Kearny Financial Corp. Reports Fiscal 2021 First Quarter Results

FAIRFIELD, N.J., Oct. 29, 2020 (GLOBE NEWSWIRE) -- Kearny Financial Corp. (NASDAQ GS: KRNY) (the “Company”), the holding company of Kearny Bank (the “Bank”), reported net income for the first quarter ended September 30, 2020 of $11.4 million, or $0.13 per diluted share. These results represent a decrease of $2.3 million from $13.7 million, or $0.17 per diluted share, for the fourth quarter ended June 30, 2020.

Reported net income for the quarters ended September 30, 2020 and June 30, 2020 was impacted by various non-recurring items which were recognized in conjunction with the Company’s July 10, 2020 acquisition of MSB Financial Corp. (“MSB”) and its subsidiary Millington Bank. Excluding the effects of these non-recurring items, net of tax, net income would have been $15.0 million, or $0.17 per diluted share for the quarter ended September 30, 2020 compared to $14.1 million or $0.17 per diluted share for the quarter ended June 30, 2020.

Craig L. Montanaro, President and Chief Executive Officer, commented, “I am pleased to report that core earnings remain strong and our level of active COVID-19 related loan modifications has declined to $76.9 million, or 1.5% of total loans. While challenges related to the pandemic persist, we remain completely focused on expanding our relationships with our clients and executing our strategic plan.”

With regard to the recently completed MSB acquisition, Mr. Montanaro further commented, “With nearly a full quarter of combined operations behind us, I can confidently state that this merger has been a success. The expansion into Somerset and Morris counties presents an excellent growth opportunity for our lending and deposit teams. From an operational perspective, the conversion of MSB’s technology systems simultaneous with the closing will allow us to recognize our anticipated cost savings more quickly than in our prior transactions.”

MSB Acquisition Highlights

  • On July 10, 2020, the Company completed its acquisition of MSB which increased total assets by $581.9 million, net loans by $530.2 million and total deposits by $460.2 million.
  • Of the $530.2 million of loans acquired, $65.3 million, or 12.3%, were classified as Purchased Credit Deteriorated (“PCD”) and had associated credit reserves of $3.9 million. Provision for credit losses attributable to non-PCD acquired loans totaled $5.1 million.
  • As the fair value of the net assets acquired exceeded the purchase price, a bargain purchase gain of $3.1 million was recognized.
  • Tangible book value dilution totaled 1.4%, or 1.8% inclusive of the impact of the provision for credit losses on the acquired loans.
  • Integration of MSB’s technology systems and the re-branding of all Millington Bank branches was completed simultaneous with the closing of the transaction, thereby accelerating non-interest expense reductions, which are expected to exceed 45%.

Balance Sheet

  • Deposits increased by $609.6 million to $5.04 billion at September 30, 2020 from $4.43 billion at June 30, 2020, largely reflecting the impact of $460.2 million of deposits acquired from MSB coupled with organic growth of $179.0 million in core non-maturity deposits.
  • Loans receivable increased by $456.4 million to $4.95 billion at September 30, 2020 from $4.50 billion at June 30, 2020. The net increase in loans reflected the impact of $530.2 million of loans that were acquired in conjunction with the acquisition of MSB, partially offset by a net decline in non-acquired loan balances, driven largely by accelerated loan pre-payment activity, as compared to the prior quarter.
  • Investment securities increased to $1.54 billion, or 21.1% of total assets, at September 30, 2020 from $1.42 billion at June 30, 2020, while borrowings decreased to $1.08 billion, or 14.7% of total assets, from $1.17 billion, for those same comparative periods.

Earnings

Net Interest Income, Spread and Margin

  • Net interest income for the quarter ended September 30, 2020 increased by $3.7 million to $44.2 million from $40.5 million for the quarter ended June 30, 2020. This increase reflected growth in interest income of $3.5 million coupled with a reduction in interest expense of $179,000. Included in net interest income was purchase accounting accretion of $4.2 million and $3.0 million, for the quarters ended September 30, 2020 and June 30, 2020, respectively.
  • Net interest margin, for the quarter ended September 30, 2020, increased by four basis points to 2.66%. This increase primarily reflected a reduction in the cost of interest-bearing liabilities, partially offset by a reduction in the yield on interest-earning assets.
  • Yield on interest-earning assets, for the quarter ended September 30, 2020, decreased by five basis points to 3.67% which was largely attributable to a 68 basis point decrease in the yield on taxable investment securities partially offset by a 16 basis point increase in the yield on loans. Cost of interest-bearing liabilities decreased by nine basis points to 1.20% which was attributable to a 27 basis point decrease in the cost of interest-bearing deposits partially offset by a 63 basis point increase in the cost of borrowings.

Non-Interest Income

  • For the quarter ended September 30, 2020, a non-recurring bargain purchase gain of $3.1 million was recognized in conjunction with the acquisition of MSB, as noted above.
  • Fees and service charges totaled $1.1 million for the quarter ended September 30, 2020, compared to $1.7 million for the quarter ended June 30, 2020. The decrease was largely attributable to a decline of $703,000 in loan pre-payment penalty income to $647,000.
  • Loan sale gains achieved record levels, totaling $1.9 million for the quarter ended September 30, 2020 as compared to $1.3 million for the quarter ended June 30, 2020. The increase in loan sale gains primarily reflected growth in the volume of residential mortgage loans sold coupled with an increase in the margin at which such loans were sold.
  • Gain (loss) on sale and call of securities reflected a loss of $377,000 for the quarter ended September 30, 2020 compared to a gain of $19,000 for the quarter ended June 30, 2020.

Non-Interest Expense

  • Non-interest expense increased by $6.7 million to $33.6 million for the quarter ended September 30, 2020 compared to $26.9 million for the quarter ended June 30, 2020. The increase in non-interest expense was partly attributable to an increase of $3.9 million in merger-related expense which was recognized in conjunction with the Company’s acquisition of MSB. The remaining change in non-interest expense included increases in salaries and employee benefits, net occupancy expense of premises, equipment and systems expense, FDIC insurance premiums and miscellaneous expense. A substantial portion of these increases were attributable to the additional infrastructure and personnel acquired from MSB.
  • As part of the Company’s ongoing initiative to improve operating efficiency, two additional branch locations will be consolidated during the Company’s second and third fiscal quarters. Once completed, this will bring the total number of consolidations to 12 over the past 24 months.

Income Taxes

  • Income tax expense totaled $2.9 million for the quarter ended September 30, 2020 compared to $4.7 million for the quarter ended June 30, 2020, resulting in effective tax rates of 20.2% and 25.6%, respectively.
  • The decrease in effective income tax rate for the quarter ended September 30, 2020 reflected the effects of various non-recurring items recorded in conjunction with the Company’s acquisition of MSB, as noted above.

Performance Ratios

  • Return on average assets declined to 0.63% for the quarter ended September 30, 2020 from 0.81% for the quarter ended June 30, 2020. Adjusting for the impact of non-recurring items, as noted above, the return on average assets was unchanged at 0.83% for the quarters ended September 30, 2020 and June 30, 2020.
  • Return on average equity declined to 4.10% for the quarter ended September 30, 2020 from 5.08% for the quarter ended June 30, 2020 while return on average tangible equity decreased to 5.08% from 6.35% for those same comparative periods, respectively. Adjusting for the impact of non-recurring items, as noted above, the return on average equity increased to 5.40% for the quarter ended September 30, 2020 from 5.24% for the quarter ended June 30, 2020 while the return on average tangible equity increased to 6.70% from 6.55% for those same comparative periods.

Asset Quality

  • On July 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), also known as the Current Expected Credit Loss (“CECL”) standard. CECL requires the measurement of all expected credit losses over the life of financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In connection with the adoption of CECL, the Company recognized a cumulative effect adjustment that reduced stockholders’ equity by $14.2 million, net of tax. At adoption, the Company increased its allowance for credit losses (“ACL”) by $19.6 million and $536,000, respectively, for loans and unfunded commitments.
  • On July 10, 2020 the Company completed its acquisition of MSB, which resulted in an increase to the ACL of $9.0 million. Of this increase, $3.9 million was attributable to PCD loans and was recorded as an adjustment to their amortized cost basis. The remaining $5.1 million increase was attributable to non-PCD loans and was recorded via a provision for credit losses.
  • The outstanding balance of non-performing loans totaled $45.1 million, or 0.91% of total loans, at September 30, 2020 compared to $36.7 million, or 0.82% of total loans, at June 30, 2020. The increase was largely attributable to non-performing loans acquired from MSB that totaled $5.8 million at September 30, 2020.  
  • Based on Section 4013 of the CARES Act and the related guidance promulgated by federal banking regulators, qualifying short-term loan modifications are not considered to be troubled debt restructurings. As of September 30, 2020, the Company had active payment deferrals on 63 loans totaling $76.9 million, representing 1.5% of total loans. This represents a small portion of the total deferrals granted and a substantial decrease in the number and amount of active deferrals at June 30, 2020.

The following table identifies the level of active and total non-TDR loan modifications at September 30, 2020:

 September 30, 2020 
 Active Modifications (1)  Total Modifications (1)  Increase/(Decrease) 
 # of Loans  Balance  # of Loans  Balance  # of Loans  Balance 
 (Dollars In Thousands) 
Commercial loans:                       
Multi-family mortgage 7  $15,910   143  $393,156   (136) $(377,246)
Nonresidential mortgage 11   41,660   168   305,841   (157)  (264,181)
Commercial business 4   2,684   60   10,107   (56)  (7,423)
Construction 1   2,537   5   12,240   (4)  (9,703)
Total commercial loans 23   62,791   376   721,344   (353)  (658,553)
                        
Residential mortgage 36   13,866   420   156,963   (384)  (143,097)
                        
Consumer loans:                       
Home equity loans 4   252   47   4,603   (43)  (4,351)
                        
Total 63  $76,909   843  $882,910   (780) $(806,001)

______________________
(1)    Includes loans acquired in conjunction with the Company’s acquisition of MSB Financial Corp. on July 10, 2020.

  • Net charge offs totaled $67,000 for the quarter ended September 30, 2020 compared to $38,000 for the quarter ended June 30, 2020 reflecting an annualized net charge off rate of 0.01% and 0.00% for those same comparative periods.  
  • Provision for credit losses totaled $4.1 million for the quarter ended September 30, 2020 and largely reflected $5.1 million of provision attributable to the acquired MSB loans, as noted above, partially offset by the effects of a decrease in the overall balance of the portion of the loan portfolio that was collectively evaluated for impairment. By comparison, the provision for loan losses for the quarter ended June 30, 2020, under prior accounting guidance, totaled $174,000.  
  • The ACL increased to $64.9 million, or 1.30% of total loans, at September 30, 2020 from $37.3 million, or 0.82% of total loans, at June 30, 2020. This increase was the result of the combined effects of the CECL adoption-date cumulative effect adjustment, reserves for PCD loans acquired from MSB and quarter-to-date provisions for credit losses, net of quarter-to-date charge-offs.

Liquidity & Capital

  • At September 30, 2020, the Company’s liquid assets included $145.8 million of short-term cash and equivalents supplemented by $1.51 billion of investment securities classified as available for sale. In addition, the Company had the capacity to borrow additional funds totaling $615.0 million via unsecured lines of credit and $1.57 billion and $296.3 million, without pledging additional collateral, from the Federal Home Loan Bank of New York and Federal Reserve Bank, respectively.
  • On October 19, 2020, the Company announced the resumption of its current stock repurchase plan, which has 761,030 shares of common stock remaining to be repurchased. In addition, the Company announced the approval of a new repurchase plan totaling 4,475,523 shares, or 5% of the Company’s outstanding common stock. Through September 30, 2020, the Company had repurchased 8,457,294 shares, or 91.7% of the shares authorized for repurchase under the current repurchase plan, at a cost of $111.1 million, or an average of $13.14 per share.
  • For the quarter ended September 30, 2020, the Company maintained its quarterly cash dividend of $0.08 per share.
  • Tangible book value per share decreased by $0.24 to $10.15 at September 30, 2020. This decrease was largely attributable to the combined effects of the July 1, 2020 adoption of CECL and the July 10, 2020 acquisition of MSB.
  • At September 30, 2020 the Company’s ratio of tangible equity to tangible assets equaled 12.81%.  The regulatory capital ratios, of both the Company and the Bank, at September 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 or remain open. 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 or remain open, 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.

Category: Earnings

Linked-Quarter Comparative Financial Analysis 
             
Summary Balance SheetAt    Variance 
(Dollars and Shares in Thousands,September 30, June 30, Variance or Change 
Except Per Share Data, Unaudited)2020 2020 or Change Pct. 
Assets            
Cash and cash equivalents$145,818 $180,967 $(35,149) -19.4%
Securities available for sale 1,508,542  1,385,703  122,839  8.9%
Securities held to maturity 31,576  32,556  (980) -3.0%
Loans held-for-sale 20,170  20,789  (619) -3.0%
Loans receivable, including yield adjustments 4,954,750  4,498,397  456,353  10.1%
Less allowance for credit losses on loans (64,860) (37,327) (27,533) 73.8%
Net loans receivable 4,889,890  4,461,070  428,820  9.6%
Premises and equipment 61,808  57,389  4,419  7.7%
Federal Home Loan Bank stock 55,118  58,654  (3,536) -6.0%
Accrued interest receivable 20,368  17,373  2,995  17.2%
Goodwill 210,895  210,895  -  0.0%
Core deposit intangible 4,420  3,995  425  10.6%
Bank owned life insurance 278,639  262,380  16,259  6.2%
Deferred income taxes, net 33,319  25,480  7,839  30.8%
Other real estate owned 178  178  -  0.0%
Other assets 49,468  40,746  8,722  21.4%
Total assets$7,310,209 $6,758,175 $552,034  8.2%
             
Liabilities            
Deposits$5,039,912 $4,430,282 $609,630  13.8%
Borrowings 1,077,540  1,173,165  (95,625) -8.2%
Advance payments by borrowers for taxes 17,008  16,569  439  2.6%
Other liabilities 51,689  53,982  (2,293) -4.2%
Total liabilities 6,186,149  5,673,998  512,151  9.0%
             
Stockholders' Equity            
Common stock 895  837  58  6.9%
Paid-in capital 769,269  722,871  46,398  6.4%
Retained earnings 378,134  387,911  (9,777) -2.5%
Unearned ESOP shares (28,212) (28,699) 487  -1.7%
Accumulated other comprehensive income, net 3,974  1,257  2,717  216.1%
Total stockholders' equity 1,124,060  1,084,177  39,883  3.7%
Total liabilities and stockholders' equity$7,310,209 $6,758,175 $552,034  8.2%
             
Consolidated capital ratios            
Equity to assets 15.38% 16.04% -0.66%   
Tangible equity to tangible assets 12.81% 13.29% -0.48%   
             
Share data            
Outstanding shares 89,510  83,663  5,847  7.0%
Book value per share$12.56 $12.96 $(0.40) -3.1%
Tangible book value per share (1)$10.15 $10.39 $(0.24) -2.3%

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

        
Summary Income StatementFor the three months ended    Variance 
(Dollars and Shares in Thousands,September 30, June 30, Variance or Change 
Except Per Share Data, Unaudited)2020 2020 or Change Pct. 
Interest income            
Loans$52,180 $46,192 $5,988  13.0%
Taxable investment securities 7,336  9,769  (2,433) -24.9%
Tax-exempt investment securities 454  487  (33) -6.8%
Other interest-earning assets 914  903  11  1.2%
Total Interest Income 60,884  57,351  3,533  6.2%
             
Interest expense            
Deposits 11,062  12,439  (1,377) -11.1%
Borrowings 5,660  4,462  1,198  26.8%
Total interest expense 16,722  16,901  (179) -1.1%
Net interest income 44,162  40,450  3,712  9.2%
Provision for credit losses on loans 4,059  174  3,885  2232.8%
Net interest income after provision for
credit losses on loans
 40,103  40,276  (173) -0.4%
             
Non-interest income            
Fees and service charges 1,076  1,696  (620) -36.6%
(Loss) gain on sale and call of securities (377) 19  (396) -2084.2%
Gain on sale of loans 1,890  1,348  542  40.2%
Income from bank owned life insurance 1,596  1,537  59  3.8%
Electronic banking fees and charges 405  325  80  24.6%
Bargain purchase gain 3,053  -  3,053  0.0%
Other income 90  77  13  16.9%
Total non-interest income 7,733  5,002  2,731  54.6%
             
Non-interest expense            
Salaries and employee benefits 16,977  15,527  1,450  9.3%
Net occupancy expense of premises 3,122  2,688  434  16.1%
Equipment and systems 3,570  2,948  622  21.1%
Advertising and marketing 500  751  (251) -33.4%
Federal deposit insurance premium 472  286  186  65.0%
Directors' compensation 748  769  (21) -2.7%
Merger-related expenses 4,349  447  3,902  872.9%
Other expense 3,835  3,475  360  10.4%
Total non-interest expense 33,573  26,891  6,682  24.8%
Income before income taxes 14,263  18,387  (4,124) -22.4%
Income taxes 2,884  4,698  (1,814) -38.6%
Net income$11,379 $13,689 $(2,310) -16.9%
             
Net income per common share (EPS)            
Basic$0.13 $0.17 $(0.04)   
Diluted$0.13 $0.17 $(0.04)   
             
Dividends declared            
Cash dividends declared per common share$0.08 $0.08 $-    
Cash dividends declared$6,917 $6,449 $468    
Dividend payout ratio 60.8% 47.1% 13.7%   
             
Weighted average number of common
shares outstanding
            
Basic 86,008  80,678  5,330    
Diluted 86,009  80,680  5,329    
             


 For the three months ended    Variance 
Average Balance Sheet DataSeptember 30, June 30, Variance or Change 
(Dollars in Thousands, Unaudited)2020 2020 or Change Pct. 
Assets            
Interest-earning assets:            
Loans receivable, including loans held for sale$4,958,293 $4,567,229 $391,064  8.6%
Taxable investment securities 1,350,511  1,369,014  (18,503) -1.4%
Tax-exempt investment securities 82,603  89,263  (6,660) -7.5%
Other interest-earning assets 247,543  141,964  105,579  74.4%
Total interest-earning assets 6,638,950  6,167,470  471,480  7.6%
Non-interest-earning assets 624,252  605,876  18,376  3.0%
Total assets$7,263,202 $6,773,346 $489,856  7.2%
             
Liabilities and Stockholders' Equity            
Interest-bearing liabilities:            
Deposits:            
Interest-bearing demand$1,464,238 $1,189,044 $275,194  23.1%
Savings 1,006,075  876,580  129,495  14.8%
Certificates of deposit 1,988,689  1,879,039  109,650  5.8%
Total interest-bearing deposits 4,459,002  3,944,663  514,339  13.0%
Borrowings:            
Federal Home Loan Bank advances 1,130,836  1,202,522  (71,686) -6.0%
Other borrowings 3,568  96,770  (93,202) -96.3%
Total borrowings 1,134,404  1,299,292  (164,888) -12.7%
Total interest-bearing liabilities 5,593,406  5,243,955  349,451  6.7%
Non-interest-bearing liabilities:            
Non-interest-bearing deposits 479,141  380,067  99,074  26.1%
Other non-interest-bearing liabilities 79,620  72,007  7,613  10.6%
Total non-interest-bearing liabilities 558,761  452,074  106,687  23.6%
Total liabilities 6,152,167  5,696,029  456,138  8.0%
Stockholders' equity 1,111,035  1,077,317  33,718  3.1%
Total liabilities and stockholders' equity$7,263,202 $6,773,346 $489,856  7.2%
             
Average interest-earning assets to average
interest-bearing liabilities
 118.69% 117.61% 1.08% 0.9%
             


 For the three months ended    
 September 30, June 30, Variance 
Performance Ratio Highlights2020 2020 or Change 
Average yield on interest-earning assets:         
Loans receivable, including loans held for sale 4.21% 4.05% 0.16%
Taxable investment securities 2.17% 2.85% -0.68%
Tax-exempt investment securities (1) 2.20% 2.18% 0.02%
Other interest-earning assets 1.48% 2.54% -1.06%
Total interest-earning assets 3.67% 3.72% -0.05%
          
Average cost of interest-bearing liabilities:         
Deposits:         
Interest-bearing demand 0.60% 0.72% -0.12%
Savings 0.57% 0.81% -0.24%
Certificates of deposit 1.50% 1.82% -0.32%
Total interest-bearing deposits 0.99% 1.26% -0.27%
Borrowings:         
Federal Home Loan Bank advances 2.00% 1.47% 0.53%
Other borrowings 0.04% 0.13% -0.09%
Total borrowings 2.00% 1.37% 0.63%
Total interest-bearing liabilities 1.20% 1.29% -0.09%
          
Interest rate spread (2) 2.47% 2.43% 0.04%
Net interest margin (3) 2.66% 2.62% 0.04%
          
Non-interest income to average assets
(annualized)
 0.43% 0.30% 0.13%
Non-interest expense to average assets
(annualized)
 1.85% 1.59% 0.26%
          
Efficiency ratio (4) 64.69% 59.16% 5.53%
          
Return on average assets (annualized) 0.63% 0.81% -0.18%
Return on average equity (annualized) 4.10% 5.08% -0.98%
Return on average tangible equity (annualized) (5) 5.08% 6.35% -1.27%

______________________
(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 SheetAt 
(Dollars and Shares in Thousands,September 30, June 30, March 31, December 31, September 30, 
Except Per Share Data, Unaudited)2020 2020 2020 2019 2019 
Assets               
Cash and cash equivalents$145,818 $180,967 $59,452 $41,796 $129,305 
Securities available for sale 1,508,542  1,385,703  1,476,344  1,402,206  1,231,691 
Securities held to maturity 31,576  32,556  34,618  36,073  37,888 
Loans held-for-sale 20,170  20,789  11,245  5,952  10,495 
Loans receivable, including yield adjustments 4,954,750  4,498,397  4,562,512  4,492,697  4,604,738 
Less allowance for credit losses on loans (64,860) (37,327) (37,191) (30,937) (32,432)
Net loans receivable 4,889,890  4,461,070  4,525,321  4,461,760  4,572,306 
Premises and equipment 61,808  57,389  58,985  56,542  56,599 
Federal Home Loan Bank stock 55,118  58,654  59,324  62,838  63,739 
Accrued interest receivable 20,368  17,373  19,036  18,261  19,393 
Goodwill 210,895  210,895  210,895  210,895  210,895 
Core deposit intangible 4,420  3,995  4,242  4,545  4,852 
Bank owned life insurance 278,639  262,380  260,843  259,312  257,735 
Deferred income taxes, net 33,319  25,480  27,150  20,438  21,742 
Other real estate owned 178  178  178  178  - 
Other assets 49,468  40,746  26,200  29,605  24,366 
Total assets$7,310,209 $6,758,175 $6,773,833 $6,610,401 $6,641,006 
                
Liabilities               
Deposits$5,039,912 $4,430,282 $4,253,254 $4,188,822 $4,197,250 
Borrowings 1,077,540  1,173,165  1,384,025  1,275,049  1,281,118 
Advance payments by borrowers for taxes 17,008  16,569  16,492  16,585  16,102 
Other liabilities 51,689  53,982  50,390  35,375  35,747 
Total liabilities 6,186,149  5,673,998  5,704,161  5,515,831  5,530,217 
                
Stockholders' Equity               
Common stock 895  837  837  851  868 
Paid-in capital 769,269  722,871  721,474  737,539  758,385 
Retained earnings 378,134  387,911  380,671  377,896  373,004 
Unearned ESOP shares (28,212) (28,699) (29,185) (29,671) (30,158)
Accumulated other comprehensive income (loss), net 3,974  1,257  (4,125) 7,955  8,690 
Total stockholders' equity 1,124,060  1,084,177  1,069,672  1,094,570  1,110,789 
Total liabilities and stockholders' equity$7,310,209 $6,758,175 $6,773,833 $6,610,401 $6,641,006 
                
Consolidated capital ratios               
Equity to assets 15.38% 16.04% 15.79% 16.56% 16.73%
Tangible equity to tangible assets 12.81% 13.29% 13.03% 13.75% 13.93%
                
Share data               
Outstanding shares 89,510  83,663  83,664  85,150  86,786 
Book value per share$12.56 $12.96 $12.79 $12.85 $12.80 
Tangible book value per share (1)$10.15 $10.39 $10.21 $10.32 $10.31 

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

   
 At 
Supplemental Balance Sheet HighlightsSeptember 30, June 30, March 31, December 31, September 30, 
(Dollars in Thousands, Unaudited)2020 2020 2020 2019 2019 
Cash and cash equivalents               
Cash and due from depository institutions$18,628 $20,391 $20,200 $17,843 $16,106 
Interest-bearing deposits in other banks 127,190  160,576  39,252  23,953  113,199 
Total cash and cash equivalents$145,818 $180,967 $59,452 $41,796 $129,305 
                
Securities available for sale               
Debt securities:               
U.S. agency securities$- $- $- $606 $694 
Municipal and state obligations 50,877  54,054  58,151  88,057  91,050 
Asset-backed securities 258,801  172,447  169,102  177,676  181,068 
Collateralized loan obligations 196,398  193,788  189,565  198,324  198,549 
Corporate bonds 122,276  143,639  163,715  192,074  191,241 
Trust preferred securities 2,773  2,627  2,852  3,795  3,775 
Debt securities 631,125  566,555  583,385  660,532  666,377 
                
Mortgage-backed securities:               
Collateralized mortgage obligations 25,770  30,903  34,671  57,839  63,594 
Residential pass-through securities 625,715  561,954  607,113  360,900  202,858 
Commercial pass-through securities 225,932  226,291  251,175  322,935  298,862 
Mortgage-backed securities 877,417  819,148  892,959  741,674  565,314 
Total securities available for sale$1,508,542 $1,385,703 $1,476,344 $1,402,206 $1,231,691 
                
Securities held to maturity               
Debt securities:               
Municipal and state obligations$31,576 $32,556 $34,618 $36,073 $37,888 
Debt securities 31,576  32,556  34,618  36,073  37,888 
                
Total securities held to maturity$31,576 $32,556 $34,618 $36,073 $37,888 
                
Total securities$1,540,118 $1,418,259 $1,510,962 $1,438,279 $1,269,579 


   
 At 
Supplemental Balance Sheet HighlightsSeptember 30, June 30, March 31, December 31, September 30, 
(Dollars in Thousands, Unaudited)2020 2020 2020 2019 2019 
Loan portfolio composition:               
Commercial loans:               
Multi-family$2,110,300 $2,059,568 $1,879,907 $1,856,591 $1,922,968 
Nonresidential 1,124,330  960,853  1,202,652  1,172,213  1,230,963 
Commercial business 255,888  138,788  73,922  67,887  66,889 
Construction 79,178  20,961  17,880  16,221  14,637 
Total commercial loans 3,569,696  3,180,170  3,174,361  3,112,912  3,235,457 
One- to four-family residential mortgage loans 1,353,197  1,273,022  1,338,099  1,331,301  1,319,750 
Consumer loans:               
Home equity loans and lines of credit 71,540  82,920  87,909  89,916  93,304 
Other consumer loans 4,136  3,991  4,604  4,908  5,209 
Total consumer loans 75,676  86,911  92,513  94,824  98,513 
Total loans, excluding yield adjustments 4,998,569  4,540,103  4,604,973  4,539,037  4,653,720 
Unaccreted yield adjustments (43,819) (41,706) (42,461) (46,340) (48,982)
Loans receivable, net of yield adjustments 4,954,750  4,498,397  4,562,512  4,492,697  4,604,738 
Less allowance for credit losses on loans (64,860) (37,327) (37,191) (30,937) (32,432)
 Net loans receivable$4,889,890 $4,461,070 $4,525,321 $4,461,760 $4,572,306 
                
Loan portfolio allocation:               
Commercial loans:               
Multi-family 42.2% 45.3% 40.8% 40.9% 41.3%
Nonresidential 22.5% 21.2% 26.1% 25.8% 26.5%
Commercial business 5.1% 3.1% 1.6% 1.5% 1.4%
Construction 1.6% 0.4% 0.4% 0.4% 0.3%
Total commercial loans 71.4% 70.0% 68.9% 68.6% 69.5%
One- to four-family residential mortgage loans 27.1% 28.1% 29.1% 29.3% 28.4%
Consumer loans:               
Home equity loans and lines of credit 1.4% 1.8% 1.9% 2.0% 2.0%
Other consumer loans 0.1% 0.1% 0.1% 0.1% 0.1%
Total consumer loans 1.5% 1.9% 2.0% 2.1% 2.1%
Total loans, excluding yield adjustments 100.0% 100.0% 100.0% 100.0% 100.0%
                
Asset quality:               
Nonperforming assets:               
Accruing loans - 90 days and over past due$238 $5 $12 $19 $15 
Nonaccrual loans 44,837  36,691  35,384  21,935  21,766 
Total nonperforming loans 45,075  36,696  35,396  21,954  21,781 
Other real estate owned 178  178  178  178  - 
Total nonperforming assets$45,253 $36,874 $35,574 $22,132 $21,781 
                
Nonperforming loans (% total loans) 0.91% 0.82% 0.78% 0.49% 0.47%
Nonperforming assets (% total assets) 0.62% 0.55% 0.53% 0.33% 0.33%
                
Allowance for credit losses on loans (ACL):               
ACL to total loans 1.30% 0.82% 0.81% 0.68% 0.70%
ACL to nonperforming loans 143.89% 101.72% 105.07% 140.92% 148.90%
Net charge offs$67 $38 $16 $30 $60 
Average net charge off rate (annualized) 0.01% 0.00% 0.00% 0.00% 0.01%
                


 At 
Supplemental Balance Sheet HighlightsSeptember 30, June 30, March 31, December 31, September 30, 
(Dollars in Thousands, Unaudited)2020 2020 2020 2019 2019 
Funding by type:               
Deposits:               
Non-interest-bearing deposits$487,710 $419,138 $321,824 $312,098 $322,846 
Interest-bearing demand 1,561,135  1,264,151  1,134,420  1,060,434  931,188 
Savings 1,025,245  906,597  848,950  829,321  800,514 
Certificates of deposit 1,965,822  1,840,396  1,948,060  1,986,969  2,142,702 
Interest-bearing deposits 4,552,202  4,011,144  3,931,430  3,876,724  3,874,404 
Total deposits 5,039,912  4,430,282  4,253,254  4,188,822  4,197,250 
                
Borrowings:               
Federal Home Loan Bank advances 1,077,540  1,167,429  1,177,319  1,253,958  1,273,618 
Overnight borrowings -  -  200,000  15,000  - 
Depositor sweep accounts -  5,736  6,706  6,091  7,500 
Total borrowings 1,077,540  1,173,165  1,384,025  1,275,049  1,281,118 
                
 Total funding$6,117,452 $5,603,447 $5,637,279 $5,463,871 $5,478,368 
                
Loans as a % of deposits 97.4% 101.2% 106.7% 106.7% 109.2%
Deposits as a % of total funding 82.4% 79.1% 75.4% 76.7% 76.6%
Borrowings as a % of total funding 17.6% 20.9% 24.6% 23.3% 23.4%
                
Funding by source:               
Retail funding:               
Non-interest-bearing deposits$487,710 $419,138 $321,824 $312,098 $322,846 
Interest-bearing demand 1,561,135  1,264,151  1,134,420  1,060,434  931,188 
Savings 1,025,245  906,597  848,950  829,321  800,514 
Certificates of deposit 1,775,189  1,773,257  1,833,081  1,876,280  1,916,132 
Total retail deposits 4,849,279  4,363,143  4,138,275  4,078,133  3,970,680 
Depositor sweep accounts -  5,736  6,706  6,091  7,500 
Total retail funding 4,849,279  4,368,879  4,144,981  4,084,224  3,978,180 
                
Wholesale funding:               
Certificates of deposit (listing service)$57,251 $35,760 $33,608 $42,119 $57,534 
Certificates of deposit (brokered) 133,382  31,379  81,371  68,570  169,036 
Total wholesale deposits 190,633  67,139  114,979  110,689  226,570 
FHLB advances 1,077,540  1,167,429  1,177,319  1,253,958  1,273,618 
Overnight borrowings -  -  200,000  15,000  - 
Total wholesale funding 1,268,173  1,234,568  1,492,298  1,379,647  1,500,188 
                
Total funding$6,117,452 $5,603,447 $5,637,279 $5,463,871 $5,478,368 
                
Retail funding as a % of total funding 79.3% 78.0% 73.5% 74.7% 72.6%
Wholesale funding as a % of total funding 20.7% 22.0% 26.5% 25.3% 27.4%
                


Summary Income StatementFor the three months ended 
(Dollars and Shares in Thousands,September 30, June 30, March 31, December 31, September 30, 
Except Per Share Data, Unaudited)2020 2020 2020 2019 2019 
Interest income               
Loans$52,180 $46,192 $46,603 $45,608 $48,600 
Taxable investment securities 7,336  9,769  10,526  9,698  9,328 
Tax-exempt investment securities 454  487  547  666  693 
Other interest-earning assets 914  903  1,100  1,210  1,278 
Total interest income 60,884  57,351  58,776  57,182  59,899 
                
Interest expense               
Deposits 11,062  12,439  14,768  15,590  16,055 
Borrowings 5,660  4,462  6,398  6,985  7,157 
Total interest expense 16,722  16,901  21,166  22,575  23,212 
Net interest income 44,162  40,450  37,610  34,607  36,687 
Provision for (reversal of) credit losses on loans 4,059  174  6,270  (1,465) (782)
Net interest income after provision for
 (reversal of) credit losses on loans
 40,103  40,276  31,340  36,072  37,469 
                
Non-interest income               
Fees and service charges 1,076  1,696  1,338  2,145  1,468 
(Loss) gain on sale and call of securities (377) 19  2,234  11  (14)
Gain on sale of loans 1,890  1,348  565  668  605 
Loss on sale and write down of other real estate
 owned
 -  -  -  (28) - 
Income from bank owned life insurance 1,596  1,537  1,532  1,576  1,580 
Electronic banking fees and charges 405  325  309  293  318 
Bargain purchase gain 3,053  -  -  -  - 
Other income 90  77  223  (111) 5 
Total non-interest income 7,733  5,002  6,201  4,554  3,962 
                
Non-interest expense               
Salaries and employee benefits 16,977  15,527  15,537  15,174  15,777 
Net occupancy expense of premises 3,122  2,688  2,685  3,082  2,969 
Equipment and systems 3,570  2,948  2,672  3,046  3,089 
Advertising and marketing 500  751  612  890  535 
Federal deposit insurance premium 472  286  -  -  - 
Directors' compensation 748  769  771  769  770 
Merger-related expenses 4,349  447  285  219  - 
Debt extinguishment expenses -  -  2,156  -  - 
Other expense 3,835  3,475  3,344  3,247  3,104 
Total non-interest expense 33,573  26,891  28,062  26,427  26,244 
Income before income taxes 14,263  18,387  9,479  14,199  15,187 
Income taxes 2,884  4,698  225  3,547  3,817 
Net income$11,379 $13,689 $9,254 $10,652 $11,370 
                
Net income per common share (EPS)               
Basic$0.13 $0.17 $0.11 $0.13 $0.13 
Diluted$0.13 $0.17 $0.11 $0.13 $0.13 
                
Dividends declared (1)               
Cash dividends declared per common share$0.08 $0.08 $0.08 $0.07 $0.06 
Cash dividends declared$6,917 $6,449 $6,479 $5,760 $5,045 
Dividend payout ratio 60.8% 47.1% 70.0% 54.1% 44.4%
                
Weighted average number of common
shares outstanding
               
Basic 86,008  80,678  81,339  82,831  84,756 
Diluted 86,009  80,680  81,358  82,876  84,793 
                


 For the three months ended 
Average Balance Sheet DataSeptember 30, June 30, March 31, December 31, September 30, 
(Dollars in Thousands, Unaudited)2020 2020 2020 2019 2019 
Assets               
Interest-earning assets:               
Loans receivable, including loans held for sale$4,958,293 $4,567,229 $4,503,996 $4,547,126 $4,656,192 
Taxable investment securities 1,350,511  1,369,014  1,406,973  1,244,475  1,147,698 
Tax-exempt investment securities 82,603  89,263  101,771  125,187  129,339 
Other interest-earning assets 247,543  141,964  104,241  117,811  125,114 
Total interest-earning assets 6,638,950  6,167,470  6,116,981  6,034,599  6,058,343 
Non-interest-earning assets 624,252  605,876  598,335  590,746  585,826 
 Total assets$7,263,202 $6,773,346 $6,715,316 $6,625,345 $6,644,169 
                
Liabilities and Stockholders' Equity               
Interest-bearing liabilities:               
Deposits:               
Interest-bearing demand$1,464,238 $1,189,044 $1,112,080 $982,163 $883,843 
Savings 1,006,075  876,580  838,501  813,626  799,181 
Certificates of deposit 1,988,689  1,879,039  2,004,785  2,063,066  2,179,333 
Total interest-bearing deposits 4,459,002  3,944,663  3,955,366  3,858,855  3,862,357 
Borrowings:               
Federal Home Loan Bank advances 1,130,836  1,202,522  1,208,627  1,255,597  1,277,145 
Other borrowings 3,568  96,770  87,072  34,733  10,012 
Total borrowings 1,134,404  1,299,292  1,295,699  1,290,330  1,287,157 
Total interest-bearing liabilities 5,593,406  5,243,955  5,251,065  5,149,185  5,149,514 
Non-interest-bearing liabilities:               
Non-interest-bearing deposits 479,141  380,067  317,530  320,161  320,641 
Other non-interest-bearing liabilities 79,620  72,007  55,456  53,479  60,078 
Total non-interest-bearing liabilities 558,761  452,074  372,986  373,640  380,719 
Total liabilities 6,152,167  5,696,029  5,624,051  5,522,825  5,530,233 
Stockholders' equity 1,111,035  1,077,317  1,091,265  1,102,520  1,113,936 
Total liabilities and stockholders' equity$7,263,202 $6,773,346 $6,715,316 $6,625,345 $6,644,169 
                
Average interest-earning assets to average
 interest-bearing liabilities
 118.69% 117.61% 116.49% 117.20% 117.65%
                


 For the three months ended 
 September 30, June 30, March 31, December 31, September 30, 
Performance Ratio Highlights2020 2020 2020 2019 2019 
Average yield on interest-earning assets:               
Loans receivable, including loans held for sale 4.21% 4.05% 4.14% 4.01% 4.18%
Taxable investment securities 2.17% 2.85% 2.99% 3.12% 3.25%
Tax-exempt investment securities (1) 2.20% 2.18% 2.15% 2.13% 2.14%
Other interest-earning assets 1.48% 2.54% 4.22% 4.11% 4.09%
Total interest-earning assets 3.67% 3.72% 3.84% 3.79% 3.95%
                
Average cost of interest-bearing liabilities:               
Deposits:               
Interest-bearing demand 0.60% 0.72% 1.17% 1.29% 1.30%
Savings 0.57% 0.81% 0.85% 0.81% 0.77%
Certificates of deposit 1.50% 1.82% 1.94% 2.09% 2.14%
Total interest-bearing deposits 0.99% 1.26% 1.49% 1.62% 1.66%
Borrowings:               
Federal Home Loan Bank advances 2.00% 1.47% 2.03% 2.19% 2.24%
Other borrowings 0.04% 0.13% 1.17% 1.36% 0.66%
Total borrowings 2.00% 1.37% 1.98% 2.17% 2.22%
Total interest-bearing liabilities 1.20% 1.29% 1.61% 1.75% 1.80%
                
Interest rate spread (2) 2.47% 2.43% 2.23% 2.04% 2.15%
Net interest margin (3) 2.66% 2.62% 2.46% 2.29% 2.42%
                
Non-interest income to average assets
 (annualized)
 0.43% 0.30% 0.37% 0.27% 0.24%
Non-interest expense to average assets
 (annualized)
 1.85% 1.59% 1.67% 1.60% 1.58%
                
Efficiency ratio (4) 64.69% 59.16% 64.05% 67.48% 64.56%
                
Return on average assets (annualized) 0.63% 0.81% 0.55% 0.64% 0.68%
Return on average equity (annualized) 4.10% 5.08% 3.39% 3.86% 4.08%
Return on average tangible equity (annualized) (5) 5.08% 6.35% 4.23% 4.80% 5.06%

______________________
(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-GAAPFor the three months ended 
(Dollars in Thousands,September 30, June 30, March 31, December 31, September 30, 
Except Per Share Data, Unaudited)2020 2020 2020 2019 2019 
Adjusted net income:               
Net income (GAAP)$11,379 $13,689 $9,254 $10,652 $11,370 
Non-recurring transactions - net of tax:               
Bargain purchase gain (3,053) -  -  -  - 
Provision for credit losses on non-PCD loans 3,563  -  -  -  - 
Merger-related expenses 3,123  426  269  183  - 
Branch consolidation expenses -  -  -  274  475 
Net effect of wholesale restructuring transaction -  -  (55) -  - 
Reversal of income tax valuation allowance -  -  (591) -  - 
Tax benefit arising from adoption of the CARES
Act provisions
 -  -  (1,624) -  - 
Net income (non-GAAP)$15,012 $14,115 $7,253 $11,109 $11,845 
                
Calculation of pre-tax, pre-provision income:               
Net income (GAAP)$11,379 $13,689 $9,254 $10,652 $11,370 
Adjustments to net income (GAAP):               
Provision for income taxes 2,884  4,698  225  3,547  3,817 
Provision for (reversal of) credit losses on loans 4,059  174  6,270  (1,465) (782)
Pre-tax, pre-provision income (non-GAAP)$18,322 $18,561 $15,749 $12,734 $14,405 
                
Adjusted earnings per share:               
Weighted average common shares - basic 86,008  80,678  81,339  82,831  84,756 
Weighted average common shares - diluted 86,009  80,680  81,358  82,876  84,793 
                
Earnings per share - basic (GAAP)$0.13 $0.17 $0.11 $0.13 $0.13 
Earnings per share - diluted (GAAP)$0.13 $0.17 $0.11 $0.13 $0.13 
                
Adjusted earnings per share - basic (non-GAAP)$0.17 $0.17 $0.09 $0.13 $0.14 
Adjusted earnings per share - diluted (non-GAAP)$0.17 $0.17 $0.09 $0.13 $0.14 
                
Adjusted return on average assets:               
Total average assets$7,263,202 $6,773,346 $6,715,316 $6,625,345 $6,644,169 
                
Return on average assets (GAAP) 0.63% 0.81% 0.55% 0.64% 0.68%
Adjusted return on average assets (non-GAAP) 0.83% 0.83% 0.43% 0.67% 0.71%
                
Adjusted return on average equity:               
Total average equity$1,111,035 $1,077,317 $1,091,265 $1,102,520 $1,113,936 
                
Return on average equity (GAAP) 4.10% 5.08% 3.39% 3.86% 4.08%
Adjusted return on average equity (non-GAAP) 5.40% 5.24% 2.66% 4.03% 4.25%
                


Reconciliation of GAAP to Non-GAAPFor the three months ended 
(Dollars in Thousands,September 30, June 30, March 31, December 31, September 30, 
Except Per Share Data, Unaudited)2020 2020 2020 2019 2019 
Adjusted return on average tangible equity:               
Total average equity$1,111,035 $1,077,317 $1,091,265 $1,102,520 $1,113,936 
Less: average goodwill (210,895) (210,895) (210,895) (210,895) (210,895)
Less: average other intangible assets (4,341) (4,124) (4,408) (4,711) (5,006)
 $895,799 $862,298 $875,962 $886,914 $898,035 
                
Return on average tangible equity (non-GAAP) 5.08% 6.35% 4.23% 4.80% 5.06%
Adjusted return on average tangible equity
 (non-GAAP)
 6.70% 6.55% 3.31% 5.01% 5.28%
                

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

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