f10q_033110-0128.htm


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
March 31, 2010
     
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 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.   Yes  [X]  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 (§232.405 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 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 [  ]
Accelerated filer [X]
Non-accelerated filer [  ]
Smaller reporting company [  ]
 
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes [  ] No  [X]
 
      The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 7, 2010.
     
$0.10 par value common stock  -  68,800,200 shares outstanding

 
 

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

INDEX



   
Page
   
Number
PART I - FINANCIAL INFORMATION
   
     
Item 1:
Financial Statements
   
     
 
Consolidated Statements of Financial Condition
   
 
at March 31, 2010 and June 30, 2009 (Unaudited)
 
1
     
 
Consolidated Statements of Income for the Three and Nine Months
   
 
Ended March 31, 2010 and March 31, 2009 (Unaudited)
 
2-3
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the
   
 
Nine Months Ended March 31, 2010 and March 31, 2009 (Unaudited)
 
4-7
     
 
Consolidated Statements of Cash Flows for the Nine
   
 
Months Ended March 31, 2010 and March 31, 2009 (Unaudited)
 
8-9
     
 
Notes to Consolidated Financial Statements (Unaudited)
 
10-33
     
Item 2:
Management’s Discussion and Analysis of
   
 
Financial Condition and Results of Operations
 
34-52
     
Item 3:
Quantitative and Qualitative Disclosure About Market Risk
 
53-60
     
Item 4:
Controls and Procedures
 
61
     
     
PART II - OTHER INFORMATION
 
62-64
     
     
SIGNATURES
 
65
     


 
 

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Data, Unaudited)


   
March 31,
 
June 30,
   
2010
 
2009
Assets
       
         
Cash and amounts due from depository institutions
$
           31,276
$
           25,970
Interest-bearing deposits in other banks
 
           75,409
 
         185,555
         
        Cash and Cash Equivalents
 
         106,685
 
         211,525
         
Securities available for sale (amortized cost $31,036 and $31,658)
 
           29,381
 
           28,027
Securities held to maturity (estimated fair value $264,555 and $0)
 
         265,000
 
-
Loans receivable, including net deferred loan costs of $524 and $962
 
      1,009,323
 
      1,045,847
  Less allowance for loan losses
 
            (8,298)
 
            (6,434)
         
  Net Loans Receivable
 
      1,001,025
 
      1,039,413
         
Mortgage-backed securities available for sale (amortized cost $663,265 and $665,127)
 
         684,534
 
         683,785
Mortgage-backed securities held to maturity (estimated fair value $3,350 and $3,678)
 
             3,463
 
             4,321
Premises and equipment
 
           35,222
 
           35,495
Federal Home Loan Bank of New York (“FHLB”) stock
 
           12,950
 
           12,950
Interest receivable
 
             8,851
 
             8,237
Goodwill
 
           82,263
 
           82,263
Bank owned life insurance
 
           16,683
 
           16,267
Deferred income tax assets, net
 
               -
 
             1,395
Other assets
 
             5,843
 
             1,243
 
       
        Total Assets
$
      2,251,900
$
      2,124,921
         
Liabilities and Stockholders’ Equity
       
         
Liabilities
       
         
Deposits:
       
  Non-interest bearing
$
           55,372
$
           51,210
  Interest-bearing
 
      1,488,185
 
      1,369,991
         
        Total Deposits
 
      1,543,557
 
      1,421,201
         
Advances from FHLB
 
         210,000
 
         210,000
Advance payments by borrowers for taxes
 
             5,551
 
             5,714
Deferred income tax liabilities, net
 
                590
 
                    -
Other liabilities
 
           10,197
 
           11,286
         
        Total Liabilities
 
      1,769,895
 
      1,648,201
         
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; 68,838,500 and 69,241,600 shares outstanding, respectively
 
             7,274
 
             7,274
Paid-in capital
 
         212,252
 
         208,577
Retained earnings
 
         311,649
 
         309,687
Unearned Employee Stock Ownership Plan shares; 1,006,202 shares
       
  and 1,115,308 shares, respectively
 
          (10,062)
 
          (11,153)
Treasury stock, at cost; 3,899,000 shares and 3,495,900 shares, respectively
 
          (50,109)
 
          (45,985)
Accumulated other comprehensive income
 
           11,001
 
             8,320
         
        Total Stockholders’ Equity
 
         482,005
 
         476,720
         
        Total Liabilities and Stockholders’ Equity
$
      2,251,900
$
      2,124,921
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
 
Nine Months Ended
   
March 31,
 
 March 31,
   
2010
 
2009
 
2010
 
2009
                 
Interest Income:
               
    Loans
$
        14,450
$
        15,227
$
        44,068
$
        45,774
    Mortgage-backed securities
 
          7,475
 
          8,604
 
        23,393
 
        26,626
    Securities:
               
      Taxable
 
             985
 
               85
 
          1,499
 
             340
      Tax-exempt
 
             158
 
             158
 
             474
 
             476
    Other interest-earning assets
 
             216
 
             174
 
             661
 
          1,109
                 
        Total Interest Income
 
        23,284
 
        24,248
 
        70,095
 
        74,325
                 
Interest Expense:
               
    Deposits
 
          6,488
 
          8,681
 
        21,504
 
        27,483
    Borrowings
 
          2,030
 
          2,091
 
          6,180
 
          6,454
                 
        Total Interest Expense
 
          8,518
 
        10,772
 
        27,684
 
        33,937
                 
Net Interest Income
 
        14,766
 
        13,476
 
        42,411
 
        40,388
                 
Provision for Loan Losses
 
             891
 
             208
 
          2,354
 
             317
                 
Net Interest Income after Provision
               
  for Loan Losses
 
        13,875
 
        13,268
 
        40,057
 
        40,071
                 
Non-Interest Income:
               
    Fees and service charges
 
             344
 
             319
 
          1,072
 
          1,087
    Loss on sale of securities
 
                 -
 
                 -
 
                 -
 
     (415)
    Other-than-temporary security
               
      impairment:
               
      Total
 
             (86)
 
           (570)
 
           (446)
 
           (570)      
      Less: Portion recognized in
               
        other comprehensive income
 
               33
 
                 -
 
             240
 
    -
      Portion recognized in earnings
 
              (53)
 
           (570)
 
            (206)
 
           (570)
    Miscellaneous
 
             219
 
             269
 
             679
 
            960
                 
        Total Non-Interest Income
 
             510
 
               18
 
          1,545
 
         1,062
                 
Non-Interest Expenses:
               
    Salaries and employee benefits
 
          6,777
 
          6,425
 
        20,121
 
       19,049
    Net occupancy expense of
               
      premises
 
          1,165
 
          1,159
 
          3,170
 
          3,161
    Equipment
 
          1,094
 
          1,184
 
          3,283
 
          3,353
    Advertising
 
             211
 
             133
 
             651
 
             738
    Federal deposit insurance
               
      premium
 
             367
 
             361
 
             917
 
             527
    Directors’ compensation
 
             559
 
             556
 
          1,655
 
          1,656
    Miscellaneous
 
          1,024
 
          1,136
 
          3,588
 
          3,641
                 
        Total Non-Interest Expenses
$
        11,197
$
        10,954
$
        33,385
$
        32,125


 
- 2 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
(In Thousands, Except Per Share Data, Unaudited)

   
Three Months Ended
 
Nine Months Ended
   
 March 31,
 
 March 31,
   
2010
 
2009
 
2010
 
2009
                 
Income Before Income Taxes
$
          3,188
$
          2,332
$
          8,217
$
          9,008
Income Taxes
 
          1,324
 
          1,028
 
          3,417
 
          3,730
                 
Net Income
$
          1,864
$
          1,304
$
          4,800
$
          5,278
                 
Net Income per Common
               
  Share (EPS):
               
    Basic
$
0.03
$
0.02
$
0.07
$
0.08
    Diluted
 
0.03
 
0.02
 
0.07
 
0.08
                 
Weighted Average Number of
               
  Common Shares Outstanding:
               
    Basic
 
67,875
 
68,485
 
67,989
 
68,843
    Diluted
 
67,875
 
68,485
 
67,989
 
68,843
                 
Dividends Declared Per Common
               
   Share (Excluding dividends
   waived by Kearny MHC)
$
0.05
$
0.05
 
$
0.15
 
$
0.15

See notes to consolidated financial statements.

 


 
- 3 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2009
(In Thousands, Except Per Share Data, Unaudited)
                               
Accumulated
   
                       
Unearned
     
Other
   
       
Common Stock
 
Paid-In
 
Retained
 
ESOP
 
Treasury
 
Comprehensive
   
       
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Stock
 
(Loss) Income
 
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
     
-
 
-
 
-
 
5,278
 
-
 
-
 
-
 
5,278
                                     
  Realized loss 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 $6,722
   
-
 
-
 
-
 
-
 
-
 
-
 
9,781
 
9,781
                                     
  Benefit plans, net of deferred income
                               
    tax expense of $103
   
-
 
-
 
-
 
-
 
-
 
-
 
164
 
164
                                     
   Total Comprehensive income
                             
15,468
                                     
Adjustment to initially apply
                               
    benefit plan measurement date
                               
    provisions, net of income tax benefit
                               
    of $34
     
-
 
-
 
-
 
(66)
 
-
 
-
 
16
 
(50)
                                     
Cumulative-effect adjustment to
                               
  initially apply split-dollar
                               
  life insurance guidance
 
-
 
-
 
-
 
(480)
 
-
 
-
 
-
 
(480)
                                     
ESOP shares committed to be released
                               
   (108 shares)
   
-
 
-
 
190
 
-
 
1,091
 
-
 
-
 
1,281
                                     
Dividends contributed for payment of
                               
    ESOP loan
     
-
 
-
 
56
 
-
 
-
 
-
 
-
 
56
                                     
Stock option expense
   
-
 
-
 
1,429
 
-
 
-
 
-
 
-
 
1,429
                                     
Treasury stock purchases
   
(959)
 
-
 
-
 
-
 
-
 
(10,778)
 
-
 
(10,778)
                                     

See notes to consolidated financial statements.

 
- 4 -

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2009
(In Thousands, Except Per Share Data, Unaudited)
                               
Accumulated
   
                       
Unearned
     
Other
   
       
Common Stock
 
Paid-In
 
Retained
 
ESOP
 
Treasury
 
Comprehensive
   
       
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Stock
 
(Loss) Income
 
Total
                                     
Restricted stock plan shares earned
                               
   (189 shares)
   
-
 
-
 
2,315
 
-
 
-
 
-
 
-
 
2,315
                                     
Tax effect from stock based
                               
  compensation
   
-
 
-
 
2
 
-
 
-
 
-
 
-
 
2
                                     
Cash dividends declared ($0.15/public
  share)
 
-
 
 
-
 
 
-
 
 
(2,654)
 
 
-
 
 
-
 
 
-
 
 
(2,654)
                                     
                                     
Balance - March 31, 2009
   
69,530
$
7,274
$
207,258
$
309,264
$
(11,517)
$
(42,801)
$
8,482
$
477,960
                                     

See notes to consolidated financial statements.


 
- 5 -

 

 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2010
(In Thousands, Except Per Share Data, Unaudited)
                               
Accumulated
   
                       
Unearned
     
Other
   
       
Common Stock
 
Paid-In
 
Retained
 
ESOP
 
Treasury
 
Comprehensive
   
       
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Stock
 
Income
 
Total
                                     
Balance - June 30, 2009
   
69,242
$
7,274
$
208,577
$
309,687
$
(11,153)
$
(45,985)
$
8,320
$
476,720
                                     
Comprehensive income:
                                 
  Net income
     
-
 
-
 
-
 
4,800
 
-
 
-
 
-
 
4,800
                                     
  Unrealized gain on securities available
                               
    for sale, net of deferred income tax
                               
    expense of $1,874
   
-
 
-
 
-
 
-
 
-
 
-
 
2,713
 
2,713
                                     
  Non-credit related other-than-
                               
    temporary impairment losses on
                               
    securities held to maturity, net of
                               
    deferred income tax benefit of $43
 
-
 
-
 
-
 
-
 
-
 
-
 
(64)
 
(64)
                                     
  Benefit plans, net of deferred income
                               
    tax expense of $23
   
-
 
-
 
-
 
-
 
-
 
-
 
32
 
32
                                     
   Total Comprehensive income
                             
7,481
                                     
ESOP shares committed to be released
                               
  (108 shares)
   
-
 
-
 
38
 
-
 
1,091
 
-
 
-
 
1,129
                                     
Dividends contributed for payment of
                               
    ESOP loan
     
-
 
-
 
75
 
-
 
-
 
-
 
-
 
75
                                     
Stock option expense
   
-
 
-
 
1,430
 
-
 
-
 
-
 
-
 
1,430
                                     
Treasury stock purchases
   
(403)
 
-
 
-
 
-
 
-
 
(4,124)
 
-
 
(4,124)
                                     
Restricted stock plan shares earned
                               
  (189 shares)
   
-
 
-
 
2,313
 
-
 
-
 
-
 
-
 
2,313
 
 
See notes to consolidated financial statements. 

 
- 6 -

 


 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2010
(In Thousands, Except Per Share Data, Unaudited)
                               
Accumulated
   
                       
Unearned
     
Other
   
       
Common Stock
 
Paid-In
 
Retained
 
ESOP
 
Treasury
 
Comprehensive
   
       
Shares
 
Amount
 
Capital
 
Earnings
 
Shares
 
Stock
 
Income
 
Total
                                     
Tax effect from stock based
                               
  compensation
   
-
 
-
 
(181)
 
-
 
-
 
-
 
-
 
(181)
                                     
Cash dividends declared ($0.15/ public 
  share)
 
-
 
 
-
 
 
-
 
 
(2,538)
 
 
-
 
 
-
 
 
-
 
 
(2,538)
Cash dividend to Kearny MHC
 
-
 
-
 
-
 
(300)
 
-
 
-
 
-
 
(300)
                                     
                                     
Balance - March 31, 2010
   
68,839
$
7,274
$
212,252
$
311,649
$
(10,062)
$
(50,109)
$
11,001
$
482,005
                                     

See notes to consolidated financial statements. 
 
- 7 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Unaudited)

   
Nine  Months Ended
   
March 31,
   
2010
 
2009
         
Cash Flows from Operating Activities:
       
    Net income
$
             4,800
$
             5,278
    Adjustments to reconcile net income to net cash provided by operating
       
      activities:
       
        Depreciation and amortization of premises and equipment
 
             1,309
 
             1,354
        Net amortization of premiums, discounts and loan fees and costs
 
                709
 
                472
        Deferred income taxes
 
                132
 
             1,201
        Amortization of intangible assets
 
                  21
 
                  21
        Amortization of benefit plans’ unrecognized net loss, net of gain
       
          from curtailment
 
                108
 
                155
        Provision for loan losses
 
             2,354
 
                317
        Realized loss on sales of securities available for sale
 
                    -
 
                415
        Realized gain on sale of deposits
 
                    -
 
               (132)
        Realized loss on disposition of premises and equipment
 
                  19
 
                    9
        Loss on other-than-temporary impairment of securities
 
                206
 
                570
        Increase in cash surrender value of bank owned life insurance
 
               (416)
 
               (420)
        ESOP, stock option plan and restricted stock plan expenses
 
             4,872
 
             5,025
       (Increase) decrease in interest receivable
 
              (614)
 
                440
       (Increase) decrease in other assets
 
           (4,323)
 
                160
        Decrease in interest payable
 
                 (41)
 
                 (91)
       (Decrease) increase in other liabilities
 
            (1,079)
 
                616
         
            Net Cash Provided by Operating Activities
 
             8,057
 
           15,390
         
Cash Flows from Investing Activities:
       
    Proceeds from sale of securities available for sale
 
                    -
 
             7,325
    Proceeds from repayments of securities available for sale
 
                623
 
                711
    Purchase of securities held to maturity
 
        (265,000)
 
                    -
    Purchase of loans
 
          (23,104)
 
          (30,087)
    Net decrease in loans receivable
 
           58,420
 
                679
    Proceeds from sale of real estate owned
 
                243
 
                    -
    Purchases of mortgage-backed securities available for sale
 
        (117,573)
 
         (47,994)
    Purchases of mortgage-backed securities held to maturity
 
                    -
 
            (5,972)
    Principal repayments on mortgage-backed securities available for sale
 
         118,797
 
           96,355
    Principal repayments on mortgage-backed securities held to maturity
 
                648
 
                500
    Additions to premises and equipment
 
            (1,055)
 
            (1,626)
    Purchase of FHLB stock
 
                    -
 
               (225)
    Redemption of FHLB stock
 
                    -
 
                585
         
            Net Cash (Used in) Provided by  Investing Activities
$
        (228,001)
$
           20,251







 
- 8 -

 


KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In Thousands, Unaudited)

   
Nine  Months Ended
   
March 31,
   
2010
 
2009
         
Cash Flows from Financing Activities:
       
    Net increase in deposits
$
          122,346
$
           33,981
    Payment in connection with sale of deposits
 
                    -
 
           (8,254)
    Repayment of long term FHLB advances
 
                    -
 
            (8,000)
    (Decrease) increase in advance payments by borrowers for taxes
 
               (163)
 
                194
    Dividends paid to stockholders of Kearny Financial Corp.
 
            (2,849)
 
            (2,696)
    Purchase of common stock of Kearny Financial Corp. for treasury
 
            (4,124)
 
          (10,778)
    Dividends contributed for payment of ESOP loan
 
                  75
 
                  56
    Tax (expense) benefit from stock based compensation
 
               (181)
 
                    2
         
            Net Cash Provided by Financing Activities
 
         115,104
 
             4,505
         
            Net (Decrease) Increase in Cash and Cash Equivalents
 
        (104,840)
 
           40,146
         
Cash and Cash Equivalents – Beginning
 
         211,525
 
         131,723
         
Cash and Cash Equivalents – Ending
$
         106,685
$
         171,869
         
Supplemental Disclosures of Cash Flows Information:
       
    Cash paid during the year for:
       
        Income taxes, net of refunds
$
             2,606
$
             2,539
         
        Interest
$
           27,725
$
           34,028
         
    Non-cash investing activities:
       
        Acquisition of  real estate owned
$
                543
$
                    -
         

See notes to consolidated financial statements.


 
- 9 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


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 KFS 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.

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, income, changes in stockholders’ equity 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 and nine month periods ended March 31, 2010, 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, 2009 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 2009 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 including restricted stock awards (see following paragraph) adjusted for Employee Stock Ownership Plan (“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.

In June 2008, the Financial Accounting Standards Board (“FASB”) issued guidance on determining whether instruments granted in share-based payment transactions are participating securities.  This guidance 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 guidance is effective for fiscal years beginning after December 15, 2008.  The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

 
- 10 -

 

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

 
Three Months Ended
 
Nine Months Ended
 
March 31, 2010
 
March 31, 2010
 
Income
Shares
Per Share
 
Income
Shares
Per Share
 
(Numerator)
(Denominator)
Amount
 
(Numerator)
(Denominator)
Amount
 
(In Thousands, Except Per Share Data)
 
(In Thousands, Except Per Share Data)
                         
Net income
$
1,864
       
$
4,800
       
Basic earnings per share,
                       
     income available to
                       
     common stockholders
$
1,864
 
67,875
$
0.03
$
4,800
 
67,989
$
0.07
Effect of dilutive securities:
                       
     Stock options
 
-
 
-
     
-
 
-
   
                         
 
$
1,864
 
67,875
$
0.03
$
4,800
 
67,989
$
0.07


 
Three Months Ended
 
Nine Months Ended
 
March 31, 2009
 
March 31, 2009
 
Income
Shares
Per Share
 
Income
Shares
Per Share
 
(Numerator)
(Denominator)
Amount
 
(Numerator)
(Denominator)
Amount
 
(In Thousands, Except Per Share Data)
 
(In Thousands, Except Per Share Data)
                         
Net income
$
1,304
       
$
5,278
       
Basic earnings per share,
                       
     income available to
                       
     common stockholders
$
1,304
 
68,485
$
0.02
$
5,278
 
68,843
$
0.08
Effect of dilutive securities:
                       
     Stock options
 
-
 
-
     
-
 
-
   
                         
 
$
1,304
 
68,485
$
0.02
$
5,278
 
68,843
$
0.08

4.  SUBSEQUENT EVENTS

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2010, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through the date this document was filed.

5.  RECENT ACCOUNTING PRONOUNCEMENTS

In February 2008, the FASB issued guidance concerning accounting for transfers of financial assets and repurchase financing transactions.  This guidance addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one "linked" transaction. The guidance includes a "rebuttable presumption" that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The guidance is effective for fiscal years beginning after November 15, 2008 and applies only to original transfers made after that date; early adoption will not be allowed.  The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

 
- 11 -

 

       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 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

 
- 12 -

 

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.

In February 2010, the FASB issued amended guidance that removed the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

All of the applicable amendments in the guidance were effective upon issuance.  The implementation of the amended guidance during the quarter ended March 31, 2010 did not have a material impact on the Company’s consolidated financial position or results of operations.

6.  STOCK REPURCHASE PLANS
 
On March 3, 2009, the Company announced that the Board of Directors authorized a fourth stock repurchase plan to acquire up to 936,323 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny MHC.  In accordance with that plan, during the three months ended March 31, 2010, the Company purchased in the open market 139,800 shares at a total cost of approximately $1.4 million and at an average cost per share of $9.99.  The Company’s open market share repurchases for the nine months ended March 31, 2010 totaled 403,100 shares at a total cost of approximately $4.1 million and at an average cost per share of $10.23.  In accordance with the fourth stock repurchase plan, through March 31, 2010 the Company has purchased in the open market 804,200 shares at a total cost of approximately $8.3 million and at an average cost per share of $10.32.
 
7.  DIVIDEND WAIVER

During the three months ended March 31, 2010, 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 (“OTS”), to receive cash dividends of approximately $2.5 million declared on the 50,916,250 shares of Company common stock it owns.  For the nine months ended March 31, 2010, Kearny MHC waived it right to receive total cash dividends of approximately $7.3 million.


 
- 13 -

 

8.  SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses, estimated fair value and stratification by contractual maturity of securities available for sale at March 31, 2010 and June 30, 2009 are presented below:
 
 
At March 31, 2010
   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Carrying
Value
 
(In Thousands)
Securities:
               
  Debt securities:
               
    Trust preferred securities
$
8,853
$
-
$
2,228
$
6,625
    U.S. agency securities
 
4,057
 
-
 
50
 
4,007
    Obligations of state and political
               
      subdivisions
 
18,126
 
626
 
3
 
18,749
                 
          Total securities
 
31,036
 
626
 
2,281
 
29,381
                 
Mortgage-backed securities:
               
  Mortgage pass-through securities:
               
    Government National Mortgage
               
      Association
 
15,252
 
879
 
40
 
16,091
    Federal Home Loan Mortgage
               
      Corporation
 
256,789
 
8,113
 
221
 
264,681
    Federal National Mortgage Association
 
391,224
 
12,924
 
386
 
403,762
                 
          Total mortgage-backed securities
 
663,265
 
21,916
 
647
 
684,534
                 
          Total securities available for sale
$
694,301
$
22,542
$
2,928
$
713,915

 
 
At March 31, 2010
       
   
Amortized
Cost
 
Carrying
Value
       
 
(In Thousands)
       
Debt securities:
               
    Due in one year or less
$
-
$
-
       
    Due after one year through five years
 
4,620
 
4,835
       
    Due after five years through ten years
 
13,641
 
14,048
       
    Due after ten years
 
12,775
 
10,498
       
                 
          Total
$
31,036
$
29,381
       










 
- 14 -

 


 
At June 30, 2009
   
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Carrying
Value
 
(In Thousands)
Securities:
               
  Debt securities:
               
    Trust preferred securities
$
8,846
$
40
$
3,756
$
5,130
    U.S. agency securities
 
4,645
 
-
 
88
 
4,557
    Obligations of state and political
               
      subdivisions
 
18,167
 
237
 
64
 
18,340
                 
          Total securities
 
31,658
 
277
 
3,908
 
28,027
                 
Mortgage-backed securities:
               
  Mortgage pass-through  securities:
               
    Government National Mortgage
               
      Association
 
17,620
 
861
 
50
 
18,431
    Federal Home Loan Mortgage
               
      Corporation
 
282,068
 
7,980
 
580
 
289,468
    Federal National Mortgage Association
 
365,439
 
10,723
 
276
 
375,886
                 
          Total mortgage-backed securities
 
665,127
 
19,564
 
906
 
683,785
                 
          Total securities available for sale
$
696,785
$
19,841
$
4,814
$
711,812

There were no sales of securities from the available for sale portfolio during the nine months ended March 31, 2010.  During the nine months ended March 31, 2009, the Company executed a redemption-in-kind transaction through which it exchanged its investment in the AMF Ultra Short Mortgage Fund (“AMF Fund”) for a pro-rata portion of its assets in the fund in lieu of a cash redemption.  The assets acquired in the transaction included $6.0 million of mortgage-backed securities and $1.3 million in cash held by the fund.  The Company recorded losses on the sale of the AMF Fund totaling $415,000 associated with the in-kind redemption transaction.
 
At March 31, 2010 and June 30, 2009, mortgage-backed securities available for sale with carrying value of approximately $240.0 million and $245.2 million, respectively, were utilized as collateral for borrowings via repurchase agreements through the FHLB of New York.  As of those same dates, mortgage-backed securities available for sale with carrying value of approximately $1.5 million and $1.6 million, respectively, were pledged to secure public funds on deposit.
 
At March 31, 2010 and June 30, 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-through securities generally share in the receipt of principal repayments on a pro-rata basis as paid by the borrowers.
 


 
- 15 -

 


9.  SECURITIES HELD TO MATURITY

The amortized cost, gross unrealized gains and losses and estimated fair value of securities held to maturity at March 31, 2010 and June 30, 2009 are as follows:
 
 
At March 31, 2010
   
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In Thousands)
Securities:
               
  Debt securities:
               
    U.S. agency securities
$
265,000
$
83
$
528
$
264,555
                 
          Total securities
 
265,000
 
83
 
528
 
264,555
                 
Mortgage-backed securities:
               
                 
Collateralized mortgage obligations:
               
    Federal Home Loan Mortgage
               
      Corporation
 
112
 
12
 
-
 
124
    Federal National Mortgage Association
 
900
 
67
 
1
 
966
    Non-agency securities
 
1,906
 
111
 
310
 
1,707
                 
          Total collateralized mortgage
               
            obligations
 
2,918
 
190
 
311
 
2,797
                 
Mortgage pass-through securities:
               
    Federal Home Loan Mortgage
               
      Corporation
 
176
 
4
 
-
 
180
    Federal National Mortgage Association
 
369
 
4
 
-
 
373
                 
          Total mortgage pass-through securities
 
 
545
 
 
8
 
 
-
 
 
553
                 
          Total mortgage-backed
               
            securities
 
3,463
 
198
 
311
 
3,350
                 
          Total securities held to maturity
$
268,463
$
281
$
839
$
267,905

 
At March 31, 2010
       
   
Carrying
Value
 
Fair Value
       
 
(In Thousands)
       
Debt securities:
               
    Due in one year or less
$
-
$
-
       
    Due after one year through five years
 
200,000
 
199,956
       
    Due after five years through ten years
 
50,000
 
49,945
       
    Due after ten years
 
15,000
 
14,654
       
                 
          Total
$
265,000
$
264,555
       



 
- 16 -

 


 
At June 30, 2009
   
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(In Thousands)
Mortgage-backed securities:
               
Collateralized mortgage obligations:
               
    Federal Home Loan Mortgage
               
      Corporation
$
175
$
14
$
-
$
189
    Federal National Mortgage Association
 
1,030
 
72
 
3
 
1,099
    Non-agency securities
 
2,509
 
2
 
731
 
1,780
                 
          Total collateralized mortgage
               
            obligations
 
3,714
 
88
 
734
 
3,068
                 
Mortgage pass-through securities:
               
    Federal Home Loan Mortgage
               
      Corporation
 
198
 
2
 
-
 
200
    Federal National Mortgage Association
 
409
 
2
 
1
 
410
                 
          Total mortgage pass-through securities
 
 
607
 
 
4
 
 
1
 
 
610
                 
          Total securities held to maturity
$
4,321
$
92
$
735
$
3,678

 
There were no sales of securities from the held to maturity portfolio during the nine months ended March 31, 2010 and March 31, 2009.  Held to maturity securities were not utilized as collateral for borrowings nor pledged to secure public funds on deposit during the nine months ended March 31, 2010.
 
The Company’s held to maturity collateralized mortgage obligations and mortgage pass-through 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.
 
10.  IMPAIRMENT OF SECURITIES

The following three tables summarize the fair values and gross unrealized losses within the available for sale and held to maturity portfolios at March 31, 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 the certain impairments as “temporary” versus those identified as “other-than-temporary”.  Such rationale is presented by investment type and generally applies consistently to both the available for sale and held

 
- 17 -

 

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
 
12 Months or More
 
Total
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
Securities Available for Sale:
                           
 
At March 31, 2010:
                           
    Trust preferred securities
$
-
$
-
 
$
5,625
$
2,228
 
$
5,625
$
2,228
    U.S. agency securities
 
-
 
-
   
3,991
 
50
   
3,991
 
50
    Obligations of state and
                           
         political subdivisions
 
396
 
3
   
-
 
-
   
396
 
3
      Mortgage pass-through securities
 
 
117,527
 
 
519
   
 
2,200
 
 
128
   
 
119,727
 
 
647
                             
          Total
$
117,923
$
522
 
$
11,816
$
2,406
 
$
129,739
$
2,928

At June 30, 2009:
                           
    Trust preferred securities
$
-
$
-
 
$
4,090
$
3,756
 
$
4,090
$
3,756
    U.S. agency securities
 
79
 
1
   
4,451
 
87
   
4,530
 
88
    Obligations of state and
                           
         political subdivisions
 
-
 
-
   
3,767
 
64
   
3,767
 
64
      Mortgage pass-through securities
 
31,356
 
    546
   
22,085
 
360
   
53,441
 
906
                             
          Total
$
31,435
$
547
 
$
34,393
$
4,267
 
$
65,828
$
4,814

The number of available for sale securities with unrealized losses at March 31, 2010 totaled 60 and included four trust preferred securities, seven U.S. agency securities, one municipal obligation and 48 mortgage pass-through 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 municipal obligations and 56 mortgage pass-through securities.

 
- 18 -

 


 
Less than 12 Months
 
12 Months or More
 
Total
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
   
Fair
Value
 
Unrealized
Losses
 
(In Thousands)
Securities Held to Maturity:
                           
 
At March 31, 2010:
                           
  U.S. agency securities
$
74,472
$
528
 
$
-
$
-
 
$
74,472
$
528
  Collateralized mortgage
                           
      obligations
 
66
 
1
   
939
 
310
   
1,005
 
311
    Mortgage pass-through securities
 
 
68
 
 
-
   
 
-
 
 
-
   
 
68
 
 
-
                             
          Total
$
74,606
$
529
 
$
939
$
310
 
$
75,545
$
839

At June 30, 2009:
                           
  Collateralized mortgage
                           
      obligations
$
1,570
$
734
 
$
-
$
-
 
$
1,570
$
734
    Mortgage pass-through securities
 
 
120
 
 
1
   
 
-
 
 
-
   
 
120
 
 
1
                             
          Total
$
1,690
$
735
 
$
-
$
-
 
$
1,690
$
735

The number of held to maturity securities with unrealized losses at March 31, 2010 totaled 44 and included five U.S agency securities, 38 collateralized mortgage obligations and one mortgage pass-through security. 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 $686.1 million at March 31, 2010 and comprised 69.8% of total investments and 30.5% of total assets as of that date.  This category of securities generally includes mortgage pass-through securities and collateralized mortgage obligations issued by U.S. government-sponsored entities such as Ginnie Mae, Fannie Mae and Freddie Mac who guarantee the contractual cash flows associated with those securities.  Those guarantees were strengthened during the 2008-2009 financial crisis during which time Fannie Mae and Freddie Mac were placed into receivership by the federal government.  Through those actions, the U.S. government effectively reinforced the guarantees of their agencies thereby assuring the creditworthiness of the mortgage-backed securities issued by those agencies.

With credit risk being reduced to negligible levels due to the U.S. government’s support of these agencies, the unrealized losses on the Company’s investment in U.S. agency mortgage-backed securities are due largely to the combined effects of several market-related factors.  First, movements in market interest rates significantly impact the average lives of mortgage-backed securities by influencing the rate of principal prepayment attributable to refinancing activity.  Changes in the expected average lives of such securities significantly impact their fair values due to the extension or contraction of the cash flows that an investor expects to receive over the life of the security.

Historically, lower market interest rates generally prompt greater refinancing activity thereby shortening the average lives of mortgage-backed securities and vice-versa.  However, prepayment rates are also influenced by fluctuating real estate values and the overall availability of credit in the marketplace which significantly impacts the ability of borrowers to refinance.  The deteriorating real

 
- 19 -

 

estate market values and reduced availability of credit that has characterized the residential real estate marketplace over the past two years has significantly slowed both real estate purchase and refinancing activities.  Consequently, prepayment rates on mortgage-backed securities have generally slowed thereby extending their average lives.

The market price of mortgage-backed securities, being the key measure of the fair value to an investor in such securities, is also influenced by the overall supply and demand for such securities in the marketplace.  Absent other factors, an increase in the demand for, or a decrease in the supply of a security increases its price.  Conversely, a decrease in the demand for, or an increase in the supply of a security decreases its price.  The recent volatility and uncertainty in the marketplace has reduced the overall level of demand for mortgage-backed securities which has generally had an adverse impact on their prices in the open market.  This has been further exacerbated by many larger institutions shedding mortgage-related assets to shrink their balance sheets for capital adequacy purposes thereby increasing the supply of such securities.

In sum, the factors influencing the fair value of the Company’s U.S. agency mortgage-backed securities, as described above, generally result from movements in market interest rates and changing real estate and financial market conditions which affect the supply and demand for such securities.  Inasmuch as such market conditions fluctuate over time, the impairments of value arising from these changing market conditions are both “noncredit-related” and “temporary” in nature.

The Company has the stated ability and intent to “hold to maturity” those securities so designated.  Moreover, the Company has both the ability and intent, as of the periods presented, to hold the temporarily impaired available for sale securities until the fair value of the securities recover to a level equal to or greater than the Company’s amortized cost.  As of March 31, 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 March 31, 2010 to be “other-than-temporarily” impaired as of that date.

Non-agency Mortgage-backed Securities.  The outstanding balance of the Company’s non-agency mortgage-backed securities totaled $1.9 million at March 31, 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.

 
- 20 -

 

       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.

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 further reinforced by the Company’s stated intent and ability to “hold to maturity” all of its non-agency mortgage-backed securities which allows for an adequate timeframe during which the fair values of the impaired securities are expected to recover to

 
- 21 -

 

the level of their amortized cost.  As of March 31, 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.

In light of the factors noted above, the Company concluded that 27 of its 57 non-agency mortgage-backed securities with book values, excluding impairments, totaling approximately $1.9 million were “other-than-temporarily” impaired by approximately $1.2 million on an accumulated basis as of March 31, 2010 comprising $535,000 and $662,000 of credit-related and non-credit related impairments, respectively.  The Company does not consider the remaining 30 non-agency mortgage-backed securities with amortized costs of approximately $1.2 million to be “other-than-temporarily” impaired as of that date.

U.S. Agency Securities.  The outstanding balance of the Company’s U.S. agency debt securities totaled $269.0 million at March 31, 2010 and comprised 27.4% of total investments and 11.9% of total assets as of that date.  Such securities are comprised of $265.0 million of U.S. agency debentures and $4.0 million of securitized pools of loans issued and fully guaranteed by the Small Business Administration (“SBA”), a U.S. government sponsored entity.
 
At March 31, 2010, the Company’s U.S. agency debentures and SBA securities were each characterized by 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 March 31, 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 the reduced demand and increased supply 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.  The unrealized losses associated with the U.S. agency debentures at March 31, 2010 is largely attributed to the reduction in the securities’ market values arising from the upward movement 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

 
- 22 -

 

fluctuate over time, the “noncredit-related” impairments of value arising from these changing market conditions are “temporary” in nature.

Notwithstanding that a portion of the Company’s U.S. agency securities are classified as available for sale while the remainder are classified as 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 March 31, 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 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 March 31, 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.

Obligations of States and Political Subdivisions.  The outstanding balance of the Company’s securities representing obligations of state and political subdivisions totaled $18.7 million at March 31, 2010  and comprised 1.9% of total investments and less than one percent of total assets as of that date.  Such securities are generally comprised of bank qualified securities representing general obligations of New Jersey municipalities or the obligations of their related entities such as boards of education or utility authorities.

The Company generally evaluates the level of credit risk for each of the securities within this category based upon ratings assigned by one or more credit rating agencies.  At March 31, 2010, all securities within this category are investment grade with ratings of A3 or higher by Moody’s Investors Service (“Moody’s”).

In light of their strong credit ratings, the unrealized losses on the Company’s investment in municipal obligations are due largely to the combined effects of several market-related factors including movements in market interest rates and general level of liquidity of such securities in the marketplace based on overall supply and demand.  Notwithstanding the generally strong credit ratings of the Company’s specific municipal securities, the market prices of bank-qualified municipal obligations, in general, currently reflect the effect of reduced demand for such securities.  Such reduced demand is attributable, in part, to the overall increased level of credit risk-aversion currently characterizing many financial institutions in the marketplace.  More specifically, however, the reduced demand specifically reflects the state and local economic strains which have adversely affected the financial condition of many municipalities.  As noted above, each of the Company’s municipal obligations retained their investment grade status at March 31, 2010.  However, the financial challenges facing certain issuers of the Company’s municipal obligations have been evidenced through credit rating downgrades within the investment grade tier.  In addition to the affects of reduced demand, municipal obligation prices also reflect the effects of increased supply generally arising from financial institutions selling investments and reducing assets for capital adequacy purposes, as noted earlier.

In sum, the factors influencing the fair value of the Company’s municipal obligations, as described above, generally result from movements in market interest rates and changing market conditions which affect the supply and demand for such securities.  Inasmuch as such market conditions

 
- 23 -

 

fluctuate over time, the “noncredit-related” impairments of value arising from these changing market conditions are “temporary” in nature.

While all of its municipal obligations are classified as “available-for-sale”, the Company has both the ability and intent to hold temporarily impaired securities until the fair value of the securities recover to a level equal to or greater than the Company’s amortized cost.  As of March 31, 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 either par or nominal premiums.  Call provisions, where applicable, require full repayment of principal at par by the issuer.  Accordingly, the Company expects that the securities will not be settled for a price less than its amortized cost.

In light of the factors noted above, the Company does not consider any of its investments in municipal obligations to be “other-than-temporarily” impaired as of March 31, 2010.

Trust Preferred Securities.  The outstanding balance of the Company’s trust preferred securities totaled $6.6 million at March 31, 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 March 31, 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 March 31, 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 March 31, 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.

 
- 24 -

 


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 March 31, 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 March 31, 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 March 31, 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 $586,000 or 19.5% of par to $2.3 million at March 31, 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 $950,000 or 19.0% of par to $3.4 million at March 31, 2010  from $2.4 million at June 30, 2009.

 
- 25 -

 

As of March 31, 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 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 March 31, 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.  At March 31, 2010, all OTTI attributed to credit-related factors have been recognized through earnings.

     
Activity in credit-related other-than-temporary impairment (“OTTI”) recognized through earnings for the three months ended March 31, 2010
   
   
Cumulative balance of credit-related OTTI recognized in earnings through December 31, 2009
 
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 through March 31, 2010
 
(In Thousands)
Collateralized mortgage
                       
  Obligations:
                       
    Non-agency securities
$
587
$
9
$
44
$
-
$
1
$
639

     
Activity in credit-related other-than-temporary impairment (“OTTI”) recognized through earnings for the nine months ended March 31, 2010
   
   
Cumulative balance of credit-related OTTI recognized in earnings through June 30, 2009
 
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 through March 31, 2010
 
(In Thousands)
Collateralized mortgage