Kearny Financial Corp. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018, with comparison to fiscal 2017. The filing is an annual report, not a quarterly report. Kearny Financial is the holding company for Kearny Bank, a New Jersey- and New York-focused community bank funded primarily by deposits and engaged in real estate, commercial, consumer lending, and securities investing.
Key financial metrics
| Metric | FY2018 / June 30, 2018 | Prior comparable period |
|---|---|---|
| Total assets | $6.58 billion | $4.82 billion |
| Net loans | $4.47 billion | $3.22 billion |
| Deposits | $4.07 billion | $2.93 billion |
| Borrowings | $1.20 billion | $806.2 million |
| Net interest income | $121.3 million | $102.6 million |
| Net income / diluted EPS | $19.6 million / $0.24 | $18.6 million / $0.22 |
| Net interest margin / spread | 2.50% / 2.25% | 2.41% / 2.14% |
| Operating efficiency ratio | 72.7% | 71.2% |
| Cash and cash equivalents | $128.9 million | $78.2 million |
| Allowance for loan losses | $30.9 million; 0.68% of loans | $29.3 million; 0.90% of loans |
| Nonperforming assets | $17.6 million; 0.27% of assets | $20.5 million; 0.43% of assets |
Net cash provided by operating activities was $45.1 million; investing activities used $1.4 million and financing activities provided $7.0 million. Cash increased by $50.6 million during the year. Total stockholders’ equity was $1.27 billion. Kearny Bank’s regulatory capital ratios were well above the stated well-capitalized thresholds.
Changes and notable items
- The April 2, 2018 acquisition of Clifton Bancorp materially expanded the company. Kearny issued 25.4 million shares; acquired assets had fair value of $1.61 billion, including $1.12 billion of loans and $326.9 million of securities; and assumed $1.38 billion of liabilities. The transaction generated $102.3 million of goodwill and $6.4 million of core deposit intangibles.
- Asset growth, loan and deposit increases, and much of the rise in interest income and expense reflect the acquisition. Commercial loans grew 23.1% to $3.17 billion; the loan portfolio remained concentrated in commercial real estate.
- Net interest income rose 18.2% as average earning assets and their yield increased. Interest expense also rose, reflecting higher average funding balances and costs.
- Net income increased modestly despite $6.7 million of merger-related expenses and a $3.5 million charge associated with federal tax reform’s remeasurement of deferred tax balances. The effective tax rate was 42.4%, versus 32.2% in FY2017; the federal statutory rate is expected to be 21% for FY2019 and thereafter.
- The allowance-to-loans ratio declined primarily because acquired loans are initially recorded at fair value with purchase-accounting credit marks rather than an acquired allowance. Net charge-offs were 0.03% of average loans, up from 0.01%.
- The company repurchased 10.0 million shares for $142.6 million and declared $0.25 per share in dividends. The reported dividend payout ratio was 102.9%.
Outlook, risks, and contingencies
Management’s strategy is to continue shifting from a traditional thrift toward a full-service community bank: grow commercial mortgage, business, and construction lending; build business customer and deposit relationships; reduce securities as a share of assets over time; and pursue selective branch and acquisition opportunities. Management expects commercial business lending to expand, but the filing provides no quantified earnings or revenue guidance. It also anticipates redeploying excess cash into higher-yielding assets.
The bank describes itself as liability-sensitive: funding costs may rise faster than asset yields as rates increase, while a flatter yield curve may further pressure spreads. Its one-year model projected net interest income down 4.14% under an immediate +300 basis-point rate shock; modeled EVE declined 19% under the same shock. These are scenario estimates, not forecasts.
- Liquidity and funding warrant attention: $1.12 billion of certificates of deposit matured within one year at June 30, 2018. The Promontory deposit program ended in July 2018; its $210.8 million balance was largely replaced with $200 million of FHLB advances.
- Commercial real estate and business lending growth, larger borrower exposures, unseasoned acquired loans, property values, and economic conditions could increase credit losses. Management cautions that allowance estimates may require revision; CECL adoption is expected to change credit-loss provisioning and could increase the allowance.
- Available-for-sale securities had a $4.3 million net unrealized loss at year-end; management considered impairments temporary. Securities and derivatives fair values, interest-rate changes, and potential impairment of $210.9 million of goodwill remain relevant to equity and earnings.
- Tax legislation, competition, regulation, cyber and operational risks, and successful integration of Clifton may affect results. Management reported no pending or contemplated litigation expected to have a material effect. The auditors issued an unqualified opinion; Clifton was excluded from the year-end internal-control assessment.
Most important facts for investors to verify
- How much FY2018 earnings growth came from acquired Clifton operations versus organic growth, and whether expected integration benefits and cost savings materialize.
- The quality, seasoning, and purchase-accounting credit marks of acquired loans, alongside future nonperforming loans, charge-offs, and allowance coverage.
- Deposit retention and repricing after the Promontory program termination, upcoming certificate maturities, and the cost and duration of replacement FHLB funding.
- Actual net interest margin and earnings sensitivity as rates and the yield curve change, compared with management’s modeled scenarios.
- The effect of the tax-law changes, merger costs, share repurchases, and dividends on recurring earnings, capital, and shareholder returns.