With a deep-pocketed fail-safe in place, a local bank has devised a plan to raise a pile of cash in hopes of shoring up its capital cushion and keeping shareholders happy.
Last week, Midlothian-based Village Bank released the initial details of its plan to raise as much as $13 million from its current shareholders and a Northern Virginia investor who wants to buy a large stake of the bank.
The bank plans to offer a million shares of common stock to its shareholders at an expected range of $11 to $13 per share, according to its prospectus. Giving shareholders first crack at buying in will help prevent the dilution of the stake in the bank.
The bank’s directors and executives will purchase up to approximately 85,000 shares in the offering, or about $1.02 million. Village insiders already pitched in a combined $1.68 million in a private placement raise late last year.
As a further safeguard, Village has entered into what’s known as a standby purchase agreement with Kenneth R. Lehman, an investor and former SEC attorney who invests in community banks. Lehman has agreed to purchase Village shares that are left over after current stockholders have had a chance to buy in on the offering. The prospectus states that Lehman’s investment could be up to about $8 million.
Two years ago Lehman bought into Glen Allen-based First Capital Bank through a similar standby purchase arrangement. He ended up owning a 48 percent stake of First Capital, according to the company’s most recent proxy.
The most he’ll be able to own of Village is 49 percent, and his final holding will depend on how much current shareholders buy in the offering.
Village Bank CEO Bill Foster said he could not comment on the plan. Lehman could not be reached for comment.
The deal also involves Village redeeming some of the its TARP shares – preferred stock it originally issued to the federal government as part of the Trouble Asset Relief Program – from Lehman, who purchased shares from the U.S. Treasury at an auction last year.
Village received $14.73 million from the Treasury through the TARP program in 2009 for 14,738 shares of preferred stock. Those shares were later purchased at auction by Lehman and other investors. Lehman currently owns 4,023 Village TARP shares and plans to buy another 5,000 from an unnamed investor. He’s agreed to sell all 9,023 TARP shares back to the bank at a discount.
The deal will allow Village to avoid paying a portion of dividends that it owes on the TARP shares. It said in its prospectus that $3.24 million in unpaid dividends has accrued on those shares.
The bank will still have 5,715 TARP shares outstanding.
If the offering plays out as planned, it could be the key to allowing Village to finally shed the last of its baggage leftover from the recession. It has been stuck in somewhat of a holding pattern because of lingering high levels of bad loans and foreclosed real estate.
It has needed to raise capital to get over that hump, but has been hindered in part by stagnant growth and two stringent agreements with the Federal Reserve and the FDIC. Those agreements require Village to maintain certain levels of capital, and the prospectus says that Village is only in partial compliance with those agreements because of its capital levels.
First Capital Bank’s performance since its similar capital raise effort two years ago proves that such a plan can help right the ship.
John Presley, First Capital’s CEO, said his company’s offering allowed the bank to get bad real estate loans of its books, rebuild strong capital levels and buy back some of its TARP shares.
Having Lehman on board as a standby gave First Capital the safeguard it needed and a chance for its longtime shareholders to not suffer from dilution.
“It gave us an opportunity to put the recession and the downturn behind us,” Presley said. “If (current shareholders) didn’t buy, then we had a standby purchaser who would then step up and buy stock.”
Presley said having Lehman on board has proven to be a good relationship so far.
“I would say he’s been an excellent director, an excellent investor,” Presley said. “He’s been very supportive of what we’ve wanted to do.”
Village Bank and its parent company have $433 million bank in assets and 11 branches around the Richmond region.
It has hired Compass Point Research & Trading and Boenning & Scattergood to work the offering. It’s also using Richmond law firm LeClairRyan during the process.
Village hasn’t yet set a date for the offering. The SEC and Federal Reserve must review it and approve it.