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Kearny Financial (KRNY)

Filed: 28 Aug 17, 8:00pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2017

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: 001-37399

 

KEARNY FINANCIAL CORP.

(Exact name of Registrant as specified in its Charter)

 

 

Maryland

 

30-0870244

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

120 Passaic Avenue, Fairfield, New Jersey

 

07004

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (973) 244-4500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES      NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES      NO

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.   See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES      NO

The aggregate market value of the voting and non-voting common equity held by non‑affiliates of the Registrant on December 31, 2016 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $1.24 billion.  Solely for purposes of this calculation, shares held by directors, executive officers and greater than 10% stockholders are treated as shares held by affiliates.

As of August 24, 2017 there were outstanding 83,011,448 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the definitive Proxy Statement for the Registrant’s 2017 Annual Meeting of Stockholders. (Part III)

 

 

 


KEARNY FINANCIAL CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended June 30, 2017

INDEX

 

 

 

PART I

 

 

 

 

 

 

Page

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

39

Item 1B.

 

Unresolved Staff Comments

 

45

Item 2.

 

Properties

 

46

Item 3.

 

Legal Proceedings

 

48

Item 4.

 

Mine Safety Disclosures

 

48

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

49

Item 6.

 

Selected Financial Data

 

51

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

53

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

74

Item 8.

 

Financial Statements and Supplementary Data

 

79

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

79

Item 9A.

 

Controls and Procedures

 

79

Item 9B.

 

Other Information

 

80

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

81

Item 11.

 

Executive Compensation

 

81

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

81

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

82

Item 14.

 

Principal Accounting Fees and Services

 

82

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

83

Item 16.

 

Form 10-K Summary

 

85

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

 

i


PART I

Item 1. Business

Forward-Looking Statements

This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of the annual report on Form 10-K.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

our ability to access cost-effective funding;

 

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

demand for loans and deposits in our market area;

 

our ability to implement changes in our business strategies;

 

competition among depository and other financial institutions;

 

inflation and changes in the interest rate environment that reduce our margins and yields, or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

 

adverse changes in the securities markets;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

changes in consumer spending, borrowing and savings habits;

 

changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

our ability to retain key employees;

 

technological changes;

 

significant increases in our loan losses;

 

2


 

changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and

 

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing products and services described elsewhere in this annual report on Form 10-K.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

General

Kearny Financial Corp. (the “Company,” or “Kearny Financial”), is a Maryland corporation that is the holding company for Kearny Bank (the “Bank” or “Kearny Bank”), a nonmember New Jersey stock savings bank.  The Bank was previously a federally charted stock savings bank.  However, the Bank converted its charter to that of a New Jersey savings bank on June 29, 2017.

On May 18, 2015, the Company completed its second-step conversion and stock offering through which it converted from the mutual holding company structure to a fully publicly held company.  In conjunction with that transaction, the Company sold 71,750,000 shares of its common stock at $10.00 per share, resulting in gross proceeds of $717.5 million.  The new shares issued included 3,612,500 shares sold to the Bank’s Employee Stock Ownership Plan (“ESOP”) with an aggregate value of $36.1 million based on the sales price of $10.00 per share.  Concurrent with the closing of the transaction, the Company also issued an additional 500,000 shares of its common stock with an aggregate value of $5.0 million and contributed these shares with an additional $5.0 million in cash to the KearnyBank Foundation.

The Company recognized direct stock offering costs of $10.7 million in conjunction with the transaction which reduced the net proceeds credited to capital.  After adjusting for transaction costs and the value of the shares issued to the Bank’s ESOP, the Company recognized a net increase in equity capital of $670.7 million, of which $353.4 million was contributed to the Bank by the Company as an additional investment in the Bank’s common equity.  Approximately $34.5 million of new capital proceeds were funded through withdrawals of existing customer deposits previously held by the Bank.

Each outstanding share held by the public stockholders of Kearny Financial Corp., a federal corporation, immediately prior to the closing of the conversion and stock offering was converted into 1.3804 shares of the Company’s new common stock while the shares previously held by Kearny MHC, the former mutual holding company, were cancelled concurrent with the closing of the transaction.  As a result of the completion of the second-step conversion and stock offering, all historical share and per share information has been revised to reflect the 1.3804-to-one exchange ratio.  At June 30, 2017, the Company had 84,350,848 shares outstanding.

The Company is a unitary savings and loan holding company, regulated by the Board of Governors of the Federal Reserve Bank (“FRB”) and conducts no significant business or operations of its own.  The Bank’s deposits are federally insured by the Deposit Insurance Fund as administered by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is primarily regulated by the New Jersey Department of Banking and Insurance (“NJDBI”) and, as a nonmember bank, the FDIC.  References in this Annual Report on Form 10‑K to the Company or Kearny Financial generally refer to the Company and the Bank, unless the context indicates otherwise. References to “we”, “us”, or “our” refer to the Bank or Company, or both, as the context indicates.  

The Company’s primary business is the ownership and operation of the Bank.  The Bank is principally engaged in the business of attracting deposits from the general public in New Jersey and New York and using these deposits, together with other funds, to originate or purchase loans for its portfolio and invest in securities.  Our loan portfolio is primarily comprised of loans collateralized by commercial and residential real estate augmented by secured and unsecured loans to businesses and consumers.  We also maintain a portfolio of investment securities, primarily comprised of U.S. agency mortgage-backed securities, U.S. government and agency debentures, bank-qualified municipal obligations, corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt.

At June 30, 2017, net loans receivable comprised 66.7% of our total assets while investment securities, including mortgage‑backed and non-mortgage-backed securities, comprised 23.0 % of our total assets.  By comparison, at June 30, 2016, net loans receivable comprised 59.0% of our total assets while securities comprised 27.8% of our total assets.  A significant long term goal of our business plan is to reallocate our balance sheet to reflect a greater percentage of interest-earning assets to loans while, in turn, reducing the relative size of the securities portfolio.  The composition and volume of loan originations and purchases during fiscal 2017 reflected that strategic focus as we increased our commercial loan origination and support staff and expanded relationships with loan participants and other external loan origination resources.

We operate from our administrative headquarters in Fairfield, New Jersey and had 42 branch offices as of June 30, 2017.  Our internet address is www.kearnybank.com.  Information on our website is not and should not be considered to be part of this annual report on Form 10-K.

 

3


Business Strategy

Our goal is to continue to evolve from a traditional thrift business model toward that of a full service community bank, profitably deploying capital and enhancing earnings through a variety of balance sheet growth and diversification strategies. The key strategic initiatives of our business plan are presented below accompanied by an overview of our activities and achievements in support of those initiatives:

 

Continue to Increase Commercial Mortgage Lending

During fiscal 2017, our commercial mortgage loan portfolio, including multi-family and nonresidential mortgage loans, increased by 34.2%, or $636.7 million, to $2.50 billion at June 30, 2017 from $1.86 billion at June 30, 2016. This increase reflected commercial mortgage loan originations and purchases in fiscal 2017 totaling $727.4 million and $126.7 million, respectively. At June 30, 2017, our commercial mortgage loan portfolio comprised 77.0% of total loans compared to 69.7% of total loans at June 30, 2016.

We plan to continue to increase our portfolio of commercial mortgage loans by expanding loan acquisition volume through all available channels, including retail and broker originations, which may be supplemented with individual and pooled loan purchases and participations.  Additionally, we intend to continue to expand our commercial lending infrastructure and resources, which will be supported by new product and pricing strategies designed to increase origination volume in a very competitive marketplace.

 

Increase Commercial Business Lending

We plan to continue to focus our efforts on expanding our commercial non-real estate secured and unsecured business lending activities through all available channels. During fiscal 2017, our commercial business loan origination and purchase volume totaled $51.1 million, reflecting retail originations of $34.1 million augmented by the acquisition of commercial and industrial (“C&I”) loans through wholesale channels totaling $17.0 million.

We continued the realignment and expansion of our commercial business lending infrastructure during fiscal 2017 which contributed to a modest increase in aggregate commercial business loan origination and purchase volume for the year.  As a result of those enhancements, we anticipate that the outstanding balance of this loan segment will continue to increase in fiscal 2018 and thereafter.  Moreover, we will attempt to expand our relationships with these borrowers to include commercial deposits and other products, with the goal of increasing our non-interest income.

The noted changes to our commercial business lending resources and infrastructure also served to better support our Small Business Administration (“SBA”) resources.  SBA loan sale volume increased by $5.7 million to $9.6 million in fiscal 2017 compared to $3.9 million in fiscal 2016.

We anticipate a continued increase in the level of non-interest income through greater gains on sale of SBA loans as well as other business loan-related fee income. Moreover, our business lending strategies will continue to be undertaken within a larger set of strategic initiatives designed to promote other business banking services intended to increase commercial deposit balances and services.

 

Modestly Increase Residential Mortgage Portfolio Lending

We plan to modestly increase our portfolio of one- to four-family home equity loans and home equity lines of credit while allowing our portfolio of one- to four-family first mortgage loans to continue to decrease as a greater portion of such loans originated are sold into the secondary market, as discussed below.  During fiscal 2017, our aggregate portfolio of one- to four-family mortgage loans decreased by $44.6 million to $650.1 million, or 20.1% of total loans, from $694.8 million or 26.0% of total loans at June 30, 2016.  We originated $67.9 million of one- to four-family first mortgage loans during the year ended June 30, 2017 while no such loans were purchased during fiscal 2017.  During the year ended June 30, 2016, we originated and purchased $87.2 million and $36.3 million, respectively, of one- to four-family first mortgage loans.

The overall decrease in the outstanding balance of the residential mortgage loan portfolio, and its decline as a percentage of total loans, continues to reflect our decreased strategic focus on residential first mortgage portfolio lending.  We anticipate that this segment of our loan portfolio will continue to decline as a percentage of total loans and earning assets as other loan categories grow.

 

Increase Residential Mortgage Banking

We are continuing to expand our residential mortgage lending infrastructure to increase the origination volume of residential mortgage loans for sale into the secondary market.  Our Director of Residential Lending updated the Company’s residential lending infrastructure during the latter half of the fiscal 2016 to support the growth in mortgage banking activity during fiscal 2017.  Our mortgage banking business strategy resulted in the recognition of $713,000 in gains on the sale of $84.4 million of mortgage loans held for sale during the year ended June 30, 2017.  We anticipate an increase in residential mortgage loan origination and sale activity that is expected to support growth in our non-interest income over time through the recognition of recurring loan sale gains, while also serving to help manage the Company’s exposure to interest rate risk (“IRR”) through the sale of longer-duration, fixed-rate loans into the secondary market.

 

4


 

Continue to Reduce the Securities Portfolio while Maintaining Sector Diversity

In recent years, we have diversified the composition and allocation of our investment portfolio into new asset sectors, including asset-backed securities, corporate bonds, municipal obligations, collateralized loan obligations, commercial mortgage-backed securities (“MBS”) and subordinated debt while reducing our concentration in traditional residential MBS. Several of the added sectors include floating rate securities that reduce the level of interest rate risk (“IRR”) embedded in our securities portfolio.

Our securities portfolio decreased by $143.7 million, or 11.5%, to $1.11 billion, or 23.0% of total assets, at June 30, 2017 from $1.25 billion, or 27.8% of total assets, at June 30, 2016, reflecting the reinvestment of security cash flows from repayments and sales into the loan portfolio.  We expect to continue utilizing a significant portion of cash flows from the securities portfolio to fund a portion of our expected loan growth while maintaining the diversity of sectors represented in the portfolio.

 

Maintain Strong Asset Quality  

We continue to emphasize and maintain strong asset quality as we grow and diversify our loan portfolio. Nonperforming assets decreased by $1.4 million to $20.5 million, or 0.43% of total assets, at June 30, 2017 compared to $21.9 million, or 0.49% of total assets, at June 30, 2016 and $23.8 million, or 0.56% of total assets, at June 30, 2015.

 

Expand Funding Through Retail Deposits

Our total deposit balances increased by $235.3 million during fiscal 2017 with aggregate deposits totaling $2.93 billion at June 30, 2017 compared to $2.69 billion at June 30, 2016.  The increase in overall deposits during fiscal 2017 partly reflected a $151.7 million increase in non-maturity deposits coupled with a net increase of $83.6 million in certificates of deposit.  The net increase in non-maturity deposits included a $28.7 million, or 12.0%, increase in non-interest-bearing deposit accounts for fiscal 2017.

At June 30, 2017, we had a total of 42 branches comprising 40 branches located in northern and central New Jersey with two additional branches located in Brooklyn and Staten Island, New York. We plan to selectively evaluate branch network expansion opportunities, with a particular focus on limited branch expansion in Brooklyn and Staten Island.  We will also continue to evaluate additional de novo branch opportunities to contiguously expand our existing New Jersey branch network with an emphasis on “fill-ins” between our northern and central New Jersey locations.

Notwithstanding the opportunities presented by de novo branching, we expect to place greater strategic emphasis on leveraging the opportunities to increase market share and expand the depth and breadth of customer relationships within our existing branch network while also considering select branch consolidation opportunities to optimize that network. We continue to develop and deploy strategies to promote the “relationship banking” business model throughout our branch network with an emphasis on expanding business customer relationships linked to business lending initiatives.

 

Seek Out Merger and Acquisition Opportunities

As a complement to the “organic” growth strategies, we continue to actively seek out opportunities to deploy capital, diversify our balance sheet, enter new markets and enhance earnings through mergers and acquisitions with other financial institutions. We are an experienced acquirer, having acquired five banks in the last 17 years. We expect to place the greatest emphasis on opportunities to expand within the existing markets we serve or to enter new markets that are generally contiguous to such markets.

In addition to potential acquisitions of financial institutions or their branches, we may explore additional opportunities for acquisitions or strategic partnerships to broaden our product and service offerings in the future.

 

Improve Operating Efficiency

In conjunction with our efforts to improve operating efficiency and control operating expenses, while expanding and enhancing product and service offerings, we continued to deploy a number of technologies during fiscal 2017 that support our internal IT infrastructure as well as our external customer-facing systems.  We consider the noted enhancements to be one of several continuing strategies to control growth in non-interest expenses and improve our overall operating efficiency.

For the year ended June 30, 2017, the Company’s ratio of non-interest expense to average assets totaled 1.76% compared to 1.64% for the year ended June 30, 2016.  For those same comparative periods, the Company’s operating efficiency ratio increased to 71.2% from 68.5%, respectively.  The increase in the non-interest expense ratio and efficiency ratio in fiscal 2017 primarily reflected the additional compensation expense associated with the Company’s 2016 Equity Incentive Plan approved by stockholders in October 2016.  The Company estimates that the recurring compensation expenses associated with that plan increased its ratio of non-interest expense to average assets by 0.08% for the year ended June 30, 2017 while adding 3.18% to its efficiency ratio for the same period.  

 

5


Market Area. At June 30, 2017, our primary market area consisted of the counties in which we currently operate branches, including Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic and Union counties in New Jersey and Kings (Brooklyn) and Richmond (Staten Island) counties in New York.  Our lending is concentrated in these markets and our predominant sources of deposits are the communities in which our offices are located as well as the neighboring communities.

Our primary market area is largely urban and suburban with a broad economic base as is typical within the New York metropolitan area.  Service jobs represent the largest employment sector followed by wholesale/retail trade. A downturn in the local economy could reduce the amount of funds available for deposit and the ability of borrowers to repay their loans which would adversely affect our profitability.

Competition.  We operate in a market area with a high concentration of banking and financial institutions and we face substantial competition in attracting deposits and in originating loans. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits.  Our ability to compete successfully is a significant factor affecting our growth potential and profitability.

Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions and credit unions located in our primary market area.  We also compete with mortgage banking and finance companies for real estate loans and with commercial banks and savings institutions for consumer loans.  We also face competition for attracting funds from providers of alternative investment products such as equity and fixed income investments, including securities such as corporate, agency and government securities, as well as the mutual funds that invest in these instruments.

There are large retail banking competitors operating throughout our primary market area, including Bank of America, Citibank, JP Morgan Chase Bank, PNC Bank, TD Bank, and Wells Fargo Bank and we also face strong competition from other community-based financial institutions.

Lending Activities

General.  In conjunction with our strategic efforts to evolve from a traditional thrift to a full-service community bank, our lending strategies have placed increasing emphasis on the origination of commercial loans while diminishing the emphasis on one- to four-family mortgage portfolio lending.  The year-to-year trends in the composition and allocation of our loan portfolio, as reported in the table below, highlight those changes in business strategy.  In particular, the outstanding balance of our commercial mortgages, including loans secured by multi‑family, mixed‑use and nonresidential properties, have significantly increased from both a dollar amount and percentage of portfolio basis over the past several years.  By comparison, the outstanding balance of our residential mortgage loans, including one- to four-family and home equity loans, have consistently declined as a percentage of the loan portfolio over the past several years.

Our commercial loan offerings also include secured business loans, many of which are secured by real estate, and unsecured business loans.  Commercial loan offerings include programs offered through the SBA in which Kearny Bank participates as a Preferred Lender.  Our consumer loan offerings primarily include home equity loans and home equity lines of credit as well as account loans, overdraft lines of credit, vehicle loans and personal loans.  We also offer construction loans to builders/developers as well as individual homeowners.  We have also purchased out-of-state one- to four-family first mortgage loans to supplement our in-house originations. For more information, please see “Lending Activities (Loan Originations, Purchases, Sales, Solicitation and Processing).”

 

 

 

 

6


Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the total portfolio at the dates indicated.

 

 

At June 30,

 

2017

 

2016

 

2015

 

2014

 

2013

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

(Dollars In Thousands)

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

567,323

 

 

 

17.50

 

%

 

$

605,203

 

 

 

22.66

 

%

 

$

592,321

 

 

 

28.17

 

%

 

$

580,612

 

 

 

33.31

 

%

 

$

500,647

 

 

 

36.77

 

%

Multi-family

 

1,412,575

 

 

 

43.57

 

 

 

 

1,040,293

 

 

 

38.94

 

 

 

 

728,379

 

 

 

34.65

 

 

 

 

431,007

 

 

 

24.73

 

 

 

 

211,817

 

 

 

15.56

 

 

Nonresidential

 

1,085,064

 

 

 

33.46

 

 

 

 

820,673

 

 

 

30.72

 

 

 

 

580,724

 

 

 

27.62

 

 

 

 

552,748

 

 

 

31.71

 

 

 

 

455,011

 

 

 

33.41

 

 

Commercial business

 

74,471

 

 

 

2.30

 

 

 

 

88,207

 

 

 

3.30

 

 

 

 

99,451

 

 

 

4.73

 

 

 

 

67,261

 

 

 

3.86

 

 

 

 

70,688

 

 

 

5.19

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

82,822

 

 

 

2.55

 

 

 

 

89,566

 

 

 

3.35

 

 

 

 

91,671

 

 

 

4.36

 

 

 

 

99,621

 

 

 

5.72

 

 

 

 

107,426

 

 

 

7.88

 

 

Passbook or certificate

 

2,863

 

 

 

0.09

 

 

 

 

3,349

 

 

 

0.13

 

 

 

 

3,999

 

 

 

0.19

 

 

 

 

3,965

 

 

 

0.23

 

 

 

 

3,887

 

 

 

0.29

 

 

Other

 

13,520

 

 

 

0.41

 

 

 

 

22,052

 

 

 

0.82

 

 

 

 

292

 

 

 

0.01

 

 

 

 

373

 

 

 

0.02

 

 

 

 

391

 

 

 

0.03

 

 

Construction

 

3,815

 

 

 

0.12

 

 

 

 

2,038

 

 

 

0.08

 

 

 

 

5,711

 

 

 

0.27

 

 

 

 

7,281

 

 

 

0.42

 

 

 

 

11,851

 

 

 

0.87

 

 

Total loans

 

3,242,453

 

 

 

100.00

 

%

 

 

2,671,381

 

 

 

100.00

 

%

 

 

2,102,548

 

 

 

100.00

 

%

 

 

1,742,868

 

 

 

100.00

 

%

 

 

1,361,718

 

 

 

100.00

 

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

29,286

 

 

 

 

 

 

 

 

24,229

 

 

 

 

 

 

 

 

15,606

 

 

 

 

 

 

 

 

12,387

 

 

 

 

 

 

 

 

10,896

 

 

 

 

 

 

Unamortized yield adjustments

  including net premiums on

  purchased loans and net

  deferred loan costs and fees

 

(2,808

)

 

 

 

 

 

 

 

(2,606

)

 

 

 

 

 

 

 

(316

)

 

 

 

 

 

 

 

1,397

 

 

 

 

 

 

 

 

847

 

 

 

 

 

 

Total adjustments

 

26,478

 

 

 

 

 

 

 

 

21,623

 

 

 

 

 

 

 

 

15,290

 

 

 

 

 

 

 

 

13,784

 

 

 

 

 

 

 

 

11,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

3,215,975

 

 

 

 

 

 

 

$

2,649,758

 

 

 

 

 

 

 

$

2,087,258

 

 

 

 

 

 

 

$

1,729,084

 

 

 

 

 

 

 

$

1,349,975

 

 

 

 

 

 

 

 

7


Loan Maturity Schedule.  The following table sets forth the maturities of our loan portfolio at June 30, 2017.  Demand loans, loans having no stated maturity and overdrafts are shown as due in one year or less.  Loans are stated in the following table at contractual maturity and actual maturities could differ due to prepayments.  

 

 

Real estate mortgage: One- to four-family

 

 

Real estate mortgage: Multi-Family

 

 

Real estate mortgage: Non-Residential

 

 

Commercial Business

 

 

Home Equity Loans

 

 

Passbook or certificate

 

 

Other

 

 

Construction

 

 

Total

 

 

(In Thousands)

 

Amounts due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

$

538

 

 

$

8,812

 

 

$

7,966

 

 

$

15,626

 

 

$

613

 

 

$

1,553

 

 

$

595

 

 

$

1,329

 

 

$

37,032

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 3 years

 

4,577

 

 

 

114,437

 

 

 

61,541

 

 

 

11,343

 

 

 

4,223

 

 

 

83

 

 

 

5,408

 

 

 

2,486

 

 

 

204,098

 

3 to 5 years

 

12,221

 

 

 

129,765

 

 

 

80,597

 

 

 

27,601

 

 

 

5,280

 

 

 

27

 

 

 

7,351

 

 

 

-

 

 

 

262,842

 

5 to 10 years

 

82,312

 

 

 

913,912

 

 

 

668,971

 

 

 

6,610

 

 

 

22,729

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,694,534

 

10 to 15 years

 

96,223

 

 

 

235,411

 

 

 

216,847

 

 

 

6,348

 

 

 

31,912

 

 

 

20

 

 

 

-

 

 

 

-

 

 

 

586,761

 

Over 15 years

 

371,452

 

 

 

10,238

 

 

 

49,142

 

 

 

6,943

 

 

 

18,065

 

 

 

1,180

 

 

 

166

 

 

 

-

 

 

 

457,186

 

Total due after one year

 

566,785

 

 

 

1,403,763

 

 

 

1,077,098

 

 

 

58,845

 

 

 

82,209

 

 

 

1,310

 

 

 

12,925

 

 

 

2,486

 

 

 

3,205,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount due

$

567,323

 

 

$

1,412,575

 

 

$

1,085,064

 

 

$

74,471

 

 

$

82,822

 

 

$

2,863

 

 

$

13,520

 

 

$

3,815

 

 

$

3,242,453

 

 

 

 

8


The following table shows the dollar amount of loans as of June 30, 2017 due after June 30, 2018 according to rate type and loan category.

 

 

Fixed Rates

 

 

Floating or Adjustable Rates

 

 

Total

 

 

(In Thousands)

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

505,557

 

 

$

61,228

 

 

$

566,785

 

Multi-family

 

447,533

 

 

 

956,230

 

 

 

1,403,763

 

Nonresidential

 

422,728

 

 

 

654,370

 

 

 

1,077,098

 

Commercial business

 

17,242

 

 

 

41,603

 

 

 

58,845

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

65,858

 

 

 

16,351

 

 

 

82,209

 

Passbook or certificate

 

69

 

 

 

1,241

 

 

 

1,310

 

Other

 

12,866

 

 

 

59

 

 

 

12,925

 

Construction

 

564

 

 

 

1,922

 

 

 

2,486

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

1,472,417

 

 

$

1,733,004

 

 

$

3,205,421

 

 

Multi-Family and Nonresidential Real Estate Mortgage Loans.  We originate commercial mortgage loans on multi-family and nonresidential properties, including loans on apartment buildings, retail/service properties and land as well as other income-producing properties, such as mixed-use properties combining residential and commercial space.  Our growing strategic emphasis in commercial lending resulted in the origination of approximately $727.4 million of multi-family and nonresidential real estate mortgages during the year ended June 30, 2017, compared to $489.3 million during the year ended June 30, 2016.

Our commercial mortgage acquisition strategies also included purchases of whole loans and participations totaling $126.7 million and $274.9 million during the years ended June 30, 2017 and 2016, respectively.  The loan purchases in fiscal 2017 were funded during the first quarter ended September 30, 2016 and reflected the deployment of excess liquidity that had accumulated through June 30, 2016 due to an increase in loan prepayments during the fourth quarter of fiscal 2016.  The loan purchases during fiscal 2016 largely reflected the deployment of a portion of the proceeds received in conjunction with the closing of the Company’s second-step conversion and stock offering at the end of fiscal 2015.

In total, commercial mortgage loan acquisition volume significantly outpaced loan repayments during fiscal 2017 resulting in the reported net increase in the outstanding balance of this segment of the loan portfolio. Our business plan continues to call for maintaining our strategic emphasis on commercial mortgage lending by increasing this segment of the portfolio on both a dollar and percentage of assets basis.

We generally require no less than a 25% down payment or equity position for mortgage loans on multi-family and nonresidential properties.  For such loans, we generally require personal guarantees.  However, the Bank may consider multi-family and nonresidential real estate mortgages for approval on a non-personally guaranteed (non-recourse) basis when the overall strengths of a proposed loan asset sufficiently mitigates the risk of exculpating the principal owners from their personal guarantee. In such cases, the Bank generally requires borrowers to execute an indemnification agreement which personally obligates those individuals in the circumstances of fraud, negligence, environmental issues, improper conveyance, condemnation, bankruptcy or other additional provisions deemed appropriate by the Bank.

We generally offer fixed-rate and adjustable-rate balloon mortgage loans on multi-family and non-residential properties with final stated maturities ranging from five to twelve years and initial interest rate reset terms ranging from five to seven years, where applicable.  Our balloon mortgage loans within this category generally have payments based on amortization terms from 25 to 30 years.  We also offer fully amortizing fixed-rate and adjustable-rate mortgage loans on multi-family and non-residential properties with terms up to 25 years.  Our commercial mortgage loans are primarily secured by properties located in New Jersey and New York and, to a lesser extent, properties located in eastern Pennsylvania.

Commercial Business Loans.  We also originate commercial term loans and lines of credit to a variety of professionals, sole proprietorships and small businesses in our market area.  Our business loan products include our Small Business Express Loan, which offers customers a simplified and expedited application and approval process for term loans and lines of credit up to $100,000, as well as loans originated through the SBA in which Kearny Bank participates as a Preferred Lender.  We originated approximately $34.1 million of commercial business loans during the year ended June 30, 2017 compared to $20.8 million during the year ended June 30, 2016.

 

9


Our commercial business loan acquisition strategies included purchases of wholesale C&I loan participations totaling $17.0 million and $19.8 million during the years ended June 30, 2017 and 2016, respectively.  Our C&I loan participations at June 30, 2017 included 13 loans with an outstanding balance of $27.4 million.  These participations were comprised entirely of our pro rata interest representing the obligations of 13 separate commercial borrowers that were acquired through Kearny Bank’s membership in BancAlliance, a cooperative network of lending institutions that serves as a conduit for institutional investors to participate in middle-market commercial credits.  The BancAlliance network is supported and managed on a day-to-day basis by Alliance Partners and its wholly-owned subsidiary AP Commercial LLC which acts as investment advisor and asset manager for loans acquired through the BancAlliance network while retaining a portion of such loans as an investor.

At June 30, 2016, our BancAlliance participations had an outstanding balance of $34.6 million representing our pro rata interest in 21 loans.  As of that same date, our C&I participations also included one additional loan with an outstanding balance of $9.7 million that was purchased through the broadly syndicated commercial loan market.  The loan, which was paid off in full during fiscal 2017, represented an obligation of a single commercial borrower that was rated by one or more independent, third-party credit rating agencies.

In total, commercial business loan repayments and sales outpaced loan acquisition volume during fiscal 2017 resulting in the reported net decrease in the outstanding balance of this segment of the loan portfolio.  As noted earlier, we continued to realign and expand our commercial business lending infrastructure during fiscal 2017 which contributed to a modest increase in aggregate commercial business loan origination and purchase volume for the year.  As a result of those enhancements, we anticipate this loan segment will increase as we continue to acquire loans through retail origination channels as well as purchases and participations acquired though wholesale sources with the goal of increasing this portfolio on both a dollar and percentage of assets basis.

Our commercial business loan activity during fiscal 2017 included the sale of $9.6 million of SBA loan participations which resulted in the recognition of related sale gains totaling approximately $822,000 for the year ended June 30, 2017.  By comparison, we sold $2.6 million of SBA loan participations during fiscal 2016 which resulted in the recognition of related sale gains totaling approximately $242,000.  Our business plan calls for a continued increase in SBA lending activity from the levels reported during fiscal 2017.  As noted earlier, the enhancements to our commercial business lending resources and infrastructure that continued to be implemented during fiscal 2017 also served to better support our SBA lending resources.

At June 30, 2017, approximately $47.1 million or 63.2% of our commercial business loans represent loans originated through our retail channel while the remaining $27.4 million or 36.8% comprise loans acquired through the wholesale C&I loan participation channels discussed earlier.  Of the retail originated loans, approximately $38.3 million or 81.3% are “non-SBA” loans consisting of secured and unsecured loans totaling $36.8 million and $1.5 million, respectively.  We generally require personal guarantees on all “non-SBA” commercial business loans originated.  The loan to value limit on secured commercial lines of credit and term loans is otherwise generally limited to 70%. Unsecured commercial loans may take the form of overdraft checking authorization up to $10,000 and unsecured lines of credit up to $100,000.  Our “non-SBA” commercial term loans generally have terms of up to 10 years and are mostly adjustable-rate loans.  Our commercial lines of credit have terms of up to one year and are generally adjustable-rate loans.

The remaining $8.8 million or 18.7% of commercial business loans originated represent the retained portion of SBA loan originations.  Such loans are generally secured by various forms of collateral, including real estate, business equipment and other forms of collateral.  Kearny Bank generally sells the guaranteed portion of eligible SBA loans originated, which ranges from 50% to 90% of the loan’s outstanding balance while retaining the nonguaranteed portion of such loans in portfolio.  Kearny Bank also retains both the guaranteed and non-guaranteed portion of those SBA originations that are generally ineligible for sale in the secondary market.  At June 30, 2017, approximately $846,000 of the retained portion of Kearny Bank’s SBA loans is guaranteed by the SBA.

Construction Lending.  Our construction lending includes loans to individuals for construction of one- to four-family residences or for major renovations or improvements to an existing dwelling.  Our construction lending also includes loans to builders and developers for multi-unit buildings or multi-house projects.  At June 30, 2017, construction loans totaled $3.8 million.

During the year ended June 30, 2017, construction loan disbursements were $3.0 million compared to $1.1 million during the year ended June 30, 2016.  Construction loan disbursements outpaced repayments during fiscal 2017 resulting in the reported increase in the outstanding balance of this segment of the loan portfolio.  

Construction borrowers must hold title to the land free and clear of any liens. Financing for construction loans is limited to 80% of the anticipated appraised value of the completed property. Disbursements are made in accordance with inspection reports by our approved appraisal firms.  Terms of financing are generally limited to one year with an interest rate tied to the prime rate published in the Wall Street Journal and may include a premium of one or more points.  In some cases, we convert a construction loan to a permanent mortgage loan upon completion of construction.

 

10


We have no formal limits as to the number of projects a builder has under construction or development and make a case-by-case determination on loans to builders and developers who have multiple projects under development.  The Board of Directors reviews Kearny Bank’s business relationship with a builder or developer prior to accepting a loan application for processing.  We generally do not make construction loans to builders on a speculative basis.  There must be a contract for sale in place. Financing is provided for up to two houses at a time in a multi-house project, requiring a contract on one of the two houses before financing for the next house may be obtained.

We are currently evaluating lending opportunities and strategies through which we may expand our construction lending activity, funding commitments and outstanding balances in the future.  If undertaken, we expect that the growth in our construction lending program will be supported by a corresponding expansion of our internal lending infrastructure and resources to support a growing number of relationships and projects with builders/borrowers.

One- to Four-Family Mortgage Loans Held in Portfolio.  Our portfolio lending activities include the origination of one- to four-family first mortgage loans, of which approximately $532.8 million or 94.0% are secured by properties located within New Jersey and New York as of June 30, 2017 with the remaining $34.6 million or 6.0% secured by properties in other states.

During the year ended June 30, 2017, Kearny Bank originated $67.9 million of one- to four-family first mortgage portfolio loans compared to $87.2 million in the year ended June 30, 2016.  To supplement portfolio loan originations, we also purchased one- to four-family first mortgages totaling $36.3 million during the year ended June 30, 2016 while no such loans were purchased during fiscal 2017.

In total, loan repayments outpaced origination volume of one- to four-family mortgage portfolio loans during fiscal 2017 resulting in a net decrease in the outstanding balance of this segment of the loan portfolio.  Our business plan calls for generally reducing strategic emphasis on one- to four-family mortgage portfolio lending by modestly decreasing the outstanding balance of this segment and reducing its basis as a percentage of total loans.

We will originate a one- to four-family mortgage loan on an owner-occupied property with a principal amount of up to 95% of the lesser of the appraised value or the purchase price of the property, with private mortgage insurance required if the loan-to-value ratio exceeds 80%. At June 30, 2017, our one- to four-family mortgage loan portfolio was primarily comprised of loans secured by owner-occupied properties.  Our loan-to-value limit on a non-owner-occupied property is 75%.  Loans in excess of $1.0 million are handled on a case-by-case basis and are subject to lower loan-to-value limits, generally no more than 50%.

We offer a first-time homebuyer program for persons who have not previously owned real estate and are purchasing a one- to four-family property in our primary lending area for use as a primary residence.  This program is also available outside these areas, but only to persons who are existing deposit or loan customers of Kearny Bank and/or members of their immediate families.  The financial incentives offered under this program are a one-eighth of one percentage point rate reduction on all first mortgage loan types and the refund of the application fee at closing.

The fixed-rate residential mortgage loans that we originate for portfolio generally meet the secondary mortgage market standards of the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

Substantially all of our residential mortgages include “due on sale” clauses, which give us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party.  Property appraisals on real estate securing our one- to four-family first mortgage loans are made by state certified or licensed independent appraisers approved by Kearny Bank’s Board of Directors.  Appraisals are performed in accordance with applicable regulations and policies.  We require title insurance policies on all first mortgage real estate loans originated.  Homeowners, liability and fire insurance and, if applicable, flood insurance, are also required.

One- to Four-Family Mortgage Loans Held for Sale.  During fiscal 2017, we continued to expand our mortgage banking strategies through which we originate one- to four-family mortgage loans for sale into the secondary market.  As above, the loans we originate for sale generally meet the same secondary mortgage market standards as those applicable to loans originated for portfolio.  Moreover, such loans are generally originated by, and sourced from, the same resources and markets as those loans originated and held in portfolio, as discussed above.

As noted earlier, our mortgage banking business strategy resulted in the recognition of $713,000 in gains associated with the sale of $84.4 million of mortgage loans held for sale during the year ended June 30, 2017.  As of that date, an additional $4.7 million of loans were held and committed for sale into the secondary market.  We anticipate an increase in residential mortgage loan origination and sale activity to support growth in the our non-interest income over time through the recognition of recurring loan sale gains, while also serving to help manage the Company’s exposure to interest rate risk.

 

11


Home Equity Loans and Lines of Credit.  Our home equity loans are fixed-rate loans for terms of generally up to 20 years.  We also offer fixed-rate and adjustable-rate home equity lines of credit with terms of up to 20 years.  During the year ended June 30, 2017, Kearny Bank originated $18.5 million of home equity loans and home equity lines of credit compared to $22.7 million in the year ended June 30, 2016.  However, repayments of home equity loans and lines of credit outpaced loan origination volume during fiscal 2017 resulting in the reported net decline in the outstanding balance of this segment of the loan portfolio.

Collateral value is determined through a property value analysis report, or full appraisal where appropriate, provided by a state certified or licensed independent appraiser.  Home equity loans and lines of credit do not require title insurance but do require homeowner, liability and fire insurance and, if applicable, flood insurance.

Home equity loans and fixed-rate home equity lines of credit are generally originated in our market area and are generally made in amounts of up to 80% of value on term loans and of up to 75% of value on home equity adjustable-rate lines of credit.  We originate home equity loans secured by either a first lien or a second lien on the property.

Consumer Loans.  Our consumer loan portfolio includes unsecured overdraft lines of credit and personal loans as well as loans secured by savings accounts and certificates of deposit on deposit with Kearny Bank.  Our unsecured consumer loans at June 30, 2017 primarily include $12.8 million of loans acquired through the Company’s relationship with Lending Club, an established peer-to-peer (i.e. marketplace) lender.  Through this relationship, the Company has purchased high-quality, unsecured consumer loans originated through Lending Club’s online platform.  The remaining balance of consumer loans at June 30, 2017 includes $2.9 million of loans fully secured by savings accounts or certificates of deposit held by the Bank and $595,000 of other unsecured consumer loans.  We will generally lend up to 90% of the account balance on a loan secured by a savings account or certificate of deposit.

Our consumer loans generally entail greater risks compared to the other categories of loans that we originate or purchase and hold in portfolio.  Consumer loan repayment is dependent on the borrower’s continuing financial stability and is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on consumer loans in the event of a default.

Our underwriting standards for internally originated consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and any additional verifiable secondary income.  Our externally originated consumer loans purchased through Lending Club are limited to those issued to qualified borrowers falling within the three highest credit tiers defined within Lending Club’s proprietary credit risk model.

Loans to One Borrower.  New Jersey law generally limits the amount that a savings bank may lend to single borrower and related entities to 15% of the institution’s capital funds. Accordingly, as of June 30, 2017, our loans-to-one-borrower limit was approximately $113.1 million.

Notwithstanding regulatory limitations regarding loans to one borrower, the Bank has established a more conservative set of internal thresholds that further limit our lending exposure to any single borrower or set of borrowers affiliated by common ownership.  In that regard, the Bank’s internal “house limits” are $20.0 million for a single loan transaction and $60.0 million for aggregate loans to a common ownership or an affiliated group of borrowers/guarantors. These limits apply irrespective of whether the obligations are on a personally guaranteed/recourse basis or non-personally guaranteed/non-recourse basis.  Exceptions to these internal limits may be considered on a case-by-case basis, subject to the review and approval of each exception by the Bank’s Board of Directors.

At June 30, 2017, our largest single borrower had an aggregate outstanding loan balance of approximately $48.2 million comprising one commercial mortgage loan and three multi-family mortgage loans. Our second largest single borrower had an aggregate outstanding loan balance of approximately $46.3 million comprising three commercial mortgage loans and three multi-family mortgage loans.  Our third largest borrower had an aggregate outstanding loan balance of approximately $44.6 million comprising two commercial mortgage loans and six multi-family mortgage loans.  At June 30, 2017, all of these lending relationships were current and performing in accordance with the terms of their loan agreements.  By comparison, at June 30, 2016, loans outstanding to Kearny Bank’s three largest borrowers totaled approximately $37.3 million, $37.2 million and $35.2 million, respectively.

 

12


Loan Originations, Purchases, Sales, Solicitation and Processing.  The following table shows portfolio loans originated, purchased, acquired and repaid during the periods indicated.

 

 

For the Years Ended June 30,

 

 

2017

 

 

2016

 

 

 

2015

 

 

(In Thousands)

 

Loan originations: (1)

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

67,907

 

 

$

87,197

 

 

$

51,315

 

Multi-family

 

578,682

 

 

 

379,416

 

 

 

214,470

 

Nonresidential

 

148,767

 

 

 

109,876

 

 

 

76,445

 

Commercial business

 

34,071

 

 

 

20,789

 

 

 

19,988

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

18,489

 

 

 

22,709

 

 

 

21,327

 

Passbook or certificate

 

739

 

 

 

918

 

 

 

1,184

 

Other

 

1,077

 

 

 

604

 

 

 

527

 

Construction

 

2,961

 

 

 

1,065

 

 

 

4,321

 

Total loan originations

 

852,693

 

 

 

622,574

 

 

 

389,577

 

Loan purchases:

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

-

 

 

 

36,250

 

 

 

55,933

 

Multi-family

 

20,800

 

 

 

32,897

 

 

 

136,143

 

Nonresidential

 

105,880

 

 

 

242,000

 

 

 

-

 

Commercial business

 

16,953

 

 

 

19,808

 

 

 

41,028

 

Other

 

-

 

 

 

25,466

 

 

 

-

 

Total loan purchases

 

143,633

 

 

 

356,421

 

 

 

233,104

 

Loan sales: (1)

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

(10,000

)

 

 

-

 

Commercial business

 

(9,589

)

 

 

(3,872

)

 

 

(1,231

)

Total loans sold

 

(9,589

)

 

 

(13,872

)

 

 

(1,231

)

 

 

 

 

 

 

 

 

 

 

 

 

Loan repayments

 

(412,234

)

 

 

(393,225

)

 

 

(257,074

)

Decrease due to other items

 

(8,286

)

 

 

(9,398

)

 

 

(6,202

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in loan portfolio

$

566,217

 

 

$

562,500

 

 

$

358,174

 

 

(1)

Excludes origination and sales of one- to four-family mortgage loans held for sale.

Our customary sources of loan applications include loans originated by our commercial and residential loan officers, repeat customers, referrals from realtors and other professionals and “walk-in” customers.  These sources are supported in varying degrees by our newspaper and electronic advertising and marketing strategies.

During prior years, we had purchased loans under the terms of loan purchase and servicing agreements with three large nationwide lenders, in order to supplement our residential mortgage loan production pipeline.  The original agreements called for the purchase of loan pools that contained mortgages on residential properties in our lending area and were subsequently expanded to include mortgage loans secured by residential real estate located outside of New Jersey.  However, we did not purchase residential mortgage loans under the noted purchase and servicing agreements during the years ended June 30, 2017, 2016 and 2015, but may do so in the future.

Once we purchase the loans, we continually monitor the seller’s performance by thoroughly reviewing portfolio balancing reports, remittance reports, delinquency reports and other data supplied to us on a monthly basis.  We also review the seller’s financial statements and documentation as to their compliance with the servicing standards established by the Mortgage Bankers Association of America.

As of June 30, 2017, our portfolio of “out-of-state” residential mortgages included loans located in eight states outside of New Jersey and New York that totaled approximately $34.6 million or 6.0% of one- to four-family mortgage loans. The states with the three largest concentrations of such loans at June 30, 2017 were Massachusetts, Pennsylvania and Georgia, with outstanding principal balances totaling $25.3 million, $5.7 million and $1.1 million, respectively.  The aggregate outstanding balances of loans in each of

 

13


the remaining five states total approximately $2.6 million and comprise approximately 7.0% of the total balance of out-of-state residential mortgage loans with aggregate balances by state ranging from $184,000 to $646,000.

We have also entered into purchase agreements with a number of bank and non-bank originators to supplement our loan production pipeline.  These agreements call for our purchase of one- to four-family first mortgage loans on either a servicing released or servicing retained basis from the seller.  No additional loans were purchased from these sources during the year ended June 30, 2017.  By comparison, during the year ended June 30, 2016, loans purchased from these sources totaled approximately $36.3 million comprising loans secured by residential properties in New Jersey and Massachusetts.

In addition to purchasing one- to four-family loans, we have also purchased commercial mortgage loans and participations originated by other banks and non-bank originators. As noted earlier, the aggregate carrying value of the loans and participations purchased from these sources during the year ended June 30, 2017 totaled approximately $126.7 million comprising loans secured primarily by multi-family and non-residential properties located in New York and eastern Pennsylvania.  We also purchased commercial business loans totaling $17.0 million during the year ended June 30, 2017, as discussed above.

Loan Approval Procedures and Authority.  Senior management recommends and the Board of Directors approves our lending policies and loan approval limits.  Kearny Bank’s Loan Committee consists of the Chief Executive Officer, Chief Operating Officer, Chief Lending Officer, Chief Credit Officer, Regional President, Director of Commercial Real Estate Lending, Director of C&I Lending, Director of Residential Lending and Special Assets Manager.  Our Chief Lending Officer may approve residential loans up to $750,000.  Loan department personnel of Kearny Bank serving in the following positions may approve loans as follows: residential mortgage loan managers, mortgage loans up to $500,000; residential mortgage loan underwriters, mortgage loans up to $250,000; consumer loan managers, consumer loans up to $250,000; and consumer loan underwriters, consumer loans up to $150,000.  In addition to these principal amount limits, there are established limits for different levels of approval authority as to minimum credit scores and maximum loan-to-value ratios and debt-to-income ratios or debt service coverage.  Our Chief Executive Officer and Chief Operating Officer have authorization to countersign loans for amounts that exceed $750,000 up to a limit of $1.0 million.  Our Chief Lending Officer must approve loans between $750,000 and $1.0 million along with one of these designated officers.  Non-conforming residential mortgage loans and loans over $1.0 million up to $2.0 million require the approval of the Loan Committee.  The Committee may approve individual commercial loans or an aggregate commercial lending relationship up to $5.0 million. Commercial loans or aggregate relationships in excess of $5.0 million require approval by the Board of Directors while such approval is also required for residential mortgage loans in excess of $2.0 million and commercial business loans in excess of $1.0 million.

Asset Quality

Collection Procedures on Delinquent Loans.  We regularly monitor the payment status of all loans within our portfolio and promptly initiate collection efforts on past due loans in accordance with applicable policies and procedures.  Delinquent borrowers are notified by both mail and telephone when a loan is 30 days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices and letters are sent.  All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection.  However, when a loan is 90 days delinquent, it is our general practice to refer it to an attorney for repossession, foreclosure or other form of collection action, as appropriate.  In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency.

As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial write-down of the property, if necessary, is charged to the allowance for loan losses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines are identified.

Past Due Loans.  A loan’s “past due” status is generally determined based upon its “P&I delinquency” status in conjunction with its “past maturity” status, where applicable.  A loan’s “P&I delinquency” status is based upon the number of calendar days between the date of the earliest P&I payment due and the “as of” measurement date.  A loan’s “past maturity” status, where applicable, is based upon the number of calendar days between a loan’s contractual maturity date and the “as of” measurement date.  Based upon the larger of these criteria, loans are categorized into the following “past due” tiers for financial statement reporting and disclosure purposes: Current (including 1-29 days past due), 30-59 days, 60-89 days and 90 or more days.

Nonaccrual Loans.  Loans are generally placed on nonaccrual status when contractual payments become 90 days or more past due, and are otherwise placed on nonaccrual when we do not expect to receive all P&I payments owed substantially in accordance with the terms of the loan agreement.  Loans that become 90 days past maturity, but remain non-delinquent with regard to ongoing P&I payments, may remain on accrual status if: (1) we expect to receive all P&I payments owed substantially in accordance with the

 

14


terms of the loan agreement, past maturity status notwithstanding, and (2) the borrower is working actively and cooperatively with us to remedy the past maturity status through an expected refinance, payoff or modification of the loan agreement that is not expected to result in a troubled debt restructuring (“TDR”) classification.  All TDRs are placed on nonaccrual status for a period of no less than six months after restructuring, irrespective of past due status.  The sum of nonaccrual loans plus accruing loans that are 90 days or more past due are generally defined as “nonperforming loans.”

Payments received in cash on nonaccrual loans, including both the principal and interest portions of those payments, are generally applied to reduce the carrying value of the loan for financial statement purposes.  When a loan is returned to accrual status, any accumulated interest payments previously applied to the carrying value of the loan during its nonaccrual period are recognized as interest income as an adjustment to the loan’s yield over its remaining term.

Loans that are not considered to be TDRs are generally returned to accrual status when payments due are brought current and we expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement.  Non-TDR loans may also be returned to accrual status when a loan’s payment status falls below 90 days past due and we: (1) expect receipt of the remaining past due amounts within a reasonable timeframe, and (2) expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement.

Nonperforming Assets.  The following table provides information regarding our nonperforming assets which are comprised of nonaccrual loans, accruing loans 90 days or more past due and real estate owned.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(Dollars In Thousands)

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family (1)

$

8,790

 

 

$

10,732

 

 

$

7,952

 

 

$

9,944

 

 

$

11,675

 

Multi-family

 

158

 

 

 

205

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonresidential

 

5,720

 

 

 

6,588

 

 

 

7,177

 

 

 

6,935

 

 

 

10,163

 

Commercial business

 

2,634

 

 

 

1,965

 

 

 

3,944

 

 

 

4,919

 

 

 

4,836

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

1,241

 

 

 

1,170

 

 

 

1,783

 

 

 

1,930

 

 

 

1,329

 

Other

 

-

 

 

 

-

 

 

 

2

 

 

 

2

 

 

 

28

 

Construction

 

255

 

 

 

357

 

 

 

2,037

 

 

 

1,448

 

 

 

2,886

 

Total nonaccrual loans (2)

 

18,798

 

 

 

21,017

 

 

 

22,895

 

 

 

25,178

 

 

 

30,917

 

Accruing loans 90 days or more past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonresidential

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial business

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer:

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

74

 

 

 

38

 

 

 

-

 

 

 

125

 

 

 

-

 

Total accruing loans 90 days or more past due

 

74

 

 

 

38

 

 

 

-

 

 

 

125

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

$

18,872

 

 

$

21,055

 

 

$

22,895

 

 

$

25,303

 

 

$

30,917

 

Real estate owned

$

1,632

 

 

$

826

 

 

$

942

 

 

$

1,624

 

 

$

2,061

 

Total nonperforming assets

$

20,504

 

 

$

21,881

 

 

$

23,837

 

 

$

26,927

 

 

$

32,978

 

Total nonperforming loans to total loans

 

0.58

%

 

 

0.79

%

 

 

1.09

%

 

 

1.45

%

 

 

2.27

%

Total nonperforming loans to total assets

 

0.39

%

 

 

0.47

%

 

 

0.54

%

 

 

0.72

%

 

 

0.98

%

Total nonperforming assets to total assets

 

0.43

%

 

 

0.49

%

 

 

0.56

%

 

 

0.77

%

 

 

1.05

%

 

(1)

At June 30, 2017, included $6.4 million of nonperforming one- to four-family mortgage loans originally acquired from Countrywide Home Loans, Inc.

(2)

TDRs on accrual status not included above totaled $2.5 million, $2.9 million, $3.1 million, $3.3 million and $4.1 million at June 30, 2017, 2016, 2015, 2014 and 2013, respectively.

Total nonperforming assets decreased by $1.4 million to $20.5 million at June 30, 2017 from $21.9 million at June 30, 2016.  The decrease comprised a net decline in nonperforming loans of $2.2 million that was partially offset by a net increase in real estate owned of $806,000.  For those same comparative periods, the number of nonperforming loans decreased to 78 loans from 89 loans while the number of real estate owned properties increased to four from three.

 

15


At June 30, 2017, nonperforming loans comprised $18.8 million of “nonaccrual” loans and $74,000 of loans being reported as “accruing loans over 90 days past due.”  By comparison, at June 30, 2016, nonperforming loans comprised $21.0 million of “nonaccrual” loans and $38,000 of loans being reported as “accruing loans over 90 days past due.”

Nonperforming one- to four-family mortgage loans at June 30, 2017 include 35 nonaccrual loans totaling $8.8 million whose net outstanding balances range from $104 to $560,000, with an average balance of approximately $251,000 as of that date.  The loans are in various stages of collection, workout or foreclosure.  Of these loans, 32 are secured by New Jersey properties while two loans are secured by properties located in New York and one loan is secured by a property located in Georgia.  We have identified approximately $154,000 of specific impairment relating to seven of the nonperforming loans for which valuation allowances are maintained in the allowance for loan losses at June 30, 2017.

The number and balance of nonperforming one- to four-family mortgage loans at June 30, 2017 includes 23 loans totaling $6.4 million that were originally acquired from Countrywide with such loans comprising 33.9% of total nonperforming loans as of June 30, 2017.  As of that same date, Kearny Bank owned a total of 39 residential mortgage loans with an aggregate outstanding balance of $11.7 million that were originally acquired from Countrywide.

Nonperforming commercial real estate loans, including multi-family and nonresidential mortgage loans, include 15 nonaccrual loans totaling $5.9 million.  At June 30, 2017, the outstanding balances of these loans range from $60,000 to $1.8 million with an average balance of approximately $392,000 as of that date.  The loans are in various stages of collection, workout or foreclosure and are secured by New Jersey properties.  We have identified approximately $39,000 of specific impairment relating to three of these nonperforming loans for which valuation allowances are maintained in the allowance for loan losses at June 30, 2017.

Nonperforming commercial business loans at June 30, 2017 include 11 nonaccrual loans totaling $2.6 million.  At June 30, 2017, the outstanding balances of these loans range from $2,000 to $1.5 million with an average balance of approximately $239,000 as of that date.  The loans are in various stages of collection, workout or foreclosure and are primarily secured by New Jersey and New York properties and, to a lesser extent, other forms of collateral.  We have identified approximately $6,000 of specific impairment relating to one of these nonperforming loans for which valuation allowances are maintained in the allowance for loan losses at June 30, 2017.

Home equity loans and home equity lines of credit that are reported as nonperforming at June 30, 2017 include 15 nonaccrual loans totaling $1.2 million.  At June 30, 2017, the outstanding balances of these loans range from $210 to $444,000 with an average balance of approximately $83,000 as of that date.  The loans are in various stages of collection, workout or foreclosure and are primarily secured by New Jersey properties.  There was no specific impairment identified relating to these nonperforming loans at June 30, 2017.

Other consumer loans that are reported as nonperforming at June 30, 2017 include one unsecured loan totaling $74,000 reported as “accruing loans over 90 days past due.”

Nonperforming construction loans include one nonaccrual loan totaling $255,000.  The loan is in the workout stage and is secured by a New Jersey property.  We have identified no specific impairment relating to this nonperforming loan at June 30, 2017.

During the years ended June 30, 2017, 2016 and 2015, gross interest income of $883,000, $1.9 million and $1.8 million, respectively, would have been recognized on loans accounted for on a nonaccrual basis if those loans had been current.  Interest income recognized on such loans of $19,000, $80,000 and $132,000 was included in income for the years ended June 30, 2017, 2016 and 2015, respectively.

At June 30, 2017, 2016, and 2015, Kearny Bank had loans with aggregate outstanding balances totaling $11.0 million, $11.6 million and $8.7 million, respectively, reported as troubled debt restructurings.

During the year ended June 30, 2017, gross interest income of $471,000 would have been recognized on loans reported as troubled debt restructurings under their original terms prior to restructuring.  Actual interest income of $144,000 was recognized on such loans for the year ended June 30, 2017 reflecting the interest received under the revised terms of those restructured loans.

During the year ended June 30, 2016, gross interest income of $548,000 would have been recognized on loans reported as troubled debt restructurings under their original terms prior to restructuring.  Actual interest income of $233,000 was recognized on such loans for the year ended June 30, 2016 reflecting the interest received under the revised terms of those restructured loans.

 

16


During the year ended June 30, 2015, gross interest income of $503,000 would have been recognized on loans reported as troubled debt restructurings under their original terms prior to restructuring.  Actual interest income of $194,000 was recognized on such loans for the year ended June 30, 2015 reflecting the interest received under the revised terms of those restructured loans.

Loan Review System.  We maintain a loan review system consisting of several related functions including, but not limited to, classification of assets, calculation of the allowance for loan losses, independent credit file review as well as internal audit and lending compliance reviews.  We utilize both internal and external resources, where appropriate, to perform the various loan review functions.  For example, we have engaged the services of a third party firm specializing in loan review and analysis to perform several loan review functions.  The firm reviews the loan portfolio in accordance with the scope and frequency determined by senior management and the Audit and Compliance Committee of the Board of Directors.  The third party loan review firm assists senior management and the Board of Directors in identifying potential credit weaknesses; in appropriately grading or adversely classifying loans; in identifying relevant trends that affect the collectability of the portfolio and identifying segments of the portfolio that are potential problem areas; in verifying the appropriateness of the allowance for loan losses; in evaluating the activities of lending personnel including compliance with lending policies and the quality of their loan approval, monitoring and risk assessment; and by providing an objective assessment of the overall quality of the loan portfolio. Currently, independent loan reviews are being conducted quarterly and include non-performing loans as well as samples of performing loans of varying types within our portfolio.

Our loan review system also includes the internal audit and compliance functions, which operate in accordance with a scope determined by the Audit and Compliance Committee of the Board of Directors.  Internal audit resources assess the adequacy of, and adherence to, internal credit policies and loan administration procedures.  Similarly, our compliance resources monitor adherence to relevant lending-related and consumer protection-related laws and regulations.  The loan review system is structured in such a way that the internal audit function maintains the ability to independently audit other risk monitoring functions without impairing its independence with respect to these other functions.

As noted, the loan review system also comprises our policies and procedures relating to the regulatory classification of assets and the allowance for loan loss functions each of which are described in greater detail below.

Classification of Assets.  In compliance with the regulatory guidelines, our loan review system includes an evaluation process through which certain loans exhibiting adverse credit quality characteristics are classified “Special Mention”, “Substandard”, “Doubtful” or “Loss”.

An asset is classified as “Substandard” if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as “Doubtful” have all of the weaknesses inherent in those classified as “Substandard”, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets, or portions thereof, classified as “Loss” are considered uncollectible or of so little value that their continuance as assets is not warranted.

Management evaluates loans classified as “Substandard” or “Doubtful” for impairment in accordance with applicable accounting requirements.  As discussed in greater detail below, a valuation allowance is established through the provision for loan losses for any impairment identified through such evaluations.  To the extent that impairment identified on a loan is classified as “Loss”, that portion of the loan is charged off against the allowance for loan losses.

The classification of loan impairment as “Loss” is based upon a confirmed expectation for loss.  For loans primarily secured by real estate, the expectation for loss is generally confirmed when: (a) impairment is identified on a loan individually evaluated in the manner described below, and (b) the loan is presumed to be collateral-dependent such that the source of loan repayment is expected to arise solely from sale of the collateral securing the applicable loan.  Impairment identified on non-collateral-dependent loans may or may not be eligible for a “Loss” classification depending upon the other salient facts and circumstances that affect the manner and likelihood of loan repayment. Loan impairment that is classified as “Loss” is charged off against the ALLL concurrent with that classification.

The timeframe between when we first identify loan impairment and when such impairment may ultimately be charged off varies by loan type.  For example, unsecured consumer and commercial loans are generally classified as “Loss” at 120 days past due, resulting in their outstanding balances being charged off at that time.  For our secured loans, the condition of collateral dependency, as noted above, generally serves as the basis upon which a “Loss” classification is ascribed to a loan’s impairment thereby confirming an expected loss and triggering charge off of that impairment.

While the facts and circumstances that effect the manner and likelihood of repayment vary from loan to loan, we generally consider the referral of a loan to foreclosure, coupled with the absence of other viable sources of loan repayment, to be demonstrable evidence of collateral dependency.  Depending upon the nature of the collections process applicable to a particular loan, an early

 

17


determination of collateral dependency could result in a nearly concurrent charge off of a newly identified impairment.  By contrast, a presumption of collateral dependency may only be determined after the completion of lengthy loan collection and/or workout efforts, including bankruptcy proceedings, which may extend several months or more after a loan’s impairment is first identified.

In a limited number of cases, the entire net carrying value of a loan may be determined to be impaired based upon a collateral-dependent impairment analysis.  However, the borrower’s adherence to contractual repayment terms precludes the recognition of a “Loss” classification and charge off.  In these limited cases, a valuation allowance equal to 100% of the impaired loan’s carrying value may be maintained against the net carrying value of the asset.

Assets which do not currently expose us to a sufficient degree of risk to warrant an adverse classification but have some credit deficiencies or other potential weaknesses are designated as “Special Mention” by management.  Adversely classified assets, together with those rated as “Special Mention”, are generally referred to as “Classified Assets”.  Non-classified assets are internally rated within one of four “Pass” categories or as “Watch” with the latter denoting a potential deficiency or concern that warrants increased oversight or tracking by management until remediated.

Management performs a classification of assets review, including the regulatory classification of assets, generally on a monthly basis.  The results of the classification of assets review are validated by our third party loan review firm during their quarterly independent review.  In the event of a difference in rating or classification between those assigned by the internal and external resources, we will generally utilize the more critical or conservative rating or classification.  Final loan ratings and regulatory classifications are presented monthly to the Board of Directors and are reviewed by regulators during the examination process.

The following table discloses our designation of certain loans as special mention or adversely classified during each of the five years presented.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(In Thousands)

 

Special mention

$

2,594

 

 

$

2,528

 

 

$

13,501

 

 

$

12,258

 

 

$

14,050

 

Substandard

 

29,428

 

 

 

33,052

 

 

 

34,748

 

 

 

41,564

 

 

 

43,371

 

Doubtful

 

3

 

 

 

2

 

 

 

273

 

 

 

290

 

 

 

391

 

Loss (1)

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total classified loans

$

32,025

 

 

$

35,582

 

 

$

48,522

 

 

$

54,112

 

 

$

57,812

 

 

(1)

Net of specific valuation allowances where applicable.

At June 30, 2017, 14 loans were classified as Special Mention and 132 loans were classified as Substandard.  As of that same date, six loans were classified as Doubtful.  As noted above, all loans, or portions thereof, classified as Loss during fiscal 2017 were charged off against the allowance for loan losses.

Allowance for Loan Losses.  Our allowance for loan loss calculation methodology utilizes a “two-tier” loss measurement process that is generally performed monthly.  Based upon the results of the classification of assets and credit file review processes described earlier, we first identify the loans that must be reviewed individually for impairment.  Factors considered in identifying individual loans to be reviewed include, but may not be limited to, loan type, classification status, contractual payment status, performance/accrual status and impaired status.

The loans we consider to be eligible for individual impairment review include our commercial mortgage loans, comprising multi-family and nonresidential real estate loans, construction loans and commercial business loans as well as our one- to four-family mortgage loans, home equity loans and home equity lines of credit.

A reviewed loan is deemed to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Once a loan is determined to be impaired, management performs an analysis to determine the amount of impairment associated with that loan.

In measuring the impairment associated with collateral-dependent loans, the fair value of the collateral securing the loan is generally used as a measurement proxy for that of the impaired loan itself as a practical expedient.  In the case of real estate collateral, such values are generally determined based upon a discounted market value obtained through an automated valuation module or prepared by a qualified, independent real estate appraiser. The value of non-real estate collateral is similarly determined based upon the independent assessment of fair market value by a qualified resource.

 

18


We generally obtain independent appraisals on properties securing mortgage loans when such loans are initially placed on nonperforming or impaired status with such values updated approximately every six to twelve months thereafter throughout the collections, bankruptcy and/or foreclosure processes.  Appraised values are typically updated at the point of foreclosure, where applicable, and approximately every six to twelve months thereafter while the repossessed property is held as real estate owned.

As supported by accounting and regulatory guidance, we reduce the fair value of the collateral by estimated selling costs, such as real estate brokerage commissions, to measure impairment when such costs are expected to reduce the cash flows available to repay the loan.

We establish valuation allowances in the fiscal period during which the loan impairments are identified.  The results of management’s individual loan impairment evaluations are validated by our third party loan review firm during their quarterly independent review.  Such valuation allowances are adjusted in subsequent fiscal periods, where appropriate, to reflect any changes in carrying value or fair value identified during subsequent impairment evaluations which are generally updated monthly by management.

The second tier of the loss measurement process involves estimating the probable and estimable losses on loans not otherwise reviewed individually for impairment as well as those individually reviewed loans that are determined to be non-impaired.  Such loans include groups of smaller-balance homogeneous loans that may generally be excluded from individual impairment analysis, and therefore collectively evaluated for impairment, as well as the non-impaired loans within categories that are otherwise eligible for individual impairment review.

Valuation allowances established through the second tier of the loss measurement process utilize historical and environmental loss factors to collectively estimate the level of probable losses within defined segments of our loan portfolio.  These segments aggregate homogeneous subsets of loans with similar risk characteristics based upon loan type.  For allowance for loan loss calculation and reporting purposes, we currently stratify our loan portfolio into seven primary segments: residential mortgage loans, multi-family mortgage loans, non-residential mortgage loans, construction loans, commercial business loans, home equity loans and other consumer loans.

The risks presented by residential mortgage loans are primarily related to adverse changes in the borrower’s financial condition that threaten repayment of the loan in accordance with its contractual terms.  Such risk to repayment can arise from job loss, divorce, illness and the personal bankruptcy of the borrower.  For collateral dependent residential mortgage loans, additional risk of loss is presented by potential declines in the fair value of the collateral securing the loan.

Home equity loans and home equity lines of credit generally share the same risks as those applicable to residential mortgage loans.  However, to the extent that such loans represent junior liens, they are comparatively more susceptible to such risks given their subordinate position behind senior liens.

In addition to sharing similar risks as those presented by residential mortgage loans, risks relating to multi-family and non-residential mortgage loans also arise from comparatively larger loan balances to single borrowers or groups of related borrowers. Moreover, the repayment of such loans is typically dependent on the successful operation of an underlying real estate project and may be further threatened by adverse changes to demand and supply of multi-family and non-residential real estate as well as changes generally impacting overall business or economic conditions.

The risks presented by construction loans are generally considered to be greater than those attributable to residential, multi-family and non-residential mortgage loans.  Risks from construction lending arise, in part, from the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on developers and builders. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost, including interest, of the project. The nature of these loans is such that they are comparatively more difficult to evaluate and monitor than permanent mortgage loans.

Commercial business loans are also considered to present a comparatively greater risk of loss due to the concentration of principal in a limited number of loans and/or borrowers and the effects of general economic conditions on the business. Commercial business loans may be secured by varying forms of collateral including, but not limited to, business equipment, receivables, inventory and other business assets which may not provide an adequate source of repayment of the outstanding loan balance in the event of borrower default.  Moreover, the repayment of commercial business loans is primarily dependent on the successful operation of the underlying business which may be threatened by adverse changes to the demand for the business’ products and/or services as well as the overall efficiency and effectiveness of the business’ operations and infrastructure.

 

19


Finally, our unsecured consumer loans generally have shorter terms and higher interest rates than other forms of lending but generally involve more credit risk due to the lack of collateral to secure the loan in the event of borrower default.  Consumer loan repayment is dependent on the borrower's continuing financial stability, and therefore is more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. By contrast, our consumer loans also include account loans that are fully secured by the borrower’s deposit accounts and generally present nominal risk to the Company.

Each primary category is further stratified to distinguish between loans originated and purchased directly from third party lenders from loans acquired through wholesale channels or through business combinations.  Where applicable, such primary categories separately identify loans that are supported by government guarantees, such as those issued by the SBA.  Within these primary categories, loans are grouped loans into more granular segments based on common risk characteristics.  For example, loans secured by real estate, such as residential and commercial mortgage loans, are generally grouped into segments by underlying property type while commercial business loans are grouped into segments based on business or industry type.

In regard to historical loss factors, our allowance for loan loss calculation calls for an analysis of historical charge-offs and recoveries for each of the defined segments within the loan portfolio.  We currently utilize a two-year moving average of annualized net charge-off rates (charge-offs net of recoveries) by loan segment, where available, to calculate our actual historical loss experience.  The outstanding principal balance of the non-impaired portion of each loan segment is multiplied by the applicable historical loss factor, which is updated quarterly, to estimate the level of probable losses based upon our historical loss experience.

As noted, the second tier of our allowance for loan loss calculation also utilizes environmental loss factors to estimate the probable losses within the loan portfolio. Environmental loss factors are based on specific quantitative and qualitative criteria that are used to assess the level of loss exposure arising from key sources of risk within the loan portfolio.  Such sources of risk include those relating to the level of and trends in nonperforming loans; the level of and trends in credit risk management effectiveness, the levels and trends in lending resource capability; levels and trends in economic and market conditions; levels and trends in loan concentrations; levels and trends in loan composition and terms, levels and trends in independent loan review effectiveness, levels and trends in collateral values and the effects of other external factors.

We utilize a set of seven risk tranches, ranging from “negligible risk” to “severe risk”, that establishes a pre-defined range of potential risk ratings to be ascribed to each criteria component supporting an environmental loss factor.  Risk ratings of zero and 30 are ascribed to the “negligible risk” and “severe risk” tranches, respectively, which generally serve as the upper and lower thresholds for the potential range of risk rating values across all risk tranches.  The remaining five risk tranches, ranging from “low risk” to “high risk”, utilize progressively higher ranges of potential risk ratings reflecting the increased level of risk associated with each tranche.

As noted earlier, we utilize both quantitative and qualitative criteria to support our assessment of risk and associated credit loss estimates using environmental loss factors.  In the case of quantitative criteria, we associate pre-defined ranges of potential criteria values with each of the risk tranches noted above.  Through this mechanism, quantitative criteria values are correlated to specific risk tranches.  For loss factor criteria that are based on wholly qualitative metrics, we simply ascribe a risk tranche directly to that criteria based on management judgement.  In both cases, the actual risk ratings ascribed by management to criteria components are generally expected to fall within the pre-defined range of risk ratings assigned to the applicable risk tranche.  

Risk ratings are multiplied by .01% to calculate a loss factor value attributable to each of the criteria components supporting an environmental loss factor. The average of the loss factor values ascribed to the criteria components generally serves as the aggregate value for that loss factor.  Where appropriate, the criteria components supporting a loss factor may be “weighted” in relation to one another to allow for greater emphasis on certain criteria in the calculation of an environmental loss factor.

Like the historical loss factors discussed above, we generally utilize a two-year moving average of criteria values, where available, to determine the risk tranche and associated set of potential risk ratings to be ascribed to the criteria components supporting an environmental loss factor.  By doing so, estimated losses should be directionally consistent with the overall credit risk characteristics and performance of the loan portfolio over time while avoiding significant short-term volatility arising from incremental changes to criteria values.  Where appropriate, we may extend or compress criteria look-back periods to properly reflect the level of credit risk and estimated losses within a specified subset of loans.  The outstanding principal balance of the non-impaired portion of each loan segment is multiplied by the aggregate value of each environmental loss factor, which is updated quarterly, to estimate the level of probable losses attributable to that factor.

The sum of the probable and estimable loan losses calculated through the first and second tiers of the loss measurement processes as described above, represents the total targeted balance for our allowance for loan losses at the end of a fiscal period.  As noted earlier, we establish all additional valuation allowances in the fiscal period during which additional individually identified loan impairments and additional estimated losses on loans collectively evaluated for impairment are identified.  We adjust our balance of valuation allowances through the provision for loan losses as required to ensure that the balance of the allowance for loan losses reflects all probable and estimable loans losses at the close of the fiscal period.  Notwithstanding calculation methodology and the

 

20


noted distinction between valuation allowances established on loans collectively versus individually evaluated for impairment, our entire allowance for loan losses is available to cover all charge-offs that arise from the loan portfolio.

Although we believe that our allowance for loans losses is established in accordance with management’s best estimate, actual losses are dependent upon future events and, as such, further additions to the level of loan loss allowances may be necessary.

The following table sets forth information with respect to activity in the allowance for loan losses for the periods indicated.

 

 

For the Years Ended June 30,

 

 

2017

 

 

2016

 

 

 

2015

 

 

 

2014

 

 

 

2013

 

 

(Dollars in Thousands)

 

Allowance balance (at beginning of period)

$

24,229

 

 

$

15,606

 

 

$

12,387

 

 

$

10,896

 

 

$

10,117

 

Provision for loan losses

 

5,381

 

 

 

10,690

 

 

 

6,108

 

 

 

3,381

 

 

 

4,464

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family mortgage

 

(76

)

 

 

(1,213

)

 

 

(1,985

)

 

 

(1,202

)

 

 

(2,272

)

Home equity loans

 

(96

)

 

 

(93

)

 

 

(77

)

 

 

(47

)

 

 

(221

)

Multi-family

 

-

 

 

 

(133

)

 

 

(14

)

 

 

-

 

 

 

-

 

Nonresidential

 

(149

)

 

 

-

 

 

 

(636

)

 

 

(44

)

 

 

(1,042

)

Commercial business

 

(221

)

 

 

(1,464

)

 

 

(491

)

 

 

(1,170

)

 

 

(182

)

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9

)

Other

 

(849

)

 

 

(55

)

 

 

(1

)

 

 

(30

)

 

 

(2

)

Total charge offs:

 

(1,391

)

 

 

(2,958

)

 

 

(3,204

)

 

 

(2,493

)

 

 

(3,728

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family mortgage

 

256

 

 

 

88

 

 

 

297

 

 

 

67

 

 

 

15

 

Home equity loans

 

16

 

 

 

41

 

 

 

-

 

 

 

2

 

 

 

10

 

Multi-family

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonresidential

 

-

 

 

 

-

 

 

 

-

 

 

 

525

 

 

 

-

 

Commercial business

 

727

 

 

 

760

 

 

 

18

 

 

 

9

 

 

 

18

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other

 

68

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

Total recoveries:

 

1,067

 

 

 

891

 

 

 

315

 

 

 

603

 

 

 

43

 

Net charge offs:

 

(324

)

 

 

(2,067

)

 

 

(2,889

)

 

 

(1,890

)

 

 

(3,685

)

Allowance balance (at end of period)

$

29,286

 

 

$

24,229

 

 

$

15,606

 

 

$

12,387

 

 

$

10,896

 

Total loans outstanding

$

3,242,453

 

 

$

2,671,381

 

 

$

2,102,548

 

 

$

1,742,868

 

 

$

1,361,718

 

Average loans outstanding

$

2,955,686

 

 

$

2,512,231

 

 

$

1,849,785

 

 

$

1,548,746

 

 

$

1,309,085

 

Allowance for loan losses as a percent of

  total loans outstanding

 

0.90

%

 

 

0.91

%

 

 

0.74

%

 

 

0.71

%

 

 

0.80

%

Net loan charge-offs as a percent of

  average loans outstanding

 

0.01

%

 

 

0.08

%

 

 

0.16

%

 

 

0.12

%

 

 

0.28

%

Allowance for loan losses to

  non-performing loans

 

155.18

%

 

 

115.07

%

 

 

68.17

%

 

 

48.96

%

 

 

35.24

%

 

 

21


Allocation of Allowance for Loan Losses.  The following table sets forth the allocation of the total allowance for loan losses by loan category and segment and the percent of loans in each category’s segment to total net loans receivable at the dates indicated.  The portion of the loan loss allowance allocated to each loan segment does not represent the total available for future losses which may occur within a particular loan segment since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio

 

 

At June 30,

 

2017

 

2016

 

2015

 

2014

 

2013

 

Amount

 

 

Percent

of Loans

to Total

Loans

 

Amount

 

 

Percent

of Loans

to Total

Loans

 

Amount

 

 

Percent

of Loans

to Total

Loans

 

Amount

 

 

Percent

of Loans

to Total

Loans

 

Amount

 

 

Percent

of Loans

to Total

Loans

 

(Dollars In Thousands)

 

 

At end of period allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

2,384

 

 

 

17.50

 

%

 

$

2,370

 

 

 

22.66

 

%

 

$

2,210

 

 

 

28.17

 

%

 

$

2,729

 

 

 

33.31

 

%

 

$

3,660

 

 

 

36.77

 

%

Multi-family

 

13,941

 

 

 

43.57

 

 

 

 

9,995

 

 

 

38.94

 

 

 

 

6,355

 

 

 

34.65

 

 

 

 

3,380

 

 

 

24.73

 

 

 

 

1,810

 

 

 

15.66

 

 

Nonresidential

 

9,939

 

 

 

33.46

 

 

 

 

7,846

 

 

 

30.72

 

 

 

 

4,765

 

 

 

27.62

 

 

 

 

4,357

 

 

 

31.71

 

 

 

 

3,549

 

 

 

33.31

 

 

Commercial business

 

1,709

 

 

 

2.30

 

 

 

 

2,784

 

 

 

3.30

 

 

 

 

1,860

 

 

 

4.73

 

 

 

 

1,284

 

 

 

3.86

 

 

 

 

1,218

 

 

 

5.19

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

501

 

 

 

2.55

 

 

 

 

432

 

 

 

3.35

 

 

 

 

366

 

 

 

4.36

 

 

 

 

548

 

 

 

5.72

 

 

 

 

566

 

 

 

7.88

 

 

Other

 

777

 

 

 

0.51

 

 

 

 

778

 

 

 

0.95

 

 

 

 

16

 

 

 

0.20

 

 

 

 

22

 

 

 

0.25

 

 

 

 

12

 

 

 

0.32

 

 

Construction

 

35

 

 

 

0.12

 

 

 

 

24

 

 

 

0.08

 

 

 

 

34

 

 

 

0.27

 

 

 

 

67

 

 

 

0.42

 

 

 

 

81

 

 

 

0.87

 

 

Total

$

29,286

 

 

 

100.00

 

%

 

$

24,229

 

 

 

100.00

 

%

 

$

15,606

 

 

 

100.00

 

%

 

$

12,387

 

 

 

100.00

 

%

 

$

10,896

 

 

 

100.00

 

%

 

The following table sets forth the allocation of the allowance for loan losses by loan category and segment within each valuation allowance category at the dates indicated.  The valuation allowance categories presented reflect the allowance for loan loss calculation methodology in effect at the time.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(In Thousands)

 

Valuation allowance for loans individually

  evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

154

 

 

$

77

 

 

$

116

 

 

$

528

 

 

$

697

 

Multi-family

 

-

 

 

 

-

 

 

 

267

 

 

 

284

 

 

 

302

 

Nonresidential

 

39

 

 

 

53

 

 

 

262

 

 

 

285

 

 

 

212

 

Commercial business

 

6

 

 

 

400

 

 

 

370

 

 

 

444

 

 

 

757

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

-

 

 

 

78

 

 

 

36

 

 

 

132

 

 

 

110

 

Other

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total valuation allowance

 

199

 

 

 

608

 

 

 

1,051

 

 

 

1,673

 

 

 

2,078

 

Valuation allowance for loans collectively

  evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Historical loss factors

 

2,131

 

 

 

3,439

 

 

 

1,913

 

 

 

2,058

 

 

 

2,439

 

Environmental loss factors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

1,988

 

 

 

1,621

 

 

 

1,236

 

 

 

1,175

 

 

 

1,278

 

Multi-family

 

13,941

 

 

 

9,985

 

 

 

6,079

 

 

 

3,096

 

 

 

1,509

 

Nonresidential

 

9,701

 

 

 

7,269

 

 

 

4,393

 

 

 

3,621

 

 

 

2,783

 

Commercial business

 

731

 

 

 

810

 

 

 

606

 

 

 

374

 

 

 

407

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

401

 

 

 

306

 

 

 

287

 

 

 

317

 

 

 

315

 

Other

 

159

 

 

 

167

 

 

 

7

 

 

 

8

 

 

 

6

 

Construction

 

35

 

 

 

24

 

 

 

34

 

 

 

65

 

 

 

81

 

Total environmental factors

 

26,956

 

 

 

20,182

 

 

 

12,642

 

 

 

8,656

 

 

 

6,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

29,286

 

 

$

24,229

 

 

$

15,606

 

 

$

12,387

 

 

$

10,896

 

 

 

22


During the year ended June 30, 2017, the balance of the allowance for loan losses increased by $5.1 million to $29.3 million or 0.90% of total loans at June 30, 2017 from $24.2 million or 0.91% of total loans at June 30, 2016.  The increase resulted from provisions of $5.4 million during the year ended June 30, 2017 that were partially offset by charge-offs, net of recoveries, totaling $324,000 during that same period.

With regard to loans individually evaluated for impairment, the balance of our allowance for loan losses attributable to such loans decreased by $409,000 to $199,000 at June 30, 2017 from $608,000 at June 30, 2016.  The balance at June 30, 2017 reflected the allowance for impairment identified on $3.1 million of impaired loans while an additional $18.9 million of impaired loans had no allowance for impairment as of that date.  By comparison, the balance at June 30, 2016 reflected the allowance for impairment identified on $3.2 million of impaired loans while an additional $21.9 million of impaired loans had no allowance for impairment as of that date.  The outstanding balances of impaired loans reflect the cumulative effects of various adjustments including, but not limited to, purchase accounting valuations and prior charge-offs, where applicable, which are considered in the evaluation of impairment.

With regard to loans evaluated collectively for impairment, the balance of our allowance for loan losses attributable to such loans increased by $5.5 million to $29.1 million at June 30, 2017 from $23.6 million at June 30, 2016.  The increase in valuation was partly attributable to a $570.9 million increase in the aggregate outstanding balance of loans collectively evaluated for impairment to $3.22 billion at June 30, 2017 from $2.65 billion at June 30, 2016 as well as the ongoing reallocation of loans within the portfolio in favor of commercial loans against which we generally assign comparatively higher historical and environmental loss factors in our allowance for loan loss calculation.  The increase in the allowance also reflected increases in certain environmental loss factors during the year ended June 30, 2017 that were partially offset by decreases in historical loss factors.

With regard to historical loss factors, our loan portfolio experienced a net annualized charge-off rate of 0.01% for the year ended June 30, 2017 representing a decrease of seven basis points from the 0.08% of charge offs reported for the year ended June 30, 2016.  The annual average net charge off rate for June 30, 2016 had previously decreased by eight basis points from 0.16% for the prior year ended June 30, 2015.  Given the effects of these annual changes, the two-year average net charge off rate for our loan portfolio decreased by seven basis points to 0.05% for the period ended June 30, 2017 from 0.12% for the period ended June 30, 2016.  The historical loss factors used in our allowance for loan loss calculation methodology were updated to reflect the effect of these changes by individual loan segment reflecting the two year look-back period used by that methodology.

The effect of the aggregate decline in the two-year average charge-off rate for fiscal 2017 on the historical loss factors was partially offset by an increase in estimated historical loss factors applicable to our wholesale C&I loan participations for which a full, two-year charge-off history is not yet available.  In such cases, we generally utilize estimated annual charge-off rates to develop the historical loss factors applicable to such loans.  As discussed in greater detail below, the Company refined its methodology for developing the estimated net charge off rates used in determining the historical loss factors applicable to its C&I loans during fiscal 2017.  In doing so, a more precise estimate of credit losses was developed for specific segments of the Company’s wholesale C&I loan participations based on the specific businesses or industry types in which the underlying borrowers conduct business.

The effects of the net decrease in historical loss factors arising from the changes noted above more than offset the effect of the increase in the overall balance of the unimpaired portion of the loan portfolio during the year ended June 30, 2017.  Consequently, the applicable portion of the allowance attributable to these factors decreased by approximately $1.3 million to $2.1 million at June 30, 2017 from $3.4 million at June 30, 2016.

The enhancements to the historical loss factors applicable to our wholesale C&I loans discussed above were undertaken in conjunction with expanding and enhancing the overall segmentation of our loan portfolio to support our larger credit risk management program which includes the allowance for loan loss calculation and loan concentration reporting regimens.  These efforts generally reflect our increased strategic focus in commercial lending and the growing diversity and complexity of the risk characteristics inherent in such loans.

In support of these objectives, certain categories traditionally used to define and evaluate our loan portfolio for allowance for loan loss calculation purposes were delineated into more granular “segments” during fiscal 2017 to better reflect their common, underlying credit risk characteristics.  For example, loans within the multi-family mortgage loan category were further segmented based on the number of dwelling units while commercial mortgage loans secured by non-residential real estate were further segmented by property type/business use (e.g. office/professional, retail, mixed use, warehouse).  Similarly, each of the categories of commercial business loans, including our traditional business and SBA loans originated through retail channels, as well as our wholesale C&I participations, were further segmented based on the specific business or industry type in which the borrower operates.

As noted above, the “re-segmentation” of the loan portfolio enabled the Company to adopt a more precise methodology to derive its historical loss factors based on actual net charge offs by detailed loan segment while supporting a better basis upon which to develop estimates for such loss factors in the absence of sufficient historical data.  However, the re-segmentation also enabled us to enhance the precision by which we estimate credit losses through the use of environmental loss factors.  Where applicable, such loss

 

23


factors were re-evaluated and re-allocated during fiscal 2017 to reflect the more granular segmentation of loans in the allowance for loan losses calculation.  Where appropriate, the specific criteria and/or basis upon which we derive environmental loss factors was revised or enhanced in conjunction with the segmentation changes noted.

The implementation of the segmentation changes within the loan portfolio in the calculation of the allowance for loan loss did not result in a significant change in the required, aggregate balance of the allowance attributable to loans evaluated collectively for impairment.  However, the Company did update certain environmental loss factors during fiscal 2017 to reflect an increase in the level of estimated credit losses attributable to the increased concentration and decreased seasoning in the Company’s commercial mortgage loan sectors.  Consequently, the $6.8 million increase in the portion of the allowance for loan losses attributable to environmental loss factors to $27.0 million at June 30, 2017 from $20.2 million at June 30, 2016 was attributable to the growth in the unimpaired portion of the loan portfolio as well as the noted changes to environmental loss factors during the period.

An overview of the balances and activity within the allowance for loan loss during the prior fiscal year ended June 30, 2016 generally reflected the effects of the overall growth and reallocation of the loan portfolio arising from our increased strategic emphasis on commercial lending during that earlier year while also reflecting a consistent improvement in asset quality and reduction in specific loan-level impairment losses.

In that regard, the balance of the allowance for loan losses increased by approximately $8.6 million to $24.2 million at June 30, 2016 from $15.6 million at June 30, 2015.  The increase resulted from provisions of $10.7 million that were partially offset by net charge offs of $2.1 million during fiscal 2016.  Valuation allowances attributable to impairment identified on individually evaluated loans decreased by $443,000 to $608,000 at June 30, 2016 from $1.1 million at June 30, 2015.  For those same comparative periods, valuation allowances on loans evaluated collectively for impairment increased by approximately $9.0 million to $23.6 million from $14.6 million reflecting the overall growth in the balance of non-impaired loans in the portfolio in conjunction with changes to the historical and environmental loss factors used in the allowance for loan loss calculation during the year.

The calculation of probable losses within a loan portfolio and the resulting allowance for loan losses is subject to estimates and assumptions that are susceptible to significant revisions as more information becomes available and as events or conditions effecting individual borrowers and the marketplace as a whole change over time.  Future additions to the allowance for loan losses may be necessary if economic and market conditions deteriorate in the future from those currently prevalent in the marketplace.  In addition, the federal banking regulators, as an integral part of their examination process, periodically review our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate.�� The regulators may require the allowance for loan losses to be increased based on their review of information available at the time of the examination, which may negatively affect our earnings.  Finally, changes in accounting standards promulgated by the Financial Accounting Standards Board, such as those discussed in Note 2 to the audited consolidated financial statements regarding the use of a current expected credit loss (“CECL”) model to calculate credit losses, may require increases in the allowance for loan losses upon adoption of the applicable accounting standard.

Securities Portfolio

Our deposits and borrowings have traditionally exceeded our outstanding balance of loans receivable.  We have generally invested excess funds into investment securities with a historical emphasis on U.S. agency mortgage-backed securities and U.S. agency debentures.  Such assets were a significant component of our investment portfolio at June 30, 2017 and are expected to remain so in the future.  However, enhancements to our investment policies, strategies and infrastructure in recent years have enabled us to diversify the composition and allocation of our securities portfolio as described below.

At June 30, 2017, our securities portfolio totaled $1.11 billion and comprised 23.0% of our total assets.  By comparison, at June 30, 2016, our securities portfolio totaled $1.25 billion and comprised 27.8% of our total assets.

The year-over-year net decrease in the securities portfolio totaled approximately $143.7 million, which largely reflected security repayments and sales during the year that were partially offset by security purchases.  The decrease in the portfolio also reflected a $2.3 million increase in the fair value of the available for sale securities portfolio to an unrealized loss of $2.4 million at June 30, 2017 from an unrealized loss of $4.7 million at June 30, 2016.

The decrease in the securities portfolio from June 30, 2017 to June 30, 2016 generally reflects the stated goals and objectives of our business plan which continues to call for shifting the mix of our earning assets toward greater balances of loans and lesser balances of securities.

Our investment policy, which is approved by the Board of Directors, is designed to foster earnings and manage cash flows within prudent interest rate risk and credit risk guidelines.  Generally, our investment policy is to invest funds in various categories of

 

24


securities and maturities based upon our liquidity needs, asset/liability management policies, investment quality, and marketability and performance objectives.  Our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer  and Treasurer/Chief Investment Officer are the senior management members of our Capital Markets Committee (“CMC”) that are generally designated by the Board of Directors as the officers primarily responsible for securities portfolio management and all transactions require the approval of at least two of these designated officers.  The Board of Directors is responsible for the oversight of the securities portfolio and the CMC’s activities relating thereto.

The investments authorized for purchase under the investment policy approved by our Board of Directors include U.S. government and agency mortgage-backed securities (including U.S. agency commercial MBS), U.S. government and government agency debentures, municipal obligations (consisting of bank-qualified municipal bond obligations of state and local governments), corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt.  We also hold small balances of single-issuer trust preferred securities and non-agency mortgage-backed securities that were acquired through bank acquisitions, but generally do not purchase such securities for the portfolio.  On a short-term basis, our investment policy authorizes investment in securities purchased under agreements to resell, federal funds, certificates of deposits of insured banks and savings institutions and Federal Home Loan Bank term deposits.

The carrying value of our mortgage-backed securities totaled $517.9 million at June 30, 2017 and comprised 46.8% of total investments and 10.7% of total assets as of that date.  We generally invest in mortgage-backed securities issued by U.S. government agencies or government-sponsored entities, such as the Government National Mortgage Association (“Ginnie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”).  Mortgage-backed securities issued or sponsored by U.S. government agencies and government-sponsored entities are guaranteed as to the payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the mortgage loans underlying such securities because of the costs of servicing and of their payment guarantees or credit enhancements which minimize the level of credit risk to the security holder.  In addition to those mortgage-backed securities issued by U.S. agencies and GSEs, the Company also held a nominal balance of non-agency collateralized mortgage obligations with credit-ratings equaling or exceeding “A” by Standard & Poor’s Financial Services (“S&P”) and/or “Baa1” by Moody’s Investor Service (“Moody’s”), where rated by those agencies.

The carrying value of our U.S. agency debt securities totaled $40.3 million at June 30, 2017 and comprised 3.6% of total investments and less than one percent of total assets as of that date.  Such securities included $35.0 million of fixed-rate U.S. agency debentures as well as $5.3 million of securitized pools of loans issued and fully guaranteed by the SBA.

The carrying value of our securities representing obligations of state and political subdivisions totaled $122.5 million at June 30, 2017 and comprised 11.1% of total investments and 2.5% of total assets as of that date.  Such securities primarily included highly-rated, fixed-rate bank-qualified securities representing general obligations of municipalities located within the U.S. or the obligations of their related entities such as boards of education or school districts.  The portfolio also includes a nominal balance of non-rated municipal obligations totaling approximately $4.6 million comprising ten short-term, bond anticipation notes (“BANs”) issued by a total of four New Jersey municipalities.  Each of our municipal obligations were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling or exceeding “A” or higher by S&P and/or “Baa1” or higher by Moody’s, where rated by those agencies.  In the absence of such ratings, we rely upon our own internal analysis of the issuer’s financial condition to validate its investment grade assessment.

The carrying value of our asset-backed securities totaled $162.4 million at June 30, 2017 and comprised 14.7% of total investments and 3.4% of total assets as of that date.  This category of securities is comprised entirely of structured, floating-rate securities representing securitized federal education loans with 97% U.S. government guarantees.  The securities represent tranches of a larger investment vehicle designed 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 loans.  Our securities represent the highest credit-quality tranches within the overall structures with each being rated “AA+” or higher by S&P/or “A1” or higher by Moody’s, where rated by those agencies, at June 30, 2017.

The outstanding balance of our collateralized loan obligations totaled $98.2 million at June 30, 2017 and comprised 8.9% of total investments and 2.0% of total assets as of that date.  This category of securities is comprised entirely of structured, floating-rate securities comprised of securitized commercial loans to large, U.S. corporations.  Our securities represent tranches of a larger investment vehicle designed to reallocate cash flows and 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 loans.  At June 30, 2017, each of our collateralized loan obligations were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling or exceeding “AA” or higher by S&P and/or “Aa2” or higher by Moody’s, where rated by those agencies.

 

25


The carrying value of our corporate bonds totaled $142.3 million at June 30, 2017 and comprised 12.9% of total investments and 3.0% of total assets as of that date.  This category of securities is comprised entirely of floating-rate corporate debt obligations issued by large financial institutions. Such issuers include domestic institutions, such as The Goldman Sachs Group, Inc., General Electric Corporation, JPMorgan Chase & Co. and Wells Fargo and Co., as well as non-domestic financial institutions such as Barclays Bank PLC and Deutsche Bank AG. The Company generally limits its investment in the unsecured corporate debt of any single issuer to $25.0 million.  At June 30, 2017, each of our corporate bonds were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling or exceeding “BBB+” or higher by S&P and/or “A3” or higher by Moody’s, where rated by those agencies.

The carrying value of our subordinated debt totaled $15.0 million at June 30, 2017 and comprised 1.4% of total investments and less than 1.0% of total assets as of that date.  This balance comprised one security purchased during fiscal 2017 that was issued by a profitable, well capitalized New Jersey-based community bank.  The subordinated notes, which were acquired through a privately negotiated transaction, have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term. The notes are redeemable after five years subject to satisfaction of certain conditions. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior to the issuer’s general and secured creditors and depositors.  The Company may consider additional purchases of subordinated debt issued by financial institutions in the future.

The carrying value of our trust preferred securities totaled $8.5 million at June 30, 2017 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 that were originally issued by four separate financial institutions.  As a result of bank mergers involving the issuers of these securities, our five trust preferred securities currently represent the de-facto obligations of three separate financial institutions.  At June 30, 2017, two of the securities at an amortized cost of $3.0 million were consistently rated by Moody’s and S&P above the thresholds that generally support our investment grade assessment, with such ratings equaling “BBB-” by S&P and “Baa2” by Moody’s. The securities were originally issued through Chase Capital II and currently represent de-facto obligations of JP Morgan Chase & Co.  We also owned two trust preferred securities at an amortized cost of $4.9 million whose external credit ratings by both S&P and Moody’s fell below the thresholds that we normally associate with investment grade securities, with such ratings equaling “BB+” by S&P and “Ba1” by Moody’s.  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.  We hold one non-rated trust preferred security with a par value of $1.0 million representing a de-facto obligation of Mercantil Commercebank Florida Bancorp, Inc.

Current accounting standards require that securities be categorized as “held to maturity”, “trading securities” or “available for sale”, based on management’s intent as to the ultimate disposition of each security.  These standards allow debt securities to be classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity.  Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity”.

We do not currently use or maintain a trading account.  Securities not classified as “held to maturity” are classified as “available for sale”.  These securities are reported at fair value and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as adjustments to accumulated other comprehensive income, a separate component of equity.  As of June 30, 2017, our held to maturity securities portfolio had a carrying value of $493.3 million or 44.6% of our total securities with the remaining $613.8 million or 55.4% of securities classified as available for sale.

Other than mortgage-backed or debt securities issued or guaranteed by the U.S. government or its agencies, we did not hold securities of any one issuer having an aggregate book value in excess of 10% of our equity at June 30, 2017.  All of our securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value.  We have determined that none of our securities with unrealized losses at June 30, 2017 are other than temporarily impaired as of that date.

Purchases of securities are made based on certain considerations, which include the interest rate, tax considerations, volatility, yield, settlement date and maturity of the security, our liquidity position and anticipated cash needs and sources.  The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered.  We do not purchase securities that are determined to be below investment grade.

During the year ended June 30, 2017, proceeds from sales of securities available for sale totaled $83.0 million and resulted in gross gains of $1.3 million and gross losses of $1.7 million.  There were no sales of securities available for sale during the year ended June 30, 2016.  During the year ended June 30, 2015, proceeds from sales of securities available for sale totaled $57.2 million and resulted in gross gains of $601,000 and gross losses of $594,000.  During the year ended June 30, 2017, proceeds from sales of securities held to maturity totaled $5.3 million which resulted in gross gains of $370,000 and gross losses of $1,000. The securities sold were limited to those whose remaining outstanding balances had declined to the required thresholds, in relation to the original

 

26


amount purchased or acquired, that allowed their sale from the held to maturity portfolio.  There were no sales of held to maturity securities during the years ended June 30, 2016 and 2015.  

The following table sets forth the carrying value of our securities portfolio at the dates indicated. Mortgage-backed securities include mortgage pass-through securities and collateralized mortgage obligations.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

5,316

 

 

$

6,440

 

 

$

7,263

 

 

$

4,205

 

 

$

5,015

 

Obligations of state and political subdivisions

 

27,740

 

 

 

28,398

 

 

 

26,835

 

 

 

26,773

 

 

 

25,307

 

Asset-backed securities

 

162,429

 

 

 

82,625

 

 

 

88,032

 

 

 

87,316

 

 

 

24,798

 

Collateralized loan obligations

 

98,154

 

 

 

127,374

 

 

 

128,171

 

 

 

119,572

 

 

 

78,486

 

Corporate bonds

 

142,318

 

 

 

137,404

 

 

 

162,608

 

 

 

162,234

 

 

 

159,192

 

Trust preferred securities

 

8,540

 

 

 

7,669

 

 

 

7,751

 

 

 

7,798

 

 

 

7,324

 

Total debt securities available for sale

 

444,497

 

 

 

389,910

 

 

 

420,660

 

 

 

407,898

 

 

 

300,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

-

 

 

 

1,960

 

 

 

2,655

 

 

 

3,276

 

 

 

6,333

 

Federal Home Loan Mortgage Corporation

 

104,728

 

 

 

151,296

 

 

 

183,528

 

 

 

231,910

 

 

 

299,833

 

Federal National Mortgage Association

 

64,535

 

 

 

130,247

 

 

 

160,271

 

 

 

201,827

 

 

 

474,486

 

Non-agency

 

-

 

 

 

124

 

 

 

165

 

 

 

210

 

 

 

-

 

Total mortgage-backed securities available for sale

 

169,263

 

 

 

283,627

 

 

 

346,619

 

 

 

437,223

 

 

 

780,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

613,760

 

 

 

673,537

 

 

 

767,279

 

 

 

845,121

 

 

 

1,080,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

35,000

 

 

 

84,992

 

 

 

143,334

 

 

 

144,349

 

 

 

144,747

 

Obligations of state and political subdivisions

 

94,713

 

 

 

82,179

 

 

 

76,528

 

 

 

72,065

 

 

 

65,268

 

Subordinated debt

 

15,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total debt securities held to maturity

 

144,713

 

 

 

167,171

 

 

 

219,862

 

 

 

216,414

 

 

 

210,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

4,188

 

 

 

10,551

 

 

 

10,119

 

 

 

9

 

 

 

-

 

Federal Home Loan Mortgage Corporation

 

50,811

 

 

 

63,783

 

 

 

60,026

 

 

 

303

 

 

 

120

 

Federal National Mortgage Association

 

293,587

 

 

 

335,748

 

 

 

373,292

 

 

 

295,292

 

 

 

100,889

 

Non-agency

 

22

 

 

 

33

 

 

 

42

 

 

 

54

 

 

 

105

 

Total mortgage-backed securities held to maturity

 

348,608

 

 

 

410,115

 

 

 

443,479

 

 

 

295,658

 

 

 

101,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

493,321

 

 

 

577,286

 

 

 

663,341

 

 

 

512,072

 

 

 

311,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

1,107,081

 

 

$

1,250,823

 

 

$

1,430,620

 

 

$

1,357,193

 

 

$

1,391,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27


The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities portfolio at June 30, 2017.  This table shows contractual maturities and does not reflect re-pricing or the effect of prepayments. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties.  At June 30, 2017, securities with a carrying value of $55.0 million are callable within one year.

 

 

At June 30, 2017

 

 

One Year or Less

 

One to Five Years

 

Five to Ten Years

 

More Than Ten Years

 

Total Securities

 

 

Carrying

Value

 

 

Weighted

Average

Yield

 

Carrying

Value

 

 

Weighted

Average

Yield

 

Carrying

Value

 

 

Weighted

Average

Yield

 

Carrying

Value

 

 

Weighted

Average

Yield

 

Carrying

Value

 

 

Weighted

Average

Yield

 

Market

Value

 

 

(Dollars In Thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

35,000

 

 

 

0.90

 

%

 

$

6

 

 

 

1.90

 

%

 

$

811

 

 

 

1.40

 

%

 

$

4,499

 

 

 

2.40

 

%

 

$

40,316

 

 

 

1.08

 

%

 

$

40,268

 

Obligations of state and political

  subdivisions

 

4,568

 

 

 

1.36

 

 

 

 

27,408

 

 

 

1.48

 

 

 

 

72,277

 

 

 

2.17

 

 

 

 

18,200

 

 

 

2.40

 

 

 

 

122,453

 

 

 

2.02

 

 

 

 

123,293

 

Subordinated debt

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

15,000

 

 

 

5.75

 

 

 

 

-

 

 

 

-

 

 

 

 

15,000

 

 

 

5.75

 

 

 

 

15,000

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

162,429

 

 

 

2.18

 

 

 

 

162,429

 

 

 

2.18

 

 

 

 

162,429

 

Collateralized loan obligations

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

43,509

 

 

 

2.94

 

 

 

 

54,645

 

 

 

2.44

 

 

 

 

98,154

 

 

 

2.66

 

 

 

 

98,154

 

Corporate bonds

 

-

 

 

 

-

 

 

 

 

50,081

 

 

 

2.29

 

 

 

 

92,237

 

 

 

2.11

 

 

 

 

-

 

 

 

-

 

 

 

 

142,318

 

 

 

2.17

 

 

 

 

142,318

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

5,190

 

 

 

1.96

 

 

 

 

3,350

 

 

 

3.96

 

 

 

 

8,540

 

 

 

2.74

 

 

 

 

8,540

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage pass-through

  securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential pass-through

  securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage

  Corporation

 

3

 

 

 

3.23

 

 

 

 

7,424

 

 

 

2.62

 

 

 

 

60,149

 

 

 

1.96

 

 

 

 

62,567

 

 

 

2.08

 

 

 

 

130,143

 

 

 

2.06

 

 

 

 

129,806

 

Federal National Mortgage

  Association

 

11

 

 

 

3.06

 

 

 

 

13,330

 

 

 

2.45

 

 

 

 

53,765

 

 

 

1.54

 

 

 

 

112,114

 

 

 

3.11

 

 

 

 

179,220

 

 

 

2.59

 

 

 

 

179,051

 

Commercial pass-through

  securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage

  Association

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

1,989

 

 

 

1.32

 

 

 

 

1,989

 

 

 

1.32

 

 

 

 

1,978

 

Federal National Mortgage

  Association

 

-

 

 

 

-

 

 

 

 

6,211

 

 

 

1.98

 

 

 

 

151,918

 

 

 

2.57

 

 

 

 

-

 

 

 

-

 

 

 

 

158,129

 

 

 

2.55

 

 

 

 

160,720

 

Collateralized mortgage

  obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage

  Association

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

2,199

 

 

 

1.70

 

 

 

 

2,199

 

 

 

1.70

 

 

 

 

2,153

 

Federal Home Loan Mortgage

  Corporation

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

15,522

 

 

 

1.52

 

 

 

 

9,874

 

 

 

2.20

 

 

 

 

25,396

 

 

 

1.78

 

 

 

 

25,039

 

Federal National Mortgage

  Association

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

195

 

 

 

1.82

 

 

 

 

20,578

 

 

 

1.99

 

 

 

 

20,773

 

 

 

1.99

 

 

 

 

20,783

 

Non-agency securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

22

 

 

 

3.08

 

 

 

 

22

 

 

 

3.08

 

 

 

 

22

 

Total securities

$

39,582

 

 

 

0.95

 

%

 

$

104,460

 

 

 

2.10

 

%

 

$

510,573

 

 

 

2.33

 

%

 

$

452,466

 

 

 

2.44

 

%

 

$

1,107,081

 

 

 

2.31

 

%

 

$

1,109,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28


Sources of Funds

General.  Retail deposits are our primary source of funds for lending and other investment purposes.  In addition, we derive funds from loan and mortgage‑backed securities principal repayments and proceeds from the maturities and calls of non-mortgage-backed securities.  Loan and securities payments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions.  Wholesale funding sources including, but not limited to, borrowings from the FHLB of New York (“FHLB”), wholesale deposits and other short term-borrowings are also used to supplement the funding for loans and investments.

Deposits.  Our current deposit products include interest-bearing and non-interest-bearing checking accounts, money market deposit accounts, savings accounts and certificates of deposit accounts ranging in terms from 30 days to five years.  Certificates of deposit with terms ranging from one year to five years are available for individual retirement account plans.  Deposit account terms, such as interest rate earned, applicability of certain fees and service charges and funds accessibility, will vary based upon several factors including, but not limited to, minimum balance, term to maturity, and transaction frequency and form requirements.

Deposits are obtained primarily from within New Jersey and New York through Kearny Bank’s network of retail branches.  Traditional methods of advertising are used to attract new customers and deposits, including radio, print media, outdoor advertising, direct mail and inserts included with customer statements.  Premiums or incentives for opening accounts are sometimes offered.  One of our key retail products in recent years has been “Star Banking”, which bundles a number of banking services and products together for those customers with a checking account with direct deposit and combined deposits of $20,000 or more, including Internet banking, bill pay, mobile banking, telephone banking and a 15 basis point premium on certificates of deposit with a term of at least one year, excluding special promotions.  We also offer “High Yield Checking” which is primarily designed to attract core deposits in the form of customers’ primary checking accounts through interest rate and fee reimbursement incentives to qualifying customers.  The comparatively higher interest expense associated with the “High Yield Checking” product in relation to our other checking products is partially offset by the transaction fee income associated with the account.

We may also offer a 15 basis point premium on certificate of deposit accounts with a term of at least one year, excluding special promotions, to certificate of deposit accountholders that have $500,000 or more on deposit with Kearny Bank.  Though certificates of deposit with non-standard maturities are popular in our market, we generally promote certificates of deposit with traditional maturities, including three and six months and one, two, three, four and five years.  During the term of our non-standard 17-month and 29-month certificates of deposit, we offer customers a “one-time option” to “step up” the rate paid from the original rate set on the certificate to the current rate being offered by Kearny Bank for certificates of that particular maturity.

The determination of interest rates on retail deposits is based upon a number of factors, including: (1) our need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a selected group of competitors’ rates for similar products; (3) our current cost of funds, yield on assets and asset/liability position; and (4) the alternate cost of funds on a wholesale basis.  Interest rates are generally reviewed by senior management on a bi-weekly basis.

We also utilize “non-retail” deposits as an alternative source of wholesale funding to traditional borrowings such as FHLB advances.  Such funds are generally used to manage our exposure to interest rate risk and liquidity risk in conjunction with our overall asset/liability management process.  At June 30, 2017, the balance of our interest-bearing checking accounts includes a total of $222.6 million of brokered money market deposits acquired through Promontory Interfinancial Network’s (“Promontory”) Insured Network Deposits (“IND”) program, a brokered deposit network that is sourced by Promontory from large retail and institutional brokerage firms whose individual clients seek to have a portion of their investments held in interest-bearing accounts at FDIC-insured institutions.  The terms of the program generally establish a reciprocal commitment for Promontory to deliver and Kearny Bank to accept such deposits for a period of no less than five years during which time total aggregate balances shall be maintained within a range of $200.0 million to $230.0 million.  Such deposits are generally sourced by Promontory from large retail and institutional brokerage firms whose individual clients seek to have a portion of their investments held in interest-bearing accounts at FDIC-insured institutions.

We also maintain a small portfolio of longer-term, brokered certificates of deposit whose balances and weighted average remaining term to maturity totaled approximately $21.6 million and 5.6 years, respectively, at June 30, 2017.  In combination with the Promontory IND money market deposits noted above, Kearny Bank’s brokered deposits totaled $244.2 million, or 8.3% of deposits, at June 30, 2017.

We also utilize the QwickRate deposit listing service to attract “non-brokered” wholesale time deposits targeting institutional investors with a three-to-five year investment horizon.  The balance of time deposits we acquired through the QwickRate listing totaled $101.4 million, or 3.5% of deposits, at June 30, 2017 with such funds having a weighted average remaining term to maturity of 1.5 years. We generally prohibit the withdrawal of our listing service deposits prior to maturity.

 

29


Additional sources of non-retail deposits including, but not limited to, deposits acquired through listing services and other sources of brokered deposits, may be utilized in the future as additional, alternative sources of wholesale funding.

A large percentage of our deposits are in certificates of deposit, which represented 44.1% and 44.8% of total deposits at June 30, 2017 and June 30, 2016, respectively.  Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period were not renewed.  At June 30, 2017 and June 30, 2016, certificates of deposit maturing within one year were $610.8 million and $666.1 million, respectively.  Historically, a significant portion of the certificates of deposit remain with us after they mature and we believe that this will continue.

At June 30, 2017, $731.0 million or 56.6% of our certificates of deposit were certificates of $100,000 or more compared to $661.0 million or 54.7% at June 30, 2016.  The general level of market interest rates and money market conditions significantly influence deposit inflows and outflows.  The effects of these factors are particularly pronounced on deposit accounts with larger balances.  In particular, certificates of deposit with balances of $100,000 or greater are traditionally viewed as being a more volatile source of funding than comparatively lower balance certificates of deposit or non-maturity transaction accounts.  In order to retain certificates of deposit with balances of $100,000 or more, we may have to pay a premium rate, resulting in an increase in our cost of funds.  In a rising rate environment, we may be unwilling or unable to pay a competitive rate. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings, which could increase our cost of funds and negatively impact our interest rate spread and our financial condition.

The following table sets forth the distribution of average deposits for the periods indicated and the weighted average nominal interest rates for each period on each category of deposits presented.

 

 

For the Years Ended June 30,

 

2017

 

 

 

2016

 

 

 

2015

 

Average

Balance

 

 

Percent

of Total

Deposits

 

Weighted

Average

Nominal

Rate

 

 

 

Average

Balance

 

 

Percent

of Total

Deposits

 

Weighted

Average

Nominal

Rate

 

 

 

Average

Balance

 

 

Percent

of Total

Deposits

 

Weighted

Average

Nominal

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

$

249,693

 

 

 

8.98

 

%

 

 

-

 

%

 

$

225,396

 

 

 

8.73

 

%

 

 

-

 

%

 

$

217,856

 

 

 

8.52

 

%

 

 

-

 

%

Interest-bearing demand

 

769,943

 

 

 

27.68

 

 

 

 

0.66

 

 

 

 

723,130

 

 

 

28.01

 

 

 

 

0.59

 

 

 

 

796,963

 

 

 

31.18

 

 

 

 

0.50

 

 

Savings and clubs

 

519,535

 

 

 

18.67

 

 

 

 

0.13

 

 

 

 

516,390

 

 

 

20.00

 

 

 

 

0.16

 

 

 

 

515,824

 

 

 

20.18

 

 

 

 

0.16

 

 

Certificates of deposit

 

1,242,857

 

 

 

44.67

 

 

 

 

1.32

 

 

 

 

1,116,906

 

 

 

43.26

 

 

 

 

1.22

 

 

 

 

1,025,482

 

 

 

40.12

 

 

 

 

1.09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

$

2,782,028

 

 

 

100.00

 

%

 

 

0.80

 

%

 

$

2,581,822

 

 

 

100.00

 

%

 

 

0.73

 

%

 

$

2,556,125

 

 

 

100.00

 

%

 

 

0.63

 

%

 

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Interest Rate

 

 

 

 

 

 

 

 

 

 

 

0.00 - 0.99%

$

327,474

 

 

$

430,451

 

 

$

537,343

 

1.00 - 1.99%

 

782,920

 

 

 

609,086

 

 

 

330,221

 

2.00 - 2.99%

 

174,792

 

 

 

161,866

 

 

 

116,884

 

3.00 - 3.99%

 

5,882

 

 

 

6,022

 

 

 

17,228

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,291,068

 

 

$

1,207,425

 

 

$

1,001,676

 

 

 

30


The following table shows the amount of certificates of deposit of $100,000 or more by time remaining until maturity as of the dates indicated.

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Maturity Period

 

 

 

 

 

 

 

 

 

 

 

Within three months

$

102,489

 

 

$

42,729

 

 

$

66,271

 

Three through six months

 

60,396

 

 

 

93,936

 

 

 

67,865

 

Six through twelve months

 

163,958

 

 

 

194,754

 

 

 

80,318

 

Over twelve months

 

404,182

 

 

 

329,586

 

 

 

274,767

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

731,025

 

 

$

661,005

 

 

$

489,221

 

 

The following table sets forth the amount and maturities of certificates of deposit at June 30, 2017.

 

 

At June 30, 2017

 

 

Within

One Year

 

 

Over One

Year to

Two Years

 

 

Over Two

Years to

Three Years

 

 

Over

Three

Years to

Four Years

 

 

Over Four

Years to

Five Years

 

 

Over Five

Years

 

 

Total

 

 

(In Thousands)

 

Interest Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.00 - 0.99%

$

274,387

 

 

$

51,786

 

 

$

1,249

 

 

$

52

 

 

$

-

 

 

$

-

 

 

$

327,474

 

1.00 - 1.99%

 

334,165

 

 

 

289,168

 

 

 

90,609

 

 

 

16,492

 

 

 

51,902

 

 

 

584

 

 

 

782,920

 

2.00 - 2.99%

 

2,211

 

 

 

13,789

 

 

 

45,382

 

 

 

83,430

 

 

 

29,980

 

 

 

-

 

 

 

174,792

 

3.00 - 3.99%

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,882

 

 

 

5,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

610,763

 

 

$

354,743

 

 

$

137,240

 

 

$

99,974

 

 

$

81,882

 

 

$

6,466

 

 

$

1,291,068

 

 

Borrowings.  The sources of wholesale funding we utilize include borrowings in the form of advances from the FHLB as well as other forms of borrowings.  We generally use wholesale funding to manage our exposure to interest rate risk and liquidity risk in conjunction with our overall asset/liability management process.  Toward that end, FHLB advances are primarily utilized to extend the duration of funding to partially offset the interest rate risk presented by our investment in longer-term fixed-rate loans and mortgage-backed securities.  Extending the duration of funding may be achieved by simply utilizing fixed-rate borrowings with longer terms to maturity.  Alternately, we may utilize derivatives such as interest rate swaps and caps in conjunction with either short-term fixed-rate or floating-rate borrowings to effectively extend the duration of those funding sources.

Advances from the FHLB are typically secured by our FHLB capital stock and certain investment securities as well as residential and multi-family mortgage loans that we choose to utilize as collateral for such borrowings.  Additional information regarding our FHLB advances is included under Note 13 to the audited consolidated financial statements.

Short‑term FHLB advances generally have original maturities of less than one year and may also include overnight borrowings which Kearny Bank may utilize to address short term funding needs, where applicable.  At June 30, 2017, we had a total of $625 million of short-term FHLB advances at a weighted average interest rate of 1.29%.  Such advances represented 90-day FHLB term advances that are generally forecasted to be periodically redrawn at maturity for the same term as the original advance.  Based on this presumption, we utilized interest rate swaps to effectively extend the duration of each of these advances at the time they were drawn to effectively fix their cost for periods of approximately four to five years.  Our balance of short-term FHLB advances at June 30, 2017 included no overnight borrowings drawn for daily liquidity management purposes.

Long-term advances generally include term advances with original maturities of greater than one year.  At June 30, 2017, our outstanding balance of long-term FHLB advances totaled $150.7 million at a weighted average interest rate of 2.98%.  Such advances included $145.0 million of callable advances at a weighted average interest rate of 3.04%, a $5.2 million non-callable, term advance at an interest rate of 1.18% and an amortizing advance of $469,000 at an interest rate of 4.94%.

 

31


Our FHLB advances mature as follows:

 

 

At June 30,

 

 

2017

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Maturing in Years Ending June 30,

 

 

 

 

 

 

 

 

 

 

 

2016

$

-

 

 

$

-

 

 

$

382,500

 

2017

 

-

 

 

 

428,000

 

 

 

3,000

 

2018

 

630,225

 

 

 

5,225

 

 

 

5,225

 

2021

 

469

 

 

 

572

 

 

 

671

 

2023

 

145,000

 

 

 

145,000

 

 

 

145,000

 

Total advances

 

775,694

 

 

 

578,797

 

 

 

536,396

 

Fair value adjustments

 

2

 

 

 

(9

)

 

 

9

 

Total advances, net of

  fair value adjustments

$

775,696

 

 

$

578,788

 

 

$

536,405

 

 

Based upon the market value of investment securities and mortgage loans that are posted as collateral for FHLB advances at June 30, 2017, we are eligible to borrow up to an additional $882.1 million of advances from the FHLB as of that date.  We are further authorized to post additional collateral in the form of other unencumbered investments securities and eligible mortgage loans that may expand our borrowing capacity with the FHLB up to 30% of our total assets.  Additional borrowing capacity up to 50% of our total assets may be authorized with the approval of the FHLB’s Board of Directors or Executive Committee.

The balance of borrowings at June 30, 2017 also included overnight borrowings in the form of depositor sweep accounts totaling $30.5 million.  Depositor sweep accounts are short-term borrowings representing funds that are withdrawn from a customer’s non-interest bearing deposit account and invested in an uninsured overnight investment account that is collateralized by specified investment securities owned by Kearny Bank.

Interest Rate Derivatives and Hedging

We utilize derivative instruments in the form of interest rate swaps and caps to hedge our exposure to interest rate risk in conjunction with our overall asset/liability management process. In accordance with accounting requirements, we formally designate all of our hedging relationships as either fair value hedges, intended to offset the changes in the value of certain financial instruments due to movements in interest rates, or cash flow hedges, intended to offset changes in the cash flows of certain financial instruments due to movement in interest rates, and documents the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.

At June 30, 2017, our derivative instruments are comprised entirely of interest rate swaps and caps with total notional amounts of $740.0 million, $ 375.0 million and $150.0 million, respectively, with Wells Fargo Bank, N.A., Bank of Montreal and PNC Bank, serving as the counterparties to the transactions.  These instruments are intended to manage the interest rate exposure relating to certain wholesale funding positions that were outstanding at June 30, 2017.

Additional information regarding our use of interest rate derivatives and our hedging activities is presented in Note 1 and Note 14 to the audited consolidated financial statements.

Subsidiary Activity

At June 30, 2017, Kearny Bank was the only wholly-owned operating subsidiary of Kearny Financial Corp.  As of that date, Kearny Bank had two wholly owned subsidiaries: KFS Financial Services, Inc. and CJB Investment Corp.

KFS Financial Services, Inc. is a service corporation subsidiary originally organized for selling insurance products to Kearny Bank customers and the general public through a third party networking arrangement.  KFS Financial Services, Inc. has one wholly-owned subsidiary named, KFS Insurance Services, Inc., that was created for the primary purpose of acquiring insurance agencies. Both KFS Financial Services Inc. and KFS Insurance Services, Inc. were considered inactive during the year ended June 30, 2017.

CJB Investment Corp. is a New Jersey Investment Company and remained active through the three-year period ended June 30, 2017.

Personnel

As of June 30, 2017, we had 430 full‑time employees and 36 part‑time employees equating to a total of 448 full time equivalent (“FTE”) employees. By comparison, at June 30, 2016, we had 416 full-time employees and 43 part-time employees equating to a total of 438 FTEs.

 

32


REGULATION

General

Kearny Bank and Kearny Financial operate in a highly regulated industry.  This regulation establishes a comprehensive framework of activities in which a savings and loan holding company and New Jersey savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors.  Set forth below is a brief description of certain laws that relate to the regulation of Kearny Bank and Kearny Financial.  The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution and its holding company, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing savings and loan holding companies, could have a material adverse impact on Kearny Financial, Kearny Bank and their operations. The adoption of regulations or the enactment of laws that restrict the operations of Kearny Bank and/or Kearny Financial or impose burdensome requirements upon one or both of them could reduce their profitability and could impair the value of Kearny Bank’s franchise, resulting in negative effects on the trading price of our common stock.

Regulation of Kearny Bank

Kearny Bank was formerly a federal savings bank.  On June 29, 2017, it converted its charter to that of a nonmember New Jersey savings bank regulated by the NJDBI and the FDIC.

General.  As a nonmember New Jersey savings bank with deposits insured by the FDIC, Kearny Bank is subject to extensive regulation.  The regulatory structure gives the agencies authority’s extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the level of the allowance for loan losses.  The activities of New Jersey savings banks are subject to extensive regulation including restrictions or requirements with respect to loans to one borrower, dividends, permissible investments and lending activities, liquidity, transactions with affiliates and community reinvestment.  New Jersey savings banks are also subject to reserve requirements imposed by the Federal Reserve Board.  Both state and federal law regulate a savings bank’s relationship with its depositors and borrowers, especially in such matters as the ownership of savings accounts and the form and content of Kearny Bank’s mortgage documents.

Kearny Bank must file reports with the NJDBI and FDIC concerning its activities and financial condition and obtain regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions.  The NJDBI and FDIC regularly examine Kearny Bank and prepare reports to Kearny Bank’s Board of Directors on deficiencies, if any, found in its operations. The agencies have substantial discretion to take enforcement action with respect to an institution that fails to comply with applicable regulatory requirements or engages in violations of law or unsafe and unsound practices.  Such actions can include, among others, the issuance of a cease and desist order, assessment of civil money penalties, removal of officers and directors and the appointment of a receiver or conservator.

Activities and Powers.  Kearny Bank derives its lending, investment and other powers primarily from the applicable provisions of the New Jersey Banking Act and the related regulations.  Under these laws and regulations, New Jersey savings banks, including Kearny Bank, generally may invest in real estate mortgages; consumer and commercial loans; specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; certain types of corporate equity securities and certain other assets.

A savings bank may also invest pursuant to a “leeway” power that permits investments not otherwise permitted by the New Jersey Banking Act. “Leeway” investments must comply with a number of limitations on the individual and aggregate amounts of “leeway” investments. New Jersey savings banks may also exercise those powers, rights, benefits or privileges authorized for national banks, federal savings banks or federal savings associations, or their subsidiaries.  New Jersey savings banks may exercise powers, rights, benefits and privileges of out-of-state banks, savings banks and savings associations, or their subsidiaries, provided that prior approval by the NJDBI is required before exercising any such power, right, benefit or privilege. The exercise of these lending, investment and activity powers is further limited by federal law and the related regulations.  See “—Activity Restrictions on State-Chartered Banks” below.

Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities as principal and equity investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, unless such activities and investments are specifically exempted by law or approved by the FDIC.

 

33


Before engaging as principal in a new activity that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC, subject to certain specified exceptions.  The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC’s Deposit Insurance Fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a “financial subsidiary” are subject to additional restrictions. Equity investments by state banks are generally limited to those permissible for national banks subject to certain exceptions.

Federal Deposit Insurance.  Kearny Bank’s deposits are insured to applicable limits by the FDIC.  Effective in 2010, the maximum deposit insurance amount was permanently increased from $100,000 to $250,000.

The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund.  Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments.  Assessments for institutions of less than $10 billion of assets, such as Kearny Bank, are now based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure of an institution’s failure within three years.  That system, effective July 1, 2016, replaced the previous system under which institutions were placed into risk categories.

Federal legislation required the FDIC to revise its procedures to base assessments upon each insured institution’s total assets less tangible equity instead of deposits.  The FDIC finalized a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.  In conjunction with the Deposit Insurance Fund’s reserve ratio achieving 1.15%, the assessment range was reduced for insured institutions of less than $10 billion of total assets to 1.5 basis points to 30 basis points, effective July 1, 2016.

Federal legislation increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.  The FDIC must seek to achieve the 1.35% ratio by September 30, 2020.  The law requires insured institutions with assets of $10 billion or more to fund the increase from 1.15% to 1.35% and, effective July 1, 2016, such institutions are subject to a surcharge to achieve that goal.  The legislation eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, and the FDIC has exercised that discretion by establishing a long-range fund ratio of 2.0%.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019.  For the quarter ended June 30, 2017, the annualized FICO assessment was equal to 0.54 basis point of total assets less tangible capital.

The FDIC has authority to increase insurance assessments.  Any significant increases would have an adverse effect on the operating expenses and results of operations of Kearny Bank.  Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.  We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

Regulatory Capital Requirements.  FDIC regulations require nonmember banks to meet several minimum capital standards:  a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio.  The present capital requirements were effective January 1, 2015 and represent increased standards over the previous requirements.  The current requirements implement recommendations of the Basel Committee on Banking Supervision and certain requirements of federal law.

The capital standards require the maintenance of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets of at least 4.5%, 6% and 8%, respectively, and a leverage ratio of at least 4% Tier 1 capital.  Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings.  Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital.  Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries.  Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital.  Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.  Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values.  Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.  

 

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In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset.  Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to equity interests depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.  The capital conservation buffer effective for calendar 2017 is 1.25%.

In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

Prompt Corrective Regulatory Action.  Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

The FDIC has adopted regulations to implement the prompt corrective action legislation. The regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1, 2015.  An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.  These actions are in addition to other discretionary supervisory or enforcement actions that the FDIC may take.

Dividend Limitations.  Federal regulations impose various restrictions or requirements on Kearny Bank to pay dividends to Kearny Financial.  An institution that is a subsidiary of a savings and loan holding company, such as Kearny Bank, must file notice with the Federal Reserve Board at least thirty days before paying a dividend.  The Federal Reserve Board may disapprove a notice if: (i) the savings institution would be undercapitalized following the capital distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in any statute, regulation, enforcement action or agreement or condition imposed in connection with an application.

New Jersey law specifies that no dividend may be paid if the dividend would impair the capital stock of the savings bank.  In addition, no dividend may be paid unless the savings bank would, after payment of the dividend, have a surplus of at least 50% of its capital stock (or if the payment of dividend would not reduce surplus).

Transactions with Related Parties.  Transactions between a savings institution (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of an institution is any company or entity that controls, is controlled by or is under common control with the institution.  In a holding company context, the parent holding

 

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company and any companies which are controlled by such parent holding company are affiliates of the institution.  Generally, Section 23A of the Federal Reserve Act limits the extent to which the institution or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes an extension of credit, purchase of assets, issuance of a guarantee or letter of credit and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.

Kearny Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board.  Among other things and subject to certain exceptions, these provisions generally require that extensions of credit to insiders:

 

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

 

not to exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Kearny Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Kearny Bank’s Board of Directors.  Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Community Reinvestment Act.  Under the CRA, every insured depository institution, including Kearny Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community.  The CRA requires the FDIC to assess the depository institution’s record of meeting the credit needs of its community and to consider such record in its evaluation of certain applications by such institution, such as a merger or the establishment of a branch office by Kearny Bank.  The FDIC may use an unsatisfactory CRA examination rating as the basis for the denial of an application.  Kearny Bank received a “satisfactory” CRA rating from its then primary federal regulator, the Office of the Comptroller of the Currency in its most recent CRA examination.

Federal Home Loan Bank System.  Kearny Bank is a member of the FHLB of New York, which is one of eleven regional Federal Home Loan Banks.  Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the FHLB System.  It makes loans to members pursuant to policies and procedures established by the Board of Directors of the FHLB.

As a member, Kearny Bank is required to purchase and maintain stock in the FHLB of New York in specified amounts.  The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral and limiting total advances to a member.

The FHLB of New York may pay periodic dividends to members.  These dividends are affected by factors such as the FHLB’s operating results and statutory responsibilities that may be imposed such as providing certain funding for affordable housing and interest subsidies on advances targeted for low- and moderate-income housing projects.  The payment of such dividends or any particular amount cannot be assumed.

Other Laws and Regulations

Interest and other charges collected or contracted for by Kearny Bank are subject to state usury laws and federal laws concerning interest rates.  Kearny Bank’s operations are also subject to federal laws (and their implementing regulations) applicable to credit transactions, such as the:

 

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

 

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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

 

Truth in Savings Act, prescribing disclosure and advertising requirements with respect to deposit accounts.

The operations of Kearny Bank also are subject to the:

 

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

Electronic Funds Transfer Act and Regulation E promulgated thereunder, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

USA PATRIOT Act, which requires institutions operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

 

Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Regulation of Kearny Financial

General.  Kearny Financial is a savings and loan holding company within the meaning of federal law.  Kearny Financial maintained its savings and loan holding company status (rather than becoming a bank holding company), notwithstanding the conversion of Kearny Bank to a New Jersey savings bank charter, by exercising an election available to it under federal law.  Kearny Bank is required to file reports with, and is subject to regulation and examination by, the Federal Reserve Board.  Kearny Financial must also obtain regulatory approval from the Federal Reserve Board before engaging in certain transactions, such as mergers with or acquisitions of other financial institutions.  In addition, the Federal Reserve Board has enforcement authority over Kearny Financial and any non-depository subsidiaries.  This permits the Federal Reserve Board to restrict or prohibit activities that are determined to pose a serious risk to Kearny Bank.  This regulation is intended primarily for the protection of the depositors and not for the benefit of stockholders of Kearny Financial.

The Federal Reserve Board has indicated that, to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of federal law, its approach is to apply to savings and loan holding companies its supervisory approach to the supervision of bank holding companies.  The stated objective of the Federal Reserve Board is to ensure the savings and loan holding company and its non-depository subsidiaries are effectively supervised, can serve as a source of strength for, and do not threaten the safety and soundness of, the subsidiary depository institutions.

Nonbanking Activities.  As a savings and loan holding company, Kearny Financial Bancorp is permitted to engage in those activities permissible for financial holding companies (if certain criteria are met and an election is submitted) and for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act and certain additional activities authorized by federal regulations, subject to the approval of the Federal Reserve Board.

 

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Mergers and Acquisitions.  Kearny Financial must obtain approval from the Federal Reserve Board before acquiring, directly or indirectly, more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation, or purchase of its assets.  Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC.  In evaluating an application for Kearny Financial to acquire control of a savings institution, the Federal Reserve Board considers factors such as the financial and managerial resources and future prospects of Kearny Financial and the target institution, the effect of the acquisition on the risk to the deposit insurance fund, the convenience and the needs of the community and competitive factors.

Consolidated Capital Requirements.  Savings and loan holding companies have historically not been subjected to consolidated regulatory capital requirements.  Federal legislation, however, required the Federal Reserve Board to promulgate consolidated capital requirements for bank and savings and loan holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions.  Instruments such as cumulative preferred stock and trust-preferred securities, which were previously includable as Tier 1 capital (within limit) by bank holding companies are no longer includable as Tier 1 capital, subject to certain grandfathering.  The previously discussed final rule regarding regulatory capital requirements implemented the legislative directives as to holding company capital requirements.  Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to savings and loan holding companies as of January 1, 2015.  As is the case with institutions themselves, the capital conservation buffer is being phased in between 2016 and 2019.

Source of Strength Doctrine; Dividends.  Federal law extended the “source of strength” doctrine, which has long applied to bank holding companies, to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the “source of strength” policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress. Further, the Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has also applied to savings and loan holding companies.  In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.  Regulatory guidance provides for prior consultation with Federal Reserve supervisory staff as to dividends in certain circumstances such as where net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the overall rate of earnings retention is inconsistent with capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary depository institution becomes undercapitalized. In addition, a subsidiary institution of a savings and loan holding company must file prior notice with the Federal Reserve Board, and receive its non-objection, before paying dividends to the parent savings and loan holding company.  Federal Reserve Board guidance also provides for regulatory review of certain stock redemption and repurchase proposals by holding companies.  These regulatory policies could affect the ability of Kearny Financial to pay dividends, engage in stock redemptions or repurchases or otherwise engage in capital distributions.

Qualified Thrift Lender Test.  In order for Kearny Financial to be regulated by the Federal Reserve Board as a savings and loan holding company (rather than as a bank holding company), Kearny Bank must remain a “qualified thrift lender” under applicable law or satisfy the “domestic building and loan association” test under the Internal Revenue Code.  Under the qualified thrift lender test, an institution is required to maintain at least 65% of its “portfolio assets” (total assets less:  (i) specified liquid assets up to 20% of total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period.

Acquisition of Control.  Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company.  An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or as otherwise defined by the Federal Reserve Board.  Under the Change in Bank Control Act, the Federal Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti‑trust effects of the acquisition.  Any company that so acquires control is then subject to regulation as a savings and loan holding company.

 

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Item 1A. Risk Factors

The following is a summary of what management currently believes to be the material risks related to an investment in the Company’s securities.

Changes in interest rates may adversely affect our profitability and financial condition.

We derive our income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income. From an interest rate risk perspective, we have generally been liability sensitive, which indicates that liabilities generally re-price faster than assets.

In response to improving economic conditions, the Federal Reserve Board’s Open Market Committee has slowly increased its federal funds rate target from a range of 0.00% - 0.25% that was in effect for several years to the current target range of 1.00% - 1.25% that was in effect at June 30, 2017.  Given our liability sensitivity, our net interest rate spread and net interest margin are at risk of being reduced due to potential increases in our cost of funds that may outpace any increases in our yield on interest-earning assets.

Interest rates also affect how much money we lend. For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease. In addition, changes in interest rates can affect the average life of loans and securities. For example, a reduction in interest rates generally results in increased prepayments of loans and mortgage-backed securities, as borrowers refinance their debt in order to reduce their borrowing cost. This causes reinvestment risk, because we generally are not able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities in a declining rate environment.

Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities as well as the value of our derivatives portfolios.  In particular, the unrealized gains and losses on securities available for sale and changes in the fair value of interest rate derivatives serving as cash flows hedges are reported, net of tax, in accumulated other comprehensive income which is a component of stockholders’ equity.  Consequently, declines in the fair value of these instruments resulting from changes in market interest rates may adversely affect stockholders’ equity.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the required amount of the allowance for loan losses, we evaluate certain loans individually and establish loan loss allowances for specifically identified impairments. For all non-impaired loans, including those not individually reviewed, we estimate losses and establish loan loss allowances based upon historical and environmental loss factors. If the assumptions used in our calculation methodology are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in further additions to our allowance. Our allowance for loan losses was 0.90% of total loans at June 30, 2017 and significant additions to our allowance could materially decrease our net income.  

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company for our first fiscal year after December 15, 2019.  This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.  This will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses.  Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

 

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A significant portion of our assets consists of investment securities, which generally have lower yields than loans, and we classify a significant portion of our investment securities as available for sale, which creates potential volatility in our equity and may have an adverse impact on our net income.

As of June 30, 2017, our securities portfolio, which includes both mortgage-backed and non-mortgage-backed debt securities, totaled $1.11 billion, or 23.0% of our total assets.  Investment securities typically have lower yields than loans. For the year ended June 30, 2017, the weighted average yield of our investment securities portfolio was 2.19%, as compared to 3.76% for our loan portfolio. Accordingly, our net interest margin is lower than it would have been if a higher proportion of our interest-earning assets consisted of loans. Additionally, at June 30, 2017, $613.8 million, or 55.4% of our investment securities, are classified as available for sale and reported at fair value with unrealized gains or losses excluded from earnings and reported in other comprehensive income, which affects our reported equity. Accordingly, given the significant size of the investment securities portfolio classified as available for sale and due to possible mark-to-market adjustments of that portion of the portfolio resulting from market conditions, we may experience greater volatility in the value of reported equity. Moreover, given that we actively manage our investment securities portfolio classified as available for sale, we may sell securities which could result in a realized loss, thereby reducing our net income.

Our increased commercial lending exposes us to additional risk.

Our commercial loans increased to 79.3% of total loans at June 30, 2017 from 54.2% of total loans at June 30, 2013. Our commercial lending operations include commercial mortgage loans, comprising multi-family loans and non-residential mortgage loans, as well as commercial business loans. We intend to continue increasing commercial lending as part of our planned transition from a traditional thrift to a full-service community bank. We have also increased our commercial lending staff and are seeking additional commercial lenders to help grow the commercial loan portfolio. Our increased commercial lending, however, exposes us to greater risks than one- to four-family residential lending. Unlike single-family, owner-occupied residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income and are secured by real property whose value tends to be more easily ascertainable and realizable, the repayment of commercial loans typically is dependent on the successful operation and income stream of the borrower, which can be significantly affected by economic conditions, and are secured, if at all, by collateral that is more difficult to value or sell or by collateral which may depreciate in value. In addition, commercial loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family mortgage loans, which increases the financial impact of a borrower’s default.

Our loan portfolio contains a significant portion of loans that are unseasoned. It is difficult to evaluate the future performance of unseasoned loans.

Our loan portfolio has grown to $3.25 billion at June 30, 2017, from $1.36 billion at June 30, 2013. This increase is largely attributable to increases in commercial loans resulting from internal loan originations, as well as purchases and participations in loans originated by other financial institutions. It is difficult to assess the future performance of these loans recently added to our portfolio because our relatively limited experience with such loans does not provide us with a significant payment history from which to evaluate future collectability. These loans may experience higher delinquency or charge-off levels than our historical loan portfolio experience, which could adversely affect our future performance.

Because we intend to continue to increase our commercial business loan originations, our credit risk will increase.

Kearny Bank historically has not had a significant portfolio of commercial business loans. We intend to increase our originations of commercial business loans, including C&I and SBA loans, which generally have more risk than both one- to four-family residential and commercial mortgage loans. Since repayment of commercial business loans may depend on the successful operation of the borrower’s business, repayment of such loans can be affected by adverse conditions in the real estate market or the local economy. Because we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for loan losses because of the increased risk characteristics associated with these types of loans. Any such increase to our allowance for loan losses would adversely affect our earnings.

Income from secondary mortgage market operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings.

A component of our business strategy is to sell a significant portion of residential mortgage loans originated into the secondary market, earning non-interest income in the form of gains on sale. For the year ended June 30, 2017, sale gains attributable to the sale of residential mortgage loans totaled $713,000 or approximately 6.3% of our non-interest income.  When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand. If the residential mortgage loan demand decreases or we are unable to sell such loans for an adequate profit, then our non-interest income will likely decline which would adversely affect our earnings.

 

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Our reliance on wholesale deposits could adversely affect our liquidity and operating results.

Among other sources of funds, we rely on wholesale deposits, including “brokered” deposits and “non-brokered” deposits acquired through listing services, to provide funds with which to make loans and provide for other liquidity needs. On June 30, 2017, brokered deposits totaled $244.2 million, or approximately 8.3% of total deposits. Our primary source for brokered money market deposits is the Promontory IND program, a brokered deposit network that is sourced by Promontory from large retail and institutional brokerage firms whose individual clients seek to have a portion of their investments held in interest-bearing accounts at FDIC-insured institutions. Our Promontory IND deposits totaled $222.6 million at June 30, 2017. These funds were augmented by a small portfolio of longer-term, brokered certificates of deposit whose total balances were $21.6 million at June 30, 2017.  As of that same date, the outstanding balance of certificates of deposit acquired through listing services totaled $101.4 million or 3.3% of total deposits.

Generally wholesale deposits may not be as stable deposits acquired through traditional retail channels.  In the future, those depositors may not replace their deposits with us as they mature, or we may have to pay a higher rate of interest to keep those deposits or to replace them with other deposits or other sources of funds. Not being able to maintain or replace those deposits as they mature would adversely affect our liquidity. Paying higher deposit rates to maintain or replace brokered deposits would adversely affect our net interest margin and operating results.

We may be required to record impairment charges with respect to our investment securities portfolio.

We review our securities portfolio at the end of each quarter to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the impairment is other than temporary. If we conclude that the impairment is other than temporary, we are required to write down the value of that security. The “credit-related” portion of the impairment is recognized through earnings whereas the “noncredit-related” portion is generally recognized through other comprehensive income in the circumstances where the future sale of the security is unlikely.

At June 30, 2017, we had investment securities with fair values of approximately $1.11 billion on which we had approximately $6.5 million in gross unrealized losses. All unrealized losses on investment securities at June 30, 2017 represented temporary impairments of value. However, if changes in the expected cash flows of these securities and/or prolonged price declines result in our concluding in future periods that the impairment of these securities is other than temporary, we will be required to record an impairment charge against income equal to the credit-related impairment.

Our investments in corporate and municipal debt securities, trust preferred and subordinated debt securities and collateralized loan obligations expose us to additional credit risks.

The composition and allocation of our investment portfolio has historically emphasized U.S. agency mortgage-backed securities and U.S. agency debentures. While such assets remain a significant component of our investment portfolio at June 30, 2017, prior enhancements to our investment policies, strategies and infrastructure have enabled us to diversify the composition and allocation of our securities portfolio. Such diversification has included investing in corporate debt and bank-qualified municipal obligations, trust preferred and subordinated debt securities issued by financial institutions and collateralized loan obligations. With the exception of collateralized loan obligations, these securities are generally backed only by the credit of their issuers while investments in collateralized loan obligations generally rely on the structural characteristics of an individual tranche within a larger investment vehicle to protect the investor from credit losses arising from borrowers defaulting on the underlying securitized loans.

While we have invested primarily in investment grade securities, these securities are not backed by the federal government and expose us to a greater degree of credit risk than U.S. agency securities. Any decline in the credit quality of these securities exposes us to the risk that the market value of the securities could decrease which may require us to write down their value and could lead to a possible default in payment.

We hold certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings would decrease.

At June 30, 2017, we had approximately $108.9 million in intangible assets on our balance sheet comprising $108.6 million of goodwill and $292,000 of core deposit intangibles. We are required to periodically test our goodwill and identifiable intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common stock, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common stock or our regulatory capital levels, but recognition of such an impairment

 

41


loss could significantly restrict Kearny Bank’s ability to make dividend payments to Kearny Financial and therefore adversely impact the Company’s ability to pay dividends to stockholders.

Financial reform legislation could substantially increase our compliance burden and costs and necessitate changes in the conduct of our business.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is having a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the Dodd-Frank Act are being implemented over time. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear and may not be known for many years. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.

Further, we may be required to invest significant management attention and resources to evaluate and continue to make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.

Strong competition within our market area may limit our growth and profitability.

Competition is intense within the banking and financial services industry in New Jersey and New York. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources, higher lending limits and offer services that we do not or cannot provide. This competition makes it more difficult for us to originate new loans and attract and retain deposits. Price competition for loans may result in originating fewer loans, or earning less on our loans and price competition for deposits may result in a reduction of our deposit base or paying more on our deposits.

Our business is geographically concentrated in New Jersey and New York and a downturn in economic conditions within the region could adversely affect our profitability.

A substantial majority of our loans are to individuals and businesses in New Jersey and New York. A decline in the economy of the region could have an adverse impact on our earnings. We have a significant amount of real estate mortgages, such that continuing decreases in local real estate values may adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which may adversely influence our profitability.

The long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.

The federal banking agencies have recently adopted proposals that have substantially amended the regulatory risk-based capital rules applicable to Kearny Bank and Kearny Financial Corp. The amendments implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The new rules apply regulatory capital requirements to both the Bank and the consolidated Company.  The amended rules included new minimum risk-based capital and leverage ratios, which became effective in January 2015, with certain requirements to be phased in beginning in 2016, and refined the definition of what constitutes “capital” for purposes of calculating those ratios.

The new minimum capital level requirements applicable to Kearny Bank and Kearny Financial include: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The amended rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

42


The Basel III changes and other regulatory capital requirements resulted in generally higher regulatory capital standards. The application of more stringent capital requirements to the Bank and the consolidated Company could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could further limit our ability to make distributions, including paying out dividends or buying back shares.

A natural disaster could harm our business.

Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the local economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. The occurrence of a natural disaster could result in one or more of the following: (i) an increase in loan delinquencies; (ii) an increase in problem assets and foreclosures; (iii) a decrease in the demand for our products and services; or (iv) a decrease in the value of the collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

Acts of terrorism and other external events could impact our ability to conduct business.

Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems. Additionally, the metropolitan New York area and northern New Jersey remain central targets for potential acts of terrorism. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.

We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.

Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.

Our risk management framework is designed to effectively manage and mitigate risk while minimizing exposure to potential losses. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.

We could be adversely affected by failure in our internal controls.

A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that customers, regulators and investors may have of us. We continue to devote a significant amount of effort, time and resources to continually strengthening our controls and ensuring compliance with complex accounting standards and banking regulations.

 

43


Risks associated with system failures, service interruptions or other performance exceptions could negatively affect our earnings.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the effect of system failures, service interruptions or other performance exceptions, but such events may still occur or may not be adequately addressed if they do occur. In addition, performance failures or other exceptions of our customer-facing technologies could deter customers from using our products and services.

In addition, we outsource a majority of our data processing to certain third-party service providers. If these service providers encounter difficulties, or if we have difficulty communicating with them, our ability to timely and accurately process and account for transactions could be adversely affected.

The occurrence of any system failures, service interruptions or other performance exceptions could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

Risks associated with cyber-security could negatively affect our earnings.

The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions

We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.

We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational disruption.

Our customers are also the target of cyber-attacks and identity theft. Large scale identity theft could result in customers' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.

The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

Our inability to effectively deploy our excess capital may negatively affect return on equity and shareholder value.

Our successful second step conversion and stock offering during fiscal 2015 resulted in the Company holding a significant level of excess capital in relation to its overall asset size and risk profile.  Our business plan calls for us to execute a variety of strategies to deploy this excess capital including, but not limited to, continued organic balance sheet growth and diversification, implementation of share repurchase plans and payment of regular cash dividends.  Additionally, we will carefully consider acquisition opportunities to further deploy our excess capital when we expect such opportunities to significantly enhance long-term shareholder value.  Our inability to effectively and timely deploy our excess capital through these strategies may constrain growth in earnings and return on equity and thereby diminish potential growth in shareholder value.  

Acquisitions may disrupt our business and dilute stockholder value.

We regularly evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded products and services.

 

44


Future acquisitions of other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:

 

difficulty in estimating the value of the target company;

 

payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;

 

potential exposure to unknown or contingent liabilities of the target company;

 

exposure to potential asset quality problems of the target company;

 

potential volatility in reported income associated with goodwill impairment losses;

 

difficulty and expense of integrating the operations and personnel of the target company;

 

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits;

 

potential disruption to our business;

 

potential diversion of our management’s time and attention;

 

possible loss of key employees and customers of the target company; and

 

potential changes in banking or tax laws or regulations that may affect the target company.

Our inability to achieve profitability on new branches may negatively affect our earnings.

We have expanded our presence throughout our market area and we intend to pursue further expansion through de novo branching or the purchase of branches from other financial institutions. The profitability of our expansion strategy will depend on whether the income that we generate from the new branches will offset the increased expenses resulting from operating these branches. We expect that it may take a period of time before these branches can become profitable, especially in areas in which we do not have an established presence. During this period, the expense of operating these branches may negatively affect our net income.

Item 1B. Unresolved Staff Comments

Not applicable.

 

 

 

45


Item 2. Properties

The Company and the Bank conduct business from their administrative headquarters at 120 Passaic Avenue in Fairfield, New Jersey and 42 branch offices located in Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic and Union counties, New Jersey and Kings and Richmond counties, New York.  Eighteen of our offices are leased with remaining terms between one and twelve years.  At June 30, 2017, our net investment in property and equipment totaled $39.6 million.  The following table sets forth certain information relating to our properties as of June 30, 2017.  The net book values reported include our investment in land, building and/or leasehold improvements by property location.

 

Office Location

 

Year

Opened

 

 

Net Book

Value at

June 30, 2017

(In Thousands)

 

 

Square

Footage

 

 

Owned/

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Executive Office:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120 Passaic Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fairfield, New Jersey

 

 

2004

 

 

$

9,698

 

 

 

53,000

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative Offices & Branch:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1903 Highway 35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oakhurst, New Jersey

 

 

2008

 

 

 

318

 

 

 

15,200

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Main Branch Office:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614 Kearny Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kearny, New Jersey

 

 

1928

 

 

 

764

 

 

 

6,764

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Branches:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

301 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allenhurst, New Jersey

 

 

2011

 

 

 

323

 

 

 

3,600

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

611 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Belmar, New Jersey

 

 

2002

 

 

 

3

 

 

 

3,200

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

425 Route 9 & Ocean Gate Drive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bayville, New Jersey

 

 

1973

 

 

 

106

 

 

 

3,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

501 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bradley Beach, New Jersey

 

 

2001

 

 

 

684

 

 

 

3,100

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

689 Fifth Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brooklyn, New York 11215

 

 

1923

 

 

 

764

 

 

 

4,900

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

417 Bloomfield Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Caldwell, New Jersey

 

 

1968

 

 

 

292

 

 

 

4,400

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20 Willow Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East Rutherford, New Jersey

 

 

1969

 

 

 

24

 

 

 

3,100

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

534 Harrison Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Harrison, New Jersey

 

 

1995

 

 

 

569

 

 

 

3,000

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1353 Ringwood Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Haskell, New Jersey

 

 

1996

 

 

 

-

 

 

 

2,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

718B Buckingham Drive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lakewood, New Jersey

 

 

2008

 

 

 

4

 

 

 

2,800

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

630 North Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lanoka Harbor, New Jersey

 

 

2005

 

 

 

1,800

 

 

 

3,200

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46


 

Office Location

 

Year

Opened

 

 

Net Book

Value at

June 30, 2017

(In Thousands)

 

 

Square

Footage

 

 

Owned/

Leased

700 Branch Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Little Silver, New Jersey

 

 

2001

 

 

 

36

 

 

 

2,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

444 Ocean Boulevard North

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Branch, New Jersey

 

 

2004

 

 

 

-

 

 

 

1,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

627 Second Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Branch, New Jersey

 

 

1998

 

 

 

547

 

 

 

3,200

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

307 Stuyvesant Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lyndhurst, New Jersey

 

 

1970

 

 

 

1,649

 

 

 

3,300

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

155 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manasquan, New Jersey

 

 

1998

 

 

 

-

 

 

 

3,000

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

270 Ryders Lane

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Milltown, New Jersey

 

 

1989

 

 

 

8

 

 

 

3,600

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

339 Main Road

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Montville, New Jersey

 

 

1996

 

 

 

3

 

 

 

1,850

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

300 West Sylvania Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neptune City, New Jersey

 

 

2000

 

 

 

95

 

 

 

3,000

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119 Paris Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northvale, New Jersey

 

 

1965

 

 

 

239

 

 

 

1,750

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80 Ridge Road

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North Arlington, New Jersey

 

 

1952

 

 

 

93

 

 

 

3,500

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61 Main Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Grove, New Jersey

 

 

2002

 

 

 

8

 

 

 

2,800

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

510 State Highway 34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Old Bridge Township, New Jersey

 

 

2002

 

 

 

795

 

 

 

2,400

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

207 Old Tappan Road

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Old Tappan, New Jersey

 

 

1973

 

 

 

339

 

 

 

2,200

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

267 Changebridge Road

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pine Brook, New Jersey

 

 

1974

 

 

 

342

 

 

 

3,600

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2201 Bridge Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Pleasant, New Jersey

 

 

2001

 

 

 

32

 

 

 

3,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

917 Route 23 South

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pompton Plains, New Jersey

 

 

2009

 

 

 

969

 

 

 

2,400

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

653 Westwood Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

River Vale, New Jersey

 

 

1965

 

 

 

527

 

 

 

1,600

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

252 Park Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rutherford, New Jersey

 

 

1974

 

 

 

1,328

 

 

 

1,984

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

520 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spotswood, New Jersey

 

 

1979

 

 

 

124

 

 

 

2,400

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47


 

Office Location

 

Year

Opened

 

 

Net Book

Value at

June 30, 2017

(In Thousands)

 

 

Square

Footage

 

 

Owned/

Leased

700 Allaire Road

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spring Lake Heights, New Jersey

 

 

1999

 

 

 

6

 

 

 

2,500

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130 Mountain Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Springfield, New Jersey

 

 

1991

 

 

 

855

 

 

 

6,500

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

339 Sand Lane

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Staten Island, New York 10305

 

 

2009

 

 

 

50

 

 

 

1,985

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

827 Fischer Boulevard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Toms River, New Jersey

 

 

1996

 

 

 

506

 

 

 

3,500

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2100 Hooper Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Toms River, New Jersey

 

 

2008

 

 

 

10

 

 

 

2,000

 

 

Leased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2200 Highway 35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wall Township, New Jersey

 

 

1997

 

 

 

830

 

 

 

5,000

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

487 Pleasant Valley Way

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West Orange, New Jersey

 

 

1971

 

 

 

126

 

 

 

3,000

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

216 Main Street

 

 

 

 

 

 

 

 

 

 

 

 

 

 

West Orange, New Jersey

 

 

1975

 

 

 

256

 

 

 

2,400

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

250 Valley Boulevard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wood-Ridge, New Jersey

 

 

1957

 

 

 

1,419

 

 

 

9,500

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

661 Wyckoff Avenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wyckoff, New Jersey

 

 

2002

 

 

 

2,176

 

 

 

6,300

 

 

Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 3. Legal Proceedings

We are, from time to time, party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business.  At June 30, 2017, there were no lawsuits pending or known to be contemplated against us that would be expected to have a material effect on operations or income.

Item 4. Mine Safety Disclosures

Not applicable.

 

 

 

48


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information.  The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “KRNY”.  The table below shows the reported high and low prices of the common stock and dividends paid per public share for each quarter during the last two fiscal years.

 

 

High

 

 

Low

 

 

Dividends

Paid

 

Fiscal Year 2017

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2017

$

15.63

 

 

$

13.75

 

 

$

0.03

 

Quarter ended March 31, 2017

$

15.85

 

 

$

14.25

 

 

$

0.03

 

Quarter ended December 31, 2016

$

16.10

 

 

$

13.45

 

 

$

0.02

 

Quarter ended September 30, 2016

$

14.09

 

 

$

12.40

 

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2016

 

 

 

 

 

 

 

 

 

 

 

Quarter ended June 30, 2016

$

13.42

 

 

$

12.14

 

 

$

0.02

 

Quarter ended March 31, 2016

$

12.67

 

 

$

11.31

 

 

$

0.02

 

Quarter ended December 31, 2015

$

13.00

 

 

$

11.23

 

 

$

0.02

 

Quarter ended September 30, 2015

$

11.90

 

 

$

11.01

 

 

$

0.02

 

 

Declarations of dividends by the Board of Directors depend on a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions. The timing, frequency and amount of dividends are determined by the Board of Directors.

The Company’s ability to pay dividends may also depend on the receipt of dividends from the Bank, which is subject to a variety of limitations under federal banking regulations regarding the payment of dividends.  For discussion of corporate and regulatory limitations applicable to the payment of dividends, see “Item 1. Business-Regulation”.

As of August 24, 2017, there were 3,593 registered holders of record of the Company’s common stock, plus approximately 5,165 beneficial (street name) owners.

(b) Use of Proceeds.  Not applicable.

(c) Issuer Purchases of Equity Securities.  Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of the fiscal year ended June 30, 2017.

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced Plans

or Programs (1)

 

 

Maximum

Number of Shares

that May Yet Be

Purchased Under

the  Plans or

Programs

 

April 1-30, 2017

 

 

627,500

 

 

$

15.00

 

 

 

627,500

 

 

 

1,003,421

 

May 1-31, 2017

 

 

1,003,421

 

 

$

14.47

 

 

 

1,003,421

 

 

 

8,559,084

 

June 1-30, 2017

 

 

1,240,000

 

 

$

14.30

 

 

 

1,240,000

 

 

 

7,319,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2,870,921

 

 

$

14.51

 

 

 

2,870,921

 

 

 

7,319,084

 

 

(1)

On May 24, 2017, the Company announced the authorization of a second stock repurchase plan for up to 8,559,084 shares or 10% of shares then outstanding. This plan has no expiration date. The plan commenced upon the completion of the first stock repurchase plan, which was announced on May 20, 2016, and authorized the purchase of up to 9,352,809 shares or 10% of shares then outstanding. The first stock repurchase plan had no expiration date.

Stock Performance Graph.  The following stock performance graph compares the cumulative total shareholder return on the Company’s common stock with (a) the cumulative total shareholder return on stocks included in the NASDAQ Composite Index, (b) the cumulative total shareholder return on stocks included in the SNL Thrift $1 Billion - $5 Billion Index and (c) the cumulative total shareholder return on stocks included in the SNL Thrift MHC Index, in each case assuming an investment of $100.00 as of June 30, 2012.  The cumulative total returns for the indices and the Company are computed assuming the reinvestment of dividends that were

 

49


paid during the period. It is assumed that the investment in the Company’s common stock was made at the initial public offering price of $10.00 per share.

 

 

 

At June 30,

 

 

2012

 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

Kearny Financial Corp.

$

100

 

 

$

108

 

 

$

156

 

 

$

159

 

 

$

180

 

 

$

214

 

NASDAQ Composite

 

100

 

 

 

118

 

 

 

154

 

 

 

177

 

 

 

174

 

 

 

223

 

SNL Thrift $1B - $5B Index

 

100

 

 

 

122

 

 

 

148

 

 

 

170

 

 

 

184

 

 

 

242

 

SNL Thrift MHC Index

 

100

 

 

 

127

 

 

 

170

 

 

 

197

 

 

 

208

 

 

 

212

 

 

The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The SNL indices were prepared by SNL Financial LC, Charlottesville, Virginia. The SNL Thrift $1 Billion - $5 Billion Index includes all thrift institutions with total assets between $1.0 billion and $5.0 billion. The SNL Thrift MHC Index includes all publicly traded mutual holding companies.

There can be no assurance that the Company’s future stock performance will be the same or similar to the historical stock performance shown in the graph above. The Company neither makes nor endorses any predictions as to stock performance.

 

 

 

50


Item 6. Selected Financial Data

The following financial information and other data in this section are derived from the Company’s audited consolidated financial statements and should be read together therewith.

 

 

At June 30,

 

 

 

2017

 

 

 

 

2016

 

 

 

 

2015

 

 

 

 

2014

 

 

 

 

2013

 

 

 

(In Thousands)

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

$

4,818,127

 

 

 

$

4,500,059

 

 

 

$

4,237,187

 

 

 

$

3,510,009

 

 

 

$

3,145,360

 

 

Net loans receivable

 

3,215,975

 

 

 

 

2,649,758

 

 

 

 

2,087,258

 

 

 

 

1,729,084

 

 

 

 

1,349,975

 

 

Debt securities available for sale

 

444,497

 

 

 

 

389,910

 

 

 

 

420,660

 

 

 

 

407,898

 

 

 

 

300,122

 

 

Mortgage-backed securities available for sale

 

169,263

 

 

 

 

283,627

 

 

 

 

346,619

 

 

 

 

437,223

 

 

 

 

780,652

 

 

Debt securities held to maturity

 

144,713

 

 

 

 

167,171

 

 

 

 

219,862

 

 

 

 

216,414

 

 

 

 

210,015

 

 

Mortgage-backed securities held to maturity

 

348,608

 

 

 

 

410,115

 

 

 

 

443,479

 

 

 

 

295,658

 

 

 

 

101,114

 

 

Cash and equivalents

 

78,237

 

 

 

 

199,200

 

 

 

 

340,136

 

 

 

 

135,034

 

 

 

 

127,034

 

 

Goodwill

 

108,591

 

 

 

 

108,591

 

 

 

 

108,591

 

 

 

 

108,591

 

 

 

 

108,591

 

 

Deposits

 

2,930,127

 

 

 

 

2,694,833

 

 

 

 

2,465,650

 

 

 

 

2,479,941

 

 

 

 

2,370,508

 

 

Borrowings

 

806,228

 

 

 

 

614,423

 

 

 

 

571,499

 

 

 

 

512,257

 

 

 

 

287,695

 

 

Stockholders' equity

 

1,057,181

 

 

 

 

1,147,629

 

 

 

 

1,167,375

 

 

 

 

494,676

 

 

 

 

467,707

 

 

 

 

For the Years Ended June 30,

 

 

 

2017

 

 

 

 

2016

 

 

 

 

2015

 

 

 

 

2014

 

 

 

 

2013

 

 

 

(In Thousands, Except Percentage and Per Share Amounts)

 

 

Summary of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

139,093

 

 

 

$

126,888

 

 

 

$

106,039

 

 

 

$

95,819

 

 

 

$

88,258

 

 

Interest expense

 

36,519

 

 

 

 

31,903

 

 

 

 

25,431

 

 

 

 

21,998

 

 

 

 

22,001

 

 

Net interest income

 

102,574

 

 

 

 

94,985

 

 

 

 

80,608

 

 

 

 

73,821

 

 

 

 

66,257

 

 

Provision for loan losses

 

5,381

 

 

 

 

10,690

 

 

 

 

6,108

 

 

 

 

3,381

 

 

 

 

4,464

 

 

Net interest income after loan loss provision

 

97,193

 

 

 

 

84,295

 

 

 

 

74,500

 

 

 

 

70,440

 

 

 

 

61,793

 

 

Non-interest income, excluding asset

  gains, losses and write-downs

 

9,920

 

 

 

 

10,426

 

 

 

 

8,616

 

 

 

 

6,967

 

 

 

 

6,179

 

 

Non-interest income (loss) from asset

  gains, losses and write-downs

 

1,428

 

 

 

 

301

 

 

 

 

(675

)

 

 

 

1,156

 

 

 

 

10,209

 

 

Debt-extinguishment expenses

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

8,688

 

 

Contribution to charitable foundation

 

-

 

 

 

 

-

 

 

 

 

10,000

 

 

 

 

-

 

 

 

 

-

 

 

Other non-interest expenses

 

81,118

 

 

 

 

72,417

 

 

 

 

68,081

 

 

 

 

64,158

 

 

 

 

60,737

 

 

Income before taxes

 

27,423

 

 

 

 

22,605

 

 

 

 

4,360

 

 

 

 

14,405

 

 

 

 

8,756

 

 

Income tax expense (benefit)