Kearny Financial Corp. — FY2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020; filed August 28, 2020. This is an annual report, not a calendar-year 2019 Q4 filing. Kearny is a New Jersey and New York-focused community bank operating through Kearny Bank.
Financial performance and position
| Metric | FY2020 / June 30, 2020 | Prior comparable period |
|---|---|---|
| Interest income | $233.2 million | $237.3 million |
| Net interest income | $149.4 million | $155.3 million |
| Net interest margin | 2.45% | 2.56% |
| Non-interest income | $19.7 million | $13.6 million |
| Non-interest expense | $107.6 million | $109.2 million |
| Provision for loan losses | $4.2 million | $3.6 million |
| Net income / diluted EPS | $45.0 million / $0.55 | $42.1 million / $0.46 |
| Return on average assets / equity | 0.67% / 4.10% | 0.63% / 3.52% |
| Net cash from operating activities | $19.8 million | $39.9 million |
- Balance sheet: Assets were $6.76 billion, up $123.3 million year over year. Net loans were $4.46 billion, down $184.6 million, while securities totaled $1.42 billion, up $127.3 million. Cash and equivalents rose to $181.0 million from $38.9 million.
- Funding and debt: Deposits increased to $4.43 billion from $4.15 billion; borrowings decreased to $1.17 billion from $1.32 billion. Certificates of deposit were 41.5% of deposits, versus 53.2% a year earlier.
- Liquidity and capital: Available-for-sale securities were $1.39 billion. Additional borrowing capacity was reported at $1.53 billion from the FHLB, $318.7 million from the Federal Reserve and $615.0 million under unsecured lines. The Bank’s Tier 1 leverage ratio was 11.95%; the consolidated Company’s was 13.27%. Both were reported above regulatory requirements.
- Credit quality: Nonperforming loans rose to $36.7 million, or 0.82% of loans, from $20.3 million, or 0.43%. The allowance for loan losses increased to $37.3 million, or 0.82% of loans, from $33.3 million, or 0.70%. Net charge-offs were $144,000.
Material changes and notable items
- Net income rose by $2.8 million, while net interest income declined by $6.0 million and margin contracted 11 basis points. Lower non-interest expense, higher non-interest income and lower tax expense more than offset the weaker net interest result and higher loan-loss provision.
- Non-interest income increased by $6.2 million, including $2.3 million of net gains on securities sales and calls and $3.2 million of gains on residential mortgage loan sales. Loan prepayment penalty income also increased.
- The CARES Act enabled a $1.6 million tax benefit from NOL carrybacks; the Company also reversed $591,000 of valuation allowances. These items contributed to the lower effective tax rate of 21.5%, versus 24.8%.
- A wholesale balance-sheet restructuring generated $2.2 million of securities gains and $2.2 million of debt-extinguishment expense, with a negligible stated effect on pretax income. The Company also recorded $951,000 in MSB merger-related expenses and identified branch-consolidation costs and asset-disposal items.
- Operating cash flow was $19.8 million, down from $39.9 million. Investing activities provided $85.0 million and financing activities provided $37.2 million; cash and equivalents increased by $142.0 million over the year.
- In July 2020, after fiscal year-end, Kearny completed its acquisition of MSB Financial Corp. for approximately $9.8 million in cash and 5,853,811 shares. It acquired approximately $500 million of loans, assumed approximately $400 million of deposits and added four branches. Purchase accounting was incomplete when the filing was prepared.
Outlook, risks and management commentary
- Management said COVID-19 created substantial uncertainty for borrowers, local economies and operating results. It reported 711 COVID-related loan modifications totaling $781.3 million, or 17.2% of loans, at June 30. By August 14, 69.5% of the $374.9 million in modified loans whose initial deferral had expired had returned to regular payment schedules; 30.3% had received a second 90-day extension.
- The Company had approximately $69.0 million in 749 PPP loans at year-end. Management cited possible deterioration in credit quality, collateral values and borrower liquidity, as well as potential PPP-related litigation.
- Management’s near-term priorities include maintaining capital and liquidity, preserving the loan portfolio while supporting affected borrowers, growing core non-maturity deposits, originating high-quality loans, continuing mortgage loan sales, improving efficiency and investing in technology. It provided no specific earnings or margin guidance.
- The stock repurchase program was temporarily suspended on March 25, 2020. The Company had repurchased 8.46 million shares under its then-current program for $111.1 million, or an average $13.14 per share. Fiscal 2020 dividends were $0.29 per share, down from $0.37.
- CECL became effective for the Company on July 1, 2020. Management expected a material increase in the allowance for credit losses, but had not determined the final amount; it did not expect a material effect on regulatory capital.
- Additional risks include interest-rate and margin sensitivity, commercial real estate and geographic concentration, reliance on wholesale funding, acquisition integration, securities valuation, cyber and operational risks, and the transition away from LIBOR. Non-owner-occupied commercial real estate was 360% of Bank risk-based capital, although portfolio growth over the preceding 36 months was 21%.
- The filing reports an unmodified audit opinion and effective internal control over financial reporting. Management reported no pending or contemplated litigation expected to materially affect operations or income.
Important facts for investors to verify
- How CECL adoption changed the allowance, retained earnings and credit outlook after June 30, 2020.
- Whether extended COVID-related payment deferrals led to renewed payment performance, delinquencies or additional loss provisions.
- Developments in the $14.3 million nonaccrual commercial real estate loan and the broader increase in nonperforming loans and classified assets.
- Whether margin pressure, deposit costs and reliance on short-term FHLB advances affect earnings and liquidity as rates change.
- MSB’s final purchase accounting, integration costs, acquired asset quality and contribution to earnings.
- The duration of the repurchase suspension and the sustainability of dividends amid pandemic uncertainty and regulatory constraints.