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Kearny Financial(KRNY) - 2024 Q3 - Quarterly Results

Executive Summary & Q3 FY2024 Highlights Q3 FY2024 Financial Performance Overview Kearny Financial Corp. reported net income of $7.4 million ($0.12 diluted EPS) in Q3 FY2024, reversing a prior quarter $13.8 million net loss Q3 FY2024 vs. Q2 FY2023 Net Income & EPS | Metric | Q3 FY2024 | Q2 FY2023 | | :---------------- | :-------- | :-------- | | Net Income | $7.4 million | $(13.8) million | | Diluted EPS | $0.12 | $(0.22) | Dividend Declaration The Board of Directors declared a quarterly cash dividend of $0.11 per share, payable on May 22, 2024 - Quarterly cash dividend declared: $0.11 per share2 CEO Commentary & Strategic Focus CEO Craig L. Montanaro emphasized prudent risk management, strong credit performance, and peer-leading capital levels amidst market uncertainty - Company maintains a low loan-to-value, low-vacancy, well-diversified commercial loan portfolio with outstanding credit performance3 - Common Equity Tier 1 capital ratio: 14.7%3 Q3 FY2024 Financial Review Balance Sheet Highlights Total assets decreased slightly to $7.84 billion, with loan growth offset by declines in investment securities and deposits, while BOLI significantly increased Key Balance Sheet Changes (QoQ) | Metric | March 31, 2024 | Change from Dec 31, 2023 | Change Pct. | | :-------------------------- | :------------- | :----------------------- | :---------- | | Total assets | $7.84 billion | $(55.9) million | -0.7% | | Investment securities | $1.24 billion | $(47.8) million | -3.7% | | Loans receivable | $5.76 billion | $12.7 million | 0.2% | | Bank-owned life insurance (BOLI) | $296.5 million | $40.4 million | 15.8% | | Deposits | $5.21 billion | $(110.6) million | -2.1% | | Borrowings | $1.72 billion | $55.1 million | 3.3% | - Decrease in non-brokered deposits was driven by a $48.4 million decline in retail certificates of deposits and a $15.7 million decline in consumer savings deposits5 - Available secured borrowing capacity: $1.81 billion, of which $1.47 billion was immediately accessible5 Earnings Highlights Net interest income decreased due to a contracted net interest margin, but non-interest income significantly increased, primarily due to the absence of prior period's investment securities portfolio repositioning losses and higher BOLI income Net Interest Income and Net Interest Margin Net interest income decreased by $1.5 million to $34.3 million, with the net interest margin contracting by 5 basis points to 1.89% Net Interest Income and Margin (QoQ) | Metric | Q3 FY2024 | Q2 FY2023 | Change | | :------------------ | :-------- | :-------- | :----- | | Net Interest Income | $34.3 million | $35.8 million | $(1.5) million | | Net Interest Margin | 1.89% | 1.94% | -5 bps | - Decrease in net interest margin driven by an increase in the cost of interest-bearing deposits and a decrease in the average balance of interest-earning assets, partially offset by a higher yield on interest-earning assets and a decrease in the cost of interest-bearing borrowings9 Non-Interest Income Total non-interest income significantly increased by $20.2 million to $4.2 million, primarily due to the absence of prior period's investment securities portfolio repositioning losses Non-Interest Income (QoQ) | Metric | Q3 FY2024 | Q2 FY2023 | Change | | :-------------------------- | :-------- | :-------- | :------- | | Total Non-Interest Income | $4.2 million | $(16.0) million | $20.2 million | | Income from BOLI | $3.0 million | $1.2 million | $1.8 million | | Loss on sale of loans | $(712,000) | $104,000 | $(816,000) | - Increase in non-interest income primarily attributable to the absence of a pre-tax loss of $18.1 million related to investment securities portfolio repositioning in the prior comparative period9 - BOLI income included a $631,000 non-recurring payment in the current period and was reduced by $573,000 non-recurring exchange charges in the prior period, with underlying improvement from BOLI restructure9 - Loss on sale of loans resulted from the sale of three related nonperforming commercial real estate loans held-for-sale9 Non-Interest Expense Total non-interest expense decreased by $708,000 to $29.1 million, driven by lower salary and benefits and other expenses Non-Interest Expense (QoQ) | Metric | Q3 FY2024 | Q2 FY2023 | Change | | :-------------------------- | :-------- | :-------- | :------- | | Total Non-Interest Expense | $29.1 million | $29.8 million | $(708,000) | | Salary and benefits expense | | | $(371,000) | | Other expense | | | $(522,000) | - Decrease in salary and benefits expense primarily attributable to a non-recurring decrease of $679,000 in stock-based compensation, partially offset by an increase of $374,000 in payroll taxes9 - Decrease in other expense primarily driven by a $637,000 decrease in OREO expense following the sale of the Company's sole OREO asset9 Income Taxes Income tax expense decreased by $0.1 million to $1.7 million, largely due to discrete tax expense associated with BOLI restructure recognized in the prior period Income Tax Expense (QoQ) | Metric | Q3 FY2024 | Q2 FY2023 | Change | | :---------------- | :-------- | :-------- | :------- | | Income Tax Expense | $1.7 million | $1.8 million | $(0.1) million | - Decrease in income tax expense largely due to discrete tax expense associated with BOLI restructure recognized in the prior period, partially offset by higher pre-tax income9 Asset Quality Highlights Asset quality improved significantly, with non-performing assets decreasing by $10.2 million to $39.5 million (0.50% of total assets), driven by the sale of non-performing loans and OREO Asset Quality Metrics (QoQ) | Metric | March 31, 2024 | December 31, 2023 | Change | | :--------------------------------- | :------------- | :---------------- | :------- | | Non-performing assets | $39.5 million | $49.8 million | $(10.2) million | | Non-performing assets (% of total assets) | 0.50% | 0.63% | -0.13% | | Net charge-offs (annualized) | $286,000 (0.02%) | $4.1 million (0.29%) | $(3.8) million | | Provision for credit losses | $349,000 | $2.1 million | $(1.8) million | | Allowance for credit losses (ACL) | $44.9 million (0.78% of total loans) | $44.9 million (0.78% of total loans) | Unchanged | - Decrease in non-performing assets driven by the January 2024 sale of three related non-performing commercial real estate loans held-for-sale and the Company's sole OREO asset14 - Provision for credit loss expense for Q3 FY2024 was primarily driven by loan growth14 Capital Highlights Book value and tangible book value per share both increased by $0.02 (0.2%), with the company maintaining strong regulatory capital ratios exceeding 'well-capitalized' levels Capital Metrics (QoQ) | Metric | March 31, 2024 | Change | | :--------------------------------- | :------------- | :------- | | Book value per share | $13.18 | $0.02 (0.2%) | | Tangible book value per share | $9.87 | $0.02 (0.2%) | | Tangible equity to tangible assets ratio | 8.34% | | - Total stockholders' equity included after-tax net unrealized losses on securities available for sale of $95.0 million, partially offset by after-tax unrealized gains on derivatives of $31.3 million14 - Regulatory capital ratios of both the Company and the Bank were in excess of the levels required by federal banking regulators to be classified as 'well-capitalized'14 Forward-Looking Statements This section includes a standard disclaimer regarding forward-looking statements, noting that such statements are subject to risks and uncertainties that could cause actual results to differ materially - Statements contained in this news release that are not historical facts are forward-looking statements subject to risks and uncertainties13 Linked-Quarter Comparative Financial Analysis Consolidated Balance Sheets Total assets decreased slightly by 0.7% to $7.84 billion, driven by lower investment securities and cash, partially offset by increased loans receivable and BOLI, while total liabilities decreased due to lower deposits Consolidated Balance Sheets (QoQ) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | Variance or Change | Variance or Change Pct. | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :---------------------- | | Total assets | $7,841,972 | $7,897,832 | $(55,860) | -0.7% | | Loans receivable | $5,758,336 | $5,745,629 | $12,707 | 0.2% | | Bank owned life insurance | $296,493 | $256,064 | $40,429 | 15.8% | | Total deposits | $5,209,050 | $5,319,630 | $(110,580) | -2.1% | | Borrowings | $1,722,178 | $1,667,055 | $55,123 | 3.3% | | Total stockholders' equity | $849,078 | $847,978 | $1,100 | 0.1% | | Equity to assets | 10.83% | 10.74% | 0.09% | | | Tangible equity to tangible assets | 8.34% | 8.26% | 0.08% | | | Book value per share | $13.18 | $13.16 | $0.02 | 0.2% | | Tangible book value per share | $9.87 | $9.85 | $0.02 | 0.2% | Consolidated Statements of Income (Loss) The company reported a net income of $7.4 million for Q3 FY2024, a significant improvement from a net loss of $13.8 million in the previous quarter, driven by increased non-interest income and decreased non-interest expense Consolidated Statements of Income (Loss) (QoQ) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | Variance or Change | Variance or Change Pct. | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :---------------------- | | Total interest income | $82,085 | $82,625 | $(540) | -0.7% | | Total interest expense | $47,766 | $46,786 | $980 | 2.1% | | Net interest income | $34,319 | $35,839 | $(1,520) | -4.2% | | Provision for credit losses | $349 | $2,105 | $(1,756) | -83.4% | | Total non-interest income | $4,203 | $(16,012) | $20,215 | 126.2% | | Total non-interest expense | $29,059 | $29,767 | $(708) | -2.4% | | Income (loss) before income taxes | $9,114 | $(12,045) | $21,159 | 175.7% | | Net income (loss) | $7,397 | $(13,827) | $21,224 | 153.5% | | Diluted EPS | $0.12 | $(0.22) | $0.34 | | | Dividend payout ratio | 92.5% | -49.8% | 142.3% | | Average Balance Sheet Data Average interest-earning assets decreased by 1.6% to $7.27 billion, while average interest-bearing liabilities decreased by 1.3% to $6.36 billion, leading to a slight contraction in their ratio Average Balance Sheet Data (QoQ) | (Dollars in Thousands) | March 31, 2024 | December 31, 2023 | Variance or Change | Variance or Change Pct. | | :--------------------- | :------------- | :---------------- | :----------------- | :---------------------- | | Total interest-earning assets | $7,274,310 | $7,390,251 | $(115,941) | -1.6% | | Total interest-bearing deposits | $4,719,570 | $4,790,411 | $(70,841) | -1.5% | | Total borrowings | $1,639,790 | $1,655,780 | $(15,990) | -1.0% | | Total interest-bearing liabilities | $6,359,360 | $6,446,191 | $(86,831) | -1.3% | | Average interest-earning assets to average interest-bearing liabilities | 114.39% | 114.65% | -0.26% | -0.2% | Performance Ratio Highlights Net interest margin contracted to 1.89%, but the efficiency ratio significantly improved to 75.43% from 150.13%, and returns on average assets and equity turned positive, reflecting improved net income Performance Ratio Highlights (QoQ) | Metric | March 31, 2024 | December 31, 2023 | Variance | | :--------------------------------- | :------------- | :---------------- | :------- | | Average yield on interest-earning assets | 4.51% | 4.47% | 0.04% | | Average cost of interest-bearing liabilities | 3.00% | 2.90% | 0.10% | | Interest rate spread | 1.51% | 1.57% | -0.06% | | Net interest margin | 1.89% | 1.94% | -0.05% | | Non-interest income to average assets (annualized) | 0.21% | -0.81% | 1.02% | | Non-interest expense to average assets (annualized) | 1.48% | 1.50% | -0.02% | | Efficiency ratio | 75.43% | 150.13% | -74.70% | | Return on average assets (annualized) | 0.38% | -0.70% | 1.08% | | Return on average equity (annualized) | 3.50% | -6.59% | 10.09% | | Return on average tangible equity (annualized) | 4.68% | -8.84% | 13.52% | Five-Quarter Financial Trend Analysis Consolidated Balance Sheets Total assets have declined from $8.35 billion in March 2023 to $7.84 billion in March 2024, with loans receivable also decreasing, while deposits trended downwards and borrowings generally increased Consolidated Balance Sheets (Five-Quarter Trend) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total assets | $7,841,972 | $7,897,832 | $7,974,866 | $8,064,815 | $8,349,336 | | Loans receivable | $5,758,336 | $5,745,629 | $5,736,049 | $5,829,421 | $5,966,325 | | Total deposits | $5,209,050 | $5,319,630 | $5,434,168 | $5,629,183 | $5,803,404 | | Borrowings | $1,722,178 | $1,667,055 | $1,626,933 | $1,506,812 | $1,611,692 | | Total stockholders' equity | $849,078 | $847,978 | $849,534 | $869,284 | $866,230 | | Equity to assets | 10.83% | 10.74% | 10.65% | 10.78% | 10.37% | | Tangible equity to tangible assets | 8.34% | 8.26% | 8.20% | 8.35% | 8.02% | | Book value per share | $13.18 | $13.16 | $13.04 | $13.20 | $12.99 | | Tangible book value per share | $9.87 | $9.85 | $9.77 | $9.96 | $9.79 | Supplemental Balance Sheet Highlights This section details the five-quarter trends in loan portfolio composition, asset quality, and funding, showing declining commercial loans and deposits, increasing borrowings, and improved non-performing assets Loan Portfolio Composition and Asset Quality Multi-family mortgages, the largest segment of the loan portfolio, have shown a declining trend, while total non-performing assets have generally decreased over the five quarters Loan Portfolio Composition (Five-Quarter Trend) | (Dollars in Thousands) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Multi-family mortgage | $2,645,195 | $2,651,274 | $2,699,151 | $2,761,775 | $2,835,852 | | Total commercial loans | $3,987,517 | $3,964,628 | $4,025,884 | $4,103,819 | $4,216,057 | | One- to four-family residential mortgage | $1,741,644 | $1,746,065 | $1,689,051 | $1,700,559 | $1,713,343 | | Total loans, excluding yield adjustments | $5,775,090 | $5,756,938 | $5,760,475 | $5,850,476 | $5,976,368 | Asset Quality (Five-Quarter Trend) | (Dollars in Thousands) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total nonperforming assets | $39,546 | $49,771 | $50,868 | $55,583 | $57,436 | | Nonperforming assets (% total assets) | 0.50% | 0.63% | 0.64% | 0.69% | 0.69% | | ACL to total loans | 0.78% | 0.78% | 0.81% | 0.83% | 0.82% | | Net charge-offs | $286 | $4,110 | $2,107 | $82 | $206 | Funding Composition Total deposits have consistently declined over five quarters, while total borrowings have generally increased, leading to a higher loans-to-deposits ratio Funding Composition (Five-Quarter Trend) | (Dollars in Thousands) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total deposits | $5,209,050 | $5,319,630 | $5,434,168 | $5,629,183 | $5,803,404 | | Total borrowings | $1,722,178 | $1,667,055 | $1,626,933 | $1,506,812 | $1,611,692 | | Loans as a % of deposits | 109.8% | 107.4% | 104.8% | 102.9% | 102.1% | | Deposits as a % of total funding | 75.2% | 76.1% | 77.0% | 78.9% | 78.3% | | Uninsured deposits (reported) | $1,760,740 | $1,813,122 | $1,734,288 | $1,771,416 | $1,678,051 | Consolidated Statements of Income (Loss) Net interest income has consistently declined over five quarters, from $42.37 million to $34.32 million, while net income fluctuated, with a significant loss in December 2023 followed by a strong recovery Consolidated Statements of Income (Loss) (Five-Quarter Trend) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Net interest income | $34,319 | $35,839 | $39,160 | $40,180 | $42,371 | | Provision for (reversal of) credit losses | $349 | $2,105 | $245 | $(306) | $451 | | Total non-interest income | $4,203 | $(16,012) | $4,010 | $3,666 | $1,646 | | Total non-interest expense | $29,059 | $29,767 | $29,774 | $28,761 | $30,352 | | Net income (loss) | $7,397 | $(13,827) | $9,842 | $12,013 | $10,312 | | Diluted EPS | $0.12 | $(0.22) | $0.16 | $0.19 | $0.16 | | Dividend payout ratio | 92.5% | -49.8% | 71.0% | 58.3% | 69.8% | Average Balance Sheet Data Average interest-earning assets have steadily decreased over five quarters, from $7.69 billion to $7.27 billion, with a similar decline in average interest-bearing liabilities Average Balance Sheet Data (Five-Quarter Trend) | (Dollars in Thousands) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Total interest-earning assets | $7,274,310 | $7,390,251 | $7,450,779 | $7,606,627 | $7,694,236 | | Total interest-bearing deposits | $4,719,570 | $4,790,411 | $4,933,851 | $5,153,792 | $5,291,831 | | Total borrowings | $1,639,790 | $1,655,780 | $1,544,571 | $1,474,371 | $1,403,880 | | Average interest-earning assets to average interest-bearing liabilities | 114.39% | 114.65% | 115.01% | 114.76% | 114.91% | Performance Ratio Highlights Net interest margin and interest rate spread have consistently declined over five quarters, while efficiency ratio and returns on assets and equity fluctuated, showing significant improvement in Q3 FY2024 after a prior dip Performance Ratio Highlights (Five-Quarter Trend) | Metric | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :--------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Net interest margin | 1.89% | 1.94% | 2.10% | 2.11% | 2.20% | | Interest rate spread | 1.51% | 1.57% | 1.77% | 1.81% | 1.93% | | Efficiency ratio | 75.43% | 150.13% | 68.97% | 65.60% | 68.96% | | Return on average assets (annualized) | 0.38% | -0.70% | 0.49% | 0.59% | 0.50% | | Return on average equity (annualized) | 3.50% | -6.59% | 4.57% | 5.58% | 4.69% | | Return on average tangible equity (annualized) | 4.68% | -8.84% | 6.07% | 7.41% | 6.20% | Reconciliation of GAAP to Non-GAAP Measures Adjusted Net Income and Pre-tax, Pre-provision Net Revenue Adjusted net income for Q2 FY2023 significantly improved from a GAAP loss to a positive figure after accounting for non-recurring items, providing a clearer view of underlying operational performance Adjusted Net Income and Pre-tax, Pre-provision Net Revenue (Five-Quarter Trend) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Net income (loss) (GAAP) | $7,397 | $(13,827) | $9,842 | $12,013 | $10,312 | | Non-recurring transactions - net of tax: | | | | | | | Branch consolidation expenses | — | — | — | — | $568 | | Net effect of sale and call of securities | — | $12,876 | — | — | — | | Net effect of bank-owned life insurance restructure | — | $6,286 | — | — | — | | Adjusted net income | $7,397 | $5,335 | $9,842 | $12,013 | $10,880 | | Pre-tax, pre-provision net revenue (non-GAAP) | $9,463 | $(9,940) | $13,396 | $15,085 | $13,665 | | Earnings per share - diluted (GAAP) | $0.12 | $(0.22) | $0.16 | $0.19 | $0.16 | | Adjusted earnings per share - diluted (non-GAAP) | $0.12 | $0.09 | $0.16 | $0.19 | $0.17 | Adjusted Returns and Efficiency Ratios Non-GAAP adjustments significantly transform Q2 FY2023's negative GAAP efficiency ratio and return on average tangible equity into positive adjusted figures, offering a clearer view of core operational performance Adjusted Returns and Efficiency Ratios (Five-Quarter Trend) | (Dollars and Shares in Thousands, Except Per Share Data) | March 31, 2024 | December 31, 2023 | September 30, 2023 | June 30, 2023 | March 31, 2023 | | :------------------------------------------------------- | :------------- | :---------------- | :----------------- | :------------ | :------------- | | Return on average tangible equity (non-GAAP) | 4.68% | -8.84% | 6.07% | 7.41% | 6.20% | | Adjusted return on average tangible equity (non-GAAP) | 4.68% | 3.41% | 6.07% | 7.41% | 6.54% | | Efficiency ratio (GAAP) | 75.43% | 150.13% | 68.97% | 65.60% | 68.96% | | Adjusted efficiency ratio (non-GAAP) | 75.43% | 77.25% | 68.97% | 65.60% | 67.14% |