION
I, William C. Ledgerwood, Senior Vice President and Chief Financial Officer, certify that:
1.
I have reviewed this annual report on Form 10-K of Kearny Financial Corp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of
directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the issuer’s internal control over financial reporting.
Date: September 14, 2009
By:
/s/ William C. Ledgerwood
William C. Ledgerwood
Senior Vice President and Chief
Financial Officer
(Back To Top)
Section 6: EX-32 (EXHIBIT 32)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended June 30, 2009 (the “Report”) of
Kearny Financial Corp. (the “Company”) as filed with the Securities and Exchange Commission on the date
hereof, we, John N. Hopkins, President and Chief Executive Officer and William C. Ledgerwood, Senior Vice
President and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ John N. Hopkins
John N. Hopkins
President and Chief Executive Officer
/s/ William C. Ledgerwood
William C. Ledgerwood
Senior Vice President and Chief
Financial Officer
September 14, 2009
(Back To Top)