Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2022, the company’s fiscal third quarter, and nine months ended March 31, 2022. The filing is unaudited. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and financial performance
Kearny Financial operates principally through Kearny Bank. At March 31, 2022, it reported total assets of $7.39 billion, primarily loans and investment securities.
- Quarter: Net income was $17.7 million, or $0.25 per diluted share, versus $16.4 million, or $0.20, a year earlier. Net interest income was $47.7 million, down from $48.5 million; net interest margin was 2.89%, versus 2.88%. Interest income was $54.6 million and non-interest income was $3.2 million.
- Nine months: Net income was $56.2 million, or $0.78 per diluted share, versus $44.8 million, or $0.53. Net interest income was $146.0 million, up from $139.2 million; net interest margin was 2.95%, versus 2.77%. Interest income was $167.7 million and non-interest income was $11.1 million.
- Credit costs and expenses: The company recorded a $3.9 million provision reversal for the quarter and an $11.7 million reversal for nine months, compared with provisions of $1.1 million and $3.8 million, respectively, in the prior-year periods. Non-interest expense was $30.6 million for the quarter and $92.1 million for nine months.
- Loans and credit quality: Net loans were $4.96 billion, up 3.5% from June 30, 2021. The allowance for credit losses was $43.9 million, or 0.87% of total loans, down from $58.2 million, or 1.19%. Nonperforming assets were $81.0 million, or 1.10% of assets; total nonperforming loans were $80.6 million. Troubled debt restructurings increased to $31.7 million from $17.8 million.
- Funding and liquidity: Deposits were $5.53 billion, up 0.8% from June 30, 2021. Borrowings rose to $851.2 million from $685.9 million, including $310.0 million of overnight borrowings. Cash and cash equivalents were $62.4 million. Management reported additional borrowing capacity of $2.38 billion from the FHLB and $312.5 million from the Federal Reserve without additional collateral, plus $640 million of unused unsecured overnight borrowing capacity.
- Cash flow: For nine months, operating activities provided $57.2 million, investing activities used $152.6 million, and financing activities provided $89.9 million. Cash and cash equivalents declined $5.5 million to $62.4 million.
- Capital and shareholder returns: Stockholders’ equity was $955.2 million, down from $1.04 billion. The company repurchased $96.0 million of shares and paid $23.3 million in dividends during the nine months. Bank regulatory capital ratios remained above “well-capitalized” thresholds; actual total risk-based capital was 14.14% at the Bank and 16.97% at the Company.
Material changes versus comparable periods
- Quarterly net income rose despite lower net interest income and non-interest income, mainly because credit-loss expense shifted to a reversal. Nine-month net income also benefited from lower credit-loss expense and higher net interest income.
- Interest expense fell substantially year over year, while loan yields declined. Nine-month net interest margin increased 18 basis points; quarterly margin was nearly unchanged.
- The nine-month comparison includes a $3.1 million bargain purchase gain and $4.3 million of merger expenses from the prior-year MSB acquisition; neither recurred in the current period. Prior-year results also included $0.8 million of debt-extinguishment expense.
- Unrealized losses on available-for-sale securities increased as market rates and credit spreads changed. The portfolio had $66.3 million of gross unrealized losses at March 31, 2022, and accumulated other comprehensive loss was $22.9 million, compared with accumulated other comprehensive income of $6.1 million at June 30, 2021. Management attributed securities losses to market movements rather than credit deterioration and recorded no securities credit-loss allowance.
- Net loans grew, mainly in residential mortgages and commercial lending. Deposits increased modestly as non-maturity deposits grew and certificates of deposit ran off; borrowings increased. Equity was reduced by share repurchases, dividends, and other comprehensive losses.
Outlook, risks, and unusual items
The filing provides no formal earnings or financial guidance. Management cites interest rates, inflation, deposit flows and funding costs, loan demand and credit quality, competition, economic conditions, and the continuing effects of COVID-19 as factors that could affect results. Its interest-rate model estimated that an immediate 300-basis-point increase would reduce projected net interest income by 10.70% over 1–12 months and reduce economic value of equity by 11.91%; management cautions that model assumptions and actual outcomes may differ.
The credit-loss reversal reflected an improved economic forecast, a shorter expected life for certain loan segments, and reduced reserves on individually evaluated loans. Management identified the allowance for credit losses, individual loan evaluations, acquired loans, business combinations, and goodwill valuation as critical accounting judgments. It reported no material changes to previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls.
Unusual items included $1.3 million of current-period nine-month occupancy costs associated with consolidating three branches, $250,000 of repairs related to Tropical Storm Ida, and a $356,000 gain on asset disposals. The company had no active COVID-related payment deferrals that were not classified as TDRs at March 31, 2022. It is evaluating the effects of recently issued accounting standards on credit-loss disclosures and hedge accounting.
Important facts for investors to verify
- Whether the large credit-loss reversals and lower allowance remain appropriate as loan performance and economic conditions evolve; monitor nonperforming loans and the increase in TDR balances.
- The duration and potential earnings or capital effects of unrealized securities losses, especially if interest rates or credit spreads move further.
- Funding and rate sensitivity, including the increase in overnight borrowings, deposit mix and pricing, and the assumptions behind the interest-rate risk model.
- The sustainability of earnings after separating recurring operating results from credit-loss reversals, purchase-accounting accretion, and prior-period MSB acquisition items.
- Capital and per-share effects of repurchases: 4.52 million shares had been repurchased under the current authorization by March 31, 2022, with 3.08 million shares remaining authorized.