Kearny Financial Corp. — FY2015 Form 10-K
Period clarification: The filing covers the fiscal year ended June 30, 2015, with comparisons to FY2014. It also reports FY2015 fourth-quarter results. This is not a FY2014 Q4 filing.
Business context
Kearny Financial is the holding company for Kearny Bank, a federally chartered savings bank operating primarily in New Jersey and New York. The bank gathers deposits and lends mainly against residential and commercial real estate. Its strategy is to shift from a traditional thrift toward a community bank, expanding commercial lending and reducing securities as a share of assets.
On May 18, 2015, the company completed its second-step conversion and public stock offering, raising $717.5 million gross. After offering costs and other adjustments, the reported increase in equity capital was $670.7 million. The company also contributed $10.0 million in cash and stock to the KearnyBank Foundation.
Financial highlights
| Metric | FY2015 / June 30, 2015 | FY2014 / June 30, 2014 |
|---|---|---|
| Total assets | $4.24 billion | $3.51 billion |
| Net loans | $2.09 billion | $1.73 billion |
| Total securities | $1.43 billion | $1.36 billion |
| Deposits | $2.47 billion | $2.48 billion |
| Borrowings | $571.5 million | $512.3 million |
| Stockholders’ equity | $1.17 billion | $494.7 million |
| Net interest income | $80.6 million | $73.8 million |
| Provision for loan losses | $6.1 million | $3.4 million |
| Net income | $5.6 million; $0.06 diluted EPS | $10.2 million; $0.11 diluted EPS |
| Net interest margin / spread | 2.34% / 2.20% | 2.44% / 2.32% |
| Return on average assets / equity | 0.15% / 0.98% | 0.31% / 2.17% |
FY2015 cash flows were $20.5 million from operating activities, $(525.4) million from investing activities and $710.0 million from financing activities, resulting in a $205.1 million increase in cash and equivalents to $340.1 million. The filing does not provide a clear standalone quarterly cash-flow figure.
At year-end, nonperforming assets were $23.8 million, or 0.56% of assets, versus $26.9 million, or 0.77%, a year earlier. The allowance for loan losses was $15.6 million, 0.74% of loans, versus $12.4 million, 0.71%. Net charge-offs were 0.16% of average loans, up from 0.12%.
Liquidity included $340.1 million of cash and equivalents and $376.7 million of additional FHLB borrowing capacity without pledging additional collateral. Certificates of deposit totaling $526.5 million matured within one year. Brokered deposits were $244.6 million, or 9.9% of deposits. The bank’s regulatory capital ratios exceeded well-capitalized thresholds; its Tier 1 leverage ratio was 16.47% and total risk-based capital ratio was 30.42%.
Material changes versus FY2014
- Commercial loans grew $357.5 million, or 34.0%, to $1.41 billion and reached 67.0% of total loans. Commercial mortgages rose 33.1% to $1.31 billion; commercial business loans increased to $99.5 million.
- Net interest income increased $6.8 million as average earning assets and loan balances grew. However, net interest margin fell 10 basis points and spread fell 12 basis points as earning-asset yields declined and funding costs rose.
- Net income declined $4.6 million. The $10.0 million foundation contribution was the principal stated driver; after tax, it reduced FY2015 earnings by approximately $6.1 million, or $0.07 per share.
- Provision expense rose $2.7 million, reflecting higher collective loss factors, portfolio growth and specific loan losses. Nonperforming assets nonetheless declined year over year.
- Equity increased substantially due to the conversion offering. Some proceeds remained in cash pending investment; $150.7 million was invested in agency mortgage-backed securities and $80.0 million in bank-owned life insurance during the year.
- FY2015 Q4 reported a net loss of $3.3 million, compared with $2.8 million of net income in FY2014 Q4. Q4 FY2015 included $27.4 million of non-interest expense, including the foundation contribution.
Outlook, risks and unusual items
Management plans to continue growing commercial real estate and business lending, expand SBA and C&I activity, and use securities cash flows to support loan growth. It also planned to deploy remaining offering proceeds into loans and other assets, continue technology and operating-efficiency initiatives, and consider acquisitions, share repurchases and regular dividends. No quantified earnings or revenue guidance is provided.
- Credit and concentration: Commercial loans were 67.0% of total loans, increasing exposure to borrower cash flows, commercial property values, larger individual credits and a relatively unseasoned portfolio. Management noted that additional loan-loss provisions may be required.
- Rates and margins: Management described the balance sheet as liability-sensitive over longer horizons and warned that margin pressure could continue. Its one-year NII model projected increases under higher-rate scenarios, while its EVE analysis showed declines; the filing cautions that these models depend on assumptions.
- Funding: Reliance on brokered and other wholesale deposits, large-balance CDs and FHLB advances creates refinancing and cost-of-funds risks. The company also had $382.5 million of FHLB advances due within one year.
- Market and investments: Securities totaled $1.43 billion; available-for-sale securities were subject to fair-value changes affecting equity. Management said unrealized losses were temporary and no securities were considered other-than-temporarily impaired. Corporate, municipal and CLO holdings carry credit risks beyond U.S. agency securities.
- Other notable items: A $510,000 write-down was recorded on a foreclosed hotel property in Absecon, New Jersey. Management reported a post-year-end sale contract expected to recover at least approximately the June 30 carrying value. Goodwill was $108.6 million, with no impairment indicated in FY2015.
- Legal and controls: Management reported no pending or contemplated litigation expected to materially affect operations or income. Management and the auditor reported effective internal control over financial reporting; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile the FY2015 annual net income of $5.6 million with the fourth-quarter net loss of $3.3 million, including the timing and tax treatment of the $10.0 million foundation contribution.
- Track deployment and returns on the offering proceeds, including the use of temporary cash balances, the $80.0 million life-insurance purchase and ongoing capital-allocation plans.
- Monitor commercial loan growth, concentrations, acquired and purchased loans, classified assets, charge-offs and the adequacy of the $15.6 million allowance.
- Review margin sensitivity and the terms, counterparties and fair-value effects of interest-rate swaps and caps; derivative liabilities were $8.7 million at year-end.
- Assess deposit stability and refinancing needs, particularly brokered funding and CDs maturing within one year, alongside available borrowing capacity.