Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2018; comparisons are to the periods ended March 31, 2017. Balance-sheet comparisons are to June 30, 2017. Amounts are in U.S. dollars.
Business context and financial performance
Kearny operates principally through Kearny Bank. Its main revenue source is net interest income from loans and securities, supplemented by fees and other non-interest income. The quarter showed higher net income, while nine-month net income declined, principally due to higher expenses and a one-time tax-reform charge.
| Metric | Three months ended Mar. 31, 2018 | Three months ended Mar. 31, 2017 | Nine months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2017 |
|---|---|---|---|---|
| Interest income | $38.5 million | $35.0 million | $114.2 million | $102.1 million |
| Net interest income | $27.1 million | $26.2 million | $80.7 million | $75.8 million |
| Provision for loan losses | $0.4 million | $1.8 million | $2.0 million | $4.2 million |
| Non-interest income | $3.5 million | $2.3 million | $9.9 million | $8.3 million |
| Non-interest expense | $22.5 million | $21.0 million | $66.6 million | $59.1 million |
| Net income | $5.4 million | $4.1 million | $11.9 million | $14.2 million |
| Diluted EPS | $0.07 | $0.05 | $0.15 | $0.17 |
Financial position, liquidity and capital
- At March 31, 2018, total assets were $4.93 billion, up $115.6 million from June 30, 2017. Net loans were $3.32 billion, up $105.1 million.
- Deposits increased $137.7 million to $3.07 billion; borrowings rose $45.8 million to $852.0 million. Stockholders’ equity fell $66.0 million to $991.2 million, largely reflecting share repurchases and dividends.
- Cash and cash equivalents declined $40.0 million to $38.3 million as the company redeployed liquidity into higher-yielding assets. Nine-month cash flows were $27.2 million provided by operations, $152.6 million used in investing, and $85.5 million provided by financing; cash declined $40.0 million overall.
- FHLB advances were $775.6 million, including $630.2 million due within one year; $145.0 million of advances were callable in April 2018. The Bank reported $971.9 million of remaining FHLB borrowing capacity.
- The Bank reported a 23.37% total capital-to-risk-weighted-assets ratio and 15.69% Tier 1 leverage ratio, above applicable “well-capitalized” thresholds. These are pre-Clifton acquisition figures.
- Net interest margin was 2.41% for both the quarter and nine-month period, down 7 basis points and 1 basis point, respectively, versus the comparable 2017 periods.
Material changes and asset quality
- Quarterly net income increased $1.3 million year over year, supported by higher net interest and non-interest income and a lower loan-loss provision. Nine-month net income decreased $2.3 million, as higher non-interest and tax expenses more than offset revenue growth and a lower provision.
- Loans continued shifting toward commercial and construction lending: those balances increased a combined $120.2 million from June 30, 2017. Management described commercial and construction lending growth as part of its strategy.
- Nonperforming loans decreased to $14.2 million, or 0.42% of loans, from $18.9 million, or 0.58%, at June 30, 2017. The allowance for loan losses was $30.2 million, or 0.90% of loans, compared with $29.3 million, also 0.90%.
- Unrealized losses on available-for-sale and held-to-maturity securities increased; management considered impairments temporary and reported no credit-related other-than-temporary impairment. Management said it had the ability and intent to hold affected securities until recovery.
- The company repurchased 5.5 million shares for $80.1 million during the nine months at an average $14.55 per share. It declared $0.21 per share in dividends during the period, including a $0.12 special dividend.
Outlook, commentary, risks and unusual items
- Clifton acquisition: The company completed its acquisition of Clifton Bancorp on April 2, 2018, after the reporting date. Clifton had $1.7 billion of assets, including $1.2 billion of net loans, and $1.4 billion of liabilities, including $945.0 million of deposits. Kearny issued 25.4 million shares in the transaction. The reported financial statements do not include the acquisition, and preliminary fair values of assets acquired and liabilities assumed were not yet available.
- Tax and merger costs: Federal tax reform reduced the statutory federal rate to 21% beginning in fiscal 2019. A $3.5 million net deferred-tax remeasurement charge increased nine-month tax expense; the nine-month effective tax rate was 46.1%. Merger-related expenses were $1.6 million for nine months and $0.4 million for the quarter; management characterized these as one-time acquisition costs.
- Interest-rate exposure: Management characterized the company as generally liability-sensitive. It warned that rising rates, particularly alongside a flattening yield curve, could pressure funding costs and net interest spread. In its March 31, 2018 model, a parallel +300 basis-point shock reduced estimated one-year net interest income by 2.98%; estimated EVE declined 14%. These are modeled scenarios, not forecasts.
- Other risks and outlook: No specific earnings guidance was provided. Forward-looking results depend on economic conditions, interest rates, deposit flows and funding costs, loan demand and credit quality, competition, regulation, tax policy, and successful integration of Clifton. Management noted that future credit deterioration or regulatory review could require higher loan-loss provisions. The company said risk factors had not materially changed from prior filings.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Legal proceedings were described as routine and immaterial.
Important facts for investors to verify
- Post-close Clifton purchase accounting, integration costs, expected synergies, and the impact of issuing 25.4 million shares on per-share results and capital.
- Whether the $145.0 million callable FHLB advance was called or renewed, and how funding costs and deposit pricing respond to interest-rate changes.
- Commercial and construction loan growth, delinquency and nonperforming trends, and the adequacy of the $30.2 million allowance.
- Quarterly and ongoing expense levels after the reported merger costs, and the effects of tax reform on future effective tax rates.
- Liquidity and funding composition, including certificates of deposit maturing within one year, brokered deposits, cash levels, and reliance on FHLB capacity.