Kearny Financial Corp. Reports Fourth Quarter and Year End 2018 Operating Results

FAIRFIELD, N.J., July 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 June 30, 2018 of $7.7 million, or $0.08 per basic and diluted share.  The results represent an increase of $2.3 million compared to net income of $5.4 million, or $0.07 per basic and diluted share, for the quarter ended March 31, 2018.

Net income for the quarters ended June 30, 2018 and March 31, 2018 reflected merger-related expenses recognized in conjunction with the Company’s acquisition of Clifton Bancorp, Inc. (“CSBK”), the holding company for Clifton Savings Bank (“Clifton”), which closed on April 2, 2018.  Excluding the effects of merger-related expenses on an after-tax basis, the Company’s net income would have been $11.4 million or $0.12 per basic and diluted share for the quarter ended June 30, 2018 compared to $5.8 million or $0.08 per basic and diluted share for the quarter ended March 31, 2018. 

For the fiscal year ended June 30, 2018, the Company reported net income of $19.6 million, or $0.24 per basic and diluted share.  The results represent an increase of $993,000 compared to net income of $18.6 million, or $0.22 per basic and diluted share, for the fiscal year ended June 30, 2017. 

As above, net income for the year ended June 30, 2018 included $6.7 million in merger-related expenses associated with the Company’s acquisition of CSBK.  The Company estimates that such expenses adversely impacted net income by approximately $5.1 million for the year ended June 30, 2018.

Net income for the year ended June 30, 2018 also reflected the effects of federal income tax reform that was codified through the passage of the Tax Cuts and Jobs Act (the “Act”) during the quarter ended December 31, 2017.  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.  The provisions of the Act positively impacted the Company’s earnings during the second half of fiscal 2018.  However, the passage of the Act 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 quarter ended December 31, 2017.

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 “transition” year ended June 30, 2018, the Company’s statutory federal income tax rate was 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%.

Acquisition Highlights

The increase in the Company’s net income for the quarter ended June 30, 2018 exemplified the beneficial impact of the $1.6 billion, or 33.4%, of growth in total assets that resulted from the Company’s acquisition of CSBK.  The growth arising from the acquisition reflected:

• Loans acquired with aggregate fair values totaling $1.12 billion primarily comprising residential and commercial mortgage loans.  Acquired loans included $5.4 million of nonperforming loans whose fair values at acquisition reflected negligible levels of impairment;
   
• Deposits assumed with aggregate fair values totaling $949.8 million housed across a retail banking network consisting of 12 branches located in New Jersey’s Passaic, Bergen, Hudson and Essex counties;
   
• Securities acquired with aggregate fair values of $326.9 million primarily comprising U.S. agency and other high-quality debt securities;
   
• Borrowings assumed with fair values of $414.1 million comprised entirely of outstanding advances from the Federal Home Loan Bank of New York;
   
• Merger consideration primarily comprising 25.4 million shares of the Company’s common stock issued to CSBK stockholders reflecting an exchange of 1.191 of Company shares for each outstanding share of CSBK common stock at the time of closing as well as cash distributed to CSBK stockholders and eligible option holders for the settlement of fractional shares and the value of outstanding options to purchase CSBK stock, respectively.

As required by applicable accounting standards, the Company recorded purchase accounting adjustments to the carrying value of all assets acquired and liabilities assumed from CSBK to reflect their fair values at the time of acquisition.  With specific regard to the interest-earning assets acquired and interest-bearing liabilities assumed, such adjustments generally accrete or amortize into interest income and interest expense, respectively, on a level-yield/cost basis over their estimated remaining lives.  As a result, the “post-acquisition” yield or cost recognized by the Company on the assets and liabilities acquired generally reflect the comparable market interest rates for such instruments at the time of their acquisition. 

The CSBK acquisition was the primary factor contributing to the reported increase in net income for the quarter ended June 30, 2018 compared to the prior quarter ended March 31, 2018.  As discussed in greater detail below, the increase in net income between comparative periods included the following highlights:

• Net interest income increased by $13.5 million, or 50.0%, to $40.6 million from $27.1 million;
   
• Net interest margin increased by 31 basis points to 2.72% from 2.41%;
   
• Excluding the impact of non-recurring, merger-related expenses recognized during both comparative periods:
   
  • Non-interest expense increased by $4.0 million, or 17.9%, to $26.1 million from $22.1 million;
     
  • The non-interest expense ratio decreased by 23 basis points to 1.59% from 1.82%.
     
  • The efficiency ratio decreased by 13.0% to 59.4% from 72.4%;
     
  • Return on average on average assets ratio increased by 22 basis points to 0.69% from 0.47%.

Overview of Financial Performance

In addition to completing the CSBK acquisition, the Company continued to execute other strategies throughout fiscal 2018 intended to organically grow and diversify its balance sheet while increasing its core earnings and prudently managing capital to promote long-term growth in shareholder value.  Together, the Company’s organic growth and acquisition strategies combined to result in several balance sheet growth and diversification achievements that are included among the following highlights for the quarter and year ended June 30, 2018:

• The Company’s aggregate loan portfolio, excluding loans held for sale and the allowance for loan losses, increased by $1.15 billion to $4.50 billion, or 68.4% of total assets, at June 30, 2018 from $3.35 billion, or 67.9% of total assets, at March 31, 2018.  For the year ended June 30, 2018, the Company’s aggregate loan portfolio increased by $1.26 billion, or 38.7%, from $3.25 billion, or 67.4% of total assets, at June 30, 2017.

• The outstanding balance of the Company’s commercial mortgage loans increased by $476.6 million to $3.06 billion at June 30, 2018 from $2.58 billion at March 31, 2018.  For the year ended June 30, 2018, commercial mortgage loans grew $563.9 million from $2.50 billion at June 30, 2017.  The organic growth in commercial mortgage loans during the quarter and year ended June 30, 2018 continued to reflect the impact of an accelerated rate of loan prepayments compared to prior years that partially offset the increase in loans arising from loan origination volume.  In addition to the growth arising from the CSBK acquisition, the Company continues to execute organic strategies designed to increase the origination volume of commercial mortgage loans to compensate for the challenges presented by 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 June 30, 2018. 

• The outstanding balance of residential mortgage loans held in the portfolio, including home equity loans and lines of credit, increased by $744.9 million to $1.39 billion at June 30, 2018 from $643.3 million at March 31, 2018.  For the year ended June 30, 2018, residential mortgage loans grew $738.1 million from $650.1 million at June 30, 2017.  The increase in residential mortgage loans during the quarter and year ended June 30, 2018 primarily reflected the impact of the CSBK acquisition as the Company continued emphasizing its mortgage banking strategy through which most residential mortgage loans originated are sold into the secondary market.

• Asset quality remained strong throughout the quarter and year ended June 30, 2018.  The outstanding balance of nonperforming loans increased by $2.6 million to $16.9 million, or 0.37% of total loans, at June 30, 2018 from $14.2 million, or 0.42% of total loans, at March 31, 2018.  For the year ended June 30, 2018, nonperforming loans decreased by $2.0 million from $18.9 million, or 0.58% of total loans, at June 30, 2017.   As noted earlier, the increase in the outstanding balance of nonperforming loans at June 30, 2018 included a nominal balance of loans acquired from CSBK which was partially offset by a net decrease in the remaining balance of nonperforming loans during the reported periods. 

• The allowance for loan losses increased to $30.9 million at June 30, 2018 from $30.2 million at March 31, 2018, resulting in a “total loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of total loans, of 0.68% and 0.90%, respectively.  For the year ended June 30, 2018, the allowance for loan losses increased by $1.6 million from $29.3 million, or 0.90% of total loans, at June 30, 2017.  The decrease in the “total loan coverage ratio” for both the quarter and year ended June 30, 2018 largely reflects the impact of the CSBK acquisition and the related accounting standards which generally preclude acquired loan balances from being considered in the balance of the allowance for loan losses at the time of their acquisition.  In lieu thereof, an accretable “credit mark” is established as a component of the purchase accounting fair value adjustments which directly reduces the carrying value of the acquired loan portfolio.

• The Company’s securities portfolio increased by $170.7 million to $1.31 billion, or 20.0% of total assets, at June 30, 2018 from $1.14 billion, or 23.2% of total assets, at March 31, 2018.  For the year ended June 30, 2018, the securities portfolio increased by $207.7 million, or 18.8%, from $1.11 billion, or 23.0% of total assets at June 30, 2017.  The increase in the securities portfolio for the quarter and year ended June 30, 2018 largely reflected the impact of securities acquired from CSBK.  The Company sold a significant portion of the securities originally acquired from CSBK with a portion of the sale proceeds reinvested into shorter-duration, higher-yielding securities and the remainder reinvested into loans. 

• The balance of cash and cash equivalents increased by $90.6 million to $128.9 million at June 30, 2018 from $38.3 million at March 31, 2018.  For the year ended June 30, 2018, cash and cash equivalents increased by $50.6 million from $78.2 million at June 30, 2017.  The increase for the quarter and year ended June 30, 2018 partly reflected day-to-day operating fluctuations in the Company’s balance of short-term liquidity coupled with the acquisition of cash and cash equivalents balances acquired from CSBK.  Notwithstanding the increase in their overall balance, the Company generally endeavors to limit the balance of cash and cash equivalents held to the minimum levels needed to meet its short-term funding obligations and overall liquidity risk management objectives.  As such, the excess balance of cash and cash equivalents held at June 30, 2018 is generally expected to be redeployed into higher-yielding assets during the quarter ending September 30, 2018.

• The Company’s total deposits increased by $1.01 billion to $4.07 billion at June 30, 2018, from $3.07 billion at March 31, 2018.  For the year ended June 30, 2018, total deposits increased by $1.14 billion from $2.93 billion at June 30, 2017.  The increase in deposits for the quarter and year ended June 30, 2018 largely reflected the impact of deposits acquired from CSBK while also reflecting the continuing effects of product, pricing and marketing strategies implemented during fiscal 2018.

• Total borrowings increased by $346.6 million to $1.20 billion at June 30, 2018, from $852.0 million at March 31, 2018.  For the year ended June 30, 2018, total borrowings increased by $392.4 million from $806.2 million at June 30, 2017.  The increase in borrowings for the quarter and year ended June 30, 2018 partly reflected the impact of borrowings acquired from CSBK.  The increase attributable to the CSBK acquisition was partly offset by the repayment of maturing FHLB term and overnight advances coupled with changes in depositor sweep account balances representing normal day-to-day fluctuations in such balances. 

• The Company’s stockholders’ equity increased by $277.5 million to $1.27 billion at June 30, 2018 from $991.2 million at March 31, 2018.  The increase in stockholders’ equity for the quarter ended June 30, 2018 partly reflected $330.7 million of capital stock issued by the Company in conjunction with the acquisition of CSBK.  The increase also reflected net income earned during the period coupled with a decrease in unearned ESOP shares and a net increase in accumulated other comprehensive income primarily reflecting changes in the fair value of the Company’s derivatives and available for sale securities portfolios.  The noted increases in stockholders’ equity were partially offset by the Company’s repurchase of 4.5 million shares of its capital stock during the quarter ended June 30, 2018 at a total cost of $62.5 million and at an average cost of $13.85 per share, coupled with cash dividends paid to stockholders of $3.9 million during the period.  For the year ended June 30, 2018, stockholders’ equity increased by $211.6 million from $1.06 billion at June 30, 2017.  The net increase for the year was generally attributable to the cumulative effects of the same factors that contributed to the net change in stockholders’ equity for the quarter ended June 30, 2018.

• At June 30, 2018, the Company’s total consolidated equity to assets ratio was 19.28% while the Bank’s total consolidated equity to assets ratio was 18.19%. The Company’s and Bank’s regulatory capital ratios at June 30, 2018 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 acquisition of CSBK coupled with the organic 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 increased by $13.5 million to $40.6 million for the quarter ended June 30, 2018 from $27.1 million for the quarter ended March 31, 2018.  For the year ended June 30, 2018, net interest income increased by $18.7 million to $121.3 million from $102.6 million for the year ended June 30, 2017.

• The Company’s net interest margin increased 31 basis points to 2.72% for the quarter ended June 30, 2018 from 2.41% for the quarter ended March 31, 2018 while the net interest rate spread increased by 33 basis points to 2.48% from 2.15% for those same comparative periods, respectively.  For the year ended June 30, 2018, the net interest margin increased by nine basis points to 2.50% from 2.41% for the year ended June 30, 2017 while the net interest rate spread increased by 11 basis points to 2.25% from 2.14% 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 $101,000 for the quarter ended June 30, 2018, reflecting an annualized net charge off rate of 0.01% on the average balance of total loans for the period. By comparison, the Company’s net charge offs totaled approximately $241,000 for the quarter ended March 31, 2018, reflecting an annualized net charge off rate of 0.03%.
  
  For the year ended June 30, 2018, the Company recognized net charge offs totaling $1.1 million reflecting an annualized charge off rate of 0.03% on the average balance of total loans for fiscal 2018.  By comparison, the Company’s net charge offs totaled approximately $324,000 for the year ended June 30, 2017 reflecting an annualized charge off rate of 0.01% on the average balance of total loans for fiscal 2017. 

• The Company’s provision for loan losses increased by $294,000 to $717,000 for the quarter ended June 30, 2018 compared to $423,000 for the quarter ended March 31, 2018.  The increase in the provision largely reflected the net effect of updates to historical and environmental loss factors that increased the level of provision expense between comparative periods.  The increase in the provision expense was partially offset by a decrease in net charge offs between the two comparative periods, as discussed above, as well as the effects of comparatively lower growth during the quarter ended June 30, 2018 in the performing portion of the non-acquired loan portfolio that is collectively evaluated for impairment using historical and environmental loss factors.

• For the year ended June 30, 2018, the provision for loan losses decreased by $2.7 million to $2.7 million from $5.4 million for the year ended June 30, 2017.  The decrease in the provision was partly attributable to the effects of comparatively lower growth during fiscal 2018 in the performing portion of the non-acquired loan portfolio that is collectively evaluated for impairment using historical and environmental loss factors while also reflecting the effects of updates to such factors between comparative periods.  This decrease was partially offset by an increase in net charge offs recognized between the two comparative periods, as discussed above.

The Company’s mortgage banking and SBA lending strategies continued to supplement and diversify its sources of non-interest income while the benefits of its commercial mortgage lending strategies were also reflected in non-interest income:

• Aggregate loan sale gains totaled $127,000 for the quarter ended June 30, 2018 compared to $346,000 for the quarter ended March 31, 2018 while such gains totaled $1.0 million and $1.5 million for the years ended June 30, 2018 and June 30, 2017, respectively.  The decrease in gains recognized was partly attributable to an overall increase in market interest rates that has reduced rate refinancing incentives for residential mortgage borrowers.  A decrease in SBA sale gains between both sets of comparative periods generally reflected fluctuations in loan origination volume and timing that generally characterizes the Company’s SBA lending activities.

• Fees and service charges totaled $1.2 million for the quarter ended June 30, 2018 compared to $1.5 million for the quarter ended March 31, 2018.  For the year ended June 30, 2018, fees and service charges increased to $5.4 million from $3.3 million for the year ended June 30, 2017.  The increased level of fees and service charges for the year ended June 30, 2018 was largely attributable to increased recognition of commercial loan prepayment fees while their inherent variability was the largest contributor to the decrease in fees and charges between the linked quarters ended June 30, 2018 and March 31, 2018.

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 1.90% for the quarter ended June 30, 2018 compared to 1.85% for the prior quarter ended March 31, 2018.  For those same comparative periods, the Company’s operating efficiency ratio decreased to 71.1% from 73.7%, respectively.    As noted earlier, excluding the impact of merger-related expenses, the Company’s non-interest expense to average assets ratios would have been 1.59% and 1.82% for the quarters ended June 30, 2018 and March 31, 2018, respectively, while the Company’s operating efficiency ratios would have been 59.4% and 72.4% for those same periods, respectively.
  
  For the year ended June 30, 2018, the Company’s ratio of non-interest expense to average assets totaled 1.86% compared to 1.76% for the year ended June 30, 2017.  For those same comparative periods, the Company’s operating efficiency ratio increased to 72.7% from 71.2%, respectively.  For the year ended June 30, 2018, the Company’s ratio of non-interest expense to average assets and operating efficiency ratio included the impacts arising from merger-related expenses, as discussed above.

Collectively, the factors noted above contributed to the increases in net income for the quarter and year ended June 30, 2018 noted earlier.  The increases in net income had a favorable impact on the Company’s earnings-based performance ratios as highlighted below:

• The Company’s return on average assets for the quarter ended June 30, 2018 totaled 0.47% compared to 0.44% for the prior quarter ended March 31, 2018.  Excluding the impacts on net income arising from the non-recurring effects of merger-related expenses, as discussed above, the Company’s return on average assets would have been 0.70% and 0.47% for the quarters ended June 30, 2018 and March 31, 2018, respectively.
  
  For the year ended June 30, 2018, the return on average assets totaled 0.37% compared to 0.40% for the prior year ended June 30, 2017.  The Company’s return on average assets for the year ended June 30, 2018 reflected the impacts arising from federal income tax reform and merger-related expenses, as discussed above.

The Company continued to execute key capital management strategies during the quarter ended June 30, 2018 to further support shareholder value:

• The Company increased its regular quarterly cash dividend payable to stockholders by $0.01 from $0.03 per share declared and paid during the quarters ended September 30, 2017, December 31, 2017 and March 31, 2018, to $0.04 per share declared and paid during the quarter ended June 30, 2018.  The Company continues to evaluate its dividend policies and practices in relation to its capital management and shareholder value objectives.

• In April 2018, the Company completed the repurchase of its shares of capital stock under its second share repurchase program announced in May 2017 through which it authorized the repurchase of 8,559,084 shares, or 10%, of the Company’s outstanding shares.  The shares associated with this second program were repurchased at a total cost of $122.0 million and at an average cost of $14.25 per share.
   
• In May 2018, the Company announced a third share repurchase program through which it authorized the repurchase of 10,238,557 shares, or 10%, of the Company’s outstanding shares.  Through June 30, 2018, the Company repurchased a total of 2,695,460 shares, or 26.3% of the shares authorized for repurchase under this third program, at a total cost of $38.4 million and at an average cost of $14.23 per share.

The exhibits that follow this narrative begin with the presentation of the Linked-Quarter Comparative Financial Analysis and Year-to-Year Comparative Financial Analysis. These tabular presentations support the discussion above by presenting the Company’s financial condition and operating results for the quarter and fiscal year ended June 30, 2018 compared to those for the prior linked-quarter ended March 31, 2018 and prior fiscal year ended June 30, 2017, respectively.  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.  The exhibits conclude with the presentation of the Reconciliation of GAAP to Non-GAAP financial data included in this news release.

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.

For further information contact:
Craig L. Montanaro, President and Chief Executive Officer, or
Eric B. Heyer, Senior Executive Vice President and Chief Operating Officer
Kearny Financial Corp.
(973) 244-4500