f10q_033111-0128.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, 2011
     
OR
     
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
     
    For the transition period from    to    
     
Commission File Number  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 6, 2011.
     
$0.10 par value common stock  -  67,975,477 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, 2011 and June 30, 2010 (Unaudited)
 
1
     
 
Consolidated Statements of Operations for the Three and Nine Months
   
 
Ended March 31, 2011 and March 31, 2010 (Unaudited)
 
2-3
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the
   
 
Nine Months Ended March 31, 2011 and March 31, 2010 (Unaudited)
 
4-6
     
 
Consolidated Statements of Cash Flows for the Nine
   
 
Months Ended March 31, 2011 and March 31, 2010 (Unaudited)
 
7-8
     
 
Notes to Consolidated Financial Statements (Unaudited)
 
9-47
     
  Item 2:
Management’s Discussion and Analysis of
   
 
Financial Condition and Results of Operations
 
48-67
     
  Item 3:
Quantitative and Qualitative Disclosure About Market Risk
 
68-74
     
  Item 4:
Controls and Procedures
 
75
     
     
PART II - OTHER INFORMATION
 
76-77
     
     
SIGNATURES
 
78
     


 
 

 

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


   
March 31,
   
June 30,
 
   
2011
   
2010
 
Assets
           
             
Cash and amounts due from depository institutions
  $ 59,752     $ 3,286  
Interest-bearing deposits in other banks
    148,504       178,136  
                 
        Cash and Cash Equivalents
    208,256       181,422  
                 
Securities available for sale (amortized cost $101,483 and $30,960)
    100,457       29,497  
Securities held to maturity (estimated fair value $157,639 and $256,914)
    157,733       255,000  
Loans receivable, including unamortized yield adjustments of $(1,371) and $564
    1,289,277       1,013,713  
  Less allowance for loan losses
    (10,661 )     (8,561 )
                 
  Net Loans Receivable
    1,278,616       1,005,152  
                 
Mortgage-backed securities available for sale (amortized cost $919,416 and $673,414)
    936,228       703,455  
Mortgage-backed securities held to maturity (estimated fair value $1,457 and $1,754)
    1,398       1,700  
Premises and equipment
    39,499       34,989  
Federal Home Loan Bank of New York (“FHLB”) stock
    13,611       12,867  
Interest receivable
    9,730       8,338  
Goodwill
    108,543       82,263  
Bank owned life insurance
    24,290       19,833  
Deferred income tax assets, net
    4,625       -  
Other assets
    10,942       5,297  
 
               
        Total Assets
  $ 2,893,928     $ 2,339,813  
                 
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
                 
Deposits:
               
  Non-interest-bearing
  $ 133,106     $ 53,709  
  Interest-bearing
    2,007,822       1,569,853  
                 
        Total Deposits
    2,140,928       1,623,562  
                 
Borrowings
    254,930       210,000  
Advance payments by borrowers for taxes
    5,478       5,699  
Deferred income tax liabilities, net
    -       4,391  
Other liabilities
    13,325       10,235  
                 
        Total Liabilities
    2,414,661       1,853,887  
                 
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; 67,975,477 and 68,344,277 shares outstanding, respectively
    7,274       7,274  
Paid-in capital
    215,191       213,529  
Retained earnings
    314,322       312,844  
Unearned Employee Stock Ownership Plan shares; 860,727 shares
               
  and 969,828 shares, respectively
    (8,607 )     (9,698 )
Treasury stock, at cost; 4,762,023 shares and 4,393,223 shares, respectively
    (58,054 )     (54,738 )
Accumulated other comprehensive income
    9,141       16,715  
                 
        Total Stockholders’ Equity
    479,267       485,926  
                 
        Total Liabilities and Stockholders’ Equity
  $ 2,893,928     $ 2,339,813  
See notes to consolidated financial statements.

 
- 1 -

 

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

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Interest Income:
                       
    Loans
  $ 17,416     $ 14,450     $ 46,095     $ 44,068  
    Mortgage-backed securities
    7,114       7,475       21,809       23,393  
    Securities:
                               
      Taxable
    1,230       985       4,017       1,499  
      Tax-exempt
    392       158       787       474  
    Other interest-earning assets
    275       216       695       661  
                                 
        Total Interest Income
    26,427       23,284       73,403       70,095  
                                 
Interest Expense:
                               
    Deposits
    5,882       6,488       18,220       21,504  
    Borrowings
    2,056       2,030       6,277       6,180  
                                 
        Total Interest Expense
    7,938       8,518       24,497       27,684  
                                 
Net Interest Income
    18,489       14,766       48,906       42,411  
                                 
Provision for Loan Losses
    1,391       891       3,518       2,354  
                                 
Net Interest Income after Provision
                               
  for Loan Losses
    17,098       13,875       45,388       40,057  
                                 
Non-Interest Income:
                               
    Fees and service charges
    613       344       1,382       1,072  
    Loss on sale of securities
    (28 )     -       (28 )     -  
    Other-than-temporary security
                               
      impairment:
                               
      Total
    -       (86 )     -       (446 )
      Less: Portion recognized in
                               
        other comprehensive income
    -       33       -       240  
      Portion recognized in earnings
    -       (53 )     -       (206 )
    Miscellaneous
    472       219       1,108       679  
                                 
        Total Non-Interest Income
    1,057       510       2,462       1,545  
                                 
Non-Interest Expenses:
                               
    Salaries and employee benefits
    8,082       6,777       22,432       20,121  
    Net occupancy expense of
                               
      premises
    1,836       1,165       4,037       3,170  
    Equipment and systems
    1,693       1,094       4,255       3,283  
    Advertising and marketing
    252       211       768       651  
    Federal deposit insurance
                               
      premium
    861       367       1,825       917  
    Directors’ compensation
    174       559       982       1,655  
    Merger-related expenses
    225       -       3,415       -  
    Miscellaneous
    1,346       1,024       3,801       3,588  
 
        Total Non-Interest Expenses
  $ 14,469     $ 11,197     $ 41,515     $ 33,385  

 
 
- 2 -

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

   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Income Before Income Taxes
  $ 3,686     $ 3,188     $ 6,335     $ 8,217  
Income Taxes
    998       1,324       2,317       3,417  
                                 
Net Income
  $ 2,688     $ 1,864     $ 4,018     $ 4,800  
                                 
Net Income per Common
                               
  Share (EPS):
                               
    Basic
  $ 0.04     $ 0.03     $ 0.06     $ 0.07  
    Diluted
    0.04       0.03       0.06       0.07  
                                 
Weighted Average Number of
                               
  Common Shares Outstanding:
                               
    Basic
    67,054       67,875       67,105       67,989  
    Diluted
    67,054       67,875       67,105       67,989  
                                 
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, 2010
 

                                        
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.
 
- 4 -

 
 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2010


                                       
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.

 
- 5 -

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 2011

                                        
Accumulated
       
                           
Unearned
         
Other
       
   
Common Stock
   
Paid-In
   
Retained
   
ESOP
   
Treasury
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Shares
   
Stock
   
Income
   
Total
 
                                                 
Balance - June 30, 2010
    68,344     $ 7,274     $ 213,529     $ 312,844     $ (9,698 )   $ (54,738 )   $ 16,715     $ 485,926  
                                                                 
Comprehensive loss:
                                                               
  Net income
    -       -       -       4,018       -       -       -       4,018  
                                                                 
  Unrealized loss on securities available
                                                               
    for sale, net of deferred income tax
                                                               
    benefit of $5,213
    -       -       -       -       -       -       (7,579 )     (7,579 )
                                                                 
  Benefit plans, net of deferred income
                                                               
    tax expense of $4
    -       -       -       -       -       -       5       5  
                                                                 
   Total comprehensive loss
                                                            (3,556 )
                                                                 
ESOP shares committed to be released
                                                               
  (108 shares)
    -       -       (108 )     -       1,091       -       -       983  
                                                                 
Dividends contributed for payment of
                                                               
    ESOP loan
    -       -       104       -       -       -       -       104  
                                                                 
Stock option expense
    -       -       708       -       -       -       -       708  
                                                                 
Treasury stock purchases
    (369 )     -       -       -       -       (3,316 )     -       (3,316 )
                                                                 
Restricted stock plan shares earned
                                                               
  (111 shares)
    -       -       1,198       -       -       -       -       1,198  
                                                                 
Tax effect from stock based
                                                               
  compensation
    -       -       (240 )     (124 )     -       -       -       (364 )
                                                                 
Cash dividends declared ($0.15/public share)
    -       -       -       (2,416 )     -       -       -       (2,416 )
                                                                 
Balance - March 31, 2011
    67,975     $ 7,274     $ 215,191     $ 314,322     $ (8,607 )   $ (58,054 )   $ 9,141     $ 479,267  
                                                                 
 
See notes to consolidated financial statements.

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

    
Nine Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Cash Flows from Operating Activities:
           
    Net income
  $ 4,018     $ 4,800  
    Adjustments to reconcile net income to net cash provided by operating
               
      activities:
               
        Depreciation and amortization of premises and equipment
    1,577       1,309  
        Net amortization of premiums, discounts and loan fees and costs
    2,606       709  
        Deferred income taxes
    80       132  
        Amortization of intangible assets
    -       21  
        Amortization of benefit plans’ unrecognized net loss
    51       108  
        Provision for loan losses
    3,518       2,354  
        Realized loss on sale of mortgage-backed securities held to maturity
    28       -  
        Realized gain on sale of loans
    (45 )     -  
        Proceeds from sale of loans
    1,967       -  
        Realized loss on disposition of premises and equipment
    -       19  
        Loss on other-than-temporary impairment of securities
    -       206  
        Increase in cash surrender value of bank owned life insurance
    (528 )     (416 )
        ESOP, stock option plan and restricted stock plan expenses
    2,889       4,872  
        Loss on sale of real estate owned
    13       -  
       Decrease (increase) in interest receivable
    695       (614 )
       Decrease (increase) in other assets
    68       (4,323 )
       Decrease in interest payable
    (200 )     (41 )
       Decrease in other liabilities
    (240 )     (1,079 )
                 
            Net Cash Provided by Operating Activities
    16,497       8,057  
                 
Cash Flows from Investing Activities:
               
    Proceeds from calls and maturities of securities held for sale
    25,610       -  
    Proceeds from repayments of securities available for sale
    921       623  
    Purchase of securities held to maturity
    (68,733 )     (265,000 )
    Proceeds from calls and maturities of securities held to maturity
    197,170       -  
    Proceeds from repayments of securities held to maturity
    480       -  
    Purchase of loans
    (1,437 )     (23,104 )
    Net decrease in loans receivable
    69,382       58,420  
    Proceeds from sale of real estate owned
    531       243  
    Purchases of mortgage-backed securities available for sale
    (379,306 )     (117,573 )
    Principal repayments on mortgage-backed securities available for sale
    164,688       118,797  
    Principal repayments on mortgage-backed securities held to maturity
    259       648  
    Proceeds from sale of mortgage-backed securities held to maturity
    34       -  
    Purchase of Federal Home Loan Bank (“FHLB”) stock
    (2,250 )     -  
    Redemption of FHLB stock
    2,701       -  
    Cash paid in merger, net of cash acquired
    (24,529 )     -  
    Proceeds from insurance claim on REO
    82       -  
    Additions to premises and equipment
    (936 )     (1,055 )
                 
            Net Cash Used in Investing Activities
  $ (15,333 )   $ (228,001 )



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

   
Nine Months Ended
 
   
March 31,
 
   
2011
   
2010
 
             
Cash Flows from Financing Activities:
           
    Net increase in deposits
  $ 41,143     $ 122,346  
    Repayment of long-term FHLB advances
    (10,026 )     -  
    Increase in other short-term borrowings
    775       -  
    Decrease in advance payments by borrowers for taxes
    (221 )     (163 )
    Dividends paid to stockholders of Kearny Financial Corp.
    (2,425 )     (2,849 )
    Purchase of common stock of Kearny Financial Corp. for treasury
    (3,316 )     (4,124 )
    Dividends contributed for payment of ESOP loan
    104       75  
    Tax effect from stock based compensation
    (364 )     (181 )
                 
            Net Cash Provided by Financing Activities
    25,670       115,104  
                 
            Net Increase (Decrease) in Cash and Cash Equivalents
    26,834       (104,840 )
                 
Cash and Cash Equivalents – Beginning
    181,422       211,525  
                 
Cash and Cash Equivalents – Ending
  $ 208,256     $ 106,685  
                 
Supplemental Disclosures of Cash Flows Information:
               
    Cash paid during the year for:
               
        Income taxes, net of refunds
  $ 3,603     $ 2,606  
                 
        Interest
  $ 24,697     $ 27,725  
                 
    Non-cash investing and financing activities:
               
        Acquisition of  real estate owned in settlement of loans
  $ 871     $ 543  
                 
Fair value of assets acquired, net of cash and cash equivalents acquired
  $ 559,113     $ -  
 
Fair value of liabilities assumed
  $ 534,584     $ -  
                 

See notes to consolidated financial statements.


 
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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., KFS Investment Corp. and CJB Investment Corp. and its wholly owned subsidiary, Central Delaware 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, 2011, 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, 2010 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, operations, changes in stockholders’ equity and cash flows should be read in conjunction with the 2010 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.

The Financial Accounting Standards Board (“FASB”) has 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.
 
 

 
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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, 2011
   
March 31, 2011
 
 
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
  $ 2,688                 $ 4,018              
Basic earnings per share,
                                       
     income available to
                                       
     common stockholders
  $ 2,688       67,054     $ 0.04     $ 4,018       67,105     $ 0.06  
Effect of dilutive securities:
                                               
     Stock options
    -       -               -       -          
                                                 
    $ 2,688       67,054     $ 0.04     $ 4,018       67,105     $ 0.06  


  
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  

4.  SUBSEQUENT EVENTS

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2011, 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. ACQUISITION OF CENTRAL JERSEY BANCORP

On November 30, 2010, the Company completed its acquisition of Central Jersey Bancorp (“Central Jersey”) and its wholly owned subsidiary, Central Jersey Bank, National Association (“Central Jersey Bank”).  The transaction qualified as a tax-free reorganization for federal income tax purposes. The final consideration paid in the transaction totaled $82.1 million which included $70.5 million paid to stockholders of Central Jersey at a price of $7.50 per outstanding share and $11.6 million paid to the U.S. Department of Treasury (“U.S. Treasury”) for the redemption of the 11,300 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and related warrant originally issued by Central Jersey to the U.S. Treasury under the TARP Capital Purchase Plan.

 
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The Company accounted for the transaction using applicable accounting guidance regarding business combinations resulting in the recognition of pre-tax merger-related expenses totaling $3.4 million during the nine months ended March 31, 2011.  Additionally, the Company recorded the assets acquired and liabilities assumed through the merger at fair value as summarized in the following table (in thousands).
 
    Consideration Paid:
     
  Cash for outstanding shares paid to Central Jersey shareholders
  $ 70,455  
  Cash paid to U.S. Department of Treasury for redemption of Central Jersey preferred 
   
shares and related warrant
    11,620     
        Total consideration paid
  $ 82,075  
         
     Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value
        
    Cash and cash equivalents
  $ 57,546  
    Investment securities
    128,948  
    Net loans receivable  
    347,721  
    Mortgage-backed securities
    34,447  
    Premises and equipment
    5,151  
    Federal Home Loan Bank (“FHLB”) stock
    1,195  
    Interest receivable
    2,087  
    Bank owned life insurance
    3,929  
    Deferred income tax assets, net
    3,887  
    Other assets
    5,468  
  Fair value of assets acquired
    590,379  
         
    Deposits
    476,791  
    Federal Home Loan Bank advances
    11,593  
    Subordinated debentures
    5,155  
    Other borrowings
    37,482  
    Other liabilities
    3,563  
  Fair value of liabilities assumed
    534,584       
         Total identifiable net assets
    55,795  
              
         Goodwill
    26,280  
  Total
  $ 82,075  
         

The fair value amounts included in the table above are preliminary estimates and are subject to adjustment but are not expected to be materially different than those shown.  None of the goodwill is deductible for income tax purposes.

The Company estimated the fair value of non-impaired loans acquired from Central Jersey by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were projected using an estimate of future credit losses and rate of prepayments.  Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.  The portion of the fair valuation attributable to expected future credit losses on non-impaired loans totaled approximately $3.5 million or 1.05% of their outstanding balances.

To estimate the fair value of impaired loans, the Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans are derived from the eventual sale of the  collateral. The value of the collateral was generally based on recently completed appraisals.  The

 
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Company discounted these values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.  The portion of the fair valuation attributable to expected future credit losses on impaired loans totaled approximately $7.6 million.

There was no carryover of Central Jersey’s allowance for loan losses associated with the loans acquired as the loans were initially recorded at fair value. Information about the loans acquired from Central Jersey as of November 30, 2010 is as follows (in thousands):

    Contractually required principal and interest at acquisition
  $ 468,977   
    Contractual cash flows not expected to be collected
    (8,005 )
    Expected cash flows at acquisition
    460,972  
    Interest component of expected cash flows
    (113,251 )
              
    Fair value of acquired loans
  $ 347,721  

The fair values of investment securities, including mortgage-backed and non-mortgage backed securities, were primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

The fair value of savings and transaction deposit accounts acquired from Central Jersey was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  The fair valuation of these deposits included a core deposit analysis which considered several factors in estimating the value of the intangible associated with such accounts.  Such factors included an assumption for an initial run off rate of five percent coupled with an annual attrition rate thereafter based upon the weighted average age of the products by deposit category.  Other factors considered included assumptions for the ongoing non-interest income and non-interest expenses relating to the applicable accounts which were based upon historical information.  Based upon these factors, the Company projected cash flows which were present valued using applicable market interest rates for discounting.  These cash flows were then compared to those applicable to alternative funding sources assumed to the borrowings from the Federal Home Loan Bank of New York.

Based upon this analysis, no core deposit intangible was ascribed to the value of non-maturity deposits due to the comparatively low cost of alternative funding sources available in the marketplace at acquisition in relation to the ongoing branch-related and transaction-related expenses associated with such accounts.

Certificates of deposit accounts were valued utilizing a discounted cash flow analysis based upon the underlying accounts’ contractual maturities and interest rates.  The present value of the projected cash flows was then determined using discount rates based upon certificate of deposit interest rates available in the marketplace for accounts with similar terms.

The acquired borrowings were valued utilizing a discounted cash flow analysis based upon the underlying contractual maturities, interest rates and, where applicable, repricing and amortization terms applicable to each borrowing.  The present value of the projected cash flow for each borrowing was then determined using discount rates based upon interest rates available in the marketplace for borrowings with similar terms.

 
- 12 -

 

Direct costs related to the merger were expensed as incurred. During the nine months ended March 31, 2011, the Company incurred $3.4 million in merger-related expenses attributable to the acquisition of Central Jersey.  Such costs included legal expenses of $199,000, investment banking and other professional service fees totaling $842,000, employment severance charges totaling $360,000, service provider severance and conversion-related charges totaling $2.0 million, respectively, and other merger-related expenses of $8,000.

The following table presents unaudited pro forma information as if the acquisition of Central Jersey had occurred on July 1, 2009. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments and the related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with Central Jersey at the beginning of fiscal 2010. In particular, expected cost savings and acquisition integration costs are not fully reflected in the unaudited pro forma amounts.

   
Pro Forma
Nine Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
   
(In Thousands,
Except Per Share Data)
   
(In Thousands,
Except Per Share Data)
 
             
Net interest income
  $ 56,865     $ 56,757  
Non-interest income
    3,346       3,935  
Non-interest expense
    53,297       45,937  
Net income
    1,873       5,624  
Net income per common shares (EPS)
      Basic and diluted
    0.03        0.08  

The amounts of revenue, expense and net income attributable to Central Jersey since the acquisition date included in the consolidated statement of operations for the nine months ended March 31, 2011 are not separately disclosed.  The Companies’ financial records have been integrated in a manner that does not allow for the accurate or efficient bifurcation of the Company’s ongoing statement of operations between the components attributable to Central Jersey and those attributable to the remainder of the Company.

6.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued guidance concerning accounting for transfers of financial assets, an amendment to previous guidance on the topic.  This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets.  Specifically, among other aspects, this guidance amends previous guidance concerning accounting for transfers and servicing of financial assets and extinguishments of liabilities by removing the concept of a qualifying special-purpose entity from previous guidance on transfers and servicing and removes the exception from applying previous guidance on transfers and servicing to variable interest entities that are qualifying special-purpose entities.  It also modifies the financial-components approach used in previous guidance.  This guidance is effective for fiscal years beginning after November 15, 2009.  The implementation of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

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

 
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