Kearny Financial Corp. (KRNY) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
This discussion and analysis reflects Kearny Financial Corp.’s consolidated financial statements and other relevant statistical data, and is intended to enhance your understanding of our financial condition and results of operations. You should read the information in this section in conjunction with the business and financial information regarding Kearny Financial Corp. and the audited consolidated financial statements and notes thereto contained in this Annual Report on Form 10-K.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. We describe them in detail in Note 1 to our audited consolidated financial statements. In preparing the audited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses.
Allowance for Credit Losses. The allowance for credit losses represents the estimated amount considered necessary to cover lifetime expected credit losses inherent in financial assets at the balance sheet date. The measurement of expected credit losses is applicable to loans receivable and securities measured at amortized cost. It also applies to off-balance sheet credit exposures such as loan commitments and unused lines of credit. The allowance is established through a provision for credit losses that is charged against income. The methodology for determining the allowance for credit losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded allowance for credit losses. The allowance for credit losses is reported separately as a contra-asset on the consolidated statement of financial condition. The expected credit loss for unfunded lending commitments and unfunded loan commitments is reported on the consolidated statement of financial condition in other liabilities while the provision for credit losses related to unfunded commitments is reported in other non-interest expense.
Allowance for Credit Losses on Loans Receivable. The allowance for credit losses on loans is deducted from the amortized cost basis of the loan to present the net amount expected to be collected. Expected losses are evaluated and calculated on a collective, or pooled, basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether loans within a pool continue to exhibit similar risk characteristics. If the risk characteristics of a loan change, such that they are no longer similar to other loans in the pool, the Company will evaluate the loan with a different pool of loans that share similar risk characteristics. If the loan does not share risk characteristics with other loan pools, the Company will evaluate the loan on an individual basis. The Company evaluates the pooling methodology at least annually. Loans are charged off against the allowance for credit losses when the Company believes the balances to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off or expected to be charged off.
The Company has chosen to segment its portfolio consistent with the manner in which it manages credit risk. Such segments include multi-family, nonresidential mortgage, commercial business, construction, one- to four-family residential, home equity and consumer. For most segments the Company calculates estimated credit losses using a probability of default and loss given default methodology, the results of which are applied to the aggregated discounted cash flow of each individual loan within the segment. The point in time probability of default and loss given default are then conditioned by macroeconomic scenarios to incorporate reasonable and supportable forecasts that affect the collectability of the reported amount.
The Company estimates the allowance for credit losses on loans via a quantitative analysis which considers relevant available information from internal and external sources related to past events and current conditions, as well as the incorporation of reasonable and supportable forecasts. The Company evaluates a variety of factors including third party economic forecasts, industry trends and other available published economic information in arriving at its forecasts. After the reasonable and supportable forecast period, the Company reverts, on a straight-line basis, to average historical losses. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the renewal option is included in the original or modified contract at the reporting date and are not unconditionally cancelable by the Company.
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Also included in the allowance for credit losses on loans are qualitative reserves to cover losses that are expected but, in the Company’s assessment, may not be adequately represented in the quantitative analysis or the forecasts described above. Factors that the Company considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and non-accrual loans, the effect of external factors such as competition, legal and regulatory requirements, among others. Qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks.
Individually Evaluated Loans. On a case-by-case basis, the Company may conclude that a loan should be evaluated on an individual basis based on its disparate risk characteristics. When the Company determines that a loan no longer shares similar risk characteristics with other loans in the portfolio, the allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Company will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.
Acquired Loans. Acquired loans are included in the Company's calculation of the allowance for credit losses. How the allowance on an acquired loan is recorded depends on whether or not it has been classified as a PCD loan. PCD loans are loans acquired at a discount that is due, in part, to credit quality. PCD loans are accounted for in accordance with ASC Subtopic 326-20 and are initially recorded at fair value as determined by the sum of the present value of expected future cash flows and an allowance for credit losses at acquisition. The allowance for PCD loans is recorded through a gross-up effect, while the allowance for acquired non-PCD loans is recorded through provision expense, consistent with originated loans. Thus, the determination of which loans are PCD and non-PCD can have a significant impact on the accounting for these loans. Subsequent to acquisition, the allowance for PCD loans will generally follow the same estimation, provision and charge-off process as non-PCD acquired and originated loans.
Business Combinations. We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill or bargain purchase gain. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.
Goodwill. Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company performed its annual impairment test during the fourth quarter of its fiscal year ended June 30, 2021. Goodwill is the only intangible asset with an indefinite life our audited consolidated Statement of Financial Condition.
In assessing impairment, we have the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform a quantitative impairment test.
The annual quantitative assessment of goodwill for our single reporting unit was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”). The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value. The market approach takes into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives. The results of the income approach were weighted at 50% while the results of the market approach were weighted at 50%. The results of the annual quantitative impairment analysis indicated that the fair value exceeded the carrying value for our single reporting unit.
No impairment charges were required to be recorded in the years ended June 30, 2021, 2020 or 2019. 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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Comparison of Financial Condition at June 30, 2021 and June 30, 2020
Executive Summary. Total assets increased by $525.6 million, or 7.8%, to $7.28 billion at June 30, 2021 from $6.76 billion at June 30, 2020. As described in greater detail below, the increase in total assets was largely the result of the Company’s July 10, 2020 acquisition of MSB. The increase primarily reflected increases in investment securities, net loans receivable and other assets, partially offset by decreases in cash and equivalents and loans held-for-sale.
Investment Securities. Investment securities available for sale increased by $291.2 million, to $1.68 billion at June 30, 2021, from $1.39 billion at June 30, 2020. This increase reflected security purchases totaling $918.7 million, net of security sales totaling $97.4 million, principal repayments totaling $521.1 million, and a $12.5 million decrease in the fair value of the portfolio to a net unrealized gain of $10.0 million. Included in this increase were securities acquired from MSB with fair values of $3.5 million at the time of acquisition.
Investment securities held to maturity increased by $5.5 million to $38.1 million at June 30, 2021 from $32.6 million at June 30, 2020. The increase in the portfolio reflected security purchases totaling $12.3 million, net of principal repayments totaling $6.8 million.
Additional information regarding investment securities at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 4 to the audited consolidated financial statements.
Loans Held-for-Sale. Loans held-for-sale totaled $16.5 million at June 30, 2021 as compared to $20.8 million at June 30, 2020 and are reported separately from the balance of net loans receivable. During the year ended June 30, 2021, $285.4 million of residential mortgage loans were sold, resulting in net gains on sale of $5.1 million.
Net Loans Receivable. Net loans receivable increased by $332.2 million, or 7.4%, to $4.79 billion at June 30, 2021 from $4.46 billion at June 30, 2020. Included in this increase were loans with fair values totaling $530.2 million that were acquired in conjunction with the acquisition of MSB. Partially offsetting this increase was a decrease of $58.8 million in PPP loan balances and a decrease of $131.2 million in other non-acquired loans. Detail regarding the change in the loan portfolio is presented below:
| June 30, | June 30, | Increase/ | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | (Decrease) | |||||||||
| (In Thousands) | |||||||||||
| Commercial loans: | |||||||||||
| Multi-family mortgage | $ | 2,039,260 | $ | 2,059,568 | $ | (20,308 | ) | ||||
| Nonresidential mortgage | 1,079,444 | 960,853 | 118,591 | ||||||||
| Commercial business | 168,951 | 138,788 | 30,163 | ||||||||
| Construction | 93,804 | 20,961 | 72,843 | ||||||||
| Total commercial loans | 3,381,459 | 3,180,170 | 201,289 | ||||||||
| One- to four-family residential mortgage | 1,447,721 | 1,273,022 | 174,699 | ||||||||
| Consumer loans: | |||||||||||
| Home equity loans | 47,871 | 82,920 | (35,049 | ) | |||||||
| Other consumer | 3,259 | 3,991 | (732 | ) | |||||||
| Total consumer | 51,130 | 86,911 | (35,781 | ) | |||||||
| Total loans | 4,880,310 | 4,540,103 | 340,207 | ||||||||
| Unaccreted yield adjustments | (28,916 | ) | (41,706 | ) | 12,790 | ||||||
| Allowance for credit losses | (58,165 | ) | (37,327 | ) | (20,838 | ) | |||||
| Net loans receivable | $ | 4,793,229 | $ | 4,461,070 | $ | 332,159 |
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Commercial loan origination volume for the year ended June 30, 2021 totaled $507.5 million, which comprised $352.5 million of commercial mortgage loan originations, $104.6 million of commercial business loan originations and construction loan disbursements of $50.4 million. Commercial loan originations for the period were augmented by the purchase of loans totaling $21.6 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired commercial loans with fair values totaling approximately $383.1 million.
One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled $553.2 million for the year ended June 30, 2021 and was augmented by the purchase of loans totaling $60.1 million. Home equity loan and line of credit origination volume for the same period totaled $15.8 million. Additionally, in conjunction with the acquisition of MSB, the Company acquired one- to four-family residential mortgage loans and home equity loans and lines of credit with fair values totaling approximately $132.5 million and $14.1 million, respectively.
Additional information about the Company’s loans at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.
Nonperforming Loans and TDRs. Nonperforming loans increased by $43.1 million to $79.8 million, or 1.64% of total loans at June 30, 2021, from $36.7 million, or 0.82% of total loans at June 30, 2020. Included in this increase were $14.4 million of non-performing loans acquired from MSB, whose fair values at acquisition reflected various levels of impairment. Non-performing loans at June 30, 2021 did not include $51.8 million of performing PCD loans acquired from MSB. The increase in nonperforming loans was largely attributable to increases in non-performing multi-family mortgage loans, nonresidential mortgage loans and one- to four-family residential mortgage loans, with increases totaling $15.6 million, $13.3 million and $10.8 million, for those loan segments, respectively.
TDRs are loans where the Company has modified the contractual terms of the loan as a result of the financial condition of the borrower. Subsequent to their modification, TDRs are placed on non-accrual until such time as satisfactory payment performance has been demonstrated, at which time the loan may be returned to accrual status. At June 30, 2021, the Company had accruing TDRs totaling $6.2 million, a decrease of $2.2 million from $8.4 million at June 30, 2020. At June 30, 2021, the Company had non-accrual TDRs totaling $11.6 million, a decrease of $1.5 million from $13.1 million at June 30, 2020.
As noted above, based on Section 4013 of the CARES Act, the 2021 Consolidated Appropriations Act and related regulatory guidance promulgated by federal banking regulators, qualifying loan modifications, including short-term payment deferrals, are not considered to be TDRs. The Company had active payment deferrals, which were not considered TDRs, of $5.6 million and $781.3 million at June 30, 2021 and June 30, 2020, respectively.
Additional information about nonperforming loans and TDRs at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.
Allowance for Credit Losses (“ACL”). At June 30, 2021, the ACL totaled $58.2 million, or 1.19% of total loans, reflecting an increase of $20.9 million from $37.3 million, or 0.82% of total loans, at June 30, 2020. This increase largely resulted from the adoption of CECL, which increased the ACL for loans receivable by $19.6 million, the establishment of an ACL for loans acquired from MSB totaling $9.0 million and an increase in the portion of the ACL attributable to loans individually evaluated for impairment. This increase was partially offset by net charge-offs and the impact of an improved economic forecast and credit risk outlook.
Additional information about the allowance for loan credit at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 1 and Note 6 to the audited consolidated financial statements.
Other Assets. The aggregate balance of other assets, including premises and equipment, FHLB stock, interest receivable, goodwill, core deposit intangibles, bank owned life insurance, deferred income taxes, OREO and other assets, increased by $14.1 million to $691.2 million at June 30, 2021 from $677.1 million at June 30, 2020.
The increase in other assets primarily reflected the impact of the MSB acquisition through which the Company acquired other assets with fair values totaling $34.1 million. The increase in other assets was partially offset by a decrease in the balance of FHLB stock during the year ended June 30, 2021.
The remaining increases and decreases in other assets for the year ended June 30, 2021 generally reflected normal operating fluctuations in their respective balances.
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Deposits. Total deposits increased by $1.06 billion, or 23.8%, to $5.49 billion at June 30, 2021 from $4.43 billion at June 30, 2020. The increase in deposits reflected the impact of organic growth in deposits of $594.9 million coupled with the MSB acquisition through which the Company assumed deposits with fair values totaling $460.2 million. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:
| June 30, | June 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Increase | ||||||||
| (In Thousands) | ||||||||||
| Non-interest-bearing deposits | $ | 593,718 | $ | 419,138 | $ | 174,580 | ||||
| Interest-bearing deposits: | ||||||||||
| Interest-bearing demand | 1,902,478 | 1,264,151 | 638,327 | |||||||
| Savings | 1,111,364 | 906,597 | 204,767 | |||||||
| Certificates of deposit | 1,877,746 | 1,840,396 | 37,350 | |||||||
| Interest-bearing deposits | 4,891,588 | 4,011,144 | 880,444 | |||||||
| Total deposits | $ | 5,485,306 | $ | 4,430,282 | $ | 1,055,024 |
Additional information about our deposits at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 10 to the audited consolidated financial statements.
Borrowings. The balance of borrowings decreased by $487.3 million, or 41.5%, to $685.9 million at June 30, 2021 from $1.17 billion at June 30, 2020 and reflected the repayment of maturing FHLB advances totaling $475.0 million, the pre-payment of FHLB advances totaling $27.0 million and a decrease in depositor sweep accounts totaling $5.7 million. Borrowings at June 30, 2021 also included other overnight borrowings totaling $20.0 million while there were no such borrowings at June 30, 2020. In conjunction with the acquisition of MSB, the Company assumed overnight FHLB advances with fair values totaling $62.9 million, which were immediately repaid.
Additional information about our borrowings at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 11to the audited consolidated financial statements.
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $942,000 to $69.6 million at June 30, 2021 from $70.6 million at June 30, 2020. The change in the balance of other liabilities reflected the adoption of CECL, as noted above. At adoption the Company increased its ACL by $536,000 for unfunded loan commitments while also recording a provision for ACL of $1.2 million during the year ended June 30, 2021. The change in other liabilities also reflected a $17.5 million decrease in the fair value of the Company’s outstanding liability derivatives positions which was partially offset by a $12.5 million loan participation liability which was paid shortly after fiscal year-end. The remaining change generally reflected normal operating fluctuations in the balances of other liabilities during the period.
Additional information about the Company’s derivatives portfolio at June 30, 2021 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 12 to the audited consolidated financial statements.
Stockholders’ Equity. Stockholders’ equity decreased by $41.2 million to $1.04 billion at June 30, 2021 from $1.08 billion at June 30, 2020. The decrease in stockholders’ equity during the year ended June 30, 2021 largely reflected share repurchases totaling $119.0 million, cash dividends totaling $28.5 million and a $14.2 million cumulative effect adjustment related to the adoption of CECL, partially offset by the issuance of $45.1 million of capital stock in conjunction with the acquisition of MSB and net income of $63.2 million.
Book value per share increased by $0.25 to $13.21 at June 30, 2021 while tangible book value per share increased by $0.10 to $10.49 at June 30, 2021.
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In March 2019 the Company announced its fourth stock repurchase plan which authorized the repurchase of 9,218,324 shares, or 10% of the Company’s outstanding common stock. On March 25, 2020, that plan was temporarily suspended due to the risks and uncertainties associated with the COVID-19 pandemic and on October 19, 2020, the Company announced the resumption of that plan. On October 19, 2020, the Company also announced the approval of a fifth repurchase plan totaling 4,475,523 shares, or 5%, of the Company’s outstanding common stock. On January 22, 2021, the Company announced the completion of its fifth stock repurchase plan and the authorization of a sixth stock repurchase plan to repurchase up to 4,210,520 shares, or 5%, of the Company’s outstanding stock. On May 26, 2021, the Company announced the completion of its sixth stock repurchase plan and the authorization of a seventh stock repurchase plan to repurchase up to 4,064,649 shares, or 5%, of the Company’s outstanding common stock.
During the year ended June 30, 2021, the Company repurchased a total of 10,567,073 shares of its common stock which were repurchased in conjunction with the Company’s fourth, fifth, sixth and seventh repurchase plans. Such shares were repurchased at a total cost of $119.0 million and at an average cost of $11.26 per share.
Including shares previously repurchased, the shares associated with the fourth repurchase plan were repurchased at a total cost of $117.9 million and at an average cost of $12.79 per share. The shares associated with the Company’s fifth share repurchase plan were repurchased at a total cost of $46.9 million and at an average cost of $10.48 per share. The shares associated with the Company’s sixth share repurchase plan were repurchased at a total cost of $51.1 million and at an average cost of $12.15 per share.
During the year ended June 30, 2021, and in conjunction with the Company’s seventh repurchase program, the Company repurchased 1,120,000 shares at a cost of $14.2 million and at an average cost of $12.65 per share which represented 27.6% of the total shares authorized to be repurchased.
Comparison of Operating Results for the Years Ended June 30, 2021, and June 30, 2020
Net Income. Net income for the year ended June 30, 2021 was $63.2 million, or $0.77 per diluted share, an increase of 40.6% from $45.0 million, or $0.55 per diluted share for the year ended June 30, 2020. The increase in net income reflected increases in net interest income and non-interest income and a decrease in the provision for credit losses that was partially offset by increases in non-interest expense and income tax expense. Net income for the year ended June 30, 2021 also reflected various non-recurring items, including items recognized in conjunction with the Company’s acquisition of MSB.
Net Interest Income. Net interest income increased by $35.2 million to $184.5 million for the year ended June 30, 2021. The increase between the comparative periods resulted from a decrease of $34.0 million in interest expense and an increase of $1.2 million in interest income.
Net interest spread increased by 39 basis points to 2.61% for the year ended June 30, 2021, from 2.22% for the year ended June 30, 2020. Net interest margin increased 30 basis points to 2.75%, from 2.45%, for the same comparative periods. The increase in spread and margin reflected a decrease in the average cost of interest-bearing liabilities that was partially offset by a decrease in the average yield on interest-earning assets.
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Details surrounding the composition of, and changes to, net interest income are presented in the table below which reflects the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances. No tax equivalent adjustments have been made to yield or costs. Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income.
| For the Years Ended June 30, | ||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Average Balance | Interest | Average Yield/ Cost | Average Balance | Interest | Average Yield/ Cost | Average Balance | Interest | Average Yield/ Cost | ||||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||
| Loans receivable (1) | $ | 4,866,436 | $ | 198,515 | 4.08 | % | $ | 4,568,816 | $ | 187,003 | 4.09 | % | $ | 4,669,436 | $ | 192,386 | 4.12 | % | ||||||||||||||||||||
| Taxable investment securities (2) | 1,571,452 | 31,238 | 1.99 | 1,291,516 | 39,321 | 3.04 | 1,171,335 | 37,213 | 3.18 | |||||||||||||||||||||||||||||
| Tax-exempt securities (2) | 74,604 | 1,652 | 2.21 | 111,477 | 2,393 | 2.15 | 134,489 | 2,839 | 2.11 | |||||||||||||||||||||||||||||
| Other interest-earning assets (3) | 200,435 | 2,955 | 1.47 | 122,278 | 4,491 | 3.67 | 101,595 | 4,895 | 4.82 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 6,712,927 | 234,360 | 3.49 | 6,094,087 | 233,208 | 3.83 | 6,076,855 | 237,333 | 3.91 | |||||||||||||||||||||||||||||
| Non-interest-earning assets | 620,934 | 595,158 | 582,838 | |||||||||||||||||||||||||||||||||||
| Total assets | $ | 7,333,861 | $ | 6,689,245 | $ | 6,659,693 | ||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||
| Interest-bearing demand | $ | 1,726,190 | $ | 7,028 | 0.41 | $ | 1,041,188 | $ | 11,433 | 1.10 | $ | 796,815 | $ | 8,125 | 1.02 | |||||||||||||||||||||||
| Savings | 1,066,794 | 3,299 | 0.31 | 831,832 | 6,735 | 0.81 | 761,203 | 4,186 | 0.55 | |||||||||||||||||||||||||||||
| Certificates of deposit | 1,931,887 | 21,208 | 1.10 | 2,032,046 | 40,684 | 2.00 | 2,194,513 | 40,200 | 1.83 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 4,724,871 | 31,535 | 0.67 | 3,905,066 | 58,852 | 1.51 | 3,752,531 | 52,511 | 1.40 | |||||||||||||||||||||||||||||
| Borrowings | 933,711 | 18,316 | 1.96 | 1,293,096 | 25,002 | 1.93 | 1,359,323 | 29,509 | 2.17 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 5,658,582 | 49,851 | 0.88 | 5,198,162 | 83,854 | 1.61 | 5,111,854 | 82,020 | 1.60 | |||||||||||||||||||||||||||||
| Non-interest-bearing liabilities (4) | 583,886 | 394,758 | 351,217 | |||||||||||||||||||||||||||||||||||
| Total liabilities | 6,242,468 | 5,592,920 | 5,463,071 | |||||||||||||||||||||||||||||||||||
| Stockholders' equity | 1,091,393 | 1,096,325 | 1,196,622 | |||||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 7,333,861 | $ | 6,689,245 | $ | 6,659,693 | ||||||||||||||||||||||||||||||||
| Net interest income | $ | 184,509 | $ | 149,354 | $ | 155,313 | ||||||||||||||||||||||||||||||||
| Interest rate spread (5) | 2.61 | % | 2.22 | % | 2.31 | % | ||||||||||||||||||||||||||||||||
| Net interest margin (6) | 2.75 | % | 2.45 | % | 2.56 | % | ||||||||||||||||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 1.19 | X | 1.17 | X | 1.19 | X |
| Column 1 | Column 2 |
|---|---|
| (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. |
| Column 1 | Column 2 |
|---|---|
| (2) | Fair value adjustments have been excluded in the balances of interest-earning assets. |
| Column 1 | Column 2 |
|---|---|
| (3) | Includes interest-bearing deposits at other banks and FHLB of New York capital stock. |
| Column 1 | Column 2 |
|---|---|
| (4) | Includes average balances of non-interest-bearing deposits of $518,149,000, $334,522,000 and $312,169,000, for the years ended June 30, 2021, 2020 and 2019, respectively. |
| Column 1 | Column 2 |
|---|---|
| (5) | Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
| Column 1 | Column 2 |
|---|---|
| (6) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
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The following table reflects the dollar amount of changes in interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.
| Year Ended June 30, 2021 versus Year Ended June 30, 2020 | Year Ended June 30, 2020 versus Year Ended June 30, 2019 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | ||||||||||||||||||
| (In Thousands) | (In Thousands) | ||||||||||||||||||||||
| Interest and dividend income | |||||||||||||||||||||||
| Loans receivable | $ | 11,976 | $ | (464 | ) | $ | 11,512 | $ | (4,023 | ) | $ | (1,360 | ) | $ | (5,383 | ) | |||||||
| Taxable investment securities | 7,341 | (15,424 | ) | (8,083 | ) | 3,770 | (1,662 | ) | 2,108 | ||||||||||||||
| Tax-exempt securities | (807 | ) | 66 | (741 | ) | (498 | ) | 52 | (446 | ) | |||||||||||||
| Other interest-earning assets | 1,984 | (3,520 | ) | (1,536 | ) | 890 | (1,294 | ) | (404 | ) | |||||||||||||
| Total interest-earning assets | $ | 20,494 | $ | (19,342 | ) | $ | 1,152 | $ | 139 | $ | (4,264 | ) | $ | (4,125 | ) | ||||||||
| Interest expense: | |||||||||||||||||||||||
| Interest-bearing demand | $ | 5,100 | $ | (9,505 | ) | $ | (4,405 | ) | $ | 2,634 | $ | 674 | $ | 3,308 | |||||||||
| Savings and club | 1,533 | (4,969 | ) | (3,436 | ) | 418 | 2,131 | 2,549 | |||||||||||||||
| Certificates of deposit | (1,923 | ) | (17,553 | ) | (19,476 | ) | (3,094 | ) | 3,578 | 484 | |||||||||||||
| Borrowings | (7,067 | ) | 381 | (6,686 | ) | (1,378 | ) | (3,129 | ) | (4,507 | ) | ||||||||||||
| Total interest-bearing liabilities | (2,357 | ) | (31,646 | ) | (34,003 | ) | (1,420 | ) | 3,254 | 1,834 | |||||||||||||
| Change in net interest income | $ | 22,851 | $ | 12,304 | $ | 35,155 | $ | 1,559 | $ | (7,518 | ) | $ | (5,959 | ) |
Provision for Credit Losses. The provision for credit losses decreased by $5.3 million to a provision for credit losses reversal of $1.1 million for the year ended June 30, 2021, compared to a provision for credit losses of $4.2 million for the year ended June 30, 2020. The level of provision for the year ended June 30, 2021 was largely attributable to $5.1 million of provision expense on non-PCD loans acquired in connection with the acquisition of MSB and an increase of $6.6 million in reserves on individually evaluated loans, partially offset by a release of reserves within certain loan segments, reflecting the improving credit risk outlook for those asset classes in the reasonable and supportable forecast. By comparison, the provision for the year ended June 30, 2020 was largely attributable to increases in qualitative factors associated with the economic impact of COVID-19 under the incurred loss standard.
The increase in reserves on individually evaluated loans, noted above, was largely attributable to five non-performing commercial real estate loans, with principal balances totaling $16.7 million.
Additional information regarding the allowance for credit losses and the associated provisions recognized during the year ended June 30, 2021 is presented under “Item 1, Business” on this Annual Report on Form 10-K as well as in Note 1 and Note 6 to the audited consolidated financial statements as well as the Comparison of Financial Condition at June 30, 2021.
Non-Interest Income. Non-interest income increased by $5.0 million, or 25.5%, to $24.8 million for the year ended June 30, 2021. Included in non-interest income for the years ended June 30, 2021 and 2020 were various non-recurring items, including items recognized in conjunction with the Company’s acquisition of MSB.
Fees and service charges decreased by $1.0 million to $5.6 million for the year ended June 30, 2021. The decrease primarily reflected a decrease in loan-related fees attributable to a decrease in commercial loan prepayment activity.
Gain on sale and call of securities reflected a net gain of $767,000 during the year ended June 30, 2021 compared to a net gain of $2.3 million, recorded during the earlier comparative period.
Gain on sale of loans increased by $2.4 million to $5.6 million for the year ended June 30, 2021. The increase in loan sale gains reflected an increase in the volume of loans originated and sold between comparative periods coupled with an increase in the average gain per loan. The increase for the year ended June 30, 2021 also included gains of $352,000 recognized on the sale of $43.6 million of PPP loans.
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The Company recognized a net loss of $28,000 related to the write down and sale of OREO during the year ended June 30, 2020, while there was no such loss recorded during the current period.
Bargain purchase gain totaled $3.1 million for the year ended June 30, 2021. The bargain purchase gain resulted from a decline in the market value of the Company’s stock, due to the COVID-19 pandemic, which occurred between the announcement date and closing date of the MSB acquisition. There was no such gain recorded in the prior comparative period.
Other non-interest income increased by $1.6 million to $1.8 million for the year ended June 30, 2021. The increase primarily reflected $309,000 of PPP-related referral fees and $1.0 million of non-recurring gains on asset disposals recognized in the current period, as compared to $342,000 of non-recurring losses on asset disposals recognized in the prior comparative period.
The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.
Non-Interest Expense. Non-interest expense increased by $18.3 million, or 17.0%, to $125.9 million for the year ended June 30, 2021. Included in non-interest expense for the years ended June 30, 2021 and 2020 were various non-recurring items, including items recognized in conjunction with the Company’s acquisition of MSB.
Salaries and employee benefits expense increased by $6.8 million to $68.8 million for the year ended June 30, 2021. This increase primarily reflected additional salary and payroll tax expense associated with employees retained in conjunction with the MSB acquisition and new hires, who were largely concentrated within the lending and retail banking lines of business. These increases were partially offset by decreases in employee severance, ESOP expense and stock benefit plan expense.
Net occupancy expense of premises increased by $1.2 million to $12.7 million for the year ended June 30, 2021. This increase was largely attributable to the ongoing operating expenses associated with the owned and leased office facilities acquired in conjunction with the MSB acquisition coupled with an increase of $460,000 in snow removal expense. The change in net occupancy expense also reflected $22,000 of lease termination costs that were incurred during the current period. By comparison, lease termination costs totaling $517,000 were incurred in the prior comparative period.
Equipment and systems expense increased by $3.1 million to $14.9 million for the year ended June 30, 2021. This increase was largely attributable to increases in equipment, technology infrastructure, core processing and electronic banking delivery channel expense associated with the Company’s growth in clients and accounts, a portion of which was attributable to the acquisition of MSB. This increase also reflected non-recurring core processing expense reductions totaling $907,000 that were recorded in the prior comparative period that were associated with the re-negotiation of the Company’s core processing contract.
Advertising and marketing expense decreased by $627,000 to $2.2 million for the year ended June 30, 2021. This decrease largely reflected changes in advertising expense across a variety of advertising formats reflecting normal fluctuations in the timing of certain campaigns supporting our loan and deposit growth initiatives.
FDIC insurance premiums increased by $1.7 million to $1.9 million for the year ended June 30, 2021. This increase was attributable to no expense being recorded during the first nine months of fiscal 2020 as a result of credits available to the Bank under the FDIC’s Small Bank Assessment Credit program.
Merger-related expenses, associated with the Company’s acquisition of MSB, increased by $3.4 million to $4.3 million for the year ended June 30, 2021.
Debt extinguishment expenses, resulting from the pre-payment of FHLB advances, totaled $796,000 for the year ended June 30, 2021 as compared to $2.2 million for the year ended June 30, 2020.
Other expense increased by $4.1 million to $17.3 million for the year ended June 30, 2021. This increase, for the year ended June 30, 2021, was primarily attributable to asset impairment charges of $1.9 million, arising from the transfer of various branch and administrative facilities to held-for sale status and $800,000, attributable to the partial write-down of the value of the Company’s equity investment in a start-up financial technology company whose remaining book value totaled $200,000 as of that date. Also included in other expense, for the year ended June 30, 2021, was $1.2 million of credit loss expense for off-balance sheet exposures required in connection with the Company’s adoption of CECL for which no such expense was recorded in the prior comparative period. For the year ended June 30, 2020, the recovery of an asset write-down totaling $288,000 was recorded.
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Provision for Income Taxes. Provision for income taxes increased by $9.0 million to $21.3 million for the year ended June 30, 2021, from $12.2 million for the year ended June 30, 2020.
The increase in income tax expense largely reflected a higher level of pre-tax net income, as compared to the prior period, resulting in a higher provision for income tax expense. This increase also reflected a $1.6 million reduction in income tax expense that was recorded in the prior comparative period, which was attributable to the carryback of net operating losses into prior periods.
Effective tax rates for the year ended June 30, 2021 and June 30, 2020 were 25.2% and 21.5%, respectively. The effective tax rate for the year ended June 30, 2021 largely reflected the effects of various non-recurring items recorded in conjunction with the Company’s acquisition of MSB, including non-deductible merger related expenses, which were partially offset by a non-taxable bargain purchase gain. The effective tax rate for the prior comparative period was primarily driven by a reduction of income tax expense attributable to the carryback of net operating losses, as discussed above.
Comparison of Operating Results for the Years Ended June 30, 2020, and June 30, 2019
A comparison of our operating results for the years ended June 30, 2020 and June 30, 2019 can be found in our Annual Report on Form 10-K for the year ended June 30, 2020, filed with the SEC on August 28, 2020.
Liquidity and Commitments
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 June 30, 2021, included $67.9 million of short-term cash and equivalents supplemented by $1.68 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 June 30, 2021, the Company had the capacity to borrow additional funds totaling $2.13 billion and $233.1 million, without pledging additional collateral, from the FHLB of New York and Federal Reserve Bank, 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 June 30, 2021, the available borrowing capacity under those lines of credit totaled $651.0 million.
Deposits increased $1.06 billion to $5.49 billion at June 30, 2021 from $4.43 billion at June 30, 2020. The increase in deposit balances reflected an $880.4 million increase in interest-bearing deposits coupled with a $174.6 million increase in non-interest-bearing deposits. Borrowings from the FHLB of New York and other sources are generally available to supplement the Bank’s liquidity position or to replace maturing deposits. As of June 30, 2021, the Bank’s outstanding balance of FHLB advances, excluding fair value adjustments, totaled $667.5 million.
The following table sets forth information concerning balances and interest rates on our short-term borrowings at and for the periods shown:
| At or For the Years Ended June 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||
| (Dollars in Thousands) | ||||||||||||||
| Balance at end of year | $ | 390,000 | $ | 865,000 | $ | 825,000 | ||||||||
| Average balance during year | $ | 646,896 | $ | 904,262 | $ | 854,554 | ||||||||
| Maximum outstanding at any month end | $ | 815,000 | $ | 1,075,000 | $ | 975,000 | ||||||||
| Weighted average interest rate at end of year | 0.33 | % | 0.45 | % | 2.54 | % | ||||||||
| Weighted average interest rate during year | 1.08 | % | 2.14 | % | 2.48 | % |
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The following table discloses our contractual obligations and commitments as of June 30, 2021:
| At June 30, 2021 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than One Year | One to Three Years | Over Three Years to Five Years | Over Five Years | Total | ||||||||||||||
| (In Thousands) | ||||||||||||||||||
| Contractual obligations | ||||||||||||||||||
| Operating lease obligations | $ | 3,604 | $ | 5,370 | $ | 3,676 | $ | 7,205 | $ | 19,855 | ||||||||
| Certificates of deposit | 1,510,761 | 287,984 | 72,703 | 6,298 | 1,877,746 | |||||||||||||
| Federal Home Loan Bank Advances | 390,000 | 167,500 | 110,000 | - | 667,500 | |||||||||||||
| Total contractual obligations | $ | 1,904,365 | $ | 460,854 | $ | 186,379 | $ | 13,503 | $ | 2,565,101 | ||||||||
| Commitments | ||||||||||||||||||
| Undisbursed funds from approved lines of credit (1) | $ | 86,176 | $ | 28,207 | $ | 7,231 | $ | 59,464 | $ | 181,078 | ||||||||
| Construction loans in process (1) | 138,328 | - | - | - | 138,328 | |||||||||||||
| Other commitments to extend credit (1) | 192,832 | - | - | - | 192,832 | |||||||||||||
| Total commitments | $ | 417,336 | $ | 28,207 | $ | 7,231 | $ | 59,464 | $ | 512,238 |
| Column 1 | Column 2 |
|---|---|
| (1) | Represents amounts committed to customers. |
In addition to the loan commitments noted above, the pipeline of loans held for sale included $48.4 million of in process loans whose terms included interest rate locks to borrowers that were paired with a best-efforts commitment to sell the loan to a buyer at a fixed price and within a predetermined timeframe after the sale commitment is established.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of our business of investing in loans and securities as well as in the normal course of maintaining and improving our facilities. 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 June 30, 2021.
In addition to the commitments noted above, we are party to standby letters of credit totaling approximately $739,000 at June 30, 2021 through which we guarantee certain specific business obligations of our commercial customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
At June 30, 2021, outstanding loan commitments relating to loans held in portfolio totaled $512.2 million compared to $145.1 million at June 30, 2020. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For additional information regarding our outstanding lending commitments at June 30, 2021, see Note 17 to the audited consolidated financial statements.
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Capital
Consistent with our goals to operate as a sound and profitable financial organization, Kearny Financial and Kearny Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As of June 30, 2021, Kearny Financial and Kearny Bank exceeded all capital requirements of the federal banking regulators and were considered well capitalized.
The following table presents information regarding the Bank’s regulatory capital levels at June 30, 2021:
| At June 30, 2021 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | $ | 761,883 | 17.22 | % | $ | 353,970 | 8.00 | % | $ | 442,462 | 10.00 | % | ||||||||||||
| Tier 1 capital (to risk-weighted assets) | 726,737 | 16.42 | % | 265,477 | 6.00 | % | 353,970 | 8.00 | % | |||||||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 726,737 | 16.42 | % | 199,108 | 4.50 | % | 287,600 | 6.50 | % | |||||||||||||||
| Tier 1 capital (to adjusted total assets) | 726,737 | 10.23 | % | 284,114 | 4.00 | % | 355,142 | 5.00 | % |
The following table presents information regarding the consolidated Company’s regulatory capital levels at June 30, 2020:
| At June 30, 2021 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Actual | For Capital Adequacy Purposes | |||||||||||||||
| Amount | Ratio | Amount | Ratio | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
| Total capital (to risk-weighted assets) | $ | 872,823 | 19.65 | % | $ | 355,274 | 8.00 | % | ||||||||
| Tier 1 capital (to risk-weighted assets) | 837,677 | 18.86 | % | 266,456 | 6.00 | % | ||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 837,677 | 18.86 | % | 199,842 | 4.50 | % | ||||||||||
| Tier 1 capital (to adjusted total assets) | 837,677 | 11.76 | % | 284,877 | 4.00 | % |
For additional information regarding regulatory capital at June 30, 2021, see Note 15 to the audited consolidated financial statements.
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities of our assets and liabilities are critical to the maintenance of acceptable performance levels.
The principal effect of inflation on earnings, as distinct from levels of interest rates, is in the area of non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.
Recent Accounting Pronouncements
For a discussion of the expected impact of recently issued accounting pronouncements that have yet to be adopted by us, please refer to Note 2 to the audited consolidated financial statements.
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