Kearny Financial Corp. — Form 10-Q Summary
Business context and period. Kearny Financial Corp. is a bank holding company operating principally through Kearny Bank. This filing covers the three months ended September 30, 2022, the company’s fiscal first quarter of fiscal 2023. Income and cash-flow comparisons are against the three months ended September 30, 2021; balance-sheet comparisons are against June 30, 2022. Dollar figures below are in millions unless noted.
Key financial results
| Metric | Quarter ended September 30, 2022 | Prior-year quarter / change |
|---|---|---|
| Net interest income | $48.5 | $49.6; down 2.1% |
| Net interest margin | 2.69% | 2.99%; down 30 basis points |
| Provision for credit losses | $0.7 expense | $5.4 reversal of provision |
| Non-interest income | $5.9 | $3.8 |
| Non-interest expense | $32.0 | $31.8 |
| Net income | $16.5 | $19.7; down 16.1% |
| Diluted earnings per share | $0.25 | $0.26 |
| Net cash from operating activities | $20.7 | $5.4 |
| Cash and cash equivalents at period end | $96.1 | $101.6 at June 30, 2022 |
Interest income increased to $64.4 million from $57.2 million, but interest expense more than doubled to $15.9 million from $7.6 million, reflecting higher funding costs. The effective tax rate was 24.1%, compared with 26.9%.
Financial condition, liquidity and capital
- Total assets were $7.89 billion, up $169.7 million from June 30. Net loans rose $238.0 million, or 4.4%, to $5.61 billion; commercial loans accounted for most of the increase.
- Deposits increased $246.0 million, or 4.2%, to $6.11 billion. Borrowings decreased $49.9 million to $851.5 million. The quarter’s cash-flow statement shows $246.1 million of deposit inflows and $179.7 million of net financing cash inflow.
- Available-for-sale securities had a carrying value of $1.26 billion, down $80.9 million from June 30, primarily due to a $49.4 million fair-value decline and $31.3 million in repayments. Cash plus available-for-sale securities totaled about $1.36 billion.
- Management reported additional borrowing capacity of $2.26 billion from the FHLB and $284 million from the Federal Reserve without additional collateral, plus $970 million of unsecured overnight borrowing capacity; none of the latter was outstanding.
- Stockholders’ equity was $875.0 million, down $19.0 million during the quarter. The decline principally reflected $20.6 million of after-tax other comprehensive loss, including securities valuation changes, and share repurchases, partly offset by net income. Book value per share was $12.88 and tangible book value per share was $9.73.
- The Bank’s regulatory capital ratios exceeded the filing’s “well-capitalized” thresholds: total capital to risk-weighted assets was 12.67% and common equity tier 1 was 12.03%.
Material changes, outlook and risks
- Earnings pressure: Net income fell despite higher interest income and non-interest income, as funding costs rose and the prior-year period included a $5.4 million credit-loss provision reversal. Net interest margin declined to 2.69%. Purchase-accounting accretion and loan prepayment penalty income also fell year over year, to $1.8 million from $2.9 million and $0.4 million from $1.7 million, respectively.
- Credit quality: Nonperforming assets declined to $77.4 million, or 0.98% of assets, from $92.2 million, or 1.19%, at June 30. Nonperforming loans were $68.6 million; the allowance for credit losses was $47.6 million, or 0.84% of total loans. Management attributed the quarter’s provision primarily to loan growth, partly offset by a shorter expected loan life.
- Market-value and interest-rate exposure: Management attributed unrealized securities losses to market interest rates and credit spreads, not deterioration in credit quality, and recorded no securities credit-loss allowance. Accumulated other comprehensive loss was $76.3 million. The company’s modeled +300-basis-point rate scenario showed a 20.0% decline in economic value of equity and an 9.0% decline in projected net interest income over 1–12 months. Management cautions these estimates rely on assumptions and are not forecasts.
- Notable income and costs: Bank-owned life insurance income increased to $3.7 million from $1.6 million, primarily from policy payouts; management said the payouts were not taxable. Salaries and benefits rose $1.7 million, while occupancy expense fell $1.5 million, partly because the prior-year quarter included $1.3 million of branch-consolidation costs.
- Capital returns: The company repurchased 759,806 shares for $8.7 million during the quarter and declared dividends of $0.11 per share. A new plan announced August 1 authorizes repurchases of up to 4 million shares; 3,565,339 remained available at September 30.
- Subsequent event: A former branch location was sold on October 31, 2022, generating a reported pre-tax gain of approximately $2.9 million. The company also declared a $0.11-per-share dividend payable November 23, 2022.
- Forward-looking considerations: The filing provides no specific earnings or margin guidance. Management identifies interest rates, inflation, deposit flows and funding costs, loan demand and credit quality, competition, economic conditions, and regulatory or accounting changes among factors that could affect results. It reported no material change to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Most important facts for investors to verify
- How deposit pricing and funding costs evolve, and whether loan yields can keep pace to stabilize net interest margin.
- Whether loan growth continues and how credit performance, nonperforming assets, and required credit-loss provisions change as economic conditions and rates shift.
- The effects of securities valuation losses, interest-rate hedges, and further rate changes on equity, liquidity, and earnings.
- Whether reported liquidity and borrowing capacity remain available under actual collateral, market, and funding conditions.
- The realized gain from the branch sale and the sustainability of bank-owned life insurance income and other non-recurring items.