Showing posts with label LCNB. Show all posts
Showing posts with label LCNB. Show all posts

LCNB Corp, Lebanon, OH (LCNB)

Shareholder Proposal Shenanigans at LCNB


Image of Unmasked Male Burglar Climbing Fence into Back Yard
As an investor stuck owning shares of several banks that deserve a kick in the pants, I took my own advice and delivered a few shareholder proposals of my own, as recommended in Timyan Bank Alert's October 2023 post.

Sadly, one of my proposals wasn't sufficiently air tight. Bad faith actors look for loopholes and technicalities to exploit. In my shareholder proposal to LCNB Corp, I made it too easy for LCNB to do what was perfectly predictable it would do.

If you are a qualified shareholder looking to submit your own proposal to an underperforming bank, please read my summary below of the weak link in my LCNB proposal, so your own proposal has a higher chance of success.
Disclosure: As of this posting, I unfortunately own shares of LCNB and may subsequently either dispose of them or purchase more.


Prospective Buyers
There's no shortage of competently managed, acquisitive banks that would happily and skillfully put LCNB's assets to better use for shareholders, customers, and communities. I'd be thrilled to see the bank sold to any of these three, in particular: 

First Financial Bancorp, Cincinnati, OH (FFBC)
Park National Corp, Newark, OH (PRK)
Peoples Bancorp, Marietta, OH (PEBO)

Financial Snapshot
†as of 12/31/2023
Total assets:
$2.3B†
Tangible book value per share:   
$11.16†
NPAs to assets:
0.0%†
Price to book:
84%
Market cap:
$199M
Dividend yield:
5.85%
Trailing 12-month ROA:
0.6%†
Trailing 12-month ROE:
6%†

Scoundrels
Spencer S. Cropper, Chairman
Eric J. Meilstrup, President and CEO
William G. Huddle, Director 

The Skinny
How Banks Respond to Shareholder Proposals

When you submit your shareholder proposal to a bank, the bank has a legal right to report any deficiencies it sees in your proposal via a No Action Request to the SEC. If you're submitting a shareholder proposal, you should be prepared for this possibility.

Banks operating in Good Faith won't bother. They'll put your proposal in the proxy for the next annual meeting and shareholders will get to vote.

Banks like LCNB will spend tens of thousands of dollars to find or invent "deficiencies" they hope will excuse them from legal obligation to allow the proposal to proceed to a shareholder vote.

Where Timyan's Shareholder Proposal to LCNB Went Wrong

Ultimately, one paragraph made it easy for LCNB to get around having to present my proposal for a shareholder vote.

The "deficiency" my proposal provided LCNB's outside counsel was a loophole that allowed the bank to pretend it had already met the Substantially Implemented Rule 14a-8(i)(10) by hiring an investment bank to – allegedly – "begin evaluation of the potential outcome of a sale or merger," rendering the need for a shareholder vote presumably unnecessary.

In reality, LCNB hired an investment banker to do exactly the opposite of what the bank represented to the SEC. LCNB has not begun and has no plans to begin "evaluation of the potential outcome of a sale or merger." It hired an investment banker only to pursue acquisition opportunities.

Two weeks after receiving my proposal, LCNB announced the acquisition of Eagle Financial Bancorp.

Remarkably, CEO Eric Meilstrup is now unabashedly broadcasting to reporters that his stated mission is decidedly NOT to pursue a sale of the bank as my proposal recommended and as he personally represented to the SEC, but to remain independent and to grow the bank via acquisitions. The scoundrel is quite gleeful to have deceived the industry's highest regulatory body and robbed LCNB shareholders of an opportunity to vote on the bank's strategic direction.

Stronger Language Timyan's Proposal Should Have Used

The loophole my proposal gave LCNB, was the "out" of being able to say it had already "[begun] evaluation of the potential outcome of a sale or merger."

As written, my proposal made it easy for LCNB to lie in its No Action Request to the SEC, in which the bank pretended its step of hiring an investment banker was sufficient action toward fulfilling the intent of my proposal, when the assignment LCNB gave the investment banker was directly counter to the proposal.

My shareholder proposal to LCNB included this paragraph:

RESOLVED, that the Stockholders of LCNB Corp recommend that the Board of Directors immediately engage an investment banking firm experienced in community bank mergers and acquisitions to guide the Company in promptly taking steps to merge or sell LCNB on terms that will maximize stockholder value.

Future shareholder proposals I present will include language more like this to preclude false claims of "substantial implementation":

RESOLVED, that the stockholders of the Company, believing that the value of their investment in the Company can best be maximized through a sale of the Company, hereby request that the Board of Directors promptly proceed to effect such a sale by (i) retaining a nationally recognized investment banking firm for the specific purpose of soliciting offers to acquire the Company by way of merger, asset sale or otherwise and (ii) establishing a committee of the Board of Directors consisting of directors, who are not current or former officers or employees of the Company or related by blood or marriage to a current or former officer or employee of the Company, and who otherwise qualify as independent directors, to consider and recommend to the full Board of Directors for approval the best available offer to acquire the Company.

Sources



  • Confidential interviews with shareholders, analysts, and Ohio bankers
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24 Underperforming Bank Stocks

Stuck Owning Stock in a Bank that Should be Sold?


Image of a person's legs with boots stuck in mud
Happily, if you’ve owned some of the bank’s stock for awhile,* there’s a legal process whereby you can strongly encourage management to sell the bank. 

Specifically, according to SEC Rule §240.14a-8, you can write a shareholder proposal that the bank’s board of directors must include in the next proxy statement they send to all shareholders.

Submitting individual shareholder proposals to bank management has gotten easier since 2010, but it appears that interest in supporting such proposals is just starting to be “a thing.” Personally, I’d like to see it become an even bigger thing, because there are a couple dozen community banks in the country that could use a public kick in the pants, ideally dealt from a shareholder in their own back yard.
Disclosure: As of this posting, I own shares in all but one of the 25 banks mentioned in this post and may subsequently either dispose of them or purchase more.

How It Works
*WHO Can Submit a Proposal
According to SEC rules, if you’ve owned the following dollar values of a given bank stock for the following durations, then you can submit a proposal to management that the bank must both include in its next proxy statement, and present to your fellow shareholders for a vote.
  • $2K for three years
  • $15K for two years
  • $25K for one year

HOW To Submit a Proposal 
Basically, to deliver this sort of kick, you write a proposal outlining your reasons for believing it’s high time management sell the bank, submit your proposal to the bank with a letter that conforms both to SEC rules and the bank’s previous proxy statement, and follow up with bank management as needed to see it through to a proxy vote. 

See https://www.sec.gov/divisions/corpfin/rule-14a-8.pdf 

WHAT to Expect
Management may ignore you (if you let them) in an attempt to run out the proxy deadline clock. They may try to talk you out of it, challenge your right to make the proposal, or claim your proposal is deficient in some way. 

Note that even if your proposal is deficient, there’s a deadline for the bank to make this claim, and the bank is required by SEC rules to afford you time to cure the deficiency, for example, by amending your proposal or submitting documentation supporting your claims.
Good Example
Mid-Southern Bank Management Gets a Kick in the Pants
Since the day it went public in July 2018, Indiana’s Mid-Southern Bancorp (MSVB) has been mismanaged and underperforming. Unsurprisingly, Mid-Southern’s performance invited pressure from shareholders losing money on the stock. 

On August 3, 2021, Mid-Southern silenced its loudest shareholder critic by buying him out at a premium not afforded to other MSVB shareholders. 

On December 22, 2023, another shareholder of Mid-Southern Bancorp submitted a formal proposal recommending the bank be sold. Apparently, Mid-Southern deemed this shareholder too small to be worthy of a premium buy-out offer, but as required by law, the bank did publish the shareholder’s proposal in the proxy for its annual meeting. The proposal won 56% of the shareholder vote, in spite of self-serving opposition by bank Management and proxy advisors. 

Was the kick enough to make Mid-Southern respect shareholders' demands to sell the bank? Time will tell. But it was a well-deserved and well-delivered kick that should inspire confidence in shareholders seeking to protect their investments from being squandered.
24 Invitations
Banks Deserving a Kick in the Pants
Here’s a shortlist of community banks I believe are worth far more in a sale than the market will accord them under current Management. 

Managers of these banks are a walking invitation for a good kick in the pants. Were I to see a shareholder proposal recommending the sale of any of these banks in a proxy statement, I would very likely vote for it. 
  1. 1895 Bancorp of WIS (BCOW)
  2. Ameriserv Financial (ASRV)
  3. BankFinancial (BFIN)
  4. Broadway Financial (BYFC)
  5. California Bancorp (CALB)
  6. Citizens Community Bancorp (CZWI)
  7. Community Bank of Santa Maria (CYSM)
  8. Community First Bancorporation (CFOK)
  9. First Commerce Bancorporation (CMRB)
  10. First US Bancshares (FUSB)
  11. FVCBankcorp (FVCB)
  12. Horizon Bancorp (HBNC)
  13. LCNB Corp (LCNB)
  14. Lewis & Clark Bancorp (LWCL)
  15. MainStreet Bancshares (MNSB)
  16. North Dallas Bank & Trust (NODB)
  17. NSTS Bancorp (NSTS)
  18. Oregon Pacific Bancorp (ORPB)
  19. Pathfinder Bancorp (PBHC)
  20. Ponce Financial (PDLB)
  21. Provident Financial Holdings (PROV) 
  22. Third Century Bancorp (TDCB) 
  23. Touchstone Bankshares (TSBA)
  24. Town Center Bank (TCNB)
Sources
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Central Federal Corp, Worthington, OH (CFBK)

A Case of Book-ish and 10x


This is a fun time to be a bank stock investor! So many really nice banks are trading at compelling values that it’s hard to choose which one to feature first.

For example, I'm seeing a number of well-run banks where you can buy shares at book value, 10x earnings, or both, and reasonably anticipate doubling your money in three or four years.

CFBank is just one of these. CFBK is trading cheaply at 7.8x rapidly-growing earnings. In three years, earnings could be $2.50, book value could be $16, and CFBK could trade at $24.

It's smart to hold a few low-stress stocks like this that just compound earnings and don't require babysitting, no?

Disclosure: As of this posting, I own shares of CFBK and may subsequently either dispose of them or purchase more.


Prospective Buyers
CFBank's leading market share in four towns would be especially attractive for these acquisitive neighbors.

Farmers National Banc Corp, Canfield, OH (FMNB)
LCNB Corp, Lebanon, OH (LCNB)
Peoples Bancorp, Marietta, OH (PEBO)

Financial Snapshot
†as of 06/30/2019
Total assets:
$721M†
Tangible book value per share:   
$11.39†
NPAs to assets:
0.75%†
Price to book:
1.07%
Market cap:
$54.7M
Dividend yield:
0%
Trailing 12-month ROA:
1.0%†
Trailing 12-month ROE:
13.9%†

The Crew
Robert E. Hoeweler, Chairman
Timothy T. O'Dell, President and CEO
Edward W. Cochran, Director, largest shareholder

The Skinny
These four characteristics inform my assessment that Central Federal Corp is well run and in a good position to grow:

1. Location, location! CFBank's branches are located in Ohio's top four metropolitan areas: Akron, Cincinnati, Cleveland, and Columbus.

2. Sizable branches. Between them, CFBank's Fairlawn and Worthington branches hold over $500 million in deposits. On average, deposits in the bank's other four branches exceed $37 million. (It takes about $15 million in deposits for a bank branch to break even.)

3. Effective CEO. Before Tim O'Dell arrived on the scene, CFBank was a sh*tty little thrift. O'Dell attracted good lenders, reduced problem loans, and exponentially increased both the size and profitability of the bank.

4. Invested Board. Collectively, the Central Federal Corp board owns 19% of CFBK stock, and every director is invested (which isn't always the case).

Sources
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