Kearny Financial Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2023, the company’s fiscal second quarter. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted. Comparisons are with the quarter or six-month period ended December 31, 2022, or with June 30, 2023 for balance-sheet figures.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net interest income | $35.8 million, down from $44.8 million | $75.0 million, down from $93.3 million |
| Net interest margin | 1.94%, versus 2.38% | 2.02%, versus 2.53% |
| Provision for credit losses | $2.1 million, versus $1.7 million | $2.4 million, versus $2.3 million |
| Non-interest income | Loss of $16.0 million, versus loss of $8.5 million | Loss of $12.0 million, versus loss of $2.6 million |
| Non-interest expense | $29.8 million, down from $32.7 million | $59.5 million, down from $64.6 million |
| Net income (loss) | Loss of $13.8 million; diluted EPS $(0.22), versus income of $2.0 million and EPS $0.03 | Loss of $4.0 million; diluted EPS $(0.06), versus income of $18.5 million and EPS $0.28 |
Higher interest expense more than offset increased interest income: six-month interest expense rose to $88.8 million from $43.5 million, while interest income increased to $163.8 million from $136.9 million. Management attributed margin pressure mainly to higher funding costs amid higher market rates. Lower salaries, occupancy and advertising expenses partly offset these pressures.
Financial position, liquidity and capital
- Total assets were $7.90 billion at December 31, down $167.0 million from June 30. Net loans were $5.70 billion, down $79.9 million; available-for-sale securities were $1.14 billion, down $83.6 million.
- Deposits decreased $309.6 million, or 5.5%, to $5.32 billion. Brokered and listing-service time deposits fell $182.1 million to $458.4 million. Borrowings increased $160.2 million to $1.67 billion, primarily reflecting higher FHLB advances as brokered deposits declined.
- Cash and cash equivalents were $73.9 million. The company reported $1.14 billion of available-for-sale securities and additional borrowing capacity; its liquidity discussion cites $972.7 million of FHLB and $405.3 million of Federal Reserve borrowing capacity without additional collateral, plus $400.8 million available against additional securities and $950 million of unused unsecured overnight lines.
- For the six months, operating cash flow was $19.1 million, investing activities provided $160.8 million and financing activities used $176.6 million. Cash and cash equivalents increased $3.3 million to $73.9 million.
- Stockholders’ equity was $848.0 million, down $21.3 million. Book value per share was $13.16 and tangible book value per share was $9.85. The Bank remained above “well-capitalized” regulatory thresholds: total risk-based capital was 13.87% and common equity tier 1 was 13.12%.
Material changes and notable items
- Securities repositioning: The company sold $122.2 million of available-for-sale securities, recording a $18.1 million pre-tax loss ($12.9 million after tax). Proceeds were used to repay higher-cost wholesale funding and reinvest in loans and securities; management said the loss had already been reflected in accumulated other comprehensive loss and had a nominal impact on tangible book value.
- BOLI restructuring: Policies yielding 2.1% with a value of $103.4 million were exchanged or surrendered for policies yielding 5.1%. The restructuring resulted in $5.7 million of discrete tax expense and $573,000 of exchange charges; management reported an after-tax loss of $6.3 million.
- Credit quality: Nonperforming assets decreased to $49.8 million, or 0.63% of assets, from $55.6 million, or 0.69%. They included $28.1 million of nonperforming loans, $9.7 million of non-accrual commercial loans held for sale and $12.0 million of other real estate owned. The allowance for loan losses was $44.9 million, or 0.78% of loans, down from $48.7 million, or 0.83%.
- Six-month net charge-offs were $6.2 million, primarily associated with three commercial real estate loans from one borrower relationship; three nonperforming commercial loans were reclassified to held-for-sale. One residential mortgage modification made since adoption of the updated accounting standard subsequently defaulted.
- Share repurchases totaled 1.50 million shares for $11.2 million during the six months. The 4.0 million-share repurchase plan was completed in November 2023. A quarterly dividend of $0.11 per share was declared January 25, 2024, payable February 21, 2024.
Outlook, risks and other disclosures
The filing provides no specific earnings, margin or balance-sheet guidance. Management’s forward-looking statements identify sensitivity to interest rates, deposit flows and funding costs, loan demand and credit quality, economic conditions, competition, regulatory changes and banking-industry developments. Interest-rate modeling shows that a 300-basis-point increase would reduce modeled one-year net interest income by 5.52% and economic value of equity by 35.18%; management cautions that model assumptions and actual outcomes may differ.
Commercial real estate exposure is significant: multi-family mortgage loans totaled $2.65 billion and nonresidential mortgage loans $947.3 million at period-end. Uninsured deposits were $1.81 billion; excluding specified collateralized and affiliate deposits, uninsured deposits were $695.7 million, or 13.1% of deposits. The company reported no material change to previously disclosed risk factors, no material pending legal proceedings beyond routine matters, and effective disclosure controls.
Important facts for investors to verify
- Whether the securities and BOLI actions’ expected funding-cost and yield benefits materialize, and how they affect subsequent net interest margin and earnings.
- Deposit retention, deposit pricing, uninsured-deposit levels and reliance on FHLB and other wholesale funding.
- Performance and collateral values of commercial real estate loans, including the borrower relationship behind the charge-offs and loans moved to held-for-sale.
- Actual liquidity availability, borrowing capacity and regulatory capital as conditions and balance-sheet composition change.
- Whether modeled interest-rate sensitivities and management’s other forward-looking assumptions remain reasonable.