Kearny Financial Corp. — Form 10-Q Summary
Period clarification: The request identifies “2015 Q3,” but this filing reports the quarter and nine months ended March 31, 2016 (fiscal 2016 Q3). Financial statements are unaudited; dollar figures below are in millions unless stated otherwise.
Business context and reporting period
Kearny Financial is a bank holding company operating principally through Kearny Bank. Results reflect substantial expansion of commercial lending and deployment of excess capital raised in the May 2015 second-step conversion and stock offering.
Financial performance and position
| Metric | Q3 ended Mar. 31, 2016 | Comparable period |
|---|---|---|
| Net interest income | $24.5 | $20.6 in Q3 2015 |
| Provision for loan losses | $2.6 | $1.8 in Q3 2015 |
| Non-interest income | $2.6 | $3.1 in Q3 2015 |
| Non-interest expense | $18.7 | $17.4 in Q3 2015 |
| Net income | $4.2; diluted EPS $0.05 | $3.9; diluted EPS $0.04 in Q3 2015 |
| Net interest margin | 2.38% | 2.49% in Q3 2015 |
- For the nine months ended March 31, 2016, net income was $10.9 million, or $0.12 diluted EPS, versus $9.0 million, or $0.10, a year earlier. Net interest income rose to $70.8 million from $59.7 million; provision expense increased to $8.6 million from $4.4 million.
- Q3 net interest spread narrowed to 2.09% from 2.36%; the average cost of interest-bearing liabilities rose to 1.11% from 0.89%, while the average yield on earning assets fell to 3.20% from 3.25%.
- At March 31, total assets were $4.49 billion, up $248.8 million from June 30, 2015. Net loans were $2.70 billion, up $609.8 million; deposits were $2.66 billion, up $195.1 million; borrowings were $618.3 million, up $46.8 million. Stockholders’ equity was $1.16 billion, down $2.6 million.
- Cash and cash equivalents were $115.0 million, down from $340.1 million, primarily as conversion-offering proceeds were deployed into loans. Available-for-sale securities totaled $685.8 million and provided an additional potential liquidity source.
- Nine-month cash flows: operating activities provided $24.5 million, investing activities used $485.3 million, and financing activities provided $235.7 million. Cash decreased $225.2 million.
- The Bank exceeded regulatory capital requirements: total risk-based capital was 25.85%, common equity Tier 1 was 25.02%, and Tier 1 leverage was 15.90% at March 31, 2016.
Material changes versus prior periods
- Growth was concentrated in commercial loans: commercial loans increased $568.5 million from June 30, 2015. Total loan growth included $332.1 million of loan purchases in investing cash flows.
- Nonperforming loans rose to $28.3 million, or 1.04% of total loans, from $22.9 million, or 1.09%, at June 30, 2015. The increase included a $5.9 million acquired hotel mortgage placed on nonaccrual amid a potential short sale.
- The allowance for loan losses rose to $23.0 million, or 0.85% of loans, from $15.6 million, or 0.74%. Management cited loan growth, a greater commercial-loan mix, updated loss factors, and risks in the newly acquired consumer-loan portfolio.
- Accumulated other comprehensive loss increased by $10.3 million during the nine months, mainly from fair-value changes in available-for-sale securities and interest-rate derivatives.
- Deposits increased mainly through certificates of deposit, including promotional retail products. Brokered deposits were $231.8 million, or 8.7% of deposits, versus $244.6 million, or 9.9%, at June 30, 2015.
Outlook, management commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management expects to complete enhancements to residential lending during fiscal Q4 2016, with increased mortgage originations for sale intended to add recurring loan-sale gains and help manage interest-rate exposure.
- The Company began purchasing unsecured consumer loans originated through Lending Club. The portfolio was $21.4 million at March 31, 2016; management planned to limit it initially to approximately $25 million while monitoring performance and servicing. Loans are unsecured and the portfolio was unseasoned, making loss estimates uncertain.
- Management describes the balance sheet as liability-sensitive and warns of potential further margin compression and adverse earnings effects if funding costs rise faster than asset yields. The one-year cumulative gap was negative 11.09%; modeled EVE fell 6% under a 100-basis-point rate increase and 21% under a 300-basis-point increase. Separate one-year NII modeling showed increases of 0.39% and 1.61%, respectively; results depend on model assumptions.
- Available-for-sale securities had a net unrealized loss of $14.4 million at March 31, 2016, versus $2.2 million at June 30, 2015. Management attributed the deterioration primarily to wider spreads and some issuer credit-rating downgrades, but concluded no other-than-temporary impairment existed. Further market volatility could reduce fair values.
- Prior-year comparisons include unusual items: Q3 2015 included a $1.4 million life-insurance payout and a $370,000 bargain-purchase gain; these contributed to the lower prior-period effective tax rate. The Company froze its Directors Consultation and Retirement Plan; management expected a nonrecurring expense adjustment in Q4 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors and no material pending legal proceedings beyond routine matters.
Important facts for investors to verify
- Confirm the reporting period: the filing is for fiscal Q3 2016, not 2015 Q3.
- Track commercial-loan growth, concentration and credit quality, including the hotel loan and changes in nonperforming loans and allowance coverage.
- Assess the Lending Club portfolio’s seasoning, realized losses, servicing quality, and performance against the Company’s estimates.
- Monitor funding costs, deposit mix, borrowings, liquidity after deployment of excess cash, and interest-rate sensitivity.
- Review fair-value losses in the credit-sector securities portfolio and the derivative liability, including potential effects on equity and regulatory capital.
- Check whether residential lending expansion and the planned Q4 DCRP adjustment affect subsequent-period income and expenses.