Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended September 30, 2021, Kearny Financial’s fiscal first quarter. The company operates principally through Kearny Bank. Income-statement and cash-flow comparisons are against the three months ended September 30, 2020; balance-sheet comparisons are against June 30, 2021. Dollar amounts below are in millions unless noted.
Financial performance and condition
- Earnings: Net income was $19.7 million, up from $11.4 million; diluted EPS was $0.26 versus $0.13. Pre-tax income was $27.0 million versus $14.3 million.
- Net interest: Net interest income rose to $49.6 million from $44.8 million. Net interest margin increased to 2.99% from 2.70%; the average cost of interest-bearing liabilities declined to 0.55% from 1.20%, while the yield on interest-earning assets fell to 3.45% from 3.71%.
- Credit costs and asset quality: The company recorded a $5.4 million reversal of credit-loss provision, versus $4.1 million of provision expense in the prior-year quarter. The allowance for credit losses was $51.8 million, or 1.08% of loans, down from $58.2 million, or 1.19%, at June 30. Nonperforming loans were $72.9 million, down from $79.8 million; troubled debt restructurings totaled $20.1 million.
- Revenue and expenses: Non-interest income was $3.8 million versus $7.1 million, largely because the prior-year quarter included a $3.1 million bargain-purchase gain from the MSB acquisition. Non-interest expense declined to $31.8 million from $33.6 million, including no current-quarter merger expenses versus $4.3 million previously.
- Balance sheet and funding: Total assets were $7.18 billion, down $100.0 million from June 30. Net loans were $4.74 billion, down $55.7 million; deposits were $5.40 billion, down $90.2 million, reflecting time-deposit runoff partly offset by growth in non-maturity deposits. Borrowings increased $35.1 million to $721.0 million, mainly from overnight funding for liquidity management. Stockholders’ equity was $1.01 billion.
- Cash flow and liquidity: Operating cash flow was $5.4 million and investing cash flow was positive $81.7 million; financing cash flow was negative $100.9 million. Cash and equivalents declined $13.8 million to $54.1 million. The company also reported $1.65 billion of available-for-sale securities and borrowing capacity of $2.19 billion at the FHLB, $274.5 million at the Federal Reserve, and $890.0 million through unsecured lines.
- Capital and shareholder returns: Kearny Bank’s total risk-based capital ratio was 15.07%, and its common equity tier 1 ratio was 14.38%; both exceeded the stated well-capitalized thresholds. The company repurchased 3.16 million shares for $39.0 million and declared dividends of $0.10 per share. Book value was $13.38 per share and tangible book value was $10.55.
Material changes and management commentary
- Management attributed higher net income primarily to improved net interest income, the credit-loss reversal, and lower expenses; higher income taxes and lower non-interest income partly offset those benefits.
- The allowance release reflected a reduction in expected loan lives and an improved credit outlook. Net charge-offs were $980,000, of which $935,000 had previously been specifically reserved.
- Residential mortgage loans originated for sale generated $1.0 million of gains, down from $1.9 million a year earlier. Purchase-accounting accretion was $2.9 million, versus $4.2 million; loan prepayment penalty income was $1.7 million, versus $631,000.
- Non-recurring current-quarter costs included $1.3 million for consolidation of three branches, $250,000 for Tropical Storm Ida-related repairs, and a $420,000 asset impairment charge related to branch consolidation.
- Available-for-sale securities had $13.8 million of gross unrealized losses at quarter-end. Management attributed these losses to interest rates and credit spreads, rather than deterioration in credit quality, and recorded no securities credit-loss allowance.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that quarterly results are not necessarily indicative of full-year results. It identifies COVID-19 and economic conditions, borrower performance and collateral values, interest rates, deposit flows and funding costs, competition, cybersecurity, regulatory changes, and acquisition integration as risks. The filing also notes that New Jersey and New York restrictions had delayed residential foreclosure sales and evictions.
Interest-rate sensitivity analysis estimated one-year net interest income would decline 6.65% in a +300-basis-point scenario and 6.93% in a -100-basis-point scenario from the base case. Economic value of equity declined 7.44% under +300 basis points and 9.89% under -100 basis points. Management cautions that these modeled scenarios rely on assumptions and are not predictions of actual results. Outstanding commitments to originate and purchase loans were approximately $199.6 million.
Important facts for investors to verify
- Whether the improvement in earnings persists without a further credit-loss reserve release or prior-year acquisition-related comparisons.
- Trends in commercial real estate exposure, nonperforming loans, TDRs, loan modifications, and allowance adequacy.
- Whether deposit runoff and increased overnight borrowing affect liquidity and funding costs.
- The durability of the 2.99% net interest margin under changing rates, deposit pricing, and asset prepayments.
- Execution, costs, and effects of branch consolidation and the newly authorized repurchase plan for up to 7,602,021 shares.
- How unrealized securities losses, pandemic-related restrictions, and the filing’s modeled rate sensitivities evolve.