Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
Kearny Financial Corp. is a bank holding company operating principally through Kearny Bank. This unaudited filing covers the quarter and six months ended December 31, 2017, the second quarter of fiscal 2018. Dollar amounts below are in millions unless otherwise stated.
Key financial metrics
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Interest income | $38.0 | $75.6 |
| Net interest income | $26.8 | $53.6 |
| Net interest margin | 2.41% | 2.40% |
| Provision for loan losses | $0.9 | $1.6 |
| Non-interest income | $3.3 | $6.4 |
| Non-interest expense | $22.8 | $44.1 |
| Net income | $1.3 | $6.5 |
| Diluted EPS | $0.02 | $0.08 |
At December 31, 2017, total assets were $4,843.8; net loans were $3,261.5; deposits were $3,033.8; borrowings were $798.9; and stockholders’ equity was $989.3. Cash and cash equivalents totaled $50.7. The allowance for loan losses was $30.1, or 0.91% of total loans.
For the six months, operating activities provided $15.0 of cash; investing activities used $53.6; and financing activities provided $11.1. Cash and cash equivalents decreased $27.6 to $50.7. The Bank reported $922.1 of remaining FHLB borrowing capacity and capital ratios well above regulatory minimums, including total risk-based capital of 23.83%.
Material changes versus comparable periods
- Quarterly net income fell from $5.5 to $1.3, while diluted EPS declined from $0.06 to $0.02. Six-month net income declined from $10.1 to $6.5, and diluted EPS from $0.12 to $0.08.
- Net interest income increased 4.8% in the quarter and 8.1% year to date. The quarterly net interest margin declined 4 basis points year over year to 2.41%; the six-month margin rose 2 basis points to 2.40%.
- Higher funding costs partly offset increased interest income: quarterly interest expense rose to $11.2 from $8.7, as both average interest-bearing balances and their average cost increased.
- Non-interest expense rose $3.4 in the quarter and $6.0 for six months. Higher salaries and benefits, among other operating costs, contributed; the current periods also included $1.2 of Clifton acquisition expenses.
- Income tax expense increased to $5.1 for the quarter and $7.9 for six months. The Tax Cuts and Jobs Act caused a one-time $3.5 net charge from remeasuring deferred tax balances. Management stated the lower federal tax rate is expected to benefit future earnings; the filing reports a 21% federal rate for fiscal 2019 and thereafter.
- Loans increased $45.5 from June 30, 2017, driven mainly by commercial and construction lending. Deposits grew $103.6, while borrowings decreased $7.4. Nonperforming loans declined to $16.3, or 0.50% of loans, from $18.9, or 0.58%.
- Stockholders’ equity fell $67.9, primarily reflecting $69.3 of share repurchases and $14.0 of declared dividends, partly offset by earnings and other comprehensive income. The company repurchased 4.75 million shares during the six months at an average $14.60 per share.
Outlook, risks, contingencies, and unusual items
- Proposed Clifton acquisition: The all-stock agreement provides 1.191 Kearny shares per Clifton share. Upon closing, Kearny and Clifton shareholders were expected to own approximately 76% and 24% of the combined company, respectively. Closing was subject to shareholder, regulatory, and other conditions and was expected late in calendar Q1 or early in Q2 2018; completion was not assured.
- Interest-rate exposure: Management characterized the balance sheet as liability-sensitive. Higher rates, particularly if short-term rates rise faster than longer-term rates, could pressure margins as funding costs rise. In the company’s modeled +300-basis-point scenario, one-year net interest income declined 1.75% and economic value of equity declined 16%; these are scenario estimates, not forecasts.
- Credit and liquidity: Management noted that loan-loss estimates are subject to uncertainty and could require increases if economic conditions deteriorate or regulators require them. Liquidity sources include deposits, securities, loan and security repayments, and FHLB advances. The company reported $617.6 of certificates of deposit maturing within one year.
- Other items: Available-for-sale securities had $4.7 of gross unrealized losses, which management deemed temporary; it reported no credit-related other-than-temporary impairment. 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, and pending legal matters were described as routine and immaterial.
The filing provides no formal earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the Clifton transaction received all required approvals, closed as expected, and achieved anticipated integration benefits and costs.
- Whether the one-time tax remeasurement and recurring effects of tax reform reconcile to subsequent effective tax rates and earnings.
- Trends in net interest margin, deposit pricing, brokered funding, and the sensitivity of earnings to further rate increases or yield-curve changes.
- Commercial and construction loan growth, nonperforming and past-due loan trends, charge-offs, and adequacy of the allowance for loan losses.
- Capital and liquidity after share repurchases and dividends, including the company’s use of FHLB advances and upcoming deposit maturities.