Kearny Financial Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016. The filing is an annual report, not a standalone fourth-quarter report; selected fourth-quarter results are noted below. Kearny Financial is the holding company for Kearny Bank, operating primarily in New Jersey and New York.
Business context and strategy
The company continued its shift from a traditional thrift toward a community-bank model, reallocating assets from securities to loans, particularly commercial real estate lending. It operated 42 branches. The May 2015 second-step conversion and stock offering raised $717.5 million gross and materially expanded capital available for deployment.
Financial performance and position
| Metric | FY2016 / June 30, 2016 | Prior comparable period |
|---|---|---|
| Total assets | $4.50 billion | $4.24 billion at June 30, 2015 |
| Net interest income | $95.0 million | $80.6 million |
| Net income; diluted EPS | $15.8 million; $0.18 | $5.6 million; $0.06 |
| Interest-rate spread; net interest margin | 2.06%; 2.35% | 2.20%; 2.34% |
| Net loans receivable | $2.65 billion | $2.09 billion |
| Investment securities | $1.25 billion | $1.43 billion |
| Deposits | $2.69 billion | $2.47 billion |
| Borrowings | $614.4 million | $571.5 million |
| Cash and cash equivalents | $199.2 million | $340.1 million |
| Stockholders’ equity | $1.15 billion | $1.17 billion |
- Interest income was $126.9 million and interest expense $31.9 million. Average interest-earning assets grew to $4.05 billion; their yield was 3.13%, while the average cost of interest-bearing liabilities rose to 1.07%.
- The loan-loss provision increased to $10.7 million from $6.1 million. The allowance ended at $24.2 million, or 0.91% of total loans; net charge-offs were $2.1 million, or 0.08% of average loans.
- Nonperforming assets fell to $21.9 million, or 0.49% of assets, from $23.8 million, or 0.56%. Nonperforming loans were 0.79% of total loans, down from 1.09%.
- Operating cash flow was $39.2 million; investing cash flow was negative $421.6 million; financing cash flow was positive $241.5 million. Cash declined $140.9 million during the year.
- Certificates of deposit were 44.8% of deposits; $666.1 million matured within one year. Brokered deposits were $232.5 million, or 8.6% of deposits. The bank reported $407.6 million of additional FHLB borrowing capacity without pledging additional collateral.
- The bank’s capital ratios substantially exceeded “well-capitalized” thresholds: total risk-based capital 26.03%, common equity Tier 1 25.16%, and Tier 1 leverage 15.88%.
Material changes versus prior period
- Commercial mortgage loans increased 42.2% to $1.86 billion; commercial mortgage and business loans together reached $1.95 billion, or 73.0% of total loans. Net loans grew 26.9%, while securities declined about $179.8 million as cash flows were redirected toward lending.
- Net income increased by $10.2 million. The comparison is affected by the prior-year $10.0 million contribution to the KearnyBank Foundation, which reduced FY2015 net income by about $6.1 million after tax. FY2015 also included a tax benefit; FY2016 recorded tax expense.
- The spread narrowed 14 basis points, though net interest margin edged up one basis point, supported by the larger earning-asset base. The provision for loan losses rose $4.6 million.
- Non-interest expense was $72.4 million versus $78.1 million, but FY2015 included the $10.0 million foundation contribution. Excluding it, FY2016 expense increased about $4.3 million. FY2016 included a $931,000 pension-plan curtailment gain.
- Stockholders’ equity decreased $19.7 million, principally reflecting share repurchases and a $9.0 million increase in accumulated other comprehensive loss, partly offset by earnings. The company repurchased 1.71 million shares for $22.3 million at an average $13.06 per share.
- Reported operating efficiency improved to 68.50% from 88.18%; management also cited a FY2015 adjusted ratio of 76.89% excluding the foundation contribution.
Outlook, commentary, risks and unusual items
- Management plans further commercial mortgage and business lending growth, continued reduction of the securities portfolio relative to earning assets, modest growth in residential portfolio mortgages, and expansion of residential mortgage originations for sale. It anticipated commercial business lending would increase in FY2017 after reorganizing lending resources; no quantified earnings or margin guidance was provided.
- Mortgage banking began in the fourth quarter: $5.9 million of residential loans were sold for $82,000 in gains, with $3.3 million held and committed for sale at year-end. SBA loan-sale gains were approximately $242,000 for FY2016.
- Cash included a temporary accumulation after loan prepayments; management intended to redeploy a significant portion into loans during the first quarter of FY2017.
- Interest-rate exposure is material. Management characterized the balance sheet as liability-sensitive in its longer-term economic-value analysis. A 300-basis-point rate increase reduced modeled economic value of equity by 19%; one-year modeled net interest income increased 2.58%. These are scenario estimates, not forecasts.
- Key risks include increased commercial real estate and business-loan concentration, limited seasoning of portfolio growth, real estate and regional economic conditions, deposit repricing and runoff, brokered funding, securities valuation and credit risk, and future allowance needs. The allowance methodology is judgmental; regulators may require additional provisions.
- The company temporarily suspended LendingClub loan purchases after disclosed events led to the founder and CEO’s resignation. Its LendingClub portfolio was $21.8 million; management said further investment would depend on satisfactory resolution and monitoring of portfolio and servicing performance.
- Available-for-sale securities had $13.4 million of gross unrealized losses, which management considered temporary. The filing identifies possible future valuation impacts and reports a net unrealized loss of $4.7 million on that portfolio.
- The company cited adoption of the CECL expected-credit-loss standard, effective for it after December 15, 2019, as likely to increase the allowance; the amount was not quantified. No pending litigation was identified as expected to materially affect operations or income. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
- Selected fourth-quarter FY2016 net income was $4.9 million, or $0.05 per diluted share, compared with a fourth-quarter FY2015 net loss of $3.3 million, or $0.04 per share; FY2015 quarter results included the foundation contribution.
Important facts for investors to verify
- Whether commercial loan growth, especially multifamily and nonresidential real estate, is maintaining underwriting quality as the portfolio seasons; track delinquencies, criticized loans, charge-offs and provision expense.
- How rate changes affect deposit costs, net interest margin and the value of securities and derivatives; review the assumptions behind the company’s sensitivity scenarios.
- Deposit retention and renewal rates, particularly for the $666.1 million of CDs maturing within one year, large-balance CDs and brokered funding.
- Whether earnings growth persists after adjusting for the prior-year charitable contribution, FY2016 pension curtailment gain and differing tax effects.
- Execution and profitability of commercial business lending, residential mortgage sales, LendingClub exposure and planned capital deployment, including the authorized share repurchase program.
- Reconcile reported share counts and securities balances across the filing: June 30, 2016 shares outstanding were 91.82 million, while the filing separately reports 89.59 million as of August 22, 2016; securities totals are presented as approximately $1.25 billion or $1.26 billion in different sections.