EDGAR 10-K Filing

Company CIK: 1617242
Filing Year: 2022
Filename: 1617242_10-K_2022_0000950170-22-017799.json

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ITEM 1. BUSINESS
Item 1. Business
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:
•statements of our goals, intentions and expectations;
•statements regarding our business plans, prospects, growth and operating strategies;
•statements regarding the quality of our loan and investment portfolios; and
•estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of the Annual Report on Form 10-K.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
•the COVID-19 pandemic may continue to adversely impact the local and national economy and our business and results of operations may continue to be adversely affected;
•general economic conditions, either nationally or in our market areas, that are worse than expected;
•changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses;
•our ability to access cost-effective funding;
•fluctuations in real estate values and both residential and commercial real estate market conditions;
•demand for loans and deposits in our market area;
•our ability to implement changes in our business strategies;
•competition among depository and other financial institutions;
•inflation and changes in the interest rate environment that reduce our margins and yields, or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;
•adverse changes in the securities markets;
•changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
•changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
•our ability to manage market risk, credit risk and operational risk in the current economic conditions;
•our ability to enter new markets successfully and capitalize on growth opportunities;
•our ability to successfully integrate any assets, liabilities, clients, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
•changes in consumer demand, borrowing and savings habits;
•changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
•our ability to retain key employees;
•technological changes;
•significant increases in our loan losses;
•cyber-attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;
•technological changes that may be more difficult or expensive than expected;
•the ability of third-party providers to perform their obligations to us;
•the ability of the U.S. Government to manage federal debt limits;
•changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and
•other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing products and services described elsewhere in this Annual Report on Form 10-K.
Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
General
Kearny Financial Corp. (the “Company,” or “Kearny Financial”), is a Maryland corporation that is the holding company for Kearny Bank (the “Bank” or “Kearny Bank”), a nonmember New Jersey-chartered savings bank.
The Company is a unitary savings and loan holding company, regulated by the Board of Governors of the Federal Reserve Bank (“FRB”) and conducts no significant business or operations of its own. The Bank’s deposits are federally insured by the Deposit Insurance Fund as administered by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is primarily regulated by the New Jersey Department of Banking and Insurance (“NJDBI”) and, as a nonmember bank, the FDIC. References in this Annual Report on Form 10-K to the Company or Kearny Financial generally refer to the Company and the Bank, unless the context indicates otherwise. References to “we”, “us”, or “our” refer to the Bank or Company, or both, as the context indicates.
The Company’s primary business is the ownership and operation of the Bank. The Bank is principally engaged in the business of attracting deposits from the general public in New Jersey and New York and using these deposits, together with other funds, to originate or purchase loans for its portfolio and for sale into the secondary market. Our loan portfolio is primarily comprised of loans collateralized by commercial and residential real estate augmented by secured and unsecured loans to businesses and consumers. We also maintain a portfolio of investment securities, primarily comprised of U.S. agency mortgage-backed securities, obligations of state and political subdivisions, corporate bonds, asset-backed securities and collateralized loan obligations.
We operate from our administrative headquarters in Fairfield, New Jersey and other administrative locations throughout the state of New Jersey. As of June 30, 2022, we had 45 branch offices. The Company maintains a website at www.kearnybank.com. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and proxy materials as soon as is reasonably practicable after the Company electronically files those materials with, or furnishes them to, the Securities and Exchange Commission. You may access these materials by following the links under “Investor Relations” under the “Financial Information” tab at the Company’s website. Information on the Company’s website is not and should not be considered a part of this Annual Report on Form 10-K.
Acquisition of MSB Financial Corp. (“MSB”)
On July 10, 2020, we completed our acquisition of MSB and its subsidiary, Millington Bank. In accordance with the merger agreement, approximately $9.8 million in cash and 5,853,811 shares of Company common stock were distributed to former MSB shareholders in exchange for their shares of MSB common stock. As a result of the merger, we acquired loans with fair values totaling $530.2 million, assumed deposits with fair values totaling $460.2 million and acquired four branch offices located in Somerset and Morris counties. The application of the acquisition method of accounting resulted in the recognition of bargain purchase gain of $3.1 million and a core deposit intangible of $690,000.
Impact of COVID-19 Pandemic
During the year ended June 30, 2022, COVID-19 continued to impact the U.S. and global economy in a variety of ways. We continue to monitor developments related to COVID-19, including, but not limited to, its impact on our employees, clients, communities and results of operations.
Employee Matters. As the COVID-19 pandemic initially unfolded, and stay-at-home orders were mandated by government officials, many of our non-branch personnel transitioned to working remotely or in a hybrid-remote environment. Through June 30, 2022, many of our non-branch personnel have continued to work in a hybrid-remote fashion. Our information technology infrastructure has afforded us the ability to work remotely with little interruption as we continue to service the needs of our clients. For those essential employees who are unable to work from home, we have provided personal protective equipment and have established procedures and guidelines to ensure a safe working environment.
Retail Branches. At the outset of the pandemic we modified our branch hours and access to ensure the safety of our employees and clients. Where possible, branch lobbies were initially transitioned to appointment-only access, with the majority of branch operations being conducted via our drive-up windows. As certain branches did not have drive-up capabilities or suitable alternatives, we temporarily closed certain locations. In the months following, and in accordance with the protocols recommended by the Centers for Disease Control and Prevention (“CDC”), we have outfitted our branches with protective barriers and continued to provide our staff with personal protective equipment. As of June 30, 2022, all of our branches were fully operational.
CARES Act, Paycheck Protection Program and Health Care Enhancement Act (“PPP Enhancement Act”). On March 27, 2020, the CARES Act was signed into law. Among the more significant components of the CARES Act, as it pertains to the Company, was the creation of the Paycheck Protection Program (“PPP”), the modification of rules and regulations surrounding troubled debt restructured loans (“TDRs”) and modifications to the tax code to allow for the carryback of net operating losses.
The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program. As part of this program the SBA guarantees 100% of the PPP loans made to eligible borrowers. As a qualified SBA lender, the Bank was automatically authorized to originate PPP loans. As of June 30, 2022 we had four loans with total outstanding balances of $396,000 under the PPP.
Based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications, including short-term payment deferrals, are not considered to be TDRs. At June 30, 2022, we did not have any active COVID-19 payment deferrals that were not considered to be TDRs.
2021 Consolidated Appropriations Act. The 2021 Consolidated Appropriations Act was signed into law on December 27, 2020. The $900 billion relief package included legislation that extended certain relief provisions of the CARES Act that were set to expire on December 31, 2020. The relief expired on January 1, 2022.
Business Strategy
In recent years we have evolved our business model from that of a traditional thrift into that of a full-service community bank. This evolution has been accomplished by growing our commercial loans and deposits, expanding our product and service offerings, de-novo branching and the acquisition of other financial institutions. During this time, our strategy has been largely focused on profitably deploying capital and enhancing earnings through a variety of balance sheet growth and diversification strategies. The key components of our business strategy are as follows:
•Maintain Robust Capital and Liquidity Levels
As demonstrated by the June 30, 2022 Tier 1 Leverage ratios of the Company and the Bank of 10.14% and 8.70%, respectively, we currently maintain, and plan to continue to maintain, capital levels in excess of regulatory minimums and internal capital adequacy guidelines.
In addition to our robust capital levels, we maintain significant sources of both on- and off-balance sheet liquidity and plan to continue to do so. At June 30, 2022, our liquid assets included $101.6 million of short-term cash and equivalents supplemented by $1.34 billion of investment securities classified as available for sale which can be readily sold or pledged as collateral, if necessary. In addition, we had the capacity to borrow additional funds totaling $975.0 million via unsecured overnight borrowings from other financial institutions and $2.04 billion and $303.9 million from the Federal Home Loan Bank of New York and FRB, respectively, without pledging additional collateral.
•Grow and Diversify Our Retail Non-Maturity Deposits
We plan to continue to focus on growing and diversifying our retail non-maturity deposit base with an emphasis on growth in core non-maturity deposits and, in particular, non-interest bearing deposits. In addition, we plan to focus on growth in commercial deposits. During fiscal 2022, we successfully grew core non-maturity deposits by $365.1 million, including non-interest-bearing deposit growth of $60.2 million.
•Grow and Diversify Our Loan Portfolio
We plan to continue focusing on growing and diversifying our loan portfolio with a particular emphasis on growth in the commercial real estate, commercial business and construction loan segments. Our focus, as it relates to new loan originations, will continue to be on high quality loans with strong sponsors and favorable credit metrics.
•Leverage Our Residential Mortgage Banking Infrastructure
We plan to continue to leverage the flexibility of our mortgage banking infrastructure to support the origination of residential mortgage loans for sale into the secondary market or to supplement our loan growth initiatives based on market conditions and loan growth targets. In the long-term, we anticipate that residential mortgage loan origination and sale activity will continue to support our non-interest income, while also serving to help manage our exposure to interest rate risk through the sale of longer-duration, fixed-rate loans into the secondary market.
•Optimize Our Branch Network
At June 30, 2022, we had a total of 45 branches. We plan to selectively evaluate branch network expansion opportunities while continuing to place strategic emphasis on leveraging the opportunities to increase market share and expand the depth and breadth of client relationships within our existing branches.
We also plan to continue to evaluate and optimize the performance of our existing branch network through additional branch consolidations, where appropriate. Such efforts will take into consideration historical branch profitability, market demographic trajectory, geographic proximity of consolidating branches and the expected impact on the Bank’s clients and communities served.
•Improve Our Operating Efficiency
In recent years, our operating efficiency has improved both organically and via economies of scale gained from merger and acquisition activity. Exclusive of potential future acquisitions, we plan to continue to improve operating efficiency through organic means, such as the increased use of technology and the continual evaluation of branch consolidation opportunities.
•Continue Our Technology Transformation
In recognition of the ongoing evolution of our business towards digital channels we have invested significant human resources and capital towards enhancing both our internal and client-facing technology systems. Our ongoing technology transformation will impact nearly every area of the Company including the residential and commercial lending functions, retail deposit gathering, risk management and back office operations. In fiscal 2023, we plan to accelerate our digital strategy, spearheaded by the adoption of a cloud-based, best-in-breed digital banking platform, and continue to serve our clients’ needs in an omnichannel environment while expanding our products and services into new markets in an efficient and cost-effective manner.
Market Area. At June 30, 2022, our primary market area consisted of the counties in which we currently operate branches, including Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset and Union counties in New Jersey and Kings (Brooklyn) and Richmond (Staten Island) counties in New York. Our lending is concentrated in New Jersey and New York and our predominant sources of deposits are the communities in which our offices are located as well as the neighboring communities.
Competition. We operate in a highly competitive market area with a large concentration of financial institutions and we face substantial competition in attracting deposits and in originating loans. A number of our competitors are significantly larger institutions with greater financial and technological resources and lending limits. Our ability to compete successfully is a significant factor affecting our growth potential and profitability. Our competition for deposits and loans comes primarily from other insured depository institutions located in our primary market area. We also face competition from out-of-market depository institutions operating via online channels and from non-depository institutions including mortgage banks, finance companies, insurance companies, brokerage firms and financial technology companies.
Lending Activities
General. Our loan portfolio is comprised of multi-family mortgage loans, nonresidential mortgage loans, commercial business loans, construction loans, one- to four-family residential mortgage loans, home equity loans and other consumer loans. In recent years our lending strategies have placed increasing emphasis on the origination of commercial loans.
Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the total portfolio at the dates indicated.
At June 30,
Amount
Percent
Amount
Percent
(Dollars In Thousands)
Commercial loans:
Multi-family mortgage
$
2,409,090
44.31
%
$
2,039,260
41.79
%
Nonresidential mortgage
1,019,838
18.76
1,079,444
22.12
Commercial business
176,807
3.25
168,951
3.46
Construction
140,131
2.58
93,804
1.92
One- to four-family residential mortgage
1,645,816
30.27
1,447,721
29.66
Consumer loans:
Home equity loans
42,028
0.78
47,871
0.98
Other consumer
2,866
0.05
3,259
0.07
Total loans
5,436,576
100.00
%
4,880,310
100.00
%
Less:
Allowance for credit losses
47,058
58,165
Unaccreted yield adjustments
18,731
28,916
Total adjustments
65,789
87,081
Total loans, net
$
5,370,787
$
4,793,229
The following table sets forth the composition of our real estate secured loans indicating the loan-to-value (“LTV”), by loan category, at June 30, 2022 and 2021:
June 30, 2022
June 30, 2021
Balance
LTV
Balance
LTV
(Dollars in Thousands)
Commercial mortgage loans:
Multi-family mortgage
$
2,409,090
%
$
2,039,260
%
Nonresidential mortgage
1,019,838
%
1,079,444
%
Construction
140,131
%
93,804
%
Total commercial mortgage loans
3,569,059
%
3,212,508
%
One- to four-family residential mortgage
1,645,816
%
1,447,721
%
Consumer loans:
Home equity loans
42,028
%
47,871
%
Total mortgage loans
$
5,256,903
%
$
4,708,100
%
Loan Maturity Schedule. The following table sets forth the maturities of our loan portfolio at June 30, 2022. Demand loans, loans having no stated maturity and overdrafts are shown as due in one year or less. Loans are stated in the following table at contractual maturity and actual maturities could differ due to prepayments.
Amounts Due
Within
One Year
1 to 5
Years
5 to 15
Years
Over 15
Years
Total Due
After One
Year
Total
(In Thousands)
Multi-family mortgage
$
43,931
$
718,154
$
1,514,579
$
132,426
$
2,365,159
$
2,409,090
Nonresidential mortgage
98,771
302,804
498,078
120,185
921,067
1,019,838
Commercial business
78,656
34,981
58,400
4,770
98,151
176,807
Construction
102,518
33,966
3,039
37,613
140,131
One- to four-family residential mortgage
5,296
37,174
261,128
1,342,218
1,640,520
1,645,816
Home equity loans
4,314
25,979
11,227
41,520
42,028
Other consumer
1,363
1,899
2,866
Total loans
$
330,647
$
1,131,889
$
2,358,812
$
1,615,228
$
5,105,929
$
5,436,576
The following table shows the loans as of June 30, 2022 due after June 30, 2023 according to rate type and loan category:
Fixed Rates
Floating or Adjustable Rates
Total
(In Thousands)
Multi-family mortgage
$
1,547,264
$
817,895
$
2,365,159
Nonresidential mortgage
513,472
407,595
921,067
Commercial business
60,385
37,766
98,151
Construction
36,812
37,613
One- to four-family residential mortgage
1,501,319
139,201
1,640,520
Home equity loans
19,431
22,089
41,520
Other consumer
1,120
1,899
Total loans
$
3,643,451
$
1,462,478
$
5,105,929
Multi-Family and Nonresidential Real Estate Mortgage Loans. At June 30, 2022, multi-family mortgage loans totaled $2.41 billion, or 44.3% of our loan portfolio, while nonresidential mortgage loans totaled $1.02 billion, or 18.8% of our loan portfolio. We originate commercial mortgage loans on a variety of multi-family and nonresidential property types, including loans on mixed-use properties which combine residential and commercial space. We generally offer fixed-rate and adjustable-rate balloon mortgage loans on multi-family and nonresidential properties with final stated maturities ranging from five to fifteen years with amortization terms which generally range from 15 to 30 years. Our commercial mortgage loans are primarily secured by properties located in New Jersey, New York and the surrounding states.
Commercial Business (C&I) Loans. At June 30, 2022, commercial business loans totaled $176.8 million, or 3.3% of our loan portfolio. We originate commercial term loans and lines of credit to a variety of clients in our market area. Included within our business loan products are loans originated through the SBA, in which we participate as a Preferred Lender. Our non-SBA commercial term loans generally have terms of up to 10 years. Our commercial lines of credit have terms of up to one year and are generally floating-rate loans.
Construction Lending. At June 30, 2022, construction loans totaled $140.1 million, or 2.6% of our loan portfolio. Our construction lending includes loans to individuals, builders or developers for the construction of multi-family residential buildings or commercial real estate or for the construction or renovation of one- to four-family residences. Construction borrowers must hold title to the land free and clear of any liens. Financing for construction loans is limited to 80% of the anticipated appraised value of the completed property. Disbursements are made in accordance with inspection reports by our approved appraisal firms. Terms of financing are generally limited to one year with an interest rate tied to the prime rate and may include a premium of one or more points. In some cases, we convert a construction loan to a permanent mortgage loan upon completion of construction. We have no formal limits as to the number of projects a builder has under construction or development and make a case-by-case determination on loans to builders and developers who have multiple projects under development.
One- to Four-Family Residential Mortgage Loans Held in Portfolio. At June 30, 2022, one- to four-family residential mortgage loans totaled $1.65 billion, or 30.3% of our loan portfolio. At June 30, 2022, $1.53 billion, or 92.9%, of our one- to four-family residential mortgage loans are secured by properties located within New Jersey and New York with the remaining $117.1 million, or 7.1%, secured by properties in other states. The fixed-rate residential mortgage loans that we originate for portfolio generally meet the secondary mortgage market standards of the Federal Home Loan Mortgage Corporation (“Freddie Mac”). In addition, we offer a first-time homebuyer program which provides financial incentives for persons who have not previously owned real estate and are purchasing a one- to four-family property in our primary lending area for use as a primary residence. This program is also available outside these areas, but only to persons who are existing deposit or loan clients of Kearny Bank and/or members of their immediate families.
One- to Four-Family Residential Mortgage Loans Held for Sale. As a complement to our residential one- to four-family portfolio lending activities, we operate a mortgage banking platform which supports the origination of one- to four-family mortgage loans for sale into the secondary market. The loans we originate for sale generally meet the secondary mortgage market standards of Freddie Mac. Such loans are generally originated by, and sourced from, the same resources and markets as those loans originated and held in our portfolio. Our mortgage banking business strategy resulted in the recognition of $2.4 million in gains associated with the sale of $189.1 million of mortgage loans held for sale during the year ended June 30, 2022. As of that date, an additional $7.1 million of loans were held and committed for sale into the secondary market.
At June 30, 2022, in addition to our one- to four-family residential mortgage loans held for sale, our commercial mortgage loans held for sale totaled $21.7 million. These loans were non-accrual loans that were expected to be sold subsequent to June 30, 2022.
Home Equity Loans. At June 30, 2022, home equity loans totaled $42.0 million, or 0.8% of our loan portfolio. Our home equity loans are fixed-rate loans for terms of generally up to 20 years. We also offer fixed-rate and adjustable-rate home equity lines of credit with terms of up to 20 years.
Other Consumer Loans. At June 30, 2022, other consumer loans totaled $2.9 million, or 0.1% of our loan portfolio. Our consumer loan portfolio includes unsecured overdraft lines of credit and personal loans as well as loans secured by savings accounts and certificates of deposit on deposit with the Bank.
Loans to One Borrower. New Jersey law generally limits the amount that a savings bank may lend to a single borrower and related entities to 15% of the institution’s capital funds. Accordingly, as of June 30, 2022, our legal loans to one borrower limit was approximately $100.8 million.
At June 30, 2022, our largest single borrower had an aggregate outstanding loan exposure of approximately $82.8 million comprising one multi-family mortgage loan, three nonresidential real estate mortgage loans and two commercial business loans. Our second largest single borrower had an aggregate outstanding loan exposure of approximately $76.1 million comprising four multi-family mortgage loans and one nonresidential real estate mortgage loan. At June 30, 2022, these lending relationships were current and performing in accordance with the terms of their loan agreements.
Loan Originations, Purchases, Sales and Repayments. The following table shows the principal balances of portfolio loans originated, purchased, acquired and repaid during the periods indicated:
For the Years Ended June 30,
(In Thousands)
Loan originations: (1)
Commercial loans:
Multi-family mortgage
$
911,021
$
256,223
$
193,158
Nonresidential mortgage
231,159
96,238
65,357
Commercial business
140,051
104,628
108,546
Construction
86,448
50,382
7,192
One- to four-family residential mortgage
415,602
553,194
197,825
Consumer loans:
Home equity loans
18,634
15,804
16,396
Other consumer
1,167
1,227
1,312
Total loan originations
1,804,082
1,077,696
589,786
Loan purchases:
Commercial loans:
Multi-family mortgage
55,847
-
2,500
Nonresidential mortgage
-
21,351
53,043
Commercial business
2,671
One- to four-family residential mortgage
67,396
60,105
15,048
Total loan purchases
123,389
81,707
73,262
Loans acquired from MSB (2)
-
530,693
-
Loan sales: (1)
Commercial business
(1,035
)
(44,450
)
(470
)
Total loans sold
(1,035
)
(44,450
)
(470
)
Loan repayments
(1,343,081
)
(1,311,576
)
(849,249
)
(Decrease) increase due to other items
(5,797
)
(1,911
)
2,087
Net increase (decrease) in loan portfolio
$
577,558
$
332,159
$
(184,584
)
(1)	Excludes origination and sales of one- to four-family mortgage loans held for sale.
(2)	For information on loans acquired in the MSB acquisition, see Note 3 to the audited consolidated financial statements.
Additional information about our loans is presented in Note 5 to the audited consolidated financial statements.
Loan Approval Procedures and Authority. Senior management recommends, and the Board of Directors approves, our lending policies and loan approval limits. The Bank’s Loan Committee consists of the Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer, Director of Residential Lending, Director of Commercial Real Estate Lending, Director of Commercial & Industrial (C&I) Lending, Senior Credit Officer and Special Assets Manager. Loans which exceed certain thresholds, as defined within our policies, are submitted to the Bank’s Loan Committee and/or Board of Directors for approval.
Asset Quality
Collection Procedures on Delinquent Loans. We regularly monitor the payment status of all loans within our portfolio and promptly initiate collection efforts on past due loans in accordance with applicable policies and procedures. Delinquent borrowers are notified when a loan is 30 days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices are sent. All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection. However, when a residential loan is 120 days delinquent and a commercial loan is 90 days delinquent, it is our general practice to refer it to an attorney for repossession, foreclosure or other form of collection action, as appropriate. In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize their financial affairs as we attempt to work with the borrower to establish a repayment schedule to cure the delinquency.
As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned until it is sold or otherwise disposed of. When other real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial write-down of the property, if necessary, is charged to the allowance for credit losses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines are identified.
Past Due Loans. A loan’s past due status is generally determined based upon its principal and interest (“P&I”) payment delinquency status in conjunction with its past maturity status, where applicable. A loan’s P&I payment delinquency status is based upon the number of calendar days between the date of the earliest P&I payment due and the as of measurement date. A loan’s past maturity status, where applicable, is based upon the number of calendar days between a loan’s contractual maturity date and the as of measurement date. Based upon the larger of these criteria, loans are categorized into the following past due tiers for financial statement reporting and disclosure purposes: Current (including 1-29 days past due), 30-59 days past due, 60-89 days past due and 90 or more days past due.
Additional information about our past due loans is presented in Note 5 to the audited consolidated financial statements.
Nonaccrual Loans. Loans are generally placed on nonaccrual status when contractual payments become 90 or more days past due or when we do not expect to receive all P&I payments owed substantially in accordance with the terms of the loan agreement, regardless of past due status. Loans that become 90 days past due but are well secured and in the process of collection, may remain on accrual status. Nonaccrual loans are generally returned to accrual status when all payments due are brought current and we expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement. Payments received in cash on nonaccrual loans, including both the principal and interest portions of those payments, are generally applied to reduce the carrying value of the loan.
Purchased Credit Deteriorated Loans (“PCD”). PCD loans are acquired loans that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. Non-PCD loans are acquired loans that have experienced no or insignificant deterioration in credit quality since origination. To distinguish between the two types of acquired loans, we evaluate risk characteristics that have been determined to be indicators of deteriorated credit quality. The determining criteria may involve loan specific characteristics such as payment status, debt service coverage or other changes in creditworthiness since the loan was originated, while others are relevant to recent economic conditions, such as borrowers in industries impacted by the pandemic. As part of our acquisition of MSB, we acquired PCD loans with a par value of $69.4 million and an allowance for credit losses of $3.9 million. Additional information about our PCD loans is presented in Note 5 to the audited consolidated financial statements.
Nonperforming Assets. The following table provides information regarding our nonperforming assets which are comprised of nonaccrual loans, accruing loans 90 days or more past due, nonaccrual loans held-for-sale and other real estate owned:
At June 30,
(Dollars In Thousands)
Nonaccrual loans (1)
$
70,321
$
79,767
Accruing loans 90 days or more past due
-
-
Total nonperforming loans
70,321
79,767
Nonaccrual loans held-for-sale
21,745
-
Other real estate owned
Total nonperforming assets
$
92,244
$
79,945
Total nonaccrual loans to total loans
1.30
%
1.64
%
Total nonperforming loans to total loans
1.30
%
1.64
%
Total nonperforming loans to total assets
0.91
%
1.10
%
Total nonperforming assets to total assets
1.19
%
1.10
%
(1)	TDRs on accrual status not included above totaled $8.7 million and $6.2 million at June 30, 2022 and 2021.
Total nonperforming assets increased by $12.3 million to $92.2 million at June 30, 2022 from $79.9 million at June 30, 2021. For those same comparative periods, the number of nonperforming loans decreased to 61 loans from 113 loans while there was one property in other real estate owned at June 30, 2022 and 2021, respectively. At June 30, 2022, there were three nonaccrual loans held-for-sale.
At June 30, 2022 and 2021, we had loans with aggregate outstanding balances totaling $22.2 million and $17.8 million, respectively, reported as TDRs.
Loan Review System. We maintain a loan review system consisting of several related functions including, but not limited to, classification of assets, calculation of the allowance for credit losses, independent credit file review as well as internal audit and lending compliance reviews. We utilize both internal and external resources, where appropriate, to perform the various loan review functions, all of which operate in accordance with a scope and frequency determined by senior management and the Audit and Compliance Committee of the Board of Directors.
As one component of our loan review system we engage a third-party firm which specializes in loan review and analysis functions. As part of their review process, our third-party review firm compares their review results with their client base to evaluate our risk assessment among our peers. This firm assists senior management and the Board of Directors in identifying potential credit weaknesses; in reviewing and confirming risk ratings or adverse classifications internally ascribed to loans by management; in identifying relevant trends that affect the collectability of the portfolio and identifying segments of the portfolio that are potential problem areas; in verifying the appropriateness of the allowance for credit losses; in evaluating the activities of lending personnel including compliance with lending policies and the quality of their loan approval, monitoring and risk assessment; and by providing an objective assessment of the overall quality of the loan portfolio. Currently, third-party loan reviews are being conducted quarterly and include non-performing loans as well as samples of performing loans of varying types within our portfolio.
In addition, our loan review system includes functions performed by internal audit and compliance personnel. Internal audit resources perform credit review functions utilizing guidance from regulatory and Institute of Internal Auditors standards in addition to assessing the adequacy of, and adherence to, internal credit policies and loan administration procedures and adherence to regulatory guidance. Our compliance resources monitor adherence to relevant lending-related and consumer protection-related laws and regulations.
Classification of Assets. In compliance with the regulatory guidelines, our loan review system includes an evaluation process through which certain loans exhibiting adverse credit quality characteristics are classified as Substandard, Doubtful or Loss. An asset is classified as Substandard if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all of the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets, or portions thereof, classified as Loss are considered uncollectible or of so little value that their continuance as assets is not warranted. Assets which do not currently expose us to a sufficient degree of risk to warrant an adverse classification but have some credit deficiencies or other potential weaknesses are designated as Special Mention by management. Adversely classified assets, together with those rated as Special Mention are generally referred to as Classified Assets. Non-classified assets are internally rated within one of four Pass categories or as Watch with the latter denoting a potential deficiency or concern that warrants increased oversight or tracking by management until remediated.
Additional information about our classification of assets is presented in Note 5 to the audited consolidated financial statements.
The following table discloses our designation of certain loans as special mention or adversely classified during each of the two years presented:
At June 30,
(In Thousands)
Special mention
$
12,740
$
84,981
Substandard
81,650
95,394
Doubtful
Total classified loans
$
94,555
$
180,891
Individually Evaluated Loans. On a case-by-case basis, we may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When we determine that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, we will establish an allowance for the difference between the fair value of the collateral, less costs to sell, at the reporting date and the amortized cost basis of the loan.
Allowance for Credit Losses - Loans
On July 1, 2020, we adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology with an expected loss methodology, referred to as the “CECL” methodology. See Note 1 to the audited consolidated financial statements for additional information on the adoption of Topic 326. Amounts reported prior to the adoption of ASU 2016-13, continue to be reported in accordance with previously applicable GAAP.
A description of our methodology in establishing our allowance for credit losses is set forth in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Allowance for Credit Losses”.
Additional information about our allowance for credit losses is also presented in Note 6 to the audited consolidated financial statements.
Our allowance for credit losses is maintained at a level necessary to cover lifetime expected credit losses in financial assets at the balance sheet date. The following table presents allowance for credit losses ratios, along with the components of their calculation, for the periods indicated:
At June 30,
(Dollars in Thousands)
Allowance for credit losses - loans
$
47,058
$
58,165
Total loans outstanding
$
5,436,576
$
4,880,310
Total non-performing loans
$
70,321
$
79,767
Allowance for credit losses as a percent of total loans outstanding
0.87
%
1.19
%
Allowance for credit losses to non-performing loans
66.92
%
72.92
%
The following table presents the ratio of net charge-offs (recoveries) to average loans outstanding by loan category, along with the components of the calculation, for the periods indicated:
For the Years Ended June 30,
Net
charge-offs
(recoveries)
Average
loans
outstanding
Net charge-
offs as a
percent of
average loans
outstanding
Net
charge-offs
Average
loans
outstanding
Net charge-
offs as a
percent of
average loans
outstanding
Net
charge-offs
(recoveries)
Average
loans
outstanding
Net charge-
offs as a
percent of
average loans
outstanding
(Dollars in Thousands)
Multi-family
mortgage
$
1,896
$
2,056,595
0.09
%
$
-
$
2,075,450
0.00
%
$
-
$
1,894,548
0.00
%
Nonresidential
mortgage
1,834
1,036,205
0.18
%
1,104,052
0.01
%
(10
)
1,188,862
0.00
%
Commercial
business
190,023
0.02
%
1,429
223,518
0.64
%
79,704
0.06
%
Construction
-
105,095
0.00
%
-
76,309
0.00
%
-
21,050
0.00
%
One- to four-family
residential
mortgage
(147
)
1,487,208
-0.01
%
1,331,779
0.00
%
-
1,335,798
0.00
%
Home equity loans
(27
)
67,849
-0.04
%
88,961
0.04
%
-
90,070
0.00
%
Other consumer
-
2,993
0.00
%
4,048
0.79
%
4,880
2.17
%
Unaccreted yield
adjustments
-
(23,568
)
0.00
%
-
(37,681
)
0.00
%
-
(46,096
)
0.00
%
Total
$
3,589
$
4,922,400
0.07
%
$
1,582
$
4,866,436
0.03
%
$
$
4,568,816
0.00
%
Our loan portfolio experienced an annualized net charge-off rate of 0.07% for the year ended June 30, 2022, an increase of four basis points from the 0.03% rate for the year ended June 30, 2021.
Allocation of Allowance for Credit Losses on Loans. The following table sets forth the allowance for credit losses (“ACL”) allocated by loan category and the percent of loans in each category to total loans receivable at the dates indicated. The ACL allocated to each category is the estimated amount considered necessary to cover lifetime expected credit losses inherent in any particular category as of the balance sheet date and does not restrict the use of the allowance to absorb losses in other categories.
At June 30,
Amount
Percent of Loans
to Total Loans
Amount
Percent of Loans
to Total Loans
(Dollars In Thousands)
Multi-family mortgage
$
25,321
44.31
%
$
28,450
41.79
%
Nonresidential mortgage
10,590
18.76
16,243
22.12
Commercial business
1,792
3.25
2,086
3.46
Construction
1,486
2.58
1,170
1.92
One- to four-family residential mortgage
7,540
30.27
9,747
29.66
Home equity loans
0.78
0.98
Other consumer
0.05
0.07
Total
$
47,058
100.00
%
$
58,165
100.00
%
At June 30, 2022, the ACL totaled $47.1 million, or 0.87% of total loans, reflecting a decrease of $11.1 million from $58.2 million, or 1.19% of total loans, at June 30, 2021. This decrease was largely attributable to a provision for credit losses reversal of $7.5 million, primarily driven by continued improvement in our economic forecast, a net reduction in reserves on loans individually analyzed for impairment and a reduction in the expected life of various segments of the loan portfolio. Also contributing to this decrease were net charge-offs of $3.6 million.
The ACL at June 30, 2022 is maintained at a level that is management’s best estimate of lifetime expected credit losses inherent in loans at the balance sheet date. The ACL is subject to estimates and assumptions that are susceptible to significant revisions as more information becomes available and as events or conditions effecting individual borrowers and the marketplace as a whole change over time. Additions to the ACL may be necessary if the future economic environment deteriorates from forecasted conditions. In addition, the banking regulators, as an integral part of their examination process, periodically review our loan and foreclosed real estate portfolios, related ACL and valuation allowance for foreclosed real estate. The regulators may require the ACL to be increased based on their review of information available at the time of the examination, which may negatively affect our earnings.
Additional information about the ACL at June 30, 2022 and 2021 is presented in Note 6 to the audited consolidated financial statements.
Investment Securities
At June 30, 2022, our investment securities portfolio totaled $1.46 billion and comprised 18.9% of our total assets. By comparison, at June 30, 2021, our securities portfolio totaled $1.72 billion and comprised 23.5% of our total assets. Additional information about our investment securities at June 30, 2022 is presented in Note 4 to the audited consolidated financial statements.
The year-over-year net decrease in the securities portfolio totaled $252.6 million which largely reflected repayments, sales and calls that were partially offset by purchases. The decrease in the portfolio included a $128.0 million decrease in the fair value of the available for sale securities portfolio to an unrealized loss of $118.0 million at June 30, 2022 from an unrealized gain of $10.0 million at June 30, 2021.
Our investment policy, which is approved by the Board of Directors, is designed to foster earnings and manage cash flows within prudent interest rate risk and credit risk guidelines, taking into consideration our liquidity needs, asset/liability management goals, and performance objectives. Our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer and Treasurer/Chief Investment Officer are the senior management members of our Capital Markets Committee (“CMC”) that are designated by the Board of Directors as the officers primarily responsible for securities portfolio management and all transactions require the approval of at least two of these designated officers.
The investments authorized for purchase under the investment policy approved by our Board of Directors include U.S. government and agency mortgage-backed securities, U.S. government agency debentures, municipal obligations, corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt. On a short-term basis, our investment policy authorizes investment in securities purchased under agreements to resell, federal funds, and certificates of deposits of insured financial institutions.
The carrying value of our mortgage-backed securities totaled $785.0 million at June 30, 2022 and comprised 53.7% of total investments and 10.2% of total assets as of that date. We generally invest in mortgage-backed securities issued by U.S. government agencies or government-sponsored entities. Mortgage-backed securities issued or sponsored by U.S. government agencies and government-sponsored entities are guaranteed as to the payment of principal and interest to investors.
The carrying value of our securities representing obligations of state and political subdivisions totaled $49.6 million at June 30, 2022 and comprised 3.4% of total investments and less than 1.0% of total assets as of that date. Such securities primarily included highly-rated, fixed-rate bank-qualified securities representing general obligations of municipalities located within the U.S. or the obligations of their related entities such as boards of education or school districts. Each of our municipal obligations were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling or exceeding A- or higher by S&P and/or A2 or higher by Moody’s, where rated by those agencies. In the absence of, or as a complement to, such ratings, we rely upon our own internal analysis of the issuer’s financial condition to validate its investment grade assessment.
The carrying value of our asset-backed securities totaled $166.6 million at June 30, 2022 and comprised 11.4% of total investments and 2.2% of total assets as of that date. This category of securities is comprised entirely of structured, floating-rate securities representing securitized federal education loans with 97% U.S. government guarantees. Our securities represent the highest credit-quality tranches within the overall structures with each being rated AA+ or higher by S&P/or Aa1 or higher by Moody’s, where rated by those agencies.
The outstanding balance of our collateralized loan obligations totaled $307.8 million at June 30, 2022 and comprised 21.0% of total investments and 4.0% of total assets as of that date. This category of securities is comprised entirely of structured, floating-rate securities representing securitized commercial loans to large, U.S. corporations. At June 30, 2022, each of our collateralized loan obligations were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling AAA by S&P and Aaa or by Moody’s, where rated by those agencies.
The carrying value of our corporate bonds totaled $153.4 million at June 30, 2022 and comprised 10.5% of total investments and 2.0% of total assets as of that date. This category of securities is comprised of two floating-rate corporate debt obligations issued by large financial institutions and subordinated debt representing profitable, well-capitalized, small- to mid-sized community banks located mainly in the mid-Atlantic region of the U.S. At June 30, 2022, corporate bonds issued by large financial institutions were consistently rated by Moody’s and S&P well above the thresholds that generally support our investment grade assessment with such ratings equaling or exceeding BB or higher by S&P and/or Baa3 or higher by Moody’s, where rated by those agencies.
Current accounting standards require that debt securities be categorized as held to maturity or available for sale, based on management’s intent as to the ultimate disposition of each security. These standards allow debt securities to be classified as held to maturity and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as held to maturity.
We do not currently use or maintain a trading account. Securities not classified as held to maturity are classified as available for sale. These securities are reported at fair value and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as adjustments to accumulated other comprehensive income, a separate component of equity. As of June 30, 2022, our available for sale securities portfolio had a carrying value of $1.34 billion or 91.9% of our total securities with the remaining $118.3 million or 8.1% of securities were classified as held to maturity.
Other than securities issued or guaranteed by the U.S. government or its agencies, we did not hold securities of any one issuer having an aggregate book value in excess of 10% of our equity at June 30, 2022. All of our securities carry market risk insofar as increases in market interest rates have caused, and may continue to cause, a decrease in their market value. We believe that unrealized and unrecognized losses on securities held at June 30, 2022, are a function of changes in market interest rates and credit spreads, not changes in credit quality. Therefore, no allowance for credit losses was recorded at that time.
During the year ended June 30, 2022, proceeds from sales of securities available for sale totaled $100.3 million and resulted in no gross gains and gross losses of $565,000. During the year ended June 30, 2021, proceeds from sales of securities available for sale totaled $98.1 million and resulted in gross gains of $1.2 million and gross losses of $470,000. During the year ended June 30, 2020, proceeds from sales of securities available for sale totaled $164.3 million and resulted in gross gains of $2.4 million and gross losses of $145,000. There were no sales of held to maturity securities during the years ended June 30, 2022, 2021 and 2020.
The following table sets forth the carrying value of our securities portfolio at the dates indicated:
At June 30,
(In Thousands)
Debt securities available for sale:
Obligations of state and political subdivisions
$
28,435
$
34,603
Asset-backed securities
166,557
242,989
Collateralized loan obligations
307,813
189,880
Corporate bonds
153,397
158,351
Total debt securities available for sale
656,202
625,823
Mortgage-backed securities available for sale:
Collateralized mortgage obligations
7,122
13,739
Residential pass-through securities
514,758
744,491
Commercial pass-through securities
166,011
292,811
Total mortgage-backed securities available for sale
687,891
1,051,041
Total securities available for sale
1,344,093
1,676,864
Debt securities held to maturity:
Obligations of state and political subdivisions
21,159
25,824
Total debt securities held to maturity
21,159
25,824
Mortgage-backed securities held to maturity:
Residential pass-through securities
84,851
-
Commercial pass-through securities
12,281
12,314
Total mortgage-backed securities held to maturity
97,132
12,314
Total securities held to maturity
118,291
38,138
Total securities
$
1,462,384
$
1,715,002
The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our securities portfolio at June 30, 2022. This table shows contractual maturities and does not reflect re-pricing or the effect of prepayments. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. At June 30, 2022, securities with a carrying value of $42.0 million are callable within one year.
At June 30, 2022
One Year or Less
One to Five Years
Five to Ten Years
More Than Ten Years
Total Securities
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Carrying
Value
Weighted
Average
Yield
Fair Market
Value
(Dollars In Thousands)
Debt securities:
Obligations of state and political
subdivisions
$
7,673
2.10
%
$
33,134
2.32
%
$
8,787
2.50
%
$
-
-
%
$
49,594
2.32
%
$
49,560
Asset-backed securities
-
-
-
-
33,138
2.30
133,419
2.55
166,557
2.50
166,557
Collateralized loan obligations
-
-
-
-
143,326
2.75
164,487
3.24
307,813
3.01
307,813
Corporate bonds
-
-
-
-
144,188
4.05
9,209
3.72
153,397
4.03
153,397
Mortgage-backed securities:
Collateralized mortgage
obligations (1)
-
-
1.58
-
-
6,406
2.15
7,122
2.09
7,122
Residential pass-through
securities (1)
-
-
3,431
2.07
8,971
2.39
587,207
2.01
599,609
2.02
591,022
Commercial pass-through
securities (1)
-
-
-
-
12,281
1.78
166,011
1.93
178,292
1.92
176,740
Total securities
$
7,673
2.10
%
$
37,281
2.28
%
$
350,691
3.19
%
$
1,066,739
2.27
%
$
1,462,384
2.49
%
$
1,452,211
(1)	Government-sponsored enterprises.
Sources of Funds
General. Retail deposits are our primary source of funds for lending and other investment purposes. In addition, we derive funds from principal repayments of loan and investment securities. Loan and securities payments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions. Wholesale funding sources including, but not limited to, borrowings from the Federal Home Loan Bank of New York (“FHLB”), wholesale deposits and other short-term borrowings are also used to supplement the funding for loans and investments.
Deposits. Our current deposit products include interest-bearing and non-interest-bearing checking accounts, money market deposit accounts, savings accounts and certificates of deposit accounts ranging in terms from 30 days to five years. Certificates of deposit with terms ranging from six months to five years are available for individual retirement account plans. Deposit account terms, such as interest rate earned, applicability of certain fees and service charges and funds accessibility, will vary based upon several factors including, but not limited to, minimum balance, term to maturity, and transaction frequency and form requirements.
Deposits are obtained primarily from within New Jersey and New York through the Bank’s network of retail branches, business relationship officers, treasury management officers and digital banking channels. We maintain a robust suite of commercial deposit products designed to appeal to small and mid-size businesses, non-profit organizations and government entities. Our team of experienced and dedicated business relationship officers serve as the primary points of contact for these commercial clients and act as both new business originators and relationship managers.
Key to our consumer deposit strategy is our “Relationship” suite of products which bundles a variety of banking services and products together for those clients whom have a checking account with direct deposit and electronic statement delivery. Such relationship clients are eligible for a variety of benefits, including a premium on certificates of deposit with a term of at least one year. We also offer High Yield Checking which is primarily designed to attract core deposits in the form of clients’ primary checking accounts through interest rate and fee reimbursement incentives to qualifying clients. The comparatively higher interest expense associated with the High Yield Checking product in relation to our other checking products is partially offset by the transaction fee income associated with the account.
The determination of interest rates on retail deposits is based upon a number of factors, including: (1) our need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of a selected group of competitors’ rates for similar products; (3) our current cost of funds, yield on assets and asset/liability position; and (4) the alternate cost of funds on a wholesale basis. Interest rates are reviewed by senior management on a regular basis, with deposit product and pricing updated, as appropriate, during recurring and ad-hoc senior management meetings.
Our liquidity could be reduced if a significant amount of certificates of deposit maturing within a short period were not renewed. At June 30, 2022 and June 30, 2021, certificates of deposit maturing within one year were $1.47 billion and $1.51 billion, respectively. Historically, a significant portion of the certificates of deposit remain with us after they mature.
At June 30, 2022, $1.33 billion or 70.2% of our certificates of deposit were certificates of $100,000 or more compared to $1.19 billion or 63.3% at June 30, 2021. The general level of market interest rates and money market conditions significantly influence deposit inflows and outflows. The effects of these factors are particularly pronounced on deposit accounts with larger balances. In particular, certificates of deposit with balances of $100,000 or greater are traditionally viewed as being a more volatile source of funding than comparatively lower balance certificates of deposit or non-maturity transaction accounts. In order to retain certificates of deposit with balances of $100,000 or more, we may have to pay a premium rate, resulting in an increase in our cost of funds. To the extent that such deposits do not remain with us, they may need to be replaced with wholesale funding.
Our sources of wholesale funding included brokered certificates of deposit and listing service certificates of deposit whose balances totaled approximately $761.9 million and $11.7 million, or 13.0% and 0.2% of total deposits, respectively, at June 30, 2022. We utilize brokered certificates of deposit and listing service certificates of deposits as alternatives to other forms of wholesale funding, including borrowings, when interest rates and market conditions favor the use of such deposits. For a portion of our short-term brokered certificates of deposit we utilized interest rate contracts to effectively extend their duration and to fix their cost.
The following table sets forth the distribution of average deposits for the periods indicated and the weighted average nominal interest rates for each period on each category of deposits presented:
For the Years Ended June 30,
Average
Balance
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
Average
Balance
Percent
of Total
Deposits
Weighted
Average
Nominal
Rate
(Dollars In Thousands)
Non-interest-bearing
deposits
$
624,666
11.37
%
-
%
$
518,149
9.88
%
-
%
$
334,522
7.89
%
-
%
Interest-bearing demand
2,067,200
37.64
0.25
1,726,190
32.92
0.41
1,041,188
24.56
1.10
Savings
1,088,971
19.83
0.11
1,066,794
20.35
0.31
831,832
19.62
0.81
Certificates of deposit
1,711,276
31.16
0.52
1,931,887
36.85
1.10
2,032,046
47.93
2.00
.
Total average deposits
$
5,492,113
100.00
%
0.28
%
$
5,243,020
100.00
%
0.60
%
$
4,239,588
100.00
%
1.39
%
As of June 30, 2022 and 2021, the aggregate amount of certificates of deposit of $250,000 and over was $897.4 billion and $635.3 million, respectively. The following table presents the time remaining until maturity of those certificates of deposit as of June 30, 2022:
At June 30,
(In Thousands)
Maturity Period
Within three months
$
559,234
Three through six months
27,042
Six through twelve months
125,093
Over twelve months
186,064
Total certificates of deposit
$
897,433
The following table sets forth the amount and maturities of certificates of deposit at June 30, 2022:
At June 30, 2022
Within
One Year
Over One
Year to
Two Years
Over Two
Years to
Three Years
Over
Three
Years to
Four Years
Over Four
Years to
Five Years
Over Five
Years
Total
(In Thousands)
Interest Rate
0.00 - 0.99%
$
1,132,482
$
65,952
$
16,186
$
27,198
$
30,079
$
-
$
1,271,897
1.00 - 1.99%
223,393
78,371
16,159
-
319,085
2.00 - 2.99%
112,690
163,657
15,484
292,329
3.00 - 3.99%
-
-
-
-
5,686
6,251
Total certificates of deposit
$
1,468,565
$
308,545
$
47,829
$
28,453
$
30,476
$
5,694
$
1,889,562
Additional information about our deposits is presented in Note 10 to the audited consolidated financial statements.
Borrowings. The sources of wholesale funding we utilize include borrowings in the form of advances from the FHLB as well as other forms of borrowings. We generally use wholesale funding to manage our exposure to interest rate risk and liquidity risk in conjunction with our overall asset/liability management process.
Advances from the FHLB are typically secured by our FHLB capital stock and certain investment securities as well as residential and commercial mortgage loans that we choose to utilize as collateral for such borrowings. Additional information about our FHLB advances is included under Note 11 to the audited consolidated financial statements.
Short-term FHLB advances generally have original maturities of less than one year. At June 30, 2022, we had a total of $375.0 million of short-term FHLB advances at a weighted average interest rate of 1.66%. Such advances represented 90-day or less FHLB term advances that are generally forecasted to be periodically redrawn at maturity for the same term as the original advance. Based on this presumption, we utilized interest rate contracts to effectively extend the duration of each of these advances at the time they were drawn to effectively fix their cost.
Long-term advances generally include term advances with original maturities of greater than one year. At June 30, 2022, our outstanding balance of long-term FHLB advances totaled $277.5 million at a weighted average interest rate of 2.87%. Such advances included $145.0 million of callable advances at a weighted average interest rate of 3.04% and $132.5 million non-callable advances at a weighted average interest rate of 2.68%.
Our FHLB advances mature as follows:
At June 30,
(In Thousands)
By remaining period to maturity:
Less than one year
$
520,000
$
390,000
One to two years
22,500
145,000
Two to three years
103,500
22,500
Three to four years
6,500
103,500
Four to five years
-
6,500
Greater than five years
-
-
Total advances
652,500
667,500
Fair value adjustments
(1,163
)
(1,624
)
Total advances, net of fair value adjustments
$
651,337
$
665,876
Based upon the market value of investment securities and mortgage loans that are posted as collateral for FHLB advances at June 30, 2022, we are eligible to borrow up to an additional $2.04 billion of advances from the FHLB as of that date. We are further authorized to post additional collateral in the form of other unencumbered investments securities and eligible mortgage loans that may expand our borrowing capacity with the FHLB up to 30% of our total assets. Additional borrowing capacity up to 50% of our total assets may be authorized with the approval of the FHLB’s Board of Directors or Executive Committee.
In addition, we had the capacity to borrow additional funds totaling $975.0 million via unsecured overnight borrowings from other financial institutions and $303.9 million from the FRB without pledging additional collateral.
The balance of borrowings at June 30, 2022 included overnight line of credit borrowings from the FHLB totaling $250.0 million.
Interest Rate Derivatives and Hedging
We utilize derivative instruments in the form of interest rate swaps and caps to hedge our exposure to interest rate risk in conjunction with our overall asset/liability management process. In accordance with accounting requirements, we formally designate all of our hedging relationships as either fair value hedges, or cash flow hedges, and documents the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness.
At June 30, 2022, our derivative instruments were comprised of interest rate swaps and caps with a total notional amount of $750.0 million. These instruments are intended to manage the interest rate exposure relating to certain wholesale funding positions that were outstanding at June 30, 2022.
Additional information regarding our use of interest rate derivatives and our hedging activities is presented in Note 1 and Note 12 to the audited consolidated financial statements.
Subsidiary Activity
At June 30, 2022, Kearny Bank was the only wholly-owned operating subsidiary of Kearny Financial Corp. As of that date, Kearny Bank had one wholly-owned subsidiary, CJB Investment Corp. CJB Investment Corp. is a New Jersey Investment Company and remained active through the three-year period ended June 30, 2022.
Human Capital Resources
Kearny Bank serves as a true financial partner to both consumers and businesses by subscribing to the belief that people, performance and relationships are what matter most. We serve our clients and shareholders through our deep-rooted principles of ethics and integrity, and by giving back to the communities in which we serve.
Employee Profile. We strive to create a diverse and inclusive workforce reflective of our clients and the communities where we live and work. We respect and recognize the unique contributions each individual brings to our Company and we are committed to supporting a culture of diversity, equity and inclusion as a foundation for our values and success. As of June 30, 2022, we employed 596 employees, approximately 63% of whom are female. We utilize an online recruitment platform that provides a vehicle to attract a diverse pool of candidates and have established a partnership with a diversity recruitment solution to enhance this effort.
Talent Development and Employee Engagement. We invest in the success and the personal and professional development of our employees, celebrating career milestones and longevity. Our average length of tenure is eight years as we look to promote from within to leverage employees’ knowledge of the organization as we continue to grow. We offer many educational and learning initiatives to enhance our employees’ professional growth, including support for certifications and licenses, as well as offering a robust tuition reimbursement program. To further our efforts in providing employees the opportunity to enrich their careers, we offer a Career Mentoring Program, which offers employees an opportunity to interact and collaborate with our senior leaders. In 2018, we established a Diversity and Inclusion Action Plan as well as a Diversity, Equity and Inclusion Committee (collectively the “Diversity Plan”). The Diversity Plan focuses on diversifying our recruiting pipeline, obtaining Diversity & Inclusion certifications and training for our recruiting staff and establishing programs to attract and retain diverse talent. As part of this initiative, our Senior Women’s Leadership Group was established to provide a forum for our female employees to exchange ideas and support programs across the Company.
Employee Benefits. We offer our employees competitive pay and incentive programs, together with a comprehensive benefits package designed to enhance the employee experience. Such benefits include medical, dental, vision, long term disability benefits, AD&D and group life insurance, additional supplement plans, Health Advocacy and Employee Assistance programs, generous paid time off and the ability to participate in charitable events during work time. In addition, our employees share in our financial success while preparing for their retirement via participation in our 401(k) Plan, which includes a competitive company match, and our Employee Stock Ownership Plan (“ESOP”), which is 100% funded by the Company.
Safety, Health and Wellness. We are committed to the safety and wellness of all of our employees and their families. We provide access to a variety of health and welfare programs, including benefits that support their physical, mental and financial wellbeing. During the COVID-19 pandemic, proper protocols were implemented in our branches and corporate offices to ensure the continued safety of our employees and customers while maintaining compliance with current state and local regulations and guidelines. We have now successfully transitioned to a hybrid work environment, where applicable, one in which employees are able to maintain productivity and efficiency while still allowing for certain flexibility. We continue to encourage those who are sick to stay home and take the time needed to recover.
Supervision and Regulation
Kearny Bank and Kearny Financial operate in a highly regulated industry. This regulation establishes a comprehensive framework of activities in which a savings and loan holding company and New Jersey savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors. Set forth below is a brief description of certain laws that relate to the regulation of Kearny Bank and Kearny Financial. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution and its holding company, the classification of assets by the institution and the adequacy of an institution’s allowance for credit losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing savings and loan holding companies, could have a material adverse impact on Kearny Financial, Kearny Bank and their operations. The adoption of regulations or the enactment of laws that restrict the operations of Kearny Bank and/or Kearny Financial or impose burdensome requirements upon one or both of them could reduce their profitability and could impair the value of Kearny Bank’s franchise, resulting in negative effects on the trading price of our common stock.
Regulation of Kearny Bank
General. As a nonmember New Jersey savings bank with federally insured deposits, Kearny Bank is subject to extensive regulation by the NJDBI and the FDIC. The regulatory structure gives the regulatory agencies widespread discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the level of the allowance for credit losses. The activities of New Jersey savings banks are subject to extensive regulation including restrictions or requirements with respect to loans to one borrower, dividends, permissible investments and lending activities, liquidity, transactions with affiliates and community reinvestment. Both state and federal law regulate a savings bank’s relationship with its depositors and borrowers, especially in such matters as the ownership of savings accounts and the form and content of Kearny Bank’s mortgage documents.
Kearny Bank must file reports with the NJDBI and FDIC concerning its activities and financial condition and obtain regulatory approvals prior to entering into certain transactions such as establishing new branches and mergers with or acquisitions of other depository institutions. The NJDBI and FDIC regularly examine Kearny Bank and prepare reports to Kearny Bank’s Board of Directors on any deficiencies found in its operations. The agencies have substantial discretion to take enforcement action with respect to an institution that fails to comply with applicable regulatory requirements or engages in violations of law or unsafe and unsound practices. Such actions can include, among others, the issuance of a cease and desist order, assessment of civil money penalties, removal of officers and directors and the appointment of a receiver or conservator.
Activities and Powers. Kearny Bank derives its lending, investment and other powers primarily from the applicable provisions of the New Jersey Banking Act and the related regulations. Under these laws and regulations, New Jersey savings banks, including Kearny Bank, generally may invest in real estate mortgages; consumer and commercial loans; specific types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies; certain types of corporate equity securities and other specified assets.
A savings bank may also invest pursuant to a leeway power that permits investments not otherwise permitted by the New Jersey Banking Act. Leeway investments must comply with a number of limitations on individual and aggregate amounts of investments. New Jersey savings banks may also exercise those powers, rights, benefits or privileges authorized for national banks, federal savings banks or federal savings associations, or either directly or through a subsidiary. New Jersey savings banks may exercise powers, rights, benefits and privileges of out-of-state banks, savings banks and savings associations, or either directly or through a subsidiary, provided that prior approval by the NJDBI is required before exercising any such power, right, benefit or privilege. The exercise of these lending, investment and activity powers is further limited by federal law and the related regulations. See “-Activity Restrictions on State-Chartered Banks” below.
Activity Restrictions on State-Chartered Banks. Federal law and FDIC regulations generally limit the activities as principal and equity investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for national banks and their subsidiaries, except such activities and investments that are specifically exempted by law or regulation, or approved by the FDIC.
Before engaging as principal in a new activity that is not permissible for a national bank, or otherwise permissible under federal law or FDIC regulations, an insured bank must seek approval from the FDIC, subject to certain specified exceptions. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC’s Deposit Insurance Fund. Certain activities of subsidiaries that are engaged in activities permitted for national banks only through a financial subsidiary are subject to additional requirements.
Federal Deposit Insurance. Kearny Bank’s deposits are insured to applicable limits by the FDIC. The general maximum deposit insurance amount is $250,000 per depositor.
The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund (“DIF”). Under the FDIC’s risk-based assessment system, institutions deemed less risky pay lower assessments. Assessments for institutions of less than $10 billion of assets, such as Kearny Bank, are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years. The assessment range for insured institutions of less than $10 billion of total assets is 1.5 to 30 basis points of total assets less tangible equity.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Kearny Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Regulatory Capital Requirements. FDIC regulations require nonmember banks to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The current requirements implement recommendations of the Basel Committee on Banking Supervision and certain requirements of federal law.
For purposes of the regulatory capital standards, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for credit losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. At June 30, 2022, Kearny Bank has exercised the opt-out election regarding the treatment of Accumulated Other Comprehensive Income.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to equity interests depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a capital conservation buffer consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. At June 30, 2022, Kearny Bank exceeded all regulatory capital requirements.
In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but also qualitative factors. The FDIC has the authority to establish higher capital requirements for individual institutions where deemed necessary.
Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria may elect to use the optional community bank leverage ratio framework, which requires maintaining a leverage ratio of greater than 9%, to satisfy the regulatory capital requirements, including the risk-based requirements. A qualifying institution may opt in and out of the community bank leverage ratio framework on its quarterly call report. Kearny Bank did not opt into the community bank leverage ratio framework as of June 30, 2022.
Regulations issued by the NJDBI establish generally similar regulatory capital standards for New Jersey-chartered savings banks such as Kearny Bank.
Prompt Corrective Regulatory Action. Federal law requires that federal bank regulatory authorities take prompt corrective action with respect to institutions that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”
The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater.
An institution is undercapitalized if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is categorized as significantly undercapitalized if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. Critically undercapitalized status is triggered if an institution has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Qualifying banks that elect and comply with the community bank leverage ratio (as established by the regulatory agencies) are considered well-capitalized under the prompt corrective action regulations.
Undercapitalized banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status adequately capitalized status. If an undercapitalized bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized banks must comply with one or more of a number of additional measures including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. Critically undercapitalized institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after such status is triggered. These actions are in addition to other discretionary supervisory or enforcement actions that the FDIC may take.
As of June 30, 2022, Kearny Bank was well capitalized.
Dividend Limitations. Federal regulations impose various restrictions or requirements on Kearny Bank to pay dividends to Kearny Financial. An institution that is a subsidiary of a savings and loan holding company, such as Kearny Bank, must file notice with the Federal Reserve Board at least thirty days before paying a dividend. The Federal Reserve Board may disapprove a notice if: (i) the savings institution would be undercapitalized following the capital distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in any statute, regulation, enforcement action or agreement or condition imposed in connection with an application.
New Jersey law specifies that no dividend may be paid if the dividend would impair the capital stock of the savings bank. In addition, no dividend may be paid unless the savings bank would, after payment of the dividend, have a surplus of at least 50% of its capital stock (or if the payment of dividend would not reduce surplus).
Transactions with Related Parties. Transactions between a depository institution (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of an institution is any company or entity that controls, is controlled by or is under common control with the institution. In a holding company context, the parent holding company and any companies that are controlled by such parent holding company are affiliates of the institution. Generally, Section 23A of the Federal Reserve Act limits the extent to which the institution or its subsidiaries may engage in covered transactions with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes an extension of credit, purchase of assets, issuance of a guarantee or letter of credit and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements.
The law also requires that affiliate transactions generally be on terms and conditions that are substantially the same as, or at least as favorable to the institution as, those provided to non-affiliates.
Kearny Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, subject to certain exceptions, these provisions generally require that extensions of credit to insiders:
•be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
•not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Kearny Bank’s regulatory capital.
In addition, extensions of credit in excess of certain limits must be approved by Kearny Bank’s Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Community Reinvestment Act. Under the Community Reinvestment Act (the “CRA”), every insured depository institution, including Kearny Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC to assess the depository institution’s record of meeting the credit needs of its community and consider that record in its consideration of certain applications by the institution, such as for a merger or the establishment of a branch office. The FDIC may use an unsatisfactory CRA examination rating as the basis for denying such an application. Kearny Bank received a satisfactory CRA rating from the FDIC in its most recent CRA evaluation.
On May 5, 2022, the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currency released a notice of proposed rulemaking to “strengthen and modernize” the CRA regulations and the related regulatory framework.
Federal Home Loan Bank System. Kearny Bank is a member of the FHLB of New York, which is one of eleven regional Federal Home Loan Banks. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members pursuant to policies and procedures established by the Board of Directors of the FHLB.
As a member, Kearny Bank is required to purchase and maintain stock in the FHLB of New York in specified amounts. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral and limiting total advances to a member.
The FHLB of New York may pay periodic dividends to members. These dividends are affected by factors such as the FHLB’s operating results and statutory responsibilities that may be imposed such as providing certain funding for affordable housing and interest subsidies on advances targeted for low- and moderate-income housing projects. The payment dividends, or any particular amount of dividend, cannot be assumed.
Other Laws and Regulations
Interest and other charges collected or contracted for by Kearny Bank are subject to state usury laws and federal laws concerning interest rates. Kearny Bank’s operations are also subject to federal laws (and their implementing regulations) applicable to credit transactions, such as the:
•Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
•Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
•Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
•Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
•Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
•Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
•Truth in Savings Act, prescribing disclosure and advertising requirements with respect to deposit accounts.
The operations of Kearny Bank also are subject to the:
•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
•Electronic Funds Transfer Act, and Regulation E promulgated thereunder, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
•Check Clearing for the 21st Century Act (also known as “Check 21”), which gives substitute checks, such as digital check images and copies made from that image, the same legal standing as the original paper check;
•USA PATRIOT Act, which requires institutions operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
•Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to opt out of the sharing of certain personal financial information with unaffiliated third parties.
Regulation of Kearny Financial
General. Kearny Financial is a savings and loan holding company within the meaning of federal law. Kearny Financial maintained its savings and loan holding company status (rather than becoming a bank holding company), notwithstanding the June 2017 conversion of Kearny Bank to a New Jersey savings bank charter, through Kearny Bank exercising an election available to it under federal law. Kearny Financial is required to file reports with, and is subject to regulation and examination by, the Federal Reserve Board. Kearny Financial must also obtain regulatory approval from the Federal Reserve Board before engaging in certain transactions, such as mergers with or acquisitions of other depository institutions.
In addition, the Federal Reserve Board has enforcement authority over Kearny Financial and any non-depository subsidiaries. That permits the Federal Reserve Board to restrict or prohibit activities that are determined to pose a serious risk to Kearny Bank. This regulatory structure is intended primarily for protection of Kearny Bank’s depositors and not for the benefit of stockholders of Kearny Financial.
The Federal Reserve Board has indicated that, to the greatest extent possible taking into account any unique characteristics of savings and loan holding companies and the requirements of federal law, its approach is to apply to savings and loan holding companies the supervisory principles applicable to the supervision of bank holding companies. The stated objective of the Federal Reserve Board is to ensure the savings and loan holding company and its non-depository subsidiaries are effectively supervised, can serve as a source of strength for and do not threaten the safety and soundness of, the subsidiary depository institution.
Nonbanking Activities. As a savings and loan holding company, Kearny Financial is permitted to engage in those activities permissible under federal law for financial holding companies (if certain criteria are met and an election is submitted) and for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance, as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act and certain additional activities authorized by federal regulations, subject to the approval of the Federal Reserve Board.
Mergers and Acquisitions. Kearny Financial must generally obtain approval from the Federal Reserve Board before acquiring, directly or indirectly, more than 5% of the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or holding company by merger, consolidation, or purchase of its assets. Federal law also prohibits a savings and loan holding company from acquiring more than 5% of a company engaged in activities other than those authorized for savings and loan holding companies by federal law or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating an application for Kearny Financial to acquire control of a savings institution, the Federal Reserve Board considers factors such as the financial and managerial resources and future prospects of Kearny Financial and the target institution, the effect of the acquisition on the risk to the deposit insurance fund, the convenience and the needs of the community served and competitive factors. A merger of another depository institution into Kearny Bank requires the prior approval of the NJDBI and FDIC, based on similar considerations.
Consolidated Capital Requirements. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions (including the community bank leverage ratio alternative) apply to savings and loan holding companies with $3 billion or more of consolidated assets, including Kearny Financial. Kearny Financial was in compliance with the holding company capital requirements and the capital conservation buffer as of June 30, 2022.
Source of Strength Doctrine; Dividends. Federal law extended the source of strength doctrine, which has long applied to bank holding companies, to savings and loan holding companies. The Federal Reserve Board has promulgated regulations implementing the source of strength policy, which requires holding companies to act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress. Further, the Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has also applied to savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior consultation with Federal Reserve supervisory staff as to dividends in certain circumstances, such as when the dividend is not covered by earnings for the period for which it is being paid, when net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or when the prospective rate of earnings retention by the holding company is inconsistent with its capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary depository institution becomes undercapitalized. In addition, a subsidiary institution of a savings and loan holding company must file prior notice with the Federal Reserve Board, and receive its non-objection, before paying a dividend to the parent savings and loan holding company. Federal Reserve Board guidance also provides for regulatory review of certain stock redemption and repurchase proposals by holding companies. These regulatory policies could affect the ability of Kearny Financial to pay dividends, engage in stock redemptions or repurchases or otherwise engage in capital distributions.
Qualified Thrift Lender Test. In order for Kearny Financial to be regulated by the Federal Reserve Board as a savings and loan holding company (rather than as a bank holding company), Kearny Bank must remain a qualified thrift lender under applicable law or satisfy the domestic building and loan association test under the Internal Revenue Code. Under the qualified thrift lender test, an institution is generally required to maintain at least 65% of its portfolio assets (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangible assets, including goodwill; and (iii) the value of property used to conduct business) in certain qualified thrift investments (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12 month period. As of June 30, 2022, Kearny Bank met the qualified thrift lender test.
Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire control of a savings and loan holding company. An acquisition of control can occur upon the acquisition of 10% or more of a class of voting stock of a savings and loan holding company or as otherwise defined by the Federal Reserve Board. Under the Change in Bank Control Act, the Federal Reserve Board has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial condition of the acquirer, and future prospects of the proposed acquirer, the competence and integrity of the proposed acquirer and the effects of the acquisition on competition. Any company that seeks to acquire “control” of Kearny Financial or Kearny Bank, within the meaning of the Savings and Loan Holding Company Act, must file an application, and receive the Federal Reserve Board’s prior approval under that statute. The Company would then be subject to regulation as a savings and loan holding company.
The prior approval of the NJDBI would also be necessary for the acquisition of 25% of a class of the Company’s voting stock, or “control” as otherwise defined under New Jersey law.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in our securities is subject to risks inherent in our business and the industry in which we operate. Before making an investment decision, you should carefully consider the risks and uncertainties described below and all other information included in this Annual Report on Form 10-K. The risks described below may adversely affect our business, financial condition and operating results. In addition to these risks and any other risks or uncertainties described in “Item 1. Business-Forward-Looking Statements” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there may be additional risks and uncertainties that are not currently known to us or that we currently deem to be immaterial that could materially and adversely affect our business, financial condition or operating results. The value or market price of our securities could decline due to any of these identified or other risks. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Economic and Market Area
Changes in economic conditions, in particular an economic slowdown in the markets we operate in, could materially and negatively affect our business.
Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. Any deterioration in economic conditions, whether caused by national or local concerns, in particular any further economic slowdown in the markets we operate in, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or non-interest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.
Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our markets. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. An economic downturn or prolonged recession may result in the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt its business. If we experience an economic downturn or a prolonged economic recession occurs in the economy as a whole, borrowers will be less likely to repay their loans as scheduled. Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. An economic downturn could, therefore, result in losses that materially and adversely affect our business.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and has continued rising in 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated throughout 2022. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could adversely affect our results of operations and financial condition.
The COVID-19 pandemic could continue to pose risks to our business, our results of operations and the future prospects of the Company.
The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our clients operate. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the business of the Company, its clients, employees and third-party service providers. The extent of such impact will depend on future developments, which are highly uncertain. Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic may have material long-term effects on the Company and its clients which are difficult to quantify in the near-term or long-term.
Severe weather could harm our business.
Weather-related events, including those that may result from climate change, can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the local economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. The occurrence of a natural disaster could result in one or more of the following: (i) an increase in loan delinquencies; (ii) an increase in problem assets and foreclosures; (iii) a decrease in the demand for our products and services; or (iv) a decrease in the value of the collateral for loans, especially real estate, in turn reducing clients’ borrowing power, the value of assets associated with problem loans and collateral coverage. Weather-related events may cause significant flooding and other storm-related damage and these outcomes may become more common in the future.
Acts of terrorism, public health issues, and geopolitical and other external events could impact our ability to conduct business.
Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems. Additionally, the metropolitan New York area and northern New Jersey remain central targets for potential acts of terrorism. Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
Additionally, global markets may be adversely affected by the emergence of widespread health emergencies or pandemics, cyber attacks or campaigns, military conflicts, terrorism or other geopolitical events, including the military conflict between Russia and Ukraine. The impact of global market fluctuations may affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad as a result of the above factors or otherwise could result in a decline in revenues and adversely affect our results of operations and financial condition, including capital and liquidity levels.
Our inability to achieve profitability on new branches may negatively affect our earnings.
We have expanded our presence throughout our market area and we intend to pursue further expansion through de novo branching or the purchase of branches from other financial institutions. The profitability of our expansion strategy will depend on whether the income that we generate from the new branches will offset the increased expenses resulting from operating these branches. We expect that it may take a period of time before these branches can become profitable, especially in areas in which we do not have an established presence. During this period, the expense of operating these branches may negatively affect our net income.
We face intense competition from other financial services and financial services technology companies, and competitive pressures could adversely affect our business or financial performance.
We face intense competition in all of its markets and geographic regions. We expect competitive pressures to intensify in the future, especially in light of legislative and regulatory initiatives arising out of the recent global economic crisis, technological innovations that alter the barriers to entry, current economic and market conditions, and government monetary and fiscal policies. Competition with financial services technology companies, or technology companies partnering with financial services companies, may be particularly intense, due to, among other things, differing regulatory environments. Competitive pressures may drive us to take actions that we might otherwise eschew, such as lowering the interest rates or fees on loans or raising the interest rates on deposits in order to keep or attract high-quality clients. These pressures also may accelerate actions that we might otherwise elect to defer, such as substantial investments in technology or infrastructure. The actions that we take in response to competition may adversely affect its results of operations and financial condition. These consequences could be exacerbated if we are not successful in introducing new products and other services, achieving market acceptance of its products and other services, developing and maintaining a strong client base, or prudently managing expenses.
Asset Quality and Interest Rate
Changes in interest rates or the shape of the yield curve may adversely affect our profitability and financial condition.
We derive our income mainly from the difference or spread between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more we earn. When market rates of interest change, the interest we receive on our assets and the interest we pay on our liabilities will fluctuate. This can cause decreases in our spread and can adversely affect our income.
In July 2019, the Federal Reserve Board’s Federal Open Market Committee’s federal funds rate target was a range of 2.25% - 2.50% and the Committee began lowering the target rate in response to a slowing economy. In March 2020, the Committee quickly lowered the target rate from 1.50% - 1.75% to 0.00 - 0.25% in response to the accelerating COVID-19 crisis and the Committee’s objective to inject liquidity into the banking system and stimulate the credit markets. In response to rising inflation in 2022, the Committee increased the target rate to 0.25% - 0.50% in March 2022, to 0.75% - 1.00% in May 2022, to 1.50% - 1.75% in June 2022 and to 2.25% - 2.50% in July 2022. Our net interest spread and net interest margin are at risk of being reduced due to potential increases in our cost of funds that may outpace any increases in our yield on interest-earnings assets.
Interest rates also affect how much money we lend. For example, when interest rates rise, the cost of borrowing increases and loan originations tend to decrease. In addition, changes in interest rates can affect the average life of loans and securities. For example, an increase in interest rates generally results in decreased prepayments of loans and mortgage-backed securities, as borrowers are less likely to refinance their debt. Changes in market interest rates also impact the value of our interest-earning assets and interest-bearing liabilities as well as the value of our derivatives portfolios. In particular, the unrealized gains and losses on securities available for sale and changes in the fair value of interest rate derivatives serving as cash flows hedges are reported, net of tax, in accumulated other comprehensive income which is a component of stockholders’ equity. Consequently, declines in the fair value of these instruments resulting from changes in market interest rates have, and may continue to, adversely affect stockholders’ equity.
If our allowance for credit losses is not sufficient to cover actual loan losses, our earnings will decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the required amount of the allowance for credit losses, we evaluate loans individually and establish credit loss allowances for specifically identified impairments. For loans not individually analyzed, we estimate losses and establish reserves based on reasonable and supportable forecasts and adjustments for qualitative factors. If the assumptions used in our calculation methodology are incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in further additions to our allowance. Our allowance for credit losses on loans was 0.87% of total loans at June 30, 2022 and significant additions to our allowance could materially decrease our net income.
In addition, bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
A significant portion of our assets consists of investment securities, which generally have lower yields than loans, and we classify a significant portion of our investment securities as available for sale, which creates potential volatility in our equity and may have an adverse impact on our net income.
As of June 30, 2022, our securities portfolio totaled $1.46 billion, or 18.9% of our total assets. Investment securities typically have lower yields than loans. For the year ended June 30, 2022, the weighted average yield of our investment securities portfolio was 2.03%, as compared to 3.87% for our loan portfolio.
Accordingly, our net interest margin is lower than it would have been if a higher proportion of our interest-earning assets consisted of loans. Additionally, at June 30, 2022, $1.34 billion, or 91.9% of our investment securities, are classified as available for sale and reported at fair value with unrealized gains or losses excluded from earnings and reported in other comprehensive income, which affects our reported equity. Accordingly, given the significant size of the investment securities portfolio classified as available for sale and due to possible mark-to-market adjustments of that portion of the portfolio resulting from market conditions, we may experience greater volatility in the value of reported equity. Moreover, given that we actively manage our investment securities portfolio classified as available for sale, we may sell securities which could result in a realized loss, thereby reducing our net income.
Our increased commercial lending exposes us to additional risk.
As part of our business strategy we intend to increase our focus on commercial lending. We have increased our commercial lending staff and continue to seek additional commercial lenders to help grow the commercial loan portfolio. Our increased commercial lending, however, exposes us to greater risks than one- to four-family residential lending. Unlike single-family, owner-occupied residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from employment and other income sources, and are secured by real property whose value tends to be more easily ascertainable and realizable, the repayment of commercial loans typically is dependent on the successful operation and income stream of the borrower, which can be significantly affected by economic conditions, and are secured, if at all, by collateral that is more difficult to value or sell or by collateral which may depreciate in value. In addition, commercial loans generally carry larger balances to single borrowers or related groups of borrowers than one- to four-family mortgage loans, which increases the financial impact of a borrower’s default.
The risk exposure from our increased commercial lending is also a function of the markets in which we operate. Our commercial lending activity is generally focused on borrowers domiciled, and real estate located, within the states of New Jersey and New York. Regional risk factors and changes to local laws and regulations, including changes to rent regulations or foreclosure laws, may present greater risk than a more geographically diversified portfolio.
Because we intend to continue to increase our commercial business loan originations, our credit risk will increase.
Historically we have not had a significant portfolio of commercial business loans. We intend to continue to increase our originations of commercial business loans, including C&I and SBA loans, which generally have more risk than both one- to four-family residential and commercial mortgage loans. Since repayment of commercial business loans may depend on the successful operation of the borrower’s business, repayment of such loans can be affected by adverse conditions in the real estate market or the local economy. Because we plan to continue to increase our originations of these loans, it may be necessary to increase the level of our allowance for credit losses because of the increased risk characteristics associated with these types of loans. Any such increase to our allowance for credit losses would adversely affect our earnings.
We have a significant concentration in commercial real estate loans. If our regulators were to curtail our commercial real estate lending activities, our earnings, dividend paying capacity and/or ability to repurchase shares could be adversely affected.
In 2006, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “Guidance”). The Guidance provides that a bank’s commercial real estate lending exposure may receive increased supervisory scrutiny when total non-owner occupied commercial real estate loans, including loans secured by multi-family property, non-owner occupied commercial real estate and construction loans, represent 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of non-owner occupied commercial real estate equaled 514% of Bank total risk-based capital at June 30, 2022, however our commercial real estate loan portfolio increased by only 12% during the preceding 36 months.
Income from secondary mortgage market operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings.
A component of our business strategy is to sell a portion of residential mortgage loans originated into the secondary market, earning non-interest income in the form of gains on sale. For the year ended June 30, 2022, gains attributable to the sale of residential mortgage loans totaled $2.4 million, or approximately 17.3% of our non-interest income, a decline of $2.7 million from $5.1 million for the year ended June 30, 2021. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand. If the residential mortgage loan demand decreases or we are unable to sell such loans for an adequate profit, then our non-interest income will likely decline which would adversely affect our earnings.
We may be required to record impairment charges with respect to our investment securities portfolio.
We review our securities portfolio at the end of each quarter to determine whether the fair value is below the current carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether we intend to sell, or it is more than likely than not that we will be required to sell the security before recovery of its amortized cost basis. If this assessment indicates that a credit loss exists, we would be required to record an impairment charge.
We elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could adversely impact the value of our investment securities portfolio. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations.
At June 30, 2022, we had investment securities with fair values of approximately $1.45 billion on which we had approximately $128.5 million in gross unrealized losses and $304,000 of gross unrealized gains. The valuation and liquidity of our securities could be adversely impacted by reduced market liquidity, increased normal bid-asked spreads and increased uncertainty of market participants, which could reduce the market value of our securities, including those with no apparent credit exposure. The valuation of our securities requires judgment and as market conditions change security values may also change. Significant negative changes to valuations could result in impairments in the value of our securities portfolio, which could have an adverse effect on our financial condition or results of operations.
Our investments in corporate and municipal debt securities, trust preferred and subordinated debt securities and collateralized loan obligations expose us to additional credit risks.
The composition and allocation of our investment portfolio has historically emphasized U.S. agency mortgage-backed securities and U.S. agency debentures. While such assets remain a significant component of our investment portfolio at June 30, 2022, prior enhancements to our investment policies, strategies and infrastructure have enabled us to diversify the composition and allocation of our securities portfolio. Such diversification has included investing in corporate debt, municipal obligations, subordinated debt securities issued by financial institutions and collateralized loan obligations. With the exception of collateralized loan obligations, these securities are generally backed only by the credit of their issuers while investments in collateralized loan obligations generally rely on the structural characteristics of an individual tranche within a larger investment vehicle to protect the investor from credit losses arising from borrowers defaulting on the underlying securitized loans.
While we have invested primarily in investment grade securities, these securities are not backed by the federal government and expose us to a greater degree of credit risk than U.S. agency securities. Any decline in the credit quality of these securities exposes us to the risk that the market value of the securities could decrease which may require us to write down their value and could lead to a possible default in payment.
Source of Funds
Our reliance on wholesale funding could adversely affect our liquidity and operating results.
Among other sources of funds, we rely on wholesale funding, including short- and long-term borrowings, brokered deposits and non-brokered deposits acquired through listing services, to provide funds with which to make loans, purchase investment securities and provide for other liquidity needs. On June 30, 2022, wholesale funding totaled $1.67 billion, or approximately 21.7% of total assets.
Generally wholesale funding may not be as stable as funding acquired through traditional retail channels. In the future, this funding may not be readily replaced as it matures, or we may have to pay a higher rate of interest to maintain it. Not being able to maintain or replace those funds as they mature would adversely affect our liquidity. Paying higher interest rates to maintain or replace funding would adversely affect our net interest margin and operating results.
Information Security
Risks associated with system failures, service interruptions or other performance exceptions could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our client relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the effect of system failures, service interruptions or other performance exceptions, but such events may still occur or may not be adequately addressed if they do occur. In addition, performance failures or other exceptions of our client-facing technologies could deter clients from using our products and services.
In addition, we outsource a majority of our data processing to certain third-party service providers. If these service providers encounter difficulties, or if we have difficulty communicating with them, our ability to timely and accurately process and account for transactions could be adversely affected.
The occurrence of any system failures, service interruptions or other performance exceptions could damage our reputation and result in a loss of clients and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Risks associated with cyber-security could negatively affect our earnings.
The financial services industry has experienced an increase in both the number and severity of reported cyber-attacks aimed at gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy data, or cause operational disruptions.
We have established policies and procedures to prevent or limit the impact of security breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants or their systems to protect our clients' transaction data may put us at risk for possible losses due to fraud or operational disruption.
Our clients are also the target of cyber-attacks and identity theft. Large scale identity theft could result in clients' accounts being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our clients' information, regardless of its origin, could damage our reputation and result in a loss of clients and business and subject us to additional regulatory scrutiny, and could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Regulatory Matters
We operate in a highly regulated environment and may be adversely affected by changes in federal and state laws and regulations.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit a company’s shareholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described under the heading “Item 1. Business-Regulation.” These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. New proposals for legislation continue to be introduced in the U.S. Congress that could further alter the regulation of the bank and non-bank financial services industries and the manner in which companies within the industry conduct business.
In addition, federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Future changes in federal policy and at regulatory agencies may occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. These changes may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
Changes to tax laws and regulations could adversely affect our financial condition or results of operations.
Changes in tax laws and/or regulatory requirements could be enacted. These changes in the law may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. An increase in our corporate tax rate could have an unfavorable impact on our earnings and capital generation abilities. Similarly, the Bank’s clients could experience varying effects from changes in tax laws and such effects, whether positive or negative, may have a corresponding impact on our business and the economy as a whole. In addition, changes to regulatory requirements could increase our costs of regulatory compliance and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, and our ongoing operations, costs and profitability.
Business Issues
Our acquisitions and the integration of acquired businesses, subject us to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations.
We have in the past, and may in the future, seek to grow our business by acquiring other businesses. There is risk that our acquisitions may not have the anticipated positive results, including results relating to: correctly assessing the asset quality of the assets being acquired; the total cost and time required to complete the integration successfully; being able to profitably deploy funds acquired in an acquisition; or the overall performance of the combined entity.
Acquisitions may also result in business disruptions that could cause clients to remove their accounts from us and move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect our ability to maintain relationships with clients and employees. The loss of key employees in connection with an acquisition could adversely affect our ability to successfully conduct our business. Acquisition and integration efforts could divert management attention and resources, which could have an adverse effect on our financial condition and results of operations. Additionally, the operation of the acquired branches may adversely affect our existing profitability, and we may not be able to achieve results in the future similar to those achieved by the existing banking business or manage growth resulting from the acquisition effectively.
Changes to LIBOR may adversely impact the value of, and the return on, our loans, investment securities and derivatives which are indexed to LIBOR.
ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June 2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates. The transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging strategies. Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our loans, and our investment securities.
We hold certain intangible assets, including goodwill, which could become impaired in the future. If these assets are considered to be either partially or fully impaired in the future, our earnings would decrease.
At June 30, 2022, we had approximately $213.9 million in intangible assets on our balance sheet comprising $210.9 million of goodwill and $3.0 million of core deposit intangibles. We are required to periodically test our goodwill and identifiable intangible assets for impairment. The impairment testing process considers a variety of factors, including the current market price of our common stock, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common stock or our regulatory capital levels, but recognition of such an impairment loss could significantly restrict Kearny Bank’s ability to make dividend payments to Kearny Financial and therefore adversely impact our ability to pay dividends to stockholders.
We cannot guarantee that our allocation of capital to various alternatives, including stock repurchase plans, will enhance long-term stockholder value.
Our business plan calls for us to execute a variety of strategies to allocate and deploy any excess capital including, but not limited to, continued organic balance sheet growth and diversification, implementation of stock repurchase plans and payment of regular cash dividends. Additionally, we will carefully consider acquisition opportunities to further deploy capital when we expect such opportunities to significantly enhance long-term shareholder value. If we are unable to effectively and timely deploy capital through these strategies, it may constrain growth in earnings and return on equity and thereby diminish potential growth in stockholder value.
On August 1, 2022, we announced that our Board authorized a new stock repurchase plan to acquire up to 4,000,000 shares of the Company’s outstanding common stock. Repurchases are made at management’s discretion at prices management considers to be attractive and in the best interests of both the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance.
The Inflation Reduction Act of 2022, which was signed into law on August 16, 2022, contains a number of changes to U.S. federal tax laws. One such change is a 1% excise tax on stock repurchases, which will increase the cost of stock repurchases and may impact our future decisions on how to return value to stockholders in the most efficient manner.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and client attrition due to potential negative publicity. In the event of a breakdown in the internal control system, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
Our risk management framework is designed to effectively manage and mitigate risk while minimizing exposure to potential losses. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
We could be adversely affected by failure in our internal controls.
A failure in our internal controls could have a significant negative impact not only on our earnings, but also on the perception that clients, regulators and investors may have of us. We continue to devote a significant amount of effort, time and resources to continually strengthening our controls and ensuring compliance with complex accounting standards and banking regulations.
The inability to attract and retain key personnel could adversely affect our business.
The successful execution of our business strategy is partially dependent on our ability to attract and retain experienced and qualified personnel. Failure to do so could adversely affect our strategy, client relationships and internal operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company and the Bank conduct business from their corporate headquarters at 120 Passaic Avenue in Fairfield, New Jersey and from administrative offices located in Fairfield, Clifton, Millington and Oakhurst, New Jersey.
At June 30, 2022, the Company operated 45 branch offices located in Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset and Union counties, New Jersey and Kings and Richmond counties, New York. At June 30, 2022, 19 of our branch offices are leased with remaining terms between 7 months and 10 years. At June 30, 2022, our net investment in property and equipment totaled $53.3 million.
Additional information regarding our properties as of June 30, 2022, is presented in Note 8 to the audited consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are, from time to time, party to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. At June 30, 2022, there were no lawsuits pending or known to be contemplated against us that would be expected to have a material effect on operations or income.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information. The Company’s common stock trades on The NASDAQ Global Select Market under the symbol “KRNY.”
Declarations of dividends by the Board of Directors depend on a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions. The timing, frequency and amount of dividends are determined by the Board of Directors.
The Company’s ability to pay dividends may also depend on the receipt of dividends from the Bank, which is subject to a variety of limitations under federal banking regulations regarding the payment of dividends. For discussion of corporate and regulatory limitations applicable to the payment of dividends, see “Item 1. Business-Regulation.”
As of August 19, 2022, there were 4,351 registered holders of record of the Company’s common stock. Certain shares of the Company are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
(b) Use of Proceeds. Not applicable.
(c) Issuer Purchases of Equity Securities. Set forth below is information regarding the Company’s stock repurchases during the fourth quarter of the fiscal year ended June 30, 2022.
Period
Total Number
of Shares
Purchased
Average Price
Paid per Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
April 1-30, 2022
1,003,199
$
12.63
1,003,199
2,076,521
May 1-31, 2022
1,233,710
$
11.93
1,233,710
842,811
June 1-30, 2022
517,666
$
11.90
517,666
325,145
Total
2,754,575
$
12.18
2,754,575
325,145
On September 22, 2021, the Company announced the authorization of a new stock repurchase plan to repurchase up to 7,602,021 shares, or 10% of the shares then outstanding. This plan has no expiration date.
Stock Performance Graph. The following graph compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return on the NASDAQ Composite Index and a peer group of the SNL Thrift Index, in each case assuming an investment of $100 as of June 30, 2017. Total return assumes the reinvestment of all dividends.
At June 30,
Kearny Financial Corp.
$
$
$
$
$
$
NASDAQ Composite
S&P U.S. SmallCap Banks Index
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. The S&P U.S. SmallCap Banks Index includes all major exchange (NYSE, NYSE American and NASDAQ) traded banks under $15 billion in market capitalization in S&P’s coverage universe. There can be no assurance that the Company’s future stock performance will be the same or similar to the historical stock performance shown in the graph above. The Company neither makes nor endorses any predictions as to stock performance.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
This discussion and analysis reflects Kearny Financial Corp.’s consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with the business and financial information regarding Kearny Financial Corp. and the audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our accounting policies are integral to understanding the results reported. We describe them in detail in Note 1 to our audited consolidated financial statements. In preparing the audited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the Consolidated Statements of Financial Condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for credit losses.
Allowance for Credit Losses. The determination of our allowance for credit losses on loans (“ACL”) is considered a critical accounting estimate by management because of the high degree of judgment involved in determining qualitative loss factors, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL. See Note 1 to our audited consolidated financial statements for a detailed discussion of our accounting policies and methodologies for establishing the ACL.
Management believes the following information may enable investors to better understand the changes in our ACL. Our ACL totaled $47.1 million and $58.2 million at June 30, 2022 and 2021, respectively. The $11.1 million decrease in our ACL was primarily driven by our collectively evaluated loans. The quantitative component of our ACL, which is largely based on the national unemployment rate forecast, decreased $10.2 million, which resulted from continued improvement in our economic forecast and a reduction in the expected life of various segments of the loan portfolio. The qualitative component of our ACL, which is largely based on management’s judgment of qualitative loss factors, increased $2.1 million.
Our ACL totaled $47.1 million at June 30, 2022 and the amount allocated to our collectively evaluated multi-family and nonresidential mortgage loans was $32.4 million, of which $28.2 million was attributable to qualitative loss factors. Changes in managements’ judgement of qualitative loss factors could result in a significant change to the ACL. As described in Note 1, qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks. At June 30, 2022, the most severe historical loss rate for multi-family and nonresidential mortgages loans was 1.92%.
Management performed a hypothetical sensitivity analysis to understand the impact of a change in a key input on our ACL. At June 30, 2022, if the four-quarter national unemployment rate forecast had been 9% rather than an average of approximately 3.5%, our ACL would have been approximately $11.1 million higher. This sensitivity analysis includes the impact to both the quantitative and qualitative components of our ACL. Changes in quantitative inputs and qualitative loss factors may not occur in the same direction or magnitude across all segments of our loan portfolio and deterioration in some quantitative inputs and qualitative loss factors may offset improvement in others. This sensitivity analysis does not represent a change to our expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to a change in a key input. This sensitivity analysis does not incorporate changes to management’s judgment of qualitative loss factors.
Our ACL on individually analyzed loans is determined on an individual basis using the present value of expected cash flows discounted using the loan’s effective interest rate or, for collateral-dependent loans, the fair value of the collateral, less estimated selling costs, as applicable. Our ACL on individually analyzed loans decreased $3.0 million, which resulted from charge-offs, a loan payoff and an increase in the fair value of collateral for collateral-dependent loans, partially offset by new individually analyzed loans.
Financial Overview
The following financial information and other data in this section are derived from our audited consolidated financial statements and should be read together therewith:
At June 30,
(In Thousands)
Balance Sheet Data:
Cash and equivalents
$
101,615
$
67,855
$
180,967
Assets
7,719,883
7,283,735
6,758,175
Net loans receivable
5,370,787
4,793,229
4,461,070
Investment securities available for sale
1,344,093
1,676,864
1,385,703
Investment securities held to maturity
118,291
38,138
32,556
Goodwill
210,895
210,895
210,895
Deposits
5,862,256
5,485,306
4,430,282
Borrowings
901,337
685,876
1,173,165
Stockholders' equity
894,000
1,042,944
1,084,177
For the Years Ended June 30,
(Dollars in Thousands, Except Per Share Amounts)
Summary of Operations:
Interest income
$
226,272
$
238,085
$
237,804
Interest expense
29,669
49,851
83,854
Net interest income
196,603
188,234
153,950
(Reversal of) provision for credit losses
(7,518
)
(1,121
)
4,197
Net interest income after (reversal of) provision for credit losses
204,121
189,355
149,753
Non-interest income
13,934
21,026
15,123
Non-interest expenses
125,708
125,885
107,624
Income before taxes
92,347
84,496
57,252
Income tax expense
24,800
21,263
12,287
Net income
$
67,547
$
63,233
$
44,965
Per Share Data:
Net income per share - Basic and diluted
$
0.95
$
0.77
$
0.55
Weighted average number of common shares outstanding (in thousands):
Basic
70,911
82,387
82,409
Diluted
70,933
82,391
82,430
Cash dividends per share
$
0.43
$
0.35
$
0.29
Dividend payout ratio (1)
45.1
%
45.1
%
52.8
%
(1)	Represents cash dividends declared divided by net income.
At or For the Years Ended June 30,
Performance ratios:
Return on average assets (net income divided by average total assets)
0.93
%
0.86
%
0.67
%
Return on average equity (net income divided by average total equity)
6.86
%
5.79
%
4.10
%
Return on average tangible equity (net income divided by average tangible equity) (1)
8.77
%
7.22
%
5.10
%
Net interest rate spread
2.86
%
2.61
%
2.22
%
Net interest margin
2.94
%
2.75
%
2.45
%
Average interest-earning assets to average interest-earning liabilities
118.93
%
118.63
%
117.24
%
Efficiency ratio (non-interest expenses divided by the sum of net interest income
and non-interest income)
59.71
%
60.16
%
63.66
%
Non-interest expense to average assets
1.73
%
1.72
%
1.61
%
Asset Quality Ratios:
Non-performing loans to total loans
1.30
%
1.64
%
0.82
%
Non-performing assets to total assets
1.19
%
1.10
%
0.55
%
Net charge-offs to average loans outstanding
0.07
%
0.03
%
0.00
%
Allowance for credit losses to total loans
0.87
%
1.19
%
0.82
%
Allowance for credit losses to non-performing loans
66.92
%
72.92
%
101.72
%
Capital Ratios:
Average equity to average assets
13.52
%
14.88
%
16.39
%
Equity to assets at period end
11.58
%
14.32
%
16.04
%
Tangible equity to tangible assets at period end (2)
9.06
%
11.72
%
13.29
%
(1)	Average tangible equity equals total average stockholders’ equity reduced by average goodwill and average core deposit intangible assets.
(2)	Tangible equity equals total stockholders’ equity reduced by goodwill and core deposit intangible assets.
Comparison of Financial Condition at June 30, 2022 and June 30, 2021
Executive Summary. Total assets increased by $436.1 million, or 6.0%, to $7.72 billion at June 30, 2022 from $7.28 billion at June 30, 2021. The increase primarily reflected an increase in net loans receivable, partially offset by a decrease in investment securities.
Investment Securities. Investment securities available for sale decreased by $332.8 million to $1.34 billion at June 30, 2022 from $1.68 billion at June 30, 2021. This decrease was largely the result of principal repayments totaling $330.2 million, sales of $100.3 million and a $128.0 million decrease in the fair value of the portfolio to a net unrealized loss of $118.0 million, partially offset by purchases totaling $229.1 million.
Investment securities held to maturity increased by $80.2 million to $118.3 million at June 30, 2022 from $38.1 million at June 30, 2021. The increase was largely the result of purchases totaling $86.4 million, partially offset by principal repayments totaling $6.1 million.
Additional information regarding investment securities at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 4 to the audited consolidated financial statements.
Loans Held-for-Sale. Loans held-for-sale totaled $28.9 million at June 30, 2022 as compared to $16.5 million at June 30, 2021 and are reported separately from the balance of net loans receivable. Loans held-for-sale at June 30, 2022 included $21.7 million of non-accrual commercial loans. During the year ended June 30, 2022, $189.1 million of residential mortgage loans were sold, resulting in net gains on sale of $2.4 million.
Net Loans Receivable. Net loans receivable increased by $577.6 million, or 12.0%, to $5.37 billion at June 30, 2022 from $4.79 billion at June 30, 2021. Detail regarding the change in the loan portfolio is presented below:
June 30,
June 30,
Increase/
(Decrease)
(In Thousands)
Commercial loans:
Multi-family mortgage
$
2,409,090
$
2,039,260
$
369,830
Nonresidential mortgage
1,019,838
1,079,444
(59,606
)
Commercial business
176,807
168,951
7,856
Construction
140,131
93,804
46,327
Total commercial loans
3,745,866
3,381,459
364,407
One- to four-family residential mortgage
1,645,816
1,447,721
198,095
Consumer loans:
Home equity loans
42,028
47,871
(5,843
)
Other consumer
2,866
3,259
(393
)
Total consumer loans
44,894
51,130
(6,236
)
Total loans
5,436,576
4,880,310
556,266
Unaccreted yield adjustments
(18,731
)
(28,916
)
10,185
Allowance for credit losses
(47,058
)
(58,165
)
11,107
Net loans receivable
$
5,370,787
$
4,793,229
$
577,558
Commercial loan origination volume for the year ended June 30, 2022 totaled $1.37 billion, which comprised $1.14 billion of commercial mortgage loan originations, $140.1 million of commercial business loan originations and construction loan disbursements of $86.4 million. Commercial loan originations for the period were augmented by the purchase of loans totaling $56.0 million.
One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled $415.6 million for the year ended June 30, 2022 and was augmented by the purchase of loans totaling $67.4 million. Home equity loan and line of credit origination volume for the same period totaled $18.6 million.
Additional information about our loans at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.
Nonperforming Loans and TDRs. Nonperforming loans decreased by $9.5 million to $70.3 million, or 1.30% of total loans, at June 30, 2022 from $79.8 million, or 1.64% of total loans, at June 30, 2021. The decrease in nonperforming loans was largely attributable to a decrease of $10.7 million in non-performing one- to four-family residential mortgage loans.
TDRs are loans where we have modified the contractual terms of the loan as a result of the financial condition of the borrower. Subsequent to their modification, TDRs are placed on non-accrual until such time as satisfactory payment performance has been demonstrated, at which time the loan may be returned to accrual status. At June 30, 2022, we had accruing TDRs totaling $8.7 million, an increase of $2.5 million from $6.2 million at June 30, 2021. At June 30, 2022, we had non-accrual TDRs totaling $13.5 million, an increase of $1.9 million from $11.6 million at June 30, 2021.
Based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications made in response to the COVID-19 pandemic, including short-term payment deferrals, were not considered to be TDRs. We had no active payment deferrals that were not considered to be TDRs as of June 30, 2022. We had active payment deferrals that were not considered TDRs of $5.6 million at June 30, 2021.
Additional information about nonperforming loans and TDRs at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.
Allowance for Credit Losses (“ACL”). At June 30, 2022, the ACL totaled $47.1 million, or 0.87% of total loans, reflecting a decrease of $11.1 million from $58.2 million, or 1.19% of total loans, at June 30, 2021. The decrease was largely attributable to a provision for credit losses reversal of $7.5 million, primarily driven by continued improvement in our economic forecast, a reduction in the expected life of various segments of the loan portfolio and a net reduction in reserves on loans individually evaluated for impairment. Also contributing to this decrease were net charge-offs of $3.6 million, of which $1.8 million had previously been individually reserved for within the ACL.
Additional information about the allowance for credit losses at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 1 and Note 6 to the audited consolidated financial statements.
Other Assets. The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, core deposit intangibles, bank owned life insurance, deferred income taxes, OREO and other assets, increased by $65.0 million to $756.2 million at June 30, 2022 from $691.2 million at June 30, 2021. The increase in other assets primarily reflected a $39.4 million increase in the fair value of our derivatives portfolio and a $20.0 million increase in net deferred income tax assets during the year ended June 30, 2022. The remaining change generally reflected normal operating fluctuations within these line items.
Deposits. Total deposits increased by $377.0 million, or 6.9%, to $5.86 billion at June 30, 2022 from $5.49 billion at June 30, 2021. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:
June 30,
June 30,
Increase/
(Decrease)
(In Thousands)
Non-interest-bearing deposits
$
653,899
$
593,718
$
60,181
Interest-bearing deposits:
Interest-bearing demand
2,265,597
1,902,478
363,119
Savings
1,053,198
1,111,364
(58,166
)
Certificates of deposit
1,889,562
1,877,746
11,816
Interest-bearing deposits
5,208,357
4,891,588
316,769
Total deposits
$
5,862,256
$
5,485,306
$
376,950
Additional information about our deposits at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 10 to the audited consolidated financial statements.
Borrowings. The balance of borrowings increased by $215.5 million, or 31.4%, to $901.3 million at June 30, 2022 from $685.9 million at June 30, 2021 which included overnight borrowings totaling $250.0 million and $20.0 million at June 30, 2022 and 2021, respectively. Partially offsetting the increase in overnight borrowings was the repayment of maturing FHLB advances totaling $15.0 million.
Additional information about our borrowings at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 11 to the audited consolidated financial statements.
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $7.3 million to $62.3 million at June 30, 2022 from $69.6 million at June 30, 2021. The change in other liabilities largely reflected the payment of a $12.5 million loan participation liability which was outstanding at June 30, 2021. The remaining change generally reflected normal operating fluctuations within these line items.
Additional information about our derivatives portfolio at June 30, 2022 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 12 to the audited consolidated financial statements.
Stockholders’ Equity. Stockholders’ equity decreased by $148.9 million to $894.0 million at June 30, 2022 from $1.04 billion at June 30, 2021. The decrease in stockholders’ equity during the year ended June 30, 2022 largely reflected share repurchases totaling $129.5 million and dividends totaling $30.5 million. In addition, accumulated other comprehensive (loss) income decreased $61.9 million due primarily to a decline in the fair value of our available for sale securities, partially offset by an increase in the fair value of our derivatives portfolio. These decreases were partially offset by net income of $67.5 million.
Book value per share decreased by $0.19 to $13.02 at June 30, 2022 while tangible book value per share decreased by $0.59 to $9.90 at June 30, 2022.
On September 20, 2021, we announced the completion of our seventh stock repurchase plan. On September 22, 2021, we announced the authorization of our eighth stock repurchase plan to repurchase up to 7,602,021, or 10% of the shares then outstanding.
During the year ended June 30, 2022, we repurchased a total of 10,221,525 shares of our common stock in conjunction with our seventh and eighth repurchase plans. Such shares were repurchased at a total cost of $129.5 million and at an average cost of $12.67 per share.
Including shares repurchased prior to July 1, 2021, the shares repurchased under our seventh repurchase plan were repurchased at a total cost of $50.5 million and at an average cost of $12.43 per share.
Included in the shares repurchased during the year ended June 30, 2022 were 7,276,876 shares that we repurchased pursuant to our eighth repurchase program at a cost of $93.2 million and at an average cost of $12.80 per share which represented 95.7% of the total shares authorized to be repurchased.
Comparison of Operating Results for the Years Ended June 30, 2022 and June 30, 2021
Net Income. Net income for the year ended June 30, 2022 was $67.5 million, or $0.95 per diluted share, an increase of 6.8% from $63.2 million, or $0.77 per diluted share for the year ended June 30, 2021. The increase in net income reflected an increase in net interest income and decreases in the provision for credit losses and non-interest expense, partially offset by a decrease in non-interest income and an increase in income tax expense.
Net Interest Income. Effective July 1, 2021, loan prepayment penalty income was reclassified to interest income on loans. Previously, loan prepayment penalty income was recorded within non-interest income. Interest income and non-interest income for all periods presented reflect this reclassification.
Net interest income increased by $8.4 million to $196.6 million for the year ended June 30, 2022. The increase between the comparative periods resulted from a decrease of $20.2 million in interest expense, partially offset by a decrease of $11.8 million in interest income. Included in net interest income for the years ended June 30, 2022 and 2021, respectively, was purchase accounting accretion of $9.0 million and $16.6 million and loan prepayment penalty income of $5.4 million and $3.7 million.
Net interest margin increased 14 basis points to 2.94% for the year ended June 30, 2022, from 2.80% for the year ended June 30, 2021. The increase reflected decreases in the cost and average balance of interest-bearing liabilities, partially offset by a decrease in the yield on interest-earning assets.
Details surrounding the composition of, and changes to, net interest income are presented in the table below which reflects the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances. No tax equivalent adjustments have been made to yield or costs. Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income.
For the Years Ended June 30,
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
Interest
Average
Yield/
Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)
$
4,922,400
$
190,520
3.87
%
$
4,866,436
$
202,240
4.16
%
$
4,568,816
$
191,599
4.19
%
Taxable investment securities (2)
1,622,475
32,746
2.02
1,571,452
31,238
1.99
1,291,516
39,321
3.04
Tax-exempt securities (2)
55,981
1,273
2.27
74,604
1,652
2.21
111,477
2,393
2.15
Other interest-earning assets (3)
82,802
1,733
2.09
200,435
2,955
1.47
122,278
4,491
3.67
Total interest-earning assets
6,683,658
226,272
3.39
6,712,927
238,085
3.55
6,094,087
237,804
3.90
Non-interest-earning assets
598,712
620,934
595,158
Total assets
$
7,282,370
$
7,333,861
$
6,689,245
Interest-bearing liabilities:
Interest-bearing demand
$
2,067,200
$
5,123
0.25
$
1,726,190
$
7,028
0.41
$
1,041,188
$
11,433
1.10
Savings
1,088,971
1,190
0.11
1,066,794
3,299
0.31
831,832
6,735
0.81
Certificates of deposit
1,711,276
8,895
0.52
1,931,887
21,208
1.10
2,032,046
40,684
2.00
Total interest-bearing deposits
4,867,447
15,208
0.31
4,724,871
31,535
0.67
3,905,066
58,852
1.51
FHLB advances
679,388
14,067
2.07
931,148
18,314
1.97
1,236,139
24,582
1.99
Other borrowings
72,841
0.54
2,563
0.06
56,957
0.74
Total borrowings
752,229
14,461
1.92
933,711
18,316
1.96
1,293,096
25,002
1.93
Total interest-bearing liabilities
5,619,676
29,669
0.53
5,658,582
49,851
0.88
5,198,162
83,854
1.61
Non-interest-bearing liabilities (4)
678,143
583,886
394,758
Total liabilities
6,297,819
6,242,468
5,592,920
Stockholders' equity
984,551
1,091,393
1,096,325
Total liabilities and
stockholders' equity
$
7,282,370
$
7,333,861
$
6,689,245
Net interest income
$
196,603
$
188,234
$
153,950
Interest rate spread (5)
2.86
%
2.67
%
2.29
%
Net interest margin (6)
2.94
%
2.80
%
2.53
%
Ratio of interest-earning assets
to interest-bearing liabilities
1.19
X
1.19
X
1.17
X
(1)Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for credit losses has been included in non-interest-earning assets.
(2)Fair value adjustments have been excluded in the balances of interest-earning assets.
(3)Includes interest-bearing deposits at other banks and FHLB of New York capital stock.
(4)Includes average balances of non-interest-bearing deposits of $624.7 million, $518.1 million and $334.5 million for the years ended June 30, 2022, 2021 and 2020, respectively.
(5)Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(6)Net interest margin represents net interest income as a percentage of average interest-earning assets.
The following table reflects the dollar amount of changes in interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.
Year Ended June 30, 2022
versus
Year Ended June 30, 2021
Year Ended June 30, 2021
versus
Year Ended June 30, 2020
Increase (Decrease) Due to
Increase (Decrease) Due to
Volume
Rate
Net
Volume
Rate
Net
(In Thousands)
(In Thousands)
Interest and dividend income
Loans receivable
$
2,337
$
(14,057
)
$
(11,720
)
$
12,057
$
(1,416
)
$
10,641
Taxable investment securities
1,030
1,508
7,341
(15,424
)
(8,083
)
Tax-exempt securities
(423
)
(379
)
(807
)
(741
)
Other interest-earning assets
(2,157
)
(1,222
)
1,984
(3,520
)
(1,536
)
Total interest-earning assets
$
$
(12,600
)
$
(11,813
)
$
20,575
$
(20,294
)
$
Interest expense:
Interest-bearing demand
$
1,216
$
(3,121
)
$
(1,905
)
$
5,100
$
(9,505
)
$
(4,405
)
Savings
(2,176
)
(2,109
)
1,533
(4,969
)
(3,436
)
Certificates of deposit
(2,192
)
(10,121
)
(12,313
)
(1,923
)
(17,553
)
(19,476
)
Borrowings
(3,489
)
(366
)
(3,855
)
(7,067
)
(6,686
)
Total interest-bearing liabilities
$
(4,398
)
$
(15,784
)
$
(20,182
)
$
(2,357
)
$
(31,646
)
$
(34,003
)
Change in net interest income
$
5,185
$
3,184
$
8,369
$
22,932
$
11,352
$
34,284
Provision for Credit Losses. The provision for credit losses decreased by $6.4 million to a provision for credit losses reversal of $7.5 million for the year ended June 30, 2022, compared to a provision for credit losses reversal of $1.1 million for the year ended June 30, 2021. The provision for credit losses reversal for the year ended June 30, 2022 was largely attributable to continued improvement in our economic forecast, a reduction in the expected life of various segments of the loan portfolio and a net reduction of $3.0 million in reserves on individually evaluated loans. By comparison, the provision for credit losses reversal for the year ended June 30, 2021 was largely attributable to a release of reserves within certain loan segments, reflecting the improving credit risk outlook for those asset classes in the reasonable and supportable forecast, partially offset by an increase of $6.6 million in reserves on individually evaluated loans and $5.1 million of provision expense on non-PCD loans acquired in connection with the acquisition of MSB.
Additional information regarding the allowance for credit losses and the associated provisions recognized during the year ended June 30, 2022 is presented under “Item 1, Business” on this Annual Report on Form 10-K as well as in Note 1 and Note 6 to the audited consolidated financial statements as well as the Comparison of Financial Condition at June 30, 2022.
Non-Interest Income. Non-interest income decreased by $7.1 million to $13.9 million for the year ended June 30, 2022.
Fees and service charges increased by $683,000 to $2.6 million for the year ended June 30, 2022. The increase primarily reflected increases in various loan-related and deposit-related fees and charges.
Loss on sale and call of securities was $559,000 during the year ended June 30, 2022 compared to a net gain of $767,000 recorded during the earlier comparative period.
Gain on sale of loans decreased by $3.0 million to $2.5 million for the year ended June 30, 2022. The decrease in gain on sale of loans reflected a decrease in the volume of loans sold between comparative periods coupled with a lower average gain per loan.
Bargain purchase gain of $3.1 million was recognized in the earlier comparative period in conjunction with the MSB acquisition. There was no such gain recorded in the current period.
The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.
Non-Interest Expense. Non-interest expense decreased by $177,000 to $125.7 million for the year ended June 30, 2022. Included in non-interest expense for the years ended June 30, 2022 and 2021 were various non-recurring items as described below.
Salaries and employee benefits expense increased by $7.5 million to $76.3 million for the year ended June 30, 2022. This increase was largely due to the impact of staff additions, annual merit increases, an increase in incentive payments tied to loan origination volume, and increases in benefit plan expense, including employee medical, post-retirement plan and ESOP expense. These increases were partially offset by a decrease in stock-based compensation expense.
Net occupancy expense of premises increased by $1.4 million to $14.1 million for the year ended June 30, 2022. This increase was primarily due to non-recurring expenses of $1.3 million related to the consolidation of three retail branch locations, $250,000 related to facility repairs made in connection with damage incurred during Tropical Storm Ida and $187,000 related to the closure of a leased office facility acquired in conjunction with the MSB acquisition.
Equipment and systems expense increased by $1.0 million to $15.9 million for the year ended June 30, 2022. This increase was largely attributable to a non-recurring expense of $800,000 from the early termination of a contract with a service provider.
Director compensation decreased by $861,000 to $2.1 million for the year ended June 30, 2022. This decrease primarily reflected a decline in director-related stock-based compensation expense.
Merger-related expenses, associated with our acquisition of MSB, were $4.3 million for the year ended June 30, 2021. There were no such expenses recorded in the current period.
Debt extinguishment expenses, resulting from the pre-payment of FHLB advances, totaled $796,000 for the year ended June 30, 2021. There were no such expenses recorded in the current period.
Other expense decreased by $4.5 million to $12.8 million for the year ended June 30, 2022. This decrease was primarily attributable to a $1.8 million decrease in the provision for credit losses on unfunded commitments and a $1.5 million decrease in asset impairment charges. For the years ended June 30, 2022 and 2021, non-recurring asset impairment charges related to branch and administrative facility consolidation activity totaled $420,000 and $1.9 million, respectively.
The remaining changes in the other components of non-interest expense between comparative periods generally reflected normal operating fluctuations within those line items.
Provision for Income Taxes. Provision for income taxes increased by $3.5 million to $24.8 million for the year ended June 30, 2022, from $21.3 million for the year ended June 30, 2021. The increase in income tax expense largely reflected a higher level of pre-tax net income, as compared to the prior period.
Effective tax rates for the years ended June 30, 2022 and 2021 were 26.9% and 25.2%, respectively. The effective tax rate for the prior comparative period was impacted by the effects of various non-recurring items recorded in conjunction with our acquisition of MSB, including non-deductible merger related expenses, which were partially offset by a non-taxable bargain purchase gain.
Comparison of Operating Results for the Years Ended June 30, 2021 and June 30, 2020
A comparison of our operating results for the years ended June 30, 2021 and June 30, 2020 can be found in our Annual Report on Form 10-K for the year ended June 30, 2021, filed with the SEC on August 27, 2021.
Liquidity and Commitments
Liquidity, represented by cash and cash equivalents, is a product of operating, investing and financing activities. Our primary sources of funds are deposits, borrowings, cash flows from investment securities and loans receivable and funds provided from operations. While scheduled payments from the amortization and maturity of loans and investment securities are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and securities.
Liquidity, at June 30, 2022, included $101.6 million of short-term cash and equivalents supplemented by $1.34 billion of investment securities classified as available for sale which can readily be sold or pledged as collateral, if necessary. In addition, we have the capacity to borrow additional funds from the FHLB, Federal Reserve Bank or via unsecured overnight borrowings. As of June 30, 2022, we had the capacity to borrow additional funds totaling $2.04 billion and $303.9 million from the FHLB of New York and Federal Reserve Bank, respectively, without pledging additional collateral. As of that same date, we also had access to unsecured overnight borrowings with other financial institutions totaling $975.0 million, of which none was outstanding.
Deposits increased $377.0 million to $5.86 billion at June 30, 2022 from $5.49 billion at June 30, 2021. The increase in deposit balances reflected a $316.8 million increase in interest-bearing deposits coupled with a $60.2 million increase in non-interest-bearing deposits. Borrowings from the FHLB of New York and other sources are generally available to supplement the Bank’s liquidity position or to replace maturing deposits. As of June 30, 2022, the Bank’s outstanding balance of FHLB advances, excluding fair value adjustments, totaled $652.5 million. As of the same date, we had $250.0 million outstanding via the Bank’s overnight line of credit with the FHLB.
The following table sets forth information concerning balances and interest rates on our short-term borrowings at and for the periods shown:
At or For the Years Ended June 30,
(Dollars in Thousands)
Balance at end of year
$
625,000
$
390,000
$
865,000
Average balance during year
$
476,142
$
646,896
$
904,262
Maximum outstanding at any month end
$
684,000
$
815,000
$
1,075,000
Weighted average interest rate at end of year
1.72
%
0.33
%
0.45
%
Weighted average interest rate during year
0.58
%
1.08
%
2.14
%
The following table discloses our contractual obligations and commitments as of June 30, 2022:
At June 30, 2022
Less than
One Year
One to
Three Years
Over Three
Years to
Five Years
Over Five
Years
Total
(In Thousands)
Contractual obligations
Operating lease obligations
$
3,614
$
6,092
$
5,524
$
5,956
$
21,186
Certificates of deposit
1,468,565
356,374
58,929
5,694
1,889,562
Federal Home Loan Bank Advances
520,000
22,500
103,500
6,500
652,500
Total contractual obligations
$
1,992,179
$
384,966
$
167,953
$
18,150
$
2,563,248
Commitments
Undisbursed funds from approved lines of credit (1)
$
75,755
$
18,548
$
6,423
$
58,540
$
159,266
Construction loans in process (1)
109,047
-
-
-
109,047
Other commitments to extend credit (1)
242,148
-
-
-
242,148
Total commitments
$
426,950
$
18,548
$
6,423
$
58,540
$
510,461
(1)Represents amounts committed to customers.
In addition to the loan commitments noted above, the pipeline of loans held for sale included $20.3 million of in process loans whose terms included interest rate locks to borrowers that were paired with a 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.
In addition to the commitments noted above, we are party to standby letters of credit totaling approximately $130,000 at June 30, 2022 through which we guarantee certain specific business obligations of our commercial customers.
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.
At June 30, 2022, outstanding loan commitments relating to loans held in portfolio totaled $510.5 million compared to $512.2 million at June 30, 2021. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For additional information regarding our outstanding lending commitments at June 30, 2022, see Note 17 to the audited consolidated financial statements.
Capital
Consistent with our goals to operate as a sound and profitable financial organization, Kearny Financial and Kearny Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As of June 30, 2022, Kearny Financial and Kearny Bank exceeded all capital requirements of the federal banking regulators and were considered well capitalized.
The following table presents information regarding the Bank’s regulatory capital levels at June 30, 2022:
At June 30, 2022
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)
$
672,274
13.10
%
$
410,429
8.00
%
$
513,036
10.00
%
Tier 1 capital (to risk-weighted assets)
642,336
12.52
%
307,822
6.00
%
410,429
8.00
%
Common equity tier 1 capital (to risk-weighted assets)
642,336
12.52
%
230,866
4.50
%
333,473
6.50
%
Tier 1 capital (to adjusted total assets)
642,336
8.70
%
295,163
4.00
%
368,954
5.00
%
The following table presents information regarding the consolidated Company’s regulatory capital levels at June 30, 2022:
At June 30, 2022
Actual
For Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets)
$
778,253
15.17
%
$
410,515
8.00
%
Tier 1 capital (to risk-weighted assets)
748,315
14.58
%
307,886
6.00
%
Common equity tier 1 capital (to risk-weighted assets)
748,315
14.58
%
230,914
4.50
%
Tier 1 capital (to adjusted total assets)
748,315
10.14
%
295,290
4.00
%
For additional information regarding regulatory capital at June 30, 2022, see Note 15 to the audited consolidated financial statements.
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.
Recent Accounting Pronouncements
For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by us, please refer to Note 2 to the audited consolidated financial statements.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management of Interest Rate Risk and Market Risk
The majority of our assets and liabilities are sensitive to changes in interest rates and as such, interest rate risk is a significant form of market risk that we must manage. Interest rate risk is generally defined in regulatory nomenclature as the risk to earnings or capital arising from the movement of interest rates and arises from several risk factors including re-pricing risk, basis risk, yield curve risk and option risk.
We maintain an Asset/Liability Management (“ALM”) program in order to manage our interest rate risk. The program is overseen by the Board of Directors through its Interest Rate Risk Management Committee, which has assigned the responsibility for the operational aspects of the ALM program to our Asset/Liability Management Committee (“ALCO”), which is comprised of various members of the senior and executive management team.
The quantitative analysis that we conduct measures interest rate risk from both a capital and earnings perspective. With regard to earnings, movements in interest rates and the shape of the yield curve significantly influence the amount of net interest income (“NII”) that we recognize. Movements in market interest rates, and the effect of such movements on the risk factors noted above, significantly influence the spread between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities. Our internal interest rate risk analysis calculates the sensitivity of our projected NII over a one year period utilizing a static balance sheet assumption through which incoming and outgoing asset and liability cash flows are reinvested into similar instruments. Product pricing and earning asset prepayment speeds are appropriately adjusted for each rate scenario.
With regard to capital, our internal interest rate risk analysis calculates the sensitivity of our Economic Value of Equity (“EVE”) to movements in interest rates. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet instruments. EVE attempts to quantify our economic value using a discounted cash flow methodology. The degree to which our EVE changes for any hypothetical interest rate scenario from its base case measurement is a reflection of an institution’s sensitivity to interest rate risk.
For both earnings and capital at risk our interest rate risk analysis calculates a base case scenario that assumes no change in interest rates. The model then measures changes throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve up and down 100, 200 and 300 basis points with additional scenarios modeled where appropriate. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at June 30, 2022 and June 30, 2021 precluded the modeling of certain falling rate scenarios.
The following tables present the results of our internal EVE and NII analyses as of June 30, 2022 and 2021, respectively:
June 30, 2022
1 to 12 Months
13 to 24 Months
Change in
Interest Rates
$ Amount
of EVE
% Change
in EVE
$ Amount
of NII
% Change
in NII
$ Amount
of NII
% Change
in NII
(Dollars in Thousands)
+300 bps
1,089,795
(15.37
)
%
178,865
(13.62
)
%
214,839
(1.68
)
%
+200 bps
1,156,219
(10.21
)
%
187,601
(9.40
)
%
215,528
(1.36
)
%
+100 bps
1,239,935
(3.71
)
%
198,126
(4.32
)
%
219,594
0.50
%
0 bps
1,287,700
-
207,069
-
218,501
-
-100 bps
1,272,203
(1.20
)
%
205,241
(0.88
)
%
204,568
(6.38
)
%
June 30, 2021
1 to 12 Months
13 to 24 Months
Change in
Interest Rates
$ Amount
of EVE
% Change
in EVE
$ Amount
of NII
% Change
in NII
$ Amount
of NII
% Change
in NII
(Dollars in Thousands)
+300 bps
1,083,847
(8.82
)
%
175,830
(8.38
)
%
196,307
4.11
%
+200 bps
1,132,915
(4.69
)
%
182,089
(5.12
)
%
195,756
3.82
%
+100 bps
1,176,890
(0.99
)
%
187,961
(2.06
)
%
194,543
3.17
%
0 bps
1,188,656
-
191,908
-
188,559
-
-100 bps
1,071,463
(9.86
)
%
181,645
(5.35
)
%
169,447
(10.14
)
%
There are numerous internal and external factors that may contribute to changes in our EVE and its sensitivity. Changes in the composition and allocation of our balance sheet, or utilization of off-balance sheet instruments such as derivatives, can significantly alter the exposure to interest rate risk as quantified by the changes in the EVE sensitivity measures. Changes to certain external factors, most notably changes in the level of market interest rates and overall shape of the yield curve, can also alter the projected cash flows of our interest-earning assets and interest-costing liabilities and the associated present values thereof.
Subsequent to June 30, 2022, we executed a series of derivative transactions designed to reduce our net interest income exposure to interest rate shocks in a rising rate environment. These transactions were structured to minimize any adverse impact on current period net interest income.
Notwithstanding the rate change scenarios presented in the EVE and NII-based analyses above, future interest rates and their effect on net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit run-offs and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in this type of computation. Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react at different times and in different degrees to changes in market interest rates. The interest rate on certain types of assets and liabilities, such as demand deposits and savings accounts, may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as adjustable-rate mortgages, generally have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in the analyses set forth above. Additionally, an increase in credit risk may result as the ability of borrowers to service their debt may decrease in the event of an interest rate increase.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The Company’s consolidated financial statements are contained in this Annual Report on Form 10-K immediately following Item 16.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
(a)	Disclosure Controls and Procedures
Based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company’s principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to the Company’s management, including the principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
(b)	Internal Control over Financial Reporting
1.	Management’s Annual Report on Internal Control Over Financial Reporting.
Management’s report on the Company’s internal control over financial reporting appears in the Company’s consolidated financial statements that are contained in this Annual Report on Form 10-K immediately following Item 16. Such report is incorporated herein by reference.
2.	Report of Independent Registered Public Accounting Firm.
The report of Crowe LLP, an independent registered public accounting firm, on the Company’s internal control over financial reporting appears in the Company’s consolidated financial statements that are contained in this Annual Report on Form 10-K immediately following Item 16. Such report is incorporated herein by reference.
3.	Changes in Internal Control Over Financial Reporting.
During the last quarter of the year under report, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information that appears under the headings included under “Proposal I - Election of Directors” and “Corporate Governance Matters” in the Registrant’s definitive proxy statement for the Registrant’s 2022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year end (the “Proxy Statement”) is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer and principal financial and accounting officer. A copy of the code of ethics (referred to as Conflicts of Interest & Code of Conduct) is available on our website at www.kearnybank.com under the “Investors Relations” link, then within the “Corporate Overview” drop down and under the link “Governance Documents” or without charge upon request to the Corporate Secretary, Kearny Financial Corp., 120 Passaic Avenue, Fairfield, New Jersey 07004.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information that appears under the headings “Executive Compensation”, “Director Compensation” and “Compensation Discussion and Analysis” in the Proxy Statement is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a)	Security Ownership of Certain Beneficial Owners. Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
(b)	Security Ownership of Management. Information required by this item is incorporated herein by reference to the section captioned “Proposal I - Election of Directors” in the Proxy Statement.
(c)	Changes in Control. Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.
(d)	Securities Authorized for Issuance Under Equity Compensation Plans. Set forth below is information as of June 30, 2022 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
(A)
(B)
(C)
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights(1)
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities Remaining
Available for Future Issuance Under
Equity Compensation Plans - Excluding
Securities Reflected in Column (A)(2)
Equity compensation plans
approved by stockholders:
2005 Stock Compensation
and Incentive Plan
138,040
$
10.67
-
2016 Equity Incentive Plan
3,251,166
$
15.17
-
2021 Equity Incentive Plan
251,905
$
-
6,744,285
Equity compensation plans
not approved by stockholders:
None
-
$
-
-
Total
3,641,111
$
14.98
6,744,285
(1)The number of securities includes 3,133,040 vested options and 120,000 non-vested options outstanding as of June 30, 2022. In addition to these options, 136,166 restricted stock awards and 251,905 restricted stock units were also non-vested as of June 30, 2022. The non-vested options and restricted stock awards are earned at the rate of 20% one year after the date of the grant and 20% annually thereafter. The non-vested restricted stock units are earned at the rate of 33% seven months after the date of the grant and 33% annually thereafter.
(2)As of June 30, 2022, there were 6,744,285 options (or 2,248,095 restricted stock units or restricted stock awards) remaining available for award under the approved equity compensation plans.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
The information that appears under the sections captioned “Corporate Governance Matters - Transactions with Certain Related Persons” and “- Board Independence” in the Proxy Statement is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Our independent registered public accounting firm is Crowe LLP, Grand Rapids, MI, Auditor Firm ID: 173
The information relating to this item is incorporated herein by reference to the information contained under the section captioned “Proposal II - Ratification of Appointment of Independent Auditor” in the Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(1)The following financial statements and the independent auditors’ report appear in this Annual Report on Form 10-K immediately after Item 16:
Management Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of June 30, 2022 and 2021
Consolidated Statements of Income For the Years Ended June 30, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income For the Years Ended June 30, 2022, 2021 and 2020
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30, 2022, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended June 30, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.
(3) The following exhibits are filed as part of this Annual Report on Form 10-K:
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)
4.1
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)
4.2
Description of Capital Stock of Kearny Financial Corp. (Incorporated by reference to Exhibit 4.2 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on August 28, 2020)
10.1
Amended and Restated Employment Agreement between Kearny Bank and Craig Montanaro dated May 18, 2015 (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.2
Amended and Restated Employment Agreement between Kearny Financial Corp. and Craig Montanaro dated May 18, 2015 (Incorporated by reference to Exhibit 10.2 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.3
Employment Agreement between Kearny Bank and Patrick M. Joyce dated May 18, 2015 (Incorporated by reference to Exhibit 10.4 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.4
Amended and Restated Employment Agreement between Kearny Bank and Eric B. Heyer dated July 1, 2018 (Incorporated by reference to Exhibit 10.5 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399, originally filed on August 28, 2018)
10.5
Employment Agreement between Kearny Bank and Erika K. Parisi dated May 18, 2015 (Incorporated by reference to Exhibit 10.6 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.6
Employment Agreement between Kearny Bank and Keith Suchodolski dated June 15, 2022 (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 001-37399, originally filed on June 16, 2022)
10.7
Employment Agreement between Kearny Bank and Thomas D. DeMedici dated June 21, 2017 (Incorporated by reference to Exhibit 10.8 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on August 28, 2019)
10.8
Change in Control Agreement between Kearny Bank and Anthony V. Bilotta, Jr. dated July 1, 2018 (Incorporated by reference to Exhibit 10.9 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on August 28, 2019)
10.9
Form of Two Year Change in Control Agreement between Kearny Bank and Certain Officers (Incorporated by reference to Exhibit 10.7 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.10
Directors Consultation and Retirement Plan as Amended and Restated (Incorporated by reference to Exhibit 10.8 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.11
Amended and Restated Benefit Equalization Plan for Pension Plan (Incorporated by reference to Exhibit 10.9 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.12
Amended and Restated Benefits Equalization Plan Related to the Employee Stock Ownership Plan (Incorporated by reference to Exhibit 10.10 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.13
Kearny Bank Director Life Insurance Agreement (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 000-51093), originally filed on August 18, 2005)
10.14
Form of Amendment to Kearny Bank Director Life Insurance Agreement (Incorporated by reference to Exhibit 10.14 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.15
Kearny Bank Amended and Restated Executive Life Insurance Agreement with Craig Montanaro (Incorporated by reference to Exhibit 10.2 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 001-37399), originally filed on June 16, 2022)
10.16
Form of Kearny Bank Executive Life Insurance Agreement with Keith Suchodolski, Patrick M. Joyce and Thomas D. DeMedici (Incorporated by reference to Exhibit 10.2 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 000-51093), originally filed on August 18, 2005)
10.17
Form of Amendment to Kearny Bank Executive Life Insurance Agreement with Keith Suchodolski, Patrick M. Joyce and Thomas D. DeMedici (Incorporated by reference to Exhibit 10.16 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on September 14, 2015)
10.18
Kearny Bank Amended and Restated Change in Control Severance Pay Plan (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Quarterly Report on Form 10-Q (File No. 001-37399), originally filed on May 6, 2022)
10.19
Kearny Bank Executive Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10.20 to Kearny Financial Corp.’s Annual Report on Form 10-K (File No. 001-37399), originally filed on August 28, 2019) 
10.20
Amendment to Freeze Benefit Accruals Under the Kearny Financial Corp. Directors Consultation and Retirement Plan (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 001-37399), originally filed on December 23, 2015)
10.21
Kearny Financial Corp. 2016 Equity Incentive Plan (Incorporated by reference to Appendix A to Kearny Financial Corp’s Proxy Statement (File No. 001-37399), originally filed on September 14, 2016)
10.22
Supplemental Executive Retirement Plan by and between Kearny Bank and Craig L. Montanaro effective as of July 1, 2021 (Incorporated by reference to Exhibit 10.1 to Kearny Financial Corp.’s Current Report on Form 8-K (File No. 001-37399), originally filed on June 21, 2021)
10.23
Kearny Financial Corp. 2021 Equity Incentive Plan (Incorporated by reference to Appendix A to Kearny Financial Corp’s Proxy Statement (File No. 001-37399), originally filed on September 17, 2021)
Subsidiaries of Registrant
23.1
Consent of Crowe LLP
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report to Stockholders on Form 10-K for the year ended June 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS
Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
	Management contract or compensatory plan or arrangement required to be filed as an exhibit.