Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2021, the company’s fiscal third quarter, with year-to-date results for the nine months ended March 31, 2021. Unless noted otherwise, dollar amounts below are in millions. The filing is unaudited.
Business context and financial results
Kearny Financial is a bank holding company operating principally through Kearny Bank in New Jersey and New York. Results include the July 10, 2020 acquisition of MSB Financial Corp. (MSB), which increased the scale of the balance sheet and affected period-over-period comparisons.
| Metric | Three months ended Mar. 31, 2021 | Prior-year quarter | Nine months ended Mar. 31, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Net interest income | $47.6 | $37.6 | $136.3 | $108.9 |
| Provision for credit losses | $1.1 | $6.3 | $3.8 | $4.0 |
| Non-interest income | $5.5 | $6.2 | $20.4 | $14.7 |
| Non-interest expense | $29.8 | $28.1 | $93.9 | $80.7 |
| Net income | $16.4 | $9.3 | $44.8 | $31.3 |
| Diluted EPS | $0.20 | $0.11 | $0.53 | $0.38 |
| Net interest margin | 2.83% | 2.46% | 2.71% | 2.39% |
Quarterly net interest spread was 2.71%, compared with 2.23% a year earlier. Management attributed improved net interest income and margin primarily to lower funding costs, partly offset by lower yields on interest-earning assets. The quarter’s effective tax rate was 25.9%, versus 2.4% in the prior-year quarter, which benefited from tax-related items.
Financial position, cash flow and liquidity
- Total assets were $7,358.0 at March 31, 2021, up $599.8 from June 30, 2020. Net loans were $4,734.5, and available-for-sale securities were $1,779.0.
- Total deposits were $5,374.5, up $944.2 since June 30, 2020; the increase included $460.2 of deposits assumed in the MSB acquisition. Borrowings were $865.8, down $307.4.
- Cash and cash equivalents were $109.0, down from $181.0 at June 30, 2020. For the nine months, operating cash flow was $57.7, investing cash flow was negative $139.6, and financing cash flow was positive $9.9; cash decreased $72.0.
- Management reported available liquidity from cash, $1.78 billion of available-for-sale securities, and stated additional borrowing capacity of $1.81 billion from the FHLB, $257 million from the Federal Reserve, and $615 million through unsecured credit lines.
- Bank capital ratios remained above regulatory well-capitalized thresholds: total risk-based capital was 18.12%, common equity tier 1 was 17.25%, and Tier 1 leverage was 10.81%. The company reported it exceeded applicable capital requirements.
Material changes and notable items
- The MSB acquisition contributed $530.2 of loans and $460.2 of deposits at acquisition-date fair value; the company recorded a $3.1 bargain-purchase gain and $4.3 of merger-related expense during the nine-month period.
- Loans receivable increased $299.8 before the allowance and yield adjustments, including MSB-acquired loans. Commercial real estate and construction balances grew, while PPP loan balances fell to $20.9 from $69.0 at June 30, 2020.
- Nonperforming loans rose to $71.4, or 1.49% of total loans, from $36.7, or 0.82%, at June 30, 2020. The increase included $10.4 of nonperforming loans acquired from MSB. The allowance for credit losses was $63.8, or 1.32% of loans, compared with $37.3, or 0.82%, at June 30, 2020. Comparability is affected by adoption of CECL, which increased the loan allowance by $19.6 million and reduced equity by $14.2 million net of tax.
- The company reported 32 active non-TDR loan modifications totaling $52.9, or 1.10% of loans. TDRs totaled $19.2. Management cited two nonperforming New York City commercial real estate loans, with $9.8 of principal, as a key contributor to increased reserves on individually evaluated loans.
- Available-for-sale securities increased to $1,779.0. Their net unrealized gain was $1.7 at period-end, down from $22.5 at June 30, 2020; management attributed unrealized losses to interest rates and credit spreads, not credit deterioration, and recorded no related credit-loss allowance.
- The company repurchased 7.5 million shares for $80.6 during the nine months and paid $20.8 in dividends. Stockholders’ equity declined to $1,063.8 from $1,084.2 at June 30, 2020.
Outlook, risks and contingencies
The filing provides no quantified earnings, margin, or balance-sheet guidance. Management cautioned that results depend on interest rates, deposit flows, loan demand and credit quality, competition, and the economic effects of COVID-19. It noted uncertainty about the pandemic’s duration and effects, including potential impacts on expected credit losses, securities and goodwill. Branch lobbies had reopened and were fully operational at March 31, 2021; many non-branch employees continued to work remotely.
Interest-rate sensitivity analysis estimated that a parallel 300-basis-point increase would reduce modeled one-year net interest income by 7.91% and economic value of equity by 11% from baseline. Management cautioned that these are hypothetical model results, not forecasts, and depend on assumptions about rates, prepayments and deposit behavior. The company also disclosed $256.7 of commitments to originate or purchase loans, plus construction-loan commitments and unused lines of credit, and stated that commitments may not be fully drawn. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of earnings and balance-sheet growth reflects MSB acquisition effects versus organic performance, and whether merger-related costs have been substantially completed.
- Whether the rise in nonperforming loans and reserves, particularly in commercial real estate, stabilizes; review loan delinquencies, modifications, collateral values and charge-offs.
- How deposit growth, funding costs, securities reinvestment yields and interest-rate sensitivity affect net interest margin in subsequent periods.
- Whether liquidity and capital remain strong as loan commitments, share repurchases and dividends evolve; verify the amount remaining under the announced repurchase plan.
- Assess the effects of CECL adoption and the securities portfolio’s unrealized-value changes when comparing reported results across periods.