KEARNY FINANCIAL CORP. Forward-Looking Statements
This Quarterly Report on Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may", "will", "believe", "expect", "estimate", "anticipate", "continue", or similar terms or variations on those terms, or the negative of those terms. The actual results of the Company could differ materially from those management expectations. This includes statements regarding general economic conditions, public health crisis such as the governmental, social and economic effects of the novel coronavirus, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities and failure to integrate or profitably operate acquired businesses. Additional potential factors include changes in interest rates, the rate of inflation, deposit flows, cost of funds, demand for loan products and financial services, competition and changes in the quality or composition of loan and investment portfolios of the Company. Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company's other filings with theSecurities and Exchange Commission . In addition, the COVID-19 pandemic has had, and may continue to have, an adverse impact on the Company, its clients and the communities it serves. Given its dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on our business. Reference is made to Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedJune 30, 2022 . Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. AtSeptember 30, 2022 , there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year endedJune 30, 2022 .
Comparison of Financial Condition at
Executive Summary. Total assets increased$169.7 million to$7.89 billion atSeptember 30, 2022 from$7.72 billion atJune 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$80.9 million to$1.26 billion atSeptember 30, 2022 , from$1.34 billion atJune 30, 2022 . This decrease was largely the result of a fair value decrease of$49.4 million and principal repayments of$31.3 million . Investment securities held to maturity decreased$2.3 million to$115.9 million atSeptember 30, 2022 from$118.3 million atJune 30, 2022 . This decrease was the result of principal repayments of$2.3 million . Additional information regarding our investment securities atSeptember 30, 2022 andJune 30, 2022 is presented in Note 4 to the unaudited consolidated financial statements. Loans Held-for-Sale. Loans held-for-sale totaled$12.9 million atSeptember 30, 2022 as compared to$28.9 million atJune 30, 2022 and are reported separately from the balance of net loans receivable. During the three months endedSeptember 30, 2022 , we sold$42.5 million of residential mortgage loans, resulting in a gain on sale of$312,000 , and$14.3 million of commercial mortgage loans, resulting in a net gain on sale of$28,000 . - 36 -
--------------------------------------------------------------------------------
Index
Net Loans Receivable. Net loans receivable increased$238.0 million , or 4.4%, to$5.61 billion atSeptember 30, 2022 from$5.37 billion atJune 30, 2022 . Details regarding the change in the loan portfolio, by loan segment, is presented below: September 30, June 30, Increase/ 2022 2022 (Decrease) (In Thousands) Commercial loans: Multi-family mortgage$ 2,570,297 $ 2,409,090 $ 161,207 Nonresidential mortgage 1,040,688 1,019,838 20,850 Commercial business 186,361 176,807 9,554 Construction 166,052 140,131 25,921 Total commercial loans 3,963,398 3,745,866 217,532
One- to four-family residential mortgage 1,666,730 1,645,816
20,914
Consumer loans:
Home equity loans 43,269 42,028 1,241
Other consumer 2,869 2,866 3
Total consumer loans 46,138 44,894 1,244
Total loans 5,676,266 5,436,576 239,690
Unaccreted yield adjustments (19,896) (18,731) (1,165)
Allowance for credit losses (47,613) (47,058) (555)
Net loans receivable $ 5,608,757 $ 5,370,787 $ 237,970
Commercial loan origination volume for the three months ended September 30, 2022
totaled $341.1 million , comprised of $282.9 million of commercial mortgage loan
originations, $31.9 million of commercial business loan originations and
construction loan disbursements of $26.3 million .
One- to four-family residential mortgage loan origination volume, excluding
loans held-for-sale, totaled
Loan-to-value ("LTV") ratios are based on current period loan balances and
original appraised values at the time of origination unless a current appraisal
has been obtained as a result of the loan being deemed collateral dependent and
individually analyzed. The following table sets forth the composition of our
real estate secured loans indicating the LTV, by loan category, at September 30,
2022 and June 30, 2022 :
September 30, 2022 June 30, 2022
Balance LTV Balance LTV
(Dollars in Thousands)
Commercial mortgage loans:
Multi-family mortgage $ 2,570,297 64 % $ 2,409,090 64 %
Nonresidential mortgage 1,040,688 54 1,019,838 54
Construction 166,052 61 140,131 61
Total commercial mortgage loans 3,777,037 61 3,569,059 61
One- to four-family residential mortgage 1,666,730 62 1,645,816 62 Consumer loans: Home equity loans 43,269 47 42,028 46 Total mortgage loans$ 5,487,036 61 %$ 5,256,903 61 % - 37 -
--------------------------------------------------------------------------------
Index
Additional information about our loans at
Nonperforming Assets and TDRs. Nonperforming assets decreased by$14.8 million to$77.4 million , or 0.98% of total assets, atSeptember 30, 2022 , from$92.2 million , or 1.19% of total assets, atJune 30, 2022 . AtSeptember 30, 2022 , we had accruing TDRs totaling$8.9 million , an increase of$273,000 from$8.7 million atJune 30, 2022 . AtSeptember 30, 2022 , we had non-accrual TDRs totaling$11.8 million , a decrease of$1.7 million from$13.5 million atJune 30, 2022 . AtSeptember 30, 2022 , nonperforming assets consisted of$68.6 million of nonperforming loans,$8.7 million of non-accrual commercial loans held for sale and$178,000 of other real estate owned. AtJune 30, 2022 , nonperforming assets consisted of$70.3 million of nonperforming loans,$21.7 million of non-accrual commercial loans held for sale and$178,000 of other real estate owned.
Additional information about our nonperforming loans and TDRs at
Allowance for Credit Losses ("ACL"). At September 30, 2022 , the ACL totaled
$47.6 million , or 0.84% of total loans, reflecting an increase of $555,000 from
$47.1 million , or 0.87% of total loans, at June 30, 2022 . The increase during
the three months ended September 30, 2022 was largely attributable to a
provision for credit losses of $670,000 , primarily driven by loan growth in the
quarter, partially offset by a reduction in the expected life of the loan
portfolio.
Additional information about our ACL at
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$36.5 million to$792.7 million atSeptember 30, 2022 from$756.2 million atJune 30, 2022 . The increase in the balance of these other assets during the three months endedSeptember 30, 2022 largely reflected a$25.3 million increase in the fair value of our derivatives portfolio. The remaining change generally reflected normal operating fluctuations within these line items. Deposits. Total deposits increased$246.0 million , or 4.2%, to$6.11 billion atSeptember 30, 2022 from$5.86 billion atJune 30, 2022 . The following table sets forth the distribution of, and changes in, deposits, by type, for the periods indicated: September 30, June 30, Increase/ 2022 2022 (Decrease) (In Thousands) Non-interest-bearing deposits$ 683,406 $ 653,899 $ 29,507 Interest-bearing deposits: Interest-bearing demand 2,382,411 2,265,597 116,814 Savings 982,916 1,053,198 (70,282) Certificates of deposit 2,059,545 1,889,562 169,983 Interest-bearing deposits 5,424,872 5,208,357 216,515 Total deposits$ 6,108,278 $ 5,862,256 $ 246,022
Additional information about our deposits at
Borrowings. The balance of borrowings decreased by
Additional information about our borrowings at
Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, decreased$7.4 million to$54.9 million atSeptember 30, 2022 from$62.3 million atJune 30, 2022 . The change in the balance of these other liabilities generally reflected normal operating fluctuations during the period. - 38 -
--------------------------------------------------------------------------------
Index
Stockholders' Equity. Stockholders' equity decreased$19.0 million to$875.0 million atSeptember 30, 2022 from$894.0 million atJune 30, 2022 . The decrease in stockholders' equity during the three months endedSeptember 30, 2022 largely reflected other comprehensive loss, net of income tax, of$20.6 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. In addition, share repurchases totaled$8.7 million and cash dividends totaled$7.3 million . These items were partially offset by net income of$16.5 million .
Book value per share decreased by
OnAugust 1, 2022 , we announced the authorization of a new stock repurchase plan, which authorized the repurchase of 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 quarter endedSeptember 30, 2022 , we repurchased 759,806 shares of common stock at a cost of$8.7 million , or$11.44 per share. ThroughSeptember 30, 2022 , we repurchased a total of 434,661 shares, or 10.9% of the shares authorized for repurchase under the current repurchase program, at a total cost of$5.1 million or$11.66 per share.
Comparison of Operating Results for the Quarter Ended
Net Income. Net income for the quarter endedSeptember 30, 2022 was$16.5 million , or$0.25 per diluted share, compared to$19.7 million , or$0.26 per diluted share for the quarter endedSeptember 30, 2021 . The decrease in net income reflected a decrease in net interest income, an increase in the provision for credit losses and an increase in non-interest expense, partially offset by an increase in non-interest income and a decrease in income tax expense. Net Interest Income. Net interest income decreased by$1.1 million to$48.5 million for the quarter endedSeptember 30, 2022 compared to$49.6 million for the quarter endedSeptember 30, 2021 . The decrease between the comparative periods resulted from an increase of$8.3 million in interest expense, partially offset by an increase of$7.2 million in interest income. Included in net interest income for the quarters endedSeptember 30, 2022 and 2021, respectively, was purchase accounting accretion of$1.8 million and$2.9 million , and loan prepayment penalty income of$441,000 and$1.7 million . Net interest margin decreased 30 basis points to 2.69% for the quarter endedSeptember 30, 2022 , from 2.99% for the quarter endedSeptember 30, 2021 and reflected an increase in the cost of interest-bearing liabilities, partially offset by increases in the average balance and yield on interest-earning assets. - 39 -
--------------------------------------------------------------------------------
Index
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.
Three Months Ended September 30,
2022 2021
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) $ 5,553,996 $ 52,935 3.81 % $ 4,835,676 $ 48,230 3.99 %
Taxable investment securities (2) 1,516,974 10,439 2.75 1,649,953 8,212 1.99
Tax-exempt securities (2) 48,973 285 2.33 59,115 333 2.25
Other interest-earning assets (3) 88,038 761 3.46 85,749 431 2.01
Total interest-earning assets 7,207,981 64,420 3.57 6,630,493 57,206 3.45
Non-interest-earning assets 570,225 616,735
Total assets $ 7,778,206 $ 7,247,228
Interest-bearing liabilities:
Interest-bearing demand $ 2,354,340 5,391 0.92 $ 1,954,271 1,147 0.23
Savings 1,019,343 595 0.23 1,102,865 334 0.12
Certificates of deposit 2,014,922 4,883 0.97 1,798,473 2,584 0.57
Total interest-bearing deposits 5,388,605 10,869 0.81 4,855,609 4,065 0.33
Federal Home Loan Bank advances 642,399 4,301 2.68 665,915 3,544 2.13
Other borrowings 127,456 719 2.26 28,532 7 0.10
Borrowings 769,855 5,020 2.61 694,447 3,551 2.05
Total interest-bearing liabilities 6,158,460 15,889 1.03 5,550,056 7,616 0.55
Non-interest-bearing liabilities (4) 724,055 667,164
Total liabilities 6,882,515 6,217,220
Stockholders' equity 895,691 1,030,008
Total liabilities and stockholders'
equity $ 7,778,206 $ 7,247,228
Net interest income $ 48,531 $ 49,590
Interest rate spread (5) 2.54 % 2.90 %
Net interest margin (6) 2.69 % 2.99 %
Ratio of interest-earning assets to
interest-bearing liabilities 1.17 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 ofNew York capital stock. (4)Includes average balances of non-interest-bearing deposits of$667.6 million and$610.3 million for the quarter endedSeptember 30, 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. - 40 -
--------------------------------------------------------------------------------
Index
Provision for Credit Losses. The provision for credit losses increased$6.1 million to a provision for credit losses of$670,000 for the quarter endedSeptember 30, 2022 , compared to a provision for credit losses reversal of$5.4 million for the quarter endedSeptember 30, 2021 . The provision for the quarter endedSeptember 30, 2022 was largely attributable to loan growth in the quarter, partially offset by a reduction in the expected life of the loan portfolio. By comparison, the provision reversal for the quarter endedSeptember 30, 2021 was largely attributable to a reduction in the expected life of various loan segments and continued improvement in our credit risk outlook.
Additional information regarding the ACL and the associated provisions
recognized during the quarters ended
Non-Interest Income. Total non-interest income increased
Gain on sale of loans decreased$611,000 to$395,000 for the quarter endedSeptember 30, 2022 . The decrease in loan sale gains largely reflected a lower average sales price of loans sold and a decrease in the volume of loans sold between comparative periods largely attributable to increases in market interest rates. Income from bank owned life insurance increased$2.1 million to$3.7 million for the quarter endedSeptember 30, 2022 . The increase is the result of payouts on life insurance policies.
Other non-interest income increased
The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.
Non-Interest Expense. Total non-interest expense increased
Salaries and employee benefits increased$1.7 million to$20.3 million for quarter endedSeptember 30, 2022 . This increase was largely due to the impact of staff additions, annual merit increases and an increase in incentive payments tied to loan origination volume. Partially offsetting these increases was a decrease in stock-based compensation expense. Net occupancy expense of premises decreased$1.5 million to$3.1 million for the quarter endedSeptember 30, 2022 . This decrease was primarily due to$1.3 million of non-recurring expenses related to the consolidation of three retail branch locations recognized in the prior period. 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$2.0 million to$5.3 million for the quarter endedSeptember 30, 2022 from$7.3 million for the quarter endedSeptember 30, 2021 .
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 quarter endedSeptember 30, 2022 and 2021 were 24.1% and 26.9%, respectively. The decrease in the effective tax rate primarily resulted from the payouts on life insurance policies, noted above, which were not taxable. - 41 -
--------------------------------------------------------------------------------
Index
Liquidity and Capital Resources
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. AtSeptember 30, 2022 , liquidity included$96.1 million of short-term cash and equivalents and$1.26 billion of investment securities available for sale. In addition, as ofSeptember 30, 2022 , we had the capacity to borrow additional funds totaling$2.26 billion and$284.0 million from the FHLB ofNew York and FRB, respectively, without pledging additional collateral. As of that same date, we also had access to unsecured overnight borrowings with other financial institutions totaling$970.0 million of which none was outstanding. AtSeptember 30, 2022 , we had outstanding commitments to originate and purchase loans totaling$352.2 million while such commitments totaled$242.1 million atJune 30, 2022 . As of those same dates, our pipeline of loans held for sale included$12.8 million and$20.3 million , respectively, of loans in process 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. Construction loans in process and unused lines of credit were$80.2 million and$159.7 million , respectively, atSeptember 30, 2022 compared to$109.0 million and$159.3 million , respectively, atJune 30, 2022 . We are also subject to the contingent liabilities resulting from letters of credit whose outstanding balances totaled$115,000 and$130,000 , atSeptember 30, 2022 andJune 30, 2022 , respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Consistent with its goals to operate a sound and profitable financial organization, the Bank actively seeks to maintain its status as a well-capitalized institution in accordance with regulatory standards.
The following table sets forth the Bank's capital position atSeptember 30, 2022 andJune 30, 2022 , as compared to the minimum regulatory capital requirements that were in effect as of those dates: At September 30, 2022 To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets)$ 683,381 12.67 %$ 431,361 8.00 %$ 539,202 10.00
%
Tier 1 capital (to risk-weighted assets) 648,894 12.03 % 323,521 6.00 % 431,361 8.00
%
Common equity tier 1 capital (to risk-weighted assets) 648,894 12.03 % 242,641 4.50 % 350,481 6.50
%
Tier 1 capital (to adjusted total
assets) 648,894 8.44 % 307,371 4.00 % 384,214 5.00 %
- 42 ---------------------------------------------------------------------------------
Index
At June 30, 2022
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted
assets) $ 672,274 13.10 % $ 410,429 8.00 % $ 513,036 10.00 %
Tier 1 capital (to risk-weighted assets) 642,336 12.52 % 307,822 6.00 % 410,429 8.00
%
Common equity tier 1 capital (to risk-weighted assets) 642,336 12.52 % 230,866 4.50 % 333,473 6.50
%
Tier 1 capital (to adjusted total assets) 642,336 8.70 % 295,163 4.00 % 368,954 5.00 %
The following table sets forth the Company's capital position at
At September 30, 2022
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 781,745 14.49 % $ 431,480 8.00 %
Tier 1 capital (to risk-weighted assets) 747,258 13.85 % 323,610 6.00 %
Common equity tier 1 capital (to
risk-weighted assets) 747,258 13.85 % 242,707 4.50 %
Tier 1 capital (to adjusted total assets) 747,258 9.72 % 307,523 4.00 %
At June 30, 2022
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
(Dollars in Thousands)
Total capital (to risk-weighted assets) $ 778,253 15.17 % $ 410,515 8.00 %
Tier 1 capital (to risk-weighted assets) 748,315 14.58 % 307,886 6.00 %
Common equity tier 1 capital (to
risk-weighted assets) 748,315 14.58 % 230,914 4.50 %
Tier 1 capital (to adjusted total assets) 748,315 10.14 % 295,290 4.00 %
In March 2020 , the federal banking agencies announced an interim final rule to
delay the estimated impact on regulatory capital stemming from the
implementation of CECL. The interim final rule provides banks the option to
delay for two years an estimate of CECL's effect on regulatory capital, relative
to the incurred loss method, followed by a three-year transition period
established in the previous rule (five-year transition option). We have adopted
the capital transition relief over the permissible five-year period. The
two-year delay ended for us as of June 30, 2022 and we then began the three-year
transition period.
Off-Balance Sheet Arrangements
In the normal course of our business of investing in loans and securities we are a party to financial instruments with off-balance-sheet risk. These financial instruments include significant purchase commitments, such as commitments related to capital expenditure plans and commitments to extend credit to meet the financing needs of our customers. We had no significant off-balance sheet commitments for capital expenditures as ofSeptember 30, 2022 .
Recent Accounting Pronouncements
For a discussion of the expected impact of recently issued accounting pronouncements that we have yet to adopt, please refer to Note 3 to the unaudited consolidated financial statements.
- 43 ---------------------------------------------------------------------------------
Index
ITEM 3.© Edgar Online, source
