8-K/A: Kearny Financial Corp. Restates Q2 2024 Earnings Due to BOLI Accounting Error, Reports Net Loss

Kearny Financial Corp. revised its second quarter fiscal 2024 earnings to reflect a $4.8 million adjustment related to a Bank-Owned Life Insurance (BOLI) portfolio restructuring, resulting in a net loss of $13.8 million.

Summary

• Kearny Financial Corp. has restated its earnings for the quarter ended December 31, 2023, due to an accounting error related to a $4.8 million non-recurring increase in cash surrender value from a BOLI portfolio restructuring.
• The company initially recognized this $4.8 million as non-interest income, but has now derecognized it and will recognize it prospectively in future periods.
• This revision increased the company's net loss for the quarter by $4.8 million, resulting in a total net loss of $13.8 million, or $0.22 per diluted share.
• The company sold $122.2 million of available-for-sale debt securities, resulting in a pre-tax net loss of $18.1 million.
• Proceeds from the sale were used to retire higher-cost wholesale funding and reinvest in loans yielding approximately 7.0%.
• The company restructured its BOLI portfolio, exchanging or surrendering $103.4 million of policies yielding 2.1% for policies yielding 5.1%, incurring a tax expense of $5.7 million and exchange charges of $573 thousand.
• A $12.0 million OREO asset was under contract to be sold and was subsequently sold in January 2024.
• The company reclassified three non-performing commercial real estate loans with a fair value of $9.7 million to loans held-for-sale.
• The company added $500.0 million of derivative notional to hedge interest rate risk.
• Total assets decreased by $77.0 million to $7.90 billion, while loans receivable increased by $9.6 million to $5.75 billion.
• Deposits decreased by $114.5 million to $5.32 billion, but excluding brokered CDs, deposits increased by $40.0 million.
• Net interest margin contracted 16 basis points to 1.94%, and net interest income decreased by $3.3 million to $35.8 million.
• Non-interest income decreased by $20.0 million to a loss of $16.0 million, primarily due to the loss on securities sales.
• Non-interest expense remained flat at $29.8 million.
• Net charge-offs totaled $4.1 million, or 0.29% of average loans, and the company recorded a provision for credit losses of $2.1 million.
• The company repurchased 687,140 shares of common stock at a cost of $4.7 million, or $6.88 per share.
• Book value per share increased to $13.16, and tangible book value per share increased to $9.85.

Sentiment

Score: 3

Explanation: The document contains negative news due to the restatement of earnings and a net loss. While the company is taking steps to improve its financial position, the overall sentiment is negative due to the accounting error and poor financial results.

Positives

• The company strategically repositioned its investment securities portfolio, selling $122.2 million of available-for-sale debt securities and reinvesting in higher-yielding loans.
• The BOLI portfolio restructuring increased the yield from 2.1% to 5.1%, which should improve future income.
• The company is actively managing non-performing assets, selling a $12.0 million OREO asset and reclassifying $9.7 million in non-performing loans.
• The company added $500.0 million in derivatives to hedge interest rate risk.
• Excluding a decrease of $154.5 million in brokered certificates of deposits, deposits increased $40.0 million, or 0.8%, from September 30, 2023.
• The company's tangible equity to tangible assets ratio equaled 8.26% and the 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 under regulatory guidelines.
• Book value per share increased $0.12, or 0.9%, to $13.16 while tangible book value per share increased $0.08, or 0.8%, to $9.85.

Negatives

• The company had to restate its earnings due to a $4.8 million accounting error related to BOLI, resulting in a net loss of $13.8 million.
• The sale of $122.2 million in securities resulted in a pre-tax net loss of $18.1 million.
• The BOLI restructuring incurred a tax expense of $5.7 million and exchange charges of $573 thousand.
• Net interest margin contracted 16 basis points to 1.94%.
• Non-interest income decreased by $20.0 million to a loss of $16.0 million.
• Net charge-offs totaled $4.1 million, or 0.29% of average loans.
• Deposits decreased by $114.5 million, or 2.1%, from September 30, 2023.

Risks

• The company's financial performance is subject to risks and uncertainties, including economic conditions, changes in interest rates, and regulatory changes.
• The company's net interest margin is under pressure due to increased cost of interest-bearing liabilities.
• The company's non-interest income is volatile and can be significantly impacted by market conditions.
• The company's asset quality could deteriorate if economic conditions worsen.
• The company's reliance on wholesale funding could increase its exposure to interest rate risk.

Future Outlook

The company remains focused on sustainable growth in core loan and deposit relationships and leveraging its digital banking platform. They are also focused on managing interest rate risk and improving asset quality.

Management Comments

• Craig L. Montanaro, President and Chief Executive Officer, stated that the company executed strategies to enhance the balance sheet, liquidity position, risk profile, and asset quality metrics.
• He also noted that deposit pressures have begun to ease and non-interest expense remains well controlled.
• Management is focused on sustainable growth in core loan and deposit relationships and leveraging their digital banking platform.

Industry Context

The restatement of earnings due to an accounting error is a negative event that could impact investor confidence. The company's actions to reposition its balance sheet and manage interest rate risk are in line with industry trends, as banks navigate a challenging economic environment. The focus on digital banking is also a common theme in the industry.

Comparison to Industry Standards

• Kearny's tangible equity to tangible assets ratio of 8.26% is within the range of other small cap banks, but the company's regulatory capital ratios are above the levels required to be classified as well-capitalized.
• The company's net interest margin of 1.94% is below the average for the S&P U.S. Small Cap Banks Index, which is a concern.
• The company's non-performing assets as a percentage of total assets is 0.63%, which is within the range of other small cap banks.
• The company's net charge-offs of 0.29% of average loans is higher than the previous quarter and may be a concern.
• The company's return on average assets of -0.70% is below the average for the S&P U.S. Small Cap Banks Index.
• The company's return on average equity of -6.59% is below the average for the S&P U.S. Small Cap Banks Index.

Stakeholder Impact

• Shareholders will be negatively impacted by the net loss and the restatement of earnings.
• Employees may be impacted by the company's cost-cutting measures.
• Customers may be impacted by changes in the company's products and services.
• Suppliers may be impacted by changes in the company's purchasing policies.
• Creditors may be impacted by the company's financial performance.

Next Steps

• The company will continue to evaluate its accounting for the BOLI enhancement fee.
• The company will continue to manage its interest rate risk and improve asset quality.
• The company will continue to focus on sustainable growth in core loan and deposit relationships.
• The company will continue to leverage its digital banking platform.

Key Dates

Keywords

earnings, financial results, BOLI, restatement, net loss, securities, loans, deposits, interest rate risk, asset quality, capital, derivatives, non-performing assets