Kearny Financial Corp. — Form 10-Q Summary
Reporting period: The filing is for the fiscal quarter ended March 31, 2020, with year-to-date results for the nine months then ended. Although the request metadata says “2019 Q3,” the filing itself reports fiscal 2020 Q3.
Business and financial performance
Kearny Financial is a bank holding company operating principally through Kearny Bank in New Jersey and New York. Unless otherwise noted, amounts below are in millions.
| Metric | Three months ended Mar. 31, 2020 | Three months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2020 | Nine months ended Mar. 31, 2019 |
|---|---|---|---|---|
| Net interest income | $37.6 | $38.6 | $108.9 | $118.2 |
| Provision for loan losses | $6.3 | $(0.2) reversal | $4.0 | $2.9 |
| Non-interest income | $6.2 | $3.7 | $14.7 | $10.2 |
| Non-interest expense | $28.1 | $26.8 | $80.7 | $80.5 |
| Net income | $9.3 | $11.4 | $31.3 | $33.3 |
| Diluted EPS | $0.11 | $0.13 | $0.38 | $0.36 |
| Net interest margin | 2.46% | 2.53% | 2.39% | 2.59% |
Quarterly interest income was $58.8 million and interest expense was $21.2 million. For the nine-month period, interest income was $175.9 million and interest expense was $67.0 million. The quarterly effective tax rate was 2.4%, affected by CARES Act tax benefits and reversal of valuation allowances; the nine-month rate was 19.5%.
Financial condition, cash flow, and liquidity
- At March 31, 2020, total assets were $6.77 billion, up $139.0 million from June 30, 2019. Net loans were $4.53 billion, down $120.3 million; available-for-sale securities were $1.48 billion, and cash and equivalents were $59.5 million.
- Deposits were $4.25 billion, up $105.6 million from June 30. Retail deposits increased $292.6 million while wholesale deposits declined $186.9 million. Borrowings were $1.38 billion, up $62.0 million.
- Nine-month operating cash flow was $30.1 million, investing cash use was $86.9 million, and financing cash provided was $77.3 million. Cash and equivalents increased $20.5 million to $59.5 million.
- Management reported additional borrowing capacity of $1.62 billion from the FHLB, $323.5 million from the Federal Reserve, and $415.0 million under unsecured lines of credit. These are reported capacities, not cash on hand.
- Bank regulatory capital ratios exceeded minimum requirements: total risk-based capital was 20.66% and common equity tier 1 was 19.71%. The Company elected not to use the community bank leverage ratio framework.
- Stockholders’ equity was $1.07 billion, down $57.5 million from June 30, largely reflecting $69.8 million of share repurchases and $17.3 million of dividends, partly offset by net income. Repurchases were suspended March 25, 2020.
Material changes and unusual items
- Quarterly net income declined 19% year over year, principally reflecting lower net interest income and a $6.3 million loan-loss provision versus a prior-year provision reversal. Nine-month net income declined despite higher EPS, as average diluted shares fell.
- Nonperforming loans rose to $35.4 million, or 0.78% of total loans, from $20.3 million, or 0.43%, at June 30, 2019. The increase primarily reflected a $14.3 million owner-occupied commercial real estate loan placed on nonaccrual.
- The allowance for loan losses increased to $37.2 million, 0.81% of total loans, from $33.3 million, 0.70%. Management raised economic-environment factors in response to COVID-19; the filing says future deterioration could require further provision increases.
- A wholesale funding and securities restructuring generated $2.2 million of securities gains and $2.2 million of debt-extinguishment expense, with negligible reported pretax impact. It included sales and repayment of advances and purchases of agency mortgage-backed securities.
- Adoption of ASU 2019-04 led to a $537.7 million transfer of held-to-maturity securities to available-for-sale. This materially changed the reported classification and fair-value presentation of securities. The company reported $19.7 million of unrealized losses in the available-for-sale portfolio at quarter-end and concluded losses were temporary, not other-than-temporary.
- Accumulated other comprehensive income moved from positive $2.8 million at June 30 to a loss of $4.1 million, including adverse derivative fair-value movements. Derivative liabilities were $15.4 million; management estimated $6.5 million would be reclassified as increased interest expense over the next 12 months.
Outlook, commentary, and risks
- The filing provides no formal earnings or margin guidance. Management cautioned that COVID-19’s duration and financial effects were uncertain, including potential impacts on borrower credit, securities impairment, goodwill, and future results.
- As of May 4, the Bank had approved 628 Paycheck Protection Program loans totaling $63.9 million. It also reported 602 COVID-related non-TDR payment modifications totaling $622.7 million. CARES Act tax changes reduced current-period tax expense by $1.6 million through NOL carrybacks.
- The company temporarily closed six of 48 branches, modified branch access, and moved most non-branch personnel to remote work. Management cited operational, cybersecurity, economic, credit, collateral-value, and low-interest-rate risks.
- The proposed MSB Financial Corp. acquisition would exchange each MSBF share for 1.3 Kearny shares or $18 cash, subject to proration targeting 90% stock and 10% cash. Closing was expected late in the June 2020 quarter or early in the September 2020 quarter, subject to shareholder, regulatory, and other approvals.
- The company planned CECL adoption on July 1, 2020, while evaluating whether to use temporary CARES Act relief. Management said the adoption impact could not yet be determined; approximately $972.4 million of acquired loans had no allowance under the existing method.
Important facts for investors to verify
- Track COVID-related modifications, delinquencies, nonaccrual loans, charge-offs, and any further increases to the allowance—especially exposure to commercial real estate and affected business sectors.
- Confirm subsequent trends in net interest margin and funding costs following Federal Reserve rate cuts, and the realized effect of the wholesale restructuring and derivative hedges.
- Monitor liquidity and borrowing capacity, the maturity profile and cost of FHLB advances, deposit mix, and the status of pledged securities.
- Verify the MSBF merger’s approvals, timing, integration costs, and final cash/stock mix; the reported timetable was an expectation, not a completed transaction.
- Assess the sustainability of earnings excluding securities gains, debt-extinguishment costs, merger charges, and one-time tax benefits; review the effect of CECL adoption or any temporary deferral.