Loading...
Docoh

Kearny Financial (KRNY)

Filed: 28 Aug 20, 4:02pm

 

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, 2020

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

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

KRNY

 

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 every Interactive Data File required to be submitted 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 such files).    YES      NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $1.07 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 21, 2020 there were outstanding 89,517,003 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the definitive Proxy Statement for the Registrant’s 2020 Annual Meeting of Stockholders. (Part III)

 

 

 


KEARNY FINANCIAL CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended June 30, 2020

INDEX

 

 

 

PART I

 

 

 

 

 

 

Page

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

33

Item 1B.

 

Unresolved Staff Comments

 

40

Item 2.

 

Properties

 

41

Item 3.

 

Legal Proceedings

 

41

Item 4.

 

Mine Safety Disclosures

 

41

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

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

 

42

Item 6.

 

Selected Financial Data

 

44

Item 7.

 

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

 

46

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

Item 8.

 

Financial Statements and Supplementary Data

 

61

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

61

Item 9A.

 

Controls and Procedures

 

62

Item 9B.

 

Other Information

 

62

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

63

Item 11.

 

Executive Compensation

 

63

Item 12.

 

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

 

63

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

64

Item 14.

 

Principal Accounting Fees and Services

 

64

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

65

Item 16.

 

Form 10-K Summary

 

67

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

 

i


PART I

Item 1. Business

Forward-Looking Statements

This Annual Report on Form 10-K 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:

 

the recent global coronavirus outbreak has and will continue to pose risks and could harm our business and results of operations;

 

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;

 

changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

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 demand, borrowing and savings habits;

 

2


 

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;

 

cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;

 

technological changes that may be more difficult or expensive than expected;

 

the ability of third-party providers to perform their obligations to us;

 

the ability of the U.S. Government to manage federal debt limits;

 

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.

Impact of COVID-19

As the Company’s business is primarily conducted within the states of New Jersey and New York, and those states have been significantly impacted by COVID-19, the operations and operating results of the Company have been similarly impacted.

Employee Matters.  As the COVID-19 pandemic has unfolded, and stay-at-home orders were mandated by government officials, the majority of our non-branch personnel have transitioned to working remotely, and have continued to do so through June 30, 2020. Our information technology infrastructure has afforded us the ability to work remotely with little interruption as we continue to service the needs of our clients. For those essential employees who are unable to work from home, we have provided personal protective equipment, established guidelines to maintain appropriate social distancing and have initiated enhanced cleaning of our facilities to ensure a safe working environment.

Retail Branches.  At the outset of the pandemic we modified our branch hours and access to ensure the safety of our employees and clients. Where possible, branch lobbies were transitioned to appointment-only access, with the majority of branch operations being conducted via our drive-up windows. As certain branches did not have drive-up capabilities, or suitable alternatives, we temporarily closed six of our 46 branches. In the months following, we have outfitted our branches with protective barriers and continued to provide our staff with personal protective equipment. In addition, we have instituted policies requiring our clients to wear face masks and to adhere to social distancing protocols while visiting our branch locations. With these modifications, as of June 30, 2020, all of our branches had re-opened their lobbies and were fully operational.

Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and Paycheck Protection Program and Health Care Enhancement Act (“PPP Enhancement Act”).  On March 27, 2020 the CARES Act was signed into law.  Among the more significant components of the CARES Act, as it pertains to the Company, was the creation of the Paycheck Protection Program (“PPP”), the modification of rules and regulations surrounding troubled debt restructured loans and modifications to the tax code to allow for the carryback of net operating losses.

The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program.  As part of this program the SBA will guarantee 100% of the PPP loans made to eligible borrowers. As a qualified SBA lender, the Bank is automatically authorized to originate PPP loans. On April 16, 2020, the original authorization of $349 billion in funding for the PPP program was exhausted. On April 23, 2020, the PPP Enhancement Act was signed into law and provided an additional $310 billion in funding for the PPP program. As of June 30, 2020 we had approximately 749 loans with total outstanding balances of $69.0 million under the PPP.

 

3


Under Section 4013 of the CARES Act, and based upon regulatory guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals that are attributable to the adverse impact of COVID-19, are not considered to be troubled debt restructurings (“TDRs”). As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. Additional information regarding loans modified in accordance with this guidance are provided in the tables below.

The CARES Act included multiple provisions which impacted the tax code. One such provision restored net operating loss (“NOL”) carrybacks that were eliminated by the 2017 Tax Cuts and Jobs Act. The new carryback provision allows for a five year carryback of NOLs incurred by corporations in the 2018, 2019 and 2020 tax years. As a result of this provision the Company was able to carry back NOLs, which had been recorded at the current statutory federal rate of 21%, at the prior statutory rate of 34%. The difference between these two rates, multiplied by the amount of the NOL, totaled $1.6 million and was recorded as a credit to income tax expense during the year ended June 30, 2020.

Loan Portfolio.  The government-mandated closure of certain businesses and the curtailment of non-essential travel has created an increased level of risk to certain segments of the loan portfolio. Additional disclosures surrounding portfolio-wide loan-to-value ratios for real estate secured loans, exposures to certain loan sectors and non-TDR loan modifications granted under section 4013 of the CARES Act are provided below.

The following table sets forth the composition of our real estate secured loans indicating the loan-to-value, by loan category, at June 30, 2020:

 

 

June 30, 2020

 

 

Balance

 

 

LTV

 

 

(In Thousands)

 

 

 

 

 

Commercial mortgage loans:

 

 

 

 

 

 

 

Multi-family commercial mortgage loans

$

2,059,568

 

 

63%

 

Nonresidential commercial mortgage loans

 

960,853

 

 

54%

 

Total commercial mortgage loans

 

3,020,421

 

 

60%

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgage

 

1,273,022

 

 

59%

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

82,920

 

 

41%

 

 

 

 

 

 

 

 

 

Total mortgage loans

$

4,376,363

 

 

59%

 

 

The following table identifies our exposure to certain loan sectors at June 30, 2020:

 

 

June 30, 2020

 

 

Real-Estate Secured

 

 

Non-Real Estate Secured

 

 

Total

 

 

# of Loans

 

 

Balance

 

 

LTV

 

 

# of Loans

 

 

Balance

 

 

# of Loans

 

Balance

 

 

(Dollars In Thousands)

 

Hotel

 

4

 

 

$

4,421

 

 

 

52

%

 

 

7

 

 

$

1,566

 

 

 

11

 

$

5,987

 

Restaurant

 

15

 

 

 

9,529

 

 

 

52

%

 

 

35

 

 

 

3,172

 

 

 

50

 

 

12,701

 

Retail shopping center

 

114

 

 

 

297,773

 

 

 

54

%

 

 

2

 

 

 

58

 

 

 

116

 

 

297,831

 

Entertainment & recreation

 

4

 

 

 

5,211

 

 

 

44

%

 

 

14

 

 

 

784

 

 

 

18

 

 

5,995

 

Wholesale commercial business

 

-

 

 

 

-

 

 

N/A

 

 

 

15

 

 

 

20,841

 

 

 

15

 

 

20,841

 

Wholesale consumer unsecured

 

-

 

 

 

-

 

 

N/A

 

 

 

133

 

 

 

449

 

 

 

133

 

 

449

 

Total

 

137

 

 

$

316,934

 

 

 

54

%

 

 

206

 

 

$

26,870

 

 

 

343

 

$

343,804

 

 

4


Through June 30, 2020, the Company had modified a total of 711 non-TDR loans with an aggregate principal balance of $781.3 million, representing 17.2% of total loans. Further details regarding these modifications are provided in the table below. As of June 30, 2020, 351 of the modified loans with an aggregate principal balance of $374.9 million had reached the expiration of their initial three-month deferral period.  Of these loans, 69.5%, or $260.6 million, had returned to their regular payment schedules by August 14, 2020.  Through that same date, 30.3%, or $113.5 million had been granted a second 90-day extension while the remaining 0.2%, or $780,000, had not yet made their July payment.

 

 

 

June 30, 2020

 

 

# of Loans

 

 

Balance

 

 

 

 

 

 

(In Thousands)

 

Commercial loans:

 

 

 

 

 

 

 

Multi-family mortgage loans

 

136

 

 

$

387,744

 

Nonresidential mortgage

 

131

 

 

 

237,384

 

Commercial business

 

54

 

 

 

10,450

 

Construction

 

1

 

 

 

796

 

Total commercial loans

 

322

 

 

 

636,374

 

 

 

 

 

 

 

 

 

Residential mortgage

 

345

 

 

 

141,890

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

Home equity loans

 

44

 

 

 

3,014

 

 

 

 

 

 

 

 

 

Total loans

 

711

 

 

$

781,278

 

 

In addition to the loans reported above, the Company acquired 144 loans with aggregate principal balances of $114.8 million in conjunction with the Company’s acquisition of MSB Financial Corp. (“MSB”) on July 10, 2020 that had been previously modified in accordance with the guidance discussed above.

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 converted its charter to that of a New Jersey savings bank on June 29, 2017 having previously been a federally chartered stock savings bank.

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, bank-qualified municipal obligations, corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt.

 

 

5


We operate from our administrative headquarters in Fairfield, New Jersey and other administrative locations throughout the state of New Jersey. As of June 30, 2020, had 46 branch offices. The Company maintains a website at www.kearnybank.com.  We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and proxy materials as soon as is reasonably practicable after the Company electronically files those materials with, or furnishes them to, the Securities and Exchange Commission.  You may access these materials by following the links under “Investor Relations” under the “Financial Information” tab at the Company’s website. Information on the Company’s website is not and should not be considered a part of this Annual Report on Form 10-K.

Acquisition of Clifton Bancorp Inc.

On April 2, 2018, the Company completed its acquisition of Clifton Bancorp Inc. (“Clifton”), the parent company of Clifton Savings Bank, a federally chartered stock savings bank.  In conjunction with the acquisition, the Company acquired assets with aggregate fair values totaling $1.61 billion including loans and securities with fair values of $1.12 billion and $326.9 million, respectively.  The Company assumed liabilities with aggregate fair values totaling $1.38 billion in conjunction with the Clifton acquisition including deposits and borrowings with fair values of $949.8 million and $414.1 million, respectively.

Merger consideration associated with the acquisition totaled $333.9 million and primarily comprised 25.4 million shares of the Company’s common stock valued at $330.7 million that were issued to Clifton stockholders to reflect an exchange of 1.191 of Company shares for each outstanding share of Clifton common stock at the time of closing.  Merger consideration also included $3.2 million in cash distributed to eligible holders of outstanding options to purchase Clifton stock as well as cash distributed to Clifton stockholders for the settlement of fractional shares.  The amount by which merger consideration exceeded the fair value of net assets acquired resulted in the Company’s recognition of $102.3 million in goodwill associated with the Clifton acquisition.

Acquisition of MSB Financial Corp.

On July 10, 2020, the Company completed its acquisition of MSB and its subsidiary, Millington Bank. In accordance with the merger agreement, approximately $9.8 million in cash and 5,853,811 shares of Company common stock was distributed to former MSB shareholders in exchange for their shares of MSB common stock.  As a result of the merger, the Company acquired approximately $500 million in loans, assumed approximately $400 million in deposits and acquired four branch offices located in Somerset and Morris counties. Given the initial accounting for this business combination is incomplete, management is not yet able to disclose the preliminary fair value of the assets acquired and liabilities assumed.

Business Strategy

In recent years we have evolved our business model from that of a traditional thrift toward that of a full service community bank. This evolution has been accomplished by growing our commercial loans and deposits, expanding our product and service offerings, de-novo branching and the acquisition of other financial institutions. During this time, our strategy has been largely focused on profitably deploying capital and enhancing earnings through a variety of balance sheet growth and diversification strategies. While many of our long-term growth strategies remain intact, the uncertainty presented by the COVID-19 pandemic has resulted in a change to our near-term business strategy.  The key components of this business strategy are as follows:

 

Maintain Robust Capital and Liquidity Levels

As demonstrated by the June 30, 2020 Tier 1 Leverage ratios of the Company and the Bank of 13.27% and 11.95%, respectively, we maintain capital levels in excess of regulatory minimums, internal capital adequacy guidelines and peer medians. We plan to continue to maintain robust capital reserves, in part due to the risks and uncertainties associated with the COVID-19 pandemic. For those same reasons, on March 25, 2020, we temporarily suspended our stock repurchase program.

In addition to our robust capital levels, we maintain significant sources of both on- and off-balance sheet liquidity and plan to continue to do so.  At June 30, 2020, our liquid assets included $181.0 million of short-term cash and equivalents supplemented by $1.39 billion of investment securities classified as available for sale which can be readily sold or pledged as collateral, if necessary. In addition, we had the capacity to borrow additional funds totaling $615.0 million via unsecured lines of credit and $1.53 billion and $318.7 million, without pledging additional collateral, from the Federal Home Loan Bank of New York and Federal Reserve Bank, respectively.

 

Ensure the Adequacy of Our Allowance for Credit Losses  

At this time the economic implications of the COVID-19 pandemic, and the resulting impact on our asset quality, remain unclear. Notwithstanding this uncertainty we intend to maintain an allowance for credit losses which, upon adoption of ASU 2016-13, will allow us to absorb all of the expected lifetime losses within our portfolios of assets measured at amortized cost.

 

6


 

Grow and Diversify Our Retail Non-Maturity Deposits

We plan to continue to focus on growing and diversifying our retail non-maturity deposit base with an emphasis on growth in core non-maturity deposits.  During fiscal 2020 we successfully grew these deposits by $646.7 million and anticipate that the balance of retail non-maturity deposits will increase in fiscal 2021 and thereafter.

 

Maintain the Balance of Our Loan Portfolio while Aiding Borrowers Impacted by COVID-19

We plan to maintain the balance of our portfolio of commercial and residential loans, replacing repayments and with new loan originations. Our focus, as it relates to new originations, will be on high quality loans with strong sponsors and favorable credit metrics.

For our existing borrowers who have been adversely impacted by COVID-19, we plan to use the resources at our disposal, including loan modifications and payment deferrals, to aid such borrowers in remaining current on their loan payments.

 

Leverage Our Residential Mortgage Banking Infrastructure

We plan to continue to leverage our mortgage banking infrastructure to support the origination of residential mortgage loans for sale into the secondary market. We anticipate that residential mortgage loan origination and sale activity will continue to support long-term growth in our non-interest income, while also serving to help manage the Company’s exposure to interest rate risk through the sale of longer-duration, fixed-rate loans into the secondary market.

 

Optimize Our Branch Network

At June 30, 2020, we had a total of 46 branches. We plan to selectively evaluate branch network expansion opportunities while continuing to place strategic emphasis on leveraging the opportunities to increase market share and expand the depth and breadth of client relationships within our existing branches.

We also plan to continue to evaluate and optimize the performance of our existing branch network, taking into consideration historical branch profitability, market demographic trajectory, geographic proximity to the consolidating branch and the expected impact on the Bank’s clients and communities served.

 

Improve Our Operating Efficiency

In recent years the Company’s operating efficiency has improved both organically and via economies of scale gained from merger and acquisition activity. Exclusive of potential future acquisitions we plan to continue to improve operating efficiency through organic means, such as the increased use of technology and the continual evaluation of branch consolidation opportunities.

 

Continue Our Technology Transformation

In recognition of the ongoing evolution of our business towards online channels we have invested significant human resources and capital towards enhancing both our internal and client-facing technology systems.  Our ongoing technology transformation will impact nearly every area of the Company including the residential and commercial lending functions, retail deposit gathering, risk management and back office operations.

Market Area. At June 30, 2020, 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 acquisition of Millington Bank on July 10, 2020 enabled us to enhance our New Jersey market area by newly expanding into Somerset county while expanding upon our existing presence in Morris county.

Competition.  We operate in a highly competitive market area with a large concentration of 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 technological 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 comes primarily from other insured depository institutions located in our primary market area. We also face competition from out-of-market depository institutions operating via online channels and from non-depository institutions including mortgage banks, finance companies, insurance companies and brokerage firms.

 

7


Lending Activities

General.  Our loan portfolio is comprised of multi-family loans, commercial real estate loans, residential mortgage loans, commercial business loans, construction loans and consumer and other loans. 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. In particular, the outstanding balance of our commercial mortgages, including loans secured by multi‑family, mixed‑use and nonresidential properties, have increased significantly over the past several years.

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,

 

2020

 

2019

 

2018

 

2017

 

2016

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

(Dollars In Thousands)

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

2,059,568

 

 

 

45.36

 

%

 

$

1,946,391

 

 

 

41.14

 

%

 

$

1,758,584

 

 

 

38.50

 

%

 

$

1,412,575

 

 

 

43.57

 

%

 

$

1,040,293

 

 

 

38.94

 

%

Nonresidential

 

960,853

 

 

 

21.16

 

 

 

 

1,258,869

 

 

 

26.61

 

 

 

 

1,302,961

 

 

 

28.52

 

 

 

 

1,085,064

 

 

 

33.46

 

 

 

 

820,673

 

 

 

30.72

 

 

Commercial business

 

138,788

 

 

 

3.06

 

 

 

 

65,763

 

 

 

1.39

 

 

 

 

85,825

 

 

 

1.88

 

 

 

 

74,471

 

 

 

2.30

 

 

 

 

88,207

 

 

 

3.30

 

 

Construction

 

20,961

 

 

 

0.46

 

 

 

 

13,907

 

 

 

0.29

 

 

 

 

23,271

 

 

 

0.51

 

 

 

 

3,815

 

 

 

0.12

 

 

 

 

2,038

 

 

 

0.08

 

 

One- to four-family residential

mortgage loans

 

1,273,022

 

 

 

28.04

 

 

 

 

1,344,044

 

 

 

28.41

 

 

 

 

1,297,453

 

 

 

28.40

 

 

 

 

567,323

 

 

 

17.50

 

 

 

 

605,203

 

 

 

22.66

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

Home equity loans and lines of

credit

 

82,920

 

 

 

1.83

 

 

 

 

96,165

 

 

 

2.03

 

 

 

 

90,761

 

 

 

1.99

 

 

 

 

82,822

 

 

 

2.55

 

 

 

 

89,566

 

 

 

3.35

 

 

Other consumer loans

 

3,991

 

 

 

0.09

 

 

 

 

5,814

 

 

 

0.13

 

 

 

 

9,060

 

 

 

0.20

 

 

 

 

16,383

 

 

 

0.50

 

 

 

 

25,401

 

 

 

0.95

 

 

Total loans

 

4,540,103

 

 

 

100.00

 

%

 

 

4,730,953

 

 

 

100.00

 

%

 

 

4,567,915

 

 

 

100.00

 

%

 

 

3,242,453

 

 

 

100.00

 

%

 

 

2,671,381

 

 

 

100.00

 

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

37,327

 

 

 

 

 

 

 

 

33,274

 

 

 

 

 

 

 

 

30,865

 

 

 

 

 

 

 

 

29,286

 

 

 

 

 

 

 

 

24,229

 

 

 

 

 

 

Unaccreted (unamortized) yield

adjustments

 

41,706

 

 

 

 

 

 

 

 

52,025

 

 

 

 

 

 

 

 

66,567

 

 

 

 

 

 

 

 

(2,808

)

 

 

 

 

 

 

 

(2,606

)

 

 

 

 

 

Total adjustments

 

79,033

 

 

 

 

 

 

 

 

85,299

 

 

 

 

 

 

 

 

97,432

 

 

 

 

 

 

 

 

26,478

 

 

 

 

 

 

 

 

21,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

4,461,070

 

 

 

 

 

 

 

$

4,645,654

 

 

 

 

 

 

 

$

4,470,483

 

 

 

 

 

 

 

$

3,215,975

 

 

 

 

 

 

 

$

2,649,758

 

 

 

 

 

 

 

Loan Maturity Schedule.  The following table sets forth the maturities of our loan portfolio at June 30, 2020.  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.

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Commercial

Business

 

 

Construction

 

 

Residential

Mortgage

 

 

Home Equity Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Amounts due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

$

56,868

 

 

$

14,925

 

 

$

13,091

 

 

$

17,297

 

 

$

1,422

 

 

$

691

 

 

$

1,690

 

 

$

105,984

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 3 years

 

116,562

 

 

 

170,326

 

 

 

82,916

 

 

 

3,664

 

 

 

10,796

 

 

 

3,084

 

 

 

393

 

 

 

387,741

 

3 to 5 years

 

248,034

 

 

 

117,551

 

 

 

15,060

 

 

 

-

 

 

 

17,649

 

 

 

3,959

 

 

 

57

 

 

 

402,310

 

5 to 10 years

 

1,410,898

 

 

 

421,046

 

 

 

20,475

 

 

 

-

 

 

 

116,108

 

 

 

25,002

 

 

 

45

 

 

 

1,993,574

 

10 to 15 years

 

79,691

 

 

 

83,553

 

 

 

2,644

 

 

 

-

 

 

 

111,845

 

 

 

29,913

 

 

 

26

 

 

 

307,672

 

Over 15 years

 

147,515

 

 

 

153,452

 

 

 

4,602

 

 

 

-

 

 

 

1,015,202

 

 

 

20,271

 

 

 

1,780

 

 

 

1,342,822

 

Total due after one year

 

2,002,700

 

 

 

945,928

 

 

 

125,697

 

 

 

3,664

 

 

 

1,271,600

 

 

 

82,229

 

 

 

2,301

 

 

 

4,434,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount due

$

2,059,568

 

 

$

960,853

 

 

$

138,788

 

 

$

20,961

 

 

$

1,273,022

 

 

$

82,920

 

 

$

3,991

 

 

$

4,540,103

 

 

 

8


The following table shows the dollar amount of loans as of June 30, 2020 due after June 30, 2021 according to rate type and loan category:

 

 

Fixed Rates

 

 

Floating or Adjustable Rates

 

 

Total

 

 

(In Thousands)

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

645,929

 

 

$

1,356,771

 

 

$

2,002,700

 

Nonresidential

 

374,550

 

 

 

571,378

 

 

 

945,928

 

Commercial business

 

94,139

 

 

 

31,558

 

 

 

125,697

 

Construction

 

-

 

 

 

3,664

 

 

 

3,664

 

One- to four-family residential mortgage loans

 

985,454

 

 

 

286,146

 

 

 

1,271,600

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

66,480

 

 

 

15,749

 

 

 

82,229

 

Other consumer loans

 

772

 

 

 

1,529

 

 

 

2,301

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

2,167,324

 

 

$

2,266,795

 

 

$

4,434,119

 

 

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 other income-producing properties, such as mixed-use properties combining residential and commercial space.  We originated approximately $258.5 million of multi-family and nonresidential real estate mortgages during the year ended June 30, 2020, compared to $437.3 million during the year ended June 30, 2019.  Supplementing our organic originations were purchases of whole loans and participations totaling $55.5 million during the year ended June 30, 2020, compared to $68.6 million during the year ended June 30, 2019.  

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 fifteen years with amortization terms which generally range from 15 to 30 years. Our commercial mortgage loans are primarily secured by properties located in New Jersey, New York and the surrounding states.

Commercial Business (C&I) Loans.  We originate commercial term loans and lines of credit to a variety of professionals, sole proprietorships and businesses in our market area.  Our business loan products include our Small Business Express Loan, which offers clients a simplified and expedited application and approval process for term loans and lines of credit up to $250,000, as well as loans originated through the SBA in which Kearny Bank participates as a Preferred Lender and is authorized to originate PPP loans, as discussed earlier.  We originated approximately $108.5 million of commercial business loans during the year ended June 30, 2020, of which $69.7 million were originated under the SBA PPP program. By comparison, we originated approximately $21.9 million during the year ended June 30, 2019.  

Supplementing our organic origination of commercial business loans was the funding of wholesale commercial business loan participations totaling $2.7 million for both of the fiscal years ended June 30, 2020 and 2019, respectively.  These participations were comprised of our pro-rata interest in the obligations of nine separate commercial borrowers that were acquired through our membership in BancAlliance, a cooperative network of lending institutions that serves as a conduit for institutional investors to participate in middle-market commercial credits.  During fiscal 2018 we opted to discontinue the purchase of wholesale commercial business loan participations and thus all of the wholesale commercial business loans funded during fiscal 2020 were comprised of advances on previously committed lines of credit.  Our outstanding balance of wholesale commercial business loan participations totaled $20.8 million and $27.2 million at June 30, 2020 and 2019, respectively.  

At June 30, 2020, approximately $48.9 million, or 35.3%, of our commercial business loans represent loans originated through our retail channel while $20.9 million, or 15.0%, comprise loans acquired through the wholesale commercial business loan participation channels and $69.0 million, or 49.7%, were originated under the PPP, as discussed earlier.  Of the retail originated loans, approximately $39.0 million, or 79.7%, are non-SBA loans consisting of secured and unsecured loans totaling $30.6 million and $8.4 million, respectively. Unsecured commercial loans may take the form of overdraft checking authorization and unsecured lines of credit.  Our non-SBA commercial term loans generally have terms of up to 10 years.  Our commercial lines of credit have terms of up to one year and are generally floating-rate loans.

The remaining $9.9 million or 20.3% of retail commercial business loans originated represent the retained portion of SBA loan originations, of which approximately $437,000 is guaranteed by the SBA.  Such loans are generally secured by various forms of collateral, including real estate, business equipment and other forms of collateral.  We may choose to sell 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.

 

9


Construction Lending.  Our construction lending includes loans to individuals for the 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 commercial real estate or multi-family residential buildings.  At June 30, 2020, construction loans totaled $21.0 million.

During the year ended June 30, 2020, construction loan disbursements were $7.2 million compared to $8.5 million during the year ended June 30, 2019.  Construction loan repayments outpaced disbursements during fiscal 2019 resulting in the reported net decrease 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.  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.

One- to Four-Family First Mortgage Loans Held in Portfolio.  Our portfolio lending activities include the origination of one- to four-family first mortgage loans, of which approximately $1.17 billion, or 92.0%, are secured by properties located within New Jersey and New York as of June 30, 2020 with the remaining $102.0 million, or 8.0%, secured by properties in other states.

During the year ended June 30, 2020, we originated $197.8 million of one- to four-family first mortgage portfolio loans compared to $106.9 million in the year ended June 30, 2019.  To supplement portfolio loan originations, we also purchased one- to four-family first mortgages totaling $15.0 million during the year ended June 30, 2020 compared to $95.5 million during the year ended June 30, 2019.

We will originate a one- to four-family mortgage loans 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, 2020, 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%.

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 incentive under this program are a one quarter of one percentage point rate reduction on all first mortgage loan types and the refund of the commitment 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 our 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.  As a complement to our residential one- to four-family portfolio lending activities, we operate a mortgage banking platform which supports the origination of one- to four-family mortgage loans for sale into the secondary market.  The loans we originate for sale generally meet the secondary mortgage market standards of the Federal Home Loan Mortgage Corporation.  Such loans are generally originated by, and sourced from, the same resources and markets as those loans originated and held in our portfolio.

Our mortgage banking business strategy resulted in the recognition of $3.2 million in gains associated with the sale of $285.4 million of mortgage loans held for sale during the year ended June 30, 2020.  As of that date, an additional $20.8 million of loans were held and committed for sale into the secondary market.

 

10


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, 2020, we originated $16.4 million of home equity loans and home equity lines of credit compared to $33.8 million in the year ended June 30, 2019.  However, repayments of home equity loans and lines of credit generally outpaced origination volume during fiscal 2020, resulting in a net decrease 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.

Other 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 the Bank.  The balance of consumer loans at June 30, 2020 primarily include $3.4 million of loans fully secured by savings accounts or certificates of deposit held by the Bank and $607,000 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 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.

Loans to One Borrower.  New Jersey law generally limits the amount that a savings bank may lend to a single borrower and related entities to 15% of the institution’s capital funds. Accordingly, as of June 30, 2020, our legal loans-to-one-borrower limit was approximately $122.5 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 limits are $35.0 million for a single loan transaction and $85.0 million 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, 2020, our largest single borrower had an aggregate outstanding loan balance of approximately $54.0 million comprising one commercial mortgage loan and four multi-family mortgage loans. Our second largest single borrower had an aggregate outstanding loan balance of approximately $49.6 million comprising six multi-family mortgage loans.  At June 30, 2020, these lending relationships were current and performing in accordance with the terms of their loan agreements.

 

11


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,

 

 

 

2020

 

 

 

2019

 

 

 

2018

 

 

(In Thousands)

 

Loan originations: (1)

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

193,158

 

 

$

352,208

 

 

$

358,521

 

Nonresidential

 

65,357

 

 

 

85,077

 

 

 

100,249

 

Commercial business

 

108,546

 

 

 

21,856

 

 

 

25,896

 

Construction

 

7,192

 

 

 

8,478

 

 

 

25,213

 

One- to four-family residential mortgage loans

 

197,825

 

 

 

106,883

 

 

 

52,974

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

16,396

 

 

 

33,757

 

 

 

20,234

 

Other consumer loans

 

1,312

 

 

 

2,274

 

 

 

1,368

 

Total loan originations

 

589,786

 

 

 

610,533

 

 

 

584,455

 

Loan purchases:

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

2,500

 

 

 

35,000

 

 

 

-

 

Nonresidential

 

53,043

 

 

 

33,625

 

 

 

-

 

Commercial business

 

2,671

 

 

 

2,732

 

 

 

28,292

 

One- to four-family residential mortgage loans

 

15,048

 

 

 

95,454

 

 

 

26,298

 

Total loan purchases

 

73,262

 

 

 

166,811

 

 

 

54,590

 

Loans acquired from Clifton (2)

 

-

 

 

 

-

 

 

 

1,116,821

 

Loan sales: (1)

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

(470

)

 

 

-

 

 

 

-

 

Commercial business

 

-

 

 

 

(867

)

 

 

(2,802

)

Total loans sold

 

(470

)

 

 

(867

)

 

 

(2,802

)

 

 

 

 

 

 

 

 

 

 

 

 

Loan repayments

 

(849,249

)

 

 

(612,622

)

 

 

(497,306

)

Increase (decrease) due to other items

 

2,087

 

 

 

11,316

 

 

 

(1,250

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in loan portfolio

$

(184,584

)

 

$

175,171

 

 

$

1,254,508

 

 

(1)

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

(2)

For information on loans acquired in the Clifton acquisition, see Note 3 to the audited consolidated financial statements.

Our customary sources of loan applications include loans originated by our loan officers, repeat clients, referrals from realtors and other professionals and walk-in clients. These sources are supported in varying degrees by our advertising and marketing strategies. 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. In addition to purchasing one- to four-family loans, we have also purchased commercial mortgage and commercial business loans and participations originated by other banks and non-bank originators.

Additional information about the Company’s loans is presented in Note 7 to the audited consolidated financial statements.

Loan Approval Procedures and Authority.  Senior management recommends, and the Board of Directors approves, our lending policies and loan approval limits.  The Bank’s Loan Committee consists of the Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Director of Residential Lending and Special Assets Manager.  Our Chief Lending Officer may approve residential loans up to $1.0 million.  Our loan department personnel serving in the following positions may approve loans as follows: residential mortgage loan managers, mortgage/consumer loans up to $500,000; and residential mortgage loan underwriters, mortgage loans up to $350,000.  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, Chief Lending Officer, or Chief Credit Officer have authorization to approve loans for amounts up to a limit of $1.0 million.  Non-conforming residential mortgage loans and loans over $1.0 million up to $2.0 million require the approval of the Loan Committee.

 

12


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 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 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 their financial affairs as 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 other real estate owned until it is sold or otherwise disposed of. When other 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 principal and interest payment (“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 past due, 60-89 days past due and 90 or more days past due.

Nonaccrual Loans.  Loans are generally placed on nonaccrual status when contractual payments become 90 or more days past due or when the Company does not expect to receive all P&I payments owed substantially in accordance with the terms of the loan agreement, regardless of past due status.  Loans that become 90 days past due, but are well secured and in the process of collection, may remain on accrual status.  Nonaccrual loans are generally returned to accrual status when all 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.  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.

 

13


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 other real estate owned:

 

 

At June 30,

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

(Dollars In Thousands)

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

2,962

 

 

$

70

 

 

$

116

 

 

$

158

 

 

$

205

 

Nonresidential

 

23,936

 

 

 

8,900

 

 

 

5,340

 

 

 

5,720

 

 

 

6,588

 

Commercial business

 

592

 

 

 

469

 

 

 

1,238

 

 

 

2,634

 

 

 

1,965

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

255

 

 

 

357

 

One- to four-family residential mortgage loans

 

8,359

 

 

 

9,943

 

 

 

9,192

 

 

 

8,790

 

 

 

10,732

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

842

 

 

 

866

 

 

 

913

 

 

 

1,241

 

 

 

1,170

 

Other consumer loans

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total nonaccrual loans (1)

 

36,691

 

 

 

20,248

 

 

 

16,799

 

 

 

18,798

 

 

 

21,017

 

Accruing loans 90 days or more past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonresidential

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial business

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer loans

 

5

 

 

 

22

 

 

 

60

 

 

 

74

 

 

 

38

 

Total accruing loans 90 days or more past due

 

5

 

 

 

22

 

 

 

60

 

 

 

74

 

 

 

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total nonperforming loans

$

36,696

 

 

$

20,270

 

 

$

16,859

 

 

$

18,872

 

 

$

21,055

 

Other real estate owned

$

178

 

 

$

-

 

 

$

725

 

 

$

1,632

 

 

$

826

 

Total nonperforming assets

$

36,874

 

 

$

20,270

 

 

$

17,584

 

 

$

20,504

 

 

$

21,881

 

Total nonperforming loans to total loans

 

0.82

%

 

 

0.43

%

 

 

0.37

%

 

 

0.58

%

 

 

0.79

%

Total nonperforming loans to total assets

 

0.54

%

 

 

0.31

%

 

 

0.26

%

 

 

0.39

%

 

 

0.47

%

Total nonperforming assets to total assets

 

0.55

%

 

 

0.31

%

 

 

0.27

%

 

 

0.43

%

 

 

0.49

%

 

(1)

TDRs on accrual status not included above totaled $8.4 million, $4.3 million, $3.5 million, $2.5 million and $2.9 million at June 30, 2020, 2019, 2018, 2017 and 2016, respectively.

Total nonperforming assets increased by $16.6 million to $36.9 million at June 30, 2020 from $20.3 million at June 30, 2019.  The increase was due to a net increase in nonperforming loans of $16.4 million coupled with an increase in other real estate owned of $178,000.  For those same comparative periods, the number of nonperforming loans decreased to 70 loans from 77 loans while there was one property in other real estate owned at June 30, 2020 compared to no properties at June 30, 2019.

As noted above, the $16.4 million increase in nonperforming loans for the year ended June 30, 2020 was primarily attributable to a single, $14.3 million, owner-occupied commercial real estate loan which was placed on non-accrual status during the quarter ended March 31, 2020.  This loan is secured by a grocery-anchored retail shopping center located in northern New Jersey and has a current loan-to-value of approximately 69%.  

At June 30, 2020, 2019, and 2018, Kearny Bank had loans with aggregate outstanding balances totaling $21.5 million, $15.1 million and $10.2 million, respectively, reported as troubled debt restructurings.

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.

 

 

14


The third party loan review firm assists senior management and the Board of Directors in identifying potential credit weaknesses; in reviewing and confirming risk ratings or adverse classifications internally ascribed to loans by management; 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.  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 as 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.  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.

Additional information about our classification of assets is presented in Note 8 to the audited consolidated financial statements.

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,

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

(In Thousands)

 

Special mention

$

9,187

 

 

$

5,681

 

 

$

592

 

 

$

2,594

 

 

$

2,528

 

Substandard

 

46,069

 

 

 

27,822

 

 

 

28,752

 

 

 

29,428

 

 

 

33,052

 

Doubtful

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

 

 

2

 

Total classified loans

$

55,257

 

 

$

33,504

 

 

$

29,345

 

 

$

32,025

 

 

$

35,582

 

 

At June 30, 2020, 17 loans were classified as Special Mention and 139 loans were classified as Substandard.  As of that same date, five loans were classified as Doubtful.  

Allowance for Loan Losses.  Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable.  The allowance for loan losses as of June 30, 2020, is maintained at a level that represents management’s best estimate of losses inherent in 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.  

 

Additional information about our allowance for loan losses is presented in Note 1 and Note 8 to the audited consolidated financial statements.

 

15


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,

 

 

 

2020

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

(Dollars in Thousands)

 

Allowance balance (at beginning of period)

$

33,274

 

 

$

30,865

 

 

$

29,286

 

 

$

24,229

 

 

$

15,606

 

Provision for loan losses

 

4,197

 

 

 

3,556

 

 

 

2,706

 

 

 

5,381

 

 

 

10,690

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(133

)

Nonresidential

 

-

 

 

 

(54

)

 

 

(45

)

 

 

(149

)

 

 

-

 

Commercial business

 

(50

)

 

 

(861

)

 

 

(145

)

 

 

(221

)

 

 

(1,464

)

One- to four-family residential mortgage loans

 

-

 

 

 

(83

)

 

 

(521

)

 

 

(76

)

 

 

(1,213

)

Home equity loans and lines of credit

 

-

 

 

 

-

 

 

 

(18

)

 

 

(96

)

 

 

(93

)

Other consumer loans

 

(139

)

 

 

(285

)

 

 

(829

)

 

 

(849

)

 

 

(55

)

Total charge offs:

 

(189

)

 

 

(1,283

)

 

 

(1,558

)

 

 

(1,391

)

 

 

(2,958

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

10

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial business

 

2

 

 

 

47

 

 

 

90

 

 

 

727

 

 

 

760

 

One- to four-family residential mortgage loans

 

-

 

 

 

-

 

 

 

172

 

 

 

256

 

 

 

88

 

Home equity loans and lines of credit

 

-

 

 

 

-

 

 

 

65

 

 

 

16

 

 

 

41

 

Other consumer loans

 

33

 

 

 

83

 

 

 

104

 

 

 

68

 

 

 

2

 

Total recoveries:

 

45

 

 

 

136

 

 

 

431

 

 

 

1,067

 

 

 

891

 

Net charge offs:

 

(144

)

 

 

(1,147

)

 

 

(1,127

)

 

 

(324

)

 

 

(2,067

)

Allowance balance (at end of period)

$

37,327

 

 

$

33,274

 

 

$

30,865

 

 

$

29,286

 

 

$

24,229

 

Total loans outstanding

$

4,540,103

 

 

$

4,730,953

 

 

$

4,567,915

 

 

$

3,242,453

 

 

$

2,671,381

 

Average loans outstanding

$

4,568,816

 

 

$

4,669,436

 

 

$

3,577,598

 

 

$

2,955,686

 

 

$

2,512,231

 

Allowance for loan losses as a percent of

  total loans outstanding

 

0.82

%

 

 

0.70

%

 

 

0.68

%

 

 

0.90

%

 

 

0.91

%

Net loan charge-offs as a percent of

  average loans outstanding

 

0.00

%

 

 

0.02

%

 

 

0.03

%

 

 

0.01

%

 

 

0.08

%

Allowance for loan losses to

  non-performing loans

 

101.72

%

 

 

164.15

%

 

 

183.08

%

 

 

155.18

%

 

 

115.07

%

 

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,

 

2020

 

2019

 

2018

 

2017

 

2016

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

20,916

 

 

 

56.03

 

%

 

$

16,959

 

 

 

50.96

 

%

 

$

14,946

 

 

 

48.42

 

%

 

$

13,941

 

 

 

43.57

 

%

 

$

9,995

 

 

 

38.94

 

%

Nonresidential

 

8,763

 

 

 

23.48

 

 

 

 

9,672

 

 

 

29.07

 

 

 

 

9,787

 

 

 

31.71

 

 

 

 

9,939

 

 

 

33.46

 

 

 

 

7,846

 

 

 

30.72

 

 

Commercial business

 

1,926

 

 

 

5.16

 

 

 

 

2,467

 

 

 

7.41

 

 

 

 

2,552

 

 

 

8.27

 

 

 

 

1,709

 

 

 

2.30

 

 

 

 

2,784

 

 

 

3.30

 

 

Construction

 

236

 

 

 

0.63

 

 

 

 

136

 

 

 

0.41

 

 

 

 

258

 

 

 

0.84

 

 

 

 

35

 

 

 

0.12

 

 

 

 

24

 

 

 

0.08

 

 

One- to four-family residential

mortgage loans

 

4,860

 

 

 

13.02

 

 

 

 

3,377

 

 

 

10.15

 

 

 

 

2,479

 

 

 

8.03

 

 

 

 

2,384

 

 

 

17.50

 

 

 

 

2,370

 

 

 

22.66

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of

credit

 

568

 

 

 

1.52

 

 

 

 

491

 

 

 

1.48

 

 

 

 

430

 

 

 

1.39

 

 

 

 

501

 

 

 

2.55

 

 

 

 

432

 

 

 

3.35

 

 

Other consumer loans

 

58

 

 

 

0.16

 

 

 

 

172

 

 

 

0.52

 

 

 

 

413

 

 

 

1.34

 

 

 

 

777

 

 

 

0.50

 

 

 

 

778

 

 

 

0.95

 

 

Total

$

37,327

 

 

 

100.00

 

%

 

$

33,274

 

 

 

100.00

 

%

 

$

30,865

 

 

 

100.00

 

%

 

$

29,286

 

 

 

100.00

 

%

 

$

24,229

 

 

 

100.00

 

%

 

16


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,

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

(In Thousands)

 

Valuation allowance for loans individually

  evaluated for impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

$

41

 

 

$

-

 

 

$

-

 

 

$

39

 

 

$

53

 

Commercial business

 

47

 

 

 

-

 

 

 

227

 

 

 

6

 

 

 

400

 

One- to four-family residential mortgage loans

 

1

 

 

 

31

 

 

 

79

 

 

 

154

 

 

 

77

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

78

 

Total valuation allowance

 

89

 

 

 

31

 

 

 

306

 

 

 

199

 

 

 

608

 

Valuation allowance for loans collectively

  evaluated for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Historical loss factors

 

1,184

 

 

 

2,108

 

 

 

2,074

 

 

 

2,131

 

 

 

3,439

 

Environmental loss factors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

20,916

 

 

 

16,959

 

 

 

14,946

 

 

 

13,941

 

 

 

9,985

 

Nonresidential

 

8,699

 

 

 

9,627

 

 

 

9,686

 

 

 

9,701

 

 

 

7,269

 

Commercial business

 

758

 

 

 

653

 

 

 

750

 

 

 

731

 

 

 

810

 

Construction

 

236

 

 

 

136

 

 

 

258

 

 

 

35

 

 

 

24

 

One- to four-family residential mortgage loans

 

4,852

 

 

 

3,243

 

 

 

2,368

 

 

 

1,988

 

 

 

1,621

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

568

 

 

 

482

 

 

 

410

 

 

 

401

 

 

 

306

 

Other

 

25

 

 

 

35

 

 

 

67

 

 

 

159

 

 

 

167

 

Total environmental factors

 

36,054

 

 

 

31,135

 

 

 

28,485

 

 

 

26,956

 

 

 

20,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

37,327

 

 

$

33,274

 

 

$

30,865

 

 

$

29,286

 

 

$

24,229

 

 

During the year ended June 30, 2020, the balance of the allowance for loan losses (“ALLL”) increased by $4.1 million to $37.3 million at June 30, 2020 from $33.3 million, at June 30, 2019, resulting in an ALLL to total loans ratio of 0.82% and 0.70% as of those dates, respectively. The increase resulted from a loan loss provision of $4.2 million during the year ended June 30, 2020 coupled with charge-offs and net of recoveries totaling $144,000 during that same period.

The portion of the allowance for loan losses attributable to loans individually evaluated for impairment increased by $58,000 to $89,000 at June 30, 2020 from $31,000 at June 30, 2019.  This balance reflected an allowance for impairment on $1.8 million of impaired loans while an additional $43.3 million of impaired loans had no allowance.  By comparison, the balance at June 30, 2019 reflected an allowance for impairment on $363,000 of impaired loans while an additional $24.2 million of impaired loans had no allowance for impairment.

The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment increased by $4.0 million to $37.2 million at June 30, 2020 from $33.2 million at June 30, 2019.  This increase was attributable to changes in a combination of historical and environmental loss factors.  With regard to historical loss factors, our loan portfolio experienced an annualized net charge-off rate of 0.00% for the year ended June 30, 2020, a decrease of two basis points from the 0.02% rate for the year ended June 30, 2019.  The annual average net charge off rate for June 30, 2019 had previously decreased by one basis point from 0.03% for the prior year ended June 30, 2018.  The effect of the net change in historical loss factors resulted in a decrease in the applicable portion of the allowance attributable to these factors of approximately $924,000 to $1.2 million at June 30, 2020 from $2.1 million at June 30, 2019.

 

17


With regard to environmental loss factors, the Company made adjustments to various factors during the year ended June 30, 2020.  Most notably, the environmental factors associated with national and regional economic conditions were increased substantially in response to the economic impact of COVID-19.  The net effect of these adjustments, partially offset by a decrease in the balance of the unimpaired portion of the loan portfolio, resulted in a $4.9 million increase in the portion of the allowance for loan losses attributable to environmental loss factors to $36.1 million at June 30, 2020 from $31.1 million at June 30, 2019.

An overview of the balances and activity within the ALLL during the prior fiscal year ended June 30, 2019 can be found in our Annual Report on Form 10-K for the year ended June 30, 2019, filed with the SEC on August 28, 2019.

The calculation of probable losses within a loan portfolio and the resulting ALLL 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. As the Company operates on a non-calendar fiscal year, as of June 30, 2020, it had not yet adopted the CECL model to calculate credit losses.

Additional information about the ALLL at June 30, 2020 and June 30, 2019 is presented in Note 8 to the audited consolidated financial statements.

Securities Portfolio

At June 30, 2020, our securities portfolio totaled $1.42 billion and comprised 21.0% of our total assets. By comparison, at June 30, 2019, our securities portfolio totaled $1.29 billion and comprised 19.5% of our total assets.  Additional information about the Company’s investment securities at Jun 30, 2020 is presented in Note 4, Note 5 and Note 6 to the audited consolidated financial statements.

The year-over-year net increase in the securities portfolio totaled approximately $127.3 million which largely reflected security purchases during the year that were partially offset by repayments, sales and calls. The increase in the portfolio included a $20.5 million increase in the fair value of the available for sale securities portfolio to an unrealized gain of $22.5 million at June 30, 2020 from an unrealized gain of $2.0 million at June 30, 2019.

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 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, Chief Risk Officer and Treasurer/Chief Investment Officer are the senior management members of our Capital Markets Committee (“CMC”) that are 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, U.S. government agency debentures, municipal obligations, corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt.  We also hold small balances of single-issuer trust preferred 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, and certificates of deposits of insured financial institutions.

 

18


The carrying value of our mortgage-backed securities totaled $819.1 million at June 30, 2020 and comprised 57.8% of total investments and 12.1% of total assets as of that date.  We generally invest in mortgage-backed securities issued by U.S. government agencies or government-sponsored entities.  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.  

The carrying value of our securities representing obligations of state and political subdivisions totaled $86.6 million at June 30, 2020 and comprised 6.1% of total investments and 1.3% 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. 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 A2 or higher by Moody’s, where rated by those agencies.  In the absence of, or as a complement to, 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 $172.4 million at June 30, 2020 and comprised 12.2% of total investments and 2.6% 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.  Our securities represent the highest credit-quality tranches within the overall structures with each being rated AA+ or higher by S&P/or Aa1 or higher by Moody’s, where rated by those agencies, at June 30, 2020.

The outstanding balance of our collateralized loan obligations totaled $193.8 million at June 30, 2020 and comprised 13.7% of total investments and 2.9% of total assets as of that date.  This category of securities is comprised entirely of structured, floating-rate securities representing securitized commercial loans to large, U.S. corporations. At June 30, 2020, 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 AAA by S&P and Aaa or by Moody’s, where rated by those agencies.

The carrying value of our corporate bonds totaled $143.6 million at June 30, 2020 and comprised 10.1% of total investments and 2.1% of total assets as of that date.  This category of securities is comprised of floating-rate corporate debt obligations issued by large financial institutions and subordinated debt representing profitable, well-capitalized, small- to mid-sized community banks located mainly in the mid-Atlantic region of the U.S.  We generally limit our investment in the unsecured corporate debt of any single issuer to $25.0 million.  At June 30, 2020, corporate bonds issued by large financial institutions 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 typical structure of the subordinated debt is a 10-year final maturity, with a fixed rate coupon 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 a spread over the remainder of the term.  The notes are redeemable after five years subject to satisfaction of certain conditions.  The securities are rated BBB- or higher by Kroll Bond Rating Agency (“Kroll”) and/or BBB- by Fitch Ratings Inc., where rated by those agencies.  Of the securities rated by Kroll, two of the securities are rated BBB- or higher by S&P and Baa3 by Moody’s, where rated by those agencies. One subordinated debt security is non-rated.  In each case, 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.

 

19


The carrying value of our trust preferred securities totaled $2.6 million at June 30, 2020 and comprised less than one percent of total investments and total assets as of that date.  This category of securities is comprised of two single-issuer trust preferred securities that were acquired as a result of merger activity. At June 30, 2020, the securities were 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 Baa1 by Moody’s.  

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.  In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.  The Company adopted ASU 2019-04 on July 1, 2019 and as part of the adoption, reclassified $537.7 million of investment securities held to maturity to investment securities available for sale. The Company did not reclassify investment securities from held to maturity to available for sale upon the original adoption of the amendments in ASU 2017-12. As of June 30, 2020, our available for sale securities portfolio had a carrying value of $1.39 billion or 97.7% of our total securities with the remaining $32.6 million or 2.3% of securities were classified as held to maturity.

Other than 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, 2020.  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, 2020 are other than temporarily impaired as of that date.

During the year ended June 30, 2020, proceeds from sales of securities available for sale totaled $164.3 million and resulted in gross gains of $2.4 million and gross losses of $145,000. During the year ended June 30, 2019, proceeds from sales of securities available for sale totaled $75.4 million and resulted in gross gains of $190,000 and gross losses of $513,000.  During the year ended June 30, 2018, proceeds from sales of securities available for sale totaled $254.6 million and resulted in gross losses of $31,000.

There were no sales of held to maturity securities during the year ended June 30, 2020 and 2019.  During the year ended June, 30, 2018, proceeds from sales of securities held to maturity totaled $211,000 which resulted in gross losses of $8,000.  The securities sold were limited to those securities where there was evidence of a deterioration of creditworthiness.  

 

20


The following table sets forth the carrying value of our securities portfolio at the dates indicated:

 

 

At June 30,

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

3,678

 

 

$

4,411

 

 

$

5,316

 

 

$

6,440

 

Obligations of state and political subdivisions

 

54,054

 

 

 

26,951

 

 

 

26,088

 

 

 

27,740

 

 

 

28,398

 

Asset-backed securities

 

172,447

 

 

 

179,313

 

 

 

182,620

 

 

 

162,429

 

 

 

82,625

 

Collateralized loan obligations

 

193,788

 

 

 

208,611

 

 

 

226,066

 

 

 

98,154

 

 

 

127,374

 

Corporate bonds

 

143,639

 

 

 

122,024

 

 

 

147,594

 

 

 

142,318

 

 

 

137,404

 

Trust preferred securities

 

2,627

 

 

 

3,756

 

 

 

3,783

 

 

 

8,540

 

 

 

7,669

 

Total debt securities available for sale

 

566,555

 

 

 

544,333

 

 

 

590,562

 

 

 

444,497

 

 

 

389,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

30,903

 

 

 

21,390

 

 

 

24,292

 

 

 

30,536

 

 

 

60,577

 

Residential pass-through securities

 

561,954

 

 

 

44,303

 

 

 

102,359

 

 

 

130,550

 

 

 

214,526

 

Commercial pass-through securities

 

226,291

 

 

 

104,237

 

 

 

7,872

 

 

 

8,177

 

 

 

8,524

 

Total mortgage-backed securities available for sale

 

819,148

 

 

 

169,930

 

 

 

134,523

 

 

 

169,263

 

 

 

283,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

1,385,703

 

 

 

714,263

 

 

 

725,085

 

 

 

613,760

 

 

 

673,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

-

 

 

 

-

 

 

 

-

 

 

 

35,000

 

 

 

84,992

 

Obligations of state and political subdivisions

 

32,556

 

 

 

104,086

 

 

 

109,483

 

 

 

94,713

 

 

 

82,179

 

Subordinated debt

 

-

 

 

 

63,086

 

 

 

46,294

 

 

 

15,000

 

 

 

-

 

Total debt securities held to maturity

 

32,556

 

 

 

167,172

 

 

 

155,777

 

 

 

144,713

 

 

 

167,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

-

 

 

 

46,381

 

 

 

56,886

 

 

 

17,854

 

 

 

23,081

 

Residential pass-through securities

 

-

 

 

 

166,283

 

 

 

200,622

 

 

 

178,813

 

 

 

223,632

 

Commercial pass-through securities

 

-

 

 

 

196,816

 

 

 

176,445

 

 

 

151,941

 

 

 

163,402

 

Total mortgage-backed securities held to maturity

 

-

 

 

 

409,480

 

 

 

433,953

 

 

 

348,608

 

 

 

410,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

32,556

 

 

 

576,652

 

 

 

589,730

 

 

 

493,321

 

 

 

577,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

1,418,259

 

 

$

1,290,915

 

 

$

1,314,815

 

 

$

1,107,081

 

 

$

1,250,823

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21


The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities portfolio at June 30, 2020.  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, 2020, securities with a carrying value of $28.9 million are callable within one year.

 

 

 

At June 30, 2020

 

 

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

 

Fair Market

Value

 

 

(Dollars In Thousands)

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political subdivisions

$

7,038

 

 

 

1.51

 

%

 

$

33,535

 

 

 

2.05

 

%

 

$

46,037

 

 

 

2.40

 

%

 

$

-

 

 

 

-

 

%

 

$

86,610

 

 

 

2.19

 

%

 

$

88,123

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

172,447

 

 

 

1.28

 

 

 

 

172,447

 

 

 

1.28

 

 

 

 

172,447

 

Collateralized loan obligations

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

87,033

 

 

 

1.70

 

 

 

 

106,755

 

 

 

1.62

 

 

 

 

193,788

 

 

 

1.66

 

 

 

 

193,788

 

Corporate bonds

 

5,009

 

 

 

2.53

 

 

 

 

69,670

 

 

 

1.27

 

 

 

 

68,960

 

 

 

5.11

 

 

 

 

-

 

 

 

-

 

 

 

 

143,639

 

 

 

3.16

 

 

 

 

143,639

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

2,627

 

 

 

1.40

 

 

 

 

-

 

 

 

-

 

 

 

 

2,627

 

 

 

1.40

 

 

 

 

2,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (1)

 

-

 

 

 

-

 

 

 

 

2,431

 

 

 

1.57

 

 

 

 

-

 

 

 

-

 

 

 

 

28,472

 

 

 

2.49

 

 

 

 

30,903

 

 

 

2.42

 

 

 

 

30,903

 

Residential pass-through securities (1)

 

3

 

 

 

4.53

 

 

 

 

16,337

 

 

 

1.66

 

 

 

 

14,837

 

 

 

1.91

 

 

 

 

530,777

 

 

 

2.70

 

 

 

 

561,954

 

 

 

2.65

 

 

 

 

561,954

 

Commercial pass-through securities (1)

 

-

 

 

 

-

 

 

 

 

79,167

 

 

 

2.33

 

 

 

 

2,337

 

 

 

3.19

 

 

 

 

144,787

 

 

 

3.29

 

 

 

 

226,291

 

 

 

2.95

 

 

 

 

226,291

 

Total securities

$

12,050

 

 

 

1.93

 

%

 

$

201,140

 

 

 

1.85

 

%

 

$

221,831

 

 

 

2.93

 

%

 

$

983,238

 

 

 

2.41

 

%

 

$

1,418,259

 

 

 

2.41

 

%

 

$

1,419,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Government-sponsored enterprises.

 

 

 

22


 

Sources of Funds

General.  Retail deposits are our primary source of funds for lending and other investment purposes.  In addition, we derive funds from principal repayments of loan and investment 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 six months 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 the Bank’s network of retail branches, business relationship officers and digital banking channels. We maintain a robust suite of commercial deposit products designed to appeal to small and mid-size businesses and non-profit organizations. Our team of experienced and dedicated business relationship officers serve as the primary points of contact for these commercial clients and act as both new business originators and relationship managers.

Key to our consumer deposit strategy is our “Relationship” suite of products which bundles a variety of banking services and products together for those clients whom have a checking account with direct deposit and electronic statement delivery. Such relationship clients are eligible for a variety of benefits, including a premium on certificates of deposit with a term of at least one year. We also offer High Yield Checking which is primarily designed to attract core deposits in the form of clients’ primary checking accounts through interest rate and fee reimbursement incentives to qualifying clients. 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.

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 reviewed by senior management on a regular basis, with deposit product and pricing updated, as appropriate, during recurring and ad-hoc senior management meetings.

A portion of our deposits are in certificates of deposit whose balances declined to 41.5% of total deposits at June 30, 2020 from 53.2% of total deposits at June 30, 2019.  Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period were not renewed.  At June 30, 2020 and June 30, 2019, certificates of deposit maturing within one year were $1.52 billion and $1.49 billion, respectively.  Historically, a significant portion of the certificates of deposit remain with us after they mature.

At June 30, 2020, $1.01 billion or 55.2% of our certificates of deposit were certificates of $100,000 or more compared to $1.32 billion or 59.8% at June 30, 2019.  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. To the extent that such deposits do not remain with us, they may need to be replaced with wholesale funding.

 

23


 

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,

 

2020

 

 

 

2019

 

 

 

2018

 

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

 

(Dollars In Thousands)

Non-interest-bearing deposits

$

334,522

 

 

 

7.89

 

%

 

 

-

 

%

 

$

312,169

 

 

 

7.68

 

%

 

 

-

 

%

 

$

281,262

 

 

 

8.67

 

%

 

 

-

 

%

Interest-bearing demand

 

1,041,188

 

 

 

24.56

 

 

 

 

1.10

 

 

 

 

796,815

 

 

 

19.60

 

 

 

 

1.02

 

 

 

 

896,695

 

 

 

27.64

 

 

 

 

0.82

 

 

Savings

 

831,832

 

 

 

19.62

 

 

 

 

0.81

 

 

 

 

761,203

 

 

 

18.73

 

 

 

 

0.55

 

 

 

 

569,777

 

 

 

17.56

 

 

 

 

0.17

 

 

Certificates of deposit

 

2,032,046

 

 

 

47.93

 

 

 

 

2.00

 

 

 

 

2,194,513

 

 

 

53.99

 

 

 

 

1.83

 

 

 

 

1,496,743

 

 

 

46.13

 

 

 

 

1.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

$

4,239,588

 

 

 

100.00

 

%

 

 

1.39

 

%

 

$

4,064,700

 

 

 

100.00

 

%

 

 

1.29

 

%

 

$

3,244,477

 

 

 

100.00

 

%

 

 

0.91

 

%

 

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

 

 

At June 30,

 

 

2020

 

 

2019

 

 

2018

 

 

(In Thousands)

 

Interest Rate

 

 

 

 

 

 

 

 

 

 

 

0.00 - 0.99%

$

326,413

 

 

$

66,109

 

 

$

185,765

 

1.00 - 1.99%

 

822,846

 

 

 

604,162

 

 

 

1,272,580

 

2.00 - 2.99%

 

663,182

 

 

 

1,506,221

 

 

 

552,459

 

3.00 - 3.99%

 

27,955

 

 

 

27,965

 

 

 

5,834

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,840,396

 

 

$

2,204,457

 

 

$

2,016,638

 

 

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:

 

CDs over 100,000:

At June 30,

 

 

2020

 

 

2019

 

 

2018

 

 

(In Thousands)

 

Maturity Period

 

 

 

 

 

 

 

 

 

 

 

Within three months

$

278,157

 

 

$

300,464

 

 

$

134,479

 

Three through six months

 

262,561

 

 

 

363,801

 

 

 

115,748

 

Six through twelve months

 

307,769

 

 

 

243,061

 

 

 

370,853

 

Over twelve months

 

166,508

 

 

 

410,220

 

 

 

528,709

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,014,995

 

 

$

1,317,546

 

 

$

1,149,789

 

 

The following table sets forth the amount and maturities of certificates of deposit at June 30, 2020:

 

 

At June 30, 2020

 

 

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%

$

290,497

 

 

$

28,520

 

 

$

4,818

 

 

$

1

 

 

$

2,507

 

 

$

70

 

 

$

326,413

 

1.00 - 1.99%

 

668,233

 

 

 

108,073

 

 

 

17,734

 

 

 

10,661

 

 

 

17,912

 

 

 

233

 

 

 

822,846

 

2.00 - 2.99%

 

534,043

 

 

 

34,321

 

 

 

62,251

 

 

 

15,857

 

 

 

16,710

 

 

 

-

 

 

 

663,182

 

3.00 - 3.99%

 

22,269

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,686

 

 

 

27,955

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,515,042

 

 

$

170,914

 

 

$

84,803

 

 

$

26,519

 

 

$

37,129

 

 

$

5,989

 

 

$

1,840,396

 

 

24


 

 

Additional information about the Company’s deposits is presented in Note 12 to the audited consolidated financial statements.

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.

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 about the Company’s 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.  At June 30, 2020, we had a total $865.0 million of short-term FHLB advances at a weighted average interest rate of 0.45%.  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 up to seven years.

Long-term advances generally include term advances with original maturities of greater than one year.  At June 30, 2020, our outstanding balance of long-term FHLB advances totaled $304.5 million at a weighted average interest rate of 2.87%.  Such advances included $145.0 million of callable advances at a weighted average interest rate of 3.04% and $159.5 million non-callable, term advances at a weighted average interest rate of 2.71%.

Our FHLB advances mature as follows:

 

 

At June 30,

 

 

2020

 

 

2019

 

 

2018

 

 

(In Thousands)

 

By remaining period to maturity:

 

 

 

 

 

 

 

 

 

 

 

Less than one year

$

865,000

 

 

$

873,400

 

 

$

741,000

 

One to two years

 

27,000

 

 

 

64,046

 

 

 

48,400

 

Two to three years

 

145,000

 

 

 

62,700

 

 

 

64,160

 

Three to four years

 

22,500

 

 

 

155,000

 

 

 

35,700

 

Four to five years

 

103,500

 

 

 

22,500

 

 

 

155,000

 

Greater than five years

 

6,500

 

 

 

110,000

 

 

 

132,500

 

Total advances

 

1,169,500

 

 

 

1,287,646

 

 

 

1,176,760

 

Fair value adjustments

 

(2,071

)

 

 

(4,435

)

 

 

(6,616

)

Total advances, net of

  fair value adjustments

$

1,167,429

 

 

$

1,283,211

 

 

$

1,170,144

 

 

Based upon the market value of investment securities and mortgage loans that are posted as collateral for FHLB advances at June 30, 2020, we are eligible to borrow up to an additional $1.53 billion 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.

 

In addition, the Company had the capacity to borrow additional funds totaling $615.0 million via unsecured lines of credit and $318.7 million from the Federal Reserve Bank without pledging additional collateral. The balance of borrowings at June 30, 2020 also included overnight borrowings in the form of depositor sweep accounts totaling $5.7 million.

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, or cash flow hedges, and documents the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.

 

25


 

At June 30, 2020, our derivative instruments were comprised of interest rate swaps and caps with a total notional amount of $1.32 billion.  These instruments are intended to manage the interest rate exposure relating to certain wholesale funding positions that were outstanding at June 30, 2020.

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, 2020, Kearny Bank was the only wholly-owned operating subsidiary of Kearny Financial Corp.  As of that date, Kearny Bank had two wholly-owned subsidiaries: CJB Investment Corp. and KFS Insurance Services, Inc. CJB Investment Corp. is a New Jersey Investment Company and remained active through the three-year period ended June 30, 2020. KFS Insurance Services, Inc. was created for the primary purpose of acquiring insurance agencies and was considered inactive through the three-year period ended June 30, 2020.

Personnel

As of June 30, 2020, we had 494 full‑time employees and 58 part‑time employees equating to a total of 523 full-time equivalent employees.  As of June 30, 2019, we had 524 full‑time employees and 41 part‑time employees equating to a total of 545 full-time equivalent employees.  None of our employees are covered by a collective bargaining agreement and we consider our relationship with our employees to be good.  As of July 31, 2020 and in conjunction with our acquisition of MSB, we retained an additional 22 full-time employees and six part-time employees thereby increasing our number of full-time equivalent employees by 21 as of that date.

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 widespread 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.

 

26


 

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 establishing new branches and 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.

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.  The general maximum deposit insurance amount is $250,000 per depositor.

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 was required 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 were subjected to a surcharge to achieve that goal.  The 1.35% ratio was reached effective September 30, 2018.  As a result, the surcharges ceased and institutions with less than $10 billion of assets received credits for assessment payments made that contributed to achieving the 1.35% ratio.  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%.

 

27


 

In addition to the FDIC assessments, the Financing Corporation (“FICO”) was 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 final FICO bonds matured in 2019 and the FICO assessments have ended.

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.  

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets 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 assets above the amount necessary to meet its minimum risk-based capital requirements.  The capital conservation buffer requirement was 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.

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. The Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018 requires the federal banking agencies, including the FDIC, to establish for banks with assets of less than $10 billion of assets a community bank leverage ratio (the ratio of a bank’s tangible equity capital to average total consolidated assets) of 8 to 10%.  A qualifying community bank with capital meeting the specified requirements (including off balance sheet exposures of 25% or less of total assets and trading assets and liabilities of 5% or less of total assets) and electing to follow the alternative framework is considered to meet all applicable regulatory capital requirements including the risk-based requirements.  The community bank leverage ratio was established at 9% Tier 1 capital to total average assets, effective January 1, 2020.  A qualifying bank may opt in and out of the community bank leverage ratio framework on its quarterly call report.  A bank that ceases to meet any qualifying criteria is provided with a two-quarter grace period to comply with the community bank leverage ratio requirements or the general capital regulations by the federal regulators.

 

28


 

Section 4012 of the Coronavirus Aid, Relief and Economic Security Act of 2020 required that the community bank leverage ratio be temporarily lowered to 8%.  The federal regulators issued a rule making the lower ratio effective April 23, 2020.  The rules also established a two-quarter grace period for a qualifying community bank whose leverage ratio falls below the 8% community bank leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater.  Another rule was issued to transition back to the 9% community bank leverage ratio, increasing the ratio to 8.5% for calendar year 2021 and to 9% thereafter.

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%.  The previously referenced 2018 legislation provides that qualifying banks that elect and comply with the community bank leverage ratio (as established by the regulatory agencies) is considered well-capitalized under the prompt corrective action regulations.

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 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.

 

29


 

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 Community Reinvestment Act (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 primary federal regulator, the FDIC, 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;

 

 

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;

 

 

30


 

 

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 Corp. 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.

 

31


 

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 had 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, were 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.  Currently, consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions (including the community bank leverage ratio alternative) apply to savings and loan holding companies with $3 billion or more of assets, including Kearny Financial.  

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 generally 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 a class of 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.  The approval of the NJDBI would also be necessary for the acquisition of 25% of a class of voting stock or control as otherwise defined under New Jersey law.  

 

 

32


 

Item 1A. Risk Factors

 

An investment in our securities is subject to risks inherent in our business and the industry in which we operate. Before making an investment decision, you should carefully consider the risks and uncertainties described below and all other information included in this Annual Report on Form 10-K. The risks described below may adversely affect our business, financial condition and operating results. In addition to these risks and any other risks or uncertainties described in “Item 1. Business—Forward-Looking Statements” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. The value or market price of our securities could decline due to any of these identified or other risks. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

The COVID-19 pandemic has, and will continue to, pose risks to our business, our results of operations and the future prospects of the Company.

The COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company, its customers, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened in an efficient manner. Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic will have material long-term effects on the Company and its customers which are difficult to quantify in the near-term or long-term.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company is subject to the following risks, any of which could have a material, adverse effect on the business, financial condition, liquidity, and results of operations of the Company:

 

 

risks to the capital markets that may impact the value or performance of the Company’s investment securities portfolio, as well as limit our access to the capital markets and wholesale funding sources;

 

 

 

effects on key employees, including operational or management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls;

 

 

declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by the Company;

 

 

collateral for loans, especially real estate, may continue to decline in value, which could cause loan losses to increase;

 

 

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

 

 

the allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect net income;

 

 

if the economy is unable to substantially reopen or reopen in an efficient manner, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased loan losses and reduced interest income;

 

 

in certain states in which we do business temporary bans on evictions and foreclosures have been enacted through executive orders, and may continue indefinitely, resulting in our inability to take timely possession of real estate assets collateralizing loans, which may increase our loan losses;

 

 

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;

 

 

 

33


 

 

cyber security risks are increased as the result of an increase in the number of employees working remotely and an increase in the number of our clients banking electronically;

 

 

declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments in the markets served by the Company; and

 

 

increasing or protracted volatility in the price of the Company’s common stock, which may also impair our goodwill or other intangible assets.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans for the PPP which could have a significant adverse impact on our business, financial position, results of operations, and prospects.

The COVID-19 pandemic and its impact on the economy have led to actions including the enactment of the Coronavirus Aid, Relief and Economic Security Act, including the establishment of the PPP administered by the Small Business Administration (“SBA”). Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. Since the initiation of the PPP, several banks have been subject to litigation or threatened litigation regarding the process and procedures that such banks used in processing applications for the PPP. We may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans. If any such litigation is filed or threatened against us and is not resolved in a manner favorable to us, it may result in significant cost or adversely affect our reputation. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial position, results of operations and prospects.

Changes in interest rates or the shape of the yield curve 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 re-price faster than assets.

From December 2015 to December 2018, the Federal Reserve Board’s Federal Open Market Committee increased its federal funds rate target from a range of 0.00% - 0.25% to a range of 2.25% - 2.50%.  However, beginning July 2019, the Committee began lowering the target rate in response to a slowing economy and in March 2020 quickly lowered the target rate back to 0.00 – 0.25% in response to the accelerating COVID-19 crisis and the Committee’s objective to inject liquidity into the banking system and stimulate the credit markets.  Such actions had the immediate effect of steepening the yield curve and then to flatten it as long-term rates fell shortly thereafter.  The Company’s cost of deposits and short-term borrowings have dropped while long-term rates on loans and investments have also dropped, but not at the same pace.  As a result of the flattening of the yield curve our net interest spread and net interest margin are at risk of being reduced due to potential decreases in our yield on interest-earning assets which may outpace the decreases in our cost of funds.

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.

 

34


 

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 0.82% of total loans at June 30, 2020 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.

Our acquisitions, including our recent acquisition of MSB, and the integration of acquired businesses, subject us to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations.

We have in the past, and may in the future, seek to grow our business by acquiring other businesses. In July 2020, we completed our acquisition of MSB, and its wholly owned subsidiary, Millington Bank. There is risk that our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.

Acquisitions may also result in business disruptions that could cause customers to remove their accounts from us and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients, customers, and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business. Acquisition and integration efforts could divert management attention and resources, which could have an adverse effect on our financial condition and results of operations. Additionally, the operation of the acquired branches may adversely affect our existing profitability, and we may not be able to achieve results in the future similar to those achieved by the existing banking business or manage growth resulting from the acquisition effectively.

A new accounting standard may 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 which became effective for us on July 1, 2020.  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 may 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.

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, 2020, our securities portfolio totaled $1.42 billion, or 21.0% of our total assets.  Investment securities typically have lower yields than loans. For the year ended June 30, 2020, the weighted average yield of our investment securities portfolio was 2.97%, as compared to 4.09% 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, 2020, $1.39 billion, or 97.7% 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.

 

35


 

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 $4.50 billion at June 30, 2020, from $2.67 billion at June 30, 2016. This increase reflects the acquisition of Clifton coupled with 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.

Our increased commercial lending exposes us to additional risk.

We intend to increase commercial lending as part of our ongoing transition from a traditional thrift to a full-service community bank.  We have increased our commercial lending staff and continue to seek 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.  

The risk exposure from our increased commercial lending is also a function of the markets in which we operate.  Our commercial lending activity is generally focused on borrowers domiciled, and real estate located, within the states of New Jersey and New York.  Regional risk factors and changes to local laws and regulations, including changes to rent regulations or foreclosure laws, may present greater risk than a more geographically diversified portfolio.

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

Historically we have 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.

We have a significant concentration in commercial real estate loans.  If our regulators were to curtail our commercial real estate lending activities, our earnings, dividend paying capacity and/or ability to repurchase shares could be adversely affected.

In 2006, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “Guidance”).  The Guidance provides that a bank’s commercial real estate lending exposure may receive increased supervisory scrutiny when total non-owner occupied commercial real estate loans, including loans secured by multi-family property, non-owner occupied commercial real estate and construction and land loans, represent 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of non-owner occupied commercial real estate equaled 360% of Bank total risk-based capital at June 30, 2020 and our commercial real estate loan portfolio increased by 21% during the preceding 36 months.

 

36


 

Changes to LIBOR may adversely impact the value of, and the return on, our loans, investment securities and derivatives which are indexed to LIBOR.

On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain loans and liabilities including our subordinated notes, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the values of the loans and liabilities, whose interest rates are tied to LIBOR.

 

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.

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 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, 2020, sale gains attributable to the sale of residential mortgage loans totaled $3.2 million or approximately 16.0% 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.

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

Among other sources of funds, we rely on wholesale funding, including short- and long-term borrowings, brokered deposits and non-brokered deposits acquired through listing services, to provide funds with which to make loans, purchase investment securities and provide for other liquidity needs. On June 30, 2020, wholesale funding totaled $1.23 billion, or approximately 18.3% of total assets.

Generally wholesale funding may not be as stable as funding acquired through traditional retail channels.  In the future, this funding may not be readily replaced as it matures, or we may have to pay a higher rate of interest to maintain it. Not being able to maintain or replace those funds as they mature would adversely affect our liquidity. Paying higher interest rates to maintain or replace funding 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, such assessment is completed internally, on a quarterly basis. 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, 2020, we had investment securities with fair values of approximately $1.42 billion on which we had approximately $10.7 million in gross unrealized losses and $34.7 million of gross unrealized gains. All unrealized losses on investment securities at June 30, 2020 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.

 

37


 

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, 2020, 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 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, including goodwill, which could become 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, 2020, we had approximately $214.9 million in intangible assets on our balance sheet comprising $210.9 million of goodwill and $4.0 million 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 loss could significantly restrict Kearny Bank’s ability to make dividend payments to Kearny Financial and therefore adversely impact our ability to pay dividends to stockholders.

We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.

The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described under the heading “Item 1. Business—Regulation.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. New proposals for legislation continue to be introduced in the U.S. Congress that could further alter the regulation of the bank and non-bank financial services industries and the manner in which companies within the industry conduct business.

In addition, federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Future changes in federal policy and at regulatory agencies may occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. These changes may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

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.

 

38


 

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.

The inability to attract and retain key personnel could adversely affect our business.

The successful execution of our business strategy is partially dependent on our ability to attract and retain experienced and qualified personnel.  Failure to do so could adversely affect our strategy, customer relationships and internal operations.

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.

 

39


 

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 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.

We face intense competition from other financial services and financial services technology companies, and competitive pressures could adversely affect our business or financial performance.

The Company faces intense competition in all of its markets and geographic regions. The Company expects competitive pressures to intensify in the future, especially in light of legislative and regulatory initiatives arising out of the recent global economic crisis, technological innovations that alter the barriers to entry, current economic and market conditions, and government monetary and fiscal policies. Competition with financial services technology companies, or technology companies partnering with financial services companies, may be particularly intense, due to, among other things, differing regulatory environments. Competitive pressures may drive the Company to take actions that the Company might otherwise eschew, such as lowering the interest rates or fees on loans or raising the interest rates on deposits in order to keep or attract high-quality customers. These pressures also may accelerate actions that the Company might otherwise elect to defer, such as substantial investments in technology or infrastructure. The actions that the Company takes in response to competition may adversely affect its results of operations and financial condition. These consequences could be exacerbated if the Company is not successful in introducing new products and other services, achieving market acceptance of its products and other services, developing and maintaining a strong customer base, or prudently managing expenses.

Item 1B. Unresolved Staff Comments

Not applicable.

 

 

40


 

Item 2. Properties

The Company and the Bank conduct business from their administrative headquarters at 120 Passaic Avenue in Fairfield, New Jersey and leases office suites in Clifton, New Jersey.  At June 30, 2020, the Company operated 46 branch offices located in Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic and Union counties, New Jersey and Kings and Richmond counties, New York. Nineteen of our branch offices are leased with remaining terms between 11 months and 12 years.  At June 30, 2020, our net investment in property and equipment totaled $57.4 million.

In conjunction with the Company’s acquisition of MSB on July 10, 2020, the Company acquired a loan production office in Millington, NJ and four branch offices located in Somerset and Morris counties.  The loan production office and two branch offices are leased with remaining terms between 14 months and 4.3 years.

Additional information regarding our properties as of June 30, 2020, is presented in Note 10 to the audited consolidated financial statements.

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, 2020, 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.

 

 

 

41


 

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.”  

 

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 21, 2020, there were 4,652 registered holders of record of the Company’s common stock, plus approximately 7,176 beneficial (street name) owners.

(b) Use of Proceeds.  Not applicable.

(c) Issuer Purchases of Equity Securities.  On March 13, 2019, the Company announced the authorization of a fourth repurchase plan for up to 9,218,324 shares or 10% of shares then outstanding.  This plan has no expiration date.  On March 25, 2020 the Company temporarily suspended its stock repurchase program due to the risks and uncertainties associated with the COVID-19 pandemic.  Through June 30, 2020, the Company repurchased 8,457,294 shares, or 91.7% of the shares authorized for repurchase under the current repurchase program, at a cost of $111.1 million, or an average of $13.14 per share.  

 

 

 

.  

 

 

42


 

Stock Performance Graph.  The following graph compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return on the NASDAQ Composite Index and a peer group of the SNL Thrift Index, in each case assuming an investment of $100 as of June 30, 2015. Total return assumes the reinvestment of all dividends. This year the stock performance graph reflects a change made by the Company in the peer group comparison indices from the SNL Thrift $5 Billion - $10 Billion Index and the SNL Thrift MHC Index to the SNL Thrift Index.  Management believes that the SNL Thrift Index provides a better peer group comparison of financial institutions more comparable to the Company.  In accordance with Item 201 (e) of the Regulation S-K of the Securities and Exchange Commission, which requires the inclusion of all new indices and all indices used the immediately preceding year, this year the performance graph also includes a comparison of the cumulative return for the SNL Thrift $5 Billion - $10 Billion Index and the SNL Thrift MHC Index.

 

 

 

 

At June 30,

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

Kearny Financial Corp.

$

100

 

 

$

113

 

 

$

135

 

 

$

124

 

 

$

126

 

 

$

80

 

NASDAQ Composite

 

100

 

 

 

98

 

 

 

126

 

 

 

156

 

 

 

168

 

 

 

213

 

SNL Thrift Index

 

100

 

 

 

101

 

 

 

119

 

 

 

130

 

 

 

117

 

 

 

95

 

SNL Thrift $5B - $10B Index

 

100

 

 

 

105

 

 

 

128

 

 

 

160

 

 

 

147

 

 

 

111

 

SNL Thrift MHC Index

 

100

 

 

 

106

 

 

 

107

 

 

 

112

 

 

 

120

 

 

 

101

 

 

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 S&P Global Market Intelligence. The SNL Thrift Index includes all major exchange (NYSE, NYSE American and NASDAQ) traded thrifts in SNL’s coverage universe. The SNL Thrift $5 Billion - $10 Billion Index includes all thrift institutions with total assets between $5.0 billion and $10.0 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.

 

 

43


 

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,

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

 

 

 

2016

 

 

 

(In Thousands)

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

$

6,758,175

 

 

 

$

6,634,829

 

 

 

$

6,579,874

 

 

 

$

4,818,127

 

 

 

$

4,500,059

 

 

Net loans receivable

 

4,461,070

 

 

 

 

4,645,654

 

 

 

 

4,470,483

 

 

 

 

3,215,975

 

 

 

 

2,649,758

 

 

Investment securities available for sale

 

1,385,703

 

 

 

 

714,263

 

 

 

 

725,085

 

 

 

 

613,760

 

 

 

 

673,537

 

 

Investment securities held to maturity

 

32,556

 

 

 

 

576,652

 

 

 

 

589,730

 

 

 

 

493,321

 

 

 

 

577,286

 

 

Cash and equivalents

 

180,967

 

 

 

 

38,935

 

 

 

 

128,864

 

 

 

 

78,237

 

 

 

 

199,200

 

 

Goodwill

 

210,895

 

 

 

 

210,895

 

 

 

 

210,895

 

 

 

 

108,591

 

 

 

 

108,591

 

 

Deposits

 

4,430,282

 

 

 

 

4,147,610

 

 

 

 

4,073,604

 

 

 

 

2,929,745

 

 

 

 

2,694,687

 

 

Borrowings

 

1,173,165

 

 

 

 

1,321,982

 

 

 

 

1,198,646

 

 

 

 

806,228

 

 

 

 

614,423

 

 

Stockholders’ equity

 

1,084,177

 

 

 

 

1,127,159

 

 

 

 

1,268,748

 

 

 

 

1,057,181

 

 

 

 

1,147,629

 

 

 

 

For the Years Ended June 30,

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

 

 

 

2016

 

 

 

(In Thousands, Except Percentage and Per Share Amounts)

 

 

Summary of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

233,208

 

 

 

$

237,333

 

 

 

$

171,431

 

 

 

$

139,093

 

 

 

$

126,888

 

 

Interest expense

 

83,854

 

 

 

 

82,020

 

 

 

 

50,138

 

 

 

 

36,519

 

 

 

 

31,903

 

 

Net interest income

 

149,354

 

 

 

 

155,313

 

 

 

 

121,293

 

 

 

 

102,574

 

 

 

 

94,985

 

 

Provision for loan losses

 

4,197

 

 

 

 

3,556

 

 

 

 

2,706

 

 

 

 

5,381

 

 

 

 

10,690

 

 

Net interest income after loan loss provision

 

145,157

 

 

 

 

151,757

 

 

 

 

118,587

 

 

 

 

97,193

 

 

 

 

84,295

 

 

Non-interest income, excluding asset

  gains, losses and write-downs

 

14,311

 

 

 

 

13,309

 

 

 

 

12,270

 

 

 

 

9,920

 

 

 

 

10,426

 

 

Non-interest income from asset

  gains, losses and write-downs

 

5,408

 

 

 

 

246

 

 

 

 

993

 

 

 

 

1,428

 

 

 

 

301

 

 

Other non-interest expenses

 

107,624

 

 

 

 

109,243

 

 

 

 

97,850

 

 

 

 

81,118

 

 

 

 

72,417

 

 

Income before taxes

 

57,252

 

 

 

 

56,069

 

 

 

 

34,000

 

 

 

 

27,423

 

 

 

 

22,605

 

 

Income tax expense

 

12,287

 

 

 

 

13,927

 

 

 

 

14,404

 

 

 

 

8,820

 

 

 

 

6,783

 

 

Net income

$

44,965

 

 

 

$

42,142

 

 

 

$

19,596

 

 

 

$

18,603

 

 

 

$

15,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share – Basic and diluted

$

0.55

 

 

 

$

0.46

 

 

 

$

0.24

 

 

 

$

0.22

 

 

 

$

0.18

 

 

Weighted average number of common shares

  outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Basic

 

82,409

 

 

 

 

91,054

 

 

 

 

82,587

 

 

 

 

84,590

 

 

 

 

89,591

 

 

         Diluted

 

82,430

 

 

 

 

91,100

 

 

 

 

82,643

 

 

 

 

84,661

 

 

 

 

89,625

 

 

Cash dividends per share

$

0.29

 

 

 

$

0.37

 

 

 

$

0.25

 

 

 

$

0.10

 

 

 

$

0.08

 

 

Dividend payout ratio (1)

 

52.78

 

%

 

 

80.75

 

 

 

 

102.87

 

%

 

 

44.99

 

%

 

 

45.28

 

%

 

(1)Represents cash dividends declared divided by net income.

 

44


 

 

 

At or For the Years Ended June 30,

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

 

 

 

2016

 

 

Performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (net income divided

  by average total assets)

 

0.67

 

%

 

 

0.63

 

%

 

 

0.37

 

%

 

 

0.40

 

%

 

 

0.36

 

%

Return on average equity (net income divided

  by average total equity)

 

4.10

 

 

 

 

3.52

 

 

 

 

1.81

 

 

 

 

1.68

 

 

 

 

1.36

 

 

Net interest rate spread

 

2.22

 

 

 

 

2.31

 

 

 

 

2.25

 

 

 

 

2.14

 

 

 

 

2.06

 

 

Net interest margin

 

2.45

 

 

 

 

2.56

 

 

 

 

2.50

 

 

 

 

2.41

 

 

 

 

2.35

 

 

Average interest-earning assets to

  average interest-earning liabilities

 

117.24

 

 

 

 

118.88

 

 

 

 

125.12

 

 

 

 

132.14

 

 

 

 

136.23

 

 

Efficiency ratio (non-interest expenses divided

  by sum of net interest income and non-interest income)

 

63.66

 

 

 

 

64.69

 

 

 

 

72.72

 

 

 

 

71.20

 

 

 

 

68.50

 

 

Non-interest expense to average assets

 

1.61

 

 

 

 

1.64

 

 

 

 

1.86

 

 

 

 

1.76

 

 

 

 

1.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

0.82

 

 

 

 

0.43

 

 

 

 

0.37

 

 

 

 

0.58

 

 

 

 

0.79

 

 

Non-performing assets to total assets

 

0.55

 

 

 

 

0.31

 

 

 

 

0.27

 

 

 

 

0.43

 

 

 

 

0.49

 

 

Net charge-offs to average loans outstanding

0.00

 

 

 

 

0.02

 

 

 

 

0.03

 

 

 

 

0.01

 

 

 

 

0.08

 

 

Allowance for loan losses to total loans

 

0.82

 

 

 

 

0.70

 

 

 

 

0.68

 

 

 

 

0.90

 

 

 

 

0.91

 

 

Allowance for loan losses to non-performing loans

 

101.72

 

 

 

 

164.15

 

 

 

 

183.08

 

 

 

 

155.18

 

 

 

 

115.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

16.39

 

 

 

 

17.97

 

 

 

 

20.54

 

 

 

 

24.02

 

 

 

 

26.47

 

 

Equity to assets at period end

 

16.04

 

 

 

 

16.99

 

 

 

 

19.28

 

 

 

 

21.94

 

 

 

 

25.50

 

 

Tangible equity to tangible assets at period end (1)

 

13.29

 

 

 

 

14.19

 

 

 

 

16.53

 

 

 

 

20.14

 

 

 

 

23.65

 

 

 

(1)Tangible equity equals total stockholders’ equity reduced by goodwill and core deposit intangible assets.

 

 

 

45


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

This discussion and analysis reflects Kearny Financial Corp.’s consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations.  You should read the information in this section in conjunction with the business and financial information regarding Kearny Financial Corp. and the audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K.

Critical Accounting Policies

Our accounting policies are integral to understanding the results reported. We describe them in detail in Note 1 to our audited consolidated financial statements included as an exhibit to this document. In preparing the audited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses.

Allowance for Loan Losses.  The allowance for loan losses is a valuation account that reflects our estimation of the losses in its loan portfolio to the extent they are both probable and reasonable to estimate.  The balance of the allowance is generally maintained through provisions for loan losses that are charged to income in the period that estimated losses on loans are identified.  We charge confirmed losses on loans against the allowance as such losses are identified.  Recoveries on loans previously charged-off are added back to the allowance.

Our allowance for loan loss calculation methodology utilizes a two-tier loss measurement process that is performed quarterly.  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.  Loans considered to be eligible for individual impairment review include commercial mortgage loans, construction loans, commercial business loans, one- to four-family mortgage loans, home equity loans and home equity lines of credit.  A 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.  

The second tier of the loss measurement process involves estimating the probable and estimable losses on loans not otherwise individually reviewed for impairment.  Such loans generally comprise large groups of smaller-balance homogeneous loans as well as the remaining non-impaired loans of those types noted above that are otherwise eligible for individual impairment evaluation.

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.  To calculate the historical loss factors, our allowance for loan loss methodology generally utilizes a two-year moving average of annualized net charge-off rates (charge-offs net of recoveries) by loan segment, where available, to calculate the actual, historical loss experience.  The outstanding principal balance of each loan segment is multiplied by the applicable historical loss factor to estimate the level of probable losses based upon our historical loss experience.

Environmental loss factors are based upon specific quantitative and qualitative criteria representing 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.  The outstanding principal balance of each applicable loan segment is multiplied by the applicable environmental loss factors to estimate the level of probable losses based upon their supporting quantitative and qualitative criteria.

The sum of the probable and estimable loan losses calculated in accordance with loss measurement processes, as described above, represents the total targeted balance for our allowance for loan losses at the end of a fiscal period.  A more detailed discussion of our allowance for loan loss calculation methodology is presented in Note 1 to our audited consolidated financial statements.

 

46


 

Business Combinations.  We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.

Goodwill.  Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level at least annually, or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, we have the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform a quantitative impairment test.

 

The quantitative impairment test is performed in two steps. The first step requires a comparison of a reporting unit’s fair value to its carrying value. If the fair value exceeds the carrying value no impairment is present; however, if the carrying value exceeds the fair value, an additional impairment evaluation must be performed. That additional evaluation compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.

 

The annual quantitative assessment of goodwill for our single reporting unit was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”).  The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value.  The market approach takes into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives.  The results of the income approach were weighted at 75% while the results of the market approach were weighted at 25%.  The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value for our single reporting unit.

 

The assumptions used in the impairment test of goodwill are susceptible to change based on changes in economic conditions and other factors. Any change in the assumptions which we utilize to determine the carrying value of goodwill could adversely impact our results of operations.

Comparison of Financial Condition at June 30, 2020 and June 30, 2019

Executive Summary.  Total assets increased $123.3 million to $6.76 billion at June 30, 2020 from $6.63 billion at June 30, 2019.  The net increase in total assets primarily reflected increases in the balances of cash and equivalents, investment securities, loans held-for-sale and other assets, partially offset by a decrease in net loans receivable.

Wholesale Restructuring Transaction.  During the year ended June 30, 2020 the Company executed a wholesale restructuring transaction designed to enhance net interest income and reduce credit risk within the investment portfolio.  During the first phase of the transaction, $158.4 million of investment securities with a weighted average yield of 2.63% were sold and a portion of the proceeds utilized to extinguish $121.5 million of Federal Home Loan Bank (“FHLB”) advances with a weighted average cost of 2.84%.  Gains on sale of investment securities and debt extinguishment losses each totaled $2.2 million, resulting in a negligible impact on pre-tax net income.  During the second phase of the transaction, $248.7 million of U.S. agency-backed mortgage-backed securities were purchased at a weighted average yield of 2.77% and were funded with a combination of FHLB advances, brokered time deposits and overnight borrowings that, at execution of the transaction, carried a weighted average cost of 1.65%.

 

47


 

Investment Securities.  Investment securities classified as available for sale increased by $671.4 million to $1.39 billion at June 30, 2020 from $714.3 million at June 30, 2019.  The net increase in the portfolio partially reflected the adoption of ASU 2019-04 on July 1, 2019, upon which the Company reclassified $537.7 million of investment securities from held to maturity to available for sale.  In addition, the net increase in the portfolio during the year ended June 30, 2020 reflected security purchases totaling $487.9 million and a $20.5 million increase in the fair value of the portfolio to a net unrealized gain of $22.5 million.  The net increase in the portfolio was partially offset by security sales totaling $162.1 million and $212.6 million in principal repayment, net of premium amortization and discount accretion.

Investment securities classified as held to maturity decreased by $544.1 million to $32.6 million at June 30, 2020 from $576.7 million at June 30, 2019.  The decrease in held to maturity securities largely reflected the adoption of ASU 2019-04, as noted above. The decrease in the portfolio for the year ended June 30, 2020 also reflected principal repayment, net of discount accretion and premium amortization, totaling $6.4 million.

Based on its evaluation, management has concluded that no other-than-temporary impairment was present within the investment portfolio as of June 30, 2020.  Additional information regarding investment securities at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 4, Note 5 and Note 6 to the audited consolidated financial statements.

Loans Held-for-Sale.  Loans held-for-sale totaled $20.8 million at June 30, 2020 as compared to $12.3 million at June 30, 2019 and are reported separately from the balance of net loans receivable as of those dates.  During the year ended June 30, 2020, $282.3 million of residential mortgage loans were sold, resulting in net gains on sale of $3.2 million.  

Net Loans Receivable.  Loans receivable, net of unamortized premiums, deferred costs and the allowance for loan losses, decreased by $184.6 million to $4.46 billion at June 30, 2020 from $4.65 billion at June 30, 2019.  The decrease in net loans receivable was primarily attributable to elevated levels of loan prepayment activity outpacing new loan origination and purchase volume during the year ended June 30, 2020.  The detail of the changes in loan portfolio is presented below:

 

 

June 30,

 

 

June 30,

 

 

Increase/

 

 

2020

 

 

2019

 

 

(Decrease)

 

 

(In Thousands)

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

2,059,568

 

 

$

1,946,391

 

 

$

113,177

 

Nonresidential

 

960,853

 

 

 

1,258,869

 

 

 

(298,016

)

Commercial business

 

138,788

 

 

 

65,763

 

 

 

73,025

 

Construction

 

20,961

 

 

 

13,907

 

 

 

7,054

 

Total commercial loans

 

3,180,170

 

 

 

3,284,930

 

 

 

(104,760

)

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgage loans

 

1,273,022

 

 

 

1,344,044

 

 

 

(71,022

)

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

82,920

 

 

 

96,165

 

 

 

(13,245

)

Other consumer loans

 

3,991

 

 

 

5,814

 

 

 

(1,823

)

Total consumer

 

86,911

 

 

 

101,979

 

 

 

(15,068

)

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

4,540,103

 

 

 

4,730,953

 

 

 

(190,850

)

 

 

 

 

 

 

 

 

 

 

 

 

Unaccreted yield adjustments

 

(41,706

)

 

 

(52,025

)

 

 

10,319

 

Allowance for loan losses

 

(37,327

)

 

 

(33,274

)

 

 

(4,053

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loans receivable

$

4,461,070

 

 

$

4,645,654

 

 

$

(184,584

)

 

 

48


 

Commercial loan origination volume for the year ended June 30, 2020 totaled $374.3 million, which comprised $258.5 million of commercial mortgage loan originations augmented by $108.5 million of commercial business loan originations and construction loan disbursements totaling $7.2 million.  For the year ended June 30, 2020, within the commercial business loan category, we originated $69.0 million under the PPP, as noted above.  Commercial loan originations were augmented with the funding of purchased loans totaling $58.2 million during the year ended June 30, 2020.

One- to four-family residential mortgage loan origination volume for the year ended June 30, 2020, excluding loans held-for-sale, totaled $197.8 million. Originations of one- to four-family residential loans were augmented with loan purchases totaling $15.0 million.  Home equity loans and line of credit origination volume for the year ended June 30, 2020 totaled $16.4 million.

Additional information about the Company’s loans at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 7 to the audited consolidated financial statements.

Nonperforming Loans.  Nonperforming loans increased by $16.4 million to $36.7 million, or 0.82% of total loans at June 30, 2020, from $20.3 million, or 0.43% of total loans at June 30, 2019.  The increase in non-performing loans was primarily attributable to a single, $14.3 million, owner-occupied commercial real estate loan which was placed on non-accrual status during the quarter ended March 31, 2020.  This loan is secured by a grocery-anchored retail shopping center located in northern New Jersey and has a current loan-to-value of approximately 69%.  

Nonperforming loans generally include those loans reported as 90 or more days past due while still accruing and loans reported as nonaccrual, with such balances totaling $5,000 and $36.7 million, respectively, at June 30, 2020.  

Additional information about nonperforming loans at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 8 to the audited consolidated financial statements.

Allowance for Loan Losses. During the year ended June 30, 2020, the balance of the allowance for loan losses increased by $4.1 million to $37.3 million, or 0.82% of total loans at June 30, 2020, from $33.3 million, or 0.70% of total loans at June 30, 2019. The increase resulted from provisions of $4.2 million during the year ended June 30, 2020 that were partially offset by charge-offs, net of recoveries, totaling $144,000 during that same period. Excluding the balance of acquired loans, which generally do not carry an ALLL, the ALLL as a percentage of non-acquired loans at June 30, 2020 and June 30, 2019 totaled 1.03% and .91%, respectively. As of June 30, 2020, the balance of acquired loans totaled $923.9 million, had remaining purchase accounting discounts of $43.1 million, or 4.67% of the applicable outstanding balance, with no associated ALLL.

Additional information about the allowance for loan losses at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 1 and Note 8 to the audited consolidated financial statements.

Other Assets.  The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, core deposit intangibles, bank owned life insurance, deferred income taxes, other real estate owned and other assets, increased by $30.0 million to $677.1 million at June 30, 2020 from $647.1 million at June 30, 2019.  

The increase in other assets primarily reflected the adoption of a new accounting standard that requires leases to be recognized on our Consolidated Statements of Condition as a right of use asset and lease liability and a payment deferral receivable related to modified loans in accordance with the CARES Act provisions. Our operating lease right of use asset and payment deferral receivable totaled approximately $16.5 million and $12.4 million, respectively, as of June 30, 2020.  The remaining increases and decreases in other assets for the year ended June 30, 2020 generally reflected normal operating fluctuations in their respective balances.

Additional information about the Company’s operating lease right of use asset at June 30, 2020 is presented in Note 9 to the audited consolidated financial statements.  

 

49


 

Deposits.  Total deposits increased by $282.7 million to $4.43 billion at June 30, 2020 from $4.15 billion at June 30, 2019.  The following table sets forth the changes, by account type, in deposits.

 

 

June 30,

 

 

June 30,

 

 

Increase/

 

 

2020

 

 

 

2019

 

 

(Decrease)

 

 

(In Thousands)

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

$

419,138

 

 

$

309,063

 

 

$

110,075

 

Interest-bearing demand

 

1,264,151

 

 

 

843,432

 

 

 

420,719

 

Savings

 

906,597

 

 

 

790,658

 

 

 

115,939

 

Certificates of deposit

 

1,840,396

 

 

 

2,204,457

 

 

 

(364,061

)

Interest-bearing deposits

 

4,011,144

 

 

 

3,838,547

 

 

 

172,597

 

Total deposits

$

4,430,282

 

 

$

4,147,610

 

 

$

282,672

 

 

The net increase in deposit balances for the year ended June 30, 2020 was comprised of changes in the balances of retail deposits as well as non-retail deposits acquired through various wholesale channels.  The reallocation of deposits for the year ended June 30, 2020 reflected the Company’s continued success in realigning its funding mix in favor of core deposits. The following table sets forth the distribution of total deposit accounts, by retail and wholesale deposits, at the dates indicated:

 

 

June 30,

 

 

June 30,

 

 

Increase/

 

 

2020

 

 

 

2019

 

 

(Decrease)

 

 

(In Thousands)

 

Retail deposits:

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing demand

$

419,138

 

 

$

309,063

 

 

$

110,075

 

Interest-bearing demand

 

1,264,151

 

 

 

843,432

 

 

 

420,719

 

Savings

 

906,597

 

 

 

790,658

 

 

 

115,939

 

Certificates of deposits

 

1,773,257

 

 

 

1,902,542

 

 

 

(129,285

)

Total retail deposits

 

4,363,143

 

 

 

3,845,695

 

 

 

517,448

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale deposits:

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposits  - listing service

 

35,760

 

 

 

66,110

 

 

 

(30,350

)

Certificates of deposits  - brokered

 

31,379

 

 

 

235,805

 

 

 

(204,426

)

Total wholesale deposits

 

67,139

 

 

 

301,915

 

 

 

(234,776

)

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

$

4,430,282

 

 

$

4,147,610

 

 

$

282,672

 

 

Additional information about our deposits at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 12 to the audited consolidated financial statements.

 

50


 

Borrowings.  The balance of borrowings decreased by $148.8 million to $1.17 billion, or 17.4% of total assets, at June 30, 2020 from $1.32 billion, or 19.9% of total assets, at June 30, 2019. The decrease in borrowings primarily reflected the extinguishment and maturity of $121.5 million and $35.0 million of FHLB advances, respectively. The decrease in borrowings also included a decrease in overnight borrowings totaling $30.0 million. The decrease in borrowings was partially offset by a net increase in short-term FHLB advances totaling $40.0 million.

Additional information about our borrowings at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 13 to the audited consolidated financial statements.

Other Liabilities.  The balance of other liabilities increased by $32.5 million to $70.6 million at June 30, 2020 from $38.1 million at June 30, 2019. The increase in other liabilities primarily reflected the adoption of a new accounting standard related to leases and a decrease in the fair value of our interest rate derivatives. The new accounting standard requires leases to be recognized on our Consolidated Statements of Condition as a right of use asset and lease liability, as noted above.  Our operating lease liability totaled approximately $17.1 million as of June 30, 2020 and the decrease in the fair value of our interest rate derivatives portfolio in a liability position was approximately $18.0 million at June 30, 2020.  The remaining variance generally represented normal operating fluctuations in the balances of other liabilities.

Additional information about the Company’s operating lease liability at June 30, 2020 is presented in Note 9 to the audited consolidated financial statements.  Additional information about the Company’s derivatives portfolio at June 30, 2020 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 14 to the audited consolidated financial statements.

Stockholders’ Equity.  Stockholders’ equity decreased by $43.0 million to $1.08 billion at June 30, 2020 from $1.13 billion at June 30, 2019 largely reflecting the impact of our share repurchases and dividends declared during fiscal 2020.  In March 2019 we announced our fourth share repurchase program through which we authorized the repurchase of 9,218,324 shares, or 10%, of our outstanding shares as of that date.  

During the year ended June 30, 2020, the Company repurchased 5,375,551 shares of common stock at a total cost of $69.8 million and an average cost of $12.98 per share. The shares of common stock repurchased during the period represented 58.3% of the total shares authorized to be repurchased under the current repurchase program. Cumulatively, the Company has repurchased a total of 8,457,294 shares or 91.7% of the shares to be repurchased under its current repurchase program at a total cost of $111.1 million and at an average cost of $13.14 per share.  On March 25, 2020 the Company temporarily suspended its stock repurchase program due to the risks and uncertainties associated with the COVID-19 pandemic.

The net decrease in stockholders’ equity was partially offset by net income of $45.0 million, or $0.55 per share, for the year ended June 30, 2020 from which we declared and paid cash dividends totaling $0.29 per share. Cash dividends declared and paid during the year ended June 30, 2020 reduced stockholders’ equity by $23.7 million.

The change in stockholders’ equity also reflected a $1.6 million decrease in accumulated other comprehensive income during the year ended June 30, 2020.

 

51


 

Comparison of Operating Results for the Years Ended June 30, 2020, and June 30, 2019

Net Income.  Net income for the year ended June 30, 2020 was $45.0 million, or $0.55 per basic and diluted share, compared to $42.1 million, or $0.46 per basic and diluted share, for the year ended June 30, 2019. The increase in net income reflected an increase in non-interest income, a decrease in non-interest expense and a decrease in income tax expense that was partially offset by a decrease in net interest income, as detailed above, and an increase to the provision for loan losses.

Net income for the year ended June 30, 2020 was impacted by a non-recurring increase of $720,000 in non-interest expense and a non-recurring decrease of $342,000 in non-interest income which were recognized in conjunction with the Company’s previously completed branch consolidations.  In addition, net income reflected the Company’s recognition of certain merger-related expenses totaling $951,000 related to its acquisition of MSB, as noted above.

Net Interest Income.  Net interest income decreased by $6.0 million to $149.4 million for the year ended June 30, 2020. The decrease between the comparative periods resulted from a decrease of $4.1 million in interest income and an increase of $1.8 million in interest expense.

The decrease in interest income of $4.1 million partly reflected an eight basis points decrease in the yield on interest-earning assets to 3.83% partially offset by an increase to their average balance of $17.2 million to $6.09 billion.  Interest income on loans decreased by $5.4 million to $187.0 million for the year ended June 30, 2020. The decrease in interest income on loans was primarily attributable to a $100.6 million decrease in the average balance of loans to $4.57 billion during the year ended June 30, 2020. The average yield on loans decreased three basis points to 4.09%. The decrease in interest income on interest-earning assets, excluding loans, was due to decreases in interest income on tax-exempt securities and other interest-earning assets partially offset by an increase in interest income on taxable investment securities.

The increase in interest expense partly reflected an $86.3 million increase in the average balance of interest-bearing liabilities to $5.20 billion for the year ended June 30, 2020, while also reflecting a one basis point increase in the average cost of interest-bearing liabilities to 1.61%. Interest expense on deposits increased $6.3 million to $58.9 million for the year ended June 30, 2020 and was attributable to an increase of $152.5 million in the average balance of interest-bearing deposits coupled with an 11 basis point increase in their cost. Interest expense on borrowings decreased by $4.5 million to $25.0 million for the year ended June 30, 2020 and was attributable to a decrease of $66.2 million in the average balance of borrowings coupled with a 24 basis point decrease in their cost.

For the year ended June 30, 2020, net interest spread declined by nine basis points to 2.22% while net interest margin declined 11 basis points to 2.45%. The decrease in the net interest rate spread reflected a decrease in the average yield on interest-earning assets and an increase in the average cost of interest-bearing liabilities.

 

52


 

Additional details surrounding the composition of, and changes to, net interest income are presented in the tables below.

The following table reflects the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances.  No tax equivalent adjustments have been made to yield or costs.  Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income.

 

 

For the Years Ended June 30,

 

2020

 

2019

 

2018

 

Average

Balance

 

 

Interest

 

 

Average

Yield/

Cost

 

Average

Balance

 

 

Interest

 

 

Average

Yield/

Cost

 

Average

Balance

 

 

Interest

 

 

Average

Yield/

Cost

 

(Dollars in Thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable (1)

$

4,568,816

 

 

$

187,003

 

 

 

4.09

 

%

 

$

4,669,436

 

 

$

192,386

 

 

 

4.12

 

%

 

$

3,577,598

 

 

$

138,426

 

 

 

3.87

 

%

Taxable investment securities (2)

 

1,291,516

 

 

 

39,321

 

 

 

3.04

 

 

 

 

1,171,335

 

 

 

37,213

 

 

 

3.18

 

 

 

 

1,048,163

 

 

 

27,053

 

 

 

2.58

 

 

Tax-exempt securities (2)

 

111,477

 

 

 

2,393

 

 

 

2.15

 

 

 

 

134,489

 

 

 

2,839

 

 

 

2.11

 

 

 

 

127,779

 

 

 

2,616

 

 

 

2.05

 

 

Other interest-earning assets (3)

 

122,278

 

 

 

4,491

 

 

 

3.67

 

 

 

 

101,595

 

 

 

4,895

 

 

 

4.82

 

 

 

 

93,209

 

 

 

3,336

 

 

 

3.58

 

 

Total interest-earning assets

 

6,094,087

 

 

 

233,208

 

 

 

3.83

 

 

 

 

6,076,855

 

 

 

237,333

 

 

 

3.91

 

 

 

 

4,846,749

 

 

 

171,431

 

 

 

3.54

 

 

Non-interest-earning assets

 

595,158

 

 

 

 

 

 

 

 

 

 

 

 

582,838

 

 

 

 

 

 

 

 

 

 

 

 

420,219

 

 

 

 

 

 

 

 

 

 

Total assets

$

6,689,245

 

 

 

 

 

 

 

 

 

 

 

$

6,659,693

 

 

 

 

 

 

 

 

 

 

 

$

5,266,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

$

1,041,188

 

 

$

11,433

 

 

 

1.10

 

 

 

$

796,815

 

 

$

8,125

 

 

 

1.02

 

 

 

$

896,695

 

 

$

7,390

 

 

 

0.82

 

 

Savings

 

831,832

 

 

 

6,735

 

 

 

0.81

 

 

 

 

761,203

 

 

 

4,186

 

 

 

0.55

 

 

 

 

569,777

 

 

 

993

 

 

 

0.17

 

 

Certificates of deposit

 

2,032,046

 

 

 

40,684

 

 

 

2.00

 

 

 

 

2,194,513

 

 

 

40,200

 

 

 

1.83

 

 

 

 

1,496,743

 

 

 

21,266

 

 

 

1.42

 

 

Total interest-bearing deposits

 

3,905,066

 

 

 

58,852

 

 

 

1.51

 

 

 

 

3,752,531

 

 

 

52,511

 

 

 

1.40

 

 

 

 

2,963,215

 

 

 

29,649

 

 

 

1.00

 

 

Borrowings

 

1,293,096

 

 

 

25,002

 

 

 

1.93

 

 

 

 

1,359,323

 

 

 

29,509

 

 

 

2.17

 

 

 

 

910,527

 

 

 

20,489

 

 

 

2.25

 

 

Total interest-bearing liabilities

 

5,198,162

 

 

 

83,854

 

 

 

1.61

 

 

 

 

5,111,854

 

 

 

82,020

 

 

 

1.60

 

 

 

 

3,873,742

 

 

 

50,138

 

 

 

1.29

 

 

Non-interest-bearing liabilities (4)

 

394,758

 

 

 

 

 

 

 

 

 

 

 

 

351,217

 

 

 

 

 

 

 

 

 

 

 

 

311,560

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

5,592,920

 

 

 

 

 

 

 

 

 

 

 

 

5,463,071

 

 

 

 

 

 

 

 

 

 

 

 

4,185,302

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

1,096,325

 

 

 

 

 

 

 

 

 

 

 

 

1,196,622

 

 

 

 

 

 

 

 

 

 

 

 

1,081,666

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’

  equity

$

6,689,245

 

 

 

 

 

 

 

 

 

 

 

$

6,659,693

 

 

 

 

 

 

 

 

 

 

 

$

5,266,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

149,354

 

 

 

 

 

 

 

 

 

 

 

$

155,313

 

 

 

 

 

 

 

 

 

 

 

$

121,293

 

 

 

 

 

 

Interest rate spread (5)

 

 

 

 

 

 

 

 

 

2.22

 

%

 

 

 

 

 

 

 

 

 

 

2.31

 

%

 

 

 

 

 

 

 

 

 

 

2.25

 

%

Net interest margin (6)

 

 

 

 

 

 

 

 

 

2.45

 

%

 

 

 

 

 

 

 

 

 

 

2.56

 

%

 

 

 

 

 

 

 

 

 

 

2.50

 

%

Ratio of interest-earning assets

  to interest-bearing liabilities

 

1.17

 

X

 

 

 

 

 

 

 

 

 

 

1.19

 

X

 

 

 

 

 

 

 

 

 

 

1.25

 

X

 

 

 

 

 

 

 

 

 

(1)

Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for loan losses has been included in non-interest-earning assets.

(2)

Fair value adjustments have been excluded in the balances of interest-earning assets.

(3)

Includes interest-bearing deposits at other banks and FHLB of New York capital stock.

(4)

Includes average balances of non-interest-bearing deposits of $334,522,000, $312,169,000 and $281,262,000, for the years ended June 30, 2020, 2019 and 2018, respectively.

(5)

Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(6)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

 

53


 

The following table reflects the dollar amount of changes in interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated.  Each category reflects the:  (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change.  The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.

 

 

Year Ended June 30, 2020

versus

Year Ended June 30, 2019

 

 

Year Ended June 30, 2019

versus

Year Ended June 30, 2018

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to