News Details

FAIRFIELD, N.J., Jan. 30, 2018 (GLOBE NEWSWIRE) -- Kearny Financial Corp. (NASDAQ:KRNY) (the “Company”), the holding company of Kearny Bank (the “Bank”), today reported net income for the quarter ended December 31, 2017 of $1.3 million, or $0.02 per basic and diluted share.  The results represent a decrease in net income of $3.9 million compared to net income of $5.2 million, or $0.07 per basic and diluted share, for the quarter ended September 30, 2017.

As discussed in greater detail below, the decrease in net income primarily reflected the impact of federal income tax reform that was codified through the passage of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017.  The decrease in net income also reflected the recognition of certain merger-related expenses related to the Company’s proposed acquisition of Clifton Bancorp, Inc. (“CSBK”), the holding company for Clifton Savings Bank (“Clifton”).

The Act permanently reduced the Company’s federal income tax rate from 35% to 21% while also including other provisions that altered the deductibility of certain recurring expenses recognized by the Company.  While, collectively, the provisions of the Act are expected to benefit the Company’s future earnings, it resulted in a $3.5 million net reduction in the carrying value of the Company’s deferred income tax assets and liabilities with an equal and offsetting charge to income tax expense during the three months ended December 31, 2017.  The $3.5 million charge to income tax expense resulted from a $4.9 million charge to reflect the reduced carrying value of the Company’s net deferred tax asset attributable to timing differences in the recognition of certain income and expense items for financial statement reporting purposes versus that recognized for income tax reporting purposes.  That charge was partially offset by a $1.4 million reduction in the net deferred income tax liability primarily attributable to the net unrealized gains and losses on the Company’s interest rate derivatives and available for sale securities portfolios.

The net charge of $3.5 million attributable to the changes in the carrying value of deferred income tax items was partially offset by a $769,000 reduction in current-year income tax expense attributable to the noted reduction in the Company’s income tax rate.  For the current “transition” year ending June 30, 2018, the Company’s statutory federal income tax rate has been reduced to 28%, reflecting effective statutory rates of 35% and 21% for the first and second halves of the year, respectively.  For the fiscal year ending June 30, 2019 and thereafter, the Company’s statutory federal income tax rate will be reduced to 21%.

As noted above, the decrease in net income between linked periods also reflects the Company’s recognition of $1.2 million of merger-related expenses related to its proposed acquisition of CSBK. The Company estimates that net income was adversely impacted by approximately $1.0 million for merger-related expenses recognized during the three months ended December 31, 2017 due to their limited income tax deductibility.  The proposed CSBK acquisition was announced on November 1, 2017, whereby the Company entered into a definitive agreement pursuant to which it will acquire CSBK in an all-stock transaction.  Under the terms of the agreement, each outstanding share of CSBK common stock will be exchanged for 1.191 shares of KRNY common stock.

Excluding the impacts on net income arising from federal income tax reform and merger-related expenses discussed above, the Company’s net income would have been $5.0 million or $0.06 per basic and diluted share for the three months ended December 31, 2017.

Overview

The Company continued to execute strategies during the second quarter of fiscal 2018 intended to grow and diversify its balance sheet while increasing its core earnings and prudently managing capital to promote long-term growth in shareholder value.  These strategies resulted in several incremental balance sheet growth and diversification achievements that are included among the following highlights for the quarter:

• The Company’s aggregate loan portfolio, excluding loans held for sale and the allowance for loan losses, increased by $31.2 million to $3.29 billion, or 68.0% of total assets, at December 31, 2017 from $3.26 billion, or 67.8% of total assets, at September 30, 2017.  The growth in the loan portfolio largely reflected the Company’s continued strategic focus on growing and diversifying its commercial loan portfolio with the outstanding balance of construction loans increasing by $13.9 million to $22.2 million at December 31, 2017 while the outstanding balance of commercial business loans increased by $10.8 million to $92.4 million for that same period.

• For those same comparative periods, the balance of commercial mortgage loans remained stable at $2.51 billion.  The overall stability in the balance of commercial mortgage loans reflected an accelerated pace of loan prepayments that offset the growth in loans arising from new loan origination volume.  The Company continues to execute strategies designed to increase the origination volume of commercial mortgage loans to compensate for the noted increase in prepayments.  Toward that end, the Company’s pipeline of commercial mortgage loans in the underwriting process increased during the quarter ended December 31, 2017.

• The outstanding balance of residential mortgage loans held in the portfolio, including home equity loans and lines of credit, increased by $15.0 million to $655.3 million at December 31, 2017 from $640.3 million at September 30, 2017.  The increase largely reflected loan purchases of approximately $22.2 million during the three months ended December 31, 2017 that were intended to augment the growth in the loan portfolio and partially offset the effects of the increase in prepayments noted above.

• Nonperforming loans decreased by $1.8 million to $16.3 million, or 0.50% of total loans, at December 31, 2017 from $18.1 million, or 0.56% of total loans, at September 30, 2017. 

• The allowance for loan losses increased to $30.1 million at December 31, 2017 from $29.4 million at September 30, 2017, resulting in a “total loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of total loans, of 0.91% and 0.90%, respectively.

• The “nonperforming loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of nonperforming loans, increased to 184.0% at December 31, 2017 from 162.6% at September 30, 2017.

• The Company’s securities portfolio decreased by $10.4 million to $1.11 billion, or 22.9% of total assets, at December 31, 2017 from $1.12 billion, or 23.3% of total assets, at September 30, 2017.  The net decrease in the securities portfolio partly reflected normal principal repayments arising from amortization and maturities of securities. A portion of the security repayments were used to fund the growth in loans while the remainder was reinvested into uncapped, floating-rate securities, tax-advantaged municipal securities, mortgage-backed securities and subordinated debt issued by two community banks located in New Jersey and eastern Pennsylvania.  The decrease in the securities portfolio also reflected a $2.0 million decrease in the fair value of the available for sale securities portfolio during the period. 

• The balance of cash and cash equivalents increased by $11.9 million to $50.7 million at December 31, 2017 from $38.8 million at September 30, 2017.  The increase largely reflected day-to-day operating fluctuations in the Company’s balance of cash and cash equivalents.  Notwithstanding the noted increase in the comparative period-end balances, the Company continues to limit the balance of cash and cash equivalents held to the minimum levels needed to meet its day-to-day funding obligations and overall liquidity risk management objectives.  Toward that end, the average balance of other interest-earning assets remained stable at $82.5 million for the quarter ended December 31, 2017 compared to $79.9 million for the quarter ended September 30, 2017.  Other interest-earning assets generally include the balance of interest-earning cash deposits held in other banks coupled with the balance of the Bank’s mandatory investment in the capital stock of the Federal Home Loan Bank of New York.

• The Company’s total deposits increased by $80.5 million to $3.03 billion at December 31, 2017, from $2.95 billion at September 30, 2017.  The net growth in deposits included an $84.7 million increase in interest-bearing deposits that was partially offset by a $4.2 million decrease in non-interest-bearing deposits.  The growth in interest-bearing deposits largely reflected the continuing effects of product, pricing and marketing strategies enacted during fiscal 2017.  The decrease in non-interest-bearing deposits largely reflected day-to-day operating fluctuations in such balances.  Notwithstanding the noted decrease in the comparative period-end balances, the average balance of non-interest-bearing deposits increased by $2.4 million between comparative periods.

• Total borrowings decreased by $9.7 million to $798.9 million at December 31, 2017, from $808.6 million at September 30, 2017.  The decrease in borrowings largely reflected a $9.7 million decrease in depositor sweep account balances representing normal day-to-day fluctuations in such balances.

• The Company’s stockholders’ equity decreased by $25.0 million to $989.3 million at December 31, 2017 from $1.01 billion at September 30, 2017.  The decrease largely reflected the effects of the Company’s share repurchases and cash dividends paid to stockholders during the period.  The decrease in stockholders’ equity was partially offset by net income earned during the period coupled with a net increase in accumulated other comprehensive income reflecting an increase in the fair value of the Company’s derivatives portfolio, which was partially offset by a decrease in the fair value of the Company’s available for sale securities portfolio.

• At December 31, 2017, the Company’s total consolidated equity to assets ratio was 20.42% while the Bank’s total consolidated equity to assets ratio was 17.68%. The Company’s and Bank’s capital ratios at December 31, 2017 were well in excess of the levels required by federal banking regulators to be classified as “well-capitalized” under regulatory guidelines. 

As highlighted below, the noted balance sheet growth, reinvestment and reallocation achievements helped to offset the adverse effects of an increase in market interest rates and a flattening yield curve on the Company’s net interest margin:

• The Company’s net interest income was $26.8 million for the quarters ended December 31, 2017 and September 30, 2017, reflecting an increase of $25,000 between comparative periods. 

• The Company’s net interest margin increased by one basis point to 2.41% for the quarter ended December 31, 2017 from 2.40% for the quarter ended September 30, 2017 while the net interest rate spread also increased by one basis point to 2.14% from 2.13% for those same comparative periods, respectively.

The level of the Company’s charge offs and provision for loan losses continued to reflect strong asset quality metrics:

• The Company recognized net charge offs totaling approximately $315,000, reflecting an annualized charge off rate of 0.04% on the average balance of total loans for the quarter ended December 31, 2017. By comparison, the Company’s net charge offs totaled approximately $471,000 for the quarter ended September 30, 2017, reflecting a net charge off rate of 0.06%.

• The Company’s provision for loan losses increased by $306,000 to $936,000 for the quarter ended December 31, 2017 compared to $630,000 for the quarter ended September 30, 2017.  The increase in the provision was partly attributable to the comparatively greater level of growth during the quarter ended December 31, 2017 in the performing portion of the loan portfolio that is collectively evaluated for impairment using historical and environmental loss factors.  Such growth was concentrated in specific segments of the loan portfolio whose estimated credit losses for ALLL calculation purposes are based on comparatively higher loss factors compared to other segments in the portfolio.  The effects of the greater level of growth in the portfolio was partially offset by the decrease in net charge offs between the two comparative periods, as discussed above.  The increase in the provision also reflected updates to historical and environmental loss factors during the period.

The strategies executed by the Company during the quarter ended December 31, 2017 continued to strengthen and diversify its sources of non-interest income, as highlighted below:

• Gains on sale of residential mortgage loans totaled $200,000 for the quarter ended December 31, 2017 compared to $213,000 for the quarter ended September 30, 2017.  The modest decrease in sale gains reflected a decrease in the volume of loans originated and sold that was partially offset by an increase in the average net gain recognized per loan sold between comparative periods.  There were no SBA loans originated and sold during the three months ended December 31, 2017.

In addition to the items noted above, fees and service charges increased by $148,000 to $1.4 million for the quarter ended December 31, 2017 from $1.3 million for the quarter ended September 30, 2017.  The increase was largely attributable to an increase in commercial mortgage loan prepayment charges recognized between comparative periods.

The Company continues to evaluate and implement tactics and strategies designed to improve operating practices, policies and procedures while making more efficient and effective use of its supporting infrastructure, including human resources, facilities and information technology systems. 

• The Company’s ratio of non-interest expense to average assets totaled 1.89% for the quarter ended December 31, 2017 compared to 1.77% for the prior quarter ended September 30, 2017.  For those same comparative periods, the Company’s operating efficiency ratio increased to 75.6% from 71.2%, respectively.  As noted earlier, the increases in these ratios reflect the recognition of $1.2 million in non-recurring merger-related expenses during the three months ended December 31, 2017 for which no such expenses were recognized during the earlier comparative quarter.  Excluding the impact of merger-related expenses, the Company’s non-interest expense to average assets and efficiency ratios would have been 1.79% and 71.7%, respectively, for the three months ended December 31, 2017.

Collectively, the factors noted above contributed to the decrease in net income for the quarter ended December 31, 2017 compared to the prior quarter ended September 30, 2017.  The decrease in net income had an unfavorable impact on the Company’s earnings-based performance ratios as highlighted below:

• The Company’s return on average assets for the quarter ended December 31, 2017 totaled 0.11% compared to 0.43% for the prior quarter ended September 30, 2017.  Excluding the impacts on net income arising from federal income tax reform and merger-related expenses discussed above, the Company’s return on average assets would have been 0.42% for the three months ended December 31, 2017.

• The Company’s return on average equity for the quarter ended December 31, 2017 totaled 0.51% compared to 2.00% for the prior quarter ended September 30, 2017.  Excluding the impacts on net income arising from federal income tax reform and merger-related expenses discussed above, the Company’s return on average equity would have been 2.00% for the three months ended December 31, 2017.

The Company continued to execute key capital management strategies during the second quarter of fiscal 2018 to further support shareholder value:

• The Company maintained its regular quarterly cash dividend payable to stockholders of $0.03 per share declared and paid during the quarter ended December 31, 2017.

• In May 2017, the Company announced its second share repurchase program through which it authorized the repurchase of 8,559,084 shares, or 10%, of the Company’s outstanding shares.  During the quarter ended December 31, 2017, the Company repurchased a total of 1,943,840 of its shares at an average cost of $14.83 per share.  Through December 31, 2017, the Company has repurchased a total of 5,986,840 shares, or 69.9% of the number of shares authorized under the current program, at a total cost of $87.0 million and at an average cost of $14.54 per share.

The exhibits that follow this narrative begin with the presentation of the Linked-Quarter Comparative Financial Analysis that supports the discussion above by presenting the Company’s financial condition and operating results for the quarter ended December 31, 2017 compared to those for the prior quarter ended September 30, 2017.  This analysis is followed by a tabular Five-Quarter Financial Trend Analysis that presents similar financial information, together with other financial highlights and performance metrics, over a consecutive five quarter look-back period that is intended to reflect the Company’s financial performance and strategic achievements over this extended period of time.

Statements contained in this news release that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by Kearny Financial Corp. with the Securities and Exchange Commission from time to time.  The Company does not undertake and specifically disclaims any obligation to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company.

For further information contact:
Craig L. Montanaro, President and Chief Executive Officer, or
Eric B. Heyer, Executive Vice President and Chief Financial Officer
Kearny Financial Corp.
(973) 244-4500