Kearny Financial Corp. — Form 10-K Summary
Period clarification: Although the request metadata says “2018 Q4,” this filing is the annual report for the fiscal year ended June 30, 2019. It includes fourth-quarter results and fiscal 2018 comparisons.
Business context and reporting period
Kearny Financial is the holding company for Kearny Bank, a New Jersey savings bank serving communities in New Jersey and New York. It gathers deposits and originates or purchases residential and commercial real estate, business, and consumer loans. Management is shifting the bank from a traditional thrift toward a full-service community bank, with greater emphasis on commercial lending, retail deposits, mortgage banking, technology, and operating efficiency.
The fiscal 2019 comparison reflects a full year of Clifton Bancorp, acquired April 2, 2018; fiscal 2018 included Clifton only after the acquisition. Accordingly, year-over-year growth is not solely organic.
Financial and operating results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net interest income | $155.3 million | $121.3 million |
| Provision for loan losses | $3.6 million | $2.7 million |
| Non-interest income | $13.6 million | $13.3 million |
| Non-interest expense | $109.2 million | $97.9 million |
| Income before taxes | $56.1 million | $34.0 million |
| Net income | $42.1 million | $19.6 million |
| Diluted earnings per share | $0.46 | $0.24 |
| Net interest margin | 2.56% | 2.50% |
| Efficiency ratio | 64.69% | 72.72% |
Net income rose by $22.5 million, primarily reflecting the full-year contribution from Clifton, higher net interest income, and a lower effective tax rate. The effective tax rate was 24.8%, versus 42.4% in fiscal 2018, which included tax-reform effects and non-deductible merger costs. Net interest income increased $34.0 million; higher interest income was partly offset by rising deposit and borrowing costs.
Fourth quarter: For the quarter ended June 30, 2019, net interest income was $37.1 million and net income was $8.8 million, or $0.10 per diluted share. The comparable 2018 quarter reported net interest income of $40.6 million and net income of $7.7 million, or $0.08 per diluted share. Fiscal 2019 Q4 included a $664,000 loan-loss provision.
Balance sheet, cash flow, credit, and capital
- Total assets were $6.63 billion at June 30, 2019, up $55.0 million year over year. Net loans were $4.65 billion, or 70.0% of assets, up $175.2 million; securities were $1.29 billion, or 19.5% of assets, down $23.9 million.
- Deposits rose $74.0 million to $4.15 billion. Borrowings increased $123.3 million to $1.32 billion, including $1.29 billion of FHLB advances. Cash and equivalents fell $89.9 million to $38.9 million.
- Cash from operating activities was $39.9 million, compared with $45.1 million in fiscal 2018. Investing activities used $148.9 million and financing activities provided $19.0 million; cash declined by $89.9 million over the year.
- Certificates of deposit were 53.2% of deposits; $1.49 billion matured within one year. Brokered deposits were $235.8 million, or 5.7% of deposits. Management reported additional FHLB capacity and $625 million of available lines of credit.
- Nonperforming assets were $20.3 million, or 0.31% of assets, versus $17.6 million, or 0.27%, a year earlier. Nonperforming loans rose to $20.3 million, or 0.43% of loans, from $16.9 million, or 0.37%. The allowance was $33.3 million, 0.70% of loans, and covered 164.15% of nonperforming loans.
- Commercial real estate loans were $3.21 billion. The filing states non-owner-occupied commercial real estate exposure was 394% of Bank risk-based capital and the portfolio grew 79% over the preceding 36 months, levels that may draw heightened regulatory scrutiny.
- Bank capital ratios remained well above well-capitalized thresholds: total risk-based capital 19.50%, common equity Tier 1 18.68%, and Tier 1 leverage 11.78%. Consolidated company ratios were 23.22%, 22.40%, and 14.14%, respectively.
Changes, outlook, risks, and unusual items
- The Clifton acquisition materially expanded the balance sheet and earnings base; acquisition-related goodwill was $102.3 million. Management attributes much of the fiscal 2019 earnings increase to the full-year inclusion of Clifton.
- Operating expenses included $1.7 million of non-recurring branch consolidation costs and $659,000 of non-recurring core-processing conversion and integration costs. Fiscal 2018 included $6.7 million of merger-related expenses.
- The company repurchased 10.6 million shares for $141.7 million in fiscal 2019. Equity fell $141.6 million to $1.13 billion. Dividends declared totaled $0.37 per share, including a $0.16 special dividend.
- Seven New Jersey branches were slated for consolidation; one closed in June 2019 and the remaining six closed in July, reducing the network from 54 to 48 branches.
- Management expects commercial business and construction lending, and retail non-maturity deposits, to grow in fiscal 2020 and thereafter. It also plans to expand residential mortgage sales, continue optimizing branches and technology, reduce securities as a share of assets, and consider acquisitions. No quantified earnings or revenue guidance is provided.
- Interest-rate risk is significant: management describes the bank as generally liability-sensitive and warns that a flat or inverted yield curve could cause funding costs to rise faster than asset yields. Its one-year NII sensitivity model showed a 10.94% decline under an immediate +300 basis-point shock; management cautions that such scenarios are assumptions, not forecasts.
- Other key risks include commercial real estate and commercial business credit concentrations, unseasoned acquired and purchased loans, deposit repricing and maturities, reliance on wholesale funding, securities valuation and credit risk, cyber and third-party technology risks, and changes in local economic and real estate conditions.
- CECL adoption was expected to require lifetime expected credit-loss estimates and could increase the allowance; the eventual effect was undetermined. At June 30, 2019, approximately $1.1 billion of acquired loans had no allowance under the then-current method.
- Management reported no pending or contemplated litigation expected to materially affect operations or income. The auditor issued an unmodified opinion and identified allowance-for-loan-loss environmental factors, especially for multi-family and non-residential mortgages, as a critical audit matter.
Important facts for investors to verify
- Separate organic growth from Clifton’s acquired contribution when assessing earnings, loan growth, and expense trends.
- Track nonperforming loans, classified assets, charge-offs, and the allowance—particularly commercial real estate credit quality and the judgment-heavy environmental reserve factors.
- Assess deposit retention and repricing against the $1.49 billion of certificates maturing within one year, brokered funding, and the increased use of FHLB advances.
- Review the impact of interest-rate changes on net interest margin, deposit costs, derivatives, and available-for-sale securities values.
- Evaluate returns from the large share repurchases and dividends alongside lower reported equity and the bank’s capacity to continue capital distributions.
- Confirm fiscal 2020 execution of branch closures, lending and deposit initiatives, and technology integration; review CECL implementation assumptions and resulting reserve effects.