UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 ofincorporation or organization)
(I.R.S. EmployerIdentification Number)
120 Passaic Ave., 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
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 (§232.405 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 filers,” “accelerated filers,” “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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 2, 2021.
$0.01 par value common stock — 75,049,972 shares outstanding
KEARNY FINANCIAL CORP. AND SUBSIDIARIES
INDEX
Page
Number
PART I—FINANCIAL INFORMATION
Item 1:
Financial Statements
Consolidated Statements of Financial Condition at September 30, 2021 (Unaudited) and June 30, 2021
1
Consolidated Statements of Income for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)
2
Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)
4
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)
5
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2021 and September 30, 2020 (Unaudited)
6
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
Item 3:
Quantitative and Qualitative Disclosure About Market Risk
49
Item 4:
Controls and Procedures
51
PART II—OTHER INFORMATION
Legal Proceedings
52
Item 1A:
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5:
Other Information
Item 6:
Exhibits
53
SIGNATURES
54
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Share and Per Share Data)
September 30,
June 30,
2021
(Unaudited)
Assets
Cash and amounts due from depository institutions
$
16,592
21,463
Interest-bearing deposits in other banks
37,478
46,392
Cash and cash equivalents
54,070
67,855
Investment securities available for sale (amortized cost $1,648,192 and $1,666,853, respectively), net of allowance for credit losses of $0 at September 30, 2021 and June 30, 2021
1,651,156
1,676,864
Investment securities held to maturity (fair value $38,673 and $39,610, respectively), net of allowance for credit losses of $0 at September 30, 2021 and June 30, 2021
37,497
38,138
Loans held-for-sale
12,884
16,492
Loans receivable
4,789,339
4,851,394
Less: allowance for credit losses on loans
(51,785
)
(58,165
Net loans receivable
4,737,554
4,793,229
Premises and equipment
55,236
56,338
Federal Home Loan Bank ("FHLB") of New York stock
36,615
Accrued interest receivable
19,541
19,362
Goodwill
210,895
Core deposit intangibles
3,524
3,705
Bank owned life insurance
284,871
283,310
Deferred income tax assets, net
27,771
29,323
Other real estate owned
178
Other assets
51,896
51,431
Total Assets
7,183,688
7,283,735
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest-bearing
631,344
593,718
Interest-bearing
4,763,795
4,891,588
Total deposits
5,395,139
5,485,306
Borrowings
720,990
685,876
Advance payments by borrowers for taxes
16,222
15,752
Other liabilities
36,914
53,857
Total Liabilities
6,169,265
6,240,791
Stockholders' Equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued and outstanding
-
Common stock, $0.01 par value; 800,000,000 shares authorized; 75,799,972 shares and 78,964,859 shares issued and outstanding, respectively
758
790
Paid-in capital
616,894
654,396
Retained earnings
420,701
408,367
Unearned employee stock ownership plan shares; 2,709,420 shares and 2,759,594 shares, respectively
(26,266
(26,753
Accumulated other comprehensive income
2,336
6,144
Total Stockholders' Equity
1,014,423
1,042,944
Total Liabilities and Stockholders' Equity
See notes to unaudited consolidated financial statements.
- 1 -
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
Three Months Ended
2020
Interest Income
Loans
48,230
52,811
Taxable investment securities
8,212
7,336
Tax-exempt investment securities
333
454
Other interest-earning assets
431
914
Total Interest Income
57,206
61,515
Interest Expense
Deposits
4,065
11,062
3,551
5,660
Total Interest Expense
7,616
16,722
Net Interest Income
49,590
44,793
(Reversal of) provision for credit losses
(5,400
4,059
Net Interest Income after (Reversal of) Provision for Credit Losses
54,990
40,734
Non-Interest Income
Fees and service charges
607
445
Gain (loss) on sale and call of securities
(377
Gain on sale of loans
1,006
1,890
Income from bank owned life insurance
1,561
1,596
Electronic banking fees and charges
407
405
Bargain purchase gain
3,053
Other income
218
90
Total Non-Interest Income
3,800
7,102
Non-Interest Expense
Salaries and employee benefits
18,617
16,977
Net occupancy expense of premises
4,547
3,122
Equipment and systems
3,825
3,570
Advertising and marketing
392
500
Federal deposit insurance premium
492
472
Directors' compensation
803
748
Merger-related expenses
4,349
Other expense
3,127
3,835
Total Non-Interest Expense
31,803
33,573
Income before Income Taxes
26,987
14,263
Income tax expense
7,272
2,884
Net Income
19,715
11,379
- 2 -
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Net Income per Common Share (EPS)
Basic
0.26
0.13
Diluted
Weighted Average Number of Common Shares Outstanding
74,537
86,008
74,556
86,009
- 3 -
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands, Unaudited)
Other Comprehensive (Loss) Income, net of tax:
Net unrealized (loss) gain on securities available for sale
(4,981
788
Net realized (gain) loss on sale and call of securities available for sale
(1
265
Fair value adjustments on derivatives
1,164
1,645
Benefit plan adjustments
10
19
Total Other Comprehensive (Loss) Income
(3,808
2,717
Total Comprehensive Income
15,907
14,096
- 4 -
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In Thousands, Except Share and Per Share Data, Unaudited)
Common Stock
Paid-In
Retained
UnearnedESOP
AccumulatedOtherComprehensive
Shares
Amount
Capital
Earnings
Income
Total
Balance - June 30, 2020
83,663
837
722,871
387,911
(28,699
1,257
1,084,177
Cumulative effect of change in accounting principle - Topic 326
(14,239
Balance - July 1, 2020 as adjusted for change in accounting principle
373,672
1,069,938
Net income
Other comprehensive loss, net of income tax
ESOP shares committed to be released (50 shares)
(100
487
387
Stock option expense
456
Restricted stock plan shares earned (69 shares)
1,016
Cancellation of shares issued for restricted stock awards
(7
(49
Shares issued in conjunction with the acquisition of MSB Financial Corp.
5,854
58
45,075
45,133
Cash dividends declared ($0.08 per common share)
(6,917
Balance - September 30, 2020
89,510
895
769,269
378,134
(28,212
3,974
1,124,060
Balance - June 30, 2021
78,965
133
620
Stock repurchases
(3,158
(32
(38,964
(38,996
Restricted stock plan shares earned (72 shares)
962
(89
Cash dividends declared ($0.10 per common share)
(7,381
Balance - September 30, 2021
75,800
- 5 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment
1,502
1,425
Net accretion of premiums, discounts and loan fees and costs
(1,845
(4,723
Deferred income taxes and valuation allowance
3,120
855
(3,053
Amortization of intangible assets
181
Amortization of benefit plans’ unrecognized net gain
20
21
Loans originated for sale
(60,620
(121,596
Proceeds from sale of mortgage loans held-for-sale
65,234
124,105
Gain on sale of mortgage loans held-for-sale, net
(1,006
(1,890
Realized (gain) loss on sale/call of investment securities available for sale
377
Realized gain on disposition of premises and equipment
Increase in cash surrender value of bank owned life insurance
(1,561
(1,596
ESOP, stock option plan and restricted stock plan expenses
2,038
1,859
Increase in interest receivable
(179
(1,294
Decrease (increase) in other assets
963
(3,456
Increase in interest payable
62
Decrease in other liabilities
(16,751
(663
Net Cash Provided by Operating Activities
5,414
6,136
Cash Flows from Investing Activities:
Purchases of:
Investment securities available for sale
(82,000
(259,381
Proceeds from:
Repayments/calls/maturities of investment securities available for sale
99,889
120,894
Repayments/calls/maturities of investment securities held to maturity
605
940
Sales of investment securities available for sale
19,600
Purchase of loans
(19,601
(21,586
Net decrease in loans receivable
83,205
104,354
Additions to premises and equipment
(400
(1,367
Proceeds from cash settlement of premises and equipment
Redemption of FHLB stock
6,881
Net cash acquired in acquisition
4,296
Net Cash Provided by (Used in) Investing Activities
81,699
(25,369
- 6 -
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Cash Flows from Financing Activities:
Net (decrease) increase in deposits
(89,927
150,000
Repayment of term FHLB advances
(390,000
(865,000
Proceeds from term FHLB advances
390,000
775,000
Net increase (decrease) in other short-term borrowings
35,000
(68,635
Net increase (decrease) in advance payments by borrowers for taxes
470
(355
Repurchase and cancellation of common stock of Kearny Financial Corp.
Cancellation of shares repurchased on vesting to pay taxes
Dividends paid
(7,356
(6,877
Net Cash Used in Financing Activities
(100,898
(15,916
Net Decrease in Cash and Cash Equivalents
(13,785
(35,149
Cash and Cash Equivalents - Beginning
180,967
Cash and Cash Equivalents - Ending
145,818
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Income taxes, net of refunds
6,011
5,371
Interest
7,611
16,660
Non-cash investing and financing activities:
Fair value of assets acquired, net of cash and cash equivalents acquired
567,816
Fair value of liabilities assumed
523,926
- 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of Kearny Financial Corp. (the “Company”), its wholly-owned subsidiary, Kearny Bank (the “Bank”) and the Bank’s wholly-owned subsidiary, CJB Investment Corp. The Company conducts its business principally through the Bank. Management prepared the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), including the elimination of all significant inter-company accounts and transactions during consolidation.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, income, comprehensive income, changes in stockholders’ equity and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the unaudited consolidated financial statements have been included. The results of operations for the quarter ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period.
The data in the consolidated statement of financial condition for June 30, 2021 was derived from the Company’s 2021 Annual Report on Form 10-K. That data, along with the interim unaudited financial information presented in the consolidated statements of financial condition, income, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s 2021 Annual Report on Form 10-K.
The accounting and reporting policies of the Company conform to U.S. GAAP and to general practice within the financial services industry. A discussion of these policies can be found in Note 1, Summary of Significant Accounting Policies, included in the Company’s 2021 Annual Report on Form 10-K. There have been no material changes to the Company’s significant accounting policies since June 30, 2021.
We have reclassified certain amounts in the prior period's financial statements to conform to the current period's presentation. Specifically, effective July 1, 2021, loan prepayment penalty income was reclassified to interest income on loans. Previously, loan prepayment penalty income was recorded within non-interest income. Interest income and non-interest income for all periods presented reflect this reclassification.
Update to Significant Accounting Policies
Allowance for Credit Losses on Loans ("ACL"). In accordance with the ACL policy, the methodology is reviewed no less than annually. During the quarter ended September 30, 2021, the Company updated the econometric factors used in the determination of the probability of default for certain loan portfolio segments used in its ACL methodology for pooled loans. Econometric factors are selected based on the correlation of the factor to credit losses for each loan portfolio segment. Effective July 1, 2021, the primary econometric factors utilized in the determination of the probability of default for each loan portfolio segment is the national unemployment rate (“NUR”). Prior to July 1, 2021, NUR and gross domestic product (“GDP”) econometric factors were used in the determination of the probability of default for each loan portfolio segment.
- 8 -
2. SUBSEQUENT EVENTS
The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of September 30, 2021, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date this document was filed.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU 2019-12, “Income taxes (Topic 740); Simplifying the Accounting for Income Taxes”. ASU 2019-12 provides amendments intended to reduce the cost and complexity in accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes the following exceptions from ASC 740, Income Taxes: (i) exceptions to the incremental approach for intraperiod tax allocation; (ii) exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment become a subsidiary; and (iii) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 provides the following amendments that simplify and improve guidance with Topic 740: (i) franchise taxes that are based partially on income; (ii) transactions that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; (iv) enacted changes in tax laws in interim periods; and (v) employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. For public business entities, the amendments in the ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 in July 2021, and its adoption did not have a significant impact on the Company’s audited consolidated financial statements.
- 9 -
4. SECURITIES
At September 30, 2021, there was no allowance for credit losses on available for sale securities. The following tables present the amortized cost, gross unrealized gains and losses and estimated fair values for available for sale securities and the amortized cost, gross unrecognized gains and losses and estimated fair values for held to maturity securities as of the dates indicated:
September 30, 2021
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Allowance for Credit Losses
FairValue
(In Thousands)
Available for sale:
Debt securities:
Obligations of state and political subdivisions
33,235
676
33,911
Asset-backed securities
232,448
2,668
56
235,060
Collateralized loan obligations
253,458
105
253,443
Corporate bonds
160,996
2,667
142
163,521
Total debt securities
680,137
6,101
303
685,935
Mortgage-backed securities:
Collateralized mortgage obligations (1)
11,300
226
11,526
Residential pass-through securities (1)
693,483
6,109
10,279
689,313
Commercial pass-through securities (1)
263,272
4,285
3,175
264,382
Total mortgage-backed securities
968,055
10,620
13,454
965,221
Total securities available for sale
1,648,192
16,721
13,757
June 30, 2021
33,800
34,603
240,217
2,835
63
242,989
189,873
177
170
189,880
155,622
2,802
73
158,351
619,512
6,617
306
625,823
13,420
319
13,739
744,196
7,443
7,148
744,491
289,725
5,738
2,652
292,811
1,047,341
13,500
9,800
1,051,041
1,666,853
20,117
10,106
- 10 -
GrossUnrecognizedGains
GrossUnrecognizedLosses
Held to maturity:
25,191
1,084
26,275
12,306
92
12,398
Total securities held to maturity
1,176
38,673
25,824
1,204
27,028
12,314
268
12,582
1,472
39,610
Excluding the balances of mortgage-backed securities, the following table presents the amortized cost and estimated fair values of debt securities available for sale and held to maturity, by contractual maturity, at September 30, 2021:
Due in one year or less
5,946
5,992
Due after one year through five years
37,244
38,288
Due after five years through ten years
370,928
374,340
Due after ten years
291,210
293,590
705,328
712,210
- 11 -
Sales of securities available for sale were as follows for the periods presented below:
Available for sale securities sold:
Proceeds from sales of securities
Gross realized gains
Gross realized losses
(385
Net gain on sales of securities
Calls of securities available for sale during the quarter ended September 30, 2021 and September 30, 2020 resulted in gross gains of $1,000 and $8,000, respectively. During the quarter ended September 30, 2021 and September 30, 2020, there were no gains or losses recognized on sales of securities held to maturity.
The carrying value of securities pledged for borrowings at the FHLB and other institutions, and securities pledged for public funds and other purposes, were as follows as of the dates presented below:
Securities pledged:
Pledged for borrowings at the FHLB of New York
152,656
170,120
Pledged to secure public funds on deposit
164,239
137,778
Pledged for potential borrowings at the Federal Reserve Bank of New York
335,889
274,076
Total carrying value of securities pledged
652,784
581,974
The following tables present the gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time that securities have been in a continuous unrealized loss position within the available for sale portfolio at September 30, 2021 and June 30, 2021:
Less than 12 Months
12 Months or More
UnrealizedLosses
Number of Securities
(Dollars in Thousands)
Securities Available for Sale:
6,076
9
5,640
47
11,716
51,738
12
58,680
93
110,418
28,881
Commercial pass-through securities
123,354
2,799
15,707
376
7
139,061
Residential pass-through securities
450,719
660,768
13,241
80,027
516
34
740,795
- 12 -
12,159
36,741
58,605
161
95,346
15,952
145,055
424,112
634,019
9,945
31
692,624
At September 30, 2021 and June 30, 2021, there were no held to maturity securities with unrecognized losses.
Available for sale securities are evaluated to determine if a decline in fair value below the amortized cost basis has resulted from a credit loss or from other factors. An impairment related to credit factors would be recorded through an allowance for credit losses. The allowance is limited to the amount by which the security’s amortized cost basis exceeds the fair value. An impairment that has not been recorded through an allowance for credit losses shall be recorded through other comprehensive income, net of applicable taxes. Investment securities will be written down to fair value through the consolidated statement of income when management intends to sell, or may be required to sell, the securities before they recover in value. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due or were placed in nonaccrual status at September 30, 2021. Management believes that the unrealized losses on these securities 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 September 30, 2021.
At September 30, 2021, the held to maturity securities portfolio consisted of one agency commercial mortgage-backed security and obligations of state and political subdivisions. The commercial mortgage-backed security is issued by a U.S. government agency and is implicitly guaranteed by the U.S. government. The obligations of state and political subdivisions in the portfolio are highly rated by major rating agencies and have a long history of no credit losses. None of the securities in the Company’s held to maturity portfolio were in an unrealized loss position at September 30, 2021. The Company regularly monitors the obligations of state and political subdivisions sector of the market and reviews collectability including such factors as the financial condition of the issuers as well as credit ratings in effect as of the reporting period.
- 13 -
5. LOANS RECEIVABLE
The following table sets forth the composition of the Company’s loan portfolio at September 30, 2021 and June 30, 2021:
Commercial loans:
Multi-family mortgage
1,978,681
2,039,260
Nonresidential mortgage
1,023,391
1,079,444
Commercial business
169,392
168,951
Construction
112,226
93,804
Total commercial loans
3,283,690
3,381,459
One- to four-family residential mortgage
1,483,106
1,447,721
Consumer loans:
Home equity loans
44,912
47,871
Other consumer
3,020
3,259
Total consumer loans
47,932
51,130
Total loans
4,814,728
4,880,310
Unaccreted yield adjustments
(25,389
(28,916
Total loans receivable, net of yield adjustments
- 14 -
Past Due Loans
Past due status is based on the contractual payment terms of the loans. The following tables present the payment status of past due loans as of September 30, 2021 and June 30, 2021, by loan segment:
Multi-FamilyMortgage
Non-ResidentialMortgage
CommercialBusiness
ResidentialMortgage
HomeEquityLoans
OtherConsumer
Current
1,960,662
990,979
169,152
111,165
1,475,160
44,770
3,019
4,754,907
Past due:
30-59 days
1,061
2,198
72
3,331
60-89 days
245
1,253
1,503
90 days and over
18,019
32,167
236
4,495
70
54,987
Total past due
32,412
240
7,946
59,821
2,023,166
1,046,553
168,550
1,439,501
47,828
3,258
4,822,660
382
389
2,734
2,739
16,094
32,891
401
5,104
32
54,522
8,220
43
57,650
Nonperforming 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 principal and interest payments (“P&I”) 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. The Company did not recognize interest income on non-accrual loans during the three months ended September 30, 2021 and 2020.
- 15 -
The following tables present information relating to the Company’s nonperforming loans as of September 30, 2021 and June 30, 2021:
Performing
1,957,735
987,641
168,718
110,140
1,471,322
43,207
4,741,783
Nonperforming:
90 days and over past due accruing
Nonaccrual loans with allowance for credit losses
5,359
11,141
5,337
335
22,176
Nonaccrual loans with no allowance for credit losses
15,587
24,609
670
2,086
6,447
1,370
50,769
Total nonperforming
20,946
35,750
674
11,784
1,705
72,945
2,020,734
1,042,257
168,039
91,576
1,428,551
46,127
4,800,543
8,300
12,612
7,422
452
29,022
10,226
24,575
2,228
11,748
1,292
50,745
18,526
37,187
912
19,170
1,744
79,767
Troubled Debt Restructurings (“TDRs”)
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. On a case-by-case basis, the Company may agree to modify the contractual terms of a loan to assist a borrower who may be experiencing financial difficulty, as well as to preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a TDR. The Company had TDRs totaling $20.1 million and $17.8 million as of September 30, 2021 and June 30, 2021, respectively. The allowance for credit losses associated with the TDRs presented in the tables below totaled $725,000 and $256,000 as of September 30, 2021 and June 30, 2021, respectively. As of September 30, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.
- 16 -
The following tables present total TDR loans at September 30, 2021 and June 30, 2021:
Accrual
Non-accrual
# of Loans
(Dollars In Thousands)
Multi-family mortgage loans
5,718
3
253
2,069
2,322
3,786
612
4,398
4,039
11
10,485
18
14,524
30
4,362
1,007
37
5,369
146
180
41
8,547
60
20,073
2,896
2,275
2,380
3,755
693
4,448
3,860
14
8,092
11,952
2,216
3,405
38
5,621
159
68
227
26
6,235
11,565
17,800
- 17 -
The following tables present information regarding troubled debt restructurings that occurred during the three months ended September 30, 2021 and 2020:
Three Months Ended September 30, 2021
Pre-modificationRecordedInvestment
Post-modificationRecordedInvestment
2,987
2,972
Three Months Ended September 30, 2020
309
308
During the three months ended September 30, 2021 and 2020, there were no charge-offs related to TDRs. During quarter ended September 30, 2021 and 2020, there were no troubled debt restructuring defaults.
Loan modifications generally involve a reduction in interest rates and/or extension of maturity dates and also may include step up interest rates in their modified terms which will impact their weighted average yield in the future. The loans which qualified as TDRs during the quarter ended September 30, 2021 and 2020, capitalized prior past due amounts and modified the loan’s repayment terms.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System (the “FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays in payment that are insignificant. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans were not to be considered TDRs if they were performing at December 31, 2019 and other considerations set forth in the interagency statements were met. Borrowers considered current are those that were less than 30 days past due at the time a modification program was implemented or at December 31, 2019.
On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. 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. As of September 30, 2021, the Company had 13 non-TDR loan modifications granted under the CARES Act totaling approximately $5.6 million.
- 18 -
Individually Analyzed Loans
Effective July 1, 2020, individually analyzed loans include loans which do not share similar risk characteristics with other loans. TDR’s will generally be evaluated for individual impairment, however, after a period of sustained repayment performance which permits the credit to be returned to accrual status, a TDR would generally be removed from individual impairment analysis and returned to its corresponding pool. As of September 30, 2021, the carrying value of individually analyzed loans totaled $72.9 million, of which $61.9 million were considered collateral dependent.
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date. See Note 12 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.
The following tables presents the carrying value and related allowance of collateral dependent individually analyzed loans at the dates indicated:
Carrying Value
Related Allowance
1,218
Nonresidential mortgage (1)
4,194
Commercial business (2)
55,622
5,412
One- to four-family residential mortgage (3)
6,230
257
Home equity loans (3)
61,922
5,669
1,368
4,724
183
51,600
6,092
7,612
420
59,243
6,512
- 19 -
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:
Pass – Loans that are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.
Special Mention – Loans which do not currently expose the Company to a sufficient degree of risk to warrant an adverse classification but have some credit deficiencies or other potential weaknesses.
Substandard – Loans which are 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 Company will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans which 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.
Loss – Loans which considered uncollectible or of so little value that their continuance as assets is not warranted.
- 20 -
The following table presents the risk category of loans as of September 30, 2021 by loan segment and vintage year:
Term Loans by Origination Year for Fiscal Years ended June 30,
2022
2019
2018
Prior
Revolving Loans
Multi-family mortgage:
Pass
74,697
279,921
255,968
336,773
299,878
664,830
1,912,067
Special Mention
26,836
5,051
4,814
36,701
Substandard
2,791
27,122
29,913
Doubtful
Total multi-family mortgage
363,609
307,720
696,766
Non-residential mortgage:
31,464
98,113
68,198
56,159
60,264
629,554
6,142
949,894
23,520
4,102
8,931
36,553
730
4,934
31,280
36,944
Total non-residential mortgage
98,843
79,679
69,300
669,765
Commercial business:
14,749
41,653
10,924
5,114
11,778
14,869
64,267
163,354
2,239
936
459
3,706
1,473
293
23
1,903
429
Total commercial business
41,694
11,069
15,490
16,518
64,758
Construction loans:
2,436
54,946
18,549
11,040
14,454
2,962
5,735
110,122
2,104
Total construction loans
5,066
Residential mortgage:
124,524
552,925
110,464
64,802
64,542
546,053
99
1,463,409
1,226
706
1,932
1,728
663
15,374
17,765
Total residential mortgage
112,192
66,691
562,133
Home equity loans:
212
812
2,210
3,828
2,542
8,880
24,009
42,493
383
102
1,934
2,036
Total home equity loans
3,930
11,197
Other consumer loans
166
370
503
520
1,083
45
2,940
79
125
248,248
1,029,511
468,689
530,583
474,301
1,962,528
100,868
- 21 -
The following table presents the risk category of loans as of June 30, 2021 by loan segment and vintage year:
2017
281,402
257,970
374,871
341,304
343,370
374,909
1,973,826
26,974
5,079
4,834
1,054
37,941
13,198
11,399
27,493
401,845
349,279
361,402
387,362
99,602
77,146
56,435
64,616
254,940
441,696
6,150
1,000,585
4,146
8,801
4,513
40,980
743
20,602
11,600
37,879
100,345
79,955
73,696
284,343
457,809
44,514
18,988
4,701
12,654
3,322
12,892
65,657
162,728
2,304
945
461
3,722
76
160
1,474
132
189
2,072
44,555
19,064
4,861
16,432
4,399
13,513
66,127
40,332
17,404
11,203
13,860
1,641
1,382
91,557
2,247
3,629
560,543
124,606
69,917
74,754
119,238
472,587
375
1,422,020
1,233
712
1,945
1,040
671
511
1,468
20,066
23,756
125,646
71,821
75,265
120,706
493,365
834
2,508
4,585
2,778
2,241
7,798
24,788
45,532
393
1,935
1,946
2,252
10,126
550
517
633
256
127
1,044
44
3,171
87
1,028,561
500,255
574,903
531,566
774,870
1,366,848
103,307
Residential Mortgage Loans in Foreclosure
We may obtain physical possession of one- to four-family real estate collateralizing a residential mortgage loan via foreclosure or through an in-substance repossession. As of September 30, 2021, we held one single-family property in other real estate owned with an aggregate carrying value of $178,000 that was acquired through a foreclosure on a residential mortgage loan. As of that same date, we held 10 residential mortgage loans with aggregate carrying values totaling $1.8 million which were in the process of foreclosure. As of June 30, 2021, we held one single-family property in other real estate owned with an aggregate carrying value of $178,000 that was acquired through a foreclosure on a residential mortgage loan. As of that same date, we held 11 residential mortgage loans with aggregate carrying values totaling $2.1 million which were in the process of foreclosure.
Under New Jersey's new eviction protections, no evictions may occur now or in the future based on rent due during the time period of March 1, 2020 through August 31, 2021. Certain other eviction protections will extend until December 31, 2021, for households under certain income levels. The moratorium on home foreclosures ends on November 15, 2021, for all income levels. This includes landlords facing foreclosure who currently have tenants. The New York law, which places a moratorium on evictions for tenants who have endured COVID-related hardships and on foreclosures, will be in effect until at least January 15, 2022. As a result, since March 28, 2020, the Company has temporarily suspended residential property foreclosure sales and evictions.
These eviction restrictions may be subject to legal challenges and may change or be rescinded completely based on the results of court proceedings.
- 22 -
6. ALLOWANCE FOR CREDIT LOSSES
Adoption of Topic 326
On July 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaces the incurred loss methodology with an expected loss methodology, referred to as the “CECL” methodology.
Allowance for Credit Losses on Loans Receivable
The following tables present the balance of the allowance for credit losses at September 30, 2021 and June 30, 2021. For the quarter ended September 30, 2021 and 2020, the balance of the allowance for credit losses is based on the CECL methodology, as noted above. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include the underlying balance of loans receivable applicable to each category as of those dates.
Multi-Family Mortgage
Balance of allowance for credit losses:
Loans acquired with deteriorated credit quality individually analyzed
2,946
2,967
Loans acquired with deteriorated credit quality collectively analyzed
658
288
1,145
Loans individually evaluated
1,248
15
395
2,876
Loans collectively evaluated
23,618
8,993
1,975
1,381
8,446
297
44,797
Total allowance for credit losses
24,982
13,845
1,994
1,430
9,129
318
51,785
Balance of Loans Receivable
Balance of loans receivable:
Loans acquired with deteriorated credit quality individually evaluated
5,763
179
1,122
367
7,431
Loans acquired with deteriorated credit quality collectively evaluated
5,569
23,703
2,533
13,534
6,962
52,364
29,986
496
10,662
1,338
65,514
1,952,166
963,939
166,184
96,606
1,464,360
43,144
4,689,419
Loans receivable, net of yield adjustments
- 23 -
2,700
122
2,843
155
692
204
1,116
2,025
33
447
3,874
26,927
10,826
1,121
8,974
410
36
50,332
Total allowance for loan losses
28,450
16,243
1,170
9,747
433
58,165
6,519
3,617
380
10,699
5,599
25,844
12,970
4,785
65
51,796
30,668
729
15,553
1,364
69,068
2,015,135
1,016,413
165,506
78,606
1,423,766
46,062
4,748,747
The following tables present the activity in the allowance for credit losses on loans for the quarter ended September 30, 2021 and 2020.
At June 30, 2021:
Charge offs
(104
(813
(160
(2
(1,079
Recoveries
97
(3,364
(1,585
(29
260
(620
(115
At September 30, 2021:
- 24 -
At June 30, 2020: (prior to adoption of ASC 326):
20,916
8,763
1,926
4,860
568
37,327
Impact of adopting Topic 326
8,408
2,390
(421
80
9,106
(15
19,640
(63
(10
(73
Initial allowance on PCD loans
250
1,720
720
3,901
(1,008
2,221
1,904
690
149
At September 30, 2020:
28,566
15,094
4,355
1,105
14,835
858
64,860
Allowance for Credit Losses on Off Balance Sheet Commitments
The following tables present the activity in the allowance for credit losses on off balance sheet commitments for the quarter ended September 30, 2021 and 2020:
1,708
Provision reversal recorded in other non-interest expense
(124
1,584
September 30, 2020
Impact of adopting Topic 326 (1)
536
Provision recorded in other non-interest expense
468
1,004
- 25 -
7. DEPOSITS
Deposits are summarized as follows:
Non-interest-bearing demand
Interest-bearing demand
1,937,661
1,902,478
Savings
1,089,699
1,111,364
Certificates of deposits
1,736,435
1,877,746
8. BORROWINGS
Fixed rate advances from the FHLB of New York mature as follows:
Balance
WeightedAverageInterest Rate
By remaining period to maturity:
Less than one year
0.36
%
0.33
One to two years
145,000
3.04
Two to three years
22,500
2.63
Three to four years
103,500
2.68
Four to five years
6,500
2.82
Greater than five years
Total advances
667,500
1.40
1.38
Unamortized fair value adjustments
(1,510
(1,624
Total advances, net of fair value adjustments
665,990
665,876
At September 30, 2021, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.34 billion and $152.7 million, respectively. At June 30, 2021, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.27 billion and $170.1 million, respectively.
Borrowings at September 30, 2021 also included overnight borrowings totaling $55.0 million. By comparison, overnight borrowings totaled $20.0 million at June 30, 2021.
- 26 -
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to specific wholesale funding positions.
Fair Values of Derivative Instruments on the Statement of Financial Condition
The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Statement of Financial Condition as of September 30, 2021 and June 30, 2021:
Asset Derivatives
Liability Derivatives
Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts
3,255
450
1,832
673
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using derivatives are primarily to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps and caps as part of its interest rate risk management strategy. These interest rate products are designated as cash flow hedges. As of September 30, 2021, the Company had a total of 11 interest rate swaps and caps with a total notional amount of $840.0 million hedging specific wholesale funding positions.
For derivatives designated as cash flow hedges, the gain or loss on the derivative is recorded in other comprehensive income, net of tax, and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate wholesale funding positions. During the quarter ended September 30, 2021, the Company had $1.5 million of reclassifications to interest expense. During the next twelve months, the Company estimates that $5.1 million will be reclassified as an increase in interest expense.
- 27 -
The tables below present the pre-tax effects of the Company’s derivative instruments on the Consolidated Statements of Income for the three months ended September 30, 2021 and 2020:
Amount of Gain (Loss) Recognized in OCI onDerivatives
Location of Gain (Loss) Reclassifiedfrom Accumulated OCI into Income
Amount of Gain(Loss) Reclassifiedfrom Accumulated OCI into Income
Derivatives in cash flow hedging relationships:
154
Interest expense
(1,497
(111
(2,372
Offsetting Derivatives
The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Statements of Financial Condition as of September 30, 2021 and June 30, 2021, respectively. The net amounts presented for derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Statements of Financial Condition.
Gross Amounts Not Offset
Gross Amount Recognized
Gross Amounts Offset
Net Amounts Presented
Financial Instruments
Cash Collateral Received
Net Amount
Assets:
7,386
(4,131
Cash Collateral Posted
Liabilities:
4,581
(450
- 28 -
6,847
(5,015
5,688
(673
Credit Risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty. The Company also has agreements with its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty. As of September 30, 2021, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to those agreements was $455,000.
As required under the enforceable master netting arrangement with its derivatives counterparties, at September 30, 2021, the Company posted financial collateral of $450,000 that was not included as an offsetting amount.
In addition to the derivative instruments noted above, the Company’s pipeline of loans held for sale at September 30, 2021 and June 30, 2021, included $54.7 million and $48.4 million, respectively, of in process loans whose terms included interest rate locks to borrowers, which are considered free-standing derivative instruments whose fair values are not material to our financial condition or results of operations.
10. BENEFIT PLANS
Components of Net Periodic Expense
The following table sets forth the aggregate net periodic benefit expense for the Bank’s Benefit Equalization Plan, Postretirement Welfare Plan, Directors’ Consultation and Retirement Plan and Atlas Bank Retirement Income Plan:
Affected Line Item in the Consolidated
Statements of Income
Service cost
29
Interest cost
69
66
Miscellaneous non-interest expense
Amortization of unrecognized loss
Expected return on assets
(28
Net periodic benefit cost
85
- 29 -
11. INCOME TAXES
The following table presents a reconciliation between the reported income taxes for the periods presented and the income taxes which would be computed by applying the federal income tax rate of 21% to income for the quarter ended September 30, 2021 and 2020:
Income before income taxes
Statutory federal tax rate
Federal income tax expense at statutory rate
5,667
2,995
(Reduction) increase in income taxes resulting from:
Tax exempt interest
(70
(94
State tax, net of federal tax effect
2,128
784
Incentive stock option compensation expense
Income from bank-owned life insurance
(328
(327
Non-deductible merger-related expenses
(641
Other items, net
(148
98
Total income tax expense
Effective income tax rate
26.95
20.22
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from, or corroborated by, market data by correlation or other means.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
- 30 -
Assets Measured on a Recurring Basis:
The following methods and significant assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at September 30, 2021 and June 30, 2021:
Investment Securities Available for Sale
The Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.
Derivatives
The Company has contracted with a third party vendor to provide periodic valuations for its interest rate derivatives to determine the fair value of its interest rate caps and swaps. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives such as discounted cash flow analysis and extensions of the Black-Scholes model. Such valuations are based upon readily observable market data and are therefore considered Level 2 valuations by the Company.
Those assets measured at fair value on a recurring basis are summarized below:
QuotedPricesin ActiveMarkets forIdenticalAssets(Level 1)
SignificantOtherObservableInputs(Level 2)
SignificantUnobservableInputs(Level 3)
Debt securities available for sale:
Mortgage-backed securities available for sale:
Collateralized mortgage obligations
Total assets
1,654,411
Total liabilities
- 31 -
Quoted Pricesin ActiveMarkets forIdenticalAssets(Level 1)
1,678,696
Assets Measured on a Non-Recurring Basis:
The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at September 30, 2021 and June 30, 2021:
Collateral Dependent Individually Analyzed Loans:
The fair value of collateral dependent loans that are individually analyzed is determined based upon the appraised fair value of the underlying collateral, less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may also adjust appraised values to reflect estimated changes in market values or apply other adjustments to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. For non-collateral-dependent loans, management estimates fair value using discounted cash flows based on inputs that are largely unobservable and instead reflect management’s own estimates of the assumptions as a market participant would in pricing such loans. Collateral dependent individually analyzed loans are considered a Level 3 valuation by the Company.
- 32 -
Other Real Estate Owned
Other real estate owned is recorded at estimated fair value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for credit losses. If further declines in the estimated fair value of the asset occur, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions.
Those assets measured at fair value on a non-recurring basis are summarized below:
Collateral dependent loans:
Residential mortgage
2,443
6,932
Non-residential mortgage
8,383
17,758
Other real estate owned, net:
Residential
3,051
8,679
18,662
- 33 -
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value:
ValuationTechniques
UnobservableInput
Range
WeightedAverage
Market valuation of underlying collateral
(1)
Adjustments to reflect current conditions/selling costs
(2)
7% - 14%
10.11
10% - 11%
10.40
9% - 24%
16.69
(3)
6.00%
6.00
7% - 13%
9.77
10.39
9% - 16%
14.48
- 34 -
At September 30, 2021, collateral dependent loans valued using Level 3 inputs comprised loans with principal balances totaling $23.4 million and valuation allowances of $5.7 million reflecting fair values of $17.8 million. By comparison, at June 30, 2021, collateral dependent loans valued using Level 3 inputs comprised loans with principal balances totaling $25.2 million and valuation allowances of $6.5 million reflecting fair values of $18.7 million.
Once a loan is foreclosed, the fair value of the other real estate owned continues to be evaluated based upon the fair value of the repossessed real estate originally securing the loan. At September 30, 2021 and June 30, 2021, the Company held other real estate owned totaling $178,000, for both comparative periods, whose carrying value was written down utilizing Level 3 inputs.
The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2021 and June 30, 2021:
CarryingAmount
Financial assets:
Investment securities held to maturity
13,146
4,761,240
FHLB Stock
Interest receivable
4,981
14,560
Financial liabilities:
5,398,708
3,658,704
1,740,004
732,891
Interest payable on deposits
838
252
586
Interest payable on borrowings
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16,934
4,830,136
4,238
15,123
5,490,923
3,607,560
1,883,363
701,419
145
96
1,335
Commitments. The fair value of commitments to fund credit lines and originate or participate in loans held in portfolio or loans held for sale is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, including those relating to loans held for sale that are considered derivative instruments for financial statement reporting purposes, the fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure.
Limitations. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no fair value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment, and advances from borrowers for taxes and insurance. In addition, the ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.
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13. COMPREHENSIVE INCOME
The components of accumulated other comprehensive income included in stockholders’ equity at September 30, 2021 and June 30, 2021 are as follows:
Net unrealized gain on securities available for sale
2,964
10,011
Tax effect
(817
(2,882
Net of tax amount
2,147
7,129
1,339
(312
(393
94
946
(218
(1,073
(1,093
316
326
(757
(767
Total accumulated other comprehensive income
Other comprehensive (loss) income and related tax effects for the three months ended September 30, 2021 and 2020 are presented in the following table:
Net unrealized holding (loss) gain on securities available for sale
(7,046
1,182
Net realized (gain) loss on sale and call of securities available for sale (1)
1,651
2,261
Benefit plans:
Amortization of actuarial loss
Net actuarial gain (2)
Net change in benefit plan accrued expense
Other comprehensive (loss) income before taxes
(5,376
3,841
1,568
(1,124
Total other comprehensive (loss) income
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14. NET INCOME PER COMMON SHARE (“EPS”)
The following schedule shows the Company’s earnings per share calculations for the periods presented:
Three Months Ended September 30,
Weighted average number of common shares outstanding - basic
Effect of dilutive securities
Weighted average number of common shares outstanding - diluted
Basic earnings per share
Diluted earnings per share
Stock options for 3,115,000 and 3,910,398 shares of common stock were not considered in computing diluted earnings per share at September 30, 2021 and September 30, 2020, respectively, because they were considered anti-dilutive.
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.
In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company, its clients and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including whether the coronavirus can continue to be controlled and abated and if the economy is able to remain open. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially remain open, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and actions taken by governmental authorities in response to the COVID‐19 pandemic, including vaccination mandates, and their potential effects on our workforce, human capital resources and infrastructure. Reference is made to Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021.
Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. At September 30, 2021, the Company considers the determination of the allowance for credit losses on loans, individually evaluating loans, calculating the allowance of credit losses on acquired loans, accounting for business combinations and the valuation of goodwill and identifiable intangible assets to be our critical accounting policies. Reference is made to Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2021, for a description of the Company's critical accounting policies.
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Comparison of Financial Condition at September 30, 2021 and June 30, 2021
Executive Summary. Total assets decreased $100.0 million to $7.18 billion at September 30, 2021 from $7.28 billion at June 30, 2021. The decrease primarily reflected decreases in cash and equivalents, investment securities, loans held-for-sale, net loans receivable, and other assets.
Investment Securities. Investment securities available for sale decreased $25.7 million, to $1.65 billion at September 30, 2021, from $1.68 billion at June 30, 2021. This decrease was largely the result of principal repayments of $100.7 million which were partially offset by security purchases of $82.0 million. Investment securities held to maturity decreased $641,000 to $37.5 million at September 30, 2021 from $38.1 million at June 30, 2021.
Additional information regarding investment securities at September 30, 2021 and June 30, 2021 is presented in Note 4 to the unaudited consolidated financial statements.
Loans Held-for-Sale. Loans held-for-sale totaled $12.9 million at September 30, 2021 as compared to $16.5 million at June 30, 2021 and are reported separately from the balance of net loans receivable. During the quarter ended September 30, 2021, $64.2 million of residential mortgage loans were sold, resulting in a gain on sale of $1.0 million.
Net Loans Receivable. Net loans receivable decreased $55.7 million, or 1.2%, to $4.74 billion at September 30, 2021 from $4.79 billion at June 30, 2021. Detail regarding the change in the loan portfolio, by loan segment, is presented below:
Increase/
(Decrease)
(60,579
(56,053
441
18,422
(97,769
35,385
(2,959
(239
Total consumer
(3,198
(65,582
3,527
Allowance for credit losses
6,380
(55,675
Commercial loan origination volume for the quarter ended September 30, 2021 totaled $163.5 million, which comprised $106.0 million of commercial mortgage loan originations, $34.0 million of commercial business loan originations and construction loan disbursements of $23.5 million.
One- to four-family residential mortgage loan origination volume for the quarter ended September 30, 2021, excluding loans held-for-sale, totaled $106.9 million and was augmented with the funding of purchased loans totaling $19.6 million. Home equity loan and line of credit origination volume for the same period totaled $3.3 million.
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Loan-to-value ("LTV") ratios are based on current period loan balances and original appraised values at the time of origination unless a current appraisal has been obtained as a result of the loan being deemed collateral dependent and individually analyzed. The following table sets forth the composition of our real estate secured loans indicating the LTV, by loan category, at September 30, 2021:
LTV
Commercial mortgage loans:
64
Nonresidential mortgage loans
Construction loans
61
Total commercial mortgage loans
3,114,298
46
Total mortgage loans
4,642,316
Additional information about the Company’s loans at September 30, 2021 and June 30, 2021 is presented in Note 5 to the unaudited consolidated financial statements.
Nonperforming Loans and TDRs. Nonperforming loans decreased by $6.8 million to $72.9 million, or 1.02% of total assets at September 30, 2021, from $79.8 million, or 1.10% of total assets at June 30, 2021. At September 30, 2021, the Company had accruing TDRs totaling $8.5 million, an increase of $2.3 million from $6.2 million at June 30, 2021. At September 30, 2021, the Company had non-accrual TDRs totaling $11.5 million, a decrease of $39,000 from $11.6 million at June 30, 2021.
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 made in response to the COVID-19 pandemic, 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 as of September 30, 2021 and June 30, 2021.
Additional information about the Company’s nonperforming loans and TDRs at September 30, 2021 and June 30, 2021 is presented in Note 5 to the unaudited consolidated financial statements.
Allowance for Credit Losses. At September 30, 2021, the ACL totaled $51.8 million, or 1.08% of total loans, reflecting a decrease of $6.4 million from $58.2 million, or 1.19% of total loans, at June 30, 2021. The decrease was largely attributable to a provision for credit loss reversal of $5.4 million, primarily resulting from a reduction in the expected life of various segments of the loan portfolio along with continued improvement in the Company's credit risk outlook. Also contributing to this decrease were net charge-offs of $980,000 of which $935,000 had previously been individually reserved for within the ACL.
Additional information about the ACL at September 30, 2021 and June 30, 2021 is presented in Note 6 to the unaudited 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, decreased $630,000 to $690.5 million at September 30, 2021 from $691.2 million at June 30, 2021. The decrease in the balance of these other assets for the quarter ended September 30, 2021 generally reflected normal operating fluctuations in their respective balances.
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Deposits. Total deposits decreased $90.2 million, or 1.6%, to $5.40 billion at September 30, 2021 from $5.49 billion at June 30, 2021. The decrease in deposits largely reflected the controlled run-off of time deposits which was partially offset by growth in core non-maturity deposits. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:
Increase
Non-interest-bearing deposits
37,626
Interest-bearing deposits:
35,183
(21,665
Certificates of deposit
(141,311
Interest-bearing deposits
(127,793
(90,167
Additional information about the Company’s deposits at September 30, 2021 and June 30, 2021 is presented in Note 7 to the unaudited consolidated financial statements.
Borrowings. The balance of borrowings increased $35.1 million, or 5.1%, to $721.0 million at September 30, 2021 from $685.9 million at June 30, 2021. The increase in borrowings during the quarter ended September 30, 2021 largely reflected an increase in overnight borrowings drawn for liquidity management purposes.
Additional information about the Company’s borrowings at September 30, 2021 and June 30, 2021 is presented in Note 8 to the unaudited consolidated financial statements.
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased $16.5 million to $53.1 million at September 30, 2021 from $69.6 million at June 30, 2021. The decrease in these other liabilities largely reflected the payment of a $12.5 million loan participation liability which was outstanding at June 30, 2021. The remaining change in the balance of these other liabilities generally reflected normal operating fluctuations during the period.
Stockholders’ Equity. Stockholders’ equity decreased $28.5 million to $1.01 billion at September 30, 2021 from $1.04 billion at June 30, 2021. The decrease in stockholders’ equity during the quarter ended September 30, 2021 largely reflected share repurchases totaling $39.0 million and cash dividends totaling $7.4 million, partially offset by net income of $19.7 million.
Book value per share increased by $0.17 to $13.38 at September 30, 2021 while tangible book value per share increased by $0.06 to $10.55 at September 30, 2021.
On September 20, 2021, the Company announced the completion of its seventh stock repurchase plan which authorized the repurchase of 4,064,649 shares. Such shares were repurchased at a cost of $50.5 million, or an average price of $12.43 per share. On September 22, 2021, the Company announced the authorization of its eighth stock repurchase plan, which authorized the repurchase of up to 7,602,021 shares, or 10% of the shares then outstanding. Through September 30, 2021, the Company repurchased a total of 213,139 shares under this plan, at a total cost of $2.6 million and at an average cost of $12.41 per share.
During the quarter ended September 30, 2021, the Company repurchased a total of 3,157,788 shares of its common stock which were repurchased in conjunction with the Company’s seventh and eighth repurchase plans. Such shares were repurchased at a total cost of $39.0 million and at an average cost of $12.35 per share.
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Comparison of Operating Results for the Quarter ended September 30, 2021 and September 30, 2020
Net Income. Net income for the quarter ended September 30, 2021 was $19.7 million, or $0.26 per diluted share, compared to $11.4 million, or $0.13 per diluted share for the quarter ended September 30, 2020. The increase in net income reflected an increase in net interest income, a decrease in the provision for credit losses and a decrease in non-interest expense partially offset by a decrease in non-interest income and an increase in income tax expense.
Net Interest Income. Effective July 1, 2021, loan prepayment penalty income was reclassified to interest income on loans. Previously, loan prepayment penalty income was recorded within non-interest income. Interest income and non-interest income for all periods presented reflect this reclassification.
Net interest income increased by $4.8 million to $49.6 million for the quarter ended September 30, 2021 compared to $44.8 million for the quarter ended September 30, 2020. The increase between the comparative periods resulted from a decrease of $9.1 million in interest expense partially offset by a decrease of $4.3 million in interest income. Included in net interest income, for the quarters ended September 30, 2021 and September 30, 2020, respectively, was purchase accounting accretion of $2.9 million and $4.2 million and loan prepayment penalty income of $1.7 million and $631,000.
Net interest margin increased 29 basis points to 2.99% for the quarter ended September 30, 2021, from 2.70% for quarter ended September 30, 2020 and 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.
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.
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For the Quarter Ended September 30,
AverageBalance
AverageYield/Cost
Interest-earning assets:
Loans receivable (1)
4,835,676
3.99
4,958,293
4.26
Taxable investment securities (2)
1,649,953
1.99
1,350,511
2.17
Tax-exempt securities (2)
59,115
2.25
82,603
2.20
Other interest-earning assets (3)
85,749
2.01
247,543
1.48
Total interest-earning assets
6,630,493
3.45
6,638,950
3.71
Non-interest-earning assets
616,735
624,252
7,247,228
7,263,202
Interest-bearing liabilities:
1,954,271
1,147
0.23
1,464,238
2,182
0.60
1,102,865
334
0.12
1,006,075
1,445
0.57
1,798,473
2,584
1,988,689
7,435
1.50
Total interest-bearing deposits
4,855,609
4,459,002
0.99
694,447
2.05
1,134,404
2.00
Total interest-bearing liabilities
5,550,056
0.55
5,593,406
1.20
Non-interest-bearing liabilities (4)
667,164
558,761
6,217,220
6,152,167
Stockholders' equity
1,030,008
1,111,035
Total liabilities and stockholders' equity
Net interest income
Interest rate spread (5)
2.90
2.51
Net interest margin (6)
2.99
2.70
Ratio of interest-earning assets to interest-bearing liabilities
1.19
X
Provision for Credit Losses. The provision for credit losses decreased $9.5 million to a provision for credit losses reversal of $5.4 million for the quarter ended September 30, 2021, compared to a provision for credit losses of $4.1 million for the quarter ended September 30, 2020. The decrease in the provision between comparative periods was largely attributable to a release of reserves, reflecting a reduction in the expected life of various loan segments and continued improvement in the Company’s credit risk outlook. By comparison, the provision for the quarter ended September 30, 2020, was largely attributable to $5.1 million of provision expense on non-PCD loans acquired in connection with the acquisition of MSB.
Additional information regarding the ACL and the associated provisions recognized during the quarters ended September 30, 2021 and 2020 is presented in Note 6 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at September 30, 2021 and June 30, 2021.
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Non-Interest Income. Non-interest income decreased $3.3 million to $3.8 million for the quarter ended September 30, 2021, primarily due to the $3.1 million bargain purchase gain that was recognized in the prior comparative period in connection with the acquisition of MSB. The remaining increases and decreases in non-interest income reflected the effects of several offsetting factors, as described below.
Fees and service charges increased $162,000 to $607,000 for the quarter ended September 30, 2021. The increase primarily reflected an increase in loan-related fees and charges.
Gain on sale and call of securities reflected a net gain of $1,000 during the quarter ended September 30, 2021 compared to a net loss of $377,000, recorded during the earlier comparative period.
Gain on sale of loans decreased $884,000 to $1.0 million for the quarter ended September 30, 2021. The decrease in loan sale gains largely reflected a decrease in the average net price, between comparative periods, at which such loans were sold, coupled with a decrease in the volume of loans originated and sold.
Other non-interest income increased $128,000 to $218,000 for the quarter ended September 30, 2021. The increase primarily reflected $44,000 of referral fees related to PPP loans and $61,000 of broker fees related to residential mortgage loans.
The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.
Non-Interest Expense. Total non-interest expense decreased $1.8 million to $31.8 million for the quarter ended September 30, 2021.
Salaries and employee benefits increased $1.6 million to $18.6 million for the quarter ended September 30, 2021. This increase was largely due to the impact of staff additions, annual merit increases and increases in benefit plan expense, including ESOP expense.
Net occupancy expense of premises increased $1.4 million to $4.5 million for the quarter ended September 30, 2021. This increase was primarily due to non-recurring expense of $1.3 million and $250,000, respectively, related to the consolidation of three retail branch locations and facility repairs made in connection with damage incurred during Tropical Storm Ida.
Equipment and systems expense increased $255,000 to $3.8 million for the quarter ended September 30, 2021, largely attributable to increases in technology expense associated with the Company's ongoing digital banking initiatives.
Advertising and marketing expense decreased $108,000 to $392,000 for the quarter ended September 30, 2021. This decrease largely reflected changes in advertising expense across a variety of advertising formats reflecting normal fluctuations in the timing of certain campaigns supporting our loan and deposit growth initiatives.
Merger-related expenses, associated with the Company’s acquisition of MSB, totaled $4.3 million for the quarter ended September 30, 2020 for which no such costs were recorded in the current period.
Other non-interest expense decreased $708,000 to $3.1 million for the quarter ended September 30, 2021. The decrease in other expense during the quarter was primarily attributable decreases in loan expense, audit and accounting fees and provisions for credit losses on off-balance sheet credit exposures. This decrease was partially offset by a non-recurring asset impairment charge of $420,000, recognized during the current quarter, related to branch consolidation activity.
Provision for Income Taxes. Provision for income taxes increased $4.4 million to $7.3 million for the quarter ended September 30, 2021, from $2.9 million for the quarter ended September 30, 2020.
The increase in income tax expense reflected a higher level of pre-tax net income, as compared to the prior period, resulting in a higher provision for income tax expense. The increase also reflected the effects of various non-recurring items recorded in conjunction with the Company’s acquisition of MSB, recorded in the prior comparative period, including non-deductible merger related expenses, which were partially offset by a non-taxable bargain purchase gain.
Effective tax rates for the quarter ended September 30, 2021 and 2020 were 26.95% and 20.2%, respectively. The effective tax rate for the prior comparative period reflected the effects of various non-recurring items recorded in conjunction with the Company’s acquisition of MSB, as noted above.
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Liquidity and Capital Resources
Liquidity, represented by cash and cash equivalents, is a product of operating, investing and financing activities. The Company’s primary sources of funds are deposits, borrowings, cash flows from investment securities and loans receivable and funds provided from operations. While scheduled payments from the amortization and maturity of loans and investment securities are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and securities.
At September 30, 2021, liquidity included $54.1 million of short-term cash and equivalents supplemented by $1.65 billion of investment securities classified as available for sale. In addition, as of September 30, 2021, the Company had the capacity to borrow additional funds totaling $2.19 billion and $274.5 million, without pledging additional collateral, from the FHLB of New York and FRB, respectively. As of that same date, the Company also had the capacity to borrow $890.0 million of additional funds, on an unsecured basis, via lines of credit established with other financial institutions.
At September 30, 2021, the Company had outstanding commitments to originate and purchase loans totaling approximately $199.6 million while such commitments totaled $192.8 million at June 30, 2021. As of those same dates, the Company’s pipeline of loans held for sale included $54.7 million and $48.4 million of loans in process whose terms included interest rate locks to borrowers that were paired with a non-binding, best-efforts, commitment to sell the loan to a buyer at a fixed price and within a predetermined timeframe after the sale commitment is established.
Construction loans in process and unused lines of credit were $120.0 million and $183.7 million, respectively, at September 30, 2021 compared to $138.3 million and $181.1 million, respectively, at June 30, 2021. The Company is also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled $739,000 at September 30, 2021 and June 30, 2021, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards.
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The following table sets forth the Bank’s capital position at September 30, 2021 and June 30, 2021, as compared to the minimum regulatory capital requirements that were in effect as of those dates:
At September 30, 2021
Actual
For CapitalAdequacy Purposes
To Be Well CapitalizedUnder PromptCorrective ActionProvisions
Ratio
Total capital (to risk-weighted assets)
662,785
15.07
351,909
8.00
439,886
10.00
Tier 1 capital (to risk-weighted assets)
632,695
14.38
263,932
Common equity tier 1 capital (to risk-weighted assets)
197,949
4.50
285,926
6.50
Tier 1 capital (to adjusted total assets)
9.02
280,603
4.00
350,753
5.00
At June 30, 2021
To Be Well Capitalized Under Prompt Corrective ActionProvisions
761,883
17.22
353,970
442,462
726,737
16.42
265,477
199,108
287,600
10.23
284,114
355,142
The following table sets forth the Company’s capital position at September 30, 2021 and June 30, 2021, as compared to the minimum regulatory capital requirements that were in effect as of those dates:
841,548
19.06
353,163
811,458
18.38
264,872
198,654
11.54
281,369
872,823
19.65
355,274
837,677
18.86
266,456
199,842
11.76
284,877
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In March 2020, the federal banking agencies announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company has adopted the capital transition relief over the permissible five-year period.
Off-Balance Sheet Arrangements
In the normal course of our business of investing in loans and securities we are a party to financial instruments with off-balance-sheet risk. These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to extend credit to meet the financing needs of our customers. We had no significant off-balance sheet commitments for capital expenditures as of September 30, 2021.
Recent Accounting Pronouncements
For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by the Company, please refer to Note 3 to the unaudited consolidated financial statements.
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The majority of our assets and liabilities are sensitive to changes in interest rates and as such interest rate risk is a significant form of market risk that we must manage. Interest rate risk is generally defined in regulatory nomenclature as the risk to earnings or capital arising from the movement of interest rates and arises from several risk factors including re-pricing risk, basis risk, yield curve risk and option risk. We maintain an Asset/Liability Management (“ALM”) program in order manage our interest rate risk. The program is overseen by the Board of Directors through its Interest Rate Risk Management Committee which has assigned the responsibility for the operational aspects of the ALM program to our Asset/Liability Management Committee (“ALCO”), which is comprised of various members of the senior and executive management team.
The quantitative analysis that we conduct measures interest rate risk from both a capital and earnings perspective. With regard to earnings, movements in interest rates and the shape of the yield curve significantly influence the amount of net interest income (“NII”) that we recognize. Movements in market interest rates, and the effect of such movements on the risk factors noted above, significantly influence the spread between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities. Our internal interest rate risk analysis calculates the sensitivity of our projected NII over a one year period utilizing a static balance sheet assumption through which incoming and outgoing asset and liability cash flows are reinvested into similar instruments. Product pricing and earning asset prepayment speeds are appropriately adjusted for each rate scenario.
With regard to capital, our internal interest rate risk analysis calculates the sensitivity of our Economic Value of Equity (“EVE”) ratio to movements in interest rates. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet instruments. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. The degree to which the EVE ratio changes for any hypothetical interest rate scenario from its base case measurement is a reflection of an institution’s sensitivity to interest rate risk.
For both earnings and capital at risk, our interest rate risk analysis calculates a base case scenario that assumes no change in interest rates. The model then measures changes throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve up and down 100, 200 and 300 basis points with additional scenarios modeled where appropriate. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at September 30, 2021 and June 30, 2021 precluded the modeling of certain falling rate scenarios.
The following tables present the results of our internal EVE analysis as of September 30, 2021 and June 30, 2021, respectively:
Economic Value ofEquity ("EVE")
EVE as a % ofPresent Value of Assets
Change inInterest Rates
$ Amountof EVE
$ Changein EVE
% Changein EVE
EVE Ratio
Change inEVE Ratio
+300 bps
1,092,865
(87,838
(7.44
16.83
bps
+200 bps
1,133,710
(46,993
(3.98
16.99
+100 bps
1,174,856
(5,847
(0.50
17.13
0 bps
1,180,703
16.82
-100 bps
1,063,978
(116,725
(9.89
14.98
(184
1,083,847
(104,809
(8.82
16.45
(20
1,132,915
(55,741
(4.69
16.72
1,176,890
(11,766
(0.99
16.89
24
1,188,656
16.65
1,071,463
(117,193
(9.86
14.84
(181
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There are numerous internal and external factors that may contribute to changes in our EVE ratio and its sensitivity. Changes in the composition and allocation of our balance sheet, or utilization of off-balance sheet instruments such as derivatives, can significantly alter the exposure to interest rate risk as quantified by the changes in the EVE sensitivity measures. Changes to certain external factors, most notably changes in the level of market interest rates and overall shape of the yield curve, can also alter the projected cash flows of our interest-earning assets and interest-costing liabilities and the associated present values thereof.
The following tables present the results of our internal NII analysis as of September 30, 2021 and June 30, 2021, respectively:
Net InterestIncome ("NII")
Balance SheetComposition
MeasurementPeriod
$ Amountof NII
$ Changein NII
% Changein NII
Static
One Year
179,080
(12,763
(6.65
184,428
(7,415
(3.87
189,414
(2,429
(1.27
191,843
178,545
(13,298
(6.93
175,830
(16,078
(8.38
182,089
(9,819
(5.12
187,961
(3,947
(2.06
191,908
181,645
(10,263
(5.35
Notwithstanding the rate change scenarios presented in the EVE and NII-based analyses above, future interest rates and their effect on net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in this type of computation. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react at different times and in different degrees to changes in market interest rates. The interest rate on certain types of assets and liabilities, such as demand deposits and savings accounts, may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in the analyses set forth above. Additionally, an increase in credit risk may result as the ability of borrowers to service their debt may decrease in the event of an interest rate increase.
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ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
During the quarter ended September 30, 2021, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II
ITEM 1. Legal Proceedings
At September 30, 2021, neither the Company nor the Bank were involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition of the Company and the Bank.
ITEM 1A. Risk Factors
There have been no material changes to the Risk Factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2021, previously filed with the Securities and Exchange Commission.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
The following table reports information regarding repurchases of the Company’s common stock during the quarter ended September 30, 2021:
Period
Total Numberof SharesPurchased
Average PricePaid per Share
Total Numberof SharesPurchased asPart of PubliclyAnnounced Plansor Programs
MaximumNumber of Sharesthat May Yet BePurchased Underthe Plans orPrograms
July 1-31, 2021
1,219,988
11.77
1,724,661
August 1-31, 2021
1,039,984
12.77
684,677
September 1-30, 2021
897,816
12.64
7,388,882
3,157,788
12.35
On September 20, 2021, the Company announced the completion of its previously disclosed stock repurchase plan. Such shares were repurchased at a cost of $50.5 million, or $12.43 per share. On September 22, 2021, the Company announced the authorization of a new stock repurchase plan to repurchase up to 7,602,021 shares, or 10% of the shares then outstanding. This current plan has no expiration date.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
ITEM 5. Other Information
None.
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ITEM 6. Exhibits
The following Exhibits are filed as part of this report:
3.1
Articles of Incorporation of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
3.2
Bylaws of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
Form of Common Stock Certificate of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following materials from the Company’s Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2021
By:
/s/ Craig L. Montanaro
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Keith Suchodolski
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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