Highlights the Board's Poor Succession
Planning, Abysmal Corporate Governance and Track Record of
Presiding Over Financial Underperformance
Urges the Board to Initiate a Credible Sale
Process and Promptly Engage with Potential Suitors
Ancora Holdings Group, LLC (together with its affiliates,
“Ancora” or “we”), the largest shareholder of Middlefield Banc
Corp. (NASDAQ: MBCN) (“MBCN,” the "Bank" or the “Company”), today
issued the following open letter to shareholders regarding the
Company's 2022 Annual Meeting of Shareholders.
***
April 18, 2022
Fellow Shareholders,
Ancora Holdings Group, LLC (together with its affiliates,
“Ancora” or “we”) is the largest stockholder of Middlefield Banc
Corp. (NASDAQ: MBCN) (“MBCN,” the “Bank” or the “Company”),
beneficially owning approximately 7.8% of the Company’s outstanding
common stock. Ancora is a long-term shareholder of the Company due
to our belief that MBCN has traded, and continues to trade, at a
persistent discount relative to the Company’s intrinsic value.
During our five-plus-year holding period, we have consistently
communicated to the Company, along with shareholders, our belief
that running a legitimate sale process to sell the Bank represents
the best risk-adjusted outcome for all stakeholders. In our view,
the Board, in response, has been consistent in its resolve to
remain entrenched and do little to improve shareholder value.
We estimate MBCN could be worth $36-$38 per share if the Company
were sold based on precedent transaction comps using a range of
1.65x - 1.75x TBV multiple.1 These transaction comps include
companies that were previously a part of MBCN's compensation peer
group that were acquired at attractive valuations representing a
significant premium to MBCN’s current share price. We find it
difficult to believe that the Company’s execution of its current
strategic plan can achieve that type of return for shareholders
(over a reasonable holding period), especially given the heightened
risk of economic turmoil. In addition to potential looming economic
risks, the Board has continued to make questionable decisions such
as botched “succession planning” (which entailed replacing the
longtime CEO with an even older executive), was unable to complete
merger of equal (“MOE”) opportunities with multiple northeast Ohio
banks that would have provided younger, talented management teams
that could have helped execute an attractive long-term growth
strategy and engaged in business activities, such as the Company's
marijuana servicing operations, that provide low moat protection
and are material enough to hurt when taken away by bigger, better
capitalized banks.
In light of the Company’s response to our shareholder proposal
in the 2022 proxy statement, we felt compelled to clarify several
statements made by the Company.
Ancora Is a Long-Term
Shareholder of MBCN
In the Company’s response to our shareholder proposal, MBCN
stated, “the board of directors believes the proposal is only for
the near-term benefit of the shareholder and is not in the best
long-term interest of all of the Company’s shareholders.” We
believe this comment typifies the narrow mindedness of incumbent
Board members. Ancora has been a shareholder of MBCN for more than
five years, while also currently being the Company’s largest
shareholder. Our ownership position is significantly larger than
the entire Board’s combined level of ownership, despite a majority
of the current Board members having director tenures of at least 14
years. We question why numerous long-term directors have such low
levels of ownership and have failed to make meaningful open market
purchases of MBCN stock if the standalone prospects of the Company
are so compelling? Below you will find a table illustrating the
current directors' tenure along with the dates of their most recent
open market purchases.
Board Members Name Title
Years on Board Years
Shares
Held
% Own
Last
Purchase
Voinovich, Michael C. Independent Director
2020-Present
2
31,200
0.5%
12/6/2021
Heslop II, James R. President, CEO & Director 2001-Present
21
31,499
0.5%
12/3/2021
Mast, Darryl E. Independent Director 2013-Present
9
36,882
0.6%
1/28/2021
Skidmore, William J. Independent Chairman of the Board 2007-Present
15
20,357
0.3%
4/29/2020
Jones, Kenneth E. Independent Director 2008-Present
14
9,748
0.2%
2/13/2014
McCaskey, James J. Independent Vice Chairman 2004-Present
18
9,932
0.2%
9/15/2011
Turk CPA, CPA, Carolyn J. Independent Director 2004-Present
18
30,429
0.5%
9/15/2011
Bevan, Thomas W. Independent Director 2017-Present
5
50,957
0.9%
-
DiGeronimo, Kevin A. Director 2021-Present
1
990
0.0%
-
Moeller, Jennifer L. Director 2021-Present
1
-
0.0%
-
Board Total
221,994
3.8%
Source: S&P Capital IQ
We continue to be disappointed by the performance of MBCN’s
stock price over our investment period. Despite claims that MBCN
has fared well compared to the SPDR S&P Regional Bank ETF
(ticker: KRE) over the last five years, the Company has
underperformed since we filed our 13D on August 8, 2019, at which
time we made our views on a sale publicly known. Since our public
disclosure, MBCN has returned just 9% for shareholders compared to
the KRE achieving a 27% return (3x the return of MBCN) through
April 11, 2022.
MBCN highlights the financial services sector as being
disproportionately impacted by the 2021 Russell rebalancing and
cites this as a main reason for the Company’s stock price
underperformance. Its response points out that 80 financial
institutions were removed from the Russell 3000 Index in 2021 and
suggests the current stock price is not a true reflection of the
Bank's recent operating results. However, when evaluating banks
with assets between $1 - $1.5 billion that were removed from the
Russell 3000 through April 11, 2022, we find MBCN has
underperformed even those peers, evidenced by MBCN’s 2.9% return
compared to the 10.6% median return of its Bank counterparts.
Failed Succession
Planning
We viewed the succession planning process as the perfect
opportunity for the Board to pursue a dual path in MBCN’s
go-forward strategy. We informed the Board on multiple occasions
that running a process to test the market value of the Company,
while also evaluating what the Company’s standalone prospects
looked like as the Board developed its three-year strategic plan
was important. In our view, our advice was not followed.
The Company highlighted that we applauded the Board for
undertaking the process of evaluating the Bank’s three-year
strategic plan on a regular basis in its proxy response. However,
this quote was taken out of context by omitting that we indicated
that the Board’s focus and responsibility is to maximize
shareholder value. We urged the Board to pursue the aforementioned
dual path, and once completed, pursue whichever option would
produce the best risk-adjusted outcome that maximized value for all
shareholders. Instead of doing this, the Company decided to pursue
its recently executed succession plan to replace longtime CEO Tom
Caldwell. The retirement of Mr. Caldwell came only after the Board
failed to execute on multiple MOE opportunities with smaller
northeast Ohio community banks that would have provided both growth
and younger management to build a future around.
The Company championed this initiative as taking favorable
governance actions by addressing CEO succession, which ultimately
led to James Heslop being named MBCN’s new CEO. While addressing
succession planning is an important aspect for boards to consider,
we question the viability of pursing a succession plan that seated
an older CEO than the one he replaced. How is hiring a 68-year-old
executive who has been with the Bank since 1996 a credible
succession plan? How are shareholders supposed to get behind a
long-term growth strategy at the Company? We view the outcome of
the succession plan as a complete failure, one which further
reinforces our belief that the Board is entrenched and will
prioritize its best interest over that of shareholders.
Peer Group
Criticism
The Company indicated that the peer group we selected to compare
MBCN’s performance against was not appropriate. We find this
criticism disingenuous at best considering MBCN has not publicly
disclosed a compensation or performance peer group in either of its
last two proxy statements (or even in its current response to our
proposal). We believe comparing MBCN against similar-sized Midwest
banking peers is the most appropriate method to gauge how the Bank
is performing given the absence of Company-defined peers. After
evaluating the criticism of our peer group further, we found that
the peer group which MBCN used for compensation purposes in its
2020 proxy statement included 19 banks, 16 of which had larger
asset bases than MBCN, with six of those banks having asset bases
twice as large as MBCN. This dynamic is quite interesting given
this peer group is used in evaluating compensation for MBCN’s
executives and directors. We believe the use of larger banks in
this peer group is purely self-serving considering larger
organizations generally have higher levels of compensation
(including for their boards). Furthermore, we noticed several MBCN
banking peers from the Company’s peer group have been acquired over
the past four years. The average and median multiple from these
transactions were 1.72x and 1.65x TBV, which would imply a $36-$38
per share valuation for MBCN if a sale were to occur. These
precedent transactions from the Company’s own peer group present an
outstanding example of what path the Company should be pursuing at
this juncture. In MBCN's June 2019 letter to Ancora, it also
identified a performance peer group of Midwest banks with assets
primarily ranging from $655 million to $1.5 billion. Ironically,
this “performance” peer group today would consist of 27 banks, 17
of which are OTC-listed. These OTC-listed banks are not eligible
for the Russell 2000 Index, typically far less liquid and another
example of information that fails to accurately present the
Company’s real relative performance.
Unsustainable
Earnings
MBCN is quick to highlight the strong operating results
generated by the Bank during fiscal year 2021. While we acknowledge
on the surface that the operating results were solid, we question
the sustainability of those results for a variety of reasons. The
2021 results were anchored by prior years' benefits from PPP
funding, an extremely low loan loss provision taken in 2021 and the
Company’s entry into the marijuana servicing business. This
confluence of events resulted in 2021 EPS of $3.01 and MBCN's
highest ROTCE ever. However, we believe most of this benefit is
unsustainable and note that Wall Street has taken its 2022 earnings
estimates down 20% to $2.46 despite the benefit of rising interest
rates this year. We estimate, based on FY 2022 earnings
expectations of $2.46 per share, that the Company's ROAE and ROATCE
will decline at least 200-300 basis points by year-end. The Company
will also have to take a normalized loan loss provision, and should
marijuana be legalized at some point, those seven-figure earnings
could evaporate.
The Company’s response touted its ROTCE versus our use of ROAE.
Just to be clear from a return standpoint, we believe ROAE presents
a more accurate picture of true return as it actually accounts (in
the denominator) for acquisitions the Company has made to generate
the earnings used in the calculation. As such, MBCN generating less
than $2.46 of EPS on a book value per share of $24.00+ would be
below peers.
In conclusion, we firmly believe the best way to maximize
shareholder value is through a sale of the bank to a larger, more
liquid partner at a significant premium to today’s stock price. We
are confident there are a number of buyers willing to purchase MBCN
and estimate fair value to be in the $36-$38 per share range. We
also know the Bank has been presented with opportunities to merge
with smaller banks that have younger management teams who could
help the Bank accelerate growth. However, to date, the Board has
continued to dig in its heels and remain firmly entrenched instead
of running a process to evaluate strategic alternatives. We are not
writing to shareholders to provide instructions on how to vote for
the shareholder proposal we sponsored but rather to inform
shareholders why we submitted the proposal and outline the need to
create a sense of urgency to maximize value at MBCN. Even if the
proposal receives a majority of the votes in the end, the
resolution is non-binding. That being said, should the Board choose
to ignore the outcome and there is significant support, we will
consider all options available to us to help increase shareholder
value, including a proxy contest.
Sincerely,
Fredrick D. DiSanto
James Chadwick
Chief Executive Officer and Executive
Chairman
President
Ancora Holdings Group, LLC
Ancora Alternatives LLC
***
About Ancora
Founded in 2003, Ancora Holdings Group, LLC offers integrated
investment advisory, wealth management and retirement plan services
to individuals and institutions across the United States. The
firm's comprehensive service offering is complemented by a
dedicated team that has the breadth of expertise and operational
structure of a global institution, with the responsiveness and
flexibility of a boutique firm. For more information about Ancora,
please visit https://ancora.net.
__________________________
1 Our transaction comps include acquired
banks that were part of the Company’s previously disclosed peer
group, namely banks in the peer group that were acquired over the
past five years with assets between $655 million - $1.5
billion.
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version on businesswire.com: https://www.businesswire.com/news/home/20220418005224/en/
Longacre Square Partners Greg Marose / Bela Kirpalani,
646-386-0091 gmarose@longacresquare.com /
bkirpalani@longacresquare.com
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