Kearny Financial Corp. Reports Second Quarter 2018 Operating Results

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

Linked-Quarter Comparative Financial Analysis
Summary Balance Sheet
(Dollars and Shares in Thousands,
Except Per Share Data, Unaudited)
AtVariance
or Change
Variance
or Change
Pct.
December 31,September 30,
2017 2017
Assets
Cash and cash equivalents$ 50,685 $ 38,823 $ 11,862 30.6
Securities available for sale 637,671 636,600 1,071 0.2
Securities held to maturity 471,452 482,926 (11,474) (2.4)
Loans held-for-sale 3,490 3,808 (318) (8.4)
Loans receivable, including yield adjustments 3,291,516 3,260,328 31,188 1.0
Less allowance for loan losses (30,066) (29,445) (621) 2.1
Net loans receivable 3,261,450 3,230,883 30,567 0.9
Premises and equipment 41,829 40,132 1,697 4.2
Federal Home Loan Bank stock 39,113 39,115 (2) (0.0)
Accrued interest receivable 13,524 13,268 256 1.9
Goodwill 108,591 108,591 - -
Bank owned life insurance 183,754 182,489 1,265 0.7
Deferred income taxes, net 6,941 13,230 (6,289) (47.5)
Other assets 25,347 18,285 7,062 38.6
Total assets $ 4,843,847 $ 4,808,150 $ 35,697 0.7
Liabilities
Deposits$ 3,033,766 $ 2,953,268 $ 80,498 2.7
Borrowings 798,864 808,554 (9,690) (1.2)
Advance payments by borrowers for taxes 8,511 9,787 (1,276) (13.0)
Other liabilities 13,433 22,308 (8,875) (39.8)
Total liabilities 3,854,574 3,793,917 60,657 1.6
Stockholders' Equity
Common stock 795 815 (20) (2.5)
Paid-in capital 662,093 690,204 (28,111) (4.1)
Retained earnings 353,536 354,123 (587) (0.2)
Unearned ESOP shares (33,563) (34,049) 486 (1.4)
Accumulated other comprehensive income, net 6,412 3,140 3,272 104.2
Total stockholders' equity 989,273 1,014,233 (24,960) (2.5)
Total liabilities and stockholders' equity$ 4,843,847 $ 4,808,150 $ 35,697 0.7
Consolidated capital ratios
Equity to assets 20.42% 21.09% -0.67%
Tangible equity to tangible assets 18.59% 19.27% -0.68%
Share data
Outstanding shares 79,527 81,548 (2,021) (2.5)
Equity per share$ 12.44 $ 12.44 $ - -
Tangible equity per share (1)$ 11.07 $ 11.10 $ (0.03) (0.3)
(1) Tangible equity equals total stockholders' equity reduced by goodwill and core deposit intangible assets.
Summary Income Statement
(Dollars and Shares in Thousands,
Except Per Share Data, Unaudited)
For the three months endedVariance
or Change
Variance
or Change
Pct.
December 31,September 30,
2017 2017
Interest income
Loans$ 30,610 $ 30,473 $ 137 0.4
Mortgage-backed securities 2,848 2,896 (48) (1.7)
Debt securities:
Taxable 3,229 2,960 269 9.1
Tax-exempt 641 621 20 3.2
Other interest-earning assets 704 642 62 9.7
Total Interest Income 38,032 37,592 440 1.2
Interest expense
Deposits 6,649 6,219 430 6.9
Borrowings 4,548 4,563 (15) (0.3)
Total interest expense 11,197 10,782 415 3.8
Net interest income 26,835 26,810 25 0.1
Provision for loan losses 936 630 306 48.6
Net interest income after provision for loan losses 25,899 26,180 (281) (1.1)
Non-interest income
Fees and service charges 1,409 1,261 148 11.7
Gain on sale of loans 200 331 (131) (39.6)
Gain (loss) on sale of real estate owned 23 (109) 132 (121.1)
Income from bank owned life insurance 1,264 1,267 (3) (0.2)
Electronic banking fees and charges 302 278 24 8.6
Miscellaneous 65 66 (1) (1.5)
Total non-interest income 3,263 3,094 169 5.5
Non-interest expense
Salaries and employee benefits 12,926 12,867 59 0.5
Net occupancy expense of premises 2,122 1,981 141 7.1
Equipment and systems 2,193 2,190 3 0.1
Advertising and marketing 748 710 38 5.4
Federal deposit insurance premium 343 360 (17) (4.7)
Directors' compensation 688 689 (1) (0.1)
Merger-related expenses 1,193 - 1,193 -
Miscellaneous 2,551 2,489 62 2.5
Total non-interest expense 22,764 21,286 1,478 6.9
Income before income taxes 6,398 7,988 (1,590) (19.9)
Income taxes 5,129 2,756 2,373 86.1
Net income$ 1,269 $ 5,232 $ (3,963) (75.7)
Net income per common share (EPS)
Basic$ 0.02 $ 0.07 $ (0.05)
Diluted$ 0.02 $ 0.07 $ (0.05)
Dividends declared (1)
Cash dividends declared per common share$ 0.03 $ 0.15 $ (0.12)
Cash dividends declared$ 1,856 $ 12,148 $ (10,292)
Dividend payout ratio 146.3% 232.2% -85.93%
Weighted average number of common
shares outstanding
Basic 77,174 79,649 (2,475)
Diluted 77,239 79,708 (2,469)
(1) Dividends declared during the quarter ended September 30, 2017 include a $0.12 special dividend representing a supplemental
distribution of net income to stockholders from the prior fiscal year ended June 30, 2017.
Average Balance Sheet Data
(Dollars in Thousands, Unaudited)
For the three months endedVariance
or Change
Variance
or Change
Pct.
December 31,September 30,
2017 2017
Assets
Interest-earning assets:
Loans receivable, including loans held for sale$ 3,255,862 $ 3,257,465 $ (1,603) (0.0)
Mortgage-backed securities 501,081 511,931 (10,850) (2.1)
Debt securities: -
Tax-exempt 126,214 122,685 3,529 2.9
Taxable 495,316 489,252 6,064 1.2
Total debt securities 621,530 611,937 9,593 1.6
Other interest-earning assets 82,539 79,920 2,619 3.3
Total interest-earning assets 4,461,012 4,461,253 (241) (0.0)
Non-interest-earning assets 364,015 361,259 2,756 0.8
Total assets $ 4,825,027 $ 4,822,512 $ 2,515 0.1
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand$ 854,400 $ 858,291 $ (3,891) (0.5)
Savings and club 518,542 522,715 (4,173) (0.8)
Certificates of deposit 1,337,560 1,285,882 51,678 4.0
Total interest-bearing deposits 2,710,502 2,666,888 43,614 1.6
Borrowings:
Federal Home Loan Bank Advances 777,460 778,104 (644) (0.1)
Other borrowings 30,606 32,041 (1,435) (4.5)
Total borrowings 808,066 810,145 (2,079) (0.3)
Total interest-bearing liabilities 3,518,568 3,477,033 41,535 1.2
Non-interest-bearing liabilities:
Non-interest-bearing deposits 277,236 274,858 2,378 0.9
Other non-interest-bearing liabilities 24,396 29,754 (5,358) (18.0)
Total non-interest-bearing liabilities 301,632 304,612 (2,980) (1.0)
Total liabilities 3,820,200 3,781,645 38,555 1.0
Stockholders' equity 1,004,827 1,040,867 (36,040) (3.5)
Total liabilities and stockholders' equity$ 4,825,027 $ 4,822,512 $ 2,515 0.1
Average interest-earning assets to average interest-bearing liabilities 126.78% 128.31% -1.53% -1.2
Performance Ratio HighlightsFor the three months endedVariance
or Change
December 31,September 30,
2017 2017
Average yield on interest-earning assets:
Loans receivable, including loans held for sale 3.76% 3.74% 0.02%
Mortgage-backed securities 2.27% 2.26% 0.01%
Debt securities:
Tax-exempt (1) 2.03% 2.03% 0.00%
Taxable 2.61% 2.42% 0.19%
Total debt securities 2.49% 2.34% 0.15%
Other interest-earning assets 3.42% 3.21% 0.21%
Total interest-earning assets 3.41% 3.37% 0.04%
Average cost of interest-bearing liabilities:
Deposits:
Interest-bearing demand 0.80% 0.76% 0.04%
Savings and club 0.12% 0.12% 0.00%
Certificates of deposit 1.43% 1.38% 0.05%
Total interest-bearing deposits 0.98% 0.93% 0.05%
Borrowings:
Federal Home Loan Bank Advances 2.33% 2.33% 0.00%
Other borrowings 0.27% 0.27% 0.00%
Total borrowings 2.25% 2.25% 0.00%
Total interest-bearing liabilities 1.27% 1.24% 0.03%
Interest rate spread (2) 2.14% 2.13% 0.01%
Net interest margin (3) 2.41% 2.40% 0.01%
Non-interest income to average assets (annualized) 0.27% 0.26% 0.01%
Non-interest expense to average assets (annualized) 1.89% 1.77% 0.12%
Efficiency ratio (4) 75.63% 71.18% 4.45%
Return on average assets (annualized) 0.11% 0.43% -0.32%
Return on average equity (annualized) 0.51% 2.01% -1.50%
(1) The yield on tax-exempt securities has not been adjusted to reflect their tax-effective yield.
(2) Interest income divided by average interest-earning assets less interest expense divided by average interest-bearing liabilities.
(3) Net interest income divided by average interest-earning assets.
(4) Non-interest expense divided by the sum of net interest income and non-interest income.
Five-Quarter Financial Trend Analysis
Summary Balance Sheet
(Dollars and Shares in Thousands,
Except Per Share Data, Unaudited)
At
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Assets
Cash and cash equivalents$ 50,685 $ 38,823 $ 78,237 $ 170,591 $ 37,032
Securities available for sale 637,671 636,600 613,760 614,948 671,281
Securities held to maturity 471,452 482,926 493,321 501,987 517,819
Loans held-for-sale 3,490 3,808 4,692 744 6,686
Loans receivable, including yield adjustments 3,291,516 3,260,328 3,245,261 3,122,628 2,973,931
Less allowance for loan losses (30,066) (29,445) (29,286) (27,614) (26,060)
Net loans receivable 3,261,450 3,230,883 3,215,975 3,095,014 2,947,871
Premises and equipment 41,829 40,132 39,585 38,904 38,341
Federal Home Loan Bank stock 39,113 39,115 39,958 39,474 34,525
Accrued interest receivable 13,524 13,268 12,493 12,320 11,809
Goodwill 108,591 108,591 108,591 108,591 108,591
Bank owned life insurance 183,754 182,489 181,223 179,935 178,656
Deferred income taxes, net 6,941 13,230 15,454 14,318 16,098
Other assets 25,347 18,285 14,838 19,416 16,599
Total assets $ 4,843,847 $ 4,808,150 $ 4,818,127 $ 4,796,242 $ 4,585,308
Liabilities
Deposits$ 3,033,766 $ 2,953,268 $ 2,930,127 $ 2,853,263 $ 2,746,017
Borrowings 798,864 808,554 806,228 825,260 701,849
Advance payments by borrowers for taxes 8,511 9,787 8,711 8,059 7,618
Other liabilities 13,433 22,308 15,880 15,650 15,172
Total liabilities 3,854,574 3,793,917 3,760,946 3,702,232 3,470,656
Stockholders' Equity
Common stock 795 815 844 873 892
Paid-in capital 662,093 690,204 728,790 768,373 795,773
Retained earnings 353,536 354,123 361,039 359,083 357,540
Unearned ESOP shares (33,563) (34,049) (34,536) (35,022) (35,508)
Accumulated other comprehensive income (loss), net 6,412 3,140 1,044 703 (4,045)
Total stockholders' equity 989,273 1,014,233 1,057,181 1,094,010 1,114,652
Total liabilities and stockholders' equity$ 4,843,847 $ 4,808,150 $ 4,818,127 $ 4,796,242 $ 4,585,308
Consolidated capital ratios
Equity to assets 20.42% 21.09% 21.94% 22.81% 24.31%
Tangible equity to tangible assets 18.59% 19.27% 20.14% 21.02% 22.47%
Share data
Outstanding shares 79,527 81,548 84,351 87,256 89,176
Equity per share$ 12.44 $ 12.44 $ 12.53 $ 12.54 $ 12.50
Tangible equity per share (1)$ 11.07 $ 11.10 $ 11.24 $ 11.29 $ 11.28
(1) Tangible equity equals total stockholders' equity reduced by goodwill and core deposit intangible assets.
Supplemental Balance Sheet Highlights
(Dollars in Thousands, Unaudited)
At
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Cash and cash equivalents
Cash and due from depository institutions $ 17,899 $ 17,972 $ 18,889 $ 17,429 $ 17,541
Interest-bearing deposits in other banks 32,786 20,851 59,348 153,162 19,491
Total cash and cash equivalents$ 50,685 $ 38,823 $ 78,237 $ 170,591 $ 37,032
Securities available for sale
Debt securities:
U.S. agency securities$ 4,810 $ 5,063 $ 5,316 $ 5,622 $ 5,809
Municipal and state obligations 27,428 27,725 27,740 27,259 27,090
Asset-backed securities 169,484 163,615 162,429 150,805 121,445
Collateralized loan obligations 133,341 128,383 98,154 104,811 98,447
Corporate bonds 142,397 142,489 142,318 141,134 138,564
Trust preferred securities 8,494 8,544 8,540 8,248 8,101
Debt securities available for sale 485,954 475,819 444,497 437,879 399,456
Mortgage-backed securities:
Collateralized mortgage obligations 27,187 28,790 30,536 31,941 52,333
Residential pass-through securities 116,496 123,868 130,550 136,926 211,258
Commercial pass-through securities 8,034 8,123 8,177 8,202 8,234
Mortgage-backed securities 151,717 160,781 169,263 177,069 271,825
Total securities available for sale$ 637,671 $ 636,600 $ 613,760 $ 614,948 $ 671,281
Securities held to maturity
Debt securities:
U.S. agency securities$ - $ 35,000 $ 35,000 $ 35,000 $ 34,999
Municipal and state obligations 100,671 95,954 94,713 91,038 87,682
Subordinated debt 25,000 15,000 15,000 15,000 15,000
Debt securities held to maturity 125,671 145,954 144,713 141,038 137,681
Mortgage-backed securities:
Collateralized mortgage obligations 35,861 16,600 17,854 19,193 20,543
Residential pass-through securities 160,487 169,257 178,813 186,248 200,402
Commercial pass-through securities 149,433 151,115 151,941 155,508 159,193
Mortgage-backed securities 345,781 336,972 348,608 360,949 380,138
Total securities held to maturity$ 471,452 $ 482,926 $ 493,321 $ 501,987 $ 517,819
Total securities$ 1,109,123 $ 1,119,526 $ 1,107,081 $ 1,116,935 $ 1,189,100
Supplemental Balance Sheet Highlights
(Dollars in Thousands, Unaudited)
At
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Loan portfolio composition:
Residential first mortgage loans$ 574,322 $ 559,593 $ 567,323 $ 566,665 $ 562,466
Home equity loans and lines of credit 80,961 80,746 82,822 82,412 83,305
Residential mortgage loans 655,283 640,339 650,145 649,077 645,771
Multifamily mortgage loans 1,438,386 1,427,840 1,412,575 1,371,339 1,295,207
Nonresidential and mixed use mortgage loans 1,069,254 1,085,983 1,085,064 995,782 932,616
Commercial mortgage loans 2,507,640 2,513,823 2,497,639 2,367,121 2,227,823
Commercial business loans 92,442 81,676 74,471 83,754 75,640
Construction loans 22,205 8,320 3,815 1,494 927
Account loans 2,996 2,800 2,863 2,860 2,980
Other consumer loans 8,951 10,988 13,520 15,313 17,501
Consumer loans 11,947 13,788 16,383 18,173 20,481
Total loans, excluding yield adjs 3,289,517 3,257,946 3,242,453 3,119,619 2,970,642
Unamortized yield adjustments 1,999 2,382 2,808 3,009 3,289
Loans receivable, including yield adjs 3,291,516 3,260,328 3,245,261 3,122,628 2,973,931
Less allowance for loan losses (30,066) (29,445) (29,286) (27,614) (26,060)
Net loans receivable$ 3,261,450 $ 3,230,883 $ 3,215,975 $ 3,095,014 $ 2,947,871
Loan portfolio allocation:
Residential first mortgage loans 17.5% 17.2% 17.5% 18.2% 18.9%
Home equity loans and lines of credit 2.5% 2.5% 2.6% 2.6% 2.8%
Residential mortgage loans 20.0% 19.7% 20.1% 20.8% 21.7%
Multifamily mortgage loans 43.7% 43.8% 43.6% 44.0% 43.6%
Nonresidential and mixed use mortgage loans 32.5% 33.3% 33.5% 31.9% 31.4%
Commercial mortgage loans 76.2% 77.2% 77.0% 75.9% 75.0%
Commercial business loans 2.8% 2.5% 2.3% 2.7% 2.5%
Construction loans 0.7% 0.3% 0.1% 0.0% 0.0%
Account loans 0.1% 0.1% 0.1% 0.1% 0.1%
Other consumer loans 0.2% 0.3% 0.4% 0.5% 0.6%
Consumer loans 0.3% 0.4% 0.5% 0.6% 0.7%
Total loans, excluding yield adjs 100.0% 100.0% 100.0% 100.0% 100.0%
Asset quality:
Nonperforming assets:
Accruing loans > 90 days past due$ 31 $ 105 $ 74 $ 65 $ 92
Nonaccrual loans 16,315 18,006 18,798 20,950 21,473
Total nonperforming loans 16,346 18,111 18,872 21,015 21,565
Other real estate owned 1,693 2,424 1,632 1,668 2,037
Total nonperforming assets$ 18,039 $ 20,535 $ 20,504 $ 22,683 $ 23,602
Nonperforming loans (% total loans) 0.50% 0.56% 0.58% 0.67% 0.72%
Nonperforming assets (% total assets) 0.37% 0.43% 0.43% 0.47% 0.51%
Allowance for loan losses (ALLL):
ALLL to total loans 0.91% 0.90% 0.90% 0.88% 0.88%
ALLL to nonperforming loans 183.93% 162.58% 155.18% 131.40% 120.84%
Net charge offs (recoveries)$ 315 $ 471 $ (483)$ 254 $ 198
Average net charge off (recovery) rate (annualized) 0.04% 0.06% -0.06% 0.03% 0.03%
Supplemental Balance Sheet Highlights
(Dollars in Thousands, Unaudited)
At
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Funding by type:
Deposits
Non-interest-bearing deposits$ 275,065 $ 279,263 $ 267,412 $ 255,939 $ 240,367
Interest-bearing demand 879,732 856,122 847,663 798,203 768,556
Savings and club 517,400 519,040 523,984 524,002 519,257
Certificates of deposit 1,361,569 1,298,843 1,291,068 1,275,119 1,217,837
Interest-bearing deposits 2,758,701 2,674,005 2,662,715 2,597,324 2,505,650
Total deposits 3,033,766 2,953,268 2,930,127 2,853,263 2,746,017
Borrowings:
Federal Home Loan Bank advances 775,649 775,673 775,696 775,719 665,742
Depositor sweep accounts 23,215 32,881 30,532 49,541 36,107
Total borrowings 798,864 808,554 806,228 825,260 701,849
Total funding$ 3,832,630 $ 3,761,822 $ 3,736,355 $ 3,678,523 $ 3,447,866
Loans as a % of deposits 107.6% 109.5% 109.9% 108.5% 107.6%
Deposits as a % of total funding 79.2% 78.5% 78.4% 77.6% 79.6%
Borrowings as a % of total funding 20.8% 21.5% 21.6% 22.4% 20.4%
Funding by source:
Retail funding
Non-interest-bearing deposits$ 275,065 $ 279,263 $ 267,412 $ 255,939 $ 240,367
Interest-bearing demand 657,696 633,778 625,061 568,865 544,487
Savings and club 517,400 519,040 523,984 524,002 519,257
Certificates of deposit 1,210,616 1,175,407 1,168,010 1,152,025 1,113,073
Total retail deposits 2,660,777 2,607,488 2,584,467 2,500,831 2,417,184
Depositor sweep accounts 23,215 32,881 30,532 49,541 36,107
Total retail funding 2,683,992 2,640,369 2,614,999 2,550,372 2,453,291
Wholesale funding:
Interest-bearing demand$ 222,036 $ 222,344 $ 222,602 $ 229,338 $ 224,069
Certificates of deposit (listing service) 93,853 101,791 101,430 101,432 96,516
Certificates of deposit (brokered) 57,100 21,645 21,628 21,662 8,248
Total wholesale deposits 372,989 345,780 345,660 352,432 328,833
FHLB Advances 775,649 775,673 775,696 775,719 665,742
Total wholesale funding 1,148,638 1,121,453 1,121,356 1,128,151 994,575
Total funding$ 3,832,630 $ 3,761,822 $ 3,736,355 $ 3,678,523 $ 3,447,866
Retail funding as a % of total funding 70.0% 70.2% 70.0% 69.3% 71.2%
Wholesale funding as a % of total funding 30.0% 29.8% 30.0% 30.7% 28.8%
Summary Income Statement
(Dollars and Shares in Thousands,
Except Per Share Data, Unaudited)
For the three months ended
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Interest income
Loans$ 30,610 $ 30,473 $ 29,842 $ 28,235 $ 27,407
Mortgage-backed securities 2,848 2,896 3,063 3,222 3,779
Debt securities:
Taxable 3,229 2,960 2,868 2,488 2,146
Tax-exempt 641 621 605 582 562
Other interest-earning assets 704 642 586 481 421
Total interest income 38,032 37,592 36,964 35,008 34,315
Interest expense
Deposits 6,649 6,219 5,909 5,420 5,410
Borrowings 4,548 4,563 4,325 3,381 3,289
Total interest expense 11,197 10,782 10,234 8,801 8,699
Net interest income 26,835 26,810 26,730 26,207 25,616
Provision for loan losses 936 630 1,188 1,809 1,255
Net interest income after provision for loan losses 25,899 26,180 25,542 24,398 24,361
Non-interest income
Fees and service charges 1,409 1,261 839 498 1,289
(Loss) gain on sale and call of securities - - - (22) 21
Gain on sale of loans 200 331 531 245 459
Gain (loss) on sale of real estate owned 23 (109) 3 (106) 12
Income from bank owned life insurance 1,264 1,267 1,288 1,279 1,321
Electronic banking fees and charges 302 278 287 240 270
Miscellaneous 65 66 72 119 74
Total non-interest income 3,263 3,094 3,020 2,253 3,446
Non-interest expense
Salaries and employee benefits 12,926 12,867 12,887 12,430 11,592
Net occupancy expense of premises 2,122 1,981 2,013 2,088 1,976
Equipment and systems 2,193 2,190 2,204 2,068 2,030
Advertising and marketing 748 710 937 753 387
Federal deposit insurance premium 343 360 352 338 339
Directors' compensation 688 689 689 689 379
Merger-related expenses 1,193 - - - -
Miscellaneous 2,551 2,489 2,969 2,668 2,670
Total non-interest expense 22,764 21,286 22,051 21,034 19,373
Income before income taxes 6,398 7,988 6,511 5,617 8,434
Income taxes 5,129 2,756 2,107 1,549 2,970
Net income$ 1,269 $ 5,232 $ 4,404 $ 4,068 $ 5,464
Net income per common share (EPS)
Basic$ 0.02 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Diluted$ 0.02 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Dividends declared (1)
Cash dividends declared per common share$ 0.03 $ 0.15 $ 0.03 $ 0.03 $ 0.02
Cash dividends declared$ 1,856 $ 12,148 $ 2,448 $ 2,525 $ 1,687
Dividend payout ratio 146.3% 232.2% 55.6% 62.1% 30.9%
Weighted average number of common
shares outstanding
Basic 77,174 79,649 82,372 84,542 85,174
Diluted 77,239 79,708 82,429 84,624 85,258
(1) Dividends declared during the quarter ended September 30, 2017 include a $0.12 special dividend representing a supplemental distribution of net income to stockholders from the prior fiscal year ended June 30, 2017.
Average Balance Sheet Data
(Dollars in Thousands, Unaudited)
For the three months ended
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Assets
Interest-earning assets:
Loans receivable, including loans held for sale$ 3,255,862 $ 3,257,465 $ 3,200,968 $3,029,151 $ 2,899,794
Mortgage-backed securities 501,081 511,931 532,621 582,591 673,569
Debt securities:
Tax-exempt 126,214 122,685 119,957 116,479 112,221
Taxable 495,316 489,252 476,499 441,124 419,966
Total debt securities 621,530 611,937 596,456 557,603 532,187
Other interest-earning assets 82,539 79,920 118,349 61,336 71,072
Total interest-earning assets 4,461,012 4,461,253 4,448,394 4,230,681 4,176,622
Non-interest-earning assets 364,015 361,259 358,791 352,419 351,458
Total assets $ 4,825,027 $ 4,822,512 $ 4,807,185 $ 4,583,100 $ 4,528,080
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand$ 854,400 $ 858,291 $ 813,148 $ 756,520 $ 761,765
Savings and club 518,542 522,715 523,798 520,572 518,225
Certificates of deposit 1,337,560 1,285,882 1,289,504 1,242,757 1,224,592
Total interest-bearing deposits 2,710,502 2,666,888 2,626,450 2,519,849 2,504,582
Borrowings:
Federal Home Loan Bank Advances 777,460 778,104 775,703 643,504 594,238
Other borrowings 30,606 32,041 40,064 44,940 35,273
Total borrowings 808,066 810,145 815,767 688,444 629,511
Total interest-bearing liabilities 3,518,568 3,477,033 3,442,217 3,208,293 3,134,093
Non-interest-bearing liabilities:
Non-interest-bearing deposits 277,236 274,858 262,499 246,449 245,928
Other non-interest-bearing liabilities 24,396 29,754 25,112 25,028 31,781
Total non-interest-bearing liabilities 301,632 304,612 287,611 271,477 277,709
Total liabilities 3,820,200 3,781,645 3,729,828 3,479,770 3,411,802
Stockholders' equity 1,004,827 1,040,867 1,077,357 1,103,330 1,116,278
Total liabilities and stockholders' equity$ 4,825,027 $ 4,822,512 $ 4,807,185 $ 4,583,100 $ 4,528,080
Average interest-earning assets to average interest-bearing liabilities 126.78% 128.31% 129.23% 131.87% 133.26%
Performance Ratio HighlightsFor the three months ended
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Average yield on interest-earning assets:
Loans receivable, including loans held for sale 3.76% 3.74% 3.73% 3.73% 3.78%
Mortgage-backed securities 2.27% 2.26% 2.30% 2.21% 2.24%
Debt securities:
Tax-exempt (1) 2.03% 2.03% 2.02% 2.00% 2.00%
Taxable 2.61% 2.42% 2.41% 2.26% 2.04%
Total debt securities 2.49% 2.34% 2.33% 2.20% 2.04%
Other interest-earning assets 3.42% 3.21% 1.98% 3.13% 2.37%
Total interest-earning assets 3.41% 3.37% 3.32% 3.31% 3.29%
Average cost of interest-bearing liabilities:
Deposits:
Interest-bearing demand 0.80% 0.76% 0.71% 0.65% 0.62%
Savings and club 0.12% 0.12% 0.12% 0.12% 0.12%
Certificates of deposit 1.43% 1.38% 1.34% 1.30% 1.33%
Total interest-bearing deposits 0.98% 0.93% 0.90% 0.86% 0.86%
Borrowings:
Federal Home Loan Bank Advances 2.33% 2.33% 2.21% 2.08% 2.20%
Other borrowings 0.27% 0.27% 0.27% 0.35% 0.29%
Total borrowings 2.25% 2.25% 2.12% 1.96% 2.09%
Total interest-bearing liabilities 1.27% 1.24% 1.19% 1.10% 1.11%
Interest rate spread (2) 2.14% 2.13% 2.13% 2.21% 2.18%
Net interest margin (3) 2.41% 2.40% 2.40% 2.48% 2.45%
Non-interest income to average assets (annualized) 0.27% 0.26% 0.25% 0.20% 0.30%
Non-interest expense to average assets (annualized) 1.89% 1.77% 1.83% 1.84% 1.71%
Efficiency ratio (4) 75.63% 71.18% 74.12% 73.91% 66.66%
Return on average assets (annualized) 0.11% 0.43% 0.37% 0.36% 0.48%
Return on average equity (annualized) 0.51% 2.01% 1.64% 1.47% 1.96%
(1) The yield on tax-exempt securities has not been adjusted to reflect their tax-effective yield.
(2) Interest income divided by average interest-earning assets less interest expense divided by average interest-bearing liabilities.
(3) Net interest income divided by average interest-earning assets.
(4) Non-interest expense divided by the sum of net interest income and non-interest income.
This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures provide additional information which allow readers to evaluate the ongoing performance of the Company. They are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is included below. In all cases, it should be understood that non-GAAP per share measures do not depict amounts that accrue directly to the benefit of shareholders.
Reconciliation of GAAP to Non-GAAP
(Dollars in Thousands,
Except Per Share Data, Unaudited)
For the three months ended
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Adjusted Net Income
Net income (GAAP)$ 1,269 $ 5,232 $ 4,404 $ 4,068 $ 5,464
Effect to adjust for:
Merger-related expenses 1,193 - - - -
Income tax benefit from merger-related expenses (165) - - - -
Income tax expense for write-down of net deferred tax asset 4,867 - - - -
Income tax benefit for write-down of net deferred tax liability (1,381) - - - -
Income tax benefit for reduction in current year income tax rate (from 35% to 28%) (769) - - - -
Adjusted net income
(non-GAAP)
$ 5,014 $ 5,232 $ 4,404 $ 4,068 $ 5,464
Adjusted Net Income per Common Share (EPS)
Net income per common share
Basic (GAAP)
$ 0.02 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Effect to adjust for:
Merger-related expenses 0.02 - - - -
Income tax benefit from merger-related expenses (0.01) - - - -
Income tax expense for write-down of net deferred tax asset 0.06 - - - -
Income tax benefit for write-down of net deferred tax liability (0.02) - - - -
Income tax benefit for reduction in current year income tax rate (from 35% to 28%) (0.01) - - - -
Adjusted net income per common share
Basic (non-GAAP)
$ 0.06 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Adjusted Net Income per Common Share (EPS)
Net income per common share
Diluted (GAAP)
$ 0.02 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Effect to adjust for:
Merger-related expenses 0.02 - - - -
Income tax benefit from merger-related expenses (0.01) - - - -
Income tax expense for write-down of net deferred tax asset 0.06 - - - -
Income tax benefit for write-down of net deferred tax liability (0.02) - - - -
Income tax benefit for reduction in current year income tax rate (from 35% to 28%) (0.01) - - - -
Adjusted net income per common share
Diluted (non-GAAP)
$ 0.06 $ 0.07 $ 0.05 $ 0.05 $ 0.06
Reconciliation of GAAP to Non-GAAP
(Unaudited)
For the three months ended
December 31,September 30,June 30,March 31,December 31,
2017 2017 2017 2017 2016
Adjusted Non-Interest Expense Ratio
Non-interest expense to average assets (GAAP) 1.89% 1.77% 1.83% 1.84% 1.71%
Effect to adjust for:
Merger-related expenses -0.10% 0.00% 0.00% 0.00% 0.00%
Adjusted non-interest expense ratio (non-GAAP) 1.79% 1.77% 1.83% 1.84% 1.71%
Adjusted Efficiency Ratio
Non-interest expense / (Net interest income + non-interest income) (GAAP) 75.6% 71.2% 74.1% 73.9% 66.7%
Effect to adjust for:
Merger-related expenses -3.9% 0.0% 0.0% 0.0% 0.0%
Adjusted efficiency ratio (non-GAAP) 71.7% 71.2% 74.1% 73.9% 66.7%
Adjusted Return on Average Assets
Return on average assets (GAAP) 0.11% 0.43% 0.37% 0.36% 0.48%
Effect to adjust for:
Merger-related expenses 0.09% 0.00% 0.00% 0.00% 0.00%
Income tax benefit from merger-related expenses -0.01% 0.00% 0.00% 0.00% 0.00%
Income tax expense for write-down of net deferred tax asset 0.40% 0.00% 0.00% 0.00% 0.00%
Income tax benefit for write-down of net deferred tax liability -0.11% 0.00% 0.00% 0.00% 0.00%
Income tax benefit for reduction in current year income tax rate (from 35% to 28%) -0.06% 0.00% 0.00% 0.00% 0.00%
Adjusted return on average assets (non-GAAP) 0.42% 0.43% 0.37% 0.36% 0.48%
Adjusted Return on Average Equity
Return on average equity (GAAP) 0.51% 2.01% 1.64% 1.47% 1.96%
Effect to adjust for:
Merger-related expenses 0.48% 0.00% 0.00% 0.00% 0.00%
Income tax benefit from merger-related expenses -0.07% 0.00% 0.00% 0.00% 0.00%
Income tax expense for write-down of net deferred tax asset 1.94% 0.00% 0.00% 0.00% 0.00%
Income tax benefit for write-down of net deferred tax liability -0.55% 0.00% 0.00% 0.00% 0.00%
Income tax benefit for reduction in current year income tax rate (from 35% to 28%) -0.31% 0.00% 0.00% 0.00% 0.00%
Adjusted return on average equity (non-GAAP) 2.00% 2.01% 1.64% 1.47% 1.96%

Source:Kearny Bank