Kearny Financial Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended September 30, 2015, the first quarter of fiscal 2016. Kearny operates principally through Kearny Bank. Figures are in U.S. dollars; financial statement amounts are generally in millions unless noted.
The period followed the May 18, 2015 second-step conversion and stock offering, which raised $717.5 million gross. Management says a portion of the proceeds held in cash at June 30 was deployed during the quarter, primarily into loans.
Key financial metrics
| Metric | Quarter-end / Q1 FY2016 | Comparison |
|---|---|---|
| Total assets | $4.302 billion | Up $64.8 million from June 30, 2015 |
| Loans receivable, net | $2.400 billion | Up $312.6 million from June 30; included substantial commercial loan purchases |
| Deposits | $2.464 billion | Down $1.8 million from June 30 |
| Borrowings | $628.4 million | Up $56.9 million from June 30 |
| Stockholders’ equity | $1.164 billion | Down $3.8 million from June 30, principally reflecting other comprehensive losses and dividends |
| Cash and cash equivalents | $102.6 million | Down $237.5 million from June 30 as excess offering proceeds were redeployed |
Quarterly income: net interest income was $22.4 million, provision for loan losses $2.6 million, non-interest income $2.5 million, non-interest expense $18.4 million, income before tax $3.8 million, and net income $3.0 million. Basic and diluted EPS were $0.03; dividends declared were $0.02 per share.
Net interest margin was 2.28%, down 13 basis points year over year; net interest rate spread was 2.01%, down 27 basis points. Average earning-asset yield declined 17 basis points to 3.00%, while average cost of interest-bearing liabilities rose 10 basis points to 0.99%.
Cash flows for the quarter: operating activities provided $5.0 million; investing activities used $296.1 million, largely reflecting $303.5 million in loan purchases; financing activities provided $53.6 million. Cash and cash equivalents declined by $237.5 million.
The allowance for loan losses was $17.7 million, or 0.73% of loans, versus $15.6 million, or 0.74%, at June 30. Nonperforming loans were $21.5 million, or 0.89% of loans, versus $22.9 million, or 1.09%, at June 30.
At September 30, the Bank’s total risk-based capital ratio was 26.97%, Tier 1 risk-based capital 26.29%, and leverage ratio 16.40%; each exceeded the stated “well-capitalized” thresholds. Available-for-sale securities had a net unrealized loss of $1.6 million before tax, and accumulated other comprehensive loss was $13.4 million. Derivatives had a net liability fair value of $16.3 million.
Material changes versus comparable periods
- Year-over-year quarterly net income increased $53,000, from $2.923 million to $2.976 million; diluted EPS remained $0.03.
- Net interest income increased $2.8 million, while provision expense rose $1.8 million and non-interest expense rose $1.6 million. Non-interest income increased $913,000, mainly due to bank-owned life insurance income.
- Loan interest income increased $3.6 million as average loans grew, especially commercial loans; the average loan yield nevertheless declined 24 basis points to 3.97%.
- Compared with June 30, commercial loans increased by $284.7 million. The quarter included $255.0 million of purchased commercial mortgage loans and participations and $13.0 million of purchased commercial business loans.
- Provision expense increased from $858,000 in the prior-year quarter. Management attributed the rise mainly to portfolio growth and collectively assessed loan-loss reserves.
- Compared with June 30, the net unrealized loss on available-for-sale debt securities widened by $4.1 million, and the fair value liability on derivatives increased from $8.7 million to $16.3 million.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it would continue adjusting liquid assets to operating needs and strategic funding requirements, with particular focus on expanding commercial lending and residential mortgage origination for secondary-market sale.
- Management described the Bank as liability-sensitive. Its cumulative one-year gap was negative 10.74% at September 30, versus negative 5.51% at June 30; the three-year gap was negative 4.35%, versus negative 0.15%. The filing cautions that gap and rate-shock analyses depend on assumptions and are not forecasts of actual results.
- In the one-year net-interest-income sensitivity analysis, a +300-basis-point parallel rate shock increased modeled NII by 0.84% at September 30, compared with 10.03% at June 30. In the EVE analysis, a +300-basis-point shock reduced modeled EVE by 19% at September 30. Down-rate scenarios were not shown because prevailing rates were already low.
- Management expects servicing of remaining Bank-owned loans serviced by Bank of America to transfer to Kearny during the quarter ending December 31, 2015. The transfer may increase reported nonperforming loans by about $3.5 million due to reimbursement of advances; management did not expect significant additional charge-offs or allowance needs. The stated 0.25% annual servicing fee would cease after transfer.
- The Bank held $224.3 million in Promontory IND brokered money-market deposits, 9.1% of deposits; total brokered deposits were $242.6 million, or 9.8%. The filing also notes $435.5 million of FHLB advances due within one year and $145.0 million of callable advances due in 2023.
- Management considered portfolio security impairments temporary and reported no securities with credit-related other-than-temporary impairment recognized in earnings. Market interest rates, security spreads, loan credit quality, deposit flows, funding costs, and competition are cited as risks.
- Management was conducting a consulting review of operating practices and infrastructure, followed by planned development of a corporate profitability measurement system. Disclosure controls were judged effective; no material change in internal control over financial reporting was reported.
- Management reported no material changes to the risk factors in its prior Form 10-K and no material pending legal proceedings beyond ordinary-course matters it considered immaterial.
Most important facts for investors to verify
- Whether the rapid commercial-loan expansion, including purchased loans, sustains acceptable underwriting quality, yields, and allowance coverage.
- The final nonperforming-loan and reimbursement impact of the Bank of America servicing transfer, and whether it affects credit costs beyond management’s estimate.
- How net interest margin and earnings respond to rate changes given liability sensitivity, large near-term FHLB maturities, and derivative exposures.
- Whether deposit growth and funding mix can support loan growth without materially increasing funding costs or dependence on wholesale funding.
- Whether reported income growth persists after accounting for elevated provision and operating expenses, and whether the planned profitability initiative produces measurable efficiencies.
- The effects of securities and derivative valuation movements on accumulated other comprehensive loss, equity, and regulatory capital.