Wednesday, March 20, 2024

James River Group: E&S Insurer, Broken Divestiture, Strategics Circling

James River Group Holdings (JRVR) is a small (~$295MM market cap) insurer primarily focused on small and middle market casualty risk in the U.S. excess and surplus ("E&S") market.  The E&S market can be an attractive market segment because it doesn't face the same regulatory constraints as the admitted (regulated) market, potential clients typically have to demonstrate they can't get regular policies before entering the E&S market where pricing and policies can be more bespoke (and profitable).  James River is relatively good at underwriting these risks, they've had some hiccups with commercial auto (particularly Uber and food-delivery services), but have maintained a low-to-mid 90s combined ratio over the past decade in E&S.  The company insists that current market conditions are favorable, but like banking, it often takes several years of hindsight to confirm that conclusion.

The recent issue for James River has been their reinsurance segment, JRG Re, where the insurer had to raise capital in 2022 via a $150MM preferred stock issuance to plug a capital hole.  JRG Re was put into run-off in 2023 and then sold to Fleming Insurance Holdings (PortCo of Altamont Capital Partners) for 75% of book value (~$277MM, partially funded via an upstreamed dividend of excess capital).  Fleming has gotten cold feet and refused to close the deal, leading to James River taking the buyer to court to enforce specific enforcement.  Toss in a recent material weakness accounting issue in the mix, which has since been remediated, and you can see why investors have lost faith in the company.

Following the announcement of the JRG Re segment sale in November, James River announced plans to explore strategic alternatives that would include a "sale, merger or other strategic transaction."  In the months since, James River has been linked by insurance industry rags to much larger peers Everest Group (EG) and Arch Capital (ACGL) and more recently to odd-duck Global Indemnity (GBLI).  Global Indemnity reportedly offered an all stock deal valuing JRVR at $15/share (versus ~$8/share today), but GBLI is illiquid (controlled) and a publicly traded partnership, meaning clumsy K-1 tax forms for U.S. investors.  GBLI trades for ~2/3rds of tangible book today versus JRVR at just under 90% of tangible book.  Global Indemnity is similarly an E&S insurer that could potentially drive synergies, but given they're roughly the same size and the partnership dynamics, it's unclear to me and the market how real is that $15/share offer and where might the pair trade if a deal was announced.  Potentially GBLI views this as a way to convert to a C-Corp and boost their liquidity, which could end up benefiting both sides.

Either Arch Capital or Everest Group make more sense as buyers, they both trade well above tangible book, another beaten up E&S insurer that was recently taken private is Argo Group International (ARGO), Brookfield paid 115% of tangible book early last year (I participated in that situation, although not profitably).  A similar valuation for JRVR would equate to $10.40/share or 30% upside from $8.

Insurance Insider is reporting today that GBLI and JRVR have entered into more formal talks to merge, with the situation pretty fluid, I'll leave this as a quick note and see if the crowd has more informed/complete thoughts.

Disclosure: I own shares of JRVR

Wednesday, March 6, 2024

BankFinancial: Shareholder Discontent, Activist Added to Board

BankFinancial (BFIN) is a small ($1.5B assets, $125MM market cap) community bank with 18 branches scattered across the Chicago suburbs.  It was a mutual holding company conversion way back in 2004, unlike many former mutual conversions, BankFinancial is primarily a commercial bank with big chunks of their loan portfolio in Class B/C suburban multi-family properties, commercial working capital lines and equipment leases.  Their deposit costs are surprisingly low at just 1.26% (Q4), over a full percentage point below the average bank, despite the strong deposit franchise, the bank struggles to turn a profit with an ROE in the 5%-7% range due to a high expense base.  The stock trades for a hair under $10/share with a book value of $12.45/share (not mark-to-marking their loan portfolio, all of their securities portfolio is AFS), admittedly not the cheapest community bank.

With regional bank tremors popping up again, BankFinancial doesn't have the same problems plaguing others.  The bank doesn't lend to high rises or do significant construction lending, there's minimal office exposure, multi-family is in Class B/C which isn't as susceptible to overbuilding and they have a strong diverse deposit base.  What they do have is an entrenched CEO, Morgan Gasior has been the CEO since the mutual conversion, and remarkably, at the age of 60, has served as a director at Bank Financial since 1983.

Not entirely sure how that's possible, would have made him 19 at the time, in 1988 he became EVP/COO at 24, BankFinancial is Morgan Gasior and Morgan Gasior is BankFinancial.  I'm guessing there's some nepotism involved, but going back to the original conversion docs, couldn't find any previous relationship ties.  I would be curious to hear the origin story.  Despite being a bank executive for nearly 40 years, he only owns 2.5% of the shares yet collect $600+k in annual compensation.

This story isn't too uncommon in the community bank world, but what caught my attention (in addition to this being a local bank for me) was the Q4 earnings call which quickly went off the rails (courtesy of BamSEC):


And our next question will come from the line of [ Stephen Buckman ] from [ Buckman ] Capital.

Unknown Analyst

I have been a shareholder that took part in the conversion 18, 19 years ago. And I have a more holistic question as well. And that is what is the role of the Board of Directors? And I'm going to refer you to a conference call comment you made on May 2, 2022. And what you said, I'm quoting, is, "Well, first of all, I think we're in a position now where our goal for the third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So I'm going to try to hit that $1 per share in our third quarter and fourth quarter." This is 2022. And then beginning next year, the goal would shift to getting into the $0.30s or somewhere between $0.30 and $0.34. I could go on, but the fact is, 18 years later, the only guy who's made out here is you. Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the Board of Directors in terms of your underperformance during this time?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

No, this is the investor conference call. We're here to discuss earnings.

Unknown Analyst

I'm quoting you directly from May 2, 2022 [indiscernible] take a look at the conference call.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I'll just say that, if you want to discuss this offline, we're happy to.

Unknown Analyst

No. No. I'd rather this be in a public forum.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, we're going to leave it there. I don't think that this is -- that's the right forum for this. If you want to...

Unknown Analyst

Well, your underperformance for 19 years is a matter of public record. And so do you want to address it publicly or do you want to pretend that it doesn't exist?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I think we're going to leave it where I said. This is the investor conference call. If you'd like to talk about it off-line, we're happy to do so. But I mean...

Unknown Analyst

And I find that your cowardice in addressing issues that affect all public shareholders is severely -- is staggering. I'll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic alternatives. I'll leave it at that.

And another one:

Unknown Analyst

Morgan, this is [ Charles Winnik ]. On February 5, 2013, you were asked questions on your last call, you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you. Well, I definitely can't disagree with your assessment, especially considering the performance over the last few years. I don't really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved, your full earnings capacity still generates returns much less than your cost of capital, which, in effect, destroys shareholder value. Your efficiency ratio is just too high. And while loan growth is always right around the corner, you admit on every call that competition is intense, which I agree, which really just justifies the fragmented nature of the markets and need consolidation. And so, yes, we have improved outlook and hefty capital, but all negatives really speak for themselves.

So, my question really is -- you've got most of your credit issues behind you now. Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction?

And finally from Jason Stock, whose fund owns just under 10% of the shares:

Jason Stock

As you know, we've been long-term investors in BankFinancial, and we're generally not the type of investor who likes to be much of a nuisance. But as owners of over 9% of the company, I think it'd be probably irresponsible of me to not pipe in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity.

Then a week after, Ben Mackovak of Strategic Value Bank Investors, a fund that specializes in community banks was added to the board after accumulating a 5.2% position.  From the 13D filing:

The Reporting Persons acquired the Common Stock reported on this Schedule 13D for investment purposes. The Reporting Persons purchased the shares based on the belief that the shares, at the time of purchase, were undervalued and represented an attractive investment opportunity. The Reporting Persons believe significant opportunity exists to enhance shareholder value by simplifying the business, improving operations, resolving certain non-performing loans, and evaluating strategic alternatives.

Mackovak follows a similar strategy of other community bank activists, he's on the board of some 10 small banks, pushes them to make operational changes, if that doesn't improve the multiple, then pushes for an M&A transaction to unlock value.  He recently went on Meb Faber's podcast and sounds like a smart, sober, capable board member that could crack the BFIN nut.  I don't anticipate an immediate M&A deal here (they have $52.8MM of mark-to-market losses on the loan portfolio an acquirer would need to realize), the bank does have some shorter duration loans that are coming off the books this year that they can put to work at higher rates improving profitability, but the pressure is on as a high expense base is much easier to fix (by selling out) than a flightly deposit base, long duration securities portfolio or credit issues, none of which really apply to BFIN.

Disclosure: I own shares of BFIN 

Friday, March 1, 2024

Limoneira: Citrus Farmer, Pursuing Strategic Alternatives

Limoneira Company (LMNR) ($330MM market cap) is a California based citrus farmer (primarily lemons, secondarily avocados) packager and part-time real estate developer that announced on 12/1/23, they were pursuing strategic alternatives.  From the press release:

Scott S. Slater, Chairperson of the Board, stated, “Over Limoneira’s 130-year history it has grown into one of the leading, sustainable agribusiness companies in the world with over 11,100 acres of valuable lands, real estate properties, and senior water rights. Over the past 18 months, we have developed a strategic roadmap intended to enhance near and long-term shareholder value. Today, we consider ourselves to be in a strong financial position, having recently reduced our net debt position and rightsized the balance sheet through our ongoing strategic shift towards an asset-lighter business model. Given the Board’s belief that there is a disconnect between Limoneira’s public market value and the intrinsic value of our Company’s underlying assets, the Board believes it is the right time to explore all strategic options to prioritize the Company’s growth and stockholder value.”

Last summer, the company hosted an investor day where they laid out their estimated fair market value of LMNR's real estate and other assets:

Today, the stock trades for roughly $18/share, or a 40% discount (60% upside) to the low end of the above NAV (which they cite is based on recent agriculture transactions).  I waited a little while to buy this one (the price has also come in from the post-announcement excitement) as it strikes me as a potentially difficult business to sell leading to an extended timeline:
  1. Agriculture/farming operations aren't know as fantastic businesses, they're price takers not price makers and as a result, can be very cyclical.  They're also capital intensive, although Limoneira is trying to be more of a farm management and packaging company, as seen above, the value is in the land and related assets.
  2. Part of the value is in higher or better uses of the real estate, such as difficult to monetize water rights.
  3. This is a old company, main employer in town (many of their employees live on property in housing owned by Limoneira), as a result, it's probably hard from a personal relationship perspective to be the management team that sells to outsiders.  Easier to maintain the status quo.
But there is reason to believe management does intend to sell, shortly after the strategic alternatives announcement, they let 13D holder Peter Nolan on the board:
Limoneira Chairperson of the Board, Scott S. Slater, stated, “... We are pleased to welcome Peter and believe he will be a valuable asset in guiding the Company as we continue to execute against our strategic roadmap to enhance near and long-term value and commence the exploration of potential strategic alternatives aimed at maximizing value for our stockholders.”

Peter Nolan, Chairman of Nolan Capital, Inc. commented, “I am excited to be joining the Board of Limoneira as it enters this phase of exploring ways to unlock additional value for stockholders.”

Peter Nolan, a former PE executive, owns 6% of the company and his family office has some past experience with real estate and agriculture businesses.  The two events of Nolan showing up on the shareholder registry and strategic process seem related, hopefully he can help engineer a sale here.

Unlike other situations, management doesn't appear to be an obstacle here; this article from the VC Star provides some interesting background on the company, including how it came public after they tripped the SEC shareholder count number and had to list in 2010.  They haven't gained much from being public, probably makes sense for them to be private again.  CEO Harold Edwards is quoted, "The value the market perceives we have versus what we believe is the intrinsic value - there's always been a big difference between those two things.  The idea is that maybe there's a better way for us to operate.  Maybe there's a better ownership structure that isn't public.  Maybe it's private, or maybe it's merging together with another public company."  Guessing we just have to be patient on a sale, maybe mid-to-late summer is reasonable.

Disclosure: I own shares of LMNR