Kearny Financial Corp. — Form 10-Q Summary
Business context and period. Kearny Financial Corp. operates principally through Kearny Bank. This unaudited filing covers the three months ended September 30, 2016, the first quarter of fiscal 2017. Income and cash-flow comparisons are with the three months ended September 30, 2015; balance-sheet comparisons are with June 30, 2016. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Current period / date | Comparable period / date |
|---|---|---|
| Interest income | $32.8 | $29.4 |
| Net interest income | $24.0 | $22.4 |
| Provision for loan losses | $1.1 | $2.6 |
| Non-interest income | $2.6 | $2.5 |
| Non-interest expense | $18.7 | $18.4 |
| Net income | $4.7 | $3.0 |
| Basic and diluted EPS | $0.05 | $0.03 |
| Dividend declared per share | $0.02 | $0.02 |
| Net interest margin | 2.32% | 2.28% |
| Net interest rate spread | 2.02% | 2.01% |
| Cash and cash equivalents | $72.6 | $199.2 at June 30, 2016 |
| Net loans receivable | $2,820.6 | $2,649.8 at June 30, 2016 |
| Total deposits | $2,734.0 | $2,694.8 at June 30, 2016 |
| Total borrowings | $633.4 | $614.4 at June 30, 2016 |
| Total assets | $4,523.3 | $4,500.1 at June 30, 2016 |
| Stockholders’ equity | $1,119.5 | $1,147.6 at June 30, 2016 |
Material changes and operating trends
- Net income increased 57% year over year, supported by higher net interest income and lower loan-loss provision, partly offset by higher interest and operating expenses and a higher tax provision. The effective tax rate was 32.0%, versus 22.2%.
- Net interest income rose $1.7 million. Average earning assets increased and their average yield rose 16 basis points to 3.16%; the average cost of interest-bearing liabilities also increased, by 15 basis points to 1.14%. Loan yield declined 16 basis points to 3.81%.
- Loans grew $170.8 million, or 6.4%, from June 30. Commercial loans increased $197.8 million, primarily commercial mortgages, while residential mortgage and home-equity balances declined $24.8 million. Commercial originations and purchases drove the growth.
- Nonperforming loans were $21.8 million, or 0.77% of loans, compared with $21.1 million, or 0.79%, at June 30. The allowance for loan losses rose to $25.0 million from $24.2 million, while the allowance-to-loans ratio decreased to 0.88% from 0.91%.
- Operating cash flow was $5.0 million; investing activities used $151.9 million, primarily reflecting loan growth and purchases; financing activities provided $20.3 million. Cash and cash equivalents declined $126.6 million. Management attributed the decrease largely to reinvesting prior-quarter excess liquidity into loans.
- Share repurchases reduced equity: 2.75 million shares were repurchased in the quarter for $35.8 million, averaging $13.04 per share. Cumulatively, 4.45 million of the 9.35 million authorized shares had been repurchased through September 30.
Liquidity, debt, and capital
Deposits increased $39.1 million and borrowings increased $19.0 million from June 30. FHLB advances were $600.8 million before fair-value adjustments; $450 million was due within one year, and $145 million of advances maturing in 2023 were callable in April 2018. Available-for-sale securities totaled $689.2 million and were identified by management as a source of liquidity. The filing reports $742.7 million of certificates of deposit maturing within one year.
The Bank exceeded regulatory capital requirements and was reported as meeting the fully phased-in capital conservation buffer. At September 30, the Bank’s total risk-based capital ratio was 24.82%, Tier 1 risk-based ratio 23.97%, common equity Tier 1 ratio 23.97%, and Tier 1 leverage ratio 16.00%. The Company’s corresponding reported ratios were 35.59%, 34.74%, 34.74%, and 23.19%.
Outlook, commentary, and risks
- No quantified earnings or financial guidance is provided. Management said it generally intends to reduce average cash balances from first-quarter levels to lower the opportunity cost of excess liquidity, and to continue expanding commercial lending and residential mortgage loan sales.
- Management describes the balance sheet as liability-sensitive. Its one-year and three-year gap measures were negative 13.93% and negative 6.95%, respectively, at September 30. In the company’s modeled one-year analysis, a 100-basis-point rate increase reduced projected net interest income 1.41%; a 300-basis-point increase reduced it 4.45%. Management cautions that these estimates depend on assumptions and may differ from actual outcomes.
- Interest-rate exposure, competition, economic conditions, deposit flows and funding costs, loan demand and credit quality are identified risks. Commercial loan growth and the concentration of mortgage-related assets also merit monitoring.
- Unrealized losses on available-for-sale securities were $10.8 million at September 30. Management classified impairments as temporary and reported no other-than-temporary impairment or credit-related impairment recognized in earnings. Market volatility and credit-rating downgrades could affect portfolio values.
- The company refined loan portfolio segmentation and certain historical loss estimates during the quarter. Management said the segmentation changes did not materially change the aggregate allowance requirement. It also reported $19.7 million in Lending Club consumer loans and said it intends to limit that portfolio to approximately $25 million pending further performance assessment.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported; pending legal proceedings were described as routine and immaterial in aggregate.
Important facts for investors to verify
- Whether commercial loan growth, including purchased loans and participations, sustains returns without weakening credit quality or increasing concentration risk.
- Trends in nonperforming loans, charge-offs, provision expense, allowance coverage, and the assumptions used in the revised credit-loss segmentation.
- Deposit pricing, certificate maturities, use of brokered or wholesale funding, and the cost and timing of FHLB borrowings.
- Actual sensitivity of earnings and economic value to rising rates, including the role and effectiveness of interest-rate hedges.
- Execution and capital impact of the remaining share-repurchase authorization, as well as the effects of future distributions on capital ratios.
- Future gains, volumes, and risks from the expanding mortgage-loan sales business and the performance of the Lending Club loan portfolio.