Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2019; comparative income and cash-flow figures are for the three months ended September 30, 2018. Balance-sheet comparisons are to June 30, 2019. The company operates principally through Kearny Bank.
Financial performance
| Metric | Quarter ended September 30, 2019 | Comparison |
|---|---|---|
| Net interest income | $36.7 million | Down $3.5 million year over year |
| Net interest margin | 2.42% | 2.68% a year earlier |
| Net interest rate spread | 2.15% | 2.44% a year earlier |
| Non-interest income | $4.0 million | Up $0.8 million year over year |
| Non-interest expense | $26.2 million | Down $0.2 million year over year |
| Provision for loan losses | $0.8 million reversal | Compared with $2.1 million expense a year earlier |
| Net income | $11.4 million; diluted EPS $0.13 | Net income up $0.2 million; diluted EPS was $0.12 a year earlier |
| Operating cash flow | $10.9 million provided | $13.7 million provided a year earlier |
Interest income rose 2.9% to $59.9 million, but interest expense increased 28.8% to $23.2 million, primarily as deposit costs rose. Average cost of interest-bearing deposits increased to 1.66% from 1.18%; the average yield on interest-earning assets increased to 3.95% from 3.89%. The effective tax rate was 25.13%, versus 24.71%.
Financial position, funding and credit
- Total assets were $6.64 billion at September 30, up $6.2 million from June 30. Cash and cash equivalents rose $90.4 million to $129.3 million; management described this increase as a temporary accumulation from short-term liquidity fluctuations.
- Net loans were $4.57 billion, down $73.3 million from June 30 as repayments and prepayments exceeded originations and purchases. Commercial loans represented the largest portfolio component, at approximately $3.24 billion.
- Total deposits increased $49.6 million to $4.20 billion. Retail deposits grew $125.0 million, partly offset by a $75.3 million reduction in wholesale deposits. Borrowings declined $40.9 million to $1.28 billion; the balance included $1.28 billion of FHLB advances.
- Available-for-sale securities were $1.23 billion. The increase from June 30 largely reflected a $537.7 million reclassification from held-to-maturity securities upon adoption of ASU 2019-04, rather than new purchases. Held-to-maturity securities fell to $37.9 million.
- The allowance for loan losses was $32.4 million, or 0.70% of loans, compared with $33.3 million and 0.70% at June 30. Nonperforming loans increased to $21.8 million, or 0.47% of loans, from $20.3 million, or 0.43%. The quarter included $64,000 of charge-offs and $4,000 of recoveries.
- Stockholders’ equity was $1.11 billion, down $16.4 million from June 30, mainly reflecting $30.6 million of share repurchases and $5.0 million of dividends, partly offset by earnings and other comprehensive income.
- The Bank reported a 20.17% total risk-based capital ratio and an 11.88% Tier 1 leverage ratio at September 30, exceeding applicable well-capitalized thresholds. The company reported a 23.25% total risk-based capital ratio.
Cash flow and liquidity
Cash and cash equivalents increased $90.4 million to $129.3 million. Investing activities provided $107.4 million, reflecting net loan repayments and security cash flows; financing activities used $27.9 million, including $30.6 million of repurchases and $5.2 million of dividends. The Bank reported $1.29 billion of additional FHLB borrowing capacity without additional collateral and $655.0 million available under other credit lines. These sources supplement deposits and cash flows from loans and securities.
Material changes and unusual items
- Net income increased modestly year over year despite lower net interest income, supported by higher non-interest income, lower expenses and the loan-loss provision reversal.
- The quarter included $567,000 of non-recurring branch-consolidation expense and $106,000 of non-recurring non-interest income reductions related to asset disposals. Occupancy expense also included $187,000 of lease termination costs.
- The company repurchased 2.33 million shares for $30.6 million, at an average $13.15 per share, under its fourth repurchase program. At quarter-end, 3.81 million shares remained authorized for repurchase.
- Adoption of lease accounting on July 1, 2019 resulted in recognition of operating lease assets and liabilities; at September 30, these were $16.4 million and $16.9 million, respectively.
Outlook, management commentary and risks
The filing provides no specific earnings, revenue or margin guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results. It is preparing to adopt CECL on July 1, 2020, but said the effect on the allowance and retained earnings was not yet determinable; approximately $1.04 billion of acquired loans had no allowance under the existing model.
Management’s interest-rate modeling showed projected one-year net interest income down 8.65% under a 300-basis-point rate increase and up 0.69% under a 100-basis-point decrease from the modeled base case at September 30. The company noted that the models rely on assumptions and may not predict actual results. Key stated risks include interest-rate movements, funding costs and deposit flows, loan demand and credit quality, economic conditions, regulation, competition, and execution or integration of acquired businesses. The filing reported no material change to previously disclosed risk factors, no material pending litigation beyond routine matters, and effective disclosure controls.
Most important facts for investors to verify
- Whether deposit pricing and funding costs continue to pressure net interest margin and net interest income.
- Whether nonperforming loans, particularly in commercial real estate and residential lending, remain controlled and whether the allowance remains adequate.
- The liquidity and earnings implications of the securities reclassification, short-term cash accumulation, and reliance on FHLB advances and other funding sources.
- The impact of continued share repurchases and dividends on capital, alongside the timing and cost of the remaining authorization.
- The eventual CECL adoption impact, especially for acquired loans currently without an allowance, and the sustainability of results excluding branch-consolidation costs and the provision reversal.