Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2018 (fiscal 2019 first quarter); comparison is with the quarter ended September 30, 2017. Kearny operates principally through Kearny Bank. Results reflect the April 2, 2018 acquisition of Clifton Bancorp, so year-over-year comparisons include acquired operations in 2018 but not in reported 2017 results.
Financial performance and position
- Profit: Net income was $11.1 million, or $0.12 per diluted share, versus $5.2 million, or $0.07, a year earlier. Pre-tax income was $14.8 million; income tax expense was $3.7 million.
- Revenue and margins: Net interest income increased to $40.2 million from $26.8 million. Net interest margin rose to 2.68% from 2.40%; net interest rate spread was 2.44%, up from 2.13%. Total non-interest income was $3.2 million, broadly stable year over year.
- Credit costs: Provision for loan losses rose to $2.1 million from $0.6 million. Allowance for loan losses was $32.7 million, 0.69% of total loans, versus $30.9 million and 0.68% at June 30, 2018.
- Cash flow: Operating activities provided $13.7 million; investing activities used $161.8 million; financing activities provided $63.8 million. Cash and equivalents declined $84.4 million during the quarter to $44.5 million.
- Balance sheet and funding: Total assets were $6.66 billion, up $76.3 million from June 30. Net loans were $4.63 billion. Deposits were $3.95 billion, down $118.8 million; borrowings were $1.42 billion, up $220.8 million. Stockholders’ equity was $1.24 billion, down $32.7 million.
- Capital and dividends: The Bank’s total risk-based capital ratio was 21.49%, above the 10.00% well-capitalized threshold. The Company declared $0.20 per share in dividends for the quarter: $0.04 regular and $0.16 special; the special dividend was payable in October.
Material changes versus comparable period and prior quarter
- Year-over-year net interest income increased $13.4 million, driven by higher average interest-earning asset balances and yield, substantially reflecting Clifton, partly offset by higher funding costs. Average earning-asset yield rose 52 basis points to 3.89%; average cost of interest-bearing liabilities rose 21 basis points to 1.45%.
- Non-interest expense increased $5.2 million to $26.5 million, largely from acquired staff, facilities, technology and core deposit intangible amortization. The loan-loss provision also increased.
- Quarter-end loans rose $157.3 million from June 30, mainly as commercial loan growth and originations exceeded repayments. Nonperforming loans increased to $20.5 million, or 0.44% of loans, from $16.9 million, or 0.37%. A $2.9 million vacant-land-secured loan was restructured and placed on nonaccrual.
- Deposits fell primarily due to the scheduled end of participation in the Promontory Insured Network Deposits program. A $200 million, 90-day FHLB advance replaced that funding; borrowings also included $60 million of overnight liquidity-management borrowings.
- The company repurchased 1,957,600 shares for $26.9 million during the quarter, averaging $13.75 per share. This was 45.4% of the shares authorized under its third repurchase program cumulatively as of September 30.
- For context, the filing’s illustrative pro forma 2017 quarter assuming Clifton had been acquired July 1, 2017 showed net income of $9.6 million; this is not the reported 2017 result or a forecast.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management says results for the quarter are not necessarily indicative of the full fiscal year.
- Management describes the company as generally liability-sensitive: rising rates can increase funding costs faster than asset yields, and a flattening yield curve may add pressure. The September 30 model projected one-year net interest income down 7.72% under an immediate +300-basis-point shock; economic value of equity declined 22% in that scenario. These are model estimates, not forecasts.
- Management is pursuing growth in commercial and construction lending and use of derivatives to manage interest-rate exposure. It notes risks from deposit flows, funding costs, competition, credit quality, economic conditions, integration of acquired businesses and regulatory or accounting changes.
- Unrealized losses on securities increased; management considered them temporary and reported no other-than-temporary impairment. The company had $20.5 million in nonperforming loans and $12.8 million in past-due loans at quarter-end.
- CECL adoption was expected for fiscal years beginning after December 15, 2019; the eventual allowance and retained-earnings effect was undetermined. The company reported that adoption of the callable-debt premium standard on October 1, 2018 had no material impact.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of earnings growth is attributable to Clifton, purchase-accounting accretion and tax-rate changes versus ongoing organic performance.
- Whether loan growth, especially commercial and construction lending, is accompanied by stable credit quality; track nonperforming loans, delinquencies and allowance coverage.
- Deposit retention and pricing after the Promontory program exit, certificate-of-deposit maturities, and reliance on FHLB and overnight borrowings.
- Interest-rate sensitivity, including actual funding-cost repricing, deposit behavior and derivative effectiveness relative to the disclosed model scenarios.
- Cash and liquidity trends alongside loan commitments, share repurchases and the special dividend; confirm capital remains comfortably above regulatory minimums.
- Final Clifton purchase-accounting and tax adjustments during the measurement period, and the eventual effect of CECL adoption.