Needham Bank Thrift Conversion Opportunity (Issue #68)
Needham Bank (NB) going public through mutual conversion could be...
TL/DR:
Needham Bank Thrift Conversion
What Are Thrift Conversions?
Watchlist & Portfolio Updates
What To Read
Needham Bank (NB) going public through mutual conversion could be a really exciting opportunity as someone who invests in thrift conversions (overview of Thrifts below). NB is not a large bank with barely a double digit number of branches that are all concentrated in Boston suburbs. However, thrifts can be really interesting opportunities for a few reasons. First, being small scale they often fly under the radar of most investors or are too small for many funds and institutions. Next, unlike banking in general for a thrift to work they don’t necessarily have to be the highest quality operation because they are growth through acquisition, market share growth opportunities for acquirers. Finally, thrifts already have baked in advantages for investors put in place by regulators, namely having to go public at below book value.
Now let’s jump into NB more specifically. The market cap midpoint is $300m for the IPO or 51% Price/Tangible Book Value. NB has $3.7b in assets with an ROA of 0.96% and ROE of 9.06%. The bank also has a solid 62.3% Efficiency Ratio. Not quite Hingham (HIFS) numbers, but still solid for any bank. No Net Charge-Offs (NCOs) although 17% of the loan book are construction. Finally, NB has very few unrealized bond losses. Not too shabby from the bank.
What Are Thrift Conversions?
Thrift Conversions are a unique discipline of investing that are a product of community banks going public. This is different from other IPOs because being community banks they are owned by the depositers meaning they have to give a lower buy-in price to their customers upon going public. Further regulations also force them to go public below book value. As a value investor at heart seeing anything indiscriminately forced to be below intrinsic value is exciting. The IPO can serve one of two functions. First, it can provide more funding for the bank to grow and expand. This is the route Citizens Bank took growing from $600m to $160b in assets since IPOing. Second, it provides an easy opportunity for another bank looking to expand its territory or grow its loan book. Acquisition are only possible 2 years after the IPO. Acquisitions in they do happen are typically at ~1.5x Price/Book. Therefore, if they IPO at 0.7-0.8x Price/Book that can double your money in 2-3 years (>25% CAGR).
Watchlist Update:
Portfolio Update:
For the full spreadsheets and linked deep dive go here.
What To Read:
Substack is a gathering place for a lot of great newsletters written by people a lot smarter than me. I wanted to mention a few of my favorite newsletters to read:
by Alex Morris by Edwin Dorsey by John Maxfield & Jonathan Rowe by Yegor “YZ” by Andrew Walker by Ryan & BrettUntil Thursday,
Soren
Thank you for the kind words Soren!
And look at that MKL allocation :)
Thank you for the mention Soren!