Kearny Financial Corp. (KRNY) Q1 2027 earnings review
Kearny cuts expenses to lift profit, but funding costs rise
Kearny earned more by spending less, while the lending margin that drives its story stopped widening. Net income rose to $10.0 million, helped by a 6% fall in costs from the June quarter. Chief executive Craig Montanaro said the margin narrowed because its last COVID-era wholesale funding position repriced, and loan repricing will widen it again. By our math net interest income growth from a year ago slowed to 6%, half the June quarter's pace.
| Net income | $10.0M +5.7% from a year ago; +40% from June, when a one-off tax charge hit |
|---|---|
| Net interest margin | 2.23% 2.26% in June; 2.10% a year ago |
| Profit before taxes and credit provisions | $13.5M +14% from June |
| Margin outlook | Unchanged further expansion expected, no figure given |
⚖️ Verdict: 🔴 Bearish
The story got worse because the funding side of the margin stopped helping. The cost of interest-bearing deposits is back at the year-ago level, the gap between what Kearny earns on assets and pays on liabilities has narrowed again, and the headline loan growth rests mostly on $75 million of consumer loans the release does not explain. The good news: loan yields rose again, and costs fell to their lowest share of revenue in more than a year.
The question now is whether loan repricing alone can widen the margin now that cheaper funding has stopped arriving. One answer is yes, because $722 million of low-rate mortgages come due in 2027 at rates almost four points higher; the other is that borrowers pay off and leave, as multifamily balances have all year. The December quarter's margin, with the last wholesale funding position already repriced, will give the first clean reading.
🐂 Bull Case
Loan Yields Rose Again as Old Mortgages Repriced
Kearny's recovery rests on one mechanism. Most of its loans are apartment-building and commercial mortgages written years ago at rates near 4%, and each one that matures or resets moves to today's rates near 7%. Chief executive Craig Montanaro said that process, with "balance sheet remixing", should "support further margin expansion in the quarters ahead".
This quarter the mechanism worked. The average yield on loans reached 4.84%, up a tenth of a point from June, even though fees from borrowers paying off early fell by almost half. Net interest income excluding those fees and purchase-accounting items rose slightly from June, Kearny said. By our math it grew 7% from a year ago.
- Loans due to mature or reset in calendar 2027: $722 million, carrying an average 3.80% today
- Rate they would carry if repriced now, by Kearny's own schedule: 7.57%
- Extra annual interest if every one of them reprices at that rate: about $27 million, by our math
- Multifamily balances: down $63 million from June and $204 million from a year ago
The schedule matters because net interest income is almost 90% of revenue, so each point of yield counts. But the risk is that borrowers pay off and leave rather than reprice, and multifamily balances have fallen every quarter this year. Yields rose anyway, so the loans that stayed repriced faster than the book shrank.
What to watch: the loan yield in the December quarter, before most of the 2027 loans come due. A further rise would show the repricing works even in a quarter with few maturities.
Costs Fell to Their Lowest Share of Revenue
Non-interest expense fell 6% from the June quarter, to $31.8 million. June carried a severance charge and this quarter included a one-off cut to stock compensation, so part of the fall is noise. Stripping both out, by our math underlying costs still fell $1.1 million, or 3%, with advertising, professional fees and core-processing fees all lower.
The result is an efficiency ratio, costs as a share of revenue, of 70.2%, the best reading in more than a year. Against a year ago, costs rose 0.4% while revenue grew 4%, so Kearny is finally growing into its cost base rather than adding to it. Even so, it still spends 70 cents of each revenue dollar, which is why return on equity is only 5.3%.
What to watch: the December quarter's expense line, which has no one-offs to hide behind. A reading near this quarter's level would confirm the lower cost base is permanent rather than a quiet quarter.
Commercial Loans Grow While Multifamily Shrinks
Kearny wants to be a commercial bank rather than a mortgage lender, so it is letting apartment-building loans run off and replacing them with business and construction lending. Chief executive Craig Montanaro describes it as moving the book "toward higher-yielding commercial and construction lending opportunities", and the same push extends to deposits from business customers.
- Construction loans: up 15% from June and 60% from a year ago
- Business (C&I) loans: $231 million, up 63% from a year ago
- Business and construction loans as a share of all loans: 8.9%, from 5.8% a year ago
- Multifamily share of loans: 40.7%, from 45.8% a year ago
- Commercial customers' share of deposits: 23%, from 21.7% in June
The shift matters because both categories carry higher rates than the loans they replace, and business borrowers bring deposits with them. But the new categories together are still under a tenth of the book, and multifamily shrank by more than they grew this quarter. Business loans added only $7 million, the smallest gain in four quarters.
What to watch: business loan balances in the quarterly filing, split between originations and purchased pools. Growth from Kearny's own bankers would show the new teams are producing, not just the purchasing desk.
🐻 Bear Case
Funding Costs Rose and Ended the Margin's Climb
Net interest margin, what Kearny earns on its assets after paying for its funding, had widened for seven straight quarters. This quarter it slipped to 2.23% from 2.26%, because interest expense rose faster than interest income. Montanaro blamed the "final remaining COVID-era wholesale funding position" moving to market rates and said the "underlying margin drivers remain intact".
- Interest expense: up $2.5 million from June, against interest income up $2.2 million
- Cost of brokered deposits: 4.03%, from 2.87%, worth about $1.6 million a quarter by our math
- Cost of interest-bearing deposits: 2.68%, back to the level of a year ago
- Interest rate spread: 1.76%, down for a second quarter from a 1.85% peak
The hedges that kept wholesale funding cheap have run out, and the retail side offers no relief either. Kearny has $816 million of retail certificates maturing in the next two calendar quarters at about 3.2%, and the certificates that matured last quarter rolled into those same short buckets at the same rate. So the funding tailwind is spent, and from here only loan repricing can widen the margin.
What to watch: the cost of interest-bearing deposits in the December quarter. A reading at 2.68% or below would confirm the wholesale repricing was the last step up, as Montanaro says.
Most Loan Growth Came From Unexplained Consumer Loans
Kearny's headline is "growing total loans by 7.2% on an annualized basis, while reducing multifamily mortgage exposure". The release does not say that a single line, "other consumer" loans, jumped to $77 million from $2 million. That one line supplied $75 million of the quarter's loan growth. By our math, without it loans grew 0.5% from June, about 2% annualized.
Nothing in the release or presentation names these loans, and consumer lending is not part of the commercial strategy Montanaro describes. Loans bought from another lender would fit: they arrive in one block, they bring no relationship deposits, and they carry thinner reserves. Kearny holds a 0.55% allowance on consumer loans against 0.88% on commercial ones. The total allowance rose only $553,000 on all the growth, and Kearny said the provision was "primarily driven by loan growth".
This matters because loan growth is the evidence that the new commercial teams are producing, and this quarter most of the growth was not commercial. Commercial loans as a whole grew $14 million, because construction and business gains barely covered the multifamily run-off.
What to watch: the quarterly filing's loan note, which has to disclose purchased loans. A purchased pool would mean Kearny is buying growth to fill the hole that multifamily repayments leave.
Problem Loans in Apartment Buildings Rose Again
Kearny's biggest exposure is $2.4 billion of apartment-building mortgages, almost half of them in New York City, and these produce most of its problem loans. Nonaccrual loans rose $3.3 million from June to $51.2 million. The presentation puts multifamily problem loans at 1.64% of that book. By our math that is about $40 million, against $36.9 million at June.
- Allowance as a share of problem loans: 90%, from 95% in June
- Classified loans, the ones the bank flags as weak: $90.9 million, up $2.7 million
- Net charge-offs: $277,000, or 0.02% of loans
- New York multifamily loans maturing or resetting within a year: $307.7 million, from $246.4 million
The numbers stay small against the book, and charge-offs are close to nil. But the maturity wall is the test, because a borrower paying 4% who cannot refinance at 7% becomes a problem loan, and the next-year total just grew by a quarter. Last fiscal year Kearny trimmed its multifamily reserve while those problem loans rose, so coverage has thinned.
What to watch: the quarterly filing's nonperforming-loan table by segment, due in November. A multifamily figure above $40 million would show the June dip was a pause rather than a turn.
Risks This Quarter Didn't Answer
Four standing concerns got no new answer in the release or the presentation, and one of them moved the wrong way without any comment from the company.
- Share repurchases: none again; shares outstanding rose by 191,000 on stock awards, with a 13.98% CET1 ratio and no stated reason for holding the capital
- Savings from the automation programme with The Lab Consulting: no figure for a fifth quarter; a run-rate target would move the cost case
- Net cost of the expiring interest-rate hedges: not separable from the brokered-deposit repricing; a split would show whether the step-up is finished
- Unrealized losses on bonds: the after-tax loss on available-for-sale securities now stands at $90.6 million; only lower rates or maturities shrink it
👓 Other Themes
Kearny Launched a Nonprofit Banking Team
Kearny added a "dedicated Nonprofit and Independent Education Banking team", "led by a seasoned industry professional with extensive experience serving mission-driven organizations". The aim is deposits: Montanaro said the team "broadens access to attractive relationship-based funding sources". The presentation counts 22 deposit-focused bankers added over the past year. No deposit figure for the new team exists yet, so it stays a plan.
Rate Moves Cut Book Value but Lift Repricing Rates
Market interest rates moved against Kearny's bond book and in favour of its loan book. Tangible book value per share fell $0.19 to $9.88, which Kearny attributed to "changes in the fair value of available-for-sale securities resulting from market interest rate movements during the quarter". The same rates lifted the rate at which 2027's maturing loans would reprice to 7.57%, from 6.99% in June's schedule.
💲 Other KPIs
Deposits grew $124 million from June and 3.6% from a year ago, the fastest in more than a year. The gain came in interest-bearing checking, while savings balances shrank. Non-interest-bearing deposits, the free funding, stayed at 13.5% of the total, so the new money costs about 2.5%.
Profit before taxes and credit provisions, the cleanest read on a bank's operating earnings, rose 14% from June to the highest level in the five quarters shown. Lower costs did the work, because revenue slipped 1%. Against a year ago it is up 14% as well, on revenue up 4%.
The bond portfolio shrank 3% from June and 9% from a year ago as Kearny let maturities fund loans rather than reinvest. Its yield rose to 3.91%, since about a quarter of the book floats with short rates. Bonds are now 13% of assets, down from 15% a year ago, so the balance sheet keeps tilting toward loans.
🔮 Guidance
Unchanged. Montanaro still expects loan repricing and remixing to widen the margin in the quarters ahead, with no figure attached. The schedule behind that has $722 million of loans maturing or resetting in calendar 2027, which only begins in the fiscal third quarter. By our math a full repricing of that wave adds about $27 million a year, and Kearny warns the benefit depends on "borrower behavior, credit discipline and replacement opportunities".
Unchanged. The board declared $0.11 again, the same amount as in every quarter shown. At 70% of this quarter's profit the payout is covered, after running above earnings in fiscal 2025. Cash paid is about $7.0 million a quarter, and it rises slightly each quarter because the share count grows through stock awards rather than shrinking through buybacks.
❓ Key Questions
What are the $75 million of new consumer loans?
Other consumer loans rose from $2.4 million to $77.4 million in one quarter, most of the loan growth. Neither the release nor the presentation names the product, the seller, the yield or the reserve, and the strategy is commercial, not consumer.
How much maturing multifamily refinanced with Kearny this quarter?
Multifamily balances fell $63 million while yields rose. The repricing story needs loans that reset in place; the share that paid off and left tells investors how much of the 2027 wave will actually reprice.
What will the automation programme with The Lab Consulting save?
Costs fell to 70% of revenue, but Kearny has given no run-rate savings target or timing for the programme in five quarters, so readers cannot tell how much of the drop is structural.
Why keep capital rather than repurchase shares?
CET1 is 13.98%, no shares were bought back for a ninth quarter by our count, and shares outstanding keep rising through awards. Management has not said what the capital is reserved for.
Which multifamily loans drove the rise in problem loans?
Nonaccrual loans rose $3.3 million, and by our math the multifamily figure is back near $40 million. Investors need the borough, the rent-regulation status and the expected loss on loans in foreclosure.