Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended March 31, 2019, Kearny Financial’s fiscal third quarter of 2019, and the nine months then ended. The request metadata says “2018 Q3,” but the filing itself is for 2019 Q3. Kearny operates principally through Kearny Bank. Results include the effects of the April 2018 Clifton Bancorp acquisition, so comparisons with the prior year are not fully like-for-like.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Interest income | 2019: $59.7 million; 2018: $38.5 million | 2019: $177.9 million; 2018: $114.2 million |
| Net interest income | 2019: $38.6 million; 2018: $27.1 million | 2019: $118.2 million; 2018: $80.7 million |
| Net income | 2019: $11.4 million; 2018: $5.4 million | 2019: $33.3 million; 2018: $11.9 million |
| Diluted EPS | 2019: $0.13; 2018: $0.07 | 2019: $0.36; 2018: $0.15 |
| Net interest margin | 2019: 2.53%; 2018: 2.41% | 2019: 2.59%; 2018: 2.41% |
Quarterly non-interest income was $3.7 million, up from $3.5 million; non-interest expense was $26.8 million, up from $22.5 million. The quarter included a $179,000 provision reversal for loan losses, compared with a $423,000 provision in the prior-year quarter. For nine months, the loan-loss provision was $2.9 million, versus $2.0 million.
At March 31, 2019, total assets were $6.66 billion, net loans $4.63 billion, deposits $4.14 billion, borrowings $1.33 billion, and stockholders’ equity $1.16 billion. Cash and cash equivalents were $54.2 million, down from $128.9 million at June 30, 2018. The allowance for loan losses was $33.1 million, or 0.70% of total loans. Nonperforming loans were $21.3 million, or 0.46% of loans, compared with $16.9 million, or 0.37%, at June 30, 2018.
Nine-month cash flows were $39.0 million provided by operations, $164.6 million used in investing, and $50.9 million provided by financing; cash and cash equivalents declined $74.7 million. The Bank’s reported total capital ratio was 19.09%, and its Tier 1 leverage ratio was 11.63%; the Company and Bank exceeded applicable regulatory capital requirements.
Material changes versus prior comparable periods
- Quarterly net income increased to $11.4 million from $5.4 million; nine-month net income rose to $33.3 million from $11.9 million. Management attributed the improvement mainly to higher net interest income, with acquisition-related scale and growth contributing materially.
- Quarterly net interest income rose $11.6 million. The quarterly net interest margin improved 12 basis points to 2.53%; higher asset yields were partly offset by rising funding costs.
- Loan balances grew $156.2 million from June 30, 2018, driven by commercial mortgage growth and loan originations and purchases. Deposits rose $64.0 million and borrowings increased $127.6 million.
- Nonperforming loans increased $4.5 million from June 30, 2018. The allowance rose $2.2 million to $33.1 million; nine-month net charge-offs were $652,000.
- Stockholders’ equity fell $110.6 million from June 30, 2018, largely due to $109.5 million of share repurchases and $28.8 million of dividends, partly offset by earnings. The company completed its third repurchase program and announced a fourth, authorizing repurchases of up to 9,218,324 shares.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management describes ongoing strategies to grow commercial and construction lending, build longer-duration core deposits, deploy excess liquidity into higher-yielding assets, and use derivatives to manage interest-rate exposure.
- Management cautions that margin pressure remains a significant risk: a relatively flat yield curve or further increases in short-term rates could raise funding costs faster than asset yields. Interest-rate sensitivity analyses also show projected net interest income declines in modeled rising-rate scenarios.
- Deposits included $251.8 million in brokered certificates of deposit, up from $84.3 million at June 30, 2018. Certificates of deposit totaling $1.59 billion, or 70.6% of the portfolio, mature within one year. The Bank reported $1.51 billion of additional FHLB borrowing capacity without additional collateral.
- Clifton integration contributed to higher recurring personnel, occupancy, systems, insurance and other operating expenses. Nine-month expenses also included $551,000 of non-recurring core-system conversion costs and $108,000 of other integration costs. The prior-year comparison included $1.6 million of merger-related costs.
- The company reported no material legal proceedings or material changes to previously disclosed risk factors. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
- CECL adoption was scheduled for fiscal years beginning after December 15, 2019; the potential effect remained undetermined. The company expected to recognize lease right-of-use assets and liabilities upon lease-standard adoption on July 1, 2019, with no expected material effect on operating results.
Most important facts for investors to verify
- Whether loan growth and acquisition-related earnings translate into sustainable organic growth, and how the post-Clifton expense base develops.
- Deposit pricing, brokered-deposit reliance, certificate maturities and the effect of funding costs on net interest margin.
- Credit quality trends, particularly the rise in nonperforming loans, commercial real estate exposure and adequacy of the loan-loss allowance.
- Liquidity and refinancing needs, including short-term FHLB advances, callable borrowings and the use of available borrowing capacity.
- The capital and per-share effects of ongoing buybacks and dividends, and the eventual impact of CECL adoption.