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| KRNY > SEC Filings for KRNY > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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 unprecedented market turmoil, the Emergency Economic Stabilization Act of Act ("EESA") was enacted on October 3, 2008. Pursuant to his authority under EESA, the Secretary of the Treasury created the Troubled Asset Relief Program ("TARP") Capital Purchase Plan under which the Treasury Department was authorized to invest in senior preferred stock of U.S. banks and savings associations or their holding companies. On November 14, 2008, the Company announced that it would not participate in the TARP Capital Purchase Plan. The decision not to access this additional source of capital was based for the most part on the Company's strong capital position.
The Federal Deposit Insurance Corporation Initiatives
On October 14, 2008, the Federal Deposit Insurance Corporation ("the FDIC") announced the Temporary Liquidity Guarantee Program ("TLG Program") to strengthen confidence and encourage liquidity in the banking system. The TLG Program consists of two components: a temporary guarantee of newly-issued senior unsecured debt of a bank or its holding company (the Debt Guarantee Program) and a temporary unlimited guarantee of funds in non-interest-bearing transaction accounts at FDIC-insured institutions (the Transaction Account Guarantee Program). Institutions that did not opt out of the program by December 5, 2008 are assessed ten basis points for non-interest-bearing transaction account balances in excess of $250,000 and 75 basis points of the amount of debt issued. The Bank is participating in the Transaction Account Guarantee Program but Kearny MHC, the Company and the Bank opted out of the Debt Guarantee Program.
As a result of The Federal Deposit Insurance Reform Act of 2006, the FDIC is required to set the insurance fund's reserve ratio at between 1.15% and 1.5% of insured deposits. Due to recent and projected future losses the insurance fund has fallen below 1.15% of insured deposits. On December 16,
Comparison of Financial Condition at March 31, 2009 and June 30, 2008
Total assets increased $26.4 million to $2.11 billion at March 31, 2009 from $2.08 billion at June 30, 2008. The increase in total assets was due primarily to increases in cash and cash equivalents and net loans receivable, partially offset by decreases in non-mortgage-backed securities and mortgage-backed securities.
Cash and cash equivalents, consisting primarily of interest-bearing deposits in other banks increased $40.2 million to $171.9 million at March 31, 2009 from $131.7 million at June 30, 2008. During the quarters ended September 30 and December 31, 2008 liquidity decreased as cash and cash equivalents were redeployed to fund loan originations, loan purchases or deposit outflows. However, by December cash and cash equivalents began to increase as the competition reduced their deposit account rates bringing them in line with those offered by the Bank. Despite several rounds of interest rate cuts by the Bank during the quarter ended March 31, 2009, deposits continued to increase as loan demand declined contributing to a significant increase in cash and cash equivalents. With the federal funds rate hovering between 0.00% and 0.25% the average yield on cash and cash equivalents was only 1.08% during the first nine months of the fiscal year. At March 31, 2009, interest-bearing deposits included $29.6 million on deposit with a money center bank and $116.8 million on deposit with the FHLB of New York. Management routinely transfers funds between the two depository institutions to maximize the return on the funds, with the former pricing off of 30-day Libor and the latter off of the federal funds rate.
Non-mortgage-backed securities, all of which are classified as available for sale, decreased $10.7 million to $27.5 million at March 31, 2009 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 (the "AMF Fund") as well as principal repayments and a $2.2 million decrease in the fair value of the portfolio. The shares of the AMF Fund, which management 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 during the quarter ended September 30, 2008. Following the redemption-in-kind, the underlying securities were reclassified as mortgage-backed securities held to maturity. At March 31, 2009, the non-mortgage-backed securities portfolio consisted of $4.7 million of Small Business Loan ("SBA") pass-through certificates, $18.3 million of municipal bonds and $4.5 million of single issue trust preferred securities with amortized costs of $4.8 million, $18.2 million and $8.8 million, respectively. The net unrealized loss for this portfolio was $4.3 million as of March 31, 2009. Management has concluded based on its evaluation of this portfolio that no other-than-temporary impairment is present for individual securities in a loss position at March 31, 2009. Four of the five trust preferred securities were issued by two money center banks and carried investment grade ratings as of March 31, 2009 according to the three major rating agencies. The fifth security was issued by a southeastern community bank and not rated. (See Note 7 to consolidated financial statements.)
Mortgage-backed securities available for sale, all of which are government agency pass-through certificates, decreased $29.6 million to $696.4 million at March 31, 2009 compared to $726.0 million at June 30, 2008. The decrease resulted from principal repayments and maturities partially offset by a $19.1 million increase in the fair value of the portfolio and purchases of $48.0 million, which for the most part were 30-year fixed-rate Community Reinvestment Act ("CRA") eligible issues used to meet CRA investment requirements. The net unrealized gain for this portfolio was $19.1 million as of March 31, 2009. Management has concluded based on its evaluation of this portfolio that no other-than-temporary impairment is present for individual securities in a loss position at March 31, 2009. Cash flows from the portfolio were used to fund loan originations, loan purchases or deposit outflows during the first six months of the fiscal year, but contributed to the increase in cash and cash equivalents during the quarter ended March 31, 2009.
Mortgage-backed securities held to maturity totaled $5.0 million at March 31, 2009 compared to none at June 30, 2008. Due to a continuing decline in the net asset value of the AMF Fund, the Company decided in July 2008 to withdraw its investment in this mutual 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. Approximately 90% of the mortgage-backed securities are collateralized mortgage obligations, a mix of agency and private label issues. Upon redemption, this portfolio was written down to fair value and classified as held-to-maturity. A recent analysis of the private label collateralized mortgage obligations resulted in the conclusion that securities having an aggregate amortized cost of $803,000 and fair value of $233,000 at March 31, 2009 were other-than-temporarily impaired.
Premises and equipment increased $264,000 to $35.2 million at March 31, 2009 from $34.9 million at June 30, 2008 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. FHLB of New York capital stock decreased $360,000 to $12.7 million at March 31, 2009 due to a reduction in borrowings over the first nine months of the fiscal year. Bank owned life insurance increased $420,000, to $16.1 million at March 31, 2009 due to an increase in the cash surrender value of the underlying insurance policies. Deferred income tax assets, net, decreased $7.1 million to $1.9 million at March 31, 2009 due primarily to increased deferred tax liabilities related to increased unrealized gains on available for sale securities.
Deposits increased $25.6 million to $1.40 billion at March 31, 2009 from $1.38 billion at June 30, 2008. During the quarters ended September 30 and December 31, 2008 and March 31, 2009, deposits decreased $30.0 million and increased $2.3 million and $53.3 million, respectively. During the nine months ended March 31, 2009 interest-bearing demand deposits increased $7.7 million to $159.3 million, savings deposits decreased $7.8 million to $292.6 million, certificates of deposit increased $29.4 million to $903.0 million and non-interest-bearing demand deposits decreased $3.7 million to $49.7 million. During the first two quarters of the fiscal year, the Bank continued to price 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 due to adequate cash flows from investing activities to fund loan demand and deposit outflows. Early in the fiscal year, 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 rate increases 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 ended December 31, 2008, deposit rates in the marketplace began to pull back in conjunction with the additional 200 basis point decrease in the federal funds rate. By December 2008, the Bank's deposit flows turned positive as the competition lowered their rates bringing them in line with those offered by the Bank. Since there was little demand for loans and virtually no return on cash and cash equivalents, management attempted to slow deposit inflows by cutting the Bank's deposit pricing several times, particularly for certificates of deposit. Nevertheless, deposits continued to build throughout the quarter ended March 31, 2009. Retail deposit rates have fallen to a level where for the first time in a number of years, depositors are beginning to lengthen the maturities on the certificates of deposit to improve the yield. In October 2008, the Bank's Franklin Lakes, New Jersey retail branch was closed upon expiration of its lease and the deposits transferred to the nearby Wyckoff branch. In December 2008, $8.6 million of deposits in the Irvington, New Jersey branch were sold to another financial institution.
FHLB advances decreased $8.0 million to $210.0 million at March 31, 2009 from $218.0 million at June 30, 2008. For the most part there was no need to borrow during the first nine months of the fiscal year; therefore, the Bank repaid advances totaling $8.0 million with a weighted average cost of 5.47%.
During the nine months ended March 31, 2009, stockholders' equity increased $6.6 million to $478.0 million from $471.4 million at June 30, 2008. The increase was primarily the result of a $10.2
Comparison of Operating Results for the Three Months Ended March 31, 2009 and 2008
General. Net income for the quarter ended March 31, 2009 was $1.3 million or $0.02 per diluted share, a decrease of $1.4 million from $2.7 million or $0.04 per diluted share for the quarter ended March 31, 2008. The decrease in net income year-over-year resulted primarily from increases in non-interest expense and income taxes as well as increases in impairment losses on securities and provision for loan losses and a decrease in non-interest income (excluding loss on securities), partially offset by an increase in net interest income.
Net Interest Income.Net interest income for the quarter ended March 31, 2009 was $13.5 million, an increase of $1.9 million compared to $11.6 million for the quarter ended March 31, 2008. Net interest income increased year-over-year due to a decrease in interest expense, partially offset by a decrease in interest income.
The Company's net interest rate spread increased 54 basis points to 2.31% during the quarter ended March 31, 2009 from 1.77% during the quarter ended March 31, 2008. The 525 basis point reduction in the federal funds rate between September 2007 and December 2008 has had a significant effect on the Company's cost of funds and yield on earning assets. The Bank has been consistently liability sensitive, which is an advantage in a falling interest rate environment. As a result, the Bank's cost of funds declined more rapidly than the yield on earning assets. Year-over-year, the yield on average interest-earning assets decreased 13 basis points to 5.09% while the cost of average interest-bearing liabilities decreased 67 basis points to 2.78%. The average yield 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. During the same period, the average cost of funds decreased due to decreases in both the cost of average interest-bearing deposits and the cost of average borrowed money. There is the possibility that the decline in the yield on earning assets will accelerate relative to the decline in the cost of funds due to the accumulation of cash and cash equivalents pressuring the net interest rate spread during the quarter ending June 30, 2009.
The Company's net interest margin increased 36 basis points to 2.83% during the quarter ended March 31, 2009, compared to 2.47% during the quarter ended March 31, 2008. The ratio of average interest-earning assets to average interest-bearing liabilities was 123.1% during the quarter ended March 31, 2009, compared to 125.2% during the quarter ended March 31, 2008. Average interest-earning assets during the quarter ended March 31, 2009 were $1.91 billion, an increase of $26.2 million compared to $1.88 billion during the quarter ended March 31, 2008. Year-over-year, the increase in average interest-earning assets resulted from a significant increase in average loans receivable, partially offset by decreases in average mortgage-backed securities, non-mortgage-backed securities and other interest-earning assets. Average interest-bearing liabilities during the quarter ended March 31, 2009 were $1.55 billion, an increase of $46.9 million compared to $1.50 billion during the quarter ended March 31, 2008.
Interest income from loans receivable increased $1.3 million to $15.2 million during the quarter ended March 31, 2009, from $13.9 million during the quarter ended March 31, 2008 due to growth in the portfolio, partially offset by a decrease in average yield. Average loans receivable increased $111.5 million to $1.07 billion during the quarter ended March 31, 2009, compared to $961.4 million during the quarter ended March 31, 2008. The decline in interest rates since September 2007 contributed to a decrease in the average yield on loans receivable, which decreased 11 basis points to 5.68% during the quarter ended March 31, 2009, compared to 5.79% during the quarter ended March 31, 2008. The average yield has been decreasing as higher coupon mortgages are replaced by new loans with lower coupons. Also contributing to the decrease in the loan portfolio's yield year-over-year was the increase in average residential first mortgages, home equity loans and home equity lines of credit relative to higher yielding nonresidential and multi-family mortgages and commercial business loans. During the quarter ended March 31, 2009, average residential first mortgages, home equity loans and home equity lines of credit totaled $854.2 million, an increase of $98.6 million from $755.6 million during the quarter ended March 31, 2008. By comparison, average nonresidential and multi-family mortgages and commercial business loans totaled $198.8 million during the quarter ended March 31, 2009, an increase of $10.6 million from $188.2 million during the quarter ended March 31, 2008.
Interest income from mortgage-backed securities decreased $61,000 to $8.6 million during the quarter ended March 31, 2009, compared to $8.7 million during the quarter ended March 31, 2008 due to a decrease in average mortgage-backed securities, partially offset by an increase in the average yield. Average mortgage-backed securities decreased $8.5 million to $685.3 million during the quarter ended March 31, 2009, compared to $693.8 million during the quarter ended March 31, 2008. The decrease in average mortgage-backed securities year-over-year was attributed to management's decision to minimize the reinvestment of cash flows back into the portfolio due to the low interest rate environment. The average yield on mortgage-backed securities increased two basis points to 5.02% during the quarter ended March 31, 2009, from 5.00% during the quarter ended March 31, 2008. For the most part, discount accretion attributed to the addition of the mortgage-backed securities from the AMF Fund during the quarter ended September 30, 2008 was responsible for the increase in the average yield, however, the average yield has been decreasing recently due to an increase in prepayments within the underlying mortgage portfolios as refinancing activity accelerates.
Interest income from non-mortgage-backed securities decreased $197,000 to $243,000 during the quarter ended March 31, 2009, from $440,000 during the quarter ended March 31, 2008 due to a decrease in average securities as well as a decrease in the average yield. Average non-mortgage-backed securities decreased $9.6 million to $31.9 million during the quarter ended March 31, 2009, compared to $41.5 million during the quarter ended March 31, 2008. Average taxable securities decreased $9.2 million to $13.7 million during the quarter ended March 31, 2009 from $22.9 million during the quarter ended March 31, 2008 due primarily to the redemption-in-kind of the AMF Fund, which resulted in the reclassification of the underlying mortgage-backed instruments to mortgage-backed securities during the quarter ended September 30, 2008. Average tax-exempt securities decreased $470,000 to $18.2 million during the quarter ended March 31, 2009 from $18.6 million during the quarter ended March 31, 2008 due primarily to the sale of municipal bonds during the prior quarter. The average yield on non-mortgage-backed securities fell 119 basis points from 4.23% during the quarter ended March 31, 2008 to 3.04% during the quarter ended March 31, 2009 with the average yield on taxable securities decreasing 239 basis points to 2.47%, partially offset by a two basis point increase to 3.48% in the average yield on
Interest income from other interest-earning assets decreased $1.4 million to $174,000 during the quarter ended March 31, 2009 from $1.5 million during the quarter ended March 31, 2008. The decrease was due to decreases in average other interest-earning assets, primarily interest-earning deposits, and in the average yield on those deposits. Average other interest-earning assets decreased $67.1 million to $117.3 million during the quarter ended March 31, 2009 from $184.4 million during the quarter ended March 31, 2008. Year-over-year, average interest-earning deposits decreased $66.9 million to $104.4 million during the quarter ended March 31, 2009 from $171.3 million during the quarter ended March 31, 2008. Average FHLB capital stock decreased $188,000 to $12.9 million during the quarter ended March 31, 2009 from $13.1 million during the quarter ended March 31, 2008. Following the addition of $200.0 million in FHLB advances during the six months ended December 31, 2007, cash and cash equivalents were redeployed to fund loan originations and purchases resulting in the decrease in average other interest-earning assets until cash and cash equivalent began to build beginning in December 2008 and during the reporting quarter thereafter. . . .
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