MSBF - Kearny Financial Corp. Reports Fourth Quarter and Fiscal Year End 2020 Operating Results

FAIRFIELD, N.J., July 30, 2020 (GLOBE NEWSWIRE) -- Kearny Financial Corp. (NASDAQ GS: KRNY) (the “Company”), the holding company of Kearny Bank (the “Bank”), reported net income for the quarter ended June 30, 2020 of $13.7 million, or $0.17 per diluted share. The results represent an increase of $4.4 million compared to $9.3 million, or $0.11 per diluted share, for the quarter ended March 31, 2020.

For the fiscal year ended June 30, 2020, the Company reported net income of $45.0 million representing an increase of $2.9 million compared to $42.1 million for the fiscal year ended June 30, 2019. The increase in net income reflected a 20% increase in earnings per diluted share to $0.55 for the year ended June 30, 2020 from $0.46 for the year ended June 30, 2019.

Craig L. Montanaro, President and Chief Executive Officer, commented, “I am proud to report that we achieved record earnings for both the quarter and the fiscal year, while making significant progress towards our long-term strategic goal of improving our funding mix. During fiscal 2020, our retail deposits increased by $517 million, or 14%, reflecting a $647 million, or 33%, increase in core non-maturity deposits. This success enabled us to reduce our wholesale funding by $381 million, with such balances representing 22% of total funding at June 30, 2020 from 30% one year earlier.”

The Company had previously announced the successful closing of its acquisition of MSB Financial Corp. (NASDAQ: MSBF) (“MSB”) and its subsidiary, Millington Bank (“Millington”) on July 10, 2020. Regarding the acquisition, Mr. Montanaro commented, “In conjunction with announcing our year-end results, I would also like to welcome the Millington employees, clients and stockholders to the Kearny family. Having successfully converted and integrated MSB’s core and online banking systems concurrent with the acquisition’s closing, we are now focused on supporting and strengthening our relationships with Millington’s existing clients, while further enhancing our presence in the very desirable New Jersey markets located within Somerset and Morris counties.”

With regard to the recent challenges presented by the COVID-19 pandemic, Mr. Montanaro further stated, “We continue to focus on the various ways in which we can assist our clients who have been adversely impacted by COVID-19, including those clients who recently joined us from Millington. While we recognize that significant economic uncertainty lies ahead, we believe that our combined balance sheets are well positioned for such an environment. We ended fiscal 2020 on exceptionally strong footing with a tangible equity ratio of 13.29%, loan loss reserves totaling $37 million and liquid assets of $1.6 billion, which are further supported by over $2.6 billion of available borrowing capacity.”

Balance Sheet

• For the quarter and the year ended June 30, 2020, the Company succeeded in significantly growing core retail deposits which facilitated the outflow of wholesale deposits.  For the quarter ended June 30, 2020, deposits increased by $177.0 million to $4.43 billion from $4.25 billion at March 31, 2020. Such growth was attributable to an increase of $224.9 million in retail deposits that was partially offset by a decline of $47.8 million in wholesale deposits.  For the year ended June 30, 2020, deposits increased by $282.6 million to $4.43 billion from $4.15 billion at June 30, 2019.  The year-over-year growth in deposits was attributable to an increase of $517.4 million in retail deposits that was partially offset by a $234.8 million decrease in wholesale deposits.
  
  
• Loans receivable decreased by $64.1 million to $4.50 billion at June 30, 2020 from $4.56 billion at March 31, 2020.  The decrease in loans receivable was attributable to a decrease in loan origination volume coupled with the acceleration of loan pre-payment activity, as compared to the prior quarter.  For the quarter ended June 30, 2020, the Company originated 749 loans totaling $69.0 million under the Payroll Protection Program (“PPP”) and recorded deferred origination fees related to such loans totaling $2.9 million.  For the year ended June 30, 2020, the Company’s aggregate loan portfolio decreased by $180.5 million, or 3.9%, from $4.68 billion, at June 30, 2019.
  
  
• Investment securities decreased by $92.7 million to $1.42 billion, or 21.0% of total assets, at June 30, 2020 from $1.51 billion at March 31, 2020.  For the year ended June 30, 2020, the securities portfolio increased by $127.3 million from $1.29 billion, or 19.5% of total assets, at June 30, 2019. 
  
  
• Borrowings decreased by $210.9 million to $1.17 billion, or 17.4% of total assets, at June 30, 2020 from $1.38 billion at March 31, 2020.  For the year ended June 30, 2020, borrowings decreased $148.8 million from $1.32 billion at June 30, 2019.  The decrease in borrowings for the quarter and year ended June 30, 2020 reflected the Company’s continuing effort to reallocate its funding mix in favor of core deposits.

Earnings

Net Interest Income, Spread and Margin

• For the quarter ended June 30, 2020, net interest income increased by $2.9 million to $40.5 million from $37.6 million for the quarter ended March 31, 2020.  The increase in net interest income was the result of a decrease of $4.3 million in interest expense, partially offset by a $1.4 million decrease in interest income between comparative periods.  For the year ended June 30, 2020, net interest income decreased by $6.0 million to $149.4 million from $155.3 million for the year ended June 30, 2019.  The decrease in net interest income was the result of a decrease of $4.1 million in interest income and an increase of $1.8 million in interest expense.
  
  
• For the quarter ended June 30, 2020, net interest spread increased by 20 basis points to 2.43% while net interest margin increased by 16 basis points to 2.62%.  These increases primarily reflected a decrease in the cost of interest-bearing liabilities partially offset by a decrease in the yield on interest-earning assets. Contributing approximately eight basis points to the quarterly increase in net interest margin was a temporary mismatch in the relationship between three-month LIBOR and three-month FHLB advance rates which favorably impacted the net cost of the Company’s portfolio of hedged FHLB advances. Specifically, the average historical spread between these two rates over the five-year period ended June 30, 2020 was approximately one basis point.  However, that spread increased to 94 basis points on April 1, 2020 reflecting significant market volatility arising at outset of the COVID-19 pandemic. The mismatch between the noted three-month rate indices declined throughout the quarter, ending at 14 basis points at June 30, 2020.
  
  
• For the year ended June 30, 2020, net interest rate spread decreased by nine basis points to 2.22% while net interest margin decreased 11 basis points to 2.45%.  These decreases primarily reflected a decrease in the yield on interest-earning assets coupled with an increase in the cost of interest-bearing liabilities.
  
  
• For the quarter ended June 30, 2020, the yield on interest-earning assets decreased by 12 basis points to 3.72% which was largely attributable to a 9 basis point decrease in the yield on loans and a 14 basis point decrease in the yield on taxable investment securities.  For that same period, the cost of interest-bearing liabilities decreased by 32 basis points to 1.29% which was attributable to a 23 basis point decrease in the cost of interest-bearing deposits coupled with a 61 basis point decrease in the cost of borrowings.
  
  
• For the year ended June 30, 2020, the yield on interest-earning assets decreased by eight basis points to 3.83% which was largely attributable to a three basis point decrease in the yield on loans, coupled with a 14 basis point decrease in the yield on taxable investment securities. For that same period, the cost of interest-bearing liabilities increased by one basis point to 1.61% which was attributable to an 11 basis point increase in the cost of interest-bearing deposits partially offset by a 24 basis point decrease in the cost of borrowings.

Non-Interest Income

• Fees and service charges totaled $1.7 million for the quarter ended June 30, 2020 compared to $1.3 million for the quarter ended March 31, 2020.  The increase was largely attributable to an increase of $518,000 in loan pre-payment penalty income to $1.4 million for the quarter ended June 30, 2020.  For the year ended June 30, 2020 fees and service charges increased by $1.2 million to $6.6 million from $5.4 million for the year ended June 30, 2019 which was largely attributable to an increase of $1.1 million in loan pre-payment penalty income to $4.6 million for the year ended June 30, 2020.
  
  
• Gains on sales and calls of securities totaled $19,000 for the quarter ended June 30, 2020 compared to $2.2 million for the quarter ended March 31, 2020.  For the year ended June 30, 2020 gains on sales of securities totaled $2.3 million compared to a net loss of $323,000 for the year ended June 30, 2019. These variances were largely attributable to the gain on sale of securities recognized in conjunction with a wholesale restructuring transaction executed during the quarter ended March 31, 2020. 
  
  
• Loan sale gains achieved record levels, totaling $1.3 million for the quarter ended June 30, 2020 as compared to $565,000 for the quarter ended March 31, 2020. Such gains totaled $3.2 million and $580,000 for the years ended June 30, 2020 and June 30, 2019, respectively.  The increase in loan sale gains primarily reflected an increase in the volume of residential mortgage loans sold during those periods.

Non-Interest Expense

• Non-interest expense decreased by $1.2 million to $26.9 million for the quarter ended June 30, 2020 compared to $28.1 million for the quarter ended March 31, 2020.  This decrease was largely attributable to $2.2 million of non-recurring debt extinguishment expenses recognized in the prior comparative period. The remaining change in non-interest expense included increases in equipment and systems expense, advertising and marketing expense, FDIC insurance premiums, non-recurring merger-related expenses and miscellaneous expense.
  
  
• For the year ended June 30, 2020, non-interest expense decreased by $1.6 million to $107.6 million from $109.2 million for the year ended June 30, 2019. This decrease was largely attributable to $1.7 million of non-recurring branch consolidation expenses recognized in the prior comparative period.  The remaining change in non-interest expense included decreases in salaries and employee benefits, equipment and systems expense, advertising and marketing expense and FDIC insurance premiums.  Partially offsetting these decreases were increases to non-recurring debt-extinguishment expenses and non-recurring merger-related expenses totaling $2.2 million and $951,000, respectively, which were recognized during the current year ended June 30, 2020.
  
  
• The Company’s non-interest expense ratio totaled 1.59% for the quarter ended June 30, 2020 compared to 1.67% for the quarter ended March 31, 2020.  For the year ended June 30, 2020, the Company’s non-interest expense ratio totaled 1.61% compared to 1.64% for the prior year ended June 30, 2019. 
  
  
• The Company’s efficiency ratio was 59.2% for the quarter ended June 30, 2020 compared to 64.1% for the prior quarter ended March 31, 2020.  For the year ended June 30, 2020, the Company’s efficiency ratio totaled 63.7% compared to 64.7% for the prior year ended June 30, 2019. 

Income Taxes

• Income tax expense totaled $4.7 million for the quarter ended June 30, 2020 compared to $225,000 for the quarter ended March 31, 2020, resulting in effective tax rates of 25.6% and 2.4%, respectively.  For the year ended June 30, 2020, income tax expense was $12.3 million compared to $13.9 million for the year ended June 30, 2019 resulting in effective tax rates of 21.5% and 24.8%, respectively. 
  
  
• The increase in income tax expense and effective tax rate for the quarter ended June 30, 2020 reflected certain income tax benefits recorded in the prior comparative period, including a $1.6 million carryback of net operating losses and the reversal of tax valuation allowances totaling $591,000. In addition, a comparatively higher level of pre-tax net income, as compared to the prior period, resulted in a comparatively higher provision for income tax expense.  The decrease in income tax expense and effective tax rate for the year ended June 30, 2020 primarily reflected income tax benefits recorded during the year ended June 30, 2020, as noted above.

Performance Ratios

• Return on average assets for the quarter ended June 30, 2020 increased to 0.81% from 0.55% for the quarter ended March 31, 2020.  For the year ended June 30, 2020, the return on average assets increased to 0.67% from 0.63% for the prior year ended June 30, 2019. 
  
  
• Return on average equity increased to 5.08% for the quarter ended June 30, 2020 from 3.39% for the quarter ended March 31, 2020 while return on average tangible equity increased to 6.35% from 4.23% for those same comparative periods, respectively.  For the year ended June 30, 2020, return on average equity increased to 4.10% from 3.52% for the prior year ended June 30, 2019 while return on average tangible equity increased to 5.10% from 4.30% for those same comparative periods, respectively.

Asset Quality

• The outstanding balance of non-performing loans totaled $36.7 million, or 0.82% of total loans, at June 30, 2020 compared to $35.4 million, or 0.78% of total loans, at March 31, 2020 and $20.3 million, or 0.43% of total loans, at June 30, 2019.  The $16.4 million increase in nonperforming loans for the year ended June 30, 2020 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 ended March 31, 2020.  This loan is secured by a grocery-anchored retail shopping center located in northern New Jersey and has a current loan-to-value of approximately 69%. 
  
  
• Based on Section 4013 of the CARES Act and the related guidance promulgated by federal banking regulators, qualifying short-term loan modifications resulting in payment deferrals for up to six months that are attributable to the adverse impact of COVID-19, are not considered to be troubled debt restructurings. Consequently, loans subject to such payment deferrals are reported as current with regard to payment status and continue to accrue interest during the payment deferral period. As of June 30, 2020, the Company had modified a total of 711 loans with an aggregate principal balance of $781.3 million, representing 17.2% of total loans. Further details regarding these modifications are provided in the table below. As of June 30, 2020, 351 of the modified loans with an aggregate principal balance of $374.9 million had reached the expiration of their initial three-month deferral period.  Of these loans, 71.4%, or $267.9 million, had returned to their regular payment schedules by July 27, 2020.  Through that same date, 24.5%, or $91.6 million had been granted a second 90-day extension while the remaining 4.1%, or $15.4 million, had not yet made their July payment.

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(1) Certain historical data presented as of May 4, 2020 has been reclassified to be consistent with the current period presentation.

• In addition to the loans reported above, the Company acquired 144 loans with aggregate principal balances of $114.8 million in conjunction with the Company’s acquisition of MSB on July 10, 2020 that had been previously modified in accordance with the guidance discussed above.
  
  
• Net charge offs totaled $38,000 for the quarter ended June 30, 2020 compared to $16,000 for the quarter ended March 31, 2020 reflecting an annualized net charge off rate of 0.00% for both comparative periods.  For the year ended June 30, 2020, the Company recognized net charge offs totaling $144,000 reflecting an annualized net charge off rate of 0.00% on the average balance of total loans for the fiscal year.  By comparison, for the year ended June 30, 2019, the Company recognized net charge offs totaling $1.1 million reflecting an annualized net charge off rate of 0.02% on the average balance of total loans for fiscal 2019. 
  
  
• For the quarter ended June 30, 2020 the Company recorded a provision for loan losses of $174,000.  The provision expense for the period partly reflected an increase of $935,000 in the allowance for loan losses resulting from increases in certain environmental loss factors reflecting estimated incurred losses specifically attributable to the continuing adverse impact of COVID-19.  That increase was largely offset by the effects of a decrease in the overall balance of the portion of the loan portfolio that was collectively evaluated for impairment at June 30, 2020.  By comparison, the provision for loan losses for the prior quarter ended March 31, 2020 totaled $6.3 million.  The provision expense during the prior comparative quarter reflected an estimate of approximately $5.5 million of incurred losses specifically attributable to the adverse impact of COVID-19.  The remaining portion of the provision during the earlier comparative period was largely attributable to the effects of an increase in the overall balance of the portion of the loan portfolio that was collectively evaluated for impairment during that period.
  
  
• For the year ended June 30, 2020, the Company recorded a provision for loan losses of $4.2 million, reflecting an increase of $641,000 from $3.6 million for the year ended June 30, 2019. The increase largely reflected increases to environmental loss factors associated with the adverse impact of COVID-19 that was partially offset by the effects of lower growth during the year ended June 30, 2020 in the balance of the portion of the loan portfolio that was collectively evaluated for impairment compared to that of the prior year ended June 30, 2019.
  
  
• The allowance for loan losses (“ALLL”) increased to $37.3 million, or 0.82% of total loans, at June 30, 2020 from $37.2 million, or 0.81% of total loans, at March 31, 2020.  For the year ended June 30, 2020, the allowance for loan losses increased by $4.1 million from $33.3 million, or 0.70% of total loans, at June 30, 2019. Excluding the balance of acquired loans, which generally do not carry an ALLL, the ALLL as a percentage of non-acquired loans at June 30, 2020 and June 30, 2019 totaled 1.03% and .91%, respectively.  As of June 30, 2020, the balance of acquired loans totaled $923.9 million, had remaining purchase accounting discounts of $43.1 million, or 4.67% of the applicable outstanding balance, with no associated ALLL. As the Company operates on a non-calendar fiscal year, as of June 30, 2020, it had not yet adopted Accounting Standards Update 2016-13, also known as the Current Expected Credit Loss (“CECL”) standard.

Liquidity & Capital

• The Company maintains significant sources of both on- and off-balance sheet liquidity.  At June 30, 2020, the Company’s liquid assets included $181.0 million of short-term cash and equivalents supplemented by $1.39 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 $615.0 million via unsecured lines of credit and $1.53 billion and $318.7 million, without pledging additional collateral, from the Federal Home Loan Bank of New York and Federal Reserve Bank, respectively.
  
  
• On March 25, 2020 the Company temporarily suspended its stock repurchase program due to the risks and uncertainties associated with the COVID-19 pandemic. Through June 30, 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, or an average of $13.14 per share. 
  
  
• For the quarter ended June 30, 2020, the Company maintained its regular quarterly cash dividend paid to stockholders of $0.08 per share.  For the year ended June 30, 2020, total cash dividends paid to stockholders totaled $0.29 per share.
  
  
• For the quarter ended June 30, 2020, book value per share increased by $0.17 to $12.96 at June 30, 2020 while tangible book value per share increased by $0.18 to $10.39 at June 30, 2020.  For the year ended June 30, 2020, book value per share increased by $0.31 to $12.96 at June 30, 2020 while tangible book value per share increased by $0.17 to $10.39 at June 30, 2020.
  
  
• At June 30, 2020 the Tier 1 leverage ratios of the Company and the Bank were 13.27% and 11.95%, respectively.  The remainder of the Company’s and Bank’s regulatory capital ratios at June 30, 2020 were in excess of the levels required by federal banking regulators to be classified as “well-capitalized” under regulatory guidelines.

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.

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

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(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.

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