A longtime activist bank investor and a hedge fund that invests primarily in banks both opened new positions in Kearny Financial (KRNY -1.25%) in the third quarter. Lawrence Seidman purchased more than 631,342 shares worth nearly $4.6 million. Meanwhile, FJ Capital Management purchased 248,000 shares worth nearly $1.8 million. Let's take a look at what these two savvy bank investors might be seeing in this stock.
Different routes for value creation
Kearny Financial, which is based in Fairfield, New Jersey, has $7.3 billion in assets. It has a market capitalization of more than $900 million as of this writing, and it had been a mutual savings bank before going public.
There are a few potential routes to value creation for Kearney. Neither Seidman nor FJ Capital Management has taken an activist position, meaning they would own more than 5% of outstanding shares. So, they could simply be long on the stock. Both Seidman and FJ Capital Management purchased shares for a weighted average cost of about $7.21 per share. That means they purchased shares when they were trading at a significant discount of just 69% to tangible book value.
Although Kearny's returns are not exactly stellar and its cost of deposits is probably higher than other comparable banks, the bank has very sound credit, with practically no net charge-offs (debt unlikely to be collected) through the third quarter of the year. Additionally, the bank has just a small portion of loans that remain on active deferral, which is also a good sign.
Kearny also has a ton of capital, which means it will likely continue to buy back shares. Since 2015, it has returned more than $600 million to shareholders through share repurchases and dividends. The bank paused repurchases in March at the beginning of the pandemic but has since resumed them, announcing in October the start of another buyback plan that will see the bank repurchase as much as 5% of its outstanding shares. Kearny has also grown its franchise through four acquisitions in the last decade, so it could use some of its excess capital to continue with that strategy.
Seidman and FJ have already seen a decent return, with shares of Kearny recently trading around $10.22 as of this writing, slightly below tangible book value. But shares were trading above $14 before the start of 2020, so there could still be plenty more upside.
Seidman and FJ Capital also may be viewing Kearny as a potential takeout candidate. Before it went public, Kearney was a mutual savings bank. This kind of corporate structure allows mutual banks to conduct their initial public offerings in multiple steps. The important thing to note here is that mutual savings banks cannot get acquired until they have been fully public for at least three years. Kearny completed its second-step conversion in 2015 and therefore finished its three-year holding period in which it is not allowed to be acquired in 2018, so it could sell itself if it wants to.
Now, there is no evidence that it wants to do this, considering its history of being an acquirer and the fact its CEO, Craig Montanaro, is only 53 and likely has some years left before thinking about retirement. However, Montanaro also has a change in control agreement in place, entitling him to a payment worth three times his base salary should the bank be acquired, so he would certainly stand to benefit from such a transaction.
Room to run
Investors can benefit by going long on the stock, hoping for an acquisition, or possibly both, as there still looks like there is room to run for Kearney. Up until the pandemic, the bank had been improving earnings, and it still has very solid credit quality. With share repurchases resuming, the stock should be able to grow organically or through strategic, well-placed acquisitions. The bank could also get bought in the future, which typically results in some kind of premium.