Kearny Financial Corp. (KRNY)

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 $44.9 million and $48.7 million at June 30, 2024 and 2023, respectively. The $3.8 million decrease in our ACL was largely attributable to a reduction in reserves for individually evaluated loans, primarily driven by the charge-off on three related non-performing commercial real estate loans transferred to held-for-sale and sold during the year ended June 30, 2024. The quantitative component of our ACL, which is largely based on the national unemployment rate forecast, increased $4.0 million, which largely resulted from slower prepayment speeds. The qualitative component of our ACL, which is largely based on management’s judgment of qualitative loss factors, decreased $5.3 million.

Our ACL totaled $44.9 million at June 30, 2024 and the amount allocated to our collectively evaluated multi-family and nonresidential mortgage loans was $29.7 million, of which $19.7 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, 2024, the most severe historical loss rate for multi-family and nonresidential mortgages loans was 1.69%.

Management performed a hypothetical sensitivity analysis to understand the impact of a change in a key input on our ACL. At June 30, 2024, 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 37 basis points from 0.78% to 1.15%. 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 $2.6 million during the year ended June 30, 2024.

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Goodwill. Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill 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 our single reporting unit is less than its carrying amount. Due to the continued impact of higher interest rates and a sustained decline in the banking industry share prices, including our own, we performed a quantitative goodwill impairment during the fourth quarter of the year ended June 30, 2024. 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 carrying value of our single reporting unit exceeded its respective fair value, resulting in the recognition of a non-cash, pre-tax goodwill impairment of $97.4 million for the year ended June 30, 2024. As a result, the Company’s goodwill decreased from $210.9 million at June 30, 2023 to $113.5 million at June 30, 2024. 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 may result in further impairment of goodwill.

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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:

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(1)Represents cash dividends declared divided by net income.

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(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, 2024 and June 30, 2023

Executive Summary. Total assets decreased by $381.4 million, or 4.7%, to $7.68 billion at June 30, 2024 from $8.06 billion at June 30, 2023. The decrease primarily reflected decreases in investment securities, net loans receivable and goodwill.

Investment Securities. Investment securities available for sale decreased by $154.9 million to $1.07 billion at June 30, 2024 from $1.23 billion at June 30, 2023. This decrease was largely the result of principal repayments of $133.0 million and sales of $122.2 million, partially offset by purchases of $74.0 million and a $25.5 million increase in the fair value of the portfolio to a net unrealized loss of $130.7 million.

Investment securities held to maturity decreased by $10.7 million to $135.7 million at June 30, 2024 from $146.5 million at June 30, 2023. The decrease was largely the result of principal repayments of $10.9 million, partially offset by purchases of $300,000.

Additional information regarding investment securities at June 30, 2024 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 3 to the audited consolidated financial statements.

Loans Held-for-Sale. Loans held-for-sale totaled $6.0 million at June 30, 2024 as compared to $9.6 million at June 30, 2023 and are reported separately from the balance of net loans receivable. Loans held-for-sale consisted of residential mortgage loans of $6.0 million at June 30, 2024 as compared to residential mortgage loans of $9.6 million at June 30, 2023. During the year ended June 30, 2024, we sold $79.1 million of residential mortgage loans, resulting in a net gain on sale of $602,000, and $10.8 million of commercial mortgage loans, resulting in a net loss on sale of $884,000.

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Net Loans Receivable. Net loans receivable decreased by $92.8 million, or 1.6%, to $5.69 billion at June 30, 2024 from $5.78 billion at June 30, 2023. Detail regarding the change in the loan portfolio is presented below:

Commercial loan origination volume for the year ended June 30, 2024 totaled $287.8 million, comprised of $103.7 million of commercial mortgage loan originations, $98.5 million of commercial business loan originations and construction loan disbursements of $85.6 million.

One- to four-family residential mortgage loan origination volume, excluding loans held-for-sale, totaled $131.5 million for the year ended June 30, 2024 and was supplemented with loan purchases totaling $60.3 million. Home equity loan and line of credit origination volume for the same period totaled $18.0 million.

Additional information about our loans at June 30, 2024 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.

Nonperforming loans. Nonperforming loans decreased by $2.7 million to $39.9 million, or 0.70% of total loans, at June 30, 2024 from $42.6 million, or 0.73% of total loans, at June 30, 2023. The decrease in nonperforming loans was largely attributable to a decrease of $6.7 million in nonperforming nonresidential mortgage loans, partially offset by an increase of $3.5 million in nonperforming multi-family mortgage loans.

Additional information about nonperforming loans and reportable loan modifications at June 30, 2024 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.

Allowance for Credit Losses. At June 30, 2024, the ACL totaled $44.9 million, or 0.78% of total loans, reflecting a decrease of $3.8 million from $48.7 million, or 0.83% of total loans, at June 30, 2023. The decrease was largely attributable to a provision for credit losses of $6.2 million, primarily driven by an increase in the provision for individually evaluated loans. Partially offsetting the provision for credit losses were net charge-offs of $10.0 million, of which $3.4 million had been individually reserved for within the ACL at June 30, 2023.

Additional information about the allowance for credit losses at June 30, 2024 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 1 and Note 5 to the audited consolidated financial statements.

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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, decreased by $112.7 million to $717.1 million at June 30, 2024 from $829.8 million at June 30, 2023. The decrease in other assets largely reflected the recognition of a non-cash, pre-tax goodwill impairment of $97.4 million and a $13.0 million decrease in OREO. The decrease in OREO was a result of the sale of our sole OREO asset in January 2024. The remaining change generally reflected normal operating fluctuations within these line items.

Deposits. Total deposits decreased by $471.1 million, or 8.4%, to $5.16 billion at June 30, 2024 from $5.63 billion at June 30, 2023. Included in total deposits are brokered and listing service time deposits of $408.2 million and $640.5 million at June 30, 2024 and 2023, respectively. The following table sets forth the distribution of, and changes in, deposits, by type, at the dates indicated:

Uninsured deposits totaled $1.77 billion as of June 30, 2024, unchanged from June 30, 2023. Excluding collateralized deposits of state and local governments, and deposits of the Bank’s wholly-owned subsidiary and holding company, uninsured deposits totaled $764.4 million, or 14.8% of total deposits, at June 30, 2024 compared to $710.4 million, or 12.6% of total deposits, at June 30, 2023.

Additional information about our deposits at June 30, 2024 is presented under “Item 1. Business” of this Annual Report on Form 10-K, as well as in Note 9 to the audited consolidated financial statements.

Borrowings. The balance of borrowings increased by $203.0 million, or 13.5%, to $1.71 billion at June 30, 2024 from $1.51 billion at June 30, 2023 which included overnight borrowings totaling $175.0 million and $225.0 million at June 30, 2024 and 2023, respectively. The increase was primarily driven by a net increase in advances from the FHLB and the Federal Reserve Bank of New York (“FRBNY”). FRBNY advances consisted of $100.0 million in borrowings under the Bank Term Funding Program (“BTFP”) which included favorable terms and conditions as compared to FHLB advances and brokered deposits.

Additional information about our borrowings at June 30, 2024 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.

Other Liabilities. The balance of other liabilities, including advance payments by borrowers for taxes and other miscellaneous liabilities, increased by $2.4 million to $62.0 million at June 30, 2024 from $59.5 million at June 30, 2023. The change in the balance of other liabilities generally reflected normal operating fluctuations within these line items.

Stockholders’ Equity. Stockholders’ equity decreased by $115.7 million to $753.6 million at June 30, 2024 from $869.3 million at June 30, 2023. The decrease in stockholders’ equity during the year ended June 30, 2024 reflected a net loss of $86.7 million, primarily driven by a non-cash, after-tax, goodwill impairment of $95.3 million, dividends totaling $27.6 million, and share repurchases totaling $11.2 million, partially offset by other comprehensive income, net of tax, of $6.3 million. Other comprehensive income during the year ended June 30, 2024 reflected the reclassification of a net realized loss on the sale of securities available for sale out of accumulated other comprehensive loss due to an investment securities repositioning and an increase in the fair value of our available for sale securities, partially offset by a decrease in the fair value of our derivatives portfolio.

Book value per share decreased by $1.50 to $11.70 at June 30, 2024 while tangible book value per share decreased by $0.06 to $9.90 at June 30, 2024.

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During the year ended June 30, 2024, we repurchased 1,504,747 shares of common stock at a cost of $11.2 million, or $7.40 per share. On November 7, 2023, we announced the completion of our ninth repurchase plan which authorized the repurchase of 4,000,000 shares. Such shares were repurchased at a cost of $34.9 million, or $8.74 per share.

Comparison of Operating Results for the Years Ended June 30, 2024 and June 30, 2023

Net (Loss) Income. Net loss for the year ended June 30, 2024 was $86.7 million, or $1.39 per diluted share, a decrease of $127.5 million from net income of $40.8 million, or $0.63 per diluted share for the year ended June 30, 2023. The net loss was primarily attributable to a non-cash, after tax, goodwill impairment charge of $95.3 million. The net loss also reflected a decrease in net interest income, a decrease in non-interest income and an increase in the provision for credit losses, partially offset by a decrease in non-interest expense, excluding goodwill impairment, and a decrease in income tax expense. Results for the years ended June 30, 2024 and June 30, 2023 were impacted by various non-recurring items, as described in further detail below.

Net Interest Income. Net interest income decreased by $33.3 million to $142.6 million for the year ended June 30, 2024. The decrease between the comparative periods resulted from an increase of $68.4 million in interest expense, partially offset by an increase of $35.1 million in interest income. Included in net interest income for the years ended June 30, 2024 and 2023, respectively, was purchase accounting accretion of $2.6 million and $5.3 million and loan prepayment penalty income of $879,000 and $895,000.

Net interest margin decreased 40 basis points to 1.94% for the year ended June 30, 2024, from 2.34% for the year ended June 30, 2023. The decrease reflected increases in the cost of interest-bearing liabilities, increases in the average balances of interest-bearing borrowings and decreases in the average balances of interest-earning assets, partially offset by higher yields on interest-earning assets and decreases in the average balances of interest-bearing deposits.

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Details surrounding the composition of, and changes to, net interest income are presented in the table below which reflects the components of the average balance sheet and of net interest income for the periods indicated. We derived the average yields and costs by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented with daily balances used to derive average balances. No tax equivalent adjustments have been made to yield or costs. Non-accrual loans were included in the calculation of average balances, however interest receivable on these loans has been fully reserved for and therefore not included in interest income. The yields and costs set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense and exclude the impact of prepayment penalties, which are recorded to non-interest income.

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(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 $595.3 million, $644.5 million and $624.7 million for the years ended June 30, 2024, 2023 and 2022, 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.

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The following table reflects the dollar amount of changes in interest income and interest expense to changes in volume and in prevailing interest rates during the periods indicated. Each category reflects the: (1) changes in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change. The net change attributable to the combined impact of volume and rate has been allocated proportionally to the absolute dollar amounts of change in each.

Provision for Credit Losses. The provision for credit losses increased by $3.7 million to a provision for credit losses of $6.2 million for the year ended June 30, 2024, compared to provision for credit losses of $2.5 million for the year ended June 30, 2023. The provision for credit losses for the year ended June 30, 2024 was largely attributable to charge-offs of three related commercial real estate loans and the charge-off of one non-performing commercial and industrial loan relationship. 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.

Additional information regarding the allowance for credit losses and the associated provision recognized during the year ended June 30, 2024 is presented under “Item 1, Business” on this Annual Report on Form 10-K as well as in Note 1 and Note 5 to the audited consolidated financial statements as well as the Comparison of Financial Condition at June 30, 2024.

Non-Interest Income. Non-interest income decreased by $4.7 million to $2.0 million for the year ended June 30, 2024.

Loss on sale and call of securities was $18.1 million during the year ended June 30, 2024 compared to a loss of $15.2 million recorded during the earlier comparative period. The current year loss was the result of our securities portfolio repositioning that involved the sale of $122.2 million of available for sale securities in December 2023. Proceeds of the sale were utilized to retire higher-cost wholesale funding and to reinvest in loans yielding approximately 7.0%.

Loss on sale of loans was $282,000 for the year ended June 30, 2024 compared to a loss of $1.6 million during the earlier comparative period. The decrease in loan sale losses was largely attributable to a loss of $2.4 million on the sale of a non-performing commercial mortgage loan held-for-sale in the prior comparative period. The loss in the current period was primarily the result of the sale of three related nonperforming commercial real estate loans held-for-sale resulting in a net loss on sale of $884,000.

We recognized a non-recurring loss of $974,000 attributable to the write-down of one other real estate owned (“OREO”) property during the quarter ended December 31, 2023, while there were no such losses recorded in the prior period. This OREO asset was subsequently sold during the quarter ended March 31, 2024.

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Income from bank owned life insurance (“BOLI”) increased $431,000 to $9.1 million for the year ended June 30, 2024. The increase primarily reflected improved income as a result of the BOLI restructure initiated in December 2023, partially offset by a decrease of $551,000 in payouts on life insurance policies compared to the prior year period and non-recurring exchange charges of $965,000 in the current year period related to the BOLI restructure.

Other non-interest income decreased $2.9 million to $3.4 million for the year ended June 30, 2024. The decrease was primarily attributable to a non-recurring gain of $2.9 million from the sale of a former branch location in the earlier comparative period.

Electronic banking fees and charges increased $598,000 to $2.4 million for the year ended June 30, 2024. The increase was primarily driven by a non-recurring contract renewal bonus of $750,000 recorded in the current period related to a licensing agreement with a third-party vendor.

The remaining changes in the other components of non-interest income between comparative periods generally reflected normal operating fluctuations within those line items.

Non-Interest Expense. Non-interest expense increased by $91.4 million to $215.2 million for the year ended June 30, 2024 from $123.8 million for the year ended June 30, 2023, driven by a pre-tax, non-cash goodwill impairment of $97.4 million recognized in the current year period. Excluding the goodwill impairment, non-interest expense decreased $6.0 million compared to the prior year period.

Salaries and employee benefits expense decreased by $6.4 million to $69.2 million for the year ended June 30, 2024 reflecting lower average headcount and a decrease in incentive payments tied to origination volume, partially offset by annual merit increases. Included in salaries and employee benefits for the year ended June 30, 2023 was $757,000 of severance expense from a workforce realignment.

Net occupancy expense of premises decreased by $1.0 million to $11.0 million for the year ended June 30, 2024. This decrease was primarily due to decreases in rent expense, depreciation expense, and building repairs and maintenance expense. These decreases are a result of the consolidation of two branch locations during the quarter ended June 30, 2023.

Advertising and marketing expense decreased $726,000 to $1.4 million for the year ended June 30, 2024. This decrease in advertising expense resulted from the adoption of lower cost in-house digital campaigns supporting our loan and deposit growth initiatives.

FDIC insurance premiums increased $847,000 to $6.0 million for the year ended June 30, 2024. This increase was largely attributable to an updated assessment rate from the FDIC.

For the year ended June 30, 2023, the Company recorded $800,000 in branch consolidation expense, of which $250,000 was recorded in occupancy expense and $550,000 was recorded in other expense. No such expenses were recorded during the year ended June 30, 2024.

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 $5.7 million to $5.9 million for the year ended June 30, 2024, from $11.6 million for the year ended June 30, 2023. The decrease in income tax expense was due to lower pre-tax income, partially offset by $5.7 million of tax expense related to the surrender of BOLI policies during the year ended June 30, 2024.

Comparison of Operating Results for the Years Ended June 30, 2023 and June 30, 2022

A comparison of our operating results for the years ended June 30, 2023 and June 30, 2022 can be found in our Annual Report on Form 10-K for the year ended June 30, 2023, filed with the SEC on August 25, 2023.

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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, 2024, included $63.9 million of short-term cash and equivalents and $1.07 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, 2024, we had the capacity to borrow additional funds totaling $1.06 billion and $381.8 million from the FHLB and FRB, respectively, without pledging additional collateral. We had the ability to pledge additional securities to borrow an additional $381.4 million at June 30, 2024. As of that same date, we also had access to unsecured overnight borrowings with other financial institutions totaling $789.0 million, of which none was outstanding.

Deposits decreased $471.1 million to $5.16 billion at June 30, 2024 from $5.63 billion at June 30, 2023. The decrease in deposit balances reflected a $459.4 million decrease in interest-bearing deposits coupled with a $11.6 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, 2024, our outstanding balance of FHLB advances, excluding fair value adjustments, totaled $1.54 billion. As of the same date, we had $175.0 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:

The following table discloses our contractual obligations and commitments as of June 30, 2024:

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(1)Represents amounts committed to customers.

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In addition to the loan commitments noted above, the pipeline of loans held for sale included $16.0 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 $160,000 at June 30, 2024 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, 2024, outstanding loan commitments relating to loans held in portfolio totaled $280.9 million compared to $251.2 million at June 30, 2023. 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, 2024, see Note 16 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, 2024, 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, 2024:

The following table presents information regarding the consolidated Company’s regulatory capital levels at June 30, 2024:

For additional information regarding regulatory capital at June 30, 2024, see Note 14 to the audited consolidated financial statements.

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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.

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.

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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.

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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: