Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
Kearny Financial Corp. is a bank holding company conducting business principally through Kearny Bank. This filing covers the fiscal third quarter and nine months ended March 31, 2017. Balance-sheet comparisons are with June 30, 2016; income and cash-flow comparisons are with the corresponding 2016 periods. Financial amounts below are in millions unless otherwise noted.
Key financial metrics
| Metric | Three months ended March 31, 2017 | Nine months ended March 31, 2017 |
|---|---|---|
| Interest income | $35.0 | $102.1 |
| Net interest income | $26.2 | $75.8 |
| Provision for loan losses | $1.8 | $4.2 |
| Non-interest income | $2.3 | $8.3 |
| Non-interest expense | $21.0 | $59.1 |
| Net income | $4.1 | $14.2 |
| Diluted EPS | $0.05 | $0.17 |
| Net interest margin | 2.48% | 2.42% |
- For the quarter, net income fell $0.1 million from $4.2 million a year earlier; diluted EPS was unchanged at $0.05. For nine months, net income rose $3.3 million, or about 30%, from $10.9 million; diluted EPS increased from $0.12.
- Quarterly net interest income increased $1.7 million year over year, while non-interest expense rose $2.4 million and non-interest income declined $0.4 million. The nine-month provision for loan losses declined $4.5 million year over year.
- Total assets were $4.80 billion, up $296.2 million from June 30, 2016. Net loans were $3.10 billion, up $445.3 million (16.8%); commercial loans grew $501.7 million, while residential mortgage and home-equity balances declined.
- Deposits were $2.85 billion, up $158.4 million. Borrowings increased $210.9 million to $825.3 million, mainly reflecting additional FHLB advances. Stockholders’ equity declined $53.6 million to $1.09 billion, principally due to share repurchases.
- Cash and cash equivalents were $170.6 million, down $28.6 million from June 30, 2016. For nine months, operating cash flow was $30.1 million, investing cash outflow $338.3 million, and financing cash inflow $279.6 million; cash declined $28.6 million.
- The allowance for loan losses was $27.6 million, or 0.88% of loans, versus $24.2 million, or 0.91%, at June 30, 2016. Nonperforming loans were $21.0 million, or 0.67% of loans, compared with $21.1 million, or 0.79%.
- Bank regulatory capital ratios remained well above “well-capitalized” minimums: total risk-based capital was 23.99% and Tier 1 leverage was 16.07% at March 31, 2017.
Material changes and management commentary
- Growth was led by commercial mortgage lending, including originations and loan purchases. Commercial loans were $2.45 billion at quarter-end; management said commercial lending is a strategic growth area. Residential loans held in portfolio decreased.
- Management expanded residential mortgage originations for sale. Nine-month residential loan sales totaled $71.2 million, producing $0.6 million in gains.
- Quarterly net interest margin improved 10 basis points year over year to 2.48%; the nine-month margin increased 7 basis points to 2.42%. Loan growth and improved yields on certain assets supported net interest income, while deposit costs increased over the nine-month comparison.
- Non-interest expense included higher employee and director stock-based compensation under the 2016 Equity Incentive Plan, as well as wage, staffing, and facility costs. Management estimated quarterly expense from the plan’s grants at approximately $1.6 million pre-tax and $1.1 million after-tax.
- The company repurchased 6.0 million shares for $84.3 million during the nine months, averaging $14.02 per share. Cumulatively, it had completed 82.6% of its 9.35-million-share authorization by March 31, 2017. The quarterly dividend declared was $0.03 per share, compared with $0.02 a year earlier.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management characterized the institution as liability-sensitive in its longer-term economic-value analysis. Its one-year and three-year cumulative gap measures were negative 11.45% and negative 7.80%, respectively. A modeled 300-basis-point rate increase reduced economic value of equity by 13%, while modeled one-year net interest income increased 2.54%; management noted the differing measures and the temporary liquidity affecting the latter result.
- Management warned that rising rates could increase funding costs faster than asset yields, and that a flatter yield curve, deposit competition, loan prepayments, and credit deterioration could affect results. The company uses interest-rate derivatives to hedge certain wholesale funding exposures.
- Commercial-loan growth and increased multi-family loan concentration and lower seasoning prompted updates to certain credit-loss assumptions. Management reported no credit-related other-than-temporary impairment in its securities portfolios and considered disclosed unrealized losses temporary.
- At March 31, 2017, commitments included $124.1 million to originate or purchase portfolio loans, $12.1 million for loans held for sale, and $63.5 million in unused lines of credit. Management stated commitments may expire undrawn and do not necessarily represent future cash requirements.
- The filing reports no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. It identifies no significant off-balance-sheet securities-purchase or capital-expenditure commitments.
Important facts for investors to verify
- Whether commercial-loan growth, concentration, underwriting, and the allowance for loan losses remain appropriate as the portfolio expands.
- The cost, maturity profile, and collateral requirements of the increased FHLB borrowings, including callable long-term advances and short-term advances hedged with derivatives.
- Whether deposit costs rise faster than asset yields as interest rates change, and how actual outcomes compare with the filing’s modeled rate scenarios.
- Progress and pricing of the share-repurchase program, and the effect of repurchases on capital and per-share results.
- The realized performance of loan-sale activity and any ongoing credit exposure from purchased commercial, consumer, and Lending Club loans.