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Section 1: 10-K (10-K)

krny-10k_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑K

 

(Mark One)

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

For the Fiscal Year Ended June 30, 2018

or

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

For the transition period from             to             

Commission File Number: 001-37399

 

KEARNY FINANCIAL CORP.

(Exact name of Registrant as specified in its Charter)

 

 

Maryland

 

30-0870244

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

120 Passaic Avenue, 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

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES      NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES      NO

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

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 Act).    YES      NO

The aggregate market value of the voting and non-voting common equity held by non‑affiliates of the Registrant on December 31, 2017 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $1.02 billion.  Solely for purposes of this calculation, shares held by directors, executive officers and greater than 10% stockholders are treated as shares held by affiliates.

As of August 20, 2018 there were outstanding 98,243,200 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1.

Portions of the definitive Proxy Statement for the Registrant’s 2018 Annual Meeting of Stockholders. (Part III)

 

 

 


KEARNY FINANCIAL CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended June 30, 2018

INDEX

 

 

 

PART I

 

 

 

 

 

 

Page

Item 1.

 

Business

 

2

Item 1A.

 

Risk Factors

 

38

Item 1B.

 

Unresolved Staff Comments

 

44

Item 2.

 

Properties

 

44

Item 3.

 

Legal Proceedings

 

44

Item 4.

 

Mine Safety Disclosures

 

44

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 5.

 

Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

45

Item 6.

 

Selected Financial Data

 

47

Item 7.

 

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

 

49

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

69

Item 8.

 

Financial Statements and Supplementary Data

 

74

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

74

Item 9A.

 

Controls and Procedures

 

75

Item 9B.

 

Other Information

 

75

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

76

Item 11.

 

Executive Compensation

 

76

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

76

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

77

Item 14.

 

Principal Accounting Fees and Services

 

77

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

 

78

Item 16.

 

Form 10-K Summary

 

80

 

 

 

 

 

SIGNATURES

 

 

 

 

 

 

 

 

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PART I

Item 1. Business

Forward-Looking Statements

This Annual Report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of the Annual Report on Form 10-K.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses;

 

our ability to access cost-effective funding;

 

fluctuations in real estate values and both residential and commercial real estate market conditions;

 

demand for loans and deposits in our market area;

 

our ability to implement changes in our business strategies;

 

competition among depository and other financial institutions;

 

inflation and changes in the interest rate environment that reduce our margins and yields, or reduce the fair value of financial instruments or reduce the origination levels in our lending business, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;

 

adverse changes in the securities markets;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;

 

our ability to manage market risk, credit risk and operational risk in the current economic conditions;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

 

changes in consumer demand, borrowing and savings habits;

 

changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;

 

our ability to retain key employees;

 

technological changes;

 

2


 

significant increases in our loan losses;

 

cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;

 

technological changes that may be more difficult or expensive than expected;

 

the ability of third-party providers to perform their obligations to us;

 

the ability of the U.S. Government to manage federal debt limits;

 

changes in the financial condition, results of operations or future prospects of issuers of securities that we own; and

 

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing products and services described elsewhere in this Annual Report on Form 10-K.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

General

Kearny Financial Corp. (the “Company,” or “Kearny Financial”), is a Maryland corporation that is the holding company for Kearny Bank (the “Bank” or “Kearny Bank”), a nonmember New Jersey stock savings bank.  The Bank converted its charter to that of a New Jersey savings bank on June 29, 2017 having previously been chartered as a federally chartered stock savings bank.

On May 18, 2015, the Company completed its second-step conversion and stock offering through which it converted from the mutual holding company structure to a fully publicly held company.  In conjunction with that transaction, the Company sold 71,750,000 shares of its common stock at $10.00 per share, resulting in gross proceeds of $717.5 million.  The new shares issued included 3,612,500 shares sold to the Bank’s Employee Stock Ownership Plan (“ESOP”) with an aggregate value of $36.1 million based on the sales price of $10.00 per share.  Concurrent with the closing of the transaction, the Company also issued an additional 500,000 shares of its common stock with an aggregate value of $5.0 million and contributed these shares with an additional $5.0 million in cash to the KearnyBank Foundation.

The Company recognized direct stock offering costs of $10.7 million in conjunction with the transaction which reduced the net proceeds credited to capital.  After adjusting for transaction costs and the value of the shares issued to the Bank’s ESOP, the Company recognized a net increase in equity capital of $670.7 million, of which $353.4 million was contributed to the Bank by the Company as an additional investment in the Bank’s common equity.  Approximately $34.5 million of new capital proceeds were funded through withdrawals of existing customer deposits previously held by the Bank.

Each outstanding share held by the public stockholders of Kearny Financial Corp., a federal corporation, immediately prior to the closing of the conversion and stock offering was converted into 1.3804 shares of the Company’s new common stock while the shares previously held by Kearny MHC, the former mutual holding company, were cancelled concurrent with the closing of the transaction.  As a result of the completion of the second-step conversion and stock offering, all historical share and per share information has been revised to reflect the 1.3804-to-one exchange ratio.  At June 30, 2018, the Company had 99,626,400 shares outstanding.

The Company is a unitary savings and loan holding company, regulated by the Board of Governors of the Federal Reserve Bank (“FRB”) and conducts no significant business or operations of its own.  The Bank’s deposits are federally insured by the Deposit Insurance Fund as administered by the Federal Deposit Insurance Corporation (“FDIC”) and the Bank is primarily regulated by the New Jersey Department of Banking and Insurance (“NJDBI”) and, as a nonmember bank, the FDIC.  References in this Annual Report on Form 10‑K to the Company or Kearny Financial generally refer to the Company and the Bank, unless the context indicates otherwise. References to “we”, “us”, or “our” refer to the Bank or Company, or both, as the context indicates.  

 

The Company’s primary business is the ownership and operation of the Bank.  The Bank is principally engaged in the business of attracting deposits from the general public in New Jersey and New York and using these deposits, together with other funds, to originate or purchase loans for its portfolio and invest in securities.  Our loan portfolio is primarily comprised of loans collateralized by commercial and residential real estate augmented by secured and unsecured loans to businesses and consumers.  We also maintain a portfolio of investment securities, primarily comprised of U.S. agency mortgage-backed securities, U.S. government and agency debentures, bank-qualified municipal obligations, corporate bonds, asset-backed securities, collateralized loan obligations and subordinated debt.

 

 

3


At June 30, 2018, net loans receivable comprised 67.9% of our total assets while investment securities, including mortgage‑backed and non-mortgage-backed securities, comprised 20.0% of our total assets.  By comparison, at June 30, 2017, net loans receivable comprised 66.7% of our total assets while securities comprised 23.0% of our total assets.  A significant long-term goal of our business plan continues to be the reallocation of our balance sheet to reflect a greater percentage of interest-earning assets in loans while reducing the relative size of the securities portfolio.

 

We operate from our administrative headquarters in Fairfield, New Jersey and had 54 branch offices as of June 30, 2018. The Company maintains a website at www.kearnybank.com. We make available through that website, free of charge, copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports and proxy materials as soon as is reasonably practical after the Company electronically files those materials with, or furnishes them to, the Securities and Exchange Commission. You may access these materials by following the links under “Investor Relations” under the “Company Info” tab at the Company’s website. Information on the Company’s website is not and should not be considered a part of this Annual Report on Form 10-K.

Acquisition of Clifton

On April 2, 2018, the Company completed its acquisition of Clifton Bancorp Inc. (“Clifton”), the parent company of Clifton Savings Bank, a federally chartered stock savings bank.  In conjunction with the acquisition, the Company acquired assets with aggregate fair values totaling $1.61 billion including loans and securities with fair values of $1.12 billion and $326.9 million, respectively.  The Company assumed liabilities with aggregate fair values totaling $1.38 billion in conjunction with the Clifton acquisition including deposits and borrowings with fair values of $949.8 million and $414.1 million, respectively.

Merger consideration associated with the acquisition totaled $333.9 million and primarily comprised 25.4 million shares of the Company’s common stock valued at $330.7 million that were issued to Clifton stockholders to reflect an exchange of 1.191 of Company shares for each outstanding share of Clifton common stock at the time of closing.  Merger consideration also included $3.2 million in cash distributed to eligible holders of outstanding options to purchase Clifton stock as well as cash distributed to Clifton stockholders for the settlement of fractional shares.  The amount by which merger consideration exceeds the fair value of net assets acquired resulted in the Company’s recognition of $102.3 million in goodwill associated with the Clifton acquisition.

Business Strategy

Our goal is to continue to evolve from a traditional thrift business model toward that of a full service community bank, profitably deploying capital and enhancing earnings through a variety of balance sheet growth and diversification strategies. The key strategic initiatives of our business plan are presented below accompanied by an overview of our activities and achievements in support of those initiatives:

 

Continue to Increase Commercial Mortgage Lending

During fiscal 2018, our commercial mortgage loan portfolio, including multi-family and nonresidential mortgage loans, increased by 22.6%, or $563.9 million, to $3.06 billion at June 30, 2018 from $2.50 billion at June 30, 2017. This increase reflected commercial mortgage loan originations in fiscal 2018 totaling $458.8 million. Additionally, we acquired commercial mortgage loans with fair values totaling approximately $397.0 million pursuant to our acquisition of Clifton. At June 30, 2018, our commercial mortgage loan portfolio comprised 67.0% of total loans compared to 77.0% of total loans at June 30, 2017.

We plan to continue to increase our portfolio of commercial mortgage loans by continuing to acquire loans through all available channels, including retail and broker originations, which may be supplemented with individual and pooled loan purchases and participations.  Additionally, we intend to continue to expand our commercial lending infrastructure and resources, which will be supported by new product and pricing strategies designed to increase origination volume in a very competitive marketplace.

 

Increase Commercial Business Lending

We plan to continue to focus our efforts on expanding our commercial non-real estate secured and unsecured business lending activities through all available channels. During fiscal 2018, our commercial business loan origination and purchase volume totaled $54.2 million, reflecting retail originations of $25.9 million augmented by the acquisition of commercial and industrial (“C&I”) loans through wholesale channels totaling $28.3 million. Additionally, we acquired commercial business loans with fair values totaling approximately $5.4 million pursuant to our acquisition of Clifton.

We continued the realignment and expansion of our commercial business lending infrastructure during fiscal 2018 which contributed to a modest increase in aggregate commercial business loan origination and purchase volume for the year.  As a result of those enhancements, we anticipate that the outstanding balance of this loan segment will continue to increase in fiscal 2019 and thereafter.  Our business lending strategies will continue to be undertaken within a larger set of strategic

 

4


initiatives designed to promote other business banking services intended to increase commercial deposit balances and services and the associated increase in the level of non-interest income recognized in conjunction with those business customer relationships.

 

Modestly Increase Residential Mortgage Portfolio Lending

We plan to increase the outstanding balance of our residential mortgage loans, including one- to four-family first mortgage loans and home equity loans and home equity lines of credit, while generally maintaining the allocation of such loans as a percentage of the total loan portfolio.  Notwithstanding, a significant portion of one- to four-family first mortgage loans originated will continue to be sold into the secondary market, as discussed below.  During fiscal 2018, our aggregate portfolio of one- to four-family mortgage loans increased by $738.1 million to $1.39 billion, or 30.4% of total loans, from $650.1 million or 20.1% of total loans at June 30, 2017.  During the year ended June 30, 2018, we originated and purchased $53.0 million and $26.3 million, respectively, of one- to four-family first mortgage loans held in portfolio.  Additionally, we acquired residential mortgage loans totaling approximately $713.9 million pursuant to our acquisition of Clifton.

 

Continue Residential Mortgage Banking

We plan to expand and enhance our residential mortgage lending infrastructure to support the continuing origination of residential mortgage loans for sale into the secondary market.  Our mortgage banking business strategy resulted in the recognition of $742,000 in gains on the sale of $78.8 million of mortgage loans held for sale during the year ended June 30, 2018, compared to recorded gains of $713,000 on the sale of $84.4 million of mortgage loans during the year ended June 30, 2017.  We anticipate that residential mortgage loan origination and sale activity will continue to support long-term growth in our non-interest income through the recognition of recurring loan sale gains, while also serving to help manage the Company’s exposure to interest rate risk through the sale of longer-duration, fixed-rate loans into the secondary market.

 

Reduce Securities as a Percentage of Assets while Maintaining Portfolio Diversity

In recent years, we have diversified the composition and allocation of our investment portfolio into new asset sectors, including asset-backed securities, corporate bonds, municipal obligations, collateralized loan obligations, commercial mortgage-backed securities (“MBS”) and subordinated debt while reducing our concentration in traditional residential MBS. Several of the added sectors include floating rate securities that reduce the level of interest rate risk (“IRR”) embedded in our securities portfolio.

Our securities portfolio increased by $207.7 million, or 18.8%, to $1.31 billion, or 20.0% of total assets, at June 30, 2018 from $1.11 billion, or 23.0% of total assets, at June 30, 2017.  The increase in the outstanding balance of securities portfolio for the year ended June 30, 2018, largely reflected the impact of securities with fair values of $326.9 million acquired from Clifton. The Company sold a significant portion of the securities originally acquired from Clifton with a portion of the sale proceeds reinvested into shorter-duration, higher-yielding securities and the remainder reinvested into loans.

The decrease in the portfolio as a percentage of total assets is indicative of the Company’s intent to continue to reduce the portion of earning assets held in the securities portfolio in favor of additional growth in loans.  As such, we expect to continue utilizing cash flows from the securities portfolio to fund a portion of our expected loan growth while maintaining the diversity of sectors represented in the portfolio.

 

Maintain Strong Asset Quality  

We continue to emphasize and maintain strong asset quality as we grow and diversify our loan portfolio. Nonperforming assets decreased by $2.9 million to $17.6 million, or 0.27% of total assets, at June 30, 2018 compared to $20.5 million, or 0.43% of total assets, at June 30, 2017 and $21.9 million, or 0.49% of total assets, at June 30, 2016.

 

Expand Funding Through Retail Deposits

Our total deposit balances increased by $1.14 billion during fiscal 2018 with aggregate deposits totaling $4.07 billion at June 30, 2018 compared to $2.93 billion at June 30, 2017.  The increase in deposits for the year ended June 30, 2018 largely reflected the impact of deposits with fair values of $949.8 million assumed in conjunction with the Clifton acquisition while also reflecting the continuing effects of product, pricing and marketing strategies implemented during fiscal 2018.  The deposits assumed from Clifton are housed across a retail banking network of 12 branches located in New Jersey’s Passaic, Bergen, Hudson and Essex counties.

The increase in overall deposits during fiscal 2018 reflected a $418.2 million increase in non-maturity deposits coupled with a net increase of $725.7 million in certificates of deposit.  The net increase in non-maturity deposits included a $44.5 million, or 16.7%, increase in non-interest-bearing deposit accounts for fiscal 2018.

 

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Branch Network

At June 30, 2018, we had a total of 54 branches comprising 52 branches located in northern and central New Jersey with two additional branches located in Brooklyn and Staten Island, New York. We plan to selectively evaluate branch network expansion opportunities, with a particular focus on limited branch expansion in Brooklyn and Staten Island.  We will also continue to evaluate additional de novo branch opportunities to contiguously expand our existing New Jersey branch network with an emphasis on “fill-ins” between our northern and central New Jersey locations.

In light of the Clifton acquisition, we expect to continue placing strategic emphasis on leveraging the opportunities to increase market share and expand the depth and breadth of customer relationships within our expanded branch network while also considering select branch consolidation opportunities to optimize that network. We continue to develop and deploy strategies to promote the “relationship banking” business model throughout our branch network with an emphasis on expanding business customer relationships linked to business lending initiatives.

 

Seek Out Merger and Acquisition Opportunities

As a complement to the “organic” growth strategies, we continue to actively seek out opportunities to prudently deploy capital, diversify our balance sheet, enter new markets and enhance earnings through mergers and acquisitions with other financial institutions. With the completion of the Clifton acquisition during fiscal 2018, we have now acquired a total of six banks in the last 18 years. We expect to place the greatest emphasis on opportunities to expand within the existing markets we serve or to enter new markets that are generally contiguous to such markets.

In addition to potential acquisitions of financial institutions or their branches, we may explore additional opportunities for acquisitions or strategic partnerships to broaden our product and service offerings in the future.

 

Improve Operating Efficiency

In conjunction with our efforts to improve operating efficiency and control operating expenses, while expanding and enhancing product and service offerings, we continued to deploy a number of technologies during fiscal 2018 that support our internal IT infrastructure as well as our external customer-facing systems.  We consider the noted enhancements to be one of several continuing strategies to control growth in non-interest expenses and improve our overall operating efficiency.

The Company’s operating efficiency is also expected to be enhanced as a result of the Clifton acquisition through which the Company’s primary sources of revenue, including net interest income and non-interest income, are expected to increase proportionately greater than the increase in non-interest expenses arising from the acquisition.

For the year ended June 30, 2018, the Company’s ratio of non-interest expense to average assets totaled 1.86% compared to 1.76% for the year ended June 30, 2017.  For those same comparative periods, the Company’s operating efficiency ratio increased to 72.7% from 71.2%, respectively.  The increase in the non-interest expense ratio and efficiency ratio in fiscal 2018 primarily reflected merger-related expenses of $6.7 million that were recognized in conjunction with the Clifton acquisition.  The Company estimates that merger-related expenses increased its ratio of non-interest expense to average assets by 0.13% for the year ended June 30, 2018 while adding 5.00% to its efficiency ratio for the same period.

Market Area. At June 30, 2018, our primary market area consisted of the counties in which we currently operate branches, including Bergen, Essex, Hudson, Middlesex, Monmouth, Morris, Ocean, Passaic and Union counties in New Jersey and Kings (Brooklyn) and Richmond (Staten Island) counties in New York.  Our lending is concentrated in these markets and our predominant sources of deposits are the communities in which our offices are located as well as the neighboring communities.

Our primary market area is largely urban and suburban with a broad economic base as is typical within the New York metropolitan area.  Service jobs represent the largest employment sector followed by wholesale/retail trade. A downturn in the local economy could reduce the amount of funds available for deposit and the ability of borrowers to repay their loans which would adversely affect our profitability.

Competition.  We operate in a market area with a high concentration of banking and financial institutions and we face substantial competition in attracting deposits and in originating loans. A number of our competitors are significantly larger institutions with greater financial and managerial resources and lending limits.  Our ability to compete successfully is a significant factor affecting our growth potential and profitability.

 

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Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions and credit unions located in our primary market area.  We also compete with mortgage banking and finance companies for real estate loans and with commercial banks and savings institutions for consumer loans.  We also face competition for attracting funds from providers of alternative investment products such as equity and fixed income investments, including securities such as corporate, agency and government securities, as well as the mutual funds that invest in these instruments.

There are large retail banking competitors operating throughout our primary market area, including Bank of America, Citibank, JP Morgan Chase Bank, PNC Bank, TD Bank, and Wells Fargo Bank and we also face strong competition from other community-based financial institutions.

Lending Activities

General.  In conjunction with our strategic efforts to evolve from a traditional thrift to a full-service community bank, our lending strategies have placed increasing emphasis on the origination of commercial loans compared to one- to four-family mortgage portfolio lending.  The year-to-year trends in the composition and allocation of our loan portfolio, as reported in the table below, generally highlight those changes in business strategy while also highlighting the growth in residential mortgage loans resulting from the Clifton acquisition in fiscal 2018.  In particular, the outstanding balance of our commercial mortgages, including loans secured by multi‑family, mixed‑use and nonresidential properties, have increased significantly over the past several years.  By comparison, the outstanding balance of our residential mortgage loans, including one- to four-family and home equity loans, remained fairly stable throughout the four years ended June 30, 2017 while increasing during the latest fiscal year ended June 30, 2018 due primarily to the Clifton acquisition.

Our commercial loan offerings also include secured business loans, many of which are secured by real estate, and unsecured business loans.  Commercial loan offerings include programs offered through the SBA in which Kearny Bank participates as a Preferred Lender.  Our consumer loan offerings primarily include home equity loans and home equity lines of credit as well as account loans, overdraft lines of credit, vehicle loans and personal loans.  We also offer construction loans to builders/developers as well as individual homeowners.  We have also purchased out-of-state one- to four-family first mortgage loans to supplement our in-house originations. For more information, please see “Lending Activities (Loan Originations, Purchases, Sales, Solicitation and Processing).”  

 

 

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Loan Portfolio Composition.  The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the total portfolio at the dates indicated.

 

 

At June 30,

 

2018

 

2017

 

2016

 

2015

 

2014

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

Amount

 

 

Percent

 

(Dollars In Thousands)

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

1,297,453

 

 

 

28.40

 

%

 

$

567,323

 

 

 

17.50

 

%

 

$

605,203

 

 

 

22.66

 

%

 

$

592,321

 

 

 

28.17

 

%

 

$

580,612

 

 

 

33.31

 

%

Multi-family

 

1,758,584

 

 

 

38.50

 

 

 

 

1,412,575

 

 

 

43.57

 

 

 

 

1,040,293

 

 

 

38.94

 

 

 

 

728,379

 

 

 

34.65

 

 

 

 

431,007

 

 

 

24.73

 

 

Nonresidential

 

1,302,961

 

 

 

28.52

 

 

 

 

1,085,064

 

 

 

33.46

 

 

 

 

820,673

 

 

 

30.72

 

 

 

 

580,724

 

 

 

27.62

 

 

 

 

552,748

 

 

 

31.71

 

 

Commercial business

 

85,825

 

 

 

1.88

 

 

 

 

74,471

 

 

 

2.30

 

 

 

 

88,207

 

 

 

3.30

 

 

 

 

99,451

 

 

 

4.73

 

 

 

 

67,261

 

 

 

3.86

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

90,761

 

 

 

1.99

 

 

 

 

82,822

 

 

 

2.55

 

 

 

 

89,566

 

 

 

3.35

 

 

 

 

91,671

 

 

 

4.36

 

 

 

 

99,621

 

 

 

5.72

 

 

Passbook or certificate

 

3,283

 

 

 

0.07

 

 

 

 

2,863

 

 

 

0.09

 

 

 

 

3,349

 

 

 

0.13

 

 

 

 

3,999

 

 

 

0.19

 

 

 

 

3,965

 

 

 

0.23

 

 

Other

 

5,777

 

 

 

0.13

 

 

 

 

13,520

 

 

 

0.41

 

 

 

 

22,052

 

 

 

0.82

 

 

 

 

292

 

 

 

0.01

 

 

 

 

373

 

 

 

0.02

 

 

Construction

 

23,271

 

 

 

0.51

 

 

 

 

3,815

 

 

 

0.12

 

 

 

 

2,038

 

 

 

0.08

 

 

 

 

5,711

 

 

 

0.27

 

 

 

 

7,281

 

 

 

0.42

 

 

Total loans

 

4,567,915

 

 

 

100.00

 

%

 

 

3,242,453

 

 

 

100.00

 

%

 

 

2,671,381

 

 

 

100.00

 

%

 

 

2,102,548

 

 

 

100.00

 

%

 

 

1,742,868

 

 

 

100.00

 

%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

30,865

 

 

 

 

 

 

 

 

29,286

 

 

 

 

 

 

 

 

24,229

 

 

 

 

 

 

 

 

15,606

 

 

 

 

 

 

 

 

12,387

 

 

 

 

 

 

Unamortized yield adjustments

  including net premiums on

  purchased loans and net

  deferred loan costs and fees

 

66,567

 

 

 

 

 

 

 

 

(2,808

)

 

 

 

 

 

 

 

(2,606

)

 

 

 

 

 

 

 

(316

)

 

 

 

 

 

 

 

1,397

 

 

 

 

 

 

Total adjustments

 

97,432

 

 

 

 

 

 

 

 

26,478

 

 

 

 

 

 

 

 

21,623

 

 

 

 

 

 

 

 

15,290

 

 

 

 

 

 

 

 

13,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net

$

4,470,483

 

 

 

 

 

 

 

$

3,215,975

 

 

 

 

 

 

 

$

2,649,758

 

 

 

 

 

 

 

$

2,087,258

 

 

 

 

 

 

 

$

1,729,084

 

 

 

 

 

 

 

Loan Maturity Schedule.  The following table sets forth the maturities of our loan portfolio at June 30, 2018.  Demand loans, loans having no stated maturity and overdrafts are shown as due in one year or less.  Loans are stated in the following table at contractual maturity and actual maturities could differ due to prepayments.

 

 

Real estate mortgage: One- to four-family

 

 

Real estate mortgage: Multi-Family

 

 

Real estate mortgage: Non-Residential

 

 

Commercial Business

 

 

Home Equity Loans

 

 

Passbook or certificate

 

 

Other

 

 

Construction

 

 

Total

 

 

(In Thousands)

 

Amounts due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within one year

$

684

 

 

$

16,675

 

 

$

11,054

 

 

$

17,798

 

 

$

844

 

 

$

1,394

 

 

$

1,390

 

 

$

18,372

 

 

$

68,211

 

After one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 to 3 years

 

5,720

 

 

 

128,943

 

 

 

72,606

 

 

 

17,850

 

 

 

2,835

 

 

 

467

 

 

 

4,229

 

 

 

4,899

 

 

 

237,549

 

3 to 5 years

 

19,690

 

 

 

155,506

 

 

 

188,034

 

 

 

22,135

 

 

 

6,919

 

 

 

124

 

 

 

2

 

 

 

-

 

 

 

392,410

 

5 to 10 years

 

151,447

 

 

 

1,164,831

 

 

 

697,587

 

 

 

17,441

 

 

 

24,657

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,055,963

 

10 to 15 years

 

142,740

 

 

 

105,252

 

 

 

149,077

 

 

 

4,965

 

 

 

30,909

 

 

 

19

 

 

 

-

 

 

 

-

 

 

 

432,962

 

Over 15 years

 

977,172

 

 

 

187,377

 

 

 

184,603

 

 

 

5,636

 

 

 

24,597

 

 

 

1,279

 

 

 

156

 

 

 

-

 

 

 

1,380,820

 

Total due after one year

 

1,296,769

 

 

 

1,741,909

 

 

 

1,291,907

 

 

 

68,027

 

 

 

89,917

 

 

 

1,889

 

 

 

4,387

 

 

 

4,899

 

 

 

4,499,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total amount due

$

1,297,453

 

 

$

1,758,584

 

 

$

1,302,961

 

 

$

85,825

 

 

$

90,761

 

 

$

3,283

 

 

$

5,777

 

 

$

23,271

 

 

$

4,567,915

 

 

 

8


The following table shows the dollar amount of loans as of June 30, 2018 due after June 30, 2019 according to rate type and loan category.

 

 

Fixed Rates

 

 

Floating or Adjustable Rates

 

 

Total

 

 

(In Thousands)

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

933,883

 

 

$

362,886

 

 

$

1,296,769

 

Multi-family

 

414,287

 

 

 

1,327,622

 

 

 

1,741,909

 

Nonresidential

 

508,162

 

 

 

783,745

 

 

 

1,291,907

 

Commercial business

 

31,923

 

 

 

36,104

 

 

 

68,027

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

70,112

 

 

 

19,805

 

 

 

89,917

 

Passbook or certificate

 

164

 

 

 

1,725

 

 

 

1,889

 

Other

 

4,328

 

 

 

59

 

 

 

4,387

 

Construction

 

182

 

 

 

4,717

 

 

 

4,899

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

$

1,963,041

 

 

$

2,536,663

 

 

$

4,499,704

 

 

Multi-Family and Nonresidential Real Estate Mortgage Loans.  We originate commercial mortgage loans on multi-family and nonresidential properties, including loans on apartment buildings, retail/service properties and land as well as other income-producing properties, such as mixed-use properties combining residential and commercial space.  Our continued strategic emphasis in commercial lending resulted in the origination of approximately $458.8 million of multi-family and nonresidential real estate mortgages during the year ended June 30, 2018. We originated $727.4 million of multi-family and nonresidential real estate mortgages during the year ended June 30, 2017.  Additionally, we acquired multi-family and nonresidential real estate mortgage loans with fair values totaling approximately $397.0 million in conjunction with our acquisition of Clifton.

Our commercial mortgage acquisition strategies also included purchases of whole loans and participations totaling $126.7 million during the year ended June 30, 2017.  However, there were no such purchases during fiscal 2018.  The loan purchases in fiscal 2017 were funded during the first quarter ended September 30, 2016 and reflected the deployment of excess liquidity that had accumulated through June 30, 2016 due to an increase in loan prepayments during the fourth quarter of fiscal 2016.

In total, commercial mortgage loan acquisition volume, including the loans acquired in conjunction with the Clifton acquisition, outpaced loan repayments during fiscal 2018, resulting in the reported net increase in the outstanding balance of this segment of the loan portfolio.  Our business plan continues to call for maintaining our strategic emphasis on commercial mortgage lending by increasing this segment of the portfolio on a dollar basis while maintaining its basis as a percentage of total loans.

We generally require no less than a 25% down payment or equity position for mortgage loans on multi-family and nonresidential properties.  For such loans, we generally require personal guarantees.  However, the Bank may consider multi-family and nonresidential real estate mortgages for approval on a non-personally guaranteed (non-recourse) basis when the overall strengths of a proposed loan asset sufficiently mitigates the risk of exculpating the principal owners from their personal guarantee. In such cases, the Bank generally requires borrowers to execute an indemnification agreement which personally obligates those individuals in the circumstances of fraud, negligence, environmental issues, improper conveyance, condemnation, bankruptcy or other additional provisions deemed appropriate by the Bank.

We generally offer fixed-rate and adjustable-rate balloon mortgage loans on multi-family and non-residential properties with final stated maturities ranging from five to twelve years and initial interest rate reset terms ranging from five to seven years, where applicable.  Our balloon mortgage loans within this category generally have payments based on amortization terms from 25 to 30 years.  We also offer fully amortizing fixed-rate and adjustable-rate mortgage loans on multi-family and non-residential properties with terms up to 25 years.  Our commercial mortgage loans are primarily secured by properties located in New Jersey and New York and, to a lesser extent, properties located in eastern Pennsylvania.

Commercial Business Loans.  We originate commercial term loans and lines of credit to a variety of professionals, sole proprietorships and small businesses in our market area.  Our business loan products include our Small Business Express Loan, which offers customers a simplified and expedited application and approval process for term loans and lines of credit up to $100,000, as well as loans originated through the SBA in which Kearny Bank participates as a Preferred Lender.  We originated approximately $25.9 million of commercial business loans during the year ended June 30, 2018 compared to $34.1 million during the year ended June 30, 2017.  Additionally, we acquired commercial business loans with fair values totaling approximately $5.4 million in our acquisition of Clifton.

 

9


Our commercial business loan acquisition strategies included purchases of wholesale C&I loan participations totaling $28.3 million and $17.0 million during the years ended June 30, 2018 and 2017, respectively.  Our C&I loan participations at June 30, 2018 included 24 loans with an outstanding balance of $35.3 million.  These participations were comprised entirely of our pro rata interest in the obligations of 16 separate commercial borrowers that were acquired through Kearny Bank’s membership in BancAlliance, a cooperative network of lending institutions that serves as a conduit for institutional investors to participate in middle-market commercial credits.  The BancAlliance network is supported and managed on a day-to-day basis by Alliance Partners and its wholly-owned subsidiary AP Commercial LLC which acts as investment advisor and asset manager for loans acquired through the BancAlliance network while retaining a portion of such loans as an investor.  At June 30, 2017, our C&I loan participations had an outstanding balance of $27.4 million representing our pro rata interest in 13 loans.  

In total, the aggregate volume of commercial business loans originated, purchased and acquired outpaced loan repayments during fiscal 2018 resulting in the reported net increase in the outstanding balance of this segment of the loan portfolio.  As noted earlier, we continued to realign and expand our commercial business lending infrastructure during fiscal 2018.  As a result of those enhancements, we anticipate this loan segment will increase as we continue to emphasize loans acquired through retail origination channels while diminishing the emphasis on loans and participations purchased through wholesale channels.  Through these efforts, we hope to increase this segment of the loan portfolio on both a dollar basis and as a percentage of total loans.

At June 30, 2018, approximately $50.5 million or 58.9% of our commercial business loans represent loans originated through our retail channel while the remaining $35.3 million or 41.1% comprise loans acquired through the wholesale C&I loan participation channels discussed earlier.  Of the retail originated loans, approximately $43.2 million or 85.5% are “non-SBA” loans consisting of secured and unsecured loans totaling $39.6 million and $3.6 million, respectively.  We generally require personal guarantees on all “non-SBA” commercial business loans originated.  The loan to value limit on secured commercial lines of credit and term loans is otherwise generally limited to 70%. Unsecured commercial loans may take the form of overdraft checking authorization up to $10,000 and unsecured lines of credit up to $100,000.  Our “non-SBA” commercial term loans generally have terms of up to 10 years and are mostly adjustable-rate loans.  Our commercial lines of credit have terms of up to one year and are generally adjustable-rate loans.

The remaining $7.3 million or 14.5% of commercial business loans originated represent the retained portion of SBA loan originations, of which approximately $688,000 is guaranteed by the SBA.  Such loans are generally secured by various forms of collateral, including real estate, business equipment and other forms of collateral.  Kearny Bank generally sells the guaranteed portion of eligible SBA loans originated, which ranges from 50% to 90% of the loan’s outstanding balance while retaining the nonguaranteed portion of such loans in portfolio.  Kearny Bank also retains both the guaranteed and non-guaranteed portion of those SBA originations that are generally ineligible for sale in the secondary market.  The Company sold $2.8 million of SBA loan participations which resulted in the recognition of related sale gains totaling approximately $262,000 for the year ended June 30, 2018.  By comparison, we sold $9.6 million of SBA loan participations during fiscal 2017 which resulted in the recognition of related sale gains totaling approximately $822,000.

Construction Lending.  Our construction lending includes loans to individuals for construction of one- to four-family residences or for major renovations or improvements to an existing dwelling.  Our construction lending also includes loans to builders and developers for multi-unit buildings or multi-house projects.  At June 30, 2018, construction loans totaled $23.3 million.

During the year ended June 30, 2018, construction loan disbursements were $25.2 million compared to $3.0 million during the year ended June 30, 2017.  Construction loan disbursements outpaced repayments during fiscal 2018 resulting in the reported increase in the outstanding balance of this segment of the loan portfolio.  

Construction borrowers must hold title to the land free and clear of any liens. Financing for construction loans is limited to 80% of the anticipated appraised value of the completed property. Disbursements are made in accordance with inspection reports by our approved appraisal firms.  Terms of financing are generally limited to one year with an interest rate tied to the prime rate published in the Wall Street Journal and may include a premium of one or more points.  In some cases, we convert a construction loan to a permanent mortgage loan upon completion of construction.

We have no formal limits as to the number of projects a builder has under construction or development and make a case-by-case determination on loans to builders and developers who have multiple projects under development.  The Board of Directors reviews Kearny Bank’s business relationship with a builder or developer prior to accepting a loan application for processing.  We generally do not make construction loans to builders on a speculative basis.  There must be a contract for sale in place. Financing is provided for up to two houses at a time in a multi-house project, requiring a contract on one of the two houses before financing for the next house may be obtained.

 

10


We continue to evaluate lending opportunities and strategies through which we may expect to expand our construction lending activity, funding commitments and outstanding balances in the future.  If undertaken, we expect that the growth in our construction lending program will be supported by a corresponding expansion of our internal lending infrastructure and resources to support a growing number of relationships and projects with builders/borrowers.

One- to Four-Family First Mortgage Loans Held in Portfolio.  Our portfolio lending activities include the origination of one- to four-family first mortgage loans, of which approximately $1.25 billion or 96.2% are secured by properties located within New Jersey and New York as of June 30, 2018 with the remaining $49.3 million or 3.8% secured by properties in other states.

During the year ended June 30, 2018, Kearny Bank originated $53.0 million of one- to four-family first mortgage portfolio loans compared to $67.9 million in the year ended June 30, 2017.  To supplement portfolio loan originations, we also purchased one- to four-family first mortgages totaling $26.3 million during the year ended June 30, 2018, while no such loans were purchased during fiscal 2017.

One- to four-family first mortgage loan repayments generally outpaced the origination volume of such loans during fiscal 2018.  However, we acquired one- to four-family first mortgage loans with fair values totaling approximately $703.1 million in conjunction with the Clifton acquisition which resulted in the net increase in the outstanding balance of this segment of the loan portfolio during fiscal 2018.  Our business plan generally calls for increasing the aggregate balance of residential mortgage loans, including one- to four-family first mortgage loans as well as home equity loans and home equity lines of credit discussed below, on a dollar basis while maintaining the aggregate balance of such loans as a percentage of the total loan portfolio.

We will originate a one- to four-family mortgage loan on an owner-occupied property with a principal amount of up to 95% of the lesser of the appraised value or the purchase price of the property, with private mortgage insurance required if the loan-to-value ratio exceeds 80%. At June 30, 2018, our one- to four-family mortgage loan portfolio was primarily comprised of loans secured by owner-occupied properties.  Our loan-to-value limit on a non-owner-occupied property is 75%.  Loans in excess of $2.0 million are handled on a case-by-case basis and are subject to lower loan-to-value limits, generally no more than 50%.

We offer a first-time homebuyer program for persons who have not previously owned real estate and are purchasing a one- to four-family property in our primary lending area for use as a primary residence.  This program is also available outside these areas, but only to persons who are existing deposit or loan customers of Kearny Bank and/or members of their immediate families.  The financial incentives offered under this program are a one-eighth of one percentage point rate reduction on all first mortgage loan types and the refund of the application fee at closing.

The fixed-rate residential mortgage loans that we originate for portfolio generally meet the secondary mortgage market standards of the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

Substantially all of our residential mortgages include “due on sale” clauses, which give us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party.  Property appraisals on real estate securing our one- to four-family first mortgage loans are made by state certified or licensed independent appraisers approved by Kearny Bank’s Board of Directors.  Appraisals are performed in accordance with applicable regulations and policies.  We require title insurance policies on all first mortgage real estate loans originated.  Homeowners, liability and fire insurance and, if applicable, flood insurance, are also required.

One- to Four-Family Mortgage Loans Held for Sale.  During fiscal 2018, we further expanded and enhanced our mortgage banking infrastructure to support the continued origination of one- to four-family mortgage loans for sale into the secondary market.  As above, the loans we originate for sale generally meet the same secondary mortgage market standards as those applicable to loans originated for portfolio.  Moreover, such loans are generally originated by, and sourced from, the same resources and markets as those loans originated and held in portfolio, as discussed above.

As noted earlier, our mortgage banking business strategy resulted in the recognition of $742,000 in gains associated with the sale of $78.8 million of mortgage loans held for sale during the year ended June 30, 2018.  As of that date, an additional $863,000 of loans were held and committed for sale into the secondary market.  As noted earlier, we anticipate that residential mortgage loan origination and sale activity will continue to support long-term growth in our non-interest income through the recognition of recurring loan sale gains, while also serving to help manage the Company’s exposure to interest rate risk through the sale of longer-duration, fixed-rate loans into the secondary market.  However, the volume of such originations and sales is likely to reflect variations in the levels of consumer demand for refinancing which generally moves inversely with movements in longer-term market interest rates.

 

11


Home Equity Loans and Lines of Credit.  Our home equity loans are fixed-rate loans for terms of generally up to 20 years.  We also offer fixed-rate and adjustable-rate home equity lines of credit with terms of up to 20 years.  During the year ended June 30, 2018, Kearny Bank originated $20.2 million of home equity loans and home equity lines of credit compared to $18.5 million in the year ended June 30, 2017. Repayments of home equity loans and lines of credit generally outpaced loan origination volume during fiscal 2018.  However, the Company acquired home equity loans and lines of credit with fair values of $10.8 million in conjunction with Clifton acquisition which resulted in a net increase in the outstanding balance of this segment of the loan portfolio.

Collateral value is determined through a property value analysis report, or full appraisal where appropriate, provided by a state certified or licensed independent appraiser.  Home equity loans and lines of credit do not require title insurance but do require homeowner, liability and fire insurance and, if applicable, flood insurance.

Home equity loans and fixed-rate home equity lines of credit are generally originated in our market area and are generally made in amounts of up to 80% of value on term loans and of up to 75% of value on home equity adjustable-rate lines of credit.  We originate home equity loans secured by either a first lien or a second lien on the property.

As noted earlier, our business plan generally calls for increasing the aggregate balance of residential mortgage loans, including home equity loans and home equity lines of credit as well as one- to four-family first mortgage loans discussed above, on a dollar basis while maintaining the aggregate balance of such loans as a percentage of the total loan portfolio

Consumer Loans.  Our consumer loan portfolio includes unsecured overdraft lines of credit and personal loans as well as loans secured by savings accounts and certificates of deposit on deposit with Kearny Bank.  Our unsecured consumer loans at June 30, 2018 primarily include $5.5 million of loans acquired through the Company’s relationship with Lending Club, an established peer-to-peer (i.e. marketplace) lender.  Through this relationship, the Company had previously purchased high-quality, unsecured consumer loans originated through Lending Club’s online platform.  The Company limited its original investment in Lending Club loans to approximately $25.0 million in aggregate outstanding balances and has since discontinued purchases of such loans in favor of investing in other loan alternatives.

The remaining balance of consumer loans at June 30, 2018 includes $3.4 million of loans fully secured by savings accounts or certificates of deposit held by the Bank and $109,000 of other unsecured consumer loans.  Additionally, we acquired consumer loans with fair values totaling approximately $476,000 in our acquisition of Clifton. We will generally lend up to 90% of the account balance on a loan secured by a savings account or certificate of deposit.

Our consumer loans generally entail greater risks compared to the other categories of loans that we originate or purchase and hold in portfolio.  Consumer loan repayment is dependent on the borrower’s continuing financial stability and is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. The application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on consumer loans in the event of a default.

Our underwriting standards for internally originated consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and any additional verifiable secondary income.

Loans to One Borrower.  New Jersey law generally limits the amount that a savings bank may lend to a single borrower and related entities to 15% of the institution’s capital funds. Accordingly, as of June 30, 2018, our loans-to-one-borrower limit was approximately $148.1 million.

Notwithstanding regulatory limitations regarding loans to one borrower, the Bank has established a more conservative set of internal thresholds that further limit our lending exposure to any single borrower or set of borrowers affiliated by common ownership.  In that regard, the Bank’s internal “house limits” are $35.0 million for a single loan transaction and $85.0 million to a common ownership or an affiliated group of borrowers/guarantors. These limits apply irrespective of whether the obligations are on a personally guaranteed/recourse basis or non-personally guaranteed/non-recourse basis.  Exceptions to these internal limits may be considered on a case-by-case basis, subject to the review and approval of each exception by the Bank’s Board of Directors.

 

12


At June 30, 2018, our largest single borrower had an aggregate outstanding loan balance of approximately $58.2 million comprising one commercial mortgage loan and four multi-family mortgage loans. Our second largest single borrower had an aggregate outstanding loan balance of approximately $56.9 million comprising six multi-family mortgage loans.  Our third largest borrower had an aggregate outstanding loan balance of approximately $44.2 million comprising four multi-family mortgage loans.  At June 30, 2018, all of these lending relationships were current and performing in accordance with the terms of their loan agreements.  By comparison, at June 30, 2017, loans outstanding to Kearny Bank’s three largest borrowers totaled approximately $48.2 million, $46.3 million and $44.6 million, respectively.

Loan Originations, Purchases, Sales, Solicitation and Processing.  The following table shows portfolio loans originated, purchased, acquired and repaid during the periods indicated.

 

 

For the Years Ended June 30,

 

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

(In Thousands)

 

Loan originations: (1)

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

52,974

 

 

$

67,907

 

 

$

87,197

 

Multi-family

 

358,521

 

 

 

578,682

 

 

 

379,416

 

Nonresidential

 

100,249

 

 

 

148,767

 

 

 

109,876

 

Commercial business

 

25,896

 

 

 

34,071

 

 

 

20,789

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

20,234

 

 

 

18,489

 

 

 

22,709

 

Passbook or certificate

 

781

 

 

 

739

 

 

 

918

 

Other

 

587

 

 

 

1,077

 

 

 

604

 

Construction

 

25,213

 

 

 

2,961

 

 

 

1,065

 

Total loan originations

 

584,455

 

 

 

852,693

 

 

 

622,574

 

Loan purchases:

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

 

26,298

 

 

 

-

 

 

 

36,250

 

Multi-family

 

-

 

 

 

20,800

 

 

 

32,897

 

Nonresidential

 

-

 

 

 

105,880

 

 

 

242,000

 

Commercial business

 

28,292

 

 

 

16,953

 

 

 

19,808

 

Other

 

-

 

 

 

-

 

 

 

25,466

 

Total loan purchases

 

54,590

 

 

 

143,633

 

 

 

356,421

 

Loans acquired from Clifton (2)

 

1,116,821

 

 

 

-

 

 

 

-

 

Loan sales: (1)

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

-

 

 

 

(10,000

)

Commercial business

 

(2,802

)

 

 

(9,589

)

 

 

(3,872

)

Total loans sold

 

(2,802

)

 

 

(9,589

)

 

 

(13,872

)

 

 

 

 

 

 

 

 

 

 

 

 

Loan repayments

 

(497,306

)

 

 

(412,234

)

 

 

(393,225

)

Decrease due to other items

 

(1,250

)

 

 

(8,286

)

 

 

(9,398

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in loan portfolio

$

1,254,508

 

 

$

566,217

 

 

$

562,500

 

 

(1)

Excludes origination and sales of one- to four-family mortgage loans held for sale.

(2)

For information on loans acquired in the Clifton acquisition, see Note 3 to the audited consolidated financial statements.

Our customary sources of loan applications include loans originated by our commercial and residential loan officers, repeat customers, referrals from realtors and other professionals and “walk-in” customers.  These sources are supported in varying degrees by our newspaper and electronic advertising and marketing strategies.  

We have also entered into purchase agreements with a number of bank and non-bank originators to supplement our loan production pipeline.  These agreements call for our purchase of one- to four-family first mortgage loans on either a servicing released or servicing retained basis from the seller.  During the year ended June 30, 2018, we purchased one- to four-family first mortgages totaling $26.3 million, while no such loans were purchased during fiscal 2017.

As of June 30, 2018, our portfolio of “out-of-state” residential mortgages included loans located in nine states outside of New Jersey and New York that totaled approximately $49.3 million or 3.8% of one- to four-family mortgage loans. The states with the three largest concentrations of such loans at June 30, 2018 were Massachusetts, Pennsylvania and Georgia, with outstanding principal

 

13


balances totaling $40.7 million, $4.8 million and $976,000, respectively.  The aggregate outstanding balances of loans in each of the remaining six states total approximately $2.9 million and comprise approximately 5.9% of the total balance of out-of-state residential mortgage loans with aggregate balances by state ranging from $242,000 to $631,000.

In addition to purchasing one- to four-family loans, we have also purchased commercial mortgage loans and participations originated by other banks and non-bank originators. Although no such loans were purchased during the year ended June 30, 2018, the aggregate carrying value of the loans and participations purchased from these sources during the year ended June 30, 2017 totaled approximately $126.7 million comprising loans secured primarily by multi-family and non-residential properties located in New York and eastern Pennsylvania.  We also purchased commercial business loans totaling $28.3 million during the year ended June 30, 2018, as discussed above.

Loan Approval Procedures and Authority.  Senior management recommends and the Board of Directors approves our lending policies and loan approval limits.  Kearny Bank’s Loan Committee consists of the Chief Executive Officer, Chief Operating Officer, Chief Lending Officer, Chief Credit Officer, Regional President, Director of Commercial Real Estate Lending, Director of Residential Lending and Special Assets Manager.  Our Chief Lending Officer may approve residential loans up to $750,000.  Loan department personnel of Kearny Bank serving in the following positions may approve loans as follows: residential mortgage loan managers, mortgage loans up to $500,000; residential mortgage loan underwriters, mortgage loans up to $250,000; consumer loan managers, consumer loans up to $250,000; and consumer loan underwriters, consumer loans up to $150,000.  In addition to these principal amount limits, there are established limits for different levels of approval authority as to minimum credit scores and maximum loan-to-value ratios and debt-to-income ratios or debt service coverage.  Our Chief Executive Officer and Chief Operating Officer have authorization to countersign loans for amounts that exceed $750,000 up to a limit of $1.0 million.  Our Chief Lending Officer must approve loans between $750,000 and $1.0 million along with one of these designated officers.  Non-conforming residential mortgage loans and loans over $1.0 million up to $2.0 million require the approval of the Loan Committee.  The Committee may approve individual commercial loans or an aggregate commercial lending relationship up to $5.0 million. Commercial loans or aggregate relationships in excess of $5.0 million require approval by the Board of Directors while such approval is also required for residential mortgage loans in excess of $2.0 million and commercial business loans in excess of $1.0 million.

Asset Quality

Collection Procedures on Delinquent Loans.  We regularly monitor the payment status of all loans within our portfolio and promptly initiate collection efforts on past due loans in accordance with applicable policies and procedures.  Delinquent borrowers are notified by both mail and telephone when a loan is 30 days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices and letters are sent.  All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection.  However, when a loan is 90 days delinquent, it is our general practice to refer it to an attorney for repossession, foreclosure or other form of collection action, as appropriate.  In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency.

As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at its fair market value less estimated selling costs. The initial write-down of the property, if necessary, is charged to the allowance for loan losses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines are identified.

Past Due Loans.  A loan’s “past due” status is generally determined based upon its “P&I delinquency” status in conjunction with its “past maturity” status, where applicable.  A loan’s “P&I delinquency” status is based upon the number of calendar days between the date of the earliest P&I payment due and the “as of” measurement date.  A loan’s “past maturity” status, where applicable, is based upon the number of calendar days between a loan’s contractual maturity date and the “as of” measurement date.  Based upon the larger of these criteria, loans are categorized into the following “past due” tiers for financial statement reporting and disclosure purposes: Current (including 1-29 days past due), 30-59 days, 60-89 days and 90 or more days.

Nonaccrual Loans.  Loans are generally placed on nonaccrual status when contractual payments become 90 days or more past due, and are otherwise placed on nonaccrual when we do not expect to receive all P&I payments owed substantially in accordance with the terms of the loan agreement.  Loans that become 90 days past maturity, but remain non-delinquent with regard to ongoing P&I payments, may remain on accrual status if: (1) we expect to receive all P&I payments owed substantially in accordance with the terms of the loan agreement, past maturity status notwithstanding, and (2) the borrower is working actively and cooperatively with us to remedy the past maturity status through an expected refinance, payoff or modification of the loan agreement that is not expected to result in a troubled debt restructuring (“TDR”) classification.  All TDRs are placed on nonaccrual status for a period of no less than six months after restructuring, irrespective of past due status.  The sum of nonaccrual loans plus accruing loans that are 90 days or more past due are generally defined as “nonperforming loans.”

 

14


Payments received in cash on nonaccrual loans, including both the principal and interest portions of those payments, are generally applied to reduce the carrying value of the loan for financial statement purposes.  When a loan is returned to accrual status, any accumulated interest payments previously applied to the carrying value of the loan during its nonaccrual period are recognized as interest income as an adjustment to the loan’s yield over its remaining term.

Loans that are not considered to be TDRs are generally returned to accrual status when payments due are brought current and we expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement.  Non-TDR loans may also be returned to accrual status when a loan’s payment status falls below 90 days past due and we: (1) expect receipt of the remaining past due amounts within a reasonable timeframe, and (2) expect to receive all remaining P&I payments owed substantially in accordance with the terms of the loan agreement.

Nonperforming Assets.  The following table provides information regarding our nonperforming assets which are comprised of nonaccrual loans, accruing loans 90 days or more past due and real estate owned.

 

 

At June 30,

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

(Dollars In Thousands)

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

9,192

 

 

$

8,790

 

 

$

10,732

 

 

$

7,952

 

 

$

9,944

 

Multi-family

 

116

 

 

 

158

 

 

 

205

 

 

 

-

 

 

 

-

 

Nonresidential

 

5,340

 

 

 

5,720

 

 

 

6,588

 

 

 

7,177

 

 

 

6,935

 

Commercial business

 

1,238

 

 

 

2,634

 

 

 

1,965

 

 

 

3,944

 

 

 

4,919

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans

 

913

 

 

 

1,241

 

 

 

1,170

 

 

 

1,783

 

 

 

1,930

 

Other

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

2

 

Construction

 

-

 

 

 

255

 

 

 

357

 

 

 

2,037

 

 

 

1,448

 

Total nonaccrual loans (1)

 

16,799

 

 

 

18,798

 

 

 

21,017

 

 

 

22,895

 

 

 

25,178

 

Accruing loans 90 days or more past due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Nonresidential

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial business

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer: