Kearny Financial Corp. — FY2021 Form 10-K
Period note: Although the request identifies “2020 Q4,” this filing is the annual report for the fiscal year ended June 30, 2021, filed August 27, 2021. Comparative figures are primarily for the year ended June 30, 2020.
Business context and reporting period
Kearny Financial is the holding company for Kearny Bank, a New Jersey savings bank serving New Jersey and New York. Its business centers on deposits, commercial and residential real estate lending, business loans, and investment securities. The Bank operated 48 branches at June 30, 2021.
The Company completed its acquisition of MSB Financial Corp. on July 10, 2020, issuing approximately 5.85 million shares and paying $9.8 million in cash. It acquired loans with a fair value of $530.2 million, assumed deposits of $460.2 million, and recognized a $3.1 million bargain-purchase gain.
Financial and operating performance
| Metric | FY2021 / June 30, 2021 | Comparable period / change |
|---|---|---|
| Total assets | $7.28 billion | Up 7.8% from $6.76 billion |
| Net loans receivable | $4.79 billion | Up 7.4% from $4.46 billion |
| Deposits | $5.49 billion | Up 23.8% from $4.43 billion |
| Borrowings | $685.9 million | Down 41.5% from $1.17 billion |
| Investment securities | $1.72 billion | Up from $1.42 billion; 23.5% of assets |
| Interest income | $234.4 million | Up from $233.2 million |
| Net interest income | $184.5 million | Up 23.5% from $149.4 million |
| Net interest margin / spread | 2.75% / 2.61% | Up 30 / 39 basis points from 2.45% / 2.22% |
| Provision for credit losses | $1.1 million reversal | Compared with $4.2 million expense |
| Non-interest income | $24.8 million | Up 25.5% from $19.7 million |
| Non-interest expense | $125.9 million | Up 17.0% from $107.6 million |
| Net income / diluted EPS | $63.2 million / $0.77 | Up from $45.0 million / $0.55 |
| Return on average assets / equity | 0.86% / 5.79% | Compared with 0.67% / 4.10% |
| Efficiency ratio | 60.16% | Improved from 63.66% |
Net interest income benefited chiefly from lower funding costs: interest expense declined $34.0 million, while interest income rose $1.2 million. The average cost of interest-bearing liabilities fell to 0.88% from 1.61%; the average yield on interest-earning assets also declined, to 3.49% from 3.83%.
Cash and equivalents were $67.9 million at year-end, down from $181.0 million. Operating cash flow was $75.4 million, investing cash flow was negative $84.0 million, and financing cash flow was negative $104.6 million. Available-for-sale securities of $1.68 billion and substantial borrowing capacity supplemented cash liquidity. Reported borrowing capacity included $2.13 billion from the FHLB, $233.1 million from the Federal Reserve, and $651.0 million under unsecured lines.
Stockholders’ equity was $1.04 billion, down $41.2 million. Tangible book value per share was $10.49. The Company declared $0.35 per share in dividends and repurchased 10.57 million shares for $119.0 million during the year.
Material changes versus the prior comparable period
- MSB acquisition contributed acquired assets, loans, deposits, branches, and a bargain-purchase gain; year-over-year growth therefore reflects both acquisition and organic activity.
- Core non-maturity deposits grew $712.5 million excluding acquired balances. Total deposits rose $1.06 billion, while FHLB advances and other borrowings fell $487.3 million.
- Nonperforming loans rose to $79.8 million, or 1.64% of loans, from $36.7 million, or 0.82%. Nonperforming assets increased to $79.9 million from $36.9 million. The filing attributes $14.4 million of nonperforming loans to acquired MSB loans.
- The allowance for credit losses increased to $58.2 million, or 1.19% of loans, from $37.3 million, or 0.82%. Adoption of CECL added $19.6 million to the loan allowance; the acquisition also added allowance on acquired loans.
- Commercial real estate remained a major concentration: multifamily loans were 41.8% and nonresidential loans 22.1% of the loan portfolio. Residential mortgage originations increased to $553.2 million from $197.8 million.
- Reported earnings included nonrecurring items, including the $3.1 million bargain-purchase gain, $4.3 million of MSB-related expenses, $1.9 million of facility impairment charges, and an $800,000 write-down of a fintech equity investment.
Outlook, commentary, and risks
Management said it intends to continue growing core non-maturity deposits, with emphasis on non-interest-bearing deposits; diversify lending, particularly commercial real estate, commercial business, and construction; expand residential mortgage lending for secondary-market sale; improve efficiency through technology and possible branch optimization; and maintain capital and liquidity above regulatory minimums. The filing does not provide specific earnings, revenue, or margin guidance for fiscal 2022.
- Credit and concentration: COVID-19 effects, local real estate conditions, borrower repayment capacity, and collateral values could affect credit losses. The allowance depends on forecasts and significant management estimates. Non-owner-occupied commercial real estate exposure was 405% of Bank risk-based capital; management reported portfolio growth of 4% over the preceding 36 months.
- Interest rates: Management described the Company as generally liability-sensitive. Its model estimated one-year net interest income would decline 8.38% under an immediate, sustained 300-basis-point rate increase from the June 2021 base case. These modeled outcomes rely on assumptions and are not forecasts.
- Funding and liquidity: Wholesale funding was approximately $1.16 billion, or 16.0% of assets. Certificates of deposit maturing within one year totaled $1.51 billion; $1.19 billion of CDs were at least $100,000. Renewal rates, funding costs, and access to wholesale sources could affect liquidity and margins.
- Securities and equity: Available-for-sale securities were 97.8% of the securities portfolio and are marked to fair value, which can affect reported equity. Management attributed unrealized losses to rates and credit spreads and recorded no securities credit-loss allowance at year-end.
- COVID-19 and operations: The pandemic continued to pose economic, credit, employee, business-continuity, and cybersecurity risks. All branches were operational at June 30, 2021. Active qualifying payment deferrals had fallen to $5.6 million from $781.3 million a year earlier.
- Other matters: The filing identifies LIBOR transition, acquisition integration, regulatory change, competition, cyber and third-party service-provider risks. Management reported no pending or known contemplated litigation expected to have a material effect. Goodwill was $210.9 million; the annual impairment test found no impairment.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: this is FY2021, not a 2020 Q4 filing.
- Separate MSB acquisition effects and nonrecurring items from underlying earnings growth; assess the sustainability of the $63.2 million net income and 2.75% margin.
- Review the composition, migration, collateral values, and subsequent performance of nonperforming and classified loans, especially the commercial real estate portfolio and acquired MSB credits.
- Validate the CECL allowance assumptions and the effect of changing economic forecasts; compare allowance coverage with the rise in nonperforming loans.
- Assess deposit retention and costs, near-term certificate maturities, brokered deposits, wholesale funding reliance, and whether disclosed borrowing capacity remains available.
- Check the effect of share repurchases and dividends on capital, tangible book value, and future capital-distribution flexibility; the Bank and Company reported capital ratios above well-capitalized thresholds.
- Review audited financial statements and subsequent filings for updates. The filing reports clean audit opinions on the financial statements and internal control, while identifying CECL estimation and acquired-loan fair valuation as critical audit matters.