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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2010
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________________ to __________________
Commission File 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. [ ] YES [X] NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] YES [X] NO
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark 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). [ ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer !
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] YES [X] NO
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant on December 31, 2009 (the last
business day of the Registrant’s most recently completed second fiscal quarter) was $152.1 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 3, 2010 there were outstanding 68,000,777 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of the definitive Proxy Statement for the Registrant’s 2010 Annual Meeting of Stockholders. (Part III)
KEARNY FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended June 30, 2010
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
[Removed and Reserved]
INDEX
PART I
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
SIGNATURES
PART IV
Page
3
48
54
54
56
56
57
60
62
90
96
97
97
98
99
99
99
100
100
101
i
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 74.5% of
the 68,344,277 total shares outstanding as of the Company’s June 30, 2010 fiscal year end. The MHC
and the Company are chartered and 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, 2010, net loans receivable comprised 43.0% of our total
assets while investment securities, including mortgage-backed and non-mortgage-backed securities,
comprised 42.3% of our total assets. By comparison, at June 30, 2009, net loans receivable comprised
48.9% of our total assets while securities comprised 33.7% of our total assets.
The loan portfolio’s decline on both a dollar and percentage of total assets basis during fiscal
2010 reflected an accelerated level of loan prepayments compared to fiscal 2009 that outpaced the year-
over-year increase in the Company’s volume of new loan acquisitions. The increase in loan acquisitions
during fiscal 2010 included an increase in internally originated loans partially offset by declines in
purchased loans. Despite the year-to-year increase in loan acquisition volume, the level of loan
originations and purchases during fiscal 2010 continued to reflect the challenges of declining real estate
values and high levels of unemployment that have characterized the regional and national economy since
the financial crisis of 2008-2009. Notwithstanding these near-term challenges, our strategic business plan
3
continues to call for increasing the balance of our loan portfolio relative to the size of our securities
portfolio over the next several years.
We operate from an administrative headquarters in Fairfield, New Jersey and had 27 branch
offices as of June 30, 2010. We also operate an Internet website at www.kearnyfederalsavings.com
through which copies of our periodic reports are available free of charge as soon as reasonably practicable
after they are filed with the Securities and Exchange Commission.
Market Area. At June 30, 2010, 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. While we have also considered Monmouth County, New Jersey to be part of our market
area in the past, we expect this market to grow in strategic significance due to our proposed acquisition of
Central Jersey Bancorp (NASDAQ: CJBK), headquartered in Monmouth County, NJ, as discussed below.
Our lending is 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 generally conducted
within our primary 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. We also face competition
for attracting funds from providers of alternative investment products such as equity and fixed income
investments such as corporate, agency and government securities as well as the mutual funds that invest
in these instruments.
There are large retail banking competitors operating throughout our primary market area,
including Bank of America, Citibank, Hudson City Savings Bank, JP Morgan Chase Bank, PNC Bank,
TD Bank, and Wells Fargo Bank and we face strong competition from other community-based financial
institutions. Based on data compiled by the FDIC as of June 30, 2009, 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 0.92% of total FDIC-insured deposits.
Proposed Acquisition of Central Jersey Bancorp. On May 25, 2010, the Company and the Bank
entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Central Jersey Bancorp
(“Central Jersey”) and its wholly owned subsidiary, Central Jersey Bank, National Association (“Central
Jersey Bank”), pursuant to which Central Jersey will merge with a to-be-formed subsidiary of the
Company and thereby become a wholly owned subsidiary of Company (the “Merger”). Immediately
thereafter, Central Jersey Bank will merge with and into the Bank (the “Bank Merger”). Central Jersey
Bank will operate as a division of the Bank for at least 18 months after closing. At June 30, 2010, Central
4
Jersey Bank had $576.8 million in assets and 13 branch offices in Monmouth and Ocean Counties, New
Jersey.
Under the terms of the Merger Agreement, shareholders of Central Jersey will receive $7.50 in
cash (the “Merger Consideration”) for each share of Central Jersey common stock held. The Merger
Agreement also provides that all options to purchase Central Jersey stock that are outstanding and
unexercised immediately prior to the closing under Central Jersey’s various stock option plans will be
cancelled in exchange for a cash payment equal to the positive difference between $7.50 and the exercise
price. The estimated aggregate value of the transaction is $72.3 million.
Central Jersey will use its best efforts to redeem the 11,300 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A previously issued to the U.S. Department of Treasury under the
TARP Capital Purchase Plan immediately before or contemporaneously with closing. The warrant issued
to the U.S. Treasury in connection with Treasury’s preferred stock investment will be converted into the
right to receive the difference between $7.50 and the warrant exercise price times the number of shares
covered by the warrant.
The Merger Agreement contains (a) customary representations and warranties of Central Jersey
and the Company, including, among others, with respect to corporate organization, capitalization,
corporate authority, third party and governmental consents and approvals, financial statements, and
compliance with applicable laws, (b) covenants of Central Jersey to conduct its business in the ordinary
course until the Merger is completed; (c) covenants of Central Jersey not to take certain actions during
such period. Central Jersey has also agreed not to (i) solicit proposals relating to alternative business
combination transactions or (ii) subject to certain exceptions, enter into discussions concerning, or
provide confidential information in connection with, any proposals for alternative business combination
transactions.
Consummation of the Merger is subject to certain conditions, including, among others, approval
of the Merger by shareholders of Central Jersey, governmental filings and regulatory approvals and
expiration of applicable waiting periods, absence of litigation, accuracy of specified representations and
warranties of the other party, and obtaining material permits and authorizations for the lawful
consummation of the Merger and the Bank Merger. The Merger is also conditioned upon Central Jersey’s
nonperforming assets, as defined in the Merger Agreement, not exceeding $20.0 million between March
31, 2010 and the Closing Date.
The Merger Agreement also contains certain termination rights for the Company and Central
Jersey, as the case may be, applicable upon the occurrence or non-occurrence of certain events, including:
final, non-appealable denial of required regulatory approvals required for consummation of the Merger;
failure of Central Jersey shareholders to approve the Merger; if, subject to certain conditions, the Merger
has not been completed by March 31, 2011; a breach by the other party that is not or cannot be cured
within 30 days after written notice if such breach would result in a failure of the conditions to closing set
forth in the Merger Agreement; entry by the Board of Directors of Central Jersey into an alternative
business combination transaction; or the failure by the Board of Directors of Central Jersey to hold the
meeting of shareholders to vote on the Merger Agreement or to recommend the Merger to its
shareholders. If the Merger is not consummated under certain circumstances, Central Jersey has agreed to
pay the Company a termination fee of up to $2.8 million.
The representations and warranties of each party set forth in the Merger Agreement have been
made solely for the benefit of the other party to the Merger Agreement. In addition, such representations
and warranties (a) are subject to materiality qualifications contained in the Merger Agreement which may
differ from what may be viewed as material by investors, (b) were made only as of the date of the Merger
5
Agreement or such other date as is specified in the Merger Agreement, and (c) may have been included in
the Merger Agreement for the purpose of allocating risk between the Company and Central Jersey rather
than establishing matters as facts. Accordingly, the Merger Agreement is included with this filing only to
provide investors with information regarding the terms of the Merger Agreement, and not to provide
investors with any other factual information regarding the parties or their respective businesses.
Lending Activities
General. We have traditionally focused on the origination of one-to-four family first mortgage
loans, which comprise a significant majority of our total loan portfolio. Our next largest category of loans
comprises commercial mortgages, including loans secured by multi-family, mixed-use and nonresidential
properties. Our commercial loan offerings also include secured and unsecured business loans most of
which are secured by real estate. Our consumer loan offerings primarily include home equity loans and
home equity lines of credit as well as account loans and overdraft lines of credit. We also offer
construction loans to builders/developers as well as individual homeowners. 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 13.
Real estate mortgage:
One-to-four family
Multi-family and
nonresidential
Commercial business
Consumer:
Home equity loans
Home equity lines of credit
Passbook or certificate
Other
Construction
Total loans
Less:
Allowance for loan losses
Unamortized yield
adjustments including net
premiums on purchased
loans and net deferred
loans costs and fees
2010
2009
At June 30,
2008
2007
2006
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
$ 663,850
65.52 % $ 689,317
65.97% $ 687,679
66.99% $ 559,306
64.66% $ 465,822 65.80%
203,013
14,352
20.04
1.42
197,379
14,812
18.89
1.42
178,588
8,735
17.40
0.85
159,147
4,205
18.40
0.48
107,111 15.13
0.45
3,208
101,659
11,320
2,703
1,545
14,707
10.03
1.12
0.27
0.15
1.45
113,387
12,116
2,922
1,585
13,367
10.85
1.16
0.28
0.15
1.28
123,978
11,478
2,662
1,332
12,062
12.08
1.12
0.26
0.13
1.17
113,624
12,748
3,250
1,391
11,360
13.14
1.47
0.38
0.16
1.31
93,639 13.23
1.83
12,988
0.41
2,884
0.03
247
3.12
22,078
1,013,149 100.00 % 1,044,885 100.00% 1,026,514 100.00%
865,031 100.00%
707,977 100.00%
8,561
6,434
6,104
6,049
5,451
(564)
7,997
(962)
5,472
(1,276)
4,828
(1,511)
4,538
(1,087)
4,364
Total loans, net
$ 1,005,152
$ 1,039,413
$1,021,686
$ 860,493
$ 703,613
6
Loan Maturity Schedule. The following table sets forth the maturities of our loan portfolio at June 30, 2010. 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
$
285 $
385 $
6,886 $
162 $
4 $
1,287 $
103 $
11,985 $
21,097
2,548
6,613
72,078
140,772
441,554
626
504
10,321
31,836
159,341
—
—
84
1,427
5,955
2,124
5,402
28,163
31,615
34,193
14
142
4,549
5,941
670
46
16
—
—
1,354
1
8
—
—
1,433
2,722
—
—
—
—
8,081
12,685
115,195
211,591
644,500
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
7
Total due after one year
663,565
202,628
7,466
101,497
11,316
1,416
1,442
2,722
992,052
Total amount due
$
663,850 $
203,013 $
14,352 $ 101,659 $ 11,320 $
2,703 $
1,545 $
14,707 $ 1,013,149
The following table shows the dollar amount of loans as of June 30, 2010 due after June 30, 2011
according to rate type and loan category.
Fixed Rates
Floating or
Adjustable
Rates
(In Thousands)
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
604,612
172,428
4,527
101,497
2,650
—
297
—
$
58,953
30,200
2,939
—
8,666
1,416
1,145
2,722
$
Total
663,565
202,628
7,466
101,497
11,316
1,416
1,442
2,722
Total
$
886,011
$
106,041
$
992,052
One-to-Four Family Mortgage Loans. Our primary lending activity has traditionally consisted
of the origination of one-to-four family first mortgage loans, of which approximately $570.7 million or
86.0% are secured by properties located within New Jersey as of June 30, 2010. By comparison, at June
30, 2009 approximately $583.5 million or 84.7% of loans were secured by New Jersey properties. During
the year ended June 30, 2010, the Bank originated $102.1 million of one-to-four family first mortgage
loans within New Jersey compared to $79.4 million in the year ended June 30, 2009. Despite the year-to-
year increase in loan origination volume, the overall level of loan originations during fiscal 2010
continued to reflect the challenges of declining real estate values and high levels of unemployment that
have characterized the regional and national economy since the financial crisis of 2008-2009. The
volume of loan originations for fiscal 2010 also reflected management’s decision to maintain its
conservative underwriting standards coupled with 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 $31.2 million during the year ended June
30, 2010, compared to $67.7 million during the year ended June 30, 2009. An acceleration of one-to-four
family mortgage loan prepayments during fiscal 2010 outpaced the corresponding increase in loan
acquisition volume resulting in the reported decline in the outstanding balance of this segment of the loan
portfolio for fiscal 2010.
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.
8
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
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, but 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 percentage point 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 business
plan continues to call for increasing loans on both a dollar and percentage of assets basis, we generally do
not sell loans in the secondary market and do not currently expect to do so in any large capacity in the
near future. Toward that end, 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 Nonresidential Real Estate Mortgage Loans. We also originate commercial
mortgage loans on multi-family and nonresidential 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 factors noted above that impacted residential loan origination
volume during fiscal 2010 also adversely impacted the origination volume of commercial mortgages.
Consequently, the Bank originated $31.0 million of multi-family and commercial real estate mortgages
during the year ended June 30, 2010, compared to $36.7 million during the year ended June 30, 2009.
Despite the year-over-year decrease in loan origination volume, the outstanding balance of the portfolio
grew modestly during fiscal 2010. The Company’s business plan continues to call for growing strategic
emphasis on the origination of commercial mortgages and increasing that portfolio on both a dollar and
percentage of assets basis.
We generally require no less than a 25% down payment or equity position for mortgage loans on
multi-family and nonresidential 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 commercial mortgage loans are secured by properties
located in New Jersey.
Commercial 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
9
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, commercial mortgage loans generally carry larger balances to single borrowers or related
groups of borrowers than one-to-four family mortgage loans. Consequently, such loans typically require
substantially greater evaluation and oversight efforts compared to residential real estate lending.
Commercial Business Loans. We also originate commercial term loans and lines of credit to a
variety of professionals, sole proprietorships and small businesses in our market area. As above, the
factors noted earlier that impacted mortgage loan origination volume during fiscal 2010 also adversely
impacted the origination volume of commercial business loans. Consequently, during the year ended
June 30, 2010, the Bank originated $3.5 million of commercial business loans compared to $8.0 million
during the year ended June 30, 2009. Despite the year-over-year decrease in loan origination volume, the
outstanding balance of the portfolio declined only modestly during fiscal 2010. The Company’s business
plan continues to calls for increased emphasis on originating commercial business loans as part of its
strategic focus on commercial lending.
Our commercial business loans are normally secured by real estate and we require personal
guarantees on all commercial loans. Approximately $9.2 million or 63.9% of our commercial business
loans are secured by one-to-four family properties and approximately $5.2 million or 36.0% are secured
by commercial real estate and other forms of collateral. Only $18,000 or less than one percent 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 may carry larger balances to single borrowers or related
groups of borrowers than one-to-four family first mortgage loans. As such, commercial business 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. The factors noted above that impacted one-to-four family loan origination
volume during fiscal 2010 also adversely impacted the origination volume of home equity loans and lines
of credit. During the year ended June 30, 2010, the Bank originated $30.6 million of home equity loans
and home equity lines of credit compared to $31.0 million in the year ended June 30, 2009. Consistent
with the one-to-four family first mortgage loans, prepayment activity on home equity loans and lines of
credit outpaced loan origination volume resulting in the reported decline in the outstanding balance of this
segment of the loan portfolio for fiscal 2010.
10
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.
Other Consumer Loans. In addition to home equity loans and lines of credit, our consumer loan
portfolio primarily includes loans secured by savings accounts and certificates of deposit on deposit with
the Bank 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, 2010,
construction loan disbursements were $7.1 million compared to $5.4 million during the year ended June
30, 2009. The level of construction loan disbursements continues to reflect reduced origination volume
attributable to many of the same factors that have adversely impacted the origination volume of other loan
categories during fiscal 2010.
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.
11
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, 2010, our loans-to-one-borrower limit was approximately $54.7 million.
At June 30, 2010, our largest single borrower had an aggregate loan balance of approximately
$14.1 million, representing four mortgage loans secured by commercial real estate. Our second largest
single borrower had an aggregate loan balance of approximately $10.0 million, representing ten 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 $9.7 million, representing two loans
secured by commercial real estate. At June 30, 2010, all of these lending relationships were current and
performing in accordance with the terms of their loan agreements. By comparison, at June 30, 2009,
loans outstanding to the Bank’s three largest borrowers totaled approximately $14.0 million, $11.0
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.
For the Years Ended June 30,
2009
2008
2010
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
Total loan purchases
Loan principal repayments
(Decrease) increase due to other items
(In Thousands)
$
102,116 $
31,002
3,457
7,081
30,622
843
469
175,590
$
79,413
36,700
8,002
5,374
31,034
1,506
792
162,821
99,113
44,854
7,622
5,569
44,992
1,504
334
203,988
31,216
31,216
(239,697)
(1,370)
67,698
67,698
(213,131)
339
102,228
102,228
(145,959)
936
Net (decrease) increase in loan portfolio
$
(34,261) $
17,727
$
161,193
12
Our customary sources of loan applications include loan originated by our commercial and
residential loan officers, repeat customers, referrals from realtors and other professionals and “walk-in”
customers. These sources are supported in varying degrees by our newspaper and electronic advertising
and marketing strategies.
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, 2010, we purchased a total of $11.0
million and $3.9 million of fixed-rate and adjustable rate loans, respectively, 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 occasionally purchased out-of-state one-to-four family first mortgage
loans to supplement our in-house originations. As of June 30, 2010, our portfolio of out-of-state loans
included mortgages in 28 states and totaled $93.2 million. The states with the two largest concentrations
of loans at June 30, 2010 were Texas and Washington with outstanding principal balances totaling $9.7
million and $9.5 million, respectively. The aggregate outstanding balances of loans in each of the
remaining 26 states comprise less than 10% of the total balance of out-of-state loans.
The Bank also enters into purchase agreements with a limited number of mortgage originators 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, 2010, we purchased a total of $15.6 million and $661,000 of fixed-rate and adjustable rate loans,
respectively, from these sellers.
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, 2010 was $7.4 million and the average balance of a single participation was
approximately $246,000. Both were virtually unchanged from June 30 2009, with additional loan
disbursements generally offset by principal repayments. At June 30, 2010, we had four non-TICIC
participations with an aggregate balance of $8.6 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
13
comparison, at June 30, 2009 non-TICIC participations totaled $11.3 million. During the year ended June
30, 2010, the Bank did not purchase any loan participations originated by other banks.
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, 2010, we held real estate owned totaling
$146,000, consisting of two properties acquire through foreclosure.
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, 2010, we had approximately $9.2 million of loans that were held on a non-accrual basis
compared to $8.1 million at June 30, 2009.
14
Non-Performing Assets. The following table provides information regarding the Bank’s non-
performing loans and real estate owned.
2010
2009
At June 30,
2008
(Dollars in Thousands)
2007
2006
Loans accounted for on a non-accrual basis:
Real estate mortgage:
One- to four-family
Multi-family and nonresidential
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
$ 1,867
4,358
2,298
$ 2,120
5,626
—
$
250
—
1
468
9,242
12,321
—
—
—
—
—
—
—
12,321
27
—
—
362
8,135
5,017
—
—
—
—
—
—
—
5,017
$
530
1,012
—
31
—
—
—
1,573
$
472
1,017
—
—
—
—
—
1,489
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
329
592
—
21
—
—
—
942
—
—
—
—
—
—
—
—
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
$ 21,563
$
146
$
$ 21,709
$ 13,152
109
$
—
— $
$ 13,261
$ 1,573
$
109
$ —
$ 1,682
$ 1,489
$
109
$ —
$ 1,598
942
$
$
109
$ —
$ 1,051
2.13%
0.92%
0.93%
1.26%
0.62%
0.62%
0.15%
0.08%
0.08%
0.17%
0.08%
0.08%
0.13%
0.05%
0.05%
Non-performing assets increased by $8.4 million to $21.7 million at June 30, 2010 from $13.3
million at June 30, 2009. The increase comprised a net increase in non-accrual loans of $1.1 million plus
the addition of $7.3 million of loans 90 days or more past due and still accruing. For those same
comparative periods, the number of nonaccrual loans increased from 21 to 26 loans while the number of
loans 90 days or more past due and still accruing increased from 12 to 28 loans.
15
The $2,117,000 of nonaccrual one-to-four family mortgage loans and home equity loans include a
total of 11 originated loans with outstanding principal balances ranging from $7,000 to $470,000 at June
30, 2010. The loans are in various stages of collection, workout or foreclosure and are secured by New
Jersey properties whose values at June 30, 2010 are estimated to equal or exceed the outstanding balances
of the loans at that date.
The $4,358,000 of nonaccrual multifamily and nonresidential mortgage loans includes a total of
seven loans with outstanding principal balances ranging from $70,000 to $2.7 million at June 30, 2010.
Five of the seven loans with combined balances of $1,632,000 were acquired through TICIC. Based upon
updated collateral valuations, the Bank has established specific valuation allowances of $1,551,000 for
the identified impairment attributable to four of these five loans at June 30, 2010. The remaining loans
represent two originated nonresidential mortgage loans with combined balances of $2,726,000. The loans
are secured by New Jersey properties whose values at June 30, 2010 are estimated to equal or exceed the
outstanding balances of the loans at that date.
The $2,298,000 of nonaccrual commercial business loans include a total of three loans with
outstanding principal balances ranging from $4,800 to $2.2 million at June 30, 2010. The largest of these
three loans represents one loan with an outstanding balance of $2.2 million loan which is secured by land
with approvals for residential development. The loan was placed on nonaccrual at June 30, 2010 based
upon its past due status. However, no specific valuation allowance for impairment was required to be
established against the loan as of that date based upon the adequacy of the Bank’s collateral as well as an
existing contract for the sale of the underlying property which is expected to close in the quarter ending
September 30, 2010. The remaining two nonaccrual commercial business loans have combined balances
of $99,600 with a specific valuation allowance of $4,800 established in the allowance for loan loss for the
identified impairment attributable to one of these two loans.
The balance of nonaccrual loans also includes $468,000 attributable to three construction loans
secured by properties in New Jersey with outstanding principal balances ranging from $106,000 to
$213,000 at June 30, 2010. Based upon updated collateral valuations, the Bank has established a specific
valuation allowance of $106,000 at June 30, 2010 for the identified impairment attributable to one of the
three loans while the values of the collateral securing the remaining two properties are estimated to equal
or exceed the outstanding balances of the loans at that date.
Nonperforming loans also include 28 accruing loans totaling $12,321,000 reported as 90 days or
more past due. Of these 28 loans, 27 represent residential mortgage loans secured by New Jersey
properties while one loan is secured by a residential property located in Alabama. The loans were
purchased from nationwide mortgage loan originators and continue to be serviced by those organizations.
In accordance with our agreements, the servicers advance 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 $2,433,000 for the identified impairment attributable to 22 of these 28
loans at June 30, 2010.
During the years ended June 30, 2010, 2009 and 2008, gross interest income of $629,000,
$591,000 and $105,000, 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 $233,000,
$134,000 and $47,000 was included in income for the years ended June 30, 2010, 2009 and 2008,
respectively.
16
In addition to the non-performing assets included in the table above, the Bank had two loans with
combined outstanding balances totaling $945,000 reported as troubled debt restructurings at June 30,
2010. No loans were reported as troubled debt restructurings at June 30, 2009, 2008, 2007 or 2006.
During the year ended June 30, 2010, gross interest income of $63,000 would have been
recognized on loans reported as troubled debt restructurings under their original terms prior to
restructuring. Actual interest income of $46,000 was recognized on such loans for the year ended June
30, 2010 reflecting the interest received under the revised terms of those restructured loans.
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.
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. In compliance with the OTS guidelines, management maintains an
internal loan review program, whereby certain loans exhibiting adverse credit quality characteristics 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.
Management evaluates loans classified as substandard or doubtful for impairment in accordance with
applicable accounting requirements. Management classifies the impaired portion of a loan as “Loss”
through which a specific valuation allowance equal to 100% of the impairment is established.
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
17
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 directly against
the allowance for loan loss or a specific valuation allowance equal to 100% of the loss is established as
noted above.
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.
The following table discloses our designation of certain loans as special mention or adversely
classified during each of the five years presented. See Page 32 for a discussion on classified securities.
2010
2009
At June 30,
2008
(In Thousands)
2007
2006
Special Mention
Substandard
Doubtful
Loss
$ 10,353
18,697
—
—
$
3,506
14,891
817
—
$
—
749
1,871
—
$
$
736
1,470
1,881
—
236
1,448
2,001
—
Total
$ 29,050
$
19,214
$
2,620
$
4,087
$
3,685
The balance of “Special Mention” loans at June 30, 2010 included a total of 19 loans whose entire
outstanding balances were classified in that manner. The balance of “Substandard” loans included a total
of 52 loans at June 30, 2010. Of these “Substandard” loans, the entire balances of 29 loans totaling
$8,915,000 were classified in that manner. The remaining 23 loans had total outstanding balances of
$12,434,000 of which $9,782,000 was classified as “Substandard” with the remaining $2,652,000
classified as “Loss”.
In addition to the 23 “Substandard” loans with portions of their balances classified as “Loss”, the
entire balances of six additional loans totaling $1,663,000 were fully classified as “Loss”. In total, the
outstanding balance of loans, or portions thereof, classified as “Loss” totaled $4,315,000 at June 30, 2010.
As seen on Page 25, 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
18
any applicable specific valuation allowances resulting in the zero net balance for assets classified as
“Loss”.
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 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 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 for estimated losses on homogenous groups of loans sharing similar
risk characteristics. The following narrative describes the specific manner in which the Company
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. 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 which addresses loans not otherwise reviewed individually for impairment. Such loans generally
19
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 through the second tier of the loss measurement process 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 six primary categories:
residential mortgage loans, multi-family mortgage loans, nonresidential mortgage loans, construction
loans, commercial business loans and consumer loans. Within these broad categories, the Company
defines certain segments. For example, the residential mortgage loan category comprises four primary
segments including one-to-four family originated mortgage loans, one-to-four family purchased loans,
home equity loans and home equity lines of credit. Commercial real estate loans, comprising the multi-
family and nonresidential mortgage loan categories are each grouped into TICIC participations and other
(non-TICIC) loans. Construction loans segments also differentiate between TICIC participations and
other (non-TICIC) loans while also grouping loans by underlying property types such as one-to-four
family, multi-family and nonresidential construction loans. Commercial business loans are generally
grouped by collateral type while consumer loans are broken into segments based on both collateral type
and/or purpose.
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 currently utilizes a two-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. During earlier fiscal years, the Company had generally utilized a five-year “look-back”
period to determine the average charge-off history used in the calculation of historical loss factors. The
Company reduced that “look-back” period to two years during fiscal 2010 to better reflect the level of
actual losses incurred during the current credit cycle in the calculation of its historical loss factors. 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 through the first and second tiers of
the loss measurement processes 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
20
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 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. 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. 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.
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
21
loan loss and emphasized the requirement that insured institutions adhere to the applicable accounting
standards 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
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.
22
The following table sets forth information with respect to activity in the allowance for loan losses
for the periods indicated.
2010
For the Years Ended June 30,
2008
2009
2007
2006
Allowance balance (at beginning of period)
Provision for loan losses
Charge-offs:
One-to-four family mortgage
Home equity loan
Commercial mortgage
Commercial business
Other
Total charge-offs
Recoveries:
One-to-four family mortgage
Commercial mortgage
Commercial business
Total recoveries
Net (charge-offs) recoveries
(Dollars in Thousands)
$
$
6,434
2,616
$
6,104
317
$
6,049
94
5,451 $
571
5,416
72
202
16
322
—
1
541
10
42
—
52
(489)
2
—
—
—
3
5
—
—
18
18
13
30
—
—
—
9
39
—
—
—
—
(39)
—
—
—
—
—
—
—
—
27
27
27
—
—
—
30
12
42
—
—
5
5
(37)
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
8,561
$
$ 1,013,149
$ 1,030,287
$
$
$
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
0.84%
0.62%
0.59%
0.70%
0.77%
0.05%
39.70%
0.00%
48.92%
0.00%
388.05%
0.00%
406.25%
0.01%
578.66%
23
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.
2010
2009
At June 30,
2008
2007
2006
Percent of
Loans to
Total Loans
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
Amount
Amount
Amount
Amount
(Dollars in Thousands)
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
2
4
$
4,302
65.52% $
3,254
65.97% $
2,979
66.99% $
1,854
64.66% $
1,582
65.80%
3,315
108
20.04
1.42
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
313
10.03
510
10.85
719
12.08
356
13.14
286
13.23
1.12
0.27
0.15
1.45
34
7
6
245
8,330
231
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
—
Total
$
8,561
100.00% $
6,434
100.00% $
6,104
100.00% $
6,049
100.00% $
5,451
100.00%
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.
2010
2009
At June 30,
2008
2007
2006
(Dollars in Thousands)
$ 2,433
$
150
$ —
$ —
$ —
Specific valuation allowance:
Real estate mortgage:
One-to-four family
Multi-family and commercial (TICIC
Participations)
Multi-family and commercial (Non-TICIC)
Commercial business
Construction
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
Total (Factors based)
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)
1,551
220
5
106
4,315
1,046
232
2
—
1,430
1,160
—
3
—
1,163
199
30
33
1,784
1,443
103
305
34
8
139
3,816
4,015
—
—
—
—
—
—
—
—
—
3,098
901
71
510
55
8
100
4,743
4,773
—
—
—
—
—
—
—
—
—
2,972
679
41
719
67
23
112
4,613
4,646
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,854
1,582
2,014
1,588
27
356
46
34
130
6,049
2,105
1,028
34
286
39
27
350
5,451
—
Unallocated general valuation allowance
231
231
295
—
Total allowance for loan losses
$ 8,561
$ 6,434
$ 6,104
$ 6,049
$ 5,451
25
As reported in the tables above, the balance of the allowance for loan losses increased by
approximately $2.1 million to $8.6 million at June 30, 2010 from $6.4 million at June 30, 2009. The
increase resulted from additional provisions of $2.6 million combined with net charge offs of $489,000
during fiscal 2010. The increase reflects net additions to specific valuation allowances of approximately
$2.9 million relating to impaired loans partially offset by net reductions of general valuation allowances,
including unallocated amounts, of approximately $758,000 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 which declined during the year.
With regard to the reported net additions to specific valuation allowances at June 30, 2010, the
Company reported a total of 39 impaired loans with a total outstanding balance of $20.5 million
compared to a total of 19 impaired loans with a total outstanding balance of $11.1 million at June 30,
2009. As of June 30, 2010, the portion of the total allowance for loan losses specifically attributable to
impaired loans totaled $4.3 million representing the specific valuation allowances on 29 impaired loans
with a total outstanding balance of $14.1 million. The remaining 10 impaired loans with a total
outstanding balance of $6.4 million did not require specific impairment allowances at June 30, 2010. By
comparison, as of June 30, 2009, the portion of the total allowance for loan losses specifically attributable
to impaired loans totaled approximately $1.4 million representing specific valuation allowances
attributable to 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. The increases in specific valuation allowances reported in fiscal 2010
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,
decreased $758,000 from $5.0 million at June 30, 2009 to $4.2 million at June 30, 2010. The reported net
change in general valuation allowances during fiscal 2010 was 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.
With regard to historical loss factors, the Company’s loan portfolio experienced a net annual
charge-off rate of 5 basis points during fiscal 2010 while such losses were limited to one basis point or
less during fiscal 2006-2009. 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, 2010 and June
loss factors.
30, 2009, $199,000 and $30,000, respectively, were attributable
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. In particular, the Company
has established specific valuation allowances of approximately $4.3 million at June 30, 2010 that
represent identified impairments on nonperforming loans which are ultimately expected to result in
additional charge offs in future periods as such loans work through the resolution process.
to historical
At June 30, 2010 and June 30, 2009, the portion of the Company’s general valuation allowances
attributable to environmental factors totaled $3.8 million and $4.7 million, respectively. The net decrease
in this portion of the general valuation allowance reflects the level of environmental loss factors applied
to the Company’s “non-impaired” loan portfolio whose outstanding balances declined during the year.
Specifically, loans receivable, excluding the allowance for loan loss, decreased $32.1 million from $1.05
billion at June 30, 2009 to $1.01 billion at June 30, 2010. Along with this decline, impaired loans
increased $9.4 million from $11.1 million at June 30, 2009 to $20.5 million at June 30, 2010. Therefore,
26
the net decline in the “non-impaired” loan portfolio totaled approximately $41.5 million for the year
ended June 30, 2010. Additionally, management’s review and update of the historical and environmental
loss factors during fiscal 2010 also resulted in modifications to the Company’s environmental factors
from June 30, 2009 to June 30, 2010. The result of such modifications increased the environmental loss
factors applied to the Company’s riskier assets while reducing those factors applicable to those loans that
are generally characterized by less credit risk. The net result of these changes, in conjunction with the
overall declines in the outstanding balance of the “non-impaired” loan portfolio, resulted in an overall
reduction in the level of general valuation allowances attributable to environmental factors during the
year.
Finally, the general valuation allowances included a balance of the unallocated allowance totaling
$231,000 at both June 30, 2010 and June 30, 2009. 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 two years ended
June 30, 2006 and June 30, 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 two 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 two years ended
June 30, 2006 and June 30, 2007 based upon their adverse classification during those years.
27
Loan loss provisions were minimal during the fiscal year ended June 30, 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, 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.
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
28
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,
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 loss experience throughout the past twenty years has generally
reflected a period of unprecedented and sustained economic expansion that continued through fiscal 2007.
The strong economic and real estate market conditions during that time resulted in minimal loan charge-
offs through the current year ended June 30, 2010. 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, 2010 as necessary or useful. Notwithstanding the Company’s low historical
charge-off rates, however, economic and market conditions deteriorated significantly from fiscal 2008
through fiscal 2010. 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.
29
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, 2010, our securities portfolio totaled $989.7 million and
comprised 42.3% of our total assets. By comparison, at June 30, 2009, our securities portfolio totaled
$716.1 million and comprised 33.7% of our total assets.
In the recent years preceding fiscal 2010, we had increased the balance of our loan portfolio
relative to the size of our securities portfolio in order to improve earnings as contemplated in our strategic
business plan. However, that trend reversed during fiscal 2010 during which the balance of the securities
portfolio grew while aggregate loan balances declined. The increase in the securities portfolio reflected
the reinvestment of excess liquidity from deposit growth coupled with additional cash flows attributable
to net declines in the loan portfolio as reviewed earlier. Notwithstanding the growth in securities during
fiscal 2010, our strategic business plan continues to call for shifting the mix of our earning assets toward
greater balances of loans and lesser balances of investment securities over the longer term.
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, 2010, mortgage-backed securities represented approximately 71.3% of our total
investment in securities, compared to 96.1% as of June 30, 2009. 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, 2010 and
2009. 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
30
flows to its component tranches based upon a predetermined structure as payments are received from the
underlying mortgagors.
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 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. Effective April 1, 2009, the Company adopted updated
guidance relating to the accounting for impairment of investment securities. 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 fourth quarter
of fiscal 2009.
Through the first three quarters of fiscal 2010, the Company recorded additional credit-related
and noncredit-related other-than-temporary impairments relating to these securities totaling $206,000 and
$240,000, respectively. During the fourth quarter ended June 30, 2010, the Company sold the remaining
outstanding balance of its non-investment grade, non-agency collateralized mortgage obligations, most of
which had been identified as other-than-temporarily impaired (“OTTI”) triggering the recognition of the
impairment charges noted above. At June 30, 2010, the Company’s remaining portfolio of non-agency
collateralized mortgage obligations totaled 20 securities with an aggregate outstanding balance of
approximately $310,000. These securities, all of which were acquired through the AMF Fund redemption
and remain in the held-to-maturity portfolio, were not other-than-temporarily impaired and were rated as
investment grade as of that date.
Current accounting standards require 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. These standards allow 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
31
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, 2010, the $1.7 million remaining balance of all securities originally acquired through the AMF Fund
redemption-in-kind, including both agency and non-agency mortgage-backed securities, were classified as
held to maturity. Additionally, the Company has classified $255.0 million of its agency debentures 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 at June 30, 2010.
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, 2010. 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. We do not purchase securities that
are rated below investment grade.
During the years ended June 30, 2010, 2009 and 2008, proceeds from sales of securities available
for sale totaled $34.2 million, $7.3 million and $48.5 million which resulted in gross gains of $1,545,000,
$-0- and $57,000 and gross losses of $-0-, $415,000 and $57,000, respectively. Proceeds from sale of
securities held to maturity during the year ended June 30, 2010 totaled $1.1 million with gross gains and
gross losses of $-0- and $1,036,000, respectively. There were no sales of held to maturity securities
during the years ended June 30, 2009 or June 30, 2008.
As of June 30, 2010, two securities with a combined amortized cost $4.9 million were classified
as “Substandard” for regulatory reporting purposes. The securities represent two single issuer, trust
preferred securities whose credit-ratings had fallen below investment grade by one of two rating agencies
monitored by the Company.
32
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
Mortgage-backed securities include mortgage pass-through securities and collateralized mortgage
obligations.
Securities Available for Sale:
U.S. agency obligations
Obligations of states and political subdivisions
Mutual funds (1)
Trust preferred securities
Total securities available for sale
Securities Held to Maturity:
U.S. agency obligations
Total securities held to maturity
Mortgage-Backed Securities Available for Sale:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage-backed securities
At June 30,
2010
2009
2008
2007
2006
(In Thousands)
$
3,942 $
18,955
—
6,600
29,497
4,557 $
5,513 $
6,864 $
18,340
—
5,130
28,027
17,757
7,545
7,368
38,183
65,333
7,795
8,877
88,869
8,786
195,661
7,424
10,922
222,793
255,000
255,000
—
—
—
—
—
—
—
—
15,628
273,704
414,123
18,431
289,468
375,886
21,930
317,448
386,645
29,540
252,497
361,742
42,646
256,036
371,647
available for sale
703,455
683,785
726,023
643,779
670,329
Mortgage-Backed Securities Held to Maturity:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency
Total mortgage-backed securities
held to maturity
267
1,123
310
373
1,439
2,509
1,700
4,321
—
—
—
—
—
—
—
—
—
—
—
—
Total
(1)
As of June 30, 2008, 2007 and 2006, our mutual fund investment consisted of shares issued by the AMF Fund.
$ 989,652 $ 716,133 $
764,206 $
732,648 $
893,122
33
The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities
portfolio at June 30, 2010. 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, 2010, securities with a carrying value of $236.6 million are callable within one year.
One Year or Less
Carrying
Value
Weighted
Average
Yield
One to Five Years
Weighted
Average
Yield
Carrying
Value
Five to Ten Years
Weighted
Average
Yield
Carrying
Value
More Than Ten Years
Weighted
Average
Yield
Carrying
Value
Total Securities
Carrying
Value
Weighted
Average
Yield
Market
Value
(Dollars in Thousands)
At June 30, 2010
Trust preferred securities
U.S. agency obligations
Obligations of states and political
$
subdivisions
3
4
Mortgage-backed securities:
Pass-through:
Government National
Mortgage Association
Federal Home Loan
Mortgage Corporation
Federal National
—
—
—
4
9
—% $
—%
—
200,000
—% $
1.82%
—
40,332
—% $
3.98%
6,600
18,610
2.32% $
4.15%
6,600
258,942
2.32% $
2.32%
6,600
260,856
—%
5,490
3.31%
13,250
3.54%
215
3.60%
18,955
3.47%
18,955
15.81%
7.70%
119
288
12.01%
529
9.32%
14,976
5.42%
15,628
5.61%
15,628
3.56%
35,413
4.69%
238,162
4.01%
273,872
4.10%
273,877
Mortgage Association
4,763
6.07%
4,857
6.21%
46,366
4.72%
358,493
4.31%
414,479
4.40%
414,487
Collateralized mortgage
obligations:
Federal Home Loan
Mortgage Corporation
Federal National
Mortgage Association
Non-agency
—
—
—
—%
—%
—%
—
—
—
—%
—%
—%
—
—
—
—%
—%
—%
99
767
310
9.48%
10.02%
4.45%
99
767
310
9.48%
10.02%
4.45%
111
837
269
Total
$
4,776
6.08% $ 210,754
1.97% $ 135,890
4.39% $ 638,232
4.20% $ 989,652
3.76% $
991,620
Sources of Funds
General. Deposits are our primary 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 non-mortgage-backed 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 from the FHLB of New York are also used to
supplement the funding for loans and investments.
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, such as interest
rate earned, applicability of certain fees and service charges and funds accessibility, will vary based upon
several factors including, but not limited to, minimum balance, term to maturity, and transaction
frequency and form requirements.
Deposits are obtained primarily from within New Jersey. Traditional methods of advertising are
used to attract new customers and deposits, including radio, print media, outdoor advertising, 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. One of our
key retail products in recent years has been “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. During the latter half of fiscal 2010, we also began to offer “High Yield
Checking” which is primarily designed to attract core deposits in the form of customers’ primary
checking accounts through interest rate and fee reimbursement incentives to qualifying customers. The
comparatively higher interest expense associated with the “High Yield Checking” product in relation to
our other checking products is expected to be partially offset by an associated increase in transaction fee
income.
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. During the term of our 17-month and 29-month
certificates of deposit, we offer customers a “one-time option” to “step up” the rate paid from the original
rate set on the certificate to the current rate being offered by the Bank for 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.
A large percentage of our deposits are in certificates of deposit, which represented 60.3% and
63.7% of total deposits at June 30, 2010 and June 30, 2009, respectively. Our liquidity could be reduced
if a significant amount of certificates of deposit maturing within a short period were not renewed. At
35
June 30, 2010 and June 30, 2009, certificates of deposit maturing within one year were $716.3 million
and $740.4 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, 2010, $333.4 million or
34.0% of our certificates of deposit were certificates of $100,000 or more compared to $275.9 million or
30.5% at June 30, 2009. The general level of market interest rates and money market conditions
significantly influence deposit inflows and outflows. The effects of these factors are particularly
pronounced on deposit accounts with larger balances. In particular, certificates of deposit with balances
of $100,000 or greater are traditionally viewed as being a more volatile source of funding than
comparatively lower balance certificates of deposit or non-maturity transaction accounts. In order to
retain certificates of deposit with balances or $100,000 or more, we may have to pay a premium rate,
resulting in an increase in our cost of funds. In a rising rate environment, we may be unwilling or unable
to pay a competitive rate. To the extent that such deposits do not remain with us, they may need to be
replaced with borrowings, which could increase our cost of funds and negatively impact our interest rate
spread and our financial condition.
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.
2010
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
For the Years Ended June 30,
2009
2008
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
Percent of
Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
(Dollars in Thousands)
Non-interest-bearing demand $
Interest-bearing demand
Savings and club
Certificates of deposit
55,436
198,623
315,715
935,684
3.68%
13.19
20.97
62.16
0.00% $
1.17
1.03
2.41
51,132
156,883
293,483
873,257
3.72%
11.41
21.35
63.52
0.00% $
1.34
1.05
3.50
59,169
149,871
303,818
830,726
4.40%
11.16
22.61
61.83
0.00%
1.81
1.08
4.49
Total deposits
$
1,505,458
100.00%
1.87% $ 1,374,755
100.00%
2.60% $ 1,343,584
100.00%
3.22%
The following table sets forth certificates of deposit classified by interest rate as of the dates
indicated.
Interest Rate
0.00-0.99%
1.00-1.99%
2.00-2.99%
3.00-3.99%
4.00-4.99%
5.00-5.99%
2010
At June 30,
2009
(In Thousands)
2008
$
$
9,396
648,259
206,791
67,991
40,482
6,613
$
3,122
187,827
182,588
417,596
106,994
6,616
-
2,235
91,937
298,819
473,649
6,969
Total
$
979,532
$
904,743
$
873,609
36
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
At June 30, 2010
(In Thousands)
$
95,275
58,154
77,862
102,127
$
333,418
The following table sets forth the amount and maturities of certificates of deposit at June 30,
2010.
0.00-0.99%
1.00-1.99%
2.00-2.99%
3.00-3.99%
4.00-4.99%
5.00-5.99%
Amount Due
Within
1 year
1-2 years
2-3 years 3-4 years
(In Thousands)
4-5 years
After 5
years
Total
$
9,396 $
— $
— $
566,892
69,359
54,631
16,011
—
75,909
80,848
5,628
8,981
1,671
5,458
39,411
3,174
15,486
4,942
— $
—
2,016
3,514
—
—
— $ — $
—
15,157
1,044
3
—
—
—
—
1
—
9,396
648,259
206,791
67,991
40,482
6,613
Total
$
716,289 $
173,037 $
68,471 $
5,530 $
16,204 $
1 $
979,532
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 our FHLB capital stock and certain investment
securities we choose to utilize as collateral for such borrowings. 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. With no overnight advances drawn at
June 30, 2010, our available overnight lines of credit at the FHLB totaled $200.0 million as of that date.
37
Long term advances generally include term advances with original maturities of greater than one
year. At June 30, 2010, our outstanding balance of long-term FHLB advances totaled $210.0 million
with a weighted average interest rate of 3.87%. Our long term advances mature as follows:
Maturing in Years Ending June 30,
2011
2018
Total
(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, 2010, it
held assets totaling $8,081 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, 2010, it held assets totaling $311,313.
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, 2010, 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, Kearny
Federal Savings Bank.
Personnel
As of June 30, 2010, we had 274 full-time employees and 11 part-time employees equating to a
total of 280 full time equivalent (“FTE”) employees. By comparison, at June 30, 2009, we had 263 full-
time employees and 21 part-time employees equating to a total of 274 FTEs. The net increase in FTE’s
year-over-year was primarily attributable to the Bank’s de novo branch opened during the first quarter of
fiscal 2010 couple with staffing additions in the commercial lending area. Our employees are not
represented by a collective bargaining unit and we consider our relationship with our employees to be
good.
38
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.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) was signed into law. The Dodd-Frank Act is intended to effect a fundamental restructuring
of federal banking regulation. Among other things, the Dodd-Frank Act creates a new Financial Stability
Oversight Council to identify systemic risks in the financial system and gives federal regulators new
authority to take control of and liquidate financial firms. The Dodd-Frank Act eliminates our current
primary federal regulator and subjects savings and loan holding companies to greater regulation. The
Dodd-Frank Act additionally creates a new independent federal regulator to administer federal consumer
protection laws. The Dodd-Frank Act is expected to have a significant impact on our business operations
as its provisions take effect. Among the provisions that are likely to affect us are the following:
Elimination of OTS. The Dodd-Frank Act calls for the elimination of the OTS, which is our
primary federal regulator and the primary federal regulator of the Bank within 12 to 18 months of
enactment. At that time, the primary federal regulator of Kearny Financial Corp. will become the Board
of Governors of the Federal Reserve System (the “Federal Reserve”), and the primary federal regulator
for the Bank will become the Office of the Comptroller of the Currency (“OCC”) if we retain our federal
savings bank charter. The Federal Reserve and OCC will generally have rulemaking, examination,
supervision and oversight authority over our operations and the FDIC will retain secondary authority over
the Bank. Prior to the elimination of the OTS, the Federal Reserve and OCC will provide a list of the
current regulations issued by the OTS that each will continue to apply. OTS guidance, orders,
interpretations, policies and similar items under which we and other savings and loan holding companies
and federal savings associations operate will continue to remain in effect until they are superseded by new
guidance and policies from the OCC or Federal Reserve.
New Limits on MHC Dividend Waivers. Effective as of the date of transfer of OTS’s duties, the
Dodd-Frank Act will make significant changes in the law governing waivers of dividends by mutual
holding companies. After that date, a mutual holding company may only waive the receipt of a dividend
from a subsidiary if no insider of the mutual holding company or their associates or tax-qualified or non-
tax-qualified employee stock benefit plan holds any shares of the class of stock to which the waiver
39
would apply, the mutual holding company gives written notice of its intent to waive the dividend at least
30 days prior to the proposed payment date and the Federal Reserve does not object. The Federal Reserve
will not object to a dividend waiver if it determines that the waiver would not be detrimental to the safe
and sound operation of the savings association, the mutual holding company’s board determines that the
waiver is consistent with its fiduciary duties and the mutual holding company has waived dividends prior
to December 1, 2009. In addition, waived dividends must be taken into account in determining the
appropriate exchange ratio for a second-step conversion of a mutual holding company unless the mutual
holding company has waived dividends prior to December 1, 2009.
Holding Company Capital Requirements. Effective as of the transfer date, the Federal Reserve
will be authorized to establish capital requirements for savings and loan holding companies. These
capital requirements must be countercyclical so that the required amount of capital increases in times of
economic expansion and decreases in times of economic contraction, consistent with safety and
soundness. Savings and loan holding companies will also be required to serve as a source of financial
strength for their depository institution subsidiaries. Within five years after enactment, the Dodd-Frank
Act requires the Federal Reserve to apply consolidated capital requirements that are no less stringent than
those currently applied to depository institutions to depository institution holding companies that were not
supervised by the Federal Reserve as of May 19, 2009. Under these standards, trust preferred securities
will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by a bank or
savings and loan holding company with less than $15 billion in assets.
Federal Preemption. A major benefit of the federal thrift charter has been the strong preemptive
effect of the Home Owners’ Loan Act (“HOLA”), under which we are chartered. Historically, the courts
have interpreted the HOLA to “occupy the field” with respect to the operations of federal thrifts, leaving
no room for conflicting state regulation. The Dodd-Frank Act, however, amends the HOLA to specifically
provide that it does not occupy the field in any area of state law. Henceforth, any preemption
determination must be made in accordance with the standards applicable to national banks, which have
themselves been scaled back to require case-by-case determinations of whether state consumer protection
laws discriminate against national banks or interfere with the exercise of their powers before these laws
may be pre-empted.
Deposit Insurance. The Dodd-Frank Act permanently increases the maximum deposit insurance
amount for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to
January 1, 2009, and extends unlimited deposit insurance to non-interest bearing transaction accounts
through December 31, 2013. The Dodd-Frank Act also broadens the base for FDIC insurance
assessments. Assessments will now be based on the average consolidated total assets less tangible equity
capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of
the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the
requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds
certain thresholds. The Dodd-Frank Act eliminates the federal statutory prohibition against the payment
of interest on business checking accounts.
Qualified Thrift Lender Test. Under the Dodd-Frank Act, a savings association that fails the
qualified thrift lender test will be prohibited from paying dividends, except for dividends that: (i) would
be permissible for a national bank; (ii) are necessary to meet obligations of a company that controls the
savings association; and (iii) are specifically approved by the OCC and the Federal Reserve. In addition,
a savings association that fails the qualified thrift lender test will be deemed to have violated Section 5 of
the Home Owners’ Loan Act and may become subject to enforcement actions thereunder.
40
Corporate Governance. The Dodd-Frank Act will require publicly traded companies to give
stockholders a non-binding vote on executive compensation at their first annual meeting taking place six
months after the date of enactment and at least every three years thereafter and on so-called “golden
parachute” payments in connection with approvals of mergers and acquisitions. The new legislation also
authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials. Additionally, the Dodd-Frank Act directs the federal banking
regulators to promulgate rules prohibiting excessive compensation paid to executives of depository
institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the
company is publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker
discretionary voting on elections of directors and executive compensation matters
Transactions with Affiliates and Insiders. Effective one year from the date of enactment, the
Dodd-Frank Act expands the definition of affiliate for purposes of quantitative and qualitative limitations
of Section 23A of the Federal Reserve Act to include mutual funds advised by a depository institution or
its affiliates. The Dodd-Frank Act will apply Section 23A and Section 22(h) of the Federal Reserve Act
(governing transactions with insiders) to derivative transactions, repurchase agreements and securities
lending and borrowing transaction that create credit exposure to an affiliate or an insider. Any such
transactions with affiliates must be fully secured. The current exemption from Section 23A for
transactions with financial subsidiaries will be eliminated. The Dodd-Frank Act will additionally prohibit
an insured depository institution from purchasing an asset from or selling an asset to an insider unless the
transaction is on market terms and, if representing more than 10% of capital, is approved in advance by
the disinterested directors.
Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent
federal agency called the Consumer Financial Protection Bureau (“CFPB”), which is granted broad
rulemaking, supervisory and enforcement powers under various federal consumer financial protection
laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy
provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB will have examination
and primary enforcement authority with respect to depository institutions with $10 billion or more in
assets. Smaller institutions will be subject to rules promulgated by the CFPB but will continue to be
examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB
will have authority to prevent unfair, deceptive or abusive practices in connection with the offering of
consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum
standards for the origination of residential mortgages including a determination of the borrower’s ability
to repay. In addition, the Dodd-Frank Act will allow borrowers to raise certain defenses to foreclosure if
they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act
permits states to adopt consumer protection laws and standards that are more stringent than those adopted
at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance
with both the state and federal laws and regulations. Federal preemption of state consumer protection law
requirements, traditionally an attribute of the federal savings association charter, has also been modified
by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the OCC and
eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised
federal preemption standard, the operations of the Bank could become subject to additional compliance
burdens in the states in which it operates.
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
41
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.
Federal Deposit Insurance. The Bank’s deposits are insured to applicable limits by the FDIC.
The maximum deposit insurance amount has been permanently increased from $100,000 to $250,000
under the Dodd-Frank Wall Street Reform and Consumer Protection Act. On October 13, 2008, the FDIC
established a Temporary Liquidity Guarantee Program under which the FDIC fully guarantees all non-
interest-bearing transaction accounts until December 31, 2009 (the “Transaction Account Guarantee
Program”) and all senior unsecured debt of insured depository institutions or their qualified holding
companies issued between October 14, 2008 and June 30, 2009, with the FDIC’s guarantee expiring by
June 30, 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 were 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. In May, 2009, the Debt Guarantee Program issue end date and the
guarantee expiration date were both extended, to October 31, 2009 and December 31, 2012, respectively.
Participating holding companies that have not issued FDIC-guaranteed debt prior to April 1, 2009 had to
apply to remain in the Debt Guarantee Program. Participating institutions will be subject to surcharges
for debt issued after that date. Effective October 1, 2009, the Transaction Account Guarantee Program
has been extended until December 31, 2010, with an assessment of between 15 and 25 basis points after
January 1, 2010. The Company and the Bank did not opt out of the Debt Guarantee Program. The Bank
did not opt out of the original Transaction Account Guarantee Program, but did opt out of its extension.
The Dodd-Frank Act has extended unlimited deposit insurance to non-interest-bearing transaction
accounts until December 31, 2013.
The FDIC has 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, until 2009, were 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
were assessed at annual rates of 10, 28 and 43 basis points, respectively.
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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. Due to recent bank failures, the FDIC determined that the reserve ratio was
1.01% as of June 30, 2008. In accordance with the Reform Act, as amended by the Helping Families
Save Their Home Act of 2009, the FDIC has established and implemented a plan to restore the reserve
ratio to 1.15% within eight years. 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 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 adjusted assets. The assessment rate may 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 Categories II, III and IV whose ratio of brokered deposits to deposits exceeds 10%.
Reciprocal deposit arrangements like CDARS® were 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 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 reserved the right to impose additional special
assessments. In November, 2009, instead of imposing additional special assessments, the FDIC amended
the assessment regulations to require all insured depository institutions to prepay their estimated risk-
based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012 on December 30,
2009. For purposes of estimating the future assessments, each institution’s base assessment rate in effect
on September 30, 2009 was used, assuming a 5% annual growth rate in the assessment base and a 3 basis
point increase in the assessment rate in 2011 and 2012. The prepaid assessment will be applied against
actual quarterly assessments until exhausted. Any funds remaining after June 30, 2013 will be returned to
the institution. If the prepayment would impair an institution’s liquidity or otherwise create significant
hardship, it may apply for an exemption. Requiring this prepaid assessment does not preclude the FDIC
from changing assessment rates or from further revising the risk-based assessment system.
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 .01% of insured deposits on an annualized
basis in fiscal year 2010. 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.
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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
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 generally 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.
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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.
During the fiscal year ended June 30, 2008, the Bank applied for and received the approval from
the OTS to distribute $19,000,000 to the Company. A cash dividend in that amount was paid by the Bank
to the Company in November, 2007. During the fiscal year ended June 30, 2010, a second application for
a capital distribution from the Bank to the Company was approved by the OTS in the amount of
$6,000,000. A cash dividend in that amount was paid by the Bank to the Company in December, 2009.
During the more recent approval process, the OTS noted that future dividend requests will require closer
scrutiny by the OTS due to the deteriorated economic conditions and level of uncertainty that characterize
the current marketplace coupled with the Bank’s compressed level of earnings in recent years.
Qualified Thrift Lender Test. Federal savings institutions must meet a qualified thrift lender test
or they become subject to the business activity restrictions and branching rules applicable to national
banks. To qualify as a qualified thrift lender, a savings institution must either (i) be deemed a “domestic
building and loan association” under the Internal Revenue Code by maintaining at least 60% of its total
assets in specified types of assets, including cash, certain government securities, loans secured by and
other assets related to residential real property, educational loans and investments in premises of the
institution or (ii) satisfy the statutory qualified thrift lender test set forth in the Home Owners’ Loan Act
by maintaining at least 65% of its portfolio assets in qualified thrift investments (defined to include
residential mortgages and related equity investments, certain mortgage-related securities, small business
loans, student loans and credit card loans). For purposes of the statutory qualified thrift lender test,
portfolio assets are defined as total assets minus goodwill and other intangible assets, the value of
property used by the institution in conducting its business and specified liquid assets up to 20% of total
assets. A savings institution must maintain its status as a qualified thrift lender on a monthly basis in at
least nine out of every twelve months.
A savings bank that fails the qualified thrift lender test and does not convert to a bank charter
generally will be prohibited from: (1) engaging in any new activity not permissible for a national bank;
(2) paying dividends not permissible under national bank regulations; and (3) establishing any new branch
office in a location not permissible for a national bank in the institution’s home state. In addition, if the
institution does 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
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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.
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.
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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
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.
On May 25, 2010, the Company announced its proposed acquisition of Central Jersey Bancorp
(NASDAQ: CJBK) based in Monmouth County, NJ. The transaction is subject to the approval of both
companies’ primary regulators as well as the shareholders of Central Jersey Bancorp. Merger
applications have been filed with each regulator as of the issuance date of this report and are under
review. Subject to the requisite approvals, the transaction is expected to close during the Company’s
second fiscal quarter ending December 31, 2010.
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, 2010, the MHC waived its right, upon non-objection from the
OTS, to receive cash dividends of $9.9 million declared during the year.
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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.
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.
We may not realize the anticipated benefits from our proposed acquisition of Central Jersey
Bancorp.
On May 25, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with Central Jersey Bancorp (“Central Jersey”) and its wholly owned subsidiary, Central Jersey Bank,
National Association (“Central Jersey Bank”), pursuant to which Central Jersey will merge with a to-be-
formed subsidiary of the Company and immediately thereafter, Central Jersey Bank will merge with and
into the Bank. The acquisition of Central Jersey is anticipated to strengthen our market position in
Monmouth and Ocean Counties and increase our profitability by increasing our commercial loan portfolio
The success of this transaction, however, will depend on, among other things, our ability to realize
anticipated cost savings and to combine the businesses of the Bank and Central Jersey Bank in a manner
that permits growth opportunities and does not materially disrupt the existing customer relationships of
Central Jersey Bank nor result in decreased revenues resulting from any loss of customers. If we are not
able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized
fully or at all or may take longer to realize than expected.
Kearny Financial Corp. and Central Jersey have operated and, until the completion of the
transactions, will continue to operate, independently. Certain Central Jersey employees may not be
employed by us after the transaction. In addition, Central Jersey employees that we wish to retain may
elect to terminate their employment as a result of the acquisition, which could delay or disrupt the
48
integration process. It is possible that the integration process could result in the disruption of Central
Jersey’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that
adversely affect our ability to maintain relationships with customers and employees or to achieve the
anticipated benefits of the acquisition.
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 throughout fiscal 2009 and 2010.
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 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 also recognized other-
than-temporary security impairments recorded through earnings and other comprehensive income
generally attributable to these same factors. 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 has generally been 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, 2010, the Company’s one-year gap position was +0.91%
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and at June 30, 2009 it was -5.17%. During the fiscal year it fluctuated from –8.46% at September 30,
2009 to -4.71% at December 31, 2009 to -4.76% at March 31, 2010. The improvement in the one-year
gap position resulted in part, from customers extending the maturities of their certificates of deposit
during fiscal 2010. Additionally, the expectation for higher mortgage prepayment speeds associated with
the continued reduction of market interest rates has increased the forecasted level of incoming cash flows
from loans within the one year time horizon. Together, these factors have improved the “mismatch”
between the dollar amount of assets and liabilities that are re-pricing within a one year interval at June 30,
2010 from June 30, 2009.
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 interest-earning assets. Notwithstanding reduced yields on interest-earning
assets, the Company’s net interest rate spread and margin improved from 2.25% to 2.45% and 2.81% to
2.83%, respectively, year-over-year.
The improvements in the Company’s net interest income and the associated net interest spread
and margin are indicative of its overall level of liability sensitivity which has generally proven to be
beneficial to net interest income during fiscal 2010. However, the Company’s liability sensitivity may
adversely effect net income and earnings in the future when market interest rates ultimately increase from
their historical lows and the its cost of interest-bearing liabilities rises faster than its yield on interest-
earning assets.
As of June 30, 2010, $716.3 million or 73.1% of our certificates of deposit mature within one
year. During the year ending June 30, 2011, $200.0 million of FHLB advances are callable, but based on
the interest rate environment as of June 30, 2010 it appears unlikely that they will be called. With respect
to re-pricing assets, at June 30, 2010, the Company maintained balances of short term, liquid assets of
$181.4 million. During the year ending June 30, 2011, $21.1 million of loans will reach their contractual
maturity dates. The effect of subsequent interest rate changes will be reflected in the re-pricing of $106.0
million of loans maturing after June 30, 2011 and mortgage-backed securities and non-mortgage-backed
securities with floating or adjustable rates with amortized costs of $177.1 million.
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 collectability 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
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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 0.84% of total loans at June 30, 2010, significant
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 on
these non-agency securities of which $714,000 was recognized in earnings and $274,000 was recorded in
other comprehensive income. During the first three quarters of fiscal 2010, we recognized an additional
$446,000 of other-than temporary impairment charges relating to these same securities of which $206,000
was recognized through earnings while $240,000 was recorded through other comprehensive income. All
other-than-temporarily impaired securities were subsequently sold during the fourth quarter of fiscal
2010.
At June 30, 2010, we had investment securities with fair values of approximately $11.1 million of
which we had approximately $2.4 million in gross unrealized losses. All unrealized losses on investment
securities at June 30, 2010 represented temporary impairments of value. However, 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
51
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 continuing decreases 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, 2010, 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.
The Company utilized open market purchases of common stock to fund restricted stock awards;
however, the Company expects to fund stock options exercised through the issuance of shares from the
Company’s treasury account. 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, 74.5% at June 30,
2010 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
52
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.
Recently enacted financial reform legislation could substantially increase our compliance burden
and costs and necessitate changes in the conduct of our business.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”) was signed into law. The Dodd-Frank Act will have a broad impact on the financial services
industry, including significant regulatory and compliance changes. Many of the requirements called for in
the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations
over the course of several years. Given the uncertainty associated with the manner in which the provisions
of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations,
the full extent of the impact such requirements will have on our operations is unclear. The changes
resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes
to certain of our business practices, impose upon us more stringent capital, liquidity and leverage
requirements or otherwise adversely affect our business. In particular, the following provisions of the
Dodd-Frank Act, among others, are expected to impact our operations and activities, both currently and
prospectively:
Elimination of the OTS as our primary federal regulator, which may require us to adapt to a new
regulatory regime;
New requirements for waivers of dividends by Kearny MHC, which could affect our dividend
policies;
Weakening of federal preemption standards applicable to Kearny Federal Savings Bank, which
could expose us to state regulation;
Changes in methodologies for calculating deposit insurance premiums and increases in required
deposit insurance fund reserve levels, which could increase our deposit insurance expense;
Application of regulatory capital requirements to Kearny Financial Corp.; and
Imposition of comprehensive, new consumer protection requirements, which could substantially
increase our compliance burden and potentially expose us to new liabilities.
Further, we may be required to invest significant management attention and resources to evaluate and
make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-
Frank Act. Failure to comply with the new requirements may negatively impact our results of operations
and financial condition. While we cannot predict what effect any presently contemplated or future
53
changes in the laws or regulations or their interpretations would have on us, these changes could be
materially adverse to our investors.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
The Company and the Bank conduct business from their administrative headquarters at 120
Passaic Avenue in Fairfield, New Jersey and 27 branch offices located in Bergen, Essex, Hudson,
Middlesex, Morris, Ocean, Passaic and Union Counties, New Jersey. Seven of our offices are leased with
remaining terms between one and 18 years. At June 30, 2010, our net investment in property and
equipment totaled $35.0 million. The following table sets forth certain information relating to our
properties as of June 30, 2010. The net book values reported include our investment in land, building
and/or leasehold improvements by property location
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
Year
Opened
Net Book Value as of
June 30, 2010
(In Thousands)
Square
Footage
Owned/
Leased
2004
$11,307
53,000
Owned
1928
921
6,764
Owned
15
343
53
612
—
3,500
Leased
4,400
Owned
3,100
Owned
3,000
Owned
2,500
Leased
42
2,800
Leased
2,134
3,200
Owned
220
3,338
Owned
1973
1968
1969
1995
1996
2008
2005
1970
54
Office Location
270 Ryders Lane
Milltown, New Jersey
339 Main Road
Montville, New Jersey
119 Paris Avenue
Northvale, New Jersey
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
917 Route 23 South
Pompton Plains, 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, 2010
(In Thousands)
Square
Footage
Owned/
Leased
3,600
Leased
1,850
Leased
1,750
Owned
3,500
Owned
2,400
Owned
2,160
Owned
3,600
Owned
$3
—
278
121
951
765
181
1,557
2,400
Owned
790
1,600
Owned
1,624
1,984
Owned
309
2,400
Owned
1,320
6,480
Owned
654
95
124
136
3,500
Owned
2,000
Leased
3,000
Owned
2,400
Owned
1,622
9,500
Owned
2,481
6,300
Owned
1989
1996
1965
1952
2002
1973
1974
2009
1965
1974
1979
1991
1996
2008
1971
1975
1957
2002
55
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, 2010 that would be expected to have a material effect on operations or
income.
Item 4. [Removed and Reserved]
56
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.
High
Low
Dividends
Fiscal Year 2010
Quarter ended September 30, 2009
Quarter ended December 31, 2009
Quarter ended March 31, 2010
Quarter ended June 30, 2010
Fiscal Year 2009
Quarter ended September 30, 2008
Quarter ended December 31, 2008
Quarter ended March 31, 2009
Quarter ended June 30, 2009
$
$
$
$
$
$
$
$
11.74
10.47
10.56
10.77
13.95
12.86
12.80
12.22
$
$
$
$
$
$
$
$
10.37
9.54
9.50
8.42
10.78
10.69
7.80
10.28
$
$
$
$
$
$
$
$
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 3, 2009 there were 4,108 registered holders of record of the Company’s
common stock, plus approximately 2,702 beneficial (street name) owners.
(b)
Use of Proceeds. Not applicable.
57
(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, 2010.
Issuer Purchases of Equity Securities
Total
Number
of Shares
(or Units)
purchased
13,200
118,923
362,100
494,223
Average
Price Paid
Per Share
(or Unit)
$
$
10.39
10.15
9.07
9.37
Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs *
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet be
Purchased Under the
Plans or Programs
13,200
118,923
362,100
494,223
118,923
-
527,406
527,406
April 1 – April 30, 2010
May 1 – May 31, 2010
June 1 – June 30, 2010
Total
*
889,506 shares or 5% of shares outstanding.
On May 26, 2010, the Company announced the authorization of a fifth stock repurchase program for up to
Stock Performance Graph. Set forth on Page 59 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 June 30, 2005. 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.
58
150
125
100
75
50
e
u
l
a
V
x
e
d
n
I
25
06/30/05
Index
Total Return Performance
Kearny Financial Corp.
NASDAQ Composite
SNL Thrift $1B - $5B Index
SNL Thrift MHC Index
06/30/06
06/30/07
06/30/08
06/30/09
06/30/10
6/30/05
6/30/06
6/30/07
6/30/08
6/30/09
6/30/10
Kearny Financial Corp.
NASDAQ Composite
SNL Thrift $1 B - $5 B Index
SNL Thrift MHC Index
$100
100
100
100
$127
106
108
116
$118
127
105
133
$ 97
111
80
124
$104
89
66
112
$ 85
103
65
123
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.
59
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
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
2010
2009
At June 30,
2008
(In Thousands)
2007
2006
$ 2,339,813 $ 2,124,921 $ 2,083,039 $ 1,917,253 $ 1,991,773
703,613
1,039,413
1,021,686
1,005,152
860,493
703,455
683,785
726,023
643,779
670,329
1,700
29,497
255,000
181,422
82,263
1,623,562
210,000
485,926
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
Summary of Operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for 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
2010
For the Years Ended June 30,
2007
2008
2009
(In Thousands, Except Percentage and Per Share Amounts)
2006
$
93,108 $
36,321
56,787
2,616
97,908 $
44,200
53,708
317
97,367 $
50,528
46,839
94
95,561 $
50,468
45,093
571
89,323
38,645
50,678
72
54,171
53,391
46,745
44,522
50,606
2,395
2,648
2,708
2,434
2,302
509
(206)
45,094
11,775
4,963
6,812 $
(415)
(714)
43,922
10,988
4,597
6,391 $
—
(659)
40,939
7,855
1,951
5,904 $
55
—
44,856
2,155
221
1,934 $
1,023
—
42,046
11,885
2,277
9,608
$
$
$
0.10 $
0.10 $
0.09 $
0.09 $
0.08 $
0.08 $
0.03 $
0.03 $
0.13
0.13
Weighted average number of common
shares outstanding – basic
67,920
68,710
69,522
70,417
71,715
Weighted average number of common
shares outstanding – diluted
Cash dividends per share (1)
Dividend payout ratio (2)
67,920
68,710
69,522
70,417
$
0.20 $
53.7%
0.20 $
54.9%
0.20 $
62.5%
0.20 $
192.6%
60
71,715
0.19
49.3%
At or For the Years Ended June 30,
2008
2009
2007
2010
2006
Performance Ratios:
Return on average assets (net income
divided by average total assets)
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:
Average equity to average assets
Equity to assets at period end
Tangible equity to tangible
assets at period end
0.31%
0.31%
0.29%
0.10%
0.47%
1.42
2.45
2.83
1.35
2.25
2.81
1.26
1.81
2.54
0.41
1.70
2.43
1.94
2.10
2.67
120.88
124.16
126.49
126.82
127.82
75.81
79.53
83.74
94.27
77.86
2.04
2.11
2.04
2.23
2.05
2.13
0.93
0.05
0.84
1.26
0.62
0.00
0.62
0.15
0.08
0.00
0.59
0.17
0.08
0.00
0.70
0.13
0.05
0.01
0.77
39.70
48.92
388.05
406.25
578.66
21.66
20.77
22.73
22.43
23.41
22.63
23.56
24.13
24.16
23.85
17.36
18.98
19.51
21.10
21.19
(1)
(2)
Excludes dividends waived by Kearny MHC.
Represents cash dividends paid divided by net income.
61
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 $214.9 million to $2.34 billion at June 30, 2010
from $2.12 billion at June 30, 2009. The increase was due primarily to increases in mortgage-backed and
non-mortgage-backed securities partially offset by decreases in cash and cash equivalents and net loans
receivable.
In general, it remains the long term goal of our business plan change the Bank’s balance sheet to
reflect a greater percentage of earnings assets in the loan portfolio while, in turn, reducing the relative size
of the securities portfolio. Within the loan portfolio, the Company’s business plan continues to call for
increased origination of commercial loans with an emphasis on commercial mortgages including multi-
family and nonresidential mortgage loans.
The lending environment during fiscal 2010, however, continued to reflect the challenging
economic environment resulting from the fiscal crisis of 2008-2009. Those challenges include declining
real estate values coupled with increased unemployment which, together, have significantly reduced
demand for new loan originations by qualified borrowers. Consequently, the loan portfolio declined on
both a dollar and percentage of assets basis during the current fiscal year. At June 30, 2010, net loans
receivable comprised 43.0% of total assets compared to 48.9% at June 30, 2009. Year-over-year, net
loans receivable decreased $34.3 million, or 3.3%. Within the loan portfolio, however, commercial
mortgages grew $5.6 million to $203.0 million while one-to-four family mortgage loans, including first
mortgages and home equity loans and lines of credit, declined $38.0 million to $776.8 million.
In contrast,
investment securities,
including mortgage-backed and non-mortgage-backed
securities, comprised 42.3% of total assets at June 30, 2010 compared to 33.7% at June 30, 2009. Year
over year, investment securities increased $273.5 million, or 38.2%. Generally, the cash flows from net
loan repayments were used to fund a portion of the growth in investment securities during fiscal 2010.
Additional funding for the growth in investment securities was also provided by the reinvestment of a
portion of the Company’s cash and cash equivalents which declined $30.1 million from June 30, 2009 to
June 30, 2010. A majority of the growth in investment securities during fiscal 2010, however, was
funded through deposit growth.
At June 30, 2010, our total deposits were $1.62 billion compared to $1.42 billion at June 30,
2009. Year-over-year, certificates of deposit and non-maturity deposits increased $74.8 million and
$127.6 million, respectively. The growth in deposits continued despite the Bank continuing to reduce its
deposit offering rates on most products reflecting, in part, consumer demand for the safety of FDIC-
insured accounts versus noninsured investment alternatives. The growth in non-maturity deposits also
reflected the Bank’s promotion of its “High Yield Checking” product which is primarily designed to
attract core deposits in the form of customers’ primary checking accounts through interest rate and fee
reimbursement incentives to qualifying customers.
62
The balance of FHLB of New York borrowings was unchanged at $210.0 million at June 30,
2010 from June 30, 2009. Due to continuing deposit inflows and flagging loan demand, there was no
need for additional borrowing during fiscal 2010.
Stockholders’ equity increased $9.2 million to $485.9 million at June 30, 2010 from $476.7
million at June 30, 2009. The increase reflected was partly attributable to an 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. The increase in stockholders’ equity also reflected increases in paid-in-capital relating to
the offsets of stock benefit plan expense during the year as well as the net increase retained earnings
resulting from the Company’s net income for fiscal 2010, net of dividends paid to shareholders. Partially
offsetting these increases was the Company’s share repurchase activity which resulted in an increase of
$8.8 million in Treasury stock during fiscal 2010.
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
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, 2010 was $6.8 million, or $0.10 per diluted share;
an increase of $421,000 from $6.4 million, or $0.09 per diluted share for the fiscal year ended June 30,
2009. The increase in net income year-over-year resulted primarily from increases in net interest income
and non-interest income, partially offset by increases in non-interest expense, income taxes and the
provision for loan losses.
Our net interest income increased $3.1 million to $56.8 million for the fiscal year ended June 30,
2010 from $53.7 million for the fiscal year ended June 30, 2009. The net interest rate spread increased to
2.45% for fiscal 2010 from 2.25% for fiscal 2009 as the cost of average interest-bearing liabilities fell to
2.19% from 2.87% while the yield on average interest-earning assets decreased to 4.64% from 5.12%.
Total interest income decreased to $93.1 million during the fiscal year ended June 30, 2010 from $97.9
million during the fiscal year ended June 30, 2009 due to a decrease in the average yield on interest-
earning assets, partially offset by an increase in their average balance. Total interest expense decreased to
$36.3 million from $44.2 million for those same comparative periods due to a decrease in the average cost
of interest-bearing liabilities that was partially offset by an increase in their average balance.
The provision for loan losses increased $2.3 million to $2.6 million for fiscal 2010 compared to
$317,000 for fiscal 2009. The net increase in the provision primarily reflected the need to establish a
comparatively greater level of specific valuation allowances on impaired loans during the current year.
The provision also reflected changes to the allowance for loan losses attributable to the historical and
environmental loss factors applied to the remaining balance of non-impaired loans whose aggregate
balances declined during fiscal 2010.
Non-interest income, excluding sale gains and losses and impairments of securities, decreased
$253,000 to $2.4 million during the fiscal year ended June 30, 2010 compared to $2.6 million during the
fiscal year ended June 30, 2009. The decline was primarily due to a decrease in miscellaneous income
attributable, in part, to income recognized during fiscal 2009 attributable to the sale of a branch for which
no such income was recorded during fiscal 2010. The Company also recognized REO operations expense
in fiscal 2010 for which no such expense was recorded during fiscal 2009.
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The increase in non-interest income also reflected net improvements in income totaling $1.4
million associated with investment security-related activities. Specifically, the Company recorded net
security sale gains of $509,000 for fiscal 2010 compared with net sale losses of $415,000 during fiscal
2009 while other-than-temporary impairment recognized in earnings totaled $206,000 during fiscal 2010
compared to $714,000 for fiscal 2009.
Non-interest expense increased $1.2 million to $45.1 million for the fiscal year ended June 30,
2009 from $43.9 million for the fiscal year ended June 30, 2009. The increase in non-interest expense
resulted primarily from increases in salaries and employee benefits expense that were partially offset by
declines in deposit insurance expense and other miscellaneous expenses. The increase in non-interest
expense also reflected merger-related costs recorded during fiscal 2010 for which no such expenses were
recognized during fiscal 2009. Such expenses were attributable to the Company’s proposed acquisition of
Central Jersey Bancorp announced on May 25, 2010.
The combined effects of these factors resulted in comparatively greater pre-tax net income during
fiscal 2010 compared with fiscal 2009 resulting in a comparative increase in income tax expense during
the more recent period.
Business Strategy. The general goals of the Company’s current business plan are to profitably
deploy capital and enhance earnings through a variety of balance sheet growth and diversification
strategies through which the Company intends to evolve from a traditional thrift business model toward
that of a full service, community bank. The key strategies of the Company’s business plan and its
performance in relation to those strategies during fiscal 2010 are noted below:
Increasing the volume of loan originations and the size of the Company’s loan
portfolio relative to its securities portfolio;
From June 30, 2006 to June 30, 2009, the Company had reported consistent annual
growth in its overall loan portfolio which increased from $708.0 million to $1.04 billion
between those periods. As noted earlier, the severe economic challenges currently
facing our regional and national economy presented significant headwinds which
adversely impacted our ability to carry the continuing achievement of the first strategic
goal throughout fiscal 2010. As such, the Company’s loan portfolio declined to $1.01
billion at June 30, 2010. Subject to economic conditions in the coming year, it remains
the Company’s goal to return to the trend of growth in the loan portfolio funded, in part,
by net principal reductions of investment securities during fiscal 2011.
Increasing the origination of commercial loans, including commercial mortgages
loans, with an emphasis on multi-family and
and commercial business
nonresidential mortgage loans;
Despite the challenging economic environment during fiscal 2010, the Company
continued its consistent annual growth in the commercial mortgage loan portfolio which
increased to $203.0 million at June 30, 2010 from $197.4 million at June 30, 2009 and
$107.1 million at June 30, 2006. The balance of commercial business loans declined
nominally to $14.4 million at June 30, 2010 from $14.8 million at June 30, 2009 after
growing to that level from $3.2 million at June 30, 2006. To support the continued
achievement of the goals associated with this strategy, the Bank hired two commercial
lenders and two commercial credit analysts during fiscal 2010 and continues to actively
seek additional lenders to augment its commercial loan staff. Subject to economic
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conditions in the coming year, it remains the Company’s goal to return to the trend of
commercial loan growth during fiscal 2011.
Maintaining high asset quality.
The Company continues to maintain a strong level of asset quality to complement the
execution of the loan-related strategies noted above. At June 30, 2010, nonperforming
assets, including accruing loans over 90 days past due, nonaccrual loans and repossessed
assets, comprised 0.93% of the Company’s total assets. The Company’s comparable
nonperforming asset ratio as of June 30, 2009 was 0.62% indicating a modest increase in
nonperforming assets from year to year. The level of increase in nonperforming assets
largely reflects the deterioration of the regional and local economies that has resulted in
increased levels of unemployment and declines in real estate values. Despite a modest
increase in its nonperforming assets, the relative strength of the Company’s asset quality
is supported by a comparison of its nonperforming asset ratio to that of its peers. Based
upon information published by the OTS in the Uniform Thrift Performance Report
(“UTPR”) for the quarter ended June 30, 2010, the median nonperforming asset ratio for
thrift institutions in the northeast region with total assets ranging from $1 billion to $5
billion was 2.03% indicating that the Company’s level of nonperforming assets is
significantly less than that of its peers at June 30, 2010.
in
the
increase
the Company’s nonperforming assets
As noted earlier,
is
disproportionately attributable to loans and participations acquired from external
sources. For example, $12.3 million or 57.1% of the Company’s nonperforming loans at
June 30, 2010 represent loans originally purchased from Countrywide which are now
serviced by Bank of America. An additional $1.7 million or 8.1% of nonperforming
loans represent participations originally acquired through TICIC. The remaining $7.5
million or 34.8% of nonperforming loans, representing 0.32% of total assets, comprise
internally originated loans that are nonperforming at June 30, 2010. The loan-related
strategies noted above emphasize growth of internally originated and underwritten loans.
Based upon the information above, such loans have historically demonstrated a level of
resiliency against credit deterioration that has compared favorably to the Company’s
externally originated loan portfolios and the loan portfolios of its peers as defined above.
Building the Company’s core banking business through internal growth and de
novo branching
During the first quarter of fiscal 2010, the Bank opened a full service branch location in
Pequannock Township, NJ. This de novo branch represented the Bank’s 27th full service
branch location. By June 30, 2010, the Pequannock branch had grown to $27.7 million
in total deposits. Deposits at the Bank’s remaining 26 branches grew by a total of
$174.7 million or 12.2% for the year ended June 30, 2010. In total, deposits grew
$202.4 million or 14.2% for the year ended June 30, 2010. Of that growth, $127.6
million or 63.0% was attributed to nonmaturity deposits while the remaining $74.8
million or 37.0% was attributable to growth in certificates of deposit.
Actively seeking out franchise expansion opportunities such as the acquisition of
other financial institutions or branches;
As a complement to the organic growth strategies noted above, the Company actively
seeks out opportunities to deploy capital, diversify its balance sheet mix and enhance
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earnings through mergers and acquisitions with other institutions. Toward that end, the
Company announced its proposed acquisition of Central Jersey Bancorp on May 25,
2010. The transaction, which is expected to close during the second fiscal quarter
ending December 31, 2010, will add 13 retail branches in Monmouth and Ocean
Counties to the Bank’s existing branch network while greatly enhancing the Bank’s
commercial lending and business development resources.
Based upon the most recent quarterly reports filed with the SEC on Form 10-Q, Central
Jersey Bancorp reported nonperforming assets totaling $9.8 million or 1.7% of total
assets at June 30, 2010 with such balances increasing by $77,000 from $9.7 million at
the close of their fiscal year ended December 31, 2009. In relation to the Company’s
level of nonperforming assets at June 30, 2010, the acquisition of Central Jersey Bancorp
is expected to modestly increase its level of nonperforming assets on both a dollar and
percentage of assets basis. However, the combined company’s pro forma nonperforming
asset ratio as of June 30, 2010 remains well below that reported by the OTS for the
northeast regional peer group via the UPTR noted earlier.
Develop and promote consumer and business-oriented products and services
designed to emphasize growth in core deposits and multiple account relationships.
During the latter half of fiscal 2010, the Bank launched its “High Yield Checking”
product which is primarily designed to attract core deposits in the form of customers’
primary checking accounts through the payment of interest rate and fee incentives to
qualifying customers. Qualification is based upon the required performance of certain
electronic transaction and internet-based account management activities which promote
use of such accounts as a consumer’s primary checking account. The acquisition of
consumers’ primary checking accounts and requisite use of the companion internet-
banking services are expected to provide opportunities for the Bank to promote
additional products and services to its customers.
Through the proposed acquisition of Central Jersey Bank noted above, the Bank is
expecting to broaden its menu of business-related products and services providing an
opportunity to expand its business banking relationships throughout the combined
institution.
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-10 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
66
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. 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 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 which addresses loans not otherwise individually reviewed for impairment. 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 the second tier of the loss measurement
process 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 24 month 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 loss
measurement processes, 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 revised account guidance applicable to the
accounting and impairment testing of goodwill. Goodwill is tested and deemed impaired when the
carrying value of goodwill exceeds its implied fair value. Goodwill was most recently tested as of May
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31, 2010, at which time no impairment was indicated. At June 30, 2010, 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”
in accordance with applicable accounting guidance.
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, 2010 and June 30, 2009
General. Total assets increased $214.9 million to $2.34 billion at June 30, 2010, from $2.12
billion at June 30, 2009. The increase in total assets was due primarily to increases in mortgage-backed
and non-mortgage-backed securities partially offset by decreases in cash and cash equivalents and net
loans receivable. The overall increase in total assets was complemented by growth in deposits and an
increase in stockholders’ equity.
Cash and Cash Equivalents. Cash and cash equivalents, which consist of interest-earning and
noninterest-earning deposits in other banks, decreased $30.1 million to $181.4 million at June 30, 2010
from $211.5 million at June 30, 2009. The decline in short term, liquid assets was largely attributable to
the continued reinvestment of a portion of the Company’s excess liquidity into investment securities.
Such excess liquidity has generally resulted from the combined effects of deposit growth coupled with net
reductions in the loan portfolio as repayments outpaced new loan originations and purchases.
In accordance with the overall goals of its strategic business plan, the Company had deferred the
reinvestment of a portion of incoming cash flows during fiscal 2010 resulting in comparatively higher
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average balances of short term, liquid assets held as a funding source for future loan originations. While
the long term strategic goal remains in place, the Company’s loan origination volume generally declined
during fiscal 2010 compared to the prior year due, in part, to the significant economic challenges and
declining real estate values that characterize the current lending marketplace. As a result, the Company
continues to face the risk to near term earnings resulting from maintaining comparatively higher average
balances of cash and cash equivalents whose yields reflect historically low short-term market interest
rates.
In recognition of the growing opportunity cost to near term earnings resulting from the
accumulation of short term, liquid assets, a portion of the Company’s excess liquidity was reinvested into
investment securities during the year ended June 30, 2010.
At June 30, 2010, the balance of interest-bearing deposits primarily included funds on deposit
with a money center bank and 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.
Securities Available for Sale. Non-mortgage-backed securities classified as available for sale
increased by $1.5 million to $29.5 million at June 30, 2010 from $28.0 million at June 30, 2009. The
increase in the portfolio was attributable to an increase in the fair value of the portfolio partially offset by
principal repayments. At June 30, 2010, the available for sale non-mortgage-backed securities portfolio
consisted of $3.9 million of SBA pass-through certificates, $19.0 million of municipal bonds and $6.6
million of single issuer trust preferred securities with amortized costs of $4.0 million, $18.1 million and
$8.9 million, respectively. The net unrealized loss for this portfolio was reduced to $1.5 million at June
30, 2010 from $3.6 million as of June 30, 2009. Based on its evaluation, management has concluded that
no other-than-temporary impairment is present within this segment of the investment portfolio at June 30,
2010. (For additional information refer to Note 4 and Note 6 to consolidated financial statements.)
Securities Held to Maturity. Non-mortgage-backed securities classified as held to maturity
increased to $255.0 million at June 30, 2010 from $-0- at June 30, 2009 resulting from the Company’s
purchase of fixed rate, callable agency debentures during fiscal 2010. As of June 30, 2010, a total of
$200.0 million of these debentures have remaining terms to maturity of five years or less while securities
having total balances of $40.0 million and $15.0 million have remaining terms to maturity of five to ten
years and greater than ten years, respectively. The purchase of these securities deployed a portion of the
Company’s excess liquidity that had accumulated for the reasons noted earlier.
Loans Receivable. Loans receivable, net of unamortized premiums, deferred costs and the
allowance for loan losses, decreased $34.3 million to $1.01 billion at June 30, 2010 from $1.04 billion at
June 30, 2009. The decrease in net loans receivable was primarily attributable to net decreases in the
balances of residential mortgage loans which were partially offset by net increases in the balance of
commercial mortgage loans and the funded portion of construction loans.
Residential mortgage loans, in aggregate, decreased by $38.0 million to $776.8 million at June
30, 2010 from $814.8 million at June 30, 2009. The components of the aggregate decrease included a net
reduction in the balance of one-to-four family first mortgage loans of $25.5 million to $663.9 million at
June 30, 2010 coupled with net declines in the balance of home equity loans and home equity lines of
credit of $11.7 million and $796,000, respectively, whose ending balances at June 30, 2010 were $101.7
million and $11.3 million, respectively. The reduction in the balance of residential mortgage loans
reflects management’s continued adherence to its disciplined pricing policy coupled with the effects of
diminished loan demand in the marketplace arising from challenging economic conditions and declining
real estate values which have adversely impacted residential real estate purchase and refinancing activity.
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In total, residential mortgage loan origination volume for the year ended June 30, 2010 was $132.7
million. Loan volume for fiscal 2010 reflected originations of one-to-four family first mortgage loans
totaling $102.1 million, of which $28.3 million, $13.5 million, $27.1 million and $33.3 million were
originated during the four quarters ended September 30, 2009, December 31, 2009, March 31, 2010 and
June 30, 2010, respectively. Aggregate originations of home equity loans and home equity lines of credit
for fiscal 2010 totaled $30.6 million, of which $11.6 million, $8.1 million, $4.9 million and $6.0 million,
were originated during the same comparative linked quarters, respectively.
Commercial loans, in aggregate, increased by $5.2 million to $217.4 million at June 30, 2010
from $212.2 million at June 30, 2009. The components of the aggregate increase included growth in
nonresidential mortgage loans of $6.1 million partially offset by nominal decreases in the balance of
multi-family mortgage loans and business loans of $460,000 and $460,000, respectively. The ending
balances of nonresidential mortgage loans, multifamily loans and commercial business loans at June 30,
2010 were $177.9 million, $25.1 million and $14.4 million, respectively. The overall growth in
commercial loans reflects the Company’s long-term expanded strategic emphasis in commercial lending
coupled with a continuing favorable pricing environment for these loans. In total, commercial loan
origination volume for fiscal 2010 was $34.5 million. Loan volume for fiscal 2010 reflected originations
of multi-family and nonresidential real estate mortgage loans totaling $31.0 million, of which $13.7
million, $7.5 million, $9.3 million and $532,000 were originated during the quarters ended September 30,
2009, December 31, 2009, March 31, 2010 and June 30, 2010, respectively. Aggregate originations of
commercial business loans for fiscal 2010 totaled $3.5 million, of which $1.2 million, $324,000,
$532,000 and $1.4 million were originated during the same comparative linked quarters, respectively.
The outstanding balance of construction loans, net of loans-in-process, increased by $1.3 million
to $14.7 million at June 30, 2010. The net increase in construction loans resulted from additional
disbursements on construction loans less repayments on such loans. Construction loan disbursements for
the year ended June 30, 2010 totaled $7.1 million, of which $4.1 million, $1.5 million, $881,000 and
$650,000 were funded during the quarters ended September 30, 2009, December 31, 2009, March 31,
2010 and June 30, 2010, respectively.
Finally, other loans, primarily comprising account loans and deposit account overdraft lines of
credit, decreased $258,000 to $4.2 million at June 30, 2010. Other loan originations for the year ended
June 30, 2010 totaled approximately $1.3 million, of which $374,000, $346,000, $302,000 and $290,000
were originated during the quarters ended September 30, 2009, December 31, 2009, March 31, 2010, and
June 30, 2010, respectively.
The balance of the allowance for loan losses increased by $2.1 million to $8.6 million or 0.84%
of total loans at June 30, 2010 from $6.4 million or 0.62% of total loans at June 30, 2009. As of those
same dates, nonperforming loans increased $8.4 million to $21.6 million or 2.13% of total loans from
$13.2 million or 1.26% of total loans.
The increase in nonperforming loans included an increase in the balance of loans 90 days or more
past due and still accruing of $7.3 million to $12.3 million at June 30, 2010 from $5.0 million at June 30,
2009. For those same comparative dates, the corresponding number of loans 90 days or more past due
and still accruing increased by 16 to 28 loans from 12 loans.
Loans reported as 90 days or more past due and still accruing at June 30, 2010 include 27
residential mortgage loans secured by New Jersey properties with aggregate outstanding balances totaling
$11.7 million as of that date. These loans were originally purchased from Countrywide Home Loans, Inc.
(“Countrywide”) and continue to be serviced by their acquirer, Bank of America through its subsidiary,
BAC Home Loans Servicing, LP. In accordance with our agreement, the servicer advances scheduled
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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 totaling $2.4 million for the
identified impairment attributable to 22 of these 27 loans at June 30, 2010. The remaining five
nonperforming Countrywide loans reported as 90 days or more past due and still accruing are in various
stages of collection, workout or foreclosure with no estimated impairments requiring specific valuation
allowances based upon the Company’s evaluation at June 30, 2010. As of that same date, the Bank
owned a total of 170 residential mortgage loans with an aggregate outstanding balance of $84.9 million
that were originally acquired from Countrywide. Of these loans, an additional 11 loans totaling $4.2
million are 30-89 days past due and are in various stages of collection.
The net increase in nonperforming loans also included a $1.1 million increase in the balance of
nonaccrual loans to $9.2 million at June 30, 2010 from $8.1 million at June 30, 2009. For those same
comparative dates, the corresponding number of nonaccrual loans increased to 26 loans from 21 loans.
Nonaccrual loans at June 30, 2010 include 11 residential mortgage loans totaling $2.1 million, three
construction loans totaling $468,000, five multi-family loans totaling $1.6 million, two nonresidential
mortgage loans totaling $2.7 million, three secured business loans totaling $2.3 million and two consumer
loans totaling $1,400.
As of June 30, 2010, the Company has established specific valuation allowances totaling $1.7
million in the full amount of the outstanding balances of four of the five nonaccrual multifamily mortgage
loans and one of the three nonaccrual construction loans. These five loans represent nonperforming
participations acquired through the Thrift Institutions Community Investment Corporation (“TICIC”), a
subsidiary of the New Jersey Bankers Association. As of that same date, the Company has established a
specific valuation allowance of approximately $4,800 against the entire balance of one secured business
loan totaling that was reported as nonaccrual at June 30, 2010. The remaining 20 nonaccrual loans
totaling $7.6 million are in various stages of collection, workout or foreclosure with no estimated losses
requiring specific valuation allowances based upon the Company’s evaluation at June 30, 2010.
In addition to the loans noted above, the Company has established an additional specific valuation
allowance of approximately $220,000 attributable to one impaired multifamily loans with an outstanding
principal balances of $2.5 million. While not nonperforming at June 30, 2010, the loan is adversely
classified with an impairment identified in the amount of the specific valuation allowance noted.
Mortgage-backed Securities Available for Sale. Mortgage-backed securities available for sale,
all of which are agency pass-through securities, increased $19.7 million to $703.5 million at June 30,
2010 from $683.8 million at June 30, 2009. The net increase reflected purchases of approximately $224.6
million of fixed rate, agency mortgage-backed securities and an increase in the unrealized gain on the
securities of $11.4 million. These increases were partially offset by the sale of securities with book
values of $32.7 million with the remaining $182.1 million decrease primarily attributable to cash
repayment of principal net of discount accretion and premium amortization. The net unrealized gain for
this portfolio was $30.0 million as of June 30, 2010. Based on its evaluation, management has concluded
that no other-than-temporary impairment is present within this segment of the investment portfolio at
June 30, 2010. The purchases of the mortgage-backed securities during the year ended June 30, 2010
included approximately $24.1 million of issues eligible to meet the Community Reinvestment Act
investment test during the reporting period. (For additional information refer to Note 4 and Note 6 to
consolidated financial statements.)
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Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity,
including agency pass-through securities as well as agency and non-agency collateralized mortgage
obligations, decreased $2.6 million to $1.7 million at June 30, 2010 from $4.3 million at June 30, 2009.
The decrease reflected the sale of non-investment grade, non-agency collateralized mortgage obligations
with an aggregate amortized cost and net book value of $2.1 million and $1.5 million, respectively.
These balances reflected the cumulative impact of credit-related and non-credit-related OTTI changes
relating to the securities. The remaining $1.1 million decrease was primarily attributable to cash
repayment of principal net of discount accretion and premium amortization.
At June 30, 2010, the Company’s remaining portfolio of non-agency CMOs totaled 20 securities
with an aggregate outstanding balance of approximately $310,000. These securities were not other-than-
temporarily impaired and were rated as investment grade at June 30, 2010. The remainder of the held to
maturity mortgage-backed securities portfolio at June 30, 2010 is comprised of government agency
mortgage pass-through securities and collateralized mortgage obligations that were also not other-than-
temporarily impaired based upon management’s evaluation as of that date. (For additional information
refer to Notes 5 and 6 to consolidated financial statements.)
Other Assets. Other noteworthy changes include a net increase of approximately $4.1 million in
other assets that was largely attributable to the remaining balance of the Bank’s original $5.0 million
prepayment of FDIC insurance during the prior quarter ended December 31, 2009. This prepayment
originally resulted from the FDIC’s requirement that all insured depository institutions prepay their
federal deposit insurance assessments through 2012 at December 30, 2009. An increase of $3.6 million in
the cash surrender value of bank owned life insurance reflected additional policy premiums of $3.0
million funded during the year coupled with increases in the cash surrender value of the associated
policies of $556,000 recognized through earnings during fiscal 2010. These increases were partially
offset by a decline in the balance of the Company’s net deferred income tax asset from $1.4 million at
June 30, 2009 to $-0- at June 30, 2010 reflecting a change in the Company’s net deferred income tax
position from a net deferred income tax asset to a net deferred income tax liability. The change was
largely attributable to an increase in the tax-effected unrealized gains associated with the Company’s
available for sale investment securities portfolios from June 30, 2009 to June 30, 2010. A corresponding
increase in deferred income tax liabilities has been recorded at June 30, 2010.
Deposits. Deposits increased $202.4 million to $1.62 billion at June 30, 2010 from $1.42 billion
at June 30, 2009. Despite the Bank continuing to maintain a disciplined pricing strategy throughout fiscal
2010 that resulted in noteworthy declines in deposit offering rates, growth was reported across all
categories of deposits. For the year ended June 30, 2010, interest-bearing demand deposits increased
$92.5 million to $256.2 million, savings deposits increased $32.5 million to $334.2 million, certificates of
deposit increased $74.8 million to $979.5 million and non-interest-bearing demand deposits increased
$2.5 million to $53.7 million. As noted earlier, the overall increase in deposits was partly attributable to
consumer demand for the safety of FDIC-insured accounts in lieu of non-insured investment alternatives.
The growth in deposits also reflected the Bank’s promotion of its “High Yield Checking” product
described earlier as well as the new deposits gathered at its de novo branch opened in Pequannock, NJ
during fiscal 2010.
As discussed in greater detail below under Item 7A. Quantitative and Qualitative Disclosures
About Market Risk, depositors have generally been lengthening the maturities of their time deposits,
particularly by transferring maturing certificates of deposit to accounts with new maturities of greater than
12 months to improve yield.
72
Advances from FHLB. The outstanding balance of FHLB advances was unchanged at $210
million at June 30, 2010 from June 30, 2009 reflecting the absence of new advances or maturities during
the fiscal 2010.
Stockholders’ Equity. During the year ended June 30, 2010 stockholders’ equity increased $9.2
million to $485.9 million from $476.7 million at June 30, 2009. The increase was partly attributable to a
$8.4 million increase in accumulated other comprehensive income due primarily to the aggregate mark-
to-market adjustment to the available for sale securities portfolios and benefit plan related adjustments to
equity. The increase in stockholders’ equity also reflected net income during the period of $6.8 million.
Also contributing to the increase was $1.5 million for ESOP shares earned, $3.1 million for restricted
stock plan shares earned and an adjustment to equity of $1.9 million for expensing stock options.
Partially offsetting these increases to stockholders’ equity was a $7.8 million increase in treasury stock
due to the purchase of 897,323 shares of the Company’s common stock as well as $3.7 million in cash
dividends declared for payment to shareholders, net of waived dividends.
Comparison of Operating Results for the Years Ended June 30, 2010 and June 30, 2009
General. Net income for the year ended June 30, 2010 was $6.8 million, or $0.10 per diluted
share; an increase of $421,000 compared to $6.4 million, or $0.09 per diluted share for the year ended
June 30, 2009. The increase in net income between fiscal years resulted primarily from increases in net
interest income and non-interest income which were partly offset by increases in the provision for loan
losses, non-interest expense. In total, these factors resulted in an overall increase in pre-tax income and
the provision for income taxes.
Net Interest Income. Net interest income for the year ended June 30, 2010 was $56.8 million, an
increase of $3.1 million from $53.7 million for the year ended June 30, 2009. The increase in net interest
income between the comparative periods resulted from a decrease in interest expense that outpaced the
concurrent decrease in interest income. In general, the decrease in interest expense reflected a continued
decline in the cost of deposits, resulting primarily from the downward re-pricing of certificates of deposit,
that more than offset the increase in interest expense attributable to an increase in the average balance of
interest-bearing deposits. The decrease in interest income was primarily attributable to an increase in the
average balance of lower yielding cash and cash equivalents and non-mortgage-backed securities in
relation to the declines in the average balance of comparatively higher yielding loans.
As a result of these factors, the Company’s net interest rate spread increased 20 basis points to
2.45% for the year ended June 30, 2010 from 2.25% for the year ended June 30, 2009. The increase in
the net interest rate spread reflected a decrease in the cost of interest bearing liabilities of 68 basis points
to 2.19% from 2.87% which was partially offset by a decrease in the yield on earning assets of 48 basis
points to 4.64% from 5.12% for the same comparative periods. A discussion of the factors contributing to
the overall change in yield on earning assets and cost of interest-bearing liabilities is presented in the
separate discussion and analysis of interest income and interest expense below.
The increase in net interest income and net interest rate spread was also reflected in the
Company’s net interest margin which increased two basis points to 2.83% for the year ended June 30,
2010 from 2.81% for the year ended June 30, 2009. The lesser improvement in net interest margin
compared the improvement in net interest spread partly reflects proportionately greater growth in the
average balance of noninterest-earning assets compared with that of noninterest-bearing liabilities
between the comparative periods. Specifically, the average balance of noninterest-bearing liabilities
increased by $6.0 million to $74.4 million for the year ended June 30, 2010 from $68.4 million for the
year ended June 30, 2009. By comparison, the average balance of noninterest-earning assets increased by
$37.8 million to $207.2 million for the year ended June 30, 2010 from $169.4 million for the year ended
73
June 30, 2009. The disparity in growth between noninterest-earning assets versus noninterest-bearing
liabilities is also reflected in the Company’s ratio of average interest-earning assets to average interest-
bearing liabilities which decreased to 120.9% for the year ended June 30, 2010 from 124.2% for the year
ended June 30, 2009.
The increase in noninterest-earning assets was attributable, in part, to an increase of $25.9 million
in the average balance of noninterest-earning cash. The growth in the Company’s short term, liquid
assets, including noninterest-earning cash, had accumulated over several consecutive quarters due largely
to retail deposit growth outpacing the Company’s near-term ability to deploy such funds into high quality
loans. As noted in greater detail below, a portion of such funds have been reinvested into high quality
investment securities during the year ended June 30, 2010. The increase in noninterest-earning assets also
reflected an aggregate increase in the average balance of the unrealized gain in available for sale
investment securities, including mortgage-backed and non-mortgage-backed securities, totaling $14.0
million.
Interest Income. Total interest income decreased $4.8 million to $93.1 million for the year ended
June 30, 2010 from $97.9 million for the year ended June 30, 2009. As noted above, the decrease in
interest income reflected a decrease in the average yield on earning assets which declined 48 basis points
to 4.64% for the year ended June 30, 2010 from 5.12% for the year ended June 30, 2009. The decrease in
the average yield was partially offset by an increase in the average balance of interest-earning assets
which increased $96.2 million to $2.01 billion from $1.91 billion for the same comparative period.
Interest income from loans decreased $2.4 million to $58.1 million for the year ended June 30,
2010 from $60.6 million for the year ended June 30, 2009. The decrease in interest income on loans was
primarily attributable to a decrease in their average balance which declined $33.7 million to $1.03 billion
for the year ended June 30, 2010 from $1.06 billion for the year ended June 30, 2009.
Within the reported decline in the average balance of loans, the Company reported a $55.4
million reduction in the average balance of residential mortgage loans to $791.2 million for the year
ended June 30, 2010 from $846.6 million for the year ended June 30, 2009. The Company’s residential
mortgages generally comprise one-to-four family first mortgage loans, home equity loans and home
equity lines of credit. The decline reflected the continued diminished residential loan demand by qualified
borrowers coupled with the Company’s disciplined pricing for such loans in the face of aggressive pricing
in the marketplace for certain loan products.
By contrast, the Company reported a net increase of $21.5 million in the average balance of
commercial loans to $219.6 million from $198.1 million for those same comparative periods. The
Company’s commercial loans generally comprise multi-family and nonresidential mortgage loans as well
as secured and unsecured business loans. The increase reflects the Company’s long-term expanded
strategic emphasis in commercial lending coupled with a continuing favorable pricing environment for
these loans.
The overall decrease in interest income on loans also reflects a decrease in their average yields
which declined five basis points to 5.64% for the year ended June 30, 2010 from 5.69% for the year ended
June 30, 2009. The reduction in the overall yield on the Company’s loan portfolio generally reflects the
effect of lower market interest rates which provides “rate reduction” refinancing incentive to borrowers
while also contributing to the downward re-pricing of adjustable rate loans. However, because the
Company’s commercial loans generally comprise comparatively higher yielding multi-family mortgages,
nonresidential mortgage loans and business loans, the continued reallocation within the loan portfolio
from residential mortgages into commercial loans diminished the adverse impact of lower market interest
rates on the overall yield of the loan portfolio between the comparative periods.
74
Interest income from mortgage-backed securities decreased $4.5 million to $30.5 million for the
year ended June 30, 2010 from $34.9 million for the year ended June 30, 2009. The decrease in interest
income reflected a decrease in the average yield on mortgage-backed securities coupled with the impact
of a decline in their average balance. The average yield on mortgage-backed securities declined 53 basis
points to 4.49% for the year ended June 30, 2010 from 5.02% for the year ended June 30, 2009 while the
average balance of the securities decreased $19.2 million to $677.5 million from $686.7 million for those
same comparative periods.
The reduction in the overall yield of the mortgage-backed securities portfolio is attributable to
many of the same factors affecting the yield on the Company’s loan portfolio. That is, lower market
interest rates have continued to provide a “rate reduction” refinancing incentive to mortgagors resulting in
the pay off of comparatively higher rate mortgage loans underlying the Company’s mortgage-backed
securities. Simultaneously, lower market interest rates have resulted in the downward re-pricing of loans
underlying the Company’s adjustable rate mortgage-backed securities. The decrease in the average
balance of mortgage-backed securities generally reflects security repayments and sales that have outpaced
the Company’s purchase of mortgage-backed securities through fiscal 2010.
Interest income from non-mortgage-backed securities increased $2.7 million to $3.7 million for
the year ended June 30, 2010 from $1.0 million for the year ended June 30, 2009. The increase in interest
income reflected an increase in the average balance of non-mortgage-backed securities partially offset by
a decline in their average yield. The average balance of these securities increased $103.6 million to
$137.5 million for the year ended June 30, 2010 from $33.9 million for the year ended June 30, 2009. For
those same comparative periods, the average yield on non-mortgage-backed securities decreased by 38
basis point to 2.69% from 3.07%.
The increase in the average balance of non-mortgage backed securities was primarily attributable
to a $103.6 million increase in the average balance of taxable securities to $119.3 million during the year
ended June 30, 2010 from $15.7 million for the year ended June 30, 2009. For those same comparative
periods, the average balance of tax-exempt securities declined nominally to $18.1 million from $18.2
million. The change in the average yield on non-mortgage backed securities reflected a decrease of 3
basis points in the yield of taxable securities to 2.57% during the year ended June 30, 2010 from 2.60%
during the year ended June 30, 2009 while the average yield on tax-exempt securities declined one basis
point to 3.48% from 3.49%.
Interest income from other interest-earning assets decreased $535,000 to $828,000 for the year
ended June 30, 2010 from $1.4 million for the year ended June 30, 2009. The decrease in interest income
was primarily attributable to a decrease in the average yield on other interest-earning assets which
declined 67 basis points to 0.51% for the year ended June 30, 2010 from 1.18% for the year ended June
30, 2009. The decline in average yield was partially offset by an increase in the average balance of other
interest-earning assets which increased $45.6 million to $161.4 million for the year ended June 30, 2010
from $115.8 million for the year ended June 30, 2009.
The decrease in the average yield on other interest-earning assets primarily reflects a decrease in
the average yield of interest-earning deposits resulting from the decline in short term, market interest rates
to historical lows. The increase in the average balance of other interest-earning assets was primarily
attributable to a $45.6 million increase in the average balance of interest-earning deposits to $148.4
million for the year ended June 30, 2010 from $102.8 million for the year ended June 30, 2009. The
increase in the average balance of interest-earning deposits reflects the accumulation of short term liquid
assets described earlier.
75
Interest Expense. Total interest expense decreased $7.9 million to $36.3 million for the year
ended June 30, 2010 from $44.2 million for the year ended June 30, 2009. As noted earlier, the decrease
in interest expense reflected a decrease in the average cost of interest-bearing liabilities which declined 68
basis points to 2.19% for the year ended June 30, 2010 from 2.87% for the year ended June 30, 2009. The
decrease in the average cost was partially offset by an increase in the average balance of interest-bearing
liabilities of $121.3 million to $1.66 billion from $1.54 billion for the same comparative periods.
Interest expense attributed to deposits decreased $7.6 million to $28.1 million for the year ended
June 30, 2010 from $35.7 million for the year ended June 30, 2009. The decrease resulted primarily from
a 76 basis point decrease in the average cost of interest-bearing deposits to 1.94% for the year ended June
30, 2010 from 2.70% for the year ended June 30, 2009. The reported decrease in the average cost was
reflected across all categories of interest-bearing deposits and was primarily attributable to the overall
declines in market interest rates. For the same comparative periods, the average cost of interest-bearing
checking accounts decreased 17 basis points to 1.17% from 1.34%, the average cost of savings accounts
decreased 2 basis points to 1.03% from 1.05% and the average cost of certificates of deposit decreased
109 basis points to 2.41% from 3.50%.
The decrease in the average cost was partially offset by a $126.4 million increase in the average
balance of interest-bearing deposits to $1.45 billion for the year ended June 30, 2010 from $1.32 billion
for the year ended June 30, 2009. The reported increase in the average balance was represented across all
categories of interest-bearing deposits and reflected the Company’s strategic efforts to increase its deposit
base coupled with consumer demand for the safety of FDIC insurance to protect their financial assets
given the recent volatility in the financial markets for uninsured investment products. For the same
comparative periods, the average balance of interest-bearing checking accounts increased $41.7 million to
$198.6 million from $156.9 million, the average balance of savings accounts increased $22.2 million to
$315.7 million from $293.5 million and the average balance of certificates of deposit increased $62.4
million to $935.7 million from $873.3 million. As of June 30, 2010, approximately $716.3 million or
73.1% of certificates of deposit, with a weighted average cost of 1.80%, mature within one year. Because
the Bank’s offering rates for CDs maturing in one year or less are generally lower than 1.80% at June 30,
2010, the majority of these certificates may re-price downward to the extent they are reinvested with the
Bank at maturity into accounts with similar terms.
Interest expense attributed to FHLB advances decreased $274,000 to $8.2 million for the year
ended June 30, 2010 from $8.5 million for the year ended June 30, 2009. The decrease in interest
expense was attributable to the combined effects of a decline in both the average balance and average cost
of FHLB advances between the comparative periods. The average balance of FHLB advances decreased
$5.1 million to $210.0 million for the year ended June 30, 2010 from $215.1 million for the year ended
June 30, 2009 while the average cost of FHLB advances declined three basis points to 3.92% from 3.95%
for those same comparative periods. The decline in the average balance and average cost of FHLB
advances was primarily attributable to the repayment of 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. The provision for loan losses increased $2.3 million to $2.6 million
for the year ended June 30, 2010 from $317,000 for the year ended June 30, 2009. The provision in the
current period reflected required net increases to the allowance for loan losses attributable primarily to
estimated specific losses on several impaired mortgage loans on residential and multi-family properties
located in New Jersey, as discussed in greater detail above. The provision also reflected changes to
balances of general valuation allowances attributable to the application of historical and environmental
loss factors to the remaining non-impaired portion of the loan portfolio in accordance with the Company’s
allowance for loan loss calculation methodology.
76
Non-Interest Income. Total non-interest income increased $1.2 million to $2.7 million for the
year ended June 30, 2010 from $1.5 million for the year ended June 30, 2010. Excluding sale gains and
losses and impairments of securities, non-interest income decreased $253,000 to $2.4 million during the
fiscal year ended June 30, 2010 compared to $2.6 million during the fiscal year ended June 30, 2009. As
noted earlier, the decline was primarily due to a decrease in miscellaneous income attributable, in part, to
income recognized during fiscal 2009 attributable to a $132,000 gain on the sale of a branch for which no
such income was recorded during fiscal 2010. The Company also recognized REO operations expense of
$25,000 in fiscal 2010 for which no such expense was recorded during fiscal 2009. The decline in
noninterest income between comparative periods also reflects a reduction in deposit and branch-related
fees and charges. Finally, the decrease in noninterest income also reflected a decline in income from the
Bank’s official check clearing agent. The 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 and reduced yields in its
investment securities portfolio.
The declines in noninterest income noted above were more than offset by increases in income
totaling $1.4 million associated with investment security-related activities. Specifically, the Company
recorded net security sale gains of $509,000 for fiscal 2010 compared with net sale losses of $415,000
during fiscal 2009. The net security sale gains during fiscal 2010 resulted, in part, from gains associated
with the sale of agency, pass-through securities. These gains were partially offset by losses on the sale of
the Company’s outstanding balance of non-investment grade, non-agency collateralized mortgage
obligations (“CMOs”). The CMOs sold were originally acquired as investment grade securities upon the
in-kind redemption of the Bank’s interest in the AMF Ultra Short Mortgage Fund (“AMF Fund”) during
the quarter ended September 30, 2008. The security sale loss of $415,000 recognized during fiscal 2009
was fully attributable to the AMF Fund in-kind redemption transaction.
Subsequent to their acquisition, the ratings of these securities declined below investment grade
with most ultimately being identified as other-than-temporarily impaired (“OTTI”). Such impairments
required the recognition of the impairment charges recognized through earnings during fiscal 2010 and
2009 totaling $206,000 and $714,000, respectively.
Non-Interest Expenses. Non-interest expense increased $1.2 million to $45.1 million for the
fiscal year ended June 30, 2009 from $43.9 million for the fiscal year ended June 30, 2009. The increase
in non-interest expense resulted primarily from increases in salaries and employee benefits expense that
were partially offset by declines in deposit insurance expense and other miscellaneous expenses. The
increase in non-interest expense also reflected merger-related costs of $373,000 recorded during fiscal
2010 for which no such expenses were recognized during fiscal 2009. Such expenses were attributable to
the Company’s proposed acquisition of Central Jersey Bancorp announced on May 25, 2010.
Employee compensation-related expenses increased by approximately $1.5 million to $26.9
million for the year ended June 30, 2010 from $25.4 million for the year ended June 30, 2009. Such
increases reflected additional costs associated with staff augmentation attributable, in part, to de novo
branch expansion and growth in commercial lending resources. More generally, however, the increase in
expense also reflects the increase in compensation-related costs attributable to annual increases in wages
and salaries of existing staff and overall increases to benefits costs including employee health care
benefits. The increase in year-over-year employee compensation expense also reflects an actuarial
adjustment that reduced pension expense in the earlier comparative period for which a lesser reduction in
expense was recorded during the current period. Partially offsetting these increases was a decline in
ESOP expense reflecting the reduction in the market price of the Company’s common stock between
comparative periods.
77
Federal deposit insurance premium expense decreased $557,000 to $1.3 million for the year
ended June 30, 2010 from $1.9 million for the year ended June 30, 2009. The decrease was primarily
attributable to the recognition of the FDIC’s Special Assessment totaling $872,000 during fiscal 2009 for
which no such assessment was paid during fiscal 2010. Partially offsetting the decrease, however was an
increase in the current year’s assessment rate charged by the FDIC on the balance of insurable deposits
held by the Bank coupled with the effect of the year-over-year growth in the balance of those deposits.
Finally, miscellaneous non-interest expense declined $134,000 to $4.8 million for the year ended
June 30, 2010 from $4.9 million for the year ended June 30, 2009. The decline reflects various decreases
and partially offsetting increases throughout a variety of general and administrative expense categories
that, in aggregate, resulted in the reported decline in non-interest expense.
Provision for Income Taxes. The provision for income taxes increased $366,000 to $5.0 million
during the for the year ended June 30, 2010 from $4.6 million during the year ended June 30, 2009. The
increase in income taxes between the comparative periods was primarily attributable to an increase in pre-
tax income. The Company’s effective tax rates during the years ended June 30, 2010 and June 30, 2009
were 42.1% and 41.8%, respectively.
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 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 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
78
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
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 continued 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 had been decreasing as higher coupon mortgages
were 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 had been decreasing due to an increase in prepayments within
the underlying mortgage portfolios as refinancing activity accelerated. Reinvestment of principal
79
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-
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.
80
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
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.
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.
81
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
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 was 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 Expenses. 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%.
82
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.
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 the 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.
83
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.
84
Average Balance Sheet. The following table sets forth certain information relating to Kearny Financial Corp. at the date 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
8
5
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 interest margin(6)
Ratio of interest-earning assets to interest-
bearing liabilities
At June 30,
2010
2010
For the Years Ended June 30,
2009
2008
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)
$ 1,013,713
675,114
5.64% $ 1,030,287 $ 58,129
30,450
677,496
4.29
5.64% $ 1,064,019 $ 60,559
34,944
4.49
696,672
5.69% $
5.02
951,019 $ 55,123
34,773
699,942
5.80%
4.97
18,125
267,835
191,003
2,165,790
174,023
$ 2,339,813
$
256,154
334,167
979,532
210,000
1,779,853
74,034
1,853,887
485,926
$ 2,339,813
3.47
2.31
0.34
4.32
1.31
0.89
2.01
3.87
1.92
2.40%
631
3,070
828
93,108
2,324
3,246
22,519
8,232
36,321
18,143
119,328
161,376
2,006,630
207,239
$ 2,213,869
$
198,623
315,715
935,684
210,000
1,660,022
74,423
1,734,445
479,424
$ 2,213,869
634
408
1,363
97,908
2,098
3,072
30,524
8,506
44,200
3.48
2.57
0.51
4.64
1.17
1.03
2.41
3.92
2.19
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
3.49
2.60
1.18
5.12
1.34
1.05
3.50
3.95
2.87
30,200
23,191
141,792
1,846,144
158,737
$ 2,004,881
$
149,871
303,818
830,726
175,081
1,459,496
75,976
1,535,472
469,409
$ 2,004,881
1,074
1,186
5,211
97,367
2,714
3,272
37,322
7,220
50,528
3.56
5.11
3.68
5.27
1.81
1.08
4.49
4.12
3.46
$ 56,787
$ 53,708
$ 46,839
2.45%
2.83%
2.25%
2.81%
1.81%
2.54%
1.21x
1.21x
1.24x
1.26x
(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 balances of interest-earning assets.
Includes interest-bearing deposits at other banks and Federal Home Loan Bank of New York capital stock.
Includes actual balance of non-interest-bearing deposits of $53,709,000 at June 30, 2010 and average balances of non-interest-bearing deposits of $55,436,000, $51,132,000 and
$59,169,000 for the years ended June 30, 2010, 2009 and 2008, respectively.
Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
Net interest margin represents net interest income as a percentage of interest-earning assets.
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,
2010 vs. 2009
Increase (Decrease)
Due to
Rate
Volume
Net
Years Ended June 30,
2009 vs. 2008
Increase (Decrease)
Due to
Rate
Volume
Net
(In Thousands)
$
(1,903) $
(929)
(527) $
(3,565)
(2,430)
(4,494)
$
6,492 $
(168)
(1,056) $
339
5,436
171
(1)
2,667
416
250 $
(2)
(5)
(951)
(5,050) $
(3)
2,662
(535)
(4,800)
514 $
233
2,060
(207)
2,600 $
(288) $
(59)
(10,065)
(67)
(10,479) $
226
174
(8,005)
(274)
(7,879)
(419)
(308)
(818)
4,779 $
(21)
(470)
(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)
$
$
$
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
$
(2,350) $
5,429 $
3,079
$
1,357 $
5,512 $
6,869
86
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
decreased $30.1 million to $181.4 million at June 30, 2010 from $211.5 million at June 30, 2009. At June
30, 2010, interest-bearing deposits included $5.9 million on deposit with a money center bank and $172.2
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 2010 were not materially different from commitments
at the close of the prior fiscal year. At June 30, 2010, the Bank had outstanding commitments to originate
loans of $28.0 million compared to $35.0 million at June 30, 2009. Construction loans in process and
unused lines of credit were $4.7 million and $25.9 million, respectively, at June 30, 2010 compared to
$7.6 million and $24.9 million, respectively, at June 30, 2009. At June 30, 2010, the Bank had $716.3
million of certificates of deposit maturing in one year compared to $740.4 million at June 30, 2009.
At June 30, 2010, the Bank had agreements to fund the purchase of loans on a flow basis of $1.0
million compared to $8.7 million at June 30, 2009. 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 $202.4 million to $1.62 billion at June 30, 2010 from $1.42 billion at June 30,
2009. During the fiscal 2010, interest-bearing demand deposits increased $92.5 million to $256.2 million,
savings deposits increased $32.5 million to $334.2 million, certificates of deposit increased $74.8 million
to $979.5 million and non-interest-bearing demand deposits increased $2.5 million to $53.7 million.
Throughout fiscal 2010, the Bank priced deposit interest rates at levels management considered to
be reasonably competitive in the marketplace. Despite the decline in the Bank’s offering rates for
deposits during the year, the Bank continued to experience inflows of deposits as customers continued to
seek the safety of insured deposits as an alternative to uninsured investments. The growth in interest-
bearing checking also reflected the promotion of the Bank’s “High Yield Checking” product during the
87
latter half of fiscal 2010. As noted earlier, “High Yield Checking” is primarily designed to attract core
deposits in the form of customers’ primary checking accounts through interest rate and fee reimbursement
incentives to qualifying customers. The comparatively higher interest expense associated with the “High
Yield Checking” product in relation to our other checking products is expected to be partially offset by an
associated increase in transaction fee income.
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, 2010, the
Bank’s borrowing potential was $19.7 million without pledging additional collateral. With no advances
maturing during the year, the Bank’s balance of FHLB advances remained unchanged at $210.0 million at
June 30, 2010 from June 30, 2009.
The following table discloses our contractual obligations and commitments as of June 30, 2010.
Operating lease obligations
Certificates of deposit
Federal Home Loan Bank advances
$
3,450 $
979,532
210,000
Total
Less Than
1 Year
1-3 Years
(In Thousands)
526
241,508
—
497 $
716,289
10,000
4-5 Years
After
5 Years
$
496 $
21,734
—
1,931
1
200,000
Total
$ 1,192,982 $
726,786 $
242,034
$
22,230 $ 201,932
Total
Committed
Less Than
1 Year
1-3 Years
(In Thousands)
4-5 Years
After
5 Years
Undisbursed funds from approved lines of credit(1)
Construction loans in process(1)
Other commitments to extend credit(1)
$
25,853 $
4,708
27,997
2,724 $
4,708
27,561
— $
—
436
— $
—
—
23,129
—
—
Total
$
58,558 $
34,993 $
436 $
— $
23,129
(1) Represents amounts committed to customers.
Our material capital expenditure plans for the year ending June 30, 2011 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
88
30, 2010, 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,
2010, outstanding loan commitments totaled $58.6 million compared to $67.4 million at June 30 2009.
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, 2010, 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, 2010, the Bank exceeded all capital requirements of the OTS. The Bank’s regulatory capital ratios at
June 30, 2010 were as follows: core capital 16.44%; Tier I risk-based capital 37.54%; and total risk-based
capital 37.98%. 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, 2010, see Note
14 to consolidated financial statements contained in this Annual Report on Form 10-K.
Impact of Inflation
The financial statements included in this document have been prepared in accordance with
accounting principles generally accepted in the United States of America. These principles require the
measurement of financial position and operating results in terms of historical dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the effects of general levels of inflation. Interest rates,
however, do not necessarily move in the same direction or with the same magnitude as the price of goods
and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable
performance levels.
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area
of non-interest expense. Expense items such as employee compensation, employee benefits and
occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect
of inflation is the possible increase in the dollar value of the collateral securing loans that we have made.
We are unable to determine the extent, if any, to which properties securing our loans have appreciated in
dollar value due to inflation.
Recent Accounting Pronouncements
For a discussion of the expected impact of recently issued accounting pronouncements that have
yet to be adopted by the Company, please refer to Note 2 of the Notes to the Consolidated Financial
Statements.
89
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
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.
90
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, 2010,
$716.3 million or 73.1% of our certificates of deposit mature within one year with an additional $173.0
million or 17.7% 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, 2010, 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,
2010, $21.1 million, or 2.1% of our total loans will reach their contractual maturity dates within one year
with the remaining $992.1 million, or 97.9% of total loans having remaining terms to contractual maturity
in excess of one year. Of loans maturing after one year, $886.0 million or 89.3% had fixed rates of
interest while the remaining $106.0 million or 10.7% had adjustable rates of interest.
Regarding investment securities, at June 30, 2010, only $4.8 million or 0.5% of our securities will
reach their contractual maturity dates within one year with the remaining $984.9 million, or 99.5% of
total securities, having remaining terms to contractual maturity in excess of one year. Of the latter
category, $801.3 million comprising 81.0% of our total securities had fixed rates of interest while the
remaining $183.6 million comprising 18.5% of our total securities had adjustable or floating rates of
interest.
At June 30, 2010, mortgage-related assets, including mortgage loans and mortgage-backed
securities, total $1.65 billion and comprise 76.4% 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.
91
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 2010, the degree of that
sensitivity, as measured internally by the institution’s one-year and three-year gap percentages, has
declined during fiscal 2010. Specifically, the Company’s cumulative one-year gap percentage improved
from -5.17% at June 30, 2009 to +0.91% at June 30, 2010. Moreover, the Company’s cumulative three-
year gap percentage changed from +3.47% to +9.00% 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.
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
92
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, 2010. During that three-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 369 basis points from 4.01% at June
30, 2007 to 0.32% at June 30, 2010. By comparison, the market yield on the 10-year U.S. Treasury
decreased by only 206 basis points from 5.03% to 2.97% over those same time periods. The steepening
yield curve during that three year period had a beneficial impact on the Company’s net interest spread
which increased 75 basis points from 1.70% for the year ended June 30, 2007 to 2.45% for the year ended
June 30, 2010.
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.
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
93
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, 2010
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, 2010
and June 30, 2009, respectively.
At June 30, 2010
Net Portfolio Value
Changes in Rates
(1)
$ Amount
$ Change
(In Thousands)
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Value Ratio
Basis Point
Change
% Change
+300 bps
+200 bps
+100 bps
0 bps
-100 bps
311,695
365,314
411,386
438,090
446,764
-126,395
-72,776
-26,704
-
8,674
-29%
-17%
-6%
-
+2%
14.34%
16.32%
17.90%
18.71%
18.88%
-437 bps
-239 bps
-81 bps
-
+18 bps
At June 30, 2009
Net Portfolio Value
Changes in Rates
(1)
$ Amount
$ Change
(In Thousands)
Net Portfolio Value
as % of Present Value of Assets
Net Portfolio
Value Ratio
Basis Point
Change
% Change
+300 bps
+200 bps
+100 bps
0 bps
-100 bps
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
(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
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 increased by 39 basis points from
-200 basis points at June 30, 2009 to –239 basis points at June 30, 2010 which indicates an aggregate
increase 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.
94
While several internal and external factors working in concert contributed to the reported change
in the Bank’s sensitivity measure, the Bank attributes the net increase in that measure from year to year to
the overall increase in investment securities funded through the reinvestment of short term, liquid assets
and incoming cash flows from growth in deposits and a net decrease in loans receivable.
Specifically, the Company’s investment portfolio, comprising both mortgage-backed and non-
mortgage backed securities, increased by $273.5 million to $989.7 million at June 30, 2010 from $716.1
million at June 30, 2009. The funding for that growth was provided, in part, by a net decrease in the
Company’s cash and cash equivalents of $30.1 million from $211.5 million or 10.0% of total assets at
June 30, 2009 to $181.4 million or 7.8% of total assets at June 30, 2010. The reinvestment of short term
liquid assets, which are re-priced on a day-to-day basis to reflect current market interest rates, into
comparatively longer duration investment securities contributed to the reported increase in the sensitivity
measure.
Funding for the increase in investments was also provided by the growth in deposits which
increased by $202.4 million from June 30, 2009 to June 30, 2010. A significant portion of that increase
included growth in certificates of deposit that, in aggregate, reprice more frequently than the investments
into which such funds were deployed thereby contributing to the reported increase in interest rate
sensitivity.
The $32.1 decline in loans receivable between those same comparative periods, excluding
changes in the allowance for loan losses, also contributed to the funding for the growth in investment
securities. In general, the reinvestment of loan repayments into comparatively shorter duration
investment securities partially offset the increases in interest rate sensitivity arising from the other funding
sources. Taken together, however, these changes in balance sheet allocation increased the aggregate
longevity of the Bank’s interest-earning assets in relation to its interest-bearing liabilities and, thereby,
increased 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, 2010 and June 30,
2009. 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).
95
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, 2010
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)
-
Static
0 bps
One Year
$
59,683 $
-
- %
Parallel
Static
+100 bps
One Year
59,538
-145
-0.24
Parallel
Static
+200 bps
One Year
58,809
-874
-1.46
Parallel
Static
+300 bps
One Year
56,713
-2,970
-4.98
Rate Change
Type
Base case
(No change)
Immediate and
permanent
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.
Item 8. Financial Statements and Supplementary Data
The Company’s consolidated financial statements are contained in this Annual Report on Form
10-K immediately following Item 15.
96
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
On October 1, 2009, the Registrant was notified that the audit practice of Beard Miller LLP
(“Beard”) was combined with Parente Randolph, LLC to form ParenteBeard LLC (“ParenteBeard”). On
October 1, 2009, Beard resigned as the Registrant’s auditors and with the approval of the Audit
Committee of the Registrant’s Board of Directors on October 5, 2009, ParenteBeard was engaged as its
independent registered public accounting firm.
Prior to engaging ParenteBeard, the Registrant did not consult with ParenteBeard regarding the
application of accounting principles to a specific completed or contemplated transaction or regarding the
type of audit opinions that might be rendered by ParenteBeard on the Registrant’s financial statements,
and ParenteBeard did not provide any written or oral advice that was an important factor considered by
the Registrant in reaching a decision as to any such accounting, auditing or financial reporting issue.
The reports of Beard regarding the Registrant’s consolidated financial statements for the fiscal
years ended June 30, 2009 and 2008 did not contain any adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the years ended June 30, 2009 and 2008, and during the interim period from the end of the
most recently completed fiscal year through the date of their resignation, there were no disagreements
with Beard on any matter of accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements, if not resolved to the satisfaction of Beard would have caused
it to make reference to such disagreement in its reports.
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 ParenteBeard LLC 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.
97
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.
98
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 2010 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.
99
(d)
Securities Authorized for Issuance Under Equity Compensation Plans. Set forth
below is information as of June 30, 2010 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))
Equity compensation plans
approved by shareholders:
2005 Stock Compensation
and Incentive Plan (1)
Equity compensation plans not
approved by stockholders:
None.
Total
3,225,740
$
12.33
N/A
N/A
3,225,740
$
12.33
475,856
N/A
475,856
(1)
In addition to 3,225,740 options outstanding under this plan as of June 30, 2010, restricted stock awards of 250,539 shares
were non-vested under this plan as of June 30, 2010. 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, 2010, 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 section captioned “Corporate Governance – Related Party
Transactions” and “ – Director Independence” 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.
100
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:
Management Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of
June 30, 2010 and 2009
Consolidated Statements of Income For the Years Ended
June 30, 2010, 2009 and 2008
Consolidated Statements of Changes in Stockholders’ Equity
for the Years Ended June 30, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2010, 2009 and 2008
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:
2.1
Agreement and Plan of Merger, dated as of May 25, 2010, by and among Kearny
Financial Corp., Kearny Federal Savings Bank, Central Jersey Bancorp and
Central Jersey Bank, National Association *
3.1 Charter of Kearny Financial Corp.**
3.2
4
10.1
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****†
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9 Directors Consultation and Retirement Plan**†
10.10 Benefit Equalization Plan**†
10.11 Benefit Equalization Plan for Employee Stock Ownership Plan**†
10.12 Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan *****†
101
10.13 Kearny Federal Savings Bank Director Life Insurance Agreement******†
10.14 Kearny Federal Savings Bank Executive Life Insurance Agreement******†
10.15 Kearny Financial Corp. Directors Incentive Compensation Plan*******†
11
16.1
21
23
31
32
Statement regarding computation of earnings per share
Letter re Change in Certifying Accountant ********
Subsidiaries of the Registrant
Consent of ParenteBeard LLC
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 identically numbered exhibit to the Registrant’s Current
Report on Form 8-K filed May 26 2010.
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 Current Report on 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 Current Report on Form 8-K filed
on August 18, 2005. (File No. 000-51093).
Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed
on December 9, 2005. (File No. 000-51093).
******** Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed
on October 6, 2009. (File No. 000-51093).
102
120 PASSAIC AVENUE FAIRFIELD, NJ 07004-3510 973-244-4500
September 13, 2010
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, 2010. 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, 2010, 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, 2010, a copy of which is included in this annual report.
John N. Hopkins
Chief Executive Officer
Craig L. Montanaro
President and
Chief Operating Officer
William C. Ledgerwood
Executive 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, 2010, 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.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2010, 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 13, 2010 expressed an unqualified opinion thereon.
Clark, New Jersey
September 13, 2010
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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and
the consolidated results of their operations and cash flows for each of the years in the three-year period
ended June 30, 2010, 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,
2010, 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 13, 2010, expressed an unqualified opinion thereon.
Clark, New Jersey
September 13, 2010
F-1
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
Assets
Cash and amounts due from depository institutions
Interest-bearing deposits in other banks
Cash and Cash Equivalents
Securities available for sale (amortized cost; 2010 $30,960; 2009 $31,658)
Securities held to maturity (estimated fair value; 2010 $256,914; 2009 $-0-)
Loans receivable, including net premiums and deferred loan costs 2010 $564; 2009 $962
Less allowance for loan losses
Net Loans Receivable
Mortgage-backed securities available for sale (amortized cost; 2010 $673,414; 2009
$665,127)
Mortgage-backed securities held to maturity (estimated fair value; 2010 $1,754; 2009 $3,678)
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
June 30,
2010
2009
(In Thousands, Except Share
and Per Share Data)
$ 3,286
178,136
181,422
29,497
255,000
1,013,713
(8,561)
1,005,152
703,455
1,700
34,989
12,867
8,338
82,263
19,833
-
5,297
$ 25,970
185,555
211,525
28,027
-
1,045,847
(6,434)
1,039,413
683,785
4,321
35,495
12,950
8,237
82,263
16,267
1,395
1,243
Total Assets
$2,339,813
$2,124,921
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Non-interest bearing
Interest-bearing
Total Deposits
Advances from FHLB
Advance payments by borrowers for taxes
Deferred income tax liabilities, net
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;
2010 68,344,277 outstanding; 2009 69,241,600 outstanding
Paid-in capital
Retained earnings
Unearned Employee Stock Ownership Plan shares; 2010 969,828 shares; 2009 1,115,304
shares
Treasury stock, at cost; 2010 4,393,223 shares; 2009 3,495,900 shares
Accumulated other comprehensive income
Total Stockholders’ Equity
$ 53,709
1,569,853
$ 51,210
1,369,991
1,623,562
1,421,201
210,000
5,699
4,391
10,235
210,000
5,714
-
11,286
1,853,887
1,648,201
-
7,274
213,529
312,844
(9,698)
(54,738)
16,715
485,926
-
7,274
208,577
309,687
(11,153)
(45,985)
8,320
476,720
Total Liabilities and Stockholders’ Equity
$2,339,813
$2,124,921
See notes to consolidated financial statements.
F-2
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
Net Interest Income after Provision for Loan Losses
Non-Interest Income
Fees and service charges
Gain (loss) 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 and systems
Advertising
Federal deposit insurance premium
Directors’ compensation
Merger-related expenses
Miscellaneous
Total Non-Interest Expenses
Income before Income Taxes
Income Taxes
Net Income
Net Income per Common Share (EPS)
Basic and Diluted
Weighted Average Number of Common Shares Outstanding
Basic
Diluted
See notes to consolidated financial statements.
F-3
2010
Years Ended June 30,
2009
(In Thousands, Except Per Share Data)
2008
$58,129
30,450
3,070
631
828
93,108
28,089
8,232
36,321
56,787
2,616
54,171
1,422
509
(446)
240
(206)
973
2,698
26,936
4,172
4,429
907
1,307
2,213
373
4,757
45,094
11,775
4,963
$60,559
34,944
408
634
1,363
97,908
35,694
8,506
44,200
53,708
317
53,391
1,415
(415)
(988)
274
(714)
1,233
1,519
25,449
4,132
4,486
900
1,864
2,200
-
4,891
43,922
10,988
4,597
$55,123
34,773
1,186
1,074
5,211
97,367
43,308
7,220
50,528
46,839
94
46,745
1,336
-
(659)
-
(659)
1,372
2,049
24,678
3,746
4,546
852
186
2,250
-
4,681
40,939
7,855
1,951
$ 6,812
$ 6,391
$ 5,904
$0.10
$0.09
$0.08
67,920
68,710
69,522
67,920
68,710
69,522
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2010, 2009 and 2008
Common Stock
Shares
Amount
Paid in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
71,143
$ 7,274
$ 197,976
$ 304,970
$ (14,063)
$ (24,361)
$ (9,204)
$ 462,592
Balance – June 30, 2007
Comprehensive income:
Net income
Loss on impairment of securities available
for sale, net of tax benefit of $0
Unrealized gain on securities available for
sale, net of deferred income tax expense
of $4,091
Benefit plan, 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
F
-
4
-
-
-
-
-
-
-
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)
(659)
5
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
278
54
1,908
-
(13)
3,084
(21)
-
5,904
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,455
-
-
-
-
-
-
(3,688)
-
-
-
-
-
-
-
(7,738)
76
-
-
-
-
659
6,169
652
-
-
-
-
-
-
-
-
5,904
659
6,169
652
13,384
1,733
54
1,908
(7,738)
63
3,084
(21)
(3,688)
Balance – June 30, 2008
70,489
$ 7,274
$ 203,266
$ 307,186
$ (12,608)
$ (32,023)
$ (1,724)
$ 471,371
See notes to consolidated financial statements.
F-4
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2010, 2009 and 2008
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 income tax benefit of $113
Benefit plan, net of deferred income tax
expense of $116
Total comprehensive income
Adjustment to initially apply benefit plan
measurement date provisions, net of
income tax benefit of $34
Cumulative-effect adjustment to initially apply
split-dollar life insurance guidance
Cumulative-effect adjustment to initially apply
security impairment guidance, net of income
tax benefit of $115
ESOP shares committed to be released
(144 shares)
Dividends contributed for payment of
ESOP loan
Stock option expense
F
-
5
-
-
-
-
-
-
-
-
-
-
Treasury stock purchases
(1,247)
Restricted stock plan shares earned (251 shares)
Tax effect from stock-based compensation
Cash dividends declared ($0.20/public share)
-
-
-
Common Stock
Shares
Amount
Paid in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
70,489
$ 7,274
$ 203,266
$ 307,186
$ (12,608)
$ (32,023)
$ (1,724)
$ 471,371
-
-
-
6,391
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
236
81
1,906
-
3,086
2
-
-
-
-
-
(66)
(480)
165
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,455
-
-
-
-
-
(3,509)
-
-
-
-
-
-
-
-
-
-
(13,962)
-
-
-
-
245
6,391
245
9,925
9,925
(161)
184
16
-
(165)
-
-
-
-
-
-
-
(161)
184
16,584
(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-5
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended June 30, 2010, 2009 and 2008
Balance – June 30, 2009
Comprehensive income:
Net income
Realized gain on securities available for sale,
net of income tax expense of $634
Unrealized gain on securities available for
sale, net of deferred income tax expense
of $6,171
Non-credit related other-than-temporary
impairment on securities held to
maturity sold, net of deferred income tax
expense of $228
Benefit plan, net of deferred income tax
expense of $36
F
-
6
Total comprehensive income
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)
Cash dividend to Kearny MHC
Common Stock
Shares
Amount
Paid in
Capital
Retained
Earnings
Unearned
ESOP
Shares
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
69,242
$ 7,274
$ 208,577
$ 309,687
$ (11,153)
$ (45,985)
$ 8,320
$ 476,720
-
-
-
-
-
-
-
-
(898)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
107
1,907
-
3,084
(176)
-
-
6,812
-
-
-
-
-
-
-
-
-
-
(3,355)
(300)
-
-
-
-
-
1,455
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8,753)
-
-
-
-
-
(911)
6,812
(911)
8,925
8,925
326
55
-
-
-
-
-
-
-
-
326
55
15,207
1,485
107
1,907
(8,753)
3,084
(176)
(3,355)
(300)
Balance – June 30, 2010
68,344
$ 7,274
$ 213,529
$ 312,844
$ (9,698)
$ (54,738)
$ 16,715
$ 485,926
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 on sale of securities available for sale
Realized gain on sale of mortgage-backed securities
available for sale
Realized loss on sale of mortgage-backed securities
held to maturity
Loss on other-than-temporary impairment of securities
Realized gain on sale of deposits
Realized loss on disposition of premises and
equipment
Realized gain on sale of real estate owned
Increase in cash surrender value of bank owned life
insurance
ESOP, stock option plan and restricted stock plan expenses
(Increase) decrease in interest receivable
(Increase) decrease in other assets
Increase (decrease) in interest payable
(Decrease) increase in other liabilities
2010
Years Ended June 30,
2009
(In Thousands)
2008
$ 6,812
$ 6,391
$ 5,904
1,745
1,777
952
(15)
22
143
2,616
-
(1,545)
1,036
206
-
13
(8)
(556)
6,476
(101)
(4,021)
13
(1,059)
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)
Net Cash Provided by Operating Activities
12,729
20,156
16,248
See notes to consolidated financial statements.
F-7
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
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 securities held to maturity
Proceeds from calls and maturities of securities held to maturity
Purchases of loans
Net decrease (increase) in loans receivable
Proceeds from sale of real estate owned
Purchases of mortgage-backed securities available for sale
Principal repayments on mortgage-backed securities available for
sale
Proceeds from sale of mortgage-backed securities available for
sale
Principal repayments on mortgage-backed securities held to
maturity
Proceeds from sale of mortgage-backed securities held to maturity
Additions to premises and equipment
Proceeds from cash settlement on premises and equipment
Purchase of bank owned life insurance
Purchases of FHLB stock
Redemptions of FHLB stock
2010
Years Ended June 30,
2009
(In Thousands)
2008
$ -
-
-
699
(265,000)
10,000
(31,216)
62,091
495
(224,643)
$ -
1,353
35
872
-
-
(67,698)
49,348
-
(77,364)
$ (357)
48,476
661
838
-
-
(102,228)
(59,319)
-
(224,188)
182,836
137,741
152,694
34,215
932
1,124
(1,258)
6
(3,010)
-
83
-
780
-
(2,328)
-
-
(459)
585
-
-
-
(1,437)
-
-
(9,386)
472
Net Cash Provided by (Used in) Investing Activities
(232,646)
42,865
(193,774)
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 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
Tax (expense) benefit from stock based compensation
Net Cash Provided by Financing Activities
202,344
-
-
-
(15)
(3,693)
(8,753)
-
107
(176)
189,814
Net (Decrease) Increase in Cash and Cash Equivalents
(30,103)
50,615
(8,254)
(8,000)
-
(135)
(3,566)
(13,962)
-
81
2
16,781
79,802
(32,639)
-
(10,488)
200,000
389
(3,712)
(7,738)
63
54
(21)
145,908
(31,618)
Cash and Cash Equivalents - Beginning
211,525
131,723
163,341
Cash and Cash Equivalents - Ending
$181,422
$211,525
$131,723
See notes to consolidated financial statements.
F-8
Kearny Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
2010
Years Ended June 30,
2009
(In Thousands)
2008
Supplemental Disclosures of Cash Flows Information
Cash paid during the year for:
Income taxes, net of refunds
$ 4,606
$ 3,854
$ 1,946
Interest
$ 36,308
$ 44,272
$ 49,650
Non-cash investing activities:
Real estate owned acquired in settlement of loans
$ 543
$ -
$ -
Mortgage-backed securities held to maturity received in
exchange for equity security available for sale
$ -
$ 5,972
$ -
See notes to consolidated financial statements.
F-9
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 27 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, 2010 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-10
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, 2010 and during the three-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 applicable accounting standards, 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”.
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-11
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 generally amortized/accreted to maturity by use of the level-yield
method considering the impact of principal amortization and prepayments on mortgage-backed securities.
Premiums on callable securities are generally 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, 2010, the Company had
interest-earning accounts totaling $5,932,000 and $172,204,000 in one money center bank and the Federal
Home Loan Bank (“the FHLB”) of New York, respectively, while non-interest-earning accounts held in these
and other depository institutions totaled $3,286,000. 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 collectability no longer exist.
F-12
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 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. 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 which
addresses loans not otherwise reviewed individually for impairment. 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.
F-13
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
Valuation allowances established through the second tier of the loss measurement process 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 six primary categories: residential mortgage loans, multi-
family mortgage loans, nonresidential mortgage loans, construction loans, commercial business loans and
consumer loans. Within these broad categories, the Company defines certain segments. For example, the
residential mortgage loan category comprises four primary segments including one-to-four family originated
mortgage loans, one-to-four family purchased loans, home equity loans and home equity lines of credit.
Commercial real estate loans, comprising the multi-family and nonresidential mortgage loan categories are
each grouped into participations originated through the Thrift Institutions Community Investment Corporation
of New Jersey (“TICIC”), a subsidiary of the New Jersey Bankers Association, and other (non-TICIC) loans.
Construction loans segments also differentiate between TICIC participations and other (non-TICIC) loans
while also grouping loans by underlying property types such as one-to-four family, multi-family and
nonresidential construction loans. Commercial business loans are generally grouped by collateral type while
consumer loans are broken into segments based on both collateral type and/or purpose.
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 currently utilizes a two-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. During earlier
fiscal years, the Company had generally utilized a five-year “look-back” period to determine the average
charge-off history used in the calculation of historical loss factors. The Company reduced that “look-back”
period to two years during fiscal 2010 to better reflect the level of actual losses incurred during the current
credit cycle in the calculation of its historical loss factors. 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 through the first and second tiers of the loss
measurement processes 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
F-14
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
valuation allowance to the targeted balance calculated at the end of the fiscal period. 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. 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. 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.
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.
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 with the carrying amount of that goodwill. An impairment loss is recorded to the
F-15
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
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, 2010, 2009 or 2008. 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. The balance of other intangible assets, which were limited
to unamortized yield adjustments on purchased deposits, were fully amortized by June 30, 2010.
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.
Effective July 1, 2008, the Company adopted revised accounting guidance concerning accounting for deferred
compensation and postretirement benefit aspects of endorsement split-dollar life insurance arrangements.
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 $39,000 and $33,000 for the years ended June 30, 2010 and 2009, respectively, attributable to
the increase in the deferred liability.
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 revised accounting guidance concerning accounting for
uncertainty in income taxes. The guidance provided clarification on accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with applicable accounting standards.
The guidance prescribed 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.
F-16
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
The Company’s indentified no significant income tax uncertainties through the evaluation of its income tax
positions for the year ended June 30, 2010. Therefore, the Company recognized no adjustment for
unrecognized income tax benefits during fiscal 2010. 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-, $-0- and $45,000 during the years ended June 30, 2010, 2009, and
2008, respectively. The tax years subject to examination by the taxing authorities are the years ended June
30, 2009, 2008 and 2007.
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
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 in accordance with applicable accounting standards. 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 those
standards.
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.
F-17
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
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. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common stock, such as
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.
Stock Compensation Plans
Upon approval of the Kearny Financial Corp. 2005 Stock Compensation and Incentive Plan on October 24,
2005, the Company adopted applicable accounting standards requiring the expensing of 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 Expenses
The Company expenses advertising and marketing costs as incurred.
Reclassification
Certain amounts as of and for the years ended June 30, 2009 and 2008 have been reclassified to conform to
the current year’s presentation.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the consolidated statement of
condition date of June 30, 2010, for items that should potentially be recognized or disclosed in these
consolidated financial statements. The evaluation was conducted through the date these consolidated
financial statements were issued.
Proposed Acquisition of Central Jersey Bancorp
On May 25, 2010, the Company and the Bank entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Central Jersey Bancorp (“Central Jersey”) and its wholly owned subsidiary, Central Jersey
Bank, National Association (“Central Jersey Bank”), pursuant to which Central Jersey will merge with a to-
be-formed subsidiary of the Company and thereby become a wholly owned subsidiary of Company (the
“Merger”). Immediately thereafter, Central Jersey Bank will merge with and into the Bank (the “Bank
Merger”). Central Jersey Bank will operate as a division of the Bank for at least 18 months after closing. At
June 30, 2010, Central Jersey Bank had $576.8 million in assets and 13 branch offices in Monmouth and
Ocean Counties, New Jersey.
Under the terms of the Merger Agreement, shareholders of Central Jersey will receive $7.50 in cash (the
“Merger Consideration”) for each share of Central Jersey common stock held. The Merger Agreement also
F-18
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies (Continued)
provides that all options to purchase Central Jersey stock that are outstanding and unexercised immediately
prior to the closing under Central Jersey’s various stock option plans will be cancelled in exchange for a cash
payment equal to the positive difference between $7.50 and the exercise price. The estimated aggregate value
of the transaction is $72.3 million.
Central Jersey will use its best efforts to redeem the 11,300 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A previously issued to the U.S. Department of Treasury under the TARP Capital
Purchase Plan immediately before or contemporaneously with closing. The warrant issued to the U.S.
Treasury in connection with Treasury’s preferred stock investment will be converted into the right to receive
the difference between $7.50 and the warrant exercise price times the number of shares covered by the
warrant.
Consummation of the Merger is subject to certain conditions, including, among others, approval of the
Merger by shareholders of Central Jersey, governmental filings and regulatory approvals and expiration of
applicable waiting periods, absence of litigation, accuracy of specified representations and warranties of the
other party, and obtaining material permits and authorizations for the lawful consummation of the Merger and
the Bank Merger. The Merger is also conditioned upon Central Jersey’s nonperforming assets, as defined in
the Merger Agreement, not exceeding $20.0 million between March 31, 2010 and the Closing Date.
The transaction is expected to close during the Company’s second fiscal quarter ending December 31, 2010.
Merger-related Expenses
Merger-related expenses are recorded in the Consolidated Statements of Income and include costs relating to
Kearny Financial Corp.’s proposed acquisition of Central Jersey Bancorp as described above. These charges
represent one-time costs associated with acquisition activities and do not represent ongoing costs of the fully
integrated combined organization. Accounting guidance requires that acquisition-related transaction and
restructuring costs incurred by the Company after June 30, 2009 be charged to expense as incurred.
Previously, such expenses were included as part of the consideration paid and effectively recorded as an
adjustment to goodwill.
Note 2 – Recent Accounting Pronouncements
In June 2009, the FASB issued guidance concerning accounting for transfers of financial assets, an amendment to
previous guidance on the topic. 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, this guidance amends previous guidance concerning accounting for transfers
and servicing of financial assets and extinguishments of liabilities by removing the concept of a qualifying
special-purpose entity from previous guidance on transfers and servicing and removes the exception from
applying previous guidance on transfers and servicing to variable interest entities that are qualifying special-
purpose entities. It also modifies the financial-components approach used in previous guidance. This guidance 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 guidance concerning consolidation of variable interest entities 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
F-19
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Recent Accounting Pronouncements (Continued)
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. This guidance also amends previous guidance to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity. This guidance 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 October 2009, the FASB issued guidance concerning accounting for own-share lending arrangements in
contemplation of convertible debt issuance or other financing. The guidance amends earlier guidance and
provides direction for accounting and reporting for own-share lending arrangements issued in contemplation of a
convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own
shares should be measured at fair value in accordance with the guidance on fair value measurements and
disclosures and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are
excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The
amendments also require several disclosures including a description and the terms of the arrangement and the
reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the
share-lending arrangement was entered into and include retrospective application for arrangements outstanding as
of the beginning of fiscal years beginning on or after December 15, 2009. The Company is currently evaluating
the potential impact the new pronouncement will have on its consolidated financial statements.
In January 2010, the FASB issued guidance concerning fair value measurement and disclosures. The guidance
mandates additional disclosure requiring that a reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers while also requiring that in the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). The guidance clarifies existing fair value
disclosure requirements such that a reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities. Moreover, a reporting entity should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required
for fair value measurements that fall in either Level 2 or Level 3. This guidance also includes conforming
amendments regarding employers' disclosures about postretirement benefit plan assets. The conforming
amendments change the terminology from “major categories” of assets to “classes” of assets and provide a cross
reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value
disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The
implementation of the new pronouncement during the quarter ended March 31, 2010 did not have a material
impact on the Company’s consolidated financial position or results of operations. The Company is currently
evaluating the potential impact the new pronouncement will have on its consolidated financial statements for
those disclosures that go into effect during fiscal 2011.
F-20
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 2 – Recent Accounting Pronouncements (Continued)
In April, 2010, the FASB issued amended guidance that codifies the consensus reached regarding the effect of a
loan modification when the loan is part of a pool that is accounted for as a single asset. The amendments to the
Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do
not result in the removal of those loans from the pool even if the modification of those loans would otherwise be
considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of
assets in which the loan is included is impaired if expected cash flows for the pool change. The amended guidance
does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within
pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt
restructuring accounting provisions within Subtopic 310-40. The amended guidance is effective prospectively for
modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual
period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an
entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This
election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to
subsequent acquisitions of loans with credit deterioration. The Company is currently evaluating the potential
impact the new pronouncement will have on its consolidated financial statements.
In July, 2010, the FASB issued guidance concerning disclosures about the credit quality of financing receivables
and the allowance for credit losses that will help investors assess the credit risk of a company’s receivables
portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk
disclosures. This guidance requires more information about the credit quality of financing receivables in the
disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing
disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on
how a company develops its allowance for credit losses and how it manages its credit exposure. The amendments
in this guidance apply to all public and nonpublic entities with financing receivables. Financing receivables
include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables
measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure
amendments. The effective date of the guidance differs for public and nonpublic companies. For public
companies, the amendments that require disclosures as of the end of a reporting period are effective for periods
ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during
a reporting period are effective for periods beginning on or after December 15, 2010. For nonpublic companies,
the amendments are effective for annual reporting periods ending on or after December 15, 2011. The Company
is currently evaluating the potential impact the new pronouncement will have on its 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.
F-21
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 3 – Stock Offering and Stock Repurchase Plans (Continued)
On January 18, 2007, the Company announced that the Board of Directors authorized a 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 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 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 year ended June 30, 2010, the Company completed
this stock purchase plan, purchasing in the open market 535,223 shares at a total cost of $5,469,000, or
approximately $10.22 per share.
On May 26, 2010, the Company announced that the Board of Directors authorized a stock repurchase plan to
acquire up to 889,506 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny
MHC. During the year ended June 30, 2010, the Company purchased in the open market 362,100 shares at a cost
of $3,284,000, or approximately $9.07 per share.
During the years ended June 30, 2010, 2009 and 2008, the federally chartered mutual holding company of the
Company, Kearny MHC, waived its right, upon non-objection from the Office of Thrift Supervision, to receive
cash dividends of $9,883,000, $10,183,000 and $10,183,000, respectively, declared by the Company during the
year. The MHC elected to receive $300,000 of such dividends during fiscal 2010.
F-22
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Securities Available for Sale
Amortized cost, gross unrealized gains and losses and estimated fair value of securities at June 30, 2010 and 2009
and stratification by contractual maturity of securities at June 30, 2010 are presented below:
Amortized
Cost
June 30, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
Debt securities:
Trust preferred securities
U.S. agency securities
Obligations of state and political subdivisions
$ 8,855
3,980
18,125
$ -
1
830
$ 2,255
39
-
$ 6,600
3,942
18,955
Total debt securities
30,960
831
2,294
29,497
Mortgage pass-through securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage pass-through
securities
14,660
263,481
395,273
999
10,267
18,884
31
44
34
15,628
273,704
414,123
673,414
30,150
109
703,455
Total securities available for sale
$ 704,374
$ 30,981
$ 2,403
$ 732,952
Debt securities available for sale:
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, 2010
Fair
Value
Amortized
Cost
(In Thousands)
$ -
5,220
13,026
12,714
$ -
5,490
13,582
10,425
$ 30,960
$ 29,497
F-23
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 4 - Securities Available for Sale (Continued)
Amortized
Cost
June 30, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Carrying
Value
Debt securities:
Trust preferred securities
U.S. agency securities
Obligations of state and political subdivisions
$ 8,846
4,645
18,167
$ 40
-
237
$ 3,756
88
64
$ 5,130
4,557
18,340
Total debt securities
31,658
277
3,908
28,027
Mortgage pass-through securities:
Government National Mortgage Association
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage pass-through
securities
17,620
282,068
365,439
861
7,980
10,723
50
580
276
18,431
289,468
375,886
665,127
19,564
906
683,785
Total securities available for sale
$ 696,785
$ 19,841
$ 4,814
$ 711,812
During the years ended June 30, 2010, 2009 and 2008, proceeds from sales of securities available for sale totaled
$34,215,000, $7,325,000 and $48,476,000 and resulted in gross gains of $1,545,000, $-0- and $57,000 and gross
losses of $-0-, $415,000 and $57,000, respectively.
At June 30, 2010 and 2009, securities available for sale with carrying value of approximately $243,744,000 and
$245,238,000, respectively, were utilized as collateral for borrowings via repurchase agreements through the
FHLB of New York. As of those same dates, securities available for sale with carrying value of approximately
$1,421,000 and $1,634,000, respectively, were pledged to secure public funds on deposit.
At June 30, 2010 and 2009, 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-24
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Securities Held to Maturity
Amortized cost, gross unrealized gains and losses and estimated fair value of securities at June 30, 2010 and 2009
and stratification by contractual maturity of securities at June 30, 2010 are presented below:
Carrying
Value
June 30, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Estimated
Fair Value
Debt securities:
U.S. agency securities
$ 255,000
$ 1,914
$ -
$ 256,914
Total debt securities
255,000
1,914
-
256,914
Mortgage-related securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total collateralized mortgage
obligations
Mortgage pass-through securities:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage pass-through
securities
Total mortgage-related securities
99
767
310
1,176
168
356
524
1,700
12
71
2
85
5
9
14
99
-
1
43
44
-
1
1
45
$ 111
837
269
1,217
173
364
537
1,754
Total securities held to maturity
$ 256,700
$ 2,013
$ 45
$ 258,668
Debt securities held to maturity:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
F-25
At June 30, 2010
Fair
Value
Amortized
Cost
(In Thousands)
$ -
200,000
40,000
15,000
$ -
201,571
40,071
15,272
$ 255,000
$ 256,914
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 5 – Securities Held to Maturity (Continued)
Carrying
Value
June 30, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Estimated
Fair Value
Mortgage-related securities:
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Non-agency securities
Total collateralized mortgage
obligations
Mortgage pass-through securities:
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
Total mortgage pass-through
securities
Total mortgage-related securities
$ 175
1,030
2,509
3,714
198
409
607
4,321
$ 14
72
2
$ -
3
731
$ 189
1,099
1,780
88
2
2
4
92
734
3,068
-
1
1
735
200
410
610
3,678
Total securities held to maturity
$ 4,321
$ 92
$ 735
$ 3,678
During the year ended June 30, 2010, proceeds from sales of securities held to maturity totaled $1,124,000, and
resulted in gross losses of $1,036,000. The proceeds and losses were fully attributable to the sale of the
Company’s non-investment grade, non-agency collateralized mortgage obligations. These securities were
originally acquired as investment grade securities upon the in-kind redemption of the Bank’s interest in the AMF
Fund during the first quarter of fiscal 2009. The ratings of these securities subsequently declined below
investment grade with most ultimately being identified as other-than-temporarily impaired resulting in their
eligibility for sale from the held-to-maturity portfolio during fiscal 2010. There were no sales of securities from
the held to maturity portfolio during the prior fiscal years ended June 30, 2009 and 2008.
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, 2010.
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-26
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities
The following four tables summarize the fair values and gross unrealized losses within the available for sale and
held to maturity portfolios at June 30, 2010 and June 30, 2009. 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 other comprehensive income 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 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.
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(In Thousands)
$ -
-
$ -
-
$ 5,600
3,667
$ 2,255
39
$ 5,600
3,667
$ 2,255
39
559
4
906
105
1,465
109
$ 559
$ 4
$ 10,173
$ 2,399
$ 10,732
$ 2,403
$ -
79
$ -
1
$ 4,090
4,451
$3,756
87
$ 4,090
4,530
$3,756
88
Securities available for
sale:
June 30, 2010:
Trust preferred securities
U.S. agency securities
Mortgage pass-through
securities
Total
June 30, 2009:
Trust preferred securities
U.S. agency securities
Obligations of state and
political subdivisions
Mortgage pass-through
securities
31,356
546
22,085
-
-
3,767
64
360
3,767
53,441
64
906
Total
$31,435
$547
$34,393
$4,267
$65,828
$4,814
The number of available for sale securities with unrealized losses at June 30, 2010 totaled 28 and included four
trust preferred securities, six U.S. agency securities, and 18 mortgage-backed securities. The number of available
for sale securities with unrealized losses at June 30, 2009 totaled 80 and included four trust preferred securities,
eight U.S. agency securities, 12 obligations of state and political subdivisions and 56 mortgage-backed securities.
F-27
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
Less than 12 Months
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(In Thousands)
Securities held to
maturity:
June 30, 2010:
Collateralized mortgage
obligations
$ 76
$ 3
$ 218
$ 41
$ 294
$ 44
Mortgage pass-through
securities
Total
June 30, 2009:
Collateralized mortgage
66
1
-
-
66
1
$ 142
$ 4
$ 218
$ 41
$ 360
$ 45
obligations
$ 1,570
$ 734
$ -
$ -
$ 1,570
$ 734
Mortgage pass-through
securities
Total
120
1
-
-
120
1
$ 1,690
$ 735
$ -
$ -
$ 1,690
$ 735
The number of held to maturity securities with unrealized losses at June 30, 2010 totaled 23 and included one
mortgage-backed security and 22 collateralized mortgage obligations. 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 $704.8 million at June 30,
2010 and comprised 71.2% of total investments and 30.1% 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.
F-28
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
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 impact of these
factors on overall prepayment speeds was partially offset during fiscal 2010 by the accelerated repurchase of
delinquent loans out of mortgage-backed security pools by the agencies. The completion of the “bulk”
repurchases of delinquent loans by the agencies by June 30, 2010 is expected to generally result in a return to
slower prepayment speeds and extended average lives for agency mortgage-backed securities during fiscal
2011.
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.
During fiscal 2008 and fiscal 2009, the volatility and uncertainty in the marketplace had reduced the overall
level of demand for mortgage-backed securities which generally had an adverse impact on their prices in the
open market. This was 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.
During fiscal 2010, however, institutional demand for mortgage-backed securities increased reflecting greater
stability and liquidity in the financial markets coupled with the intervention of the Federal Reserve as a
buyer/holder of such securities. As a result, market prices of agency mortgage-backed securities generally
reflected the positive impact of these factors during fiscal 2010.
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
Company’s amortized cost. As of June 30, 2010, 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, 2010 to be “other-than-temporarily” impaired as of that date.
F-29
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
Non-agency Mortgage-backed Securities.
The carrying value of the Company’s non-agency mortgage-backed securities totaled $310,000 at June 30,
2010 and comprised less than one percent of total investments and total assets as of that date. As noted
earlier, all such securities were acquired during fiscal 2009 when the Company invoked a redemption-in-kind
relating to its prior investment in the AMF Fund.
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
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.
F-30
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
The impairments of those securities whose cash flows, when present valued, fall below the Company’s
amortized cost 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 amortized cost 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 amortized cost 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 generally 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. However, in the event of a severe deterioration of a security’s credit characteristics –
including, but not limited to, a reduction in credit rating from investment grade to below investment grade
and/or the recognition of credit-related impairment resulting from actual or expected deterioration of cash
flows - the Company may re-evaluate and restate its intent to hold an impaired security until the expected
recovery of its amortized cost.
For example, during the fourth quarter of fiscal 2010, the Company re-evaluated its intent regarding the
retention or sale of its impaired, nonagency collateralized mortgage obligations whose credit-ratings had
fallen below investment grade. The Company considered the combined effects of the severe deterioration of
the securities’ credit-ratings since their acquisition as investment grade securities and the actual and
anticipated cash flow losses that characterized most of the securities. Based on these factors, the Company
modified its intent regarding these impaired securities during the quarter ended June 30, 2010 from “hold to
recovery of amortized cost” to “sell” and sold such securities prior to the end of that same quarter.
At June 30, 2010, the Company's remaining portfolio of non-agency CMOs totaled 20 securities with an
aggregate outstanding balance of approximately $310,000. These securities, all of which remain in the held-
to-maturity portfolio, are rated as investment grade at June 30, 2010. Consequently, the Company has not
decided to sell any portion of the remaining balance of its non-agency mortgage-backed securities as of June
30, 2010. Additionally, the Company has concluded that the possibility of being required to sell such
securities prior to their anticipated recovery is unlikely based upon its strong liquidity, asset quality and
capital position as of that date.
In light of the factors noted above, the Company does not consider its balance of non-agency mortgage-
backed securities with unrealized losses at June 30, 2010 to be “other-than-temporarily” impaired as of that
date.
F-31
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
U.S. Agency Securities
The carrying value of the Company’s U.S. agency debt securities totaled $258.9 million at June 30, 2010 and
comprised 26.2% of total investments and 11.1% of total assets as of that date. Such securities are comprised
of $255.0 million of U.S. agency debentures and $3.9 million of securitized pools of loans issued and fully
guaranteed by the Small Business Administration (“SBA”), a U.S. government sponsored entity.
At June 30, 2010, the fair value of the Company’s SBA securities included a combination of unrealized gains
and losses. As of that same date, the fair value of the Company’s portfolio of U.S. agency debentures
reflected no unrealized losses. 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 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 SBA securities, as determined based
upon the market price of these securities, reflects the adverse effects of the historically low short term, market
interest rates at June 30, 2010.
Like the mortgage-backed securities described earlier, the currently diminished fair value of the Company’s
SBA 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 fluctuating supply and demand and in the
marketplace attributable to similar factors as those applying to mortgage-backed securities, as presented
above.
Unlike its SBA securities, the Company’s U.S. agency debentures are fixed rate investments whose fair
values over time reflect movements in comparatively longer term market interest rates. While there were no
unrealized losses in the agency debenture portfolio at June 30, 2010, fluctuation in the fair value of such
securities are generally attributable to movements in longer term market interest rates since their acquisition
by the Company.
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.
Notwithstanding their classification as available for sale versus held to maturity, the Company has both the
ability and intent, as of the periods presented, to hold the temporarily impaired securities within each segment
until the fair value of the securities recover to a level equal to or greater than the Company’s amortized cost.
As of June 30, 2010 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. Moreover, the
F-32
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
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, 2010 to be “other-than-temporarily” impaired as of that date. As such, the temporary
impairments associated with those securities classified as available for sale continue to be recognized through
other comprehensive income while the accounting for those securities classified as held to maturity continue
to be based upon historical cost.
Trust Preferred Securities
The outstanding balance of the Company’s trust preferred securities totaled $6.6 million at June 30, 2010 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, 2010, 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, 2010, the Company owned two securities at an amortized cost of $2.9 million that were
consistently rated as investment grade by Moody’s and Standard & Poor’s Financial Services (“S&P”). 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, 2010.
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.
F-33
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
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, 2010 that were consistently 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, 2010, 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 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
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, 2010 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. Toward that end, the fair values of the two securities
with combined amortized costs totaling $2.9 million representing de-facto obligations of JPMorgan Chase &
Co increased by approximately $557,000 or 18.6% of par to $2.2 million at June 30, 2010 from $1.7 million
at June 30, 2009. Additionally, the fair values of the two securities with combined amortized costs totaling
$4.9 million representing de-facto obligations of Bank of America Corporation increased $953,000 or 19.1%
of par to $3.4 million at June 30, 2010 from $2.4 million at June 30, 2009.
As of June 30, 2010 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. Moreover, the
Company purchased these securities at nominal discounts. Call provisions, where applicable, require full
F-34
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 – Impairment of Securities (Continued)
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, 2010 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
other comprehensive income.
The following table presents roll forwards of OTTI recognized in earnings due to credit-related losses.
Activity in credit-related other-than-temporary impairment
(“OTTI”) recognized through earnings
Cumulative
balance of
credit-
related
OTTI
recognized
in earnings
- beginning
Additions
for newly
identified
credit-
related
OTTI
Additions
to existing
OTTI for
further
credit-
related
declines in
fair value
Reductions
in credit-
related
OTTI for
security
sale
Reductions
in credit-
related
OTTI due to
accretion of
impairment
into interest
income
Cumulative
balance of
credit-
related
OTTI
recognized
in earnings
- ending
(In Thousands)
$
$
434 $
17 $
189 $
(639) $
290 $
92 $
52 $
- $
1 $
- $
-
434
Collateralized mortgage
obligations:
Non-agency securities:
Year ended
June 30, 2010
Three months ended
June 30, 2009
F-35
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 yield adjustments including net premiums on
purchased loans and net deferred loan costs and fees
June 30,
2010
2009
(In Thousands)
$ 866,863
$ 886,696
14,352
14,812
101,659
11,320
2,703
1,545
113,387
12,116
2,922
1,585
117,227
130,010
14,707
13,367
1,013,149
1,044,885
564
962
$1,013,713
$1,045,847
At June 30, 2010 and 2009, real estate mortgage loans included $663,850,000 and $689,317,000, respectively, of
loans secured by one-to-four-family residential properties and $203,013,000 and $197,379,000, respectively, of
commercial mortgage loans secured by multi-family and nonresidential 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 collectability. As of June 30, 2010 and 2009 such loans totaled approximately $4.1 million and $4.8
million, respectively. During the year ended June 30, 2010, new loans to related parties totaled $352,000 and
repayments totaled approximately $1,079,000.
F-36
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:
Balance – beginning
Provisions charged to operations
Loans charged off
Loans recovered
Balance – ending
2010
Years Ended June 30,
2009
(In Thousands)
2008
$6,434
2,616
(541)
52
$8,561
$6,104
317
(6)
19
$6,434
$6,049
94
(39)
-
$6,104
At June 30, 2010, 2009 and 2008, non-accrual loans for which the accrual of interest had been discontinued
totaled approximately $9,242,000, $8,135,000 and $1,573,000, respectively. Had these loans been performing in
accordance with their original terms, the interest income recognized for the years ended June 30, 2010, 2009 and
2008, would have been $629,000, $591,000 and $105,000, respectively. Interest income recognized on such
loans was $233,000, $134,000 and $47,000, respectively.
At June 30, 2010, 2009 and 2008, accruing loans which are contractually past due 90 days or more totaled
approximately $12,321,000, $5,017,000 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, 2010, 2009 and 2008, total impaired loans were $20,539,000, $11,075,000 and $2,485,000, and the
related allowance for loan losses totaled $4,315,000, $1,430,000 and $1,163,000, respectively. The portion of
impaired loans that did not have a specific allocation of the allowance for loan losses totaled $6,443,000,
$5,696,000 and $596,000 at June 30, 2010, 2009 and 2008, respectively. During the years ended June 30, 2010,
2009 and 2008, the average balance of impaired loans was $17,886,000, $5,546,000 and $2,519,000,
respectively, and interest income recognized during the periods of impairment totaled $826,000, $113,000 and
$117,000, respectively.
F-37
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,
2010
2009
(In Thousands)
$ 8,950
31,123
2,159
11,681
1,011
54,924
19,935
$ 8,964
31,395
577
11,124
2,003
54,063
18,568
$34,989
$35,495
Land included properties held for future branch expansion totaling $2,419,000 at both years ended June 30, 2010
and 2009.
Note 9 - Interest Receivable
Loans
Mortgage-backed securities
Debt securities
June 30,
2010
2009
(In Thousands)
$4,235
2,814
1,289
$8,338
$4,485
3,533
219
$8,237
F-38
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 - Goodwill and Other Intangible Assets
Balance at June 30, 2007
Amortization
Balance at June 30, 2008
Amortization
Balance at June 30, 2009
Amortization
Balance at June 30, 2010
Goodwill
Core Deposit
Intangibles
(In Thousands)
$ 82,263
-
82,263
-
82,263
-
$ 82,263
$ 292
(241)
51
(29)
22
(22)
$ -
The gross carrying amount of core deposit intangibles was $5,987,000 at both June 30, 2010 and 2009, while
accumulated amortization totaled $5,987,000 and $5,965,000 at June 30, 2010 and 2009, respectively. Deposit
intangibles were fully amortized at June 30, 2010 with no additional amortization expected in future periods.
Core deposit intangibles are included in other assets in the consolidated statements of financial condition.
Note 11 - Deposits
June 30,
2010
2009
Weighted
Average
Interest
Rate
Amount
(Dollars In Thousands)
Weighted
Average
Interest
Rate
%
-
1.31
0.89
2.01
$ 51,210
163,611
301,637
904,743
%
-
1.09
1.02
2.97
Amount
$ 53,709
256,154
334,167
979,532
$1,623,562
1.60 %
$1,421,201
2.23 %
Non-interest bearing demand
Interest-bearing demand
Savings and club
Certificates of deposit
Certificates of deposit with balances of $100,000 or more at June 30, 2010 and 2009, totaled approximately
$333,418,000 and $275,920,000, 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.
F-39
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,
2010
2009
(In Thousands)
$716,289
173,037
68,471
5,530
16,204
1
$740,383
111,086
24,317
23,181
5,772
4
$979,532
$904,743
Interest expense on deposits consists of the following:
Demand
Savings and clubs
Certificates of deposits
2010
$ 2,324
3,246
22,519
Years Ended June 30,
2009
(In Thousands)
2008
$ 2,098
3,072
30,524
$ 2,714
3,272
37,322
$28,089
$35,694
$43,308
Note 12 - Advances from FHLB
Fixed rate advances from FHLB of New York mature as follows:
Maturing in years ending June 30:
2011
2018
June 30,
2010
2009
Weighted
Average
Interest
Rate
(Dollars In Thousands)
Amount
Weighted
Average
Interest
Rate
Amount
$ 10,000
200,000
5.40 %
3.79 %
$ 10,000
200,000
5.40 %
3.79 %
$210,000
3.87 %
$210,000
3.87 %
F-40
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12 - Advances from FHLB (Continued)
At June 30, 2010, of the $200,000,000 in advances due after one year, $200,000,000 are callable within one year.
FHLB advances at June 30, 2010 and 2009 are collateralized by the FHLB capital stock owned by the Bank and
mortgage-backed securities available for sale with carrying values totaling approximately $243,744,000 and
$245,238,000, 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.
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 $1,485,000, $1,691,000 and
$1,733,000 for the years ended June 30, 2010, 2009 and 2008, respectively.
F-41
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Employee Stock Ownership Plan (Continued)
At June 30, 2010 and 2009, 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,
2010
2009
649,770
518,291
41,706
84,396
969,828
27,775
84,330
1,115,304
Total ESOP Shares
1,745,700
1,745,700
Fair value of unearned shares
$8,883,624
$12,759,078
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 $30,000, $44,000 and $48,000 for the years
ended June 30, 2010, 2009 and 2008, respectively. The liability totaled approximately $23,000 and $26,000
at June 30, 2010 and 2009, 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 $360,000, $337,000 and $324,000, for
the years ended June 30, 2010, 2009 and 2008, respectively.
Retirement Plan
The Bank has a non-contributory multiple-employer pension plan covering all eligible employees. In
accordance with final regulations issued by the Internal Revenue Service, the Bank elected to take advantage
of a one-time change in the rules governing the interest rate basis used in actuarial valuations of defined
benefit pans. Issuance of the final Regulation permitted the use of the March 2009 IRS Corporate Bond Yield
curve for the July 1, 2009 actuarial valuation instead of the June 2009 yield curve, which resulted in reduced
plan liabilities and reduced minimum required contributions for the year ended June 30, 2010. March 2009
interest rates were approximately 100 basis points higher than June 2009 rates. Beginning July 1, 2010, the
June 30 IRS Corporate Bond Yield curve will be used to determine the interest rate basis for each subsequent
actuarial valuation of the plan. At the date of the latest plan review, the actuarial present value of
accumulated plan benefits exceeded the net assets available for 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, 2010, 2009 and 2008, total pension plan expense, contributions to the
plan and administrative expenses and Pension Benefit Guaranty Corporation premium were approximately
$291,000, $41,000 and $650,000, respectively.
F-42
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Retirement Plan (Continued)
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
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 $63,000, $62,000
and $61,000 in contributions made to and benefits paid under the BEP during each of the years ended
June 30, 2010, 2009 and 2008, respectively.
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
Actuarial loss
Benefit payments
Increase (decrease) due to change in the discount rate
June 30,
2010
2009
(Dollars in Thousands)
$2,568
163
-
(63)
80
$2,560
164
17
(62)
(111)
Benefit obligation - ending
$2,748
$2,568
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
$ -
(63)
63
$ -
(62)
62
$ -
$ -
$(2,748)
$(2,568)
$(2,748)
-
$(2,568)
-
Accrued pension cost included in other liabilities
$(2,748)
$(2,568)
Valuation assumptions:
Discount rate
Salary increase rate
5.50%
N/A
6.25%
N/A
F-43
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Benefit Equalization Plan (“BEP”) (Continued)
Net periodic pension expense:
Interest cost
Curtailment
Amortization of net actuarial loss
Valuation assumptions:
Discount rate
Salary increase rate
2010
Years Ended June 30,
2009
(Dollars in Thousands)
2009
$163
-
80
$243
6.25%
N/A
$164
-
98
$262
6.75%
N/A
$152
(35)
146
$263
6.25%
N/A
It is estimated that contributions of approximately $96,000 will be made during the year ending June 30,
2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2011
2012
2013
2014
2015
2016-2020
(In Thousands)
$96
281
250
250
248
1,199
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 both June 30, 2010 and 2009, unrecognized net loss of $345,000 was included in accumulated other
comprehensive income. For the fiscal year ending June 30, 2011, $13,000 of the net loss is expected to be
recognized as a component of net periodic pension cost.
F-44
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, 2010, 2009 and 2008,
contributions and benefits paid totaled $5,000, $6,000 and $4,000, respectively.
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
June 30,
2010
2009
(Dollars in Thousands)
$558
25
34
(29)
(5)
-
$583
$ -
(5)
5
$ -
$(583)
-
$491
25
33
-
(6)
15
$558
$ -
(6)
6
$ -
$(558)
-
Accrued postretirement benefit cost included
in other liabilities
Valuation assumptions:
Discount rate
Salary increase rate
$(583)
$(558)
5.50%
3.25%
6.50%
4.00%
F-45
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
2010
Years Ended June 30,
2009
(Dollars in Thousands)
2008
$25
34
10
(8)
$61
$25
33
10
(6)
$62
$24
34
10
-
$68
6.50%
4.00%
7.00%
4.25%
6.38%
3.75%
It is estimated that contributions of approximately $11,000 will be made during the year ending June 30,
2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2011
2012
2013
2014
2015
2016-2020
(In Thousands)
$11
13
14
15
15
82
At June 30, 2010 and 2009, unrecognized net gain of $133,000 and $112,000, respectively, and unrecognized
past service cost of $12,000 and $22,000, respectively, were included in accumulated other comprehensive
income. For the fiscal year ending June 30, 2011, $1,000 of unrecognized net gain and $10,000 of
unrecognized past service cost are expected to be recognized as a component of net periodic post retirement
benefit 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, 2010, 2009 and 2008, contributions and
benefits paid totaled $84,000, $89,000 and $89,000, respectively.
F-46
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 loss
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
June 30,
2010
2009
(Dollars in Thousands)
$2,558
129
160
2
(84)
-
$2,765
$ -
(84)
84
$ -
$2,301
121
156
-
(89)
69
$2,558
$ -
(89)
89
$ -
$(2,138)
$(2,089)
$(2,765)
-
$(2,558)
-
Accrued cost included in other liabilities
$(2,765)
$(2,558)
Valuation assumptions:
Discount rate
Fee increase rate
5.50%
3.25%
6.50%
4.00%
F-47
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
2010
Years Ended June 30,
2009
(Dollars in Thousands)
2008
$129
160
-
61
$350
6.50%
4.00%
$121
156
43
61
$381
7.00%
4.25%
$134
139
44
61
$378
6.38%
3.75%
It is estimated that contributions of approximately $183,000 will be made during the year ending June 30,
2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid:
Years Ending June 30:
2011
2012
2013
2014
2015
2016-2020
(In Thousands)
$183
162
176
150
167
1,125
At June 30, 2010 and 2009, unrecognized net gain of $229,000 and $230,000, respectively, and unrecognized
past service cost of $324,000 and $385,000, respectively, were included in accumulated other comprehensive
income. For the fiscal year ending June 30, 2011, $15,000 of unrecognized gain and $61,000 of unrecognized
past service cost are expected to be recognized as a component of net periodic plan cost.
F-48
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, 2010, 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, 2010, 2009 and 2008.
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 granted during the years ended June 30, 2010, 2009 and 2008.
During the years ended June 30, 2010, 2009 and 2008, the Company recorded $4,991,000, $4,992,000 and
$4,992,000, respectively, of share-based compensation expense, comprised of stock option expense of
$1,907,000, $1,906,000 and $1,908,000, respectively, and restricted stock expense of $3,084,000, $3,086,000
and $3,084,000, respectively.
During the years ended June 30, 2010, 2009 and 2008, the income tax benefit attributed to non-qualified stock
options expense was approximately $533,000, $533,000 and $521,000, respectively, and attributed to
restricted stock expense was approximately $1,260,000, $1,260,000 and $1,232,000, 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, 2010:
Weighted
Average
Exercise
Price
Range
of
Prices
Weighted
Average
Remaining
Contractual
Term
Options
(In Thousands)
Outstanding at June 30, 2009
Exercised
Forfeited
3,226
-
-
$12.33
-
-
$11.55 - $12.71
6.4 years
Aggregate
Intrinsic
Value
(In Thousands)
$ -
-
Outstanding at June 30, 2010
3,226
$12.33
$11.55 - $12.71
5.4 years
-
Exercisable at June 30, 2010
2,579
$12.33
$11.55 - $12.71
5.4 years
-
Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.
As of June 30, 2010, the Company has 4,393,223 shares of treasury stock. There were no vested options
exercised during the years ended June 30, 2010 and 2009. The aggregate intrinsic values of exercised vested
options during the year ended June 30, 2008 was $3,000. Expected future compensation expense relating to
the 646,848 unexercisable options outstanding as of June 30, 2010 is $745,000 over a weighted average
period of 0.4 years.
F-49
F-49
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 13 - Benefit Plans (Continued)
Stock Compensation Plans (Continued)
The following is a summary of the status of the Company's non-vested restricted share awards as of June 30,
2010 and changes during the year ended June 30, 2010:
Non-vested at June 30, 2009
Vested
Non-vested at June 30, 2010
Weighted
Average
Grant Date
Fair Value
Restricted
Shares
(In Thousands)
501
(251)
$12.31
$12.31
250
$12.31
During the years ended June 30, 2010, 2009 and 2008, the total fair value of vested restricted shares were
$2,506,000, $3,048,000 and $3,154,000, respectively. Expected future compensation expense relating to the
250,539 non-vested restricted shares at June 30, 2010 is $1,199,000 over a weighted average period of 0.4
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.
During the fiscal year ended June 30, 2008, the Bank applied for and received the approval from the OTS to
distribute $19,000,000 to the Company. A cash dividend in that amount was paid by the Bank to the Company in
November, 2007. During the fiscal year ended June 30, 2010, a second application for a capital distribution from
the Bank to the Company was approved by the OTS in the amount of $6,000,000. A cash dividend in that amount
was paid by the Bank to the Company in December, 2009.
F-50
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, are
not 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 on securities
Noncredit-related other-than-temporary impairment losses on
securities held to maturity
Net benefit plan change in AOCI
Goodwill
Intangible assets
Core (Tier 1) and tangible capital
Add: General valuation allowance for loan losses
Less: Low level recourse and residual interest
June 30,
2010
2009
(In Thousands)
$485,926
(22,653)
$476,720
(25,658)
463,273
451,062
(16,816)
(8,710)
-
188
(82,263)
-
161
242
(82,263)
(22)
364,382
360,470
4,246
-
5,004
(417)
Total Regulatory Capital
$368,628
$365,057
F-51
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 14 - Stockholders’ Equity and Regulatory Capital (Continued)
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
As of June 30, 2010:
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, 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)
$368,628
364,382
364,382
364,382
$365,057
360,470
360,470
360,470
37.98 % $77,655
38,828
37.54
8.00 % $97,069
58,241
4.00
10.00 %
6.00
16.44
16.44
88,674
33,253
4.00
1.50
110,842
-
5.00
-
38.80 % $75,267
37,634
38.27
8.00 % $94,084
56,450
4.00
10.00 %
6.00
17.84
17.84
80,814
30,305
4.00
1.50
101,018
-
5.00
-
On November 9, 2009, the most recent notification from the OTS, the Bank was categorized as well capitalized as
of June 30, 2009, 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-52
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, 2010, 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
2010
Years Ended June 30,
2009
(In Thousands)
2008
$4,916
62
4,978
(1,198)
1,086
(112)
97
$3,988
(64)
3,924
(457)
1,142
685
(12)
$4,963
$4,597
$2,948
953
3,901
741
(511)
230
(2,180)
$1,951
F-53
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
years ended June 30, 2010 and 2009 and 34% to the year ended June 30, 2008:
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
Merger-related expenses
Charitable donation
Other items, net
Valuation allowance
Total income tax expense
2010
Years Ended June 30,
2009
(In Thousands)
2008
4,121
$3,846
$2,671
(199)
809
10
211
(182)
175
131
(63)
(147)
4,866
97
4,963
(193)
721
83
211
(182)
166
-
-
(43)
4,609
(12)
$4,597
(310)
1,108
94
204
(189)
376
-
-
177
4,131
(2,180)
$1,951
Effective income tax rate
42.15%
41.84%
24.84%
The effective income tax rate represents total income tax expense divided by income before income taxes.
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 was not currently more likely than not that the deferred tax asset
related to incurred capital losses would be realized, the Company established a valuation allowance thereon
during the years ended June 30, 2010 and 2009.
F-54
F-54
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:
Deferred income tax assets:
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
Depreciation
Other
Valuation allowance
Deferred income tax liabilities:
Depreciation
Goodwill
Unrealized gain on securities available for sale
Other
June 30,
2010
2009
(In Thousands)
$ -
$ 228
131
3,497
2,398
153
3,846
156
-
-
369
339
24
79
167
2,628
2,208
142
3,262
160
889
177
272
273
-
20
10,992
10,426
(369)
(272)
10,623
10,154
-
3,287
11,675
52
15,014
74
2,489
6,138
58
8,759
Net deferred income tax (liability) asset
$ (4,391)
$ 1,395
F-55
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, 2010:
Years Ending June 30:
2011
2012
2013
2014
2015
Thereafter
Total Minimum Payments Required
(In Thousands)
$497
286
240
252
244
1,931
$3,450
The following schedule shows the composition of total rental expense for all operating leases:
2010
June 30,
2009
(In Thousands)
2008
Minimum rentals
$531
$524
$466
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,
2010
2009
(In Thousands)
$ 27,091
395
511
4,708
23,129
2,724
$26,653
4,535
2,727
7,574
24,901
1,050
$ 58,558
$67,440
Mortgage loans
Home equity loans
Construction loans
Construction loans in process
Undisbursed funds from approved lines of credit
Commercial line of credit
F-56
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16 - Commitments (Continued)
At June 30, 2010, the outstanding mortgage loan commitments include $26,913,000 for fixed rate loans with
interest rates ranging from 3.875% to 6.50% and $178,000 for adjustable rate loans with initial rates ranging from
4.50% to 5.75%. Home equity loan commitments include $395,000 for fixed rate loans with interest rates ranging
from 5.00% to 6.75%. Construction loan commitments totaling $511,000 are for short term loans with initial
interest rates at 6.00% and maturities of six to twelve months. Undisbursed funds from home equity and business
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. Lines of credit providing overdraft protection for checking accounts are
adjustable rate loans with interest rates set at 3.75% above prime.
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.
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, 2010. As of June 30,
2010, no funds were drawn against these credit lines.
The Company and subsidiaries are also party to litigation which arises primarily in the ordinary course of
business. In the opinion of management, the ultimate disposition of such litigation should not have a material
adverse effect on the consolidated financial position of the Company.
Note 17 - Fair Value of Financial Instruments
Effective July 1, 2008, the Company adopted FASB’s guidance on fair value measurement. The guidance defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. This guidance does not require any new fair value measurements. The definition of fair value
retains the exchange price notion in earlier definitions of fair value. The guidance 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). The guidance emphasizes that fair
value is a market-based measurement, not an entity-specific measurement.
F-57
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (continued)
Additional guidance concerning the effective date of FASB’s statement on fair value measurement issued in
February 2008, delayed the effective date of the guidance 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
implementation of this guidance did not have a material impact on the Company’s consolidated financial position
or results of operations.
In August 2009, the FASB issued guidance concerning fair value measurements and disclosures, specifically
measuring liabilities at fair value. The amendments within the guidance clarify that in circumstances in which a
quoted price in an active market for the identical liability is not available, a reporting entity is required to measure
fair value using one or more of the following techniques: A valuation technique that uses the quoted price of the
identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded
as assets or another valuation technique that is consistent with the principles of the guidance. Two examples
would be an income approach, such as a present value technique, or a market approach, such as a technique that is
based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability
or would receive to enter into the identical liability. When estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. Both a quoted price in an active market for the identical
liability at the measurement date and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This guidance is effective for the first reporting period (including interim periods) beginning after
issuance. The Company is currently evaluating the potential impact the new pronouncement will have on its
consolidated financial statements.
In September 2009, the FASB issued guidance concerning fair value measurements and disclosures, specifically
investments in certain entities that calculate net asset value per share (or its equivalent). The amendments within
the guidance create a practical expedient to measure the fair value of an investment in the scope of the
amendments in this guidance on the basis of the net asset value per share of the investment (or its equivalent)
determined as of the reporting entity’s measurement date; require disclosures by major category of investment
about the attributes of those investments, such as the nature of any restrictions on the investor’s ability to redeem
its investments at the measurement date, any unfunded commitments, and the investment strategies of the
investees; improve financial reporting by permitting use of a practical expedient, with appropriate disclosures,
when measuring the fair value of an alternative investment that does not have a readily determinable fair value;
and improve transparency by requiring additional disclosures about investments in the scope of the amendments
in this guidance to enable users of financial statements to understand the nature and risks of investments and
whether the investments are probable of being sold at amounts different from net asset value per share. The
guidance is effective for interim and annual periods ending after December 15, 2009. The implementation of this
guidance did not have a material impact on the Company’s consolidated financial position or results of operations.
In January 2010, the FASB issued guidance concerning fair value measurement and disclosures. The guidance
mandates additional disclosure requiring that a reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the
transfers while also requiring that in the reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). The guidance clarifies existing fair value
disclosure requirements such that a reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and
liabilities. Moreover, a reporting entity should provide disclosures about the valuation techniques and inputs used
F-58
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (continued)
to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required
for fair value measurements that fall in either Level 2 or Level 3. This guidance also includes conforming
amendments regarding employers' disclosures about postretirement benefit plan assets. The conforming
amendments change the terminology from “major categories” of assets to “classes” of assets and provide a cross
reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value
disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective
for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The
implementation of the new pronouncement during the quarter ended March 31, 2010 did not have a material
impact on the Company’s consolidated financial position or results of operations. The Company is currently
evaluating the potential impact the new pronouncement will have on its consolidated financial statements for
those disclosures that go into effect during fiscal 2011.
The guidance on fair value measurement describes three levels of inputs that may be used to measure fair value:
Level 1:
Quoted prices in active markets for identical assets or liabilities.
Level 2:
Level 3:
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, the guidance requires the Company to disclose the fair value for assets and liabilities on both a
recurring and non-recurring basis.
F-59
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
Those assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Balance
At June 30, 2010:
Securities available for
sale
Mortgage-backed
securities available
for sale
At June 30, 2009:
Securities available for
sale
Mortgage-backed
securities available
for sale
$
$
-
-
-
-
$
28,497
$
1,000
$
29,497
703,455
-
703,455
$
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. Consequently, the
security’s fair value at June 30, 2010 is based upon the present value of its expected future cash flows assuming
the security continues to meet all its payment obligations and utilizing a discount rate based upon the security’s
contractual interest rate.
F-60
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
(In Thousands)
Balance
$
-
-
$
-
-
$
9,781
37
$
9,781
37
$
-
$
-
$
3,949
$
3,949
-
274
-
274
At June 30, 2010
Impaired loans
Real estate owned
At June 30, 2009
Impaired loans
Other-than-temporarily
impaired securities
held to maturity
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 the
FASB’s guidance on 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
$14.1 million and $5.4 million with valuation allowances of $4.3 million and $1.4 million at June 30, 2010 and
June 30, 2009, respectively.
Once a loan is foreclosed, the fair value of real estate owned continues to be evaluated based upon the market
value of the repossessed real estate originally securing the loan. Real estate owned whose carrying value reflected
Level 3 inputs totaled $37,000 at June 30, 2010.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments
at June 30, 2010 and June 30, 2009:
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-60 concerning assets measured at fair value on a recurring
basis.
Loans Receivable. Except for certain impaired loans as previously discussed, 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.
F-61
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
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.
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 loan
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, is not considered
material for disclosure. The contractual amounts of unfunded commitments are presented on Page F-56.
The carrying amounts and estimated fair values of financial instruments are as follows:
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity
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
At June 30, 2010
At June 30, 2009
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimate
d Fair
Value
(In Thousands)
$
181,422 $
29,497
255,000
1,005,152
703,455
1,700
8,338
181,422
29,497
256,914
1,022,873
703,455
1,754
8,338
$
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
1,623,562
210,000
1,054
1,632,209
245,491
1,054
1,421,201
210,000
1,058
1,430,796
238,714
1,058
(A) Includes accrued interest payable on deposits of $142 and $125, respectively, at June 30, 2010 and June 30, 2009.
Limitations. Fair value estimates are made at a specific point in time based on relevant market information
and information about the financial instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial instrument, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of
various financial instrument and other factors. These estimates are subjective in nature, involve uncertainties
and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
F-62
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Fair Value of Financial Instruments (Continued)
The fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting
the value of anticipated future business and the value of assets and liabilities that are not considered financial
instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include
premises and equipment, and advances from borrowers for taxes and insurance. In addition, the ramifications
related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and
have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
Note 18 – Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity are as follows:
Net unrealized gain 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,
2010
2009
(In Thousands)
$28,578
(11,675)
$15,027
(6,138)
16,903
8,889
-
-
-
(319)
131
(188)
(554)
228
(326)
(410)
167
(243)
Accumulated other comprehensive income
$ 16,715
$ 8,320
F-63
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:
Realized loss (gain) on securities available for sale:
Realized loss (gain) arising during the year
Loss on impairment of securities available for sale:
Realized loss arising during the year
Unrealized holding gain on securities
available for sale:
Unrealized gain arising during the year
Noncredit-related other-than-temporary impairment
gain on securities held to maturity
Benefit plans:
Amortization of:
Transition obligation
Actuarial loss
Past service cost
New actuarial (loss) gain during the year
Effects of curtailment
Net change in benefit plans accrued expense
2010
Years Ended June 30,
2009
(In Thousands)
2008
$ (1,545)
$ 415
$ -
-
-
659
15,096
16,746
10,260
554
(274)
-
-
72
71
(52)
-
91
43
92
71
94
-
300
44
146
71
177
647
1,085
12,004
(4,524)
Other comprehensive income before taxes
Tax effect
14,196
(5,801)
17,187
(6,994)
Other comprehensive income
$ 8,395
$ 10,193
$ 7,480
F-64
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, 2010 and 2009,
and for each of the years in the three-year period ended June 30, 2010.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Assets
Cash and amounts due from depository institutions
ESOP loan receivable
Mortgage-backed securities available for sale (amortized cost 2010
$3,163; 2009 $4,415)
Interest receivable
Investment in subsidiaries
Other assets
Liabilities and Stockholders’ Equity
Other liabilities
Stockholders’ equity
June 30,
2010
2009
(In Thousands)
$ 9,010
11,198
3,309
13
463,281
222
$ 9,598
12,533
4,436
18
451,069
233
$ 487,033
$477,887
$ 1,107
485,926
$ 1,167
476,720
$ 487,033
$477,887
F-65
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF INCOME
2010
Years Ended June 30,
2009
(In Thousands)
2008
Dividends from subsidiary
Interest income
Equity in undistributed earnings of subsidiaries
$ 6,000
819
645
$ -
1,017
6,226
$ 19,000
1,303
(13,408)
Directors’ compensation
Other expenses
Income before Income Taxes
Income tax expense
Net income
7,464
7,243
6,895
128
411
539
6,925
113
122
614
736
6,507
116
134
648
782
6,113
209
$ 6,812
$ 6,391
$ 5,904
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
Payments received on intercompany
liabilities
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Net Cash Provided by Operating Activities
2010
Years Ended June 30,
2009
(In Thousands)
2008
$ 6,812
$ 6,391
$ 5,904
(645)
29
5
3,073
4
(75)
9,203
(6,226)
12
(18)
3,857
10
(80)
3,946
13,408
-
69
7,354
46
92
26,873
F-66
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19 - Parent Only Financial Information (Continued)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
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
Net Cash (Used in) Provided by Investing
Activities
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
Net Cash Used in Financing
Activities
Net (Decrease) Increase in Cash and Cash
Equivalents
Cash and Cash Equivalents - Beginning
2010
Years Ended June 30,
2009
(In Thousands)
2008
$ 1,335
$ 1,264
$ 1,197
-
(4,913)
1,223
(10)
487
(10)
-
-
-
2,548
(3,172)
1,197
(3,693)
(8,753)
-
107
(3,566)
(13,962)
-
81
(3,712)
(7,738)
63
54
(12,339)
(17,447)
(11,333)
(588)
9,598
(16,673)
26,271
16,737
9,534
Cash and Cash Equivalents - Ending
$ 9,010
$ 9,598
$26,271
F-67
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:
Year Ended June 30, 2010
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
$ 6,812
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$ 6,812
67,920
$0.10
-
-
$ 6,812
67,920
$0.10
Year Ended June 30, 2009
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
$ 6,391
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$ 6,391
68,710
$0.09
-
-
$ 6,391
68,710
$0.09
Year Ended June 30, 2008
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
(In Thousands, Except Per Share Data)
Net income
$5,904
Basic earnings per share, income available to common
stockholders
Effect of dilutive securities:
Stock options
Diluted earnings per share
$5,904
69,522
$0.08
-
-
$5,904
69,522
$0.08
During the years ended June 30, 2010, 2009 and 2008, the average number of options which were anti-dilutive
totaled 3,225,740, 3,225,740 and 3,227,388, respectively.
F-68
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, 2010 and
2009:
First
Quarter
Year Ended June 30, 2010
Second
Quarter
Third
Quarter
(In Thousands, Except Per Share Data)
Fourth
Quarter
Interest income
Interest expense
$ 23,156
9,903
$ 23,655
9,263
$ 23,284
8,518
$ 23,013
8,637
Net Interest Income
13,253
14,392
14,766
14,376
Provision for loan losses
858
605
891
262
Net Interest Income after Provision
for Loan Losses
Non-interest income
Non-interest expenses
Income before Income Taxes
Income taxes
Net Income
Net income per common share:
Basic
Diluted
12,395
520
11,017
1,898
803
13,787
515
11,171
3,131
1,290
13,875
510
11,197
3,188
1,324
14,114
1,153
11,709
3,558
1,546
$ 1,095
$ 1,841
$ 1,864
$ 2,012
$ 0.02
$ 0.03
$ 0.03
$ 0.03
$ 0.02
$ 0.03
$ 0.03
$ 0.03
Dividends declared per common share
$ 0.05
$ 0.05
$ 0.05
$ 0.05
Weighted Average Number of Common
Shares Outstanding:
Basic
Diluted
68,074
68,074
68,015
68,015
67,875
68,875
67,711
67,711
F-69
Kearny Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Note 21 - Quarterly Results of Operations (Unaudited) (Continued)
First
Quarter
Year Ended June 30, 2009
Second
Quarter
Third
Quarter
(In Thousands, Except Per Share Data)
Fourth
Quarter
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
Non-interest income
Non-interest expenses
Income before Income Taxes
Income taxes
Net Income
Net income per common share:
Basic
Diluted
13,243
308
10,618
2,933
1,197
13,560
736
10,553
3,743
1,505
13,268
18
10,954
2,332
1,028
13,320
457
11,797
1,980
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
Dividends declared per common share
$ 0.05
$ 0.05
$ 0.05
$ 0.05
Weighted Average Number of Common
Shares Outstanding:
Basic
Diluted
69,205
69,205
68,829
68,829
68,485
68,485
68,310
68,310
F-70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 13, 2010
KEARNY FINANCIAL CORP.
By:
/s/ John N. Hopkins
John N. Hopkins
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 13, 2010 on behalf of the Registrant and in the
capacities indicated.
/s/ John N. Hopkins
John N. Hopkins
Chief Executive Officer
(Principal Executive Officer)
/s/ William C. Ledgerwood
William C. Ledgerwood
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
/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
/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/ Eric B. Heyer
Eric B. Heyer
First Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
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