LAACO Is Said to Explore Storage West Sale as Self-Storage Booms ($LAACZ)

From Bloomberg (h/t @Catahoula_Value)
LAACO Ltd., owner of the Los Angeles Athletic Club and the California Yacht Club, is exploring a sale of Storage West, its division that acquires, develops and manages self-storage facilities, according to people with knowledge of the matter.

Los Angeles-based LAACO, which has shares that trade over the counter, is working with an adviser to solicit interest in Storage West from potential suitors, said the people, who asked not to be identified discussion private information. A targeted valuation couldn’t immediately be learned.

A spokesman for LAACO declined to comment. Storage West directed inquiries to its parent company.

Storage West, founded in 1978, operates almost 60 facilities in California, Nevada, Arizona and Texas. It posted “impressive year-over-year growth” and recorded occupancy of 92%, according to LAACO’s 2020 annual report, written by Karen Hathaway, the company’s president and managing partner.
Nate posted about LAACO way back in April 2014 when shares were trading for around $1,100. Shares are up 2.4x since then plus it paid $712 in dividends along the way.

Oddball Stocks Newsletter Excerpt: "Full Steam Ahead" by Guest Writer "Catahoula"

This excerpt is from the most recent Issue (#36) of the Oddball Stocks Newsletter: a guest piece by "Catahoula" (@Catahoula_Value).

Catahoula Excerpt by Nate Tobik on Scribd

Oddball Stocks Newsletter Excerpt: Editors' Interview with Mutual Fund Manager Eric Speron

This excerpt is from the most recent Issue (#36) of the Oddball Stocks Newsletter: an interview with mutual fund manager Eric Speron (@off_the_run).

Eric Speron Pages From Oddball_Newsletter_Issue_36 by Nate Tobik on Scribd

Just Published: Issue 36 of the Oddball Stocks Newsletter!

We just published Issue 36 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: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31. We lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

We also published a Highlights Issue in February 2020. The Highlights Issue is available here for purchase 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.

Make It Rain? Yes! With Make It Ring

 As Founder of CompleteBankData I talk to a lot of banks.  A universal message I heard across banks is that they want to grow, but they aren't built with an outbound sales culture.  Growing loans by outbound direct mail and cold calls is foreign and sometimes scary.  To grow in a predictable outbound manner would require an entire cultural transformation.  Let's break down why this is untenable and how we can solve it.

What we hear from executives is that it just isn't worth lender time to make cold calls, prepare mailing lists, and mail sales collateral to prospects.  At best a lender might bat 1 for 100 from these efforts.  Additionally at most banks the process of going from a mailing list to mailed outbound collateral can take weeks to months.  In our experience it typically takes a bank one month to six months to execute on a direct mail marketing campaign.  Ironically the larger the bank the slower to execute.  When you look at it like this it makes sense why banks aren't investing in outbound outreach.

What makes sense is for lenders to focus on handing inbound requests and farming business from existing relationships.  Banks know that this works, and why try to fix what isn't broken?

What is worth it is for us (CompleteBankData) to do this outreach for you.  This is why we're in business in the first place: it's not worth your time to prospect, but it is worth our time to prospect for you.

Let me explain how it works.

We use our next generation market intelligence to assess where the market is going, not where the market has been (to paraphrase a Wayne Gretzky quote).  From this we identify areas of opportunity and recommend prospects to you based on your lending preferences.  We can be as broad as "everyone in county X with a loan maturing in the next six months above 3.75%."  Or as specific as "small business owners who also own a personal airplane, have recently financed an auto and have a house worth $1m."

Once we have identified a set of prospects you decide if they are good to go or not.  Typically banks like to browse this list and knock off people they have worked with in the past that they don't wish to interact with again.

Then we execute on the mailing and or telephone prospecting on your behalf.  Since our tools can identify prospects who are in an ideal position to borrow, our conversion results are significantly higher than average.  

Finally we make your phones ring with prospective borrowers at the other end.

To summarize:

  1. We recommend prospects based on your idea borrower profiles
  2. You decide if they're good to go
  3. We execute on mail and/or telephone prospecting
  4. Your phones ring with prospective borrowers on the other end
That's it!  It really is that simple.

So what does this mean for your bank?  Let's take a look at some rough cut numbers.  In Pennsylvania right now there are over a million outstanding mortgages with rates above 3.75%.  With an average loan size of $240k that's $240b worth of mortgages that can be refinanced saving borrowers money.  Think Pennsylvania is unique?  It isn't, there are similar number of high rate mortgages nationwide.  You probably think that these are bad credits, they aren't.

Here's an example I ran yesterday.  In two of the most prosperous Philadelphia suburban counties there are 422 borrowers who have a loan between $1m-$4m, who all earn $200k or more and many who have $1m of liquid assets and yet still have a mortgage above 4%.

We don't do just residential.  Surprisingly residential mortgages are an afterthought for many of our clients.  We can identify these same types of opportunities for commercial loans as well.  Commercial credits can be even better due to the sticky nature of the relationships and sizes of the loans.

In many markets there are at least $500m-$1b in commercial loans that will be maturing in the next six months to a year.  Sometimes substantially more!  

The possibilities for prospect automation are almost endless.  Want to target commercial borrowers at a bank that's closing branches?  We can do that.  How about targeting borrowers at a bank that's merging? We do that as well.  High income borrowers? Yup, that too!

I want to share a slide on how impactful this is for our clients.  When one client sent a single postcard to ideal prospects identified by us they....

Imagine if prospects received multiple mailings.  We can, at another client using Make It Ring with multiple direct mail pieces their response rate was 5%.  Five percent of prospects picked up the phone and called our client asking about financing.  If you know anything about direct mail that number is off the charts.

If you are a banker and want to grow your loans without your headcount we can help you.  Click through and setup a time to get a demonstration of our software.  If you are a bank investor who owns shares in an underperforming bank, or a bank that wants to grow but might not know how we can help them as well.  

Contact Us Now

Sonics & Materials, Inc. Tender Offer ($SIMA)

We received this recently regarding Sonics & Materials, Inc. (OTC: SIMA). Some highlights from the tender offer document:

  • Sonics & Materials, Inc. (“Sonics” or the “Company”) is offering to purchase up to 837,580 of its
    common stock (the “Common Stock”) in a tender offer at a price per share of $10.00 in cash.
  • We will purchase up to a maximum of 837,580 shares of Common Stock, which number of shares represents all of the outstanding shares of Common Stock held by stockholders other than Robert Soloff, Lauren Soloff and their respective affiliates, including JBH Sonics, LLC (collectively, the “Soloff family”), and shares held by Sonics. The Soloff family is our largest stockholder, controls our Board of Directors and will not participate in this offer as a selling stockholder. As of the date hereof, the Soloff family beneficially owns 2,563,490 shares of our Common Stock (representing 73.2% of the outstanding shares of our Common Stock).
  • In recent years, the Company has received inquiries from stockholders regarding how the Company plans to use the cash on its balance sheet. While the Board has explored various options, including having engaged an investment banker to present possible acquisition targets (none of which is contemplated at this time), the Company has received several requests from stockholders that the Company use its available cash to repurchase its issued and outstanding shares not held by the Soloff family. In connection with this offer, the Company recently retained Access Value, LLC (“Access Value”), an independent third-party valuation firm to determine the fair market value of the our Common Stock. Access Value has determined that the fair market value per share of Common Stock as of March 31, 2021 was $6.11 on a minority, non-marketable basis and $9.60 on a minority, marketable basis.
  • Sonics designs, manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
    and fastening of thermoplastic components, textiles and other synthetic materials, and (ii) ultrasonic liquid processors for dispersing, blending, cleaning, degassing, atomizing and reducing particles as well as expediting chemical reactions. To further address the needs of its customers, the Company also manufactures a spin welder and the vibration welder, both of which are used for the bonding of thermoplastic components. The Company was incorporated in New Jersey in April 1969, and was reincorporated in Delaware in October 1978. Robert S. Soloff, its chief executive officer and founder, invented the ultrasonic plastic welding process early in his career. He has been granted numerous patents in the field of power ultrasonics and is considered to be a pioneer in the application of ultrasonic technology to industrial processes. The certain patents granted to Mr. Soloff in the field of power ultrasonics have expired and the technology related to them is now in the public domain and is used in part in the development and manufacture of the Company's products. Lauren Soloff, Robert Soloff’s daughter, has worked in the business since 1994. In 2019, she became president of the Company.

The tender offer document shows unaudited financials for the nine months ended March 31, 2021. The company made $2 million (net) on $18.5 million of sales in just nine months. Book value at the end of March was $35 million and current assets net of all liabilities were $31.7 million.

At $10 per share (the tender offer price), the market cap is $34 million. However, the enterprise value is much less, because of all the cash on the balance sheet. 

You might wonder how a company with $9.32 in net current assets could have a fair market value of $6.11. Here is the reasoning applied by the Access Value appraisal report:

Based on the LOCD [lack of control] market indications and the analysis of key factors of control noted above, a 19.0 percent LOCD was selected to convert the control basis of value to a minority basis of value in the market approach and the asset approach to valuing the Subject Interest. [...]

An LOMD [lack of marketability] of 38.0 percent was selected for the income approach, which reflected public market liquidity; and a 30.0 percent LOMD was selected for market approach and asset approach, which reflected control liquidity in the private markets.

If I owned Sonics & Materials shares, I'd be on guard on the future for the controlling shareholders to try to squeeze me out at a ridiculously low "appraised" valuation.

SEC Rule 15c2-11 Restricted Securities

Last September, we wrote about a proposed SEC rule change that threatened to make it more difficult to trade in opaque micro cap companies. 

Over a hundred people wrote in to comment, almost all in opposition, including well-known investors, firms, and funds like: Mitchell Partners, the OTC Markets Group, and the Oddball land company Aztec Land and Cattle Company, Ltd..

TD Ameritrade just sent an email to clients with a 162 page list of OTC stocks (embedded below) that they are going to restrict from trading because of the new SEC Rule 15c2-11. Here is how they are describing their new policy:

On September 28, 2021, new amendments to Rule 15c-211 under the Securities Exchange Act of 1934
go into effect to enhance investor protection and improve issuer transparency. These amendments
restrict the ability of market makers to publish quotations for those companies that have not made
required current financial and company information available to regulators and investors.

Ahead of the regulatory enforcement date, TD Ameritrade will only accept orders to liquidate positions - (i.e. no new buy orders) starting in mid-August 2021. Please note: After the amendment officially goes into effect on September 28, 2021, it may be more difficult to liquidate these securities. Quoting and market liquidity may also be very limited.

The list is below as of June 30, 2021 and is subject to change at any time.

The TD Ameritrade list includes such Oddball companies as Hanover Foods (both HNSFA/HNFSB), Pardee Resources, PD-RX Pharmaceuticals, Queen City Investments, Pinelawn Cemetery, ACMAT Corp, Advant-e Corp, Aztec Land & Cattle, Avoca, and Boston Sand & Gravel. 

It includes some banks, but not very many.

We will be continuing to cover this regulatory change in the Oddball Stocks Newsletter. If you haven't yet, give us a try.

Tda 101550 by Nate Tobik on Scribd

Just Published: Issue 35 of the Oddball Stocks Newsletter!

We just published Issue 35 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: 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 as a single Issue.

We just lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

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.

"Friendly Hills Bank Plans Dubious Branch Acquisition" $FHLB

Dave Waters writes:

The economic rationale for this branch purchase is dubious at best. Moreover, Friendly Hills is a chronic under-performer that has shown no ability to manage its own assets successfully, let alone the cast-offs of a successful bank.

Also see our recent posts, Shareholder Vote at Friendly Hills Bank and A Story of Two CEOs.

Friendly Hills Bank ($FHLB): "A Story of Two CEOs"

We did a post last month about the upcoming shareholder vote at Friendly Hills Bank (FHLB) regarding the proposed acquisition of three branches, all from Southern California Bancorp (BCAL). A Friendly Hills shareholder wrote in today with his analysis of the situation, which we are sharing below.

The key thing to understand is that the proposed acquisition is a "story of two CEOs": one CEO is buying three branches that the other CEO owns and wants to get rid of. 

What you worry about is an adverse selection problem: how can the buying CEO make sure that the price he's paying is low enough when he's buying an asset from someone who knows it better (asymmetric information problem) and wants to get rid of it. 

Is the Friendly Hills CEO familiar with one of the all-time most important economics papers, "The Market for Lemons"? Since the assets come with expense commitments, it is even possible that he should be getting paid to take them!

Friendly Hills BANK Story ... by Nate Tobik

Double Bottomline Corp. Reaches Definitive Agreement to Purchase Community Savings Bancorp, Inc. ($CCSB)

Press release yesterday: 

Double Bottomline Corp. ("DB") and Evan M. Stone have reached a definitive agreement with Community Savings Bancorp, Inc. (OTC: CCSB), and its wholly-owned subsidiary, Community Savings, a federal savings and loan association, to acquire Community Savings Bancorp, Inc. ("CCSB"), the registered savings and loan holding company for Community Savings. The aggregate merger consideration for the transaction is $9.5 million, subject to adjustment as provided in the definitive agreement. CCSB currently estimates that, without any adjustments, this will result in approximately $22.76 per share to the current holders of CCSB common stock. However, the estimated per share consideration may be subject to significant adjustment based on a variety of factors, including, but not limited to, transaction costs and whether the organization obtains CDFI status, as defined below. As a result, CCSB shareholders should not assume they will receive $22.76 per share upon closing of the transaction. Community Savings operates a full service location in Caldwell, Ohio. As of March 31, 2021, CCSB reported $59.58 million in total assets and total equity capital of $7.79 million. 

We wrote about Community Savings Bancorp in Issue 16 of the Oddball Stocks Newsletter (March 2017) when it was trading for $13.25. It had just de-mutualized at that point and was trading at a big discount to book value. Here was how Nate explained the idea in that Issue:

Following the conversion their equity to assets is about 18%, and their Tier 1 ratio should be about 40%. These are very high levels. The significant excess capital explains the paltry 0.2% return on equity (“ROE”). The bank barely ekes out a profit with a 97% efficiency ratio. The bank only has $32m in loans with the rest of their assets sitting in cash or investment securities. This is truly the epitome of a bank net-net if there ever was one.

Many people will think about all of this for a second and wonder why anyone would pay book value for this dog. After all, there are any number of people who believe that unless a bank can earn something like a 10% ROE they aren’t even worth book value. With that in mind, there are really a few reasons you might want to consider investing in this bank.

The first reason is that by consummating the conversion management took the first step towards realizing value, both for themselves and for shareholders. In most cases mutual banks convert either as a way to grow or as a way to cash out. There are banking regulations that prevent newly converted mutuals from selling within three years of their IPO date, but they are permitted to engage in value accretive actions before then. On the first anniversary of their IPO they can buy back stock, and on the second anniversary they can pay a dividend. Once the third anniversary rolls around they are afforded the opportunity, if they wish, to sell and cash out. The statistics on newly demutualized banks selling after the three year mark is encouraging. Over 80% of demutualized banks have been sold to another institution within five years of their IPO. If you’re looking to buy a bank hoping that it will be acquired at a tidy premium (ideally after you’ve made your purchase) then mutuals are fertile ground.

But what if the bank doesn’t want to sell? Remember that the 2 primary reasons to convert are to raise capital for growth or as a means of cashing out. So, if the bank isn’t going to sell and cash out, by process of elimination we are left with a growth strategy. With a larger asset base the bank is in a better position to make additional loans and grow, although it remains to be seen in Community Savings Bancorp’s case. This is because management hasn’t demonstrated any ability to grow beyond drifting up and down with the local economy.

The good news is that the bank’s management has skin in the game along with investors. They purchased 10% of the shares offered in the IPO for approximately $360k in the aggregate. This might seem like a nominal sum to many ritzy investors, but it is significant considering the CEO makes a base salary of $120k and got $20k in bonuses last year.

Community Savings never performed well as a bank, but what mattered in the end was purchasing at a big discount to tangible book value.

Shareholder Vote at Friendly Hills Bank ($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 $11, which is not much greater than the IPO price a decade and a half ago.

What caught our eye recently is that Friendly Hills is having a special meeting on June 22nd in order to hold a shareholder vote on a proposed acquisition of three branches from Bank of Southern California. The other thing that we noticed was a couple of smart bank investors (like @TimyanBankAlert) on Twitter mentioning Friendly Hills and the acquisition:

We follow @OurBank3 on Twitter, a bank investor account that has the motto: "The shareholders are the rightful owners. Management has a fiduciary responsibility. Proud #SHT member-Shareholders who Hate value Traps". So far we agree on banks wholeheartedly! So if this account has a beef with this proposed acquisition, we thought that we should dig a little deeper.

Let's first back up and understand Friendly Hills a little better. As of March 31, 2021, this is a bank with $214 million in assets, $127 million in loans, $171 million in deposits (L/D only 74%), and $20.7 million in shareholder equity (all tangible). In 2020, FHLB had comprehensive income of $1.4 million, which was a 7.4% return on equity and a 77 bps return on average assets for the year. However, for Q1 2021, the net income was only $240k which is a 4.7% annualized return on equity.

Unusually for a bank of this size, Friendly Hills is not a residential lender. Their loans are 70% commercial real estate and 30% commercial and industrial. The average interest coupon is 4.2%. Since their loans/deposits are so low, they have a significant amount of investment securities, more than half of which is of ten year or greater maturity. The bank is overcapitalized with Tier 1 RBC of 18.8%.

You can see the efficiency ratio trend for Friendly Hills as calculated by Complete Bank Data:

Book value per share for FHLB is $10.34 vs the recent trading price on May 27th of $10.95 per share, so it is trading for 106% of TBV. This is not exactly a screaming bargain when Oddball Stocks has recently written about a basket of small banks that are earning higher ROEs and trading for about 80 percent of tangible book.

Also, Friendly Hills management has a lackluster (at best) history of value creation. As you can see from a long term chart of the share price it has gone nowhere since the IPO. (And it has never paid a dividend.) The current president of the bank has been in place since the founding. We found an LA Times article from 2013 with his complaints about how small banks are over-regulated. 

It looks as though he and Friendly Hills stumbled right out of the gate after the bank was founded, losing a significant amount of money during the 2008 credit crisis. The bank originally raised about $17 million in equity, and by the end of 2010 the bank had accumulated a deficit of $5.2 million and was down to $11.8 million in equity ($7.29 per share). Even today, the bank has only $3 million of retained earnings since inception.

Now Friendly Hills wants to buy three branches from a local competitor (one each in Orange, Redlands, and Santa Fe Springs) for $1.17 million (plus assumption of the lease liabilities for the branches) that have $92 million in deposits. Here is what we wonder about with this proposed transaction:

  • Why does a bank with only 74% of its deposits lent want to buy more deposits? Don't they need loans and not deposits?
  • The pro-forma financials (disclosed on p34 of the special meeting proxy) show that in Q1 2021, these three branches would have been responsible for $432k of additional non-interest expense. So, in addition to the purchase price of $1.17 million, there is going to be commitment to a fixed overhead burden: lease payments, compensation, etc.
  • Are going to stick with their long-term securities portfolio strategy and term out / increase the tenor (time until maturity) of the $92 million that is coming in? It seems like this acquisition could result in pressure to earn back this incremental overhead burden by taking either more interest rate risk or more credit risk, plus more leverage from the additional $92 million of deposits on the existing equity base.
  • Is acquiring more branches really the right move for any bank in a country that is staggeringly over-branched (especially given changes in customer habits and technology)? Plus, is there an adverse selection problem in buying branches that a local competitor wants to get rid of? Is this an example of a smarter bank dumping an albatross on a bank that is "slow to realize their branch networks are a drag"?
  • Was there a better deal to be done here? If Friendly Hills shareholders turn this down, can Bank of Southern California really do just as well, or might the deal get sweetened?

We noticed in the proxy statement for the special meeting is that there is a significant outside shareholder who happens to be the largest shareholder of Friendly Hills. The officers and directors of FHLB as a group own 21.1% of the company, with the plurality of this held by the Chairman William Greenbeck and the CEO Jeffrey Ball. But the largest shareholder, Frank Kavanaugh in Newport Beach, owns 26.2%, which is more than all of the insiders combined. (The other shareholder disclosed in the proxy is AllianceBernstein which owns 9.6%.)

The 21% owned by management seems like good ownership skin in the game, but unfortunately a lot of this stock was essentially given to them and not purchased:

Stock Option Grants to Executive Officers
On December 31, 2018, we granted incentive stock options under the 2017 Equity Incentive Plan to our executive officers. We granted an option to Jeffrey K. Ball, President and Chief Executive Officer, to purchase shares in an amount equal to 2.5% of our issued and outstanding shares, or 50,000 shares, an option to our Chief Operating Officer, to purchase shares in an amount equal to 0.5% of our issued and outstanding shares, or 10,000 shares, an option to our Chief Financial Officer to purchase shares in an amount equal to 0.3% of our issued and outstanding shares, or 5,000 shares, and an option to our Chief Credit Officer to purchase shares in an amount equal to 0.3% of our issued and outstanding shares, or 5,000 shares.

The incentive stock options, which we granted to our executive officers in 2018, vest at the rate of 20% per year, beginning on December 31, 2019, which is one year after the date of grant. The options shall all remain exercisable, subject to earlier termination upon the happening of certain events, until December 31, 2028, ten years after the date of grant. The exercise price of the incentive stock options granted to our executive officers is $6.80 per share, which is equal to or in excess of the fair market value of the shares of our common stock on December 31, 2018, the time of the grant of such stock options. We did not grant any stock options or other stock awards to any of our executive officers in 2020.

Stock Option Grants to Directors
On December 31, 2018, we granted nonstatutory stock options to our non-employee directors under the 2017 Equity Incentive Plan. The nonstatutory stock options granted to our non-employee directors in the aggregate is equal to 4.5% of our issued and outstanding shares or 89,750 shares. The non-employee directors’ option grants vest at the rate of 20% per year, beginning on December 31, 2019, which is one year after the date of grant and the term of each of the option grants is ten years from the date of grant. The exercise price of the nonstatutory stock options granted to our non-employee directors is $6.80 per share, which is equal to or in excess of the fair market value of the shares of our common stock at the time of the grant of such stock options. We did not grant any stock options (or other stock awards) to our directors in 2020.
So that is really brutal from a shareholder perspective. The end of 2018, you may recall, was a big market crash. And how did FHLB insiders respond? Why, they gave themselves options to acquire 8.1% of the bank at 80 percent of tangible book value, and less than 70 percent of the IPO price a dozen years earlier.

Something else brutal about management is that FHLB has never bought back stock when it was cheap. The share count now is higher than it was a decade ago, even though the bank has excess capital and even though the stock had traded at big discounts to tangible book. After having been in business for a decade and a half under the same management, you get a pretty clear view that management doesn't allocate capital well (which should worry us about the branch acquisitions) and is opportunistic about transferring value to themselves (with the 2018 options grants).

We found that the largest shareholder Kavanaugh made a change in control filing with the Federal Reserve in December 2018 to acquire shares of FHLB. At the end of 2018, the shares had collapsed down to around $6-7, so this may have been a very astutely timed buy. (Yet notice that he, an outside shareholder, was paying cash for his stake, while the insiders were being granted cheap options.)

Really good things can happen for shareholders if someone with significant ownership skin in the game - that they paid for - comes in and pushes things in the direction of shareholder value maximization. This is "reading the tea leaves": remember how SouthFirst in Alabama was acquired last year? The only clues to long-suffering outside shareholder that things were moving in that direction were (a) unhappy minority shareholders with big ownership positions and (b) right before the sale, the termination of the golden parachutes for execs.

If you want to dig in further on Friendly Hills, we have uploaded some helpful documents on Scribd:

And if you like small banks and shareholder activism, be sure to try the Oddball Stocks Newsletter. We've been talking about almost nothing but small banks since last summer, and we are always very interested in shareholder activism and small bank activism.

Hanover Foods Quarterly Financials

We just received the latest quarterly financials from Hanover Foods.

Notice that between the end of fiscal second quarter (Nov 29, 2020) and the fiscal third quarter (Feb 28, 2021), the company bought back $1.26 million of stock. This is the first time that we have seen the company repurchase a significant amount of stock.

We would love to know the details about that repurchase and whether the company plans to do more repurchases at a fraction of book value and net current assets.

Hanover Foods 3rd Fiscal Quarter by Nate Tobik on Scribd

Bidding War for Sunnyside Bancorp ($SNNY)

We mentioned last month that "An Old Oddball Stocks Idea Ha[d] Its Day" with the sale of Sunnyside Bancorp, Inc. Today, a different buyer announced that it has a higher bid (20% premium) for Sunnyside.  

Rhodium BA Holdings LLC (“Rhodium”), a New York-based investor, which through its special purpose subsidiary OppCapital Associates LLC beneficially owns approximately 9.82% of the outstanding common shares of Sunnyside Bancorp, Inc. (OTCBB: SNNY) (“Sunnyside” or the “Company”), today sent a letter to the Company’s Board of Directors presenting a fully financed proposal to acquire Sunnyside for $18.50 per share in cash.

Over the past twelve months, Rhodium has privately approached the Company with multiple expressions of interest to acquire the Company on attractive terms, which were rejected without explanation by Sunnyside’s Board of Directors. Rhodium’s current offer represents a 23% premium to Sunnyside’s closing price on April 19, 2021, a 19% premium to the price offered by DLP Bancshares Inc. and a 50% premium to the Company’s unaffected share price on March 16, 2021 prior to the announcement of the DLP Bancshares Inc. offer. 

In its open letter to Sunnyside, Rhodium seems to be threatening to do a tender offer if their bid is rejected.

Third Amended Complaint Filed in Life Insurance Company of Alabama Shareholders' Lawsuit

Earlier, we mentioned that there was an Eleventh Circuit Court of Appeals ruling that was favorable to the minority shareholders suing Life Insurance Company of Alabama, which resulted in the federal court in Alabama ordering the shareholders to file file one final amended complaint against the company and its directors. That third amended complaint has now been filed, so we thought we would quote from some interesting sections:

  • In some cases, a large book value discount at an insurance company might indicate an asset quality problem, suggesting the company's assets were not worth their carrying values. However, LICOA's assets then and now consisted primarily of a rather “vanilla” corporate bond portfolio managed by outside advisers. The distress that the market price of the non-voting shares was (and is now) implying is managerial in nature. As discussed herein, it would ultimately be revealed that a group of relatives took legal control of LICOA by owning a majority of shares and have used and continue to use this control inequitably to the detriment of minority shareholders. Interestingly, during the pendency of this litigation, that discount seems to have widened and narrowed based on the market perception of Plaintiffs' likelihood of success in the litigation, indicating that it is indeed the inequitable conduct causing the distressed trading price of the non-voting shares.
  • The economic purpose of an insurance company, from a shareholder perspective, is to raise funds from policyholders and invest them at a profitable spread. Using borrowed money (“Float”) from the insurance customers as leverage and investing it in a bond portfolio ought to offer shareholders a higher return on their capital. But because the controlling shareholders of LICOA overpay themselves and otherwise waste money, the return on equity that minority shareholders receive is lower than the underlying yield on the bond portfolio. The minority shareholders bear all the risk of an insurance company's financial leverage (where the total assets are approximately three times the shareholder capital) but without the benefit of any increased return.
  • Causey’s husband Michael—who also works for LICOA—has had a similar social media presence, claiming to “Live in Alabama, but rarely there! Love traveling the globe in search of the best life has to offer...”. Like his wife, Mr. Causey also posted pictures of a lavish lifestyle of global travel and extravagance. The problem with the Causeys—and their family members who are also Director Defendants in this case—is that consistent with their social media profiles, their interests lie with funding and maintaining their lifestyles – not the interests of the shareholders of LICOA consistent with their fiduciary and statutory duties.
  • Even though Daugette is the Chairman of LICOA and his brothers-in law Lowe and Renfrow have subordinate titles, each year they are paid virtually the same amount. In 2019, LICOA began paying Causey a matching amount as well. For four executives of varying tenure, title, and seniority to receive virtually identical compensation shows that LICOA's compensation is not based on the market value of services rendered, but rather it is a de facto family dividend. The controlling shareholders have hired each other and split a disproportionate share of LICOA's profits according to a negotiated scheme amongst themselves. Tellingly, LICOA does not have any board minutes, compensation studies, or any documents whatsoever that explain how these nearly identical compensation levels were established.
  • After this litigation ensued—and after Terry Jacobs, whose family members are LICOA shareholders (“Jacobs Shareholders”), was disclosed as a witness and potential plaintiff—Defendants caused LICOA to purchase the Jacobs Shareholders’ shares at nearly three times the then-trading value of the LICOA shares (i.e., much closer to the book value). See Exhibit I. Near the same time, Director Daugette was purchasing the shares of other, uninformed shareholders at much lower prices, demonstrating how the Director Defendants game the system to keep share prices artificially low for their own oppressive repurchasing scheme, even though they know that the true value of the shares is much higher, as exhibited by the much higher price paid for the more knowledgeable Jacobs Shareholders' shares.
  • The Daugette, Renfrow, and Causey family members receive extravagant six figure salaries, some of which is for “no show” or “no work” jobs, and all of this excessive compensation is a de facto dividend that shareholders who are not family members do not receive. See Exhibit K. This compensation has been rising even as the company's profitability has deteriorated in recent years. See Exhibit L. As self-dealing transactions, these payments to insiders need to be entirely fair (both stemming from a fair process and resulting in a fair outcome). The burden of proof is on the Director Defendants to show that payments to these insiders are entirely fair, but since they run their business in a “Mafia Style” without written records, they will be unable to meet this burden.
  • The most egregious usurpation of a repurchase opportunity was committed by Daugette after the Lightfoot investigation and report. During the coronavirus chaos of 2020, Daugette personally bought shares from small shareholders for less than a quarter of tangible book value, while shortly thereafter he had LICOA pay three times as much for the Jacobs Shareholders' shares. If it was a good deal for LICOA to pay the Jacobs Shareholders $31.88 per LINSA share, then Daugette clearly usurped an even better opportunity from LICOA when he personally bought LINSA shares for prices as low as $10 per share – using LICOA resources such as employees, email accounts, and letterhead to conduct these personal purchases. After having his independent director patsies rubber-stamp his past misconduct with the Lightfoot straw-man investigation, he now feels emboldened to commit even more blatant abuses.

The entire Third Amended complaint is embedded below. The voluminous exhibits are in a second embed after that.

Licoa - Plaintiffs’ Third Amended Consolidated Complaint by Nate Tobik on Scribd

LICOA Third Complaint Exhibits by Nate Tobik on Scribd

New Order in LICOA Shareholders' Lawsuit

This order in Trondheim Capital Partners LP et al v. Life Insurance Company of Alabama et al in the US District Court for the Northern District of Alabama was published today:

This matter comes before the court on the parties’ Joint Status Report (doc. 52), which the court will construe as a motion by the plaintiffs for leave to file an amended complaint. For the reasons set forth below, the court will GRANT the motion and will grant the plaintiffs leave to file one final amended consolidated complaint.

In its prior Order (doc. 51), the court found that it erroneously abstained from hearing the Shareholders’ claim for judicial dissolution in light of the decision of the United States Court of Appeals for the Eleventh Circuit in Deal v. Tugalo Gas Co., --- F.3d ----, 2021 WL 1049813 (11th Cir. Mar. 19, 2021). The court ordered the parties to submit a Joint Status Report and to include proposals for moving forward in light of Deal.

In the Joint Status Report (doc. 52), the plaintiffs request leave to file “one final amended complaint asserting the derivative claims and reinstating the dissolution claim,” which in turn would “allow Defendants an opportunity to answer those claims or move to dismiss.” The plaintiffs also request to proceed with discovery while any motion filed by defendants remains pending. (Doc. 52 at 3).

The defendants request a briefing schedule to allow this court “to determine if it has jurisdiction to consider the dissolution claim[] before considering Plaintiffs’ remaining claims.” According to the defendants, “Deal concludes with the directive that the district court make…a determination of jurisdiction;” accordingly, they ask the court to follow that course here. (Doc. 52 at 3).

Although the defendants correctly point out that the Eleventh Circuit in Deal ordered the district court to decide on the merits “whether the governing state law permits a federal court to dissolve a state-chartered corporation,” plaintiffs’ claim for judicial dissolution is not currently pending before this court, because this court dismissed that claim without prejudice. Deal, --- F.3d at ----, 2021 WL 1049813 at *9; (doc. 50).

Accordingly, pursuant to Fed. R. Civ. P. 54(b), the court sua sponte WITHDRAWS its Memorandum Opinion (doc. 49, § III.B) and Order (doc. 50) ONLY as to its rulings to abstain from hearing and to dismiss Count Two of the Shareholders’ Direct Complaint—the claim for judicial dissolution—and to stay the case. The court LIFTS the stay pursuant to such withdrawal.

The court next construes the Shareholders’ proposal in the Joint Status Report (doc. 52 at 3) as a motion for leave to amend pursuant to Fed. R. Civ. P. 15(a)(2). Because the court previously dismissed Counts One, Two, and Three of the Direct Complaint and the entire Derivative Complaint without prejudice, and because Fed. R. Civ. P. 15(a)(2) requires the court to “freely give leave [to amend] when justice so requires,” the court will GRANT that motion and will grant the Shareholders leave to file one final amended, consolidated complaint containing the claim for judicial dissolution and any other claims—both derivative and direct—against all defendants. The Shareholders shall file their amended complaint on or by April 22, 2021.

This procedure will allow the defendants the opportunity to move to dismiss the claim for judicial dissolution in light of Deal’s directive, but will promote judicial economy by also allowing the court to consider at the same time any other matters in this case.

DONE and ORDERED this 7th day of April, 2021.

The LICOA Concerned Shareholders website has the documents that the Concerned Shareholders have received from books and records inspections of LICOA.

Interested in trying the Oddball Stocks Newsletter?

If you are curious about the Oddball Stocks Newsletter, we've added a couple low-risk ways that you can try out what we are about.

First, there are our back Issues. Our most recent Issue was Issue 34 this month. The following earlier Issues are available à la carte: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31.

Last February, we compiled a collection of Highlights from our back catalog to demonstrate what the Newsletter is, or what it hopes to be: topical, philosophical, focused on companies that the market ignores, pounding the table for value investing while grappling with problems like rapacious managements that are consuming value.

The "Highlights Issue" is available here for purchase as a single Issue. If you have been curious about the Newsletter, then this is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.

This is a "highlight reel," but it is not a victory lap or a tout of what we have written about. A lot of these highlights are our think-pieces: on shareholder rights, on banking as a business model, on value investing. There are pieces about companies that got taken out at a premium but also about ones that are trading lower now some years later... of course, those may be the most interesting to pay attention to now. There are two companies – Scheid Vineyards and Enterprise Diversified (formerly known as Sitestar) – where we warned about significant risks that ended up materializing.

In the past, we also posted some Newsletter excerpts that give a taste of the Oddball writing and coverage style - but just remember that the most interesting content is for subscribers only. The excerpts were on The Coal Creek Company, Tower Properties, Bank of Utica, small banks, Avalon Holdings, Boston Sand and Gravel, Conrad Industries, and Sitestar / Enterprise Diversified.

Don't miss our recent Oddball Stocks blog posts (separate from the Newsletter content) on:
Finally, if you want to be completely immersed in the Oddball universe, be sure to follow Nate Tobik and the Newsletter on Twitter. 

Scheid Family Wines Announces Sale of Three Vineyard Properties ($SVIN)

Oddball grape farmer, vineyard, and wine producer Scheid Vineyards Inc. announced the following the night before Good Friday,
Salinas, California, April 2, 2021. Scheid Vineyards Inc. (dba Scheid Family Wines) (OTC Markets: SVIN) announced today that it sold three of its vineyard parcels for $33,000,000 in consideration, which includes the buyer assuming $20,000,000 of the Company’s debt that was secured by the properties. The disposition of these parcels, which comprise 1,193 acres of leased and owned vineyards, is part of Scheid Family Wines’ overall strategy to better align its asset holdings and debt with its growing premium bottled wine business.
Mr. Scott Scheid, President and CEO of the Company, stated, “We are pleased to complete this transaction and continue to focus our attention and resources on the growth of our branded goods portfolio, which includes our recently launched entrant in the trending ‘better for you’ category, Sunny with a Chance of Flowers, as well as other national and global brands.”

One of the bullish writeups that went around in 2018 thought that that Scheid's land should be worth $40k to $60k per acre. While this sale may not have been their best acreage (and location matters a lot in wine), this valuation still has to be a disappointment for Sum of the Parts investors in Scheid.

Left unsaid is what Scheid's ongoing relationship with this land and these grapes will be. Is this a sale-leaseback? Are they just going to buy the grapes? Is there any kind of long-term contract to buy them? 

Or, are they realizing that they don't need as many grapes because they can't sell that much wine?

Note that Scheid also had to sell land in 2000 to deleverage.

Previously regarding Scheid:

We have also covered Scheid in past Issues of the Oddball Stocks Newsletter.

Just Published: Issue 34 of the Oddball Stocks Newsletter!

We just published Issue 34 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: 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 as a single Issue.

We just lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

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.

Life Insurance Company of Alabama ($LINS $LINSA)

A new ruling in the Life Insurance Company of Alabama minority shareholder litigation:

LICOA Abstention Order by Nate Tobik

And an update at the Concerned Shareholders of Life Insurance Company of Alabama (LICOA) website:
UPDATE: All of the documents that the Concerned Shareholders have received from books and records inspections of LICOA are available now at this link. We believe that minority shareholders of LICOA should work together to "follow the money" and figure out the best path forward for the company so that shareholders can earn an attractive return on their capital invested.

UPDATE: A new ruling in the litigation in Federal Court in Alabama: "ORDER re the court's December 8, 2020 Memorandum Opinion (doc. 49) and Order (doc. 50), where it would abstain from adjudicating Count II of the plaintiff Shareholders' Direct Complaint (doc. 25). Accordingly, this court concludes that it erroneously decided to abstain from adjudicating the Shareholders' claim for judicial dissolution of LICOA. To that end, the court ORDERS the parties to submit a Joint Status Report to the court on or by Wednesday, April 7, 2021, informing the court of the current status of this litigation and a proposal for moving forward in light of the Eleventh Circuit's decision in Deal. Signed by Judge Karon O Bowdre on 3/23/2021."
Previously, regarding Life Insurance Company of Alabama

An Old Oddball Stocks Idea Has Its Day - Sale of Sunnyside Bancorp, Inc. ($SNNY)

Back in August 2014, Nate wrote a post, "Sunnyside bank, severely undervalued on the cusp of a turnaround,"

I have a portion of my portfolio set aside specifically for cheap bank stocks.  In the terms of some value investors my dedicated cheap bank portfolio might be considered a 'basket'.  That is I buy tiny stakes in many banks if they meet certain criteria.  I purchase larger positions in banks outside of this basket, but inside of it most positions are roughly the same size, about a quarter of a percent.  No single bank is going to make or break the portfolio, but as a group I have a large exposure to undervalued banks. Sunnyside Bancorp (SNNY) is one of these banks.

Sunnyside Federal is a savings and loan that was established in 1930.  The bank is located in Westchester County about 25 miles north of New York City.  The bank's headquarters and only branch is located on Main Street of the quaint Irvington a few blocks from the Hudson River.  They're also located near a number of country clubs, which should tell you something about the area they're located in.  Westchester is the second wealthiest county in the State of New York with median home values of $533k and median household income of $81k.

The bank started as a mutual meaning the depositors owned the bank.  The bank felt constrained by their mutual structure and in 2013 conducted an IPO.  The IPO raised $7.9m with the sale of 793,500 shares at $10 per share.  Depositors are given the first opportunity to purchase shares and with the completion of the IPO the shares now trade on the secondary market.  The IPO proceeds plus their capital prior to the IPO gives them an equity value of ~$12m or $15.12 a share.  Given that shares most recently traded at $9.45 this is an attractive stock at 63% of book value.

The bank's conversion from a mutual to a stock company was in an effort to pursue growth.  The bank is as safe as they come with a 35% Tier 1 capital ratio and 13.7% Core capital ratio.  They have a very small amount of non-performing assets, and OREO.  Some small banks trade for less than book value because they have an asset quality problem, Sunnyside does not.  Sunnyside has a growth problem.

We just saw a press release from last night: DLP Bancshares Inc., an affiliate of DLP Real Estate Capital, to Acquire Sunnyside Bancorp, Inc. Under the terms of the acquisition agreement, shareholders of Sunnyside Bancorp are supposed to receive $15.55 in cash per share. From the time when Nate wrote about it, shareholders will have earned an IRR of around 8% compounded if the sale happens for $15.55 per share. Tangible book value was $14.99 per share as of September 30, 2020. 

Sunnyside is and has been an overcapitalized (27.5% Tier 1), unprofitable former mutual bank (i.e. a conversion). Note that the idea got a little bit of flak in the comments:

  • Are you concerned with the declining deposit base?
  • As a customer of this bank and many other banks- I find NOTHING going for this bank that deserve mention EXC EPT your figures that a buyout from another bank can make sense. WHile you glossed over the fact that this bank had to go from MUTUIAL to Stock mainly because it was losing money the fact that stockholders now have to make that up instead of its customers is no solace. Holding this banks stock for some kind of buyout may be not a reason to buy the shares as long as the bank itself has at its core a very limited banking services and simply poor business practice.

Sunny side is an impressive case of how well a poor quality business can do if bought at the right price. For seven years, book value has remained the same ($15) - meaning the occasional profitable years were offset by subsequent losses. The bank did not pay a dividend or buy back stock, either.

Owning it would have been like watching paint dry, or even worse. The only thing it had going for it as an investment was valuation - 63% of tangible book when Nate bought. Every year you would have been tempted to sell it because nothing was happening. There was no story to tell about progress or improvement. 

Lyall Taylor has some very important posts about how value investing works, and will continue to work, because of psychological barriers and institutional (principal-agent conflict) barriers to implementing it:

The fundamental issue underlying all these factors, I believe, is the nature of the payoff patterns deep value stocks typically exhibit, and why. A typical value stock has well-understood and well-publicised problems/issues/risks, and the majority of the time, for individual issues, these well-understood issues do result in subsequently lackluster investment outcomes (usually in the form of protracted periods of stagnant performance that lag go-go market favourates). [...]

[I]t is not just a principal-agency issue - this non-linear payoff profile is also psychologically very difficult for the investment practitioner/analyst themselves, because investing in/recommending such stocks requires one to endure a continuous stream of negative reinforcement most of the time, of which our human psychies are not well adapted to withstand. Indeed, academic research shows that most people's ability to remain rational breaks down in an environment of constant negative reinforcement. Day after day, month after month, and even year after year, the market, friends, associates, the media, and clients are telling you you are wrong and are a fool, and most of the time that judgement will seem vindicated by subsequent outcomes. [...]

 Many so-called 'value' investors fall into this trap. Most value investors these days do a lot of things that are actually the antithesis of true value investing as described above: they focus on buying good businesses with good outlooks trading at 'reasonable' valuations (read full/high but not absurd multiples), and they invest in concentrated portfolios. This is the antithesis of exploiting the market's tendency to overprice the best businesses with the best outlooks and underprice the worst businesses with the worst outlooks; and it focuses - just like the market - only on the base-case, most-likely outcome, and generally ignores tail risks. And yet it is changes of opinion, driven by unexpected events, which drives the vast majority of the big moves (and returns/losses) in markets. The fundamental issue underlying this dynamic is that investors systematically overestimate their ability to predict the future, and are therefore prone to overconfidence and excessive extrapolation. [...]

The truth is that there is no statistical evidence that high quality stocks - however they are measured - systematically outperform. In fact, there is evidence to the contrary, and it makes sense why: investors overestimate their ability to predict future growth and business quality, and underestimate the capacity for change. Consequently, investors systematically overpay for growth and quality. The problem is that when aspirant 'value' investors come to implement the philosophy, they notice that all the cheap businesses have problems of one type of another, and so avoid them. They end up seeking quality instead of value, and forget that you are rewarded in markets not for identifying and owning good companies, but instead for identifying and exploiting mispricings. It turns out markets are 'too efficient' at pricing in growth and quality - it is too well recognised so they overpay for it.  

Why are they finally selling? The board and officers only owned 6.5% of the company. The bank is in Irvington, NY (up the Hudson) and the top three execs were making $570k combined. The CEO turned 66 this year, maybe that was why?

Update on Enloe State Bank

We posted about the failure of Enloe State Bank in Texas a couple years ago. Here is the update:

@MidwestHedgie Tweetstorm on Bank of Utica $BKUT $BKUTK

 You saw our post last week about the Bank of Utica 2020 Annual Report. On Twitter, @MidwestHedgie

The Ohio Art Company - Reverse Split (Squeeze Out) $OART

Ohio Art (OART) sent out a notice regarding a 1:2,300 reverse split (squeese out) that will cash out smaller shareholders at $10.05. The announcement says that controlling shareholders (the Killgallon family) control enough stock to push it through. 

The announcement does not have 2020 financial statements, and OART reports only annually. Given the lack of disclosure and the price where the stock was trading prior to the announcement, we consider this split potentially abusive.

One investor reaction on Twitter:

Ohio Art Reverse Split Notice of Meeting by Nate Tobik on Scribd

Fidelity D & D Bancorp, Inc. $FDBC to Acquire Landmark Bancorp, Inc. $LDKB

A tiny bank acquisition in Pennsylvania announced on Friday:
Based on the financial results as of December 31, 2020, the combined company would have pro forma total assets of approximately $2.05 billion, total deposits of approximately $1.8 billion, and loans of approximately $1.4 billion.

Once the merger is complete, Fidelity will have 25 retail community banking offices in Northeast and Eastern Pennsylvania, offering a complete range of consumer and business products, including wealth management. Its Customer Care Center is open 7 days a week for the convenience of its clients. Additionally, Fidelity Bank offers the ability for its clients to apply for consumer deposits, real estate loans, and personal loans through its robust online application processes.

Landmark shareholders will receive 0.272 shares of Fidelity common stock and $3.26 in cash for each share of Landmark common stock that they own as of the closing date.

Based on Fidelity’s 10-day average closing price at February 25, 2021 of $55.00, the transaction is valued at $43.4 million or $18.22 per share. The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes.

As of December 31, 2020, Landmark had total assets of $354 million, total deposits of $287 million and total loans of $280 million.

Acquirer FDBC is paying mostly stock with some cash, valued at $42 million with acquirer stock down 6% on Friday. That is 1.17x the year-end 2020 book value of target LDKB, which earned 4% on equity last year and had assets of $354 million. 

Both banks are in the Scranton area.

Target stock was offered on Friday at a 1.7% deal spread.

Small Banks Hold Better Credits Than Regional Banks, And They're Cheaper

I think it’s safe to say that most value investors believe the market is overvalued.  But that doesn’t mean stocks can’t appreciate like crazy…hence the Gamestop situation.  The question is what do those do, those who look to buy things at a discount?

I’ve watched the stock market madness with intensity.  I HATE to overpay for anything, from something cheap to something expensive.  I’m always hunting for a bargain.  The problem is no one is bargain hunting anymore.  It’s a first in wins market.

We have some friends who are in their early 20’s and who recently purchased houses.  They explained that they’d get an email alert when a house listed, and within a few hours there’d be dozens of offers on the house.  They had to view and pick the place they’d live for the next decade in an hour.  This is absolute madness.

When my wife and I looked at houses (circa – 2015) we’d look at a place, ponder, look again, ponder, look again and then make a decision.  It always seemed strange to me that you could walk through a house and within an hour decide that you’d want to live there for decades after a simple walkthrough.

People who are looking now have no advantage of time, they’re rushed by the market to make a decision, any decision as quick as possible.

When I think about this it seems like it isn’t conducive to good outcomes.  Imagine having to decide on a spouse on the first date, or a job based on how the building looks from the parking lot.  There isn’t enough time to determine what the other side is like.

The thing is everything is rushed now.  Stocks, houses, spouses, everything.  If you can’t make a snap decision you’ve messed up!

Can you imagine what our ancestors would have thought of this?  Someone who spent months walking between cities, or years working as an apprentice.  They’d think we are crazy and stupid.  Yet that’s where we’re at!

A good friend of mine will send me pictures of sales as they’re happening.  He’ll shoot me an iMessage image of a beer that’s one sale, or some other crazy deal with a message like “wow, can you believe the price?”  I always chide him that when you see a bargain that’s the time to purchase.  He misses most of these thinking that the deal will remain forever.  When I see a bargain I jump on it right away because I know that bargains are situational.  Something that is cheap now probably won’t be cheap in a week or month.

The corollary to this are Oddball stocks that have been cheap for weeks and months and years.  Investors are losing patience and are giving up.

What does this mean?

A year ago I started to get calls and emails that investors were dumping their Hanover Foods shares.  Eventually I realized there were no investors left standing in this stock.  I thought that if everyone gave up it would be some sort of sign shares would start to appreciate.  Instead nothing happened.  Maybe they will eventually, but it hasn’t happened yet!

I think that’s similar to a lot of these stocks.  We purchase some dowdy share and think “since no one else is buying it’ll pop quickly.”  Nope, they wallow at a low valuation until suddenly one day they pop.

The thing is most stocks don’t pop if their business never changes from something terrible to something mediocre.

As we’ve talked to banks at we’ve realized something significant.  Headline stories on business don’t tell the whole story.

There are banks that are deposit constrained and want to lend more, but most banks are lending constrained and want to lend but don’t know who to lend to.

These banks are looking for solid owner occupied credits that aren’t likely to default.  The problem is these credits are few and far between.

Anyone looking to purchase a vacant office building?  The market is flooded with those!

Let’s talk offices for a minute.  I know remote working is the rage right now, and it has to be.  But is this trend something that’s going to continue?  I don’t know, although workers are largely stating their opinion that they want it to continue.

One of my younger brothers works in healthcare, and his company put out an anonymous survey asking who’d like to work from home full time, part time, or from the office full time.  He said 70% of survey recipients wanted to work from home full time, with 25% part time and 5% full time.  The company listened and decided that they’d adjust their policies.  It had worked well enough in 2020 and 2021, so why not?

This is an enormous office space lessee in Northern Ohio.  What does this mean for the market?  It means that most companies are going to be reducing office space.  Maybe not dumping the office entirely, but some portion of it.

The people who need to worry are landlords and banks who bet heavily on white collar workers.  The majority note holders of this asset class are regional banks.  It isn’t a small community bank that owns a note on a $250m office building, it’s the name brand regional bank that owns the note.

If companies reduce their office space by 20-30% this is going to create a significant issue for regional commercial banks that own notes on these buildings.  Who is going to purchase this office space?  Will it be the upstart tech companies that are remote only?  If it’s not them then who?  There isn’t a natural buyer, and hence prices could drop through the floor.

As we’ve talked to local banks they are interested in owner occupied commercial real estate, but nothing office related (unless it’s a doctor or dentist).

If we extrapolate that out it’s a depressing print for regional banks and downtown office buildings, but not that awful for smaller banks that have avoided those buildings simply by size.

What’s crazy is the market is penalizing these small banks as if they’re dead.  Most are not, and many are thriving!  The problem is the larger banks exposed to the latest COVID trends are dragging down the smallest banks.

This presents an awesome opportunity for investors to investors who are interested in picking up shares in cheap banks that are still relatively safe.

It’s my view that sitting patiently and waiting for deals is much better than being sucked up in whatever mania is present at the moment.  Patience always wins the day!