Ruling in Shareholders' Lawsuit Against Life Insurance Company of Alabama

We've mentioned in recent posts about Life Insurance Company of Alabama that the shareholders' lawsuit against the company was awaiting the court's ruling on the motion to dismiss. The court dismissed the derivative claims, but the direct claims, including the claim for dissolution of LICOA, survived and will proceed in federal court.
This matter comes before the court on Defendants’ motion to dismiss Plaintiffs’ third amended consolidated complaint. (Doc. 57). For the reasons stated in the Memorandum Opinion issued contemporaneously with this Order, the court rules as follows.

The court GRANTS IN PART and DENIES IN PART Defendants’ motion to dismiss. As to the derivative claims, the court DISMISSES all Plaintiffs’ derivative claims WITH PREJUDICE because LICOA’s independent directors validly exercised their business judgment in rejecting Plaintiffs’ claims after a thorough and good faith investigation. See Roberts, 404 So. 2d at 632. If the court were not dismissing the derivative claims on that ground, the court would alternatively dismiss with prejudice any of Plaintiffs’ derivative claims arising from facts occurring before August 28, 2017—two years before the filing of Plaintiffs’ complaint—because the statute of limitations as to those claims has expired.

But the court DENIES Defendants’ motion to dismiss Plaintiffs’ individual direct claims because the court finds no merit to Defendants’ challenges to those claims.

So the only claims remaining in the case are the direct claim for dissolution, brought by all Plaintiffs against all Defendants (Count 2) and the direct claim for violation of shareholder rights, brought by Plaintiffs Trondheim and MTP against all Defendants (Count 3).
The full order is below:

LICOA Order Order by Nate Tobik on Scribd

Allied First Bancorp - Proxy Statement for Merger $AFBA

Last week, we mentioned that Allied First Bancorp was being acquired, but we didn't know the price or terms. Now we have the proxy statement for the merger:

AFBA - Proxy Statement for Merger - March 2022 by Nate Tobik on Scribd

AFBA - Merger Agreement and Fairness Opinion - March 2022 by Nate Tobik on Scribd

Just Published: Issue 39 of the Oddball Stocks Newsletter

We just published Issue 39 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 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.

Don't miss our recent blog posts on Oddball Stocks, some of which contain samples of Newsletter content:

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

Upcoming Shareholder Meetings for Oddball Companies

  • Southern Realty (SRLY) - Monday, April 4, 2022 - La Jolla, CA
  • National Stockyards Company (NSYC) - April 20, 2022 - Oklahoma City, OK 
  • HMN Financial (HMNF) - April 26, 2022 - virtual
  • First Resource Bank (FRSB) - April 27, 2022 - Exton, PA
  • Keweenaw Land Association, Ltd. (KEWL) - May 9, 2022 - Ironwood, MI
  • Pardee Resources (PDER) - May 19, 2022 - Philadelphia, PA

If you would like more specifics, or to find out whether any fellow Oddball investors will be attending, please get in touch. 

Also, if you are interested in any of these companies, we can point you to the back Issues of the Newsletter where we wrote about them.

Allied First Bancorp Being Acquired... But at What Price? $AFBA

We have mentioned Allied First Bancorp (AFBA) in the Oddball Stocks Newsletter and on the blog:

Here is what we said in Issue 36:

AFBA is a standout as a very small bank with a very high return on equity that trades at a 12% discount to tangible book value as of June 30, 2021. Based in Oswego, Illinois (southwest Chicago exurbs), it started as a credit union for American Airline pilots in 1994 and converted in 2000. Our guest writer Catahoula first mentioned it in Issue 26 (August 2019) at $1 so it has returned 8.5x since. The current market capitalization is $16 million at $8.50 per share which is 88% of TBV. (We use a 1,911,892 total share count which assumes that 139,995 shares of convertible preferred stock that were issued under TARP are converted to common.)

We just found out that AFBA is being acquired:

ServBanc Holdco, Inc., Phoenix, Arizona; to become a bank holding company by merging with Allied First Bancorp, Inc., and thereby indirectly acquiring Allied First Bank, SB, both of Oswego, Illinois.

As Phil Timyan was first to notice, the company did not put out a press release. Nor did the acquirer. So, there is no information about price and terms available for shareholders or investors.



Phil also pointed out that the lack of communication was "about what you'd expect from a guy still around from a $10 2001 conversion that almost failed."

We did some digging. The "Executive Vice President - Chief Financial Officer" of the bank is Mark A. Fritz. His email is mfritz@alliedfirst.com and his phone number is 630-383-0102, but he didn't answer the phone.

Next we tried to get a hold of President Ken Bertrand, but we couldn't get a hold of him at the office either. His email is kbertrand@alliedfirst.com and he can be reached via the main switchboard at 630-554-8899.

One of our Oddballs got in touch with the Chairman of the bank, John Maxwell, who is a real estate agent in Hawaii. This Oddball found out from Mr. Maxwell that the deal price is estimated to be $11-12 per share. The bank is refusing to give any more details about the merger besides this, but has said that a proxy statement for the merger is "in the mail."

So, if that information about the deal price is accurate, this AFBA idea will have returned 11x since it was mentioned in the Newsletter in 2019!

"Hanover Foods Enters Consent Order With EPA Over Wastewater" $HNFSA

A reader sent us a heads-up about this story:

The U.S. Environmental Protection Agency is taking legal action to get Hanover Foods Corp. to address numerous alleged violations at the company’s wastewater treatment facility in Hanover, Pennsylvania, that included excessive levels of contaminants as well as floating solids and visible scum in the discharged water and receiving water.

“The number of alleged violations observed during inspections is appalling,” said EPA Mid-Atlantic Regional Administrator Adam Ortiz. “The company needs to identify why this occurred and present a plan to fix this so that the local waters that eventually feed into the Chesapeake Bay are protected.”

Under a consent order with EPA announced Feb. 25, Hanover Foods will conduct a study to determine the cause and how to correct these alleged water pollution violations that were identified during inspections by EPA and the Pennsylvania Department of Environmental Protection.

EPA alleges the company has failed to comply with a state-issued National Pollutant Discharge Elimination System permit to operate its own wastewater treatment facility at 1486 York Street to treat industrial waste before wastewater is discharged to Oil Creek, a tributary of Codorus Creek that feeds into the Susquehanna River in the Chesapeake Bay watershed.

Environmental inspections identified numerous alleged violations at the facility including discharges of water exceeding permit effluent discharge limitations, floating solids and visible scum in wastewater and receiving water, and violations of the permit’s operation and maintenance conditions.

We just received financial statements (embedded below) for Hanover for the quarter (second fiscal) that ended November 28, 2021.

During the first fiscal quarter (ended August 2021), Hanover lost $3 million and spent $6.4 million on capital expenditures. During the second fiscal quarter, Hanover lost a further $700k and spent a further $7.4 million on capex.

Hanover has borrowed an additional $24 million over the six months that ended November 28, 2021. Rising debt, rising capex, and flat-to-falling sales are a red flag that we have previously noted at troubled companies. Remember how we described Scheid Vineyards back in July 2019, avoiding a subsequent (further) 70% share price decline:

"Nobody who has done an asset valuation writeup of [Scheid] has commented on the deteriorating profitability and margins, or the fact that management has responded to it by taking on more leverage to make much bigger investments in the business."

Leverage is not that high yet as a proportion of assets (debt/assets 34%) or book equity, but total Hanover Foods liabilities are very high compared to the market value of the equity. Assuming a $50 share price for Hanover gives you an implied market capitalization of $36 million. So, total liabilities are 3.4x this. 

Hanover shares are coming to resemble an equity stub. We will have more about this in the upcoming March 2022 Issue of the Oddball Stocks Newsletter.

Hanover Fiscal Q2 2022 by Nate Tobik on Scribd

LICOA Annual Statement for 2021 $LINS $LINSA

Life Insurance Company of Alabama (LICOA) published its regulatory financials ("Annual Statement") for 2021 with the NAIC yesterday. Both the Annual Statement and the Investment Schedule are embedded below.

LICOA has significant unrealized gains in its investment portfolio. If you look at page 5 of the Investment Schedule below, you will see that the "Fair Value" of the common stock and bond investments is $113.7 million but the "Book/Adjusted Carrying Value" is only $105 million. So the regulatory financials understate the book value by $8.7 million, although you could haircut this for a tax accrual, and have a net number more like $6.9 million.

The regulatory financials also have certain reserves ("Interest Maintenance" and "Asset Valuation"), which total $4.4 million. When estimating LICOA's book value per share, it may be appropriate to add back these reserves, and also make a market value adjustment (less a reserve for deferred taxes) to the investment portfolio, in order to better approximate the GAAP book value. 

Our understanding is that there are approximately 86k voting (LINS) shares and 382k nonvoting (LINSA) shares with one-fifth the economic interest, for a total of 813k LINSA equivalents. The company's total assets less liabilities are $38.8 million, or $47.73 per LINSA equivalent share. Making the adjustments described above gives an adjusted book value of $50 million (mostly the market value adjustment to the investment portfolio), which is almost $62 per share.

The implied market capitalization of LICOA at a $26 LINSA share price is $21 million, or 30x the reported net income of $690k for 2021. The net income was a paltry 2.1% return on statutory equity. However, the adjusted book value per share grew by much more than the paltry ROE suggests, because of the accretive repurchase as well as the investment portfolio gains that do not flow through the income statement.

It is noteworthy that LICOA is profitable, overcapitalized, bought back 20% of its outstanding shares last year, is being sued by minority shareholders, but the nonvoting shares last traded for only 42% of adjusted book value per share.

LICOA Annual Statement 12 31 2021 by Nate Tobik on Scribd

LICOA Investment Schedule 12 31 2021 by Nate Tobik on Scribd

Previously, regarding Life Insurance Company of Alabama:

Be sure to check out the Concerned Shareholders of Life Insurance Company of Alabama website as well. We will have more about LICOA in the upcoming March 2022 Issue of the Oddball Stocks Newsletter.

Some Folksy Wisdom... the Berkshire Hathaway 2021 Shareholder Letter is Out

No explanation for the $140 billion cash hoard when real interest rates are so low.

2021ltr by Nate Tobik on Scribd

Rockford Corporation Has Its "One-Day" $ROFO

This press release was published on Thursday:
Rockford Corporation (OTC Pink: ROFO.PK) announced today that it has signed a definitive agreement under which Rockford will become a wholly owned subsidiary of Patrick Industries, Inc. by merger. Patrick Industries (NASDAQ: PATK) is a leading component solutions provider for the RV, marine, manufactured housing, and various industrial markets – including single and multi-family housing, hospitality, institutional and commercial markets. Founded in 1959, Patrick is based in Elkhart, Indiana, with over 11,000 employees across the United States.

Shares were trading for around $10 last year (very thinly traded) but popped to $15.50 with the announcement. 

According to a projection in the Notice of Special Meeting, common shareholders should receive an initial payment of $16.326 and a final payment (from a holdback fund) six months later of $0.331, for a total of $16.657 in consideration. 

The purchase price of the company is $125 million. The most recent annual report we have is for 2018, below. Book value at the end of 2018 was $18 million, and the company had made $7.3 million of net income that year.

In 2021, ROFO paid $1.50 per share in dividends, $2.5 in 2020, $0.75 in 2019, and $1 in 2018. With 7.25 million shares outstanding, that was a total of $41.7 million ($5.75 per share) in four years. 

Interestingly, it was trading for years on end at a dividend yield north of 10%. Dividend yield can be a very good indicator. Rockford had high free cash flow conversion on its earnings, greater than 100% of net income in 2016-2018 for example, and allocated this cash flow well. They simply returned it to shareholders.

Rofo 2018 Ar by Nate Tobik on Scribd

This is the Notice of Special Meeting that was sent to Rockford shareholders:

Rockford Corporation - Notice of Special Meeting by Nate Tobik on Scribd

Pardee Resources Shareholder Letter - February 2022

During 2021, the operating earnings of Pardee Resources Company benefited from the resilience and strength of all three of its primary markets, namely hardwood timber, metallurgical coal and natural gas. Commodity prices, which turned upward during Q4 2020, continued to improve throughout 2021, as the rebounding economy, combined with supply chain constraints, put upward pressure on prices. While the U.S. Federal Reserve is expected to increase interest rates as a means of containing overall price inflation in the economy, commodity prices remain strong as of early 2022.

The annual audit by Ernst & Young of the Company’s financial statements is expected to be completed in early April, after which we will be mailing you our 2021 Annual Report.

Your Board of Directors has voted to maintain the quarterly dividend at $1.80 per common share which will be payable March 7, 2022 to shareholders of record February 28, 2022

SHLTR_490641 by Nate Tobik on Scribd

DuArt Film Laboratories and "The Biggest Mensch in the Business," Irwin Young $DAFL

This is the only time we can think of that an Oddball company executive has been honored with a full New York Times obituary:

Mr. Young had a practical side as well. He made two investments in the 1970s that helped secure DuArt’s long-term future: He acquired the 12-story building in Midtown Manhattan where the laboratory had long been located, freeing it from the whims of a landlord; and he bought a two-thirds interest in a television station in Puerto Rico, which brought in a strong flow of revenue that helped improve DuArt’s bottom line. He also oversaw DuArt’s embrace of a process that benefited independent filmmakers: blowing up 16-millimeter negatives into 35-millimeter prints, which have a better chance at being commercially viable. And he added to DuArt’s photochemical film processing business by branching into film-to-video transfers and online video editing in 1970, and into digital work, including effects, titles and restorations, in 1994. But last August, Ms. Young, DuArt’s president and chief executive since 2017, announced that its business was being shuttered because it was no longer economically viable to stay independent. Its building was recently put up for sale.

DuArt Film Laboratories (DAFL) is well known by Oddball investors, although we have not mentioned it on the blog (except briefly). Nate first mentioned it in Issue 9 of the Newsletter, and we also published updates in Issues 36, 31, and 26. (The latter two are available à la carte if you are interested in giving the Newsletter a try.)

Just Published: Issue 38 of the Oddball Stocks Newsletter

We just published Issue 38 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 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.

Don't miss our recent blog posts on Oddball Stocks, some of which contain samples of Newsletter content:

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