Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period. Kearny Financial Corp. is a bank holding company operating principally through Kearny Bank in New Jersey and New York. This unaudited filing covers the fiscal quarter and six months ended December 31, 2020 (fiscal Q2 2021); comparisons are with the corresponding 2019 periods unless otherwise stated. On July 10, 2020, the company acquired MSB Financial Corp. and Millington Bank.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2020 |
|---|---|---|
| Net interest income | $44.6; prior year $34.6 | $88.7; prior year $71.3 |
| Net income | $16.9; prior year $10.7 | $28.3; prior year $22.0 |
| Diluted EPS | $0.20; prior year $0.13 | $0.33; prior year $0.26 |
| Net interest margin | 2.64%; prior year 2.29% | 2.65%; prior year 2.36% |
| Provision for (reversal of) credit losses | $(1.4); prior-year reversal $(1.5) | $2.7; prior-year reversal $(2.2) |
| Non-interest income | $7.2; prior year $4.6 | $14.9; prior year $8.5 |
| Non-interest expense | $30.5; prior year $26.4 | $64.1; prior year $52.7 |
Balance sheet at Dec. 31, 2020: Total assets were $7.34 billion, up $577.0 million from June 30, 2020. Net loans were $4.77 billion; available-for-sale securities were $1.70 billion; deposits were $5.31 billion; borrowings were $865.7 million; and stockholders’ equity was $1.09 billion. The loan allowance for credit losses was $63.4 million, or 1.30% of loans.
Cash flow for the six months: Operating activities provided $30.8 million; investing activities used $72.4 million; financing activities used $9.7 million. Cash and cash equivalents fell $51.3 million to $129.7 million.
Liquidity and capital: The company reported $129.7 million in cash and equivalents and $1.70 billion in available-for-sale securities. It also reported unused borrowing capacity of $1.75 billion at the FHLB, $292.0 million at the Federal Reserve, and $615.0 million through unsecured lines with other financial institutions. The Bank’s capital ratios exceeded regulatory well-capitalized thresholds; its total risk-based capital ratio was 19.23% and Tier 1 leverage ratio was 11.30%.
Material changes versus comparable periods
- Quarterly net income rose to $16.9 million from $10.7 million. Net interest income increased $9.9 million, mainly as lower funding costs more than offset lower yields on some earning assets. Quarterly NIM improved to 2.64%.
- For the six-month period, net income increased to $28.3 million from $22.0 million. Results included a $3.1 million bargain-purchase gain from the MSB acquisition; merger-related costs were $4.3 million.
- The MSB acquisition contributed to growth in assets, loans and deposits. Deposits increased $882.3 million from June 30, including $460.2 million assumed in the acquisition; net loans increased $304.2 million, reflecting acquired loans partly offset by runoff and loan sales.
- Nonperforming loans increased to $71.5 million, or 1.48% of loans, from $36.7 million, or 0.82%, at June 30. The filing attributes much of the increase to four New York City commercial and multifamily loans placed on nonaccrual, plus acquired MSB loans.
- The company adopted CECL on July 1, 2020. Adoption increased the loan allowance by $19.6 million and reduced equity by $14.2 million, net of tax. The quarter’s credit-loss provision was a reversal of $1.4 million; the six-month period included $2.7 million of provision expense.
- Six-month share repurchases totaled $45.7 million. The company resumed buybacks in October and announced a sixth repurchase plan in January 2021.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results.
- Management says the COVID-19 pandemic, its duration and economic effects, interest-rate changes, and government responses could adversely affect operations, credit-loss estimates, securities and goodwill impairment estimates, and business continuity. Most non-branch staff were working remotely; branches were open and operating as of December 31.
- At quarter-end, 37 loans totaling $33.2 million had COVID-related non-TDR modifications still in effect. The company also disclosed $19.6 million of TDRs and $71.5 million of nonperforming loans. Foreclosure and eviction restrictions may affect resolution timing.
- Credit risk is sensitive to economic forecasts and management assumptions under CECL. The loan portfolio includes substantial multifamily and nonresidential mortgage exposure; disclosed hotel, restaurant, retail, and entertainment/recreation exposures totaled $345.9 million.
- Interest-rate sensitivity analysis estimated that a 300-basis-point increase would reduce modeled one-year net interest income by 5.28%, while a 100-basis-point decrease would reduce it by 2.38%. Management cautions that these modeled scenarios rely on assumptions and may not predict actual results.
- Unusual current-period items included the MSB bargain-purchase gain, merger expenses, $796,000 of debt-extinguishment costs, and a $347,000 branch-related asset impairment. A $523,000 tax valuation-allowance reversal also affected the period.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending legal proceedings beyond routine matters.
Important facts for investors to verify
- How the acquired MSB loan book and the increase in nonperforming loans develop, including the status and collateral support of the four cited New York City credits.
- Whether the $63.4 million CECL loan allowance adequately reflects portfolio risks, economic assumptions, and acquired-loan performance.
- How much earnings growth is sustainable after excluding the $3.1 million bargain-purchase gain, loan-sale gains, and other unusual items, and after considering merger and integration costs.
- Whether deposit growth and lower funding costs persist, and how rate changes affect net interest margin and funding costs.
- Liquidity and capital levels alongside planned share repurchases, dividend payments, and the company’s substantial securities and borrowing capacity.