Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (fiscal 2019 second quarter); unaudited consolidated results. Dollar amounts below are in millions unless stated otherwise. The company operates principally through Kearny Bank.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Net interest income | $39.3 | $26.8 | $79.5 | $53.6 |
| Provision for loan losses | $1.0 | $0.9 | $3.1 | $1.6 |
| Noninterest income | $3.3 | $3.3 | $6.5 | $6.4 |
| Noninterest expense | $27.3 | $22.8 | $53.7 | $44.1 |
| Income before taxes | $14.4 | $6.4 | $29.2 | $14.4 |
| Net income | $10.8 | $1.3 | $21.9 | $6.5 |
| Diluted EPS | $0.12 | $0.02 | $0.23 | $0.08 |
| Net interest margin | 2.56% | 2.41% | 2.62% | 2.40% |
- At December 31, total assets were $6.70 billion, including net loans of $4.72 billion. Loans grew $249 million from June 30, led by commercial mortgage lending.
- Total deposits were $4.17 billion, up $100 million from June 30; borrowings were $1.31 billion, up $112 million. Stockholders’ equity was $1.18 billion, down $85 million, principally reflecting share repurchases and dividends.
- Cash and cash equivalents declined $77 million to $51.5 million. For the six months, operating activities provided $24.7 million; investing activities used $210.8 million, largely reflecting loan growth; financing activities provided $108.8 million.
- The allowance for loan losses was $33.5 million, or 0.70% of total loans, versus $30.9 million, or 0.68%, at June 30. Nonperforming loans rose to $20.8 million, or 0.44% of loans, from $16.9 million, or 0.37%.
- Bank regulatory capital ratios remained well above stated minimums: total capital to risk-weighted assets was 21.59% at the Bank and 23.24% at the Company.
Material changes and drivers
- Net income increased substantially year over year, while comparisons are affected by the April 2018 Clifton Bancorp acquisition. Clifton added significant loans, securities, deposits, borrowings, employees and operating costs; acquired-asset and liability fair-value adjustments also affect interest income and expense.
- For the quarter, interest income rose $22.0 million and interest expense rose $9.5 million. The net interest margin improved 15 basis points year over year. Management attributed much of the increase in balances and yields/costs to the acquisition, alongside higher asset yields and funding costs.
- Noninterest expense increased $4.5 million for the quarter, including ongoing Clifton-related expenses. The October core-processing conversion also produced $551,000 of nonrecurring IT expense and $108,000 of related miscellaneous expense. The prior-year quarter included $1.2 million of merger expenses, with none in the current quarter.
- The effective tax rate was 25.3% for the quarter versus 80.2% a year earlier, and 25.0% for the six-month period versus 54.8%. The filing cites federal tax reform, the prior-year deferred-tax-rate adjustment and prior merger-related expenses as important comparison factors; New Jersey’s corporate tax surtax partly offsets federal tax benefits.
- The company repurchased 5.79 million shares for $77.1 million during the six months, at an average $13.33 per share. It declared $0.25 per share in dividends for the six-month period, including a $0.16 special dividend.
Outlook, risks and other notable matters
- No numerical earnings or financial guidance is provided. Management says further net interest spread and margin compression is a significant risk: funding costs may rise faster than asset yields, particularly if the yield curve continues to flatten. The company uses interest-rate swaps and other asset-liability strategies to manage exposure.
- Interest-rate sensitivity analysis estimates that a parallel +300 basis-point shock would reduce one-year net interest income by 7.61% and economic value of equity by 20% from their respective base cases. Management cautions that these modeled estimates rely on assumptions and are not forecasts of actual results.
- Funding considerations include $2.30 billion of certificates of deposit, of which $1.55 billion mature within one year, and $1.30 billion of FHLB advances. The Bank reported $1.50 billion of additional FHLB borrowing capacity without additional collateral. Management reduced cash balances to redeploy excess liquidity into higher-yielding assets.
- Management identified no other-than-temporary impairment in its securities portfolios, although available-for-sale securities had $9.9 million of gross unrealized losses and held-to-maturity securities had $6.6 million of unrecognized losses at December 31. The company said it did not intend, and was unlikely to be required, to sell temporarily impaired securities before recovery.
- Credit risks include possible deterioration in economic and market conditions, increased future loan-loss provisions and the future CECL standard. The company said CECL’s impact could not yet be determined and expected to adopt it in fiscal 2021. Loan growth is concentrated in commercial real estate, including $1.97 billion of multifamily and $1.30 billion of nonresidential mortgage loans.
- The Clifton acquisition’s purchase-accounting measurement period runs through April 2, 2019; tax-return work could lead to adjustments to tax balances and goodwill. No adjustments were recorded this quarter. The company expects to recognize lease assets and liabilities upon adoption of the lease standard on July 1, 2019; potential impact was still under evaluation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings or material changes to previously reported risk factors were disclosed.
Important facts for investors to verify
- How much of earnings and margin improvement reflects sustainable organic performance versus Clifton acquisition accounting and added scale.
- Deposit pricing, certificate renewals and maturities, brokered-deposit growth, and the replacement of Promontory funding with FHLB advances.
- Commercial real estate credit trends, the increase in nonperforming loans, and adequacy of the allowance as loan balances grow.
- Whether share repurchases, dividends and loan growth remain consistent with capital and liquidity needs.
- Updates on Clifton integration and purchase-accounting adjustments, CECL implementation, and the expected lease-accounting impact.