Kearny Financial Corp. Reports Third Quarter 2020 Operating Results

FAIRFIELD, N.J., April 29, 2020 (GLOBE NEWSWIRE) -- Kearny Financial Corp. (NASDAQ GS: KRNY) (the "Company"), the holding company of Kearny Bank (the "Bank"), today reported net income for the quarter ended March 31, 2020 of $9.3 million, or $0.11 per basic and diluted share.  The results represent a decrease of $1.4 million compared to net income of $10.7 million, or $0.13 per basic and diluted share, for the quarter ended December 31, 2019.

Craig L. Montanaro, President and Chief Executive Officer, commented, "During this extraordinarily difficult time our primary focus has been on the ways in which we can support our employees, our clients and the communities that we serve.  In spite of the challenges presented by COVID-19 our team is working tirelessly to ensure the availability of essential banking services to our clients.  At this time, 42 of our 48 retail branches are operating in a modified capacity and are complemented by our robust suite of digital banking products and services.  Our lending team is working closely with our impacted borrowers to assess their needs and to provide payment relief or supplemental sources of credit, as appropriate.

While significant challenges lie ahead, Kearny Bank's exceptionally strong capital and liquidity positions and long history of conservative underwriting will enable us to persevere throughout this unprecedented event."

Balance Sheet

• Deposits increased by $64.4 million to $4.25 billion at March 31, 2020 from $4.19 billion at December 31, 2019.  The increase in deposits was primarily attributable to an increase of $60.1 million in retail deposits, reflecting the Company's continued success in growing the balance of core deposits.

• Loans receivable increased by $69.8 million to $4.56 billion at March 31, 2020 from $4.49 billion at December 31, 2019.  The increase in loans receivable was attributable to an increase in loan origination volume coupled with a slowing of loan pre-payment activity, as compared to the prior quarter.

• During the first half of the quarter ended March 31, 2020 the Company executed a wholesale restructuring transaction designed to enhance net interest income and reduce credit risk within the investment portfolio.  During the first phase of the transaction, $158.4 million of investment securities with a weighted average yield of 2.63% were sold and a portion of the proceeds utilized to extinguish $121.5 million of Federal Home Loan Bank ("FHLB") advances with a weighted average cost of 2.84%.  Gains on sale of investment securities and debt extinguishment losses each totaled $2.2 million, resulting in a negligible impact on pre-tax net income.  During the second phase of the transaction, $248.7 million of US agency-backed mortgage-backed securities were purchased at a weighted average yield of 2.77% and were funded with a combination of FHLB advances, brokered time deposits and overnight borrowings at a weighted average cost of 1.65%.

Earnings

Net Interest Income, Spread and Margin

• For the quarter ended March 31, 2020, net interest income increased by $3.0 million to $37.6 million from $34.6 million for the quarter ended December 31, 2019.  The increase in net interest income resulted from of an increase of $1.6 million in interest income coupled with a decrease of $1.4 million in interest expense.

• For the quarter ended March 31, 2020, net interest spread increased by 19 basis points to 2.23% while net interest margin increased by 17 basis points to 2.46%.  These increases primarily reflected an increase in the yield on interest-earning assets coupled with a decrease in the cost of interest-bearing liabilities.

• For the quarter ended March 31, 2020, the yield on interest-earning assets increased by five basis points, largely attributable to a 13 basis point increase in the yield on loans to 4.14% which was partially offset by a 13 basis point decrease in the yield on taxable investment securities to 2.99%.  For that same period, the cost of interest-bearing liabilities decreased by 14 basis points, attributable to a 13 basis point decrease in the cost of interest-bearing deposits to 1.49% coupled with a 19 basis point decrease in the cost of borrowings to 1.98%.

Non-Interest Income

• Fees and service charges decreased by $807,000 to $1.3 million for the quarter ended March 31, 2020 from $2.1 million for the quarter ended December 31, 2019.  This decrease was largely attributable to a decrease of $733,000 in loan pre-payment penalty income to $832,000 for the quarter ended March 31, 2020 from $1.6 million for the quarter ended December 31, 2019.

• Gains on sales of securities totaled $2.2 million for the quarter ended March 31, 2020 compared to $11,000 for the quarter ended December 31, 2019.  This increase was attributable to the sale of securities in conjunction with the wholesale restructuring transaction noted earlier.

• Loan sale gains totaled $565,000 for the quarter ended March 31, 2020 as compared to $668,000 for the quarter ended December 31, 2019.  The decrease in loan sale gains largely reflected a decrease in the volume of residential mortgage loans sold during the period.

• Miscellaneous non-interest income increased by $334,000 to $223,000 for the quarter ended December 31, 2019 from a net loss of $111,000 for the quarter ended December 31, 2019.  This increase was largely attributable to non-recurring losses on asset disposals associated with branch consolidations that were recognized in the prior comparative period.

Non-Interest Expense

• Non-interest expense increased by $1.6 million to $28.1 million for the quarter ended March 31, 2020 compared to $26.4 million for the quarter ended December 31, 2019.  This increase was largely attributable to $2.2 million of non-recurring debt extinguishment expenses incurred upon the execution of the wholesale restructuring transaction, as noted earlier.  The remaining change in non-interest expense included decreases in net occupancy expense of premises, equipment and systems expense and advertising and marketing expense.  Partially offsetting these decreases were increases in salaries and employee benefits, non-recurring merger-related expense and miscellaneous expense.

• The Company's non-interest expense ratio totaled 1.67% for the quarter ended March 31, 2020 compared to 1.60% for the prior quarter ended December 31, 2019.

• The Company's efficiency ratio was 64.1% for the quarter ended March 31, 2020 compared to 67.5% for the prior quarter ended December 31, 2019.

Income Taxes

• Income tax expense totaled $225,000 for the quarter ended March 31, 2020 compared to $3.5 million for the quarter ended December 31, 2019 resulting in effective tax rates of 2.4% and 25.0%, respectively. 

• The decrease in income tax expense and effective tax rate reflected a $1.6 million reduction in income tax expense attributable to the carryback of net operating losses into prior periods at a higher statutory federal tax rate than is currently in effect for the Company.  This carryback was permitted by tax law changes enacted by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, which was signed into law on March 27, 2020.  In addition, the Company reversed valuation allowances totaling $591,000 which were associated with capital loss carryforwards and were determined to be realizable due to the sale of investment securities at the Bank's New Jersey investment company subsidiary.  Finally, a comparatively lower level of pre-tax net income, as compared to the prior period, resulted in a comparatively lower provision for income tax expense.

Performance Ratios

• Return on average assets for the quarter ended March 31, 2020 decreased to 0.55% from 0.64% for the quarter ended December 31, 2019.

• Return on average equity decreased to 3.39% for the quarter ended March 31, 2020 from 3.86% for the quarter ended December 31, 2019 while return on average tangible equity decreased to 4.23% for the quarter ended March 31, 2020 from 4.80% for the quarter ended December 31, 2019.

Asset Quality

• The outstanding balance of non-performing loans totaled $35.4 million, or 0.78% of total loans, at March 31, 2020 as compared to $22.0 million, or 0.49% of total loans, at December 31, 2019.  The increase in non-performing loans was primarily attributable to a single, $14.3 million, owner-occupied commercial real estate loan which was placed on non-accrual status during the quarter.  This loan is secured by a grocery-anchored retail shopping center located in northern New Jersey and has an original loan-to-value of approximately 55%.

• The allowance for loan losses ("ALLL") increased to $37.2 million, or 0.81% of total loans, at March 31, 2020 from $30.9 million, or 0.68% of total loans, at December 31, 2019.  Excluding the balance of acquired loans, which generally do not carry an ALLL, the ALLL as a percentage of non-acquired loans at March 31, 2020 totaled 1.02%.  As of that same date, the balance of acquired loans totaled $972.4 million, had remaining purchase accounting discounts of $46.2 million or 4.75% of the applicable outstanding balance, with no associated ALLL.  As the Company operates with a June 30 fiscal year end it has not yet adopted Accounting Standards Update 2016-13, also known as the Current Expected Credit Loss ("CECL") standard.

• Net charge offs totaled $15,000 or 0.00% of average loans, annualized, for the quarter ended March 31, 2020 compared to $30,000, or 0.00% of average loans, annualized, for the quarter ended December 31, 2019.

• The Company recorded a loan loss provision of $6.3 million for the quarter ended March 31, 2020 compared to a loan loss provision reversal of $1.5 million for the quarter ended December 31, 2019.  The increase in provision was largely attributable to increases in the qualitative factors associated with the impact of COVID-19 on national and regional economic conditions and, to a lesser extent, the growth in the balance of loans receivable during the current period, as compared to a decline in the balance of loans receivable during the prior comparative period.

• Under Section 4013 of the CARES Act, and based upon regulatory guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals of up to six months, that are attributable to the adverse impact of COVID-19, are not considered to be troubled debt restructurings.  As such, the applicable loans are reported as current with regard to payment status and continue to accrue interest during the payment deferral period.  As of April 24, 2020 the Company had modified 403 loans with aggregate outstanding principal balances of $499.0 million, in accordance with this guidance.

Liquidity & Capital

• The Company maintains significant sources of both on-and-off balance sheet liquidity.  At March 31, 2020, the Company's liquid assets included $59.5 million of short-term cash and equivalents supplemented by $1.48 billion of investment securities classified as available for sale which can be readily sold or pledged as collateral, if necessary.  In addition, the Company had the capacity to borrow additional funds totaling $415.0 million via unsecured lines of credit and $1.62 billion and $323.5 million, without pledging additional collateral, from the Federal Home Loan Bank of New York and Federal Reserve Bank, respectively.  During the quarter ended March 31, 2020 the Company actively utilized its secured and unsecured borrowing facilities to ensure their accessibility.

• During the quarter ended March 31, 2020, the Company repurchased 1,475,000 shares of common stock at a cost of $17.5 million and an average cost of $11.88 per share.  Through March 31, 2020, the Company repurchased 8,457,294 shares, or 91.7% of the shares authorized for repurchase under the current repurchase program, at a cost of $111.1 million and at an average cost of $13.14 per share.  On March 25, 2020 the Company temporarily suspended its stock repurchase program.

• As announced on February 19, 2020, the Company increased its regular quarterly cash dividend by $0.01 to $0.08 per share.

• Book value per share decreased by $0.07 to $12.79 at March 31, 2020 while tangible book value per share decreased by $0.11 to $10.21 at March 31, 2020.  These decreases were largely attributable to a $13.2 million decline in the fair value of the Company's derivatives portfolio which is reflected within the balance of accumulated other comprehensive income.

• At March 31, 2020 the Tier 1 leverage ratios of the Company and the Bank were 13.25% and 11.92%, respectively.  The remainder of the Company's and Bank's regulatory capital ratios at March 31, 2020 were in excess of the levels required by federal banking regulators to be classified as "well-capitalized" under regulatory guidelines.

Merger Update

• On December 18, 2019, the Company announced that it had entered into a definitive agreement to acquire MSB Financial Corp. MSBF ("MSBF"), the holding company for Millington Bank.  The merger is currently expected to close late in the quarter ended June 30, 2020 or early in the quarter ended September 30, 2020 subject to MSBF receiving the requisite approval of its shareholders, receipt of all regulatory approvals and fulfilment of other customary closing conditions.  A special meeting of MSBF stockholders has been scheduled for May 28, 2020.

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 the Company 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.

In addition, the COVID-19 pandemic is having an adverse impact on the Company, its customers and the communities it serves. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.  As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: the demand for our products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for loan losses may increase if borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; as the result of the decline in the Federal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; due to a decline in our stock price or other factors, goodwill may become impaired and be required to be written down; and our cyber security risks are increased as the result of an increase in the number of employees working remotely.

 (1)   Tangible book value equals total stockholders' equity reduced by goodwill and core deposit intangible assets.

(1)   The yield on tax-exempt investment 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.
(5)   Average tangible equity equals total average stockholders' equity reduced by average goodwill and average core deposit intangible assets.

 (1)   Tangible book value equals total stockholders' equity reduced by goodwill and core deposit intangible assets.