Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2020. Comparative operating results are for the three months ended September 30, 2019; balance-sheet comparisons are to June 30, 2020. Amounts below are in millions unless stated otherwise.
Business context
Kearny Financial is a bank holding company operating principally through Kearny Bank. On July 10, 2020, it completed its acquisition of MSB Financial Corp. and subsidiary Millington Bank. The acquisition materially increased the size of the balance sheet and affected period comparisons.
Key financial results
| Metric | Quarter ended Sep. 30, 2020 | Comparable 2019 period or prior balance date |
|---|---|---|
| Interest income | $60.9 | $59.9 |
| Interest expense | $16.7 | $23.2 |
| Net interest income | $44.2 | $36.7 |
| Provision for credit losses | $4.1 | Reversal of $0.8 |
| Non-interest income | $7.7 | $4.0 |
| Non-interest expense | $33.6 | $26.2 |
| Net income | $11.4 | $11.4 |
| Basic and diluted EPS | $0.13 | $0.13 |
| Net interest margin | 2.66% | 2.42% |
Net interest spread increased to 2.47% from 2.15%. The average yield on interest-earning assets declined to 3.67% from 3.95%, while the average cost of interest-bearing liabilities fell to 1.20% from 1.80%. The effective tax rate was 20.2%, compared with 25.1%.
Financial condition, cash flow and liquidity
- Total assets rose $552.0 million to $7.31 billion, primarily due to the MSB acquisition. Net loans increased $428.8 million to $4.89 billion; available-for-sale securities increased $122.8 million to $1.51 billion.
- Deposits grew $609.6 million to $5.04 billion, including $460.2 million assumed in the acquisition and $149.4 million of organic growth. Borrowings declined $95.6 million to $1.08 billion.
- Cash and cash equivalents were $145.8 million, down from $181.0 million at June 30. Quarterly cash flows were $6.1 million provided by operations, $25.4 million used in investing, and $15.9 million used in financing; cash decreased $35.1 million.
- Stockholders’ equity was $1.12 billion. Book value per share was $12.56 and tangible book value per share was $10.15. The filing attributes quarter-over-quarter declines in both per-share measures largely to CECL adoption and the MSB acquisition.
- Management reported additional borrowing capacity of $1.57 billion from the FHLB, $296.3 million from the Federal Reserve, and $615.0 million under unsecured lines with other financial institutions. The Bank’s September 30 capital ratios included 20.23% total capital and 11.78% Tier 1 capital to adjusted total assets; management said the Company and Bank exceeded regulatory capital requirements.
Material changes and unusual items
- MSB acquisition consideration was approximately $55.0 million, comprising $9.8 million cash and 5,853,811 Kearny shares. The company recorded a $3.1 million bargain purchase gain and $4.3 million in merger-related expense. Purchase accounting remains subject to measurement-period adjustments through July 2021.
- On July 1, 2020, Kearny adopted CECL. The adoption increased the loan allowance by $19.6 million and the reserve for unfunded commitments by $0.5 million, and reduced equity by $14.2 million net of tax. The reported allowance for credit losses on loans was $64.9 million, or 1.30% of loans, at September 30.
- Nonperforming loans increased to $45.1 million, or 0.91% of loans, from $36.7 million, or 0.82%, at June 30; the filing says the increase largely reflected $5.8 million of nonperforming loans acquired from MSB. The company also reported $76.9 million of active COVID-related non-TDR loan modifications at quarter end.
- Net income was nearly unchanged year over year despite higher net interest income and non-interest income: the bargain purchase gain and lower tax expense were offset in part by the higher credit provision and merger-related and other expenses.
- Cash dividends declared were $0.08 per share. On October 19, 2020, the company announced resumption of its existing share repurchase plan, with 761,030 shares remaining, and a new 4,475,523-share authorization to follow completion of the current plan.
Outlook, commentary and risks
The filing gives no quantitative earnings or financial guidance. Management cautioned that COVID-19’s duration and financial effects remain uncertain and could affect credit losses, securities and goodwill valuations, operations, and future results. The company identified risks from economic conditions, interest rates, deposit flows, funding costs, loan demand and credit quality, competition, and integrating acquired businesses. Its interest-rate scenarios are estimates based on assumptions, not forecasts; the filing notes that certain falling-rate scenarios could not be modeled because rates were already low. Management reported that all branches had reopened their lobbies and were fully operational at September 30, and that remote work continued for most non-branch personnel.
Legal proceedings were described as routine and immaterial in aggregate. The company reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- How acquired MSB loans and deposits perform, and whether purchase-accounting fair values or the bargain purchase gain are adjusted during the measurement period.
- Whether CECL assumptions and reserves adequately reflect COVID-19 conditions, including the status of modified loans and the movement in nonperforming loans.
- Whether lower funding costs and the improved net interest margin persist as market rates, deposit pricing, and asset yields change.
- Liquidity and funding needs, including the maturity profile and cost of FHLB borrowings and the availability of stated borrowing capacity.
- The effect of the resumed and newly authorized share repurchases on capital, liquidity, and per-share book value.