PicoBlog

With a new year I wanted to talk about a new stock (just went public last week!). Needham Bank (NASDAQ: NBBK — $555.52m) IPOed on Thursday ( December 28, 2023). There was a ~40% pop on the first day which means investors are clearly excited by the now public opportunity and it is not more expensive for the rest of us.

In recent years the bank has grown revenue by ~28% annually and grew net income by 40% in 2022 on track for at least ~22% growth this year. This is very encouraging and I don’t know many other businesses doing the same much less a bank doing it. The bank is currently priced at 1.6x Price/Book which isn’t cheap, but their reinvested earnings should be useful for growing book value. Current assets total $4.2b, $3.7b of which is a loan portfolio. There is also a little over $100m of cash on the balance sheet.

Unlike one of my favorite companies Hingham Institution For Savings, Needham Bank does not limit themselves to certain specific types of loans. They are a more general consumer bank meaning they have loans on “things that move”, student loans, and more. To be clear, the majority of the loan book consists of one-to-four-family residences and commercial real estate.

Conversely, similarly to Hingham the charge-offs for the loan book are extremely low. They do not round to zero every year for the past 20 years they still sum to less than a percentage point annually. The bank has a solid ROE of 10.19% and an alright efficiency ratio of 62.5%.

The bank is comprised of 11 branches spread across the suburbs of Boston with only one location in the city. This would be a prime acquisition target for any bank looking to quickly grasp practically all of the greater Boston Metro Area.

There are many telltale signs of motivations for IPOs and more importantly acquisitions within small banks. One of them includes the age of management because an older CEO may want a nice retirement package of liquid public stock or cold hard cash from acquisition. The CEO Joe Campanelli who has been with the bank since 2017 is to my best estimate 67 years old and probably ready for retirement in the next couple years.

Looking forward to the thrift conversion/mutual conversion playbook there are certain telltale signs that have yet to reveal themselves. The first and largest being outside big-name investors obtaining large positions, board seats, etc. and forcing the company into a buyout. Since the company has been trading for less than a week there is still plenty of time for an investor like this to step in. Further even once the investor gets involved there is a 2-year buffer period before the bank can be acquired. This is not a high-risk high return space, but with enough of the criteria “checked off” early on it can have high conviction on outcome likelihood.

As a thrift it would be difficult to see any real opportunity unless the stock became significantly undervalued because of trading price or growth in book value because the acquisition multiples for a typical bank are typically right where the stock is currently trading (~1.5x Price/Book Value). Additionally, there are a lot of other signs of a potential acquisition that have yet to play out before this one becomes very promising. Personally, I will be watching eagerly from the sidelines and consider investing given the right changes to make the stock more enticing.

Watchlist Update:

Portfolio Update:

Until Sunday,

Soren

Disclaimer: Nothing comprised within this newsletter is financial advice. Soren Peterson and Pillars and Profits Newsletter are liable for any financial results. Always do your own research.

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