f10q_123111-0128.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
December 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  [X]  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: February 3, 2012.
     
$0.10 par value common stock  -  66,971,840 shares outstanding

 
 
 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

INDEX



   
Page
   
Number
PART I - FINANCIAL INFORMATION
   
     
Item 1:
Financial Statements
   
     
 
Consolidated Statements of Financial Condition
   
 
at December 31, 2011 and June 30, 2011 (Unaudited)
 
1
     
 
Consolidated Statements of Operations for the Three and Six Months
   
 
Ended December 31, 2011 and December 31, 2010 (Unaudited)
 
2-3
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the
   
 
Six Months Ended December 31, 2011 and December 31, 2010
 
4-5
 
(Unaudited)
   
     
 
Consolidated Statements of Cash Flows for the Six Months
 
6-7
 
Ended December 31, 2011 and December 31, 2010 (Unaudited)
   
     
 
Notes to Consolidated Financial Statements (Unaudited)
 
8-57
     
Item 2:
Management’s Discussion and Analysis of
   
 
Financial Condition and Results of Operations
 
58-84
     
Item 3:
Quantitative and Qualitative Disclosure About Market Risk
 
85-92
     
Item 4:
Controls and Procedures
 
93
     
     
PART II - OTHER INFORMATION
 
94-96
     
     
SIGNATURES
 
97
     
 
 
 
 
 

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

   
December 31,
   
June 30,
 
   
2011
   
2011
 
Assets
           
             
Cash and amounts due from depository institutions
  $ 51,382     $ 47,332  
Interest-bearing deposits in other banks
    95,250       175,248  
                 
        Cash and Cash Equivalents
    146,632       222,580  
                 
Securities available for sale (amortized cost $15,395 and $46,145)
    13,004       44,673  
Securities held to maturity (estimated fair value $45,950 and $107,052)
    45,517       106,467  
Loans receivable, including unamortized yield adjustments of $(1,236) and $(1,021)
    1,228,347       1,268,351  
  Less allowance for loan losses
    (8,596 )     (11,767 )
                 
  Net Loans Receivable
    1,219,751       1,256,584  
                 
Mortgage-backed securities available for sale (amortized cost $1,190,006 and
   $1,032,407)
     1,225,222        1,060,247  
Mortgage-backed securities held to maturity (estimated fair value $1,281 and $1,416)
    1,207       1,345  
Premises and equipment
    39,539       39,556  
Federal Home Loan Bank of New York (“FHLB”) stock
    13,558       13,560  
Interest receivable
    8,761       9,740  
Goodwill
    108,591       108,591  
Bank owned life insurance
    24,845       24,470  
Other assets
    16,153       16,323  
 
               
        Total Assets
  $ 2,862,780     $ 2,904,136  
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
                 
Deposits:
               
  Non-interest-bearing
  $ 138,603     $ 143,087  
  Interest-bearing
    1,978,643       2,006,266  
                 
        Total Deposits
    2,117,246       2,149,353  
                 
Borrowings
    238,012       247,642  
Advance payments by borrowers for taxes
    5,224       5,794  
Deferred income tax liabilities, net
    4,787       1,669  
Other liabilities
    10,941       11,804  
                 
        Total Liabilities
    2,376,210       2,416,262  
                 
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; 67,080,371 and 67,851,077 shares outstanding, respectively
    7,274       7,274  
Paid-in capital
    215,381       215,258  
Retained earnings
    318,286       317,354  
Unearned Employee Stock Ownership Plan shares; 751,621 shares
               
  and 824,352 shares, respectively
    (7,516 )     (8,244 )
Treasury stock, at cost; 5,657,129 shares and 4,886,423 shares, respectively
    (66,294 )     (59,200 )
Accumulated other comprehensive income
    19,439       15,432  
                 
        Total Stockholders’ Equity
    486,570       487,874  
                 
        Total Liabilities and Stockholders’ Equity
  $ 2,862,780     $ 2,904,136  
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
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Interest Income
                       
    Loans
  $ 16,216     $ 14,878     $ 32,684     $ 28,679  
    Mortgage-backed securities
    7,933       7,297       15,915       14,695  
    Securities:
                               
      Taxable
    334       1,379       826       2,787  
      Tax-exempt
    11       238       55       395  
    Other interest-earning assets
    182       241       377       420  
        Total Interest Income
    24,676       24,033       49,857       46,976  
                                 
Interest Expense
                               
    Deposits
    5,223       6,015       10,815       12,338  
    Borrowings
    2,035       2,146       4,077       4,221  
        Total Interest Expense
    7,258       8,161       14,892       16,559  
                                 
        Net Interest Income
    17,418       15,872       34,965       30,417  
                                 
Provision for Loan Losses
    1,323       876       2,388       2,127  
                                 
        Net Interest Income after Provision
                               
           for Loan Losses
    16,095       14,996       32,577       28,290  
                                 
Non-Interest (Loss) Income
                               
    Fees and service charges
    639       427       1,265       769  
    Loss on sale of securities
    (5 )     -       (5 )     -  
    Gain on sale of loans
    123       13       309       13  
    Income from bank owned life insurance
     185        174        375        337  
    Electronic banking fees and charges
    236       167       471       281  
    Loss from REO operations
    (2,049 )     (36 )     (2,203 )     (50 )
    Miscellaneous
    41       29       76       55  
        Total Non-Interest (Loss) Income
    (830 )     774       288       1,405  
                                 
Non-Interest Expenses
                               
    Salaries and employee benefits
    8,383       7,397       16,544       14,350  
    Net occupancy expense of premises
    1,596       1,152       3,181       2,201  
    Equipment and systems
    1,774       1,385       3,743       2,562  
    Advertising and marketing
    321       270       622       516  
    Federal deposit insurance premium
    496       517       981       964  
    Directors’ compensation
    158       250       324       808  
    Merger-related expenses
    -       3,150       -       3,190  
    Miscellaneous
    1,895       1,281       3,509       2,455  
        Total Non-Interest Expenses
  $ 14,623     $ 15,402     $ 28,904     $ 27,046  

 
- 2 -
 

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

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
      Income Before Income Taxes
  $ 642     $ 368     $ 3,961     $ 2,649  
                                 
Income Taxes
    172       373       1,473       1,319  
                                 
      Net Income (Loss)
  $ 470     $ (5 )   $ 2,488     $ 1,330  
                                 
Net Income (Loss) per Common
                               
  Share (EPS):
                               
    Basic and Diluted
  $ 0.01     $ 0.00     $ 0.04     $ 0.02  
                                 
Weighted Average Number of
                               
  Common Shares Outstanding:
                               
    Basic and Diluted
    66,498       67,042       66,733       67,130  
                                 
Dividends Declared Per Common
                               
   Share
  $ 0.05     $ 0.05     $ 0.10     $ 0.10  

See notes to consolidated financial statements.

 
- 3 -
 
 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2010
(In Thousands, Except Per Share Data, Unaudited)
 
                            
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
    -       -       -       1,330       -       -       -       1,330  
                                                                 
  Unrealized loss on securities
                                                               
    available for sale, net of
                                                               
    deferred income tax                                                                
    benefit of $5,342
    -       -       -       -       -       -       (7,793 )     (7,793 )
                                                                 
  Benefit plans, net of deferred
                                                               
    income tax benefit of $3
    -       -       -       -       -       -       (5 )     (5 )
                                                                 
      Total comprehensive loss
                                                            (6,468 )
                                                                 
ESOP shares committed to be
                                                               
    released (72 shares)
    -       -       (84 )     -       727       -       -       643  
                                                                 
Dividends contributed for
                                                               
    payment of ESOP loan
    -       -       64       -       -       -       -       64  
                                                                 
Stock option expense
    -       -       745       -       -       -       -       745  
                                                                 
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                                                                  
   ($0.10/ public share)
    -       -       -       (1,608 )     -       -       -       (1,608 )
                                                                 
Balance - December 31, 2010
    67,975     $ 7,274     $ 215,212     $ 312,442     $ (8,971 )   $ (58,054 )   $ 8,917     $ 476,820  
                                                                 

See notes to consolidated financial statements. 
- 4 -
 
 
 
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended December 31, 2011
(In Thousands, Except Per Share Data, Unaudited)

                            
Unearned
         
Other
       
   
Common Stock
   
Paid-In
   
Retained
   
ESOP
   
Treasury
   
Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Shares
   
Stock
   
Income
   
Total
 
                                                 
Balance - June 30, 2011
    67,851     $ 7,274     $ 215,258     $ 317,354     $ (8,244 )   $ (59,200 )   $ 15,432     $ 487,874  
                                                                 
Comprehensive income:
                                                               
  Net income
    -       -       -       2,488       -       -       -       2,488  
                                                                 
  Unrealized gain on securities
                                                               
    available for sale, net of 
                                                               
    deferred income tax                                                                
    expense of $2,629
    -       -       -       -       -       -       3,828       3,828  
                                                                 
  Benefit plans, net of deferred
                                                               
    income tax expense of $124
    -       -       -       -       -       -       179       179  
                                                                 
   Total Comprehensive income
                                                            6,495  
                                                                 
ESOP shares committed to be
                                                               
    released (72 shares)
    -       -       (55 )     -       728       -       -       673  
                                                                 
Dividends contributed for
                                                               
    payment of ESOP loan
    -       -       73       -       -       -       -       73  
                                                                 
Stock option expense
    -       -       21       -       -       -       -       21  
                                                                 
Treasury stock purchases
    (771 )     -       -       -       -       (7,094 )     -       (7,094 )
                                                                 
Restricted stock plan shares
                                                               
   earned (8 shares)
    -       -       84       -       -       -       -       84  
                                                                 
Cash dividends declared                                                                  
   ($0.10/ public share)
    -       -       -       (1,556 )     -       -       -       (1,556 )
                                                                 
Balance - December 31, 2011
    67,080     $ 7,274     $ 215,381     $ 318,286     $ (7,516 )   $ (66,294 )   $ 19,439     $ 486,570  
                                                                 

See notes to consolidated financial statements. 
- 5 -
 
 

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

    
Six Months Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Cash Flows from Operating Activities:
           
    Net income
  $ 2,488     $ 1,330  
    Adjustments to reconcile net income to net cash provided by operating
               
      activities:
               
   Depreciation and amortization of premises and equipment
    1,310       944  
   Net amortization of premiums, discounts and loan fees and costs
    4,086       1,681  
   Deferred income taxes
    365       (756 )
   Amortization of intangible assets
    81       -  
   Amortization of benefit plans’ unrecognized net loss
    20       34  
   Provision for loan losses
    2,388       2,127  
   Loss on write-down and sales of real estate owned
    2,056       35  
   Realized gain on sale of loans
    (309 )     (13 )
   Proceeds from sale of loans
    3,551       1,049  
   Realized loss on sale of mortgage-backed securities held to maturity
    5       -  
   Realized gain on disposition of premises and equipment
    (3 )     -  
   Increase in cash surrender value of bank owned life insurance
    (375 )     (337 )
   ESOP, stock option plan and restricted stock plan expenses
    778       2,586  
   Decrease in interest receivable
    979       -  
   Increase in other assets
    (437 )     (1,242 )
   Decrease in interest payable
    (24 )     (36 )
   Decrease in other liabilities
    (430 )     (1,194 )
                 
      Net Cash Provided by Operating Activities
    16,529       6,208  
                 
Cash Flows from Investing Activities:
               
    Proceeds from calls and maturities of securities available for sale
    30,088       405  
    Proceeds from repayments of securities available for sale
    590       585  
    Purchase of securities held to maturity
    (1,068 )     (65,555 )
    Proceeds from calls and maturities of securities held to maturity
    61,522       115,230  
    Proceeds from repayments of securities held to maturity
    458       148  
    Purchase of loans
    (27,907 )     (1,437 )
    Net decrease in loans receivable
    58,011       41,223  
    Proceeds from sale of real estate owned
    224       60  
    Purchases of mortgage-backed securities available for sale
    (311,817 )     (245,211 )
    Principal repayments on mortgage-backed securities available for sale
    149,045       105,597  
    Principal repayments on mortgage-backed securities held to maturity
    110       181  
    Proceeds from sale of mortgage-backed securities held to maturity
    27       -  
    Purchase of FHLB stock
    -       (2,250 )
    Redemption of FHLB stock
    2       2,250  
    Cash paid in merger, net of cash acquired
    -       (24,529 )
    Proceeds from cash settlement of premises and equipment
    3       -  
    Additions to premises and equipment
    (1,293 )     (434 )
                 
      Net Cash Used in Investing Activities
  $ (42,005 )   $ (73,737 )
 

 
- 6 -
 
 

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

   
Six Months Ended
 
   
December 31,
 
   
2011
   
2010
 
             
Cash Flows from Financing Activities:
           
    Net (decrease) increase in deposits
  $ (31,739 )   $ 31,157  
    Repayment of long-term FHLB advances
    (39 )     (6 )
    Decrease in other short-term borrowings
    (9,516 )     (9,009 )
    Decrease in advance payments by borrowers for taxes
    (570 )     (474 )
    Dividends paid to stockholders of Kearny Financial Corp.
    (1,587 )     (1,617 )
    Purchase of common stock of Kearny Financial Corp. for treasury
    (7,094 )     (3,316 )
    Dividends contributed for payment of ESOP loan
    73       64  
    Tax effect from stock based compensation
    -       (364 )
                 
            Net Cash (Used in) Provided by Financing Activities
    (50,472 )     16,435  
                 
            Net Decrease in Cash and Cash Equivalents
    (75,948 )     (51,094 )
                 
Cash and Cash Equivalents – Beginning
    222,580       181,422  
                 
Cash and Cash Equivalents – Ending
  $ 146,632     $ 130,328  
                 
Supplemental Disclosures of Cash Flows Information:
               
    Cash paid during the year for:
               
        Income taxes, net of refunds
  $ 2,027     $ 3,603  
                 
        Interest
  $ 14,916     $ 16,595  
                 
    Non-cash investing and financing activities:
               
        Acquisition of  real estate owned in settlement of loans
  $ 1,157     $ 435  
        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.

 
- 7 -
 
 

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.  Kearny Financial Securities, Inc. and Central Delaware Investment Corp. were each dissolved during the quarter ended September 30, 2011.  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 six month periods ended December 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, 2011 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 2011 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.
 
 
- 8 -
 
 
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:

 
Three Months Ended
   
Six Months Ended
 
 
December 31, 2011
   
December 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
  $ 470                 $ 2,488              
Basic earnings per share,
                                       
     income available to
                                       
     common stockholders
  $ 470       66,498     $ 0.01     $ 2,488       66,733     $ 0.04  
Effect of dilutive securities:
                                               
     Stock options
    -       -               -       -          
                                                 
    $ 470       66,498     $ 0.01     $ 2,488       66,733     $ 0.04  
 
 
 
Three Months Ended
   
Six Months Ended
 
 
December 31, 2010
   
December 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 (loss) income
  $ (5 )               $ 1,330              
Basic earnings per share,
                                       
     income available to
                                       
     common stockholders
  $ (5 )     67,042     $ 0.00     $ 1,330       67,130     $ 0.02  
Effect of dilutive securities:
                                               
     Stock options
    -       -               -       -          
                                                 
    $ (5 )     67,042     $ 0.00     $ 1,330       67,130     $ 0.02  

During the three and six months ended December 31, 2011, the average number of options which were considered anti-dilutive totaled approximately 3,233,000 and 3,233,000, respectively.  During the three and six months ended December 31, 2010, the average number of options which were considered anti-dilutive totaled approximately 3,182,000 and 3,201,000, respectively.

4.  SUBSEQUENT EVENTS

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of December 31, 2011, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date this document was filed.

5.  RECENT ACCOUNTING PRONOUNCEMENTS

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
 
- 9 -
 
 
the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers while also requiring that in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).  The guidance clarifies existing fair value disclosure requirements such that a reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position.

A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities.  Moreover, a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  This guidance also includes conforming amendments regarding employers' disclosures about postretirement benefit plan assets.  The conforming amendments change the terminology from “major categories” of assets to “classes” of assets and provide a cross reference to the guidance in Subtopic 820-10 on how to determine appropriate classes to present fair value disclosures.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The implementation of the new pronouncement did not have a material impact on the Company’s consolidated financial position or results of operations.

In December 2010, the FASB issued amended guidance concerning goodwill impairment testing.  The amended guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and related examples, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  These amendments eliminate an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice.

For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted.  Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by existing guidance. The implementation of the new pronouncement did not have a material impact on the Company’s consolidated financial position or results of operations.

 
- 10 -
 
 

In April 2011, the FASB issued Accounting Standards Update 2011-03 which clarifies the accounting principles applied to repurchase agreements, as set forth by FASB ASC Topic 860, Transfers and Servicing. This ASU, entitled Reconsideration of Effective Control for Repurchase Agreements, amends one of three criteria used to determine whether or not a transfer of assets may be treated as a sale by the transferor. Under Topic 860, the transferor may not maintain effective control over the transferred assets in order to qualify as a sale. This ASU eliminates the criteria under which the transferor must retain collateral sufficient to repurchase or redeem the collateral on substantially agreed upon terms as a method of maintaining effective control. This ASU is effective for interim and annual reporting periods beginning on or after December 31, 2011, and requires prospective application to transactions or modifications of transactions which occur on or after the effective date. Early adoption is not permitted.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.
 
 
In June 2011, the FASB issued Accounting Standards Update 2011-05 which amends FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate, but consecutive, statements of net income and other comprehensive income. Under previous GAAP, all 3 presentations were acceptable. Regardless of the presentation selected, the Reporting Entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 31, 2011 for public entities. As the two remaining options for presentation existed prior to the issuance of this ASU, early adoption is permitted.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In September, 2011, the FASB issued Accounting Standards Update 2011-08, Testing Goodwill for Impairment. The purpose of this ASU is to simplify how entities test goodwill for impairment by adding a new first step to the preexisting goodwill impairment test under ASC Topic 350, Intangibles – Goodwill and Other.  This amendment gives the entity the option to first assess a variety of qualitative factors such as economic conditions, cash flows, and competition to determine whether it was more likely than not that the fair value of goodwill has fallen below its carrying value. If the entity determines that it is not likely that the fair value has fallen below its carrying value, then the entity will not have to complete the original two-step test under Topic 350. The amendments in this ASU are effective for impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In September, 2011, the FASB issued Accounting Standards Update 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan. This update creates additional disclosures for employers participating in multiemployer pension plans to provide clarity with regard to the employer’s involvement in the plan, as well as the financial health of the plan itself. Participating employers will now be required to disclose plan names, contribution amounts, funded status, minimum contribution requirements, and other relevant plan information for all years presented on the statement of income. The ASU does not amend the accounting requirements for such contributions and liabilities, and as such will only impact the level of disclosure made with regard to the plan. For public companies, the amendments of this ASU are effective for annual periods for fiscal years ending after December 15, 2011. Early adoption by both public and nonpublic entities is permitted.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

 
- 11 -
 
 
In December, 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. In response to stakeholder concerns regarding the operational ramifications of the presentation of these reclassifications for current and previous years, the FASB has deferred the implementation date of this provision to allow time for further consideration. The requirement in ASU 2011-05, Presentation of Comprehensive Income, for the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net income and other comprehensive income is still effective for fiscal years and interim periods beginning after December 15, 2011 for public companies. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

6.  STOCK REPURCHASE PLANS
 
On August 17, 2011, the Company announced the completion of its stock repurchase plan originally announced on May 26, 2010 through which it repurchased a total of 889,506 shares at an average cost of $9.07 per share.  On that same day, the Company announced that the Board of Directors authorized a new stock repurchase plan to acquire up to 845,031 shares, or 5% of the Company’s outstanding stock held by persons other than Kearny MHC.  Through December 31, 2011 the Company has repurchased a total of 736,500 shares in accordance with this repurchase plan at a total cost of $6.8 million and at an average cost per share of $9.20.
 
7.  DIVIDEND WAIVER

During the six months ended December 31, 2011, Kearny MHC, the federally chartered mutual holding company of the Company waived its right, in accordance with the non-objection previously granted by the Federal Reserve Bank (“FRB”), to receive cash dividends of approximately $5.1 million declared on the 50,916,250 shares of Company common stock it owns.


 
- 12 -
 
 

8.  SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses and estimated fair values of securities at December 31, 2011 and June 30, 2011 and stratification by contractual maturity of securities at December 31, 2011 are presented below:
 
    
At December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Carrying
Value
 
   
(In Thousands)
 
Securities:
                       
  Debt securities:
                       
    Trust preferred securities
  $ 8,866     $ -     $ 2,418     $ 6,448  
    U.S. agency securities
    6,017       28       1       6,044  
    Obligations of state and political
                               
      subdivisions
    512       -       -       512  
                                 
          Total securities
    15,395       28       2,419       13,004  
                                 
Mortgage-backed securities:
                               
  Collateralized mortgage obligations:
                               
    Federal National Mortgage Association
    2,959       33       -       2,992  
                                 
          Total collateralized mortgage
                               
            obligations
    2,959       33       -       2,992  
                                 
  Mortgage pass-through securities:
                               
    Government National Mortgage
                               
      Association
    11,615       973       20       12,568  
    Federal Home Loan Mortgage
                               
      Corporation
    386,090       10,963       30       397,023  
    Federal National Mortgage Association
    789,342       23,335       38       812,639  
                                 
         Total mortgage pass-through securities
    1,187,047       35,271       88       1,222,230  
                                 
         Total mortgage-backed securities
    1,190,006       35,304       88       1,225,222  
 
Total securities available for sale
  $ 1,205,401     $ 35,332     $ 2,507     $ 1,238,226  

 
   
At December 31, 2011
 
   
Amortized
Cost
   
Carrying
Value
 
   
(In Thousands)
 
Debt securities:
           
    Due in one year or less
  $ 511     $ 512  
    Due after one year through five years
    -       -  
    Due after five years through ten years
    59       59  
    Due after ten years
    14,825       12,433  
                 
          Total
  $ 15,395     $ 13,004  
 
 
- 13 -
 
 

 
   
At June 30, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Carrying
Value
 
   
(In Thousands)
 
Securities:
                       
  Debt securities:
                       
    Trust preferred securities
  $ 8,863     $ -     $ 1,416     $ 7,447  
    U.S. agency securities
    6,657       -       66       6,591  
    Obligations of state and political
                               
      subdivisions
    30,625       10       -       30,635  
                                 
          Total securities
    46,145       10       1,482       44,673  
                                 
Mortgage-backed securities:
                               
  Collateralized mortgage obligations: