Docoh
Loading...

KRNY Kearny Financial

Filed: 26 Aug 21, 8:00pm
0001617242 krny:FourthShareRepurchaseProgramAnnouncedInMarchTwoThousandNineteenMember 2019-03-31

 

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, 2021

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, 2020 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $815.8 million.  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 20, 2021 there were outstanding 77,004,871 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the definitive Proxy Statement for the Registrant’s 2021 Annual Meeting of Stockholders. (Part III)

 

 

 


 

KEARNY FINANCIAL CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended June 30, 2021

INDEX

 

 

 

PART I

 

 

 

 

 

 

Page

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

31

Item 1B.

 

Unresolved Staff Comments

 

39

Item 2.

 

Properties

 

39

Item 3.

 

Legal Proceedings

 

39

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

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

 

40

Item 6.

 

Selected Financial Data

 

42

Item 7.

 

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

 

44

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

56

Item 8.

 

Financial Statements and Supplementary Data

 

58

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

58

Item 9A.

 

Controls and Procedures

 

58

Item 9B.

 

Other Information

 

58

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

59

Item 11.

 

Executive Compensation

 

59

Item 12.

 

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

 

59

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

60

Item 14.

 

Principal Accounting Fees and Services

 

60

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

61

Item 16.

 

Form 10-K Summary

 

63

 

 

 

 

 

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 COVID-19 pandemic may continue to adversely impact the local and national economy and our business and results of operations may continue to be adversely affected;

 

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 credit 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, clients, 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.

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 for sale into the secondary market. 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.

We operate from our administrative headquarters in Fairfield, New Jersey and other administrative locations throughout the state of New Jersey. As of June 30, 2021, we had 48 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.

 

3


Acquisition of MSB Financial Corp. (“MSB”)

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 were distributed to former MSB shareholders in exchange for their shares of MSB common stock. As a result of the merger, the Company acquired loans with fair values totaling $530.2 million, assumed deposits with fair values totaling $460.2 million and acquired four branch offices located in Somerset and Morris counties. The application of the acquisition method of accounting resulted in the recognition of bargain purchase gain of $3.1 million and a core deposit intangible of $690,000.

COVID-19 Pandemic

As the Company’s business is primarily conducted within the states of New Jersey and New York, which have each been significantly impacted by COVID-19, the operations of the Company have been similarly impacted. We continue to monitor developments related to COVID-19, including, but not limited to, its impact on our employees, clients, communities and results of operations.

Employee Matters. As the COVID-19 pandemic initially unfolded, and stay-at-home orders were mandated by government officials, many of our non-branch personnel transitioned to working remotely or in a hybrid-remote environment. Through June 30, 2021 many of our non-branch personnel have continued to work in a hybrid-remote fashion. 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 and have established procedures and guidelines 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 initially 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 certain locations. In the months following, and in accordance with the protocols recommended by the Centers for Disease Control and Prevention (“CDC”), we have outfitted our branches with protective barriers and continued to provide our staff with personal protective equipment. As of June 30, 2021, all of our branches were fully operational.

CARES Act, 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 (“TDRs”) 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 guarantees 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 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, 2021 we had approximately 15 loans with total outstanding balances of $10.2 million under the PPP.

Based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications, including short-term payment deferrals, are not considered to be TDRs. Additional information regarding loans modified in accordance with this guidance is provided in the tables below.

2021 Consolidated Appropriations Act. The 2021 Consolidated Appropriations Act was signed into law on December 27, 2020.  The $900 billion relief package includes legislation that extends certain relief provisions of the CARES Act that were set to expire on December 31, 2020. This legislation extends this relief to the earlier of 60 days after the national emergency declared by the President is terminated or January 1, 2022.

 

 

4


 

Business Strategy

In recent years we have evolved our business model from that of a traditional thrift into 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. The key components of our business strategy are as follows:

 

Maintain Robust Capital and Liquidity Levels

As demonstrated by the June 30, 2021 Tier 1 Leverage ratios of the Company and the Bank of 11.76% and 10.23%, respectively, we currently maintain, and plan to continue to maintain, capital levels in excess of regulatory minimums and internal capital adequacy guidelines.

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, 2021, our liquid assets included $67.9 million of short-term cash and equivalents supplemented by $1.68 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 $651.0 million via unsecured lines of credit and $2.13 billion and $233.1 million, without pledging additional collateral, from the Federal Home Loan Bank of New York and Federal Reserve Bank, respectively.

 

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 and, in particular, non-interest bearing deposits. During fiscal 2021, excluding acquired balances, we successfully grew core non-maturity deposits by $712.5 million and anticipate that the balance of non-maturity deposits will continue to increase in fiscal 2022.

 

Grow and Diversify Our Loan Portfolio

We plan to continue focusing on growing and diversifying our loan portfolio with a particular emphasis on growth in commercial real estate, commercial business and commercial construction loan segments. Our focus, as it relates to new loan originations, will continue to be on high quality loans with strong sponsors and favorable credit metrics.

 

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 and to supplement our loan growth initiatives. 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, 2021, we had a total of 48 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 through additional branch consolidations, where appropriate. Such efforts will take into consideration historical branch profitability, market demographic trajectory, geographic proximity of consolidating branches 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.

 

5


 

Continue Our Technology Transformation

In recognition of the ongoing evolution of our business towards digital 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. We continually strive to enhance our digital banking services which allow us to serve our clients’ needs in an omnichannel environment.

Market Area. At June 30, 2021, our primary market area consisted of the counties in which we currently operate branches, including Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset 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.

Lending Activities

General. Our loan portfolio is comprised of multi-family loans, nonresidential real estate loans, commercial business loans, construction loans, one- to four-family residential mortgage loans, home equity loans and lines of credit and consumer loans. In recent years our lending strategies have placed increasing emphasis on the origination of commercial loans.

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,

 

2021

 

2020

 

2019

 

2018

 

2017

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

(Dollars In Thousands)

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

2,039,260

 

 

 

41.79

 

%

 

$

2,059,568

 

 

 

45.36

 

%

 

$

1,946,391

 

 

 

41.14

 

%

 

$

1,758,584

 

 

 

38.50

 

%

 

$

1,412,575

 

 

 

43.57

 

%

Nonresidential

 

1,079,444

 

 

 

22.12

 

 

 

 

960,853

 

 

 

21.16

 

 

 

 

1,258,869

 

 

 

26.61

 

 

 

 

1,302,961

 

 

 

28.52

 

 

 

 

1,085,064

 

 

 

33.46

 

 

Commercial business

 

168,951

 

 

 

3.46

 

 

 

 

138,788

 

 

 

3.06

 

 

 

 

65,763

 

 

 

1.39

 

 

 

 

85,825

 

 

 

1.88

 

 

 

 

74,471

 

 

 

2.30

 

 

Construction

 

93,804

 

 

 

1.92

 

 

 

 

20,961

 

 

 

0.46

 

 

 

 

13,907

 

 

 

0.29

 

 

 

 

23,271

 

 

 

0.51

 

 

 

 

3,815

 

 

 

0.12

 

 

One- to four-family residential

mortgage loans

 

1,447,721

 

 

 

29.66

 

 

 

 

1,273,022

 

 

 

28.04

 

 

 

 

1,344,044

 

 

 

28.41

 

 

 

 

1,297,453

 

 

 

28.40

 

 

 

 

567,323

 

 

 

17.50

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of

credit

 

47,871

 

 

 

0.98

 

 

 

 

82,920

 

 

 

1.83

 

 

 

 

96,165

 

 

 

2.03

 

 

 

 

90,761

 

 

 

1.99

 

 

 

 

82,822

 

 

 

2.55

 

 

Other consumer loans

 

3,259

 

 

 

0.07

 

 

 

 

3,991

 

 

 

0.09

 

 

 

 

5,814

 

 

 

0.13

 

 

 

 

9,060

 

 

 

0.20

 

 

 

 

16,383

 

 

 

0.50

 

 

Total loans

 

4,880,310

 

 

 

100.00

 

%

 

 

4,540,103

 

 

 

100.00

 

%

 

 

4,730,953

 

 

 

100.00

 

%

 

 

4,567,915

 

 

 

100.00

 

%

 

 

3,242,453

 

 

 

100.00

 

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

58,165

 

 

 

 

 

 

 

 

37,327

 

 

 

 

 

 

 

 

33,274

 

 

 

 

 

 

 

 

30,865

 

 

 

 

 

 

 

 

29,286

 

 

 

 

 

 

Unaccreted (unamortized) yield

adjustments

 

28,916

 

 

 

 

 

 

 

 

41,706

 

 

 

 

 

 

 

 

52,025

 

 

 

 

 

 

 

 

66,567

 

 

 

 

 

 

 

 

(2,808

)

 

 

 

 

 

Total adjustments

 

87,081

 

 

 

 

 

 

 

 

79,033

 

 

 

 

 

 

 

 

85,299

 

 

 

 

 

 

 

 

97,432

 

 

 

 

 

 

 

 

26,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

4,793,229

 

 

 

 

 

 

 

$

4,461,070

 

 

 

 

 

 

 

$

4,645,654

 

 

 

 

 

 

 

$

4,470,483

 

 

 

 

 

 

 

$

3,215,975

 

 

 

 

 

 

 

 

6


 

The following table sets forth the composition of our real estate secured loans indicating the loan-to-value (“LTV”), by loan category, at June 30, 2021:

 

 

June 30, 2021

 

 

Balance

 

 

LTV

 

 

(In Thousands)

 

Commercial mortgage loans:

 

 

 

 

 

 

 

Multi-family mortgage loans

$

2,039,260

 

 

64%

 

Nonresidential mortgage loans

 

1,079,444

 

 

54%

 

Construction loans

 

93,804

 

 

61%

 

Total commercial mortgage loans

 

3,212,508

��

 

61%

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgage

 

1,447,721

 

 

59%

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

Home equity loans

 

47,871

 

 

47%

 

 

 

 

 

 

 

 

 

Total real estate secured loans

$

4,708,100

 

 

60%

 

 

Loan Maturity Schedule. The following table sets forth the maturities of our loan portfolio at June 30, 2021. 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

$

63,264

 

 

$

54,314

 

 

$

77,362

 

 

$

44,459

 

 

$

3,849

 

 

$

333

 

 

$

1,106

 

 

$

244,687

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 3 years

 

191,516

 

 

 

159,869

 

 

 

26,726

 

 

 

37,399

 

 

 

14,635

 

 

 

2,144

 

 

 

456

 

 

 

432,745

 

3 to 5 years

 

341,456

 

 

 

148,991

 

 

 

25,339

 

 

 

1,125

 

 

 

23,682

 

 

 

3,249

 

 

 

105

 

 

 

543,947

 

5 to 10 years

 

1,248,498

 

 

 

506,915

 

 

 

32,924

 

 

 

-

 

 

 

122,330

 

 

 

12,952

 

 

 

43

 

 

 

1,923,662

 

10 to 15 years

 

90,236

 

 

 

65,217

 

 

 

2,350

 

 

 

-

 

 

 

175,277

 

 

 

15,516

 

 

 

5

 

 

 

348,601

 

Over 15 years

 

104,290

 

 

 

144,138

 

 

 

4,250

 

 

 

10,821

 

 

 

1,107,948

 

 

 

13,677

 

 

 

1,544

 

 

 

1,386,668

 

Total due after one year

 

1,975,996

 

 

 

1,025,130

 

 

 

91,589

 

 

 

49,345

 

 

 

1,443,872

 

 

 

47,538

 

 

 

2,153

 

 

 

4,635,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount due

$

2,039,260

 

 

$

1,079,444

 

 

$

168,951

 

 

$

93,804

 

 

$

1,447,721

 

 

$

47,871

 

 

$

3,259

 

 

$

4,880,310

 

 

 

7


 

The following table shows the dollar amount of loans as of June 30, 2021 due after June 30, 2022 according to rate type and loan category:

 

 

Fixed Rates

 

 

Floating or Adjustable Rates

 

 

Total

 

 

(In Thousands)

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

855,553

 

 

$

1,120,443

 

 

$

1,975,996

 

Nonresidential

 

411,953

 

 

 

613,177

 

 

 

1,025,130

 

Commercial business

 

48,569

 

 

 

43,020

 

 

 

91,589

 

Construction

 

7,026

 

 

 

42,319

 

 

 

49,345

 

One- to four-family residential mortgage loans

 

1,247,938

 

 

 

195,934

 

 

 

1,443,872

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

21,460

 

 

 

26,078

 

 

 

47,538

 

Other consumer loans

 

847

 

 

 

1,306

 

 

 

2,153

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

2,593,346

 

 

$

2,042,277

 

 

$

4,635,623

 

 

Multi-Family and Nonresidential Real Estate Mortgage Loans. At June 30, 2021, multi-family loans totaled $2.04 billion, or 41.8% of our loan portfolio, while nonresidential loans totaled $1.08 billion, or 22.1% of our loan portfolio. We originate commercial mortgage loans on a variety of multi-family and nonresidential property types, including loans on mixed-use properties which combine residential and commercial space. We originated approximately $352.5 million of multi-family and nonresidential real estate mortgages during the year ended June 30, 2021, compared to $258.5 million during the year ended June 30, 2020. Supplementing our organic originations were loan purchases and participations totaling $21.4 million during the year ended June 30, 2021, compared to $55.5 million during the year ended June 30, 2020. Additionally, in conjunction with our acquisition of MSB we acquired multi-family and nonresidential real estate mortgage loans with fair values totaling approximately $231.0 million.

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. At June 30, 2021, commercial business loans totaled $169.0 million, or 3.5% of our loan portfolio. We originate commercial term loans and lines of credit to a variety of clients in our market area. Included within our business loan products are loans originated through the SBA in which Kearny Bank participates as a Preferred Lender. We originated approximately $104.6 million of commercial business loans during the year ended June 30, 2021, of which $4.0 million were originated under the SBA PPP program. By comparison, we originated approximately $108.5 million during the year ended June 30, 2020, of which $69.7 million were originated under the SBA PPP program. Additionally, in conjunction with our acquisition of MSB we acquired C&I loans with fair values totaling approximately $103.9 million. 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.

During the year ended June 30, 2021, we sold $43.6 million of PPP loans. At June 30, 2021, the balance of commercial business loans included PPP loans totaling $10.2 million.

Supplementing our organic origination of commercial business loans was the funding of wholesale commercial business loan participations totaling $251,000 and $2.7 million for the years ended June 30, 2021 and 2020, respectively. 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 2021 and 2020 were comprised of advances on previously committed lines of credit. Our outstanding balance of wholesale commercial business loan participations totaled $11.9 million and $20.8 million at June 30, 2021 and 2020, respectively.

Construction Lending. At June 30, 2021, construction loans totaled $93.8 million, or 1.9% of our loan portfolio. Our construction lending includes loans to individuals, builders or developers for the construction or renovation of one- to four-family residences or for the construction of commercial real estate or multi-family residential buildings. In conjunction with our acquisition of MSB we acquired construction loans with fair values totaling approximately $48.2 million.

During the year ended June 30, 2021, construction loan disbursements were $50.4 million compared to $7.2 million during the year ended June 30, 2020. Construction loan disbursements, including construction loans acquired from MSB, outpaced repayments during fiscal 2021 resulting in the reported net increase in the outstanding balance of this segment of the loan portfolio.

 

8


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 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. At June 30, 2021, one- to four-family mortgage loans totaled $1.45 billion, or 29.7% of our loan portfolio. Our portfolio lending activities include the origination of one- to four-family first mortgage loans, of which approximately $1.35 billion, or 93.1%, are secured by properties located within New Jersey and New York as of June 30, 2021 with the remaining $99.5 million, or 6.9%, secured by properties in other states.

During the year ended June 30, 2021, we originated $553.2 million of one- to four-family first mortgage portfolio loans compared to $197.8 million in the year ended June 30, 2020. To supplement portfolio loan originations, we also purchased one- to four-family first mortgages totaling $60.1 million during the year ended June 30, 2021 compared to $15.0 million during the year ended June 30, 2020. Additionally, in conjunction with our acquisition of MSB, we acquired one- to four-family first mortgage loans with fair values totaling approximately $132.5 million.

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”). In addition, we offer a first-time homebuyer program which provides financial incentives 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 clients of Kearny Bank and/or members of their immediate families.

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 $5.1 million in gains associated with the sale of $285.4 million of mortgage loans held for sale during the year ended June 30, 2021. As of that date, an additional $16.5 million of loans were held and committed for sale into the secondary market.

Home Equity Loans and Lines of Credit. At June 30, 2021, home equity loans and lines of credit totaled $47.9 million, or 1.0% of our loan portfolio. 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, 2021, we originated $15.8 million of home equity loans and home equity lines of credit compared to $16.4 million in the year ended June 30, 2020. However, repayments of home equity loans and lines of credit generally outpaced origination volume and acquired loans during fiscal 2021, resulting in a net decrease in the outstanding balance of this segment of the loan portfolio. Additionally, in conjunction with our acquisition of MSB we acquired home equity loans and home equity lines of credit with fair values totaling approximately $14.1 million.

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, 2021 primarily include $3.0 million of loans fully secured by savings accounts or certificates of deposit held by the Bank and $262,000 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.

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, 2021, our legal loans to one borrower limit was approximately $114.3 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.

 

9


At June 30, 2021, our largest single borrower had an aggregate outstanding loan balance of approximately $48.5 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 $48.2 million comprising six multi-family mortgage loans. At June 30, 2021, these lending relationships were current and performing in accordance with the terms of their loan agreements.

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

 

 

For the Years Ended June 30,

 

 

 

2021

 

 

 

2020

 

 

 

2019

 

 

(In Thousands)

 

Loan originations: (1)

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

256,223

 

 

$

193,158

 

 

$

352,208

 

Nonresidential

 

96,238

 

 

 

65,357

 

 

 

85,077

 

Commercial business

 

104,628

 

 

 

108,546

 

 

 

21,856

 

Construction

 

50,382

 

 

 

7,192

 

 

 

8,478

 

One- to four-family residential mortgage loans

 

553,194

 

 

 

197,825

 

 

 

106,883

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

15,804

 

 

 

16,396

 

 

 

33,757

 

Other consumer loans

 

1,227

 

 

 

1,312

 

 

 

2,274

 

Total loan originations

 

1,077,696

 

 

 

589,786

 

 

 

610,533

 

Loan purchases:

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

2,500

 

 

 

35,000

 

Nonresidential

 

21,351

 

 

 

53,043

 

 

 

33,625

 

Commercial business

 

251

 

 

 

2,671

 

 

 

2,732

 

One- to four-family residential mortgage loans

 

60,105

 

 

 

15,048

 

 

 

95,454

 

Total loan purchases

 

81,707

 

 

 

73,262

 

 

 

166,811

 

Loans acquired from MSB (2)

 

530,693

 

 

 

-

 

 

 

-

 

Loan sales: (1)

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

(44,450

)

 

 

(470

)

 

 

(867

)

Total loans sold

 

(44,450

)

 

 

(470

)

 

 

(867

)

 

 

 

 

 

 

 

 

 

 

 

 

Loan repayments

 

(1,311,576

)

 

 

(849,249

)

 

 

(612,622

)

Increase (decrease) due to other items

 

(1,911

)

 

 

2,087

 

 

 

11,316

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in loan portfolio

$

332,159

 

 

$

(184,584

)

 

$

175,171

 

 

(1)

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

(2)

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

Additional information about the Company’s loans is presented in Note 5 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, Director of Commercial Real Estate Lending, Director of Commercial & Industrial (C&I) Lending and Special Assets Manager. Loans which exceed certain thresholds, as defined within our policies, are submitted to the Bank’s Loan Committee and/or Board of Directors for approval.

 

10


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 residential loan is 120 days delinquent and a commercial 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.

The following table presents our past due loans by type and by amount as of the dates indicated:

 

 

Past Due Loans For

 

 

30-59 Days

 

 

60-89 Days

 

 

90 Days and Over

 

 

Total

 

At June 30, 2021

(In Thousands)

 

Multi-family

$

-

 

 

$

-

 

 

$

16,094

 

 

$

16,094

 

Nonresidential

 

-

 

 

 

-

 

 

 

32,891

 

 

 

32,891

 

Commercial business

 

-

 

 

 

-

 

 

 

401

 

 

 

401

 

Construction

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

One- to four-family residential mortgage loans

 

382

 

 

 

2,734

 

 

 

5,104

 

 

 

8,220

 

Home equity loans and lines of credit

 

6

 

 

 

5

 

 

 

32

 

 

 

43

 

Other consumer loans

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

Total

$

389

 

 

$

2,739

 

 

$

54,522

 

 

$

57,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

$

-

 

 

$

14,478

 

 

$

4,661

 

 

$

19,139

 

Commercial business

 

-

 

 

 

-

 

 

 

349

 

 

 

349

 

One- to four-family residential mortgage loans

 

3,211

 

 

 

1,038

 

 

 

4,506

 

 

 

8,755

 

Home equity loans and lines of credit

 

169

 

 

 

13

 

 

 

380

 

 

 

562

 

Other consumer loans

 

-

 

 

 

5

 

 

 

5

 

 

 

10

 

Total

$

3,380

 

 

$

15,534

 

 

$

9,901

 

 

$

28,815

 

 

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.

 

11


Purchased Credit Deteriorated Loans (“PCD”). Loans acquired in a business combination after July 1, 2020 are recorded in accordance with ASC Topic 326, after which acquired loans are separated into two types. PCD loans are acquired loans that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. Non-PCD loans are acquired loans that have experienced no or insignificant deterioration in credit quality since origination. To distinguish between the two types of acquired loans, the Company evaluates risk characteristics that have been determined to be indicators of deteriorated credit quality. The determining criteria may involve loan specific characteristics such as payment status, debt service coverage or other changes in creditworthiness since the loan was originated, while others are relevant to recent economic conditions, such as borrowers in industries impacted by the pandemic. As part of the acquisition of MSB, the Company acquired loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The Company acquired PCD loans with a par value of $69.4 million and an allowance for credit losses of $3.9 million in its acquisition of MSB. Additional information about the Company’s PCD loans is presented in Note 5 to the audited consolidated financial statements.

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,

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

(Dollars In Thousands)

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

$

18,526

 

 

$

2,962

 

 

$

70

 

 

$

116

 

 

$

158

 

Nonresidential

 

37,187

 

 

 

23,936

 

 

 

8,900

 

 

 

5,340

 

 

 

5,720

 

Commercial business

 

912

 

 

 

592

 

 

 

469

 

 

 

1,238

 

 

 

2,634

 

Construction

 

2,228

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

255

 

One- to four-family residential mortgage loans

 

19,170

 

 

 

8,359

 

 

 

9,943

 

 

 

9,192

 

 

 

8,790

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

1,744

 

 

 

842

 

 

 

866

 

 

 

913

 

 

 

1,241

 

Total nonaccrual loans (1)

 

79,767

 

 

 

36,691

 

 

 

20,248

 

 

 

16,799

 

 

 

18,798

 

Accruing loans 90 days or more past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer loans

 

-

 

 

 

5

 

 

 

22

 

 

 

60

 

 

 

74

 

Total accruing loans 90 days or more past due

 

-

 

 

 

5

 

 

 

22

 

 

 

60

 

 

 

74

 

Total nonperforming loans

 

79,767

 

 

 

36,696

 

 

 

20,270

 

 

 

16,859

 

 

 

18,872

 

Other real estate owned

 

178

 

 

 

178

 

 

 

-

 

 

 

725

 

 

 

1,632

 

Total nonperforming assets

$

79,945

 

 

$

36,874

 

 

$

20,270

 

 

$

17,584

 

 

$

20,504

 

Total nonperforming loans to total loans

 

1.64

%

 

 

0.82

%

 

 

0.43

%

 

 

0.37

%

 

 

0.58

%

Total nonperforming loans to total assets

 

1.10

%

 

 

0.54

%

 

 

0.31

%

 

 

0.26

%

 

 

0.39

%

Total nonperforming assets to total assets

 

1.10

%

 

 

0.55

%

 

 

0.31

%

 

 

0.27

%

 

 

0.43

%

 

(1)

TDRs on accrual status not included above totaled $6.2 million, $8.4 million, $4.3 million, $3.5 million and $2.5 million at June 30, 2021, 2020, 2019, 2018 and 2017, respectively.

Total nonperforming assets increased by $43.0 million to $79.9 million at June 30, 2021 from $36.9 million at June 30, 2020. For those same comparative periods, the number of nonperforming loans increased to 113 loans from 70 loans while there was one property in other real estate owned at June 30, 2021 and June 30, 2020, respectively. Included in the increase in nonperforming assets were $14.4 million of non-performing loans acquired from MSB, whose fair values at acquisition reflected various levels of impairment. Non-performing loans at June 30, 2021 did not include $51.8 million of performing PCD loans acquired from MSB.

At June 30, 2021, 2020, and 2019, Kearny Bank had loans with aggregate outstanding balances totaling $17.8 million, $21.5 million and $15.1 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 credit 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, all of which operate in accordance with a scope and frequency determined by senior management and the Audit and Compliance Committee of the Board of Directors.

 

12


As one component of our loan review system we engage a third-party firm which specializes in loan review and analysis functions. As part of their review process, our third-party review firm compares their review results with their client base to evaluate our risk assessment among our peers. This 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 credit 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, third-party loan reviews are being conducted quarterly and include non-performing loans as well as samples of performing loans of varying types within our portfolio.

In addition, our loan review system includes functions performed by internal audit and compliance personnel. Internal audit resources perform credit review functions similar to those of our third-party firm in addition to assessing the adequacy of, and adherence to, internal credit policies, regulatory guidance to policies and procedures and loan administration procedures. Our compliance resources monitor adherence to relevant lending-related and consumer protection-related laws and regulations.

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 5 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,

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

(In Thousands)

 

Special mention

$

84,981

 

 

$

9,187

 

 

$

5,681

 

 

$

592

 

 

$

2,594

 

Substandard

 

95,394

 

 

 

46,069

 

 

 

27,822

 

 

 

28,752

 

 

 

29,428

 

Doubtful

 

516

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

3

 

Total classified loans

$

180,891

 

 

$

55,257

 

 

$

33,504

 

 

$

29,345

 

 

$

32,025

 

 

At June 30, 2021, 29 loans were classified as Special Mention and 152 loans were classified as Substandard. As of that same date, 45 loans were classified as Doubtful.

Individually Evaluated Loans. On a case-by-case basis, we may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When we determine that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, we will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

 

13


Allowance for Credit Losses - Loans

On July 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology with an expected loss methodology, referred to as the “CECL” methodology. See Note 1, Summary of Significant Accounting Policies for additional information on the adoption of Topic 326. Amounts reported prior to the adoption of ASU 2016-13, continue to be reported in accordance with previously applicable GAAP.

A description of our methodology in establishing our allowance for credit losses is set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Allowance for Credit Losses”.

Additional information about our allowance for credit losses is also presented in Note 6 to the audited consolidated financial statements.

Our allowance for credit losses is maintained at a level necessary to cover lifetime expected credit losses in financial assets at the balance sheet date. The following table sets forth information with respect to activity in the allowance for credit losses for the periods indicated:

 

 

For the Years Ended June 30,

 

 

 

2021

 

 

 

2020

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

(Dollars in Thousands)

 

Allowance balance (at beginning of period)

$

37,327

 

 

$

33,274

 

 

$

30,865

 

 

$

29,286

 

 

$

24,229

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

(80

)

 

 

-

 

 

 

(54

)

 

 

(45

)

 

 

(149

)

Commercial business

 

(1,446

)

 

 

(50

)

 

 

(861

)

 

 

(145

)

 

 

(221

)

One- to four-family residential mortgage loans

 

(13

)

 

 

-

 

 

 

(83

)

 

 

(521

)

 

 

(76

)

Home equity loans and lines of credit

 

(32

)

 

 

-

 

 

 

-

 

 

 

(18

)

 

 

(96

)

Other consumer loans

 

(41

)

 

 

(139

)

 

 

(285

)

 

 

(829

)

 

 

(849

)

Total charge offs:

 

(1,612

)

 

 

(189

)

 

 

(1,283

)

 

 

(1,558

)

 

 

(1,391

)

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonresidential

 

-

 

 

 

10

 

 

 

6

 

 

 

-

 

 

 

-

 

Commercial business

 

17

 

 

 

2

 

 

 

47

 

 

 

90

 

 

 

727

 

One- to four-family residential mortgage loans

 

4

 

 

 

-

 

 

 

-

 

 

 

172

 

 

 

256

 

Home equity loans and lines of credit

 

-

 

 

 

-

 

 

 

-

 

 

 

65

 

 

 

16

 

Other consumer loans

 

9

 

 

 

33

 

 

 

83

 

 

 

104

 

 

 

68

 

Total recoveries:

 

30

 

 

 

45

 

 

 

136

 

 

 

431

 

 

 

1,067

 

Net charge offs:

 

(1,582

)

 

 

(144

)

 

 

(1,147

)

 

 

(1,127

)

 

 

(324

)

(Reversal of) provision for credit losses

 

(1,121

)

 

 

4,197

 

 

 

3,556

 

 

 

2,706

 

 

 

5,381

 

Impact of adopting Topic 326

 

19,640

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Initial allowance on PCD loans

 

3,901

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Allowance balance (at end of period)

$

58,165

 

 

$

37,327

 

 

$

33,274

 

 

$

30,865

 

 

$

29,286

 

Total loans outstanding

$

4,880,310

 

 

$

4,540,103

 

 

$

4,730,953

 

 

$

4,567,915

 

 

$

3,242,453

 

Average loans outstanding

$

4,866,436

 

 

$

4,568,816

 

 

$

4,669,436

 

 

$

3,577,598

 

 

$

2,955,686

 

Allowance for credit losses as a percent of

  total loans outstanding

 

1.19

%

 

 

0.82

%

 

 

0.70

%

 

 

0.68

%

 

 

0.90

%

Net loan charge-offs as a percent of

  average loans outstanding

 

0.03

%

 

 

0.00

%

 

 

0.02

%

 

 

0.03

%

 

 

0.01

%

Allowance for credit losses to

  non-performing loans

 

72.92

%

 

 

101.72

%

 

 

164.15

%

 

 

183.08

%

 

 

155.18

%

 

 

14


 

Allocation of Allowance for Credit Losses on Loans. The following table sets forth the allocation of the allowance for credit losses by loan category and the percent of loans in each category to total net loans receivable at the dates indicated. The allowance for credit losses allocated to each category is the estimated amount considered necessary to cover lifetime expected credit losses inherent in any particular category as of the balance sheet date and does not restrict the use of the allowance to absorb losses in other categories. For periods prior to 2021, the allowance for credit losses represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans.

 

 

At June 30,

 

2021

 

2020

 

2019

 

2018

 

2017

 

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

$

28,450

 

 

 

48.91

 

%

 

$

20,916

 

 

 

56.03

 

%

 

$

16,959

 

 

 

50.96

 

%

 

$

14,946

 

 

 

48.42

 

%

 

$

13,941

 

 

 

43.57

 

%

Nonresidential

 

16,243

 

 

 

27.93

 

 

 

 

8,763

 

 

 

23.48

 

 

 

 

9,672

 

 

 

29.07

 

 

 

 

9,787

 

 

 

31.71

 

 

 

 

9,939

 

 

 

33.46

 

 

Commercial business

 

2,086

 

 

 

3.59

 

 

 

 

1,926

 

 

 

5.16

 

 

 

 

2,467

 

 

 

7.41

 

 

 

 

2,552

 

 

 

8.27

 

 

 

 

1,709

 

 

 

2.30

 

 

Construction

 

1,170

 

 

 

2.01

 

 

 

 

236

 

 

 

0.63

 

 

 

 

136

 

 

 

0.41

 

 

 

 

258

 

 

 

0.84

 

 

 

 

35

 

 

 

0.12

 

 

One- to four-family residential

mortgage loans

 

9,747

 

 

 

16.76

 

 

 

 

4,860

 

 

 

13.02

 

 

 

 

3,377

 

 

 

10.15

 

 

 

 

2,479

 

 

 

8.03

 

 

 

 

2,384

 

 

 

17.50

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of

credit

 

433

 

 

 

0.74

 

 

 

 

568

 

 

 

1.52

 

 

 

 

491

 

 

 

1.48

 

 

 

 

430

 

 

 

1.39

 

 

 

 

501

 

 

 

2.55

 

 

Other consumer loans

 

36

 

 

 

0.06

 

 

 

 

58

 

 

 

0.16

 

 

 

 

172

 

 

 

0.52

 

 

 

 

413

 

 

 

1.34

 

 

 

 

777

 

 

 

0.50

 

 

Total

$

58,165

 

 

 

100.00

 

%

 

$

37,327

 

 

 

100.00

 

%

 

$

33,274

 

 

 

100.00

 

%

 

$

30,865

 

 

 

100.00

 

%

 

$

29,286

 

 

 

100.00

 

%

 

At June 30, 2021, the allowance for credit losses totaled $58.2 million, or 1.19% of total loans, reflecting an increase of $20.9 million from $37.3 million, or 0.82% of total loans, at June 30, 2020. This increase resulted from the adoption of CECL, which increased the ACL for loans receivable by $19.6 million, the establishment of an ACL for loans acquired from MSB totaling $9.0 million and an increase in the portion of the ACL attributable to loans individually evaluated for impairment. This increase was partially offset by a reduction in ACL attributable to the effects of a decrease in the overall balance of the portion of the loan portfolio that was collectively evaluated for impairment and net charge-offs.

Our loan portfolio experienced an annualized net charge-off rate of 0.03% for the year ended June 30, 2021, an increase of three basis points from the 0.00% rate for the year ended June 30, 2020.

An overview of the balances and activity within the allowance for credit losses during the prior fiscal year ended June 30, 2020 can be found in our Annual Report on Form 10-K for the year ended June 30, 2020, filed with the SEC on August 28, 2020.

The ACL at June 30, 2021 is maintained at a level that is management’s best estimate of lifetime expected credit losses inherent in loans at the balance sheet date. The ACL 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. Additions to the allowance for credit losses may be necessary if the future economic environment deteriorates from forecasted conditions. In addition, the banking regulators, as an integral part of their examination process, periodically review our loan and foreclosed real estate portfolios, related allowance for credit losses and valuation allowance for foreclosed real estate. The regulators may require the allowance for credit losses to be increased based on their review of information available at the time of the examination, which may negatively affect our earnings.

Additional information about the ACL at June 30, 2021 and June 30, 2020 is presented in Note 6 to the audited consolidated financial statements.

 

15


Investment Securities

At June 30, 2021, our investment securities portfolio totaled $1.72 billion and comprised 23.5% of our total assets.  By comparison, at June 30, 2020, our securities portfolio totaled $1.42 billion and comprised 21.0% of our total assets. Additional information about the Company’s investment securities at June 30, 2021 is presented in Note 4 to the audited consolidated financial statements.

The year-over-year net increase in the securities portfolio totaled approximately $296.7 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 $12.5 million decrease in the fair value of the available for sale securities portfolio to an unrealized gain of $10.0 million at June 30, 2021 from an unrealized gain of $22.5 million at June 30, 2020.

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, taking into consideration our liquidity needs, asset/liability management goals, 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 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. 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.

The carrying value of our mortgage-backed securities totaled $1.06 billion at June 30, 2021 and comprised 62.0% of total investments and 14.6% 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.

The carrying value of our securities representing obligations of state and political subdivisions totaled $60.4 million at June 30, 2021 and comprised 3.5% of total investments and less than 1.0% 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 $243.0 million at June 30, 2021 and comprised 14.2% of total investments and 3.3% 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.

The outstanding balance of our collateralized loan obligations totaled $189.9 million at June 30, 2021 and comprised 11.1% 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 commercial loans to large, U.S. corporations. At June 30, 2021, 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 $158.4 million at June 30, 2021 and comprised 9.2% of total investments and 2.2% of total assets as of that date. This category of securities is comprised of two 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. At June 30, 2021, 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.

 

16


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

We do not currently use or maintain a trading account. Securities not classified as held to maturity are classified as available for sale. These securities are reported at fair value and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as adjustments to accumulated other comprehensive income, a separate component of equity. As of June 30, 2021, our available for sale securities portfolio had a carrying value of $1.68 billion or 97.8% of our total securities with the remaining $38.1 million or 2.2% 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, 2021. All of our securities carry market risk insofar as increases in market rates of interest may cause a decrease in their market value. We believe that unrealized losses on securities held at June 30, 2021, are a function of changes in market interest rates and credit spreads, not changes in credit quality. Therefore, no allowance for credit losses was recorded at that time.

During the year ended June 30, 2021, proceeds from sales of securities available for sale totaled $98.1 million and resulted in gross gains of $1.2 million and gross losses of $470,000. 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.  There were no sales of held to maturity securities during the year ended June 30, 2021, 2020 and 2019.

 

17


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

 

 

At June 30,

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

-

 

 

$

3,678

 

 

$

4,411

 

 

$

5,316

 

Obligations of state and political subdivisions

 

34,603

 

 

 

54,054

 

 

 

26,951

 

 

 

26,088

 

 

 

27,740

 

Asset-backed securities

 

242,989

 

 

 

172,447

 

 

 

179,313

 

 

 

182,620

 

 

 

162,429

 

Collateralized loan obligations

 

189,880

 

 

 

193,788

 

 

 

208,611

 

 

 

226,066

 

 

 

98,154

 

Corporate bonds

 

158,351

 

 

 

143,639

 

 

 

122,024

 

 

 

147,594

 

 

 

142,318

 

Trust preferred securities

 

-

 

 

 

2,627

 

 

 

3,756

 

 

 

3,783

 

 

 

8,540

 

Total debt securities available for sale

 

625,823

 

 

 

566,555

 

 

 

544,333

 

 

 

590,562

 

 

 

444,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

13,739

 

 

 

30,903

 

 

 

21,390

 

 

 

24,292

 

 

 

30,536

 

Residential pass-through securities

 

744,491

 

 

 

561,954

 

 

 

44,303

 

 

 

102,359

 

 

 

130,550

 

Commercial pass-through securities

 

292,811

 

 

 

226,291

 

 

 

104,237

 

 

 

7,872

 

 

 

8,177

 

Total mortgage-backed securities available for sale

 

1,051,041

 

 

 

819,148

 

 

 

169,930

 

 

 

134,523

 

 

 

169,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

 

1,676,864

 

 

 

1,385,703

 

 

 

714,263

 

 

 

725,085

 

 

 

613,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

35,000

 

Obligations of state and political subdivisions

 

25,824

 

 

 

32,556

 

 

 

104,086

 

 

 

109,483

 

 

 

94,713

 

Subordinated debt

 

-

 

 

 

-

 

 

 

63,086

 

 

 

46,294

 

 

 

15,000

 

Total debt securities held to maturity

 

25,824

 

 

 

32,556

 

 

 

167,172

 

 

 

155,777

 

 

 

144,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

-

 

 

 

-

 

 

 

46,381

 

 

 

56,886

 

 

 

17,854

 

Residential pass-through securities

 

-

 

 

 

-

 

 

 

166,283

 

 

 

200,622

 

 

 

178,813

 

Commercial pass-through securities

 

12,314

 

 

 

-

 

 

 

196,816

 

 

 

176,445

 

 

 

151,941

 

Total mortgage-backed securities held to maturity

 

12,314

 

 

 

-

 

 

 

409,480

 

 

 

433,953

 

 

 

348,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

 

38,138

 

 

 

32,556

 

 

 

576,652

 

 

 

589,730

 

 

 

493,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities

$

1,715,002

 

 

$

1,418,259

 

 

$

1,290,915

 

 

$

1,314,815

 

 

$

1,107,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18


 

The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities portfolio at June 30, 2021. 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, 2021, securities with a carrying value of $39.2 million are callable within one year.

 

 

 

At June 30, 2021

 

 

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

$

5,246

 

 

 

1.72

 

%

 

$

34,314

 

 

 

2.22

 

%

 

$

20,867

 

 

 

2.45

 

%

 

$

-

 

 

 

-

 

%

 

$

60,427

 

 

 

2.26

 

%

 

$

61,631

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

46,262

 

 

 

0.92

 

 

 

 

196,727

 

 

 

1.15

 

 

 

 

242,989

 

 

 

1.11

 

 

 

 

242,989

 

Collateralized loan obligations

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

154,904

 

 

 

1.38

 

 

 

 

34,976

 

 

 

1.56

 

 

 

 

189,880

 

 

 

1.41

 

 

 

 

189,880

 

Corporate bonds

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

 

148,292

 

 

 

4.35

 

 

 

 

10,059

 

 

 

3.72

 

 

 

 

158,351

 

 

 

4.31

 

 

 

 

158,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (1)

 

-

 

 

 

-

 

 

 

 

1,420

 

 

 

1.54

 

 

 

 

-

 

 

 

-

 

 

 

 

12,319

 

 

 

2.47

 

 

 

 

13,739

 

 

 

2.37

 

 

 

 

13,739

 

Residential pass-through securities (1)

 

-

 

 

 

-

 

 

 

 

2,949

 

 

 

1.67

 

 

 

 

9,508

 

 

 

2.87

 

 

 

 

732,034

 

 

 

1.79

 

 

 

 

744,491

 

 

 

1.80

 

 

 

 

744,491

 

Commercial pass-through securities (1)

 

-

 

 

 

-

 

 

 

 

62,625

 

 

 

2.26

 

 

 

 

14,481

 

 

 

1.98

 

 

 

 

228,019

 

 

 

1.95

 

 

 

 

305,125

 

 

 

2.02

 

 

 

 

305,393

 

Total securities

$

5,246

 

 

 

1.72

 

%

 

$

101,308

 

 

 

2.22

 

%

 

$

394,314

 

 

 

2.56

 

%

 

$

1,214,134

 

 

 

1.73

 

%

 

$

1,715,002

 

 

 

1.95

 

%

 

$

1,716,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Government-sponsored enterprises.

 

 

 

19


 

 

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, non-profit organizations and government entities. 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 34.2% of total deposits at June 30, 2021 from 41.5% of total deposits at June 30, 2020. Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period were not renewed. At June 30, 2021 and June 30, 2020, certificates of deposit maturing within one year were $1.51 billion and $1.52 billion, respectively. Historically, a significant portion of the certificates of deposit remain with us after they mature.

At June 30, 2021, $1.19 billion or 63.3% of our certificates of deposit were certificates of $100,000 or more compared to $1.01 billion or 55.2% at June 30, 2020. 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.

Our sources of wholesale funding included brokered certificates of deposit and listing service certificates of deposit whose balances totaled approximately $458.6 million and $20.3 million, or 8.4% and 0.4% of total deposits, respectively, at June 30, 2021. We utilize brokered certificates of deposit and listing service certificates of deposits as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our short-term brokered certificates of deposit we utilized interest rate contracts to effectively extend their duration and to fix their cost.

 

 

20


 

 

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,

 

2021

 

 

 

2020

 

 

 

2019

 

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

$

518,149

 

 

 

9.88

 

%

 

 

-

 

%

 

$

334,522

 

 

 

7.89

 

%

 

 

-

 

%

 

$

312,169

 

 

 

7.68

 

%

 

 

-

 

%

Interest-bearing demand

 

1,726,190

 

 

 

32.92

 

 

 

 

0.41

 

 

 

 

1,041,188

 

 

 

24.56

 

 

 

 

1.10

 

 

 

 

796,815

 

 

 

19.60

 

 

 

 

1.02

 

 

Savings

 

1,066,794

 

 

 

20.35

 

 

 

 

0.31

 

 

 

 

831,832

 

 

 

19.62

 

 

 

 

0.81

 

 

 

 

761,203

 

 

 

18.73

 

 

 

 

0.55

 

 

Certificates of deposit

 

1,931,887

 

 

 

36.85

 

 

 

 

1.10

 

 

 

 

2,032,046

 

 

 

47.93

 

 

 

 

2.00

 

 

 

 

2,194,513

 

 

 

53.99

 

 

 

 

1.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average deposits

$

5,243,020

 

 

 

100.00

 

%

 

 

0.60

 

%

 

$

4,239,588

 

 

 

100.00

 

%

 

 

1.39

 

%

 

$

4,064,700

 

 

 

100.00

 

%

 

 

1.29

 

%

 

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

 

 

At June 30,

 

 

2021

 

 

2020

 

 

2019

 

 

(In Thousands)

 

Interest Rate

 

 

 

 

 

 

 

 

 

 

 

0.00 - 0.99%

$

1,554,774

 

 

$

326,413

 

 

$

66,109

 

1.00 - 1.99%

 

172,892

 

 

 

822,846

 

 

 

604,162

 

2.00 - 2.99%

 

143,849

 

 

 

663,182

 

 

 

1,506,221

 

3.00 - 3.99%

 

6,231

 

 

 

27,955

 

 

 

27,965

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,877,746

 

 

$

1,840,396

 

 

$

2,204,457

 

 

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,

 

 

2021

 

 

2020

 

 

2019

 

 

(In Thousands)

 

Maturity Period

 

 

 

 

 

 

 

 

 

 

 

Within three months

$

700,290

 

 

$

278,157

 

 

$

300,464

 

Three through six months

 

154,934

 

 

 

262,561

 

 

 

363,801

 

Six through twelve months

 

152,971

 

 

 

307,769

 

 

 

243,061

 

Over twelve months

 

181,032

 

 

 

166,508

 

 

 

410,220

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,189,227

 

 

$

1,014,995

 

 

$

1,317,546

 

 

 

21


 

 

The following table sets forth the amount and maturities of certificates of deposit at June 30, 2021:

 

 

At June 30, 2021

 

 

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%

$

1,340,625

 

 

$

162,225

 

 

$

14,306

 

 

$

7,933

 

 

$

29,489

 

 

$

196

 

 

$

1,554,774

 

1.00 - 1.99%

 

123,483

 

 

 

19,598

 

 

 

10,960

 

 

 

17,641

 

 

 

986

 

 

 

224

 

 

 

172,892

 

2.00 - 2.99%

 

46,653

 

 

 

64,931

 

 

 

15,419

 

 

 

16,339

 

 

 

315

 

 

 

192

 

 

 

143,849

 

3.00 - 3.99%

 

-

 

 

 

-

 

 

 

545

 

 

 

-

 

 

 

-

 

 

 

5,686

 

 

 

6,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total certificates of deposit

$

1,510,761

 

 

$

246,754

 

 

$

41,230

 

 

$

41,913

 

 

$

30,790

 

 

$

6,298

 

 

$

1,877,746

 

Additional information about the Company’s deposits is presented in Note 10 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 commercial mortgage loans that we choose to utilize as collateral for such borrowings. Additional information about the Company’s FHLB advances is included under Note 11 to the audited consolidated financial statements.

Short‑term FHLB advances generally have original maturities of less than one year. At June 30, 2021, we had a total $390.0 million of short-term FHLB advances at a weighted average interest rate of 0.33%.  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 contracts to effectively extend the duration of each of these advances at the time they were drawn to effectively fix their cost.

Long-term advances generally include term advances with original maturities of greater than one year. At June 30, 2021, our outstanding balance of long-term FHLB advances totaled $277.5 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 $132.5 million non-callable, term advances at a weighted average interest rate of 2.68%.

Our FHLB advances mature as follows:

 

 

At June 30,

 

 

2021

 

 

2020

 

 

2019

 

 

(In Thousands)

 

By remaining period to maturity:

 

 

 

 

 

 

 

 

 

 

 

Less than one year

$

390,000

 

 

$

865,000

 

 

$

873,400

 

One to two years

 

145,000

 

 

 

27,000

 

 

 

64,046

 

Two to three years

 

22,500

 

 

 

145,000

 

 

 

62,700

 

Three to four years

 

103,500

 

 

 

22,500

 

 

 

155,000

 

Four to five years

 

6,500

 

 

 

103,500

 

 

 

22,500

 

Greater than five years

 

-

 

 

 

6,500

 

 

 

110,000

 

Total advances

 

667,500

 

 

 

1,169,500

 

 

 

1,287,646

 

Fair value adjustments

 

(1,624

)

 

 

(2,071

)

 

 

(4,435

)

Total advances, net of

  fair value adjustments

$

665,876

 

 

$

1,167,429

 

 

$

1,283,211

 

 

 

22


 

 

Based upon the market value of investment securities and mortgage loans that are posted as collateral for FHLB advances at June 30, 2021, we are eligible to borrow up to an additional $2.13 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 $651.0 million via unsecured lines of credit and $233.1 million from the Federal Reserve Bank without pledging additional collateral. The balance of borrowings at June 30, 2021 also included other overnight borrowings totaling $20.0 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.

At June 30, 2021, our derivative instruments were comprised of interest rate swaps and caps with a total notional amount of $1.04 billion. These instruments are intended to manage the interest rate exposure relating to certain wholesale funding positions that were outstanding at June 30, 2021.

Additional information regarding our use of interest rate derivatives and our hedging activities is presented in Note 1 and Note 12 to the audited consolidated financial statements.

Subsidiary Activity

At June 30, 2021, Kearny Bank was the only wholly-owned operating subsidiary of Kearny Financial Corp. As of that date, Kearny Bank had one wholly-owned subsidiary, CJB Investment Corp. CJB Investment Corp. is a New Jersey Investment Company and remained active through the three-year period ended June 30, 2021.

Human Capital Resources

Kearny Bank serves as a true financial partner to both consumers and businesses by subscribing to the belief that people, performance and relationships are what matter most. We serve our clients and shareholders through our deep-rooted principles of ethics and integrity, and by giving back to the communities in which we serve. Our workforce reflects and is inclusive of the full array of cultures and ethnicities.

Employee Profile. We strive to create a diverse and inclusive culture reflective of our clients and the communities where we live and work. As of June 30, 2021, we employed 584 employees, approximately 65% of whom are female.  We utilize an online recruitment platform that provides a vehicle to attract a diverse pool of candidates and have established a partnership with a diversity recruitment solution to enhance this effort.

Talent Development and Employee Engagement. We invest in the success and development of our employees, celebrating career milestones and longevity. Our average length of tenure is eight years as we promote from within to leverage employees’ knowledge of the organization as we continue to grow. We offer many learning and development initiatives, including departmental budgets for certifications and professional development, as well as a robust tuition reimbursement program. In a further effort to provide employees the opportunity to learn new skill sets, gain insights and receive advice from senior leaders, we recently launched a Career Mentoring Program. We also developed a Senior Women’s Leadership Group, which provides a forum for our female employees to exchange ideas and support initiatives.

Employee Benefits. We offer our employees competitive pay and incentive programs, together with a comprehensive benefits package designed to enhance the employee experience. Such benefits include medical, dental, vision and long term disability benefits, AD&D and group life insurance, AFLAC, Health Advocacy and Employee Assistance programs, generous paid time off and the ability to participate in charitable events during work time. In addition, our employees share in our financial success while preparing for their retirement via participation in our 401(k) Plan, which includes a competitive company match, and our Employee Stock Ownership Plan (“ESOP”), which is 100% funded by the Company.

 

23


 

Safety, Health and Wellness. We are committed to the safety and wellness of all of our employees and their families. We provide access to a variety of health and welfare programs, including benefits that support their physical, mental and financial health. During the COVID-19 pandemic, we regularly communicated with our employees and took many steps to protect them in accordance with applicable guidance. Our incident response team developed a “work from home” plan for our corporate and regional offices, while we continued to support our front-line employees. Our facilities team installed barriers where appropriate, provided personal protective equipment and cleaning supplies, and implemented temperature screenings, physical distancing procedures and enhanced cleaning in all locations. Branches were either closed or operated in drive-up mode only, as appropriate. We encourage those who are sick to stay home, and encourage employees to become vaccinated by rewarding them with paid time off and eligibility to participate in raffles.

Supervision and Regulation

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.

General. As a nonmember New Jersey savings bank with federally insured deposits, Kearny Bank is subject to extensive regulation by the NJDBI and the FDIC. 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. Both state and federal law regulate a savings bank’s relationship with its depositors and borrowers, especially in such matters as the ownership of savings accounts and the form and content of Kearny Bank’s mortgage documents.

Kearny Bank must file reports with the NJDBI and FDIC concerning its activities and financial condition and obtain regulatory approvals prior to entering into certain transactions such as establishing new branches and mergers with or acquisitions of other depository institutions. The NJDBI and FDIC regularly examine Kearny Bank and prepare reports to Kearny Bank’s Board of Directors on any deficiencies 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 other specified assets.

 

24


 

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 individual and aggregate amounts of 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 either directly or through a subsidiary. New Jersey savings banks may exercise powers, rights, benefits and privileges of out-of-state banks, savings banks and savings associations, or either directly or through a subsidiary, 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, except such activities and investments that are specifically exempted by law or regulation, 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 requirements.

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 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.

In June 2020, the FDIC adopted changes to its assessment system intended to mitigate the effects on the deposit insurance assessment of an institution’s participation in certain governmental-sponsored programs designed to address economic effects arising from the COVID-19 pandemic. Such programs include the Paycheck Protection Program and the Money Market Liquidity Facility.

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 is required to achieve the 1.35% ratio by September 30, 2020.  The 1.35% ratio was reached effective September 30, 2018.  However, extraordinary growth in insured deposits during the first two quarters of 2020 caused the Deposit Insurance Fund ratio to decline to 1.30% as of June 30, 2020. In September 2020, the FDIC adopted a Restoration Plan to restore the ratio to at least 1.35% by the September 30, 2028 statutory deadline. The Restoration Plan maintained the existing assessment rate schedule for now and is based on projected estimates of future losses and an assumed return to normal deposit insurance growth. The FDIC has established a long-range fund ratio of 2.0%.

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.

 

25


 

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.

For purposes of the regulatory capital standards, 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 also qualitative factors. The FDIC has the authority to establish higher capital requirements for individual institutions where deemed necessary.

Regulations issued by the NJDBI establish generally similar regulatory capital standards for New Jersey-chartered savings banks such as Kearny Bank.

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.  

 

26


 

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 categorized as 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%. Critically undercapitalized status is triggered if an institution has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Qualifying banks that elect and comply with the community bank leverage ratio (as established by the regulatory agencies) are 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 adequately capitalized status. 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 such status is triggered. 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 depository 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 that are controlled by such parent holding company are affiliates of the institution. Generally, Section 23A of the Federal Reserve Act limits the extent to which the institution or its subsidiaries may engage in covered transactions with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes an extension of credit, purchase of assets, issuance of a guarantee or letter of credit and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements.

The law also requires that affiliate transactions generally be on terms and conditions that are substantially the same as, 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 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, 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 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 regulatory 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.

 

27


 

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 consider that record in its consideration of certain applications by the institution, such as for a merger or the establishment of a branch office. The FDIC may use an unsatisfactory CRA examination rating as the basis for denying such an application.  Kearny Bank received a satisfactory CRA rating from the FDIC in its most recent CRA evaluation.

In July 2021, the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency announced plans to jointly work to “strengthen and modernize” the CRA regulations and the related regulatory framework.  No timetable for a rulemaking process was announced.

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 dividends, or any particular amount of dividend, 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;

 

 

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;

 

28


 

 

 

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 June 2017 conversion of Kearny Bank to a New Jersey savings bank charter, through Kearny Bank exercising an election available to it under federal law.  Kearny Financial 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 depository institutions.  

In addition, the Federal Reserve Board has enforcement authority over Kearny Financial and any non-depository subsidiaries. That permits the Federal Reserve Board to restrict or prohibit activities that are determined to pose a serious risk to Kearny Bank. This regulatory structure is intended primarily for protection of Kearny Bank’s 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 the supervisory principles applicable 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 institution.

Nonbanking Activities. As a savings and loan holding company, Kearny Financial is permitted to engage in those activities permissible under federal law 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.

Mergers and Acquisitions. Kearny Financial must generally 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 served and competitive factors. A merger of another depository institution into Kearny Bank requires the prior approval of the NJDBI and FDIC, based on similar considerations.

 

29


 

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 limits) by bank holding companies, were no longer includable as Tier 1 capital, subject to certain grandfathering. Regulations implementing the legislation were effective in January 2015. 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 consolidated 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 when the dividend is not covered by earnings for the period for which it is being paid, when net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or when the prospective rate of earnings retention by the holding company is inconsistent with its 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 a dividend 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 condition of the acquirer, and future prospects of the proposed acquirer, the competence and integrity of the proposed acquirer and the effects of the acquisition on competition. Any company that seeks to acquire “control” of Kearny Financial or Kearny Bank, within the meaning of the Savings and Loan Holding Company Act, must file an application, and receive the Federal Reserve Board’s prior approval under that statute. The Company would then be subject to regulation as a savings and loan holding company.

The prior approval of the NJDBI would also be necessary for the acquisition of 25% of a class of the Company’s voting stock, or “control” as otherwise defined under New Jersey law.

 

30


 

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.

Economic and Market Area

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

The COVID-19 pandemic has adversely impacted certain industries and geographies in which our clients operate and could impact their ability to repay their obligations to us. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the business of the Company, its clients, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain, including if the coronavirus can continue to be controlled and abated and if and how the economy may remain open. Additionally, the responses of various governmental and nongovernmental authorities to curtail business and consumer activities in an effort to mitigate the pandemic may have material long-term effects on the Company and its clients 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 commercial real estate and multi-family, may decline in value, which could cause credit 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 remain open or do so 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, some of which may continue indefinitely, resulting in our inability to take timely possession of real estate assets collateralizing loans, which may increase our loan losses;

 

 

31


 

 

 

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;

 

 

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.

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 clients’ borrowing power, the value of assets associated with problem loans and collateral coverage.

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

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

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 clients. 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 client base, or prudently managing expenses.


 

32


 

 

Asset Quality and Interest Rate

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.

If our allowance for credit 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 credit losses, we evaluate loans individually and establish credit loss allowances for specifically identified impairments. For loans not individually analyzed, we estimate losses and establish reserves based on reasonable and supportable forecasts and adjustments for qualitative factors. If the assumptions used in our calculation methodology are incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in further additions to our allowance. Our allowance for credit losses was 1.19% of total loans at June 30, 2021 and significant additions to our allowance could materially decrease our net income.

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

A 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, 2021, our securities portfolio totaled $1.72 billion, or 23.5% of our total assets.  Investment securities typically have lower yields than loans. For the year ended June 30, 2021, the weighted average yield of our investment securities portfolio was 2.00%, as compared to 4.08% for our loan portfolio.

 

33


 

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, 2021, $1.68 billion, or 97.8% of our investment securities, are classified as available for sale and reported at fair value with unrealized gains or losses excluded from earnings and reported in other comprehensive income, which affects our reported equity. Accordingly, given the significant size of the investment securities portfolio classified as available for sale and due to possible mark-to-market adjustments of that portion of the portfolio resulting from market conditions, we may experience greater volatility in the value of reported equity. Moreover, given that we actively manage our investment securities portfolio classified as available for sale, we may sell securities which could result in a realized loss, thereby reducing our net income.

Our increased commercial lending exposes us to additional risk.

As part of our business strategy we intend to increase our focus on commercial lending. 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 employment and other income sources, 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 continue 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 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 405% of Bank total risk-based capital at June 30, 2021 and our commercial real estate loan portfolio increased by 4% during the preceding 36 months.

 

34


 

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, 2021, sale gains attributable to the sale of residential mortgage loans totaled $5.1 million or approximately 20.8% 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.

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 we intend to sell, or it is more than likely than not that we will be required to sell the security before recovery of its amortized cost basis. If this assessment indicates that a credit loss exists, we would be required to record an impairment charge.

We elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could adversely impact the value of our investment securities portfolio. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations.

At June 30, 2021, we had investment securities with fair values of approximately $1.72 billion on which we had approximately $10.1 million in gross unrealized losses and $21.6 million of gross unrealized gains. The valuation and liquidity of our securities could be adversely impacted by reduced market liquidity, increased normal bid-asked spreads and increased uncertainty of market participants, which could reduce the market value of our securities, including those with no apparent credit exposure. The valuation of our securities requires judgment and as market conditions change security values may also change. Significant negative changes to valuations could result in impairments in the value of the Corporation’s securities portfolio, which could have an adverse effect on the Corporation’s financial condition or results of operations.

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, 2021, 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, 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.

 

35


 

Source of Funds

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, 2021, wholesale funding totaled $1.16 billion, or approximately 16.0% 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.

Regulatory Matters

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.

 

The recent change in the Federal Administration could result in changes to tax laws and regulations.

The recent change in Administration could lead to changes in tax laws as well as changes in regulatory requirements. We are subject to changes in tax law that could increase our effective tax rates. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. An increase in our corporate tax rate could have an unfavorable impact on our earnings and capital generation abilities. Similarly, the Bank’s clients could experience varying effects from changes in tax laws and such effects, whether positive or negative, may have a corresponding impact on our business and the economy as a whole. In addition, changes to regulatory requirements could increase our costs of regulatory compliance and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.

Business Issues

Our acquisitions 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. 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.

 

36


 

Acquisitions may also result in business disruptions that could cause clients 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 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.

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. ICE Benchmark Administration (“IBA”), the authorized and regulated administrator of LIBOR recently announced it would consult on its plans for the discontinuation of LIBOR. IBA intends to end publication of some LIBOR tenors on December 31, 2021 and the remaining LIBOR tenors in June 2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates. The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies. 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.

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, 2021, we had approximately $214.6 million in intangible assets on our balance sheet comprising $210.9 million of goodwill and $3.7 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.

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 client 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.

 

37


 

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 clients, 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, client relationships and internal operations.

Information Security

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 client 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 client-facing technologies could deter clients 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 clients and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.

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

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

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

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

 

38


 

Our clients are also the target of cyber-attacks and identity theft. Large scale identity theft could result in clients' 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 clients' information, regardless of its origin, could damage our reputation and result in a loss of clients 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.

Item 1B. Unresolved Staff Comments

Not applicable.

 

Item 2. Properties

The Company and the Bank conduct business from their corporate headquarters at 120 Passaic Avenue in Fairfield, New Jersey and from administrative offices located in Fairfield, Clifton, Millington and Oakhurst, New Jersey.

At June 30, 2021, the Company operated 48 branch offices located in Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset and Union counties, New Jersey and Kings and Richmond counties, New York. Twenty two of our branch offices are leased with remaining terms between 12 months and 11 years. At June 30, 2021, our net investment in property and equipment totaled $56.3 million.

Additional information regarding our properties as of June 30, 2021, is presented in Note 8 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, 2021, 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.

 

 

 

39


 

 

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 20, 2021, there were 4,493 registered holders of record of the Company’s common stock, plus approximately 8,191 beneficial (street name) owners.

(b) Use of Proceeds.  Not applicable.

(c) Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of the fiscal year ended June 30, 2021.

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced Plans

or Programs

 

 

Maximum

Number of Shares

that May Yet Be

Purchased Under

the  Plans or

Programs

 

April 1-30, 2021

 

 

1,050,000

 

 

$

12.42

 

 

 

1,050,000

 

 

 

4,926,469

 

May 1-31, 2021

 

 

861,820

 

 

$

13.03

 

 

 

861,820

 

 

 

4,064,649

 

June 1-30, 2021

 

 

1,120,000

 

 

$

12.65

 

 

 

1,120,000

 

 

 

2,944,649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

3,031,820

 

 

$

12.68

 

 

 

3,031,820

 

 

 

2,944,649

 

 

On March 13, 2019, the Company announced the authorization of a fourth repurchase plan for up to 9,218,324 shares or 10% of the Company’s outstanding common stock. On March 25, 2020 the Company temporarily suspended its stock repurchase program due to the risks and uncertainties associated with the COVID-19 pandemic.

On October 19, 2020, the Company announced the resumption of its fourth stock repurchase plan and completed that plan during the quarter ended December 31, 2020. Also on October 19, 2020, the Company announced the authorization of a fifth stock repurchase plan totaling 4,475,523 shares, or 5% of the Company’s outstanding common stock. The plan commenced upon the completion of the fourth stock repurchase plan.

On January 22, 2021, the Company announced the completion of its fifth stock repurchase plan and the authorization of a sixth stock repurchase plan to repurchase up to 4,210,520 shares, or 5%, of the Company’s outstanding common stock.  On May 26, 2021, the Company announced the completion of its sixth stock repurchase plan and the authorization of a seventh stock repurchase plan to repurchase up to 4,064,649 shares, or 5%, of the Company’s outstanding common stock. This plan has no expiration date.  

During June 30, 2021, the Company repurchased 1,120,000 shares, or 27.6% of the shares authorized for repurchase under the current repurchase program, at a cost of $14.2 million, or an average of $12.65 per share.

 

40


 

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, 2016. Total return assumes the reinvestment of all dividends.

 

 

 

At June 30,

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

Kearny Financial Corp.

$

100

 

 

$

119

 

 

$

109

 

 

$

111

 

 

$

70

 

 

$

106

 

NASDAQ Composite

 

100

 

 

 

128

 

 

 

159

 

 

 

171

 

 

 

217

 

 

 

315

 

SNL Thrift Index

 

100

 

 

 

118

 

 

 

129

 

 

 

117

 

 

 

94

 

 

 

138

 

 

The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The SNL Thrift Index includes all major exchange (NYSE, NYSE American and NASDAQ) traded thrifts in SNL’s coverage universe. 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.

 

 

41


 

 

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,

 

 

2021

 

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

 

(In Thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and equivalents

$

67,855

 

 

 

$

180,967

 

 

 

$

38,935

 

 

 

$

128,864

 

 

 

$

78,237

 

Assets

 

7,283,735

 

 

 

 

6,758,175

 

 

 

 

6,634,829

 

 

 

 

6,579,874

 

 

 

 

4,818,127

 

Net loans receivable

 

4,793,229

 

 

 

 

4,461,070

 

 

 

 

4,645,654

 

 

 

 

4,470,483

 

 

 

 

3,215,975

 

Investment securities available for sale

 

1,676,864

 

 

 

 

1,385,703

 

 

 

 

714,263

 

 

 

 

725,085

 

 

 

 

613,760

 

Investment securities held to maturity

 

38,138

 

 

 

 

32,556

 

 

 

 

576,652

 

 

 

 

589,730

 

 

 

 

493,321

 

Goodwill

 

210,895

 

 

 

 

210,895

 

 

 

 

210,895

 

 

 

 

210,895

 

 

 

 

108,591

 

Deposits

 

5,485,306

 

 

 

 

4,430,282

 

 

 

 

4,147,610

 

 

 

 

4,073,604

 

 

 

 

2,929,745

 

Borrowings

 

685,876

 

 

 

 

1,173,165

 

 

 

 

1,321,982

 

 

 

 

1,198,646

 

 

 

 

806,228

 

Stockholders' equity

 

1,042,944

 

 

 

 

1,084,177

 

 

 

 

1,127,159

 

 

 

 

1,268,748

 

 

 

 

1,057,181

 

 

 

For the Years Ended June 30,

 

 

2021

 

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

 

(In Thousands, Except Percentage and Per Share Amounts)

 

Summary of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

$

234,360

 

 

 

$

233,208

 

 

 

$

237,333

 

 

 

$

171,431

 

 

 

$

139,093

 

Interest expense

 

49,851

 

 

 

 

83,854

 

 

 

 

82,020

 

 

 

 

50,138

 

 

 

 

36,519

 

Net interest income

 

184,509

 

 

 

 

149,354

 

 

 

 

155,313

 

 

 

 

121,293

 

 

 

 

102,574

 

(Reversal of) provision for credit losses

 

(1,121

)

 

 

 

4,197

 

 

 

 

3,556

 

 

 

 

2,706

 

 

 

 

5,381

 

Net interest income after (reversal of) provision for

credit losses

 

185,630

 

 

 

 

145,157

 

 

 

 

151,757

 

 

 

 

118,587

 

 

 

 

97,193

 

Non-interest income

 

24,751

 

 

 

 

19,719

 

 

 

 

13,555

 

 

 

 

13,263

 

 

 

 

11,348

 

Non-interest expenses

 

125,885

 

 

 

 

107,624

 

 

 

 

109,243

 

 

 

 

97,850

 

 

 

 

81,118

 

Income before taxes

 

84,496

 

 

 

 

57,252

 

 

 

 

56,069

 

 

 

 

34,000

 

 

 

 

27,423

 

Income tax expense

 

21,263

 

 

 

 

12,287

 

 

 

 

13,927

 

 

 

 

14,404

 

 

 

 

8,820

 

Net income

$

63,233

 

 

 

$

44,965

 

 

 

$

42,142

 

 

 

$

19,596

 

 

 

$

18,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - Basic and diluted

$

0.77

 

 

 

$

0.55

 

 

 

$

0.46

 

 

 

$

0.24

 

 

 

$

0.22

 

Weighted average number of common shares

  outstanding (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Basic

 

82,387

 

 

 

 

82,409

 

 

 

 

91,054

 

 

 

 

82,587

 

 

 

 

84,590

 

         Diluted

 

82,391

 

 

 

 

82,430

 

 

 

 

91,100

 

 

 

 

82,643

 

 

 

 

84,661

 

Cash dividends per share

$

0.35

 

 

 

$

0.29

 

 

 

$

0.37

 

 

 

$

0.25

 

 

 

$

0.10

 

Dividend payout ratio (1)

 

45.1

%

 

 

 

52.8

%

 

 

 

80.8

%

 

 

 

102.9

%

 

 

 

45.0

%

 

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

 

 

42


 

 

 

 

At or For the Years Ended June 30,

 

 

2021

 

 

 

 

2020

 

 

 

 

2019

 

 

 

 

2018

 

 

 

 

2017

 

Performance ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (net income divided

  by average total assets)

 

0.86

%

 

 

 

0.67

%

 

 

 

0.63

%

 

 

 

0.37

%

 

 

 

0.40

%

Return on average equity (net income divided

  by average total equity)

 

5.79

%

 

 

 

4.10

%

 

 

 

3.52

%

 

 

 

1.81

%

 

 

 

1.68

%

Return on average tangible equity (net income divided by

  by average tangible equity) (1)

 

7.22

%

 

 

 

5.10

%

 

 

 

4.30

%

 

 

 

2.08

%

 

 

 

1.87

%

Net interest rate spread

 

2.61

%

 

 

 

2.22

%

 

 

 

2.31

%

 

 

 

2.25

%

 

 

 

2.14

%

Net interest margin

 

2.75

%

 

 

 

2.45

%

 

 

 

2.56

%

 

 

 

2.50

%

 

 

 

2.41

%

Average interest-earning assets to

  average interest-earning liabilities

 

118.63

%

 

 

 

117.24

%

 

 

 

118.88

%

 

 

 

125.12

%

 

 

 

132.14

%

Efficiency ratio (non-interest expenses divided

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

 

60.16

%

 

 

 

63.66

%

 

 

 

64.69

%

 

 

 

72.72

%

 

 

 

71.20

%

Non-interest expense to average assets

 

1.72

%

 

 

 

1.61

%

 

 

 

1.64

%

 

 

 

1.86

%

 

 

 

1.76

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing loans to total loans

 

1.64

%

 

 

 

0.82

%

 

 

 

0.43

%

 

 

 

0.37

%

 

 

 

0.58

%

Non-performing assets to total assets

 

1.10

%

 

 

 

0.55

%

 

 

 

0.31

%

 

 

 

0.27

%

 

 

 

0.43

%

Net charge-offs to average loans outstanding

 

0.03

%

 

 

 

0.00

%

 

 

 

0.02

%

 

 

 

0.03

%

 

 

 

0.01

%

Allowance for credit losses to total loans

 

1.19

%

 

 

 

0.82

%

 

 

 

0.70

%

 

 

 

0.68

%

 

 

 

0.90

%

Allowance for credit losses to non-performing loans

 

72.92

%

 

 

 

101.72

%

 

 

 

164.15

%

 

 

 

183.08

%

 

 

 

155.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

14.88

%

 

 

 

16.39

%

 

 

 

17.97

%

 

 

 

20.54

%

 

 

 

24.02

%

Equity to assets at period end

 

14.32

%

 

 

 

16.04

%

 

 

 

16.99

%

 

 

 

19.28

%

 

 

 

21.94

%

Tangible equity to tangible assets at period end (2)

 

11.72

%

 

 

 

13.29

%

 

 

 

14.19

%

 

 

 

16.53

%

 

 

 

20.14

%

 

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

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

 

 

 

 

43


 

 

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. 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 Credit Losses. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is reported separately as a contra-asset on the consolidated statement of financial condition. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities while the provision for credit losses related to unfunded commitments is reported in other non-interest expense.

Allowance for Credit Losses on Loans Receivable. The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics.  If the loan does not share risk characteristics with other loan pools, the Company will evaluate the loan on an individual basis. The Company evaluates the pooling methodology at least annually. Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off.

The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk. Such segments include multi-family, nonresidential mortgage, commercial business, construction, one- to four-family residential, home equity and consumer. For most segments the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount.

The Company estimates the allowance for credit losses on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the renewal option is included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company.

 

44


 

Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, the effect of external factors such as competition, legal and regulatory requirements, among others. Qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks.

Individually Evaluated Loans. On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

Acquired Loans. Acquired loans are included in the Company's calculation of the allowance for credit losses. How the allowance on an acquired loan is recorded depends on whether or not it has been classified as a PCD loan. PCD loans are loans acquired at a discount that is due, in part, to credit quality. PCD loans are accounted for in accordance with ASC Subtopic 326-20 and are initially recorded at fair value as determined by the sum of the present value of expected future cash flows and an allowance for credit losses at acquisition. The allowance for PCD loans is recorded through a gross-up effect, while the allowance for acquired non-PCD loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which loans are PCD and non-PCD can have a significant impact on the accounting for these loans. Subsequent to acquisition, the allowance for PCD loans will generally follow the same estimation, provision and charge-off process as non-PCD acquired and originated loans.

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 or bargain purchase gain. 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 arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company performed its annual impairment test during the fourth quarter of its fiscal year ended June 30, 2021. Goodwill is the only intangible asset with an indefinite life our audited consolidated Statement of Financial Condition.

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 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 50% while the results of the market approach were weighted at 50%. The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value for our single reporting unit.

No impairment charges were required to be recorded in the years ended June 30, 2021, 2020 or 2019. If an impairment loss is determined to exist in the future, such loss will be reflected as an expense in the consolidated statements of income in the period in which the impairment loss is determined.

 

45


 

Comparison of Financial Condition at June 30, 2021 and June 30, 2020

Executive Summary.  Total assets increased by $525.6 million, or 7.8%, to $7.28 billion at June 30, 2021 from $6.76 billion at June 30, 2020. As described in greater detail below, the increase in total assets was largely the result of the Company’s July 10, 2020 acquisition of MSB. The increase primarily reflected increases in investment securities, net loans receivable and other assets, partially offset by decreases in cash and equivalents and loans held-for-sale.

Investment Securities. Investment securities available for sale increased by $291.2 million, to $1.68 billion at June 30, 2021, from $1.39 billion at June 30, 2020. This increase reflected security purchases totaling $918.7 million, net of security sales totaling $97.4 million, principal repayments totaling $521.1 million, and a $12.5 million decrease in the fair value of the portfolio to a net unrealized gain of $10.0 million. Included in this increase were securities acquired from MSB with fair values of $3.5 million at the time of acquisition.

Investment securities held to maturity increased by $5.5 million to $38.1 million at June 30, 2021 from $32.6 million at June 30, 2020. The increase in the portfolio reflected security purchases totaling $12.3 million, net of principal repayments totaling $6.8 million.

Additional information regarding investment securities at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 4 to the audited consolidated financial statements.

Loans Held-for-Sale. Loans held-for-sale totaled $16.5 million at June 30, 2021 as compared to $20.8 million at June 30, 2020 and are reported separately from the balance of net loans receivable. During the year ended June 30, 2021, $285.4 million of residential mortgage loans were sold, resulting in net gains on sale of $5.1 million.

Net Loans Receivable. Net loans receivable increased by $332.2 million, or 7.4%, to $4.79 billion at June 30, 2021 from $4.46 billion at June 30, 2020. Included in this increase were loans with fair values totaling $530.2 million that were acquired in conjunction with the acquisition of MSB. Partially offsetting this increase was a decrease of $58.8 million in PPP loan balances and a decrease of $131.2 million in other non-acquired loans. Detail regarding the change in the loan portfolio is presented below:

 

 

June 30,

 

 

June 30,

 

 

Increase/

 

 

2021

 

 

2020

 

 

(Decrease)

 

 

(In Thousands)

 

Commercial loans:

 

 

 

 

 

 

 

 

 

 

 

Multi-family mortgage

$

2,039,260

 

 

$

2,059,568

 

 

$

(20,308

)

Nonresidential mortgage

 

1,079,444

 

 

 

960,853

 

 

 

118,591

 

Commercial business

 

168,951

 

 

 

138,788

 

 

 

30,163

 

Construction

 

93,804

 

 

 

20,961

 

 

 

72,843

 

Total commercial loans

 

3,381,459

 

 

 

3,180,170

 

 

 

201,289

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential mortgage

 

1,447,721

 

 

 

1,273,022

 

 

 

174,699

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

47,871

 

 

 

82,920

 

 

 

(35,049

)

Other consumer

 

3,259

 

 

 

3,991

 

 

 

(732

)

Total consumer

 

51,130

 

 

 

86,911

 

 

 

(35,781

)

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

4,880,310

 

 

 

4,540,103

 

 

 

340,207

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaccreted yield adjustments

 

(28,916

)

 

 

(41,706

)

 

 

12,790

 

Allowance for credit losses

 

(58,165

)

 

 

(37,327

)

 

 

(20,838

)

 

 

 

 

 

 

 

 

 

 

 

 

Net loans receivable

$

4,793,229

 

 

$

4,461,070

 

 

$

332,159

 

 

 

46


 

 

Commercial loan origination volume for the year ended June 30, 2021 totaled $507.5 million, which comprised $352.5 million of commercial mortgage loan originations, $104.6 million of commercial business loan originations and construction loan disbursements of $50.4 million. Commercial loan originations for the period were augmented by the purchase of loans totaling $21.6 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired commercial loans with fair values totaling approximately $383.1 million.

One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled $553.2 million for the year ended June 30, 2021 and was augmented by the purchase of loans totaling $60.1 million. Home equity loan and line of credit origination volume for the same period totaled $15.8 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired one- to four-family residential mortgage loans and home equity loans and lines of credit with fair values totaling approximately $132.5 million and $14.1 million, respectively.

Additional information about the Company’s loans at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.

Nonperforming Loans and TDRs. Nonperforming loans increased by $43.1 million to $79.8 million, or 1.64% of total loans at June 30, 2021, from $36.7 million, or 0.82% of total loans at June 30, 2020. Included in this increase were $14.4 million of non-performing loans acquired from MSB, whose fair values at acquisition reflected various levels of impairment. Non-performing loans at June 30, 2021 did not include $51.8 million of performing PCD loans acquired from MSB. The increase in nonperforming loans was largely attributable to increases in non-performing multi-family mortgage loans, nonresidential mortgage loans and one- to four-family residential mortgage loans, with increases totaling $15.6 million, $13.3 million and $10.8 million, for those loan segments, respectively.

TDRs are loans where the Company has modified the contractual terms of the loan as a result of the financial condition of the borrower. Subsequent to their modification, TDRs are placed on non-accrual until such time as satisfactory payment performance has been demonstrated, at which time the loan may be returned to accrual status. At June 30, 2021, the Company had accruing TDRs totaling $6.2 million, a decrease of $2.2 million from $8.4 million at June 30, 2020. At June 30, 2021, the Company had non-accrual TDRs totaling $11.6 million, a decrease of $1.5 million from $13.1 million at June 30, 2020.

As noted above, based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications, including short-term payment deferrals, are not considered to be TDRs. The Company had active payment deferrals, which were not considered TDRs, of $5.6 million and $781.3 million at June 30, 2021 and June 30, 2020, respectively.

Additional information about nonperforming loans and TDRs at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.

Allowance for Credit Losses (“ACL”). At June 30, 2021, the ACL totaled $58.2 million, or 1.19% of total loans, reflecting an increase of $20.9 million from $37.3 million, or 0.82% of total loans, at June 30, 2020. This increase largely resulted from the adoption of CECL, which increased the ACL for loans receivable by $19.6 million, the establishment of an ACL for loans acquired from MSB totaling $9.0 million and an increase in the portion of the ACL attributable to loans individually evaluated for impairment. This increase was partially offset by net charge-offs and the impact of an improved economic forecast and credit risk outlook.

Additional information about the allowance for loan credit at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 1 and Note 6 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, OREO and other assets, increased by $14.1 million to $691.2 million at June 30, 2021 from $677.1 million at June 30, 2020.

The increase in other assets primarily reflected the impact of the MSB acquisition through which the Company acquired other assets with fair values totaling $34.1 million. The increase in other assets was partially offset by a decrease in the balance of FHLB stock during the year ended June 30, 2021.

The remaining increases and decreases in other assets for the year ended June 30, 2021 generally reflected normal operating fluctuations in their respective balances.

 

47


 

Deposits. Total deposits increased by $1.06 billion, or 23.8%, to $5.49 billion at June 30, 2021 from $4.43 billion at June 30, 2020. The increase in deposits reflected the impact of organic growth in deposits of $594.9 million coupled with the MSB acquisition through which the Company assumed deposits with fair values totaling $460.2 million. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

2021

 

 

 

2020

 

 

Increase

 

 

(In Thousands)

 

Non-interest-bearing deposits

$

593,718

 

 

$

419,138

 

 

$

174,580

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

1,902,478

 

 

 

1,264,151

 

 

 

638,327

 

Savings

 

1,111,364

 

 

 

906,597

 

 

 

204,767

 

Certificates of deposit

 

1,877,746

 

 

 

1,840,396

 

 

 

37,350

 

Interest-bearing deposits

 

4,891,588

 

 

 

4,011,144

 

 

 

880,444

 

Total deposits

$

5,485,306

 

 

$

4,430,282

 

 

$

1,055,024

 

 

Additional information about our deposits at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 10 to the audited consolidated financial statements.

Borrowings. The balance of borrowings decreased by $487.3 million, or 41.5%, to $685.9 million at June 30, 2021 from $1.17 billion at June 30, 2020 and reflected the repayment of maturing FHLB advances totaling $475.0 million, the pre-payment of FHLB advances totaling $27.0 million and a decrease in depositor sweep accounts totaling $5.7 million. Borrowings at June 30, 2021 also included other overnight borrowings totaling $20.0 million while there were no such borrowings at June 30, 2020. In conjunction with the acquisition of MSB, the Company assumed overnight FHLB advances with fair values totaling $62.9 million, which were immediately repaid.

Additional information about our borrowings at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 11to the audited consolidated financial statements.

Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $942,000 to $69.6 million at June 30, 2021 from $70.6 million at June 30, 2020. The change in the balance of other liabilities reflected the adoption of CECL, as noted above. At adoption the Company increased its ACL by $536,000 for unfunded loan commitments while also recording a provision for ACL of $1.2 million during the year ended June 30, 2021. The change in other liabilities also reflected a $17.5 million decrease in the fair value of the Company’s outstanding liability derivatives positions which was partially offset by a $12.5 million loan participation liability which was paid shortly after fiscal year-end. The remaining change generally reflected normal operating fluctuations in the balances of other liabilities during the period.

Additional information about the Company’s derivatives portfolio at June 30, 2021 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.

Stockholders’ Equity.  Stockholders’ equity decreased by $41.2 million to $1.04 billion at June 30, 2021 from $1.08 billion at June 30, 2020. The decrease in stockholders’ equity during the year ended June 30, 2021 largely reflected share repurchases totaling $119.0 million, cash dividends totaling $28.5 million and a $14.2 million cumulative effect adjustment related to the adoption of CECL, partially offset by the issuance of $45.1 million of capital stock in conjunction with the acquisition of MSB and net income of $63.2 million.

Book value per share increased by $0.25 to $13.21 at June 30, 2021 while tangible book value per share increased by $0.10 to $10.49 at June 30, 2021.

 

48


 

In March 2019 the Company announced its fourth stock repurchase plan which authorized the repurchase of 9,218,324 shares, or 10% of the Company’s outstanding common stock. On March 25, 2020, that plan was temporarily suspended due to the risks and uncertainties associated with the COVID-19 pandemic and on October 19, 2020, the Company announced the resumption of that plan. On October 19, 2020, the Company also announced the approval of a fifth repurchase plan totaling 4,475,523 shares, or 5%, of the Company’s outstanding common stock. On January 22, 2021, the Company announced the completion of its fifth stock repurchase plan and the authorization of a sixth stock repurchase plan to repurchase up to 4,210,520 shares, or 5%, of the Company’s outstanding stock. On May 26, 2021, the Company announced the completion of its sixth stock repurchase plan and the authorization of a seventh stock repurchase plan to repurchase up to 4,064,649 shares, or 5%, of the Company’s outstanding common stock.

During the year ended June 30, 2021, the Company repurchased a total of 10,567,073 shares of its common stock which were repurchased in conjunction with the Company’s fourth, fifth, sixth and seventh repurchase plans. Such shares were repurchased at a total cost of $119.0 million and at an average cost of $11.26 per share.

Including shares previously repurchased, the shares associated with the fourth repurchase plan were repurchased at a total cost of $117.9 million and at an average cost of $12.79 per share. The shares associated with the Company’s fifth share repurchase plan were repurchased at a total cost of $46.9 million and at an average cost of $10.48 per share. The shares associated with the Company’s sixth share repurchase plan were repurchased at a total cost of $51.1 million and at an average cost of $12.15 per share.

During the year ended June 30, 2021, and in conjunction with the Company’s seventh repurchase program, the Company repurchased 1,120,000 shares at a cost of $14.2 million and at an average cost of $12.65 per share which represented 27.6% of the total shares authorized to be repurchased.

Comparison of Operating Results for the Years Ended June 30, 2021, and June 30, 2020

Net Income. Net income for the year ended June 30, 2021 was $63.2 million, or $0.77 per diluted share, an increase of 40.6% from $45.0 million, or $0.55 per diluted share for the year ended June 30, 2020. The increase in net income reflected increases in net interest income and non-interest income and a decrease in the provision for credit losses that was partially offset by increases in non-interest expense and income tax expense. Net income for the year ended June 30, 2021 also reflected various non-recurring items, including items recognized in conjunction with the Company’s acquisition of MSB.

Net Interest Income. Net interest income increased by $35.2 million to $184.5 million for the year ended June 30, 2021. The increase between the comparative periods resulted from a decrease of $34.0 million in interest expense and an increase of $1.2 million in interest income.

Net interest spread increased by 39 basis points to 2.61% for the year ended June 30, 2021, from 2.22% for the year ended June 30, 2020. Net interest margin increased 30 basis points to 2.75%, from 2.45%, for the same comparative periods. The increase in spread and margin reflected a decrease in the average cost of interest-bearing liabilities that was partially offset by a decrease in the average yield on interest-earning assets.

 

49


 

Details surrounding the composition of, and changes to, net interest income are presented in the table below which 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,

 

2021

 

2020

 

2019

 

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)

$

4,866,436

 

 

$

198,515

 

 

 

4.08

 

%

 

$

4,568,816

 

 

$

187,003

 

 

 

4.09

 

%

 

$

4,669,436

 

 

$

192,386

 

 

 

4.12

 

%

Taxable investment securities (2)

 

1,571,452

 

 

 

31,238

 

 

 

1.99

 

 

 

 

1,291,516

 

 

 

39,321

 

 

 

3.04

 

 

 

 

1,171,335

 

 

 

37,213

 

 

 

3.18

 

 

Tax-exempt securities (2)

 

74,604

 

 

 

1,652

 

 

 

2.21

 

 

 

 

111,477

 

 

 

2,393

 

 

 

2.15

 

 

 

 

134,489

 

 

 

2,839

 

 

 

2.11

 

 

Other interest-earning assets (3)

 

200,435

 

 

 

2,955

 

 

 

1.47

 

 

 

 

122,278

 

 

 

4,491

 

 

 

3.67

 

 

 

 

101,595

 

 

 

4,895

 

 

 

4.82

 

 

Total interest-earning assets

 

6,712,927

 

 

 

234,360

 

 

 

3.49

 

 

 

 

6,094,087

 

 

 

233,208

 

 

 

3.83

 

 

 

 

6,076,855

 

 

 

237,333

 

 

 

3.91

 

 

Non-interest-earning assets

 

620,934

 

 

 

 

 

 

 

 

 

 

 

 

595,158

 

 

 

 

 

 

 

 

 

 

 

 

582,838

 

 

 

 

 

 

 

 

 

 

Total assets

$

7,333,861

 

 

 

 

 

 

 

 

 

 

 

$

6,689,245

 

 

 

 

 

 

 

 

 

 

 

$

6,659,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

$

1,726,190

 

 

$

7,028

 

 

 

0.41

 

 

 

$

1,041,188

 

 

$

11,433

 

 

 

1.10

 

 

 

$

796,815

 

 

$

8,125

 

 

 

1.02

 

 

Savings

 

1,066,794

 

 

 

3,299

 

 

 

0.31

 

 

 

 

831,832

 

 

 

6,735

 

 

 

0.81

 

 

 

 

761,203

 

 

 

4,186

 

 

 

0.55

 

 

Certificates of deposit

 

1,931,887

 

 

 

21,208

 

 

 

1.10

 

 

 

 

2,032,046

 

 

 

40,684

 

 

 

2.00

 

 

 

 

2,194,513

 

 

 

40,200

 

 

 

1.83

 

 

Total interest-bearing deposits

 

4,724,871

 

 

 

31,535

 

 

 

0.67

 

 

 

 

3,905,066

 

 

 

58,852

 

 

 

1.51

 

 

 

 

3,752,531

 

 

 

52,511

 

 

 

1.40

 

 

Borrowings

 

933,711

 

 

 

18,316

 

 

 

1.96

 

 

 

 

1,293,096

 

 

 

25,002

 

 

 

1.93

 

 

 

 

1,359,323

 

 

 

29,509

 

 

 

2.17

 

 

Total interest-bearing liabilities

 

5,658,582

 

 

 

49,851

 

 

 

0.88

 

 

 

 

5,198,162

 

 

 

83,854

 

 

 

1.61

 

 

 

 

5,111,854

 

 

 

82,020

 

 

 

1.60

 

 

Non-interest-bearing liabilities (4)

 

583,886

 

 

 

 

 

 

 

 

 

 

 

 

394,758

 

 

 

 

 

 

 

 

 

 

 

 

351,217

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

6,242,468

 

 

 

 

 

 

 

 

 

 

 

 

5,592,920

 

 

 

 

 

 

 

 

 

 

 

 

5,463,071

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

1,091,393

 

 

 

 

 

 

 

 

 

 

 

 

1,096,325

 

 

 

 

 

 

 

 

 

 

 

 

1,196,622

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders'

  equity

$

7,333,861

 

 

 

 

 

 

 

 

 

 

 

$

6,689,245

 

 

 

 

 

 

 

 

 

 

 

$

6,659,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

184,509

 

 

 

 

 

 

 

 

 

 

 

$

149,354

 

 

 

 

 

 

 

 

 

 

 

$

155,313

 

 

 

 

 

 

Interest rate spread (5)

 

 

 

 

 

 

 

 

 

2.61

 

%

 

 

 

 

 

 

 

 

 

 

2.22

 

%

 

 

 

 

 

 

 

 

 

 

2.31

 

%

Net interest margin (6)

 

 

 

 

 

 

 

 

 

2.75

 

%

 

 

 

 

 

 

 

 

 

 

2.45

 

%

 

 

 

 

 

 

 

 

 

 

2.56

 

%

Ratio of interest-earning assets

  to interest-bearing liabilities

 

1.19

 

X

 

 

 

 

 

 

 

 

 

 

1.17

 

X

 

 

 

 

 

 

 

 

 

 

1.19

 

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 $518,149,000, $334,522,000 and $312,169,000, for the years ended June 30, 2021, 2020 and 2019, 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.

 

50


 

 

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, 2021

versus

Year Ended June 30, 2020

 

 

Year Ended June 30, 2020

versus

Year Ended June 30, 2019

 

 

Increase (Decrease) Due to

 

 

Increase (Decrease) Due to

 

 

Volume

 

 

Rate

 

 

Net

 

 

Volume

 

 

Rate

 

 

Net

 

 

(In Thousands)

 

 

(In Thousands)

 

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

$

11,976

 

 

$

(464

)

 

$

11,512

 

 

$

(4,023

)

 

$

(1,360

)

 

$

(5,383

)

Taxable investment securities

 

7,341

 

 

 

(15,424

)

 

 

(8,083

)

 

 

3,770

 

 

 

(1,662

)

 

 

2,108

 

Tax-exempt securities

 

(807

)

 

 

66

 

 

 

(741

)

 

 

(498

)

 

 

52

 

 

 

(446

)

Other interest-earning assets

 

1,984

 

 

 

(3,520

)

 

 

(1,536

)

 

 

890

 

 

 

(1,294

)

 

 

(404

)

Total interest-earning assets

$

20,494

 

 

$

(19,342

)

 

$

1,152

 

 

$

139

 

 

$

(4,264

)

 

$

(4,125

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

$

5,100

 

 

$

(9,505

)

 

$

(4,405

)

 

$

2,634

 

 

$

674

 

 

$

3,308

 

Savings and club

 

1,533

 

 

 

(4,969

)

 

 

(3,436

)

 

 

418

 

 

 

2,131

 

 

 

2,549

 

Certificates of deposit

 

(1,923

)

 

 

(17,5