Kearny Financial Corp. — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022. Although the request identifies “2021 Q4,” this filing reports FY2022, with FY2021 and FY2020 comparative information; it is not a standalone quarterly filing. Kearny Financial is the holding company for Kearny Bank, a New Jersey-chartered community bank operating primarily in New Jersey and New York.
Financial performance and condition
| Metric | FY2022 / June 30, 2022 | Prior comparable period |
|---|---|---|
| Net income | $67.5 million; diluted EPS $0.95 | FY2021: $63.2 million; diluted EPS $0.77 |
| Net interest income | $196.6 million | FY2021: $188.2 million |
| Net interest margin | 2.94% | FY2021 comparison is inconsistent in the filing: 2.80% in the detailed discussion and 2.75% in the financial overview table |
| Provision for credit losses | $7.5 million reversal | FY2021: $1.1 million reversal |
| Non-interest income / expense | $13.9 million / $125.7 million | FY2021: $21.0 million / $125.9 million |
| Net loans / deposits | $5.37 billion / $5.86 billion | FY2021: $4.79 billion / $5.49 billion |
| Borrowings / cash and equivalents | $901.3 million / $101.6 million | FY2021: $685.9 million / $67.9 million |
| Operating cash flow | $81.3 million | FY2021: $75.4 million |
- Net income rose 6.8%. Net interest income increased $8.4 million, mainly as interest expense fell $20.2 million, partly offset by an $11.8 million decline in interest income.
- Net loans grew 12.0%; multi-family mortgage loans increased $369.8 million and one- to four-family residential mortgages increased $198.1 million. Deposits grew 6.9%, including $60.2 million growth in non-interest-bearing deposits.
- Net cash used in investing activities was $480.0 million and net cash provided by financing activities was $432.4 million; cash and equivalents increased $33.8 million over the year.
- Return on average assets was 0.93%, return on average equity 6.86%, and the reported efficiency ratio 59.71%.
- Stockholders’ equity fell $148.9 million to $894.0 million, primarily reflecting $129.5 million of repurchases, $30.5 million of dividends and a $61.9 million decline in accumulated other comprehensive income, partly offset by net income. Tangible book value per share was $9.90.
Material changes and notable items
- The loan allowance declined $11.1 million to $47.1 million, or 0.87% of loans, compared with 1.19% a year earlier. The release reflected improved economic forecasts, lower expected portfolio lives and reduced reserves on individually evaluated loans; net charge-offs were $3.6 million.
- Nonperforming loans declined to $70.3 million, or 1.30% of loans, from $79.8 million, or 1.64%. However, nonperforming assets increased to $92.2 million, including $21.7 million of nonaccrual commercial loans held for sale. Accruing and nonaccruing TDRs totaled $22.2 million.
- Available-for-sale securities declined to $1.34 billion. Their net unrealized loss was $118.0 million at year-end, versus a $10.0 million unrealized gain a year earlier; management attributed the mark-down to rates and credit spreads, not credit deterioration, and recorded no securities credit-loss allowance.
- Non-interest income fell $7.1 million, including lower loan-sale gains and the absence of the $3.1 million MSB acquisition bargain-purchase gain recognized in FY2021. Residential mortgage loan-sale gains were $2.4 million, down from $5.1 million.
- FY2022 expenses included $1.3 million for consolidation of three branches, $250,000 in Tropical Storm Ida repairs and $800,000 for early termination of a service-provider contract. FY2021 included $4.3 million in MSB merger costs and $796,000 in debt-extinguishment expense.
Liquidity, capital, outlook and risks
- Management reported $101.6 million in cash and equivalents and $1.34 billion in available-for-sale securities. Additional stated borrowing capacity was $2.04 billion from the FHLB, $303.9 million from the Federal Reserve and $975.0 million in unsecured overnight facilities. These are stated capacities, not cash on hand.
- Wholesale funding was approximately $1.67 billion, or 21.7% of assets. Brokered certificates of deposit were $761.9 million, and $1.47 billion of certificates of deposit matured within one year. Total borrowings included $250.0 million of overnight FHLB line borrowings.
- The Bank’s Tier 1 leverage ratio was 8.70%; the Company’s was 10.14%. Both were reported as well capitalized. The Bank’s commercial real estate exposure was 514% of risk-based capital, a concentration management identified as potentially subject to additional supervisory scrutiny.
- Interest-rate modeling showed that an immediate +300 basis-point shock reduced projected one-year NII by 13.62% and economic value of equity by 15.37% at June 30, 2022. Management said it subsequently entered derivative transactions intended to reduce rising-rate NII exposure.
- Management emphasized growth and diversification of commercial loans and core deposits, capital and liquidity maintenance, branch optimization, operating efficiency and technology investment. For FY2023 it planned to accelerate its digital strategy, including adoption of a cloud-based digital banking platform. No specific earnings or balance-sheet guidance was provided.
- Key disclosed risks include inflation and rising rates, margin pressure, real-estate and regional concentration, commercial-credit losses, wholesale-funding costs or availability, securities valuation and equity volatility, cyber and third-party technology risks, and continuing economic or pandemic impacts. The filing reported no pending or known contemplated litigation expected to materially affect operations or income.
- After year-end, the company announced a new authorization to repurchase up to 4 million shares. The filing also notes the Inflation Reduction Act’s 1% excise tax on stock repurchases; both developments may affect capital allocation.
Most important facts for investors to verify
- Confirm the net interest margin comparison: the filing gives FY2021 as both 2.80% and 2.75% in different tables.
- Assess the sustainability of earnings given the $7.5 million credit-loss reversal, lower purchase-accounting accretion ($9.0 million versus $16.6 million) and reduced mortgage-sale gains.
- Review securities portfolio duration, liquidity and the potential capital effect of the $118.0 million after-tax-sensitive unrealized loss; distinguish reported equity from regulatory capital, for which the Bank elected to exclude AOCI.
- Track deposit retention and pricing, near-term certificate maturities, brokered-deposit reliance, borrowings and available borrowing capacity under changing rate and market conditions.
- Monitor commercial real-estate concentrations, nonperforming held-for-sale loans, TDR performance and allowance adequacy as economic conditions change.
- Verify execution and cost of the digital-platform plan and branch consolidations, and evaluate the effect of repurchases and dividends on capital and tangible book value.