Equibles

10-Q

Kearny Financial Corp. (KRNY)

10-Q 2021-05-07 For: 2021-03-31
View Original
Added on April 06, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from              to

Commission File Number 001-37399

KEARNY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Maryland 30-0870244
(State or other jurisdiction of<br>incorporation or organization) (I.R.S. Employer<br>Identification Number)
120 Passaic Ave., Fairfield, New Jersey 07004
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code

973-244-4500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value KRNY The NASDAQ Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

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

Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 4, 2021.

$0.01 par value common stock — 80,792,973 shares outstanding

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

INDEX

Page<br><br><br>Number
PART I—FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Financial Condition at March 31, 2021 (Unaudited) and June 30, 2020 1
Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2021 and March 31, 2020 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 48
Item 3: Quantitative and Qualitative Disclosure About Market Risk 64
Item 4: Controls and Procedures 66
PART II—OTHER INFORMATION
Item 1: Legal Proceedings 67
Item 1A: Risk Factors 67
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 67
Item 3: Defaults Upon Senior Securities 67
Item 4: Mine Safety Disclosures 67
Item 5: Other Information 67
Item 6: Exhibits 68
SIGNATURES 69

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data)

June 30,
2020
Assets
Cash and amounts due from depository institutions 20,502 $ 20,391
Interest-bearing deposits in other banks 88,489 160,576
Cash and cash equivalents 108,991 180,967
Investment securities available for sale, at fair value (amortized cost 1,777,316), net of<br> allowance for credit losses of 0 at March 31, 2021 1,778,970 1,385,703
Investment securities held to maturity (fair value 28,408 and 34,069), respectively, net of<br> allowance for credit losses of 0 at March 31, 2021 27,168 32,556
Loans held-for-sale 5,172 20,789
Loans receivable 4,798,239 4,498,397
Less: allowance for credit losses on loans (63,762 ) (37,327 )
Net loans receivable 4,734,477 4,461,070
Premises and equipment 60,360 57,389
Federal Home Loan Bank ("FHLB") of New York stock 45,578 58,654
Accrued interest receivable 20,562 17,373
Goodwill 210,895 210,895
Core deposit intangibles 3,888 3,995
Bank owned life insurance 281,765 262,380
Deferred income tax assets, net 32,230 25,480
Other real estate owned 178 178
Other assets 47,760 40,746
Total Assets 7,357,994 $ 6,758,175
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest-bearing 545,746 $ 419,138
Interest-bearing 4,828,706 4,011,144
Total deposits 5,374,452 4,430,282
Borrowings 865,763 1,173,165
Advance payments by borrowers for taxes 15,300 16,569
Other liabilities 38,667 53,982
Total Liabilities 6,294,182 5,673,998
Stockholders' Equity
Preferred stock, 0.01 par value, 100,000,000 shares authorized;<br>  none issued and outstanding - -
Common stock, 0.01 par value; 800,000,000 shares authorized;<br>  81,942,973 shares and 83,663,192 shares issued and outstanding, respectively 820 837
Paid-in capital 691,280 722,871
Retained earnings 397,594 387,911
Unearned employee stock ownership plan shares;<br>  2,809,766 shares and 2,960,289 shares, respectively (27,239 ) (28,699 )
Accumulated other comprehensive income 1,357 1,257
Total Stockholders' Equity 1,063,812 1,084,177
Total Liabilities and Stockholders' Equity 7,357,994 $ 6,758,175

All values are in US Dollars.

See notes to unaudited consolidated financial statements.

  • 1 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Interest Income
Loans $ 49,307 $ 46,603 $ 150,953 $ 140,811
Taxable investment securities 7,891 10,526 22,934 29,552
Tax-exempt investment securities 410 547 1,297 1,906
Other interest-earning assets 705 1,100 2,406 3,588
Total Interest Income 58,313 58,776 177,590 175,857
Interest Expense
Deposits 6,670 14,768 26,379 46,413
Borrowings 4,012 6,398 14,865 20,540
Total Interest Expense 10,682 21,166 41,244 66,953
Net Interest Income 47,631 37,610 136,346 108,904
Provision for credit losses 1,126 6,270 3,820 4,023
Net Interest Income after Provision for<br><br><br>Credit Losses 46,505 31,340 132,526 104,881
Non-Interest Income
Fees and service charges 1,325 1,338 4,297 4,951
Gain on sale and call of securities 18 2,234 454 2,231
Gain on sale of loans 943 565 5,211 1,838
Loss on sale and write down of other real estate<br><br><br>owned - - - (28 )
Income from bank owned life insurance 1,530 1,532 4,722 4,688
Electronic banking fees and charges 456 309 1,265 920
Bargain purchase gain - - 3,053 -
Other income 1,194 223 1,351 117
Total Non-Interest Income 5,466 6,201 20,353 14,717
Non-Interest Expense
Salaries and employee benefits 16,965 15,537 51,023 46,488
Net occupancy expense of premises 3,433 2,685 9,675 8,736
Equipment and systems 3,823 2,672 11,295 8,807
Advertising and marketing 567 612 1,580 2,037
Federal deposit insurance premium 488 - 1,450 -
Directors' compensation 748 771 2,244 2,310
Merger-related expenses - 285 4,349 504
Debt extinguishment expenses - 2,156 796 2,156
Other expense 3,792 3,344 11,487 9,695
Total Non-Interest Expense 29,816 28,062 93,899 80,733
Income before Income Taxes 22,155 9,479 58,980 38,865
Income tax expense 5,732 225 14,230 7,589
Net Income $ 16,423 $ 9,254 $ 44,750 $ 31,276

See notes to unaudited consolidated financial statements.

  • 2 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(In Thousands, Except Per Share Data)

(Unaudited)

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Net Income per Common Share (EPS)
Basic $ 0.20 $ 0.11 $ 0.53 $ 0.38
Diluted $ 0.20 $ 0.11 $ 0.53 $ 0.38
Weighted Average Number of Common Shares<br><br><br>Outstanding
Basic 80,673 81,339 83,958 82,981
Diluted 80,690 81,358 83,961 83,016

See notes to unaudited consolidated financial statements.

  • 3 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands, Unaudited)

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
Net Income $ 16,423 $ 9,254 $ 44,750 $ 31,276
Other Comprehensive (Loss) Income, net of tax:
Net unrealized (loss) gain on securities available<br><br><br>for sale (15,671 ) 2,705 (14,379 ) 7,968
Amortization of net unrealized loss on securities<br><br><br>available for sale transferred to held to maturity - - - 421
Net realized gain on sale and call of<br><br><br>securities available for sale (13 ) (1,575 ) (319 ) (1,574 )
Fair value adjustments on derivatives 10,574 (13,213 ) 14,750 (14,120 )
Benefit plan adjustments 14 3 48 341
Total Other Comprehensive (Loss) Income (5,096 ) (12,080 ) 100 (6,964 )
Total Comprehensive Income (Loss) $ 11,327 $ (2,826 ) $ 44,850 $ 24,312

See notes to unaudited consolidated financial statements.

  • 4 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Data, Unaudited)

Paid-In Retained Unearned<br><br><br>ESOP Accumulated<br><br><br>Other<br><br><br>Comprehensive
Amount Capital Earnings Shares Income Total
Balance - December 31, 2019 85,150 $ 851 $ 737,539 $ 377,896 $ (29,671 ) $ 7,955 $ 1,094,570
Net income - - - 9,254 - - 9,254
Other comprehensive loss, net<br>  of income tax - - - - - (12,080 ) (12,080 )
ESOP shares committed to be<br>  released (50 shares) - - 95 - 486 - 581
Stock option expense - - 465 - - - 465
Stock repurchases (1,476 ) (14 ) (17,514 ) - - - (17,528 )
Restricted stock plan shares<br>  earned (70 shares) - - 1,025 - - - 1,025
Cancellation of shares issued for<br>  restricted stock awards (10 ) - (136 ) - - - (136 )
Cash dividends declared<br>  (0.08 per common share) - - - (6,479 ) - - (6,479 )
Balance - March 31, 2020 83,664 $ 837 $ 721,474 $ 380,671 $ (29,185 ) $ (4,125 ) $ 1,069,672

All values are in US Dollars.

Paid-In Retained Unearned<br><br><br>ESOP Accumulated<br><br><br>Other<br><br><br>Comprehensive
Amount Capital Earnings Shares Income Total
Balance - June 30, 2019 89,126 $ 891 $ 787,394 $ 366,679 $ (30,644 ) $ 2,839 $ 1,127,159
Net income - - - 31,276 - - 31,276
Other comprehensive loss, net<br>  of income tax - - - - - (6,964 ) (6,964 )
ESOP shares committed to be<br>  released (150 shares) - - 475 - 1,459 - 1,934
Stock option expense - - 1,382 - - - 1,382
Stock repurchases (5,376 ) (53 ) (69,729 ) - - - (69,782 )
Restricted stock plan shares<br>  earned (208 shares) - - 3,024 - - - 3,024
Cancellation of shares issued for<br>  restricted stock awards (86 ) (1 ) (1,072 ) - - - (1,073 )
Cash dividends declared<br>  (0.21 per common share) - - - (17,284 ) - - (17,284 )
Balance - March 31, 2020 83,664 $ 837 $ 721,474 $ 380,671 $ (29,185 ) $ (4,125 ) $ 1,069,672

All values are in US Dollars.

See notes to unaudited consolidated financial statements.

  • 5 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Data, Unaudited)

Paid-In Retained Unearned<br><br><br>ESOP Accumulated<br><br><br>Other<br><br><br>Comprehensive
Amount Capital Earnings Shares Income Total
Balance - December 31, 2020 84,938 $ 849 $ 724,389 $ 388,376 $ (27,726 ) $ 6,453 $ 1,092,341
Net income - - - 16,423 - - 16,423
Other comprehensive loss, net<br>  of income tax - - - - - (5,096 ) (5,096 )
ESOP shares committed to be<br>  released (50 shares) - - 87 - 487 - 574
Stock option exercise 41 - 373 - - - 373
Stock option expense - - 455 - - - 455
Stock repurchases (3,026 ) (29 ) (34,834 ) - - - (34,863 )
Restricted stock plan shares<br>  earned (69 shares) - - 924 - - - 924
Cancellation of shares issued for<br>  restricted stock awards (10 ) - (114 ) - - - (114 )
Cash dividends declared<br>  (0.09 per common share) - - - (7,205 ) - - (7,205 )
Balance - March 31, 2021 81,943 $ 820 $ 691,280 $ 397,594 $ (27,239 ) $ 1,357 $ 1,063,812

All values are in US Dollars.

Paid-In Retained Unearned<br><br><br>ESOP Accumulated<br><br><br>Other<br><br><br>Comprehensive
Amount Capital Earnings Shares Income Total
Balance - June 30, 2020 83,663 $ 837 $ 722,871 $ 387,911 $ (28,699 ) $ 1,257 1,084,177
Cumulative effect of change in<br> accounting principle - Topic 326 - - - (14,239 ) - - (14,239 )
Balance - July 1, 2020 as<br> adjusted for change in<br> accounting principle 83,663 837 722,871 373,672 (28,699 ) 1,257 1,069,938
Net income - - - 44,750 - - 44,750
Other comprehensive income, net<br>  of income tax - - - - - 100 100
ESOP shares committed to be<br>  released (150 shares) - - (25 ) - 1,460 - 1,435
Stock option exercise 41 - 373 - - - 373
Stock option expense - - 1,366 - - - 1,366
Stock repurchases (7,535 ) (74 ) (80,493 ) - - - (80,567 )
Restricted stock plan shares<br>  earned (207 shares) - - 2,915 - - - 2,915
Cancellation of shares issued for<br>  restricted stock awards (80 ) (1 ) (802 ) - - - (803 )
Shares issued in conjunction with<br> the acquisition of MSB<br> Financial Corp. 5,854 58 45,075 - - - 45,133
Cash dividends declared<br>  (0.25 per common share) - - - (20,828 ) - - (20,828 )
Balance - March 31, 2021 81,943 $ 820 $ 691,280 $ 397,594 $ (27,239 ) $ 1,357 $ 1,063,812

All values are in US Dollars.

See notes to unaudited consolidated financial statements.

  • 6 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

Nine Months Ended
March 31,
2021 2020
Cash Flows from Operating Activities:
Net income $ 44,750 $ 31,276
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 4,355 3,404
Net accretion of premiums, discounts and loan fees and costs (11,257 ) (6,716 )
Deferred income taxes and valuation allowance 3,004 1,145
Realized gain on bargain purchase (3,053 ) -
Amortization of intangible assets 797 918
Amortization of benefit plans’ unrecognized net gain 62 485
Provision for credit losses 3,820 4,023
Loss on write-down and sales of other real estate owned - 28
Loans originated for sale (249,671 ) (173,436 )
Proceeds from sale of mortgage loans held-for-sale 270,147 176,269
Gain on sale of mortgage loans held-for-sale, net (4,859 ) (1,811 )
Realized gain on sale and call of investment securities available for sale (454 ) (2,231 )
Realized loss on debt extinguishment 796 2,156
Realized gain on sale of loans receivable (352 ) (27 )
Realized loss on disposition of premises and equipment 40 342
Increase in cash surrender value of bank owned life insurance (4,722 ) (4,688 )
ESOP, stock option plan and restricted stock plan expenses 5,716 6,340
(Increase) decrease in interest receivable (1,488 ) 324
Increase in other assets (1,021 ) (20,444 )
Decrease in interest payable (406 ) (3,237 )
Increase in other liabilities 1,519 15,496
Net Cash Provided by Operating Activities 57,723 29,616
Cash Flows from Investing Activities:
Purchases of:
Investment securities available for sale (865,163 ) (487,898 )
Proceeds from:
Repayments/calls/maturities of investment securities available for sale 407,489 111,194
Repayments/calls/maturities of investment securities held to maturity 5,280 4,155
Sales of investment securities available for sale 44,842 164,299
Purchase of loans (34,635 ) (41,816 )
Net decrease in loans receivable 237,383 165,642
Proceeds from sale of loans receivable 43,931 497
Purchase of interest rate caps - (1,476 )
Additions to premises and equipment (2,889 ) (6,272 )
Proceeds from cash settlement of premises and equipment 3,401 395
Purchase of FHLB stock - (2,250 )
Redemption of FHLB stock 16,421 7,116
Net cash acquired in acquisition 4,296 -
Net Cash Used in Investing Activities $ (139,644 ) $ (86,414 )

See notes to unaudited consolidated financial statements.

  • 7 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands, Unaudited)

Nine Months Ended
March 31,
2021 2020
Cash Flows from Financing Activities:
Net increase in deposits 485,417 106,500
Repayment of term FHLB advances (2,257,796 ) (2,633,146 )
Proceeds from term FHLB advances 1,955,000 2,525,000
Net (decrease) increase in other short-term borrowings (68,635 ) 167,935
Net decrease in advance payments by borrowers for taxes (2,063 ) (395 )
Repurchase and cancellation of common stock of Kearny Financial Corp. (80,567 ) (69,782 )
Cancellation of shares repurchased on vesting to pay taxes (803 ) (1,073 )
Exercise of stock options 373 -
Dividends paid (20,981 ) (17,724 )
Net Cash Provided by Financing Activities 9,945 77,315
Net (Decrease) Increase in Cash and Cash Equivalents (71,976 ) 20,517
Cash and Cash Equivalents - Beginning 180,967 38,935
Cash and Cash Equivalents - Ending $ 108,991 $ 59,452
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Income taxes, net of refunds $ 13,675 $ 8,029
Interest $ 41,649 $ 70,189
Non-cash investing and financing activities:
Transfers from loans receivable to loans receivable held-for-sale $ 43,579 $ -
Acquisition of other real estate owned in settlement of loans $ - $ 206
Fair value of assets acquired, net of cash and cash equivalents acquired $ 567,816 $ -
Fair value of liabilities assumed $ 523,926 $ -
In conjunction with the adoption of ASU 2019-04, the following qualifying held to<br><br><br>maturity securities were transferred to available for sale:
Debt securities transferred from held to maturity to available for sale $ - $ 537,732
In conjunction with the adoption of ASU 2016-02, the following assets and liabilities<br><br><br>were recognized:
Operating lease right-of-use assets $ - $ 17,243
Operating lease liabilities $ - $ 17,758

See notes to unaudited consolidated financial statements.

  • 8 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of Kearny Financial Corp. (the “Company”), its wholly-owned subsidiary, Kearny Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, CJB Investment Corp. and Millington Savings Service Corp. The Company conducts its business principally through the Bank. Management prepared the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), including the elimination of all significant inter-company accounts and transactions during consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and Regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, income, comprehensive income, changes in stockholders’ equity and cash flows in conformity with GAAP. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the unaudited consolidated financial statements have been included. The results of operations for the three-month and nine-month periods ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period.

The data in the consolidated statement of financial condition for June 30, 2020 was derived from the Company’s 2020 Annual Report on Form 10-K. That data, along with the interim unaudited financial information presented in the consolidated statements of financial condition, income, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s 2020 Annual Report on Form 10-K.

Risks and Uncertainties

As previously disclosed, on March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The COVID-19 pandemic has adversely affected, and may continue to adversely affect, local, national and global economic activity. The spread of the outbreak has caused significant disruptions to the U.S. economy, significant reductions in the targeted federal funds rate and has disrupted banking and other financial activity in the areas in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to, among other provisions, provide emergency assistance for individuals, families and businesses affected by the COVID-19 pandemic. On December 27, 2020, the 2021 Consolidated Appropriations Act, was enacted as part of an omnibus spending bill for the 2021 federal fiscal year, included provisions intended to provide additional aid to those impacted by the pandemic.

Reductions in interest rates and other effects of the COVID-19 pandemic may continue to materially and adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company. It is possible that estimates made in the financial statements could be materially and adversely impacted as a result of these conditions, including estimates regarding expected credit losses on loans receivable, impairment of investment securities and impairment of goodwill. Although the Company continues to operate while taking steps to ensure the safety of employees and clients, COVID-19 could also potentially create widespread business continuity issues for the Company.

The extent to which the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations in future periods will depend on future developments, including the scope and duration of the pandemic, the efficacy and adoption of COVID-19 vaccines and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Company may take as may be required by government authorities or that the Company determines is in the best interests of its employees and clients. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

  • 9 -

Adoption of New Accounting Standards

On July 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology.  The Company adopted ASU 2016-13 using a modified retrospective approach. Results for reporting periods beginning after July 1, 2020 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. At adoption, the Company increased its allowance for credit losses by $20.2 million, comprised of $19.6 million for loans receivable and $536,000 for unfunded commitments. Upon adoption the Company recorded a cumulative effect adjustment that reduced stockholders’ equity by $14.2 million, net of tax.

Allowance for Credit Losses

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

Allowance for Credit Losses on Loans Receivable

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

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

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

Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, the effect of external factors such as competition, legal and regulatory requirements, among others. Furthermore, the Company considers the inherent uncertainty in quantitative models that are built upon historical data.

  • 10 -

Individually Evaluated Loans

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

Acquired Loans

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

Allowance for Credit Losses on Off-Balance Sheet Commitments

The Company is required to include unfunded commitments that are expected to be funded in the future within the allowance calculation, other than those that are unconditionally cancelable. To arrive at that reserve, the reserve percentage for each applicable segment is applied to the unused portion of the expected commitment balance and is multiplied by the expected funding rate. To determine the expected funding rate, the Company uses a historical utilization rate for each segment. As noted above, the allowance for credit losses on unfunded loan commitments is included in other liabilities on the consolidated statement of financial condition and the related credit expense is recorded in other non-interest expense in the consolidated statements of income.

Allowance for Credit Losses on Held to Maturity Securities

At March 31, 2021, the Company’s entire portfolio of held to maturity securities consisted of municipal bonds which are highly rated by major rating agencies and have a long history of no credit losses. In estimating the net amount expected to be collected for held to maturity securities in an unrealized loss position, a historical loss based method is utilized.

Allowance for Credit Losses on Available for Sale Securities

For available for sale securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more than likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet the above criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating by a rating agency, and adverse conditions related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of tax. The Company elected the practical expedient of zero loss estimates for securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rate by major agencies and have a long history of no credit losses.

Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

  • 11 -

Accrued Interest Receivable

The Company made an accounting policy election to exclude accrued interest receivable from the amortized cost basis of loans, available for sale securities, and held to maturity securities. Accrued interest receivable on loans is reported as a component of accrued interest receivable on the Consolidated Statement of Financial Condition, totaled $15.7 million at March 31, 2021 and is excluded from the estimate of credit losses. Accrued interest receivable on available of sale securities and held to maturity securities, also a component of accrued interest receivable on the Consolidated Statement of Financial Condition, totaled $4.7 million and $214,000, respectively, at March 31, 2021 and is excluded from the estimate of credit losses. There were no material accrued interest balances for loans on deferral under the CARES Act and Consolidated Appropriations Act.

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

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

The following schedule shows the Company’s earnings per share calculations for the periods presented:

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
(In Thousands, Except Per Share Data)
Net income $ 16,423 $ 9,254 $ 44,750 $ 31,276
Weighted average number of common shares<br><br><br>outstanding - basic 80,673 81,339 83,958 82,981
Effect of dilutive securities 17 19 3 35
Weighted average number of common shares<br><br><br>outstanding - diluted 80,690 81,358 83,961 83,016
Basic earnings per share $ 0.20 $ 0.11 $ 0.53 $ 0.38
Diluted earnings per share $ 0.20 $ 0.11 $ 0.53 $ 0.38

Stock options for 3,253,040 and 3,115,000 shares of common stock were not considered in computing diluted earnings per share at March 31, 2021 and March 31, 2020, respectively, because they were considered anti-dilutive.

3.     SUBSEQUENT EVENTS

The Company has evaluated events and transactions occurring subsequent to the statement of financial condition date of March 31, 2021, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date this document was filed.

4.    ACQUISITION OF MSB FINANCIAL CORP.

On July 10, 2020, the Company completed its acquisition of MSB Financial Corp. (“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.

  • 12 -

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of July 10, 2020 based on management’s best estimate using the information available as of the merger date.  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. During the nine months ended March 31, 2021 the Company completed all MSB tax returns and determined that there were no material adjustments needed to the balance of deferred income tax assets or bargain purchase gain associated with the MSB acquisition.

The Company recorded the assets acquired and liabilities assumed through the merger at fair value as summarized in the following table:

As Recorded<br><br><br>by MSB Fair Value Adjustments As Recorded<br><br><br>at Acquisition
(In Thousands)
Cash paid for acquisition $ 9,830
Value of stock issued 45,133
Total purchase price $ 54,963
Cash and cash equivalents $ 14,126 $ - $ 14,126
Investment securities 4,000 (510 ) (a) 3,490
Loans receivable 537,589 (7,345 ) (b) 530,244
Allowance for loan losses (6,037 ) 6,037 (c) -
Premises and equipment 7,698 (3,221 ) (d) 4,477
FHLB stock 3,345 - 3,345
Accrued interest receivable 1,701 - 1,701
Core deposit intangibles - 690 (e) 690
Bank owned life insurance 14,663 - 14,663
Deferred income taxes, net 1,729 2,152 (f) 3,881
Other assets 4,830 495 (g) 5,325
Total assets acquired $ 583,644 $ (1,702 ) $ 581,942
Deposits $ 458,392 $ 1,786 (h) $ 460,178
FHLB borrowings 62,900 - 62,900
Advance payments by borrowers for taxes 794 - 794
Other liabilities 810 (756 ) (i) 54
Total liabilities assumed $ 522,896 $ 1,030 $ 523,926
Net assets acquired $ 58,016
Bargain purchase gain $ (3,053 )

Explanation of certain fair value related adjustments:

(a) Represents the fair value adjustments on investment securities.
(b) Represents the fair value adjustments on the net book value of loans, which includes an interest rate mark and credit mark adjustment and the reversal of deferred fees/costs and premiums.
--- ---
(c) Represents the elimination of MSB’s allowance for loan losses.
--- ---
(d) Represents the fair value adjustments to reflect the fair value of land and buildings and premises and equipment, which will be amortized on a straight-line basis over the estimated useful lives of the individual assets.
--- ---
(e) Represents the intangible assets recorded to reflect the fair value of core deposits.  The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.
--- ---
(f) Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.
--- ---
(g) Represents an adjustment to other assets acquired.
--- ---
(h) Represents fair value adjustments on time deposits, which will be treated as a reduction of interest expense over the remaining term of the time deposits.
--- ---
(i) Represents an adjustment to other liabilities assumed.
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The fair value of loans acquired from MSB was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of MSB’s allowance for loan losses associated with the loans that were acquired.  For information regarding purchased loans which have been determined to be PCD, refer to Note 7, Loans Receivable.

The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum-of-the-years digits method.

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Merger-related expenses were recorded in the Consolidated Statements of Income as a component of non-interest expense and include costs related to the Company’s acquisition of MSB, as described above.  These charges represent one-time costs associated with acquisition activities and are expensed as incurred.  Direct acquisition and other charges were recorded in merger-related expense on the consolidated statements of income.  During the nine months ended March 31, 2021, merger-related expenses related to the MSB acquisition totaled $4.3 million. By comparison, for the three and nine months ended March 31, 2020, merger-related expenses related to the MSB acquisition totaled $285,000 and $504,000, respectively.

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5.     RECENT ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU 2019-12, “Income taxes (Topic 740); Simplifying the Accounting for Income Taxes”. ASU 2019-12 provides amendments intended to reduce the cost and complexity in accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 removes the following exceptions from ASC 740, Income Taxes: (i) exceptions to the incremental approach for intraperiod tax allocation; (ii) exceptions to accounting for basis differences when a foreign subsidiary becomes an equity method investment or a foreign equity method investment become a subsidiary; and (iii) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 provides the following amendments that simplify and improve guidance with Topic 740: (i) franchise taxes that are based partially on income; (ii) transactions that result in a step up in the tax basis of goodwill; (iii) separate financial statements of legal entities that are not subject to tax; (iv) enacted changes in tax laws in interim periods; and (v) employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. For public business entities, the amendments in the ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

Adoption of New Accounting Standards

In January 2021 the Financial Accounting Standards Board (the “FASB”), issued ASU 2021-01 to clarify the scope of ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides temporary, optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference the London Interbank Offered Rate or another reference rate that is expected to be discontinued.  The ASU addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition”. The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition. The amendments in ASU 2021-01 are effective immediately for all entities. The amendments do not apply to contract modifications made after December 31, 2022; new hedging relationships entered into after December 31, 2022; and existing hedging relationships evaluated for effectiveness in periods after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship, including periods after December 31, 2022. The Company adopted ASU 2021-01 in January 2021, and its adoption did not have a significant impact on the Company’s consolidated financial statements.

On July 1, 2020 the Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost including loan receivables and held to maturity debt securities. This ASU also applies to off-balance exposures. In addition, this ASU made certain changes to the accounting for available for sale securities debt securities. Credit losses are required to be presented as an allowance rather than as a write-down on available for sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell. The Company adopted Topic 326 and all its related updates on July 1, 2020, using the modified retrospective approach for financial assets measured at amortized cost. Results for reporting periods after July 1, 2020 are presented in accordance to the guidance under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption the Company recorded a cumulative effect adjustment that reduced stockholders’ equity by $14.2 million, net of tax. Additional information regarding the adoption of ASU 2016-13 is presented in Note 1, Summary of Significant Accounting Policies.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies subsequent measurement of goodwill by eliminating Step 2 of the impairment test while retaining the option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform a quantitative goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. For public entities, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment testing dates beginning after January 1, 2017. The Company is applying the amendments of ASU 2017-04 prospectively for goodwill impairment testing conducted after July 1, 2020.

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6.     SECURITIES

At March 31, 2021, there was no allowance for credit losses on available for sale securities. The following tables present the amortized cost, gross unrealized gains and losses and estimated fair values for available for sale securities and the amortized cost, gross unrecognized gains and losses and estimated fair values for held to maturity securities as of the dates indicated:

March 31, 2021
Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(In Thousands)
Available for sale:
Debt securities:
Obligations of state and political subdivisions $ 42,219 $ 841 $ - $ 43,060
Asset-backed securities 248,048 2,774 81 250,741
Collateralized loan obligations 169,863 136 223 169,776
Corporate bonds 172,123 2,090 751 173,462
Trust preferred securities 2,967 - 86 2,881
Total debt securities 635,220 5,841 1,141 639,920
Mortgage-backed securities:
Collateralized mortgage obligations ^(1)^ 16,380 420 - 16,800
Residential pass-through securities ^(1)^ 813,263 7,836 14,444 806,655
Commercial pass-through securities ^(1)^ 312,453 6,762 3,620 315,595
Total mortgage-backed securities 1,142,096 15,018 18,064 1,139,050
Total securities available for sale $ 1,777,316 $ 20,859 $ 19,205 $ 1,778,970
(1) Government-sponsored enterprises.
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June 30, 2020
--- --- --- --- --- --- --- --- ---
Amortized<br><br><br>Cost Gross<br><br><br>Unrealized<br><br><br>Gains Gross<br><br><br>Unrealized<br><br><br>Losses Fair<br><br><br>Value
(In Thousands)
Available for sale:
Debt securities:
Obligations of state and political subdivisions $ 52,843 $ 1,211 $ - 54,054
Asset-backed securities 177,413 - 4,966 172,447
Collateralized loan obligations 198,619 - 4,831 193,788
Corporate bonds 142,942 1,267 570 143,639
Trust preferred securities 2,967 - 340 2,627
Total debt securities 574,784 2,478 10,707 566,555
Mortgage-backed securities:
Collateralized mortgage obligations ^(1)^ 30,043 860 - 30,903
Residential pass-through securities ^(1)^ 543,819 18,135 - 561,954
Commercial pass-through securities ^(1)^ 214,575 11,716 - 226,291
Total mortgage-backed securities 788,437 30,711 - 819,148
Total securities available for sale $ 1,363,221 $ 33,189 $ 10,707 $ 1,385,703
(1) Government-sponsored enterprises.
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March 31, 2021
Amortized<br><br><br>Cost Gross<br><br><br>Unrecognized<br><br><br>Gains Gross<br><br><br>Unrecognized<br><br><br>Losses Fair<br><br><br>Value
(In Thousands)
Held to maturity:
Debt securities:
Obligations of state and political subdivisions $ 27,168 $ 1,240 $ - $ 28,408
Total debt securities 27,168 1,240 - 28,408
Total securities held to maturity $ 27,168 $ 1,240 $ - $ 28,408
June 30, 2020
--- --- --- --- --- --- --- --- ---
Amortized<br><br><br>Cost Gross<br><br><br>Unrecognized<br><br><br>Gains Gross<br><br><br>Unrecognized<br><br><br>Losses Fair<br><br><br>Value
(In Thousands)
Held to maturity:
Debt securities:
Obligations of state and political subdivisions $ 32,556 $ 1,513 $ - $ 34,069
Total debt securities 32,556 1,513 - 34,069
Total securities held to maturity $ 32,556 $ 1,513 $ - $ 34,069

Excluding the balances of mortgage-backed securities, the following table presents the amortized cost and estimated fair values of debt securities available for sale and held to maturity, by contractual maturity, at March 31, 2021:

March 31, 2021
Amortized<br><br><br>Cost Fair<br><br><br>Value
(In Thousands)
Debt securities:
Due in one year or less $ 3,749 $ 3,766
Due after one year through five years 88,469 89,718
Due after five years through ten years 331,520 334,300
Due after ten years 238,650 240,544
Total $ 662,388 $ 668,328

Sales of securities available for sale were as follows for the periods presented below:

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
(In Thousands) (In Thousands)
Available for sale securities sold:
Proceeds from sales of securities $ - $ 160,653 $ 44,842 $ 164,299
Gross realized gains $ - $ 2,350 $ 800 $ 2,363
Gross realized losses - (116 ) (385 ) (145 )
Net gain on sales of securities $ - $ 2,234 $ 415 $ 2,218
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Calls of securities available for sale during the three months ended March 31, 2021 resulted in gross gains of $18,000.  During the three months ended March 31, 2020, there were no gains or losses recognized on the calls of securities available for sale. During the nine months ended March 31, 2021 and March 31, 2020, calls of securities available for sale resulted in gross gains of $39,000 and $13,000, respectively.  During the three and nine months ended March 31, 2021 and March 31, 2020, there were no gains or losses recorded on sales and calls of securities held to maturity.

The carrying value of securities pledged for borrowings at the FHLB and other institutions, and securities pledged for public funds and other purposes, were as follows as of the dates presented below:

March 31, June 30,
2021 2020
(In Thousands)
Securities pledged:
Pledged for borrowings at the FHLB of New York $ 158,531 $ 155,288
Pledged to secure public funds on deposit 143,659 19,944
Pledged for potential borrowings at the Federal<br><br><br>Reserve Bank of New York 297,100 366,482
Pledged as collateral for depositor sweep accounts - 7,830
Total carrying value of securities pledged $ 599,290 $ 549,544

The following tables present the gross unrealized losses on securities and the estimated fair value of the related securities, aggregated by investment category and length of time that securities have been in a continuous unrealized loss position within the available for sale portfolio at March 31, 2021 and June 30, 2020:

March 31, 2021
Less than 12 Months 12 Months or More Total
Fair<br><br><br>Value Unrealized<br><br><br>Losses Fair<br><br><br>Value Unrealized<br><br><br>Losses Number of Securities Fair<br><br><br>Value Unrealized<br><br><br>Losses
(Dollars in Thousands)
Securities Available for Sale:
Asset-backed securities $ 12,984 $ 18 $ 28,740 $ 63 4 $ 41,724 $ 81
Collateralized loan obligations 9,440 1 94,575 222 9 104,015 223
Corporate bonds 30,393 751 - - 6 30,393 751
Trust preferred securities - - 2,881 86 2 2,881 86
Commercial pass-through securities 147,929 3,620 - - 7 147,929 3,620
Residential pass-through<br><br><br>securities 531,613 14,444 - - 12 531,613 14,444
Total $ 732,359 $ 18,834 $ 126,196 $ 371 40 $ 858,555 $ 19,205
  • 18 -
June 30, 2020
Less than 12 Months 12 Months or More Total
Fair<br><br><br>Value Unrealized<br><br><br>Losses Fair<br><br><br>Value Unrealized<br><br><br>Losses Number of Securities Fair<br><br><br>Value Unrealized<br><br><br>Losses
(Dollars in Thousands)
Securities Available for Sale:
Asset-backed securities $ 146,494 $ 3,962 $ 25,954 $ 1,004 16 $ 172,448 $ 4,966
Collateralized loan obligations 71,282 1,245 122,506 3,586 19 193,788 4,831
Corporate bonds 24,764 236 39,651 334 8 64,415 570
Trust preferred securities - - 2,626 340 2 2,626 340
Total $ 242,540 $ 5,443 $ 190,737 $ 5,264 45 $ 433,277 $ 10,707

At March 31, 2021 and June 30, 2020, there were no held to maturity securities with unrecognized losses.

Available for sale securities are evaluated to determine if a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. An impairment related to credit factors would be recorded through an allowance for credit losses. The allowance is limited to the amount by which the security’s amortized cost basis exceeds the fair value. An impairment that has not been recorded through an allowance for credit losses shall be recorded through other comprehensive income, net of applicable taxes. Investment securities will be written down to fair value through the consolidated statement of income when management intends to sell, or may be required to sell, the securities before they recover in value.  The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due or were placed in nonaccrual status at March 31, 2021. Management believes that the unrealized losses on these securities are a function of changes in market interest rates and credit spreads, not changes in credit quality. Therefore, no allowance for credit losses was recorded at March 31, 2021.

At March 31, 2021, the Company’s entire portfolio of held to maturity securities consisted of municipal bonds which are highly rated by major rating agencies and have a long history of no credit losses.  None of the securities in the Company’s portfolio of held to maturity municipal bonds were in an unrealized loss position. The Company continually monitors the municipal bond sector of the market and reviews collectability including such factors as the financial condition of the issuers including credit ratings in effect as of the reporting period.

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7.     LOANS RECEIVABLE

The following table sets forth the composition of the Company’s loan portfolio at March 31, 2021 and June 30, 2020:

March 31, June 30,
2021 2020
(In Thousands)
Commercial loans:
Multi-family mortgage $ 2,055,396 $ 2,059,568
Nonresidential mortgage 1,110,765 960,853
Commercial business ^(1)^ 183,181 138,788
Construction 95,533 20,961
Total commercial loans 3,444,875 3,180,170
One- to four-family residential mortgage 1,323,485 1,273,022
Consumer loans:
Home equity loans 59,721 82,920
Other consumer 3,445 3,991
Total consumer loans 63,166 86,911
Total loans 4,831,526 4,540,103
Unaccreted yield adjustments (33,287 ) (41,706 )
Total loans receivable, net of yield adjustments $ 4,798,239 $ 4,498,397
(1) Includes Paycheck Protection Program (“PPP”) loans of $20.9 million and $69.0 million as of March 31, 2021 and June 30, 2020, respectively.
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Past Due Loans

Past due status is based on the contractual payment terms of the loans. The following tables present the payment status of past due loans as of March 31, 2021 and June 30, 2020, by loan segment:

March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Current $ 2,033,617 $ 1,065,795 $ 182,727 $ 95,533 $ 1,315,841 $ 59,637 $ 3,426 $ 4,756,576
Past due:
30-59 days 2,459 849 2 - 1,212 - 2 4,524
60-89 days 6,123 22,566 - - 1,072 5 15 29,781
90 days and over 13,197 21,555 452 - 5,360 79 2 40,645
Total past due 21,779 44,970 454 - 7,644 84 19 74,950
Total loans $ 2,055,396 $ 1,110,765 $ 183,181 $ 95,533 $ 1,323,485 $ 59,721 $ 3,445 $ 4,831,526
June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Current $ 2,059,568 $ 941,714 $ 138,439 $ 20,961 $ 1,264,267 $ 82,358 $ 3,981 $ 4,511,288
Past due:
30-59 days - - - - 3,211 169 - 3,380
60-89 days - 14,478 - - 1,038 13 5 15,534
90 days and over - 4,661 349 - 4,506 380 5 9,901
Total past due - 19,139 349 - 8,755 562 10 28,815
Total loans $ 2,059,568 $ 960,853 $ 138,788 $ 20,961 $ 1,273,022 $ 82,920 $ 3,991 $ 4,540,103

Nonperforming Loans

Loans are generally placed on nonaccrual status when contractual payments become 90 or more days past due or when the Company does not expect to receive all principal and interest payments (“P&I”) owed substantially in accordance with the terms of the loan agreement, regardless of past due status. Loans that become 90 days past due, but are well secured and in the process of collection, may remain on accrual status. Nonaccrual loans are generally returned to accrual status when all payments due are brought current and we expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement.  Payments received in cash on nonaccrual loans, including both the principal and interest portions of those payments, are generally applied to reduce the carrying value of the loan. The Company did not recognize interest income on non-accrual loans during the three and nine months ended March 31, 2021 and March 31, 2020.

  • 21 -

The following tables present information relating to the Company’s nonperforming loans as of March 31, 2021 and June 30, 2020:

March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Performing $ 2,039,302 $ 1,074,357 $ 182,510 $ 93,162 $ 1,307,728 $ 59,606 $ 3,443 $ 4,760,108
Nonperforming:
90 days and over past due accruing - - - - - - 2 2
Nonaccrual loans with<br><br><br>allowance for credit losses - 10,683 277 - 4,188 - - 15,148
Nonaccrual loans with no<br><br><br>allowance for credit losses 16,094 25,725 394 2,371 11,569 115 - 56,268
Total nonperforming 16,094 36,408 671 2,371 15,757 115 2 71,418
Total loans $ 2,055,396 $ 1,110,765 $ 183,181 $ 95,533 $ 1,323,485 $ 59,721 $ 3,445 $ 4,831,526
June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Performing $ 2,056,606 $ 936,917 $ 138,196 $ 20,961 $ 1,264,663 $ 82,078 $ 3,986 $ 4,503,407
Nonperforming:
90 days and over past due accruing - - - - - - 5 5
Nonaccrual 2,962 23,936 592 - 8,359 842 - 36,691
Total nonperforming 2,962 23,936 592 - 8,359 842 5 36,696
Total loans $ 2,059,568 $ 960,853 $ 138,788 $ 20,961 $ 1,273,022 $ 82,920 $ 3,991 $ 4,540,103
  • 22 -

Troubled Debt Restructurings (“TDRs”)

On a case-by-case basis, the Company may agree to modify the contractual terms of a loan to assist a borrower who may be experiencing financial difficulty, as well as to preserve the Company’s position in the loan. If the borrower is experiencing financial difficulties and a concession has been made at the time of such modification, the loan is classified as a TDR. At March 31, 2021, the Company had TDRs totaling $19.2 million. The allowance for credit losses associated with the TDRs presented in the tables below totaled $194,000 and $8,000 as of March 31, 2021 and June 30, 2020, respectively. As of March 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

The following tables present total TDR loans at March 31, 2021 and June 30, 2020:

March 31, 2021
Accrual Non-accrual Total
# of Loans Amount # of Loans Amount # of Loans Amount
(Dollars In Thousands)
Commercial loans:
Multi-family mortgage loans - $ - 1 $ 2,896 1 $ 2,896
Nonresidential mortgage 1 107 7 2,476 8 2,583
Commercial business 5 4,900 5 409 10 5,309
Construction - - 1 2,371 1 2,371
Total commercial loans 6 5,007 14 8,152 20 13,159
One- to four-family residential<br><br><br>mortgage 16 2,261 17 3,122 33 5,383
Consumer loans:
Home equity loans 9 606 1 24 10 630
Total 31 $ 7,874 32 $ 11,298 63 $ 19,172
June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- ---
Accrual Non-accrual Total
# of Loans Amount # of Loans Amount # of Loans Amount
(Dollars In Thousands)
Commercial loans:
Multi-family mortgage loans - $ - 1 $ 2,962 1 $ 2,962
Nonresidential mortgage 1 112 9 5,442 10 5,554
Commercial business 5 5,179 6 446 11 5,625
Total commercial loans 6 5,291 16 8,850 22 14,141
One- to four-family residential<br><br><br>mortgage 14 2,407 20 3,811 34 6,218
Consumer loans:
Home equity loans 12 715 2 448 14 1,163
Total 32 $ 8,413 38 $ 13,109 70 $ 21,522
  • 23 -

The following tables present information regarding the restructuring of the Company’s troubled debts during the three and nine months ended March 31, 2021 and March 31, 2020:

Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021
# of Loans Pre-modification<br><br><br>Recorded<br><br><br>Investment Post-modification<br><br><br>Recorded<br><br><br>Investment # of Loans Pre-modification<br><br><br>Recorded<br><br><br>Investment Post-modification<br><br><br>Recorded<br><br><br>Investment
(Dollars In Thousands)
One- to four-family residential<br><br><br>mortgage - $ - $ - 1 $ 309 $ 308
Home equity loans 1 24 24 1 24 24
Total 1 $ 24 $ 24 2 $ 333 $ 332
Three Months Ended March 31, 2020 Nine Months Ended March 31, 2020
--- --- --- --- --- --- --- --- --- --- --- --- ---
# of Loans Pre-modification<br><br><br>Recorded<br><br><br>Investment Post-modification<br><br><br>Recorded<br><br><br>Investment # of Loans Pre-modification<br><br><br>Recorded<br><br><br>Investment Post-modification<br><br><br>Recorded<br><br><br>Investment
(Dollars In Thousands)
Multi-family mortgage 1 $ 3,062 $ 2,996 1 $ 3,062 $ 2,996
Nonresidential mortgage 1 521 517 1 521 517
Commercial business 1 2,482 2,494 5 4,349 4,415
One- to four-family residential<br><br><br>mortgage - - - 3 1,046 982
Home equity loans - - - 1 82 81
Total 3 $ 6,065 $ 6,007 11 $ 9,060 $ 8,991

During the three and nine months ended March 31, 2021 and March 31 2020, there were no charge-offs related to TDRs. During the three and nine months ended March 31, 2021 there were no troubled debt restructuring defaults. During the three and nine months ended March 31, 2020, there was one troubled debt restructuring default totaling $514,000.

Loan modifications generally involve a reduction in interest rates and/or extension of maturity dates and also may include step up interest rates in their modified terms which will impact their weighted average yield in the future. The home equity loan which qualified as a TDR during the three months ended March 31, 2021, capitalized prior past due amounts and modified the loan’s repayment terms. The residential mortgage loan which qualified as a TDR during the nine months ended March 31, 2021, capitalized prior past due amounts and modified the loan’s repayment terms.

  • 24 -

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System (the “FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extension of repayment terms, or other delays in payment that are insignificant. Provisions of the CARES Act largely mirrored the provisions of the interagency statement, providing that modified loans were not to be considered TDRs if they were performing at December 31, 2019 and other considerations set forth in the interagency statements were met. Borrowers considered current are those that are less than 30 days past due at the time a modification program is implemented or at December 31, 2019.

On December 27, 2020, the 2021 Consolidated Appropriations Act was signed into law. The $900 billion relief package includes legislation that extends certain relief provisions of the CARES Act that were set to expire on December 31, 2020. The CARES Act permitted financial institutions to suspend TDR assessment and reporting requirements under GAAP for loan modifications. This new legislation extends this relief to the earlier of 60 days after the national emergency declared by the President is terminated or January 1, 2022. As of March 31, 2021, the Company had 32 non-TDR modified loans totaling approximately $52.9 million.

The following table sets forth the composition of these loans by loan segments as of March 31, 2021:

March 31, 2021
# of Loans Balance % of Total Loans
(Dollars In Thousands)
Commercial loans:
Multi-family mortgage loans 7 $ 29,880 0.62%
Nonresidential mortgage 4 11,641 0.24%
Commercial business 2 2,121 0.04%
Total commercial loans 13 43,642 0.90%
One- to four-family<br><br><br>residential mortgage 17 7,788 0.16%
Consumer loans:
Home equity loans 2 1,513 0.03%
Total 32 $ 52,943 1.10%
  • 25 -

Individually Analyzed Loans

Effective July 1, 2020, individually analyzed loans include loans which do not share similar risk characteristics with other loans. TDR’s will generally be evaluated for individual impairment, however, after a period of sustained repayment performance which permits the credit to be returned to accrual status, a TDR would generally be removed from individual impairment analysis and returned to its corresponding pool. As of March 31, 2021, the carrying value of individually analyzed loans totaled $71.4 million, of which $51.4 million were considered collateral dependent.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral, less costs to sell, and the amortized cost basis of the loan as of the measurement date. See Note 14 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.

The following table presents the carrying value of collateral dependent individually analyzed loans:

March 31, 2021
Carrying Value Related Allowance
(In Thousands)
Commercial loans:
Multi-family mortgage $ 13,197 $ -
Nonresidential mortgage ^(1)^ 31,491 5,354
Commercial business ^(2)^ 189 -
Construction - -
Total commercial loans 44,877 5,354
One- to four-family residential<br><br><br>mortgage ^(3)^ 6,458 190
Consumer loans:
Home equity loans ^(3)^ 79 -
Total $ 51,414 $ 5,544
(1) Secured by income-producing nonresidential property.
--- ---
(2) Secured by business assets.
--- ---
(3) Secured by one- to four-family residential properties.
--- ---
  • 26 -

The following table presents, under previously applicable GAAP, loans individually evaluated for impairment by portfolio segment as of June 30, 2020:

June 30, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Carrying value of impaired loans:
Non-impaired loans $ 2,056,606 $ 936,805 $ 132,999 $ 20,961 $ 1,262,256 $ 81,363 $ 3,991 $ 4,494,981
Impaired loans:
Impaired loans with no allowance<br><br><br>for impairment 2,962 22,516 5,622 - 10,659 1,557 - 43,316
Impaired loans with allowance<br><br><br>for impairment:
Recorded investment - 1,532 167 - 107 - - 1,806
Allowance for impairment - (41 ) (47 ) - (1 ) - - (89 )
Balance of impaired loans net<br><br><br>of allowance for impairment - 1,491 120 - 106 - - 1,717
Total impaired loans, excluding<br><br><br>allowance for impairment: 2,962 24,048 5,789 - 10,766 1,557 - 45,122
Total loans $ 2,059,568 $ 960,853 $ 138,788 $ 20,961 $ 1,273,022 $ 82,920 $ 3,991 $ 4,540,103
Unpaid principal balance<br><br><br>of impaired loans:
Total impaired loans $ 3,544 $ 25,898 $ 8,778 $ 73 $ 12,908 $ 1,950 $ - $ 53,151

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually to classify the loans as to credit risk. The Company uses the following definitions for risk ratings:

Pass – Loans that are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

Special Mention – Loans which do not currently expose the Company to a sufficient degree of risk to warrant an adverse classification but have some credit deficiencies or other potential weaknesses.

Substandard – Loans which are inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans which have all of the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.

Loss – Loans which considered uncollectible or of so little value that their continuance as assets is not warranted.

  • 27 -

The following table presents the risk category of loans as of March 31, 2021 by loan segment and vintage year:

Term Loans by Origination Year for Fiscal Years ended June 30,
2021 2020 2019 2018 2017 Prior Revolving Loans Total
(In Thousands)
Multi-family mortgage:
Pass $ 212,906 $ 259,809 $ 381,989 $ 377,936 $ 356,269 $ 404,115 $ - $ 1,993,024
Special Mention - - 10,408 5,095 1,840 3,246 - 20,589
Substandard - - 16,723 2,896 13,197 8,967 - 41,783
Doubtful - - - - - - - -
Total multi-family mortgage 212,906 259,809 409,120 385,927 371,306 416,328 - 2,055,396
Non-residential mortgage:
Pass 77,508 77,604 57,255 65,443 262,070 485,535 6,212 1,031,627
Special Mention - - 23,520 4,156 9,815 4,540 - 42,031
Substandard 755 - - 4,934 19,569 11,849 - 37,107
Doubtful - - - - - - - -
Total non-residential mortgage 78,263 77,604 80,775 74,533 291,454 501,924 6,212 1,110,765
Commercial business:
Pass 39,735 28,742 4,511 15,954 6,489 13,175 64,402 173,008
Special Mention 1,218 1,534 265 2,337 961 14 411 6,740
Substandard 43 79 216 1,571 179 1,325 20 3,433
Doubtful - - - - - - - -
Total commercial business 40,996 30,355 4,992 19,862 7,629 14,514 64,833 183,181
Construction loans:
Pass 25,561 16,166 11,238 18,763 14,226 1,453 5,735 93,142
Special Mention - - - - - - - -
Substandard - - - - - 2,391 - 2,391
Doubtful - - - - - - - -
Total construction loans 25,561 16,166 11,238 18,763 14,226 3,844 5,735 95,533
Residential mortgage:
Pass 326,309 144,050 83,745 84,259 137,357 525,530 - 1,301,250
Special Mention - - 1,238 - - 742 - 1,980
Substandard - 1,056 676 - 926 17,597 - 20,255
Doubtful - - - - - - - -
Total residential mortgage 326,309 145,106 85,659 84,259 138,283 543,869 - 1,323,485
Home equity loans:
Pass 626 3,123 5,784 3,123 2,557 17,287 26,160 58,660
Special Mention - - - - - 386 - 386
Substandard - - - - - 675 - 675
Doubtful - - - - - - - -
Total home equity loans 626 3,123 5,784 3,123 2,557 18,348 26,160 59,721
Other consumer loans
Pass 415 538 690 260 137 1,249 45 3,334
Special Mention - - - - - - 15 15
Substandard - - - - - - 1 1
Doubtful - - - - - - 95 95
Other consumer loans 415 538 690 260 137 1,249 156 3,445
Total loans $ 685,076 $ 532,701 $ 598,258 $ 586,727 $ 825,592 $ 1,500,076 $ 103,096 $ 4,831,526
  • 28 -

The following table presents, under previously applicable GAAP, the risk category of loans as of June 30, 2020 by loan segment:

June 30, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Pass $ 2,055,520 $ 932,202 $ 132,818 $ 20,961 $ 1,258,246 $ 81,120 $ 3,979 $ 4,484,846
Special Mention 1,086 4,373 2,585 - 981 157 5 9,187
Substandard 2,962 24,278 3,385 - 13,795 1,643 6 46,069
Doubtful - - - - - - 1 1
Total loans $ 2,059,568 $ 960,853 $ 138,788 $ 20,961 $ 1,273,022 $ 82,920 $ 3,991 $ 4,540,103

Purchased Credit Deteriorated Loans

Loans acquired in a business combination after July 1, 2020 are recorded in accordance with ASC Topic 326, after which acquired loans are separated into two types. PCD loans are acquired loans that, as of the acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. Non-PCD loans are acquired loans that have experienced no or insignificant deterioration in credit quality since origination. To distinguish between the two types of acquired loans, the Company evaluates risk characteristics that have been determined to be indicators of deteriorated credit quality. The determining criteria may involve loan specific characteristics such as payment status, debt service coverage or other changes in creditworthiness since the loan was originated, while others are relevant to recent economic conditions, such as borrowers in industries impacted by the pandemic.

As part of the acquisition of MSB, the Company purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:

At July 10, 2020
(In Thousands)
Purchase price of PCD loans at acquisition $ 69,415
Allowance for credit losses at acquisition (3,901 )
Non-credit discount at acquisition (167 )
Amortized cost of acquired PCD loans at acquisition $ 65,347

Residential Mortgage Loans in Foreclosure

We may obtain physical possession of one- to four-family real estate collateralizing a residential mortgage loan via foreclosure or through an in-substance repossession. As of March 31, 2021, we held one single-family property in other real estate owned with an aggregate carrying value of $178,000 that was acquired through a foreclosure on a residential mortgage loan.  As of that same date, we held 11 residential mortgage loans with aggregate carrying values totaling $2.1 million which were in the process of foreclosure.

As of June 30, 2020, we held one single-family property in other real estate owned with an aggregate carrying value of $178,000 that was acquired through a foreclosure on a residential mortgage loan. As of that same date, we held nine residential mortgage loans with aggregate carrying values totaling $1.9 million which were in the process of foreclosure.

The States of New Jersey and New York have issued executive orders and enacted legislation declaring moratoriums on removing individuals from a residential property as a result of an eviction or foreclosure proceeding. The New Jersey order will be in effect until two months after the Governor has declared an end to the COVID-19 health crisis. The New York law, which places a moratorium on evictions for tenants who have endured COVID-related hardship and on foreclosures, will be in effect until at least August 31, 2021.  As a result, since March 28, 2020, the Company has temporarily suspended residential property foreclosure sales and evictions.

On September 4, 2020, the Centers for Disease Control and Prevention (“CDC”) imposed a nationwide temporary federal moratorium on residential evictions due to nonpayment of rent, for qualified tenants. The national eviction moratorium took effect after the expiration of eviction protections established by the CARES Act and was scheduled to extend through December 31, 2020, but was extended legislatively through January 31, 2021. On March 29, 2021, the CDC announced its intent to extend the existing eviction moratorium order through June 30, 2021.

  • 29 -

8.     ALLOWANCE FOR CREDIT LOSSES

Adoption of Topic 326

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

Allowance for Credit Losses on Loans Receivable

The following tables present the balance of the allowance for credit losses at March 31, 2021 and June 30, 2020.  For the three months and nine months ended March 31, 2021, the balance of the allowance for credit losses is based on the CECL methodology, as noted above. For the year ended June 30, 2020, the allowance for loan losses is based upon the calculation methodology as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include the underlying balance of loans receivable applicable to each category as of those dates.

Allowance for Credit Losses
March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Balance of allowance for credit<br><br><br>losses:
Loans acquired with deteriorated<br><br><br>credit quality individually<br><br><br>analyzed $ - $ 2,834 $ - $ - $ 206 $ - $ - $ 3,040
Loans acquired with deteriorated<br><br><br>credit quality collectively<br><br><br>analyzed 172 747 56 70 217 17 - 1,279
Loans individually<br><br><br>evaluated for impairment - 2,521 26 - 102 - - 2,649
Loans collectively<br><br><br>evaluated for impairment 28,814 13,875 2,444 1,175 9,853 591 42 56,794
Total allowance for credit losses $ 28,986 $ 19,977 $ 2,526 $ 1,245 $ 10,378 $ 608 $ 42 $ 63,762
Balance of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Balance of loans receivable:
Loans acquired with deteriorated<br><br><br>credit quality  individually<br><br><br>evaluated $ - $ 6,538 $ 189 $ - $ 3,700 $ - $ - $ 10,427
Loans acquired with deteriorated<br><br><br>credit quality collectively<br><br><br>evaluated 5,629 26,500 4,981 12,533 4,896 354 - 54,893
Loans individually<br><br><br>evaluated for impairment 16,093 29,869 483 2,371 12,058 115 - 60,989
Loans collectively<br><br><br>evaluated for impairment 2,033,674 1,047,858 177,528 80,629 1,302,831 59,252 3,445 4,705,217
Total loans $ 2,055,396 $ 1,110,765 $ 183,181 $ 95,533 $ 1,323,485 $ 59,721 $ 3,445 $ 4,831,526
Unaccreted yield adjustments (33,287 )
Loans receivable, net of yield<br><br><br>adjustments $ 4,798,239
  • 30 -
Allowance for Loan Losses
June 30, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Balance of allowance for loan losses:
Loans acquired with deteriorated<br><br><br>credit quality $ - $ - $ - $ - $ - $ - $ - $ -
Loans individually<br><br><br>evaluated for impairment - 41 47 - 1 - - 89
Loans collectively<br><br><br>evaluated for impairment 20,916 8,722 1,879 236 4,859 568 58 37,238
Total allowance for loan losses $ 20,916 $ 8,763 $ 1,926 $ 236 $ 4,860 $ 568 $ 58 $ 37,327
Balance of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
June 30, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Balance of loans receivable:
Loans acquired with deteriorated<br><br><br>credit quality $ - $ - $ 222 $ - $ 77 $ - $ - 299
Loans individually<br><br><br>evaluated for impairment 2,962 24,048 5,567 - 10,689 1,557 - 44,823
Loans collectively<br><br><br>evaluated for impairment 2,056,606 936,805 132,999 20,961 1,262,256 81,363 3,991 4,494,981
Total loans $ 2,059,568 $ 960,853 $ 138,788 $ 20,961 $ 1,273,022 $ 82,920 $ 3,991 $ 4,540,103
Unaccreted yield adjustments (41,706 )
Loans receivable, net of yield<br><br><br>adjustments $ 4,498,397

The following tables present the activity in the allowance for credit losses on loans for the three and nine months ended March 31, 2021:

Three Months Ended March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Changes in the allowance for credit<br><br><br>losses for the three months ended<br><br><br>March 31, 2021:
At December 31, 2020: $ 29,500 $ 15,933 $ 3,348 $ 1,205 $ 12,625 $ 725 $ 50 $ 63,386
.
Charge offs - (9 ) (738 ) - - - (9 ) (756 )
Recoveries - - 2 - 2 - 2 6
(Reversal of) provision for credit<br><br><br>losses (514 ) 4,053 (86 ) 40 (2,249 ) (117 ) (1 ) 1,126
Total allowance for credit losses $ 28,986 $ 19,977 $ 2,526 $ 1,245 $ 10,378 $ 608 $ 42 $ 63,762
  • 31 -
Nine Months Ended March 31, 2021
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Changes in the allowance for credit<br><br><br>losses for the nine months ended<br><br><br>March 31, 2021:
At June 30, 2020 (prior to adoption<br><br><br>of ASC 326): $ 20,916 $ 8,763 $ 1,926 $ 236 $ 4,860 $ 568 $ 58 $ 37,327
Impact of adopting Topic 326 8,408 2,390 (421 ) 80 9,106 92 (15 ) 19,640
Charge offs - (75 ) (802 ) - (13 ) (32 ) (22 ) (944 )
Recoveries - - 7 - 2 - 9 18
Initial allowance on PCD loans 250 1,720 1,007 99 720 105 - 3,901
(Reversal of) provision for credit<br><br><br>losses (588 ) 7,179 809 830 (4,297 ) (125 ) 12 3,820
Total allowance for credit losses $ 28,986 $ 19,977 $ 2,526 $ 1,245 $ 10,378 $ 608 $ 42 $ 63,762

For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended June 30, 2020. The following tables present the activity in the allowance for loan losses for the three and nine months ended March 31, 2020:

Three Months Ended March 31, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Changes in the allowance for loan<br><br><br>losses for the three months ended<br><br><br>March 31, 2020:
At December 31, 2019: $ 16,060 $ 8,684 $ 2,008 $ 142 $ 3,478 $ 456 $ 109 $ 30,937
Total charge offs - - - - - - (26 ) (26 )
Total recoveries - - - - - - 10 10
Provision for (reversal of) loan<br><br><br>losses 2,831 2,026 (6 ) 42 1,277 108 (8 ) 6,270
Total allowance for loan losses $ 18,891 $ 10,710 $ 2,002 $ 184 $ 4,755 $ 564 $ 85 $ 37,191
  • 32 -
Nine Months Ended March 31, 2020
Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Commercial<br><br><br>Business Construction Residential<br><br><br>Mortgage Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Changes in the allowance for loan<br><br><br>losses for the nine months ended<br><br><br>March 31, 2020:
At June 30, 2019: $ 16,959 $ 9,672 $ 2,467 $ 136 $ 3,377 $ 491 $ 172 $ 33,274
Total charge offs - - - - - - (134 ) (134 )
Total recoveries - - - - - - 28 28
Provision for (reversal of) loan<br><br><br>losses 1,932 1,038 (465 ) 48 1,378 73 19 4,023
Total allowance for loan losses $ 18,891 $ 10,710 $ 2,002 $ 184 $ 4,755 $ 564 $ 85 $ 37,191

Allowance for Credit Losses on Off Balance Sheet Commitments

The following tables present the activity in the allowance for credit losses on off balance sheet commitments for the three and nine months ended March 31, 2021:

Three Months Ended
March 31, 2021
(In Thousands)
Changes in the allowance for credit<br><br><br>losses for the three months ended<br><br><br>March 31, 2021:
At December 31, 2020: $ 1,058
Provision recorded in other non-interest expense 207
Total allowance for credit losses on off balance sheet commitments $ 1,265
Nine Months Ended
--- --- ---
March 31, 2021
(In Thousands)
Changes in the allowance for credit<br><br><br>losses for the nine months ended<br><br><br>March 31, 2021:
At June 30, 2020: $ -
Impact of adopting Topic 326 ^(1)^ 536
Provision recorded in other non-interest expense 729
Total allowance for credit losses on off balance sheet commitments $ 1,265
(1) Adoption of CECL accounting standard effective July 1, 2020.
--- ---
  • 33 -

9.     DEPOSITS

Deposits are summarized as follows:

March 31, June 30,
2021 2020
(In Thousands)
Non-interest-bearing demand $ 545,746 $ 419,138
Interest-bearing demand 1,923,184 1,264,151
Savings 1,105,481 906,597
Certificates of deposits 1,800,041 1,840,396
Total deposits $ 5,374,452 $ 4,430,282

10.     BORROWINGS

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

March 31, 2021 June 30, 2020
Balance Weighted<br><br><br>Average<br><br><br>Interest Rate Balance Weighted<br><br><br>Average<br><br><br>Interest Rate
(Dollars in Thousands)
By remaining period to maturity:
Less than one year $ 590,000 0.36 % $ 865,000 0.45 %
One to two years - - 27,000 2.85
Two to three years 145,000 3.04 145,000 3.04
Three to four years 103,500 2.65 22,500 2.63
Four to five years 29,000 2.77 103,500 2.68
Greater than five years - - 6,500 2.82
Total advances 867,500 1.16 % 1,169,500 1.08 %
Unamortized fair value adjustments (1,737 ) (2,071 )
Total advances, net of<br><br><br>fair value adjustments $ 865,763 $ 1,167,429

At March 31, 2021, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.15 billion and $158.5 million, respectively. At June 30, 2020, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.21 billion and $155.3 million, respectively.

Borrowings at June 30, 2020 also included overnight borrowings in the form of depositor sweep accounts totaling $5.7 million, while there were no such borrowings at March 31, 2021.

  • 34 -

11.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company uses various financial instruments, including derivatives, to manage its exposure to interest rate risk. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to specific wholesale funding positions.

Fair Values of Derivative Instruments on the Statement of Financial Condition

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the Statement of Financial Condition as of March 31, 2021 and June 30, 2020:

March 31, 2021
Asset Derivatives Liability Derivatives
Location Fair Value Location Fair Value
(In Thousands)
Derivatives designated as hedging<br><br><br>instruments:
Interest rate contracts Other assets $ 4,302 Other liabilities $ 1,318
Total $ 4,302 $ 1,318
June 30, 2020
--- --- --- --- --- --- ---
Asset Derivatives Liability Derivatives
Location Fair Value Location Fair Value
(In Thousands)
Derivatives designated as hedging<br><br><br>instruments:
Interest rate contracts Other assets $ 235 Other liabilities $ 18,177
Total $ 235 $ 18,177

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using derivatives are primarily to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps and caps as part of its interest rate risk management strategy.  These interest rate products are designated as cash flow hedges.  As of March 31, 2021, the Company had a total of 12 interest rate swaps and caps with a total notional amount of $1.04 billion hedging specific wholesale funding positions.

For derivatives designated as cash flow hedges, the gain or loss on the derivative is recorded in other comprehensive income, net of tax, and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate wholesale funding positions.  During the three and nine months ended March 31, 2021, the Company had $2.0 million and $6.6 million, respectively, of reclassifications to interest expense.  During the next twelve months, the Company estimates that $5.8 million will be reclassified as an increase in interest expense.

  • 35 -

The tables below present the pre-tax effects of the Company’s derivative instruments on the Consolidated Statements of Income for the three and nine months ended March 31, 2021 and 2020:

Three Months Ended March 31, 2021
Amount of Gain<br><br><br>(Loss) Recognized<br><br><br>in OCI on<br><br><br>Derivatives Location of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income Amount of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income
(In Thousands)
Derivatives in cash flow<br><br><br>hedging relationships:
Interest rate contracts $ 13,075 Interest expense $ (1,987 )
Total $ 13,075 $ (1,987 )
Nine Months Ended March 31, 2021
--- --- --- --- --- --- ---
Amount of Gain<br><br><br>(Loss) Recognized<br><br><br>in OCI on<br><br><br>Derivatives Location of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income Amount of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income
(In Thousands)
Derivatives in cash flow<br><br><br>hedging relationships:
Interest rate contracts $ 14,353 Interest expense $ (6,576 )
Total $ 14,353 $ (6,576 )
Three Months Ended March 31, 2020
--- --- --- --- --- --- ---
Amount of Gain<br><br><br>(Loss) Recognized<br><br><br>in OCI on<br><br><br>Derivatives Location of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income Amount of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income
(In Thousands)
Derivatives in cash flow<br><br><br>hedging relationships:
Interest rate contracts $ (18,324 ) Interest expense $ 417
Total $ (18,324 ) $ 417
Nine Months Ended March 31, 2020
--- --- --- --- --- --- ---
Amount of Gain<br><br><br>(Loss) Recognized<br><br><br>in OCI on<br><br><br>Derivatives Location of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income Amount of Gain<br><br><br>(Loss) Reclassified<br><br><br>from Accumulated<br><br><br>OCI into Income
(In Thousands)
Derivatives in cash flow<br><br><br>hedging relationships:
Interest rate contracts $ (17,405 ) Interest expense $ 2,623
Total $ (17,405 ) $ 2,623
  • 36 -

Offsetting Derivatives

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Statements of Financial Condition as of March 31, 2021 and June 30, 2020, respectively. The net amounts presented for derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Consolidated Statements of Financial Condition.

March 31, 2021
Gross Amounts Not Offset
Gross Amount Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Received Net Amount
(In Thousands)
Assets:
Interest rate contracts $ 9,735 $ (5,433 ) $ 4,302 $ - $ - $ 4,302
Total $ 9,735 $ (5,433 ) $ 4,302 $ - $ - $ 4,302
Gross Amounts Not Offset
Gross Amount Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Posted Net Amount
(In Thousands)
Liabilities:
Interest rate contracts $ 6,751 $ (5,433 ) $ 1,318 $ - $ (1,318 ) $ -
Total $ 6,751 $ (5,433 ) $ 1,318 $ - $ (1,318 ) $ -
June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Gross Amounts Not Offset
Gross Amount Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Received Net Amount
(In Thousands)
Assets:
Interest rate contracts $ 592 $ (357 ) $ 235 $ - $ - $ 235
Total $ 592 $ (357 ) $ 235 $ - $ - $ 235
Gross Amounts Not Offset
Gross Amount Recognized Gross Amounts Offset Net Amounts Presented Financial Instruments Cash Collateral Posted Net Amount
(In Thousands)
Liabilities:
Interest rate contracts $ 18,534 $ (357 ) $ 18,177 $ - $ (18,177 ) $ -
Total $ 18,534 $ (357 ) $ 18,177 $ - $ (18,177 ) $ -
  • 37 -

Credit Risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.  The Company also has agreements with its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty.  As of March 31, 2021, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to those agreements was $1.7 million.

As required under the enforceable master netting arrangement with its derivatives counterparties, at March 31, 2021, the Company posted financial collateral of $1.3 million that was not included as an offsetting amount.

In addition to the derivative instruments noted above, the Company’s pipeline of loans held for sale at March 31, 2021 and June 30, 2020, included $22.1 million and $127.2 million, respectively, of in process loans whose terms included interest rate locks to borrowers, which are considered free-standing derivative instruments whose fair values are not material to our financial condition or results of operations.

12.     BENEFIT PLANS

Components of Net Periodic Expense

The following table sets forth the aggregate net periodic benefit expense for the Bank’s Benefit Equalization Plan, Postretirement Welfare Plan, Directors’ Consultation and Retirement Plan and Atlas Bank Retirement Income Plan:

Three Months Ended Nine Months Ended Affected Line Item in the Consolidated
March 31, March 31, Statements of Income
2021 2020 2021 2020
(In Thousands) (In Thousands)
Service cost $ 26 $ 20 $ 79 $ 59 Salaries and employee benefits
Interest cost 66 81 197 244 Miscellaneous non-interest  expense
Amortization of unrecognized loss 20 4 62 14 Miscellaneous non-interest  expense
Expected return on assets (28 ) (28 ) (85 ) (84 ) Miscellaneous non-interest  expense
Net periodic benefit cost $ 84 $ 77 $ 253 $ 233
  • 38 -

13.     INCOME TAXES

The following table presents a reconciliation between the reported income taxes for the periods presented and the income taxes which would be computed by applying the federal income tax rate of 21% to income for the three and nine months ended March 31, 2021 and March 31, 2020:

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
(Dollars in Thousands) (Dollars in Thousands)
Income before income taxes $ 22,155 $ 9,479 $ 58,980 $ 38,865
Statutory federal tax rate 21 % 21 % 21 % 21 %
Federal income tax expense at statutory rate $ 4,653 $ 1,991 $ 12,386 $ 8,162
(Reduction) increase in income taxes resulting from:
Tax exempt interest (85 ) (114 ) (270 ) (396 )
State tax, net of federal tax effect 1,498 554 3,738 2,604
Incentive stock option compensation expense 23 21 63 58
Income from bank-owned life insurance (324 ) (324 ) (989 ) (990 )
Non-deductible merger-related expenses - 49 49 69
Bargain purchase gain - - (641 ) -
Impact of Cares Act - (1,624 ) - (1,624 )
Utilization of capital loss carryforward - - (375 ) -
Other items, net (21 ) 97 804 131
5,744 650 14,765 8,014
Reversal of valuation allowance (12 ) (425 ) (535 ) (425 )
Total income tax expense $ 5,732 $ 225 $ 14,230 $ 7,589
Effective income tax rate 25.87 % 2.37 % 24.13 % 19.53 %

14.     FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability or inputs that are derived principally from, or corroborated by, market data by correlation or other means.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
  • 39 -

Assets Measured on a Recurring Basis:

The following methods and significant assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at March 31, 2021 and June 30, 2020:

Investment Securities Available for Sale

The Company’s available for sale investment securities are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securities’ terms and conditions, among other things. From time to time, the Company validates prices supplied by the independent pricing service by comparison to prices obtained from third-party sources or derived using internal models.

Derivatives

The Company has contracted with a third party vendor to provide periodic valuations for its interest rate derivatives to determine the fair value of its interest rate caps and swaps. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives such as discounted cash flow analysis and extensions of the Black-Scholes model. Such valuations are based upon readily observable market data and are therefore considered Level 2 valuations by the Company.

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

March 31, 2021
Quoted<br><br><br>Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3) Total
(In Thousands)
Assets:
Debt securities available for sale:
Obligations of state and political subdivisions - 43,060 - 43,060
Asset-backed securities - 250,741 - 250,741
Collateralized loan obligations - 169,776 - 169,776
Corporate bonds - 173,462 - 173,462
Trust preferred securities - 2,881 - 2,881
Total debt securities - 639,920 - 639,920
Mortgage-backed securities available for sale:
Collateralized mortgage obligations - 16,800 - 16,800
Residential pass-through securities - 806,655 - 806,655
Commercial pass-through securities - 315,595 - 315,595
Total mortgage-backed securities - 1,139,050 - 1,139,050
Total securities available for sale $ - $ 1,778,970 $ - $ 1,778,970
Interest rate contracts - 4,302 - 4,302
Total assets $ - $ 1,783,272 $ - $ 1,783,272
Liabilities:
Interest rate contracts $ - $ 1,318 $ - $ 1,318
Total liabilities $ - $ 1,318 $ - $ 1,318
  • 40 -
June 30, 2020
Quoted Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3) Total
(In Thousands)
Assets:
Debt securities available for sale:
Obligations of state and political subdivisions - 54,054 - 54,054
Asset-backed securities - 172,447 - 172,447
Collateralized loan obligations - 193,788 - 193,788
Corporate bonds - 143,639 - 143,639
Trust preferred securities - 2,627 - 2,627
Total debt securities - 566,555 - 566,555
Mortgage-backed securities available for sale:
Collateralized mortgage obligations - 30,903 - 30,903
Residential pass-through securities - 561,954 - 561,954
Commercial pass-through securities - 226,291 - 226,291
Total mortgage-backed securities - 819,148 - 819,148
Total securities available for sale - 1,385,703 - 1,385,703
Interest rate contracts - 235 - 235
Total assets $ - $ 1,385,938 $ - $ 1,385,938
Liabilities:
Interest rate contracts $ - $ 18,177 $ - $ 18,177
Total liabilities $ - $ 18,177 $ - $ 18,177

Assets Measured on a Non-Recurring Basis:

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at March 31, 2021 and June 30, 2020:

Collateral Dependent Individually Analyzed / Impaired Loans:

The fair value of collateral dependent loans that are individually analyzed or were previously deemed impaired is determined based upon the appraised fair value of the underlying collateral, less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may also adjust appraised values to reflect estimated changes in market values or apply other adjustments to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. For non-collateral-dependent loans, management estimates fair value using discounted cash flows based on inputs that are largely unobservable and instead reflect management’s own estimates of the assumptions as a market participant would in pricing such loans. Collateral dependent individually analyzed / impaired loans are considered a Level 3 valuation by the Company.

  • 41 -

Other Real Estate Owned

Other real estate owned is recorded at estimated fair value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair value is generally based on independent appraisals. These appraisals include adjustments to comparable assets based on the appraisers’ market knowledge and experience. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, is charged to the allowance for credit losses. If further declines in the estimated fair value of the asset occur, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions.

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

March 31, 2021
Quoted Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3) Total
(In Thousands)
Collateral dependent loans:
Residential mortgage $ - $ - $ 1,887 $ 1,887
Non-residential mortgage - - 7,577 7,577
Total $ - $ - $ 9,464 $ 9,464
Other real estate owned, net:
Residential mortgage $ - $ - $ 178 $ 178
Total $ - $ - $ 178 $ 178
June 30, 2020
--- --- --- --- --- --- --- --- ---
Quoted Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3) Total
(In Thousands)
Impaired loans:
Residential mortgage $ - $ - $ 2,339 $ 2,339
Non-residential mortgage - - 2,282 2,282
Commercial business - - 129 129
Total $ - $ - $ 4,750 $ 4,750
Other real estate owned, net:
Residential mortgage - - 178 178
Total $ - $ - $ 178 $ 178
  • 42 -

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company has utilized adjusted Level 3 inputs to determine fair value:

March 31, 2021
Fair<br><br><br>Value Valuation<br><br><br>Techniques Unobservable<br><br><br>Input Range Weighted<br><br><br>Average
(In Thousands)
Collateral dependent loans:
Residential mortgage $ 1,887 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 7% - 12% 8.57 %
Non-residential mortgage 7,577 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 9% - 20% 14.77 %
Total $ 9,464
Other real estate owned, net:
Residential mortgage $ 178 Market valuation of<br><br><br>underlying collateral ^(3)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 6.00% 6.00 %
Total $ 178
June 30, 2020
--- --- --- --- --- --- --- --- --- --- ---
Fair<br><br><br>Value Valuation<br><br><br>Techniques Unobservable<br><br><br>Input Range Weighted<br><br><br>Average
(In Thousands)
Impaired loans:
Residential mortgage $ 2,339 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 7% - 9% 8.17 %
Non-residential mortgage 2,282 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 9% - 12% 10.27 %
Commercial business 129 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 0% - 0% 0.00 %
Total $ 4,750
Other real estate owned, net:
Residential mortgage 178 Market valuation of<br><br><br>underlying collateral ^(3)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 6.00% 6.00 %
Total $ 178
(1) The fair value of impaired loans is generally determined based on an independent appraisal of the fair value of a loan’s underlying collateral.
--- ---
(2) The fair value basis of impaired loans and other real estate owned is adjusted to reflect management’s estimates of selling costs including, but not necessarily limited to, real estate brokerage commissions and title transfer fees.
--- ---
(3) The fair value basis of other real estate owned is generally determined based upon the lower of an independent appraisal of the property’s fair value or the applicable listing price or contracted sales price.
--- ---

At March 31, 2021, collateral dependent loans valued using Level 3 inputs comprised loans with principal balances totaling $15.0 million and valuation allowances of $5.5 million reflecting fair values of $9.5 million. By comparison, at June 30, 2020, under previously applicable GAAP, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $4.8 million and valuation allowances of $89,000 reflecting fair values of $4.8 million.

Once a loan is foreclosed, the fair value of the other real estate owned continues to be evaluated based upon the fair value of the repossessed real estate originally securing the loan. At March 31, 2021 and June 30, 2020, the Company held other real estate owned totaling $178,000 whose carrying value was written down utilizing Level 3 inputs.

  • 43 -

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2021 and June 30, 2020:

March 31, 2021
Carrying<br><br><br>Amount Fair<br><br><br>Value Quoted<br><br><br>Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3)
(In Thousands)
Financial assets:
Cash and cash equivalents $ 108,991 $ 108,991 $ 108,991 $ - $ -
Investment securities available for sale 1,778,970 1,778,970 - 1,778,970 -
Investment securities held to maturity 27,168 28,408 - 28,408 -
Loans held-for-sale 5,172 5,181 - 5,181 -
Net loans receivable 4,734,477 4,763,215 - - 4,763,215
FHLB Stock 45,578 - - - -
Interest receivable 20,562 20,562 3 4,887 15,672
Interest rate contracts 4,302 4,302 - 4,302 -
Financial liabilities:
Deposits 5,374,452 5,382,474 3,574,411 - 1,808,063
Borrowings 865,763 881,900 - - 881,900
Interest payable on deposits 183 183 138 - 45
Interest payable on borrowings 1,528 1,528 - - 1,528
Interest rate contracts 1,318 1,318 - 1,318 -
June 30, 2020
--- --- --- --- --- --- --- --- --- --- ---
Carrying<br><br><br>Amount Fair<br><br><br>Value Quoted<br><br><br>Prices<br><br><br>in Active<br><br><br>Markets for<br><br><br>Identical<br><br><br>Assets<br><br><br>(Level 1) Significant<br><br><br>Other<br><br><br>Observable<br><br><br>Inputs<br><br><br>(Level 2) Significant<br><br><br>Unobservable<br><br><br>Inputs<br><br><br>(Level 3)
(In Thousands)
Financial assets:
Cash and cash equivalents $ 180,967 $ 180,967 $ 180,967 $ - $ -
Investment securities available for sale 1,385,703 1,385,703 - 1,385,703 -
Investment securities held to maturity 32,556 34,069 - 34,069 -
Loans held-for-sale 20,789 21,550 - 21,550 -
Net loans receivable 4,461,070 4,462,232 - - 4,462,232
FHLB Stock 58,654 - - - -
Interest receivable 17,373 17,373 4 4,154 13,215
Interest rate contracts 235 235 - 235 -
Financial liabilities:
Deposits 4,430,282 4,449,877 2,589,886 - 1,859,991
Borrowings 1,173,165 1,215,529 - - 1,215,529
Interest payable on deposits 395 395 295 - 100
Interest payable on borrowings 1,723 1,723 - - 1,723
Interest rate contracts 18,177 18,177 - 18,177 -
  • 44 -

Commitments. The fair value of commitments to fund credit lines and originate or participate in loans held in portfolio or loans held for sale is estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, including those relating to loans held for sale that are considered derivative instruments for financial statement reporting purposes, the fair value also considers the difference between current levels of interest and the committed rates. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure.

Limitations. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no fair value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include premises and equipment, and advances from borrowers for taxes and insurance. In addition, the ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values.

15.     COMPREHENSIVE INCOME

The components of accumulated other comprehensive income included in stockholders’ equity at March 31, 2021 and June 30, 2020 are as follows:

March 31, June 30,
2021 2020
(In Thousands)
Net unrealized gain on securities available for sale $ 1,654 $ 22,482
Tax effect (411 ) (6,541 )
Net of tax amount 1,243 15,941
Fair value adjustments on derivatives 1,511 (19,418 )
Tax effect (449 ) 5,730
Net of tax amount 1,062 (13,688 )
Benefit plan adjustments (1,350 ) (1,412 )
Tax effect 402 416
Net of tax amount (948 ) (996 )
Total accumulated other comprehensive income $ 1,357 $ 1,257
  • 45 -

Other comprehensive (loss) income and related tax effects for the three and nine months ended March 31, 2021 and March 31, 2020 are presented in the following table:

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
(In Thousands) (In Thousands)
Net unrealized holding (loss) gain on securities<br><br><br>available for sale $ (22,285 ) $ 3,975 $ (20,374 ) $ 11,286
Amortization of net unrealized holding loss on<br><br><br>securities available for sale transferred to held<br><br><br>to maturity^(1)^ - - - 596
Net realized gain on sale and call of securities<br><br><br>available for sale ^(2)^ (18 ) (2,234 ) (454 ) (2,231 )
Fair value adjustments on derivatives 15,062 (18,742 ) 20,929 (20,028 )
Benefit plans:
Amortization of actuarial loss 20 4 62 14
Net actuarial gain ^(3)^ - - - 471
Net change in benefit plan accrued expense 20 4 62 485
Other comprehensive (loss) income before taxes (7,221 ) (16,997 ) 163 (9,892 )
Tax effect 2,125 4,917 (63 ) 2,928
Total other comprehensive (loss) income $ (5,096 ) $ (12,080 ) $ 100 $ (6,964 )
(1) Represents amounts reclassified out of accumulated other comprehensive income and included in interest income on taxable securities.
--- ---
(2) Represents amounts reclassified out of accumulated other comprehensive income and included in gain on sale of securities on the consolidated statements of income.
--- ---
(3) Represents amounts reclassified out of accumulated other comprehensive income and included in the computation of net periodic pension expense.  See Note 12 – Benefit Plans for additional information.
--- ---
  • 46 -

16.     REVENUE RECOGNITION

All of the Company’s revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, is recognized within non-interest income. The following table presents the Company’s sources of non-interest income for the three and nine months ended March 31, 2021 and 2020.  Sources of revenue outside the scope of ASC 606 are noted as such.

Three Months Ended Nine Months Ended
March 31, March 31,
2021 2020 2021 2020
(In Thousands) (In Thousands)
Non-interest income:
Deposit-related fees and charges $ 343 $ 423 $ 1,077 $ 1,362
Loan-related fees and charges ^(1)^ 982 915 3,220 3,589
Gain on sale and call of securities ^(1)^ 18 2,234 454 2,231
Gain on sale of loans ^(1)^ 943 565 5,211 1,838
Loss on sale and write down of other real estate owned - - - (28 )
Income from bank owned life insurance ^(1)^ 1,530 1,532 4,722 4,688
Electronic banking fees and charges (interchange income) 456 309 1,265 920
Bargain purchase gain ^(1)^ - - 3,053 -
Other income ^(1)^ 1,194 223 1,351 117
Total non-interest income $ 5,466 $ 6,201 $ 20,353 $ 14,717
(1) Not within the scope of ASC 606.
--- ---

A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Charges on Deposit Accounts

The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Gain (Loss) on Sales of Other Real Estate Owned (“OREO”)

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. Gain (loss) on the sales of OREO falls within the scope of ASC 606, if the Company finances the transaction.  Under ASC 606, if the Company finances the sale of OREO to the buyer, the Company is required to assess whether the buyer is committed to perform their obligations under the contract and whether the collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Generally, the Company does not finance the sale of OREO properties.

Interchange Income

The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsourced technology solution.

  • 47 -

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations.  This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and prices.  Further description of the risks and uncertainties to the business are included in the Company’s other filings with the Securities and Exchange Commission.

Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Impact of COVID-19

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

Employee Matters.  As the COVID-19 pandemic has unfolded, and stay-at-home orders were mandated by government officials, many of our non-branch personnel have transitioned to working remotely, and have continued to do so through March 31, 2021. Our information technology infrastructure has afforded us the ability to work remotely with little interruption as we continue to service the needs of our clients. For those essential employees who are unable to work from home, we have provided personal protective equipment, established guidelines to maintain appropriate social distancing and have initiated enhanced cleaning of our facilities to ensure a safe working environment.

Retail Branches.  At the outset of the pandemic we modified our branch hours and access to ensure the safety of our employees and clients. Where possible, branch lobbies were 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 CDC, we have outfitted our branches with protective barriers and continued to provide our staff with personal protective equipment. In addition, we have instituted policies requiring our clients to wear face masks and to adhere to social distancing protocols while visiting our branch locations. As the result of these modifications, as of March 31, 2021, all of our branches had re-opened their lobbies and 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 PPP, the modification of rules and regulations surrounding troubled debt restructured loans and modifications to the tax code to allow for the carryback of net operating losses.

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

As of March 31, 2021 and including loans acquired in conjunction with the Company’s acquisition of MSB, we had approximately 35 loans with total outstanding balances of $20.9 million under the PPP.

  • 48 -

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

The CARES Act included multiple provisions which impacted the tax code. One such provision restored net operating loss (“NOL”) carrybacks that were eliminated by the 2017 Tax Cuts and Jobs Act. The new carryback provision allows for a five year carryback of NOLs incurred by corporations in the 2018, 2019 and 2020 tax years. As a result of this provision the Company was able to carry back NOLs, which had been recorded at the current statutory federal rate of 21%, at the prior statutory rate of 34%.

2021 Consolidated Appropriations Act. As noted earlier, the 2021 Consolidated Appropriations Act was signed into law on December 27, 2020.  This new legislation is a $900 billion relief package that includes legislation extending certain relief provisions from the CARES Act that were set to expire on December 31, 2020.  Of note for financial institutions, $286 billion was approved for additional PPP loans. As it relates to TDRs, the CARES Act permitted financial institutions to suspend TDR assessment and reporting requirements under GAAP for loan modifications. Set to expire on December 31, 2020, this new legislation extends this relief to the earlier of 60 days after the national emergency declared by the President is terminated or January 1, 2022.

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

The following table sets forth the composition of our real estate secured loans indicating the loan-to-value, by loan category, at March 31, 2021:

March 31, 2021
Balance LTV
(In Thousands)
Commercial mortgage loans:
Multi-family mortgage loans $ 2,055,396 63%
Nonresidential mortgage loans 1,110,765 55%
Total commercial mortgage loans 3,166,161 60%
One- to four-family residential mortgage 1,323,485 59%
Consumer loans:
Home equity loans 59,721 44%
Total mortgage loans $ 4,549,367 60%

The following table identifies our exposure to various loan sectors at March 31, 2021:

March 31, 2021
Real-Estate Secured Non-Real Estate Secured Total
# of Loans Balance LTV # of Loans Balance # of Loans Balance
(Dollars In Thousands)
Hotel 3 $ 3,841 60 % 6 $ 1,341 9 $ 5,182
Restaurant 13 7,891 50 % 35 4,739 48 12,630
Retail shopping center 126 319,561 55 % 2 51 128 319,612
Entertainment & recreation 5 6,653 45 % 13 2,933 18 9,586
Wholesale commercial business - - N/A 13 17,930 13 17,930
Wholesale consumer unsecured - - N/A 15 25 15 25
Total 147 $ 337,946 55 % 84 $ 27,019 231 $ 364,965
  • 49 -

Loan modifications in the table below reflect those loans whose modification includes a deferral that was still in effect at March 31, 2021.  As of March 31, 2021, the Company had active modifications on 32 loans totaling $52.9 million in principal balances, representing 1.10% of total loans.

The following table sets forth the composition of loans with modifications by loan segment as of March 31, 2021:

March 31, 2021
# of Loans ^(1)^ Balance % of Total Loans
(Dollars In Thousands)
Commercial loans:
Multi-family mortgage loans 7 $ 29,880 0.62%
Nonresidential mortgage 4 11,641 0.24%
Commercial business 2 2,121 0.04%
Total commercial loans 13 43,642 0.90%
One- to four-family<br><br><br>residential mortgage 17 7,788 0.16%
Consumer loans:
Home equity loans 2 1,513 0.03%
Total 32 $ 52,943 1.10%

Comparison of Financial Condition at March 31, 2021 and June 30, 2020

Executive Summary.  Total assets increased by $599.8 million to $7.36 billion at March 31, 2021 from $6.76 billion at June 30, 2020. As described in greater detail below, the net increase in total assets was due, in part, to the Company’s July 10, 2020 acquisition of MSB. The increase primarily reflected increases in investment securities, net loans receivable and other assets, partially offset by decreases in cash and equivalents and loans held-for-sale.

Investment Securities.  Investment securities available for sale increased by $393.3 million, to $1.78 billion at March 31, 2021, from $1.39 billion at June 30, 2020. The net increase in the portfolio during the nine months ended March 31, 2021 reflected security purchases totaling $865.2 million. The net increase in the portfolio was partially offset by security sales totaling $44.4 million, $410.1 million in principal repayment, net of premium amortization and discount accretion, and a $20.8 million decrease in the fair value of the portfolio to a net unrealized gain of $1.7 million. Also included in this increase were securities acquired from MSB with fair values of $3.5 million at the time of acquisition.

Investment securities held to maturity decreased by $5.4 million to $27.2 million at March 31, 2021 from $32.6 million at June 30, 2020. This decrease was attributable to principal repayment, net of discount accretion and premium amortization.

Additional information regarding investment securities as of those dates is presented in Note 6 to the unaudited consolidated financial statements.

Loans Held-for-Sale. Loans held-for-sale totaled $5.2 million at March 31, 2021 as compared to $20.8 million at June 30, 2020 and are reported separately from the balance of net loans receivable. During the nine months ended March 31, 2021, $265.3 million of residential mortgage loans were sold, resulting in net gains on sale of $4.9 million.

  • 50 -

Net Loans Receivable.  Net loans receivable increased by $273.4 million to $4.73 billion at March 31, 2021 from $4.46 billion at June 30, 2020. Included in this increase were loans with fair values totaling $530.2 million that were acquired in conjunction with the acquisition of MSB. Partially offsetting this increase was a net decrease in non-acquired loans which resulted, in part, from elevated levels of loan prepayment activity, largely concentrated within the one- to four-family residential portfolio, and a decrease of $48.0 million in PPP loan balances. Detail regarding the changes in the loan portfolio is presented below:

March 31, June 30, Increase/
2021 2020 (Decrease)
(In Thousands)
Commercial loans:
Multi-family mortgage $ 2,055,396 $ 2,059,568 $ (4,172 )
Nonresidential mortgage 1,110,765 960,853 149,912
Commercial business 183,181 138,788 44,393
Construction 95,533 20,961 74,572
Total commercial loans 3,444,875 3,180,170 264,705
One- to four-family residential mortgage 1,323,485 1,273,022 50,463
Consumer loans:
Home equity loans 59,721 82,920 (23,199 )
Other consumer 3,445 3,991 (546 )
Total consumer 63,166 86,911 (23,745 )
Total loans 4,831,526 4,540,103 291,423
Unaccreted yield adjustments (33,287 ) (41,706 ) 8,419
Allowance for credit losses (63,762 ) (37,327 ) (26,435 )
Net loans receivable $ 4,734,477 $ 4,461,070 $ 273,407

Commercial loan origination volume for the nine months ended March 31, 2021 totaled $371.4 million, which comprised $258.7 million of commercial mortgage loan originations, $79.2 million of commercial business loan originations and construction loan disbursements of $33.5 million. Commercial loan originations for the period were augmented by the funding of purchased loans totaling $21.6 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired commercial loans with fair values totaling approximately $389.3 million. At March 31, 2021, the balance of commercial loans included PPP loans totaling $20.9 million.

One- to four-family residential mortgage loan origination volume for the nine months ended March 31, 2021, excluding loans held-for-sale, totaled $352.9 million and was augmented with the funding of purchased loans totaling $13.0 million. Home equity loan and line of credit origination volume for the same period totaled $11.5 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired one- to four-family residential mortgage loans and home equity loans and lines of credit with fair values totaling approximately $121.7 million and $19.1 million, respectively.

Additional information about the Company’s loans at March 31, 2021 and June 30, 2020 is presented in Note 7 to the unaudited consolidated financial statements.

Nonperforming Loans and TDRs.  Nonperforming loans increased by $34.7 million to $71.4 million, or 1.49% of total loans at March 31, 2021, from $36.7 million, or 0.82% of total loans at June 30, 2020. Included in this increase were $10.4 million of non-performing loans acquired from MSB, whose fair values at acquisition reflected various levels of impairment. Non-performing loans at March 31, 2021 did not include $54.9 million of performing PCD loans acquired from MSB.

  • 51 -

TDRs are loans where the Company has modified the contractual terms of the loan as a result of the financial condition of the borrower. Subsequent to their modification, TDRs are placed on non-accrual until such time as satisfactory payment performance has been demonstrated, at which time the loan may be returned to accrual status. As noted above, based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications, including short-term payment deferrals, are not considered to be TDRs. At March 31, 2021, the Company had accruing TDRs totaling $7.9 million, a decrease of $539,000 from $8.4 million at June 30, 2020. At March 31, 2021, the Company had non-accrual TDRs totaling $11.3 million, a decrease of $1.8 million from $13.1 million at June 30, 2020.

Additional information about the Company’s nonperforming loans at March 31, 2021 and June 30, 2020 is presented in Note 7 to the unaudited consolidated financial statements.

Allowance for Credit Losses (“ACL”). At March 31, 2021, the ACL totaled $63.8 million, or 1.32% of total loans, reflecting an increase of $26.4 million from $37.3 million, or 0.82% of total loans, at June 30, 2020. This increase resulted from the adoption of CECL, which increased the ACL for loans receivable by $19.6 million, the establishment of an ACL for loans acquired from MSB totaling $9.0 million and an increase in the portion of the ACL attributable to loans individually evaluated for impairment. This increase was partially offset by a reduction in ACL attributable to the effects of a decrease in the overall balance of the portion of the loan portfolio that was collectively evaluated for impairment and net charge-offs.

See Note 1 to the unaudited consolidated financial statements regarding the process and methodology employed to estimate the ACL.  Additional information about the ACL at March 31, 2021 and June 30, 2020 is presented in Note 8 to the unaudited consolidated financial statements.

Other Assets.  The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, core deposit intangibles, bank owned life insurance, deferred income taxes, OREO and other assets, increased by $26.1 million to $703.2 million at March 31, 2021 from $677.1 million at June 30, 2020.

The increase in other assets primarily reflected the impact of the MSB acquisition through which the Company acquired other assets with fair values totaling $34.1 million. The increase in other assets was partially offset by a decrease in the balance of FHLB stock during the nine months ended March 31, 2021.

The remaining increases and decreases in other assets for the nine months ended March 31, 2021 generally reflected normal operating fluctuations in their respective balances.

Deposits.  Total deposits increased by $944.2 million to $5.37 billion at March 31, 2021 from $4.43 billion at June 30, 2020.  The increase in deposits reflected the impact of the MSB acquisition through which the Company assumed deposits with fair values totaling $460.2 million coupled with organic growth in deposits of $484.0 million. The following table sets forth the distribution of total deposits, by type, at the dates indicated:

March 31, June 30,
2021 2020 Increase
(In Thousands)
Non-interest-bearing deposits $ 545,746 $ 419,138 $ 126,608
Interest-bearing deposits:
Interest-bearing demand 1,923,184 1,264,151 659,033
Savings 1,105,481 906,597 198,884
Certificates of deposit 1,800,041 1,840,396 (40,355 )
Interest-bearing deposits 4,828,706 4,011,144 817,562
Total deposits $ 5,374,452 $ 4,430,282 $ 944,170

Additional information about the Company’s deposits at March 31, 2021 and June 30, 2020 is presented in Note 9 to the unaudited consolidated financial statements.

  • 52 -

Borrowings.  The balance of borrowings decreased by $307.4 million to $865.8 million at March 31, 2021 from $1.17 billion at June 30, 2020 and reflected the repayment of maturing FHLB advances totaling $275.0 million, the pre-payment of FHLB advances totaling $27.0 million and a decrease in depositor sweep accounts totaling $5.7 million. In conjunction with the acquisition of MSB, the Company assumed overnight FHLB advances with fair values totaling $62.9 million, which were immediately repaid.

Additional information about the Company’s borrowings at March 31, 2021 and June 30, 2020 is presented in Note 10 to the unaudited consolidated financial statements.

Other Liabilities.  The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $16.6 million to $54.0 million at March 31, 2021 from $70.6 million at June 30, 2020. The change in the balance of other liabilities reflected the adoption of CECL, as noted above. At adoption the Company increased its ACL by $536,000 for unfunded loan commitments while also recording a provision for ACL of $730,000 during the nine months ended March 31, 2021. The change in other liabilities also reflected a $16.9 million decrease in the fair value of the Company’s outstanding liability derivatives positions. The remaining change generally reflected normal operating fluctuations in the balances of other liabilities during the period.

Stockholders’ Equity.  Stockholders’ equity decreased by $20.4 million to $1.06 billion at March 31, 2021 from $1.08 billion at June 30, 2020. The decrease in stockholders’ equity during the nine months ended March 31, 2021 largely reflected share repurchases totaling $80.6 million, cash dividends totaling $20.8 million and a $14.2 million cumulative effect adjustment related to the adoption of CECL, partially offset by the issuance of $45.1 million of capital stock in conjunction with the acquisition of MSB and net income of $44.8 million.

Book value per share increased by $0.02 to $12.98 at March 31, 2021 while tangible book value per share decreased by $0.03 to $10.36 at March 31, 2021.

In March 2019 the Company announced its fourth stock repurchase plan which authorized the repurchase of 9,218,324 shares, or 10%, of the outstanding shares as of that date. On March 25, 2020, that plan was temporarily suspended due to the risks and uncertainties associated with the COVID-19 pandemic. On October 19, 2020, the Company announced the resumption of that plan which had, as of that date, 761,030 shares of common stock remained to be repurchased. In addition, the Company announced the approval of a fifth repurchase plan totaling 4,475,523 shares, or 5% of the Company’s then outstanding common stock which was implemented upon the completion of the fourth stock repurchase plan. On January 22, 2021, the Company announced the completion of its fifth stock repurchase plan and the authorization of a sixth stock repurchase plan to repurchase up to 4,210,520 shares, or 5% of the shares then outstanding.

During the nine months ended March 31, 2021, the Company repurchased a total of 7,535,253 shares of its common stock which were repurchased in conjunction with the Company’s fourth, fifth and sixth repurchase plans. Such shares were repurchased at a total cost of $80.6 million and at an average cost of $10.69 per share.

Including shares previously repurchased, the shares associated with the fourth repurchase plan were repurchased at a total cost of $117.9 million and at an average cost of $12.79 per share. The Company fully repurchased shares associated with the Company’s fifth share repurchase plan during the quarter ended March 31, 2021, such shares were repurchased at a total cost of $46.9 million and at an average cost of $10.48 per share. The shares repurchased related to the Company’s sixth share repurchase plan were repurchased at a total cost of $26.9 million and at an average cost of $11.69 per share.

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Comparison of Operating Results for the Quarter ended March 31, 2021 and March 31, 2020

Net Income.  Net income for the quarter ended March 31, 2021 was $16.4 million, or $0.20 per diluted share, compared to $9.3 million, or $0.11 per diluted share for the quarter ended March 31, 2020. The increase in net income reflected an increase in net interest income and a decrease in the provision for credit losses, partially offset by a decrease in non-interest income, an increase in non-interest expense and an increase in income tax expense.

Net Interest Income.  Net interest income increased by $10.0 million to $47.6 million for the quarter ended March 31, 2021. The increase between the comparative periods resulted from a decrease of $10.5 million in interest expense partially offset by a decrease of $463,000 in interest income.

The decrease in interest expense for the quarter ended March 31, 2021, reflected an 86 basis points decrease in the average cost of interest-bearing liabilities to 0.75%, partially offset by a $435.5 million increase in the average balance of interest-bearing liabilities to $5.69 billion. For the same period, interest expense on deposits decreased by $8.1 million to $6.7 million and was attributable to a 94 basis points decrease in the cost of interest-bearing deposits, partially offset by an $865.5 million increase in their average balance. For the quarter ended March 31, 2021, interest expense on borrowings decreased by $2.4 million to $4.0 million and was attributable to a decrease of $430.0 million in the average balance of borrowings coupled with a 13 basis points decrease in their cost.

The decrease in interest income of $463,000 reflected a 38 basis points decrease in the yield on the average balance of interest-earning assets to 3.46% that was partially offset by an increase to their average balance of $616.7 million to $6.73 billion. Interest income on loans increased by $2.7 million to $49.3 million for the quarter ended March 31, 2021 and was primarily attributable to a $312.6 million increase in the average balance of loans to $4.82 billion. For the same period, the average yield on loans decreased five basis points to 4.09%. The decrease in interest income on interest-earning assets, excluding loans, was due to decreases in interest income on taxable securities, tax-exempt securities and other interest-earning assets.

Net interest spread increased by 48 basis points to 2.71% for the quarter ended March 31, 2021, from 2.23% for the quarter ended March 31, 2020. Net interest margin increased 37 basis points to 2.83%, from 2.46%, for the same comparative periods. The increase in spread and margin was the result of a decrease in the average cost of interest-bearing liabilities that was partially offset by a decrease in the average yield on interest-earning assets.

Additional 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.

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For the Quarter Ended March 31,
2021 2020
Average<br><br><br>Balance Interest Average<br><br><br>Yield/<br><br><br>Cost Average<br><br><br>Balance Interest Average<br><br><br>Yield/<br><br><br>Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable ^(1)^ $ 4,816,592 $ 49,307 4.09 % $ 4,503,996 $ 46,603 4.14 %
Taxable investment securities^(2)^ 1,674,223 7,891 1.89 1,406,973 10,526 2.99
Tax-exempt securities ^(2)^ 73,573 410 2.23 101,771 547 2.15
Other interest-earning assets^(3)^ 169,291 705 1.67 104,241 1,100 4.22
Total interest-earning assets 6,733,679 58,313 3.46 6,116,981 58,776 3.84
Non-interest-earning assets 617,440 598,335
Total assets $ 7,351,119 $ 6,715,316
Interest-bearing liabilities:
Interest-bearing demand $ 1,831,617 $ 1,558 0.34 $ 1,112,080 $ 3,251 1.17
Savings 1,084,981 557 0.21 838,501 1,782 0.85
Certificates of deposit 1,904,234 4,555 0.96 2,004,785 9,735 1.94
Total interest-bearing deposits 4,820,832 6,670 0.55 3,955,366 14,768 1.49
Borrowings 865,690 4,012 1.85 1,295,699 6,398 1.98
Total interest-bearing liabilities 5,686,522 10,682 0.75 5,251,065 21,166 1.61
Non-interest-bearing liabilities^(4)^ 582,036 372,986
Total liabilities 6,268,558 5,624,051
Stockholders' equity 1,082,561 1,091,265
Total liabilities and stockholders'<br><br><br>equity $ 7,351,119 $ 6,715,316
Net interest income $ 47,631 $ 37,610
Interest rate spread^(5)^ 2.71 % 2.23 %
Net interest margin^(6)^ 2.83 % 2.46 %
Ratio of interest-earning assets<br><br><br>to interest-bearing liabilities 1.18 X 1.16 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 $525,018,000 and $317,530,000, for the quarter ended March 31, 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.
--- ---

Provision for Credit Losses.  For the quarter ended March 31, 2021 the provision for credit losses decreased by $5.2 million to $1.1 million compared to $6.3 million for the quarter ended March 31, 2020. The decrease in the provision between comparative periods was largely attributable to increases in qualitative factors associated with the impact of COVID-19 on economic conditions and an increase in the outstanding balance of the loan portfolio that was collectively evaluated for impairment during the prior comparative period. Also contributing to the change in the level of provision during the quarter was an increase in reserves on individually evaluated loans of $4.2 million, partially offset by a release of reserves within the one- to four-family residential segments, reflecting the improving credit risk outlook for that asset class.

The increase in reserves on individually evaluated loans, noted above, was largely attributable to two non-performing commercial real estate loans, with principal balances totaling $9.8 million, secured by properties located in New York City.

Additional information regarding the allowance for credit losses and the associated provisions recognized during the quarter ended March 31, 2021 and 2020 is presented in Note 8 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at March 31, 2021 and June 30, 2020.

  • 55 -

Non-Interest Income.  Non-interest income decreased by $735,000 to $5.5 million for the quarter ended March 31, 2021.

Gain on sale and call of securities reflected a net gain of $18,000 during the quarter ended March 31, 2021 compared to a net gain of $2.2 million, recorded during the earlier comparative period. The gain recorded in the earlier comparative period was related to the Company’s execution of a wholesale restructuring transaction.

Gain on sale of loans increased by $378,000 to $943,000 for the quarter ended March 31, 2021. The increase in loan sale gains largely reflected an increase in the average net price, between comparative periods, at which such loans were sold, partially offset by a decrease in the volume of loans originated and sold.

Other non-interest income increased by $971,000 to $1.2 million for the quarter ended March 31, 2021. The increase primarily reflected $239,000 of referral fees related to PPP loans and $837,000 of non-recurring gains on asset disposals recognized in the current period for which no such gains were recorded in the prior comparative 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. Total non-interest expense increased by $1.8 million to $29.8 million for the quarter ended March 31, 2021.

Salaries and employee benefits increased by $1.4 million to $17.0 million for the quarter ended March 31, 2021. This increase reflected additional salary and payroll tax expense associated with employees retained in conjunction with the MSB acquisition and new hires, who were largely concentrated within the lending and retail banking lines of business, coupled with an increase in incentive compensation expense. These increases were partially offset by decreases in medical and stock benefit plan expense.

Net occupancy expense of premises increased by $748,000 to $3.4 million for the quarter ended March 31, 2021. This increase was largely attributable to ongoing operating expense associated with the addition of four office locations and the acquisition of five office locations from MSB. Partially offsetting these increases were expense reductions associated with the consolidation of multiple office locations during the period.

Equipment and systems expense increased by $1.2 million to $3.8 million for the quarter ended March 31, 2021. This increase was largely attributable to increases in equipment, technology infrastructure, core processing and electronic banking delivery channel expense associated with the Company’s growth in clients and accounts, a portion of which was attributable to the acquisition of MSB. This increase was also attributable to non-recurring core processing expense reductions totaling $500,000 that were recorded in the prior comparative period, and were associated with the re-negotiation of the Company’s core processing contract.

Advertising and marketing expense decreased by $45,000 to $567,000 for the quarter ended March 31, 2021.  This decrease largely reflected changes in advertising expense across a variety of advertising formats reflecting normal fluctuations in the timing of certain campaigns supporting our loan and deposit growth initiatives.

FDIC insurance premiums totaled $488,000 for the quarter ended March 31, 2021 for which no comparable expense was recorded during the prior comparative period. No expense was recorded in the prior comparative period as a result of credits available to the Bank under the FDIC’s Small Bank Assessment Credit program.

Merger-related expenses, associated with the Company’s acquisition of MSB, totaled $285,000 for the quarter ended March 31, 2020 for which no such costs were recorded in the current period.

Debt extinguishment expenses totaled $2.2 million for the quarter ended March 31, 2020 and were related to the Company’s execution of a wholesale restructuring transaction, for which no such expense was recorded in the current period.

Other non-interest expense increased by $448,000 to $3.8 million for the quarter ended March 31, 2021. The increase in other expense during the quarter was primarily attributable to a non-recurring asset impairment charge of $375,000 related to a branch consolidation and resulting closure and $207,000 of credit loss expense for off-balance sheet exposures.

  • 56 -

Provision for Income Taxes.  Provision for income taxes increased by $5.5 million to $5.7 million for the quarter ended March 31, 2021, from $225,000 for the quarter ended March 31, 2020.

The increase in income tax expense largely reflected a $1.6 million reduction in income tax expense that was recorded in the prior comparative period, which was attributable to the carryback of net operating losses into prior periods. Also recorded during the prior comparative period, the Company reversed valuation allowances totaling $591,000 which were associated with capital loss carryforwards and were determined to be realizable due to the sale of investment securities at the Bank’s New Jersey investment company subsidiary. Finally, a higher level of pre-tax net income, as compared to the prior period, resulted in a higher provision for income tax expense.

Effective tax rates for the quarter ended March 31, 2021 and March 31, 2020 were 25.9% and 2.4% which, in relation to statutory income tax rates, reflected the effects of recurring sources of tax-favored income included in pre-tax income as well as the impact of various non-recurring items noted above. The effective tax rate for the prior comparative period was primarily driven by a reduction of income tax expense attributable to the carryback of net operating losses and the reversal of valuation allowances, as discussed above.

Comparison of Operating Results for the Nine Months ended March 31, 2021 and March 31, 2020

Net Income.  Net income for the nine months ended March 31, 2021 was $44.8 million, or $0.53 per diluted share, compared to $31.3 million, or $0.38 per diluted share for the nine months ended March 31, 2020. The increase in net income reflected increases in net interest income and non-interest income and a decrease in the provision for credit losses that was partially offset by increases in non-interest expense and income tax expense. Net income for the nine months ended March 31, 2021 also reflected various non-recurring items recognized in conjunction with the Company’s acquisition of MSB.

Net Interest Income.  Net interest income increased by $27.4 million to $136.3 million for the nine months ended March 31, 2021. The increase between the comparative periods resulted from a decrease of $25.7 million in interest expense and an increase of $1.7 million in interest income.

The decrease in interest expense for the nine months ended March 31, 2021, reflected a 75 basis points decrease in the average cost of interest-bearing liabilities to 0.97%, partially offset by a $476.5 million increase in the average balance of interest-bearing liabilities to $5.66 billion. For the same period, interest expense on deposits decreased by $20.0 million to $26.4 million and was attributable to an 83 basis points decrease in the cost of interest-bearing deposits partially offset by a $747.1 million increase in their average balance. For the nine months ended March 31, 2021, interest expense on borrowings decreased by $5.7 million to $14.9 million and was attributable to a decrease of $270.6 million in the average balance of borrowings coupled with an 18 basis points decrease in their cost.

The increase in interest income of $1.7 million reflected an increase to the average balance of interest-earning assets of $641.1 million to $6.71 billion, partially offset by a 33 basis points decrease in their yield to 3.53%. Interest income on loans increased by $10.1 million to $151.0 million for the nine months ended March 31, 2021 and was primarily attributable to a $313.2 million increase in the average balance of loans to $4.88 billion. For the same period, the average yield on loans increased one basis point to 4.12%. The decrease in interest income on interest-earning assets, excluding loans, was due to decreases in interest income on taxable securities, tax-exempt securities and other interest-earning assets.

Net interest spread increased by 42 basis points to 2.56% for the nine months ended March 31, 2021, from 2.14% for the nine months ended March 31, 2020. Net interest margin increased 32 basis points to 2.71%, from 2.39%, for the same comparative periods. The increase in spread and margin reflected a decrease in the average cost of interest-bearing liabilities that was partially offset by a decrease in the average yield on interest-earning assets.

Additional 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.

  • 57 -
For the Nine Months Ended March 31,
2021 2020
Average<br><br><br>Balance Interest Average<br><br><br>Yield/<br><br><br>Cost Average<br><br><br>Balance Interest Average<br><br><br>Yield/<br><br><br>Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable ^(1)^ $ 4,882,529 $ 150,953 4.12 % $ 4,569,341 $ 140,811 4.11 %
Taxable investment securities^(2)^ 1,521,839 22,934 2.01 1,265,871 29,552 3.11
Tax-exempt securities ^(2)^ 78,442 1,297 2.20 118,828 1,906 2.14
Other interest-earning assets^(3)^ 228,075 2,406 1.41 115,764 3,588 4.13
Total interest-earning assets 6,710,885 177,590 3.53 6,069,804 175,857 3.86
Non-interest-earning assets 624,644 591,611
Total assets $ 7,335,529 $ 6,661,415
Interest-bearing liabilities:
Interest-bearing demand $ 1,658,437 $ 5,727 0.46 $ 992,261 $ 9,304 1.25
Savings 1,049,655 2,874 0.37 817,025 4,964 0.81
Certificates of deposit 1,930,970 17,778 1.23 2,082,677 32,145 2.06
Total interest-bearing deposits 4,639,062 26,379 0.76 3,891,963 46,413 1.59
Borrowings 1,020,472 14,865 1.94 1,291,045 20,540 2.12
Total interest-bearing liabilities 5,659,534 41,244 0.97 5,183,008 66,953 1.72
Non-interest-bearing liabilities^(4)^ 572,249 375,792
Total liabilities 6,231,783 5,558,800
Stockholders' equity 1,103,746 1,102,615
Total liabilities and stockholders'<br><br><br>equity $ 7,335,529 $ 6,661,415
Net interest income $ 136,346 $ 108,904
Interest rate spread^(5)^ 2.56 % 2.14 %
Net interest margin^(6)^ 2.71 % 2.39 %
Ratio of interest-earning assets<br><br><br>to interest-bearing liabilities 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 $502,046,000 and $319,451,000, for the nine months ended March 31, 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.
--- ---

Provision for Credit Losses.  The provision for credit losses decreased by $203,000 to $3.8 million for the nine months ended March 31, 2021 compared to $4.0 million for the nine months ended March 31, 2020. The level of provision for the nine months ended March 31, 2021 was largely attributable to $5.1 million of provision expense on non-PCD loans acquired in connection with the acquisition of MSB, an increase of $5.7 million in reserves on individually evaluated loans, partially offset by a release of reserves within the one- to four-family residential segments, reflecting the improving credit risk outlook for that asset class and provision for credit loss reversals associated with a decline in balances of loans collectively evaluated for impairment. By comparison, the level of provision for the nine months ended March 31, 2020 was attributable to increases in qualitative factors associated with the economic impact of COVID-19 and a decrease in the outstanding balance of the loan portfolio that was collectively evaluated for impairment.

The increase in reserves on individually evaluated loans, noted above, was largely attributable to two non-performing commercial real estate loans, with principal balances totaling $9.8 million, secured by properties located in New York City.

Additional information regarding the allowance for credit losses and the associated provisions recognized during the nine months ended March 31, 2021 and 2020 is presented in Note 8 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at March 31, 2021 and June 30, 2020.

  • 58 -

Non-Interest Income.  Non-interest income increased by $5.6 million to $20.4 million for the nine months ended March 31, 2021.

Fees and service charges decreased by $654,000 to $4.3 million for the nine months ended March 31, 2021. The decrease primarily reflected a decrease in loan-related fees attributable to a decrease in commercial loan prepayment activity.

Gain on sale and call of securities reflected a net gain of $454,000 during the nine months ended March 31, 2021 compared to a net gain of $2.2 million, recorded during the earlier comparative period. The gain recorded in the prior comparative period was related to the Company’s execution of a wholesale restructuring transaction.

Gain on sale of loans increased by $3.4 million to $5.2 million for the nine months ended March 31, 2021. The increase in loan sale gains reflected an increase in the volume of loans originated and sold between comparative periods coupled with an increase in the average net price at which such loans were sold. The increase for the nine months ended March 31, 2021 also included gains recognized on the sale of $43.6 million of PPP loans, which resulted in a gain on sale of $352,000.

The Company recognized a net loss of $28,000 related to the write down and sale of OREO during the nine months ended March 31, 2020, while there was no such loss recorded during the current period.

Bargain purchase gain, recognized in conjunction with the acquisition of MSB, totaled $3.1 million for the nine months ended March 31, 2021. There was no such gain recorded in the prior comparable period.

Other non-interest income increased by $1.2 million to $1.4 million for the nine months ended March 31, 2021. The increase primarily reflected $239,000 of referral fees related to PPP loans and $837,000 of non-recurring gains on asset disposals recognized in the current period and $342,000 of non-recurring losses on asset disposals recognized in the prior comparative 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 increased by $13.2 million to $93.9 million for the nine months ended March 31, 2021.

Salaries and employee benefits expense increased by $4.5 million to $51.0 million for the nine months ended March 31, 2021.  This increase reflected additional salary and payroll tax expense associated with employees retained in conjunction with the MSB acquisition and new hires, who were largely concentrated within the lending and retail banking lines of business. These increases were partially offset by decreases in employee severance, ESOP expense and stock benefit plan expense.

Net occupancy expense of premises increased by $939,000 to $9.7 million for the nine months ended March 31, 2021. This increase was largely attributable to the ongoing operating expenses associated with the owned and leased office facilities acquired by the Company in conjunction with the MSB acquisition coupled with an increase of $441,000 in snow removal expense. The change in net occupancy expense also reflected $517,000 of lease termination costs incurred in the prior comparative period for which no such costs were recorded in the current period.

Equipment and systems expense increased by $2.5 million to $11.3 million for the nine months ended March 31, 2021. This increase was largely attributable to increases in equipment, technology infrastructure, core processing and electronic banking delivery channel expense associated with the Company’s growth in clients and accounts, a portion of which was attributable to the acquisition of MSB. This increase was also attributable to non-recurring core processing expense reductions totaling $500,000 that were recorded in the prior comparative period, and were associated with the re-negotiation of the Company’s core processing contract.

Advertising and marketing expense decreased by $457,000 to $1.6 million for the nine months ended March 31, 2021.  This decrease largely reflected changes in advertising expense across a variety of advertising formats reflecting normal fluctuations in the timing of certain campaigns supporting our loan and deposit growth initiatives.

  • 59 -

FDIC insurance premiums totaled $1.5 million for the nine months ended March 31, 2021 for which no comparable expense was recorded during the prior comparative period. No expense was recorded in the prior comparative period as a result of credits available to the Bank under the FDIC’s Small Bank Assessment Credit program.

Merger-related expenses, associated with the Company’s acquisition of MSB, increased by $3.8 million to $4.3 million for the nine months ended March 31, 2021.

Debt extinguishment expenses totaled $796,000 for the nine months ended March 31, 2021 which was related to the pre-payment of FHLB borrowings. By comparison, debt extinguishment expenses totaled $2.2 million for the nine months ended March 31, 2020 and were related to the Company’s execution of a wholesale restructuring transaction.

Other expense increased by $1.8 million to $11.5 million for the nine months ended March 31, 2021. The increase in other expense was primarily attributable to non-recurring items recorded in both comparative periods. For the nine months ended March 31, 2021 asset impairment charges of $722,000, related to a branch closures, was recognized as was $729,000 of credit loss expense for off-balance sheet exposures required in connection with the Company’s adoption of CECL. For the nine months ended March 31, 2020 the recovery of an asset write-down totaling $288,000 was recorded.

Provision for Income Taxes.  Provision for income taxes increased by $6.6 million to $14.2 million for the nine months ended March 31, 2021, from $7.6 million for the nine months ended March 31, 2020.

The increase in income tax expense largely reflected a $1.6 million reduction in income tax expense that was recorded in the prior comparative period, which was attributable to the carryback of net operating losses into prior periods. Also recorded during the prior comparative period, the Company reversed valuation allowances totaling $591,000 which were associated with capital loss carryforwards and were determined to be realizable due to the sale of investment securities at the Bank’s New Jersey investment company subsidiary.  Finally, a higher level of pre-tax net income, as compared to the prior period, resulted in a higher provision for income tax expense.

The effects of a higher level of pre-tax net income was partially offset by the reversal of valuation allowances totaling $535,000 which was associated with the realization of a capital loss carryforward during the period.

Effective tax rates for the nine months ended March 31, 2021 and March 31, 2020 were 24.1% and 19.5%, respectively. The effective tax rate for the nine months ended March 31, 2021 reflected the effects of various non-recurring items recorded in conjunction with the Company’s acquisition of MSB, including non-deductible merger related expenses, which were partially offset by a non-taxable bargain purchase gain. In addition, the effective tax rate for the nine months ended March 31, 2021 further reflected the effects of the reversal of valuation allowances recognized during the period, as discussed above. The effective tax rate for the prior comparative period was primarily driven by a reduction of income tax expense attributable to the carryback of net operating losses, as discussed above.

  • 60 -

Liquidity and Capital Resources

Liquidity, represented by cash and cash equivalents, is a product of operating, investing and financing activities. The Company’s primary sources of funds are deposits, borrowings, cash flows from investment securities and loans receivable and funds provided from operations. While scheduled payments from the amortization and maturity of loans and investment securities are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and securities.

Liquidity, at March 31, 2021, included $109.0 million of short-term cash and equivalents supplemented by $1.78 billion of investment securities classified as available for sale. In addition, as of March 31, 2021, the Company had the capacity to borrow additional funds totaling $1.81 billion and $257.0 million, without pledging additional collateral, from the FHLB of New York and FRB, respectively. The Company also had the capacity to borrow, as of March 31, 2021, $615.0 million of additional funds, on an unsecured basis, via lines of credit established with other financial institutions.

At March 31, 2021, the Company had outstanding commitments to originate and purchase loans totaling approximately $256.7 million while such commitments totaled $45.6 million at June 30, 2020. As of those same dates, the Company’s pipeline of loans held for sale included $22.1 million and $127.2 million of loans in process whose terms included interest rate locks to borrowers that were paired with a non-binding, best-efforts, commitment to sell the loan to a buyer at a fixed price and within a predetermined timeframe after the sale commitment is established.

Construction loans in process and unused lines of credit were $75.3 million and $180.5 million, respectively, at March 31, 2021 compared to $17.0 million and $82.5 million, respectively, at June 30, 2020. The Company is also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled $689,000 and $217,000 at March 31, 2021 and June 30, 2020, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Deposits increased $944.2 million to $5.37 billion at March 31, 2021 from $4.43 billion at June 30, 2020.  The increase in deposit balances reflected an $817.6 million increase in interest-bearing deposits coupled with a $126.6 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 March 31, 2021, the Bank’s outstanding balance of FHLB advances, excluding fair value adjustments, totaled $867.5 million.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of March 31, 2021, the Company and the Bank exceeded all capital requirements of federal banking regulators.

  • 61 -

The following table sets forth the Bank’s capital position at March 31, 2021 and June 30, 2020, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

At March 31, 2021
Actual For Capital<br><br><br>Adequacy Purposes To Be Well Capitalized<br><br><br>Under Prompt<br><br><br>Corrective Action<br><br><br>Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 807,658 18.12 % $ 356,678 8.00 % $ 445,848 10.00 %
Tier 1 capital (to risk-weighted assets) 769,007 17.25 % 267,509 6.00 % 356,678 8.00 %
Common equity tier 1 capital (to risk-weighted assets) 769,007 17.25 % 200,631 4.50 % 289,801 6.50 %
Tier 1 capital (to adjusted total assets) 769,007 10.81 % 284,660 4.00 % 355,825 5.00 %
At June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Actual For Capital<br><br><br>Adequacy Purposes To Be Well Capitalized<br><br><br>Under Prompt<br><br><br>Corrective Action<br><br><br>Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 816,577 21.38 % $ 305,562 8.00 % $ 381,953 10.00 %
Tier 1 capital (to risk-weighted assets) 779,250 20.40 % 229,172 6.00 % 305,562 8.00 %
Common equity tier 1 capital (to risk-weighted assets) 779,250 20.40 % 171,879 4.50 % 248,269 6.50 %
Tier 1 capital (to adjusted total assets) 779,250 11.95 % 260,893 4.00 % 326,116 5.00 %

The following table sets forth the Company’s capital position at March 31, 2021 and June 30, 2020, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

At March 31, 2021
Actual For Capital<br><br><br>Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 903,110 20.18 % $ 358,018 8.00 %
Tier 1 capital (to risk-weighted assets) 864,459 19.32 % 268,513 6.00 %
Common equity tier 1 capital (to risk-weighted assets) 864,459 19.32 % 201,385 4.50 %
Tier 1 capital (to adjusted total assets) 864,459 12.12 % 285,393 4.00 %
At June 30, 2020
--- --- --- --- --- --- --- --- --- --- ---
Actual For Capital<br><br><br>Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 906,058 23.61 % $ 306,958 8.00 %
Tier 1 capital (to risk-weighted assets) 868,731 22.64 % 230,219 6.00 %
Common equity tier 1 capital (to risk-weighted assets) 868,731 22.64 % 172,664 4.50 %
Tier 1 capital (to adjusted total assets) 868,731 13.27 % 261,783 4.00 %
  • 62 -

As a result of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies have adopted a rule to establish for institutions with assets of less than $10 billion that meet other specified criteria a community bank leverage ratio (“CBLR”) that such institutions may elect to utilize in lieu of the generally applicable leverage and risk-based capital requirements noted above. The federal banking agencies have adopted 9% as the applicable ratio, effective March 31, 2020, and as a result of the CARES Act, temporarily reduced the ratio to 8% in response to COVID-19. Institutions with capital meeting the specified requirements and electing to follow the alternative framework will be considered compliant with all applicable regulatory capital and leverage requirements, including the requirement to be “well capitalized.” The Company has elected not to utilize the CBLR framework.

In March 2020, the federal banking agencies announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company has adopted the capital transition relief over the permissible five-year period.

Off-Balance Sheet Arrangements

In the normal course of our business of investing in loans and securities we are a party to financial instruments with off-balance-sheet risk.  These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to extend credit to meet the financing needs of our customers. We had no significant off-balance sheet commitments for capital expenditures as of March 31, 2021.

Recent Accounting Pronouncements

For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by the Company, please refer to Note 5 to the unaudited consolidated financial statements.

  • 63 -

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The majority of our assets and liabilities are sensitive to changes in interest rates. Consequently, interest rate risk is a significant form of business risk that we must manage. Interest rate risk is generally defined in regulatory nomenclature as the risk to earnings or capital arising from the movement of interest rates and arises from several risk factors including re-pricing risk, basis risk, yield curve risk and option risk.

We maintain an Asset/Liability Management (“ALM”) program in order manage our interest rate risk. The program is overseen by the Board of Directors through its Interest Rate Risk Management Committee which has assigned the responsibility for the operational aspects of the ALM program to our Asset/Liability Management Committee (“ALCO”). The ALCO is a management committee comprising the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer, Chief Banking Officer, Chief Risk Officer and Treasurer/Chief Investment Officer. Additional members of our management team may be asked to participate on the ALCO, as appropriate.

The quantitative analysis that we conduct measures interest rate risk from both a capital and earnings perspective. With regard to earnings, movements in interest rates and the shape of the yield curve significantly influence the amount of net interest income (“NII”) that we recognize. Movements in market interest rates, and the effect of such movements on the risk factors noted above, significantly influence the spread between the interest earned on our interest-earning assets and the interest paid on our interest-bearing liabilities.  Our internal interest rate risk analysis calculates the sensitivity of our projected NII over a one year period utilizing a static balance sheet assumption through which incoming and outgoing asset and liability cash flows are reinvested into similar instruments. Product pricing and earning asset prepayment speeds are appropriately adjusted for each rate scenario.

With regard to capital, our internal interest rate risk analysis calculates the sensitivity of our Economic Value of Equity (“EVE”) ratio to movements in interest rates. EVE represents the present value of the expected cash flows from our assets less the present value of the expected cash flows arising from our liabilities adjusted for the value of off-balance sheet instruments. EVE attempts to quantify our economic value using a discounted cash flow methodology while the EVE ratio reflects that value as a form of capital ratio. The degree to which the EVE ratio changes for any hypothetical interest rate scenario from its base case measurement is a reflection of an institution’s sensitivity to interest rate risk.

For both earnings and capital at risk our interest rate risk analysis calculates a base case scenario that assumes no change in interest rates. The model then measures changes throughout a series of interest rate scenarios representing immediate and permanent, parallel shifts in the yield curve up and down 100, 200 and 300 basis points with additional scenarios modeled where appropriate. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at March 31, 2021 and June 30, 2020 precluded the modeling of certain falling rate scenarios.

  • 64 -

The following tables present the results of our internal EVE analysis as of March 31, 2021 and June 30, 2020, respectively:

March 31, 2021
Economic Value of<br>Equity ("EVE") EVE as a % of<br><br><br>Present Value of Assets
Change in<br><br><br>Interest Rates Amount<br>of EVE Change<br>in EVE % Change<br><br><br>in EVE EVE Ratio Change in<br><br><br>EVE Ratio
(Dollars in Thousands)
+300 bps ) (11 ) % 16.31 % (56 ) bps
+200 bps ) (7 ) % 16.65 % (22 ) bps
+100 bps ) (2 ) % 16.93 % 6 bps
0 bps - - 16.87 % -
-100 bps ) (8 ) % 15.42 % (145 ) bps

All values are in US Dollars.

June 30, 2020
Economic Value of<br>Equity ("EVE") EVE as a % of<br><br><br>Present Value of Assets
Change in<br><br><br>Interest Rates Amount<br>of EVE Change<br>in EVE % Change<br><br><br>in EVE EVE Ratio Change in<br><br><br>EVE Ratio
(Dollars in Thousands)
+300 bps 1 % 15.57 % 113 bps
+200 bps 4 % 15.61 % 117 bps
+100 bps 4 % 15.28 % 84 bps
0 bps - - 14.44 % -
-100 bps ) (13 ) % 12.60 % (184 ) bps

All values are in US Dollars.

There are numerous internal and external factors that may contribute to changes in our EVE ratio and its sensitivity. Changes in the composition and allocation of our balance sheet, or utilization of off-balance sheet instruments such as derivatives, can significantly alter the exposure to interest rate risk as quantified by the changes in the EVE sensitivity measures. Changes to certain external factors, most notably changes in the level of market interest rates and overall shape of the yield curve, can also alter the projected cash flows of our interest-earning assets and interest-costing liabilities and the associated present values thereof.

The following tables present the results of our internal NII analysis as of March 31, 2021 and June 30, 2020, respectively:

March 31, 2021
Net Interest<br>Income ("NII")
Change in<br><br><br>Interest Rates Balance Sheet<br><br><br>Composition Measurement<br><br><br>Period Amount<br>of NII Change<br>in NII % Change<br><br><br>in NII
(Dollars In Thousands)
+300 bps Static One Year ) (7.91 ) %
+200 bps Static One Year ) (4.90 )
+100 bps Static One Year ) (2.05 )
0 bps Static One Year -
-100 bps Static One Year ) (4.39 )

All values are in US Dollars.

June 30, 2020
Net Interest<br>Income ("NII")
Change in<br><br><br>Interest Rates Balance Sheet<br><br><br>Composition Measurement<br><br><br>Period Amount<br>of NII Change<br>in NII % Change<br><br><br>in NII
(Dollars In Thousands)
+300 bps Static One Year ) (5.81 ) %
+200 bps Static One Year ) (2.95 )
+100 bps Static One Year ) (0.30 )
0 bps Static One Year -
-100 bps Static One Year 4.51

All values are in US Dollars.

  • 65 -

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 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this Report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2021, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

  • 66 -
ITEM 1. Legal Proceedings

At March 31, 2021, neither the Company nor the Bank were involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition of the Company and the Bank.

ITEM 1A. Risk Factors

There have been no material changes to the Risk Factors previously disclosed under Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2020, previously filed with the Securities and Exchange Commission.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES:

The following table reports information regarding repurchases of the Company’s common stock during the quarter ended March 31, 2021:

Period Total Number<br><br><br>of Shares<br><br><br>Purchased Average Price<br><br><br>Paid per Share Total Number<br><br><br>of Shares<br><br><br>Purchased as<br><br><br>Part of Publicly<br><br><br>Announced Plans<br><br><br>or Programs Maximum<br><br><br>Number of Shares<br><br><br>that May Yet Be<br><br><br>Purchased Under<br><br><br>the  Plans or<br><br><br>Programs
January 1-31, 2021 727,864 $ 10.99 727,864 4,210,520
February 1-28, 2021 1,108,700 $ 10.91 1,108,700 3,101,820
March 1-31, 2021 1,190,000 $ 12.41 1,190,000 1,911,820
Total 3,026,564 $ 11.52 3,026,564 1,911,820

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

On January 22, 2021, the Company announced the completion of its fifth stock repurchase plan and the authorization of a sixth stock repurchase plan to repurchase up to 4,210,520 shares, or 5% of the shares then outstanding. This current plan has no expiration date.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

  • 67 -
ITEM 6. Exhibits

The following Exhibits are filed as part of this report:

3.1 Articles of Incorporation of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
3.2 Bylaws of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
4 Form of Common Stock Certificate of Kearny Financial Corp. (Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-198602), originally filed on September 5, 2014)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 The following materials from the Company’s Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholder’s Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.
101.INS Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
  • 68 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

KEARNY FINANCIAL CORP.
Date: May 7, 2021 By: /s/ Craig L. Montanaro
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 2021 By: /s/ Keith Suchodolski
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
  • 69 -

krny-ex311_8.htm

Exhibit 31.1

CERTIFICATION

I, Craig L. Montanaro, certify that:

1. I have reviewed this Form 10-Q of Kearny Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report.
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
--- ---
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: May 7, 2021 /s/ Craig L. Montanaro
--- ---
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)

krny-ex312_6.htm

Exhibit 31.2

CERTIFICATION

I, Keith Suchodolski, certify that:

1. I have reviewed this Form 10-Q of Kearny Financial Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report.
--- ---
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
--- ---
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:
--- ---
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: May 7, 2021 /s/ Keith Suchodolski
--- ---
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

krny-ex321_7.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Kearny Financial Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig L. Montanaro, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
--- ---
Date: May 7, 2021 /s/ Craig L. Montanaro
--- ---
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)

krny-ex322_9.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Kearny Financial Corp. (the “Company”) on Form 10-Q for the period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Keith Suchodolski, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
--- ---
Date: May 7, 2021 /s/ Keith Suchodolski
--- ---
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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