KEARNY FINANCIAL CORP. General
This discussion and analysis reflectsKearny 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 regardingKearny 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.
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 $47.1 million and $58.2
million at June 30, 2022 and 2021, respectively. The $11.1 million decrease 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, decreased $10.2 million , which resulted from
continued improvement in our economic forecast and a reduction in the expected
life of various segments of the loan portfolio. The qualitative component of our
ACL, which is largely based on management's judgment of qualitative loss
factors, increased $2.1 million .
Our ACL totaled $47.1 million at June 30, 2022 and the amount allocated to our
collectively evaluated multi-family and nonresidential mortgage loans was $32.4
million , of which $28.2 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, 2022 , the most severe historical loss rate for multi-family and
nonresidential mortgages loans was 1.92%.
Management performed a hypothetical sensitivity analysis to understand the
impact of a change in a key input on our ACL. At June 30, 2022 , if the
four-quarter national unemployment rate forecast had been 9% rather than an
average of approximately 3.5%, our ACL would have been approximately $11.1
million higher. 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 $3.0 million , which resulted from
charge-offs, a loan payoff and an increase in the fair value of collateral for
collateral-dependent loans, partially offset by new individually analyzed loans.
39
--------------------------------------------------------------------------------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,
2022 2021 2020
(In Thousands)
Balance Sheet Data:
Cash and equivalents $ 101,615 $ 67,855 $ 180,967
Assets 7,719,883 7,283,735 6,758,175
Net loans receivable 5,370,787 4,793,229 4,461,070Investment securities available for sale 1,344,093 1,676,864
1,385,703
Investment securities held to maturity 118,291 38,138 32,556
Goodwill 210,895 210,895 210,895
Deposits 5,862,256 5,485,306 4,430,282
Borrowings 901,337 685,876 1,173,165
Stockholders' equity 894,000 1,042,944 1,084,177
For the Years Ended June 30,
2022 2021 2020
(Dollars in Thousands, Except Per Share Amounts)
Summary of Operations:
Interest income $ 226,272 $ 238,085 $ 237,804
Interest expense 29,669 49,851 83,854
Net interest income 196,603 188,234 153,950
(Reversal of) provision for credit losses (7,518 ) (1,121 ) 4,197
Net interest income after (reversal of)
provision for credit losses 204,121 189,355 149,753
Non-interest income 13,934 21,026 15,123
Non-interest expenses 125,708 125,885 107,624
Income before taxes 92,347 84,496 57,252
Income tax expense 24,800 21,263 12,287
Net income $ 67,547 $ 63,233 $ 44,965
Per Share Data:
Net income per share - Basic and diluted $ 0.95 $ 0.77 $ 0.55
Weighted average number of common shares
outstanding (in thousands):
Basic 70,911 82,387 82,409
Diluted 70,933 82,391 82,430
Cash dividends per share $ 0.43 $ 0.35 $ 0.29
Dividend payout ratio (1) 45.1 % 45.1 % 52.8 %
(1) Represents cash dividends declared divided by net income.
40
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At or For the Years Ended June 30,
2022 2021 2020
Performance ratios:
Return on average assets (net income divided
by average total assets) 0.93 % 0.86 % 0.67 %
Return on average equity (net income divided
by average total equity) 6.86 % 5.79 % 4.10 %
Return on average tangible equity (net income
divided by average tangible equity) (1) 8.77 % 7.22 % 5.10 %
Net interest rate spread 2.86 % 2.61 % 2.22 %
Net interest margin 2.94 % 2.75 % 2.45 %
Average interest-earning assets to average
interest-earning liabilities 118.93 % 118.63 % 117.24 %
Efficiency ratio (non-interest expenses
divided by the sum of net interest income
and non-interest income) 59.71 % 60.16 % 63.66 %
Non-interest expense to average assets 1.73 % 1.72 % 1.61 %
Asset Quality Ratios: Non-performing loans to total loans 1.30 % 1.64 % 0.82 % Non-performing assets to total assets 1.19 % 1.10 % 0.55 % Net charge-offs to average loans outstanding 0.07 % 0.03 % 0.00 % Allowance for credit losses to total loans 0.87 % 1.19 % 0.82 % Allowance for credit losses to non-performing loans 66.92 %
72.92 % 101.72 %
Capital Ratios:
Average equity to average assets 13.52 % 14.88 % 16.39 %
Equity to assets at period end 11.58 % 14.32 % 16.04 %
Tangible equity to tangible assets at period
end (2) 9.06 % 11.72 % 13.29 %
(1) Average tangible equity equals total average stockholders' equity reduced by
average goodwill and average core deposit intangible assets.
(2) Tangible equity equals total stockholders' equity reduced by goodwill and
core deposit intangible assets.
41
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Comparison of Financial Condition at
Executive Summary. Total assets increased by$436.1 million , or 6.0%, to$7.72 billion atJune 30, 2022 from$7.28 billion atJune 30, 2021 . 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$332.8 million to$1.34 billion atJune 30, 2022 from$1.68 billion atJune 30, 2021 . This decrease was largely the result of principal repayments totaling$330.2 million , sales of$100.3 million and a$128.0 million decrease in the fair value of the portfolio to a net unrealized loss of$118.0 million , partially offset by purchases totaling$229.1 million .
Investment securities held to maturity increased by
Additional information regarding investment securities at
Loans Held-for-Sale. Loans held-for-sale totaled$28.9 million atJune 30, 2022 as compared to$16.5 million atJune 30, 2021 and are reported separately from the balance of net loans receivable. Loans held-for-sale atJune 30, 2022 included$21.7 million of non-accrual commercial loans. During the year endedJune 30, 2022 ,$189.1 million of residential mortgage loans were sold, resulting in net gains on sale of$2.4 million .
Net Loans Receivable. Net loans receivable increased by
June 30, June 30, Increase/
2022 2021 (Decrease)
(In Thousands)
Commercial loans:
Multi-family mortgage $ 2,409,090 $ 2,039,260 $ 369,830
Nonresidential mortgage 1,019,838 1,079,444 (59,606 )
Commercial business 176,807 168,951 7,856
Construction 140,131 93,804 46,327
Total commercial loans 3,745,866 3,381,459 364,407
One- to four-family residential mortgage 1,645,816 1,447,721
198,095 Consumer loans: Home equity loans 42,028 47,871 (5,843 ) Other consumer 2,866 3,259 (393 ) Total consumer loans 44,894 51,130 (6,236 ) Total loans 5,436,576 4,880,310 556,266 Unaccreted yield adjustments (18,731 ) (28,916 ) 10,185 Allowance for credit losses (47,058 ) (58,165 ) 11,107 Net loans receivable$ 5,370,787 $ 4,793,229 $ 577,558
Commercial loan origination volume for the year ended
One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled$415.6 million for the year endedJune 30, 2022 and was augmented by the purchase of loans totaling$67.4 million . Home equity loan and line of credit origination volume for the same period totaled$18.6 million . 42 -------------------------------------------------------------------------------- Additional information about our loans atJune 30, 2022 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$9.5 million to$70.3 million , or 1.30% of total loans, atJune 30, 2022 from$79.8 million , or 1.64% of total loans, atJune 30, 2021 . The decrease in nonperforming loans was largely attributable to a decrease of$10.7 million in non-performing one- to four-family residential 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. AtJune 30, 2022 , we had accruing TDRs totaling$8.7 million , an increase of$2.5 million from$6.2 million atJune 30, 2021 . AtJune 30, 2022 , we had non-accrual TDRs totaling$13.5 million , an increase of$1.9 million from$11.6 million atJune 30, 2021 . 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 made in response to the COVID-19 pandemic, including short-term payment deferrals, were not considered to be TDRs. We had no active payment deferrals that were not considered to be TDRs as ofJune 30, 2022 . We had active payment deferrals that were not considered TDRs of$5.6 million atJune 30, 2021 . Additional information about nonperforming loans and TDRs atJune 30, 2022 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"). AtJune 30, 2022 , the ACL totaled$47.1 million , or 0.87% of total loans, reflecting a decrease of$11.1 million from$58.2 million , or 1.19% of total loans, atJune 30, 2021 . The decrease was largely attributable to a provision for credit losses reversal of$7.5 million , primarily driven by continued 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 evaluated for impairment. Also contributing to this decrease were net charge-offs of$3.6 million , of which$1.8 million had previously been individually reserved for within the ACL. Additional information about the allowance for credit losses atJune 30, 2022 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$65.0 million to$756.2 million atJune 30, 2022 from$691.2 million atJune 30, 2021 . The increase in other assets primarily reflected a$39.4 million increase in the fair value of our derivatives portfolio and a$20.0 million increase in net deferred income tax assets during the year endedJune 30, 2022 . The remaining change generally reflected normal operating fluctuations within these line items. Deposits. Total deposits increased by$377.0 million , or 6.9%, to$5.86 billion atJune 30, 2022 from$5.49 billion atJune 30, 2021 . The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated: June 30, June 30, Increase/ 2022 2021 (Decrease) (In Thousands)
Non-interest-bearing deposits
Interest-bearing deposits: Interest-bearing demand 2,265,597 1,902,478 363,119 Savings 1,053,198 1,111,364 (58,166 ) Certificates of deposit 1,889,562 1,877,746 11,816 Interest-bearing deposits 5,208,357 4,891,588 316,769 Total deposits$ 5,862,256 $ 5,485,306 $ 376,950 Additional information about our deposits atJune 30, 2022 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. 43 -------------------------------------------------------------------------------- Borrowings. The balance of borrowings increased by$215.5 million , or 31.4%, to$901.3 million atJune 30, 2022 from$685.9 million atJune 30, 2021 which included overnight borrowings totaling$250.0 million and$20.0 million atJune 30, 2022 and 2021, respectively. Partially offsetting the increase in overnight borrowings was the repayment of maturing FHLB advances totaling$15.0 million . Additional information about our borrowings atJune 30, 2022 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$7.3 million to$62.3 million atJune 30, 2022 from$69.6 million atJune 30, 2021 . The change in other liabilities largely reflected the payment of a$12.5 million loan participation liability which was outstanding atJune 30, 2021 . The remaining change generally reflected normal operating fluctuations within these line items.
Additional information about our derivatives portfolio at
Stockholders' Equity. Stockholders' equity decreased by$148.9 million to$894.0 million atJune 30, 2022 from$1.04 billion atJune 30, 2021 . The decrease in stockholders' equity during the year endedJune 30, 2022 largely reflected share repurchases totaling$129.5 million and dividends totaling$30.5 million . In addition, accumulated other comprehensive (loss) income decreased$61.9 million due primarily to 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 decreases were partially offset by net income of$67.5 million .
Book value per share decreased by
OnSeptember 20, 2021 , we announced the completion of our seventh stock repurchase plan. OnSeptember 22, 2021 , we announced the authorization of our eighth stock repurchase plan to repurchase up to 7,602,021, or 10% of the shares then outstanding. During the year endedJune 30, 2022 , we repurchased a total of 10,221,525 shares of our common stock in conjunction with our seventh and eighth repurchase plans. Such shares were repurchased at a total cost of$129.5 million and at an average cost of$12.67 per share. Including shares repurchased prior toJuly 1, 2021 , the shares repurchased under our seventh repurchase plan were repurchased at a total cost of$50.5 million and at an average cost of$12.43 per share.
Included in the shares repurchased during the year ended
Comparison of Operating Results for the Years Ended
Net Income. Net income for the year endedJune 30, 2022 was$67.5 million , or$0.95 per diluted share, an increase of 6.8% from$63.2 million , or$0.77 per diluted share for the year endedJune 30, 2021 . The increase in net income reflected an increase in net interest income and decreases in the provision for credit losses and non-interest expense, partially offset by a decrease in non-interest income and an increase in income tax expense. Net Interest Income. EffectiveJuly 1, 2021 , loan prepayment penalty income was reclassified to interest income on loans. Previously, loan prepayment penalty income was recorded within non-interest income. Interest income and non-interest income for all periods presented reflect this reclassification. Net interest income increased by$8.4 million to$196.6 million for the year endedJune 30, 2022 . The increase between the comparative periods resulted from a decrease of$20.2 million in interest expense, partially offset by a decrease of$11.8 million in interest income. Included in net interest income for the years endedJune 30, 2022 and 2021, respectively, was purchase accounting accretion of$9.0 million and$16.6 million and loan prepayment penalty income of$5.4 million and$3.7 million . Net interest margin increased 14 basis points to 2.94% for the year endedJune 30, 2022 , from 2.80% for the year endedJune 30, 2021 . The increase reflected decreases in the cost and average balance of interest-bearing liabilities, partially offset by a decrease in the yield on interest-earning assets. 44 -------------------------------------------------------------------------------- Details surrounding the composition of, and changes to, net interest income are presented in the table below which reflects the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances. No tax equivalent adjustments have been made to yield or costs. Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income. For the Years Ended June 30, 2022 2021 2020 Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost (Dollars in Thousands) Interest-earning assets: Loans receivable (1)$ 4,922,400 $ 190,520 3.87 %$ 4,866,436 $ 202,240 4.16 %$ 4,568,816 $ 191,599 4.19 % Taxable investment securities (2) 1,622,475 32,746 2.02 1,571,452 31,238 1.99 1,291,516 39,321 3.04 Tax-exempt securities (2) 55,981 1,273 2.27 74,604 1,652 2.21 111,477 2,393 2.15 Other interest-earning assets (3) 82,802 1,733 2.09 200,435 2,955 1.47 122,278 4,491 3.67 Total interest-earning assets 6,683,658 226,272 3.39 6,712,927 238,085 3.55 6,094,087 237,804 3.90 Non-interest-earning assets 598,712 620,934 595,158 Total assets$ 7,282,370 $ 7,333,861 $ 6,689,245 Interest-bearing liabilities: Interest-bearing demand$ 2,067,200 $ 5,123 0.25$ 1,726,190 $ 7,028 0.41$ 1,041,188 $ 11,433 1.10 Savings 1,088,971 1,190 0.11 1,066,794 3,299 0.31 831,832 6,735 0.81 Certificates of deposit 1,711,276 8,895 0.52 1,931,887 21,208 1.10 2,032,046 40,684 2.00 Total interest-bearing deposits 4,867,447 15,208 0.31 4,724,871 31,535 0.67 3,905,066 58,852 1.51 FHLB advances 679,388 14,067 2.07 931,148 18,314 1.97 1,236,139 24,582 1.99 Other borrowings 72,841 394 0.54 2,563 2 0.06 56,957 420 0.74 Total borrowings 752,229 14,461 1.92 933,711 18,316 1.96 1,293,096 25,002 1.93 Total interest-bearing liabilities 5,619,676 29,669 0.53 5,658,582 49,851 0.88 5,198,162 83,854 1.61 Non-interest-bearing liabilities (4) 678,143 583,886 394,758 Total liabilities 6,297,819 6,242,468 5,592,920 Stockholders' equity 984,551 1,091,393 1,096,325 Total liabilities and stockholders' equity$ 7,282,370 $ 7,333,861 $ 6,689,245 Net interest income$ 196,603 $ 188,234 $ 153,950 Interest rate spread (5) 2.86 % 2.67 % 2.29 % Net interest margin (6) 2.94 % 2.80 % 2.53 % Ratio of interest-earning assets to interest-bearing liabilities 1.19 X 1.19 X 1.17 X (1) Loans held-for-sale and non-accruing loans have been included in loans receivable and the effect of such inclusion was not material. Allowance for 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$624.7 million ,$518.1 million and$334.5 million for the years endedJune 30, 2022 , 2021 and 2020, respectively. (5) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (6) Net interest margin represents net interest income as a percentage of average interest-earning assets. 45 -------------------------------------------------------------------------------- The following table reflects the dollar amount of changes in interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each. Year Ended June 30, 2022 Year Ended June 30, 2021 versus versus Year Ended June 30, 2021 Year Ended June 30, 2020 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Net Volume Rate Net (In Thousands) (In Thousands) Interest and dividend income Loans receivable$ 2,337 $ (14,057 ) $ (11,720 ) $ 12,057 $ (1,416 ) $ 10,641 Taxable investment securities 1,030 478 1,508 7,341 (15,424 ) (8,083 ) Tax-exempt securities (423 ) 44 (379 ) (807 ) 66 (741 ) Other interest-earning assets (2,157 ) 935 (1,222 ) 1,984 (3,520 ) (1,536 ) Total interest-earning assets$ 787 $ (12,600 ) $ (11,813 ) $ 20,575 $ (20,294 ) $ 281 Interest expense: Interest-bearing demand$ 1,216 $ (3,121 ) $ (1,905 ) $ 5,100 $ (9,505 ) $ (4,405 ) Savings 67 (2,176 ) (2,109 ) 1,533 (4,969 ) (3,436 ) Certificates of deposit (2,192 ) (10,121 ) (12,313 ) (1,923 ) (17,553 ) (19,476 ) Borrowings (3,489 ) (366 ) (3,855 ) (7,067 ) 381 (6,686 ) Total interest-bearing liabilities$ (4,398 ) $ (15,784 ) $ (20,182 ) $
(2,357 )
Change in net interest income$ 5,185 $ 3,184 $ 8,369 $ 22,932 $ 11,352 $ 34,284 Provision for Credit Losses. The provision for credit losses decreased by$6.4 million to a provision for credit losses reversal of$7.5 million for the year endedJune 30, 2022 , compared to a provision for credit losses reversal of$1.1 million for the year endedJune 30, 2021 . The provision for credit losses reversal for the year endedJune 30, 2022 was largely attributable to continued improvement in our economic forecast, a reduction in the expected life of various segments of the loan portfolio and a net reduction of$3.0 million in reserves on individually evaluated loans. By comparison, the provision for credit losses reversal for the year endedJune 30, 2021 was largely attributable to a release of reserves within certain loan segments, reflecting the improving credit risk outlook for those asset classes in the reasonable and supportable forecast, partially offset by an increase of$6.6 million in reserves on individually evaluated loans and$5.1 million of provision expense on non-PCD loans acquired in connection with the acquisition of MSB. Additional information regarding the allowance for credit losses and the associated provisions recognized during the year endedJune 30, 2022 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 atJune 30, 2022 .
Non-Interest Income. Non-interest income decreased by
Fees and service charges increased by
Loss on sale and call of securities was$559,000 during the year endedJune 30, 2022 compared to a net gain of$767,000 recorded during the earlier comparative period. Gain on sale of loans decreased by$3.0 million to$2.5 million for the year endedJune 30, 2022 . The decrease in gain on sale of loans reflected a decrease in the volume of loans sold between comparative periods coupled with a lower average gain per loan. Bargain purchase gain of$3.1 million was recognized in the earlier comparative period in conjunction with the MSB acquisition. There was no such gain recorded in the current period. The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items. 46 --------------------------------------------------------------------------------
Non-Interest Expense. Non-interest expense decreased by
Salaries and employee benefits expense increased by$7.5 million to$76.3 million for the year endedJune 30, 2022 . This increase was largely due to the impact of staff additions, annual merit increases, an increase in incentive payments tied to loan origination volume, and increases in benefit plan expense, including employee medical, post-retirement plan and ESOP expense. These increases were partially offset by a decrease in stock-based compensation expense. Net occupancy expense of premises increased by$1.4 million to$14.1 million for the year endedJune 30, 2022 . This increase was primarily due to non-recurring expenses of$1.3 million related to the consolidation of three retail branch locations,$250,000 related to facility repairs made in connection with damage incurred during Tropical Storm Ida and$187,000 related to the closure of a leased office facility acquired in conjunction with the MSB acquisition. Equipment and systems expense increased by$1.0 million to$15.9 million for the year endedJune 30, 2022 . This increase was largely attributable to a non-recurring expense of$800,000 from the early termination of a contract with a service provider. Director compensation decreased by$861,000 to$2.1 million for the year endedJune 30, 2022 . This decrease primarily reflected a decline in director-related stock-based compensation expense.
Merger-related expenses, associated with our acquisition of MSB, were
Debt extinguishment expenses, resulting from the pre-payment of FHLB advances, totaled$796,000 for the year endedJune 30, 2021 . There were no such expenses recorded in the current period. Other expense decreased by$4.5 million to$12.8 million for the year endedJune 30, 2022 . This decrease was primarily attributable to a$1.8 million decrease in the provision for credit losses on unfunded commitments and a$1.5 million decrease in asset impairment charges. For the years endedJune 30, 2022 and 2021, non-recurring asset impairment charges related to branch and administrative facility consolidation activity totaled$420,000 and$1.9 million , respectively. 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 increased by$3.5 million to$24.8 million for the year endedJune 30, 2022 , from$21.3 million for the year endedJune 30, 2021 . The increase in income tax expense largely reflected a higher level of pre-tax net income, as compared to the prior period. Effective tax rates for the years endedJune 30, 2022 and 2021 were 26.9% and 25.2%, respectively. The effective tax rate for the prior comparative period was impacted by the effects of various non-recurring items recorded in conjunction with our acquisition of MSB, including non-deductible merger related expenses, which were partially offset by a non-taxable bargain purchase gain.
Comparison of Operating Results for the Years Ended
A comparison of our operating results for the years endedJune 30, 2021 andJune 30, 2020 can be found in our Annual Report on Form 10-K for the year endedJune 30, 2021 , filed with theSEC onAugust 27, 2021 . 47 --------------------------------------------------------------------------------
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, atJune 30, 2022 , included$101.6 million of short-term cash and equivalents supplemented by$1.34 billion of investment securities classified as 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,Federal Reserve Bank or via unsecured overnight borrowings. As ofJune 30, 2022 , we had the capacity to borrow additional funds totaling$2.04 billion and$303.9 million from the FHLB ofNew York andFederal Reserve Bank , respectively, without pledging additional collateral. As of that same date, we also had access to unsecured overnight borrowings with other financial institutions totaling$975.0 million , of which none was outstanding. Deposits increased$377.0 million to$5.86 billion atJune 30, 2022 from$5.49 billion atJune 30, 2021 . The increase in deposit balances reflected a$316.8 million increase in interest-bearing deposits coupled with a$60.2 million increase in non-interest-bearing deposits. Borrowings from the FHLB ofNew York and other sources are generally available to supplement the Bank's liquidity position or to replace maturing deposits. As ofJune 30, 2022 , the Bank's outstanding balance of FHLB advances, excluding fair value adjustments, totaled$652.5 million . As of the same date, we had$250.0 million outstanding via the Bank's 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,
2022 2021 2020
(Dollars in Thousands)
Balance at end of year $ 625,000 $ 390,000 $ 865,000
Average balance during year $ 476,142 $ 646,896 $ 904,262
Maximum outstanding at any month end $ 684,000 $ 815,000 $ 1,075,000
Weighted average interest rate at end of year 1.72 % 0.33 % 0.45 %
Weighted average interest rate during year 0.58 % 1.08 % 2.14 %
The following table discloses our contractual obligations and commitments as ofJune 30, 2022 : At June 30, 2022 Over Three Less than One to Years to Over Five One Year Three Years Five Years Years Total (In Thousands) Contractual obligations Operating lease obligations$ 3,614 $ 6,092 $ 5,524 $ 5,956 $ 21,186 Certificates of deposit 1,468,565 356,374 58,929 5,694 1,889,562 Federal Home Loan Bank Advances 520,000 22,500 103,500 6,500 652,500
Total contractual obligations
Commitments
Undisbursed funds from approved lines of credit (1)$ 75,755 $ 18,548 $ 6,423 $ 58,540 $ 159,266 Construction loans in process (1) 109,047 - - - 109,047 Other commitments to extend credit (1) 242,148 - - - 242,148 Total commitments$ 426,950 $ 18,548 $ 6,423 $ 58,540 $ 510,461 (1)
Represents amounts committed to customers.
In addition to the loan commitments noted above, the pipeline of loans held for sale included$20.3 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. 48 --------------------------------------------------------------------------------
In addition to the commitments noted above, we are party to standby letters of
credit totaling approximately
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. AtJune 30, 2022 , outstanding loan commitments relating to loans held in portfolio totaled$510.5 million compared to$512.2 million atJune 30, 2021 . Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. For additional information regarding our outstanding lending commitments atJune 30, 2022 , see Note 17 to the audited consolidated financial statements. Capital Consistent with our goals to operate as a sound and profitable financial organization,Kearny Financial andKearny Bank actively seek to maintain our well capitalized status in accordance with regulatory standards. As ofJune 30, 2022 ,Kearny Financial andKearny Bank exceeded all capital requirements of the federal banking regulators and were considered well capitalized. The following table presents information regarding the Bank's regulatory capital levels atJune 30, 2022 : At June 30, 2022 To Be Well Capitalized Under Prompt For Capital Corrective Action Actual Adequacy Purposes Provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) Total capital (to risk-weighted assets)$ 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 presents information regarding the consolidated Company's
regulatory capital levels at
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 %
For additional information regarding regulatory capital at
Impact of Inflation
The financial statements included in this document have been prepared in accordance with accounting principles generally accepted inthe 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. 49 -------------------------------------------------------------------------------- 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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