Kearny Financial Corp. (KRNY) FY 2023 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 and Estimates
Our accounting policies are integral to understanding the results reported. We describe them in detail in Note 1 to our audited consolidated financial statements. In preparing the audited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the Consolidated Statements of Financial Condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for credit losses and goodwill.
Allowance for Credit Losses. The determination of our allowance for credit losses on loans (“ACL”) is considered a critical accounting estimate by management because of the high degree of judgment involved in determining qualitative loss factors, the subjectivity of the assumptions used, and the potential for changes in the forecasted economic environment that could result in changes to the amount of the recorded ACL. See Note 1 to our audited consolidated financial statements for a detailed discussion of our accounting policies and methodologies for establishing the ACL.
Management believes the following information may enable investors to better understand the changes in our ACL. Our ACL totaled $48.7 million and $47.1 million at June 30, 2023 and 2022, respectively. The $1.7 million increase in our ACL was primarily driven by our collectively evaluated loans. The quantitative component of our ACL, which is largely based on the national unemployment rate forecast, increased $8.5 million, which largely resulted from loan growth, slower prepayment speeds and a higher forecasted national unemployment rate. The qualitative component of our ACL, which is largely based on management’s judgment of qualitative loss factors, decreased $6.5 million.
Our ACL totaled $48.7 million at June 30, 2023 and the amount allocated to our collectively evaluated multi-family and nonresidential mortgage loans was $32.0 million, of which $23.3 million was attributable to qualitative loss factors. Changes in managements’ judgement of qualitative loss factors could result in a significant change to the ACL. As described in Note 1, qualitative loss factors are applied to each portfolio segment with the amounts judgmentally determined by the relative risk to the most severe loss periods identified in the historical loan charge-offs of a peer group of similar-sized regional banks. At June 30, 2023, the most severe historical loss rate for multi-family and nonresidential mortgages loans was 1.72%.
Management performed a hypothetical sensitivity analysis to understand the impact of a change in a key input on our ACL. At June 30, 2023, if the four-quarter national unemployment rate forecast had been 9% rather than an average of approximately 4.0%, our ACL as a percent of total loans would have increased 33 basis points from 0.83% to 1.16%. This sensitivity analysis includes the impact to both the quantitative and qualitative components of our ACL. Changes in quantitative inputs and qualitative loss factors may not occur in the same direction or magnitude across all segments of our loan portfolio and deterioration in some quantitative inputs and qualitative loss factors may offset improvement in others. This sensitivity analysis does not represent a change to our expectations of the economic environment but provides a hypothetical result to assess the sensitivity of the ACL to a change in a key input. This sensitivity analysis does not incorporate changes to management’s judgment of qualitative loss factors.
Our ACL on individually analyzed loans is determined on an individual basis using the present value of expected cash flows discounted using the loan’s effective interest rate or, for collateral-dependent loans, the fair value of the collateral, less estimated selling costs, as applicable. Our ACL on individually analyzed loans decreased $315,000 during the year ended June 30, 2023.
39
Table of Contents
Goodwill. We have goodwill of $210.9 million at June 30, 2023. 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 is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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. Due to a significant decline in bank stock prices, triggered by regional bank failures, we performed a quantitative goodwill impairment during the fourth quarter of the year ended June 30, 2023. The quantitative goodwill impairment test compares the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair value, and impairment loss would be recorded.
The 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 approaches”). The result of the income approach was weighted at 50% and the results of the market approaches comprised the remaining 50% in determining the fair value of our single reporting unit. The fair value of our single reporting unit exceeded its carrying value and no impairment charges were recorded for the year ended June 30, 2023. Determining fair value of our single reporting unit is subject to uncertainty as it is reliant on projected future cash flows, discount rate assumption, and market estimates. In the future, changes in projected future cash flows, discount rate assumption, or market estimates could result in material goodwill impairment. To quantify the impact of a potential goodwill impairment charge at June 30, 2023, the impact of a five percent impairment charge on goodwill would result in a reduction in pre-tax income of approximately $10.5 million.
40
Table of Contents
Financial Overview
The following financial information and other data in this section are derived from our audited consolidated financial statements and should be read together therewith:
| At June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||
| (In Thousands) | ||||||||||
| Balance Sheet Data: | ||||||||||
| Cash and equivalents | $ | 70,515 | $ | 101,615 | $ | 67,855 | ||||
| Assets | 8,064,815 | 7,719,883 | 7,283,735 | |||||||
| Net loans receivable | 5,780,687 | 5,370,787 | 4,793,229 | |||||||
| Investment securities available for sale | 1,227,729 | 1,344,093 | 1,676,864 | |||||||
| Investment securities held to maturity | 146,465 | 118,291 | 38,138 | |||||||
| Goodwill | 210,895 | 210,895 | 210,895 | |||||||
| Deposits | 5,629,183 | 5,862,256 | 5,485,306 | |||||||
| Borrowings | 1,506,812 | 901,337 | 685,876 | |||||||
| Stockholders' equity | 869,284 | 894,000 | 1,042,944 |
| For the Years Ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||
| (Dollars in Thousands, Except Per Share Amounts) | ||||||||||
| Summary of Operations: | ||||||||||
| Interest income | $ | 293,724 | $ | 226,272 | $ | 238,085 | ||||
| Interest expense | 117,859 | 29,669 | 49,851 | |||||||
| Net interest income | 175,865 | 196,603 | 188,234 | |||||||
| Provision for (reversal of) credit losses | 2,486 | (7,518) | (1,121) | |||||||
| Net interest income after provision for (reversal of) credit losses | 173,379 | 204,121 | 189,355 | |||||||
| Non-interest income | 2,751 | 13,934 | 21,026 | |||||||
| Non-interest expenses | 123,751 | 125,708 | 125,885 | |||||||
| Income before taxes | 52,379 | 92,347 | 84,496 | |||||||
| Income tax expense | 11,568 | 24,800 | 21,263 | |||||||
| Net income | $ | 40,811 | $ | 67,547 | $ | 63,233 | ||||
| Per Share Data: | ||||||||||
| Net income per share - Basic and diluted | $ | 0.63 | $ | 0.95 | $ | 0.77 | ||||
| Weighted average number of common shares outstanding (in thousands): | ||||||||||
| Basic | 64,804 | 70,911 | 82,387 | |||||||
| Diluted | 64,804 | 70,933 | 82,391 | |||||||
| Cash dividends per share | $ | 0.44 | $ | 0.43 | $ | 0.35 | ||||
| Dividend payout ratio(1) | 70.2 | % | 45.1 | % | 45.1 | % |
________________________________________
(1)Represents cash dividends declared divided by net income.
41
Table of Contents
| At or For the Years Ended June 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||
| Performance ratios: | ||||||||
| Return on average assets (ratio of net income to average total assets) | 0.51 | % | 0.93 | % | 0.86 | % | ||
| Return on average equity (ratio of net income to average total equity) | 4.66 | % | 6.86 | % | 5.79 | % | ||
| Return on average tangible equity (ratio of net income to average tangible equity)(1) | 6.17 | % | 8.77 | % | 7.22 | % | ||
| Net interest rate spread | 2.09 | % | 2.86 | % | 2.61 | % | ||
| Net interest margin | 2.34 | % | 2.94 | % | 2.75 | % | ||
| Average interest-earning assets to average interest-bearing liabilities | 115.66 | % | 118.93 | % | 118.63 | % | ||
| Efficiency ratio(2) | 69.28 | % | 59.71 | % | 60.16 | % | ||
| Non-interest expense to average assets | 1.53 | % | 1.73 | % | 1.72 | % | ||
| Asset Quality Ratios: | ||||||||
| Non-performing loans to total loans | 0.73 | % | 1.30 | % | 1.64 | % | ||
| Non-performing assets to total assets | 0.69 | % | 1.19 | % | 1.10 | % | ||
| Net charge-offs to average loans outstanding | 0.01 | % | 0.07 | % | 0.03 | % | ||
| Allowance for credit losses to total loans | 0.83 | % | 0.87 | % | 1.19 | % | ||
| Allowance for credit losses to non-performing loans | 114.33 | % | 66.92 | % | 72.92 | % | ||
| Capital Ratios: | ||||||||
| Average equity to average assets | 10.85 | % | 13.52 | % | 14.88 | % | ||
| Equity to assets at period end | 10.78 | % | 11.58 | % | 14.32 | % | ||
| Tangible equity to tangible assets at period end(3) | 8.35 | % | 9.06 | % | 11.72 | % |
________________________________________
(1)Average tangible equity equals average total stockholders’ equity reduced by average goodwill and average core deposit intangible assets.
(2)Efficiency ratio equals non-interest expense divided by the sum of net interest income and non-interest income.
(3)Tangible equity equals total stockholders’ equity reduced by goodwill and core deposit intangible assets.
Comparison of Financial Condition at June 30, 2023 and June 30, 2022
Executive Summary. Total assets increased by $344.9 million, or 4.5%, to $8.06 billion at June 30, 2023 from $7.72 billion at June 30, 2022. The increase primarily reflected an increase in net loans receivable, partially offset by a decrease in investment securities.
Investment Securities. Investment securities available for sale decreased by $116.4 million to $1.23 billion at June 30, 2023 from $1.34 billion at June 30, 2022. This decrease was largely the result of principal repayments of $124.7 million, sales of $120.4 million and a $38.1 million decrease in the fair value of the portfolio to a net unrealized loss of $156.1 million, partially offset by purchases of $166.5 million.
Investment securities held to maturity increased by $28.2 million to $146.5 million at June 30, 2023 from $118.3 million at June 30, 2022. The increase was largely the result of purchases of $40.4 million, partially offset by principal repayments of $12.1 million.
Additional information regarding investment securities at June 30, 2023 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 $9.6 million at June 30, 2023 as compared to $28.9 million at June 30, 2022 and are reported separately from the balance of net loans receivable. Loans held-for-sale consisted of residential mortgage loans of $9.6 million at June 30, 2023 as compared to residential mortgage loans and commercial mortgage loans of $7.1 million and $21.7 million, respectively, at June 30, 2022. During the year ended June 30, 2023, we sold $103.8 million of residential mortgage loans, resulting in a net gain on sale of $760,000, and $25.3 million of commercial mortgage loans, resulting in a net loss on sale of $2.5 million.
42
Table of Contents
Net Loans Receivable. Net loans receivable increased by $409.9 million, or 7.6%, to $5.78 billion at June 30, 2023 from $5.37 billion at June 30, 2022. Detail regarding the change in the loan portfolio is presented below:
| June 30, 2023 | June 30, 2022 | Increase/ (Decrease) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | ||||||||||
| Commercial loans: | ||||||||||
| Multi-family mortgage | $ | 2,761,775 | $ | 2,409,090 | $ | 352,685 | ||||
| Nonresidential mortgage | 968,574 | 1,019,838 | (51,264) | |||||||
| Commercial business | 146,861 | 176,807 | (29,946) | |||||||
| Construction | 226,609 | 140,131 | 86,478 | |||||||
| Total commercial loans | 4,103,819 | 3,745,866 | 357,953 | |||||||
| One- to four-family residential mortgage | 1,700,559 | 1,645,816 | 54,743 | |||||||
| Consumer loans: | ||||||||||
| Home equity loans | 43,549 | 42,028 | 1,521 | |||||||
| Other consumer | 2,549 | 2,866 | (317) | |||||||
| Total consumer loans | 46,098 | 44,894 | 1,204 | |||||||
| Total loans | 5,850,476 | 5,436,576 | 413,900 | |||||||
| Unaccreted yield adjustments | (21,055) | (18,731) | (2,324) | |||||||
| Allowance for credit losses | (48,734) | (47,058) | (1,676) | |||||||
| Net loans receivable | $ | 5,780,687 | $ | 5,370,787 | $ | 409,900 |
Commercial loan origination volume for the year ended June 30, 2023 totaled $895.9 million, comprised of $716.4 million of commercial mortgage loan originations, $91.8 million of commercial business loan originations and construction loan disbursements of $87.7 million.
One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled $197.8 million for the year ended June 30, 2023 and was supplemented with loan purchases totaling $656,000. Home equity loan and line of credit origination volume for the same period totaled $26.0 million.
Additional information about our loans at June 30, 2023 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 5 to the audited consolidated financial statements.
Nonperforming Loans and TDRs. Nonperforming loans decreased by $27.7 million to $42.6 million, or 0.73% of total loans, at June 30, 2023 from $70.3 million, or 1.30% of total loans, at June 30, 2022. The decrease in nonperforming loans was largely attributable to a decrease of $15.4 million in nonperforming nonresidential mortgage loans and a decrease of $7.5 million in nonperforming multi-family mortgage loans.
TDRs are loans where we have modified the contractual terms of the loan as a result of the financial condition of the borrower. Subsequent to their modification, TDRs are placed on non-accrual until such time as satisfactory payment performance has been demonstrated, at which time the loan may be returned to accrual status. At June 30, 2023, we had accruing TDRs totaling $10.5 million, an increase of $1.8 million from $8.7 million at June 30, 2022. At June 30, 2023, we had non-accrual TDRs totaling $6.9 million, a decrease of $6.6 million from $13.5 million at June 30, 2022.
Additional information about nonperforming loans and TDRs at June 30, 2023 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.
43
Table of Contents
Allowance for Credit Losses. At June 30, 2023, the ACL totaled $48.7 million, or 0.83% of total loans, reflecting an increase of $1.7 million from $47.1 million, or 0.87% of total loans, at June 30, 2022. The increase was largely attributable to a provision for credit losses of $2.5 million, primarily driven by loan growth, partially offset by a reduction in the expected life of the loan portfolio. Partially offsetting the provision for credit losses were net charge-offs of $810,000, of which $396,000 had been individually reserved for within the ACL at June 30, 2022.
Additional information about the allowance for credit losses at June 30, 2023 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 $73.6 million to $829.8 million at June 30, 2023 from $756.2 million at June 30, 2022. The increase in other assets largely reflected a $24.6 million increase in FHLB stock, a $23.8 million increase in the fair value of our derivatives portfolio and a $12.8 million increase in OREO. The increase in OREO was a result of our acquisition of a $13.0 million nonresidential real estate property through foreclosure. The remaining change generally reflected normal operating fluctuations within these line items.
Deposits. Total deposits decreased by $233.1 million, or 4.0%, to $5.63 billion at June 30, 2023 from $5.86 billion at June 30, 2022. Included in total deposits are brokered and listing service time deposits of $640.5 million and $773.5 million at June 30, 2023 and 2022, respectively. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:
| June 30, 2023 | June 30, 2022 | Increase/ (Decrease) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In Thousands) | ||||||||||
| Non-interest-bearing deposits | $ | 609,999 | $ | 653,899 | $ | (43,900) | ||||
| Interest-bearing deposits: | ||||||||||
| Interest-bearing demand | 2,252,912 | 2,265,597 | (12,685) | |||||||
| Savings | 748,721 | 1,053,198 | (304,477) | |||||||
| Certificates of deposit | 2,017,551 | 1,889,562 | 127,989 | |||||||
| Interest-bearing deposits | 5,019,184 | 5,208,357 | (189,173) | |||||||
| Total deposits | $ | 5,629,183 | $ | 5,862,256 | $ | (233,073) |
Uninsured deposits totaled $1.77 billion as of June 30, 2023 compared to $1.53 billion as of June 30, 2022. Excluding collateralized deposits of state and local governments, and deposits of the Bank’s wholly-owned subsidiary and holding company, uninsured deposits totaled $710.4 million, or 12.6% of total deposits, at June 30, 2023 compared to $792.1 million, or 13.5% of total deposits, at June 30, 2022.
Additional information about our deposits at June 30, 2023 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 10 to the audited consolidated financial statements.
Borrowings. The balance of borrowings increased by $605.5 million, or 67.2%, to $1.51 billion at June 30, 2023 from $901.3 million at June 30, 2022 which included overnight borrowings totaling $225.0 million and $250.0 million at June 30, 2023 and 2022, respectively. The increase was primarily driven by a net increase in FHLB advances.
Additional information about our borrowings at June 30, 2023 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 11 to the audited consolidated financial statements.
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased by $2.8 million to $59.5 million at June 30, 2023 from $62.3 million at June 30, 2022. The change in the balance of other liabilities generally reflected normal operating fluctuations within these line items.
Stockholders’ Equity. Stockholders’ equity decreased by $24.7 million to $869.3 million at June 30, 2023 from $894.0 million at June 30, 2022. The decrease in stockholders’ equity during the year ended June 30, 2023 largely reflected dividends totaling $28.7 million and share repurchases totaling $27.4 million. In addition, other comprehensive loss, net of tax, was $13.7 million, which was driven by a decline in the fair value of our available for sale securities, partially offset by an increase in the fair value of our derivatives portfolio. These items were partially offset by net income of $40.8 million.
44
Table of Contents
Book value per share increased by $0.18 to $13.20 at June 30, 2023 while tangible book value per share increased by $0.06 to $9.96 at June 30, 2023.
On August 1, 2022, we announced that the Board of Directors had authorized a new stock repurchase plan to repurchase up to 4,000,000 shares, and the completion of our previous stock repurchase plan, which authorized the repurchase of 7,602,021 shares. During the year ended June 30, 2023, we repurchased 2,820,398 shares of common stock at a cost of $27.4 million, or $9.73 per share, including 2,495,253 shares, or 62.4% of the shares authorized for repurchase under the current repurchase program, at a cost of $23.8 million, or $9.54 per share.
Comparison of Operating Results for the Years Ended June 30, 2023 and June 30, 2022
Net Income. Net income for the year ended June 30, 2023 was $40.8 million, or $0.63 per diluted share, a decrease of 39.6% from $67.5 million, or $0.95 per diluted share for the year ended June 30, 2022. The decrease in net income reflected a decrease in net interest income, an increase in the provision for credit losses and a decrease in non-interest income, partially offset by a decrease in non-interest expense and a decrease in income tax expense. Net income for the years ended June 30, 2023 and June 30, 2022 was impacted by various non-recurring items, as described in further detail below.
Net Interest Income. Net interest income decreased by $20.7 million to $175.9 million for the year ended June 30, 2023. The decrease between the comparative periods resulted from an increase of $88.2 million in interest expense, partially offset by an increase of $67.5 million in interest income. Included in net interest income for the years ended June 30, 2023 and 2022, respectively, was purchase accounting accretion of $5.3 million and $9.0 million and loan prepayment penalty income of $895,000 and $5.4 million.
Net interest margin decreased 60 basis points to 2.34% for the year ended June 30, 2023, from 2.94% for the year ended June 30, 2022. The decrease reflected increases in the cost and average balance of interest-bearing liabilities, partially offset by increases in the yield on and average balance of interest-earning assets. The increased cost of interest-bearing liabilities and yield on interest-earning assets is the result of higher market interest rates that were caused by an increase in the federal funds target rate from 0% - 0.25% in March 2022 to 5.00% - 5.25% in May 2023.
45
Table of Contents
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, | ||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||
| 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) | $ | 5,827,123 | $ | 233,147 | 4.00 | % | $ | 4,922,400 | $ | 190,520 | 3.87 | % | $ | 4,866,436 | $ | 202,240 | 4.16 | % | ||||||||||||||
| Taxable investment securities(2) | 1,532,961 | 54,855 | 3.58 | 1,622,475 | 32,746 | 2.02 | 1,571,452 | 31,238 | 1.99 | |||||||||||||||||||||||
| Tax-exempt securities (2) | 30,332 | 694 | 2.29 | 55,981 | 1,273 | 2.27 | 74,604 | 1,652 | 2.21 | |||||||||||||||||||||||
| Other interest-earning assets(3) | 115,390 | 5,028 | 4.36 | 82,802 | 1,733 | 2.09 | 200,435 | 2,955 | 1.47 | |||||||||||||||||||||||
| Total interest-earning assets | 7,505,806 | 293,724 | 3.91 | 6,683,658 | 226,272 | 3.39 | 6,712,927 | 238,085 | 3.55 | |||||||||||||||||||||||
| Non-interest-earning assets | 563,131 | 598,712 | 620,934 | |||||||||||||||||||||||||||||
| Total assets | $ | 8,068,937 | $ | 7,282,370 | $ | 7,333,861 | ||||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
| Interest-bearing demand | $ | 2,349,802 | $ | 40,650 | 1.73 | $ | 2,067,200 | $ | 5,123 | 0.25 | $ | 1,726,190 | $ | 7,028 | 0.41 | |||||||||||||||||
| Savings | 896,651 | 3,351 | 0.37 | 1,088,971 | 1,190 | 0.11 | 1,066,794 | 3,299 | 0.31 | |||||||||||||||||||||||
| Certificates of deposit | 2,083,864 | 34,162 | 1.64 | 1,711,276 | 8,895 | 0.52 | 1,931,887 | 21,208 | 1.10 | |||||||||||||||||||||||
| Total interest-bearing deposits | 5,330,317 | 78,163 | 1.47 | 4,867,447 | 15,208 | 0.31 | 4,724,871 | 31,535 | 0.67 | |||||||||||||||||||||||
| FHLB advances | 1,101,658 | 37,734 | 3.43 | 679,388 | 14,067 | 2.07 | 931,148 | 18,314 | 1.97 | |||||||||||||||||||||||
| Other borrowings | 57,468 | 1,962 | 3.41 | 72,841 | 394 | 0.54 | 2,563 | 2 | 0.06 | |||||||||||||||||||||||
| Total borrowings | 1,159,126 | 39,696 | 3.42 | 752,229 | 14,461 | 1.92 | 933,711 | 18,316 | 1.96 | |||||||||||||||||||||||
| Total interest-bearing liabilities | 6,489,443 | 117,859 | 1.82 | 5,619,676 | 29,669 | 0.53 | 5,658,582 | 49,851 | 0.88 | |||||||||||||||||||||||
| Non-interest-bearing liabilities(4) | 704,136 | 678,143 | 583,886 | |||||||||||||||||||||||||||||
| Total liabilities | 7,193,579 | 6,297,819 | 6,242,468 | |||||||||||||||||||||||||||||
| Stockholders' equity | 875,358 | 984,551 | 1,091,393 | |||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 8,068,937 | $ | 7,282,370 | $ | 7,333,861 | ||||||||||||||||||||||||||
| Net interest income | $ | 175,865 | $ | 196,603 | $ | 188,234 | ||||||||||||||||||||||||||
| Interest rate spread(5) | 2.09 | % | 2.86 | % | 2.67 | % | ||||||||||||||||||||||||||
| Net interest margin(6) | 2.34 | % | 2.94 | % | 2.80 | % | ||||||||||||||||||||||||||
| Ratio of interest-earning assets to interest-bearing liabilities | 1.16 | 1.19 | 1.19 |
________________________________________
(1)Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for credit losses has been included in non-interest-earning assets.
(2)Fair value adjustments have been excluded in the balances of interest-earning assets.
(3)Includes interest-bearing deposits at other banks and FHLB of New York capital stock.
(4)Includes average balances of non-interest-bearing deposits of $644.5 million, $624.7 million and $518.1 million for the years ended June 30, 2023, 2022 and 2021, respectively.
(5)Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(6)Net interest margin represents net interest income as a percentage of average interest-earning assets.
46
Table of Contents
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, 2023 versus Year Ended June 30, 2022 | Year Ended June 30, 2022 versus Year Ended June 30, 2021 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||
| (In Thousands) | (In Thousands) | |||||||||||||||||||||
| Interest and dividend income | ||||||||||||||||||||||
| Loans receivable | $ | 36,040 | $ | 6,587 | $ | 42,627 | $ | 2,337 | $ | (14,057) | $ | (11,720) | ||||||||||
| Taxable investment securities | (1,901) | 24,010 | 22,109 | 1,030 | 478 | 1,508 | ||||||||||||||||
| Tax-exempt securities | (590) | 11 | (579) | (423) | 44 | (379) | ||||||||||||||||
| Other interest-earning assets | 876 | 2,419 | 3,295 | (2,157) | 935 | (1,222) | ||||||||||||||||
| Total interest-earning assets | $ | 34,425 | $ | 33,027 | $ | 67,452 | $ | 787 | $ | (12,600) | $ | (11,813) | ||||||||||
| Interest expense: | ||||||||||||||||||||||
| Interest-bearing demand | $ | 802 | $ | 34,725 | $ | 35,527 | $ | 1,216 | $ | (3,121) | $ | (1,905) | ||||||||||
| Savings | (243) | 2,404 | 2,161 | 67 | (2,176) | (2,109) | ||||||||||||||||
| Certificates of deposit | 2,320 | 22,947 | 25,267 | (2,192) | (10,121) | (12,313) | ||||||||||||||||
| Borrowings | 10,324 | 14,911 | 25,235 | (3,489) | (366) | (3,855) | ||||||||||||||||
| Total interest-bearing liabilities | $ | 13,203 | $ | 74,987 | $ | 88,190 | $ | (4,398) | $ | (15,784) | $ | (20,182) | ||||||||||
| Change in net interest income | $ | 21,222 | $ | (41,960) | $ | (20,738) | $ | 5,185 | $ | 3,184 | $ | 8,369 |
Provision for Credit Losses. The provision for credit losses increased by $10.0 million to a provision for credit losses of $2.5 million for the year ended June 30, 2023, compared to a reversal of credit losses of $7.5 million for the year ended June 30, 2022. The provision for credit losses for the year ended June 30, 2023 was largely attributable to loan growth, partially offset by a reduction in the expected life of the loan portfolio. By comparison, the reversal of credit losses for the year ended June 30, 2022 was largely attributable to an improvement in our economic forecast, a reduction in the expected life of various segments of the loan portfolio and a net reduction in reserves on loans individually analyzed for impairment.
Additional information regarding the allowance for credit losses and the associated provision recognized during the year ended June 30, 2023 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, 2023.
Non-Interest Income. Non-interest income decreased by $11.2 million to $2.8 million for the year ended June 30, 2023.
Loss on sale and call of securities was $15.2 million during the year ended June 30, 2023 compared to $559,000 recorded during the earlier comparative period. The current year loss was the result of a previously announced wholesale restructuring that involved the sale of $120.4 million of available for sale securities. The proceeds of the sale were reinvested in higher yielding securities.
Loss on sale of loans was $1.6 million for the year ended June 30, 2023 compared to a gain on sale of loans of $2.5 million during the earlier comparative period. The current year included a loss of $2.5 million that resulted from the sale of a non-performing commercial mortgage loan held-for-sale. In addition, the decrease in gain on sale of loans reflected a decrease in the volume of loans sold between comparative periods.
Income from bank owned life insurance increased $2.5 million to $8.6 million for the year ended June 30, 2023. The increase is the result of payouts on life insurances policies.
47
Table of Contents
Other non-interest income increased $4.7 million to $6.3 million for the year ended June 30, 2023. The increase was primarily attributable to a non-recurring gain of $2.9 million from the sale of a former branch location and a $1.8 million increase in income from investment services. These increases were partially offset by $356,000 of non-recurring gains on asset disposals in the earlier 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 decreased by $2.0 million to $123.8 million for the year ended June 30, 2023.
Salaries and employee benefits expense decreased by $675,000 to $75.6 million for the year ended June 30, 2023. This decrease was largely due to lower incentive compensation, lower incentive payments tied to loan origination volume and lower expense from retirement plans. These decreases were partially offset by higher salary expense and non-recurring severance expense resulting from a reduction in headcount.
Net occupancy expense of premises decreased by $2.1 million to $12.0 million for the year ended June 30, 2023. This decrease was largely due to expenses recognized in the prior period including $1.5 million of non-recurring expenses related to the consolidation of three retail branch locations and an office facility and $250,000 related to facility repairs made in connection with damage incurred during Tropical Storm Ida. The current year includes $250,000 of non-recurring occupancy expenses related to the consolidation of two retail branch locations.
Equipment and systems expense decreased by $1.3 million to $14.6 million for the year ended June 30, 2023. This decrease was largely attributable to a prior period non-recurring expense of $800,000 from the early termination of a contract with a service provider.
FDIC insurance premiums increased $2.7 million to $5.1 million for the year ended June 30, 2023. This increase was largely driven by asset growth.
Director compensation decreased by $768,000 to $1.4 million for the year ended June 30, 2023. This decrease primarily reflected a decline in director-related stock-based compensation expense.
The remaining changes in the other components of non-interest expense between comparative periods generally reflected normal operating fluctuations within those line items.
Provision for Income Taxes. Provision for income taxes decreased by $13.2 million to $11.6 million for the year ended June 30, 2023, from $24.8 million for the year ended June 30, 2022. The decrease in income tax expense reflected a lower level of pre-tax income as compared to the prior period.
Effective tax rates for the years ended June 30, 2023 and 2022 were 22.1% and 26.9%, respectively. The decrease in the effective tax rate was primarily due to lower taxable income, as well as non-taxable payouts on life insurance policies, noted above, during the year ended June 30, 2023.
Comparison of Operating Results for the Years Ended June 30, 2022 and June 30, 2021
A comparison of our operating results for the years ended June 30, 2022 and June 30, 2021 can be found in our Annual Report on Form 10-K for the year ended June 30, 2022, filed with the SEC on August 26, 2022.
48
Table of Contents
Liquidity and Commitments
Liquidity, represented by cash and cash equivalents, is a product of operating, investing and financing activities. Our primary sources of funds are deposits, borrowings, cash flows from investment securities and loans receivable and funds provided from operations. While scheduled payments from the amortization and maturity of loans and investment securities are relatively predictable sources of funds, general interest rates, economic conditions and competition greatly influence deposit flows and prepayments on loans and securities.
Liquidity, at June 30, 2023, included $70.5 million of short-term cash and equivalents and $1.23 billion of investment securities available for sale which can readily be sold or pledged as collateral, if necessary. In addition, we have the capacity to borrow additional funds from the FHLB, FRB or via unsecured overnight borrowings. As of June 30, 2023, we had the capacity to borrow additional funds totaling $1.55 billion and $415.0 million from the FHLB and FRB, respectively, without pledging additional collateral. We had the ability to pledge additional securities to borrow an additional $477.0 million at June 30, 2023. As of that same date, we also had access to unsecured overnight borrowings with other financial institutions totaling $990.0 million, of which $100.0 million was outstanding.
Deposits decreased $233.1 million to $5.63 billion at June 30, 2023 from $5.86 billion at June 30, 2022. The decrease in deposit balances reflected a $189.2 million decrease in interest-bearing deposits coupled with a $43.9 million decrease in non-interest-bearing deposits. Borrowings from the FHLB and other sources are generally available to supplement our liquidity position or to replace maturing deposits. As of June 30, 2023, our outstanding balance of FHLB advances, excluding fair value adjustments, totaled $1.28 billion. As of the same date, we had $125.0 million outstanding via our overnight line of credit with the FHLB.
The following table sets forth information concerning balances and interest rates on our short-term borrowings at and for the periods shown:
| At or For the Years Ended June 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||
| (Dollars in Thousands) | ||||||||||
| Balance at end of year | $ | 1,175,000 | $ | 625,000 | $ | 390,000 | ||||
| Average balance during year | $ | 900,997 | $ | 476,142 | $ | 646,896 | ||||
| Maximum outstanding at any month end | $ | 1,280,000 | $ | 684,000 | $ | 815,000 | ||||
| Weighted average interest rate at end of year | 5.42 | % | 1.72 | % | 0.33 | % | ||||
| Weighted average interest rate during year | 4.49 | % | 0.58 | % | 1.08 | % |
The following table discloses our contractual obligations and commitments as of June 30, 2023:
| June 30, 2023 | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 | $ | 3,445 | $ | 6,254 | $ | 4,904 | $ | 4,305 | $ | 18,908 | ||||||||
| Certificates of deposit | 1,896,132 | 94,472 | 21,365 | 5,582 | 2,017,551 | |||||||||||||
| Federal Home Loan Bank Advances | 972,500 | 110,000 | 200,000 | — | 1,282,500 | |||||||||||||
| Total contractual obligations | $ | 2,872,077 | $ | 210,726 | $ | 226,269 | $ | 9,887 | $ | 3,318,959 | ||||||||
| Commitments | ||||||||||||||||||
| Undisbursed funds from approved lines of credit(1) | $ | 87,467 | $ | 20,942 | $ | 4,123 | $ | 56,961 | $ | 169,493 | ||||||||
| Construction loans in process(1) | 58,485 | — | — | — | 58,485 | |||||||||||||
| Other commitments to extend credit(1) | 23,261 | — | — | — | 23,261 | |||||||||||||
| Total commitments | $ | 169,213 | $ | 20,942 | $ | 4,123 | $ | 56,961 | $ | 251,239 |
________________________________________
(1)Represents amounts committed to customers.
49
Table of Contents
In addition to the loan commitments noted above, the pipeline of loans held for sale included $11.7 million of in process loans whose terms included interest rate locks to borrowers that were paired with a best-efforts commitment to sell the loan to a buyer at a fixed price and within a predetermined timeframe after the sale commitment is established.
In addition to the commitments noted above, we are party to standby letters of credit totaling approximately $115,000 at June 30, 2023 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, 2023, outstanding loan commitments relating to loans held in portfolio totaled $251.2 million compared to $510.5 million at June 30, 2022. 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, 2023, see Note 17 to the audited consolidated financial statements.
Capital
Consistent with our goals to operate as a sound and profitable financial organization, Kearny Financial and Kearny Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As of June 30, 2023, 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, 2023:
| June 30, 2023 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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) | $ | 695,417 | 13.31 | % | $ | 417,853 | 8.00 | % | $ | 522,316 | 10.00 | % | ||||||||
| Tier 1 capital (to risk-weighted assets) | 659,783 | 12.63 | % | 313,389 | 6.00 | % | 417,853 | 8.00 | % | |||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 659,783 | 12.63 | % | 235,042 | 4.50 | % | 339,505 | 6.50 | % | |||||||||||
| Tier 1 capital (to adjusted total assets) | 659,783 | 8.15 | % | 323,922 | 4.00 | % | 404,902 | 5.00 | % |
The following table presents information regarding the consolidated Company’s regulatory capital levels at June 30, 2023:
| June 30, 2023 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Actual | For Capital Adequacy Purposes | ||||||||||||
| Amount | Ratio | Amount | Ratio | ||||||||||
| (Dollars in Thousands) | |||||||||||||
| Total capital (to risk-weighted assets) | $ | 770,621 | 14.75 | % | $ | 418,015 | 8.00 | % | |||||
| Tier 1 capital (to risk-weighted assets) | 734,987 | 14.07 | % | 313,511 | 6.00 | % | |||||||
| Common equity tier 1 capital (to risk-weighted assets) | 734,987 | 14.07 | % | 235,133 | 4.50 | % | |||||||
| Tier 1 capital (to adjusted total assets) | 734,987 | 9.07 | % | 324,170 | 4.00 | % |
For additional information regarding regulatory capital at June 30, 2023, see Note 15 to the audited consolidated financial statements.
50
Table of Contents
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.