Kearny Financial Corp. Reports Second Quarter 2017 Operating Results

FAIRFIELD, NJ--(Marketwired - Jan 30, 2017) - 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, 2016 of $5.5 million, or $0.06 per basic and diluted share. The results represent an increase in net income of $797,000, or 17.0%, compared to net income of $4.7 million, or $0.05 per basic and diluted share, for the quarter ended September 30, 2016.

Overview

The Company continued to execute strategies during the second quarter of fiscal 2017 that were intended to grow and diversify its balance sheet while increasing 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 noteworthy highlights for the quarter:

• The Company's aggregate loan portfolio, excluding loans held for sale and the allowance for loan losses, increased by $128.3 million, or 4.5%, to $2.97 billion, or 64.9% of total assets, at December 31, 2016 from $2.85 billion, or 62.9% of total assets, at September 30, 2016. This growth largely reflected the Company's continued strategic focus on commercial loans, which increased by $156.5 million or 7.3% during the period.
  
  
• Nonperforming loans decreased to $21.6 million, or 0.72% of total loans, at December 31, 2016 from $21.8 million, or 0.77% of total loans, at September 30, 2016.
  
  
• The allowance for loan losses increased to $26.1 million at December 31, 2016 from $25.0 million at September 30, 2016, resulting in a "total loan coverage ratio", representing the balance of the allowance for loan losses as a percentage of total loans, that was unchanged at 0.88% between comparative periods.
  
  
• The "nonperforming loan coverage ratio", representing the balance of the allowance for loan losses as a percentage of nonperforming loans, increased to 120.8% at December 31, 2016 from 114.5% at September 30, 2016.
  
  
• The Company's securities portfolio decreased by $38.4 million, or 3.1%, to $1.19 billion, or 25.9% of total assets, at December 31, 2016 from $1.23 billion, or 27.1% of total assets, at September 30, 2016. The decrease partly reflected the reinvestment of a significant portion of security cash flows into the loan portfolio while also reflecting decreases in the fair value of the available for sale portfolio due to an increase in interest rates during the period.
  
  

The decrease in the securities portfolio was partially offset by the Company's purchase of $15.0 million in subordinated debt issued by a profitable, well capitalized New Jersey-based community bank during the quarter ended December 31, 2016. The subordinated notes, which were acquired through a privately negotiated transaction, have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term. The notes are redeemable after five years subject to satisfaction of certain conditions. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior to the issuer's general and secured creditors and depositors.

• The balance of cash and cash equivalents decreased by $35.6 million to $37.0 million at December 31, 2016 from $72.6 million at September 30, 2016. The decrease in cash and equivalents largely reflected the reallocation of interest-earning cash and equivalents into comparatively higher-yielding assets in the loan portfolio. Such reallocation contributed significantly to a $133.5 million decrease in the average balance of other interest-earning assets to $71.1 million for the quarter ended December 31, 2016 from $204.6 million for the quarter ended September 30, 2016. 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 $12.1 million to $2.75 billion at December 31, 2016, from $2.73 billion at September 30, 2016. The growth in deposits during the second quarter included a $22.8 million increase in interest-bearing deposits that was partially offset by a decrease in non-interest-bearing deposits of $10.8 million. The decrease in non-interest-bearing deposits generally reflected day-to-day fluctuations in the balance of such deposits, as average balances increased by $2.0 million between comparative periods.
  
  
• The Company's total assets increased by $62.0 million to $4.59 billion at December 31, 2016 from $4.52 billion at September 30, 2016.
  
  
• The Company's stockholders' equity decreased by $4.9 million to $1.11 billion at December 31, 2016 from $1.12 billion at September 30, 2016. The decrease partly reflected the return of capital to shareholders through share repurchases and cash dividends during the quarter ended December 31, 2016. These decreases were partially offset by net income earned for 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 that more than offset the noted decrease in the fair value of its available for sale securities.
  
  

At December 31, 2016, the Company's total consolidated equity to assets ratio was 24.31% while the Bank's total consolidated equity to assets ratio was 17.91%. The Company's and Bank's capital ratios at December 31, 2016 were well in excess of the levels required by federal banking regulators to be classified "well-capitalized" under regulatory guidelines.

As highlighted below, the noted balance sheet growth, reinvestment and reallocation achievements more than offset the adverse effects on net interest income that resulted from the downward pressure on net interest margin arising from low market interest rates and a generally flat yield curve:

• The Company's net interest income increased $1.6 million, or 6.6%, to $25.6 million for the quarter ended December 31, 2016 from $24.0 million for the quarter ended September 30, 2016.
  
  
• The Company's net interest margin increased 13 basis points to 2.45% for the quarter ended December 31, 2016 from 2.32% for the quarter ended September 30, 2016 while the net interest rate spread increased by 16 basis points to 2.18% from 2.02% for those same comparative periods, respectively.
  
  

The levels 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 $198,000 reflecting an annualized charge off rate of 0.03% on the average balance of total loans for the quarter ended December 31, 2016. By comparison, the Company's net charge offs totaled approximately $354,000 for the quarter ended September 30, 2016, reflecting an annualized charge off rate of 0.05%.
  
  
• The Company's provision for loan losses totaled $1.3 million for the quarter ended December 31, 2016 compared to $1.1 million for the quarter ended September 30, 2016. The provisions for both periods largely reflected the overall growth in the performing portion of the loan portfolio which is collectively evaluated for impairment using historical and environmental loss factors. In addition to updating the historical loss factors for the trend of decreasing charge offs, environmental loss factors were also updated during the quarter ended December 31, 2016 to reflect the increased concentration and decreased seasoning in the Company's multi-family loan sectors.
  
  

The strategies executed by the Company during the second quarter of fiscal 2017 also served to strengthen and diversify its sources of non-interest income, as highlighted below:

• Gains on sale of residential mortgage loans increased to $297,000 for the quarter ended December 31, 2016 compared to $112,000 for the quarter ended September 30, 2016, which largely reflected an increase in the volume of loans originated and sold between comparative periods. In addition to bolstering non-interest income, the Company's mortgage banking strategy is expected to help manage its exposure to interest rate risk.
  
  
• Gains on sale of SBA loans originated totaled $162,000 for the quarter ended December 31, 2016 compared to $188,000 for the quarter ended September 30, 2016, reflecting a slight decrease in the balance of SBA loans originated and sold between comparative periods.
  
  

The Company continues to evaluate and implement operating 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. As highlighted below, these tactics have enabled the Company to generally improve operating efficiency and defray a portion of the compensation costs associated with its recently implemented equity incentive plans:

• The Company's operating efficiency ratio decreased (improved) to 66.7% for the quarter ended December 31, 2016 compared to 70.0% for the prior quarter ended September 30, 2016.
  
  
• The Company reduced its number of full time equivalent ("FTE") employees by eight during the latest quarter to 434 at December 31, 2016 from 442 at September 30, 2016 with the reduction in FTE count arising largely through attrition.
  
  
• The Company's ratio of non-interest expense to average assets totaled 1.71% for the quarter ended December 31, 2016 compared to 1.66% for the prior quarter ended September 30, 2016. The increase in the non-interest expense ratio largely reflected the recognition of additional costs associated with the granting of benefits to employees and directors under the terms of the Company's 2016 Equity Incentive Plan approved by shareholders in October 2016.
  
  

Specifically, the noted grants comprised 1,387,390 shares of restricted stock and 3,290,000 stock options issued on December 1, 2016 that will be earned and vested by plan participants over a five-year period with the vesting of certain restricted stock benefits further subject to "performance-based" metrics. The noted shares of restricted stock were issued from authorized shares during the quarter ended December 31, 2016 and are included in the number of the Company's outstanding shares reported as of that date.

Based on the Company's closing stock price on the date of grant and other assumptions supporting the Company's valuation of the stock options granted under a Black-Scholes calculation methodology, the Company expects the annual pre-tax cost of the grants issued on December 1, 2016 to total approximately $6.2 million with an annual "after-tax" estimated cost of $4.3 million. Given the grant date of December 1, 2016, the Company recognized 8.33% (one-twelfth) or approximately $517,000 in pre-tax expense associated the with noted grants resulting in an "after-tax" charge to net income of approximately $356,000 during the quarter ended December 31, 2016. Beginning with the next quarter ending March 31, 2017, the ongoing quarterly "pre-tax" and "after-tax" expense associated with the noted grants is expected to total $1.6 million and $1.1 million, respectively.

Collectively, the factors noted above contributed to an increase in recurring operating earnings for the quarter ended December 31, 2016 compared to the prior quarter ended September 30, 2016 as highlighted below:

• The Company's return on average assets for the quarter ended December 31, 2016 totaled 0.48% compared to 0.41% for the prior quarter ended September 30, 2016.
  
  
• The Company's return on average equity for the quarter ended December 31, 2016 totaled 1.96% compared to 1.66% for the prior quarter ended September 30, 2016.
  
  

The earnings for the quarter ended December 31, 2016 augmented the Company's stockholders' equity, which continues to reflect the excess capital resulting from the second-step conversion and stock offering that was completed in fiscal 2015. As such, the Company continued to execute two key capital management strategies during the second quarter of fiscal 2017 to further support shareholder value:

• The Company continued its payment of a regular quarterly cash dividend of $0.02 per share to stockholders during the quarter ended December 31, 2016. The Company is currently evaluating its dividend policies and practices, including the level of its regular quarterly cash dividend, in relation to its larger capital management and shareholder value objectives. 
  
  
• The Company continued to repurchase shares of its capital stock under the share repurchase program announced in May 2016 through which it authorized a repurchase of 9,352,809 shares, or 10%, of the Company's outstanding shares. However, the volume of shares repurchased during the quarter ended December 31, 2016 decreased compared to prior quarters reflecting the significant increase in the Company's share price during the period.
  
  

For the quarter ended December 31, 2016, the Company repurchased a total of 1,286,533 of its shares at an average cost of $14.55 per share compared to 2,746,290 shares repurchased during the prior quarter ended September 30, 2016 at an average cost of $13.04 per share. Through December 31, 2016, the Company has repurchased 5,739,005 shares, or 61.4% of the number authorized under the current program, at a total cost of $76.8 million and at an average cost of $13.38 per share.

The exhibits that follow this narrative begin with the presentation of a tabular 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, 2016 compared to those for the prior quarter ended September 30, 2016. 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.