Kearny Financial Corp. Reports Third Quarter 2018 Operating Results and Announces Authorization for Third Stock Repurchase Plan

FAIRFIELD, N.J., April 27, 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 March 31, 2018 of $5.4 million, or $0.07 per basic and diluted share.  The results represent an increase in net income of $4.1 million compared to net income of $1.3 million, or $0.02 per basic and diluted share, for the quarter ended December 31, 2017.

The increase in net income partly reflected a decrease in merger-related expenses related to the Company’s acquisition of Clifton Bancorp, Inc. (“CSBK”), the holding company for Clifton Savings Bank (“Clifton”), which closed on April 2, 2018.  Such expenses decreased by $792,000 to $401,000 for the quarter ended March 31, 2018 compared to $1.2 million for the quarter ended December 31, 2017.  The Company estimates that merger-related expenses adversely impacted net income by approximately $379,000 and $1.0 million for the quarters ended March 31, 2018 and December 31, 2017, respectively, due to their limited income tax deductibility.  The Company expects to recognize additional merger-related expenses during the fourth quarter ending June 30, 2018 in conjunction with the closing of the CSBK merger transaction.

Under the terms of the merger agreement, each outstanding share of CSBK common stock was exchanged for 1.191 shares of the Company’s common stock, resulting in the Company issuing 25.4 million shares of common stock to CSBK stockholders in conjunction with the merger’s closing.  An additional $7,000 in cash was distributed to CSBK stockholders in lieu of fractional shares representing the equivalent of $13.24 per whole share of Kearny Financial Corp.

The increase in net income also reflected the impact of federal income tax reform that was codified through the passage of the Tax Cuts and Jobs Act (the “Act”) during the prior 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 quarter ended March 31, 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 prior 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 current “transition” year ending June 30, 2018, the Company’s statutory federal income tax rate has been 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%.

Excluding the impact on net income arising from the non-recurring, merger-related expenses discussed above, the Company’s net income would have been $5.8 million or $0.08 per basic and diluted share for the three months ended March 31, 2018.  By comparison, excluding the impacts on net income arising from non-recurring merger-related expenses and federal income tax reform discussed above, the Company’s net income would have been $5.0 million or $0.06 per basic and diluted share for the three months ended December 31, 2017.

Stock Repurchase Authorization

In addition to reporting operating results for the third quarter ended March 31, 2018, the Company also announced today that the Board of Directors has authorized a third stock repurchase plan to acquire up to 10,238,557 shares or 10% of the Company’s currently outstanding common stock.  In conjunction with the commencement of a third stock repurchase plan, the Company also announced the completion of its second 10% stock repurchase plan.  That second plan, which was announced on May 24, 2017, authorized the repurchase of up to 8,559,084 shares. As discussed in greater detail below, the Company repurchased 8,559,084 shares under that plan, at a total cost of $122.0 million and an average cost of $14.25 per share.

Repurchases under the third stock repurchase plan will be made from time to time in the open market, through block trades, in privately negotiated stock purchases or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission regulations. Such repurchases will be made at management’s discretion at prices management considers to be attractive and in the best interests of the Company and its stockholders, subject to the availability of stock, general market conditions, the trading price of the stock, alternative uses for capital, and the Company’s financial performance.  Open market purchases will be conducted in accordance with the limitations set forth in Rule 10b-18 of the Securities and Exchange Commission and other applicable legal requirements.

The third stock repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases.  The third stock repurchase program does not obligate the Company to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company.

Overview of Financial Performance

The Company continued to execute strategies during the third quarter of fiscal 2018 intended to grow and diversify its balance sheet while increasing its core earnings and prudently managing capital to promote long-term growth in shareholder value.  These strategies resulted in several incremental balance sheet growth and diversification achievements that are included among the following highlights for the quarter:

• The Company’s aggregate loan portfolio, excluding loans held for sale and the allowance for loan losses, increased by $59.9 million to $3.35 billion, or 67.9% of total assets, at March 31, 2018 from $3.29 billion, or 68.0% of total assets, at December 31, 2017.  The growth in the loan portfolio largely reflected the Company’s continued strategic focus on growing and diversifying its commercial loan portfolio with the outstanding balance of commercial mortgage loans increasing by $77.3 million to $2.58 billion at March 31, 2018.  The rate of growth in commercial mortgage loans during the quarter ended March 31, 2018 continued to reflect the impact of an accelerated rate of loan prepayments that partially offset the increase in loans arising from new loan origination volume.  The Company continues to execute strategies designed to increase the origination volume of commercial mortgage loans to compensate for 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 March 31, 2018.  

• The outstanding balance of residential mortgage loans held in the portfolio, including home equity loans and lines of credit, decreased by $12.0 million to $643.3 million at March 31, 2018 from $655.3 million at December 31, 2017.  The decrease largely reflected the Company’s continued emphasis on its mortgage banking strategy through which most residential mortgage loans originated are sold into the secondary market.  Where appropriate, the Company augments the balance of loans originated and retained in portfolio with additional loan purchases to generally maintain the balance of residential mortgage loans as a percentage of the aggregate loan portfolio over time.

• Nonperforming loans decreased by $2.1 million to $14.2 million, or 0.42% of total loans, at March 31, 2018 from $16.3 million, or 0.50% of total loans, at December 31, 2017. 

• The allowance for loan losses increased to $30.2 million at March 31, 2018 from $30.1 million at December 31, 2017, resulting in a “total loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of total loans, of 0.90% and 0.91%, respectively.

• The “nonperforming loan coverage ratio”, representing the balance of the allowance for loan losses as a percentage of nonperforming loans, increased to 212.5% at March 31, 2018 from 184.0% at December 31, 2017.

• The Company’s securities portfolio increased by $35.0 million to $1.14 billion, or 23.2% of total assets, at March 31, 2018 from $1.11 billion, or 22.9% of total assets, at December 31, 2017.  The net increase in the securities portfolio partly reflected purchases of uncapped, floating-rate securities and subordinated debt issued by one community bank.  The growth due to security purchases was partially offset by normal principal repayments arising from amortization and maturities of securities. The increase in the securities portfolio was partially offset by a $2.0 million decrease in the fair value of the available for sale securities portfolio during the period. 

• The balance of cash and cash equivalents decreased by $12.4 million to $38.3 million at March 31, 2018 from $50.7 million at December 31, 2017.  The decrease largely reflected day-to-day operating fluctuations in the Company’s balance of cash and cash equivalents.  The Company continues to limit the balance of cash and cash equivalents held to the minimum levels needed to meet its day-to-day funding obligations and overall liquidity risk management objectives.  Toward that end, the average balance of other interest-earning assets decreased by $14.7 million to $67.8 million for the quarter ended March 31, 2018 compared to $82.5 million for the quarter ended December 31, 2017.  Other interest-earning assets generally include the balance of interest-earning cash deposits held in other banks coupled with the balance of the Bank’s mandatory investment in the capital stock of the Federal Home Loan Bank of New York.

• The Company’s total deposits increased by $34.0 million to $3.07 billion at March 31, 2018, from $3.03 billion at December 31, 2017.  The net growth in deposits reflected a $38.9 million increase in interest-bearing deposits that was partially offset by a $4.8 million decrease in non-interest-bearing deposits.  The growth in interest-bearing deposits largely reflected the continuing effects of product, pricing and marketing strategies implemented during fiscal 2018.  The decrease in non-interest-bearing deposits largely reflected day-to-day operating fluctuations in such balances.

• Total borrowings increased by $53.1 million to $852.0 million at March 31, 2018, from $798.9 million at December 31, 2017.  The increase in borrowings partly reflected a $42.0 million increase in overnight borrowings drawn for liquidity management purposes coupled with an $11.1 million increase in depositor sweep account balances representing normal day-to-day fluctuations in such balances.

• The Company’s stockholders’ equity increased by $1.9 million to $991.2 million at March 31, 2018 from $989.3 million at December 31, 2017.  The increase largely reflected net income earned during the period coupled with a net increase in accumulated other comprehensive income reflecting an increase in the fair value of the Company’s derivatives portfolio, which was partially offset by a decrease in the fair value of the Company’s available for sale securities portfolio.  The increase in stockholders’ equity was partially offset by the effects of the Company’s share repurchases and cash dividends paid to stockholders during the period. 

• At March 31, 2018, the Company’s total consolidated equity to assets ratio was 20.09% while the Bank’s total consolidated equity to assets ratio was 17.66%. The Company’s and Bank’s capital ratios at March 31, 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 noted 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 $222,000 to $27.1 million for the quarter ended March 31, 2018 from $26.8 million for the quarter ended December 31, 2017. 

• The Company’s net interest margin remained stable at 2.41% for the quarters ended March 31, 2018 and December 31, 2017 while the net interest rate spread increased by one basis point to 2.15% 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 $241,000, reflecting an annualized net charge off rate of 0.03% on the average balance of total loans for the quarter ended March 31, 2018. By comparison, the Company’s net charge offs totaled approximately $315,000 for the quarter ended December 31, 2017, reflecting an annualized net charge off rate of 0.04%.

• The Company’s provision for loan losses decreased by $513,000 to $423,000 for the quarter ended March 31, 2018 compared to $936,000 for the quarter ended December 31, 2017.  The decrease in the provision was partly attributable to the decrease in net charge offs between the two comparative periods, as discussed.  The decrease also reflected the effects of updates to historical and environmental loss factors that decreased the level of provision expense between comparative periods.  The decrease in provision expense was partially offset by the effects of comparatively greater growth during the quarter ended March 31, 2018 in the performing portion of the loan portfolio that is collectively evaluated for impairment using historical and environmental loss factors.

The strategies executed by the Company during the quarter ended March 31, 2018 continued to strengthen and diversify its sources of non-interest income, as highlighted below:

• Gains on sale of residential mortgage loans totaled $202,000 for the quarter ended March 31, 2018 compared to $200,000 for the quarter ended December 31, 2017.  The modest increase in gains on sale reflected an increase in the volume of loans originated and sold that was partially offset by a decrease in the average net gain recognized per loan sold between comparative periods. 

• Gains on sale of loans originated under Small Business Administration (“SBA”) programs totaled $144,000 for the quarter ended March 31, 2018.  By comparison, there were no SBA loans originated and sold during the three months ended December 31, 2017.

In addition to the items noted above, fees and service charges increased by $128,000 to $1.5 million for the quarter ended March 31, 2018 from $1.4 million for the quarter ended December 31, 2017.  The increase was largely attributable to an increase in commercial mortgage loan prepayment charges recognized between comparative periods.

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 1.85% for the quarter ended March 31, 2018 compared to 1.89% for the prior quarter ended December 31, 2017.  For those same comparative periods, the Company’s operating efficiency ratio decreased to 73.7% from 75.6%, respectively.    Excluding the impact of merger-related expenses, as discussed above, the Company’s non-interest expense to average assets ratios would have been 1.82% and 1.79% for the quarters ended March 31, 2018 and December 31, 2017, respectively, while the Company’s operating efficiency ratios would have been 72.4% and 71.7% for those same periods, respectively.

Collectively, the factors noted above contributed to the increase in net income for the quarter ended March 31, 2018 compared to the prior quarter ended December 31, 2017.  The increase 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 March 31, 2018 totaled 0.44% compared to 0.11% for the prior quarter ended December 31, 2017.  Excluding the impacts on net income arising from the non-recurring effects of merger-related expenses and federal income tax reform, as discussed above, the Company’s return on average assets would have been 0.47% and 0.42% for the quarters ended March 31, 2018 and December 31, 2017, respectively.

• The Company’s return on average equity for the quarter ended March 31, 2018 totaled 2.18% compared to 0.51% for the prior quarter ended December 31, 2017.  Excluding the impacts on net income arising from the non-recurring effects of merger-related expenses and federal income tax reform, as discussed above, the Company’s return on average equity would have been 2.33% and 2.00% for the quarters ended March 31, 2018 and December 31, 2017, respectively.

The Company continued to execute key capital management strategies during the quarter ended March 31, 2018 to further support shareholder value:

• The Company maintained its regular quarterly cash dividend payable to stockholders of $0.03 per share declared and paid during the quarter ended March 31, 2018.

• In May 2017, the Company announced its second share repurchase plan through which it authorized the repurchase of up to 8,559,084 shares, or 10%, of the Company’s outstanding shares.  During the quarter ended March 31, 2018, the Company repurchased a total of 758,896 of its shares at an average cost of $14.26 per share.  The volume of the Company’s share repurchases during the quarter ended March 31, 2018 reflected a significant period of inactivity during the pendency of the merger transaction with CSBK.  Through March 31, 2018, the Company has repurchased a total of 6,745,736 shares, or 78.8% of the number of shares authorized under the noted program, at a total cost of $97.9 million and at an average cost of $14.51 per share.

The Company’s capital management strategies are continuing into the fourth quarter ending June 30, 2018, as highlighted below:

• Subsequent to the closing of the merger with CSBK on April 2, 2018, the Company completed the second share repurchase plan by repurchasing the remaining 1,813,348 shares under the program announced in May 2017 at an average cost of $13.29 per share.
   
• As discussed above, the Company has announced its third share repurchase program through which it authorized the repurchase of up to 10,238,557 shares, or 10%, of the Company’s outstanding shares.

The exhibits that follow this narrative begin with the presentation of the Linked-Quarter Comparative Financial Analysis that supports the discussion above by presenting the Company’s financial condition and operating results for the quarter ended March 31, 2018 compared to those for the prior quarter ended December 31, 2017.  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.

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.