Kearny Financial Corp. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended September 30, 2017. Balance-sheet comparisons are with June 30, 2017; operating results are compared with the three months ended September 30, 2016. Amounts below are in U.S. dollars.
Business context and key financial metrics
Kearny is a bank holding company operating principally through Kearny Bank. Its earnings are driven mainly by net interest income from loans, securities, deposits, and borrowings.
| Metric | Quarter ended September 30, 2017 | Comparable period / change |
|---|---|---|
| Total interest income | $37.6 million | Up $4.8 million year over year |
| Net interest income | $26.8 million | Up $2.8 million year over year |
| Net interest margin | 2.40% | 2.32% in prior-year quarter |
| Net interest rate spread | 2.13% | 2.02% in prior-year quarter |
| Provision for loan losses | $0.6 million | $1.1 million in prior-year quarter |
| Non-interest income | $3.1 million | $2.6 million in prior-year quarter |
| Non-interest expense | $21.3 million | $18.7 million in prior-year quarter |
| Income before taxes | $8.0 million | $6.9 million in prior-year quarter |
| Net income | $5.2 million | $4.7 million in prior-year quarter |
| Diluted earnings per share | $0.07 | $0.05 in prior-year quarter |
| Cash dividends declared per share | $0.15 | $0.02 in prior-year quarter |
Financial position, cash flow, and liquidity
- Total assets were $4.81 billion, down $10.0 million from June 30, 2017. Net loans were $3.23 billion, up $14.9 million; loans receivable before allowance were $3.26 billion.
- Deposits totaled $2.95 billion, up $23.1 million during the quarter. Borrowings were $808.6 million, including $775.7 million of FHLB advances and $32.9 million of depositor sweep balances. About $630.2 million of FHLB advances mature within one year; $145.0 million of longer-term advances are callable in April 2018.
- Stockholders’ equity was $1.01 billion, down $42.9 million, mainly reflecting share repurchases and dividends. Cash and cash equivalents fell $39.4 million to $38.8 million as the company redeployed liquidity to higher-yielding assets. Available-for-sale securities totaled $636.6 million.
- Cash flows for the quarter: $5.0 million provided by operations, $28.2 million used in investing, and $16.3 million used in financing; cash and cash equivalents decreased by $39.4 million.
- The Bank reported regulatory capital ratios of 23.43% total capital to risk-weighted assets and 15.59% Tier 1 capital to adjusted assets, above applicable well-capitalized thresholds. The company said it and the Bank met the fully phased-in capital conservation buffer requirement.
Material changes and management commentary
- Net income increased $0.6 million year over year. Higher interest income and non-interest income, along with a lower loan-loss provision, more than offset higher non-interest expense and interest expense.
- Average earning assets increased $311.8 million year over year, with average loans up $560.4 million, led by commercial lending. The average loan yield declined seven basis points to 3.74%, while the average yield on earning assets rose 21 basis points to 3.37%. Interest expense increased as both average interest-bearing liabilities and their average cost rose.
- Non-interest expense rose $2.6 million, including a $2.0 million increase in salaries and benefits. Management cited employee stock-plan costs, staffing and compensation increases, technology expenses, advertising, and director equity awards; lower regulatory oversight and examination expense partly offset the increases.
- Commercial loans increased $23.4 million from June 30, while residential mortgage and home-equity loans declined $9.8 million. Management described continued plans to expand commercial, C&I, and construction lending and residential mortgage originations for sale.
- The company repurchased 2.803 million shares for $40.5 million, averaging $14.44 per share. This represented 47.2% of the 8.559 million shares authorized under its second repurchase program. It declared a $0.12 special dividend in September, payable in October, in addition to a $0.03 regular dividend declared and paid during the quarter.
Outlook, risks, and unusual items
- Merger announced after quarter-end: On November 1, 2017, Kearny agreed to acquire Clifton Bancorp in an all-stock transaction valued at approximately $408 million. Clifton shareholders would receive 1.191 Kearny shares per share; ownership of the combined company is expected to be approximately 76% Kearny and 24% Clifton. The companies estimated combined assets of $6.5 billion, loans of $4.4 billion, and deposits of $3.9 billion. Closing was expected in late Q1 or early Q2 of calendar 2018, subject to shareholder, regulatory, and other approvals.
- Merger risks include failure or delay in obtaining approvals, integration costs and disruption, deposit or employee attrition, and failure to realize anticipated benefits. If the deal does not close, transaction costs and restrictions on business activity may remain.
- Management characterized the company as liability-sensitive. It warned that rising rates, particularly alongside a flattening yield curve, could increase funding costs faster than asset yields and pressure earnings. In its September 30 sensitivity analysis, a parallel +300-basis-point shock reduced modeled economic value of equity 15%; modeled one-year net interest income changed by +0.11%. These are estimates based on assumptions, not forecasts.
- Nonperforming loans were $18.1 million, or 0.56% of total loans, versus $18.9 million, or 0.58%, at June 30. The allowance for loan losses was $29.4 million, or 0.90% of loans; quarterly net charge-offs were $0.5 million. Management noted future provisions could rise if economic or market conditions deteriorate, and regulatory reviews or adoption of the expected-credit-loss standard could affect the allowance.
- Unrealized securities losses were considered temporary; the company reported no credit-related other-than-temporary impairment at September 30. One trust-preferred security valued using Level 3 inputs was carried at $1.0 million. The filing reports no material pending legal proceedings and says disclosure controls were effective.
- No specific earnings or financial guidance was provided. Management stated that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Merger approval, closing timetable, exchange terms, integration plans, and anticipated costs or benefits.
- Whether commercial loan growth, credit quality, and the $29.4 million allowance remain consistent with management’s risk assumptions.
- Deposit trends, funding costs, FHLB maturities and call features, and remaining borrowing capacity.
- Effects of interest-rate changes on net interest margin and funding costs, including actual results versus modeled sensitivity scenarios.
- Capital, liquidity, and shareholder returns after the substantial repurchases and special dividend.
- Implementation effects of forthcoming accounting standards, particularly the expected-credit-loss standard.