Investors in Mid-Southern Bancorp in Salem, Indiana, voted in favor of a shareholder-led measure to hire an investment banking firm to explore a potential sale.
J. David Rosenberg, owner of 46,000 Mid-Southern shares, filed the initial proposal that demanded a prompt hiring of an investment bank "experienced in community banking mergers and acquisitions" to guide a sale.
Alex Babey, CEO of Mid-Southern, did not respond to a request for comment.
The measure was approved in a nonbinding vote during the company's annual meeting in late May with almost 1.2 million votes cast for the proposal and about 920,000 votes against it. Another 59,000 votes abstained. Rosenberg told American Banker that he was "moderately surprised" by the outcome as he did not solicit any support for the proposal.
In his proposal, Rosenberg called Mid-Southern's performance "disappointing," citing the bank's tangible book value (TBV) per share declining from $15.42 in December 2021 to $10.74 in September 2022. He attributed this partly to unrealized losses on available-for-sale securities.
Rosenberg also blamed this decline on the company
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Rosenberg also wrote that Mid-Southern's earnings per share were not satisfactory. Mid-Southern earned 55 cents per share for the nine months that ended on Sept. 30, which is a return on average stockholders' equity of about 5.13%, he said. He noted that the bank's stock price has remained largely stagnant since the company went public in 2018.
"I think it unlikely Mid-Southern stockholders will receive an acceptable return on their investment in the foreseeable future through the company's continued independent operation," Rosenberg wrote in his proposal. "In contrast, the sale or merger of the company with a larger financial institution likely will provide stockholders a substantial premium over present market value. Mid-Southern should take advantage of the rapid consolidation in the banking industry by selling or merging the company."
But more broadly, Rosenberg argued that the bank's small size was a disadvantage in an industry where scale matters. Mid-Southern's banking unit, Mid-Southern Savings Bank, has about $266 million in assets.
"I talked to their president a year ago in May of 2022 and urged them to start looking for a sale opportunity then. My point was that they were just too small to succeed as an independent bank," he said during an interview with American Banker.
In a letter a week and a half before the vote, Dana J. Dunbar, Mid-Southern's chairman, urged shareholders to vote against the proposal to seek a sale, citing recommendations by advisory firms Glass Lewis Co. and Institutional Shareholder Services to vote against Rosenberg's measure.
Both in that letter and an earlier statement of opposition to Rosenberg's proposal from the board, Dunbar warned that "actively seeking a buyer" would create unnecessary uncertainty, especially during the "current state of volatility in capital and credit markets." Bank stocks have taken a hit this year after the failure of three large regional banks. The KBW Nasdaq Bank Index is down about 20% since the beginning of the year. Rising interest rates have also affected the value of Mid-Southern's securities portfolio and contributed to the broader market turmoil, the company argued.
The board noted that it was open to potentially selling when market conditions had improved and mentioned prior meetings with two investment bankers in the last year.
"The board will continue to regularly review the company's business and prospects and, as part of the review and consistent with the exercise of its fiduciary duties, will consider whether strategic alternatives, such as a sale of the company, will enhance stockholder value," the statement of opposition said.
