Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2019 (the second quarter of fiscal 2020). The financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context and financial position
Kearny Financial is a bank holding company operating principally through Kearny Bank. At December 31, 2019, total assets were $6,610.4 million, down $24.4 million from June 30, 2019. Net loans were $4,461.8 million, deposits $4,188.8 million, borrowings $1,275.0 million, and stockholders’ equity $1,094.6 million.
Loans were concentrated in commercial mortgages: multifamily balances were $1,856.6 million and nonresidential balances were $1,172.2 million. The allowance for loan losses was $30.9 million, or 0.68% of loans, compared with $33.3 million, or 0.70%, at June 30.
Results and key metrics
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2019 | Six months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Interest income | $57.2 | $60.0 | $117.1 | $118.2 |
| Net interest income | $34.6 | $39.3 | $71.3 | $79.5 |
| Provision for loan losses | $(1.5) reversal | $1.0 expense | $(2.2) reversal | $3.1 expense |
| Non-interest income | $4.6 | $3.3 | $8.5 | $6.5 |
| Non-interest expense | $26.4 | $27.3 | $52.7 | $53.7 |
| Net income | $10.7 | $10.8 | $22.0 | $21.9 |
| Diluted EPS | $0.13 | $0.12 | $0.26 | $0.23 |
| Net interest margin | 2.29% | 2.56% | 2.36% | 2.62% |
Quarterly net income was slightly lower year over year despite higher non-interest income and lower expenses, as net interest income fell $4.7 million. For the six-month period, net income increased modestly as higher non-interest income, lower expenses, and the loan-loss provision reversal more than offset lower net interest income. The filing does not provide a formal earnings forecast.
For the six months, operating cash flow was $24.7 million, investing activities provided $48.8 million, and financing activities used $70.7 million. Cash and cash equivalents increased $2.9 million to $41.8 million.
Material changes and management commentary
- Net interest pressure: Quarterly net interest income declined 12% year over year; the six-month decline was 10%. Management attributed the pressure to lower loan balances and yields, alongside higher deposit costs. Six-month average cost of interest-bearing liabilities rose 25 basis points to 1.78%; net interest margin declined 26 basis points year over year to 2.36%.
- Loan contraction and credit: Net loans fell $183.9 million from June 30, mainly because elevated prepayments exceeded originations and purchases. Nonperforming loans rose to $22.0 million, or 0.49% of loans, from $20.3 million, or 0.43%. The allowance decline reflected a $2.2 million six-month provision reversal and $90,000 of net charge-offs.
- Funding mix and debt: Deposits increased $41.2 million. Retail deposits rose $232.4 million while wholesale deposits fell $191.2 million, consistent with the company’s stated effort to favor core deposits. Borrowings decreased $46.9 million. Cash was supplemented by $1.40 billion of available-for-sale securities; the bank also reported $1.58 billion of additional FHLB borrowing capacity without additional collateral and $655.0 million available under other credit lines.
- Capital returns: The company repurchased 3.9 million shares for $52.3 million during the six months, at an average $13.40 per share, and declared dividends of $0.13 per share. Bank regulatory capital ratios exceeded stated minimums; its total risk-based capital ratio was 21.07% and common equity tier 1 ratio 20.25%.
- Securities classification: Adoption of ASU 2019-04 on July 1, 2019 moved $537.7 million of held-to-maturity securities to available-for-sale. Available-for-sale securities totaled $1,402.2 million at period-end. Management said it identified no other-than-temporary impairment.
Outlook, risks, and unusual items
- Proposed MSB Financial acquisition: Announced December 18, 2019; MSBF shareholders may elect 1.3 Kearny shares or $18 cash per share, subject to aggregate allocation of 90% stock and 10% cash. MSBF had approximately $593.1 million in assets, $513.7 million in gross loans, and $472.8 million in deposits. Closing was expected in the second calendar quarter of 2020, subject to shareholder and regulatory approvals and other conditions. Kearny shareholders were expected to own about 94% of the combined company.
- Acquisition and branch-related items: The quarter included $219,000 of merger expenses. Six-month results also included branch-consolidation costs and asset-disposal losses; management identified $720,000 of nonrecurring expense and $342,000 of nonrecurring income reduction for the six-month period. FDIC insurance expense was zero in the current six-month period because assessment credits were available.
- Accounting transition: CECL was scheduled for adoption July 1, 2020. The company said the impact was indeterminable, and noted approximately $1.03 billion of acquired loans without an allowance under the then-current model. Operating lease accounting added approximately $17.2 million of right-of-use assets and $17.8 million of lease liabilities at adoption.
- Risk exposures: Interest-rate changes, deposit flows, funding costs, prepayments, loan demand and credit quality may affect results. The company’s one-year static-balance-sheet model estimated NII would fall 8.13% under an immediate +300 basis-point rate shock; modeled EVE fell 15% in that scenario. Management cautioned that these estimates depend on assumptions and are not forecasts. Merger risks include failure or delay in obtaining approvals, integration costs, customer or employee losses, and failure to realize expected benefits.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material pending legal proceedings beyond ordinary-course matters.
Important facts for investors to verify
- Whether the MSBF transaction received all required approvals, closed on schedule, and delivered expected integration benefits and costs.
- Whether net interest margin and deposit funding costs stabilized after the year-over-year margin contraction.
- Whether loan prepayments, commercial real estate exposure, nonperforming loans, and the allowance remain consistent with management’s credit assumptions.
- The eventual CECL adoption adjustment, particularly its treatment of acquired loans and effect on retained earnings and credit reserves.
- Whether liquidity and capital remain adequate as securities, borrowings, share repurchases, dividends, and loan commitments evolve.