Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period. Kearny Financial Corp. is a bank holding company whose business is conducted principally through Kearny Bank. This unaudited fiscal second-quarter 2022 filing covers the quarter and six months ended December 31, 2021; comparative results are for the periods ended December 31, 2020. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter | Six months ended Dec. 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $48.7 | $45.9 | $98.3 | $90.7 |
| Net interest margin | 2.96% | 2.72% | 2.98% | 2.71% |
| Net income | $18.8 | $16.9 | $38.5 | $28.3 |
| Diluted EPS | $0.26 | $0.20 | $0.53 | $0.33 |
| Net cash from operating activities | — | $26.5 | $30.8 |
Quarterly net interest income rose 6% year over year and six-month net income rose 36%. Lower interest expense more than offset lower interest income. The six-month provision for credit losses was a $7.8 million reversal, versus $2.7 million of provision expense in the prior-year period. Six-month non-interest income was $7.9 million (prior year $12.9 million), while non-interest expense was $61.5 million (prior year $64.1 million). Effective tax rates were 26.6% for the quarter and 26.8% for the six months.
At December 31, 2021, total assets were $7.19 billion, down $97.5 million from June 30, 2021. Net loans were $4.78 billion, down $15.0 million; available-for-sale securities were $1.59 billion, down $85.8 million. Deposits were $5.45 billion, down $31.3 million, largely from planned certificate-of-deposit runoff, partly offset by growth in core non-maturity deposits. Borrowings were essentially unchanged at $686.1 million. Stockholders’ equity declined $47.5 million to $995.5 million, principally reflecting $69.0 million of repurchases and $15.3 million of dividends, partly offset by net income.
Cash and cash equivalents were $60.5 million at period-end, down $7.4 million over the six months. Investing activities provided $81.3 million, while financing activities used $115.2 million; operating activities provided $26.5 million. The Bank reported a 14.88% total risk-based capital ratio and 14.21% common equity tier 1 ratio, above the stated well-capitalized thresholds.
Material changes and notable items
- Net interest margin improved year over year as the cost of interest-bearing liabilities fell; average asset yields also declined.
- The allowance for credit losses fell to $48.2 million, or 0.99% of loans, from $58.2 million, or 1.19%, at June 30, 2021. Management attributed the release primarily to an improved credit outlook, shorter expected loan lives in certain segments, and lower reserves on individually evaluated loans. Net charge-offs for the six months were $2.1 million.
- Nonperforming assets decreased to $72.8 million, or 1.01% of assets, from $79.9 million, or 1.10%. Nonperforming loans were $72.1 million. Troubled debt restructurings totaled $19.2 million, up from $17.8 million.
- The company repurchased 2.29 million shares for $30.0 million during the quarter at an average $13.10 per share. The September 2021 plan authorizes repurchases of up to 7.60 million shares; 5.10 million remained authorized at December 31.
- Unrealized losses on available-for-sale securities increased, and accumulated other comprehensive income declined to $1.6 million from $6.1 million. Management attributed the securities losses to market interest rates and credit spreads rather than deterioration in credit quality; no securities credit-loss allowance was recorded.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results. Its forward-looking discussion identifies uncertainty from economic conditions and COVID-19, interest rates, deposit flows and funding costs, loan demand and credit quality, competition, regulation, and technology and cybersecurity risks.
Interest-rate risk is material. Under the company’s static-balance-sheet model at December 31, a 300-basis-point rate increase reduced modeled one-year net interest income by 7.54%, while a 100-basis-point decrease reduced it by 5.56%. Modeled economic value of equity declined 7.29% under a 300-basis-point increase and 8.04% under a 100-basis-point decrease. The filing cautions that these scenarios rely on assumptions and should not be treated as forecasts of actual results.
Liquidity included $60.5 million of cash and $1.59 billion of available-for-sale securities. The company also reported borrowing capacity of $2.24 billion from the FHLB and $301.2 million from the Federal Reserve without additional collateral, plus $890 million of unsecured overnight borrowing access, of which $20 million was outstanding. Loan origination and purchase commitments totaled approximately $177.1 million. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings were reported.
Unusual or nonrecurring items included $356,000 of gains on asset disposals in the current quarter and six-month period; $1.3 million of branch-consolidation costs and $250,000 of Tropical Storm Ida repair costs in six-month occupancy expense; and prior-year MSB acquisition-related bargain purchase gain, merger costs, and debt-extinguishment expense that affect comparisons. The ACL methodology also changed in fiscal 2022 to use the national unemployment rate as the primary econometric factor for probability-of-default estimates.
Key facts investors should verify
- Whether the sizable credit-loss reserve release is sustainable and whether nonperforming loans, TDRs, and collateral-dependent exposures improve or worsen.
- How deposit mix and cost of funds evolve as certificates of deposit run off, and whether lower funding costs continue to support net interest margin.
- The sensitivity of earnings and securities values to interest-rate changes, including assumptions behind the company’s modeled scenarios.
- The effect of share repurchases and dividends on capital, book value per share, and earnings per share.
- How current-period earnings compare after accounting for prior-year MSB acquisition items and current-period nonrecurring gains and expenses.