Once is Chance, Twice is a Coincidence, Three Times is a Pattern

About nine months ago, Oddball Stocks Newsletter guest writer Catahoula wrote an article entitled “Put Yourself in My Shoes” on Five "Teenage" OTC-listed banks that were trading between 0.75x and 1.25x Tangible Book Value, with an efficiency ratio under 55%, net interest margin greater than 300 basis points, and were between 10 to 20 years old (hence, "teenagers").  

Today, we sat up and took notice when the third of those five banks, Centric Financial Corporation (CFCX) announced a merger with First Commonwealth (FCF) in an all-stock transaction valued at approximately $16.20 per share.

Over the years, we've grown fond of Centric, a solid bank that has flourished under Patti Husic, President and CEO. CFCX  was founded in 2007, making it a teenager at 15 years old. Centric Bank has principal executive offices in Enola, Pennsylvania. This is the Harrisburg area about 110 miles away from Philadelphia. A major hiccup along the way occurred about a year ago when the bank suffered a $5.1 million fraud in 3Q21. Though mighty unpalatable, one loan fraud is a business risk in banking.  

CFCX has sometimes traded 85% of tangible book value, which is confounding. If you compare Centric (CFCX), which trades on OTC, with Bank of the James (BOTJ) a similarly-sized bank on the NASDAQ, Centric is more efficient and profitable. But there's sometimes been a valuation difference of thirty percent of tangible book value between otherwise comparable public and private (OTC-listed) banks! 

We find this really fascinating because these paired comparisons of similarly-sized banks demonstrate a discount that arises purely by virtue of being OTC-listed instead of public. If the Oddball Stocks Newsletter stands for anything, it is for harvesting this OTC valuation discount.

We asked Catahoula why he thought that so many of the teenage banks he mentioned have merged.  He said that a bank in its second decade often faces increasing pressures. The board and executives have tapped out their contacts in the immediate community for business. They contemplate growth through expansion, but they are not as familiar with neighboring towns. Sometimes they are reluctant to acquire acquire another bank. He also said that capital management becomes more important. As profits accumulate, banks may face pressure to pay a dividend or buyback stock.

Often, early investors look for a a cash-out of their initial investment before two decades have elapsed.  Banks initially listed on the OTC Markets usually intend to graduate to the major exchanges, hoping to uplist to NASDAQ, and ultimately the NYSE. Uplisting supports expansion of the shareholder base to include institutional investors, with a goal of eventually becoming included in the Russell 2000 or 3000 indexes.  

Whether increased valuation comes from a buyout or uplisting to a major exchange, at Oddball Stocks we like to eat steak for the price of hamburger. We will continue to bring you small, non-public companies and banks trading in the obscure corners of the market. If you are interested in the two remaining teenage banks that Catahoula identified, be sure to check out Issue 37 of the Oddball Stocks Newsletter.

Just Published: Issue 41 of the Oddball Stocks Newsletter

We just published Issue 41 of the Oddball Stocks Newsletter. If you are a subscriber, it should be in your inbox right now. If not, you can sign up right here.

Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription. 

The past two years' back Issues are available for $139 per copy. (Links for purchase: Issues 32, 33, 34, 35, 36, 37, 38, 39, and 40.)

Our older Issues (19-31) are available for $99 per copy. (Links for purchase: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31.)

We also published a Highlights Issue in February 2020. The Highlights Issue is available here for purchase for only $59 as a single Issue. If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.

Also, we tweet regularly from the @stocksoddball account on Twitter so be sure to follow us there.

Second of Catahoula's Five "Teenage" Banks Acquired

In November 2021, our guest writer Catahoula wrote a guest piece in the Oddball Stocks Newsletter entitled: Guest Piece: “Put Yourself in My Shoes” by “Catahoula” on Five Teenage OTC Banks. (That Issue #37 of the Newsletter is available à la carte.) He writes in with an update,

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In February, Peak Financial in Idaho (IDFB) got taken out. Last week, Integrated Financial Holdings (IFHI) announced a nice merger. MVBF is tech-forward and fintech-sensitive. It's an all-stock acquisition, so I might consider hanging around. IFHI built a nice platform for government guaranteed loans at West Town Bank. 

From my November 2021 article in Issue 37, there are three remaining teenage banks -- CFCX, USMT and CMRB. In 2Q22, CMRB's operating results continued to flag due to increased salary and bonus expenses. As "Ronbo" on Twitter summarized: 


All of the long-time holders (myself included) were unhappy about the deterioration in the operating results. I sold out my full position. As "Our Bank" on Twitter said: 


Although I no longer have a dog in this hunt, if CMRB can't find its footing, in my opinion it will be increasingly vulnerable to acquisition. The board owns ~20% and former CEO Herb Schnieder had 2.5% or so (the last proxy before he departed). As I mentioned in the article:

"When I look at the opportunity set among OTC banks, I identified five that have reached their second decade. I believe they are either set on a path to acquisition or a profitable long-term niche."

--

Be sure to check out Issue 37 of the Oddball Stocks Newsletter and read Catahoula's piece on the three remaining "teenage" banks.

Pardee Resources Co. ($PDER) Reports Q2 2022 Results

Pardee Resources Co. (PDER) published quarterly results (PDF) for the period ended June 30th.
During Q2 2022, Pardee Resources Company earned $9.24 per share, an increase of 211% above the $2.97 per share earned during Q2 2021. EBITDA during the quarter was $14.74 per share, 144% higher than EBITDA of $6.03 earned in 2021. Supported by strong commodity prices during the quarter, our Metallurgical Coal, Timber & Surface, and Oil & Gas Divisions achieved meaningful revenue improvements over Q2 2021 results. Quarterly revenues from our Alternative Energy Division were down versus last year due to a decline in both power production and the average realized price of our renewable energy credits. Despite high summer temperatures in both California and Portugal, our table grape and almond crops remain on track for a healthy harvest season.

Metallurgical Coal Division: Strong global coal and steel markets lifted U.S. metallurgical coal markets which were further strengthened by the fallout from the Ukraine War. While new U.S. longwall mines helped to meet demand, a limited supply response from Australia and Canada, together with equipment, labor, and transportation bottlenecks in the U.S., kept global supplies in check. As a result, 2022 domestic High Vol-A metallurgical coal contracts settled at record high prices of over $180 per ton. At Pardee, a year-over-year production increase resulting from a new deep mine, coupled with stronger pricing, led to Q2 2022 Division revenues of $6.3 million, 127% higher than our Q2 2021 results; while first half (H1) 2022 Division revenues totaled $11.0 million, 140% above last year’s results.

Oil & Gas Division: During Q2 2022 natural gas prices continued their upward momentum, but not without significant volatility. LNG exports and limited gas-to-coal switching led Appalachian Basin prices higher, from a monthly average of $3.23 per MMBtu in January to $6.49 per MMBtu in May. Prices then fell from their interim highs after an explosion in early June forced a major U.S. LNG export facility offline, crimping demand and prices. Late in the quarter, prices were trending upward again as a heatwave spread across the U.S. causing a natural gas demand surge from electric power producers. As a result of the strong pricing year-to-date, Pardee’s H1 2022 Division revenues reached $6.6 million, a 101% gain above H1 2021 Division revenues of $3.3 million.

Timber & Surface Division: Strong markets during the quarter sustained hardwood lumber and log prices at elevated levels. Single-family housing starts for the first six months of the year were up 8% over the prior year period, while home remodeling expenditures increased 18%. Hardwood lumber exports through May were also up 21% in dollar value versus the prior year. During Q2 2022, Pardee’s realized average hardwood stumpage price was $374 per mbf, 21% higher than Q2 2021 levels. Meanwhile, our Q2 2022 hardwood production was down versus last year due to harvest timing variances, while H1 production year-over-year was flat as logging operations remained challenged by shortages of labor, equipment, and trucking services. Quarterly gains from our Virginia rural real estate initiatives were $394,207, bringing the total for the first half of the year to $1.3 million.

Alternative Energy Division: While high prices for oil, natural gas, and coal placed renewed urgency to develop solar generating capacity, U.S. installations during Q1 2022, which is the latest data available, were 21% lower than Q1 2021 and 52% lower than Q4 2021. The reduction in U.S. solar installations was due to a Department of Commerce tariff related investigation which halted solar module shipments to the U.S. from Asia, a constraint which is expected to remain through the end of 2022. Electricity production from Pardee’s renewable portfolio during Q2 2022 was 15.3% lower than during Q2 2021, due to both year-over-year weather variances and equipment-related outages. Meanwhile, our average SREC price dropped 17.5% versus Q2 2021, following the expiration of certain long-term contracts in New Jersey. Overall, quarterly Division revenues were $992,000, a 23% decline versus our Q2 2021 results.

Agriculture Division: Despite the high summer temperatures recorded in both California and Portugal during Q2 2022, our table grapes and almond trees are developing well, and healthy harvests are expected in the fall. In California, our table grapes benefited from warm days and cool nights; while in Portugal, the plentiful water supplies allowed for irrigation sufficient to avoid the negative effects of hot weather. As reported in our Q1 2022 Report, we do not expect the current drought in the U.S. West to materially impact our table grape operations since both of our ranches have access to sufficient well water.

Recently, we got to thinking about how Pardee's timber acreage per share has changed over time.  At the end of 2002, Pardee had 770,196 shares outstanding. They had not yet bought their 44,000 acre “Powellton” timber tract in West Virginia (for which they paid $18 million in 2003), so their timber holdings must have been about 156,000 acres, or 0.2 acres per share. It also had a book value of $36 million, paid a total of $1.78 in dividends that year, and had $4.7 million of outstanding preferred stock at liquidation value. The shares traded for about 1.5x book value. 

As of the second quarter of 2021, Pardee had 660,112 shares outstanding and owns something on the order of 155,000 acres of land. Their holdings have grown to 0.24 acre per share, or a 20% increase in acreage per share, during a period of 20 years – thanks to share buybacks. Meanwhile, Pardee's book value increased by 4.3x to $155 million, it returned $15.4 million to shareholders in 2021, and it currently trades for 1.1 times book value.

If you are interested in Pardee, you will find the June 2022 edition (Issue 40) of the Newsletter especially worthwhile. Guest writer Marcus Frampton's piece was titled, “Pardee Resources vs. Beaver Coal – a Comparison of Two High-Yielding, Coal-Rich Land Companies”. The Issue is available here for purchase à la carte.

Previously, regarding Pardee Resources on the blog:

We will have more about Pardee Resources in the upcoming August 2022 edition of the Oddball Stocks Newsletter, which will be our 41st Issue.

"The Family Behind Pinelawn Memorial Park Cashed in During COVID"

Earlier this month we posted an excerpt on the blog from the Oddball Stocks Newsletter about Pinelawn Cemetery. A journalist from ProPublica has just published a long exposé on Pinelawn Memorial Park, which has "land share certificates" that trade on the OTC:

All those new graves and higher prices at Pinelawn translated into cash for the Locke family, the descendents of the cemetery’s founder. The explanation lies in an obscure but lucrative financial instrument called a “land share,” which in Pinelawn’s case dates back to 1904 and pays dividends twice a year. Those payouts more than doubled during the early months of the pandemic, from $13.65 per share in August 2019 to $28 in August 2020, before subsiding to $20.70 in August 2021.

The Locke family owns 51,964 of the 127,850 land shares that were issued by Pinelawn during the presidential administration of Theodore Roosevelt, and which still circulate today. The shares are unusual in another regard: Some of the rest are traded on an over-the-counter Nasdaq market — their price has more than doubled over the past five years — and a small coterie of investors have bought shares, coveting their reliable revenue stream. No other cemetery land shares are listed on Nasdaq’s OTC Markets Group.

Calling them “land shares” is a bit of a misnomer, since they don’t actually entail owning land. Instead, they’re an investment, originally used to fund the creation of the cemetery, that entitles the holder to dividends derived from the sales of cemetery plots. Half of the proceeds from each sale of a plot go to pay the dividends, with the other half used to take care of the property.

The shares remain valid until the last plot is sold and the empty land at Pinelawn has been used up. That day is far off. Of Pinelawn’s 839 acres, more than 600 remain unsold and undeveloped today. In 2018, Pinelawn president Justin Locke said that at the current pace the cemetery wouldn’t run out of land for at least 206 years.

That is much more unsold land than we had previously estimated. However, it seems plausible because Pinelawn has enough undeveloped land that they have proposed to develop warehouses and office buildings on some of it:

Justin Locke was appearing before the Cemetery Board to sound them out on a new idea: leasing 100 acres of Pinelawn’s property to develop into warehouses and office buildings.

Justin Locke made his case to the Cemetery Board, starting with the surprising claim that the area of the cemetery he wanted to develop was blighted. He described the 100-acre parcel as filled with “crime, trespassing, quality-of-life issues that are affecting the neighbors, complaints. It’s hurting our reputation.” (The “crime” he was describing seemed to consist largely of trespassers riding ATVs on the property.)

Noting Pinelawn’s extensive unused land, Locke touted the potential revenues the cemetery could earn by leasing the parcel. He called it a “cake-and-eat-it scenario where we can leave the property over there, maintain control over it, but generate a substantial income off of it in the meantime.”

The Pinelawn certificates are now "expert market" on the OTC. Recently they have been trading in the low $500s, which is about an 8% distribution yield on the most recent two distributions.

Oddball Stocks Newsletter Excerpt - Pinelawn Cemetery (Issue 38)

This is an excerpt from our Company Updates in Oddball Stocks Newsletter Issue 38 (January 2022): 

We recently did a deeper dive on Pinelawn Cemetery and its “purchase money certificates” that trade as PLWN on the OTC and collectively are entitled to “one-half the gross proceeds of the sale of the use of lots in Pinelawn Cemetery.” One thing that we were able to confirm is that there are 127,850 land purchase certificates outstanding. That means that the market capitalization of these interests, in total, is $67 million at $525 per share. We have a list of certificate shareholders that, while not current, shows that members of the Locke family, which control the cemetery nonprofit, owned something like 30,000 of the certificates. Rather than worrying that the cemetery management would want to disadvantage the certificates, it actually appears as though their incentives are aligned with the PLWN holders. In fact, if anything the State of New York has gotten upset that too much was being paid to the certificates.

Our understanding is that in 2004, Pinelawn had half of its 785 acres unsold. It is a bit difficult to tell how much is unsold now, but keep in mind that cemeteries have evolved towards denser ways of sharing the same remaining, limited space. Suppose that Pinelawn had 300 developable acres remaining. That would mean that the current “enterprise value” is $67 million divided by a half-interest in 300 acres, or $450,000 per acre. If you can fit 400 “lots” per acre on 300 acres that would be $1,000 per lot. Since the lots are worth quite a bit more than that, the back of the envelope math is there for the certificates to still be pretty attractive at this price.

Oddball Stocks Newsletter Excerpt - Pardee Resources Company (Issue 38)

This is an excerpt from our Company Updates in Oddball Stocks Newsletter Issue 38 (January 2022): 

At the end of 2021, Pardee declared a nice special dividend of $15 per share, which was in addition to $7.20 of quarterly dividends during the year. (We are waiting by the mailbox to see how much more money Pardee made during the fourth quarter from metallurgical coal royalties.) Thinking about Keweenaw's sale of land, and doing the analysis for the Dorchester Minerals update in this Issue, got us to thinking about how Pardee's timber acreage per share has changed over time.

At the end of 2002, Pardee had 770,196 shares outstanding. They had not yet bought their 44,000 acre “Powellton” timber tract in West Virginia (for which they paid $18 million in 2003), so their timber holdings must have been about 156,000 acres, or 0.2 acres per share. It also had a book value of $36 million, paid a total of $1.78 in dividends that year, and had $4.7 million of outstanding preferred stock at liquidation value. The shares traded for about 1.5x book value.

In the third quarter of 2021, Pardee had 656,993 shares outstanding and owns 161,225 acres of land. Their holdings have grown to a quarter of an acre per share, or about 20% per share increase, during a period of 20 years – thanks to share buybacks. Meanwhile, Pardee's book value increased by 4.3x to $155 million, it paid $22.20 of dividends last year, and trades for only 90% of book value.