Equibles

10-Q

Kearny Financial Corp. (KRNY)

10-Q 2020-05-08 For: 2020-03-31
View Original
Added on April 06, 2026

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, 2020

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, 2020.

$0.01 par value common stock — 83,663,192 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, 2020 (Unaudited) and June 30, 2019 1
Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited) 2
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited) 4
Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and March 31, 2019 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 9
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 50
Item 3: Quantitative and Qualitative Disclosure About Market Risk 68
Item 4: Controls and Procedures 71
PART II—OTHER INFORMATION
Item 1: Legal Proceedings 72
Item 1A: Risk Factors 72
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 73
Item 3: Defaults Upon Senior Securities 73
Item 4: Mine Safety Disclosures 73
Item 5: Other Information 73
Item 6: Exhibits 74
SIGNATURES 75

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In Thousands, Except Share and Per Share Data)

June 30,
2019
Assets
Cash and amounts due from depository institutions 20,200 $ 19,032
Interest-bearing deposits in other banks 39,252 19,903
Cash and cash equivalents 59,452 38,935
Investment securities available for sale, at fair value 1,476,344 714,263
Investment securities held to maturity (fair value 35,433 and 584,678, respectively) 34,618 576,652
Loans held-for-sale 11,245 12,267
Loans receivable, including unaccreted yield adjustments of (42,461) and (52,025),<br> respectively 4,562,512 4,678,928
Less: allowance for loan losses (37,191 ) (33,274 )
Net loans receivable 4,525,321 4,645,654
Premises and equipment 58,985 56,854
Federal Home Loan Bank ("FHLB") of New York stock 59,324 64,190
Accrued interest receivable 19,036 19,360
Goodwill 210,895 210,895
Core deposit intangibles 4,242 5,160
Bank owned life insurance 260,843 256,155
Deferred income tax assets, net 27,150 25,367
Other real estate owned 178 -
Other assets 26,200 9,077
Total Assets 6,773,833 $ 6,634,829
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Non-interest-bearing 321,824 $ 309,063
Interest-bearing 3,931,430 3,838,547
Total deposits 4,253,254 4,147,610
Borrowings 1,384,025 1,321,982
Advance payments by borrowers for taxes 16,492 16,887
Other liabilities 50,390 21,191
Total Liabilities 5,704,161 5,507,670
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>  83,664,427 shares and 89,125,655 shares issued and outstanding, respectively 837 891
Paid-in capital 721,474 787,394
Retained earnings 380,671 366,679
Unearned employee stock ownership plan shares;<br>  3,010,464 shares and 3,160,987 shares, respectively (29,185 ) (30,644 )
Accumulated other comprehensive (loss) income (4,125 ) 2,839
Total Stockholders' Equity 1,069,672 1,127,159
Total Liabilities and Stockholders' Equity 6,773,833 $ 6,634,829

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,
2020 2019 2020 2019
Interest Income
Loans $ 46,603 $ 48,116 $ 140,811 $ 144,568
Taxable investment securities 10,526 9,511 29,552 27,441
Tax-exempt investment securities 547 710 1,906 2,139
Other interest-earning assets 1,100 1,320 3,588 3,737
Total Interest Income 58,776 59,657 175,857 177,885
Interest Expense
Deposits 14,768 14,114 46,413 37,380
Borrowings 6,398 6,905 20,540 22,338
Total Interest Expense 21,166 21,019 66,953 59,718
Net Interest Income 37,610 38,638 108,904 118,167
Provision for (reversal of) loan losses 6,270 (179 ) 4,023 2,892
Net Interest Income after Provision for (Reversal of)<br><br><br>Loan Losses 31,340 38,817 104,881 115,275
Non-Interest Income
Fees and service charges 1,338 1,674 4,951 4,105
Gain (loss) on sale and call of securities 2,234 (182 ) 2,231 (182 )
Gain on sale of loans 565 151 1,838 384
Loss on sale and write down of other real estate<br><br><br>owned - (6 ) (28 ) (20 )
Income from bank owned life insurance 1,532 1,560 4,688 4,753
Electronic banking fees and charges 309 253 920 780
Miscellaneous 223 226 117 347
Total Non-Interest Income 6,201 3,676 14,717 10,167
Non-Interest Expense
Salaries and employee benefits 15,537 15,350 46,488 46,691
Net occupancy expense of premises 2,685 2,979 8,736 8,476
Equipment and systems 2,672 3,053 8,807 9,356
Advertising and marketing 612 739 2,037 2,103
Federal deposit insurance premium - 455 - 1,341
Directors' compensation 771 770 2,310 2,274
Merger-related expenses 285 - 504 -
Debt extinguishment expenses 2,156 - 2,156 -
Miscellaneous 3,344 3,425 9,695 10,257
Total Non-Interest Expense 28,062 26,771 80,733 80,498
Income before Income Taxes 9,479 15,722 38,865 44,944
Income tax expense 225 4,305 7,589 11,613
Net Income $ 9,254 $ 11,417 $ 31,276 $ 33,331

See notes to unaudited consolidated financial statements.

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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,
2020 2019 2020 2019
Net Income per Common Share (EPS)
Basic $ 0.11 $ 0.13 $ 0.38 $ 0.36
Diluted $ 0.11 $ 0.13 $ 0.38 $ 0.36
Weighted Average Number of Common Shares<br><br><br>Outstanding
Basic 81,339 89,488 82,981 92,370
Diluted 81,358 89,532 83,016 92,419

See notes to unaudited consolidated financial statements.

  • 3 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands, Unaudited)

Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 2020 2019
Net Income $ 9,254 $ 11,417 $ 31,276 $ 33,331
Other Comprehensive Loss, net of tax:
Net unrealized gain on securities available<br><br><br>for sale 2,705 3,637 7,968 1,121
Amortization of net unrealized loss on securities<br><br><br>available for sale transferred to held to maturity - 38 421 168
Net realized (gain) loss on sale and call of<br><br><br>securities available for sale (1,575 ) 128 (1,574 ) 128
Fair value adjustments on derivatives (13,213 ) (5,034 ) (14,120 ) (12,366 )
Benefit plan adjustments 3 8 341 (7 )
Total Other Comprehensive Loss (12,080 ) (1,223 ) (6,964 ) (10,956 )
Total Comprehensive (Loss) Income $ (2,826 ) $ 10,194 $ 24,312 $ 22,375

See notes to unaudited consolidated financial statements.

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three and Nine Months Ended March 31, 2019

(In Thousands, 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, 2018 93,772 $ 938 $ 848,145 $ 356,993 $ (31,617 ) $ 8,802 $ 1,183,261
Net income - - - 11,417 - - 11,417
Other comprehensive loss, net<br>  of income tax expense - - - - - (1,223 ) (1,223 )
ESOP shares committed to be<br>  released (50 shares) - - 161 - 487 - 648
Stock option exercise 21 - 152 - - - 152
Stock option expense - - 538 - - - 538
Share repurchases (2,446 ) (24 ) (32,364 ) - - - (32,388 )
Issuance of shares for stock benefit<br>  plans 148 1 (1 ) - - - -
Restricted stock plan shares<br>  earned (71 shares) - - 1,044 - - - 1,044
Cash dividends declared<br>  (0.06 per common share) - - - (5,338 ) - - (5,338 )
Balance - March 31, 2019 91,495 $ 915 $ 817,675 $ 363,072 $ (31,130 ) $ 7,579 $ 1,158,111

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, 2018 99,626 $ 996 $ 922,711 $ 359,096 $ (32,590 ) $ 18,535 $ 1,268,748
Cumulative effect of change in<br> accounting principle for the<br> adoption of ASU 2017-08 - - - (531 ) - - (531 )
Balance - July 1, 2018, as adjusted<br> for change in accounting principle 99,626 996 922,711 358,565 (32,590 ) 18,535 1,268,217
Net income - - - 33,331 - - 33,331
Other comprehensive loss, net<br>  of income tax expense - - - - - (10,956 ) (10,956 )
ESOP shares committed to be<br>  released (150 shares) - - 527 - 1,460 - 1,987
Stock option exercise 21 - 152 - - - 152
Stock option expense - - 1,533 - - - 1,533
Share repurchases (8,231 ) (81 ) (109,416 ) - - - (109,497 )
Issuance of shares under stock<br> benefit plans 233 2 (2 ) - - - -
Restricted stock plan shares<br>  earned (213 shares) - - 3,112 - - - 3,112
Cancellation of shares issued for<br>  restricted stock awards (154 ) (2 ) (942 ) - - - (944 )
Cash dividends declared<br>  (0.31 per common share) - - - (28,824 ) - - (28,824 )
Balance - March 31, 2019 91,495 $ 915 $ 817,675 $ 363,072 $ (31,130 ) $ 7,579 $ 1,158,111

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

Three and Nine Months Ended March 31, 2020

(In Thousands, Unaudited)

Paid-In Retained Unearned<br><br><br>ESOP Accumulated<br><br><br>Other<br><br><br>Comprehensive
Amount Capital Earnings Shares Loss 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
Share 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 Loss 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 benefit - - - - - (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
Share 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.

  • 6 -

KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Unaudited)

Nine Months Ended
March 31,
2020 2019
Cash Flows from Operating Activities:
Net income $ 31,276 $ 33,331
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 3,404 3,190
Net accretion of premiums, discounts and loan fees and costs (6,716 ) (8,479 )
Deferred income taxes and valuation allowance 1,145 3,698
Amortization of intangible assets 918 825
Amortization (accretion) of benefit plans’ unrecognized net gain 485 (25 )
Provision for loan losses 4,023 2,892
Loss on write-down and sales of other real estate owned 28 20
Loans originated for sale (173,436 ) (33,716 )
Proceeds from sale of mortgage loans held-for-sale 176,269 33,911
Gain on sale of mortgage loans held-for-sale, net (1,811 ) (328 )
Realized (gain) loss on sale and call of investment securities available for sale (2,231 ) 182
Proceeds from sale of SBA loans 497 922
Realized gain on sale of SBA loans (27 ) (56 )
Realized loss on disposition of premises and equipment 342 17
Increase in cash surrender value of bank owned life insurance (4,688 ) (4,753 )
ESOP, stock option plan and restricted stock plan expenses 6,340 6,632
Decrease (increase) in interest receivable 324 (1,816 )
(Increase) decrease in other assets (20,444 ) 3,134
(Decrease) increase in interest payable (3,237 ) 3,574
Increase (decrease) in other liabilities 17,652 (4,132 )
Net Cash Provided by Operating Activities 30,113 39,023
Cash Flows from Investing Activities:
Purchases of:
Investment securities available for sale (487,898 ) (113,686 )
Investment securities held to maturity - (55,247 )
Proceeds from:
Repayments/calls/maturities of investment securities available for sale 111,194 60,377
Repayments/calls/maturities of investment securities held to maturity 4,155 52,286
Sales of investment securities available for sale 164,299 51,989
Purchase of loans (41,816 ) (63,305 )
Net decrease (increase) in loans receivable 165,642 (87,023 )
Proceeds from the sale of other real estate owned - 496
Purchase of interest rate caps (1,476 ) -
Additions to premises and equipment (6,272 ) (5,349 )
Proceeds from cash settlement of premises and equipment 395 108
Purchase of FHLB stock (2,250 ) (10,215 )
Redemption of FHLB stock 7,116 4,931
Net Cash Used in Investing Activities $ (86,911 ) $ (164,638 )

See notes to unaudited consolidated financial statements.

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KEARNY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In Thousands, Unaudited)

Nine Months Ended
March 31,
2020 2019
Cash Flows from Financing Activities:
Net increase in deposits 106,500 65,640
Repayment of term FHLB advances (2,633,146 ) (2,309,586 )
Proceeds from term FHLB advances 2,525,000 2,427,000
Net increase in other short-term borrowings 167,935 8,430
Net decrease in advance payments by borrowers for taxes (395 ) (880 )
Repurchase and cancellation of common stock of Kearny Financial Corp. (69,782 ) (109,497 )
Cancellation of shares repurchased on vesting to pay taxes (1,073 ) (944 )
Exercise of stock options - 152
Dividends paid (17,724 ) (29,404 )
Net Cash Provided by Financing Activities 77,315 50,911
Net Increase (Decrease) in Cash and Cash Equivalents 20,517 (74,704 )
Cash and Cash Equivalents - Beginning 38,935 128,864
Cash and Cash Equivalents - Ending $ 59,452 $ 54,160
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Income taxes, net of refunds $ 8,029 $ 4,633
Interest $ 70,189 $ 56,144
Non-cash investing and financing activities:
Acquisition of real estate owned in settlement of loans $ 206 $ -
In conjunction with the adoption of ASU 2019-04, as detailed in Note 6 to the unaudited<br><br><br>consolidated financial statements, the following qualifying held to maturity securities were<br><br><br>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, as detailed in Note 6 to the unaudited<br><br><br>consolidated financial statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets $ 17,243 $ -
Operating lease liabilities $ 17,758 $ -

See notes to unaudited consolidated financial statements.

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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 KFS Insurance Services, Inc. The Company conducts its business principally through the Bank. Management prepared the unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), including the elimination of all significant inter-company accounts and transactions during consolidation.

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 (loss) 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, 2020 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, 2019 was derived from the Company’s 2019 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 (loss) 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 2019 Annual Report on Form 10-K.

Risks and Uncertainties

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. Actions taken to help mitigate the spread of COVID-19 include restrictions on travel, localized quarantines, and government-mandated closures of certain businesses. The spread of the outbreak has caused significant disruptions to the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range by 50 basis points to 1.00 percent to 1.25 percent. This range was further reduced to 0 percent to 0.25 percent on March 16, 2020. 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. These reductions in interest rates and other effects of the COVID-19 pandemic may 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, other-than-temporary impairment of investment securities and impairment of goodwill.

Goodwill

Goodwill represents the excess cost over fair value of the net assets of institutions acquired in purchase transactions. Goodwill is evaluated annually or during interim periods when a triggering event occurs which indicates that the fair value of the reporting unit may be below its carrying amount.  At March 31, 2020, due to the impact of COVID-19, including the deterioration of economic conditions and the decline in the market price of many publicly traded securities, including the common stock of the Company, management determined that a triggering event had occurred. This triggering event necessitated the qualitative evaluation of goodwill impairment.  Upon completion of that evaluation the Company determined that, as of March 31, 2020 it was more likely than not that the fair value of the Company’s single reporting unit exceed its carrying amount and therefore goodwill was not impaired.

If an impairment loss is determined to exist in the future, such loss will be reflected as an expense in the consolidated statements of income in the period in which the impairment loss is determined.

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

Three Months Ended Nine Months Ended
March 31, 2020 March 31, 2020
Income<br><br><br>(Numerator) Shares<br><br><br>(Denominator) Per<br><br><br>Share<br><br><br>Amount Income<br><br><br>(Numerator) Shares<br><br><br>(Denominator) Per<br><br><br>Share<br><br><br>Amount
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $ 9,254 $ 31,276
Basic earnings per share, income<br><br><br>available to common stockholders $ 9,254 81,339 $ 0.11 $ 31,276 82,981 $ 0.38
Effect of dilutive securities:
Stock options 19 35
$ 9,254 81,358 $ 0.11 $ 31,276 83,016 $ 0.38
Three Months Ended Nine Months Ended
--- --- --- --- --- --- --- --- --- --- --- --- ---
March 31, 2019 March 31, 2019
Income<br><br><br>(Numerator) Shares<br><br><br>(Denominator) Per<br><br><br>Share<br><br><br>Amount Income<br><br><br>(Numerator) Shares<br><br><br>(Denominator) Per<br><br><br>Share<br><br><br>Amount
(In Thousands, Except Per Share Data) (In Thousands, Except Per Share Data)
Net income $ 11,417 $ 33,331
Basic earnings per share, income<br><br><br>available to common stockholders $ 11,417 89,488 $ 0.13 $ 33,331 92,370 $ 0.36
Effect of dilutive securities:
Stock options 44 49
$ 11,417 89,532 $ 0.13 $ 33,331 92,419 $ 0.36

Stock options for 3,115,000 and 3,299,000 shares of common stock were not considered in computing diluted earnings per share at March 31, 2020 and March 31, 2019, 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, 2020, 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.    PROPOSED ACQUISITION OF MSB FINANCIAL CORP.

On December 18, 2019, the Company and MSB Financial Corp. (“MSBF”), the holding company for Millington Bank announced that the companies had entered into a definitive agreement pursuant to which the Company will acquire MSBF.  Consideration will be paid to MSBF stockholders in a combination of stock and cash.  Under the terms of merger agreement MSBF will merge with and into the Company and each outstanding share of MSBF common stock will be exchanged for 1.3 shares of the Company’s common stock or $18.00 in cash.

  • 10 -

MSBF stockholders may elect cash or stock, or a combination thereof, subject to proration to ensure that, in the aggregate, 10% of MSBF shares will be converted into cash and 90% of MSBF shares will be converted into the Company’s common stock.  Upon closing, the Company’s stockholders holders will own approximately 94% of the combined company and MSBF stockholders will own approximately 6% of the combined company.

As of March 31, 2020, MSBF had approximately $600.4 million of assets, gross loans of $528.9 million and deposits of $447.4 million and operated four New Jersey branches located in Somerset and Morris counties.  The required approvals to complete this transaction include MSBF shareholder approval, regulatory approval, and the continued effectiveness of the registration statement filed by the Company with respect to the common stock to be issued in the transaction.  The merger is expected to close late in the quarter ended June 30, 2020 or early in the quarter ended September 30, 2020.  A special meeting of MSBF stockholders has been scheduled for May 28, 2020.

5.    MERGER RELATED EXPENSES

Merger-related expenses are recorded in the Consolidated Statements of Income as a component of non-interest expense and include costs relating to the Company’s proposed acquisition of MSBF, as described above.  These charges represent one-time costs associated with acquisition activities and do not represent ongoing costs of the fully integrated combined organization.  Accounting guidance requires that acquisition-related transactional and restructuring costs incurred by the Company be charged to expense as incurred.

6.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model, referred to as the current expected credit loss (“CECL”) model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument. An allowance will be established for loans that have been acquired in a business combination that currently do not have an allowance.  As of March 31, 2020, approximately $972.4 million of acquired loans do not have an allowance.

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

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (“AFS”) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  For public business entities that are SEC filers and not smaller reporting companies, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of July 1, 2020 (i.e. modified retrospective approach).  The Company has selected a third party firm to assist in the development of a CECL program, and has selected a software model to assist in the calculation of the allowance for loan losses in preparation for the change to the expected loss model. The Company is continuing its evaluation of this ASU including the potential impact on its consolidated financial statements.  The extent of change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time.  Upon adoption, any impact to the allowance for credit losses, currently allowance for loan and lease losses, will have an offsetting impact on retained earnings, and be net of tax.  The CARES Act offers insured depository institutions, as defined in Section 3 of the Federal Deposit Insurance Act, optional temporary relief from applying CECL.  These depository institutions are not required to comply with CECL during the period beginning on the date of enactment of the CARES Act and ending on the earlier of the termination of the national emergency declared under the National Emergencies Act, related to the outbreak of COVID-19, and December 31, 2020. The Company is currently evaluating the impact of electing this temporary relief.

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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 Step 2 of the 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 currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief”.  ASU 2019-05 provides transition relief by providing entities with an alternative to irrevocably elect the fair value option for eligible financial assets measured at amortized cost upon adoption of the credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3.  The election must be applied on an instrument-by-instrument basis and is not available for either available for sale or held to maturity debt securities. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings net of tax, as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses”.  ASU 2019-11 clarifies the accounting treatment on the following issues: (i) negative allowances; (ii) troubled debt restructuring (TDR) transition; (iii) accrued interest disclosures; and (iv) collateral maintenance practical expedient.  ASU 2019-11 will permit an entity to record negative allowances on write-offs or expected write-offs of the amortized cost basis of purchased financial assets with credit deterioration (PCD) within ASC 326-20’s scope.  Regarding TDRs, the FASB tentatively approved a clarification to allow entities to calculate a prepayment-adjusted effective interest rate for TDRs existing as of the adoption date of ASC 326 based on the prepayment assumptions as of the adoption date rather than the restructuring date.  In the previously issued ASU 2019-04, FASB allowed an entity to elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-11 extends this relief to all relevant disclosures involving amortized cost basis.  A collateral maintenance practical expedient regarding collateral-dependent financial assets, will permit an allowance to be estimated as the difference between the value of the collateral net of costs to sell and the amortized cost basis of the loans.  For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements for these amendments are the same as ASU 2016-13.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

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. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

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Adoption of New Accounting Standards

Effective July 1, 2019, the Company implemented ASU No. 2016-02, “Leases (Topic 842)” (modified by ASU 2018-01 – Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842) and ASU 2018-20 – Leases (Topic 842) Narrow – Scope Improvements for Lessors).  ASU 2016-02 requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current GAAP.  Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP.  For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities.  The Company has made this accounting policy election. Effective with the adoption on July 1, 2019, the Company recognized a “right-of-use-asset” and a “lease liability” for its operating leases and has elected to apply practical expedients pertaining to the ASU. The Company applied the following three practical expediencies, which must be elected as a package and applied consistently to all of our leases: (i) the Company did not have to reassess whether any expired leases or existing contracts are, or contain, a lease; (ii) the Company did not have to reassess the lease classifications for any expired or existing leases.  Accordingly, Topic 840 operating leases became Topic 842 operating leases; and (iii) the Company did not have to reassess initial; direct costs for any existing leases. The Company applied a modified retrospective transition approach for the applicable leases.  ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to account for lease and non-lease components separately because such amounts are readily determinable under our lease contracts rather than elect the practical expedient to account for the components as a single lease component.  The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (July 1, 2019) and will not restate comparative periods. Upon adoption of ASU 2016-02, the Company recorded a right-of-use asset of approximately $17.2 million and a lease liability of approximately $17.8 million.

In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits the use of the OIS Rate based on SOFR as a benchmark interest rate for purposes of applying hedge accounting under Topic 815. This is the fifth U.S. benchmark interest rate eligible for use in hedge accounting in addition to interest rates on direct Treasury obligations of the U.S. Government, the London Interbank Offered Rate swap rate, and the OIS Rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association Municipal Swap Rate.  The amendments in this ASU are required to be adopted concurrently with the amendments in ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, for entities that have not adopted that guidance.  For public entities that have previously adopted ASU 2017-12, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period if an entity already has adopted ASU 2017-12.  The Company early adopted ASU 2017-12 on July 1, 2017.  The amendments in ASU 2018-16 should be applied on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption.  The Company adopted ASU 2018-16 on July 1, 2019, and its adoption did not have a significant impact on the Company’s audited consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 amends certain aspects of accounting for credit losses, hedging activities, and financial instruments addressed by ASUs 2016-13, 2016-01, and 2017-12, respectively. Significant amendments to ASU 2016-13 relate to the measurement of accrued interest, transfers between classifications or categories for loans and debt securities and including recoveries when estimating the allowance for credit losses. For Topic 825, the codification improvements to ASU 2016-01 provide scope clarification for Subtopics 320-10, Investments-Debt and Equity Securities-Overall, and 321-10, Investments-Equity Securities-Overall, held to maturity debt securities fair value disclosures, and re-measurement of equity securities at historical exchange rates.  Significant amendments to ASU 2017-12 amends the guidance related to partial-term fair value hedges of interest rate risk, disclosure of fair value hedge basis adjustments, and scope for not-for-profit entities. ASU 2019-04 clarifies that an entity that reclassifies debt securities from the held to maturity category to available for sale as part of its transition would not (1) call in to question its held to maturity assertion for other securities held at the entity’s most recent reporting date, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security.  The Company adopted ASU 2019-04 on July 1, 2019. As part of the adoption, the Company reclassified $537.7 million of investment securities held to maturity to investment securities available for sale. The Company did not reclassify investment securities from held to maturity to available for sale upon the original adoption of the amendments in ASU 2017-12. Entities electing to reclassify investment securities upon adoption of the amendments in this update are required to reflect the reclassification as of the beginning of the first annual period beginning after the issuance of ASU 2019-04 (July 1, 2019).

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7.     SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains and losses and fair values of debt and mortgage-backed securities available for sale at March 31, 2020 and June 30, 2019 and stratification by contractual maturity of debt securities available for sale at March 31, 2020 are presented below as of the dates indicated.  As of July 1, 2019, the Company adopted ASU 2019-04 and reclassified $537.7 million of securities held to maturity to securities available for sale.  See Note 6, Recent Accounting Pronouncements, for further details regarding the adoption of ASU 2019-04.

March 31, 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)
Investment securities available for sale:
Debt securities:
Obligations of state and political subdivisions $ 57,360 $ 791 $ - $ 58,151
Asset-backed securities 178,379 - 9,277 169,102
Collateralized loan obligations 199,342 - 9,777 189,565
Corporate bonds 162,962 1,208 455 163,715
Trust preferred securities 2,967 - 115 2,852
Total debt securities 601,010 1,999 19,624 583,385
Mortgage-backed securities:
Collateralized mortgage obligations ^(1)^ 33,718 953 - 34,671
Residential pass-through securities ^(1)^ 588,241 18,872 - 607,113
Commercial pass-through securities ^(1)^ 242,345 8,885 55 251,175
Total mortgage-backed securities 864,304 28,710 55 892,959
Total securities available for sale $ 1,465,314 $ 30,709 $ 19,679 $ 1,476,344
(1) Government-sponsored enterprises.
--- ---
March 31, 2020
--- --- --- --- ---
Amortized<br><br><br>Cost Fair<br><br><br>Value
(In Thousands)
Debt securities available for sale:
Due in one year or less $ 25,258 $ 25,232
Due after one year through five years 83,405 83,237
Due after five years through ten years 193,869 191,781
Due after ten years 298,478 283,135
Total $ 601,010 $ 583,385
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June 30, 2019
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)
Securities available for sale:
Debt securities:
U.S. agency securities $ 3,642 $ 40 $ 4 $ 3,678
Obligations of state and political subdivisions 26,628 323 - 26,951
Asset-backed securities 178,168 1,465 320 179,313
Collateralized loan obligations 209,453 254 1,096 208,611
Corporate bonds 122,929 121 1,026 122,024
Trust preferred securities 3,967 - 211 3,756
Total debt securities 544,787 2,203 2,657 544,333
Mortgage-backed securities:
Collateralized mortgage obligations ^(1)^ 21,469 70 149 21,390
Residential pass-through securities ^(1)^ 44,611 156 464 44,303
Commercial pass-through securities ^(1)^ 101,421 2,816 - 104,237
Total mortgage-backed securities 167,501 3,042 613 169,930
Total securities available for sale $ 712,288 $ 5,245 $ 3,270 $ 714,263
(1) Government-sponsored enterprises.
--- ---

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

Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 2020 2019
(In Thousands) (In Thousands)
Available for sale securities sold:
Proceeds from sales of securities $ 160,653 $ 51,989 $ 164,299 $ 51,989
Gross realized gains $ 2,350 $ 190 $ 2,363 $ 190
Gross realized losses (116 ) (372 ) (145 ) (372 )
Net gain (loss) on sales of securities $ 2,234 $ (182 ) $ 2,218 $ (182 )

Calls of securities available for sale resulted in gross gains of $13,000 during the nine months ended March 31, 2020.  During the three months ended March 31, 2020 and for the three and nine months ended March 31, 2019 there were no gains or losses recognized on the calls of securities available for sale.

Securities available for sale 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,
2020 2019
(In Thousands)
Available for sale securities pledged:
Pledged for borrowings at the FHLB of New York $ 159,200 $ 24,099
Pledged to secure public funds on deposit 9,852 -
Pledged for potential borrowings at the Federal<br><br><br>Reserve Bank of New York 387,296 43,623
Pledged as collateral for depositor sweep accounts 7,849 1,322
Total available for sale securities pledged $ 564,197 $ 69,044
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8.     SECURITIES HELD TO MATURITY

The amortized cost, gross unrecognized gains and losses and fair values of debt and mortgage-backed securities held to maturity at March 31, 2020 and June 30, 2019 and stratification by contractual maturity of debt securities held to maturity at March 31, 2020 are presented below:

March 31, 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)
Investment securities held to maturity:
Debt securities:
Obligations of state and political subdivisions $ 34,618 $ 817 $ 2 $ 35,433
Total debt securities 34,618 817 2 35,433
Total securities held to maturity $ 34,618 $ 817 $ 2 $ 35,433
March 31, 2020
--- --- --- --- ---
Amortized<br><br><br>Cost Fair<br><br><br>Value
(In Thousands)
Debt securities held to maturity:
Due in one year or less $ 7,331 $ 7,342
Due after one year through five years 18,469 18,811
Due after five years through ten years 8,818 9,280
Total $ 34,618 $ 35,433
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June 30, 2019
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)
Securities held to maturity:
Debt securities:
Obligations of state and political subdivisions $ 104,086 $ 1,787 $ 16 $ 105,857
Corporate bonds 63,086 914 - 64,000
Total debt securities 167,172 2,701 16 169,857
Mortgage-backed securities:
Collateralized mortgage obligations ^(1)^ 46,370 568 168 46,770
Residential pass-through securities ^(1)^ 166,283 1,961 518 167,726
Commercial pass-through securities ^(1)^ 196,816 3,504 6 200,314
Non-agency securities 11 - - 11
Total mortgage-backed securities 409,480 6,033 692 414,821
Total securities held to maturity $ 576,652 $ 8,734 $ 708 $ 584,678
(1) Government-sponsored enterprises.
--- ---

There were no sales or calls of securities held to maturity during the three and nine months ended March 31, 2020 and March 31, 2019.

Securities held to maturity 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,
2020 2019
(In Thousands)
Held to maturity securities pledged:
Pledged for borrowings at the FHLB of New York $ - $ 136,696
Pledged to secure public funds on deposit - 7,023
Pledged for potential borrowings at the Federal<br><br><br>Reserve Bank of New York 34,338 103,419
Pledged as collateral for depositor sweep accounts - 12,884
Total held to maturity securities pledged $ 34,338 $ 260,022
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9.     IMPAIRMENT OF SECURITIES

The following two tables summarize the fair values, gross unrealized and unrecognized losses and the number of securities impaired within the available for sale and held to maturity portfolios at March 31, 2020 and June 30, 2019. The gross unrealized losses, presented by security type, represent temporary impairments of value within each portfolio as of the dates presented. Temporary impairments within the available for sale portfolio have been recognized through other comprehensive loss as reductions in stockholders’ equity on a tax-effected basis.

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

March 31, 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 $ 150,005 $ 8,376 $ 19,097 $ 901 $ 16 $ 169,102 $ 9,277
Collateralized loan obligations 69,236 3,409 120,329 6,368 19 189,565 9,777
Corporate bonds 34,922 86 44,615 369 8 79,537 455
Trust preferred securities - - 2,852 115 2 2,852 115
Commercial pass-through<br><br><br>securities 11,976 55 - - 1 11,976 55
Total $ 266,139 $ 11,926 $ 186,893 $ 7,753 46 $ 453,032 $ 19,679
June 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
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:
U.S. agency securities $ - $ - $ 1,122 $ 4 5 $ 1,122 $ 4
Asset-backed securities 40,211 262 4,934 58 4 45,145 320
Collateralized loan obligations 44,061 75 115,914 1,021 15 159,975 1,096
Corporate bonds 47,486 509 44,462 517 11 91,948 1,026
Trust preferred securities - - 2,756 211 2 2,756 211
Collateralized mortgage<br><br><br>obligations - - 16,369 149 4 16,369 149
Residential pass-through<br><br><br>securities - - 33,519 464 6 33,519 464
Total $ 131,758 $ 846 $ 219,076 $ 2,424 47 $ 350,834 $ 3,270
  • 18 -
March 31, 2020
Less than 12 Months 12 Months or More Total
Fair<br><br><br>Value Unrecognized Losses Fair<br><br><br>Value Unrecognized Losses Number of Securities Fair<br><br><br>Value Unrecognized<br><br><br>Losses
(Dollars in Thousands)
Securities Held to Maturity:
Obligations of state and political<br><br><br>subdivisions $ 1,279 $ 2 $ - $ - 3 $ 1,279 $ 2
Total $ 1,279 $ 2 $ - $ - 3 $ 1,279 $ 2
June 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Less than 12 Months 12 Months or More Total
Fair<br><br><br>Value Unrecognized Losses Fair<br><br><br>Value Unrecognized Losses Number of Securities Fair<br><br><br>Value Unrecognized<br><br><br>Losses
(Dollars in Thousands)
Securities Held to Maturity:
Obligations of state and political<br><br><br>subdivisions $ 274 $ 1 $ 7,149 $ 15 19 $ 7,423 $ 16
Collateralized mortgage<br><br><br>obligations - - 9,347 168 5 9,347 168
Residential pass-through<br><br><br>securities 438 1 76,848 517 70 77,286 518
Commercial pass-through<br><br><br>securities - - 1,852 6 2 1,852 6
Total $ 712 $ 2 $ 95,196 $ 706 96 $ 95,908 $ 708

In general, if the fair value of a debt security is less than its amortized cost basis at the time of evaluation, the security is impaired and the impairment is to be evaluated to determine if it is other than temporary.  The Company evaluates the impaired securities in its portfolio for possible other-than-temporary impairment (“OTTI”) on at least a quarterly basis.  The following represents the circumstances under which an impaired security is determined to be other-than-temporarily impaired: (i) when the Company intends to sell the impaired debt security; (ii) when the Company more likely than not will be required to sell the impaired debt security before recovery of its amortized cost; or (iii) when an impaired debt security does not meet either of the two conditions above, but the Company does not expect to recover the entire amortized cost of the security.

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

The Company considers a variety of factors when determining whether a credit loss exists for an impaired security including, but not limited to (i) the length of time and the extent to which the fair value has been less than the amortized cost basis; (ii) adverse conditions specifically related to the security, an industry, or a geographic area; (iii) the historical and implied volatility of the fair value of the security; (iv) the payment structure of the debt security; (v) actual or expected failure of the issuer of the security to make scheduled interest or principal payments; (vi) changes to the rating of the security by external rating agencies; and (vii) recoveries or additional declines in fair value subsequent to the balance sheet date.  The Company regularly monitors the historical cash flows and financial strength of all issuers and/or guarantors to confirm that security impairment, where applicable, is not due to an actual or expected adverse change in security cash flows that would result in the recognition of credit-related OTTI.

  • 19 -

The unrealized losses on the Company’s securities are due to the combined effects of several market-related factors including changes in market interest rates and changes in market credit spreads.  Those market conditions may fluctuate over time resulting in certain securities being impaired for periods in excess of 12 months.  However, the longevity of such impairment is not necessarily reflective of an expectation for an adverse change in cash flows signifying a credit loss. Unrealized losses within the asset-backed securities and collateralized loan obligation categories are reflective of such changes in market credit spreads however are not necessarily indicative of OTTI. No issuers within these investment categories have defaulted on their interest payments, the Company has the stated ability and intent to hold until forecasted recovery those securities so designated and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of their fair value to a level equal to or greater than the Company’s amortized cost.  Furthermore, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely.

In light of the factors noted above, the Company does not consider its balance of securities with unrealized losses at March 31, 2020 and June 30, 2019, to be other-than-temporarily impaired as of those dates.

10.     LOANS RECEIVABLE

The following table sets forth the composition of the Company’s loan portfolio at March 31, 2020 and June 30, 2019:

March 31, June 30,
2020 2019
(In Thousands)
One- to four-family residential mortgage $ 1,338,099 $ 1,344,044
Commercial mortgage:
Multi-family 1,879,907 1,946,391
Nonresidential 1,202,652 1,258,869
Total commercial mortgage 3,082,559 3,205,260
Construction 17,880 13,907
Commercial business 73,922 65,763
Consumer:
Home equity loans and lines of credit 87,909 96,165
Other consumer loans 4,604 5,814
Total consumer 92,513 101,979
Total loans 4,604,973 4,730,953
Unaccreted yield adjustments including net premiums and discounts<br><br><br>on purchased and acquired loans and net deferred  fees and costs on<br><br><br>loans originated (42,461 ) (52,025 )
Total loans receivable, net of yield adjustments $ 4,562,512 $ 4,678,928
  • 20 -

11.     LOAN QUALITY AND ALLOWANCE FOR LOAN LOSSES

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, 2020, we held one single-family property in other real estate owned, with a carrying value of $178,000 that was acquired through 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.  Residential mortgage loans in the process of foreclosure at March 31, 2020, were secured by residential properties in the State of New Jersey and New York.

As of June 30, 2019, we held no single-family properties that were acquired through foreclosures on residential mortgage loans.  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.

The states of  New Jersey and New York have issued executive orders which declared moratoriums on removing individuals from a residential property as a result of an eviction or foreclosure proceeding. The orders issued will be in effect for at least 60 to 90 days, as applicable.  In response to these orders, on March 28, 2020, the Company temporarily suspended residential property foreclosure sales and evictions.

Loan Quality. The following tables present the balance of the allowance for loan losses at March 31, 2020 and June 30, 2019 based upon the calculation methodology as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The tables identify the valuation allowances attributable to specifically identified impairments on individually evaluated loans, including those acquired with deteriorated credit quality, as well as valuation allowances for impairments on loans evaluated collectively. The tables include the underlying balance of loans receivable applicable to each category as of those dates as well as the activity in the allowance for loan losses for the three and nine months ended March 31, 2020 and March 31, 2019. Unless otherwise noted, the balance of loans reported in the tables below excludes yield adjustments and the allowance for loan loss.

Allowance for Loan Losses
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 8 - - - 8 - - 16
Loans collectively<br><br><br>evaluated for impairment 4,747 18,891 10,710 184 1,994 564 85 37,175
Total allowance for loan losses $ 4,755 $ 18,891 $ 10,710 $ 184 $ 2,002 $ 564 $ 85 $ 37,191
  • 21 -
Balance of Loans Receivable
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 $ 78 $ - $ - $ - $ 223 $ - $ - $ 301
Loans individually<br><br><br>evaluated for impairment 9,512 2,995 23,680 - 5,785 1,614 - 43,586
Loans collectively<br><br><br>evaluated for impairment 1,328,509 1,876,912 1,178,972 17,880 67,914 86,295 4,604 4,561,086
Total loans $ 1,338,099 $ 1,879,907 $ 1,202,652 $ 17,880 $ 73,922 $ 87,909 $ 4,604 $ 4,604,973
Unaccreted yield<br><br><br>adjustments (42,461 )
Loans receivable, net of<br><br><br>yield adjustments $ 4,562,512
Allowance for Loan Losses
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 31 - - - - - - 31
Loans collectively<br><br><br>evaluated for impairment 3,346 16,959 9,672 136 2,467 491 172 33,243
Total allowance for loan losses $ 3,377 $ 16,959 $ 9,672 $ 136 $ 2,467 $ 491 $ 172 $ 33,274
  • 22 -
Balance of Loans Receivable
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 $ 84 $ - $ - $ - $ 242 $ - $ - 326
Loans individually<br><br><br>evaluated for impairment 12,545 70 8,900 - 1,213 1,531 - 24,259
Loans collectively<br><br><br>evaluated for impairment 1,331,415 1,946,321 1,249,969 13,907 64,308 94,634 5,814 4,706,368
Total loans $ 1,344,044 $ 1,946,391 $ 1,258,869 $ 13,907 $ 65,763 $ 96,165 $ 5,814 $ 4,730,953
Unaccreted yield<br><br><br>adjustments (52,025 )
Loans receivable, net of<br><br><br>yield adjustments $ 4,678,928
  • 23 -
Allowance for Loan Losses
Three Months Ended March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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: $ 3,478 $ 16,060 $ 8,684 $ 142 $ 2,008 $ 456 $ 109 $ 30,937
Total charge offs - - - - - - (26 ) (26 )
Total recoveries - - - - - - 10 10
Total provisions 1,277 2,831 2,026 42 (6 ) 108 (8 ) 6,270
Total allowance for loan losses $ 4,755 $ 18,891 $ 10,710 $ 184 $ 2,002 $ 564 $ 85 $ 37,191
Allowance for Loan Losses
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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: $ 3,377 $ 16,959 $ 9,672 $ 136 $ 2,467 $ 491 $ 172 $ 33,274
Total charge offs - - - - - - (134 ) (134 )
Total recoveries - - - - - - 28 28
Total provisions 1,378 1,932 1,038 48 (465 ) 73 19 4,023
Total allowance for loan losses $ 4,755 $ 18,891 $ 10,710 $ 184 $ 2,002 $ 564 $ 85 $ 37,191
  • 24 -
Allowance for Loan Losses
Three Months Ended March 31, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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, 2019:
At December 31, 2018: $ 2,977 $ 17,095 $ 9,918 $ 305 $ 2,514 $ 464 $ 253 $ 33,526
Total charge offs - - - - (184 ) - (76 ) (260 )
Total recoveries - - - - - - 18 18
Total provisions 138 (83 ) (343 ) (156 ) 234 25 6 (179 )
Total allowance for loan losses $ 3,115 $ 17,012 $ 9,575 $ 149 $ 2,564 $ 489 $ 201 $ 33,105
Allowance for Loan Losses
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended March 31, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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, 2019:
At June 30, 2018: $ 2,479 $ 14,946 $ 9,787 $ 258 $ 2,552 $ 430 $ 413 $ 30,865
Total charge offs (83 ) - (54 ) - (369 ) - (215 ) (721 )
Total recoveries - - 2 - - - 67 69
Total provisions 719 2,066 (160 ) (109 ) 381 59 (64 ) 2,892
Total allowance for loan losses $ 3,115 $ 17,012 $ 9,575 $ 149 $ 2,564 $ 489 $ 201 $ 33,105
  • 25 -

The following tables present key indicators of credit quality regarding the Company’s loan portfolio based upon loan classification and contractual payment status at March 31, 2020 and June 30, 2019 based upon the methodology for identifying and reporting such loans as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Credit-Rating Classification of Loans Receivable
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Pass $ 1,325,449 $ 1,875,819 $ 1,172,834 $ 17,880 $ 67,722 $ 86,061 $ 4,587 $ 4,550,352
Special Mention 281 1,093 5,905 - 2,660 158 1 10,098
Substandard 12,369 2,995 23,913 - 3,540 1,690 14 44,521
Doubtful - - - - - - 2 2
Total loans $ 1,338,099 $ 1,879,907 $ 1,202,652 $ 17,880 $ 73,922 $ 87,909 $ 4,604 $ 4,604,973
Credit-Rating Classification of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Pass $ 1,328,811 $ 1,945,205 $ 1,249,438 $ 13,907 $ 59,768 $ 94,544 $ 5,776 $ 4,697,449
Special Mention 629 1,116 - - 3,894 28 14 5,681
Substandard 14,604 70 9,431 - 2,101 1,593 23 27,822
Doubtful - - - - - - 1 1
Total loans $ 1,344,044 $ 1,946,391 $ 1,258,869 $ 13,907 $ 65,763 $ 96,165 $ 5,814 $ 4,730,953
  • 26 -
Contractual Payment Status of Loans Receivable
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Current $ 1,331,827 $ 1,879,907 $ 1,182,448 $ 17,880 $ 73,431 $ 87,507 $ 4,589 $ 4,577,589
Past due:
30-59 days 2,457 - 15,796 - 296 20 3 18,572
60-89 days 661 - 139 - - - - 800
90 days and over 3,154 - 4,269 - 195 382 12 8,012
Total past due 6,272 - 20,204 - 491 402 15 27,384
Total loans $ 1,338,099 $ 1,879,907 $ 1,202,652 $ 17,880 $ 73,922 $ 87,909 $ 4,604 $ 4,604,973
Contractual Payment Status of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Current $ 1,338,347 $ 1,946,391 $ 1,256,892 $ 13,907 $ 65,668 $ 95,793 $ 5,754 $ 4,722,752
Past due:
30-59 days 1,680 - - - 95 197 25 1,997
60-89 days 473 - - - - 36 13 522
90 days and over 3,544 - 1,977 - - 139 22 5,682
Total past due 5,697 - 1,977 - 95 372 60 8,201
Total loans $ 1,344,044 $ 1,946,391 $ 1,258,869 $ 13,907 $ 65,763 $ 96,165 $ 5,814 $ 4,730,953
  • 27 -

The following tables present information relating to the Company’s nonperforming and impaired loans at March 31, 2020 and June 30, 2019 based upon the methodology for identifying and reporting such loans as described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. Loans reported as 90 days and over past due accruing in the table immediately below are also reported in the preceding contractual payment status table under the heading 90 days and over past due.

Performance Status of Loans Receivable
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Performing $ 1,331,069 $ 1,876,912 $ 1,178,972 $ 17,880 $ 73,194 $ 86,958 $ 4,592 $ 4,569,577
Nonperforming:
90 days and over past due accruing - - - - - - 12 12
Nonaccrual 7,030 2,995 23,680 - 728 951 - 35,384
Total nonperforming 7,030 2,995 23,680 - 728 951 12 35,396
Total loans $ 1,338,099 $ 1,879,907 $ 1,202,652 $ 17,880 $ 73,922 $ 87,909 $ 4,604 $ 4,604,973
Performance Status of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
Performing $ 1,334,101 $ 1,946,321 $ 1,249,969 $ 13,907 $ 65,294 $ 95,299 $ 5,792 $ 4,710,683
Nonperforming:
90 days and over past due accruing - - - - - - 22 22
Nonaccrual 9,943 70 8,900 - 469 866 - 20,248
Total nonperforming 9,943 70 8,900 - 469 866 22 20,270
Total loans $ 1,344,044 $ 1,946,391 $ 1,258,869 $ 13,907 $ 65,763 $ 96,165 $ 5,814 $ 4,730,953
  • 28 -
Impairment Status of Loans Receivable
At March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 $ 1,328,509 $ 1,876,912 $ 1,178,972 $ 17,880 $ 67,914 $ 86,295 $ 4,604 $ 4,561,086
Impaired loans:
Impaired loans with no allowance<br><br><br>for impairment 9,495 2,995 23,680 5,919 1,614 - 43,703
Impaired loans with allowance<br><br><br>for impairment:
Recorded investment 95 - - - 89 - - 184
Allowance for impairment (8 ) - - - (8 ) - - (16 )
Balance of impaired loans net<br><br><br>of allowance for impairment 87 - - - 81 - - 168
Total impaired loans, excluding<br><br><br>allowance for impairment: 9,590 2,995 23,680 - 6,008 1,614 - 43,887
Total loans $ 1,338,099 $ 1,879,907 $ 1,202,652 $ 17,880 $ 73,922 $ 87,909 $ 4,604 $ 4,604,973
Unpaid principal balance<br><br><br>of impaired loans:
Total impaired loans $ 11,761 $ 3,544 $ 25,236 $ 73 $ 8,978 $ 2,004 $ - $ 51,596
Impairment Status of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
At June 30, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business 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 $ 1,331,415 $ 1,946,321 $ 1,249,969 $ 13,907 $ 64,308 $ 94,634 $ 5,814 $ 4,706,368
Impaired loans:
Impaired loans with no allowance<br><br><br>for impairment 12,266 70 8,900 - 1,455 1,531 - 24,222
Impaired loans with allowance<br><br><br>for impairment:
Recorded investment 363 - - - - - - 363
Allowance for impairment (31 ) - - - - - - (31 )
Balance of impaired loans net<br><br><br>of allowance for impairment 332 - - - - - - 332
Total impaired loans, excluding<br><br><br>allowance for impairment: 12,629 70 8,900 - 1,455 1,531 - 24,585
Total loans $ 1,344,044 $ 1,946,391 $ 1,258,869 $ 13,907 $ 65,763 $ 96,165 $ 5,814 $ 4,730,953
Unpaid principal balance<br><br><br>of impaired loans:
Total impaired loans $ 14,985 $ 779 $ 10,200 $ 73 $ 3,987 $ 1,924 $ - $ 31,948
  • 29 -
Impairment Status of Loans Receivable
Three and Nine Months Ended March 31, 2020 and 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(In Thousands)
For the three months ended<br><br><br>March 31, 2020:
Average balance of impaired loans $ 10,191 $ 3,028 $ 12,404 $ - $ 4,702 $ 1,649 $ - $ 31,974
Interest earned on impaired loans $ 29 $ - $ - $ - $ 89 $ 9 $ - $ 127
For the nine months ended<br><br><br>March 31, 2020:
Average balance of impaired loans $ 10,964 $ 2,144 $ 10,227 $ - $ 3,341 $ 1,566 $ - $ 28,242
Interest earned on impaired loans $ 90 $ 28 $ - $ - $ 188 $ 25 $ - $ 331
For the three months ended<br><br><br>March 31, 2019:
Average balance of impaired loans $ 13,766 $ 86 $ 8,750 $ - $ 2,143 $ 1,540 $ - $ 26,285
Interest earned on impaired loans $ 32 $ - $ - $ - $ 19 $ 9 $ - $ 60
For the nine months ended<br><br><br>March 31, 2019:
Average balance of impaired loans $ 13,014 $ 97 $ 8,039 $ - $ 2,352 $ 1,556 $ - $ 25,058
Interest earned on impaired loans $ 97 $ - $ - $ - $ 48 $ 26 $ - $ 171
  • 30 -

The following table presents information regarding the restructuring of the Company’s troubled debts during the nine months ended March 31, 2020 and March 31, 2019, and any defaults during those periods of troubled debt restructurings (“TDRs”) that were restructured within 12 months of the date of default.

Troubled Debt Restructurings of Loans Receivable
Nine Months Ended March 31, 2020
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(Dollars in Thousands)
Troubled debt restructuring activity<br><br><br>for the nine months ended<br><br><br>March 31, 2020:
Number of loans 3 1 1 - 5 1 - 11
Pre-modification outstanding<br><br><br>recorded investment $ 1,046 $ 3,062 $ 521 $ - $ 4,349 $ 82 $ - $ 9,060
Post-modification outstanding<br><br><br>recorded investment 982 2,996 517 - 4,415 81 - 8,991
Reserves included in and charge offs<br><br><br>against the allowance for loan loss<br><br><br>recognized at modification - - - - 15 - - 15
-
Troubled debt restructuring defaults<br><br><br>for the nine months ended<br><br><br>March 31, 2020:
Number of loans - - 1 - - - - 1
Outstanding recorded investment $ - $ - $ 517 $ - $ - $ - $ - $ 517
Troubled Debt Restructurings of Loans Receivable
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Nine Months Ended March 31, 2019
Residential<br><br><br>Mortgage Multi-Family Mortgage Non-<br><br><br>Residential<br><br><br>Mortgage Construction Commercial<br><br><br>Business Home<br><br><br>Equity<br><br><br>Loans Other<br><br><br>Consumer Total
(Dollars in Thousands)
Troubled debt restructuring activity<br><br><br>for the nine months ended<br><br><br>March 31, 2019:
Number of loans 5 - 1 - 6 - - 12
Pre-modification outstanding<br><br><br>recorded investment $ 1,267 $ - $ 2,957 $ - $ 1,468 $ - $ - $ 5,692
Post-modification outstanding<br><br><br>recorded investment 1,309 - 2,955 - 1,488 - - 5,752
Reserves included in and charge offs<br><br><br>against the allowance for loan loss<br><br><br>recognized at modification 2 - 2 - - - - 4
Troubled debt restructuring defaults<br><br><br>for the nine months ended<br><br><br>March 31, 2019:
Number of loans - - - - - - - -
Outstanding recorded investment $ - $ - $ - $ - $ - $ - $ - $ -
  • 31 -

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

• Interest Rate Reduction: Temporary or permanent reduction of the interest rate charged against the outstanding balance of the loan.
• Capitalization of Prior Past Dues: Capitalization of prior amounts due to the outstanding balance of the loan.
--- ---
• Extension of Maturity or Balloon Date: Extending the term of the loan past its original balloon or maturity date.
--- ---
• Deferral of Principal Payments: Temporary deferral of the principal portion of a loan payment.
--- ---
• Payment Recalculation and Re-amortization: Recalculation of the recurring payment obligation and resulting loan amortization/repayment schedule based on the loan’s modified terms.
--- ---

12.     LEASES

The Company adopted ASU 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 on July 1, 2019. Topic 842 requires lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. At the time of adoption, operating lease right-of-use assets of approximately $17.2 million and operating lease liabilities of approximately $17.8 million were recorded in other assets and other liabilities, respectively, on our Consolidated Statements of Financial Condition. The calculated amount of the right-of-use asset and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum lease payments. The discount rate used in determining the lease liability for each individual lease was the Company’s incremental borrowing rate at the time of adoption of ASU 2016-02, on a collateralized basis, over a similar term.

As of March 31, 2020, the weighted average remaining lease term for operating leases was 8.59 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.51%.

The Company has elected to account for lease and non-lease components separately since such amounts are readily determinable under the Company’s lease contracts.  Total operating lease costs for the three and nine months ended March 31, 2020 was $832,000 and $3.1 million, respectively. Net rent expense for the three and nine months ended March 31, 2019, prior to the adoption of ASU 2016-02 was $794,000 and $2.3 million, respectively.

There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three and nine months ended March 31, 2020.  At March 31, 2020, the Company had no leases that had not yet commenced.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability at March 31, 2020 is as follows:

March 31,
2020
(In Thousands)
Less than one year $ 3,183
After one year but within two years 2,947
After two years but within three years 2,536
After three years but within four years 1,788
After four years but within five years 1,448
Greater than five years 7,739
Total undiscounted cash flows 19,641
Less: discount on cash flows (2,210 )
Total lease liability $ 17,431
  • 32 -

13.     DEPOSITS

Deposits are summarized as follows:

March 31, June 30,
2020 2019
(In Thousands)
Non-interest-bearing demand $ 321,824 $ 309,063
Interest-bearing demand 1,134,420 843,432
Savings 848,950 790,658
Certificates of deposits 1,948,060 2,204,457
Total deposits $ 4,253,254 $ 4,147,610

14.     BORROWINGS

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

March 31, 2020 June 30, 2019
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 $ 875,000 1.23 % $ 873,400 2.49 %
One to two years 27,000 2.85 64,046 1.87
Two to three years - 0.00 62,700 2.46
Three to four years 145,000 3.04 155,000 3.00
Four to five years 103,500 2.65 22,500 2.63
Greater than five years 29,000 2.77 110,000 2.69
Total advances 1,179,500 1.65 % 1,287,646 2.54 %
Unamortized fair value adjustments (2,181 ) (4,435 )
Total advances, net of<br><br><br>fair value adjustments $ 1,177,319 $ 1,283,211

At March 31, 2020, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.28 billion and $159.2 million, respectively. At June 30, 2019, FHLB advances were collateralized by the FHLB capital stock owned by the Bank and mortgage loans and securities with carrying values totaling approximately $3.04 billion and $160.8 million, respectively.

Borrowings at March 31, 2020 and June 30, 2019 also included overnight borrowings in the form of depositor sweep accounts totaling $6.7 million and $8.8 million, respectively. Borrowings at March 31, 2020 and June 30, 2019 also included other overnight borrowings totaling $200.0 million and $30.0 million, respectively.

  • 33 -

15.     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, 2020 and June 30, 2019:

March 31, 2020
Asset Derivatives Liability Derivatives
Location Fair Value Location Fair Value
(In Thousands)
Derivatives designated as hedging<br><br><br>instruments:
Interest rate swaps and caps Other assets $ 535 Other liabilities $ 15,372
Total $ 535 $ 15,372
June 30, 2019
--- --- --- --- --- --- ---
Asset Derivatives Liability Derivatives
Location Fair Value Location Fair Value
(In Thousands)
Derivatives designated as hedging<br><br><br>instruments:
Interest rate swaps Other assets $ 3,856 Other liabilities $ 140
Total $ 3,856 $ 140

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, 2020, the Company had a total of 16 interest rate swaps and caps with a total notional amount of $1.18 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, 2020, the Company had $417,000 and $2.6 million, respectively, of reclassifications to interest expense.  During the next twelve months, the Company estimates that $6.5 million will be reclassified as an increase in interest expense.

  • 34 -

The tables below present the pre-tax effects of the Company’s derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended March 31, 2020 and 2019:

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
Three Months Ended March 31, 2019
--- --- --- --- --- --- ---
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 $ (4,982 ) Interest expense $ 2,159
Total $ (4,982 ) $ 2,159
Nine Months Ended March 31, 2019
--- --- --- --- --- --- ---
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 $ (12,058 ) Interest expense $ 4,855
Total $ (12,058 ) $ 4,855
  • 35 -

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, 2020 and June 30, 2019, 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, 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 $ 1,267 $ (732 ) $ 535 $ - $ - $ 535
Total $ 1,267 $ (732 ) $ 535 $ - $ - $ 535
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 $ 16,104 $ (732 ) $ 15,372 $ - $ (14,940 ) $ 432
Total $ 16,104 $ (732 ) $ 15,372 $ - $ (14,940 ) $ 432
June 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- ---
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 $ 5,334 $ (1,478 ) $ 3,856 $ - $ - $ 3,856
Total $ 5,334 $ (1,478 ) $ 3,856 $ - $ - $ 3,856
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 $ 1,618 $ (1,478 ) $ 140 $ - $ - $ 140
Total $ 1,618 $ (1,478 ) $ 140 $ - $ - $ 140
  • 36 -

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, 2020, 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 $15.0 million.

As required under the enforceable master netting arrangement with its derivatives counterparties, at March 31, 2020, the Company posted financial collateral of $14.9 million that was not included as offsetting amount.

In addition to the derivative instruments noted above, the Company’s pipeline of loans held for sale at March 31, 2020 and June 30, 2019, included $114.5 million and $46.2 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.

16.     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
2020 2019 2020 2019
(In Thousands) (In Thousands)
Service cost $ 20 $ 13 $ 59 $ 41 Salaries and employee benefits
Interest cost 81 95 244 283 Miscellaneous non-interest  expense
Amortization of unrecognized loss 4 11 14 33 Miscellaneous non-interest  expense
Expected return on assets (28 ) (28 ) (84 ) (84 ) Miscellaneous non-interest  expense
Net periodic benefit cost $ 77 $ 91 $ 233 $ 273
  • 37 -

17.     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, 2020 and March 31, 2019.

Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 2020 2019
(Dollars in Thousands) (Dollars in Thousands)
Income before income taxes $ 9,479 $ 15,722 $ 38,865 $ 44,944
Statutory federal tax rate 21 % 21 % 21 % 21 %
Federal income tax expense at statutory rate $ 1,991 $ 3,302 $ 8,162 $ 9,438
(Reduction) increases in income taxes resulting from:
Tax exempt interest (114 ) (147 ) (396 ) (444 )
State tax, net of federal tax effect 554 1,540 2,604 3,661
Incentive stock option compensation expense 21 12 58 68
Income from bank-owned life insurance (324 ) (421 ) (990 ) (1,000 )
Non-deductible merger-related expenses 49 - 69 -
Impact of CARES Act (1,624 ) - (1,624 ) -
Reversal of capital loss carryforward valuation allowance (425 ) - (425 ) -
Impact of deferred tax rate adjustment - - - (820 )
Other items, net 97 19 131 710
Total income tax expense $ 225 $ 4,305 $ 7,589 $ 11,613
Effective income tax rate 2.37 % 27.38 % 19.53 % 25.84 %
  • 38 -

The tax effects of existing temporary differences that give rise to deferred income tax assets and liabilities are as follows:

March 31, June 30,
2020 2019
(Unaudited)
(In Thousands)
Deferred income tax assets:
Purchase accounting $ 12,539 $ 15,137
Accumulated other comprehensive income:
Defined benefit plans 175 319
Derivatives 4,814 -
Unrealized loss on securities available for sale<br><br><br>transferred to held to maturity - 175
Allowance for loan losses 11,007 9,831
Benefit plans 2,384 2,280
Compensation 938 1,246
Stock-based compensation 2,072 1,973
Uncollected interest 1,261 1,070
Depreciation 553 -
Charitable contribution carryover - 186
Net operating loss carryover 33 919
Capital loss carryforward 318 814
Other items 868 587
36,962 34,537
Valuation allowance (540 ) (1,258 )
36,422 33,279
Deferred income tax liabilities:
Deferred loan fees and costs 568 1,584
Accumulated other comprehensive income:
Derivatives - 1,094
Unrealized gain on securities available for sale 3,234 573
Goodwill 4,654 4,608
Other items 816 53
9,272 7,912
Net deferred income tax asset $ 27,150 $ 25,367
  • 39 -

18.     FAIR VALUE OF FINANCIAL INSTRUMENTS

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments”. This guidance amends existing guidance to improve accounting standards for financial instruments including clarification and simplification of accounting and disclosure requirements and the requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The Company adopted the guidance effective July 1, 2018.  Upon adoption, the fair value of the Company’s loan portfolio is now presented using an exit price method.

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.

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, 2020 and June 30, 2019:

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.

  • 40 -

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

March 31, 2020
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 - 58,151 - 58,151
Asset-backed securities - 169,102 - 169,102
Collateralized loan obligations - 189,565 - 189,565
Corporate bonds - 163,715 - 163,715
Trust preferred securities - 2,852 - 2,852
Total debt securities - 583,385 - 583,385
Mortgage-backed securities available for sale:
Collateralized mortgage obligations - 34,671 - 34,671
Residential pass-through securities - 607,113 - 607,113
Commercial pass-through securities - 251,175 - 251,175
Total mortgage-backed securities - 892,959 - 892,959
Total securities available for sale $ - $ 1,476,344 $ - $ 1,476,344
Interest rate swaps and caps - 535 - 535
Total assets $ - $ 1,476,879 $ - $ 1,476,879
Liabilities:
Interest rate swaps $ - $ 15,372 $ - $ 15,372
Total liabilities $ - $ 15,372 $ - $ 15,372
  • 41 -
June 30, 2019
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:
U.S. agency securities $ - $ 3,678 $ - $ 3,678
Obligations of state and political subdivisions - 26,951 - 26,951
Asset-backed securities - 179,313 - 179,313
Collateralized loan obligations - 208,611 - 208,611
Corporate bonds - 122,024 - 122,024
Trust preferred securities - 2,756 1,000 3,756
Total debt securities - 543,333 1,000 544,333
Mortgage-backed securities available for sale:
Collateralized mortgage obligations - 21,390 - 21,390
Residential pass-through securities - 44,303 - 44,303
Commercial pass-through securities - 104,237 - 104,237
Total mortgage-backed securities - 169,930 - 169,930
Total securities available for sale - 713,263 1,000 714,263
Interest rate swaps - 3,856 - 3,856
Total assets $ - $ 717,119 $ 1,000 $ 718,119
Liabilities:
Interest rate swaps $ - $ 140 $ - $ 140
Total liabilities $ - $ 140 $ - $ 140

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, 2020 and June 30, 2019:

Impaired Loans

An impaired loan is evaluated and valued at the time the loan is identified as impaired at the lower of cost or fair value. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Fair value is measured based on the value of the collateral securing the loan and is classified at a Level 3 in the fair value hierarchy. Once a loan is identified as individually impaired, management measures impairment in accordance with the FASB’s guidance on accounting by creditors for impairment of a loan with the fair value estimated using the fair value of the collateral reduced by estimated disposal costs.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

  • 42 -

Other Real Estate Owned

Other real estate owned (“OREO”) 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 loan 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, 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 $ - $ - $ 2,371 $ 2,371
Non-residential mortgage - - 791 791
Commercial business - - 92 92
Total $ - $ - $ 3,254 $ 3,254
Other real estate owned, net:
Residential mortgage $ - $ - $ 178 $ 178
Total $ - $ - $ 178 $ 178
June 30, 2019
--- --- --- --- --- --- --- --- ---
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 $ - $ - $ 3,071 $ 3,071
Non-residential mortgage - - 791 791
Commercial business - - 16 16
Total $ - $ - $ 3,878 $ 3,878
  • 43 -

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, 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 $ 2,371 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 6% - 8 % 7.40 %
Non-residential mortgage 791 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 10% - 11% 10.98 %
Commercial business 92 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 9% - 10% 9.35 %
Total $ 3,254
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, 2019
--- --- --- --- --- --- --- --- --- --- ---
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 $ 3,071 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 6% - 8% 7.03 %
Non-residential mortgage 791 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 10% - 11% 10.08 %
Commercial business 16 Market valuation of<br><br><br>underlying collateral ^(1)^ Adjustments to reflect current<br><br><br>conditions/selling costs ^(2)^ 9% - 10% 9.36 %
Total $ 3,878
(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, 2020, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $3.3 million and valuation allowances of $16,000 reflecting fair values of $3.3 million. By comparison, at June 30, 2019, impaired loans valued using Level 3 inputs comprised loans with principal balances totaling $3.9 million and valuation allowances of $31,000 reflecting fair values of $3.9 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, 2020, the Company held other real estate owned totaling $178,000 whose carrying value was written down utilizing Level 3 inputs.  At June 30, 2019, the Company held no other real estate owned whose carrying value was written down utilizing Level 3 inputs.

  • 44 -

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2020 and June 30, 2019:

March 31, 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 $ 59,452 $ 59,452 $ 59,452 $ - $ -
Investment securities available for sale 1,476,344 1,476,344 - 1,476,344 -
Investment securities held to maturity 34,618 35,433 - 35,433 -
Loans held-for-sale 11,245 11,318 - 11,318 -
Net loans receivable 4,525,321 4,512,519 - - 4,512,519
FHLB Stock 59,324 - - - -
Interest receivable 19,036 19,036 - 5,413 13,623
Interest rate swaps and caps 535 535 - 535 -
Financial liabilities:
Deposits 4,253,254 4,277,611 2,305,194 - 1,972,417
Borrowings 1,384,025 1,421,194 - - 1,421,194
Interest payable on deposits 749 749 415 - 334
Interest payable on borrowings 3,019 3,019 - - 3,019
Interest rate swaps 15,372 15,372 - 15,372 -
June 30, 2019
--- --- --- --- --- --- --- --- --- --- ---
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 $ 38,935 $ 38,935 $ 38,935 $ - $ -
Investment securities available for sale 714,263 714,263 - 713,263 1,000
Investment securities held to maturity 576,652 584,678 - 584,678 -
Loans held-for-sale 12,267 12,501 - 12,501 -
Net loans receivable 4,645,654 4,630,853 - - 4,630,853
FHLB Stock 64,190 - - - -
Interest receivable 19,360 19,360 11 5,278 14,071
Interest rate swaps 3,856 3,856 - 3,856 -
Financial liabilities:
Deposits 4,147,610 4,152,558 1,943,154 - 2,209,404
Borrowings 1,321,982 1,337,560 - - 1,337,560
Interest payable on deposits 3,106 3,106 367 - 2,739
Interest payable on borrowings 3,899 3,899 - - 3,899
Interest rate swaps 140 140 - 140 -
  • 45 -

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.

19.     COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive (loss) income included in stockholders’ equity at March 31, 2020 and June 30, 2019 are as follows:

March 31, June 30,
2020 2019
(In Thousands)
Net unrealized gain on securities available for sale $ 11,030 $ 1,975
Tax effect (3,234 ) (573 )
Net of tax amount 7,796 1,402
Net unrealized loss on securities available for sale<br><br><br>transferred to held to maturity - (596 )
Tax effect - 175
Net of tax amount - (421 )
Fair value adjustments on derivatives (16,312 ) 3,716
Tax effect 4,814 (1,094 )
Net of tax amount (11,498 ) 2,622
Benefit plan adjustments (598 ) (1,083 )
Tax effect 175 319
Net of tax amount (423 ) (764 )
Total accumulated other comprehensive (loss) income $ (4,125 ) $ 2,839
  • 46 -

Other comprehensive loss and related tax effects for the three and nine months ended March 31, 2020 and March 31, 2019 are presented in the following table:

Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 2020 2019
(In Thousands) (In Thousands)
Net unrealized holding gain on securities<br><br><br>available for sale $ 3,975 $ 5,122 $ 11,286 $ 1,453
Amortization of net unrealized holding loss on<br><br><br>securities available for sale transferred to held<br><br><br>to maturity^(1)^ - 54 596 221
Net realized (gain) loss on sale and call of securities<br><br><br>available for sale (2,234 ) 182 (2,231 ) 182
Fair value adjustments on derivatives (18,742 ) (7,139 ) (20,028 ) (16,913 )
Benefit plans:
Amortization of actuarial loss 4 11 14 33
Net actuarial loss ^(2)^ - - 471 (59 )
Net change in benefit plan accrued expense 4 11 485 (26 )
Other comprehensive loss before taxes (16,997 ) (1,770 ) (9,892 ) (15,083 )
Tax effect^(3)^ 4,917 547 2,928 4,127
Total other comprehensive loss $ (12,080 ) $ (1,223 ) $ (6,964 ) $ (10,956 )
(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 the computation of net periodic pension expense.  See Note 16 – Benefit Plans for additional information.
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(3) The amounts included in income taxes for items reclassified out of accumulated other comprehensive income totaled $(658) and $(515)for the three and nine months ended March 31, 2020, respectively, and $57 and $34 for the three and nine months ended March 31, 2019, respectively.
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  • 47 -

20.     REVENUE RECOGNITION

Effective July 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, "ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities, and derivatives that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of OREO.

The Company, using a modified retrospective transition approach, determined that there was no cumulative effect adjustment to retained earnings as a result of adopting the new standard, nor did the standard have a material impact on our consolidated financial statements including the timing or amounts of revenue recognized.

All of the Company’s revenue from contracts with customers within the scope of ASC 606 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, 2020 and 2019.  Sources of revenue outside the scope of ASC 606 are noted as such.

Three Months Ended Nine Months Ended
March 31, March 31,
2020 2019 2020 2019
(In Thousands) (In Thousands)
Non-interest income:
Deposit-related fees and charges $ 423 $ 376 $ 1,362 $ 1,126
Loan-related fees and charges ^(1)^ 915 1,298 3,589 2,979
Gain (loss) on sale and call of securities ^(1)^ 2,234 (182 ) 2,231 (182 )
Gain on sale of loans ^(1)^ 565 151 1,838 384
Loss on sale and write down of other real estate owned - (6 ) (28 ) (20 )
Income from bank owned life insurance ^(1)^ 1,532 1,560 4,688 4,753
Electronic banking fees and charges (interchange income) 309 253 920 780
Miscellaneous ^(1)^ 223 226 117 347
Total non-interest income $ 6,201 $ 3,676 $ 14,717 $ 10,167
(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.

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Gains/Losses on Sales of 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/Losses 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.

  • 49 -

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 the planned merger of MSB Financial Corp. (“MSBF”) with and into the Company, with the Company surviving the merger as the surviving corporation (the “Merger”). Factors that could cause future results to vary from current management expectations include, but are not limited to, the inability to obtain approvals and/or meet the other closing conditions required to close the Merger in a timely manner, 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 and under Item 1A. Risk Factors of the Quarterly Report on Form 10-Q.

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.

Proposed Acquisition of MSBF

On December 18, 2019, the Company and MSBF, the holding company for Millington Bank, announced that the companies had entered into a definitive agreement pursuant to which the Company will acquire MSBF. Consideration will be paid to MSBF stockholders in a combination of stock and cash. Under the terms of merger agreement MSBF will merge with and into the Company and each outstanding share of MSBF common stock will be exchanged for 1.3 shares of the Company’s common stock or $18.00 in cash. MSBF stockholders may elect cash or stock, or a combination thereof, subject to proration to ensure that, in the aggregate, 10% of MSBF shares will be converted into cash and 90% of MSBF shares will be converted into the Company’s common stock. Upon closing, the Company’s stockholders holders will own approximately 94% of the combined company and MSBF stockholders will own approximately 6% of the combined company.

As of March 31, 2020, MSBF had approximately $600.4 million of assets, gross loans of $528.9 million and deposits of $447.4 million and operated four New Jersey branches located in Somerset and Morris counties. The Merger is expected to close late in the quarter ended June 30, 2020 or early in the quarter ended September 30, 2020, subject to MSBF receiving the requisite approval of its shareholders, receipt of all regulatory approvals and fulfillment of other customary closing conditions.

Impact of COVID-19

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

Employee Matters.  As the COVID-19 pandemic has unfolded, and stay-at-home orders have been mandated by government officials, the majority of our non-branch personnel have transitioned to working remotely. 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.  Across our branch network, branch hours and access have been modified to ensure the safety of our employees and clients.  Where possible, branch lobbies have been transitioned to appointment-only access, with the majority of branch operations being conducted via our drive-up windows.  As certain branches do not have drive-up capabilities, or suitable alternatives, we have temporarily closed six of our 48 branches.

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Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) and Paycheck Protection Program and Health Care Enhancement Act (“PPP Enhancement Act”).  On March 27, 2020 the CARES Act was signed into law.  Among the more significant components of the CARES Act, as it pertains to the Company, was the creation of the Paycheck Protection Program (“PPP”), the modification of rules and regulations surrounding Troubled Debt Restructured loans and modifications to the tax code to allow for the carryback of net operating losses.

The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program.  As part of this program the SBA will guarantee 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 May 4, 2020 we had approved approximately 628 loans for $63.9 million under the PPP.

Under Section 4013 of the CARES Act, and based upon regulatory guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals of up to six months, that are attributable to the adverse impact of COVID-19, are not considered to be troubled debt restructurings. As such, the applicable loans are reported a current with regard to payment status and continue to accrue interest during the payment deferral period. 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%. The difference between these two rates, multiplied by the amount of the NOL, totaled $1.6 million and was recorded as a credit to income tax expense in the current period.

Loan Portfolio.  The government-mandated closure of certain businesses 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, non-TDR loan modifications granted under section 4013 of the CARES Act and exposures to certain sectors 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, 2020:

March 31, 2020
Balance LTV
(In Thousands)
Residential mortgage loans:
One- to four-family residential mortgage $ 1,338,099 59 %
Home equity loans and lines of credit 87,909 42 %
Total residential mortgage loans 1,426,008 58 %
Commercial mortgage loans:
Multi-family commercial mortgage loans 1,879,907 64 %
Nonresidential commercial mortgage loans 1,202,652 55 %
Total commercial mortgage loans 3,082,559 60 %
Total mortgage loans $ 4,508,567 60 %
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The following table identifies our exposure, at March 31, 2020, to various loan sectors:

March 31, 2020
Real-Estate Secured Non-Real Estate Secured Total
# of Loans Balance LTV # of Loans Balance # of Loans Balance
(Dollars In Thousands)
Hotel 4 $ 4,494 51 % 6 $ 1,537 10 $ 6,031
Restaurant 15 9,671 52 % 38 3,849 53 13,520
Retail shopping center 116 304,929 54 % 2 60 118 304,989
Entertainment & recreation 4 5,318 44 % 14 1,207 18 6,525
Wholesale commercial business - - 15 21,306 15 21,306
Wholesale consumer unsecured - - 150 706 150 706
Total commercial loans 139 $ 324,412 53 % 225 $ 28,665 364 $ 353,077

The following table identifies, at May 4, 2020, the number and balance of non-TDR loan modifications granted under section 4013 of the CARES Act:

May 4, 2020
# of Loans Balance
(In Thousands)
Residential mortgage loans:
One- to four-family residential mortgage 305 $ 126,647
Home equity loans and lines of credit 37 2,409
Total residential mortgage loans 342 129,056
Commercial loans:
Multi-family commercial mortgage loans 80 199,797
Nonresidential commercial mortgage loans 133 286,255
Commercial business 46 6,770
Construction 1 796
Total commercial loans 260 493,618
Total loans 602 $ 622,674

Comparison of Financial Condition at March 31, 2020 and June 30, 2019

Executive Summary.  Total assets increased by $139.0 million to $6.77 billion at March 31, 2020 from $6.63 billion at June 30, 2019.  The net increase in total assets primarily reflected increases in cash and cash equivalents, investment securities and other assets partially offset by decreases in the balance of loans held-for-sale and loans receivable.

Wholesale Restructuring Transaction.  During the quarter ended March 31, 2020 the Company executed a wholesale restructuring transaction designed to enhance net interest income and reduce credit risk within the investment portfolio.  During the first phase of the transaction, $158.4 million of investment securities with a weighted average yield of 2.63% were sold and a portion of the proceeds utilized to extinguish $121.5 million of Federal Home Loan Bank (“FHLB”) advances with a weighted average cost of 2.84%.  Gains on sale of investment securities and debt extinguishment losses each totaled $2.2 million, resulting in a negligible impact on pre-tax net income.  During the second phase of the transaction, $248.7 million of US agency-backed mortgage-backed securities were purchased at a weighted average yield of 2.77% and were funded with a combination of FHLB advances, brokered time deposits and overnight borrowings at a weighted average cost of 1.65%.

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Investment Securities.  Investment securities classified as available for sale increased by $762.1 million to $1.48 billion at March 31, 2020 from $714.3 million at June 30, 2019. The net increase in the portfolio partially reflected the adoption of ASU 2019-04 on July 1, 2019, upon which the Company reclassified $537.7 million of investment securities from held to maturity to available for sale.  In addition, the net increase in the portfolio during the nine months ended March 31, 2020 reflected security purchases totaling $487.9 million and a $9.1 million increase in the fair value of the portfolio to a net unrealized gain of $11.1 million.  The net increase in the portfolio was partially offset by security sales totaling $162.1 million and $110.5 million in principal repayment, net of premium amortization and discount accretion.

Investment securities classified as held to maturity decreased by $542.0 million to $34.6 million at March 31, 2020 from $576.7 million at June 30, 2019.  The decrease in held to maturity securities largely reflected the adoption of ASU 2019-04, as noted above. The decrease in the portfolio for the nine months ended March 31, 2020 also reflected principal repayment, net of discount accretion and premium amortization, totaling $4.3 million.

Based on its evaluation, management has concluded that no other-than-temporary impairment was present within the investment portfolio as of March 31, 2020 or June 30, 2019.  Additional information regarding investment securities as of those dates is presented in Note 7, Note 8 and Note 9 to the unaudited consolidated financial statements.

Loans Held-for-Sale. Loans held-for-sale totaled $11.2 million at March 31, 2020 as compared to $12.3 million at June 30, 2019 and are reported separately from the balance of net loans receivable as of those dates.  During the nine months ended March 31, 2020, $174.5 million of residential mortgage loans were sold, resulting in net gains on sale of $1.8 million.

Net Loans Receivable.  Loans receivable, net of unamortized premiums, deferred costs and the allowance for loan losses, decreased by $120.3 million to $4.52 billion at March 31, 2020 from $4.65 billion at June 30, 2019.  The decrease in net loans receivable was primarily attributable to elevated levels of loan prepayment activity outpacing new loan origination and purchase volume during the nine months ended March 31, 2020.  The detail of the changes in loan portfolio is presented below:

March 31, June 30, Increase/
2020 2019 (Decrease)
(In Thousands)
Residential mortgage loans:
One- to four-family residential mortgage $ 1,338,099 $ 1,344,044 $ (5,945 )
Home equity loans and lines of credit 87,909 96,165 (8,256 )
Total residential mortgage loans 1,426,008 1,440,209 (14,201 )
Commercial loans:
Multi-family commercial mortgage loans 1,879,907 1,946,391 (66,484 )
Nonresidential commercial mortgage loans 1,202,652 1,258,869 (56,217 )
Commercial business 73,922 65,763 8,159
Construction 17,880 13,907 3,973
Total commercial loans 3,174,361 3,284,930 (110,569 )
Other consumer loans 4,604 5,814 (1,210 )
Total loans 4,604,973 4,730,953 (125,980 )
Deferred fees, premiums and other, net (42,461 ) (52,025 ) 9,564
Allowance for loan losses (37,191 ) (33,274 ) (3,917 )
Net loans receivable $ 4,525,321 $ 4,645,654 $ (120,333 )
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Residential mortgage loan origination volume for the nine months ended March 31, 2020, excluding loans held-for-sale, totaled $182.4 million, comprising $168.6 million of one- to four-family first mortgage loan originations and $13.8 million of home equity loan and line of credit originations.  Residential mortgage loan originations for the period were augmented with the purchase of one- to four-family first mortgage loans totaling $14.1 million.

Commercial loan origination volume for the nine months ended March 31, 2020 totaled $242.5 million, which comprised $203.3 million of commercial mortgage loan originations augmented by $35.1 million of commercial business loan originations and construction loan disbursements totaling $4.1 million.  Commercial loan originations were augmented with the funding of purchased loans totaling $57.4 million during the nine months ended March 31, 2020.

Additional information about the Company’s loans at March 31, 2020 and June 30, 2019 is presented in Note 10 to the unaudited consolidated financial statements.

Nonperforming Loans.  Nonperforming loans increased by $15.1 million to $35.4 million, or 0.78% of total loans at March 31, 2020, from $20.3 million, or 0.43% of total loans at June 30, 2019.  The increase in non-performing loans was primarily attributable to a single, $14.3 million, owner-occupied commercial real estate loan which was placed on non-accrual status during the quarter ended March 31, 2020.  This loan is secured by a grocery-anchored retail shopping center located in northern New Jersey and has an original loan-to-value of approximately 55%.

Nonperforming loans generally include those loans reported as 90 days and over past due while still accruing and loans reported as nonaccrual with such balances totaling $12,000 and $35.4 million, respectively, at March 31, 2020.

Additional information about the Company’s nonperforming loans at March 31, 2020 and June 30, 2019 is presented in Note 11 to the unaudited consolidated financial statements.

Allowance for Loan Losses.  During the nine months ended March 31, 2020, the balance of the allowance for loan losses (“ALLL”) increased by $3.9 million to $37.2 million at March 31, 2020 from $33.3 million, at June 30, 2019, resulting in an ALLL to total loans ratio of 0.81% and 0.70% as of those dates, respectively. The increase resulted from a loan loss provision of $4.0 million during the nine months ended March 31, 2020 coupled with charge-offs and net of recoveries totaling $106,000 during that same period.

The portion of the allowance for loan losses attributable to loans individually evaluated for impairment decreased by $15,000 to $16,000 at March 31, 2020 from $31,000 at June 30, 2019.  This balance reflected an allowance for impairment on $184,000 of impaired loans while an additional $43.7 million of impaired loans had no allowance.  By comparison, the balance at June 30, 2019 reflected an allowance for impairment on $363,000 of impaired loans while an additional $24.2 million of impaired loans had no allowance for impairment.

The portion of the allowance for loan losses attributable to loans collectively evaluated for impairment increased by $4.0 million to $37.2 million at March 31, 2020 from $33.2 million at June 30, 2019.  This increase was attributable to changes in a combination of historical and environmental loss factors.  With regard to historical loss factors, our loan portfolio experienced an annualized net charge-off rate of 0.00% for the nine months ended March 31, 2020, a decrease of two basis points from the 0.02% rate for the year ended June 30, 2019.  The annual average net charge off rate for June 30, 2019 had previously decreased by one basis point from   0.03% for the prior year ended June 30, 2018.  The effect of the net change in historical loss factors resulted in a decrease in the applicable portion of the allowance attributable to these factors of approximately $813,000 to $1.3 million at March 31, 2020 from $2.1 million at June 30, 2019.

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With regard to environmental loss factors, the Company made adjustments to various factors during the nine months ended March 31, 2020.  Most notably, the environmental factors associated with national and regional economic conditions were increased substantially in response to the economic impact of COVID-19.  The net effect of these adjustments, partially offset by a decrease in the balance of the unimpaired portion of the loan portfolio, resulted in a $4.8 million increase in the portion of the allowance for loan losses attributable to environmental loss factors to $35.9 million at March 31, 2020 from $31.1 million at June 30, 2019.

The calculation of probable incurred losses within a loan portfolio and the resulting allowance for loan losses is subject to estimates and assumptions that are susceptible to significant revisions as more information becomes available and as events or conditions effecting individual borrowers and the marketplace as a whole change over time.  Future additions to the allowance for loan losses may be necessary if economic and market conditions deteriorate in the future from those currently prevalent in the marketplace.  In addition, our banking regulators, as an integral part of their examination process, periodically review our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate.  The regulators may require the allowance for loan losses to be increased based on their review of information available at the time of the examination, which may negatively affect our earnings.  Finally, changes in accounting standards promulgated by the Financial Accounting Standards Board, such as those discussed in Note 6 to the unaudited consolidated financial statements regarding the use of a current expected credit loss (“CECL”) model to calculate credit losses, may require increases in the allowance for loan losses upon adoption of the applicable accounting standard.

Additional information about the allowance for loan losses at March 31, 2020 and June 30, 2019 is presented in Note 11 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, other real estate owned and other assets, increased by $19.8 million to $666.9 million at March 31, 2020 from $647.1 million at June 30, 2019.

The increase in other assets primarily reflected the adoption of a new accounting standard that requires leases to be recognized on our Consolidated Statements of Condition as a right of use asset and lease liability. Our operating lease right of use asset totaled approximately $16.8 million as of March 31, 2020.  The remaining increases and decreases in other assets for the nine months ended March 31, 2020 generally reflected normal operating fluctuations in their respective balances.

Additional information about the Company’s operating lease right of use asset at March 31, 2020 is presented in Note 12 to the unaudited consolidated financial statements.

Deposits.  Total deposits increased by $105.6 million to $4.25 billion at March 31, 2020 from $4.15 billion at June 30, 2019.  The following table sets forth the distribution of total deposit accounts, by account type, at the dates indicated:

March 31, June 30, Increase/
2020 2019 (Decrease)
(In Thousands)
Deposits:
Non-interest-bearing deposits $ 321,824 $ 309,063 12,761
Interest-bearing demand 1,134,420 843,432 290,988
Savings 848,950 790,658 58,292
Certificates of deposit 1,948,060 2,204,457 (256,397 )
Interest-bearing deposits 3,931,430 3,838,547 92,883
Total deposits $ 4,253,254 $ 4,147,610 $ 105,644
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The net increase in deposit balances for the nine months ended March 31, 2020 was comprised of changes in the balances of retail deposits as well as non-retail deposits acquired through various wholesale channels.  The reallocation of deposits for the nine months ended March 31, 2020 reflected the Company’s continued success in realigning its funding mix in favor of core deposits. The following table sets forth the distribution of total deposit accounts, by retail and wholesale deposits, at the dates indicated:

March 31, June 30, Increase/
2020 2019 (Decrease)
(In Thousands)
Retail deposits:
Non-interest-bearing demand $ 321,824 $ 309,063 $ 12,761
Interest-bearing demand 1,134,420 843,432 290,988
Savings 848,950 790,658 58,292
Certificates of deposits 1,833,081 1,902,542 (69,461 )
Total retail deposits 4,138,275 3,845,695 292,580
Wholesale deposits:
Certificates of deposits  - listing service 33,608 66,110 (32,502 )
Certificates of deposits  - brokered 81,371 235,805 (154,434 )
Total wholesale deposits 114,979 301,915 (186,936 )
Total deposits $ 4,253,254 $ 4,147,610 $ 105,644

Additional information about the Company’s deposits at March 31, 2020 and June 30, 2019 is presented in Note 13 to the unaudited consolidated financial statements.

Borrowings.  The balance of borrowings increased by $62.0 million to $1.38 billion at March 31, 2020 from $1.32 billion at June 30, 2019.  The increase in borrowings primarily reflected increases in overnight borrowings of $170.0 million and new FHLB advances of $50.0 million, partially offset by the extinguishment and maturity of $121.5 million and $35.3 million of FHLB advances, respectively.

Additional information about the Company’s borrowings at March 31, 2020 and June 30, 2019 is presented in Note 14 to the unaudited consolidated financial statements.

Other Liabilities.  The balance of other liabilities increased by $28.8 million to $66.9 million at March 31, 2020 from $38.1 million at June 30, 2019. The increase in other liabilities primarily reflected the adoption of a new accounting standard related to leases and a decrease in the fair value of our interest rate derivatives. The new accounting standard requires leases to be recognized on our Consolidated Statements of Condition as a right of use asset and lease liability, as noted above.  Our operating lease liability totaled approximately $17.4 million as of March 31, 2020 and the decrease in the fair value of our interest rate derivatives portfolio in a liability position was approximately $15.2 at March 31, 2020.  The remaining variance generally represented normal operating fluctuations in the balances of other liabilities.

Additional information about the Company’s operating lease liability at March 31, 2020 is presented in Note 12 to the unaudited consolidated financial statements.  Additional information about the Company’s derivatives portfolio at March 31, 2020 is presented in Note 15 to the unaudited consolidated financial statements.

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Stockholders’ Equity.  Stockholders’ equity decreased by $57.5 million to $1.07 billion at March 31, 2020 from $1.13 billion at June 30, 2019 largely reflecting the impact of our share repurchases during the first nine months of fiscal 2020.  In March 2019 we announced our fourth share repurchase program through which we authorized the repurchase of 9,218,324 shares, or 10%, of our outstanding shares as of that date.

During the nine months ended March 31, 2020, the Company repurchased 5,375,551 shares of common stock at a total cost of $69.8 million and an average cost of $12.98 per share. The shares of common stock repurchased during the period represented 58.3% of the total shares authorized to be repurchased under the current repurchase program. Cumulatively, the Company has repurchased a total of 8,457,294 shares or 91.7% of the shares to be repurchased under its current repurchase program at a total cost of $111.1 million and at an average cost of $13.14 per share.  On March 25, 2020 the Company temporarily suspended its stock repurchase program.

The net decrease in stockholders’ equity was partially offset by net income of $31.3 million, or $0.38 per share, for the nine months ended March 31, 2020 from which we declared and paid regular quarterly cash dividends totaling $0.21 per share. Cash dividends declared and paid during the nine months ended March 31, 2020 reduced stockholders’ equity by $17.3 million.

The change in stockholders’ equity also reflected a $7.0 million decrease in accumulated other comprehensive income during the nine months ended March 31, 2020.

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Analysis of Net Interest Income

Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.

Average Balance Sheet and Yields. The following tables reflect the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances.  No tax equivalent adjustments have been made to yield or costs.  Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income.

For the Three Months Ended March 31,
2020 2019
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)^ $ 4,503,996 $ 46,603 4.14 % $ 4,709,052 $ 48,116 4.09 %
Taxable investment securities^(2)^ 1,406,973 10,526 2.99 1,161,492 9,511 3.28
Tax-exempt securities ^(2)^ 101,771 547 2.15 134,309 710 2.12
Other interest-earning assets^(3)^ 104,241 1,100 4.22 107,554 1,320 4.91
Total interest-earning assets 6,116,981 58,776 3.84 6,112,407 59,657 3.91
Non-interest-earning assets 598,335 574,921
Total assets $ 6,715,316 $ 6,687,328
Interest-bearing liabilities:
Interest-bearing demand $ 1,112,080 $ 3,251 1.17 $ 790,567 $ 2,092 1.06
Savings 838,501 1,782 0.85 773,308 1,162 0.60
Certificates of deposit 2,004,785 9,735 1.94 2,288,836 10,860 1.90
Total interest-bearing deposits 3,955,366 14,768 1.49 3,852,711 14,114 1.47
Borrowings 1,295,699 6,398 1.98 1,318,205 6,905 2.10
Total interest-bearing liabilities 5,251,065 21,166 1.61 5,170,916 21,019 1.63
Non-interest-bearing liabilities^(4)^ 372,986 343,575
Total liabilities 5,624,051 5,514,491
Stockholders' equity 1,091,265 1,172,837
Total liabilities and stockholders'<br><br><br>equity $ 6,715,316 $ 6,687,328
Net interest income $ 37,610 $ 38,638
Interest rate spread^(5)^ 2.23 % 2.28 %
Net interest margin^(6)^ 2.46 % 2.53 %
Ratio of interest-earning assets<br><br><br>to interest-bearing liabilities 1.16 X 1.18 X
(1) Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for loan losses has been included in non-interest-earning assets.
--- ---
(2) Fair value adjustments have been excluded in the balances of interest-earning assets.
--- ---
(3) Includes interest-bearing deposits at other banks and FHLB of New York capital stock.
--- ---
(4) Includes average balances of non-interest-bearing deposits of $317,530,000 and $307,645,000, for the three months ended March 31, 2020, and 2019, respectively.
--- ---
(5) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
--- ---
(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.
--- ---
  • 58 -
For the Nine Months Ended March 31,
2020 2019
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)^ $ 4,569,341 $ 140,811 4.11 % $ 4,676,435 $ 144,568 4.12 %
Taxable investment securities^(2)^ 1,265,871 29,552 3.11 1,166,995 27,441 3.14
Tax-exempt securities ^(2)^ 118,828 1,906 2.14 135,280 2,139 2.11
Other interest-earning assets^(3)^ 115,764 3,588 4.13 102,664 3,737 4.85
Total interest-earning assets 6,069,804 175,857 3.86 6,081,374 177,885 3.90
Non-interest-earning assets 691,611 586,366
Total assets $ 6,761,415 $ 6,667,740
Interest-bearing liabilities:
Interest-bearing demand $ 992,261 $ 9,304 1.25 $ 790,568 $ 5,707 0.96
Savings 817,025 4,964 0.81 754,775 2,849 0.50
Certificates of deposit 2,082,677 32,145 2.06 2,182,820 28,824 1.76
Total interest-bearing deposits 3,891,963 46,413 1.59 3,728,163 37,380 1.34
Borrowings 1,291,045 20,540 2.12 1,374,421 22,338 2.17
Total interest-bearing liabilities 5,183,008 66,953 1.72 5,102,584 59,718 1.56
Non-interest-bearing liabilities^(4)^ 375,792 351,307
Total liabilities 5,558,800 5,453,891
Stockholders' equity 1,102,615 1,213,849
Total liabilities and stockholders'<br><br><br>equity $ 6,661,415 $ 6,667,740
Net interest income $ 108,904 $ 118,167
Interest rate spread^(5)^ 2.14 % 2.34 %
Net interest margin^(6)^ 2.39 % 2.59 %
Ratio of interest-earning assets<br><br><br>to interest-bearing liabilities 1.17 X 1.19 X
(1) Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for loan losses has been included in non-interest-earning assets.
--- ---
(2) Fair value adjustments have been excluded in the balances of interest-earning assets.
--- ---
(3) Includes interest-bearing deposits at other banks and FHLB of New York capital stock.
--- ---
(4) Includes average balances of non-interest-bearing deposits of $319,451,000 and $312,342,000, for the nine months ended March 31, 2020, and 2019, respectively.
--- ---
(5) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
--- ---
(6) Net interest margin represents net interest income as a percentage of average interest-earning assets.
--- ---
  • 59 -

Comparison of Operating Results for the Three Months Ended March 31, 2020 and March 31, 2019

Net Income.  Net income for the three months ended March 31, 2020 was $9.3 million, or $0.11 per basic and diluted share, compared to $11.4 million, or $0.13 per basic and diluted share, for the three months ended March 31, 2019. The decrease in net income reflected a decrease in net interest income, as detailed above, an increase to the provision for loan losses and an increase to non-interest expense that was partially offset by an increase in non-interest income and a decrease in income tax expense.

Net income for the three months ended March 31, 2020 reflected the Company’s recognition of certain merger-related expenses totaling $285,000 related to its proposed acquisition of MSBF.

Net Interest Income.  Net interest income decreased by $1.0 million to $37.6 million for the three months ended March 31, 2020. The decrease between the comparative periods resulted from a decrease of $881,000 in interest income coupled with an increase of $147,000 in interest expense.

For the three months ended March 31, 2020, net interest spread declined by five basis points to 2.23% while net interest margin declined seven basis points to 2.46%. The decrease in net interest spread and margin reflected a decrease in the average yield on interest-earning assets partially offset by a decrease in the average cost of interest-bearing liabilities.

Interest Income.  Interest income decreased by $881,000 to $58.8 million for the three months ended March 31, 2020, reflecting a $4.6 million decrease in the average balance of interest-earning assets and a seven basis point decrease in their yield to 3.84%.  Interest income on loans decreased by $1.5 million to $46.6 million for the three months ended March 31, 2020.  The decrease in interest income on loans was primarily attributable to a $205.1 million decrease in the average balance of loans to $4.50 billion during the three months ended March 31, 2020. The average yield on loans increased five basis points to 4.14%.

The increase in interest income on interest-earning assets, excluding loans, was due to the increase in interest income on taxable investment securities, partially offset by a decrease in interest income on other interest-earning assets.

Interest Expense.  Total interest expense increased by $147,000 to $21.2 million for the three months ended March 31, 2020.  The increase in interest expense reflected an increase of $80.1 million in the average balance of interest-bearing liabilities to $5.25 billion partially offset by a two basis point decrease in the average cost of interest-bearing liabilities to 1.61% for the three months ended March 31, 2020.

Interest expense on deposits increased $654,000 to $14.8 million for the three months ended March 31, 2020 and was attributable to an increase of $102.7 million in the average balance of interest-bearing deposits coupled with a two basis point increase in their cost.

Interest expense on borrowings decreased by $507,000 to $6.4 million for the three months ended March 31, 2020 and was attributable to a decrease of $22.5 million in the average balance of borrowings coupled with a 12 basis point decrease in their cost.

Provision for Loan Losses.  The provision for loan losses increased by $6.5 million to provision expense of $6.3 million for the three months ended March 31, 2020 compared to a provision reversal of $179,000 for the three months ended March 31, 2019.  The increase in provision was largely attributable to increases in qualitative factors associated with the impact of COVID-19 on national and regional economic conditions. The increase also reflected the effects of an increase in the outstanding balance of the loan portfolio that was collectively evaluated for impairment during the three months ended March 31, 2020, compared to a net decrease in that portion of the portfolio for the three months ended March 31, 2019.

Additional information regarding the allowance for loan losses and the associated provisions recognized during the three months ended March 31, 2020 and 2019 is presented in Note 11 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at March 31, 2020 and June 30, 2019.

Non-Interest Income.  Non-interest income increased by $2.5 million to $6.2 million for the three months ended March 31, 2020, reflecting the effects of several offsetting factors.

Fees and service charges decreased by $336,000 to $1.3 million for the three months ended March 31, 2020.  The decrease primarily reflected a decrease in loan-related fees attributable to a decrease in commercial loan prepayment activity.

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We recognized a net gain of $2.2 million on the sale and call of securities during the three months ended March 31, 2020 compared to a net loss of $182,000 during the earlier comparative period.  The increase was attributable to the execution of a wholesale restructuring transaction, as noted above.

Gain on sale of loans increased by $414,000 to $565,000 for the three months ended March 31, 2020. The increase in loan sale gains reflected an increase of $426,000 in gains on sale of residential mortgage loans, partially offset by a decrease of $11,000 in gains on sale of SBA loans.  Both the increase in residential mortgage gains on sale and the decrease in SBA gains on sale primarily reflected changes in the volume of loans originated and sold between comparative periods.

We recognized a net loss of $6,000 related to the write down and sale of other real estate owned (“OREO”) during the three months ended March 31, 2019 while there were no such losses during the current period.

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

Non-Interest Expenses.  Total non-interest expense increased by $1.3 million to $28.1 million for the three months ended March 31, 2020.

Salaries and employee benefits expense increased by $187,000 to $15.5 million for the three months ended March 31, 2020.  The net increase in salaries and employee benefits was largely attributable to a non-recurring increase of $250,000 associated with discretionary bonuses granted to certain essential front-line branch employees.  Also contributing to the net increase were decreases in employee severance, employee benefits expense and employee stock-based compensation that were partially offset by increases in ESOP expense and payroll tax expense.

Net occupancy expense of premises decreased by $294,000 to $2.7 million for the three months ended March 31, 2020.  This decrease was largely attributable to $226,000 of snow removal expense recognized in the prior comparative period.

Equipment and systems expense decreased by $381,000 to $2.7 million for the three months ended March 31, 2020.  This decrease was largely attributable to non-recurring core processing expense reductions totaling $500,000 which were associated with the re-negotiation of the Company’s core processing contract, partially offset by increases in other equipment and technology infrastructure costs.

Advertising and marketing expense decreased by $127,000 to $612,000 for the three months ended March 31, 2020.  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.

For the three months ended March 31, 2020, the Company recorded no expense associated with FDIC insurance premiums compared to $455,000 for the three months ended March 31, 2019.  No expense was recorded in the current period as a result of the FDIC’s Deposit Insurance Fund Reserve Ratio having reached a pre-established threshold defined by federal regulation.  Upon reaching this threshold qualifying banks with total consolidated assets of less than $10 billion were awarded assessment credits to be utilized towards their FDIC insurance premiums.

Debt extinguishment expenses increased by $2.2 million and were related to the Company’s execution of a wholesale restructuring transaction, as noted above, for which no comparable expense was recorded during the earlier comparative period.

Merger-related expenses increased by $285,000 and were related to the Company’s pending acquisition of MSBF, as noted above, for which no comparable expense was recorded during the earlier comparative period.

Miscellaneous expense decreased by $81,000 to $3.3 million for the three months ended March 31, 2020.  The decrease in expense was mainly attributable to decreases in professional and consulting fees and subscription expense.  These decreases in expense were partially offset by increases to regulatory filing fees, loan expense, bad debt expense and ATM & Debit card supplies.

  • 61 -

Provision for Income Taxes.  The provision for income taxes decreased by $4.1 million to $225,000 for the three months ended March 31, 2020.  The decrease in income tax expense partly reflected a $1.6 million reduction in income tax expense attributable to the carryback of net operating losses into prior periods at a higher statutory federal tax rate than is currently in effect for the Company.  This carryback was permitted by tax law changes enacted by the CARES Act, which was signed into law on March 27, 2020.  In addition, 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 lower level of pre-tax net income, as compared to the prior period, resulted in a lower provision for income tax expense.

Our effective tax rates for the three month periods ended March 31, 2020 and March 31, 2019 were 2.4% and 27.4% which, in relation to statutory income tax rates, reflected the effects of recurring sources of tax-favored income included in pre-tax income. However, the effective tax rate for the three months ended March 31, 2020 further reflected the effects of the CARES Act and the reversal of valuation allowances recognized during the period, as discussed above.

Comparison of Operating Results for the Nine Months Ended March 31, 2020 and March 31, 2019

Net Income.  Net income for the nine months ended March 31, 2020 was $31.3 million, or $0.38 per basic and diluted share, compared to $33.3 million, or $0.36 per basic and diluted share, for the nine months ended March 31, 2019. The decrease in net income reflected a decrease in net-interest income, as detailed above, an increase to the provision for loan losses and an increase to non-interest expense that was partially offset by an increase in non-interest income and a decrease in income tax expense.

Net income for the nine months ended March 31, 2020 was impacted by a non-recurring increase of $720,000 in non-interest expense and a non-recurring decrease of $342,000 in non-interest income which were recognized in conjunction with the Company’s previously completed branch consolidations.  In addition, net income reflected the Company’s recognition of certain merger-related expenses totaling $504,000 related to its proposed acquisition of MSBF, as noted above.

Net Interest Income.  Net interest income decreased by $9.3 million to $108.9 million for the nine months ended March 31, 2020. The decrease between the comparative periods resulted from a decrease of $2.0 million in interest income and an increase of $7.2 million in interest expense.

For the nine months ended March 31, 2020, net interest spread declined by 20 basis points to 2.14% while net interest margin declined 20 basis points to 2.39%. The decrease in the net interest rate spread reflected a decrease in the average yield on interest-earning assets and an increase in the average cost of interest-bearing liabilities.

Interest Income.  Interest income decreased by $2.0 million to $175.9 million for the nine months ended March 31, 2020.  The decrease in interest income partly reflected an $11.6 million decrease in the average balance of interest-earning assets and a four basis points decrease in their yield to 3.86%.  Interest income on loans decreased by $3.8 million to $140.8 million for the nine months ended March 31, 2020. The decrease in interest income on loans was primarily attributable to a $107.1 million decrease in the average balance of loans to $4.57 billion during the nine months ended March 31, 2020. The average yield on loans decreased one basis point to 4.11%.

The decrease in interest income on interest-earning assets, excluding loans, was due to decreases in interest income on tax-exempt securities and other interest-earning assets partially offset by an increase in interest income on taxable investment securities.

Interest Expense.  Total interest expense increased by $7.2 million to $67.0 million for the nine months ended March 31, 2020.  The increase in interest expense partly reflected an $80.4 million increase in the average balance of interest-bearing liabilities to $5.18 billion for the nine months ended March 31, 2020, while also reflecting a 16 basis point increase in the average cost of interest-bearing liabilities to 1.72%.

Interest expense on deposits increased $9.0 million to $46.4 million for the nine months ended March 31, 2020 and was attributable to an increase of $163.8 million in the average balance of interest-bearing deposits coupled with a 25 basis point increase in their cost.

Interest expense on borrowings decreased by $1.8 million to $20.5 million for the nine months ended March 31, 2020 and was attributable to a decrease of $83.4 million in the average balance of borrowings coupled with a five basis point decrease in their cost.

  • 62 -

Provision for Loan Losses.  The provision for loan losses increased by $1.1 million to $4.0 million for the nine months ended March 31, 2020 compared to $2.9 million for the nine months ended March 31, 2019.  The increase in provision at March 31, 2020, was attributable to increases in qualitative factors associated with the economic impact of COVID-19 on national and regional economic conditions.  This increase was partially offset by the effects of a decrease in the outstanding balance of the loan portfolio that was collectively evaluated for impairment during the nine months ended March 31, 2020, compared to a net increase in that portion of the portfolio for the nine months ended March 31, 2019.

Additional information regarding the allowance for loan losses and the associated provisions recognized during the nine months ended March 31, 2020 and 2019 is presented in Note 11 to the unaudited consolidated financial statements as well as the Comparison of Financial Condition at March 31, 2020 and June 30, 2019.

Non-Interest Income.  Non-interest income increased by $4.5 million to $14.7 million for the nine months ended March 31, 2020, reflecting the effects of several offsetting factors.

Fees and service charges increased by $846,000 to $5.0 million for the nine months ended March 31, 2020.  The increase primarily reflected an increase in loan-related fees attributable to an increase in commercial loan prepayment activity.

We recognized a net gain of $2.2 million on the sale and call of securities during the nine months ended March 31, 2020 compared to a net loss of $182,000 during the earlier comparative period.  The increase was primarily attributable to the execution of a wholesale restructuring transaction, as noted above.

Gain on sale of loans increased by $1.5 million to $1.8 million for the nine months ended March 31, 2020. The increase in loan sale gains reflected an increase of $1.5 million in gains on sale of residential mortgage loans.  The increase in residential mortgage gains on sale primarily reflected changes in the volume of loans originated and sold between comparative periods.

The Company incurred a net loss of $28,000 related to the write down and sale of OREO during the nine months ended March 31, 2020 compared to a net loss of $20,000 during the earlier comparative period.

Miscellaneous non-interest income decreased by $230,000 to $117,000 for the nine months ended March 31, 2020.  The decrease primarily reflected $342,000 of non-recurring asset disposal losses recognized in conjunction with the Company’s previously completed branch consolidations.

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 Expenses.  Total non-interest expense increased by $235,000 to $80.7 million for the nine months ended March 31, 2020.

Salaries and employee benefits expense decreased by $203,000 to $46.5 million for the nine months ended March 31, 2020.  The net decrease in salaries and employee benefits expense reflected decreases in incentive compensation, bonus, benefits expense and employee stock-based compensation expenses. These decreases were partially offset by increases in wages and salaries, employee severance, ESOP expense and payroll taxes.

Net occupancy expense of premises increased by $260,000 to $8.7 million for the nine months ended March 31, 2020.  This increase was largely attributable to $517,000 of non-recurring lease termination costs recognized in conjunction with the previously noted branch consolidations coupled with an increase in facility lease expenses arising from costs associated with forthcoming branch additions and relocations.  Partially offsetting these increases were decreases in ongoing facility repairs and maintenance expenses.

Equipment and systems expense decreased by $549,000 to $8.8 million for the nine months ended March 31, 2020.  This decrease in expense was largely attributable to a decrease of $729,000 in core processing expense and $347,000 in telecommunication delivery channel expense, partially offset by increases in other technology infrastructure costs.  The reduction in core processing expense was primarily attributable to non-recurring expense reductions of $500,000, recognized in the current period, attributable the re-negotiation of the Company’s core processing contract.  The remaining reduction in core processing expense and the reduction in telecommunication channel expense was largely the result of expenses recognized by the Company, in the earlier comparative period, related to an acquired institution.

Advertising and marketing expense decreased by $66,000 to $2.0 million for the nine months ended March 31, 2020.  This decrease largely reflected changes in advertising expenses across a variety of advertising formats reflecting normal fluctuations in the timing of certain campaigns supporting our loan and deposit growth initiatives.

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For the nine months ended March 31, 2020, the Company recorded no expense associated with FDIC insurance premiums compared to $1.3 million for the nine months ended March 31, 2019.  No expense was recorded in the current period as a result of the FDIC’s Deposit Insurance Fund Reserve Ratio having reached a pre-established threshold defined by federal regulation.  Upon reaching this threshold qualifying banks with total consolidated assets of less than $10 billion were awarded assessment credits to be utilized towards their FDIC insurance premiums.

Directors’ compensation expense increased by $36,000 to $2.3 million for the nine months ended March 31, 2020.  The increase in expense primarily reflected an increase in director-related stock based compensation.

Merger-related expenses increased by $504,000 and were related to the Company’s pending acquisition of MSBF, as noted above, for which no such expenses were recorded during the earlier comparative period.

Debt extinguishment expenses increased by $2.2 million and were related to the Company’s execution of a wholesale restructuring transaction designed to enhance net interest income and reduce credit risk within the investment portfolio, as noted above, for which no such expenses were recorded during the earlier comparative period.

Miscellaneous expense decreased by $562,000 to $9.7 million for the nine months ended March 31, 2020. The decrease in expense was largely attributable to the recovery of asset write-down costs totaling $288,000 which were recognized in conjunction with branch consolidations.  The decrease in expense also reflected decreases in education expenses, consulting expense and audit and accounting fees that were partially offset by increases in loan expense and legal expense.

Provision for Income Taxes.  The provision for income taxes decreased by $4.0 million to $7.6 million for the nine months ended March 31, 2020.  The decrease in income tax expense reflected a $1.6 million reduction in income tax expense attributable to the carryback of net operating losses into prior periods at a higher statutory federal tax rate than is currently in effect for the Company.  This carryback was permitted by tax law changes enacted by the CARES Act, which was signed into law on March 27, 2020.  In addition, 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 lower level of pre-tax net income, as compared to the prior period, resulted in a lower provision for income tax expense.

Our effective tax rates for the nine month periods ended March 31, 2020 and March 31, 2019 were 19.5% and 25.8% which, in relation to statutory income tax rates, reflected the effects of recurring sources of tax-favored income included in pre-tax income. However, the effective tax rate for the nine months ended March 31, 2020 further reflected the effects of the CARES Act and the reversal of valuation allowances recognized during the period, as discussed above.

  • 64 -

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, 2020, included $59.5 million of short-term cash and equivalents supplemented by $1.48 billion of investment securities classified as available for sale which can readily be sold or pledged as collateral, if necessary.  In addition, the Company has the capacity to borrow additional funds from the FHLB, Federal Reserve Bank or via unsecured lines of credit.  As of March 31, 2020, the Company had the capacity to borrow additional funds totaling $1.62 billion and $323.5 million, without pledging additional collateral, from the FHLB of New York and FRB, respectively.  The Company also had the capacity to borrow additional funds, on an unsecured basis, via lines of credit established with other financial institutions.  As of March 31, 2020, the available borrowing capacity under those lines of credit totaled $415.0 million.

At March 31, 2020, the Company had outstanding commitments to originate and purchase loans totaling approximately $94.2 million while such commitments totaled $27.7 million at June 30, 2019.  As of those same dates, the Company’s pipeline of loans held for sale included $114.5 million and $46.2 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 $8.3 million and $79.1 million, respectively, at March 31, 2020 compared to $3.9 million and $78.5 million, respectively, at June 30, 2019. The Company is also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled $217,000 and $612,000 at March 31, 2020 and June 30, 2019, 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 $105.6 million to $4.25 billion at March 31, 2020 from $4.15 billion at June 30, 2019.  The increase in deposit balances reflected a $92.9 million increase in interest-bearing deposits coupled with a $12.8 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, 2020, the Bank’s outstanding balance of FHLB advances, excluding fair value adjustments, totaled $1.18 billion.  In addition to FHLB advances we have $200.0 million in overnight borrowings and other borrowings totaling $6.7 million which represent collateralized overnight sweep account balances linked to customer demand deposits.

Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards. As of March 31, 2020, the Company and the Bank exceeded all capital requirements of federal banking regulators.

  • 65 -

The following table sets forth the Bank’s capital position at March 31, 2020 and June 30, 2019, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

At March 31, 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) $ 807,569 20.66 % $ 312,691 8.00 % $ 390,864 10.00 %
Tier 1 capital (to risk-weighted assets) 770,378 19.71 % 234,519 6.00 % 312,691 8.00 %
Common equity tier 1 capital (to risk-weighted assets) 770,378 19.71 % 175,889 4.50 % 254,062 6.50 %
Tier 1 capital (to adjusted total assets) 770,378 11.92 % 258,527 4.00 % 323,159 5.00 %
At June 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
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) $ 787,219 19.50 % $ 322,974 8.00 % $ 403,718 10.00 %
Tier 1 capital (to risk-weighted assets) 753,945 18.68 % 242,231 6.00 % 322,974 8.00 %
Common equity tier 1 capital (to risk-weighted assets) 753,945 18.68 % 181,673 4.50 % 262,417 6.50 %
Tier 1 capital (to adjusted total assets) 753,945 11.78 % 256,116 4.00 % 320,145 5.00 %

The following table sets forth the Company’s capital position at March 31, 2020 and June 30, 2019, as compared to the minimum regulatory capital requirements that were in effect as of those dates:

At March 31, 2020
Actual For Capital<br><br><br>Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 896,622 22.84 % $ 314,076 8.00 %
Tier 1 capital (to risk-weighted assets) 859,431 21.89 % 235,557 6.00 %
Common equity tier 1 capital (to risk-weighted assets) 859,431 21.89 % 176,668 4.50 %
Tier 1 capital (to adjusted total assets) 859,431 13.25 % 259,385 4.00 %
At June 30, 2019
--- --- --- --- --- --- --- --- --- --- ---
Actual For Capital<br><br><br>Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 941,319 23.22 % $ 324,246 8.00 %
Tier 1 capital (to risk-weighted assets) 908,045 22.40 % 243,184 6.00 %
Common equity tier 1 capital (to risk-weighted assets) 908,045 22.40 % 182,388 4.50 %
Tier 1 capital (to adjusted total assets) 908,045 14.14 % 256,856 4.00 %
  • 66 -

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 Coronavirus Aid, Relief and Economic Security (“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 at this time.

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, 2020.

Recent Accounting Pronouncements

For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by the Company, please refer to Note 6 to the unaudited consolidated financial statements.

  • 67 -

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.  The Board of Directors has assigned the responsibility for the operational aspects of the ALM program to our Asset/Liability Management Committee (“ALCO”).  The ALCO is a management committee comprising the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, 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, 2020 and June 30, 2019 precluded the modeling of certain falling rate scenarios.

  • 68 -

The following tables present the results of our internal EVE analysis as of March 31, 2020 and June 30, 2019, respectively:

March 31, 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 ) (9 ) % 11.05 % (20 ) bps
+200 bps ) (2 ) % 11.57 % 32 bps
+100 bps 2 % 11.70 % 44 bps
0 bps - - 11.25 % -
-100 bps ) (15 ) % 9.54 % (172 ) bps

All values are in US Dollars.

June 30, 2019
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 ) (19 ) % 12.44 % (168 ) bps
+200 bps ) (12 ) % 13.12 % (100 ) bps
+100 bps ) (5 ) % 13.77 % (35 ) bps
0 bps - - 14.12 % -
-100 bps ) (1 ) % 13.63 % (49 ) bps
-200 bps ) (12 ) % 12.11 % (201 ) 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.

  • 69 -

The following tables present the results of our internal NII analysis as of March 31, 2020 and June 30, 2019, respectively:

March 31, 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 ) (9.51 ) %
+200 bps Static One Year ) (5.29 )
+100 bps Static One Year ) (1.33 )
0 bps Static One Year -
-100 bps Static One Year ) (1.03 )

All values are in US Dollars.

June 30, 2019
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 ) (10.94 ) %
+200 bps Static One Year ) (7.08 )
+100 bps Static One Year ) (2.92 )
0 bps Static One Year -
-100 bps Static One Year 0.48
-200 bps Static One Year ) (0.26 )

All values are in US Dollars.

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.

  • 70 -

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, 2020, 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.

  • 71 -
ITEM 1. Legal Proceedings

At March 31, 2020, 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
The Risk Factors noted below are in addition to the Risk Factors previously disclosed under Item 1A of the Company’s Form 10-Q for the quarter ended December 31, 2019 and Item 1A of the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, previously filed with the Securities and Exchange Commission. The Risk Factors below relate to the planned Merger of MSBF and the Company and the recent global outbreak of the coronavirus.
---

The recent global coronavirus outbreak has and will continue to pose risks and could harm business and results of operations for each of the Company, and MSBF and the combined company following the completion of the merger.

The COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on the business of the Company and MSBF and the combined company following the completion of the merger. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, both the Company and MSBF, and the combined company following the completion of the merger, are subject to the following risks, any of which could have a material, adverse effect on the business, financial condition, liquidity, and results of operations of the Company, MSBF and, following the merger, the combined company:

• risks to the capital markets that may impact the performance of the investment securities portfolios of the Company and MSBF;
• effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the companies’ financial reporting and internal controls;
--- ---
• declines in demand for loans and other banking services and products, as well as a decline in the credit quality of our loan portfolio, owing to the effects of COVID-19 in the markets served by the Company and MSBF;
--- ---
• if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
--- ---
• collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
--- ---
• allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect net income;
--- ---
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;
--- ---
• as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on assets may decline to a greater extent than the decline in cost of interest-bearing liabilities, reducing net interest margin and spread and reducing net income;
--- ---
  • 72 -
• cyber security risks are increased as the result of an increase in the number of employees working remotely;
• declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments in the markets served by the Company and MSBF; and
--- ---
• increasing or protracted volatility in the price of the Company’s common stock.
--- ---

These factors, together or in combination with other events or occurrences not yet known or anticipated, could adversely affect the value of the merger consideration or could delay or prevent the consummation of the merger and the related transactions. If the Company or MSBF is unable to recover from a business disruption on a timely basis, the merger and the combined company’s business and financial conditions and results of operations following the completion of the merger could be adversely affected. The merger and efforts to integrate the businesses of the Company and MSBF may also be delayed and adversely affected by the coronavirus outbreak, and become more costly. Each of the Company, MSBF and the combined company may also incur additional costs to remedy damages caused by such disruptions, which could adversely affect its financial condition and results of operations.

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, 2020:

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^(1)^ 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, 2020 525,000 $ 13.39 525,000 1,711,030
February 1-29, 2020 475,000 $ 12.13 475,000 1,236,030
March 1-31, 2020 475,000 $ 9.96 475,000 761,030
Total 1,475,000 $ 11.88 1,475,000 761,030
(1) On March 13, 2019, the Company announced the authorization of a fourth repurchase plan for up to 9,218,324 shares or 10% of shares then outstanding.  This plan has no expiration date.  The plan commenced upon the completion of the third stock repurchase plan, which was announced on April 27, 2018, and authorized the purchase of up to 10,238,557 shares or 10% of shares then outstanding. On March 25, 2020, the Company temporarily suspended its stock repurchase program.
--- ---
ITEM 3. Defaults Upon Senior Securities
--- ---

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

  • 73 -
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, 2020, 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)
  • 74 -

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 8, 2020 By: /s/ Craig L. Montanaro
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 2020 By: /s/ Keith Suchodolski
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
  • 75 -

krny-ex311_6.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 8, 2020 /s/ Craig L. Montanaro
--- ---
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)

krny-ex312_9.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 8, 2020 /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, 2020 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 8, 2020 /s/ Craig L. Montanaro
--- ---
Craig L. Montanaro
President and Chief Executive Officer
(Principal Executive Officer)

krny-ex322_8.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, 2020 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 8, 2020 /s/ Keith Suchodolski
--- ---
Keith Suchodolski
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

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