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Kearny Financial Corp. Reports Third Quarter 2019 Operating Results and Retail Branch Consolidation

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  • KRNY

FAIRFIELD, N.J., April 29, 2019 (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, 2019 of $11.4 million, or $0.13 per basic and diluted share, as compared to net income of $10.8 million, or $0.12 per basic and diluted share, for the quarter ended December 31, 2018.

The Company concurrently announced the consolidation of seven of the Bank’s retail branches located in northern and central New Jersey as a part of its ongoing strategy to improve operating efficiency and enhance long-term shareholder value. The Company considered several factors in identifying the locations to be consolidated including historical branch profitability, market demographic trajectory, geographic proximity to the consolidating branch and the expected impact on the Bank’s clients and communities served. Completion of these consolidations is expected to occur during the quarter ended September 30, 2019, subject to regulatory approval. The Company anticipates these consolidations to result in annualized pre-tax cost savings of at least $3.0 million, after recognition of associated one-time charges.

Craig L. Montanaro, President and Chief Executive Officer, commented, “We are very pleased to report another quarter of solid earnings performance, particularly in the face of the continuing challenges presented by the flat yield curve. Our decision to consolidate certain branch locations, while representing meaningful cost savings, also reflects the recognition that the preferences of our clients are rapidly evolving towards a more omni-channel banking model. As a result, our strategy remains focused on driving digital channel adoption and enhancing our suite of digital banking solutions to provide our clients with a frictionless experience through whichever channel is most convenient and appealing to them.”

Balance Sheet Highlights

  • Loans, excluding loans held for sale and the allowance for loan losses, decreased by $93.6 million to $4.66 billion, or 70.0% of total assets, at March 31, 2019 from $4.75 billion, or 70.9% of total assets, at December 31, 2018. The decrease in loans was largely attributable to an elevated level of pre-payment activity in the commercial mortgage loan portfolio which outpaced loan origination volume during the period.

  • Deposits decreased by $35.9 million to $4.14 billion at March 31, 2019, from $4.17 billion at December 31, 2018. The net decrease was attributable to a decline of $47.3 million in wholesale deposits that was partially offset by an increase of $11.4 million in retail deposits reflecting the Company’s ongoing efforts to reallocate its funding mix from wholesale to retail deposits.

  • Investment securities increased by $54.2 million to $1.32 billion at March 31, 2019 from $1.26 billion at December 31, 2018 as a portion of the cash flows from the loan portfolio were deployed into U.S. agency commercial mortgage-backed securities with similar yields to the loans that pre-paid during the period.

  • Borrowings increased by $15.7 million to $1.33 billion at March 31, 2019, from $1.31 billion at December 31, 2018. The net increase in borrowings reflected a $20.2 million increase in depositor sweep account balances that was partially offset by the repayment of a $5.0 million long-term Federal Home Loan Bank (“FHLB”) advance that matured during the period.

Earnings Highlights

  • Interest income decreased by $365,000 to $59.7 million for the quarter ended March 31, 2019 from $60.0 million for the quarter ended December 31, 2018 while interest expense increased by $346,000 to $21.0 million from $20.7 million between the same comparative periods. Consequently, net interest income decreased by $711,000 to $38.6 million for the quarter ended March 31, 2019, from $39.3 million for the quarter ended December 31, 2018.

  • The Company’s interest rate spread decreased three basis points to 2.28% for the quarter ended March 31, 2019 from 2.31% for the quarter ended December 31, 2018. The decrease in the interest rate spread primarily reflected a three basis point increase in the average cost of interest-bearing liabilities to 1.63% for the quarter ended March 31, 2019 from 1.60% for the quarter ended December 31, 2018 while the average yield on interest-earning assets remained stable at 3.91% for those same comparative periods. The factors that contributed to the change in interest rate spread also contributed to a three basis point decrease in the Company’s net interest margin to 2.53% from 2.56%, for the same comparative periods.

The Company’s non-interest income continued to supplement and diversify its sources of revenue.

  • Fees and service charges increased by $416,000, or 33.1%, to $1.7 million for the quarter ended March 31, 2019 compared to $1.3 million for the quarter ended December 31, 2018. This increase was largely driven by pre-payment fee income on commercial real estate loans related to the elevated level of pre-payment activity noted above.

  • Aggregate loan sale gains increased by $50,000, or 49.5%, to $151,000 for the quarter ended March 31, 2019 as compared to $101,000 for the quarter ended December 31, 2018 largely reflecting an increase in the volume of loans sold.

The Company continued to evaluate and implement tactics and strategies designed to improve operating efficiency and make more effective use of its supporting infrastructure while maintaining its effective income tax rate.

  • Non-interest expense decreased by $499,000 to $26.8 million for the quarter ended March 31, 2019 compared to $27.3 million for the quarter ended December 31, 2018. The decrease was largely attributable to various non-recurring expenses that were recognized during the quarter ended December 31, 2018 in conjunction with the October 2018 conversion of Clifton Savings Bank’s core processing system. The decrease in non-interest expense also reflected a net decrease of $349,000 in salaries and employee benefit expense from $15.7 million for the quarter ended December 31, 2018 to $15.4 million for the quarter ended March 31, 2019 largely attributable to decreases in wages, overtime and employee bonus compensation, partially offset by an increase in employer payroll tax expense. These decreases were partially offset by an increase in facilities occupancy expense which was primarily attributable to seasonal fluctuations in such expenses.

  • The Company’s ratio of non-interest expense to average assets totaled 1.60% for the quarter ended March 31, 2019 compared to 1.62% for the prior quarter ended December 31, 2018. For those same comparative periods, the Company’s efficiency ratios were 63.3% and 63.9%, respectively.

  • Income tax expense totaled $4.3 million for the quarter ended March 31, 2019 compared to $3.6 million for the quarter ended December 31, 2018 resulting in effective tax rates of 27.4% and 25.3%, respectively.

Collectively, these factors resulted in an increase of $649,000 in net income for the quarter ended March 31, 2019 compared to the prior quarter ended December 31, 2018.

  • The Company’s return on average assets for the quarter ended March 31, 2019 increased to 0.68% from 0.64% for the quarter ended December 31, 2018.

  • The Company’s return on average equity increased to 3.89% for the quarter ended March 31, 2019 from 3.55% for the quarter ended December 31, 2018 while the Company’s return on average tangible equity increased to 4.78% from 4.33% for the comparative periods.

Asset Quality Highlights

  • Asset quality remained strong throughout the quarter ended March 31, 2019. The outstanding balance of nonperforming loans totaled $21.3 million, or 0.46% of total loans, at March 31, 2019 as compared to $20.8 million, or 0.44% of total loans, at December 31, 2018.

  • The allowance for loan losses decreased to $33.1 million at March 31, 2019 from $33.5 million at December 31, 2018, resulting in a total loan coverage ratio, representing the balance of the allowance for loan losses as a percentage of total loans, excluding loans held for sale, of 0.70% for both comparative periods. The total loan coverage ratio for both periods reflects the impact of purchase accounting which generally precludes acquired loan balances from being considered in the balance of the allowance for loan losses at the time of their acquisition.

  • The Company recognized net charge offs totaling approximately $242,000 for the quarter ended March 31, 2019, reflecting an annualized net charge off rate of 0.02% on the average balance of total loans for the period. By comparison, the Company’s net charge offs totaled approximately $176,000 for the quarter ended December 31, 2018, reflecting an annualized net charge off rate of 0.01%.

  • The Company recorded a loan loss provision reversal of $179,000 for the quarter ended March 31, 2019 as compared to a provision for loan loss expense of $971,000 for the quarter ended December 31, 2018. The decrease in provision for loan loss was largely attributable to the net decrease during the quarter ended March 31, 2019 in the performing portion of the loan portfolio that was collectively evaluated for impairment.

Capital Highlights

  • The Company increased its regular quarterly cash dividend by $0.01 per share, to $0.06 per share during the quarter ended March 31, 2019, from $0.05 per share during the quarter ended December 31, 2018. The Company continually evaluates its dividend policies and practices in relation to its overall capital management and shareholder value objectives.

  • In March 2019, the Company completed the repurchase of its shares of common stock under its third share repurchase program announced in April 2018 through which it authorized the repurchase of 10,238,557 shares, or 10%, of the Company’s outstanding shares. The shares associated with this third program were repurchased at a total cost of $138.8 million and at an average cost of $13.55 per share. Concurrently, the Company announced its fourth share repurchase program through which it authorized the repurchase of 9,218,324 shares, or 10%, of the Company’s outstanding shares as of that date.

  • During the quarter ended March 31, 2019, the Company repurchased 2,445,689 shares of its common stock at a total cost of $32.4 million and an average cost of $13.24 per share. The shares of common stock repurchased during the period included 1,757,572 shares attributed to the completion of the Company’s third share repurchase program, as noted above. Such shares were repurchased at a total cost of $23.3 million and an average cost of $13.24 per share. The additional 688,117 shares repurchased during the period represented 7.5% of the total shares to be repurchased under the Company’s fourth share repurchase program, also noted above. Such shares were repurchased at a total cost of $9.1 million and at an average cost of $13.24 per share.

  • The Company’s and Bank’s regulatory capital ratios at March 31, 2019 were in excess of the levels required by federal banking regulators to be classified as “well-capitalized” under regulatory guidelines.

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, 2019 compared to those for the prior linked-quarter ended December 31, 2018. 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.

Linked-Quarter Comparative Financial Analysis

Summary Balance Sheet

At

Variance

(Dollars and Shares in Thousands,

March 31,

December 31,

Variance

or Change

Except Per Share Data, Unaudited)

2019

2018

or Change

Pct.

Assets

Cash and cash equivalents

$

54,160

$

51,483

$

2,677

5.2

%

Securities available for sale

726,920

666,602

60,318

9.0

%

Securities held to maturity

592,199

598,318

(6,119

)

-1.0

%

Loans held-for-sale

997

1,001

(4

)

-0.4

%

Loans receivable, including yield adjustments

4,659,804

4,753,392

(93,588

)

-2.0

%

Less allowance for loan losses

(33,105

)

(33,526

)

421

-1.3

%

Net loans receivable

4,626,699

4,719,866

(93,167

)

-2.0

%

Premises and equipment

58,274

58,414

(140

)

-0.2

%

Federal Home Loan Bank stock

64,288

64,514

(226

)

-0.4

%

Accrued interest receivable

20,326

19,435

891

4.6

%

Goodwill

210,895

210,895

-

0.0

%

Core deposit intangible

5,470

5,743

(273

)

-4.8

%

Bank owned life insurance

254,569

253,009

1,560

0.6

%

Deferred income taxes, net

24,182

24,692

(510

)

-2.1

%

Other real estate owned

209

508

(299

)

-58.9

%

Other assets

19,563

27,960

(8,397

)

-30.0

%

Total assets

$

6,658,751

$

6,702,440

$

(43,689

)

-0.7

%

Liabilities

Deposits

$

4,137,573

$

4,173,434

$

(35,861

)

-0.9

%

Borrowings

1,326,216

1,310,547

15,669

1.2

%

Advance payments by borrowers for taxes

17,208

17,201

7

0.0

%

Other liabilities

19,643

17,997

1,646

9.1

%

Total liabilities

5,500,640

5,519,179

(18,539

)

-0.3

%

Stockholders' Equity

Common stock

915

938

(23

)

-2.5

%

Paid-in capital

817,675

848,145

(30,470

)

-3.6

%

Retained earnings

363,072

356,993

6,079

1.7

%

Unearned ESOP shares

(31,130

)

(31,617

)

487

-1.5

%

Accumulated other comprehensive income, net

7,579

8,802

(1,223

)

-13.9

%

Total stockholders' equity

1,158,111

1,183,261

(25,150

)

-2.1

%

Total liabilities and stockholders' equity

$

6,658,751

$

6,702,440

$

(43,689

)

-0.7

%

Consolidated capital ratios

Equity to assets

17.39

%

17.65

%

-0.26

%

Tangible equity to tangible assets

14.62

%

14.90

%

-0.28

%

Share data

Outstanding shares

91,495

93,772

(2,277

)

-2.4

%

Equity per share

$

12.66

$

12.62

$

0.04

0.3

%

Tangible equity per share (1)

$

10.29

$

10.31

$

(0.02

)

-0.2

%


(1)

Tangible equity equals total stockholders' equity reduced by goodwill and core deposit intangible assets.


Summary Income Statement

For the three months ended

Variance

(Dollars and Shares in Thousands,

March 31,

December 31,

Variance

or Change

Except Per Share Data, Unaudited)

2019

2018

or Change

Pct.

Interest income

Loans

$

48,116

$

49,015

$

(899

)

-1.8

%

Taxable investment securities

9,511

9,051

460

5.1

%

Tax-exempt investment securities

710

713

(3

)

-0.4

%

Other interest-earning assets

1,320

1,243

77

6.2

%

Total Interest Income

59,657

60,022

(365

)

-0.6

%

Interest expense

Deposits

14,114

12,727

1,387

10.9

%

Borrowings

6,905

7,946

(1,041

)

-13.1

%

Total interest expense

21,019

20,673

346

1.7

%

Net interest income

38,638

39,349

(711

)

-1.8

%

(Reversal of) provision for loan losses

(179

)

971

(1,150

)

-118.4

%

Net interest income after provision for
loan losses

38,817

38,378

439

1.1

%

Non-interest income

Fees and service charges

1,674

1,258

416

33.1

%

Loss on sale and call of securities

(182

)

-

(182

)

N/A

Gain on sale of loans

151

101

50

49.5

%

(Loss) gain on sale and write down of other real estate owned

(6

)

36

(42

)

-116.7

%

Income from bank owned life insurance

1,560

1,599

(39

)

-2.4

%

Electronic banking fees and charges

253

277

(24

)

-8.7

%

Miscellaneous

226

38

188

494.7

%

Total non-interest income

3,676

3,309

367

11.1

%

Non-interest expense

Salaries and employee benefits

15,350

15,699

(349

)

-2.2

%

Net occupancy expense of premises

2,979

2,761

218

7.9

%

Equipment and systems

3,053

3,377

(324

)

-9.6

%

Advertising and marketing

739

787

(48

)

-6.1

%

Federal deposit insurance premium

455

421

34

8.1

%

Directors' compensation

770

746

24

3.2

%

Miscellaneous

3,425

3,479

(54

)

-1.6

%

Total non-interest expense

26,771

27,270

(499

)

-1.8

%

Income before income taxes

15,722

14,417

1,305

9.1

%

Income taxes

4,305

3,649

656

18.0

%

Net income

$

11,417

$

10,768

$

649

6.0

%

Net income per common share (EPS)

Basic

$

0.13

$

0.12

$

0.01

Diluted

$

0.13

$

0.12

$

0.01

Dividends declared

Cash dividends declared per common share

$

0.06

$

0.05

$

0.01

Cash dividends declared

$

5,338

$

4,082

$

1,256

Dividend payout ratio

46.8

%

37.9

%

8.8

%

Weighted average number of common
shares outstanding

Basic

89,488

92,434

(2,946

)

Diluted

89,532

92,480

(2,948

)


For the three months ended

Variance

Average Balance Sheet Data

March 31,

December 31,

Variance

or Change

(Dollars in Thousands, Unaudited)

2019

2018

or Change

Pct.

Assets

Interest-earning assets:

Loans receivable, including loans held for sale

$

4,709,052

$

4,758,587

$

(49,535

)

-1.0

%

Taxable investment securities

1,161,492

1,158,720

2,772

0.2

%

Tax-exempt investment securities

134,309

135,453

(1,144

)

-0.8

%

Other interest-earning assets

107,554

87,916

19,638

22.3

%

Total interest-earning assets

6,112,407

6,140,676

(28,269

)

-0.5

%

Non-interest-earning assets

574,921

587,921

(13,000

)

-2.2

%

Total assets

$

6,687,328

$

6,728,597

$

(41,269

)

-0.6

%

Liabilities and Stockholders' Equity

Interest-bearing liabilities:

Deposits:

Interest-bearing demand

$

790,567

$

792,989

$

(2,422

)

-0.3

%

Savings and club

773,308

743,676

29,632

4.0

%

Certificates of deposit

2,288,836

2,214,932

73,904

3.3

%

Total interest-bearing deposits

3,852,711

3,751,597

101,114

2.7

%

Borrowings:

Federal Home Loan Bank advances

1,292,168

1,293,470

(1,302

)

-0.1

%

Other borrowings

26,037

119,281

(93,244

)

-78.2

%

Total borrowings

1,318,205

1,412,751

(94,546

)

-6.7

%

Total interest-bearing liabilities

5,170,916

5,164,348

6,568

0.1

%

Non-interest-bearing liabilities:

Non-interest-bearing deposits

307,645

315,165

(7,520

)

-2.4

%

Other non-interest-bearing liabilities

35,930

37,374

(1,444

)

-3.9

%

Total non-interest-bearing liabilities

343,575

352,539

(8,964

)

-2.5

%

Total liabilities

5,514,491

5,516,887

(2,396

)

0.0

%

Stockholders' equity

1,172,837

1,211,710

(38,873

)

-3.2

%

Total liabilities and stockholders' equity

$

6,687,328

$

6,728,597

$

(41,269

)

-0.6

%

Average interest-earning assets to average
interest-bearing liabilities

118.21

%

118.91

%

-0.70

%

-0.6

%


For the three months ended

March 31,

December 31,

Variance

Performance Ratio Highlights

2019

2018

or Change

Average yield on interest-earning assets:

Loans receivable, including loans held for sale

4.09

%

4.12

%

-0.03

%

Taxable investment securities

3.28

%

3.12

%

0.16

%

Tax-exempt investment securities (1)

2.12

%

2.11

%

0.01

%

Other interest-earning assets

4.91

%

5.66

%

-0.75

%

Total interest-earning assets

3.91

%

3.91

%

0.00

%

Average cost of interest-bearing liabilities:

Deposits:

Interest-bearing demand

1.06

%

0.97

%

0.09

%

Savings and club

0.60

%

0.49

%

0.11

%

Certificates of deposit

1.90

%

1.79

%

0.11

%

Total interest-bearing deposits

1.47

%

1.36

%

0.11

%

Borrowings:

Federal Home Loan Bank advances

2.13

%

2.27

%

-0.14

%

Other borrowings

0.35

%

1.99

%

-1.64

%

Total borrowings

2.10

%

2.25

%

-0.15

%

Total interest-bearing liabilities

1.63

%

1.60

%

0.03

%

Interest rate spread (2)

2.28

%

2.31

%

-0.03

%

Net interest margin (3)

2.53

%

2.56

%

-0.03

%

Non-interest income to average assets
(annualized)

0.22

%

0.20

%

0.02

%

Non-interest expense to average assets
(annualized)

1.60

%

1.62

%

-0.02

%

Efficiency ratio (4)

63.27

%

63.93

%

-0.66

%

Return on average assets (annualized)

0.68

%

0.64

%

0.04

%

Return on average equity (annualized)

3.89

%

3.55

%

0.34

%

Return on average tangible equity (annualized) (5)

4.78

%

4.33

%

0.45

%


(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.


Five-Quarter Financial Trend Analysis

Summary Balance Sheet

At

(Dollars and Shares in Thousands,

March 31,

December 31,

September 30,

June 30,

March 31,

Except Per Share Data, Unaudited)

2019

2018

2018

2018

2018

Assets

Cash and cash equivalents

$

54,160

$

51,483

$

44,486

$

128,864

$

38,283

Securities available for sale

726,920

666,602

706,240

725,085

684,771

Securities held to maturity

592,199

598,318

602,838

589,730

459,380

Loans held-for-sale

997

1,001

1,503

863

2,377

Loans receivable, including yield adjustments

4,659,804

4,753,392

4,660,507

4,501,348

3,351,369

Less allowance for loan losses

(33,105

)

(33,526

)

(32,731

)

(30,865

)

(30,248

)

Net loans receivable

4,626,699

4,719,866

4,627,776

4,470,483

3,321,121

Premises and equipment

58,274

58,414

57,635

56,240

42,856

Federal Home Loan Bank stock

64,288

64,514

66,428

59,004

39,112

Accrued interest receivable

20,326

19,435

19,455

18,510

13,926

Goodwill

210,895

210,895

210,895

210,895

108,591

Core deposit intangible

5,470

5,743

6,018

6,295

206

Bank owned life insurance

254,569

253,009

251,410

249,816

184,981

Deferred income taxes, net

24,182

24,692

22,136

23,754

3,898

Other real estate owned

209

508

674

725

1,094

Other assets

19,563

27,960

38,717

39,610

33,104

Total assets

$

6,658,751

$

6,702,440

$

6,656,211

$

6,579,874

$

4,933,700

Liabilities

Deposits

4,137,573

$

4,173,434

$

3,954,821

$

4,073,604

$

3,067,102

Borrowings

1,326,216

1,310,547

1,419,424

1,198,646

852,009

Advance payments by borrowers for taxes

17,208

17,201

10,687

18,088

8,969

Other liabilities

19,643

17,997

35,198

20,788

14,419

Total liabilities

5,500,640

5,519,179

5,420,130

5,311,126

3,942,499

Stockholders' Equity

Common stock

915

938

978

996

788

Paid-in capital

817,675

848,145

897,551

922,711

653,045

Retained earnings

363,072

356,993

350,838

359,096

355,270

Unearned ESOP shares

(31,130

)

(31,617

)

(32,104

)

(32,590

)

(33,076

)

Accumulated other comprehensive income, net

7,579

8,802

18,818

18,535

15,174

Total stockholders' equity

1,158,111

1,183,261

1,236,081

1,268,748

991,201

Total liabilities and stockholders' equity

$

6,658,751

$

6,702,440

$

6,656,211

$

6,579,874

$

4,933,700

Consolidated capital ratios

Equity to assets

17.39

%

17.65

%

18.57

%

19.28

%

20.09

%

Tangible equity to tangible assets

14.62

%

14.90

%

15.83

%

16.53

%

18.29

%

Share data

Outstanding shares

91,495

93,772

97,754

99,626

78,765

Equity per share

$

12.66

$

12.62

$

12.64

$

12.74

$

12.58

Tangible equity per share (1)

$

10.29

$

10.31

$

10.43

$

10.56

$

11.20


(1)

Tangible equity equals total stockholders' equity reduced by goodwill and core deposit intangible assets.


At

Supplemental Balance Sheet Highlights

March 31,

December 31,

September 30,

June 30,

March 31,

(Dollars in Thousands, Unaudited)

2019

2018

2018

2018

2018

Cash and cash equivalents

Cash and due from depository institutions

$

15,943

$

24,361

$

21,973

$

26,199

$

18,229

Interest-bearing deposits in other banks

38,217

27,122

22,513

102,665

20,054

Total cash and cash equivalents

$

54,160

$

51,483

$

44,486

$

128,864

$

38,283

Securities available for sale

Debt securities:

U.S. agency securities

$

3,737

$

3,942

$

4,070

$

4,411

$

4,667

Municipal and state obligations

26,731

26,205

25,907

26,088

26,733

Asset-backed securities

180,145

180,828

182,390

182,620

182,066

Collateralized loan obligations

207,906

184,439

215,569

226,066

178,342

Corporate bonds

121,597

144,692

147,811

147,594

142,202

Trust preferred securities

3,775

3,726

3,794

3,783

8,485

Debt securities available for sale

543,891

543,832

579,541

590,562

542,495

Mortgage-backed securities:

Collateralized mortgage obligations

21,660

23,019

23,097

24,292

25,601

Residential pass-through securities

70,513

91,918

95,795

102,359

108,736

Commercial pass-through securities

90,856

7,833

7,807

7,872

7,939

Mortgage-backed securities

183,029

122,770

126,699

134,523

142,276

Total securities available for sale

$

726,920

$

666,602

$

706,240

$

725,085

$

684,771

Securities held to maturity

Debt securities:

Municipal and state obligations

$

107,375

$

107,826

$

109,061

$

109,483

$

98,011

Subordinated debt

63,107

56,255

46,275

46,294

30,000

Debt securities held to maturity

170,482

164,081

155,336

155,777

128,011

Mortgage-backed securities:

Collateralized mortgage obligations

49,368

51,540

54,130

56,886

34,309

Residential pass-through securities

174,338

182,335

190,812

200,622

151,605

Commercial pass-through securities

198,011

200,362

202,560

176,445

145,455

Mortgage-backed securities

421,717

434,237

447,502

433,953

331,369

Total securities held to maturity

$

592,199

$

598,318

$

602,838

$

589,730

$

459,380

Total securities

$

1,319,119

$

1,264,920

$

1,309,078

$

1,314,815

$

1,144,151


At

Supplemental Balance Sheet Highlights

March 31,

December 31,

September 30,

June 30,

March 31,

(Dollars in Thousands, Unaudited)

2019

2018

2018

2018

2018

Loan portfolio composition:

Residential first mortgage loans

$

1,325,105

$

1,334,284

$

1,303,249

$

1,297,453

$

563,807

Home equity loans and lines of credit

97,788

96,001

93,473

90,761

79,522

Residential mortgage loans

1,422,893

1,430,285

1,396,722

1,388,214

643,329

Multifamily mortgage loans

1,956,571

1,974,409

1,898,831

1,758,584

1,471,573

Nonresidential and mixed use mortgage loans

1,249,215

1,302,583

1,315,279

1,302,961

1,113,385

Commercial mortgage loans

3,205,786

3,276,992

3,214,110

3,061,545

2,584,958

Commercial business loans

66,476

70,059

78,317

85,825

88,216

Construction loans

14,377

28,405

26,581

23,271

22,963

Account loans

3,360

3,310

3,133

3,283

3,038

Other consumer loans

2,624

3,524

4,427

5,777

7,186

Consumer loans

5,984

6,834

7,560

9,060

10,224

Total loans, excluding yield adjustments

4,715,516

4,812,575

4,723,290

4,567,915

3,349,690

Unamortized yield adjustments

(55,712

)

(59,183

)

(62,783

)

(66,567

)

1,679

Loans receivable, including yield adjustments

4,659,804

4,753,392

4,660,507

4,501,348

3,351,369

Less allowance for loan losses

(33,105

)

(33,526

)

(32,731

)

(30,865

)

(30,248

)

Net loans receivable

$

4,626,699

$

4,719,866

$

4,627,776

$

4,470,483

$

3,321,121

Loan portfolio allocation:

Residential first mortgage loans

28.1

%

27.7

%

27.6

%

28.4

%

16.8

%

Home equity loans and lines of credit

2.1

%

2.0

%

2.0

%

2.0

%

2.4

%

Residential mortgage loans

30.2

%

29.7

%

29.6

%

30.4

%

19.2

%

Multifamily mortgage loans

41.5

%

41.0

%

40.2

%

38.5

%

43.9

%

Nonresidential and mixed use mortgage loans

26.5

%

27.1

%

27.8

%

28.5

%

33.2

%

Commercial mortgage loans

68.0

%

68.1

%

68.0

%

67.0

%

77.1

%

Commercial business loans

1.3

%

1.4

%

1.6

%

1.9

%

2.6

%

Construction loans

0.3

%

0.6

%

0.6

%

0.5

%

0.7

%

Account loans

0.1

%

0.1

%

0.1

%

0.1

%

0.1

%

Other consumer loans

0.1

%

0.1

%

0.1

%

0.1

%

0.3

%

Consumer loans

0.2

%

0.2

%

0.2

%

0.2

%

0.4

%

Total loans, excluding yield adjustments

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Asset quality:

Nonperforming assets:

Accruing loans > 90 days past due

$

23

$

32

$

19

$

60

$

45

Nonaccrual loans

21,297

20,743

20,473

16,799

14,190

Total nonperforming loans

21,320

20,775

20,492

16,859

14,235

Other real estate owned

209

508

674

725

1,094

Total nonperforming assets

$

21,529

$

21,283

$

21,166

$

17,584

$

15,329

Nonperforming loans (% total loans)

0.46

%

0.44

%

0.44

%

0.37

%

0.42

%

Nonperforming assets (% total assets)

0.32

%

0.32

%

0.32

%

0.27

%

0.31

%

Allowance for loan losses (ALLL):

ALLL to total loans

0.70

%

0.70

%

0.69

%

0.68

%

0.90

%

ALLL to nonperforming loans

155.28

%

161.38

%

159.73

%

183.08

%

212.49

%

Net charge offs

$

242

$

176

$

234

$

101

$

241

Average net charge off rate (annualized)

0.02

%

0.01

%

0.02

%

0.01

%

0.03

%


At

Supplemental Balance Sheet Highlights

March 31,

December 31,

September 30,

June 30,

March 31,

(Dollars in Thousands, Unaudited)

2019

2018

2018

2018

2018

Funding by type:

Deposits

Non-interest-bearing deposits

$

303,713

$

305,392

$

308,631

$

311,938

$

270,217

Interest-bearing demand

800,023

807,389

786,069

1,000,989

871,425

Savings and club

777,678

760,499

743,289

744,039

515,805

Certificates of deposit

2,256,159

2,300,154

2,116,832

2,016,638

1,409,655

Interest-bearing deposits

3,833,860

3,868,042

3,646,190

3,761,666

2,796,885

Total deposits

4,137,573

4,173,434

3,954,821

4,073,604

3,067,102

Borrowings:

Federal Home Loan Bank advances

1,289,285

1,293,845

1,335,844

1,170,144

775,625

Overnight borrowings

-

-

60,000

-

42,000

Depositor sweep accounts

36,931

16,702

23,580

28,502

34,384

Total borrowings

1,326,216

1,310,547

1,419,424

1,198,646

852,009

Total funding

$

5,463,789

$

5,483,981

$

5,374,245

$

5,272,250

$

3,919,111

Loans as a % of deposits

111.8

%

113.1

%

117.1

%

109.8

%

108.4

%

Deposits as a % of total funding

75.7

%

76.1

%

73.6

%

77.3

%

78.3

%

Borrowings as a % of total funding

24.3

%

23.9

%

26.4

%

22.7

%

21.7

%

Funding by source:

Retail funding

Non-interest-bearing deposits

$

303,713

$

305,392

$

308,631

$

311,938

$

270,217

Interest-bearing demand

800,023

807,389

786,069

790,164

656,114

Savings and club

777,678

760,499

743,289

744,039

515,805

Certificates of deposit

1,925,630

1,922,287

1,871,903

1,828,039

1,247,900

Total retail deposits

3,807,044

3,795,567

3,709,892

3,674,180

2,690,036

Depositor sweep accounts

36,931

16,702

23,580

28,502

34,384

Total retail funding

3,843,975

3,812,269

3,733,472

3,702,682

2,724,420

Wholesale funding:

Interest-bearing demand

$

-

$

-

$

-

$

210,825

$

215,311

Certificates of deposit (listing service)

78,704

108,067

104,990

104,256

104,934

Certificates of deposit (brokered)

251,825

269,800

139,939

84,343

56,821

Total wholesale deposits

330,529

377,867

244,929

399,424

377,066

FHLB advances

1,289,285

1,293,845

1,335,844

1,170,144

775,625

Overnight borrowings

-

-

60,000

-

42,000

Total wholesale funding

1,619,814

1,671,712

1,640,773

1,569,568

1,194,691

Total funding

$

5,463,789

$

5,483,981

$

5,374,245

$

5,272,250

$

3,919,111

Retail funding as a % of total funding

70.4

%

69.5

%

69.5

%

70.2

%

69.5

%

Wholesale funding as a % of total funding

29.6

%

30.5

%

30.5

%

29.8

%

30.5

%


Summary Income Statement

For the three months ended

(Dollars and Shares in Thousands,

March 31,

December 31,

September 30,

June 30,

March 31,

Except Per Share Data, Unaudited)

2019

2018

2018

2018

2018

Interest income

Loans

$

48,116

$

49,015

$

47,437

$

46,615

$

30,728

Taxable investment securities

9,511

9,051

8,879

8,670

6,450

Tax-exempt investment securities

710

713

716

702

652

Other interest-earning assets

1,320

1,243

1,174

1,275

715

Total interest income

59,657

60,022

58,206

57,262

38,545

Interest expense

Deposits

14,114

12,727

10,539

9,755

7,026

Borrowings

6,905

7,946

7,487

6,916

4,462

Total interest expense

21,019

20,673

18,026

16,671

11,488

Net interest income

38,638

39,349

40,180

40,591

27,057

(Reversal of) provision for loan losses

(179

)

971

2,100

717

423

Net interest income after provision for
loan losses

38,817

38,378

38,080

39,874

26,634

Non-interest income

Fees and service charges

1,674

1,258

1,173

1,205

1,537

(Loss) gain on sale and call of securities

(182

)

-

-

9

(1

)

Gain on sale of loans

151

101

132

127

346

(Loss) gain on sale and write down of other real estate owned

(6

)

36

(50

)

60

7

Income from bank owned life insurance

1,560

1,599

1,594

1,604

1,227

Electronic banking fees and charges

253

277

250

278

243

Miscellaneous

226

38

83

75

189

Total non-interest income

3,676

3,309

3,182

3,358

3,548

Non-interest expense

Salaries and employee benefits

15,350

15,699

15,642

15,277

12,814

Net occupancy expense of premises

2,979

2,761

2,736

2,716

2,359

Equipment and systems

3,053

3,377

2,926

2,776

2,323

Advertising and marketing

739

787

577

757

745

Federal deposit insurance premium

455

421

465

463

350

Directors' compensation

770

746

758

754

689

Merger-related expenses

-

-

-

5,149

401

Miscellaneous

3,425

3,479

3,353

3,365

2,862

Total non-interest expense

26,771

27,270

26,457

31,257

22,543

Income before income taxes

15,722

14,417

14,805

11,975

7,639

Income taxes

4,305

3,649

3,659

4,257

2,262

Net income

$

11,417

$

10,768

$

11,146

$

7,718

$

5,377

Net income per common share (EPS)

Basic

$

0.13

$

0.12

$

0.12

$

0.08

$

0.07

Diluted

$

0.13

$

0.12

$

0.12

$

0.08

$

0.07

Dividends declared (1)

Cash dividends declared per common share

$

0.06

$

0.05

$

0.20

$

0.04

$

0.03

Cash dividends declared

$

5,338

$

4,082

$

19,404

$

3,892

$

2,262

Dividend payout ratio

46.8

%

37.9

%

174.1

%

50.4

%

42.1

%

Weighted average number of common
shares outstanding

Basic

89,488

92,434

95,127

98,046

75,492

Diluted

89,532

92,480

95,181

98,100

75,539


(1)

Dividends declared during the quarter ended September 30, 2018 include a $0.16 special dividend representing a supplemental distribution of net income to stockholders from the fiscal year ended June 30, 2018.


For the three months ended

Average Balance Sheet Data

March 31,

December 31,

September 30,

June 30,

March 31,

(Dollars in Thousands, Unaudited)

2019

2018

2018

2018

2018

Assets

Interest-earning assets:

Loans receivable, including loans held for sale

$

4,709,052

$

4,758,587

$

4,562,375

$

4,507,336

$

3,293,664

Taxable investment securities

1,161,492

1,158,720

1,180,655

1,192,066

1,003,600

Tax-exempt investment securities

134,309

135,453

136,056

134,683

127,605

Other interest-earning assets

107,554

87,916

112,629

142,591

67,770

Total interest-earning assets

6,112,407

6,140,676

5,991,715

5,976,676

4,492,639

Non-interest-earning assets

574,921

587,921

596,006

586,976

369,299

Total assets

$

6,687,328

$

6,728,597

$

6,587,721

$

6,563,652

$

4,861,938

Liabilities and Stockholders' Equity

Interest-bearing liabilities:

Deposits:

Interest-bearing demand

$

790,567

$

792,989

$

788,148

$

1,004,445

$

870,762

Savings and club

773,308

743,676

747,743

724,430

513,948

Certificates of deposit

2,288,836

2,214,932

2,046,997

1,983,372

1,385,151

Total interest-bearing deposits

3,852,711

3,751,597

3,582,888

3,712,247

2,769,861

Borrowings:

Federal Home Loan Bank advances

1,292,168

1,293,470

1,350,113

1,179,147

777,721

Other borrowings

26,037

119,281

40,981

34,636

33,529

Total borrowings

1,318,205

1,412,751

1,391,094

1,213,783

811,250

Total interest-bearing liabilities

5,170,916

5,164,348

4,973,982

4,926,030

3,581,111

Non-interest-bearing liabilities:

Non-interest-bearing deposits

307,645

315,165

314,114

305,763

267,152

Other non-interest-bearing liabilities

35,930

37,374

43,533

39,340

24,953

Total non-interest-bearing liabilities

343,575

352,539

357,647

345,103

292,105

Total liabilities

5,514,491

5,516,887

5,331,629

5,271,133

3,873,216

Stockholders' equity

1,172,837

1,211,710

1,256,092

1,292,519

988,722

Total liabilities and stockholders' equity

$

6,687,328

$

6,728,597

$

6,587,721

$

6,563,652

$

4,861,938

Average interest-earning assets to average
interest-bearing liabilities

118.21

%

118.91

%

120.46

%

121.33

%

125.45

%


For the three months ended

March 31,

December 31,

September 30,

June 30,

March 31,

Performance Ratio Highlights

2019

2018

2018

2018

2018

Average yield on interest-earning assets:

Loans receivable, including loans held for sale

4.09

%

4.12

%

4.16

%

4.14

%

3.73

%

Taxable investment securities

3.28

%

3.12

%

3.01

%

2.91

%

2.57

%

Tax-exempt investment securities (1)

2.12

%

2.11

%

2.10

%

2.09

%

2.04

%

Other interest-earning assets

4.91

%

5.66

%

4.17

%

3.58

%

4.22

%

Total interest-earning assets

3.91

%

3.91

%

3.89

%

3.83

%

3.43

%

Average cost of interest-bearing liabilities:

Deposits:

Interest-bearing demand

1.06

%

0.97

%

0.86

%

0.89

%

0.84

%

Savings and club

0.60

%

0.49

%

0.41

%

0.29

%

0.12

%

Certificates of deposit

1.90

%

1.79

%

1.58

%

1.41

%

1.46

%

Total interest-bearing deposits

1.47

%

1.36

%

1.18

%

1.05

%

1.01

%

Borrowings:

Federal Home Loan Bank advances

2.13

%

2.27

%

2.19

%

2.34

%

2.27

%

Other borrowings

0.35

%

1.99

%

0.94

%

0.34

%

0.56

%

Total borrowings

2.10

%

2.25

%

2.15

%

2.28

%

2.20

%

Total interest-bearing liabilities

1.63

%

1.60

%

1.45

%

1.35

%

1.28

%

Interest rate spread (2)

2.28

%

2.31

%

2.44

%

2.48

%

2.15

%

Net interest margin (3)

2.53

%

2.56

%

2.68

%

2.72

%

2.41

%

Non-interest income to average assets
(annualized)

0.22

%

0.20

%

0.19

%

0.20

%

0.29

%

Non-interest expense to average assets
(annualized)

1.60

%

1.62

%

1.61

%

1.90

%

1.85

%

Efficiency ratio (4)

63.27

%

63.93

%

61.01

%

71.12

%

73.66

%

Return on average assets (annualized)

0.68

%

0.64

%

0.68

%

0.47

%

0.44

%

Return on average equity (annualized)

3.89

%

3.55

%

3.55

%

2.39

%

2.18

%

Return on average tangible equity (annualized) (5)

4.78

%

4.33

%

4.29

%

2.90

%

2.44

%


(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.

This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures provide additional information which allow readers to evaluate the ongoing performance of the Company. They are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is included below. In all cases, it should be understood that non-GAAP per share measures do not depict amounts that accrue directly to the benefit of shareholders.

Reconciliation of GAAP to Non-GAAP

For the three months ended

(Dollars in Thousands,

March 31,

December 31,

September 30,

June 30,

March 31,

Except Per Share Data, Unaudited)

2019

2018

2018

2018

2018

Adjusted Net Income

Net income (GAAP)

$

11,417

$

10,768

$

11,146

$

7,718

$

5,377

Effect to adjust for:

Merger-related expenses

-

-

-

5,149

401

Income tax benefit from merger-related
expenses

-

-

-

(1,451

)

(22

)

Adjusted net income
(non-GAAP)

$

11,417

$

10,768

$

11,146

$

11,416

$

5,756

Adjusted Net Income per Common Share (EPS)

Net income per common share
Basic and Diluted (GAAP)

$

0.13

$

0.12

$

0.12

$

0.08

$

0.07

Effect to adjust for:

Merger-related expenses

-

-

-

0.05

0.01

Income tax benefit from merger-related
expenses

-

-

-

(0.01

)

-

Adjusted net income per common share
Basic and Diluted (non-GAAP)

$

0.13

$

0.12

$

0.12

$

0.12

$

0.08

Adjusted Non-Interest Expense

Non-interest expense (GAAP)

$

26,771

$

27,270

$

26,457

$

31,257

$

22,543

Effect to adjust for:

Merger-related expenses

-

-

-

(5,149

)

(401

)

Adjusted non-interest expense
(non-GAAP)

$

26,771

$

27,270

$

26,457

$

26,108

$

22,142

Adjusted Non-Interest Expense Ratio

Non-interest expense to average assets (GAAP)

1.60

%

1.62

%

1.61

%

1.90

%

1.85

%

Effect to adjust for:

Merger-related expenses

0.00

%

0.00

%

0.00

%

-0.31

%

-0.03

%

Adjusted non-interest expense ratio
(non-GAAP)

1.60

%

1.62

%

1.61

%

1.59

%

1.82

%

Adjusted Efficiency Ratio

Non-interest expense / (Net interest income
+ non-interest income) (GAAP)

63.3

%

63.9

%

61.0

%

71.1

%

73.7

%

Effect to adjust for:

Merger-related expenses

0.0

%

0.0

%

0.0

%

-11.7

%

-1.3

%

Adjusted efficiency ratio
(non-GAAP)

63.3

%

63.9

%

61.0

%

59.4

%

72.4

%


For the three months ended

Reconciliation of GAAP to Non-GAAP

March 31,

December 31,

September 30,

June 30,

March 31,

(Unaudited)

2019

2018

2018

2018

2018

Adjusted Return on Average Assets

Return on average assets (GAAP)

0.68

%

0.64

%

0.68

%

0.47

%

0.44

%

Effect to adjust for:

Merger-related expenses

0.00

%

0.00

%

0.00

%

0.31

%

0.03

%

Income tax benefit from merger-related
expenses

0.00

%

0.00

%

0.00

%

-0.09

%

0.00

%

Adjusted return on average assets
(non-GAAP)

0.68

%

0.64

%

0.68

%

0.69

%

0.47

%

Adjusted Return on Average Equity

Return on average equity (GAAP)

3.89

%

3.55

%

3.55

%

2.39

%

2.18

%

Effect to adjust for:

Merger-related expenses

0.00

%

0.00

%

0.00

%

1.59

%

0.16

%

Income tax benefit from merger-related
expenses

0.00

%

0.00

%

0.00

%

-0.45

%

-0.01

%

Adjusted return on average equity
(non-GAAP)

3.89

%

3.55

%

3.55

%

3.53

%

2.33

%

For further information contact:
Keith Suchodolski, Executive Vice President and Chief Financial Officer
Kearny Financial Corp.
(973) 244-4500