Description

Middlefield Banc Corp. (Ticker: MBCN)

Investment Thesis

The stock has recently popped up from the $25’s to $27’s while I was putting this together. Please wait for a pullback into the $25’s-$26’s to jump into this one. I apologize that some of this is copy/paste from our CLDB/ESXB/WAYN write-ups but the dynamics are very similar and those have performed well so hopefully you won’t hold it against me. Similar to our other Ohio bank write up’s, MBCN is a high upside / limited fundamental downside investment. We believe MBCN is a solid franchise with good earnings power that has the potential to be swept up in the wave of community bank M&A at some point in the next several years. While Middlefield has been a middling performer for much of its history, an ongoing acquisition will greatly change the profile and governance of the bank.  The bank is one of the final remaining independent community banks in the $1-$2 billion asset range in a rapidly consolidating northern Ohio market, and is therefore a prime candidate for consolidation with numerous buyers interested.  While you wait for a potential event, the bank earns a 12%-13% ROE.   Additionally, the bank trades at an undemanding 1.2-1.3x tangible book value based on my recommended price and has a history of solid loan underwriting. The bank is acquiring a Northwestern Ohio bank (Liberty Bancshares) that is a portfolio company of Castle Creek. Castle Creek is (IMHO) the best investor in private and community banks in the country. They have a phenomenal track record and virtually all of their exits come via portfolio companies being sold. They have agreed to merge Liberty into MBCN at a very undemanding 1.15x TBV in exchange for a board seat and their CEO becoming President of MBCN. With MBCN’s CEO being 70 years old it’s safe to say Castle Creek is soon to have significant influence over MBCN. If history is any guide this will lead to some sort of much larger transaction in the next 3-5 years after performance is optimized.  

 I estimate, if the bank were to sell today, a buyout price of $40-$50 per share, or 40%-80% higher than current. This price should grow at 12%-13% or so per year until resolution.

Key Statistics

 Description & Thesis

Middlefield is a community bank franchise providing commercial and retail banking services throughout sixteen branch locations focused on Northeastern Ohio. The acquisition of Liberty provides an additional six branches throughout Mid-Western Ohio down through Columbus. Each bank has a primarily rural footprint with locations in larger cities (MBCN in Cleveland, Liberty in Columbus). Middlefield’s history has been in Amish communities which are famous in Midwest lending circles for being incredible credits. Relative to our last few write ups I would say these markets are better than CLDB’s but not as good as WAYN’s.

MBCN also represents one of the last remaining “bite sized” banks left in the region. A strategic buyer would most likely have to pay a generous premium to acquire MBCN for the following reasons:

1.           Scarcity value as one of last independent banks of its size to acquire

2.      Attractive M&A premiums in Northeast Ohio over the past several years

3.      Long list of potential strategic buyers with interest in MBCN

4.      Pro forma synergy calculations indicate high ability to pay

5.      Solid business with attractive valuation (at recommended buy in price MBCN trades at 1.25-1.3x TBV)

Scarcity Value

The desire for larger community banks to continue to grow market share, assets, deposits, and their loan bases has resulted in a robust M&A market in Northern Ohio and surrounding regions over the past several years (See Midwest M&A table below). Because of this consolidation, the number of independent community banks in the Midwest with greater than $500 million of assets, and more specifically Ohio, is minimal.  With $1.2 bln of total assets (going to $1.8), MBCN is large enough to draw attention of both in-market and out-of-market acquirers.  Since 2014 there have been 28 deals completed in Ohio and other Great Lakes States ranging in size from $420.8m - $1,945.4m in total assets (excluding the FMER/HBAN merger) at an average purchase multiple of 1.73x TBV and 22.9x LTM earnings. Given MBCN’s size, markets, core deposits and scale it should receive a premium to many of these banks. These metrics support the thesis of a strategic buyer paying a premium for a scarce asset in a highly sought-after market.

Substantial M&A activity in Northeast Ohio

Northern Ohio has very few small independent banking institutions remaining after a flurry of activity in the 2010’s. There have been 6 deals completed over the last several years.  Parkview Federal Savings was acquired by F.N.B Corp (FNB) in 2013, National Bancshares was acquired by Farmers National (FMNB) in 2015, Lorain National Bank (LNBB) was acquired by Northwest Bancshares (NWBI) in 2015, Lake National Bank was acquired by CNB Financial Corp (CCNE) in 2016, Liberty Bank was acquired by Middlefield Banc Corp (MBCN) in 2016 and Cortland Bancorp was acquired by Farmers National (FMNB) in 2021.

NWBI received $1.2 billion in assets and $1.1 billion in deposits when it purchased LNBB at nearly 2.0x TBV in 2015. CCNE paid approximately 1.75x TBV for Lake National, which only had $152.2 million in assets.  With limited availability of targets with greater than $500m in assets around NE OH and high purchase multiples being paid recently, it is my view that a strategic buyer would need to pay a generous premium to acquire a presence in the market.

There should be a long list of strategic buyers with interest in MBCN

MBCN should garner interest from a number of in-market and out-of-market buyers. The buyer list overviews presented below are separated as in-market and out-of-market.

In-market buyers:

Farmers National Banc Corp. operates as a bank holding company. Farmers National Bank is Mahoning Valley’s leading community bank with more than $4.1 Billion in assets. The bank has over t0 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina, and Cuyahoga Counties in Ohio, and Beaver County in Pennsylvania. FMNB offers clients personal and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans, and insurance products through its licensed representatives. Farmers National Banc was founded in 1983 and is headquartered in Canfield, OH.

Notable M&A Activity:

Premier Financial Corp. (Nasdaq: PFC) is a community banking and financial services corporation headquartered in Defiance, Ohio.

Premier Financial Corp. (Nasdaq: PFC), is the holding company for Premier Bank and First Insurance Group. Premier Bank, headquartered in Youngstown, Ohio, operates 75 branches and 12 loan offices in Ohio, Michigan, Indiana, Pennsylvania, and West Virginia (West Virginia office operates as Home Savings Bank) and serves clients through a team of wealth professionals dedicated to each community banking branch. First Insurance Group is a full-service insurance agency with ten offices in Ohio.

Notable M&A Activity:

·         

Out-of-market buyers:

Out of market buyers include: 1.) Community Bank System, Inc. (NYSE: CBU), a $3.9 billion market cap bank out of New York trading at over 3.0x tangible book value and which has been trying to get a foothold in Ohio for some time; 2.) First Commonwealth Financial (NYSE: FCF), a $1.6 billion market cap bank out of Pennsylvania trading at almost 2.0x tangible book value. FCF has historically been very acquisitive including in other parts of Ohio but hasn’t done a deal in a couple years; and 3.) FNB Corporation (NYSE: FNB), a $4.9 billion market cap bank out of Pennsylvania trading at 1.6x tangible book value. FNB has made acquisitions in Ohio in the past.

For out of market competitors hoping to establish a market presence in NE Ohio, MBCN represents one of the only options available for them. Out of the group mentioned above, we believe CBU would be interested in breaking into the NE Ohio market as part of their growth strategy. FNB already has a presence via its recent Parkview Savings acquisition.  Interest from multiple strategic buyers could result in a higher premium being paid if a bidding war ensued.

In addition to possible buyers a handful of MOE candidates exist including WAYN, among others.  

Pro forma synergy calculations indicate ability of strategic buyer to pay generous premium

Most strategic acquirers rely on some type of synergy adjusted EPS multiple to help determine what price to pay.  I currently see buyers paying between 10-12x synergy adjusted earnings multiples. Given MBCN is a bit more fat than WAYN, I would expect a strategic to be able to extract between 25-35% of non-interest related costs in an acquisition based on the overlap with the buyer. Based on the analysis below and the fact that MBCN has high scarcity value, a strategic buyer could easily pay over $40 and up to $50 per share for MBCN, which would represent a 40%-80% premium to the current share price.  

Compelling Acquisition & Addition of Castle Creek

Liberty Bank in Ada, OH has agreed to merge into MBCN. The financial terms were attractive at 1.15x TBV and below 10x synergy adjusted EPS. This is why I haven’t adjusted my metrics for this deal as it has little hit to TBV and it will be earned back extremely quickly. The deal is likely to be 10% accretive to EPS so if all goes well this will be additive to ultimate value. More importantly, a Castle Creek representative is being added to the board of Middlefield, and the CEO of Liberty will be named President of the combined bank. Castle Creek is one of the best community bank investors in the country and have been very successful at achieving exits at large premiums. They are selling nothing in this deal and I fully expect they will be major shareholder advocates in the boardroom.

Solid Business with attractive valuation

MBCN is a $1.3 billion bank offering a variety of commercial and retail banking services. The Bank is committed to growing loans and deposits within their core markets and continuing their strategic focus on commercial banking relationships.  MBCN services its clients through a branch network of 16 branches which are clustered in NE Ohio. MBCN offers customers checking, savings, and time deposit accounts, along with commercial, mortgage, and installment lending products.

MBCN trades at 1.2x-1.3x TBV at my recommended entry price which is below the peer group average of 1.59x. I realize this is a difficult compare as many of these banks are more sizable but I do believe they are relevant, although less so than the M&A sheet.

Conclusion

MBCN has a number of strong elements of a solid fundamental value investment.  MBCN is one of the last independent community banks in Ohio with greater than $1 billion of assets and I believe a sale of the company is a possibility at some point and a long list of strategic buyers would be interested. This drives significant option value for long holders.  While you wait, value should compound at 12-13% per year.

Catalyst

MBCN is one of the last independent community banks in Ohio with greater than $1 billion of assets and I believe a sale of the company is a possibility in the medium term with a long list of strategic buyers lined up to participate.   While you wait, value should compound at 12-13% per year.

Catalyst

MBCN is one of the last independent community banks in Ohio with greater than $1 billion of assets and I believe a sale of the company is a possibility in the medium term with a long list of strategic buyers lined up to participate.   While you wait, value should compound at 12-13% per year.