Kearny Financial Corp. Reports First Quarter 2018 Operating Results

FAIRFIELD, N.J., Oct. 30, 2017 (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 September 30, 2017 of $5.2 million, or $0.07 per basic and diluted share.  The results represent an increase in net income of $828,000 compared to net income of $4.4 million, or $0.05 per basic and diluted share, for the quarter ended June 30, 2017.

Overview

The Company continued to execute strategies during the first quarter of fiscal 2018 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 $15.1 million to $3.26 billion, or 67.8% of total assets, at September 30, 2017 from $3.25 billion, or 67.4% of total assets, at June 30, 2017.  The growth in the loan portfolio largely reflected the Company’s continued strategic focus on commercial mortgage loans, which increased by $16.2 million to $2.51 billion at September 30, 2017 from $2.50 billion at June 30, 2017.
  
  For those same comparative periods, the balance of commercial business loans increased by $7.2 million to $81.7 million from $74.5 million while the outstanding balance of the funded portion of construction loans increased by $4.5 million to $8.3 million from $3.8 million.  In both cases, the noted growth reflects the Company’s strategic efforts to further grow and diversify its loan portfolio into these additional categories of loans.
  
  
• Nonperforming loans decreased by $761,000 to $18.1 million, or 0.56% of total loans, at September 30, 2017 from $18.9 million, or 0.58% of total loans, at June 30, 2017. 
  
  
• The allowance for loan losses increased to $29.4 million at September 30, 2017 from $29.3 million at June 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 0.90% at the close of each period.
  
  
• The “nonperforming loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of nonperforming loans, increased to 162.6% at September 30, 2017 from 155.2% at June 30, 2017.
  
  
• The Company’s securities portfolio increased by $12.4 million to $1.11 billion, or 23.3% of total assets, at September 30, 2017 from $1.11 billion, or 23.0% of total assets, at June 30, 2017.  The net increase in the securities portfolio partly reflected the purchase of uncapped, floating-rate securities and tax-advantaged municipal securities while also reflecting a net increase in the fair value of the available for sale portfolio during the period.  The noted increases were partially offset by normal principal repayments arising from amortization, calls and maturities of securities.
  
  
• The balance of cash and cash equivalents decreased by $39.4 million to $38.8 million at September 30, 2017 from $78.2 million at June 30, 2017.  The decrease in cash and equivalents largely reflected the continuing effort to reallocate interest-earning cash and equivalents into comparatively higher-yielding assets during the period.  Such reallocation contributed to a $38.4 million decrease in the average balance of other interest-earning assets to $79.9 million for the quarter ended September 30, 2017 from $118.3 million for the quarter ended June 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 $23.1 million to $2.95 billion at September 30, 2017, from $2.93 billion at June 30, 2017.  The growth in deposits during the first quarter included an $11.9 million increase in non-interest-bearing deposits coupled with an $11.3 million increase in interest-bearing deposits.  The growth in deposits largely reflected the continuing effects of product, pricing and marketing strategies enacted during fiscal 2017.
  
  
• Total borrowings increased by $2.3 million to $808.6 million at September 30, 2017, from $806.2 million at June 30, 2017.  The increase in borrowings largely reflected a $2.3 million increase in depositor sweep account balances representing normal day-to-day fluctuations in such balances.
  
  
• The Company’s stockholders’ equity decreased by $42.9 million to $1.01 billion at September 30, 2017 from $1.06 billion at June 30, 2017.  The decrease largely reflected the return of capital to stockholders through share repurchases and cash dividends 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 increases in the fair value of the Company’s derivatives and available for sale securities portfolios.
  
  At September 30, 2017, the Company’s total consolidated equity to assets ratio was 21.09% while the Bank’s total consolidated equity to assets ratio was 17.66%. The Company’s and Bank’s capital ratios at September 30, 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 on net interest income that resulted from the downward pressure on net interest margin arising from low market interest rates and a flattening yield curve:

• The Company’s net interest income increased $80,000 to $26.8 million for the quarter ended September 30, 2017 from $26.7 million for the quarter ended June 30, 2017. 
  
  
• The Company’s net interest margin and net interest rate spread remained stable at 2.40% and 2.13%, respectively, for the quarters ended September 30, 2017 and June 30, 2017.   

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 $471,000, reflecting an annualized charge off rate of 0.06% on the average balance of total loans for the quarter ended September 30, 2017. By comparison, for the quarter ended June 30, 2017, the Company recognized recoveries of charge offs from prior periods that exceeded the level of charge offs recognized during that period.  The net recoveries of $483,000 recognized during the quarter ended June 30, 2017 reflected an annualized charge off (recovery) rate of (0.06)% on the average balance of total loans for the quarter ended June 30, 2017. 
  
  
• The Company’s provision for loan losses decreased by $558,000 to $630,000 for the quarter ended September 30, 2017 compared to $1.2 million for the quarter ended June 30, 2017.  The decrease in the provision was largely attributable to the comparatively lower level of growth during the quarter ended September 30, 2017 in the performing portion of the loan portfolio that is collectively evaluated for impairment using historical and environmental loss factors.  The effects of the lower level of growth in the portfolio was partially offset by the increase in net charge offs between the two comparative periods, as discussed above.  The decrease in the provision also reflected less noteworthy updates to historical and environmental loss factors during the period.

The strategies executed by the Company during the quarter ended September 30, 2017 also served to strengthen and diversify its sources of non-interest income, as highlighted below:

• Gains on sale of residential mortgage loans totaled $213,000 for the quarter ended September 30, 2017 compared to $139,000 for the quarter ended June 30, 2017.  The increase in sale gains reflected an increase in the volume of loans originated and sold partially offset by a modest decrease in the average net gain recognized per loan sold between comparative periods.  In addition to bolstering non-interest income, the Company’s mortgage banking activities are expected to continue serving as a strategy to manage exposure to interest rate risk.
  
  
• Gains on sale of SBA loans originated totaled $118,000 for the quarter ended September 30, 2017 compared to $392,000 for the quarter ended June 30, 2017.  The decrease in sale gains reflected a decrease in the balance of SBA loans originated and sold partially offset by a modest increase in the average net gain recognized per loan sold between comparative periods.

In addition to the items noted above, fees and service charges increased by $422,000 to $1.3 million for the quarter ended September 30, 2017 from $839,000 for the quarter ended June 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 1.77% for the quarter ended September 30, 2017 compared to 1.83% for the prior quarter ended June 30, 2017.  For those same comparative periods, the Company’s operating efficiency ratio decreased to 71.2% from 74.1%, respectively.

Collectively, the factors noted above contributed to the increase in net income for the quarter ended September 30, 2017 compared to the prior quarter ended June 30, 2017.  These increases in operating earnings had a favorable impact on the Company’s earnings-based performance ratios as highlighted below:

• The Company’s return on average assets for the quarter ended September 30, 2017 totaled 0.43% compared to 0.37% for the prior quarter ended June 30, 2017. 
  
  
• The Company’s return on average equity for the quarter ended September 30, 2017 totaled 2.01% compared to 1.64% for the prior quarter ended June 30, 2017. 

The Company continued to execute key capital management strategies during the first 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 quarters ended September 30, 2017 and June 30, 2017.  Additionally, the Company declared a special cash dividend of $0.12 during the quarter ended September 30, 2017.  When combined with the regular cash dividends of $0.10 declared and paid during the prior fiscal year, the special dividend of $0.12 effectively increased the Company’s dividend payout ratio to approximately 100% based on its basic and diluted earnings per share of $0.22 reported for the fiscal year ended June 30, 2017.  The Company continuously evaluates its dividend policies and practices in relation to its capital management and shareholder value objectives.
  
  
• 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 September 30, 2017, the Company repurchased a total of 2,803,000 of its shares at an average cost of $14.44 per share.  Through September 30, 2017, the Company repurchased a total of 4,043,000 shares, or 47.2% of the number of shares authorized under the current program, at a total cost of $58.2 million and at an average cost of $14.40 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 September 30, 2017 compared to those for the prior quarter ended June 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