SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

_____________________________

 

FORM 10-Q

 

(Mark One)

 

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended

September 30, 2008

 

 

 

OR

 

 

 

o

 

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 000-51093

 

 

 

KEARNY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

UNITED STATES

 

22-3803741

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

120 Passaic Ave., Fairfield, New Jersey

 

07004-3510

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code

973-244-4500

 

 

 

 

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 3, 2008.

 

 

 

$0.10 par value common stock - 70,175,703 shares outstanding

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

 

INDEX

 

 

 

 

Page

 

 

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

at September 30, 2008 and June 30, 2008 (Unaudited)

 

1

 

 

 

 

Consolidated Statements of Income for the Three Months Ended

 

 

 

September 30, 2008 and 2007 (Unaudited)

 

2-3

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three

 

 

 

Months Ended September 30, 2008 and 2007 (Unaudited)

 

4-6

 

 

 

 

Consolidated Statements of Cash Flows for the Three

 

 

 

Months Ended September 30, 2008 and 2007 (Unaudited)

 

7-8

 

 

 

 

Notes to Consolidated Financial Statements

 

9 -16

 

 

 

Item 2:

Management’s Discussion and Analysis of

 

 

 

Financial Condition and Results of Operations

 

17 - 29

 

 

 

Item 3:

Quantitative and Qualitative Disclosure About Market Risk

 

30 - 32

 

 

 

Item 4:

Controls and Procedures

 

33

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

34 - 36

 

 

 

 

 

 

SIGNATURES

 

37

 

 

 

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data, Unaudited)

 

 

 

 

September 30,

 

June 30,

 

 

 

2008

 

2008

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and amounts due from depository institutions

 

$

18,707

 

$

19,864

 

Interest-bearing deposits in other banks

 

 

60,117

 

 

111,859

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

78,824

 

 

131,723

 

 

 

 

 

 

 

 

 

Securities available for sale (amortized cost $32,326 and $40,305)

 

 

30,278

 

 

38,183

 

Loans receivable, including net deferred loan costs of $1,388 and $1,276

 

 

1,081,749

 

 

1,027,790

 

Less allowance for loan losses

 

 

(6,122

)

 

(6,104

)

 

 

 

 

 

 

 

 

Net Loans Receivable

 

 

1,075,627

 

 

1,021,686

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale (amortized cost $699,921 and $726,037)

 

 

702,561

 

 

726,023

 

Mortgage-backed securities held to maturity (estimated fair value $5,249)

 

 

5,840

 

 

 

Premises and equipment

 

 

35,079

 

 

34,950

 

Federal Home Loan Bank of New York (“FHLB”) stock

 

 

13,076

 

 

13,076

 

Interest receivable

 

 

9,040

 

 

8,949

 

Goodwill

 

 

82,263

 

 

82,263

 

Bank owned life insurance

 

 

15,854

 

 

15,709

 

Deferred income tax assets, net

 

 

8,224

 

 

9,028

 

Other assets

 

 

1,042

 

 

1,449

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,057,708

 

$

2,083,039

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

50,697

 

 

53,349

 

Interest-bearing

 

 

1,298,345

 

 

1,325,683

 

 

 

 

 

 

 

 

 

Total Deposits

 

 

1,349,042

 

 

1,379,032

 

 

 

 

 

 

 

 

 

Advances from FHLB

 

 

218,000

 

 

218,000

 

Advance payments by borrowers for taxes

 

 

5,885

 

 

5,849

 

Other liabilities

 

 

10,183

 

 

8,787

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

1,583,110

 

 

1,611,668

 

 

 

 

 

 

 

 

 

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; 70,440,903 and 70,489,003 shares outstanding, respectively

 

 

7,274

 

 

7,274

 

Paid-in capital

 

 

204,646

 

 

203,266

 

Retained earnings

 

 

307,468

 

 

307,186

 

Unearned Employee Stock Ownership Plan shares; 1,224,414 shares and 1,260,783 shares, respectively

 

 

(12,244

)

 

(12,608

)

Treasury stock, at cost; 2,296,597 shares and 2,248,497 shares, respectively

 

 

(32,565

)

 

(32,023

)

Accumulated other comprehensive income (loss)

 

 

19

 

 

(1,724

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

 

474,598

 

 

471,371

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

2,057,708

 

$

2,083,039

 

 

See notes to consolidated financial statements.

 

1

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data, Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Interest Income:

 

 

 

 

 

 

 

Loans

 

$

15,102

 

$

13,171

 

Mortgage-backed securities

 

 

9,124

 

 

8,203

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

126

 

 

352

 

Tax-exempt

 

 

159

 

 

549

 

Other interest-earning assets

 

 

649

 

 

1,138

 

 

 

 

 

 

 

 

 

Total Interest Income

 

 

25,160

 

 

23,413

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

Deposits

 

 

9,730

 

 

11,250

 

Borrowings

 

 

2,187

 

 

791

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

 

11,917

 

 

12,041

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

13,243

 

 

11,372

 

 

 

 

 

 

 

 

 

Provision for Loan Losses

 

 

 

 

94

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

 

13,243

 

 

11,278

 

 

 

 

 

 

 

 

 

Non-Interest Income:

 

 

 

 

 

 

 

Fees and service charges

 

 

428

 

 

335

 

Gain (loss) on sale of securities available for sale

 

 

(415

)

 

7

 

Miscellaneous

 

 

295

 

 

370

 

 

 

 

 

 

 

 

 

Total Non-Interest Income

 

 

308

 

 

712

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,414

 

 

6,323

 

Net occupancy expense of premises

 

 

1,003

 

 

890

 

Equipment

 

 

1,071

 

 

1,036

 

Advertising

 

 

298

 

 

251

 

Federal insurance premium

 

 

150

 

 

141

 

Amortization of intangible assets

 

 

11

 

 

159

 

Directors’ compensation

 

 

556

 

 

560

 

Miscellaneous

 

 

1,115

 

 

1,001

 

 

 

 

 

 

 

 

 

Total Non-Interest Expenses

 

 

10,618

 

 

10,361

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

 

2,933

 

 

1,629

 

Income Taxes

 

 

1,197

 

 

599

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,736

 

$

1,030

 

 

 

2

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(In Thousands, Except Per Share Data, Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net Income per Common

 

 

 

 

 

 

 

Share (EPS):

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

0.01

 

Diluted

 

 

0.03

 

 

0.01

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding:

 

 

 

 

 

 

 

Basic

 

 

68,454

 

 

68,718

 

Diluted

 

 

68,686

 

 

68,933

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.05

 

$

0.05

 

 

See notes to consolidated financial statements.

 

 

3

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2007

(In Thousands, Except Share Data, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

ESOP

 

 

Treasury

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Stock

 

 

(Loss)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2007

 

71,143

 

 

$

7,274

 

 

$

197,976

 

 

$

304,970

 

 

$

(14,063

)

 

$

(24,361

)

 

$

(9,204

)

 

$

462,592

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

1,030

 

 

 

 

 

 

 

 

 

 

 

 

1,030

 

Realized gain on securities available for sale, net of income tax of expense of $3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

Unrealized gain on securities available for sale, net of deferred income tax expense of $2,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,769

 

 

 

4,769

 

Benefit plans, net of deferred income expense tax of $263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

395

 

 

 

395

 

Total Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,190

 

ESOP shares committed to be released (36 shares)

 

 

 

 

 

 

 

104

 

 

 

 

 

 

364

 

 

 

 

 

 

 

 

 

468

 

Dividends contributed for payment of ESOP loan

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

Stock option expense

 

 

 

 

 

 

 

477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

477

 

Treasury stock purchases

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(469

)

 

 

 

 

 

(469

)

Treasury stock reissued

 

5

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

63

 

Restricted stock plan shares earned (63 shares)

 

 

 

 

 

 

 

771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

771

 

Tax effect from stock based compensation

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Cash dividends declared ($0.05/public share)

 

 

 

 

 

 

 

 

 

 

(934

)

 

 

 

 

 

 

 

 

 

 

 

(934

)

Balance - September 30, 2007

 

71,114

 

 

$

7,274

 

 

$

199,335

 

 

$

305,066

 

 

$

(13,699

)

 

$

(24,754

)

 

$

(4,044

)

 

$

469,178

 

 

See notes to consolidated financial statements.

 

4

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2008

(In Thousands, Except Share Data, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

ESOP

 

 

Treasury

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Stock

 

 

Income (Loss)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - June 30, 2008

 

70,489

 

 

$

7,274

 

 

$

203,266

 

 

$

307,186

 

 

$

(12,608

)

 

$

(32,023

)

 

$

(1,724

)

 

$

471,371

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

1,736

 

 

 

 

 

 

 

 

 

 

 

 

1,736

 

Realized gain on securities available for sale, net of income tax benefit of $170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

245

 

 

 

245

 

Unrealized gain on securities available for sale, net of deferred income tax expense of $925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,387

 

 

 

1,387

 

Benefit plans, net of deferred income expense tax of $66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95

 

 

 

95

 

Total Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,463

 

Adjustment to apply FASB Statement No. 158 measurement date provisions, net of income tax benefit of $34

 

 

 

 

 

 

 

 

 

 

(66

)

 

 

 

 

 

 

 

 

16

 

 

 

(50

)

Cumulative-effect adjustment to initially apply EITF Issue No. 06-4

 

 

 

 

 

 

 

 

 

 

(480

)

 

 

 

 

 

 

 

 

 

 

 

(480

)

ESOP shares committed to be released (36 shares)

 

 

 

 

 

 

 

98

 

 

 

 

 

 

364

 

 

 

 

 

 

 

 

 

462

 

Dividends contributed for payment of ESOP loan

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

Stock option expense

 

 

 

 

 

 

 

476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

476

 

Treasury stock purchases

 

(48

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(542

)

 

 

 

 

 

(542

)

Restricted stock plan shares earned (63 shares)

 

 

 

 

 

 

 

772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

772

 

 

 

See notes to consolidated financial statements.

 

 

5

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended September 30, 2008

(In Thousands, Except Share Data, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

ESOP

 

 

Treasury

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Stock

 

 

Income (Loss)

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect from stock based compensation

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

Cash dividends declared ($0.05/public share)

 

 

 

 

 

 

 

 

 

 

(908

)

 

 

 

 

 

 

 

 

 

 

 

(908

)

Balance - September 30, 2008

 

70,441

 

 

$

7,274

 

 

$

204,646

 

 

$

307,468

 

 

$

(12,244

)

 

$

(32,565

)

 

$

19

  

 

$

474,598

 

 

 

See notes to consolidated financial statements.

 

 

6

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

1,736

 

$

1,030

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

456

 

 

469

 

Net amortization of premiums, discounts and loan fees and costs

 

 

179

 

 

182

 

Deferred income taxes

 

 

(323

)

 

(606

)

Amortization of intangible assets

 

 

11

 

 

159

 

Amortization of benefit plans’ unrecognized net loss, net of gain from curtailment

 

 

49

 

 

29

 

Provision for loan losses

 

 

 

 

94

 

Realized loss (gain) on sales of securities available for sale

 

 

415

 

 

(7

)

Increase in cash surrender value of bank owned life insurance

 

 

(145

)

 

(135

)

ESOP, stock option plan and restricted stock plan expenses

 

 

1,710

 

 

1,716

 

Increase in interest receivable

 

 

(91

)

 

(340

)

Decrease in other assets

 

 

396

 

 

679

 

Increase in interest payable

 

 

7

 

 

306

 

Increase in other liabilities

 

 

935

 

 

779

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

 

5,335

 

 

4,355

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of securities available for sale

 

 

 

 

(104

)

Proceeds from sale of securities available for sale

 

 

7,325

 

 

43,241

 

Proceeds from repayments of securities available for sale

 

 

238

 

 

249

 

Purchase of loans

 

 

(27,032

)

 

(26,562

)

Net increase in loans receivable

 

 

(26,966

)

 

(43,326

)

Purchases of mortgage-backed securities available for sale

 

 

(11,808

)

 

(63,747

)

Purchases of mortgage-backed securities held to maturity

 

 

(5,972

)

 

 

Principal repayments on mortgage-backed securities available for sale

 

 

37,781

 

 

34,811

 

Principal repayments on mortgage-backed securities held to maturity

 

 

153

 

 

 

 

Additions to premises and equipment

 

 

(585

)

 

(59

)

Purchase of FHLB stock

 

 

 

 

(4,500

)

Redemption of FHLB stock

 

 

 

 

7

 

 

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

$

(26,866

)

$

(59,990

)

 

 

7

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands, Unaudited)

 

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net decrease in deposits

 

$

(29,984

)

$

(73,360

)

Repayment of long-term FHLB advances

 

 

 

 

(160

)

Long-term FHLB advances

 

 

 

 

100,000

 

Increase (decrease) in advance payments by borrowers for taxes

 

 

36

 

 

(304

)

Dividends paid to minority stockholders of Kearny Financial Corp.

 

 

(912

)

 

(934

)

Purchase of common stock of Kearny Financial Corp. for treasury

 

 

(542

)

 

(469

)

Treasury stock reissued

 

 

 

 

63

 

Dividends contributed for payment of ESOP loan

 

 

19

 

 

12

 

Tax benefit from stock based compensation

 

 

15

 

 

8

 

 

 

 

 

 

 

 

 

Net Cash (Used in) Provided by Financing Activities

 

 

(31,368

)

 

24,856

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(52,899

)

 

(30,779

)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents – Beginning

 

 

131,723

 

 

163,341

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents – Ending

 

$

78,824

 

$

132,562

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

531

 

$

 

 

 

 

 

 

 

 

 

Interest

 

$

11,910

 

$

11,735

 

 

See notes to consolidated financial statements.

 

 

8

 

 

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements include the accounts of Kearny Financial Corp. (the “Company”), its wholly-owned subsidiaries, Kearny Federal Savings Bank (the “Bank”) and Kearny Financial Securities, Inc., and the Bank’s wholly-owned subsidiaries, KFS Financial Services, Inc. and Kearny Federal Investment Corp. The Company conducts its business principally through the Bank. Management prepared the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, including the elimination of all significant inter-company accounts and transactions during consolidation. In June 2008, Kearny Federal Investment Corp. was formally dissolved and its assets returned to its parent company, the Bank.

 

2. BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles (“GAAP”). However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three-month period ended September 30, 2008, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period.

 

The data in the consolidated statements of financial condition for June 30, 2008 was derived from the Company’s annual report on Form 10-K. That data, along with the interim financial information presented in the consolidated statements of financial condition, income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2008 consolidated financial statements, including the notes thereto included in the Company’s annual report on Form 10-K.

 

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

 

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

 

9

 


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

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30, 2008

 

 

 

 

 

Income

 

Shares

 

Per Share

 

 

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

 

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

1,736

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income available to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

 

 

 

$

1,736

 

 

 

68,454

 

 

 

$

0.03

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

Restricted stock awards

 

 

 

 

 

 

 

192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,736

 

 

 

68,686

 

 

 

$

0.03

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

September 30, 2007

 

 

 

 

 

Income

 

Shares

 

Per Share

 

 

 

 

 

(Numerator)

 

(Denominator)

 

Amount

 

 

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

1,030

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income available to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stockholders

 

 

 

$

1,030

 

 

 

68,718

 

 

 

$

0.01

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

Restricted stock awards

 

 

 

 

 

 

 

202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,030

 

 

 

68,933

 

 

 

$

0.01

 

 

 

 

4. DIVIDEND WAIVER

 

During the quarter ended September 30, 2008, Kearny MHC, the federally chartered mutual holding company of the Company waived its right, in accordance with the non-objection previously granted by the Office of Thrift Supervision, to receive cash dividends of approximately $2.5 million declared on the shares of Company common stock it owns.

 

5. STOCK REPURCHASE PLANS

 

On April 23, 2008 the Company announced that the Board of Directors authorized a third stock repurchase plan to acquire up to 985,603 shares or 5% of the Company’s currently outstanding common stock held by persons other than Kearny MHC. During the quarter ended September 30, 2008, the Company purchased in the open market 48,100 shares at a cost of $542,000, or approximately $11.27 per share. Through September 30, 2008, the Company purchased in the open market 187,400 shares at a cost of $2.1 million, or approximately $11.13 per share.

 

 

10


 

6. BENEFIT PLANS – COMPONENTS OF NET PERIODIC EXPENSE

 

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

 

 

 

 

 

Three Months

 

 

 

 

 

 

 

Ended September 30,

 

 

 

 

 

 

 

2008

 

 

 

2007

 

 

 

 

 

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

 

 

$

37

 

 

 

$

40

 

 

 

Interest cost

 

 

 

 

88

 

 

 

 

81

 

 

 

Curtailment (Gain)

 

 

 

 

 

 

 

 

(35

)

 

 

Amortization of unrecognized transition

 

 

 

 

 

 

 

 

 

 

 

 

 

obligation

 

 

 

 

11

 

 

 

 

11

 

 

 

Amortization of unrecognized past service

 

 

 

 

 

 

 

 

 

 

 

 

 

liability

 

 

 

 

17

 

 

 

 

18

 

 

 

Amortization of unrecognized net actuarial

 

 

 

 

 

 

 

 

 

 

 

 

 

loss

 

 

 

 

21

 

 

 

 

36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit expense

 

 

 

$

174

 

 

 

$

151

 

 

 

 

Effective July 1, 2007, the Company implemented a freeze on all future benefit accruals under the Bank’s non-contributory defined benefit pension plan and related benefit equalization plan. A curtailment gain of $682,000 related to the reduction in the projected benefit obligation for the benefit equalization plan was applied against the unrecognized net actuarial loss. In addition, a curtailment gain of $35,000 was recorded as part of the net periodic benefit expense due to the immediate recognition of the unrecognized prior service cost for the benefit equalization plan during the quarter ended September 30, 2007.

 

Effective July 1, 2008, the Company adopted the measurement date provisions of the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 158, which requires the date at which the benefit obligation and plan assets are measured to be the Company’s fiscal year end. The adjustment to initially apply SFAS No. 158 resulted in an after-tax reduction of retained earnings and increase to other comprehensive income of approximately $66,000 and $16,000, respectively.

 

In September 2006, the FASB’s Emerging Issues Task Force (“EITF”) issued EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements” (“EITF 06-4”). EITF 06-4 requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability is based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. The Company adopted EITF 06-4 on July 1, 2008, and recorded a cumulative effect adjustment of $480,000 as a reduction of retained earnings effective July 1, 2008. Total compensation expense for the year ending June 30, 2009, is projected to increase by approximately $33,000 as a result of the adoption of EITF 06-4.

 

 

11


7. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Effective July 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurement.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The definition of fair value retains the exchange price notion in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157,” issued in February 2008, delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008.

 

 

SFAS No. 157 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:

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.

 

 

 

 

Level 3:

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

In addition, SFAS No. 157 requires the Company to disclose the fair value for financial assets on both a recurring and non-recurring basis.

 

 

Those assets measured at fair value on a recurring basis are summarized below:

 

 

Fair Value Measurements at September 30, 2008, Using

 

 

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 


Significant Other Observable Inputs (Level 2)

 


Significant Unobservable Inputs (Level 3)

 


Balance as of September 30, 2008

 

(In Thousands)

Securities available for

 

 

 

 

 

 

 

 

 

 

 

 

sale

$

-

 

$

29,233

 

$

1,045

 

$

30,278

Mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

securities available

 

 

 

 

 

 

 

 

 

 

 

 

for sale

 

-

 

 

702,561

 

 

-

 

 

702,561

 

The fair values of securities available for sale is primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without

 

12

 


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 issued by a southeastern community bank, whose fair value has been determined by using Level 3 inputs. It is a part of a $40.0 million private placement with a coupon of 8.90% issued in 1998 and maturing in 2028. Generally management has been unable to obtain a market quote due to a lack of trading activity for this security; therefore, it has been valued using its call price, which is on a sliding scale adjusting lower each June 15th until 2018 when the call price settles at 100% of par. The aforementioned security was most recently re-priced as of June 15, 2008. Accordingly, there has been no activity in the balance of Level 3 securities during the quarter ended September 30, 2008.

 

 

Those assets measured at fair value on a non-recurring basis are summarized below:

 

 

Fair Value Measurements at September 30, 2008, Using

 

 

 

Quoted Prices in

 

 

 

 

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Balance as of

(Level 1)

(Level 2)

(Level 3)

September 30, 2008

(In Thousands)

Impaired loans

$

-

 

$

-

 

$

906

 

$

906

 

An impaired loan is evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Market value is measured based on the value of the collateral securing the loan and is classified at a Level 3 in the fair value hierarchy. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” with the fair value estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. 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 $1.9 million and $2.1 million at June 30 and September 30, 2008, respectively, with valuation allowances of $1.2 million at both dates. During the quarter ended September 30, 2008, one loan of $180,000 was added and principal payments totaling $6,000 were received.

 

8. NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of SFAS No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company July 1, 2008. The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In March 2007, the FASB ratified EITF Issue No. 06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements” (“EITF 06-10”). EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. EITF 06-10 is effective for our Company July 1,

 

13

 

 


2008. The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2007, the EITF reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on non-vested equity shares, non-vested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. EITF 06-11 is effective for our Company July 1, 2008. The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

 

SFAS No. 141(R) “Business Combinations” was issued in December of 2007. SFAS No. 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations completed after the effective date.

 

In February 2008, the FASB issued FSP FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a “rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed. The Company expects that FAS 140-3 will not have an impact on its consolidated financial statements.

 

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” that permits a one-year deferral in applying the measurement provisions of SFAS No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of SFAS No. 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applied SFAS No. 157 in interim or annual financial statements prior to the issuance of FAS 157-2. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 157-2 on its consolidated financial condition, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. SFAS No. 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS No. 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS No. 133 has

14

 

 


been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company expects that SFAS No. 161 will not have an impact on its consolidated financial statements.

 

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets.” This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This FSP is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 

In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees. It also clarifies that the disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods. FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008. The Company expects that FSP 133-1 and FIN 45-4 will not have an impact on its consolidated financial statements.

 

In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5). EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee). It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability. EITF 08-5 is effective for the first reporting period beginning after December 15, 2008. The Company expects that EITF 08-5 will not have an impact on its consolidated financial statements.

 

 

15

 

 


In October 2008, the FASB issued FSP FAS 157-3,Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our September 30, 2008 financial statements. The application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition as of and for the quarter ended September 30, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

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

 

Emergency Economic Stabilization Act of 2008

 

In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act of Act (“EESA”) was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program (“TARP”). Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250 billion in troubled assets immediately and up to $350 billion upon certification by the President that such authority is needed. The Secretary’s authority will be increased to $700 billion if the President submits a written report to Congress detailing the Secretary’s plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary’s authority under TARP expires on December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.

 

Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than

 

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$300 million in assets under TARP auctions will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code.

 

EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the Federal Deposit Insurance Corporation’s (the “FDIC”) ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.

 

Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital Purchase Plan under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the rate of 5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have not been paid for six periods. The senior preferred will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also waive any claims against the Department of Treasury.

 

In connection with the issuance of the senior preferred, participating institutions must issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The Secretary may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment from one or more offerings of common or preferred stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of common stock acquired through exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying a Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the financial institution must call a

 

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meeting of shareholders for that purpose as soon as practicable after the date of investment. The exercise price of the warrants will be reduced by 15% for each six months that lapse before shareholder approval subject to a maximum reduction of 45%.

 

The Company is currently evaluating TARP and has not determined whether it will participate.

 

Comparison of Financial Condition at September 30, 2008 and June 30, 2008

 

Total assets decreased $25.3 million or 1.2%, to $2.06 billion at September 30, 2008 from $2.08 billion at June 30, 2008. The decrease in total assets was due primarily to decreases in cash and cash equivalents, non-mortgage-backed securities and mortgage-backed securities, partially offset by an increase in net loans receivable.

 

Cash and cash equivalents, consisting primarily of interest-bearing deposits in other banks decreased $52.9 million or 40.2%, to $78.8 million at September 30, 2008 from $131.7 million at June 30, 2008. For the most part, cash and cash equivalents were redeployed into loan originations and loan purchases. With the federal funds rate pegged at 2.00%, management chose not to accumulate excess liquidity during the quarter. At September 30, 2008, the Company had $18.3 million on deposit with a money center bank, reduced from $52.0 million at June 30, 2008, and $41.8 million on deposit with the Federal Home Loan Bank (“FHLB”) of New York. Management routinely transfers funds between the two depository institutions to maximize the return on the funds, with one pricing off of 30-day Libor and the other off of the federal funds rate.

 

Non-mortgage-backed securities, all of which are classified as available for sale, decreased $7.9 million or 20.7%, to $30.3 million at September 30, 2008 compared to $38.2 million at June 30, 2008. The decrease resulted primarily from the redemption-in-kind of the AMF Ultra Short Mortgage Fund as well as principal repayments partially offset by a small increase in the fair value of the portfolio. The shares of the mutual fund redeemed for the underlying securities were written down to fair value as of the trade date resulting in a pre-tax charge to earnings of $415,000 compared to an other-than-temporary impairment pre-tax charge of $659,000 recorded during the linked quarter for the same mutual fund. Following the redemption-in-kind, the underlying securities were reclassified as mortgage-backed securities held to maturity. At September 30, 2008, the remainder of the non-mortgage-backed securities portfolio consisted of $5.3 million of Small Business Loan (“SBA”) pass-through certificates, $17.5 million of municipal bonds and $7.5 million of single issuer trust preferred securities.

 

Loans receivable, net of deferred fees and costs and the allowance for loan losses, increased $53.9 million or 5.3% to $1.08 billion at September 30, 2008 from $1.02 billion at June 30, 2008. During the current quarter, loan originations and loan purchases totaled $65.0 million and $27.0 million, respectively, compared to $64.5 million and $51.9 million, respectively, during the linked quarter. The loans purchased during the quarter were all one-to-four family first mortgages. There was a net increase in virtually all loan categories quarter-over-quarter. Loan growth was concentrated in the residential mortgage category, with one-to-four family first mortgages increasing $44.9 million between June 30 and September 30, 2008 to $732.5 million. During the quarter ended September 30, 2008, home equity loans increased $2.1 million to $126.1 million while unused home equity lines of credit and lines outstanding, decreased $109,000 to $24.5 million and $59,000 to $11.4 million, respectively, the only categories that experienced a quarter-over-quarter decrease. Between June 30 and September 30, 2008, nonresidential mortgages, multi-family mortgages and commercial business loans increased $984,000 to $158.4 million, $2.5 million to $23.7 million, and $1.7 million to $10.4 million, respectively. Recently, the sluggish economy has curtailed demand for higher yielding nonresidential mortgages. During the quarter ended September 30, 2008, construction loans increased $2.0 million to $23.1 million while construction loans outstanding increased $1.4 million to $13.5 million and miscellaneous loan types increased $283,000 to

 

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$4.3 million. During the quarter, loan originations exceeded principal repayments by approximately $26.8 million.

 

Mortgage-backed securities available for sale, all of which are government agency pass-through certificates, decreased $23.4 million or 3.2%, to $702.6 million at September 30, 2008 compared to $726.0 million at June 30, 2008. The decrease resulted from principal repayments and maturities partially offset by a $2.6 million increase in the fair value of the portfolio and purchases of $11.8 million, which were 30-year fixed-rate Community Reinvestment Act (“CRA”) eligible issues used to meet CRA investment requirements. Generally, cash flows from principal and interest payments were used to fund loan originations and loan purchases during the quarter. Due to a continuing decline in the net asset value of the AMF Ultra Short Mortgage Fund, the Company decided in July 2008 to withdraw its investment in the fund by invoking a redemption-in-kind option after the fund’s manager instituted a temporary prohibition against cash redemptions. As a result of the redemption-in-kind, the Bank received its pro-rata share of cash assets and the mortgage-backed securities in the fund, which totaled approximately $1.2 million and $6.8 million in par value, respectively. Most of the mortgage-backed securities are private label collateralized mortgage obligations. Upon redemption, this portfolio was written down to fair value and classified as held-to-maturity. At September 30, 2008, mortgage-backed securities held to maturity totaled $5.8 million.

 

FHLB of New York capital stock was unchanged at $13.1 million at June 30 and September 30, 2008. The FHLB paid annualized cash dividends for the quarters ended June 30 and September 30, 2008 of 6.50% and 3.50%, respectively. Premises and equipment increased $129,000 to $35.1 million, due primarily to renovations in the Fairfield administrative building to accommodate the relocation of the Company’s commercial lending department from the Bank’s retail branch building in Wood-Ridge, New Jersey. Bank owned life insurance increased $145,000, to $15.9 million at September 30, 2008 compared to $15.7 million at June 30, 2008, due to an increase in the cash surrender value of the underlying insurance policies. Deferred tax assets decreased $804,000 or 8.9%, to $8.2 million primarily due to decreased deferred tax assets related to