I Like Kearny Financial – Seeking Alpha Quant Doesn’t (NASDAQ:KRNY)

Introduction

Let me get this out of the way at the start of this article. First, I’m a fan of Ben Franklin and his quotes, including the one he never said: “Watch your pennies and the dollars will take care of themselves.” And, even if he never said that particular one, it’s a mantra that I try to follow. As a result, I have had a relationship with Kearny Bank for more than 20 years.

Second, I’m cheap. I like things that are free or to buy things on sale, whether it’s a major purchase, a bargain at the supermarket, or a loan, and especially a stock. I originally had a Home Equity Line of Credit, or HELOC, with Pulaski Savings Bank, a small bank in Springfield, NJ. I had moved my HELOC to Pulaski because it had the lowest rate in the area – 5/8% below prime – and 1/8% below my then-current HELOC with another bank. It also had the best benefits, including three free checks per month (provided the checks were for a minimum of $500), better hours, and a convenient drive through teller.

Pulaski would be acquired by Kearny Bank in late 2002. I continued to be a customer because the bank remained the lowest cost lender in the area, and it would improve some of the benefits. These changes included unlimited check-writing, lower minimum amounts for check writing, and free duplicate paper checks. And, while the initial term of that HELOC would have expired several years ago, the bank renewed it for another 15 years.

Third, I’m a shareholder of Kearny Financial (NASDAQ:KRNY). I have tried not to let any of these factors influence this article. However, I’m fairly sure I will fail the bias test, since I am often reluctant to admit if I may have made a mistake.

Seeking Alpha’s Quant Ratings Issues Warning For Kearny Financial

It’s not too difficult to imagine my reaction when I went to the Kearny Financial home page on Seeking Alpha to check the current share price and find out if there were any new headlines or articles. What I found was this message, highlighted in red, reading “Warning: KRNY is at high risk of performing badly. Learn why »”.

When one goes through the link to the Seeking Alpha Quant Rating, it’s clear that the message is to run away from this stock:

Kearny Financial Corp. (KRNY) has characteristics which have been historically associated with poor future stock performance. KRNY has negative EPS revisions and decelerating momentum when compared to other Financials stocks, to the point that it gets a Sell rating from our Quant rating system. Stocks rated Sell or worse by our Quant rating system have massively underperformed the S&P 500, as this article will describe.

Will Kearny “massively underperform” the S&P 500? It’s possible, although why it should be “compared” to the S&P 500 in the first place is a mystery. It’s a small, lightly covered bank with a market cap of less than $700 million. Being lightly covered, any analyst revisions are likely to be from a small sample size, so one might question the relevance.

“Recent” News

A press release by the bank on December 8th was titled Kearny Financial Corp. Announces Wholesale Restructuring and Adoption of Operating Efficiency Initiative, noting that Kearny had:

completed a wholesale restructuring related to its investment securities portfolio. In addition, the Company announced the adoption of a company-wide operating efficiency initiative.

The changes to the investment portfolio should lead to an increase in cash flow and modestly improve the bottom line, but it’s the second part of the headline that could be even better for shareholders. The companywide operating efficiency initiative is:

…targeting an annualized reduction in operating expense of five to ten percent. The goal of this initiative is to improve the Company’s cost structure through cost-reduction and cost-containment initiatives. These include actions surrounding the optimization and reduction of vendor spend, the automation or outsourcing of routine activities, and the realignment of the Company’s workforce.

Obviously, any benefit from these “cost-reduction and cost-containment initiatives” will only benefit shareholders if they yield tangible results that exceed any cost increases resulting from a tight labor market and/or increased interest payments on deposits.

“Old” News

I’ve written about Kearny previously, focusing on a dividend that has been increased at irregular intervals since being restored in 2015. The quarterly dividend had initially been kept low, but the bank also paid out relatively large extra or special dividends in both 2017 and 2018. The current quarterly dividend is $0.11, and it has been at this level for the past five payments. At recent share prices near $10, the yield has been a bit under 4.5%.

Other than the dividends, Kearny has been using excess cash to reduce the outstanding shares. Over the past five years, the number of outstanding shares would rise when the bank used cash and stock to purchase other small banks, then the outstanding shares would come quickly come back down as Kearny would start one stock buyback after another.

In April of 2018 Kearny acquired Clifton Savings Bank in an all-stock transaction. After each share of Clifton was converted to 1.191 shares of Kearny common stock, the Kearny shares outstanding climbed to 102,385,573 as of May 2, 2018. The share count has been rapidly brought down despite the acquisition of MSB Financial Corp. completed in July of 2020.

Kearny’s 10k filed for its fiscal year ending on June 30, 2021 showed that as of August 20, 2021 there were 77,004,871 shares outstanding. In the 10k filed on August 19, 2022 the shares outstanding had fallen further – to 68,226,775. And, and with its fiscal first quarter 10Q filed on October 31, 2022 the figure had further edged down to 67,567,771.

All too often investors have seen shares continue to rise despite buybacks. Not only would stock be used for acquisitions, but for many companies stock grants and options are often part of generous compensation plans for boards, executives, and key employees. Clearly, to the extent Kearny has used stock as part of compensation, it does not appear to have been excessively generous or impeded a rapid decline in shares outstanding.

Going Forward

The Fed began raising rates in March of last year, and Kearny wasted no time in raising the rates on our HELOC. By April 1, 2022 the rate rose from 2.625% to 2.875% and kept rising until it reached 6.75% by the end of 2022. That’s an increase of 3.875 percentage points. By contrast, the best rate offered by the bank on time deposits is a special 11 month CD at 3.25%, with all other rates no higher than 3%, and those are for special money market accounts with balances of at least $100,000. That would suggest that the spread on the typical HELOC has increased and contributes positively to Kearny’s bottom line.

Unfortunately, it’s not quite that simple. Fixed rate 30-year mortgages have no such flexibility, and even adjustable rate mortgages typically have limits on the frequency of the changes and the maximum, or the cap rate that can be charged. And, of course, in an environment where interest rates have risen sharply over the past year, the bank’s cost of keeping deposits increases.

What is less clear is the mix of mortgages underwritten during the housing boom and the mix of Kearny’s holdings. A January news item on Bankrate.com has the ominous title Is the housing market about to crash? Here’s what the experts say. The article presents what appears to be a balanced view, and even suggests that while the market could see an 8%-9% decline in home prices, there is little chance to see a repeat of the housing crash of 2005-2007:

Rob Dietz, chief economist at the National Association of Home Builders, sums up the consensus among housing experts: “We’re thinking this is going to be a moderate downturn,” he says. …

… “The market is clearly turning,” says NAR chief economist Lawrence Yun.

…Housing economists agree that prices could fall, but the decline won’t be as severe as the one homeowners experienced during the Great Recession. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 15 years ago. The typical homeowner with a mortgage has stellar credit, a ton of equity and a fixed-rate mortgage locked in at a rate well below 5 percent. So no foreclosure crisis looms.

…What’s more, builders remember the Great Recession all too well, and they’ve been cautious about their pace of construction. The result is an ongoing shortage of homes for sale.

“We simply don’t have enough inventory,” Yun says. “Will some markets see a price decline? Yes,” he says. “[But] with the supply not being there, the repeat of a 30 percent price decline is highly, highly unlikely.”

Anecdotally, I live in an area that is typical of much of Kearny’s market. The lines for open houses are gone and the houses are remaining on the market longer. Even the flood of builders buying perfectly fine homes and tearing them down to put up larger and more modern housing has dried up. Many of these factors would seem to support Seeking Alpha’s warning to avoid Kearny.

Rating

One of the most successful mutual fund investors of all time was Peter Lynch, who managed Fidelity Investment’s Magellan fund for 13 years. During that time the average annual return for the fund was 29.2%. Lynch was also noted for his advice to “Invest in what you know” although he subsequently would clarify that quote by pointing out that it should only be a starting point. Clearly, I knew quite a bit about Kearny before looking at it as an investment.

Despite Seeking Alpha’s Quant rating issuing what appears to be a strong sell recommendation, I prefer to look at the positives for Kearny. Kearny survived the housing crash of 2005-2007, and I’m “banking” on Kearny being able to successfully navigate through the current slowdown in housing and rising interest rates, continue to reduce the shares outstanding and to modestly increase the dividend in 2023. For those reasons I will continue to reinvest the dividends and rate the shares a Buy.

Some final notes about ratings. There is an SEC required disclaimer for mutual fund advertisements that contain performance information to include disclosure that past performance does not guarantee future results and that current performance may be lower or higher than the performance quoted.

Clearly, I am under no such requirements, but would like to point out my past performance as rated by TipRanks.com, even though it is a somewhat flawed system. That site gives Crunching Numbers five stars with rankings of #390 out of 20,724 Financial Bloggers #714 out of 28,976 experts.