Activist investor revives effort to force sale of an Ohio bank

Barely a quarter removed from the most successful year in its 120-year history, Middlefield Banc Corp. in Ohio is facing renewed calls from an activist investor to sell itself.

In a letter Monday, Ancora Holdings Group, Middlefield’s largest shareholder with a 7.8% stake, claimed the $1.33 billion-asset company “botched” the search for a new CEO and failed to secure a merger-of-equals-type deal with any of several northeast Ohio community banks. An MOE deal might have provided an influx of younger management talent while bolstering Middlefield’s long-term growth prospects, according to Ancora; it didn’t name the potential merger partners.

Ancora, a Cleveland-based investment firm, previously urged Middlefield, holding company for the Middlefield Banking Co., to sell itself in August 2019.

Longtime CEO Thomas Caldwell, who led Middlefield for more than two decades, stepped down March 31 as planned since last summer. James Heslop, who had served as the company’s chief operating officer since 2000, succeeded Caldwell. Heslop, 68, is four years older than Caldwell — a fact Ancora highlighted in its letter to shareholders.

“We question the viability of pursuing a succession plan that seated an older CEO than the one he replaced,” Ancora wrote.

“We don’t consider that succession planning,” James Chadwick, president of Ancora Advisors, the registered investment advisor that serves as general partner and investment manager to Ancora’s private funds, said Monday in an interview. “I think it surprised us the way that was handled. … It literally doesn’t make sense to us. Part of our proposal and our letter is really kind of out of frustration. This doesn’t feel like a thought-out strategy. It feels like something that’s more reactionary, even though [Middlefield] had plenty of time to make a decision on where it’s going long-term.”

Ancora added in the shareholder letter that Middlefield failed to follow its counsel to combine the search process that led to Heslop’s selection as CEO with a “dual path” that would have tested the company’s market value and evaluated its stand-alone prospects.

“I’d say they definitely have not done that,” Chadwick said.

A Middlefield spokesman said Monday the company had no comment on Ancora’s letter. In January, Middlefield reported a record $18.6 million in net income for 2021, up 123% over its 2020 profit of $8.3 million. Middlefield returned $16.2 million to shareholders through dividends and share repurchases. It’s expected to report first-quarter results next week.

Ancora claimed the 2021 results received a boost from the Paycheck Protection Program and what it termed an “extremely low” loan-loss provision. As business conditions normalize, Middlefield’s return on average tangible common equity, which totaled 14.38% in 2021, is likely to decline “at least 200 to 300 basis points by year-end,” Ancora wrote.

According to Ancora, Middlefield’s stock trades “at a persistent discount relative to the company’s intrinsic value” and that it could fetch as much as $38 per share in a sale. Middlefield shares were up nearly 5% in midday trading Monday, at $25.48, and closed at $25.25.

Ancora did not challenge management after Middlefield declined to follow its first call to sell in 2019. “We sat down with them and had discussions with some of the board members,” Chadwick said. “It was pretty clear that wasn’t the direction they wanted to go, but there were also discussions going on about potential mergers with other smaller banks,” that Ancora was loath to disrupt.

It may not be so accommodating this time around.

Ancora submitted a nonbinding resolution urging the board to “take the necessary steps to achieve a sale, merger or other disposition of the company.” If the resolution receives “significant support” at Middlefield’s May 11 annual meeting and the board disregards the outcome, Ancora has promised to “consider all options available to us to help increase shareholder value, including a proxy contest.”

“To me, [the nonbinding proposal] is a good way to test what could happen in a contest,” Chadwick said. “This gives us kind of a free look at how responsive the shareholders would be to this type of action. …We’ll see how agitated the base is.”

“I do think we will get significant support,” Chadwick added.

Ancora’s proxy fight threat comes as a growing list of banks faces challenges from disgruntled investors. At Republic First Bancorp in Philadelphia, two different groups are locked in an increasingly bitter struggle with the $5.6 billion-asset company’s management, led by Chairman and CEO Vernon Hill. Meanwhile, Driver Management, one of the two groups challenging Hill’s control at Republic First, is also pushing for the sale of the $2.4 billion-asset Codorus Valley Bancorp in York, Pennsylvania.

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