Description

SUMMARY

Needham Bank, which has been a mutual bank for the entire 131 years of its existence, started trading publicly two weeks ago, on December 28th. The organization was restructured so that the bank is now a wholly owned subsidiary of NB Bancorp, Inc., the public entity now trading on Nasdaq (ticker: NBBK).

As is typical with these mutual-to-stock conversions, the IPO was priced at $10.00. The stock traded in a range of $13.10 to $14.18 in its first two weeks as a public company, closing Friday at $13.97.

I consider NBBK to be attractive at this price for investors with patience and a three-to-five-year time horizon, with a good likelihood of earning an annualized return exceeding 20% over that period.

There are structural reasons why I believe that we have the opportunity to invest in NBBK stock at an attractive price:

1. IPOs of these mutual-to-stock conversions happen without hoopla. The depositors at these banks have priority in applying for shares, and there are no roadshows to drum up interest.

2. As a result it will be some time before analyst coverage is initiated and the stock appears on investor screens.

3. Because of the absence of prior “ownership” of Needham’s retained earnings, which has been built up over decades, mutual-to-stock conversions are almost invariably priced so that the IPO price is well below tangible book value. Technically the depositors in a mutual bank “own” the bank, though the only real benefit they get from this ownership happens if the bank converts to stock form. If that happens, depositors get first rights to buy shares in the IPO.

4. Despite the pop of almost 40% from the IPO price since going public, the stock is trading at an 18% discount to tangible book value of $17.00. Post-IPO, with an overcapitalized balance sheet and a long and solid history of profitability, earnings should increase meaningfully over the next few years.

5. The bank is permitted to buy back shares (and pay dividends) after one year as a public company. If the stock is trading below TBV then, as it is today, buybacks could be very accretive.

6. Aspects of the management team lead me to believe that the bank is likely to be sold to a larger one when that is permitted, which is three years after the IPO.

I believe that the stock is worth at least 100% of TBV today, or at least $17.00 per share. It is not hard to imagine the stock trading at over $20 in a couple of years and being acquired at about $35 in four to five years, as I will discuss below.

HISTORY

Needham Bank was founded in 1892 in Needham, MA (suburban Boston), and has served the Greater Boston metropolitan area and, to a lesser extent, portions of neighboring states since that time. As was common in that era, local businessmen (including several homebuilders) recognized the need for a community bank which could be a safe home for savings and a conduit for financing mortgages. Needham’s initial “office” was a chair in the public library, staffed for a few hours each month to accept deposits, make loans, and collect loan payments. In 1906 in opened its first real office, in a small storefront, and in 1923 built its own building.

In the century since then, the bank has grown and prospered, and is now one of the largest community banks in the Greater Boston metropolitan area and throughout New England. At the end of 2022, Needham had total assets of $3.6 billion, and earned net income of $30 million that year. By September 2023 assets had grown further to over $4.2 billion, and the annual earnings run rate was $34 million. It operates through 11 branches and two administrative offices, all located in suburbs of Boston.