Payday for Kingsway

I’ve been following 1347 Property Insurance Holdings since their spinoff (or better, “IPO“) from Kingsway Financial Services in the spring of last year.  After all, it appeared as veritable catnip to the enterprising value investor–a spinoff, insurance float, aspirations of growth…

Initial plans included expanding 1347’s Louisiana property and casualty insurance business (“Maison Insurance Co.”) to include “Texas, Hawaii, and/or Florida during 2014.” (49)

A secondary offering followed quickly on the heels of the initial offering and raised $23 million more in June (PR).

Unexpectedly, the Florida market proved resilient to entry, as “1347 Property Insurance Holdings, Inc. notified the Florida Office of Insurance Regulation (the “OIR”) of the Company’s intent to withdraw its initial application for a de novo, wholly-owned subsidiary to seek a certificate of authority to write insurance policies in the State of Florida…  The Company may choose to re-submit an application to the OIR in 2015.” (8-k)  No official word yet on progress in Texas and Hawaii.

Admittedly the story of 1347 would seem to be only in its first chapters, which is why I was surprised to see Kingsway recently terminate its management services agreement with 1347. (PR)

1347 though was kind enough to ease Kingsway’s departure, offering $2 million in cash, $3 million in 8% preferred stock, a performance share grant agreement worth 100,000 shares of PIH, and 1.5 million warrants to purchase PIH at $15 per share.  That is no small gift for company with less than $50 million in equity.

It does leave one to wonder though–what services will 1347 now be foregoing?  With some digging, one can find a brief description of the management services agreement: “On February 11, 2014, we entered into a Management Services Agreement, which provides for certain permanent services, unless terminated, that we will receive from 1347 Advisors, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives. For the services performed, 1347 Advisors will be paid a monthly fee equal to 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

Going forward though, that monthly fee to Kingsway would decline if Kingsway ever sold 50% of its common shares.  As they say: “After the seventh year of the term of the Management Services Agreement, should the ownership of our shares by KFSI or an affiliate or subsidiary thereof fall below fifty percent (50%) of KFSI’s (or an affiliate or subsidiary thereof) ownership of our shares at the close of our initial public offering, the monthly fee shall be calculated by (a) dividing the existing shares owned by KFSI (or an affiliate or subsidiary thereof) by the number of original shares owned by KFSI (or an affiliate or subsidiary thereof) at the close of our initial public offering, and (b) multiplying by 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

All told then, Kingsway has elected to forego 1% of gross written premiums in exchange for the cash/preferred/stock/warrant package.  I suppose it makes good economic sense for them, since 1% of $20 million premium would only amount to $200,000 per annum.

Disclosure: No position

BNCCORP’s 2014 Results

Some twelve months past we briefly profiled BNCCORP’s 2013 results. Casting aside the convention of geographic contiguity, BNCCORP, Inc. “operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota, and has mortgage banking offices in Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota.” (PR)

Initially it was the attractive price that drew my interest (uncovered frauds tend to provide such), but over the last few years, BNCCORP has also pleasantly surprised its investors with strong core banking results.  And 2014 offered more of the same.

As of 12/31/14, BNCCORP had a book value per common share of $18.28, and it produced a return on average assets and equity of  0.94% and 12.37%, respectively, through the year 2014.  Non-performing assets decreased to $317k at 12/31/14, compared to $6.7 million at 12/31/13.  For that performace, today’s buyer is willing to pay $15.75 per share, or roughly, .86x BV.

Last year I expressed some disappointment with BNCCORP’s modest loan book ($351 million in total loans at 12/31/13, vs. $436 million in securities), and the fact that they hadn’t yet redeemed their preferred stock and subordinated debt.  In 2014, progress was made on both fronts: the loan book increased to $408 million at 12/31/14 (vs. $449 million in securities), and the subordinated debt was redeemed in Q314.  Coupled together, these moves helped to prevent some of the net interest margin compression that peers have endured.

This year, one additional potential negative is the effect of lower oil prices on BNCCORP’s North Dakota loan book and demand deposits.  Though BNCCORP’s North Dakota loan book represents only $233 million of their $947 million total assets, it was the portion that many thought would offer the quickest and most profitable growth.

Disclosure: No position.

[P.S. On Seeking Alpha, Chris DeMuth has offered BNCCORP as his best long idea for 2015.]

Hingham Institution for Savings 2014 Results

We have found a new year, and what better way to begin than to digest the feast of community bank earnings?

Last year at this time we profiled the Hingham Institution of Savings (Hingham, MA).  Though already much admired, Hingham has seemed to only bolster its reputation further in 2014–retaining its spot as the #1 thrift in the East, and moving up to #2 in the US (per SNL Financial [PR]).

The close of 2013 found Hingham with a book value per common share of $48.49, a return on average assets of 1.07%, and a share price of $77.50 per share, or roughly, 1.6x BV.

2014 saw them improve nearly every operating metric of significance. [PR] Return on average assets and equity rose to 1.13% and 14.32%, respectively (after adjusting for a large one-time life insurance death benefit).  Non-performing assets decreased to 0.20% of total assets, compared to 0.46% at December 31, 2013.  And non-interest expense as a percentage of average assets settled at 1.37% in 2014, vs. 1.40% in 2013.

Book value per share reached $57.08 at 12/31/14, and today’s price of $88 represents a multiple of 1.54x BV.

Like last year, the most impressive aspects of 2014’s performance were Hingham’s large loan portfolio (i.e., as a percent of total assets) and low efficiency ratio (37.19%).  The most obvious negatives remain their relatively high cost of funds (now 0.78% in 2014, down from 0.93% in 2013), low level of demand deposits, and low level of non-interest income (when excluding the one-time insurance death benefit).

Disclosure: No position

California Water Rights

I have found a few more data points to add to my list of water rights sales in California and Arizona.

Some snippets:

1) “This year the market is unbelievable,” said Thomas Greci, the general manager of the Madera Irrigation District, which recently made nearly $7 million from selling about 3,200 acre-feet. “And this is a way to pay our bills.”

2) “Now everyone’s mad at me saying I increased the price of water. I didn’t do it, the weather did it,” said Etchechury, who manages the Buena Vista Water Storage District, which netted about $13.5 million from the auction of 12,000 acre-feet of water.

Disclosure: No position.

Investing at Any Price

“There are no bad bonds, only bad prices.”  So says the old and odd adage that gets kicked around trading floors from time to time.

Of course, once you start there, the adage subtly twists upon itself, becoming “there are no bad assets, only bad prices.”  Or perhaps worse, “there are no bad stocks, only bad prices.”

The truth that lurks somewhere therein is uncontroversial.  For any asset worth X (i.e., its “intrinsic value”), investment returns increase as the discount from X increases.  Perhaps more interestingly, the increase is not linear.

However, our seemingly innocuous adage seems to hide the way in which it breeds and feeds confidence and security.  The inner monologue quickly follows: “as long as I buy a security at a big enough discount to X, I’ll make money.”  Subtly the mind fixates on the discount, and comfortably takes the X as a given.

Given the prevalence of the adage, and the investment justifications it seems to elide, I was ever so grateful to stumble upon Robert Vinall’s May presentation, entitled “Mistakes of Omission.” (Hat Tip to ValueInvestingWorld)

It would be hard to overstate the profound elegance of the presentation, but even the barbarian would appreciate the simplicity of slide 14.

To me, it seems to suggest that there is no price too low for some equities, and conversely, almost no price too high for others.  The crux that differentiates the two–the quality of the underlying business.

Thoughts?

Activism Simplest

Joseph Stilwell’s proxy campaign continues with Harvard Illinois Bancorp ($HARI), and May 22nd is the date set for the annual meeting.

As well-meaning as my previous commentary was, it now appears premature–for Mr. Stilwell’s latest letter to shareholders takes the written word down to three sentences, from seven.

Oh, but note, this time a picture is included.  And you know what a picture is worth…

April 7, 2014

Dear Fellow Shareholder,

Below is a picture taken at last year’s annual shareholder meeting of our Bank’s Chairman.  None of the other board members bothered to wake him up.

If you, like me, believe it’s time to bring a fresh influence to our Bank’s board of directors, please vote the GREEN proxy card for Mark Saladin.

Sincerely, Joseph Stilwell 

So for today, I will dub this–“activism simplest.”  Hopefully this moniker lasts longer than my last attempt.

Disclosure: No position.

Activism Made Simple

Activist investors deploy a wide range of public and non-public forms of persuasion to compel change in their targets.  Insofar as they take to the airwaves, their message–for better or worse–enters into that domain the ancients called “rhetoric.”  And were we to visit them awhile, they would tell us that there are at least three means of persuasion: via 1) the speaker’s credibility, 2) the emotions of the audience, or 3) the grip of the argument itself. (Stanford EoP)

Some activists, perhaps those most enamored with their rhetorical flair (or rather, more generously, those gifted to entertain), take the complex route, weaving an elegant and elaborate discourse of personal anecdotes and earnest appeals.  Yet, there is another way.

Stunningly simple, a written letter, seven sentences.

“Dear Fellow Shareholder,

HARI has publicly reported six full years of financial information. In each of the three years before its IPO, it reported a net loss. Since the IPO, our Company has produced subpar returns in each of the years for which financial results have been reported.[1] In every year for which information has been publicly reported except 2012, the CEO’s pay was greater than the earnings of the Bank.[2]

It is our belief that subpar returns are symptomatic of a poorly-run company with a board that does not hold its management team accountable. We believe it is now time to find a better-run community bank to buy HARI in an effort to maximize shareholder value. Our nominee, Mark Saladin, a partner of Zanck, Coen, Wright & Saladin, P.C., understands management responsibilities first-hand and will utilize his experience to push HARI’s Board in this direction.

Sincerely, Joseph Stilwell”   [Preliminary Proxy]

Simple, yes–but rather potent.

Disclosure: No position