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| KRNY > SEC Filings for KRNY > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Forward-Looking Statements
This Form 10-Q may include certain forward-looking statements based on current management expectations. Such forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. The actual results of Kearny Financial Corp. (the "Company") could differ materially from those management expectations. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities. Additional potential factors include changes in interest rates, deposit flows, cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of loan and investment portfolios of Kearny Federal Savings Bank, the Company's wholly-owned subsidiary, (the "Bank"). Other factors that could cause future results to vary from current management expectations include changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Further description of the risks and uncertainties to the business are included in the Company's other filings with the Securities and Exchange Commission.
Emergency Economic Stabilization Act of 2008
In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act of Act ("EESA") was enacted on October 3, 2008. EESA authorizes the Secretary of the Treasury to purchase up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program ("TARP"). Troubled assets include residential or commercial mortgages and related instruments originated prior to March 14, 2008 and any other financial instrument that the Secretary determines, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, the purchase of which is necessary to promote financial stability. If the Secretary exercises his authority under TARP, EESA directs the Secretary of Treasury to establish a program to guarantee troubled assets originated or issued prior to March 14, 2008. The Secretary is authorized to purchase up to $250 billion in troubled assets immediately and up to $350 billion upon certification by the President that such authority is needed. The Secretary's authority will be increased to $700 billion if the President submits a written report to Congress detailing the Secretary's plans to use such authority unless Congress passes a joint resolution disapproving such amount within 15 days after receipt of the report. The Secretary's authority under TARP expires on December 31, 2009 unless the Secretary certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.
Institutions selling assets under TARP will be required to issue warrants for common or preferred stock or senior debt to the Secretary. If the Secretary purchases troubled assets directly from an institution without a bidding process and acquires a meaningful equity or debt position in the institution as a result or acquires more than $300 million in troubled assets from an institution regardless of method, the institution will be required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than
EESA increases the maximum deposit insurance amount up to $250,000 until December 31, 2009 and removes the statutory limits on the Federal Deposit Insurance Corporation's (the "FDIC") ability to borrow from the Treasury during this period. The FDIC may not take the temporary increase in deposit insurance coverage into account when setting assessments. EESA allows financial institutions to treat any loss on the preferred stock of the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation as an ordinary loss for tax purposes.
Pursuant to his authority under EESA, the Secretary of the Treasury has created the TARP Capital Purchase Plan under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. The senior preferred stock will pay dividends at the rate of 5% per annum until the fifth anniversary of the investment and thereafter at the rate of 9% per annum. The senior preferred stock may not be redeemed for three years except with the proceeds from an offering of common stock or preferred stock qualifying as Tier 1 capital in an amount equal to not less than 25% of the amount of the senior preferred. After three years, the senior preferred may be redeemed at any time in whole or in part by the financial institution. No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Until the third anniversary of the issuance of the senior preferred, the consent of the U.S. Treasury will be required for any increase in the dividends on the common stock or for any stock repurchases unless the senior preferred has been redeemed in its entirety or the Treasury has transferred the senior preferred to third parties. The senior preferred will not have voting rights other than the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The senior preferred will also have the right to elect two directors if dividends have not been paid for six periods. The senior preferred will be freely transferable and participating institutions will be required to file a shelf registration statement covering the senior preferred. The issuing institution must grant the Treasury piggyback registration rights. Prior to issuance, the financial institution and its senior executive officers must modify or terminate all benefit plans and arrangements to comply with EESA. Senior executives must also waive any claims against the Department of Treasury.
In connection with the issuance of the senior preferred, participating institutions must issue to the Secretary immediately exercisable 10-year warrants to purchase common stock with an aggregate market price equal to 15% of the amount of senior preferred. The exercise price of the warrants will equal the market price of the common stock on the date of the investment. The Secretary may only exercise or transfer one-half of the warrants prior to the earlier of December 31, 2009 or the date the issuing financial institution has received proceeds equal to the senior preferred investment from one or more offerings of common or preferred stock qualifying as Tier 1 capital. The Secretary will not exercise voting rights with respect to any shares of common stock acquired through exercise of the warrants. The financial institution must file a shelf registration statement covering the warrants and underlying common stock as soon as practicable after issuance and grant piggyback registration rights. The number of warrants will be reduced by one-half if the financial institution raises capital equal to the amount of the senior preferred through one or more offerings of common stock or preferred stock qualifying a Tier 1 capital. If the financial institution does not have sufficient authorized shares of common stock available to satisfy the warrants or their issuance otherwise requires shareholder approval, the financial institution must call a
The Company is currently evaluating TARP and has not determined whether it will participate.
Comparison of Financial Condition at September 30, 2008 and June 30, 2008
Total assets decreased $25.3 million or 1.2%, to $2.06 billion at September 30, 2008 from $2.08 billion at June 30, 2008. The decrease in total assets was due primarily to decreases in cash and cash equivalents, non-mortgage-backed securities and mortgage-backed securities, partially offset by an increase in net loans receivable.
Cash and cash equivalents, consisting primarily of interest-bearing deposits in other banks decreased $52.9 million or 40.2%, to $78.8 million at September 30, 2008 from $131.7 million at June 30, 2008. For the most part, cash and cash equivalents were redeployed into loan originations and loan purchases. With the federal funds rate pegged at 2.00%, management chose not to accumulate excess liquidity during the quarter. At September 30, 2008, the Company had $18.3 million on deposit with a money center bank, reduced from $52.0 million at June 30, 2008, and $41.8 million on deposit with the Federal Home Loan Bank ("FHLB") of New York. Management routinely transfers funds between the two depository institutions to maximize the return on the funds, with one pricing off of 30-day Libor and the other off of the federal funds rate.
Non-mortgage-backed securities, all of which are classified as available for sale, decreased $7.9 million or 20.7%, to $30.3 million at September 30, 2008 compared to $38.2 million at June 30, 2008. The decrease resulted primarily from the redemption-in-kind of the AMF Ultra Short Mortgage Fund as well as principal repayments partially offset by a small increase in the fair value of the portfolio. The shares of the mutual fund redeemed for the underlying securities were written down to fair value as of the trade date resulting in a pre-tax charge to earnings of $415,000 compared to an other-than-temporary impairment pre-tax charge of $659,000 recorded during the linked quarter for the same mutual fund. Following the redemption-in-kind, the underlying securities were reclassified as mortgage-backed securities held to maturity. At September 30, 2008, the remainder of the non-mortgage-backed securities portfolio consisted of $5.3 million of Small Business Loan ("SBA") pass-through certificates, $17.5 million of municipal bonds and $7.5 million of single issuer trust preferred securities.
Loans receivable, net of deferred fees and costs and the allowance for loan losses, increased $53.9 million or 5.3% to $1.08 billion at September 30, 2008 from $1.02 billion at June 30, 2008. During the current quarter, loan originations and loan purchases totaled $65.0 million and $27.0 million, respectively, compared to $64.5 million and $51.9 million, respectively, during the linked quarter. The loans purchased during the quarter were all one-to-four family first mortgages. There was a net increase in virtually all loan categories quarter-over-quarter. Loan growth was concentrated in the residential mortgage category, with one-to-four family first mortgages increasing $44.9 million between June 30 and September 30, 2008 to $732.5 million. During the quarter ended September 30, 2008, home equity loans increased $2.1 million to $126.1 million while unused home equity lines of credit and lines outstanding, decreased $109,000 to $24.5 million and $59,000 to $11.4 million, respectively, the only categories that experienced a quarter-over-quarter decrease. Between June 30 and September 30, 2008, nonresidential mortgages, multi-family mortgages and commercial business loans increased $984,000 to $158.4 million, $2.5 million to $23.7 million, and $1.7 million to $10.4 million, respectively. Recently, the sluggish economy has curtailed demand for higher yielding nonresidential mortgages. During the quarter ended September 30, 2008, construction loans increased $2.0 million to $23.1 million while construction loans outstanding increased $1.4 million to $13.5 million and miscellaneous loan types increased $283,000 to
Mortgage-backed securities available for sale, all of which are government agency pass-through certificates, decreased $23.4 million or 3.2%, to $702.6 million at September 30, 2008 compared to $726.0 million at June 30, 2008. The decrease resulted from principal repayments and maturities partially offset by a $2.6 million increase in the fair value of the portfolio and purchases of $11.8 million, which were 30-year fixed-rate Community Reinvestment Act ("CRA") eligible issues used to meet CRA investment requirements. Generally, cash flows from principal and interest payments were used to fund loan originations and loan purchases during the quarter. Due to a continuing decline in the net asset value of the AMF Ultra Short Mortgage Fund, the Company decided in July 2008 to withdraw its investment in the fund by invoking a redemption-in-kind option after the fund's manager instituted a temporary prohibition against cash redemptions. As a result of the redemption-in-kind, the Bank received its pro-rata share of cash assets and the mortgage-backed securities in the fund, which totaled approximately $1.2 million and $6.8 million in par value, respectively. Most of the mortgage-backed securities are private label collateralized mortgage obligations. Upon redemption, this portfolio was written down to fair value and classified as held-to-maturity. At September 30, 2008, mortgage-backed securities held to maturity totaled $5.8 million.
FHLB of New York capital stock was unchanged at $13.1 million at June 30 and September 30, 2008. The FHLB paid annualized cash dividends for the quarters ended June 30 and September 30, 2008 of 6.50% and 3.50%, respectively. Premises and equipment increased $129,000 to $35.1 million, due primarily to renovations in the Fairfield administrative building to accommodate the relocation of the Company's commercial lending department from the Bank's retail branch building in Wood-Ridge, New Jersey. Bank owned life insurance increased $145,000, to $15.9 million at September 30, 2008 compared to $15.7 million at June 30, 2008, due to an increase in the cash surrender value of the underlying insurance policies. Deferred tax assets decreased $804,000 or 8.9%, to $8.2 million primarily due to decreased deferred tax assets related to unrealized losses on securities.
Deposits decreased $30.0 million or 2.2%, to $1.35 billion at September 30, 2008, from $1.38 billion at June 30, 2008. During the quarter ended September 30, 2008, interest-bearing demand deposits increased $2.5 million to $154.1 million while the other deposit types experienced decreases. Savings deposits decreased $9.6 million to $290.8 million, certificates of deposit decreased $20.2 million to $853.4 million and non-interest-bearing demand deposits decreased $2.7 million to $50.7 million. The Bank priced deposit interest rates at levels management considered to be reasonably competitive in the marketplace. Management determined that there was no need to increase interest rates to attract deposits during the quarter due to the combination of adequate cash flows from investing activities to fund loan demand as well as low returns on cash and cash equivalents. Management attributed the decrease in deposits to several factors. Deposit pricing in the marketplace was reasonably disciplined, but there continued to be fierce competition for certificates of deposit and interest-bearing demand deposits emanating from those financial institutions receiving negative publicity due to asset quality problems. Also contributing to the competition for deposits, some financial institutions were attempting to lock in depositors at current interest rates for longer terms as a hedge against future increases in the federal funds rate and, notwithstanding the FDIC's increase in insurance of deposit accounts, some depositors spread funds to other financial institutions to reduce their risk of loss on uninsured deposits following the collapse of several major banks during the quarter. The Bank will be closing its retail branch in Franklin Lakes, New Jersey in October 2008 and consolidating the deposits into its nearby retail branch in Wyckoff, New Jersey. The Bank also announced that it will close its Irvington, New Jersey retail branch and sell the deposits to Investors Savings Bank in December 2008, then subsequently sell the branch property as part of an urban renewal project during 2009. During the quarter, to develop new depositor relationships and build on the success of Star Banking, the Bank introduced its Generations Gold product,
FHLB advances were unchanged from the linked quarter at $218.0 million as of September 30, 2008. Given adequate liquidity, there was no reason to borrow during the quarter but additional borrowings are an option available to management if funding needs change or to either lengthen liabilities or to implement a wholesale leverage strategy.
During the quarter ended September 30, 2008, stockholders' equity increased $3.2 million or 0.7%, to $474.6 million from $471.4 million at June 30, 2008. The increase was primarily the result of a $1.7 million increase in accumulated other comprehensive income, net of income taxes, mostly a result of mark-to-market adjustments to the available for sale non-mortgage-backed securities and mortgage-backed securities portfolios and net income during the quarter of $1.7 million. Also contributing to the increase was the release of $462,000 of Employee Stock Ownership Plan ("ESOP") shares and $772,000 of restricted stock plan shares and an adjustment to equity of $476,000 for expensing stock options. Partially offsetting these increases were adjustments to initially apply two new accounting pronouncements (both related to benefit plans), which resulted in a net decrease in stockholders' equity of $530,000, a $542,000 increase in treasury stock due to the purchase of 48,100 shares of the Company's common stock and a $908,000 cash dividend declared for payment to minority shareholders. The Company declared a dividend of $0.05 per share for the quarter ended September 30, 2008, the payment of which was waived by Kearny MHC.
Comparison of Operating Results for the Three Months Ended September 30, 2008 and 2007
General. Net income for the quarter ended September 30, 2008 was $1.7 million or $0.03 per diluted share, an increase of $706,000 or 68.5%, from $1.0 million or $0.01 per diluted share for the quarter ended September 30, 2007. The increase in net income year-over-year resulted primarily from an increase in net interest income as well as a decrease in the provision for loan losses, partially offset by increases in loss on sale of securities, non-interest expense and income taxes.
Net Interest Income. Net interest income for the quarter ended September 30, 2008 was $13.2 million, an increase of $1.8 million or 15.8%, compared to $11.4 million for the quarter ended September 30, 2007. Net interest income increased year-over-year due to an increase in the Company's net interest rate spread and increased average balances, partially offset by a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities.
The Company's net interest rate spread increased 29 basis points to 2.12% during the quarter ended September 30, 2008 from 1.83% during the quarter ended September 30, 2007. The 325 basis point reduction in the federal funds rate between September 2007 and May 2008 had a significant effect on the Company's cost of funds and return on earning assets. Since the Company was liability sensitive between the comparative periods, its cost of funds declined faster than the decline in the yield on earning assets with the yield on average interest-earning assets decreasing ten basis points to 5.24% while the cost of average interest-bearing liabilities decreased 39 basis points to 3.12%. Year-over-year, the Company's average cost of funds decreased due to decreases in both the cost of average deposits and the cost of average borrowed money. During the same period, the Company's average return on earning assets decreased due to decreases in the yields on average loans receivable, non-mortgage-backed securities and other interest-earning assets, partially offset by an increase in the yield on average mortgage-backed securities. Since the end of the quarter, the Federal Open Market Committee has cut the federal funds rate by an additional 100 basis points. The Company anticipates that this reduction will further reduce its cost of funds to the extent maturing certificates of deposit re-price lower.
earning assets during the quarter ended September 30, 2008 were $1.92 billion, an increase of $166.9 million compared to $1.75 billion during the quarter ended September 30, 2007. Year-over-year, the increase in average interest-earnings assets resulted from increases in average loans receivable, mortgage-backed securities and other interest-bearing assets, partially offset by a decrease in non-mortgage-backed securities. Average interest-bearing liabilities during the quarter ended September 30, 2008 were $1.53 billion, an increase of $158.3 million compared to $1.37 billion during the quarter ended September 30, 2007. Year-over-year, there was a significant increase in average borrowings and a nominal increase in average interest-bearing deposits. The ratio of average interest-earning assets to average interest-bearing liabilities was 125.6% during the quarter ended September 30, 2008, compared to 127.9% during the quarter ended September 30, 2007.
Interest Income. Total interest income increased $1.8 million or 7.7%, to $25.2 million during the quarter ended September 30, 2008, from $23.4 million during the quarter ended September 30, 2007. The increase in interest income resulted from increases in interest on loans receivable and mortgage-backed securities, partially offset by decreases in interest from non-mortgage-backed securities and other interest-earning assets.
Interest income from loans receivable increased $1.9 million or 14.4%, to $15.1 million during the quarter ended September 30, 2008, from $13.2 million during the quarter ended September 30, 2007 due to growth in the portfolio, partially offset by a decrease in average yield. In keeping with the Company's business plan, the loan portfolio continues to generate an increasing proportion of the Company's interest income. Average loans receivable increased $144.1 million to $1.05 billion or 54.7% of average earning assets during the quarter ended September 30, 2008, compared to $906.6 million or 51.7% of average earnings assets during the quarter ended September 30, 2007. The decline in short-term interest rates since September 2007 contributed to a decrease in the average yield on loans receivable, which decreased six basis points to 5.75% during the quarter ended September 30, 2008, compared to 5.81% during the quarter ended September 30, 2007. Also contributing to the decrease in the loan portfolio's yield year-over-year was the increase in average one-to-four family mortgages relative to higher yielding nonresidential mortgages. During the quarter ended September 30, 2007, one-to-four family mortgages and nonresidential mortgages represented 64.5% and 18.9% of average loans receivable, respectively. By the quarter ending September 30, 2008, the ratios had adjusted to 67.2% and 17.1%, respectively.
Interest income from mortgage-backed securities increased $921,000 or 11.2%, to $9.1 million during the quarter ended September 30, 2008, compared to $8.2 million during the quarter ended September 30, 2007 due to an increase in average mortgage-backed securities and an increase in the average yield. Average mortgage-backed securities increased $49.1 million to $718.9 million during the quarter ended September 30, 2008, compared to $669.8 million during the quarter ended September 30, 2007. To the extent that the Bank did not need the funds for loan originations, management reinvested cash flows from principal and interest payments back into additional mortgage-backed securities, which contributed to the increase in the average balance year-over-year. Also contributing to the increase was the addition of the mortgage-backed securities from the AMF Ultra Short Mortgage Fund during the current quarter. The average yield on mortgage-backed securities increased 18 basis points to 5.08% during the quarter ended September 30, 2008, from 4.90% during the quarter ended September 30, 2007. For the most part, rate adjustments on pass-through certificates containing adjustable-rate mortgages and the addition of the mortgage-backed securities from the AMF Ultra Short Mortgage Fund were responsible for the increase in yield.
Interest income from other interest-earning assets decreased $489,000 or 43.0%, to $649,000 during the quarter ended September 30, 2008, from $1.1 million during the quarter ended September 30, 2007. The decrease was due to a decrease in average yield; partially offset by an increase in average other interest-bearing assets, primarily interest-earning deposits. There was a $18.0 million increase in average other interest-earning assets to $110.0 million during the quarter ended September 30, 2008, from $92.0 million during the . . .
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