STAMFORD, Conn.--(BUSINESS WIRE)--Hildene Capital Management, LLC and certain funds it manages (collectively “Hildene”) today nominated two highly qualified director candidates for election to the Board of Directors (the “Board”) of CIB Marine Bancshares, Inc. (OTC:CIBH) (“CIB Marine” or the “Company”) in connection with the Company’s 2021 Annual Meeting of Shareholders. Funds managed by Hildene beneficially own 36% of each of the Company’s series A and series B preferred stock, in the aggregate, as well as approximately 0.10% of the Company’s common stock.
Hildene is also issuing an open letter to CIB Marine shareholders outlining why immediate change is required to the Company’s Board and capital structure in order to maximize shareholder value.
The full text of Hildene’s letter can be found below.
Dear fellow CIB Marine Bancshares, Inc. shareholders,
We are writing to inform you that funds managed by Hildene Capital Management, LLC (collectively “Hildene” or “we”), which own 12,093 shares of CIB Marine Bancshares, Inc. (OTC:CIBH) (“CIB Marine” or the “Company”) common stock and approximately 15,845 shares in the aggregate of CIB Marine Series A and Series B preferred stock, have nominated two highly qualified directors to the Company’s Board of Directors (the “Board”) in connection with the upcoming 2021 Annual Meeting of Shareholders.
Hildene is an asset management firm with a long history of investing in community banks, particularly through Trust Preferred Securities (“TruPS”) – instruments that were issued by banks, insurance companies, and REITs, mostly in the early 2000s, and often pooled into collateralized loan obligations (“TruPS CDOs”). It was through our investments in TruPS CDOs that we own CIBH preferred shares today.
As a longtime investor in CIB Marine and one of the largest holders of the Company’s preferred shares, like you, we have witnessed firsthand the Company’s decade-long mismanagement of the Company marred by underperformance and unfulfilled promises. Nevertheless, we have remained steadfast in our belief that, with the right leadership and capital structure, CIB Marine has the ability to achieve its full potential and create significant value for all shareholders.
While Hildene is not typically an “activist investor,” we do engage with management teams, boards and other related parties to create long-term value for our partners and fellow shareholders. To this end, in November 2020 we approached the Company privately with a plan designed to optimize its capital structure. Our intention was to work constructively and in good faith with management and the Board to improve the balance sheet for the benefit of all CIB Marine stakeholders. We hoped that the Board would share an owner’s mentality and recognize the benefits of our plan to the Company’s long-term success.
Unfortunately, our proposal was quickly dismissed, without, in our view, proper consideration or discussion. We believe these actions demonstrated that the Board has no interest in embracing any fresh ideas that would position the Company to trade at a better market valuation. As it stands, CIB Marine is the least valued bank in the publicly investable universe and its Board has a clear reluctance to value-maximizing changes.1 As we are not willing to accept that, we felt we had no other choice than to publicly make our case for change to you directly.
A board’s utmost duty is to serve as a fiduciary to all shareholders and put their interests first. CIB Marine’s Board has failed to fulfill this duty and it is clear that change is needed to create value. We believe that Hildene’s two director nominees will provide proper fiduciary oversight to the benefit of all shareholders.
We are therefore nominating two highly qualified candidates – John Scannell and Raymond Tellini – to the CIB Marine Board and proposing a solution to optimize CIB Marine’s capital structure. We believe that Messrs. Scannell and Tellini have the right mix of skills, experience and fresh perspectives that the Board desperately requires, and are confident that, as directors, they will work collaboratively alongside the incumbent directors to uphold the fiduciary duties of the Board and implement a recapitalization plan to maximize shareholder value. At the core of our recapitalization plan, which has been revised since our last communication with CIB Marine’s Board to further enhance value for all shareholders, is a request that the Company issue subordinated debt to redeem Series A preferred stock at a discounted value.
Why is change needed?
In our view, three key issues plaguing CIB Marine demonstrate why the Board as currently comprised is incapable of leading the Company successfully.
Issue #1: The Board has failed to hold management accountable for clear and persistent underperformance in operating as a competitive bank.
As a result, today, CIB Marine…
- is the least valuable bank in the publicly investable universe.2 CIB Marine’s market capitalization has collapsed by more than 40% since its three-year high in 2018.3
- has an efficiency ratio that is, on average, 24%4 worse than the industry, partially driven by the Company’s salary and benefit expenses, which have increased by roughly 50% since 2016.5
- has a net interest margin that has lagged the industry by 19%, on average, over the last five years.6
- has been marred by consistent deposit market share declines, despite a cost of funds that has lagged the industry by 53%, on average, over the last five years.7
The ability to both lend and collect deposits is the core feature of the community bank value proposition. Despite routinely expressing their goals of improving performance at almost every annual meeting, CIB Marine’s long history of poor results makes clear that management is incapable of positioning the Company to successfully compete in today’s market and the Board is incapable of providing proper oversight of management’s poor stewardship.
We believe CIB Marine’s 2020 financial results were the exception, not the rule, as underscored by the Company’s weak track record relative to almost all other similar banks over any other recent time period. While we appreciate that CIB Marine has improved its performance over the past two quarters, we do not believe this performance is sustainable without critical changes to the Company’s leadership and capital structure. The macroeconomic conditions of 2020 created an extremely unique year, allowing most banks, CIB Marine included, to grow their mortgage lending businesses and paycheck protection program lending portfolios, given the needs of the American consumer. While we do not blame the Company for taking advantage of the opportunities brought about by COVID-19, we have trouble giving it any credit for recent performance when the entire industry produced similar results.
Issue #2: The Board has permitted CIB Marine management to maintain a capital structure that has destroyed value for all shareholders.
Between 2015 and 2020, publicly-traded banks paid hundreds of billions of dollars to common equity shareholders in dividends and repurchased hundreds of billions dollars of common stock. During the same period, CIB Marine’s Board and management spent $0 on either while allowing the Company’s compensation expenses per employee to nearly double, vastly outspending other banks to make its own employees richer at the expense of the shareholder.
While the Board claims that it has exhausted every attempt to improve outcomes for common shareholders, in our view, that’s simply not true. We do not believe that the Board has made any fair and reasonable attempt to pay the preferred equity dividends required to facilitate payments of dividends to common shareholders and improve the Company’s ability to repurchase common stock. Despite seemingly ample liquidity, CIB Marine is one of the rare adequately capitalized, publicly investable banks that is not paying dividends on its preferred shares, much to the detriment of common shareholders.
Moreover, the Company has not raised additional capital to redeem the outstanding preferred equity shares in support of the needs of its common shareholders, despite arguably the most robust capital markets environment for depository institutions in history. We believe the Company could easily raise low-cost subordinated debt, providing flexibility for preferred share redemptions and paving the way towards an improved market valuation for the common stock. In fact, Hildene made an offer to the Board for Hildene to serve as the lead investor in a potential subordinated debt offering, but the Board rejected the offer.
Issue #3: The Board’s and management’s interests are not aligned with yours.
Based on our analysis of the Board’s and management’s equity holdings disclosures, which, despite shareholder requests, are few and far between following the Company’s delisting in 2012, we believe it is clear why the Board has not carefully considered changes to maximize shareholder value. Unlike you, the Board has little skin in the game; the directors and senior management team collectively own just 4% of the Company; since nearly half of that 4% can be attributed to the Board’s Chairman, we believe that the remaining officers, directors and affiliates hold just 2% of the Company’s common shares outstanding.
We find these facts to be alarming and indicative of the misaligned incentives at both the Board and management levels. The lack of disclosure on the nature of equity holdings, combined with the fact that compensation expenses per employee have nearly doubled since 2015, forces us to draw the conclusion that employees, including senior management, are paid regardless of CIB Marine’s financial performance. As shareholders, we must ask ourselves: If management and the Board are paid regardless of performance, how can they be incentivized to push for positive change for our benefit?
We believe the Board and management team are indifferent towards company performance so long as their salaries are paid.
Hildene’s nominees will help to implement the right capital structure and governance practices at CIB Marine to the benefit of all shareholders.
John Scannell and Raymond Tellini are two well-respected executives who have significant experience overseeing financial controls, systems, and operations at financial institutions as well as growth initiatives at public and private companies. We are confident that, as directors, they will work to ensure that CIB Marine operates with a long overdue shareholder-first mentality to maximize value for all shareholders. We look forward to discussing our concerns with CIB Marine and our proposed solutions in greater detail in the weeks ahead.
Chief Operating Officer
John Scannell is Senior Advisor of Hildene Capital Management, LLC (“Hildene”). Mr. Scannell joined Hildene at the firm’s inception in 2008 and has previously held the positions of Chief Operating Officer, Chief Compliance Officer and General Counsel during his tenure at Hildene. Mr. Scannell is responsible for oversight of financial controls, systems and operations. Prior to joining Hildene, Mr. Scannell worked in the structured finance market for 13 years at a number of banks. His most recent position was as Vice President in the CDO structuring group at Citigroup, where he provided on-desk legal, structuring, documentation, compliance and administration support for the CDO structuring business. Prior to joining Citigroup, Mr. Scannell was an associate at Skadden, Arps, Slate, Meagher & Flom LLP, where he represented a variety of issuers and underwriters in transactions involving collateralized debt obligations, asset-backed securities and other securities issued in publicly-registered transactions and private placements. Mr. Scannell also was a litigator at Cadwalader, Wickersham & Taft. Mr. Scannell served on the Board of Directors of FB Corporation between February 2018 and June 2020. Before attending law school, Mr. Scannell was financial controller for the New York division of a Fortune 500 medical services company, responsible for financial controls and operations. Mr. Scannell has a Juris Doctorate and graduated cum laude from Brooklyn Law School in 1996 and earned a Bachelor of Science degree in Accounting at San Diego State University in 1987.
Raymond Tellini is the Co-Chief Investment Officer of Delta Capital Management Partners LLC (“Delta”). Mr. Tellini has over seven years of experience investing in litigation finance opportunities that generated recoveries of over $35 million. Prior to joining Delta in 2016, Mr. Tellini served as the Managing Member of Brennecke Partners LLC, a Stamford, Connecticut-based private investment firm focused on specialty finance and growth capital investments. Investments included secondary market purchases from hedge funds of distressed assets, investments in litigation finance (both in commercial disputes and in intellectual property claims) and growth capital investments in fiber optic networks, data delivery technology, medical device companies, and industrial technologies. Previously, Mr. Tellini served as a portfolio manager at the Palladin Group L.P., an $800 million market neutral hedge fund. At Palladin, Mr. Tellini was Chief Executive Officer of the captive broker-dealer, as well as a portfolio manager for specialty finance and PIPE transactions. Prior to joining the Palladin Group, Mr. Tellini served as Chief Financial Officer of an e-commerce streaming media company, where he helped raised over $37 million in preferred equity and debt financing. Mr. Tellini also has served as U.S. Treasurer of Wassall PLC, a $1.5 billion private equity firm, where he was the principal analyst responsible for supporting acquisition activities in North and South America, primarily focused on leveraged acquisitions of underperforming/turnaround multi-national concerns. Between February 2012 and December 2018, Mr. Tellini served as a Managing Member or Manager at multiple former asbestos companies. Mr. Tellini started his career at PricewaterhouseCoopers LLP. As a Manager in the Corporate Finance and Business Restructuring practice at PwC, Mr. Tellini performed financial consulting services on behalf of banking institutions and other creditor constituencies in bankruptcy and out of court restructurings. Mr. Tellini has a Master’s of Business Administration degree from New York University Stern School of Business and earned a Bachelor of Science degree in Accounting at Lehigh University.
1 Note: Using Price-to-Tangible Book Value multiples valuation for 671 publicly-traded bank stocks. Source: S&P Global Markets. Data as of 02/19/21.
2 Note: Using Price-to-Tangible Book Value multiples valuation for 671 publicly-traded bank stocks. Source: S&P Global Markets. Data as of 02/19/21.
3 Note: CIBH’s market capitalization on June 28, 2018 was $36.5mm; as of 2/19/21, the market capitalization is $24.1mm. Source: S&P Global Markets. Data as of 02/19/21.
4 Note: 24% represents the average difference between CIBM Bank’s annually reported efficiency vs. the median of 4,952 US Banks from YE2016 to YE2020. Source: S&P Global Markets. Bank regulatory data as of 02/19/21.
5 Note: CIBH Bank’s salary and benefit expenses for YE2016 were $16.4mm. For YE2020, CIBH Bank’s compensation and benefit expenses were $24.1mm. Source: S&P Global Markets. Bank regulatory data as of 12/31/20.
6 Note: 19% represents the average difference between CIBM Bank’s annually reported net interest margin versus the median of 4,952 US banks from YE2016 to YE2020. Source: S&P Global Markets. Bank regulatory data as of 02/19/21.
7 Note: 53% represents the average difference between CIBM Bank’s annually cost of funds versus the median of 4,952 US banks from YE2016 to YE2020. Source: S&P Global Markets. Bank regulatory data as of 02/19/21.
About Hildene Capital Management, LLC
Founded in 2008, Hildene Capital Management, LLC is an asset manager, which has together with its affiliates, over $12.5 billion in hedge fund, separate account and CDO assets under management. The firm seeks to generate attractive risk-adjusted returns for its institutional clientele by implementing a disciplined, systematic investment approach.