Kearny Financial in Fairfield, New Jersey, announced a partial restructuring of its balance sheet Thursday, selling $121.4 million of lower-yielding debt securities and reinvesting the proceeds in higher-yielding instruments.
The $7.9 billion-asset bank bought debt securities that yield, on average, 440 basis points more than those that it sold.
The transaction will result in a one-time after-tax loss of $11 million, but it will have virtually no impact on Kearny's tangible book value, since the loss was already reflected in capital through accumulated other comprehensive income, which is known as AOCI.
Kearny also tapped the wholesale borrowing market to purchase $100 million of debt securities, a transaction good for an average spread of 216 basis points.
In addition to the changes in its investment portfolio, Kearny said that it intends to embark on a cost-cutting campaign with the goal of shaving 5% to 10% off its annual noninterest expense spending. The company's noninterest expenses totaled $30.6 million for the quarter ending Sept. 30, up 3% year over year.
The securities that Kearny sold amount to less than 10% of its $1.38 billion portfolio, too small a proportion to qualify as a wholesale restructuring, Janney Montgomery Scott Research Director Chris Marinac wrote in a research note.
Laurie Havener Hunsicker, who covers Kearny for Compass Point Research & Trading, predicted that the balance-sheet moves, along with the efficiency campaign, will drive annual earnings per share to $1 in the company's 2024 fiscal year, up from her previous estimate of 87 cents.
Hunsicker gives Kearny a "buy" rating based on the strength of its balance-sheet maneuvering and conservative credit culture. "Kearny has strong underwriting standards and should outperform through the cycle," Hunsicker wrote Friday in a research note.
Banks across the spectrum have suffered hits to tangible book value as the sharp rise in interest rates has led to a corresponding decline in the value of the securities they added to their books in 2020 and 2021.
Marinac estimated the industry-wide, year-to-date hit to tangible common equity at 16%, though he added that virtually none of that loss is the result of credit risk, given banks' generally conservative approach to investing.
Banks' securities losses are reflected in AOCI, which is charged to their capital accounts. Though the changes don't impact regulatory capital, they have created operational difficulties for a number of banks. Share buybacks have become less frequent, and merger-and-acquisition activity has slowed dramatically.
Investors expressed approval of Kearny's moves Thursday, pushing shares up 11% to $10.09. The stock gave back some of those gains on Friday, but the share price was still up nearly 9% over its Wednesday closing price in midday trading.
Kearny is the holding company for the 138-year-old Kearny Bank, which operates 45 branches in Northern New Jersey and the New York City boroughs of Brooklyn and Staten Island. Kearny converted to stock ownership in 2015.
