Oddball Stocks Newsletter Excerpt: Allied First Bankcorp from Issue 33

We wrote an update on Allied First Bancorp in the Oddball Stocks Newsletter, Issue 33:

Banks' 2020 results have been rolling in the past few weeks, and the standouts in various categories tend to capture our attention. The highest ROEs we have seen, which happen to trade at big discounts to TBV too, are Allied and CIB Marine (CIBH). The cheapest bank to TBV, and one of the most overcapitalized, is Bank of Utica. Another observation is that OTC banks with the same or even better ROE, capitalization, NPAs, demand deposits, and buyback history trade far cheaper to TBV than banks that are NASDAQ listed.

OBN - AFBA - Issue 33 (January 2021) by Nate Tobik on Scribd

Oddball Stocks Newsletter Excerpt: "Bank of Utica" from Issue 32

We wrote an update on Bank of Utica in the Oddball Stocks Newsletter, Issue 32:

We brought up Bank of Utica in the Small Bank Feature article in this Issue, and the situation is the same as every other time we have mentioned it: big discount to tangible book value, very overcapitalized, but stubbornly refusing to buy back stock. Often when we see an Oddball management making an error like this, the reflexive answer is that they are dumb. However, we have discovered something that makes us think that lack of intelligence is not the problem here.

OBN - BKUTK - Issue 32 (November 2020) by Nate Tobik on Scribd

Oddball Stocks Newsletter Excerpt: "Small Banks" from Issue 32

This was our Feature story in Oddball Stocks Newsletter, Issue 32, in November 2020. As we wrote,

As long as covid goes away (either through vaccination or herd immunity) in the early part of next year and borrowers who have deferred resume their normal payments, the current valuations will look cheap. There are certainly many bankers feeling sanguine about their loan portfolios given the astonishing number of share repurchases that have been conducted or announced by banks this fall and winter. Profitable companies buying back stock is a great sign, but we should always question why we are being presented with an opportunity that appears juicy. Perhaps the explanation is in something that Gator Capital wrote about in its October letter; a lack of generalists interested in the bank sector. With that valuation and that much excess capital, and a management inclined to repurchase shares, there seems to be a good chance that shares recover to where they were pre-covid. We also very much like the signal of bankers announcing share repurchases – not just the implications for individual banks but for the sector as a whole. They can see what is happening with their borrowers and they have decided to spend capital on accretion instead of hoarding it.

OBN - Small Banks - Issue 32 (November 2020) by Nate Tobik on Scribd

Oddball Stocks Newsletter Excerpt: "Small Bank Snapshot" from Issue 31

This was our Feature story in the Oddball Stocks Newsletter, Issue 31, in August 2020. 

We pointed out that small bank stocks had crashed with coronavirus in the spring and represented an interesting recovery trade.

OBN - Small Bank Snapshot -... by Nate Tobik

Horrible Quarterly Earnings Report from Hanover Foods

The quarterly report from Hanover Foods for the period that ended August 29, 2021 shows that sales, gross profit, operating expense, and net income all dropped versus the prior year's quarter.

The company spent $6.4 million on “acquisitions of property, plant and equipment” last quarter. Over the past five fiscal years (not including the recent $6.4 million), the company has spent an immense amount on capital expenditures, a total of almost $80 million dollars.

It is hard to know what this $80 million of capital expenditure has accomplished for shareholders without any disclosure of what it was spent on. Certainly, it is difficult to see in the financial statements that this has been a worthwhile expenditure of capital.

All that we can see is that assets (both current assets and property and equipment) are growing, but seem to be generating less revenue. Asset turnover is slowing. Revenue, gross profit, and operating profit were all lower in fiscal 2021 than they were in fiscal 2017. And since cash from operations has not been sufficient to pay for the capital expenditures, debt has been rising, from total liabilities of $63 million in May 2016 to $106 million in August 2021.

Hanover Fiscal Q1 2022 Earnings by Nate Tobik on Scribd

 

Our past posts on Hanover Foods:

Life Insurance Company of Alabama Repurchases Massive Block of Stock ($LINSA)

There is something interesting on page 5 of the quarterly statement for Life Insurance Company of Alabama (LICOA) for Q3 2021. 


Notice the "change in treasury stock" since the beginning of the year.  

We knew that on June 14th, a block of 205,221 LINSA (LICOA non-voting) shares had traded for $24 per share, and that the same block traded again on July 22nd for $32 per share. But we did not know who had bought for $24 (a $4.9 million purchase) or $32 ($6.6 million).

However, we now see that LICOA's regulatory financial statements for the third quarter of 2021 disclose a $6,576,662 purchase of treasury stock. That would be $32.05 per share if it was that same block from July. That purchase price was well below book value (approximately 75% of statutory book), and it was for a huge percentage (~20%) of the company, so the result is very accretive to book value. 

LICOA borrowed $6,600,000 from the Federal Home Loan Bank of Atlanta in connection with the share repurchase. Perhaps management has finally figured out that it makes sense to replace outside shareholder capital with cheap debt, especially if shares can be had at a discount to book value.

The minority shareholders who sued the company in the US District Court for the Northern District of
Alabama in 2019 are awaiting a ruling from the court on the company's motion to dismiss their case. Be sure to check out the Concerned Shareholders of Life Insurance Company of Alabama website as well.

LICOA Quarterly Statement Q3 2021 by Nate Tobik on Scribd

Previously, regarding Life Insurance Company of Alabama:

Friendly Hills Bank Shareholder Frank Kavanaugh Releases Public Letter to Shareholders ($FHLB)

Friendly Hills Bank is a small bank in Whittier, California (a city in Los Angeles County) that was founded as a community bank in 2006. The shares are OTC-listed (ticker FHLB) and trade for around $10, which is about the same as the IPO price a decade and a half ago. We did several posts about rising activist pressure at FHLB earlier this summer:

Since we last wrote about it, the company has announced that incumbent CEO Jeffrey K. Ball, Chief Executive Officer is moving on to greener pastures, "in connection with his desire to pursue other business opportunities." 

We also saw that Frank Kavanaugh, a long-term shareholder of Friendly Hills Bank, released a public letter to shareholders of FHLB yesterday:

November 22, 2021

Dear Fellow Friendly Hills Shareholders,

We are a group of shareholders that represent more than 25% of the outstanding shares of Friendly Hills Bank (“Friendly Hills” or “the Company”). We have long been concerned and dismayed by the inability of management and the Company’s board of directors (the “Board”) to create value for shareholders, and we believe that it is time for that to change.

Soon, you will receive proxy materials from us in which we outline our vision for a better future for the bank and its employees and customers. In our view, any change must start by refreshing the Board with the addition of new, independent members who understand the bank, its history and its mission, and who are committed to make Friendly Hills responsive to its stakeholders rather than a piggybank for its current Chairman, Vice Chairman, and CEO.

We urge you to consider the following recent failures of the Company’s management and Board, which we believe have destroyed tremendous value for shareholders:

  • June 2021, the Board approved a poorly conceived, strategically flawed merger that cost shareholders $0.66 per share in Q3 2021 alone, by reducing net tangible value to $9.56 while burying additional losses in a 10-year expense recognition. 
  • Bloated, top-heavy management, with four executives earning more than $200,000 in base salary (with bonuses & expenses the annual amount is over $1 million). 
  • Over the past five years, the Company’s return on assets has been mired around 0.45% - for comparison, well-run banks typically return approximately 1.0-1.5%. 
  • Federal Home Loan Bank borrowings totaled $20.5 million and cost $491,000 in interest expense in 2020 – in our view, a waste of precious shareholder resources. 
  • Management has granted options representing 7.0% of the bank to themselves at $6.89, significantly below net tangible book value. 
  • In total, since 2016 management and directors have rewarded themselves more than $5 million in compensation in a bank with approximately $19 million in equity.

We believe Friendly Hills urgently needs new independent directors who will advocate for shareholder rights and interests. With the departure of the CEO, the board will select the direction and leadership for the future. The CEO, Chairman, and Vice Chairman have not generated value for shareholders in over 15 years, and they have not been held accountable. The Bank needs leadership focused on creating value for Friendly Hills’ owners – its shareholders – we need a Board with a demonstrated track record of successfully building community banks. Join us in creating a strong future for Friendly Hills Bank, its employees, and shareholders. Help us hold the Board leadership accountable at this critical juncture.

We urge Friendly Hills’ shareholders NOT to respond to solicitations made by the Company, its current management, or the Board until you have received our proxy material.

We would value your feedback. Please contact us at 949 212-2222.