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Kearny Financial Corp. - Quarter Report: 2016 December (Form 10-Q)

 

 

 

 

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 December 31, 2016

OR

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

For the transition period from              to             

Commission File Number 001-37399

 

KEARNY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

 

Maryland

  

30-0870244

(State or other jurisdiction of
incorporation or organization)

  

(I.R.S. Employer
Identification 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

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 6, 2017.

$0.01 par value common stock — 88,240,445 shares outstanding

 

 

 

 

 

 


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page

Number

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1:

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition at December 31, 2016 (Unaudited) and June 30, 2016

 

1

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended December 31, 2016 and December 31, 2015 (Unaudited)

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended December 31, 2016 and December 31, 2015 (Unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2016 and December 31, 2015 (Unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2016 and December 31, 2015 (Unaudited)

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

Item 2:

 

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

 

46

 

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosure About Market Risk

 

63

 

 

 

 

 

Item 4:

 

Controls and Procedures

 

69

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

70

 

 

 

 

 

Item 1A:

 

Risk Factors

 

70

 

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

 

 

 

 

 

Item 3:

 

Defaults Upon Senior Securities

 

70

 

 

 

 

 

Item 4:

 

Mine Safety Disclosures

 

70

 

 

 

 

 

Item 5:

 

Other Information

 

70

 

 

 

 

 

SIGNATURES

 

72

 

 

 

 


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data)

 

 

December 31,

 

 

June 30,

 

 

2016

 

 

2016

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and amounts due from depository institutions

$

17,541

 

 

$

21,328

 

Interest-bearing deposits in other banks

 

19,491

 

 

 

177,872

 

Cash and cash equivalents

 

37,032

 

 

 

199,200

 

Debt securities available for sale (amortized cost $408,666 and $402,137)

 

399,456

 

 

 

389,910

 

Mortgage-backed securities available for sale (amortized cost $273,751 and $276,111)

 

271,825

 

 

 

283,627

 

Securities available for sale

 

671,281

 

 

 

673,537

 

Debt securities held to maturity (fair value $136,730 and $169,794)

 

137,681

 

 

 

167,171

 

Mortgage-backed securities held to maturity (fair value $380,401 and $422,690)

 

380,138

 

 

 

410,115

 

Securities held to maturity

 

517,819

 

 

 

577,286

 

Loans held-for-sale

 

6,686

 

 

 

3,316

 

Loans receivable, including unamortized yield adjustments of $3,289 and $2,606

 

2,973,931

 

 

 

2,673,987

 

Less allowance for loan losses

 

(26,060

)

 

 

(24,229

)

Net loans receivable

 

2,947,871

 

 

 

2,649,758

 

Premises and equipment

 

38,341

 

 

 

38,385

 

Federal Home Loan Bank of New York ("FHLB") stock

 

34,525

 

 

 

30,612

 

Accrued interest receivable

 

11,809

 

 

 

11,212

 

Goodwill

 

108,591

 

 

 

108,591

 

Bank owned life insurance

 

178,656

 

 

 

176,016

 

Deferred income tax assets, net

 

16,098

 

 

 

25,973

 

Other assets

 

16,599

 

 

 

6,173

 

Total Assets

$

4,585,308

 

 

$

4,500,059

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest-bearing

$

240,367

 

 

$

238,751

 

Interest-bearing

 

2,505,650

 

 

 

2,456,082

 

Total deposits

 

2,746,017

 

 

 

2,694,833

 

Borrowings

 

701,849

 

 

 

614,423

 

Advance payments by borrowers for taxes

 

7,618

 

 

 

7,906

 

Other liabilities

 

15,172

 

 

 

35,268

 

Total Liabilities

 

3,470,656

 

 

 

3,352,430

 

 

 

 

 

 

 

 

 

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;

  89,176,477 shares and 91,821,910 shares issued and outstanding, respectively

 

892

 

 

 

918

 

Paid-in capital

 

795,773

 

 

 

849,173

 

Retained earnings

 

357,540

 

 

 

350,806

 

Unearned employee stock ownership plan shares;

  3,662,730 shares and 3,763,078 shares, respectively

 

(35,508

)

 

 

(36,481

)

Accumulated other comprehensive loss, net

 

(4,045

)

 

 

(16,787

)

Total Stockholders' Equity

 

1,114,652

 

 

 

1,147,629

 

Total Liabilities and Stockholders' Equity

$

4,585,308

 

 

$

4,500,059

 

 

See notes to unaudited consolidated financial statements

 

- 1 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

27,407

 

 

$

24,641

 

 

$

53,104

 

 

$

46,673

 

Mortgage-backed securities

 

 

3,779

 

 

 

4,409

 

 

 

7,716

 

 

 

8,923

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,146

 

 

 

1,845

 

 

 

4,186

 

 

 

3,741

 

Tax-exempt

 

 

562

 

 

 

555

 

 

 

1,113

 

 

 

1,089

 

Other interest-earning assets

 

 

421

 

 

 

374

 

 

 

1,002

 

 

 

813

 

Total Interest Income

 

 

34,315

 

 

 

31,824

 

 

 

67,121

 

 

 

61,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,410

 

 

 

4,529

 

 

 

10,771

 

 

 

8,601

 

Borrowings

 

 

3,289

 

 

 

3,357

 

 

 

6,713

 

 

 

6,344

 

Total Interest Expense

 

 

8,699

 

 

 

7,886

 

 

 

17,484

 

 

 

14,945

 

Net Interest Income

 

 

25,616

 

 

 

23,938

 

 

 

49,637

 

 

 

46,294

 

Provision for Loan Losses

 

 

1,255

 

 

 

3,414

 

 

 

2,384

 

 

 

6,055

 

Net Interest Income after Provision for

  Loan Losses

 

 

24,361

 

 

 

20,524

 

 

 

47,253

 

 

 

40,239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees and service charges

 

 

1,289

 

 

 

709

 

 

 

1,952

 

 

 

1,382

 

Gain on sale and call of securities

 

 

21

 

 

 

2

 

 

 

21

 

 

 

2

 

Gain on sale of loans

 

 

459

 

 

 

76

 

 

 

759

 

 

 

148

 

Gain (loss) on sale and write down of real estate owned

 

 

12

 

 

 

(113

)

 

 

(3

)

 

 

(113

)

Income from bank owned life insurance

 

 

1,321

 

 

 

1,409

 

 

 

2,640

 

 

 

2,799

 

Electronic banking fees and charges

 

 

270

 

 

 

277

 

 

 

553

 

 

 

563

 

Miscellaneous

 

 

74

 

 

 

50

 

 

 

153

 

 

 

122

 

Total Non-Interest Income

 

 

3,446

 

 

 

2,410

 

 

 

6,075

 

 

 

4,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,592

 

 

 

10,381

 

 

 

22,501

 

 

 

21,006

 

Net occupancy expense of premises

 

 

1,976

 

 

 

1,774

 

 

 

3,917

 

 

 

3,683

 

Equipment and systems

 

 

2,030

 

 

 

1,614

 

 

 

4,078

 

 

 

3,592

 

Advertising and marketing

 

 

387

 

 

 

563

 

 

 

936

 

 

 

991

 

Federal deposit insurance premium

 

 

339

 

 

 

675

 

 

 

644

 

 

 

1,337

 

Directors' compensation

 

 

379

 

 

 

181

 

 

 

604

 

 

 

363

 

Miscellaneous

 

 

2,670

 

 

 

2,516

 

 

 

5,353

 

 

 

5,114

 

Total Non-Interest Expense

 

 

19,373

 

 

 

17,704

 

 

 

38,033

 

 

 

36,086

 

Income before Income Taxes

 

 

8,434

 

 

 

5,230

 

 

 

15,295

 

 

 

9,056

 

Income taxes

 

 

2,970

 

 

 

1,433

 

 

 

5,164

 

 

 

2,283

 

Net Income

 

$

5,464

 

 

$

3,797

 

 

$

10,131

 

 

$

6,773

 

 

See notes to unaudited consolidated financial statements.

 

- 2 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(In Thousands, Except Per Share Data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

2016

 

 

 

2015

 

Net Income per Common Share (EPS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.04

 

 

$

0.12

 

 

$

0.08

 

Diluted

 

$

0.06

 

 

$

0.04

 

 

$

0.12

 

 

$

0.08

 

Weighted Average Number of

  Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

85,174

 

 

 

89,640

 

 

 

85,710

 

 

 

89,615

 

Diluted

 

 

85,258

 

 

 

89,674

 

 

 

85,782

 

 

 

89,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.02

 

 

$

0.02

 

 

$

0.04

 

 

$

0.04

 

 

See notes to unaudited consolidated financial statements.

 

 

 

- 3 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Income

$

5,464

 

 

$

3,797

 

 

$

10,131

 

 

$

6,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized loss on securities available

  for sale, net of deferred income tax

  benefit of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 $2,924, $2,182;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 $2,548, $3,317

 

(5,314

)

 

 

(3,871

)

 

 

(4,241

)

 

 

(4,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) gain on securities transferred from

  available for sale to held to maturity, net of

  deferred income tax (benefit) expense of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 $(18), $(15);

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 $11, $(2)

 

(25

)

 

 

14

 

 

 

(21

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized loss (gain) on securities available for sale,

  net of income tax benefit (expense) of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 $4, $4;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 $(1), $(1)

 

6

 

 

 

(1

)

 

 

6

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value adjustments on derivatives,

  net of deferred income tax expense (benefit) of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 $9,704, $11,887;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 $2,769, $(291)

 

14,051

 

 

 

4,008

 

 

 

17,212

 

 

 

(423

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit plan adjustments, net of  deferred

  income tax expense (benefit) of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016 $6, $(148);

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015 $8, $(357)

 

10

 

 

 

11

 

 

 

(214

)

 

 

(517

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other Comprehensive Income (Loss)

 

8,728

 

 

 

161

 

 

 

12,742

 

 

 

(5,499

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

$

14,192

 

 

$

3,958

 

 

$

22,873

 

 

$

1,274

 

 

See notes to unaudited consolidated financial statements.

 

 

 

- 4 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended December 31, 2015

(In Thousands, Unaudited)

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Unearned

ESOP

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Loss

 

 

Total

 

Balance - June 30, 2015

 

93,528

 

 

$

935

 

 

$

870,480

 

 

$

342,148

 

 

$

(38,427

)

 

$

(7,761

)

 

$

1,167,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

6,773

 

 

 

-

 

 

 

-

 

 

 

6,773

 

Other comprehensive loss, net of

  income tax benefit

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,499

)

 

 

(5,499

)

ESOP shares committed to be

  released (100 shares)

 

-

 

 

 

-

 

 

 

211

 

 

 

-

 

 

 

973

 

 

 

-

 

 

 

1,184

 

Stock option expense

 

-

 

 

 

-

 

 

 

80

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

80

 

Restricted stock plan shares

  earned (16 shares)

 

-

 

 

 

-

 

 

 

141

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

141

 

Cash dividends declared

  ($0.04 per common share)

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,578

)

 

 

-

 

 

 

-

 

 

 

(3,578

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2015

 

93,528

 

 

$

935

 

 

$

870,912

 

 

$

345,343

 

 

$

(37,454

)

 

$

(13,260

)

 

$

1,166,476

 

 

See notes to unaudited consolidated financial statements.

 

- 5 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended December 31, 2016

(In Thousands, Unaudited)

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Unearned

ESOP

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Shares

 

 

Loss

 

 

Total

 

Balance - June 30, 2016

 

91,822

 

 

$

918

 

 

$

849,173

 

 

$

350,806

 

 

$

(36,481

)

 

$

(16,787

)

 

$

1,147,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

 

 

-

 

 

 

-

 

 

 

10,131

 

 

 

-

 

 

 

-

 

 

 

10,131

 

Other comprehensive income, net of

  income tax expense

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,742

 

 

 

12,742

 

ESOP shares committed to be

  released (100 shares)

 

-

 

 

 

-

 

 

 

434

 

 

 

-

 

 

 

973

 

 

 

-

 

 

 

1,407

 

Stock option expense

 

-

 

 

 

-

 

 

 

231

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

231

 

Share repurchases

 

(4,033

)

 

 

(40

)

 

 

(54,478

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(54,518

)

Issuance of shares for stock benefit plan

 

1,387

 

 

 

14

 

 

 

(14

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Restricted stock plan shares

  earned (30 shares)

 

-

 

 

 

-

 

 

 

427

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

427

 

Cash dividends declared

  ($0.04 per common share)

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,397

)

 

 

-

 

 

 

-

 

 

 

(3,397

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2016

 

89,176

 

 

$

892

 

 

$

795,773

 

 

$

357,540

 

 

$

(35,508

)

 

$

(4,045

)

 

$

1,114,652

 

 

See notes to unaudited consolidated financial statements.

 

 

 

- 6 -


 

 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

 

 

Six Months Ended

 

 

December 31,

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

$

10,131

 

 

$

6,773

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of premises and equipment

 

1,471

 

 

 

1,488

 

Net amortization of premiums, discounts and loan fees and costs

 

2,785

 

 

 

2,143

 

Deferred income taxes

 

342

 

 

 

(1,457

)

Amortization of intangible assets

 

72

 

 

 

86

 

Amortization of benefit plans’ unrecognized net loss (gain)

 

33

 

 

 

(439

)

Provision for loan losses

 

2,384

 

 

 

6,055

 

Loss on write-down and sales of real estate owned

 

3

 

 

 

113

 

Loans originated for sale

 

(58,305

)

 

 

-

 

Proceeds from sale of loans held-for-sale

 

55,344

 

 

 

-

 

Realized gain on sale of loans held-for-sale, net

 

(409

)

 

 

-

 

Realized gain on sale of loans

 

(350

)

 

 

(148

)

Proceeds from sale of loans

 

4,217

 

 

 

1,811

 

Realized loss on call of debt securities available for sale

 

10

 

 

 

-

 

Realized gain on call of debt securities held to maturity

 

(31

)

 

 

(2

)

Realized gain on disposition of premises and equipment

 

(11

)

 

 

(14

)

Increase in cash surrender value of bank owned life insurance

 

(2,640

)

 

 

(2,799

)

ESOP, stock option plan and restricted stock plan expenses

 

2,065

 

 

 

1,405

 

Increase in interest receivable

 

(597

)

 

 

(1,056

)

Decrease (increase) in other assets

 

154

 

 

 

(53

)

Increase in interest payable

 

100

 

 

 

117

 

(Increase) decrease in other liabilities

 

(1,319

)

 

 

2,788

 

Net Cash Provided by Operating Activities

 

15,449

 

 

 

16,811

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Purchases of debt securities available for sale

 

(36,926

)

 

 

-

 

Proceeds from repayments of debt securities available for sale

 

30,476

 

 

 

389

 

Purchases of mortgage-backed securities available for sale

 

(30,663

)

 

 

-

 

Principal repayments on mortgage-backed securities available for sale

 

32,446

 

 

 

36,985

 

Purchase of debt securities held to maturity

 

(22,793

)

 

 

(9,488

)

Proceeds from repayments of debt securities held to maturity

 

52,198

 

 

 

61,914

 

Purchases of mortgage-backed securities held to maturity

 

-

 

 

 

(11,958

)

Principal repayments on mortgage-backed securities held to maturity

 

28,902

 

 

 

23,277

 

Purchase of loans

 

(133,101

)

 

 

(321,176

)

Net increase in loans receivable

 

(173,739

)

 

 

(182,700

)

Proceeds from sale of real estate owned

 

505

 

 

 

435

 

Additions to premises and equipment

 

(1,416

)

 

 

(1,464

)

Proceeds from cash settlement of premises and equipment

 

-

 

 

 

14

 

Purchase of FHLB stock

 

(10,080

)

 

 

(2,475

)

Redemption of FHLB stock

 

6,167

 

 

 

272

 

Net Cash Used in Investing Activities

$

(258,024

)

 

$

(405,975

)

 

See notes to unaudited consolidated financial statements.

- 7 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands, Unaudited)

 

 

Six Months Ended

 

 

December 31,

 

 

2016

 

 

2015

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net increase in deposits

$

51,189

 

 

$

117,556

 

Repayment of term FHLB advances

 

(853,051

)

 

 

(801,048

)

Proceeds from term FHLB advances

 

850,000

 

 

 

850,000

 

Net change in overnight borrowings

 

90,000

 

 

 

-

 

Net increase (decrease) in other short-term borrowings

 

472

 

 

 

(32

)

Net decrease in advance payments by borrowers for taxes

 

(288

)

 

 

(1,006

)

Repurchase and cancellation of common stock of Kearny Financial Corp.

 

(54,518

)

 

 

-

 

Cash dividends paid

 

(3,397

)

 

 

(3,578

)

Net Cash Provided by Financing Activities

 

80,407

 

 

 

161,892

 

Net Decrease in Cash and Cash Equivalents

 

(162,168

)

 

 

(227,272

)

Cash and Cash Equivalents - Beginning

 

199,200

 

 

 

340,136

 

Cash and Cash Equivalents - Ending

$

37,032

 

 

$

112,864

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Income taxes, net of refunds

$

3,934

 

 

$

2,834

 

Interest

$

17,385

 

 

$

14,828

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Acquisition of real estate owned in settlement of loans

$

1,719

 

 

$

1,920

 

 

See notes to unaudited consolidated financial statements.

 

 

 

- 8 -


 

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.     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 subsidiaries, CJB Investment Corp. and KFS Financial Services, Inc. and its wholly-owned subsidiary, KFS Insurance Services, Inc. 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.

 

 

2.     BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, income, 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 three-month and six-month periods ended December 31, 2016 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, 2016 was derived from the Company’s 2016 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 2016 annual report on Form 10-K.

 

 

3.     NET INCOME PER COMMON SHARE (“EPS”)

Basic EPS is based on the weighted average number of common shares actually outstanding including restricted stock awards adjusted for Employee Stock Ownership Plan (“ESOP”) shares not yet committed to be released. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of contracts or securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock method. Shares issued and reacquired during any period are weighted for the portion of the period they were outstanding.

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31, 2016

 

 

December 31, 2016

 

 

 

Income

(Numerator)

 

 

Shares

(Denominator)

 

 

Per

Share

Amount

 

 

Income

(Numerator)

 

 

Shares

(Denominator)

 

 

Per

Share

Amount

 

 

 

(In Thousands, Except Per Share Data)

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,464

 

 

 

 

 

 

 

 

 

 

$

10,131

 

 

 

 

 

 

 

 

 

Basic earnings per share, income

  available to common stockholders

 

$

5,464

 

 

 

85,174

 

 

$

0.06

 

 

$

10,131

 

 

 

85,710

 

 

$

0.12

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

 

$

5,464

 

 

 

85,258

 

 

$

0.06

 

 

$

10,131

 

 

 

85,782

 

 

$

0.12

 

 

- 9 -


 

 

 

Three Months Ended

December 31, 2015

 

 

Six Months Ended

December 31, 2015

 

 

 

Income

(Numerator)

 

 

Shares

(Denominator)

 

 

Per

Share

Amount

 

 

Income

(Numerator)

 

 

Shares

(Denominator)

 

 

Per

Share

Amount

 

 

 

(In Thousands, Except Per Share Data)

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,797

 

 

 

 

 

 

 

 

 

 

$

6,773

 

 

 

 

 

 

 

 

 

Basic earnings per share, income

  available to common stockholders

 

$

3,797

 

 

 

89,640

 

 

$

0.04

 

 

$

6,773

 

 

 

89,615

 

 

$

0.08

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

$

3,797

 

 

 

89,674

 

 

$

0.04

 

 

$

6,773

 

 

 

89,647

 

 

$

0.08

 

 

During the three and six months ended December 31, 2016, the average number of options which were considered anti-dilutive totaled approximately 1,108,587 and 554,293, respectively.  During the three months and six months ended December 31, 2015, the average number of options which were considered anti-dilutive totaled approximately 264,077 and 270,078, respectively.

 

 

4.     SUBSEQUENT EVENTS

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of December 31, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date this document was filed.

 

 

5.     PLAN OF CONVERSION AND STOCK OFFERING

On May 18, 2015, the Company completed its second-step conversion and stock offering as outlined in the Plan of Conversion and Reorganization (the “Plan”). Pursuant to the Plan, Kearny MHC converted from the mutual holding company form of organization to the fully public form. Kearny MHC was merged into the prior holding company and no longer exists. The prior holding company was then merged into a new Maryland corporation, also named Kearny Financial Corp., which became the holding company for the Bank.

In conjunction with that transaction, the Company sold 71,750,000 shares of its common stock at $10.00 per share, resulting in gross proceeds of $717.5 million.  The new shares issued included 3,612,500 shares sold to the Bank’s Employee Stock Ownership Plan (“ESOP”) with an aggregate value of $36.1 million based on the sales price of $10.00 per share.  Concurrent with the closing of the transaction, the Company also issued an additional 500,000 shares of its common stock with an aggregate value of $5.0 million and contributed these shares with an additional $5.0 million in cash to the newly established KearnyBank Foundation.

The Company recognized direct stock offering costs of approximately $10.7 million in conjunction with the transaction which reduced the net proceeds credited to capital.  After adjusting for transaction costs and the value of the shares issued to the Bank’s ESOP, the Company recognized a net increase in equity capital of approximately $670.7 million, of which approximately $353.4 million was contributed to the Bank by the Company as an additional investment in the Bank’s common equity.

The outstanding shares held by the Company’s public stockholders immediately prior to the closing of the conversion and stock offering were “exchanged” or converted into 1.3804 shares of the Company’s new common stock.  All shares previously held by Kearny MHC, the former mutual holding company, as well as the remaining shares previously repurchased by the Company and held in treasury were cancelled concurrent with the closing of the transaction.

 

 

 

6.     RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the

- 10 -


 

guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  The ASU requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined.  This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

In addition, the amendments in the ASU would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 and its adoption did not have a significant impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  The ASU requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The Update provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The Update also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The ASU applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.

The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.

Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The new leases standard addresses other considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the lease term, and re-measurement of lease payments. It also contains comprehensive implementation guidance with practical examples. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.  The ASU requires an entity to discontinue a designated hedging relationship in certain circumstances, including termination of the derivative hedging instrument or if the entity wishes to change any of the critical terms of the hedging relationship. ASU 2016-05 amends Topic 815 to clarify that novation of a derivative (replacing one of the parties to a derivative instrument with a new party) designated as the hedging instrument would not, in and of itself, be considered a termination of the derivative instrument or a change in critical terms requiring discontinuation of the designated hedging relationship.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

- 11 -


 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.  The ASU addresses how an entity should assess whether contingent call (put) options that can accelerate the payment of debt instruments are clearly and closely related to their debt hosts. This assessment is necessary to determine if the option(s) must be separately accounted for as a derivative. The ASU clarifies that an entity is required to assess the embedded call (put) options solely in accordance with a specific four-step decision sequence. This means entities are not also required to assess whether the contingency for exercising the option(s) is indexed to interest rates or credit risk. For example, when evaluating debt instruments puttable upon a change in control, the event triggering the change in control is not relevant to the assessment. Only the resulting settlement of debt is subject to the four-step decision sequence.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  The ASU introduces targeted amendments intended to simplify the accounting for stock compensation.  Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.

In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.

The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.

For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  The Company adopted this ASU effective October 1, 2016 and its adoption did not have a significant impact on the Company’s consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.  The amendments in ASU 2016-10 provide more detailed guidance, including additional implementation guidance and examples for identifying performance obligations and revenue recognition for licenses of intellectual property.

The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements of Topic 606 which, for public entities, is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting.  ASU 2016-11 codifies the SEC’s rescission of certain SEC Staff Observer comments that were codified in Topic 605 and Topic 932.  In addition, the ASU codifies SEC’s rescission of SEC Staff Announcement, “Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share under Topic 815,” which was previously codified in paragraph 815-10-S99-3.

The amendments within Topics 605 and 932 are effective upon adoption of Topic 606 which, for public entities, is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  Paragraph 815-10-S99-3 is rescinded to coincide with the effective date of Update 2014-16.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.  The amendments do not alter the core principle of the new revenue standard, but make certain targeted changes to clarify the following topics: assessing collectability, presenting sales taxes and other similar taxes collected

- 12 -


 

from customers, non-cash consideration, contract modifications and transition, completed contracts at transition and disclosing the accounting change in the period of adoption.

The effective date and transition requirements for ASU 2016-12 are the same as the effective date and transition requirements of Topic 606 which, for public entities, is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument.  The ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force.  The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The new guidance addresses eight classification issues related to the statement of cash flows, which include proceeds from settlement of corporate-owned and bank-owned life insurance policies.  For a public entity, ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

On December 14, 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements to clarify and amend key areas in Generally Accepted Accounting Principles (GAAP).  Most of the amendments go into effect immediately, while others take effect for interim and annual reporting periods beginning after December 15, 2016.  For a public entity, ASU 2016-19 is effective for annual and interim periods in fiscal years beginning after December 15, 2016.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

 

 

- 13 -


 

7.     SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses and fair values of debt and mortgage-backed securities available for sale at December 31, 2016 and June 30, 2016 and stratification by contractual maturity of debt securities available for sale at December 31, 2016 are presented below:

 

 

December 31, 2016

 

 

Amortized

Cost

 

 

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

(In Thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

5,810

 

 

 

 

$

17

 

 

$

18

 

 

$

5,809

 

Obligations of state and political subdivisions

 

27,477

 

 

 

 

 

37

 

 

 

424

 

 

 

27,090

 

Asset-backed securities

 

124,754

 

 

 

 

 

129

 

 

 

3,438

 

 

 

121,445

 

Collateralized loan obligations

 

98,695

 

 

 

 

 

144

 

 

 

392

 

 

 

98,447

 

Corporate bonds

 

143,022

 

 

 

 

 

410

 

 

 

4,868

 

 

 

138,564

 

Trust preferred securities

 

8,908

 

 

 

 

 

-

 

 

 

807

 

 

 

8,101

 

Total debt securities

 

408,666

 

 

 

 

 

737

 

 

 

9,947

 

 

 

399,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

17,507

 

 

 

 

 

51

 

 

 

222

 

 

 

17,336

 

Federal National Mortgage Association

 

35,909

 

 

 

 

 

2

 

 

 

1,027

 

 

 

34,884

 

Non-agency securities

 

114

 

 

 

 

 

-

 

 

 

1

 

 

 

113

 

Total collateralized mortgage obligations

 

53,530

 

 

 

 

 

53

 

 

 

1,250

 

 

 

52,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

1,521

 

 

 

 

 

130

 

 

 

-

 

 

 

1,651

 

Federal Home Loan Mortgage Corporation

 

132,460

 

 

 

 

 

1,070

 

 

 

2,422

 

 

 

131,108

 

Federal National Mortgage Association

 

78,054

 

 

 

 

 

1,449

 

 

 

1,004

 

 

 

78,499

 

Total residential pass-through securities

 

212,035

 

 

 

 

 

2,649

 

 

 

3,426

 

 

 

211,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

8,186

 

 

 

 

 

48

 

 

 

-

 

 

 

8,234

 

Total commercial pass-through securities

 

8,186

 

 

 

 

 

48

 

 

 

-

 

 

 

8,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

273,751

 

 

 

 

 

2,750

 

 

 

4,676

 

 

 

271,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

$

682,417

 

 

 

 

$

3,487

 

 

$

14,623

 

 

$

671,281

 

 

 

December 31, 2016

 

 

Amortized

Cost

 

 

Fair

Value

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

Due in one year or less

$

-

 

 

$

-

 

Due after one year through five years

 

52,648

 

 

 

51,529

 

Due after five years through ten years

 

208,893

 

 

 

205,096

 

Due after ten years

 

147,125

 

 

 

142,831

 

Total

$

408,666

 

 

$

399,456

 

 

 

 

 

 

 

 

 

 

- 14 -


 

 

June 30, 2016

 

 

Amortized

Cost

 

 

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

(In Thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

6,307

 

 

 

 

$

146

 

 

$

13

 

 

$

6,440

 

Obligations of state and political subdivisions

 

27,489

 

 

 

 

 

909

 

 

 

-

 

 

 

28,398

 

Asset-backed securities

 

87,746

 

 

 

 

 

-

 

 

 

5,121

 

 

 

82,625

 

Collateralized loan obligations

 

128,664

 

 

 

 

 

24

 

 

 

1,314

 

 

 

127,374

 

Corporate bonds

 

143,027

 

 

 

 

 

7

 

 

 

5,630

 

 

 

137,404

 

Trust preferred securities

 

8,904

 

 

 

 

 

25

 

 

 

1,260

 

 

 

7,669

 

Total debt securities

 

402,137

 

 

 

 

 

1,111

 

 

 

13,338

 

 

 

389,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Mortgage Corporation

 

20,944

 

 

 

 

 

380

 

 

 

-

 

 

 

21,324

 

Federal National Mortgage Association

 

38,992

 

 

 

 

 

226

 

 

 

89

 

 

 

39,129

 

Non-agency securities

 

126

 

 

 

 

 

-

 

 

 

2

 

 

 

124

 

Total collateralized mortgage obligations

 

60,062

 

 

 

 

 

606

 

 

 

91

 

 

 

60,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

1,789

 

 

 

 

 

171

 

 

 

-

 

 

 

1,960

 

Federal Home Loan Mortgage Corporation

 

126,415

 

 

 

 

 

3,557

 

 

 

-

 

 

 

129,972

 

Federal National Mortgage Association

 

79,583

 

 

 

 

 

3,011

 

 

 

-

 

 

 

82,594

 

Total residential pass-through securities

 

207,787

 

 

 

 

 

6,739

 

 

 

-

 

 

 

214,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

8,262

 

 

 

 

 

262

 

 

 

-

 

 

 

8,524

 

Total commercial pass-through securities

 

8,262

 

 

 

 

 

262

 

 

 

-

 

 

 

8,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

276,111

 

 

 

 

 

7,607

 

 

 

91

 

 

 

283,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

$

678,248

 

 

 

 

$

8,718

 

 

$

13,429

 

 

$

673,537

 

 

There were no sales of securities available for sale during the three months and six months ended December 31, 2016 and December 31, 2015.

At December 31, 2016 and June 30, 2016, securities available for sale with carrying values of approximately $38.3 million and $45.0 million, respectively, were utilized as collateral for borrowings through the FHLB of New York. As of those same dates, securities available for sale with total carrying values of approximately $872,000 and $983,000, respectively, were pledged to secure public funds on deposit.

 

 

- 15 -


 

8.     SECURITIES HELD TO MATURITY

The amortized cost, gross unrealized gains and losses and fair values of debt and mortgage-backed securities held to maturity at December 31, 2016 and June 30, 2016 and stratification by contractual maturity of debt securities held to maturity at December 31, 2016 are presented below:

 

 

December 31, 2016

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

(In Thousands)

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

34,999

 

 

$

-

 

 

$

41

 

 

$

34,958

 

Obligations of state and political subdivisions

 

87,682

 

 

 

87

 

 

 

997

 

 

 

86,772

 

Subordinated debt

 

15,000

 

 

 

-

 

 

 

-

 

 

 

15,000

 

Total debt securities

 

137,681

 

 

 

87

 

 

 

1,038

 

 

 

136,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

2,471

 

 

 

-

 

 

 

57

 

 

 

2,414

 

Federal Home Loan Mortgage Corporation

 

17,867

 

 

 

2

 

 

 

382

 

 

 

17,487

 

Federal National Mortgage Association

 

178

 

 

 

19

 

 

 

-

 

 

 

197

 

Non-agency securities

 

27

 

 

 

-

 

 

 

1

 

 

 

26

 

Total collateralized mortgage obligations

 

20,543

 

 

 

21

 

 

 

440

 

 

 

20,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

8

 

 

 

1

 

 

 

-

 

 

 

9

 

Federal Home Loan Mortgage Corporation

 

39,472

 

 

 

6

 

 

 

391

 

 

 

39,087

 

Federal National Mortgage Association

 

160,922

 

 

 

642

 

 

 

328

 

 

 

161,236

 

Total residential pass-through securities

 

200,402

 

 

 

649

 

 

 

719

 

 

 

200,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

4,981

 

 

 

-

 

 

 

22

 

 

 

4,959

 

Federal National Mortgage Association

 

154,212

 

 

 

992

 

 

 

218

 

 

 

154,986

 

Total commercial pass-through securities

 

159,193

 

 

 

992

 

 

 

240

 

 

 

159,945

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

380,138

 

 

 

1,662

 

 

 

1,399

 

 

 

380,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

$

517,819

 

 

$

1,749

 

 

$

2,437

 

 

$

517,131

 

 

 

December 31, 2016

 

 

Amortized

Cost

 

 

Fair

Value

 

 

(In Thousands)

 

Debt securities held to maturity:

 

 

 

 

 

 

 

Due in one year or less

$

39,284

 

 

$

39,242

 

Due after one year through five years

 

18,834

 

 

 

18,634

 

Due after five years through ten years

 

68,012

 

 

 

67,425

 

Due after ten years

 

11,551

 

 

 

11,429

 

Total

$

137,681

 

 

$

136,730

 

 

 

- 16 -


 

 

June 30, 2016

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

 

 

Gross

Unrealized

Losses

 

 

 

 

Fair

Value

 

 

(In Thousands)

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

84,992

 

 

$

31

 

 

 

 

$

1

 

 

 

 

$

85,022

 

Obligations of state and political subdivisions

 

82,179

 

 

 

2,602

 

 

 

 

 

9

 

 

 

 

 

84,772

 

Total debt securities

 

167,171

 

 

 

2,633

 

 

 

 

 

10

 

 

 

 

 

169,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

2,787

 

 

 

25

 

 

 

 

 

-

 

 

 

 

 

2,812

 

Federal Home Loan Mortgage Corporation

 

20,067

 

 

 

92

 

 

 

 

 

-

 

 

 

 

 

20,159

 

Federal National Mortgage Association

 

194

 

 

 

24

 

 

 

 

 

-

 

 

 

 

 

218

 

Non-agency securities

 

33

 

 

 

-

 

 

 

 

 

1

 

 

 

 

 

32

 

Total collateralized mortgage obligations

 

23,081

 

 

 

141

 

 

 

 

 

1

 

 

 

 

 

23,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

8

 

 

 

1

 

 

 

 

 

-

 

 

 

 

 

9

 

Federal Home Loan Mortgage Corporation

 

43,716

 

 

 

470

 

 

 

 

 

-

 

 

 

 

 

44,186

 

Federal National Mortgage Association

 

179,908

 

 

 

4,132

 

 

 

 

 

4

 

 

 

 

 

184,036

 

Total residential pass-through securities

 

223,632

 

 

 

4,603

 

 

 

 

 

4

 

 

 

 

 

228,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial pass-through securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government National Mortgage Association

 

7,756

 

 

 

22

 

 

 

 

 

-

 

 

 

 

 

7,778

 

Federal National Mortgage Association

 

155,646

 

 

 

7,814

 

 

 

 

 

-

 

 

 

 

 

163,460

 

Total commercial pass-through securities

 

163,402

 

 

 

7,836

 

 

 

 

 

-

 

 

 

 

 

171,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

410,115

 

 

 

12,580

 

 

 

 

 

5

 

 

 

 

 

422,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities held to maturity

$

577,286

 

 

$

15,213

 

 

 

 

$

15

 

 

 

 

$

592,484

 

 

There were no sales of securities held to maturity during the three and six months ended December 31, 2016 and December 31, 2015.

At December 31, 2016 and June 30, 2016, securities held to maturity with carrying values of approximately $124.8 million and $148.8 million, respectively, were utilized as collateral for borrowings from the FHLB of New York. As of those same dates, securities held to maturity with total carrying values of approximately $7.0 million and $7.5 million, respectively, were pledged to secure public funds on deposit.

 

 

- 17 -


 

9.     IMPAIRMENT OF SECURITIES

The following two tables summarize the fair values and gross unrealized losses within the available for sale and held to maturity portfolios at December 31, 2016 and June 30, 2016. The gross unrealized losses, presented by security type, represent temporary impairments of value within each portfolio as of the dates presented. Temporary impairments within the available for sale portfolio have been recognized through other comprehensive income as reductions in stockholders’ equity on a tax-effected basis.

The tables are followed by a discussion that summarizes the Company’s rationale for recognizing impairments, where applicable, as “temporary” versus those identified as “other-than-temporary”. Such rationale is presented by investment type and generally applies consistently to both the “available for sale” and “held to maturity” portfolios, except where specifically noted.

 

 

December 31, 2016

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

2,064

 

 

$

4

 

 

$

1,927

 

 

$

14

 

 

$

3,991

 

 

$

18

 

Obligations of state and political

  subdivisions

 

19,776

 

 

 

424

 

 

 

-

 

 

 

-

 

 

 

19,776

 

 

 

424

 

Asset-backed securities

 

31,481

 

 

 

744

 

 

 

60,594

 

 

 

2,694

 

 

 

92,075

 

 

 

3,438

 

Collateralized loan obligations

 

19,917

 

 

 

10

 

 

 

59,576

 

 

 

382

 

 

 

79,493

 

 

 

392

 

Corporate bonds

 

-

 

 

 

-

 

 

 

110,163

 

 

 

4,868

 

 

 

110,163

 

 

 

4,868

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

7,101

 

 

 

807

 

 

 

7,101

 

 

 

807

 

Collateralized mortgage obligations

 

36,860

 

 

 

858

 

 

 

9,933

 

 

 

392

 

 

 

46,793

 

 

 

1,250

 

Residential pass-through securities

 

117,476

 

 

 

3,426

 

 

 

-

 

 

 

-

 

 

 

117,476

 

 

 

3,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

227,574

 

 

$

5,466

 

 

$

249,294

 

 

$

9,157

 

 

$

476,868

 

 

$

14,623

 

 

 

June 30, 2016

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

-

 

 

$

2,053

 

 

$

13

 

 

$

2,053

 

 

$

13

 

Asset-backed securities

 

45,564

 

 

 

2,726

 

 

 

37,061

 

 

 

2,395

 

 

 

82,625

 

 

 

5,121

 

Collateralized loan obligations

 

18,227

 

 

 

119

 

 

 

98,743

 

 

 

1,195

 

 

 

116,970

 

 

 

1,314

 

Corporate bonds

 

18,938

 

 

 

61

 

 

 

113,482

 

 

 

5,569

 

 

 

132,420

 

 

 

5,630

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

6,644

 

 

 

1,260

 

 

 

6,644

 

 

 

1,260

 

Collateralized mortgage obligations

 

672

 

 

 

3

 

 

 

10,485

 

 

 

88

 

 

 

11,157

 

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

83,401

 

 

$

2,909

 

 

$

268,468

 

 

$

10,520

 

 

$

351,869

 

 

$

13,429

 

 

- 18 -


 

The number of available for sale securities with unrealized losses at December 31, 2016 totaled 132 and included seven U.S. agency securities, 52 municipal obligations, nine asset-backed securities, 12 collateralized loan obligations, nine corporate obligations, four trust preferred securities, ten collateralized mortgage obligations and 29 residential pass-through securities. The number of available for sale securities with unrealized losses at June 30, 2016 totaled 52 and included five U.S. agency securities, eight asset-backed securities, 18 collateralized loan obligations, 14 corporate obligations, four trust preferred securities and three collateralized mortgage obligations. 

 

 

December 31, 2016

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

24,976

 

 

$

24

 

 

$

9,983

 

 

$

17

 

 

$

34,959

 

 

$

41

 

Obligations of state and political

  subdivisions

 

66,782

 

 

 

984

 

 

 

403

 

 

 

13

 

 

 

67,185

 

 

 

997

 

Collateralized mortgage obligations

 

19,881

 

 

 

439

 

 

 

27

 

 

 

1

 

 

 

19,908

 

 

 

440

 

Residential pass-through securities

 

134,611

 

 

 

660

 

 

 

1,951

 

 

 

59

 

 

 

136,562

 

 

 

719

 

Commercial pass-through securities

 

26,807

 

 

 

240

 

 

 

-

 

 

 

-

 

 

 

26,807

 

 

 

240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

273,057

 

 

$

2,347

 

 

$

12,364

 

 

$

90

 

 

$

285,421

 

 

$

2,437

 

 

 

June 30, 2016

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

-

 

 

$

10,000

 

 

$

1

 

 

$

10,000

 

 

$

1

 

Obligations of state and political

  subdivisions

 

1,904

 

 

 

5

 

 

 

669

 

 

 

4

 

 

 

2,573

 

 

 

9

 

Collateralized mortgage obligations

 

-

 

 

 

-

 

 

 

32

 

 

 

1

 

 

 

32

 

 

 

1

 

Residential pass-through securities

 

-

 

 

 

-

 

 

 

2,026

 

 

 

4

 

 

 

2,026

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

1,904

 

 

$

5

 

 

$

12,727

 

 

$

10

 

 

$

14,631

 

 

$

15

 

 

The number of held to maturity securities with unrealized losses at December 31, 2016 totaled 198 and included two U.S. agency securities, 145 municipal obligations, eight collateralized mortgage obligations, 36 residential pass-through security and seven commercial pass-through securities.  The number of held to maturity securities with unrealized losses at June 30, 2016 totaled 13 and included one U.S. agency security, seven municipal obligations, four collateralized mortgage obligations, and one residential pass-through security.

In general, if the fair value of a debt security is less than its amortized cost basis at the time of evaluation, the security is “impaired” and the impairment is to be evaluated to determine if it is other than temporary.  The Company evaluates the impaired securities in its portfolio for possible other than temporary impairment (OTTI) on at least a quarterly basis.  The following represents the circumstances under which an impaired security is determined to be other than temporarily impaired:

 

When the Company intends to sell the impaired debt security;

 

When the Company more likely than not will be required to sell the impaired debt security before recovery of its amortized cost (for example, whether liquidity requirements or contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs); or

 

When an impaired debt security does not meet either of the two conditions above, but the Company does not expect to recover the entire amortized cost of the security.  According to applicable accounting guidance for debt securities, this is generally when the present value of cash flows expected to be collected is less than the amortized cost of the security.

- 19 -


 

In the first two circumstances noted above, the amount of OTTI recognized in earnings is the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date.  In the third circumstance, however, the OTTI is to be separated into the amount representing the credit loss from the amount related to all other factors.  The credit loss component is to be recognized in earnings while the non-credit loss component is to be recognized in other comprehensive income.  In these cases, OTTI is generally predicated on an adverse change in cash flows (e.g. principal and/or interest payment deferrals or losses) versus those expected at the time of purchase.  The absence of an adverse change in expected cash flows generally indicates that a security’s impairment is related to other “non-credit loss” factors and is thereby generally not recognized as OTTI.

The Company considers a variety of factors when determining whether a credit loss exists for an impaired security including, but not limited to:

 

The length of time and the extent (a percentage) to which the fair value has been less than the amortized cost basis;

 

Adverse conditions specifically related to the security, an industry, or a geographic area (e.g. changes in the financial condition of the issuer of the security, or in the case of an asset backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

 

The historical and implied volatility of the fair value of the security;

 

The payment structure of the debt security;

 

Actual or expected failure of the issuer of the security to make scheduled interest or principal payments;

 

Changes to the rating of the security by external rating agencies; and

 

Recoveries or additional declines in fair value subsequent to the balance sheet date.

At December 31, 2016 and June 30, 2016, the Company held no securities for which credit-related OTTI had been recognized in earnings based on the Company’s analysis and determination that the impairment reported in the tables above was “temporary” in nature as of both dates.

The rationale for making that determination is based on several factors which are generally shared among the various sectors represented in the Company’s available for sale and held to maturity portfolios.  The most significant of these is the general mitigation of credit risk arising from the U.S. government, agency and GSE guarantees supporting the Company’s mortgage-backed securities, U.S. agency debt securities and asset-backed securities.

While not supported by such guarantees, the Company’s collateralized loan obligations represent tranches within a larger investment vehicle that reallocate cash flows and credit risk among the individual tranches comprised within that vehicle.  Through this structure, the Company is afforded significant protection against the risk that the securities within this sector will be adversely impacted by borrowers defaulting on the underlying loans.

In the absence of the guarantor or structural protections noted above, the securities within the other sectors of the Company’s securities portfolio, including its municipal obligations, corporate bonds and single-issuer trust preferred securities are generally issued by credit-worthy entities with the ability and resources to fully meet their financial obligations.  The Company regularly monitors the historical cash flows and financial strength of all issuers and/or guarantors to confirm that security impairment, where applicable, is not due to an actual or expected adverse change in security cash flows that would result in the recognition of credit-related OTTI.

With credit risk being mitigated in the manner outlined above, the unrealized losses on the Company’s securities are due largely to the combined effects of several market-related factors including, most notably, changes in market interest rates and changing market conditions which affect the supply and demand for such securities.  Those market conditions may fluctuate over time resulting in certain securities being impaired for periods in excess of 12 months.  However, the longevity of such impairment is not necessarily reflective of an expectation for an adverse change in cash flows signifying a credit loss.  Consequently, the impairments of value resulting directly from these changing market conditions are considered “noncredit-related” and “temporary” in nature.

The Company has the stated ability and intent to “hold to maturity” those securities so designated at December 31, 2016  and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of their fair value to a level equal to or greater than the Company’s amortized cost.  Furthermore, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely based upon its strong liquidity, asset quality and capital position as of that

- 20 -


 

date.  In light of the factors noted, the Company does not consider its balance of securities with unrealized losses at December 31, 2016 to be “other-than-temporarily” impaired as of that date.

 

 

10.     LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES

Acquired Credit-Impaired Loans. At December 31, 2016, the remaining outstanding principal balance and carrying amount of acquired credit-impaired loans totaled approximately $1,445,000 and $1,112,000, respectively. By comparison, at June 30, 2016, the remaining outstanding principal balance and carrying amount of acquired credit-impaired loans totaled approximately $1,605,000 and $1,168,000, respectively.

The carrying amount of acquired credit-impaired loans for which interest is not being recognized due to the uncertainty of the cash flows relating to such loans totaled $388,000 and $436,000 at December 31, 2016 and June 30, 2016, respectively.

The balance of the allowance for loan losses at June 30, 2016 included approximately $13,000 of valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans. The valuation allowances were attributable to additional impairment recognized on the applicable loans subsequent to their acquisition, net of any charge offs recognized during that time.  There were no valuation allowances for specifically identified impairment attributable to acquired credit-impaired loans at December 31, 2016.

The following table presents the changes in the accretable yield relating to the acquired credit-impaired loans for the three months ended December 31, 2016 and December 31, 2015.

 

 

Three Months Ended December 31,

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Beginning balance

$

314

 

 

$

1,084

 

Accretion to interest income

 

(2

)

 

 

(214

)

Disposals

 

-

 

 

 

(26

)

Reclassifications from nonaccretable difference

 

-

 

 

 

-

 

Ending balance

$

312

 

 

$

844

 

 

 

Six Months Ended December 31,

 

 

2016

 

 

2015

 

 

(In Thousands)

 

Beginning balance

$

335

 

 

$

1,189

 

Accretion to interest income

 

(4

)

 

 

(319

)

Disposals

 

(19

)

 

 

(26

)

Reclassifications from nonaccretable difference

 

-

 

 

 

-

 

Ending balance

$

312

 

 

$

844

 

 

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 December 31, 2016, we held two single-family properties in real estate owned with an aggregage carrying value of $830,000 that were acquired through foreclosures on residential mortgage loans.  As of that same date, we held 20 residential mortgage loans with aggregate carrying values totaling $4.5 million which were in the process of foreclosure.


- 21 -


 

Loan Quality. The following tables present the balance of the allowance for loan losses at December 31, 2016 and June 30, 2016 based upon the calculation methodology as described in the Company’s Form 10-K for the fiscal year ended June 30, 2016. 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 as well as the activity in the allowance for loan losses for the three months and six months ended December 31, 2016 and December 31, 2015. Unless otherwise noted, the balance of loans reported in the tables below excludes yield adjustments and the allowance for loan loss.

 

Allowance for Loan Losses and Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Balance of allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired with deteriorated

  credit quality

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Loans individually

  evaluated for impairment

 

45

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

8

 

 

 

57

 

 

 

-

 

 

 

133

 

Loans collectively

  evaluated for impairment

 

2,385

 

 

 

12,226

 

 

 

8,332

 

 

 

29

 

 

 

1,771

 

 

 

499

 

 

 

685

 

 

 

25,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,430

 

 

$

12,226

 

 

$

8,355

 

 

$

29

 

 

$

1,779

 

 

$

556

 

 

$

685

 

 

$

26,060

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses and Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Balance of loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired with deteriorated

  credit quality

$

101

 

 

$

-

 

 

$

296

 

 

$

-

 

 

$

715

 

 

$

-

 

 

$

-

 

 

$

1,112

 

Loans individually

  evaluated for impairment

 

13,061

 

 

 

181

 

 

 

5,855

 

 

 

259

 

 

 

2,444

 

 

 

2,040

 

 

 

-

 

 

 

23,840

 

Loans collectively

  evaluated for impairment

 

549,304

 

 

 

1,295,026

 

 

 

926,465

 

 

 

668

 

 

 

72,481

 

 

 

81,265

 

 

 

20,481

 

 

 

2,945,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

562,466

 

 

$

1,295,207

 

 

$

932,616

 

 

$

927

 

 

$

75,640

 

 

$

83,305

 

 

$

20,481

 

 

$

2,970,642

 

Unamortized yield

  adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,289

 

Loans receivable, net of

   yield adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,973,931

 

- 22 -


 

 

 

Allowance for Loan Losses and Loans Receivable

 

Period ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Changes in the allowance for loan

  losses for the three months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2016:

$

2,806

 

 

$

10,269

 

 

$

8,316

 

 

$

39

 

 

$

2,319

 

 

$

534

 

 

$

720

 

 

$

25,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charge offs

 

(41

)

 

 

-

 

 

 

(37

)

 

 

-

 

 

 

-

 

 

 

(74

)

 

 

(241

)

 

 

(393

)

Total recoveries

 

182

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

1

 

 

 

11

 

 

 

195

 

Total provisions

 

(517

)

 

 

1,957

 

 

 

76

 

 

 

(10

)

 

 

(541

)

 

 

95

 

 

 

195

 

 

 

1,255

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,430

 

 

$

12,226

 

 

$

8,355

 

 

$

29

 

 

$

1,779

 

 

$

556

 

 

$

685

 

 

$

26,060

 

 

 

Allowance for Loan Losses and Loans Receivable

 

Period ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Changes in the allowance for loan

  losses for the six months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2016

$

2,370

 

 

$

9,995

 

 

$

7,846

 

 

$

24

 

 

$

2,784

 

 

$

432

 

 

$

778

 

 

$

24,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charge offs

 

(64

)

 

 

-

 

 

 

(78

)

 

 

-

 

 

 

(194

)

 

 

(95

)

 

 

(336

)

 

 

(767

)

Total recoveries

 

182

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16

 

 

 

1

 

 

 

15

 

 

 

214

 

Total provisions

 

(58

)

 

 

2,231

 

 

 

587

 

 

 

5

 

 

 

(827

)

 

 

218

 

 

 

228

 

 

 

2,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,430

 

 

$

12,226

 

 

$

8,355

 

 

$

29

 

 

$

1,779

 

 

$

556

 

 

$

685

 

 

$

26,060

 

 


- 23 -


 

 

Allowance for Loan Losses and Loans Receivable

 

Period ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Changes in the allowance for loan

  losses for the three months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2015:

$

2,469

 

 

$

6,855

 

 

$

6,326

 

 

$

29

 

 

$

1,578

 

 

$

406

 

 

$

27

 

 

$

17,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charge offs

 

(615

)

 

 

-

 

 

 

(97

)

 

 

-

 

 

 

(548

)

 

 

(36

)

 

 

(3

)

 

 

(1,299

)

Total recoveries

 

9

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

700

 

 

 

-

 

 

 

-

 

 

 

709

 

Total provisions

 

535

 

 

 

1,658

 

 

 

710

 

 

 

6

 

 

 

211

 

 

 

31

 

 

 

263

 

 

 

3,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,398

 

 

$

8,513

 

 

$

6,939

 

 

$

35

 

 

$

1,941

 

 

$

401

 

 

$

287

 

 

$

20,514

 

 

Allowance for Loan Losses and Loans Receivable

 

Period Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

 

 

Multi-Family Mortgage

 

 

 

 

Non-

Residential

Mortgage

 

 

 

 

Construction

 

 

 

 

Commercial

Business

 

 

 

 

Home

Equity

Loans

 

 

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Changes in the allowance for loan

  losses for the six months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2015

$

2,210

 

 

 

 

$

6,354

 

 

 

 

$

4,766

 

 

 

 

$

34

 

 

 

 

$

1,860

 

 

 

 

$

366

 

 

 

 

$

16

 

 

$

15,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total charge offs

 

(1,153

)

 

 

 

 

-

 

 

 

 

 

(97

)

 

 

 

 

-

 

 

 

 

 

(644

)

 

 

 

 

(60

)

 

 

 

 

(3

)

 

 

(1,957

)

Total recoveries

 

9

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

759

 

 

 

 

 

41

 

 

 

 

 

1

 

 

 

810

 

Total provisions

 

1,332

 

 

 

 

 

2,159

 

 

 

 

 

2,270

 

 

 

 

 

1

 

 

 

 

 

(34

)

 

 

 

 

54

 

 

 

 

 

273

 

 

 

6,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,398

 

 

 

 

$

8,513

 

 

 

 

$

6,939

 

 

 

 

$

35

 

 

 

 

$

1,941

 

 

 

 

$

401

 

 

 

 

$

287

 

 

$

20,514

 

 


- 24 -


 

Allowance for Loan Losses and Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Balance of allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired with deteriorated

  credit quality

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

13

 

 

$

-

 

 

$

-

 

 

$

13

 

Loans individually

  evaluated for impairment

 

77

 

 

 

-

 

 

 

53

 

 

 

-

 

 

 

387

 

 

 

78

 

 

 

-

 

 

 

595

 

Loans collectively

  evaluated for impairment

 

2,293

 

 

 

9,995

 

 

 

7,793

 

 

 

24

 

 

 

2,384

 

 

 

354

 

 

 

778

 

 

 

23,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

$

2,370

 

 

$

9,995

 

 

$

7,846

 

 

$

24

 

 

$

2,784

 

 

$

432

 

 

$

778

 

 

$

24,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses and Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Balance of loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans acquired with deteriorated

  credit quality

$

104

 

 

$

-

 

 

$

304

 

 

$

-

 

 

$

760

 

 

$

-

 

 

$

-

 

 

 

1,168

 

Loans individually

  evaluated for impairment

 

12,806

 

 

 

205

 

 

 

6,773

 

 

 

357

 

 

 

1,647

 

 

 

2,180

 

 

 

-

 

 

 

23,968

 

Loans collectively

  evaluated for impairment

 

592,293

 

 

 

1,040,088

 

 

 

813,596

 

 

 

1,681

 

 

 

85,800

 

 

 

87,386

 

 

 

25,401

 

 

 

2,646,245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

605,203

 

 

$

1,040,293

 

 

$

820,673

 

 

$

2,038

 

 

$

88,207

 

 

$

89,566

 

 

$

25,401

 

 

$

2,671,381

 

Unamortized yield

  adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,606

 

Loans receivable, net of

   yield adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,673,987

 

- 25 -


 

The following tables present key indicators of credit quality regarding the Company’s loan portfolio based upon loan classification and contractual payment status at December 31, 2016 and June 30, 2016 based upon the methodology for identifying and reporting such loans as described in the Company’s Form 10-K for the fiscal year ended June 30, 2016.

 

Credit-Rating Classification of Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Non-classified

$

545,574

 

 

$

1,295,026

 

 

$

924,495

 

 

$

-

 

 

$

69,220

 

 

$

80,480

 

 

$

20,273

 

 

$

2,935,068

 

Classified:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

948

 

 

 

-

 

 

 

-

 

 

 

668

 

 

 

54

 

 

 

392

 

 

 

112

 

 

 

2,174

 

Substandard

 

15,944

 

 

 

181

 

 

 

8,121

 

 

 

259

 

 

 

6,366

 

 

 

2,433

 

 

 

93

 

 

 

33,397

 

Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3

 

Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total classified loans

 

16,892

 

 

 

181

 

 

 

8,121

 

 

 

927

 

 

 

6,420

 

 

 

2,825

 

 

 

208

 

 

 

35,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

562,466

 

 

$

1,295,207

 

 

$

932,616

 

 

$

927

 

 

$

75,640

 

 

$

83,305

 

 

$

20,481

 

 

$

2,970,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit-Rating Classification of Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Non-classified

$

588,992

 

 

$

1,040,088

 

 

$

811,621

 

 

$

1,063

 

 

$

81,902

 

 

$

86,835

 

 

$

25,298

 

 

$

2,635,799

 

Classified:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special Mention

 

859

 

 

 

-

 

 

 

-

 

 

 

618

 

 

 

681

 

 

 

309

 

 

 

61

 

 

 

2,528

 

Substandard

 

15,352

 

 

 

205

 

 

 

9,052

 

 

 

357

 

 

 

5,624

 

 

 

2,422

 

 

 

40

 

 

 

33,052

 

Doubtful

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

2

 

Loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total classified loans

 

16,211

 

 

 

205

 

 

 

9,052

 

 

 

975

 

 

 

6,305

 

 

 

2,731

 

 

 

103

 

 

 

35,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

605,203

 

 

$

1,040,293

 

 

$

820,673

 

 

$

2,038

 

 

$

88,207

 

 

$

89,566

 

 

$

25,401

 

 

$

2,671,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 26 -


 

 

Contractual Payment Status of Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Current

$

553,429

 

 

$

1,295,207

 

 

$

930,097

 

 

$

319

 

 

$

73,234

 

 

$

82,286

 

 

$

20,170

 

 

$

2,954,742

 

Past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 days

 

802

 

 

 

-

 

 

 

40

 

 

 

349

 

 

 

719

 

 

 

823

 

 

 

110

 

 

 

2,843

 

60-89 days

 

939

 

 

 

-

 

 

 

340

 

 

 

-

 

 

 

7

 

 

 

83

 

 

 

109

 

 

 

1,478

 

90+ days

 

7,296

 

 

 

-

 

 

 

2,139

 

 

 

259

 

 

 

1,680

 

 

 

113

 

 

 

92

 

 

 

11,579

 

Total past due

 

9,037

 

 

 

-

 

 

 

2,519

 

 

 

608

 

 

 

2,406

 

 

 

1,019

 

 

 

311

 

 

 

15,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

562,466

 

 

$

1,295,207

 

 

$

932,616

 

 

$

927

 

 

$

75,640

 

 

$

83,305

 

 

$

20,481

 

 

$

2,970,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Payment Status of Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Current

$

596,548

 

 

$

1,040,293

 

 

$

817,539

 

 

$

1,681

 

 

$

87,328

 

 

$

88,657

 

 

$

25,301

 

 

$

2,657,347

 

Past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 days

 

1,524

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

503

 

 

 

22

 

 

 

2,049

 

60-89 days

 

940

 

 

 

-

 

 

 

376

 

 

 

-

 

 

 

411

 

 

 

75

 

 

 

40

 

 

 

1,842

 

90+ days

 

6,191

 

 

 

-

 

 

 

2,758

 

 

 

357

 

 

 

468

 

 

 

331

 

 

 

38

 

 

 

10,143

 

Total past due

 

8,655

 

 

 

-

 

 

 

3,134

 

 

 

357

 

 

 

879

 

 

 

909

 

 

 

100

 

 

 

14,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

605,203

 

 

$

1,040,293

 

 

$

820,673

 

 

$

2,038

 

 

$

88,207

 

 

$

89,566

 

 

$

25,401

 

 

$

2,671,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 27 -


 

The following tables present information relating to the Company’s nonperforming and impaired loans at December 31, 2016 and June 30, 2016 based upon the methodology for identifying and reporting such loans as described in the Company’s Form 10-K for the fiscal year ended June 30, 2016. Loans reported as “90+ days past due accruing” in the table immediately below are also reported in the preceding contractual payment status table under the heading “90+ days past due”.

 

Performance Status of Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Performing

$

551,235

 

 

$

1,295,026

 

 

$

926,787

 

 

$

668

 

 

$

72,920

 

 

$

82,052

 

 

$

20,389

 

 

$

2,949,077

 

Nonperforming:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90+ days past due accruing

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

92

 

 

 

92

 

Nonaccrual

 

11,231

 

 

 

181

 

 

 

5,829

 

 

 

259

 

 

 

2,720

 

 

 

1,253

 

 

 

-

 

 

 

21,473

 

Total nonperforming

 

11,231

 

 

 

181

 

 

 

5,829

 

 

 

259

 

 

 

2,720

 

 

 

1,253

 

 

 

92

 

 

 

21,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

562,466

 

 

$

1,295,207

 

 

$

932,616

 

 

$

927

 

 

$

75,640

 

 

$

83,305

 

 

$

20,481

 

 

$

2,970,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Status of Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Performing

$

594,471

 

 

$

1,040,088

 

 

$

814,085

 

 

$

1,681

 

 

$

86,242

 

 

$

88,396

 

 

$

25,363

 

 

$

2,650,326

 

Nonperforming:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90+ days past due accruing

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38

 

 

 

38

 

Nonaccrual

 

10,732

 

 

 

205

 

 

 

6,588

 

 

 

357

 

 

 

1,965

 

 

 

1,170

 

 

 

-

 

 

 

21,017

 

Total nonperforming

 

10,732

 

 

 

205

 

 

 

6,588

 

 

 

357

 

 

 

1,965

 

 

 

1,170

 

 

 

38

 

 

 

21,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

605,203

 

 

$

1,040,293

 

 

$

820,673

 

 

$

2,038

 

 

$

88,207

 

 

$

89,566

 

 

$

25,401

 

 

$

2,671,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 28 -


 

Impairment Status of Loans Receivable

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Carrying value of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

$

549,304

 

 

$

1,295,026

 

 

$

926,465

 

 

$

668

 

 

$

72,481

 

 

$

81,265

 

 

$

20,481

 

 

$

2,945,690

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no allowance

  for impairment

 

12,332

 

 

 

181

 

 

 

5,931

 

 

 

259

 

 

 

3,148

 

 

 

1,964

 

 

 

-

 

 

 

23,815

 

Impaired loans with allowance

  for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

830

 

 

 

-

 

 

 

220

 

 

 

-

 

 

 

11

 

 

 

76

 

 

 

-

 

 

 

1,137

 

Allowance for impairment

 

(45

)

 

 

-

 

 

 

(23

)

 

 

-

 

 

 

(8

)

 

 

(57

)

 

 

-

 

 

 

(133

)

Balance of impaired loans net

  of allowance for impairment

 

785

 

 

 

-

 

 

 

197

 

 

 

-

 

 

 

3

 

 

 

19

 

 

 

-

 

 

 

1,004

 

Total impaired loans, excluding

  allowance for impairment:

 

13,162

 

 

 

181

 

 

 

6,151

 

 

 

259

 

 

 

3,159

 

 

 

2,040

 

 

 

-

 

 

 

24,952

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

562,466

 

 

$

1,295,207

 

 

$

932,616

 

 

$

927

 

 

$

75,640

 

 

$

83,305

 

 

$

20,481

 

 

$

2,970,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

  of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

$

16,567

 

 

$

837

 

 

$

7,506

 

 

$

365

 

 

$

4,596

 

 

$

2,458

 

 

$

-

 

 

$

32,329

 

 

 

Impairment Status of Loans Receivable

 

at June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Carrying value of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

$

592,293

 

 

$

1,040,088

 

 

$

813,596

 

 

$

1,681

 

 

$

85,800

 

 

$

87,386

 

 

$

25,401

 

 

$

2,646,245

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans with no allowance

  for impairment

 

10,876

 

 

 

205

 

 

 

6,473

 

 

 

357

 

 

 

1,900

 

 

 

2,101

 

 

 

 

 

 

 

21,912

 

Impaired loans with allowance

  for impairment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded investment

 

2,034

 

 

 

-

 

 

 

604

 

 

 

 

 

 

 

507

 

 

 

79

 

 

 

 

 

 

 

3,224

 

Allowance for impairment

 

(77

)

 

 

-

 

 

 

(53

)

 

 

 

 

 

 

(400

)

 

 

(78

)

 

 

 

 

 

 

(608

)

Balance of impaired loans net

  of allowance for impairment

 

1,957

 

 

 

-

 

 

 

551

 

 

 

-

 

 

 

107

 

 

 

1

 

 

 

-

 

 

 

2,616

 

Total impaired loans, excluding

  allowance for impairment:

 

12,910

 

 

 

205

 

 

 

7,077

 

 

 

357

 

 

 

2,407

 

 

 

2,180

 

 

 

-

 

 

 

25,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

605,203

 

 

$

1,040,293

 

 

$

820,673

 

 

$

2,038

 

 

$

88,207

 

 

$

89,566

 

 

$

25,401

 

 

$

2,671,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

  of impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans

$

16,571

 

 

$

849

 

 

$

8,269

 

 

$

458

 

 

$

3,736

 

 

$

2,505

 

 

$

-

 

 

$

32,388

 

 

 

- 29 -


 

 

Impairment Status of Loans Receivable

 

Period ended December 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

For the three months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balance of impaired loans

$

13,262

 

 

$

187

 

 

$

6,263

 

 

$

282

 

 

$

3,225

 

 

$

2,072

 

 

$

-

 

 

$

25,291

 

Interest earned on impaired loans

$

28

 

 

$

-

 

 

$

7

 

 

$

-

 

 

$

2

 

 

$

10

 

 

$

-

 

 

$

47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balance of impaired loans

$

13,140

 

 

$

193

 

 

$

6,515

 

 

$

313

 

 

$

3,166

 

 

$

2,117

 

 

$

-

 

 

$

25,444

 

Interest earned on impaired loans

$

49

 

 

$

-

 

 

$

19

 

 

$

-

 

 

$

6

 

 

$

24

 

 

$

-

 

 

$

98

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balance of impaired loans

$

12,608

 

 

$

319

 

 

$

7,756

 

 

$

809

 

 

$

8,952

 

 

$

2,405

 

 

$

-

 

 

$

32,849

 

Interest earned on impaired loans

$

33

 

 

$

-

 

 

$

11

 

 

$

-

 

 

$

204

 

 

$

10

 

 

$

-

 

 

$

258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the six months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average balance of impaired loans

$

11,485

 

 

$

378

 

 

$

7,633

 

 

$

1,332

 

 

$

9,659

 

 

$

2,444

 

 

$

-

 

 

$

32,931

 

Interest earned on impaired loans

$

101

 

 

$

-

 

 

$

21

 

 

$

-

 

 

$

421

 

 

$

16

 

 

$

-

 

 

$

559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 30 -


 

The following table presents information regarding the restructuring of the Company’s troubled debts during the three and six months ended December 31, 2016 and 2015 and any defaults during those periods of TDRs that were restructured within 12 months of the date of default.

 

Troubled Debt Restructurings of Loans Receivable

 

Period ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Troubled debt restructuring activity

  for the three months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

2

 

Pre-modification outstanding

  recorded investment

$

197

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

87

 

 

$

-

 

 

$

284

 

Post-modification outstanding

  recorded investment

 

186

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

95

 

 

 

-

 

 

 

281

 

Charge offs against the allowance

  for loan loss recognized at

  modification

 

14

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructuring defaults

  for the three months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding recorded investment

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings of Loans Receivable

 

Period ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Troubled debt restructuring activity

  for the six months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

1

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

4

 

Pre-modification outstanding

  recorded investment

$

197

 

 

$

-

 

 

$

244

 

 

$

-

 

 

$

-

 

 

$

271

 

 

$

-

 

 

$

712

 

Post-modification outstanding

  recorded investment

 

186

 

 

 

-

 

 

 

223

 

 

 

-

 

 

 

-

 

 

 

279

 

 

 

-

 

 

 

688

 

Charge offs against the allowance

  for loan loss recognized at

  modification

 

14

 

 

 

-

 

 

 

27

 

 

 

-

 

 

 

-

 

 

 

12

 

 

 

-

 

 

 

53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructuring defaults

  for the six months ended

  December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding recorded investment

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 31 -


 

Troubled Debt Restructurings of Loans Receivable

 

Period ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Troubled debt restructuring activity

  for the three months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

3

 

Pre-modification outstanding

  recorded investment

$

404

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

110

 

 

$

-

 

 

$

514

 

Post-modification outstanding

  recorded investment

 

354

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

-

 

 

 

441

 

Charge offs against the allowance

  for loan loss recognized at

  modification

 

61

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24

 

 

 

-

 

 

 

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructuring defaults

  for the three months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding recorded investment

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings of Loans Receivable

 

Period ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

Mortgage

 

 

Multi-Family Mortgage

 

 

Non-

Residential

Mortgage

 

 

Construction

 

 

Commercial

Business

 

 

Home

Equity

Loans

 

 

Other

Consumer

 

 

Total

 

 

(In Thousands)

 

Troubled debt restructuring activity

  for the six months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

3

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

8

 

Pre-modification outstanding

  recorded investment

$

1,097

 

 

$

-

 

 

$

2,285

 

 

$

-

 

 

$

-

 

 

$

110

 

 

$

-

 

 

$

3,492

 

Post-modification outstanding

  recorded investment

 

785

 

 

 

-

 

 

 

2,290

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

-

 

 

 

3,162

 

Charge offs against the allowance

  for loan loss recognized at

  modification

 

292

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24

 

 

 

-

 

 

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructuring defaults

  for the six months ended

  December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of loans

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding recorded investment

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


- 32 -


 

 

The manner in which the terms of a loan are modified through a troubled debt restructuring generally includes one or more of the following changes to the loan’s repayment terms:

 

Interest Rate Reduction: Temporary or permanent reduction of the interest rate charged against the outstanding balance of the loan.

 

Capitalization of Prior Past Dues: Capitalization of prior amounts due to the outstanding balance of the loan.

 

Extension of Maturity or Balloon Date: Extending the term of the loan past its original balloon or maturity date.

 

Deferral of Principal Payments: Temporary deferral of the principal portion of a loan payment.

 

Payment Recalculation and Re-amortization: Recalculation of the recurring payment obligation and resulting loan amortization/repayment schedule based on the loan’s modified terms.

 

 

11.     BORROWINGS

Fixed rate advances from the FHLB of New York mature as follows:

 

 

 

 

December 31, 2016

 

 

 

June 30, 2016

 

 

 

Balance

 

 

Weighted

Average

Interest Rate

 

Balance

 

 

Weighted

Average

Interest Rate

 

(Dollars in Thousands)

Maturing in years ending June 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

$

515,000

 

 

 

0.66

 

%

 

$

428,000

 

 

 

0.69

 

%

2018

 

5,225

 

 

 

1.18

 

 

 

 

5,225

 

 

 

1.18

 

 

2021

 

521

 

 

 

4.94

 

 

 

 

572

 

 

 

4.94

 

 

2023

 

145,000

 

 

 

3.04

 

 

 

 

145,000

 

 

 

3.04

 

 

Total borrowings

 

665,746

 

 

 

1.19

 

%

 

 

578,797

 

 

 

1.29

 

%

Fair value adjustments

 

(4

)

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

Total borrowings, net of

  fair value adjustments

$

665,742

 

 

 

 

 

 

 

$

578,788

 

 

 

 

 

 

 

At December 31, 2016, $515.0 million in advances are due within one year while the remaining $150.7 million in advances are due after one year of which $145.0 million are callable in April 2018.

At December 31, 2016, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $1.5 billion and $163.2 million, respectively. At June 30, 2016, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $970.5 million and $193.8 million, respectively.

Borrowings at December 31, 2016 and June 30, 2016 also included overnight borrowings in the form of depositor sweep accounts totaling $36.1 million and $35.6 million, respectively. Depositor sweep accounts are short term borrowings representing funds that are withdrawn from a customer’s noninterest-bearing deposit account and invested in an uninsured overnight investment account that is collateralized by specified investment securities owned by the Bank.

 

 

12.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

At December 31, 2016 and June 30, 2016, the Company was subject to the terms of certain interest rate derivative agreements that were utilized by the Company to manage the interest rate exposure arising from specific wholesale funding positions. Such wholesale funding sources include floating-rate brokered money market deposits indexed to one-month LIBOR as well as a number of 90 day fixed-rate FHLB advances that are forecasted to be periodically redrawn at maturity for the same 90 day term as the original advance. The derivatives were designated as cash flow hedges with changes in their fair value recorded as an adjustment through other comprehensive income on an after-tax basis.

- 33 -


 

The effects of derivative instruments on the statements of condition included in the Consolidated Financial Statements at December 31, 2016 and June 30, 2016 and for the three and six months ended December 31, 2016 and December 31, 2015 are as follows:

 

 

December 31, 2016

 

Notional/

Contract

Amount

 

 

Fair

Value

 

 

Balance

Sheet

Location

 

Expiration

Date

 

(Dollars in Thousands)

Derivatives designated

  as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

 

 

July 1, 2013

$

165,000

 

 

$

(329

)

 

Other assets

 

July 1, 2018

August 19, 2013

 

75,000

 

 

 

(515

)

 

Other assets

 

August 20, 2018

October 9, 2013

 

50,000

 

 

 

(152

)

 

Other assets

 

October 9, 2018

March 28, 2014

 

75,000

 

 

 

(732

)

 

Other assets

 

March 28, 2019

June 5, 2015

 

60,000

 

 

 

(1,221

)

 

Other assets

 

June 5, 2020

July 28, 2015

 

50,000

 

 

 

(1,291

)

 

Other assets

 

July 28, 2020

September 28, 2015

 

40,000

 

 

 

(1,117

)

 

Other assets

 

September 28, 2020

December 28, 2015

 

35,000

 

 

 

(1,161

)

 

Other assets

 

December 28, 2020

June 5, 2018

 

40,000

 

 

 

1,377

 

 

Other assets

 

June 5, 2022

July 2, 2018

 

200,000

 

 

 

6,385

 

 

Other assets

 

July 1, 2021

August 20, 2018

 

75,000

 

 

 

2,647

 

 

Other assets

 

August 19, 2022

October 9, 2018

 

50,000

 

 

 

2,169

 

 

Other assets

 

October 9, 2023

March 28, 2019

 

75,000

 

 

 

3,231

 

 

Other assets

 

March 28, 2024

 

 

990,000

 

 

 

9,291

 

 

 

 

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

 

 

June 5, 2013

 

40,000

 

 

 

83

 

 

Other assets

 

June 5, 2018

July 1, 2013

 

35,000

 

 

 

68

 

 

Other assets

 

July 1, 2018

 

 

75,000

 

 

 

151

 

 

 

 

 

Total

$

1,065,000

 

 

$

9,442

 

 

 

 

 

 

 

 

June 30, 2016

 

Notional/

Contract

Amount

 

 

Fair

Value

 

 

Balance

Sheet

Location

 

Expiration

Date

 

(Dollars in Thousands)

Derivatives designated

  as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

 

 

July 1, 2013

$

165,000

 

 

$

(2,280

)

 

Other liabilities

 

July 1, 2018

August 19, 2013

 

75,000

 

 

 

(1,627

)

 

Other liabilities

 

August 20, 2018

October 9, 2013

 

50,000

 

 

 

(911

)

 

Other liabilities

 

October 9, 2018

March 28, 2014

 

75,000

 

 

 

(2,364

)

 

Other liabilities

 

March 28, 2019

June 5, 2015

 

60,000

 

 

 

(3,412

)

 

Other liabilities

 

June 5, 2020

July 28, 2015

 

50,000

 

 

 

(3,243

)

 

Other liabilities

 

July 28, 2020

September 28, 2015

 

40,000

 

 

 

(2,765

)

 

Other liabilities

 

September 28, 2020

December 28, 2015

 

35,000

 

 

 

(2,715

)

 

Other liabilities

 

December 28, 2020

 

 

550,000

 

 

 

(19,317

)

 

 

 

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

 

 

June 5, 2013

 

40,000

 

 

 

33

 

 

Other liabilities

 

June 5, 2018

July 1, 2013

 

35,000

 

 

 

27

 

 

Other liabilities

 

July 1, 2018

 

 

75,000

 

 

 

60

 

 

 

 

 

Total

$

625,000

 

 

$

(19,257

)

 

 

 

 

 

- 34 -


 

 

 

Three Months Ended December 31, 2016

 

 

Amount of Gain

Recognized in OCI on

Derivatives, net of Tax

(Effective Portion)

 

 

Location of Gain (Loss) Recognized in Income of

Derivatives

(Ineffective Portion)

 

Amount of Gain (Loss)

Recognized in Income of Derivatives

(Ineffective Portion)

 

 

(Dollars in Thousands)

 

Derivatives in cash flow hedges

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

July 1, 2013

$

660

 

 

Not applicable

 

$

-

 

August 19, 2013

 

345

 

 

Not applicable

 

 

-

 

October 9, 2013

 

246

 

 

Not applicable

 

 

-

 

March 28, 2014

 

569

 

 

Not applicable

 

 

-

 

June 5, 2015

 

876

 

 

Not applicable

 

 

-

 

July 28, 2015

 

789

 

 

Not applicable

 

 

-

 

September 28, 2015

 

677

 

 

Not applicable

 

 

-

 

December 28, 2015

 

653

 

 

Not applicable

 

 

-

 

June 5, 2018

 

856

 

 

Not applicable

 

 

-

 

July 2, 2018

 

3,162

 

 

Not applicable

 

 

 

 

August 20, 2018

 

1,627

 

 

Not applicable

 

 

 

 

October 9, 2018

 

1,364

 

 

Not applicable

 

 

 

 

March 28, 2019

 

2,066

 

 

Not applicable

 

 

 

 

 

 

13,890

 

 

 

 

 

-

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

June 5, 2013

 

82

 

 

Not applicable

 

 

-

 

July 1, 2013

 

79

 

 

Not applicable

 

 

-

 

 

 

161

 

 

 

 

 

-

 

Total

$

14,051

 

 

 

 

$

-

 

 

 

 

Six Months Ended December 31, 2016

 

 

Amount of Gain

Recognized in OCI on

Derivatives, net of Tax

(Effective Portion)

 

 

Location of Gain (Loss) Recognized in Income of

Derivatives

(Ineffective Portion)

 

Amount of Gain (Loss)

Recognized in Income of Derivatives

(Ineffective Portion)

 

 

(Dollars in Thousands)

 

Derivatives in cash flow hedges

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

July 1, 2013

$

1,154

 

 

Not applicable

 

$

-

 

August 19, 2013

 

658

 

 

Not applicable

 

 

-

 

October 9, 2013

 

449

 

 

Not applicable

 

 

-

 

March 28, 2014

 

966

 

 

Not applicable

 

 

-

 

June 5, 2015

 

1,296

 

 

Not applicable

 

 

-

 

July 28, 2015

 

1,154

 

 

Not applicable

 

 

-

 

September 28, 2015

 

975

 

 

Not applicable

 

 

-

 

December 28, 2015

 

919

 

 

Not applicable

 

 

-

 

June 5, 2018

 

814

 

 

Not applicable

 

 

-

 

July 2, 2018

 

3,777

 

 

Not applicable

 

 

-

 

August 20, 2018

 

1,566

 

 

Not applicable

 

 

-

 

October 9, 2018

 

1,283

 

 

Not applicable

 

 

-

 

March 28, 2019

 

1,911

 

 

Not applicable

 

 

-

 

 

 

16,922

 

 

 

 

 

-

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

June 5, 2013

 

150

 

 

Not applicable

 

 

-

 

July 1, 2013

 

140

 

 

Not applicable

 

 

-

 

 

 

290

 

 

 

 

 

-

 

Total

$

17,212

 

 

 

 

$

-

 

- 35 -


 

 

 

Three Months Ended December 31, 2015

 

 

Amount of Gain

Recognized in OCI on

Derivatives, net of Tax

(Effective Portion)

 

 

Location of Gain (Loss) Recognized in Income of

Derivatives

(Ineffective Portion)

 

Amount of Gain (Loss)

Recognized in Income of Derivatives

(Ineffective Portion)

 

 

(Dollars in Thousands)

 

Derivatives in cash flow hedges

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

July 1, 2013

$

846

 

 

Not applicable

 

$

-

 

August 19, 2013

 

483

 

 

Not applicable

 

 

-

 

October 9, 2013

 

322

 

 

Not applicable

 

 

-

 

March 28, 2014

 

578

 

 

Not applicable

 

 

-

 

June 5, 2015

 

555

 

 

Not applicable

 

 

-

 

July 28, 2015

 

479

 

 

Not applicable

 

 

-

 

September 28, 2015

 

392

 

 

Not applicable

 

 

-

 

December 28, 2015

 

239

 

 

Not applicable

 

 

-

 

 

 

3,894

 

 

 

 

 

-

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

June 5, 2013

 

64

 

 

Not applicable

 

 

-

 

July 1, 2013

 

50

 

 

Not applicable

 

 

-

 

 

 

114

 

 

 

 

 

-

 

Total

$

4,008

 

 

 

 

$

-

 

 

 

Six Months Ended December 31, 2015

 

 

Amount of Gain (Loss)

Recognized in OCI on

Derivatives, net of Tax

(Effective Portion)

 

 

Location of Gain (Loss) Recognized in Income of

Derivatives

(Ineffective Portion)

 

Amount of Gain (Loss)

Recognized in Income of Derivatives

(Ineffective Portion)

 

 

(Dollars in Thousands)

 

Derivatives in cash flow hedges

 

 

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

 

 

July 1, 2013

$

112

 

 

Not applicable

 

$

-

 

August 19, 2013

 

129

 

 

Not applicable

 

 

-

 

October 9, 2013

 

47

 

 

Not applicable

 

 

-

 

March 28, 2014

 

75

 

 

Not applicable

 

 

-

 

June 5, 2015

 

(80

)

 

Not applicable

 

 

-

 

July 28, 2015

 

(116

)

 

Not applicable

 

 

-

 

September 28, 2015

 

(193

)

 

Not applicable

 

 

-

 

December 28, 2015

 

(307

)

 

Not applicable

 

 

-

 

 

 

(333

)

 

 

 

 

-

 

Interest rate caps by effective date:

 

 

 

 

 

 

 

 

 

June 5, 2013

 

(46

)

 

Not applicable

 

 

-

 

July 1, 2013

 

(44

)

 

Not applicable

 

 

-

 

 

 

(90

)

 

 

 

 

-

 

Total

$

(423

)

 

 

 

$

-

 

 

The Company has in place enforceable master netting arrangements with all counterparties. All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and cash collateral received and pledged.

At December 31, 2016, seven of the Company’s derivatives were in an asset position totaling $16.0 million while the remaining eight derivatives were in a liability position totaling $6.5 million. In total, the Company’s derivatives were in a net asset position of $9.4 million at December 31, 2016 and included in other assets as of that date. As required under the enforceable master netting arrangement with its derivatives counterparties, the Company received financial collateral from two counterparties totaling $10.3 million at December 31, 2016 that was not included as an offsetting amount.

- 36 -


 

At June 30, 2016, two of the Company’s derivatives were in an asset position totaling $60,000 while the remaining eight derivatives were in a liability position totaling $19.3 million. In total, the Company’s derivatives were in a net liability position of $19.3 million at June 30, 2016 and included in other liabilities as of that date. As required under the enforceable master netting arrangement with its derivatives counterparty, the Company posted financial collateral in the amount of $19.7 million at June 30, 2016 that was not included as an offsetting amount.

In addition to the derivatives noted above, the Company had outstanding commitments to originate loans held-for-sale totaling $10.0 million and $16.7 million at December 31, 2016 and June 30, 2016, respectively, which are considered free-standing derivative instruments whose fair values are not material to our financial condition or results of operations.

 

 

13.     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:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

(In Thousands)

 

 

(In Thousands)

 

Service cost

$

8

 

 

$

59

 

 

$

16

 

 

$

118

 

Interest cost

 

95

 

 

 

121

 

 

 

190

 

 

 

242

 

Amortization of unrecognized past service liability

 

-

 

 

 

9

 

 

 

-

 

 

 

18

 

Amortization of unrecognized loss

 

16

 

 

 

9

 

 

 

32

 

 

 

18

 

Expected return on assets

 

(62

)

 

 

(64

)

 

 

(124

)

 

 

(128

)

Net periodic benefit cost

$

57

 

 

$

134

 

 

$

114

 

 

$

268

 

 

Directors Consultation and Retirement Plan

On December 23, 2015, the Company amended its Directors Consultation and Retirement Plan (the “DCRP”) to freeze the DCRP such that no additional DCRP benefits will accrue to any participant after December 31, 2015 and to revise the minimum age requirement for benefit vesting purposes. Accordingly, the benefits payable to participating directors under the DCRP will not increase after December 31, 2015.

 

 

14.     FAIR VALUE OF FINANCIAL INSTRUMENTS

The guidance on fair value measurement establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy describes three levels of inputs that may be used to measure fair value:

 

 

Level 1:

  

Quoted prices in active markets for identical assets or liabilities.

 

 

Level 2:

  

 

Observable inputs other than Level 1 prices, such as quoted for similar assets or liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

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.

In addition, the guidance requires the Company to disclose the fair value for assets and liabilities on both a recurring and non-recurring basis.

- 37 -


 

Those assets and liabilities measured at fair value on a recurring basis are summarized below:

 

 

December 31, 2016

 

 

Quoted

Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

5,809

 

 

$

-

 

 

$

5,809

 

Obligations of state and political subdivisions

 

-

 

 

 

27,090

 

 

 

-

 

 

 

27,090

 

Asset-backed securities

 

-

 

 

 

121,445

 

 

 

-

 

 

 

121,445

 

Collateralized loan obligations

 

-

 

 

 

98,447

 

 

 

-

 

 

 

98,447

 

Corporate bonds

 

-

 

 

 

138,564

 

 

 

-

 

 

 

138,564

 

Trust preferred securities

 

-

 

 

 

7,101

 

 

 

1,000

 

 

 

8,101

 

Total debt securities

 

-

 

 

 

398,456

 

 

 

1,000

 

 

 

399,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

-

 

 

 

52,333

 

 

 

-

 

 

 

52,333

 

Residential pass-through securities

 

-

 

 

 

211,258

 

 

 

-

 

 

 

211,258

 

Commercial pass-through securities

 

-

 

 

 

8,234

 

 

 

-

 

 

 

8,234

 

Total mortgage-backed securities

 

-

 

 

 

271,825

 

 

 

-

 

 

 

271,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

$

-

 

 

$

670,281

 

 

$

1,000

 

 

$

671,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

-

 

 

$

9,291

 

 

$

-

 

 

$

9,291

 

Interest rate caps

 

-

 

 

 

151

 

 

 

-

 

 

 

151

 

Total derivatives

$

-

 

 

$

9,442

 

 

$

-

 

 

$

9,442

 

 

 

- 38 -


 

 

June 30, 2016

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

(In Thousands)

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

-

 

 

$

6,440

 

 

$

-

 

 

$

6,440

 

Obligations of state and political subdivisions

 

-

 

 

 

28,398

 

 

 

-

 

 

 

28,398

 

Asset-backed securities

 

-

 

 

 

82,625

 

 

 

-

 

 

 

82,625

 

Collateralized loan obligations

 

-

 

 

 

127,374

 

 

 

-

 

 

 

127,374

 

Corporate bonds

 

-

 

 

 

137,404

 

 

 

-

 

 

 

137,404

 

Trust preferred securities

 

-

 

 

 

7,669

 

 

 

-

 

 

 

7,669

 

Total debt securities

 

-

 

 

 

389,910

 

 

 

-

 

 

 

389,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations

 

-

 

 

 

60,577

 

 

 

-

 

 

 

60,577

 

Residential pass-through securities

 

-

 

 

 

214,526

 

 

 

-

 

 

 

214,526

 

Commercial pass-through securities

 

-

 

 

 

8,524

 

 

 

-

 

 

 

8,524

 

Total mortgage-backed securities

 

-

 

 

 

283,627

 

 

 

-

 

 

 

283,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total securities available for sale

$

-

 

 

$

673,537

 

 

$

-

 

 

$

673,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

-

 

 

$

(19,317

)

 

$

-

 

 

$

(19,317

)

Interest rate caps

 

-

 

 

 

60

 

 

 

-

 

 

 

60

 

Total derivatives

$

-

 

 

$

(19,257

)

 

$

-

 

 

$

(19,257

)

 

The fair values of securities available for sale (carried at fair value) or held to maturity (carried at amortized cost) are primarily determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

The Company held one trust preferred security whose fair value of $1.0 million at December 31, 2016 was determined using Level 3 inputs. By comparison, the security’s fair value of $1.0 million at June 30, 2016 had been determined using Level 2 inputs based on the availability of matrix pricing at that time.  Matrix pricing was no longer available for the security at December 31, 2016 requiring the use of Level 3 inputs to determine the fair value of the security as of that date.

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.

In addition to the derivative instruments noted above, the Company had outstanding commitments to fund loans held-for sale totaling $10.0 million and $16.7 million at December 31, 2016 and June 30, 2016, respectively, which are considered free-standing derivative instruments, the fair values of which are not material to our financial condition or results of operations.  

 

- 39 -


 

Those assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

 

December 31, 2016

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

(In Thousands)

 

Impaired loans

$

-

 

 

$

-

 

 

$

9,104

 

 

$

9,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

 

(In Thousands)

 

Impaired loans

$

-

 

 

$

-

 

 

$

10,533

 

 

$

10,533

 

Real estate owned

$

-

 

 

$

-

 

 

$

280

 

 

$

280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

December 31, 2016

 

 

Fair

Value

 

 

Valuation

Techniques

 

Unobservable

Input

 

Range

 

Weighted

Average

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

9,104

 

 

Market valuation of underlying collateral

(1)

Direct disposal costs

(3)

6% - 10%

 

 

8.95

%

 

 

June 30, 2016

 

 

Fair

Value

 

 

Valuation

Techniques

 

Unobservable

Input

 

Range

 

Weighted

Average

 

 

(In Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

$

10,533

 

 

Market valuation of underlying collateral

(1)

Direct disposal costs

(3)

6% - 10%

 

 

9.45

%

Real estate owned

$

280

 

 

Market valuation of property

(2)

Direct disposal costs

(3)

N/A

 

 

8.00

%

 

 

(1)

The fair value of impaired loans is generally determined based on an independent appraisal of the market value of a loan’s underlying collateral.

 

(2)

The fair value basis of impaired loans and real estate owned is adjusted to reflect management estimates of disposal costs including, but not necessarily limited to, real estate brokerage commissions and title transfer fees, with such cost estimates generally ranging from 6% to 10% of collateral or property market value.

 

(3)

The fair value basis of real estate owned is generally determined based upon the lower of an independent appraisal of the property’s market value or the applicable listing price or contracted sales price.

 

An impaired loan is evaluated and valued at the time the loan is identified as impaired at the lower of cost or market value. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the

- 40 -


 

loan agreement are considered impaired. Market value is measured based on the value of the collateral securing the loan and is classified at a Level 3 in the fair value hierarchy. Once a loan is identified as individually impaired, management measures impairment in accordance with the FASB’s guidance on accounting by creditors for impairment of a loan with the fair value estimated using the market value of the collateral reduced by estimated disposal costs. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

At December 31, 2016, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $9.2 million and valuation allowances of $133,000 reflecting fair values of $9.1 million. By comparison, at June 30, 2016, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $11.1 million and valuation allowances of $608,000 reflecting fair values of $10.5 million.

Once a loan is foreclosed, the fair value of the real estate owned continues to be evaluated based upon the market value of the repossessed real estate originally securing the loan.  At December 31, 2016, the Company held no real estate owned whose carrying value was written down utilizing Level 3 inputs during the first six months of fiscal 2017.  At June 30, 2016, the Company held real estate owned totaling $280,000 whose carrying value was written down utilizing Level 3 inputs during fiscal 2016.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 2016 and June 30, 2016:

Cash and Cash Equivalents, Interest Receivable and Interest Payable. The carrying amounts for cash and cash equivalents, interest receivable and interest payable approximate fair value because they mature in three months or less.

Securities. See the discussion presented above concerning assets measured at fair value on a recurring basis.

Loans Receivable. Except for certain impaired loans as previously discussed, the fair value of loans receivable is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans.

FHLB of New York Stock. The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

Deposits. The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market.

Advances from FHLB. Fair value is estimated using rates currently offered for advances of similar remaining maturities.

Interest Rate Derivatives. See the discussion presented above concerning assets measured at fair value on a recurring basis.

Commitments. The fair value of commitments to fund credit lines and originate or participate in loans 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, 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. The contractual amounts of unfunded commitments are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading Liquidity and Capital Resources.

- 41 -


 

The carrying amounts and fair values of financial instruments are as follows:

 

 

December 31, 2016

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Quoted

Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

(In Thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

37,032

 

 

$

37,032

 

 

$

37,032

 

 

$

-

 

 

$

-

 

Debt securities available for sale

 

399,456

 

 

 

399,456

 

 

 

-

 

 

 

398,456

 

 

 

1,000

 

Mortgage-backed securities

  available for sale

 

271,825

 

 

 

271,825

 

 

 

-

 

 

 

271,825

 

 

 

-

 

Debt securities held to maturity

 

137,681

 

 

 

136,730

 

 

 

-

 

 

 

136,730

 

 

 

-

 

Mortgage-backed securities

  held to maturity

 

380,138

 

 

 

380,401

 

 

 

-

 

 

 

380,401

 

 

 

-

 

Loans held-for-sale

 

6,686

 

 

 

6,686

 

 

 

-

 

 

 

6,686

 

 

 

-

 

Net loans receivable

 

2,947,871

 

 

 

2,912,793

 

 

 

-

 

 

 

-

 

 

 

2,912,793

 

FHLB Stock

 

34,525

 

 

 

34,525

 

 

 

-

 

 

 

-

 

 

 

34,525

 

Interest receivable

 

11,809

 

 

 

11,809

 

 

 

11,809

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits (1)

 

2,746,017

 

 

 

2,760,322

 

 

 

1,528,180

 

 

 

-

 

 

 

1,232,142

 

Borrowings

 

701,849

 

 

 

720,148

 

 

 

-

 

 

 

-

 

 

 

720,148

 

Interest payable on borrowings

 

1,382

 

 

 

1,382

 

 

 

1,382

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

9,291

 

 

 

9,291

 

 

 

-

 

 

 

9,291

 

 

 

-

 

Interest rate caps

 

151

 

 

 

151

 

 

 

-

 

 

 

151

 

 

 

-

 

 

(1)

Includes accrued interest payable on deposits of $157,000 at December 31, 2016.

 

- 42 -


 

 

June 30, 2016

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Quoted

Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

(In Thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

199,200

 

 

$

199,200

 

 

$

199,200

 

 

$

-

 

 

$

-

 

Debt securities available for sale

 

389,910

 

 

 

389,910

 

 

 

-

 

 

 

389,910

 

 

 

-

 

Mortgage-backed securities

  available for sale

 

283,627

 

 

 

283,627

 

 

 

-

 

 

 

283,627

 

 

 

-

 

Debt securities held to maturity

 

167,171

 

 

 

169,794

 

 

 

-

 

 

 

169,794

 

 

 

-

 

Mortgage-backed securities

  held to maturity

 

410,115

 

 

 

422,690

 

 

 

-

 

 

 

422,690

 

 

 

-

 

Loans held-for-sale

 

3,316

 

 

 

3,316

 

 

 

-

 

 

 

3,316

 

 

 

-

 

Net loans receivable

 

2,649,758

 

 

 

2,652,736

 

 

 

-

 

 

 

-

 

 

 

2,652,736

 

FHLB Stock

 

30,612

 

 

 

30,612

 

 

 

-

 

 

 

-

 

 

 

30,612

 

Interest receivable

 

11,212

 

 

 

11,212

 

 

 

11,212

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits (1)

 

2,694,833

 

 

 

2,709,779

 

 

 

1,487,408

 

 

 

-

 

 

 

1,222,371

 

Borrowings

 

614,423

 

 

 

634,855

 

 

 

-

 

 

 

-

 

 

 

634,855

 

Interest payable on borrowings

 

1,226

 

 

 

1,226

 

 

 

1,226

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

(19,317

)

 

 

(19,317

)

 

 

-

 

 

 

(19,317

)

 

 

-

 

Interest rate caps

 

60

 

 

 

60

 

 

 

-

 

 

 

60

 

 

 

-

 

 

(1)

Includes accrued interest payable on deposits of $146,000 at June 30, 2016.

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 market 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. 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.

 

 

- 43 -


 

15.     COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss included in stockholders’ equity at December 31, 2016 and June 30, 2016 are as follows:

 

 

December 31,

 

 

June 30,

 

 

2016

 

 

2016

 

 

(In Thousands)

 

Net unrealized loss on securities available for sale

$

(11,137

)

 

$

(4,711

)

Tax effect

 

4,145

 

 

 

1,954

 

Net of tax amount

 

(6,992

)

 

 

(2,757

)

 

 

 

 

 

 

 

 

Net unrealized loss on securities available for sale transferred to held to maturity

 

(1,092

)

 

 

(1,056

)

Tax effect

 

446

 

 

 

431

 

Net of tax amount

 

(646

)

 

 

(625

)

 

 

 

 

 

 

 

 

Fair value adjustments on derivatives

 

7,780

 

 

 

(21,317

)

Tax effect

 

(3,178

)

 

 

8,708

 

Net of tax amount

 

4,602

 

 

 

(12,609

)

 

 

 

 

 

 

 

 

Benefit plan adjustments

 

(1,707

)

 

 

(1,346

)

Tax effect

 

698

 

 

 

550

 

Net of tax amount

 

(1,009

)

 

 

(796

)

 

 

 

 

 

 

 

 

Total accumulated other comprehensive loss

$

(4,045

)

 

$

(16,787

)

 

- 44 -


 

 

Other comprehensive income and related tax effects for the three months ended December 31, 2016 and December 31, 2015 are presented in the following table:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

(In Thousands)

 

 

(In Thousands)

 

Net unrealized holding loss on securities

  available for sale

$

(8,251

)

 

$

(6,419

)

 

$

(6,436

)

 

$

(7,871

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net unrealized holding (loss) gain on

  securities available for sale transferred to held

  to maturity (3)

 

(43

)

 

 

25

 

 

 

(36

)

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) on securities available for sale

 

10

 

 

 

(2

)

 

 

10

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivatives

 

23,755

 

 

 

6,777

 

 

 

29,099

 

 

 

(714

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss (1)

 

16

 

 

 

10

 

 

 

32

 

 

 

19

 

Past service cost (1)

 

-

 

 

 

9

 

 

 

-

 

 

 

18

 

New actuarial loss

 

-

 

 

 

-

 

 

 

(394

)

 

 

(911

)

Net change in benefit plan accrued expense

 

16

 

 

 

19

 

 

 

(362

)

 

 

(874

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before taxes

 

15,487

 

 

 

400

 

 

 

22,275

 

 

 

(9,467

)

Tax effect (2)

 

(6,759

)

 

 

(239

)

 

 

(9,533

)

 

 

3,968

 

Total other comprehensive income (loss)

$

8,728

 

 

$

161

 

 

$

12,742

 

 

$

(5,499

)

 

(1)

Represents amounts reclassified out of accumulated other comprehensive income and included in the computation of net periodic pension expense. See Note 13 – Benefit Plans for additional information.

(2)

The amounts included in income taxes for items reclassified out of accumulated other comprehensive income totaled $10 and $(144) for the three and six months ended December 31, 2016 and $7 and $(358) for the three and six months ended December 31, 2015, respectively.

(3)

Represents amounts reclassified out of accumulated other comprehensive loss and included in interest income on taxable securities.

 

 

 

- 45 -


 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

This 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. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government and changes in tax policies, rates and regulations of federal, state and local tax authorities. 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.

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.

 

 

Comparison of Financial Condition at December 31, 2016 and June 30, 2016

General. Total assets increased $85.2 million to $4.59 billion at December 31, 2016 from $4.50 billion at June 30, 2016. The net increase in total assets reflected an increase in net loans receivable that was partially offset by decreases in balances of securities and cash and cash equivalents. The net increase in total assets was largely funded by increases in deposits and borrowings that were partially offset by a net decrease in stockholders’ equity.

Cash and Cash Equivalents. Cash and cash equivalents, which consist primarily of interest-earning and non-interest-earning deposits in other banks, decreased by $162.2 million to $37.0 million at December 31, 2016 from $199.2 million at June 30, 2016.  The variance between periods partly reflected the effects of a temporary accumulation of short-term, liquid assets arising from an increase in loan prepayments during the quarter ended June 30, 2016.  The Company reinvested a significant portion of that excess liquidity back into the loan portfolio during the prior quarter ended September 30, 2016.  However, the variance also reflects the Company’s ongoing effort to enhance earnings by generally reducing the level of lower-yielding, short-term liquid assets to only the amount needed to fund the Company’s strategic initiatives while meeting its performance and risk management objectives.

Debt Securities Available for Sale. Debt securities classified as available for sale increased by $9.6 million to $399.5 million at December 31, 2016 from $389.9 million at June 30, 2016. The increase partly reflected security purchases totaling $36.9 million for the six months ended December 31, 2016 coupled with a $3.0 million decrease in the net unrealized loss of the portfolio to a net unrealized loss of $9.2 million at December 31, 2016 from a net unrealized loss of $12.2 million at June 30, 2016.  The decrease in the net unrealized loss reflected changes in the fair value of various sectors within the portfolio arising from movements in market interest rates coupled with a tightening of pricing spreads within certain sectors in the portfolio.  The noted increases in the portfolio were partially offset by principal repayments, net of premium amortization and discount accretion, totaling $30.5 million during the six months ended December 31, 2016.

The net unrealized loss on debt securities available for sale was primarily reflected within the applicable “credit sectors” of the portfolio which include asset-backed securities, collateralized loan obligations, corporate bonds and non-pooled trust preferred securities.  The net unrealized loss on this subset of securities decreased by $4.5 million to a net unrealized loss of $8.8 million at December 31, 2016 from a net unrealized loss of $13.3 million at June 30, 2016.  The decrease in the unrealized loss largely reflected a general tightening of pricing spreads in the marketplace resulting in an overall increase in the market price of such securities.  The decrease in the net unrealized loss on the noted securities was partially offset by a $1.4 million decline in the fair value of government and agency securities, including U.S. agency debentures and municipal obligations, to an unrealized loss of $388,000 at December 31, 2016 from an unrealized gain of $1.0 million at June 30, 2016.

Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of December 31, 2016.  However, volatility in the financial markets may result in additional decreases in the fair value of the Company’s available for sale securities.  Such volatility may impact the fair value of the securities within the

- 46 -


 

“credit sectors” of the portfolio more adversely than the Company’s government and agency securities.  The adverse effects of such volatility on the current and prospective financial strength of specific corporate issuers, and the resulting impact on the fair value of the related securities held by the Company, will be carefully monitored by management.

Mortgage-backed Securities Available for Sale. Mortgage-backed securities available for sale decreased by $11.8 million to $271.8 million at December 31, 2016 from $283.6 million at June 30, 2016. The net decrease reflected cash repayment of principal, net of discount accretion and premium amortization, totaling $33.0 million coupled with a $9.4 million decrease in the fair value of the portfolio to a net unrealized loss of $1.9 million at December 31, 2016 from a net unrealized gain of $7.5 million at June 30, 2016.  These decreases were partially offset by security purchases totaling $30.7 million during the six months ended December 31, 2016.

At December 31, 2016, the available for sale mortgage-backed securities portfolio primarily included agency pass-through securities and agency collateralized mortgage obligations. As of that date, we also held one non-agency mortgage-backed security within the available for sale portfolio whose aggregate carrying value totaled $113,000.  Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.

Additional information regarding securities available for sale at December 31, 2016 is presented in Note 7 and Note 9 to the unaudited consolidated financial statements.

Debt Securities Held to Maturity. Debt securities classified as held to maturity decreased by $29.5 million to $137.7 million at December 31, 2016 from $167.2 million at June 30, 2016. The net decrease in the portfolio largely reflected principal repayments, net of premium amortization and discount accretion, totaling $52.3 million during the six months ended December 31, 2016.  The net decrease was partially offset by debt security purchases totaling $22.8 million during the same period which included the purchase of $15.0 million in subordinated debt issued by a New Jersey-based community bank during the quarter ended December 31, 2016.  The subordinated notes, which were acquired through a privately negotiated transaction, have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term. The notes are redeemable after five years subject to satisfaction of certain conditions. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior to the issuer’s general and secured creditors and depositors.

At December 31, 2016, the held to maturity debt securities portfolio also included U.S. agency debentures and municipal obligations, a small portion of which represent non-rated, short term, bond anticipation notes (“BANs”) issued by New Jersey municipalities.  Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.

Mortgage-backed Securities Held to Maturity. Mortgage-backed securities held to maturity decreased by $30.0 million to $380.1 million at December 31, 2016 from $410.1 million at June 30, 2016. The decrease in the portfolio fully reflected cash repayment of principal, net of discount accretion and premium amortization, during the six months ended December 31, 2016.

At December 31, 2016, the held to maturity mortgage-backed securities portfolio primarily included agency pass-through securities and agency collateralized mortgage obligations. As of that date, we also held four non-agency mortgage-backed securities in the held to maturity portfolio whose aggregate carrying value and fair value totaled $28,000 and $27,000, respectively. Based on its evaluation, management has concluded that no other-than-temporary impairment is present within this segment of the investment portfolio as of that date.

Additional information regarding securities held to maturity at December 31, 2016 is presented in Note 8 and Note 9 to the unaudited consolidated financial statements.

Loans Held-for-Sale.  The Company continues to expand its residential lending infrastructure to support strategies focused on increasing the origination volume of residential mortgage loans for sale into the secondary market.  The increase in residential mortgage loan origination and sale activity has increased the Company’s level of non-interest income through the recognition of additional sources of recurring loan sale gains while serving to help manage the Company’s exposure to interest rate risk.  During the six months ended December 31, 2016, we sold $54.9 million of residential mortgage loans resulting in net sale gains totaling $409,000 for the period.  Loans held for sale totaled $6.7 million at December 31, 2016 compared to $3.3 million at June 30, 2016 and are reported separately from balance of net loans receivable as of those dates.

Loans Receivable.  Loans receivable, net of unamortized premiums, deferred costs and the allowance for loan losses, increased by $298.1 million, or 11.3%, to $2.95 billion at December 31, 2016 from $2.65 billion at June 30, 2016. The increase in net loans receivable was primarily attributable to new loan origination and purchase volume outpacing loan repayments during the six months ended December 31, 2016.

- 47 -


 

Residential mortgage loans held in portfolio, including home equity loans and lines of credit, decreased by $49.0 million to $645.8 million at December 31, 2016 from $694.8 million at June 30, 2016. The decrease was primarily attributable to a decrease in the balance of one-to-four family first mortgage loans of $42.7 million to $562.5 million at December 31, 2016 from $605.2 million at June 30, 2016.  The decrease also reflected an aggregate decrease of $6.3 million in the balance of home equity loans and home equity lines of credit to $83.3 million at December 31, 2016 from $89.6 million at June 30, 2016.  

Notwithstanding the decrease in their balance during the six months ended December 31, 2016, the Company generally intends to modestly increase the outstanding balance of residential mortgage loans held in portfolio while allowing the segment to continue to decline as a percentage of total loans and earning assets.  In total, the origination volume of portfolio residential mortgage loans for the six months ended December 31, 2016 totaled $21.3 million while aggregate originations of home equity loans and home equity lines of credit totaled $7.1 million for that same period.

Commercial loans, in aggregate, increased by $354.3 million to $2.30 billion at December 31, 2016 from $1.95 billion at June 30, 2016. The components of the aggregate increase included an increase in commercial mortgage loans totaling $366.9 million that was partially offset by a $12.6 million decrease in commercial business loans.  The ending balances of commercial mortgage loans and commercial business loans at December 31, 2016 were $2.23 billion and $75.6 million, respectively.

Commercial loan origination volume for the six months ended December 31, 2016 totaled $361.7 million, comprised of $350.0 million and $11.7 million of commercial mortgage and commercial business loan originations, respectively. Commercial loan originations were augmented with the purchase of commercial mortgage loans and participations totaling $126.7 million coupled with the purchase of commercial business loans totaling $6.4 million during the six months ended December 31, 2016.  Commercial loan purchases during the six months ended December 31, 2016 were largely funded with the excess liquidity that had accumulated during the fourth quarter of the prior fiscal year ended June 30, 2016 due to an increase in loan prepayments during that period.

The outstanding balance of construction loans, net of loans-in-process, decreased by $1.1 million to $927,000 at December 31, 2016 from $2.0 million at June 30, 2016. Construction loan disbursements for the six months ended December 31, 2016 totaled $56,000.

Other loans, primarily account loans, deposit account overdraft lines of credit and other consumer loans, decreased by $4.9 million to $20.5 million at December 31, 2016 from $25.4 million at June 30, 2016.  The balance of other consumer loans at December 31, 2016 included loans with outstanding balances totaling $17.2 million that were acquired through the Company’s relationship with Lending Club, an established peer-to-peer (i.e. marketplace) lender.  Through this relationship, the Company has purchased high-quality, unsecured consumer loans originated through Lending Club’s online platform.  The Company has limited its investment of Lending Club loan portfolio to an initial threshold of approximately $25.0 million in aggregate outstanding balances while continuing to independently monitor and validate the performance of the portfolio in relation to Company’s expectations as well as those of Lending Club’s proprietary credit risk model.  Additional investment in Lending Club loans up to this initial threshold may be considered by the Company while it continues to monitor and assess the performance of the portfolio and quality of loan servicing and reporting rendered by Lending Club.

The Company originated $648,000 of consumer loans during the six months ended December 31, 2016 while no additional consumer loans were purchased during the period.

Nonperforming Loans.  Nonperforming loans increased by $510,000 to $21.6 million, or 0.72% of total loans at December 31, 2016, from $21.1 million, or 0.79% of total loans at June 30, 2016. Nonperforming loans generally include loans reported as “accruing loans over 90 days past due” and loans reported as “nonaccrual” with such balances totaling $92,000 and $21.5 million, respectively, at December 31, 2016.

Additional information about the Company’s nonperforming loans at December 31, 2016 is presented in Note 10 to the unaudited consolidated financial statements.

Allowance for Loan Losses. During the six months ended December 31, 2016, the balance of the allowance for loan losses increased by $1.8 million to $26.1 million or 0.88% of total loans at December 31, 2016 from $24.2 million or 0.91% of total loans at June 30, 2016. The increase resulted from provisions of $2.4 million during the six months ended December 31, 2016 that were partially offset by charge-offs, net of recoveries, totaling $552,000 during that same period.

With regard to loans individually evaluated for impairment, the balance of our allowance for loan losses attributable to such loans decreased by $475,000 to $133,000 at December 31, 2016 from $608,000 at June 30, 2016. The balance at December 31, 2016 reflected the allowance for impairment identified on $1.1 million of impaired loans while an additional $23.8 million of impaired loans had no allowance for impairment as of that date. By comparison, the balance at June 30, 2016 reflected the allowance for

- 48 -


 

impairment identified on $3.2 million of impaired loans while an additional $21.9 million of impaired loans had no allowance for impairment as of that date. The outstanding balances of impaired loans reflect the cumulative effects of various adjustments including, but not limited to, purchase accounting valuations and prior charge-offs, where applicable, which are considered in the evaluation of impairment.

With regard to loans evaluated collectively for impairment, the balance of our allowance for loan losses attributable to such loans increased by $2.3 million to $25.9 million at December 31, 2016 from $23.6 million at June 30, 2016. The increase in valuation was partly attributable to a $299.4 million increase in the aggregate outstanding balance of loans collectively evaluated for impairment to $2.95 billion at December 31, 2016 from $2.65 billion at June 30, 2016, as well as the ongoing reallocation of loans within the portfolio in favor of commercial loans against, which we generally assign comparatively higher historical and environmental loss factors in our ALLL calculation.  The increase in the allowance also reflected updates to certain environmental and historical loss factors during the six months ended December 31, 2016.

With regard to historical loss factors, our loan portfolio experienced a net annualized average charge-off rate of 0.04% for the six months ended December 31, 2016 representing a decrease of four basis points from the 0.08% of average charge offs reported for the year ended June 30, 2016.  The annual average net charge off rate for June 30, 2016 had previously decreased by eight basis points from 0.16% for the prior year ended June 30, 2015. The historical loss factors used in our allowance for loan loss calculation methodology were updated to reflect the effect of these changes by individual loan segment reflecting the two year look-back period used by that methodology.

In addition to reflecting the trend of a decreasing average net charge off rate on the aggregate loan portfolio, the decrease in historical loss factors for the six months ended December 31, 2016 also reflected a decrease in estimated historical loss factors applicable to our wholesale C&I loan participations for which a full, two-year charge-off history is not yet available.  In such cases, we generally utilize estimated annual charge-off rates to develop the historical loss factors applicable to such loans.  As discussed in greater detail below, the Company refined its methodology for developing the estimated net charge off rates used in determining the historical loss factors applicable to its C&I loans during fiscal 2017.  In doing so, a more precise estimate of credit losses was developed for specific segments of the Company’s wholesale C&I loan participations based on the specific businesses or industry types in which the underlying borrowers conduct business.

The effects of the net decrease in historical loss factors arising from the changes noted above more than offset the effect of the increase in the overall balance of the unimpaired portion of the loan portfolio during the six months ended December 31, 2016.  Consequently, the applicable portion of the allowance attributable to these factors decreased by approximately $1.4 million to $2.1 million at December 31, 2016 from $3.5 million at June 30, 2016.

The enhancements to the historical loss factors applicable to the Company’s wholesale C&I loans discussed above were undertaken to expand and enhance the overall segmentation of its loan portfolio to support its larger credit risk management program which includes, but is not limited to, the allowance for loan loss calculation and loan concentration reporting regimens.  These efforts generally reflect the Company’s increased strategic focus in commercial lending and the growing diversity and complexity of the risk characteristics inherent in such loans.

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

As noted above, the “re-segmentation” of the loan portfolio enabled the Company to adopt a more precise methodology to derive its historical loss factors based on actual net charge offs by detailed loan segment while supporting a better basis upon which to develop estimates for such loss factors in the absence of sufficient historical data.  However, the re-segmentation also enabled the Company to enhance the precision by which it estimates credit losses through the use of qualitative, environmental loss factors.  Where applicable, such loss factors were re-evaluated and re-allocated during fiscal 2017 to reflect the more granular segmentation of loans in the allowance for loan losses calculation.  Where appropriate, the specific criteria and/or basis upon which the Company derives the environmental loss factors ascribed to loans was revised or enhanced in conjunction with the segmentation changes noted.

The implementation of the segmentation changes within the loan portfolio in the calculation of the allowance for loan loss did not result in a significant change in the required, aggregate balance of the allowance attributable to loans evaluated collectively for

- 49 -


 

impairment.  However, the Company did update certain environmental loss factors during fiscal 2017 to reflect an increase in the level of estimated credit losses attributable to the increased concentration and decreased seasoning in the Company’s multi-family loan sectors.  Consequently, the $3.7 million increase in the portion of the allowance for loan losses attributable to environmental loss factors to $23.9 million at December 31, 2016 from $20.2 million at June 30, 2016 was attributable to the growth in the unimpaired portion of the loan portfolio as well as the noted changes to environmental loss factors during the period.

Additional information about the allowance for loan losses at December 31, 2016 is presented in Note 10 to the unaudited consolidated financial statements.

Other Assets. The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, bank owned life insurance, deferred income taxes and other miscellaneous assets, increased by $7.7 million to $404.6 million at December 31, 2016 from $397.0 million at June 30, 2016.

The increase in other assets partly reflected an increase in the fair value of the Company’s interest rate derivatives portfolio to net asset value of $9.4 million, included in other assets at December 31, 2016, compared to a net liability value of $19.3 million, included in other liabilities at June 30, 2016.  The increase in other assets also included a $3.9 million increase in FHLB stock resulting from an increase in short-term advances drawn during the six months ended December 31, 2016 coupled with a $2.6 million increase in the cash surrender value of the Company’s bank-owned life insurance policies for the same period.  The noted increases in other assets were partially offset by a $9.9 million decrease in deferred income tax assets arising primarily from changes in the fair value of the Company’s available for sale securities and derivatives portfolios.

The noted increases in other assets included a $1.2 million increase in the balance of real estate owned (“REO”) to $2.0 million representing the carrying value of six properties at December 31, 2016, from $826,000, representing the carrying value of three properties at June 30, 2016.

The remaining increases and decreases in other assets for the six months ended December 31, 2016 generally comprised normal operating fluctuations in their respective balances.

Deposits. Total deposits increased by $51.2 million to $2.75 billion at December 31, 2016 from $2.69 billion at June 30, 2016.  The increase in deposit balances reflected a $49.6 million increase in interest-bearing deposits coupled with a $1.6 million increase in non-interest-bearing deposits.  The increase in interest-bearing deposits included an increase in the balance of interest-bearing checking accounts totaling $35.9 million as well as increases in balances of certificates of deposit and savings and club accounts totaling $10.4 million and $3.2 million, respectively.

The noted increase in non-interest-bearing deposits partly reflected fluctuating balances within certain large commercial deposit accounts.  Notwithstanding these day-to-day fluctuations, the average balance of non-interest-bearing deposits for the first six months of fiscal 2017 increased by $19.5 million to $244.9 million compared to $225.4 million for the prior fiscal year ended June 30, 2016.

The change in deposit balances for the period reflected changes in the balances of retail deposits as well as “non-retail” deposits acquired through various wholesale channels. The $35.9 million increase in the balance of interest-bearing checking accounts primarily reflected an increase in the balance of retail accounts while the balance of brokered money market deposits acquired through Promontory Interfinancial Network’s (“Promontory”) Insured Network Deposits (“IND”) program remained substantially unchanged at $224.1 million, or 8.2% of total deposits at December 31, 2016 compared to $224.1 million, or 8.3% of total deposits at June 30, 2016. The terms of the IND program generally establish a reciprocal commitment for Promontory to deliver and for us to accept such deposits for a period of no less than five years during which time total aggregate balances shall be maintained within a range of $200.0 million to $230.0 million. Such deposits are generally sourced by Promontory from large retail and institutional brokerage firms whose individual clients seek to have a portion of their investments held in interest-bearing accounts at FDIC-insured institutions.

We continued to utilize a deposit listing service through which we attract “non-brokered” wholesale time deposits targeting institutional investors with an original investment horizon of two-to-five years. We generally prohibit the withdrawal of our listing service deposits prior to maturity. The balance of the Bank’s listing service time deposits increased to $96.5 million, or 3.5% of total deposits at December 31, 2016, compared to $89.9 million, or 3.3% of total deposits at June 30, 2016.

We also maintain a small portfolio of longer-term, brokered certificates of deposit that were originally acquired during fiscal 2014 whose balances decreased by approximately $118,000 to $8.3 million at December 31, 2016 from $8.4 million at June 30, 2016. In combination with our Promontory IND money market deposits, our brokered deposits totaled $232.5 million, or 8.5% of deposits at December 31, 2016 compared to $232.5 million, or 8.6% of deposits at June 30, 2016.

- 50 -


 

Borrowings. The balance of borrowings increased by $87.4 million to $701.8 million at December 31, 2016 from $614.4 million at June 30, 2016. The increase in borrowings primarily reflected a $90.0 million increase in short-term FHLB advances drawn for liquidity management purposes coupled with a $472,000 increase in outstanding overnight “sweep account” balances linked to customer demand deposits that generally reflected normal operating fluctuations in such balances.

The noted increases in borrowings were partially offset by the repayment of a $3.0 million FHLB term advance that matured during the period coupled with principal payments that reduced the outstanding balance of one amortizing advance.

Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $20.4 million to $22.8 million at December 31, 2016 from $43.2 million at June 30, 2016. As noted earlier, the decrease primarily reflected changes in the fair value of the Company’s derivatives coupled with normal operating fluctuations in the balances of other liabilities.

During the first six months of fiscal 2017, the Company executed a total of five interest rate derivative transactions with an aggregate notional value of $440.0 million.  Each of the transactions represent an interest rate swap with a “forward” effective date that corresponds to the expiration date of one or more existing derivatives with the same aggregate notional value.  As such, each new derivative effectively extends the interest rate risk protection provided by one or more existing derivatives that currently serve as cash flow hedges against existing sources of wholesale funding.

Stockholders’ Equity.  Stockholders’ equity decreased by $33.0 million to $1.11 billion at December 31, 2016 from $1.15 billion at June 30, 2016.  The decrease in stockholders’ equity largely reflected the impact of the Company’s share repurchases during the first six months of fiscal 2017.  The Company initiated a share repurchase program in May 2016 through which it intends to repurchase a total of 9,352,809 shares, or 10%, of its outstanding shares.  During the six months ended December 31, 2016, the Company repurchased 4,032,823 shares at a total cost of $54.5 million or an average cost of $13.52 per share.  Cumulatively, the Company has repurchased a total of 5,739,005 shares, or 61.4% of the shares to be repurchased under the current program through December 31, 2016 at a total cost of $76.8 million, or an average cost of $13.38 per share.  The cumulative cost of the Company’s repurchased shares has directly reduced the balance of stockholders’ equity at December 31, 2016.

The net decrease in stockholders’ equity was partially offset by net income of $10.1 million for the six months ended December 31, 2016, from which cash dividends of $3.4 million were paid to shareholders during the period.  The change in  stockholders’ equity also reflected a $12.7 million decrease in accumulated other comprehensive loss, due primarily to changes in the fair value of the Company’s available for sale securities portfolio and outstanding derivatives, and a $973,000 reduction of unearned ESOP shares for plan shares earned during the six months ended December 31, 2016.

 

Comparison of Operating Results for the Three Months Ended December 31, 2016 and December 31, 2015

General. Net income for the three months ended December 31, 2016 was $5.5 million or $0.06 per diluted share; an increase of $1.7 million from $3.8 million or $0.04 per diluted share for the three months ended December 31, 2015. The increase in net income reflected increases in net interest income and non-interest income coupled with a decrease in the provision for loan losses that were partially offset by an increase in non-interest expense.  These factors contributed to an overall increase in pre-tax net income and a corresponding increase in the provision for income taxes.

Net Interest Income. Net interest income for the three months ended December 31, 2016 was $25.6 million; an increase of $1.7 million from $23.9 million for the three months ended December 31, 2015. The increase in net interest income between the comparative periods resulted from an increase in interest income that was partially offset by an increase in interest expense. The increase in interest income was attributable to an increase in the average balance of interest-earning assets coupled with an increase in their average yield.   The increase in interest expense resulted from an increase in the average balance of interest-bearing liabilities coupled with an increase in their average cost.

As a result of these factors, our net interest rate spread increased nine basis points to 2.18% for the three months ended December 31, 2016 from 2.09% for the three months ended December 31, 2015. The increase in the net interest rate spread reflected a 13 basis points increase in the average yield on interest-earning assets to 3.29% for three months ended December 31, 2016 from 3.16% for the three months ended December 31, 2015.  For those same comparative periods, the average cost of interest-bearing liabilities increased to 1.11% from 1.07%.  A discussion of the factors contributing to changes in the average yield and average cost of categories within interest-earning assets and interest-bearing liabilities, respectively, is presented in the separate discussion and analysis of interest income and interest expense below.

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The factors resulting in the reported increase in our net interest rate spread also affected our net interest margin.  In total, the Company’s net interest margin increased seven basis points to 2.45% for the three months ended December 31, 2016 compared to 2.38% for the three months ended December 31, 2015.

Interest Income. Total interest income increased $2.5 million to $34.3 million for the three months ended December 31, 2016 from $31.8 million for the three months ended December 31, 2015. The increase in interest income partly reflected a $153.7 million increase in the average balance of interest-earning assets to $4.18 billion for the three months ended December 31, 2016 from $4.02 billion for the three months ended December 31, 2015.  For those same comparative periods, the yield on earning assets increased by 13 basis points to 3.29% from 3.16%.

Interest income from loans increased $2.8 million to $27.4 million for the three months ended December 31, 2016 from $24.6 million for the three months ended December 31, 2015. The increase in interest income on loans was attributable to a net increase in the average balance of loans that was partially offset by a decline in their average yield.

The average balance of loans increased by $403.5 million to $2.90 billion for the three months ended December 31, 2016 from $2.50 billion for the three months ended December 31, 2015. The reported increase in the average balance of loans primarily reflected an aggregate increase of $445.1 million in the average balance of commercial loans to $2.21 billion for the three months ended December 31, 2016 from $1.76 billion for the three months ended December 31, 2015. Our commercial loans generally comprise commercial mortgage loans, including multi-family and nonresidential mortgage loans, as well as secured and unsecured commercial business loans.

For those same comparative periods, the average balance of other loans, primarily comprising unsecured consumer term loans, account loans and deposit account overdraft lines of credit, increased by $10.7 million to $21.7 million from $11.0 million.  The increase in the average balance of other loans primarily reflected the increased balance of unsecured consumer term loans acquired through Lending Club, as described earlier.

The increase in the average balance of commercial and consumer loans was partially offset by a $50.7 million decrease in the average balance of residential mortgage loans to $663.9 million for the three months ended December 31, 2016 from $714.6 million for the three months ended December 31, 2015. Our residential mortgages generally comprise one- to four-family first mortgage loans, home equity loans and home equity lines of credit.  For those same comparative periods, the average balance of construction loans decreased by $2.2 million to $1.5 million for the three months ended December 31, 2016 from $3.7 million for the three months ended December 31, 2015.

The effect on interest income attributable to the net increase in the average balance of loans was partially offset by the noted decrease in their average yield. The average yield on loans decreased by 17 basis points to 3.78% for the three months ended December 31, 2016 from 3.95% for the three months ended December 31, 2015. The reduction in the overall yield on our loan portfolio largely reflected the effect of the comparatively lower average yield on most newly originated loans in relation to that of the portfolio of existing loans which has reduced the overall yield of the aggregate portfolio.  To a lesser extent, the decline in the average yield generally reflects the effects of low market interest rates that provide “rate reduction” refinancing incentive to existing borrowers while also contributing to the downward re-pricing of adjustable rate loans.

Interest income from mortgage-backed securities decreased by $630,000 to $3.8 million for the three months ended December 31, 2016 from $4.4 million for the three months ended December 31, 2015. The decrease in interest income reflected a decrease in the average balance of mortgage-backed securities coupled with a decrease in their average yield.

The average balance of mortgage-backed securities decreased by $78.0 million to $673.6 million for the three months ended December 31, 2016 from $751.6 million for the three months ended December 31, 2015. The decrease in the average balance of mortgage-backed securities largely reflected the level of aggregate principal repayments and security sales between comparative periods outpacing aggregate security purchases.

For those same comparative periods, the average yield on mortgage-backed securities decreased by 11 basis points to 2.24% for the three months ended December 31, 2016 from 2.35% for the three months ended December 31, 2015. The reduction in the overall yield on mortgage-backed securities largely reflected the effect of the comparatively lower average yield on purchased securities in relation to that of the existing portfolio coupled with the continuing repayment of comparatively higher yielding securities within the portfolio.

Interest income from debt securities increased by $308,000 to $2.7 million for the three months ended December 31, 2016 from $2.4 million for the three months ended December 31, 2015. The increase in interest income reflected an increase in the average yield of debt securities that was partially offset by a decrease in their average balance.  The average yield on debt securities increased by 46

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basis points to 2.04% for the three months ended December 31, 2016 from 1.58% for the three months ended December 31, 2015. For those same comparative periods, the average balance of debt securities decreased $75.4 million to $532.2 million from $607.6 million.

The increase in the average yield on debt securities reflected a 55 basis points increase in the yield on taxable securities to 2.04% during the three months ended December 31, 2016 from 1.49% during the three months ended December 31, 2015. For those same comparative periods, the yield on tax-exempt securities increased by one basis point to 2.00% from 1.99%.

The decrease in the average balance of debt securities was largely attributable to a $76.0 million decrease in the average balance of taxable securities to $420.0 million for the three months ended December 31, 2016 from $496.0 million for the three months ended December 31, 2015. The decrease in taxable securities was partially offset by a $610,000 increase in the average balance of tax-exempt securities to $112.2 million from $111.6 million.

Interest income from other interest-earning assets increased by $47,000 to $421,000 for the three months ended December 31, 2016 from $374,000 for the three months ended December 31, 2015 reflecting an increase in their average yield that was partially offset by a decrease in their average balance.  The average yield on other interest-earning assets increased by 147 basis points to 2.37% for the three months ended December 31, 2016 from 0.90% for the three months ended December 31, 2015.  For those same comparative periods, the average balance of other interest-earning assets decreased by $96.4 million to $71.1 million from $167.5 million.  The increase in average yield and decrease in the average balance of other interest earning assets largely reflected the Company’s efforts to reduce the opportunity cost of maintaining excess liquidity by reinvesting a portion of cash and cash equivalents into the loan portfolio during the current fiscal year.

Interest Expense. Total interest expense increased by $812,000 to $8.7 million for the three months ended December 31, 2016 from $7.9 million for the three months ended December 31, 2015. The increase in interest expense resulted from an increase in the average balance of interest-bearing liabilities coupled with an increase in their average cost. The average balance of interest-bearing liabilities increased by $181.3 million to $3.13 billion for the three months ended December 31, 2016 from $2.95 billion for the three months ended December 31, 2015. For those same comparative periods, the average cost of interest-bearing liabilities increased four basis points to 1.11% from 1.07%.

Interest expense attributed to deposits increased by $880,000 to $5.4 million for the three months ended December 31, 2016 from $4.5 million for the three months ended December 31, 2015. The increase in interest expense was attributable to increases in the average cost and average balance of interest-bearing deposits.

The average cost of interest-bearing deposits increased by eight basis points to 0.86% for the three months ended December 31, 2016 from 0.78% for the three months ended December 31, 2015. The net increase in the average cost largely reflected an increase in the average cost of certificates of deposit which increased 13 basis points to 1.33% for the three months ended December 31, 2016 from 1.20% for the three months ended December 31, 2015. For those same comparative periods, the average cost of interest-bearing checking accounts increased five basis points to 0.62% from 0.57% while the average cost of savings and club accounts decreased five basis points to 0.12% from 0.17%.

The average balance of interest-bearing deposits increased by $178.1 million to $2.50 billion for the three months ended December 31, 2016 from $2.33 billion for the three months ended December 31, 2015. The increase in the average balance was reflected across all categories of interest-bearing deposits. For the comparative periods noted, the average balance of certificates of deposit increased by $125.0 million to $1.22 billion from $1.10 billion, the average balance of interest-bearing checking accounts increased by $45.8 million to $761.8 million from $716.0 million and the average balance of savings and club accounts increased by $7.4 million to $518.2 million from $510.8 million.

Interest expense attributed to borrowings decreased by $68,000 to $3.3 million for the three months ended December 31, 2016 from $3.4 million for the three months ended December 31, 2015. The decrease in interest expense on borrowings reflected a decrease in their average cost that was partially offset by an increase in their average balance.  The average cost of borrowings decreased by five basis points to 2.09% for the three months ended December 31, 2016 from 2.14% for the three months ended December 31, 2015. For those same comparative periods, the average balance of borrowings increased by $3.2 million to $629.5 million from $626.3 million.

The increase in the average balance of borrowings partly reflected a $7.9 million increase in the average balance of FHLB advances to $594.2 million for the three months ended December 31, 2016 from $586.3 million for the three months ended December 31, 2015. For those same comparative periods, the average cost of FHLB advances decreased five basis points to 2.20% from 2.25% largely reflecting the Company’s greater use of lower-costing, overnight borrowings to temporarily fund a portion of loan growth during the quarter ended December 31, 2016.

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The noted increase in the average balance of FHLB advances was partially offset by a $4.7 million decrease in the average balance of other borrowings, comprised primarily of depositor sweep accounts, to $35.3 million from $40.0 million. The average cost of sweep accounts decreased by 24 basis points to 0.29% from 0.53% between the same comparative periods.

Provision for Loan Losses. The provision for loan losses decreased by $2.1 million to $1.3 million for the three months ended December 31, 2016 from $3.4 million for the three months ended December 31, 2015.  The decrease was largely attributable to a lower provision on non-impaired loans evaluated collectively for impairment coupled with a decrease in specific losses recognized on nonperforming loans individually reviewed for impairment.

Regarding the provision on non-impaired loans, the noted decrease partly reflected the effects of a comparatively lower level of growth in the unimpaired portion of the loan portfolio between comparative periods.  The decrease also reflected the comparative effects of updates to historical and environmental loss factors between periods.  As previously discussed, the changes to historical loss factors generally reflected the impact of a decreased level of net charge offs recognized during the three months ended December 31, 2016 on the two-year lookback period used to calculate the Company’s historical loss factors coupled with the “roll off” of the net charge offs from the same period two years earlier.  The Company also updated certain environmental loss factors during the three months ended December 31, 2016 to reflect an increase in the level of estimated credit losses attributable to the increased concentration and decreased seasoning in the Company’s multi-family loan sectors.

Additional information regarding the allowance for loan losses and the associated provisions recognized during the three months ended December 31, 2016 is presented in Note 10 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at December 31, 2016 and June 30, 2016 presented earlier.

Non-Interest Income. Non-interest income, excluding gains and losses on the sale and write-down of real estate owned, increased by $912,000 to $3.4 million for the three month period ended December 31, 2016 from $2.5 million for the three months ended December 31, 2015.  The increase was partly attributable to a $383,000 increase in the gain on sale of loans.  The increase in loan sale gains included an $88,000 increase in gains associated with the sale of SBA loans arising from an increase in loans originated and sold.  The increase in loan sale gains also included $297,000 in gains on sale of residential mortgage loans during the three months ended December 31, 2016 for which no such gains were recognized during the earlier comparative period due to the recent implementation and continuing expansion of the Company’s mortgage banking business strategy. The increase in non-interest income also reflected a $580,000 increase in fees and service charges that largely reflected an increase in loan prepayment penalties recognized between comparative periods.

The noted increase in non-interest income was partially offset by an $87,000 decrease in the income recognized on bank-owned life insurance that largely reflected the continuing effects of lower market interest rates on the yields earned by the Company on its underlying policies.

We also recognized net gains totaling $11,000 arising from the write down and sale of REO during the three months ended December 31, 2016 compared to net losses of $113,000 recognized during the earlier comparative period.

The changes in other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.

Non-Interest Expenses. Non-interest expense increased by $1.7 million to $19.4 million for the three months ended December 31, 2016 from $17.7 million for the three months ended December 31, 2015. The net increase in non-interest expense partly reflected increases in salary and employee benefits expense and director compensation expense as well as increases in premises occupancy expense and equipment and system expense.  These increases were partially offset by decreases in advertising and marketing expense and deposit insurance expense.  A less noteworthy variance in miscellaneous expense reflected normal growth and operating fluctuations within that category.

Salaries and employee benefits expense increased by $1.2 million to $11.6 million for the three months ended December 31, 2016 from $10.4 million for the three months ended December 31, 2015.  The increase partly reflected the effects of annual increases in non-executive wages and salaries for fiscal 2017 and the cost of staffing additions within the lending and business development functions, coupled with lesser increases in employee incentive compensation and commissions expenses.  The increase in employee-compensation related expenses also reflected an increase in employee benefits expenses due to an increase in the cost of employee health insurance and retirement plan benefits and an increase in ESOP expense arising from an increase in the market value of the Company’s capital stock between comparative periods.

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The increase in salaries and employee benefits expense also reflected the recognition of additional costs associated with the granting of benefits to employees and directors under the terms of the Company’s 2016 Equity Incentive Plan approved by shareholders in October 2016.  Specifically, the noted grants comprised 1,387,390 shares of restricted stock and 3,290,000 stock options issued on December 1, 2016 that will be earned and vested by plan participants over a five-year period with the vesting of certain restricted stock benefits further subject to “performance-based” metrics.  The noted shares of restricted stock were issued from authorized shares during the quarter ended December 31, 2016 and are included in the number of the Company’s outstanding shares reported as of that date.  

Based on the Company’s closing stock price on the date of grant and other assumptions supporting the Company’s valuation of the stock options granted under a Black-Scholes calculation methodology, the Company expects the annual pre-tax cost of the grants issued on December 1, 2016 to total approximately $6.2 million with an annual “after-tax” estimated cost of $4.3 million.  Given the grant date of December 1, 2016, the Company recognized 8.33% (one-twelfth), or approximately $517,000, in pre-tax expense associated with the noted grants resulting in an “after-tax” charge to net income of approximately $356,000 during the quarter ended December 31, 2016.  Beginning with the quarter ending March 31, 2017, the ongoing quarterly “pre-tax” and “after-tax” expense associated with the noted grants is expected to total $1.6 million and $1.1 million, respectively.

In addition to noted costs associated with the granting of restricted stock and stock option benefits noted above, the increase in director compensation expense also reflected the quarterly retainers paid to the Company’s two newest members of the Board of Directors who joined the Company in December 2015.

The increase in premises occupancy expense partly reflected an increase in facility rent expense due to the revised terms of certain facility leases renewed during the period coupled with the additional cost of a new ground lease associated with a forthcoming branch relocation.  The increase in premises occupancy expense also reflected an increase in facility repairs and maintenance expenses relating to the Company’s branch and administrative facilities.

The increase in equipment and systems expense largely reflected the recognition of a non-recurring recovery of certain historical data network charges that reduced technology service provider expenses during the earlier comparative quarter ended December 31, 2015.

Advertising and marketing expense decreased by $175,000 to $388,000 for the three months ended December 31, 2016 from $563,000 for the three months ended December 31, 2015.  The decrease largely reflected decreases in advertising expenses across a variety of advertising formats including outdoor, print and electronic media reflecting normal fluctuations in the timing of certain advertising campaigns supporting the Company’s loan and deposit growth initiatives.

Finally, deposit insurance expense decreased by $336,000 to $339,000 for the three months ended December 31, 2016 from $675,000 for the three months ended December 31, 2015.  The decrease primarily reflected a reduction in the Bank’s FDIC assessment rate that went into effect on July 1, 2016.

Provision for Income Taxes. The provision for income taxes increased by $1.6 million to $3.0 million for the three months ended December 31, 2016 from $1.4 million for the three months ended December 31, 2015.  The increase in income tax expense primarily reflected the underlying differences in the level of the taxable portion of pre-tax income between comparative periods.

Our effective tax rates during the three month periods ended December 31, 2016 and December 31, 2015 were 35.2% and 27.4% which, in relation to statutory income tax rates, reflected the effects of recurring sources of tax-favored income included in pre-tax income.

 

Comparison of Operating Results for the Six Months Ended December 31, 2016 and December 31, 2015

General. Net income for the six months ended December 31, 2016 was $10.1 million or $0.12 per diluted share, an increase of $3.4 million from $6.8 million or $0.08 per diluted share for the six months ended December 31, 2015. The increase in net income reflected increases in net interest income and non-interest income coupled with a decrease in the provision for loan losses that were partially offset by an increase in non-interest expense.  These factors contributed to an overall increase in pre-tax net income and a corresponding increase in the provision for income taxes.

Net Interest Income. Net interest income for the six months ended December 31, 2016 was $49.6 million; an increase of $3.3 million from $46.3 million for the six months ended December 31, 2015. The increase in net interest income between the comparative periods resulted from an increase in interest income that was partially offset by an increase in interest expense. The increase in interest income was attributable to an increase in the average balance of interest-earning assets coupled with an increase in their average yield.  

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The increase in interest expense resulted from an increase in the average balance of interest-bearing liabilities coupled with an increase in their average cost.

As a result of these factors, our net interest rate spread increased five basis points to 2.10% for the six months ended December 31, 2016 from 2.05% for the six months ended December 31, 2015. The increase in the net interest rate spread reflected a 14 basis points increase in the average yield on interest-earning assets to 3.22% for the six months ended December 31, 2016 from 3.08% for the six months ended December 31, 2015.  For those same comparative periods, the average cost of interest-bearing liabilities increased to 1.12% from 1.03%.  A discussion of the factors contributing to changes in the average yield and average cost of categories within interest-earning assets and interest-bearing liabilities, respectively, is presented in the separate discussion and analysis of interest income and interest expense below.

The factors resulting in the reported increase in our net interest rate spread also affected our net interest margin.  In total, the Company’s net interest margin increased five basis points to 2.38% for the six months ended December 31, 2016 compared to 2.33% for the six months ended December 31, 2015.

Interest Income. Total interest income increased $5.9 million to $67.1 million for the six months ended December 31, 2016 from $61.2 million for the six months ended December 31, 2015. As noted above, the increase in interest income partly reflected a $189.2 million increase in the average balance of interest-earning assets to $4.16 billion for the six months ended December 31, 2016 from $3.97 billion for the six months ended December 31, 2015.  For those same comparative periods, the yield on earning assets increased by 14 basis points to 3.22% from 3.08%.

Interest income from loans increased $6.4 million to $53.1 million for the six months ended December 31, 2016 from $46.7 million for the six months ended December 31, 2015. The increase in interest income on loans was attributable to a net increase in the average balance of loans that was partially offset by a decline in their average yield.

The average balance of loans increased by $441.0 million to $2.80 billion for the six months ended December 31, 2016 from $2.36 billion for the six months ended December 31, 2015. The reported increase in the average balance of loans primarily reflected an aggregate increase of $457.2 million in the average balance of commercial loans to $2.10 billion for the six months ended December 31, 2016 from $1.64 billion for the six months ended December 31, 2015. Our commercial loans generally comprise commercial mortgage loans, including multi-family and nonresidential mortgage loans, as well as secured and unsecured commercial business loans.

For those same comparative periods, the average balance of other loans, primarily comprising unsecured consumer term loans, account loans and deposit account overdraft lines of credit, increased by $15.5 million to $23.0 million from $7.5 million.  The increase in the average balance of other loans primarily reflected the increased balance of unsecured consumer term loans acquired through Lending Club, as described earlier.

The increase in the average balance of commercial and consumer loans was partially offset by a $29.5 million decrease in the average balance of residential mortgage loans to $675.8 million for the six months ended December 31, 2016 from $705.3 million for the six months ended December 31, 2015. Our residential mortgages generally comprise one- to four-family first mortgage loans, home equity loans and home equity lines of credit.  For those same comparative periods, the average balance of construction loans decreased by $3.0 million to $1.8 million for the six months ended December 31, 2016 from $4.8 million for the six months ended December 31, 2015.

The effect on interest income attributable to the net increase in the average balance of loans was partially offset by the noted decrease in their average yield. The average yield on loans decreased by 16 basis points to 3.80% for the six months ended December 31, 2016 from 3.96% for the six months ended December 31, 2015. The reduction in the overall yield on our loan portfolio largely reflected the effect of the comparatively lower average yield on most newly originated loans in relation to that of the portfolio of existing loans which has reduced the overall yield of the aggregate portfolio.  To a lesser extent, the decline in the average yield generally reflects the effects of low market interest rates that provide “rate reduction” refinancing incentive to existing borrowers while also contributing to the downward re-pricing of adjustable rate loans.

Interest income from mortgage-backed securities decreased by $1.2 million to $7.7 million for the six months ended December 31, 2016 from $8.9 million for the six months ended December 31, 2015. The decrease in interest income reflected a decrease in the average balance of mortgage-backed securities coupled with a decrease in their average yield.

The average balance of mortgage-backed securities decreased by $79.0 million to $684.7 million for the six months ended December 31, 2016 from $763.7 million for the six months ended December 31, 2015. The decrease in the average balance of

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mortgage-backed securities largely reflected the level of aggregate principal repayments and security sales between comparative periods outpacing aggregate security purchases.

For those same comparative periods, the average yield on mortgage-backed securities decreased by nine basis points to 2.25% for the six months ended December 31, 2016 from 2.34% for the six months ended December 31, 2015. The reduction in the overall yield on mortgage-backed securities largely reflected the effect of the comparatively lower average yield on purchased securities in relation to that of the existing portfolio coupled with the continuing repayment of comparatively higher yielding securities within the portfolio.

Interest income from debt securities increased by $469,000 to $5.3 million for the six months ended December 31, 2016 from $4.8 million for the six months ended December 31, 2015. The increase in interest income reflected an increase in the average yield on debt securities that was partially offset by a decrease in their average balance.  The average yield on debt securities increased 42 basis points to 1.96% for the six months ended December 31, 2016 from 1.54% for the six months ended December 31, 2015. For those same comparative periods, the average balance of debt securities decreased $85.6 million to $542.0 million from $627.6 million.

The increase in the average yield on debt securities reflected a 49 basis points increase in the yield on taxable securities to 1.94% during the six months ended December 31, 2016 from 1.45% during the six months ended December 31, 2015. For those same comparative periods, the yield on tax-exempt securities increased three basis points to 2.01% from 1.98%.

The decrease in the average balance of debt securities was largely attributable to a $86.2 million decrease in the average balance of taxable securities to $431.1 million for the six months ended December 31, 2016 from $517.3 million for the six months ended December 31, 2015. The decrease in taxable securities was partially offset by a $624,000 increase in the average balance of tax-exempt securities to $110.9 million from $110.3 million.

Interest income from other interest-earning assets increased by $189,000 to $1.0 million for the six months ended December 31, 2016 from $813,000 for the six months ended December 31, 2015 reflecting an increase in their average yield that was partially offset by a decrease in their average balance.  The average yield on other interest-earning assets increased by 73 basis points to 1.45% for the six months ended December 31, 2016 from 0.72% for the six months ended December 31, 2015.  For those same comparative periods, the average balance of other interest-earning assets decreased by $87.3 million to $137.8 million from $225.1 million.

Interest Expense. Total interest expense increased by $2.6 million to $17.5 million for the six months ended December 31, 2016 from $14.9 million for the six months ended December 31, 2015. As noted earlier, the increase in interest expense resulted from an increase in the average balance of interest-bearing liabilities coupled with an increase in their average cost. The average balance of interest-bearing liabilities increased by $213.1 million to $3.11 billion for the six months ended December 31, 2016 from $2.90 billion for the six months ended December 31, 2015. For those same comparative periods, the average cost of interest-bearing liabilities increased nine basis points to 1.12% from 1.03%.

Interest expense attributed to deposits increased by $2.2 million to $10.8 million for the six months ended December 31, 2016 from $8.6 million for the six months ended December 31, 2015. The increase in interest expense was attributable to increases in the average cost and average balance of interest-bearing deposits.

The average cost of interest-bearing deposits increased by 11 basis points to 0.86% for the six months ended December 31, 2016 from 0.75% for the six months ended December 31, 2015. The net increase in the average cost largely reflected an increase in the average cost of certificates of deposit which increased 15 basis points to 1.32% for the six months ended December 31, 2016 from 1.17% for the six months ended December 31, 2015. For those same comparative periods, the average cost of interest-bearing checking accounts increased seven basis points to 0.63% from 0.56% while the average cost of savings and club accounts decreased three basis points to 0.14% from 0.17%.

The average balance of interest-bearing deposits increased by $210.3 million to $2.49 billion for the six months ended December 31, 2016 from $2.28 billion for the six months ended December 31, 2015.  The increase in the average balance was reflected across all categories of interest-bearing deposits. For the comparative periods noted, the average balance of certificates of deposit increased by $174.3 million to $1.22 billion from $1.05 billion, the average balance of interest-bearing checking accounts increased by $34.6 million to $755.1 million from $720.6 million and the average balance of savings and club accounts increased by $1.5 million to $516.9 million from $515.4 million.

Interest expense attributed to borrowings increased by $369,000 to $6.7 million for the six months ended December 31, 2016 from $6.3 million for the six months ended December 31, 2015. The increase in interest expense on borrowings reflected an increase in their average balance coupled with an increase in their average cost. The average balance of borrowings increased by $2.8 million

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to $620.2 million for the six months ended December 31, 2016 from $617.4 million for the six months ended December 31, 2015. For those same comparative periods, the average cost of borrowings increased by 11 basis points to 2.16% from 2.05%.

The increase in the average balance of borrowings largely reflected a $6.7 million increase in the average balance of FHLB advances to $585.8 million for the six months ended December 31, 2016 from $579.1 million for the six months ended December 31, 2015. For those same comparative periods, the average cost of FHLB advances increased 11 basis points to 2.27% from 2.16%. The increase in the average cost of FHLB advances largely reflects the effects of an increase in interest rate hedging costs between comparative periods.

The noted increase in the average balance of FHLB advances was partially offset by a $4.0 million decrease in the average balance of other borrowings, comprised primarily of depositor sweep accounts, to $34.4 million from $38.4 million. The average cost of sweep accounts decreased by 17 basis points to 0.35% from 0.52% between the same comparative periods.

Provision for Loan Losses. The provision for loan losses decreased by $3.7 million to $2.4 million for the six months ended December 31, 2016 from $6.1 million for the six months ended December 31, 2015.  The decrease was largely attributable to a lower provision on non-impaired loans evaluated collectively for impairment coupled with a decrease in specific losses recognized on nonperforming loans individually reviewed for impairment.

Regarding the provision on non-impaired loans, the noted decrease partly reflected the effects of a comparatively lower level of growth in the unimpaired portion of the loan portfolio between comparative periods.  The decrease also reflected the comparative effects of updates to historical and environmental loss factors between periods.  As previously discussed, the changes to historical loss factors generally reflected the impact of a decreased level of net charge offs recognized during the six months ended December 31, 2016 on the two-year lookback period used to calculate the Company’s historical loss factors coupled with the “roll off” of the net charge offs from the same period two years earlier.  Such changes also reflected a decrease in estimated historical loss factors applicable to our wholesale C&I loan participations for which a full, two-year charge-off history is not yet available. The Company also updated certain environmental loss factors during the six months ended December 31, 2016 to reflect an increase in the level of estimated credit losses attributable to the increased concentration and decreased seasoning in the Company’s multi-family loan sectors.

The prior discussion regarding the allowance for loan losses also highlighted the impact of the “re-segmentation” of the loan portfolio on the Company’s qualitative, environmental loss factors.  As noted therein, such loss factors were re-evaluated and re-allocated, where appropriate, to reflect the more granular segmentation of loans in the allowance for loan loss calculation during the first quarter of fiscal 2017.  Where appropriate, the specific criteria and/or basis upon which the Company derives the environmental loss factors ascribed to loans was also revised or enhanced in conjunction with the segmentation changes noted.

The implementation of the segmentation changes within the loan portfolio in the calculation of the allowance for loan loss did not result in a significant change in the required, aggregate balance of the allowance attributable to loans evaluated collectively for impairment.  Consequently, the decrease in the provision for loan losses during the six months ended December 31, 2016 largely reflected the updates to the historical and environmental loss factors discussed earlier coupled with the noted effects of a comparatively lower level of growth in the unimpaired portion of the loan portfolio between comparative periods. As noted above, the decrease in provision also reflected a decrease in losses recognized on specific loans individually reviewed for impairment.

Additional information regarding the allowance for loan losses and the associated provisions recognized during the six months ended December 31, 2016 is presented in Note 10 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at December 31, 2016 and June 30, 2016 presented earlier.

Non-Interest Income. Non-interest income, excluding gains and losses on the sale and write-down of real estate owned, increased by $1.1 million to $6.1 million for the six months ended December 31, 2016 from $5.0 million for the six months ended December 31, 2015.  The increase was partly attributable to a $611,000 increase in the gain on sale of loans.  The increase in loan sale gains included an $202,000 increase in gains associated with the sale of SBA loans arising from an increase in loans originated and sold.  The increase in loan sale gains also included $409,000 in gains on sale of residential mortgage loans during the six months ended December 31, 2016 for which no such gains were recognized during the earlier comparative period due to the recent implementation and continuing expansion of the Company’s mortgage banking business strategy. The increase in non-interest income also reflected a $570,000 increase in fees and service charges that largely reflected an increase in loan prepayment penalties recognized between comparative periods.

The noted increase in non-interest income was partially offset by an $159,000 decrease in the income recognized on bank-owned life insurance that largely reflected the continuing effects of lower market interest rates on the yields earned by the Company on its underlying policies.

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We also recognized net losses totaling $3,000 arising from the write down and sale of REO during the six months ended December 31, 2016 compared to net losses of $113,000 recognized during the earlier comparative period.

The changes in other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.

Non-Interest Expenses. Non-interest expense increased by $1.9 million to $38.0 million for the six months ended December 31, 2016 from $36.1 million for the six months ended December 31, 2015. The net increase in non-interest expense partly reflected increases in salary and employee benefits expense and director compensation expense as well as increases in premises occupancy expense and equipment and system expense.  These increases were partially offset by a decrease in deposit insurance expense.  Less noteworthy variances in advertising and marketing expense and miscellaneous expense reflected normal growth and operating fluctuations within these categories.

Salaries and employee benefits expense increased by $1.5 million to $22.5 million for the six months ended December 31, 2016 from $21.0 million for the six months ended December 31, 2015.  The increase partly reflected the effects of annual increases in non-executive wages and salaries for fiscal 2017 and the cost of staffing additions within the lending and business development functions coupled with lesser increases in employee incentive compensation and commissions expenses.  The increase in employee-compensation related expenses also reflected an increase in employee benefits expenses due to an increase in the cost of employee health insurance and retirement plan benefits and an increase in ESOP expense arising from an increase in the market value of the Company’s capital stock between comparative periods.

The increase in salaries and employee benefits expense also reflected the recognition of additional costs associated with the granting of benefits to employees and directors under the terms of the Company’s 2016 Equity Incentive Plan approved by shareholders in October 2016.  Specifically, the noted grants comprised 1,387,390 shares of restricted stock and 3,290,000 stock options issued on December 1, 2016 that will be earned and vested by plan participants over a five-year period with the vesting of certain restricted stock benefits further subject to “performance-based” metrics.  The noted shares of restricted stock were issued from authorized shares during the quarter ended December 31, 2016 and are included in the number of the Company’s outstanding shares reported as of that date.  

Based on the Company’s closing stock price on the date of grant and other assumptions supporting the Company’s valuation of the stock options granted under a Black-Scholes calculation methodology, the Company expects the annual pre-tax cost of the grants issued on December 1, 2016 to total approximately $6.2 million with an annual “after-tax” estimated cost of $4.3 million.  Given the grant date of December 1, 2016, the Company recognized 8.33% (one-twelfth) or approximately $517,000 in pre-tax expense associated the with noted grants resulting in an “after-tax” charge to net income of approximately $356,000 during the quarter ended December 31, 2016.  Beginning with the next quarter ending March 31, 2017, the ongoing quarterly “pre-tax” and “after-tax” expense associated with the noted grants is expected to total $1.6 million and $1.1 million, respectively.

In addition to noted costs associated with the granting of restricted stock and stock option benefits noted above, the increase in director compensation expense also reflected the quarterly retainers paid to the Company’s two newest members of the Board of Directors who joined the Company in December 2015.

The increase in premises occupancy expense partly reflected an increase in facility rent expense due to the revised terms of certain facility leases renewed during the period coupled with the additional cost of a new ground lease associated with a forthcoming branch relocation.  The increase in premises occupancy expense also reflected and an increase in facility repairs and maintenance expenses and real estate tax expenses relating to the Company’s branch and administrative facilities.

The increase in equipment and systems expense largely reflected the recognition of a non-recurring recovery of certain historical data network charges that reduced technology service provider expenses during the earlier comparative period ended December 31, 2015.

Finally, deposit insurance expense decreased by $693,000 to $644,000 for the six months ended December 31, 2016 from $1.3 million for the six months ended December 31, 2015.  The decrease primarily reflected a reduction in the Bank’s FDIC assessment rate that went into effect on July 1, 2016.

Provision for Income Taxes. The provision for income taxes increased by $2.9 million to $5.2 million for the six months ended December 31, 2016 from $2.3 million for the six months ended December 31, 2015.  The increase in income tax expense primarily reflected the underlying differences in the level of the taxable portion of pre-tax income between comparative periods.

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Our effective tax rates during the six month periods ended December 31, 2016 and December 31, 2015 were 33.8% and 25.2% which, in relation to statutory income tax rates, reflected the effects of recurring sources of tax-favored income included in pre-tax income.

 

Liquidity and Capital Resources

Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, borrowings, amortization, prepayments and maturities of mortgage-backed securities and outstanding loans, maturities and calls of debt securities and funds provided from operations. In addition to cash and cash equivalents, we invest excess funds in short-term interest-earning assets such as overnight deposits or U.S. agency securities, which provide liquidity to meet lending requirements. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and mortgage-backed securities.

The Bank is required to have enough investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure a safe operation. Toward that end, we generally maintain cash and cash equivalents whose balances decreased by $162.2 million to $37.0 million at December 31, 2016 from $199.2 million at June 30, 2016.  The decrease in cash and cash equivalents partly reflected the effects of a temporary accumulation of short-term, liquid assets arising from an increase in loan prepayments during the quarter ended June 30, 2016.  The Company reinvested a significant portion of that excess liquidity back into the loan portfolio during the prior quarter ended September 30, 2016.  However, the variance also reflected the Company’s ongoing effort to enhance earnings by generally reducing the level of lower-yielding, short-term liquid assets to only the amount needed to fund the Company’s strategic initiatives while meeting its performance and risk management objectives.

Investments that formally qualify as liquid assets are supplemented by our portfolio of securities classified as available for sale whose balances at December 31, 2016 included $271.8 million of mortgage-backed securities and $399.5 million of debt securities that can readily be sold if necessary.

At December 31, 2016, the Company had outstanding commitments to originate and purchase loans held in portfolio totaling approximately $67.1 million while outstanding commitments to originate loans held for sale totaled $10.0 million as of that same date.  By comparison, the Company had outstanding commitments to originate and purchase loans held in portfolio totaling $35.6 million at June 30, 2016 while outstanding commitments to originate loans held for sale totaled $16.7 million as of that same date.  Origination commitments on loans held for sale whose terms include interest rate locks to borrowers are generally 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 $14,000 and $59.5 million, respectively, at December 31, 2016 compared to $73,000 and $55.4 million, respectively, at June 30, 2016. The Company is also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled $546,000 and $514,000 at December 31, 2016 and June 30, 2016, 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.

As noted earlier, for the six months ended December 31, 2016, the balance of total deposits increased by $51.2 million to $2.75 billion from $2.69 billion at June 30, 2016.  The net increase in deposits reflected a net increase in interest-bearing deposits totaling $49.6 million coupled with an increase in non-interest-bearing checking accounts totaling $1.6 million.  The increase in interest-bearing deposits included an increase in the balance of interest-bearing checking accounts totaling $35.9 million as well as increases in balances of certificates of deposit and savings and club accounts totaling $10.4 million and $3.2 million, respectively.  The balance of certificates of deposit with maturities within one year increased to $669.3 million at December 31, 2016 compared to $666.1 million at June 30, 2016 with such balances representing 55.0% and 55.1% of total certificates of deposit at the close of each period, respectively.

Advances from the FHLB of New York are available to supplement the Company’s liquidity position and, to the extent that maturing deposits do not remain with the Company, management may replace such funds with advances. As of December 31, 2016, the Company’s outstanding balance of FHLB advances, excluding fair value adjustments, totaled $665.7 million. Of these advances,

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$145.0 million represent long-term, fixed-rate advances maturing in 2023 that have terms enabling the FHLB to call the borrowing at their option prior to maturity. The remaining balance of long-term, fixed rate advances totaled $5.2 million representing a single advance maturing during fiscal 2018. Short-term FHLB advances at December 31, 2016 included $425.0 million of fixed-rate borrowings which have been effectively converted to longer duration funding sources through the use of interest rate derivatives coupled with one overnight advance totaling $90.0 million drawn for short-term, liquidity management purpose.  The remaining $521,000 of advances represents one fixed-rate, amortizing advance maturing in 2021.

The Company has the capacity to borrow additional funds from the FHLB, through a line of credit or by taking additional short-term or long-term advances. Such borrowings are an option available to management if funding needs change or to lengthen the duration of liabilities. Most of the Bank’s mortgage-backed and debt securities are held in safekeeping at the FHLB of New York with a majority being available as collateral if necessary. In addition to the FHLB advances, the Bank has other borrowings totaling $36.1 million at December 31, 2016 representing overnight “sweep account” balances linked to customer demand deposits.

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. As of December 31, 2016, the Company and the Bank exceeded all capital requirements of federal banking regulators.

The following table sets forth the Bank’s capital position at December 31, 2016 and June 30, 2016, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

 

 

At December 31, 2016

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To Be Well Capitalized

Under Prompt

Corrective Action

Provisions

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

(Dollars in Thousands)

Total capital (to risk-weighted assets)

$

736,975

 

 

 

24.60

 

%

$

239,624

 

 

 

8.00

 

%

$

299,530

 

 

 

10.00

 

%

Tier 1 capital (to risk-weighted assets)

 

710,915

 

 

 

23.73

 

%

 

179,718

 

 

 

6.00

 

%

 

239,624

 

 

 

8.00

 

%

Common equity tier 1 capital (to risk-weighted assets)

 

710,915

 

 

 

23.73

 

%

 

134,788

 

 

 

4.50

 

%

 

194,694

 

 

 

6.50

 

%

Tier 1 capital (to adjusted total assets)

 

710,915

 

 

 

16.09

 

%

 

176,742

 

 

 

4.00

 

%

 

220,927

 

 

 

5.00

 

%

  

 

At June 30, 2016

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

To Be Well Capitalized

Under Prompt

Corrective Action

Provisions

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

(Dollars in Thousands)

Total capital (to risk-weighted assets)

$

722,561

 

 

 

26.03

 

%

$

222,062

 

 

 

8.00

 

%

$

277,577

 

 

 

10.00

 

%

Tier 1 capital (to risk-weighted assets)

 

698,332

 

 

 

25.16

 

%

 

166,546

 

 

 

6.00

 

%

 

222,062

 

 

 

8.00

 

%

Common equity tier 1 capital (to risk-weighted assets)

 

698,332

 

 

 

25.16

 

%

 

124,910

 

 

 

4.50

 

%

 

180,425

 

 

 

6.50

 

%

Tier 1 capital (to adjusted total assets)

 

698,332

 

 

 

15.88

 

%

 

175,848

 

 

 

4.00

 

%

 

219,810

 

 

 

5.00

 

%

 


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The following table sets forth the Company’s capital position at December 31, 2016 and June 30, 2016, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

 

 

At December 31, 2016

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

(Dollars in Thousands)

Total capital (to risk-weighted assets)

$

1,033,247

 

 

 

34.32

 

%

$

240,854

 

 

 

8.00

 

%

Tier 1 capital (to risk-weighted assets)

 

1,007,187

 

 

 

33.45

 

%

 

180,641

 

 

 

6.00

 

%

Common equity tier 1 capital (to risk-weighted assets)

 

1,007,187

 

 

 

33.45

 

%

 

135,480

 

 

 

4.50

 

%

Tier 1 capital (to adjusted total assets)

 

1,007,187

 

 

 

22.77

 

%

 

176,899

 

 

 

4.00

 

%

 

 

At June 30, 2016

 

Actual

 

 

For Capital

Adequacy Purposes

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

(Dollars in Thousands)

Total capital (to risk-weighted assets)

$

1,076,640

 

 

 

38.78

 

%

$

222,106

 

 

 

8.00

 

%

Tier 1 capital (to risk-weighted assets)

 

1,052,411

 

 

 

37.91

 

%

 

166,579

 

 

 

6.00

 

%

Common equity tier 1 capital (to risk-weighted assets)

 

1,052,411

 

 

 

37.91

 

%

 

124,934

 

 

 

4.50

 

%

Tier 1 capital (to adjusted total assets)

 

1,052,411

 

 

 

23.93

 

%

 

175,919

 

 

 

4.00

 

%

 

In July 2013, the OCC and the other federal bank regulatory agencies issued a final rule that revised the risk-based and leverage capital requirements and the method for calculating risk-weighted assets, to make them consistent with the agreements that were reached by the international Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.  The final rule applies to all depository institutions, top-tier bank holding companies and top-tier savings and loan holding companies with total consolidated assets of $1.0 billion or more (“banking organizations”).  Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), set the minimum leverage ratio for all banking organizations at a uniform 4% of total assets, increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The final rule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt out is exercised which the Company and the Bank intend to exercise.  The final rule limits a banking organization’s dividends, stock repurchases and other capital distributions, and certain discretionary bonus payments to executive officers, if the bank organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above regulatory minimum risk-based requirements.  The final rule became effective for us on January 1, 2015. The capital conservation buffer requirement is being phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.  The Bank and Company each meet the fully phased in capital conservation buffer requirement at December 31, 2016.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving Kearny Bank’s facilities. These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to purchase securities or mortgage-backed securities and commitments to extend credit to meet the financing needs of our customers. At December 31, 2016, we had no significant off-balance sheet commitments to purchase securities or for capital expenditures.

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 6 to the unaudited consolidated financial statements.

 

 

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Qualitative Analysis. The majority of our assets and liabilities are sensitive to changes in interest rates. Consequently, interest rate risk is a significant form of business risk that we must manage. Interest rate risk is generally defined in regulatory nomenclature as the risk to our earnings or capital arising from the movement of interest rates. It arises from several risk factors including: the differences between the timing of rate changes and the timing of cash flows (re-pricing risk); the changing rate relationships among different yield curves that affect bank activities (basis risk); the changing rate relationships across the spectrum of maturities (yield curve risk); and the interest-rate-related options embedded in bank products (option risk).

Regarding the risk to our earnings, movements in interest rates significantly influence the amount of net interest income we recognized. Net interest income is the difference between:

 

the interest income recorded on our interest-earning assets, such as loans, securities and other interest-earning assets; and

 

the interest expense recorded on our interest-bearing liabilities, such as interest-bearing deposits and borrowings.

Net interest income is, by far, our largest revenue source to which we add our non-interest income and from which we deduct our provision for loan losses, non-interest expense and income taxes to calculate net income. 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 loans, securities and other interest-earning assets and the interest paid on our deposits and borrowings. Movements in interest rates that increase, or “widen”, that net interest spread enhance our net income. Conversely, movements in interest rates that reduce, or “tighten”, that net interest spread adversely impact our net income.

For any given movement in interest rates, the resulting degree of movement in an institution’s yield on interest-earning assets compared with that of its cost of interest-bearing liabilities determines if an institution is deemed “asset sensitive” or “liability sensitive”. An asset sensitive institution is one whose yield on interest-earning assets reacts more quickly to movements in interest rates than its cost of interest-bearing liabilities. In general, the earnings of asset sensitive institutions are enhanced by upward movements in interest rates through which the yield on its interest-earning assets increases faster than its cost of interest-bearing liabilities resulting in a widening of its net interest spread. Conversely, the earnings of asset sensitive institutions are adversely impacted by downward movements in interest rates through which the yield on its interest-earning assets decreases faster than its cost of interest-bearing liabilities resulting in a tightening of its net interest spread.

In contrast, a liability sensitive institution is one whose cost of interest-bearing liabilities reacts more quickly to movements in interest rates than its yield on interest-earning assets. In general, the earnings of liability sensitive institutions are enhanced by downward movements in interest rates through which the cost of interest-bearing liabilities decreases faster than its yield on its interest-earning assets resulting in a widening of its net interest spread. Conversely, the earnings of liability sensitive institutions are adversely impacted by upward movements in interest rates through which the cost of interest-bearing liabilities increases faster than its yield on its interest-earning assets resulting in a tightening of its net interest spread.

The degree of an institution’s asset or liability sensitivity is traditionally represented by its “gap position”. In general, gap is a measurement that describes the net mismatch between the balance of an institution’s interest-earning assets that are maturing and/or re-pricing over a selected period of time compared to that of its interest-costing liabilities. Positive gaps represent the greater dollar amount of interest-earning assets maturing or re-pricing over the selected period of time than interest-costing liabilities. Conversely, negative gaps represent the greater dollar amount of interest-costing liabilities than interest-earning assets maturing or re-pricing over the selected period of time. The degree to which an institution is asset or liability sensitive is reported as a negative or positive percentage of assets, respectively. The industry commonly focuses on cumulative one-year and three-year gap percentages as fundamental indicators of interest rate risk sensitivity.

Based upon the findings of our internal interest rate risk analysis, we are considered to be liability sensitive. Liability sensitivity is generally attributable to the comparatively shorter contractual maturity and/or re-pricing characteristics of the institution’s deposits and borrowings versus those of its loans and investment securities.

With respect to the maturity and re-pricing of our interest-bearing liabilities, at December 31, 2016, $669.3 million, or 55.0%, of our certificates of deposit mature within one year with an additional $223.3 million, or 18.3%, of our certificates of deposit maturing after one year but within two years. The remaining $325.2 million or 26.7% of certificates, at December 31, 2016 have remaining terms to maturity exceeding two years.

Excluding fair value adjustments, the balance of FHLB advances totaled $665.7 million at December 31, 2016 and comprised both short-term and long-term advances with fixed rates of interest. Short-term FHLB advances generally have original maturities of

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less than one year and may include overnight borrowings which the Bank typically utilizes to address short term funding needs as they arise. At December 31, 2016, the Bank had a total of $515.0 million of short-term FHLB advances which included $425.0 million of 90-day FHLB term advances that are generally forecasted to be periodically redrawn at maturity for the same 90 day term as the original advance. Based on this presumption, the Bank has utilized interest rate swaps to effectively extend the duration of each of these advances at the time they were drawn to effectively fix their cost for a period of five years.  The balance of short-term advances at December 31, 2016 also included $90.0 million of overnight FHLB advances drawn for liquidity management purposes

Long-term advances generally include advances with original maturities of greater than one year. At December 31, 2016, our outstanding balance of long-term FHLB advances totaled $150.7 million. Such advances included $145.0 million of fixed-rate, callable term advances and $5.2 million of fixed-rate, non-callable term advances as well as a $521,000 fixed-rate amortizing advance.

With respect to the maturity and re-pricing of our interest-earning assets, at December 31, 2016, $25.6 million, or 0.9% of our total loans, will reach their contractual maturity dates within one year with the remaining $2.95 billion, or 99.1% of total loans having remaining terms to contractual maturity in excess of one year. Of loans maturing after one year, $1.40 billion had fixed rates of interest while the remaining $1.54 billion had adjustable rates of interest, with such loans representing 47.6% and 52.4% of total loans, respectively.

At December 31, 2016, $39.4 million, or 3.3% of our total securities, will reach their contractual maturity dates within one year with the remaining $1.15 billion, or 96.7% of total securities, having remaining terms to contractual maturity in excess of one year. Of the latter category, $765.8 million comprising 64.4% of our total securities had fixed rates of interest while the remaining $383.9 million comprising 32.3% of our total securities had adjustable or floating rates of interest.

At December 31, 2016, mortgage-related assets, including mortgage loans and mortgage-backed securities, totaled $3.53 billion and comprised 77.0% of total assets. In addition to remaining term to maturity and interest rate type as discussed above, other factors contribute significantly to the level of interest rate risk associated with mortgage-related assets. In particular, the scheduled amortization of principal and the borrower’s option to prepay any or all of a mortgage loan’s principal balance, where applicable, have a significant effect on the average lives of such assets and, therefore, the interest rate risk associated with them. In general, the prepayment rate on lower yielding assets tends to slow as interest rates rise due to the reduced financial incentive for borrowers to refinance their loans. By contrast, the prepayment rate of higher yielding assets tends to accelerate as interest rates decline due to the increased financial incentive for borrowers to prepay or refinance their loans to comparatively lower interest rates. These characteristics tend to diminish the benefits of falling interest rates to liability sensitive institutions while exacerbating the adverse impact of rising interest rates.

We generally retained our liability sensitivity during the first six months of fiscal 2017 while the degree of that sensitivity, as measured internally by the institution’s one-year and three-year gap percentages increased during the period. Specifically, our cumulative one-year gap percentage changed to (14.5)% at December 31, 2016 from (9.31)% at June 30, 2016 while our cumulative three-year gap percentage changed to (6.54)% from (6.02)% over those same comparative periods.  Our one-year and three-year gap measures do not currently reflect the effect of our interest rate derivatives and the effective extension of liability duration arising from their use as cash flow hedges.  The increase in the gap percentages between periods partly reflected the effects of a decrease in short-term liquid assets attributable to the deployment of the excess liquidity that was temporarily held in cash and cash equivalents at June 30, 2016.  The excess liquidity had temporarily accumulated during the quarter ended June 30, 2016 due to an increase in loan prepayments and was subsequently reinvested into the loan portfolio during the quarter ended September 30, 2016.  The increase in the gap percentages also reflected a $90.0 million increase in short-term FHLB advances drawn for liquidity management purposes.  Such overnight borrowings are generally expected to be replaced by one or more funding sources whose effective duration will be similar to that of the commercial mortgage loans comprising a significant portion of the Company’s recent loan growth.

As a liability-sensitive institution, our net interest spread is generally expected to benefit from overall reductions in market interest rates. Conversely, our net interest spread is generally expected to be adversely impacted by overall increases in market interest rates. However, the general effects of movements in market interest rates can be diminished or exacerbated by “nonparallel” movements in interest rates across a yield curve. Nonparallel movements in interest rates generally occur when shorter term and longer term interest rates move disproportionately in a directionally consistent manner. For example, shorter term interest rates may decrease faster than longer term interest rates which would generally result in a “steeper” yield curve. Alternately, nonparallel movements in interest rates may also occur when shorter term and longer term interest rates move in a directionally inconsistent manner. For example, shorter term interest rates may rise while longer term interest rates remain steady or decline which would generally result in a “flatter” yield curve.

In general, the interest rates paid on our deposits tend to be determined based upon the level of shorter term interest rates. By contrast, the interest rates earned on our loans and investment securities generally tend to be based upon the level of comparatively longer term interest rates to the extent such assets are fixed-rate in nature. As such, the overall “spread” between shorter term and

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longer term interest rates when earning assets and costing liabilities re-price greatly influences our overall net interest spread over time. In general, a wider spread between shorter term and longer term interest rates, implying a “steeper” yield curve, is beneficial to our net interest spread. By contrast, a narrower spread between shorter term and longer term interest rates, implying a “flatter” yield curve, or a negative spread between those measures, implying an inverted yield curve, adversely impacts our net interest spread.

We continue to execute various strategies to mitigate the risk to our net interest rate spread and margin arising from adverse changes in interest rates and the shape of the yield curve. Such strategies include deploying excess liquidity in higher yielding interest-earning assets, such as commercial loans and investment securities, while continuing to generally maintain our cost of interest-bearing liabilities at low levels while extending their duration through various deposit pricing strategies. For example, we have extended the duration of our wholesale funding sources through cost effective use of interest rate derivatives that effectively converted short-term wholesale funding sources into longer-term, fixed-rate funding sources.

Notwithstanding these efforts, the risk of further net interest rate spread and margin compression is significant as the yield on our interest-earning assets continues to reflect the impact of the greater declines in longer term market interest rates in recent years compared to the lesser concurrent reductions in shorter term market interest rates that affect the cost of our interest-bearing liabilities. In particular, our ability to further reduce the cost of our interest-bearing deposits is increasingly limited since many of our deposit offering rates are already well below 1.00% at December 31, 2016. Moreover, our liability sensitivity may adversely affect net income in the future as market interest rates continue to increase from their prior historical lows and our cost of interest-bearing liabilities may rise faster than our yield on interest-earning assets.

Given the inherent liability sensitivity of our balance sheet, our business plan also calls for greater expansion into C&I and construction lending. Toward that end, we are continuing to expand our retail lending resources with an experienced team of business lenders focused on the origination of floating-rate and shorter-term fixed-rate loans and the corresponding core deposit account balances typically associated with such relationships. As a complement to this retail business lending strategy, we have implemented strategies through which floating-rate and other shorter-term fixed-rate C&I and consumer loans are acquired through wholesale resources.

We maintain an Asset/Liability Management (“ALM”) Program to address all matters relating to the management of interest rate risk and liquidity risk. The program is overseen by the Board of Directors through our Interest Rate Risk Management Committee comprising five members of the Board with our Chief Operating Officer, Chief Financial Officer and Chief Risk Officer participating as management’s liaison to the committee. The committee meets quarterly to address management of our assets and liabilities, including review of our liquidity and interest rate risk profiles, loan and deposit pricing and production volumes, investment and wholesale funding strategies, and a variety of other asset and liability management topics. The results of the committee’s quarterly review are reported to the full Board, which adjusts our ALM policies and strategies, as it considers necessary and appropriate.

The Board of Directors has assigned the responsibility for the operational aspects of the ALM program to our Asset/Liability Management Committee (“ALCO”). The ALCO is a management committee comprising the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Branch Administrator, Chief Risk Officer, Treasurer/Chief Investment Officer and Controller. Additional members of our management team may be asked to participate on the ALCO, as appropriate.

Responsibilities conveyed to the ALCO by the Board of Directors include:

 

developing ALM-related policies and associated operating procedures and controls that will identify and measure the risks associated with ALM while establishing the limits and thresholds relating thereto;

 

developing ALM-related operating strategies and tactics designed to manage the relevant risks within the applicable policy thresholds and limits while supporting the achievement of the goals and objectives of our strategic business plan;

 

developing, implementing and maintaining a management- and Board-level ALM monitoring and reporting system;

 

ensuring that the ALCO and the Board of Directors are kept abreast of current technologies, procedures and industry best practices that may be utilized to carry out their ALM-related duties and responsibilities;

 

ensuring the periodic independent validation of Kearny Bank’s ALM risk management policies and operating practices and controls; and

 

conducting periodic ALCO committee meetings to review all matters relating to ALM strategies and risk management activities.

Quantitative Analysis. The quantitative analysis regularly conducted by management measures interest rate risk from both a capital and earnings perspective. With regard to capital, our internal interest rate risk analysis calculates the sensitivity of our

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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 contracts. The EVE ratio represents the dollar amount of our EVE divided by the present value of our total assets for a given interest rate scenario. In essence, 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.

Our EVE ratio is first calculated in a “base case” scenario that assumes no change in interest rates as of the measurement date. The model then measures the change in the EVE ratio 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 “down rate” scenarios during periods of lower market interest rates. Our interest rate risk management policy establishes acceptable floors for the EVE ratio and caps for the maximum change in the EVE ratio throughout the scenarios modeled.

As illustrated in the tables below, our EVE would be negatively impacted by an increase in interest rates. This result is expected given our liability sensitivity noted earlier. Specifically, based upon the comparatively shorter maturity and/or re-pricing characteristics of our interest-bearing liabilities compared with that of our interest-earning assets, an upward movement in interest rates would have a disproportionately adverse impact on the present value of our assets compared to the beneficial impact arising from the reduced present value of our liabilities. Hence, our EVE and EVE ratio decline in the increasing interest rate scenarios. The low level of interest rates at December 31, 2016 and June 30, 2016 precluded the modeling of certain scenarios as parallel downward shifts in the yield curve of 100 basis points or more would result in negative interest rates for many points along that curve.

The following tables present the results of our internal EVE analysis as of December 31, 2016 and June 30, 2016, respectively.

 

 

 

December 31, 2016

 

 

Economic Value of

Equity ("EVE")

 

 

 

EVE as a % of

Present Value of Assets

Change in

Interest Rates (1)

 

$ Amount

of EVE

 

 

$ Change

in EVE

 

 

% Change

in EVE

 

EVE Ratio

 

Change in

EVE Ratio

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

+300 bps

 

 

919,347

 

 

 

(162,824

)

 

 

(15

)

%

 

 

22.33

 

%

 

 

(195

)

bps

+200 bps

 

 

982,203

 

 

 

(99,968

)

 

 

(9

)

%

 

 

23.21

 

%

 

 

(107

)

bps

+100 bps

 

 

1,037,984

 

 

 

(44,187

)

 

 

(4

)

%

 

 

23.88

 

%

 

 

(40

)

bps

0 bps

 

 

1,082,171

 

 

-

 

 

-

 

 

 

 

24.28

 

%

 

-

 

 

 

 

 

At June 30, 2016

 

 

Economic Value of

Equity ("EVE")

 

 

 

EVE as a % of

Present Value of Assets

Change in

Interest Rates (1)

 

$ Amount

of EVE

 

 

$ Change

in EVE

 

 

% Change

in EVE

 

EVE Ratio

 

Change in

EVE Ratio

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

+300 bps

 

 

893,389

 

 

 

(205,041

)

 

 

(19

)

%

 

 

21.94

 

%

 

 

(282

)

bps

+200 bps

 

 

970,045

 

 

 

(128,385

)

 

 

(12

)

%

 

 

23.12

 

%

 

 

(164

)

bps

+100 bps

 

 

1,040,292

 

 

 

(58,138

)

 

 

(5

)

%

 

 

24.08

 

%

 

 

(68

)

bps

0 bps

 

 

1,098,430

 

 

-

 

 

-

 

 

 

 

24.76

 

%

 

-

 

 

 

(1)

The (100) bps, (200) bps and (300) bps scenarios are not shown due to the low prevailing interest rate environment.

As seen in the table above, the dollar amount of EVE and the EVE ratio have declined between comparative periods across most scenarios modeled while the sensitivity of those measures to movements in interest rates between comparative periods decreased.  The decrease in the EVE ratios across all rate scenarios partly reflected the overall decrease in stockholders’ equity arising from the Company’s repurchase of its shares of common stock during the six months ended December 31, 2016.  By contrast, the decrease in the sensitivity of EVE to movements in interest rates between comparative periods largely reflects the effects of the additional interest rate derivatives executed during the six months ended December 31, 2016 that effectively extended the duration of the Bank’s wholesale funding sources.  These benefits were partially offset by the effects of the reduction in short-term liquid assets and increase in overnight borrowings noted earlier.  As modeled in our EVE-based analysis, short-term liquid assets and overnight borrowings are generally expected to retain their market value throughout all rate change scenarios.  As such, the noted decrease in the balance of

- 66 -


 

such funds increased the overall sensitivity of earning assets, costing liabilities and EVE to movements in interest rates at December 31, 2016 compared to June 30, 2016.

In addition to the specific considerations noted above, there are numerous internal and external factors that may also contribute to changes in an institution’s EVE ratio and its sensitivity. Internally, changes in the composition and allocation of an institution’s balance sheet and the interest rate risk characteristics of its components can significantly alter the exposure to interest rate risk as quantified by the changes in the EVE sensitivity measures. Toward that end, the reported increase in EVE sensitivity also reflects the aggregate effects of the various balance sheet management strategies we have undertaken to deploy capital through profitable growth and diversification strategies while managing our exposure to interest rate risk.  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 the institution’s interest-earning assets and interest-costing liabilities and the associated present values thereof.  Changes in internal and external factors from period to period can complement one another’s effects to reduce overall sensitivity, partly or wholly offset one another’s effects, or exacerbate one another’s adverse effects and thereby increase the institution’s exposure to interest rate risk as quantified by EVE sensitivity measures.

Our internal interest rate risk analysis also includes an “earnings-based” component.  A quantitative, earnings-based approach to measuring interest rate risk is strongly encouraged by bank regulators as a complement to the “EVE-based” methodology. However, there are no commonly accepted “industry best practices” that specify the manner in which “earnings-based” interest rate risk analysis should be performed with regard to certain key modeling variables. Such variables include, but are not limited to, those relating to rate scenarios (e.g., immediate and permanent rate “shocks” versus gradual rate change “ramps”, “parallel” versus “nonparallel” yield curve changes), measurement periods (e.g., one year versus two year, cumulative versus noncumulative), measurement criteria (e.g., net interest income versus net income) and balance sheet composition and allocation (“static” balance sheet, reflecting reinvestment of cash flows into like instruments, versus “dynamic” balance sheet, reflecting internal budget and planning assumptions).

The absence of a commonly shared, industry-standard set of analysis criteria and assumptions on which to base an “earnings-based” analysis could result in inconsistent or misinterpreted disclosure concerning an institution’s level of interest rate risk. Consequently, we limit the presentation of our earnings-based interest rate risk analysis to the scenarios presented in the table below. Consistent with the EVE analysis above, such scenarios utilize immediate and permanent rate “shocks” that result in parallel shifts in the yield curve. For each scenario, projected net interest income is measured over a one year period utilizing a static balance sheet assumption through which incoming and outgoing asset and liability cash flows are reinvested into the same instruments. Product pricing and earning asset prepayment speeds are appropriately adjusted for each rate scenario.

As illustrated in the tables below, at December 31, 2016, our net interest income (“NII”) would have been adversely impacted by a parallel upward shift in the yield curve.  The “liability sensitivity” as measured from an NII perspective at December 31, 2016 is generally consistent with the “liability sensitivity” exhibited in the Company’s EVE-based analysis.

As noted earlier, the excess liquidity that had previously accumulated in cash equivalents through June 30, 2016 was re-invested into the loan portfolio during the quarter ended September 30, 2016.   Similarly, the increase in overnight borrowings at December 31, 2016 was largely drawn to temporarily fund growth in loans through that date.  Together, these factors contributed to an increase in the forecasted level of net interest income across most the scenarios presented below.    However, the sensitivity of interest income to movements in interest rates increased as a result of those factors.  The changes in the sensitivity of net interest income to movements in interest rates also reflect the aggregate impact of the various balance sheet management strategies we have undertaken to deploy capital through profitable growth and diversification strategies while also reflecting the effects of changes in the level of market interest rates and overall shape of the yield curve.

- 67 -


 

The level and direction of risk exposure assessed by the NII-based and EVE-based methodologies may differ based on the comparative terms over which risk exposure is measured by those methodologies, as they did at June 30, 2016.  As noted earlier, EVE-based analysis generally takes a longer-term view of interest rate risk by measuring changes in the present value of cash flows of interest-earning assets and interest-bearing liabilities over their expected lives.  By contrast, the NII-based analysis presented below takes a comparatively shorter-term view of interest rate risk by measuring the forecasted changes in the net interest income generated by those interest-earning assets and interest-bearing liabilities over a one-year period.

 

 

 

 

 

 

 

At December 31, 2016

 

 

 

 

 

 

Net Interest

Income ("NII")

Change in

Interest Rates (1)

 

Balance Sheet

Composition

 

Measurement

Period

 

$ Amount

of NII

 

 

$ Change

in NII

 

 

% Change

in NII

 

 

 

 

 

 

(Dollars In Thousands)

 

 

 

 

 

 

+300 bps

 

Static

 

One Year

 

$

96,574

 

 

$

(8,333

)

 

 

(7.94

)

%

+200 bps

 

Static

 

One Year

 

 

99,408

 

 

 

(5,499

)

 

 

(5.24

)

 

+100 bps

 

Static

 

One Year

 

 

102,074

 

 

 

(2,833

)

 

 

(2.70

)

 

0 bps

 

Static

 

One Year

 

 

104,907

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

At June 30, 2016

 

 

 

 

 

 

Net Interest

Income ("NII")

Change in

Interest Rates (1)

 

Balance Sheet

Composition

 

Measurement

Period

 

$ Amount

of NII

 

 

$ Change

in NII

 

 

% Change

in NII

 

 

 

 

 

 

(Dollars In Thousands)

 

 

 

 

 

 

+300 bps

 

Static

 

One Year

 

$

98,393

 

 

$

2,479

 

 

 

2.58

 

%

+200 bps

 

Static

 

One Year

 

 

97,694

 

 

 

1,780

 

 

 

1.86

 

 

+100 bps

 

Static

 

One Year

 

 

96,739

 

 

 

825

 

 

 

0.86

 

 

0 bps

 

Static

 

One Year

 

 

95,914

 

 

 

-

 

 

 

-

 

 

 

(1)

The (100) bps, (200) bps and (300) bps scenarios are not shown due to the low prevailing interest rate environment.

Notwithstanding the rate change scenarios presented in the EVE and earnings-based analyses above, future interest rates and their effect on net portfolio value or 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 maturity 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 making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase.

 

 

 

- 68 -


 

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by the 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 and 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 December 31, 2016, 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.

 

 

 

- 69 -


 

PART II

ITEM 1.

Legal Proceedings

At December 31, 2016, 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

Management of the Company does not believe there have been any material changes with regard to the Risk Factors previously disclosed under Item 1A of the Company’s Form 10-K for the year ended June 30, 2016 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 December 31, 2016.

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

Paid per Share

 

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced Plans

or Programs (1)

 

 

Maximum

Number of Shares

that May Yet Be

Purchased Under

the  Plans or

Programs

 

October 1-31, 2016

 

 

509,442

 

 

$

13.72

 

 

 

509,442

 

 

 

4,390,895

 

November 1-30, 2016

 

 

318,117

 

 

$

14.49

 

 

 

318,117

 

 

 

4,072,778

 

December 1-31, 2016

 

 

458,974

 

 

$

15.50

 

 

 

458,974

 

 

 

3,613,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,286,533

 

 

$

14.55

 

 

 

1,286,533

 

 

 

3,613,804

 

 

(1)

On May 20, 2016, the Company announced the authorization of a stock repurchase plan for up to 9,352,809 shares or 10% shares outstanding.

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Mine Safety Disclosures

Not applicable.

ITEM 5.

Other Information

None.

 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)

 

4

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

- 70 -


 

 

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 December 31, 2016, formatted in 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

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

- 71 -


 

SIGNATURES

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.

 

 

KEARNY FINANCIAL CORP.

 

 

 

Date: February 8, 2017

By:

  /s/ Craig L. Montanaro

 

 

  Craig L. Montanaro

 

 

  President and Chief Executive Officer

 

 

  (Duly authorized officer and principal executive officer)

 

 

 

Date: February 8, 2017

By:

  /s/ Eric B. Heyer

 

 

  Eric B. Heyer

 

 

  Executive Vice President and

 

 

  Chief Financial Officer

 

 

  (Principal financial and accounting officer)

 

 

- 72 -