I own shares in a private de novo bank named VantageSouth Bank, a small community bank headquartered in Burlington (Alamance County), NC. I bought 100 shares of their stock in 2006 at $11.00/share during their initial public offering, being well-aware that investing in a de novo startup is a risky venture and I could easily lose my whole investment.
Having previously lived in Alamance County, I found that land, housing, and cost-of-living expenses were much lower there than in many other parts of North Carolina. I could envision the potential for future growth in Alamance County because of it’s lower costs of living and because of it being centrally-located between the more expensive Triad and Triangle regions of North Carolina. With easy access to Highway 40 throughout the county, a commute to either region would be quick and easy, and attract more growth.
Many of the local businesses in the county significantly invested their own time and money into the venture, the bank founders had good reputations and were experienced and successful bankers in the past. As such, I thought an investment in VantageSouth Bank could prove profitable.
So, when I recently received a letter from the President and CEO informing me that the bank wants to issue 1.5 million shares of preferred stock to a private investment group at $4.59/share, I started to wonder that perhaps things aren’t going so well. To the bank’s credit though, they propose to offer the same deal to current shareholders, although only up to 250,545 shares.
However, I’m wondering if buying additional shares would be throwing good money after bad? Let me explain my questions and concerns.
1. VantageSouth Bank has yet to make a yearly profit. According to the 03/31/09 quarterly report at iBanknet.com, their ROE is -18.95%, and their ROA is -1.48%. As reported in their latest 10K (pdf), VantageSouth Bank lost $1.28/share each year for both 2007 and 2008. In the first quarter of this year, they’ve lost $0.33/share. Because of continued losses, and as reported in their latest 10Q (pdf), book value has fallen to $6.79/share.
I question that if they can’t generate a profit from the equity and assets that they have now, how would infusing more capital into the bank improve those ratios?
2. Why dilute current shareholders and give new investors preferential pricing and benefits (preferred stock) over founding stock holders? If this deal goes through, the venture capitalists will be buying the bank at 33% discount to book value. Why not offer the full amount to current shareholders instead?
There are currently only about 1 million shares outstanding. Issuing another 1.5 million preferred shares would more than double that amount, and since they’re convertible into common shares, would give the venture capitalists controlling interest in the bank. Why in the world would management want to hand over the bank to them?
This seems like a desperate measure to me, or either it reeks of something underhanded. Are things that bad? The way the Investment Agreement announcement is worded, the bank President and CEO makes it sound like the venture capitalists are doing us a favor. If VantageSouth Bank needs a capital infusion that bad, why not apply for TARP funding? It would seem that choice would serve in the best interest of shareholders.
These actions are subject to shareholder approval. Although I’m only a chump-change stock holder, I’m leaning towards voting against this amendment and would encourage other shareholders to do the same until management and the BOD at VantageSouth Bank clarify why they’re giving controlling interest in the bank away.
However, being an amateur individual investor, maybe there’s something that I’m not assessing correctly, some data that I’m missing, or something that I just don’t understand, because the venture capitalists looking to invest in VantageSouth are willing to risk about $7 million of their own money, albeit at preferred terms. What do they see that I don’t?
I was willing to risk an initial investment in VantageSouth Bank stock, but I’m not sure I’m willing to invest any more of my money. Like the old saying goes “Fool me once, shame on you; fool me twice, shame on me”. There are other small, but profitable community banks where I could invest my savings at lower stock prices (UWHR, MFBP, CZBS).
I haven’t called anyone at the bank, I like to communicate by email. I’ve attempted to email my questions to VantageSouth Bank at their website, but their contact form (conveniently?) wasn’t working, and no other email addresses were provided. So, I’ll leave the comment section of this post open in hopes that bank management or board members will respond to my questions and concerns here, and perhaps provide more clarity or convince me otherwise.
I’d also like to hear from any other VantageSouth Bank shareholders, or others wanting to share their thoughts, opinions, or concerns.
Comments 6
I thought it was pretty standard to give existing shareholders a chance to buy up the new equity offering, so that they can maintain their percentage of ownership..? I suppose like you said, the whole thing is up for shareholder vote though right? Hopefully the majority owners aren’t oblivious institutionals…
Posted 03 Jul 2009 at 7:14 pm ¶Hi Dave..
That’s why I think that there may something underhanded happening. The board of directors includes the top two managers, and the rest of the board are local folks who aren’t very experienced with serving on boards. I’m hoping that they can see past any possible management manipulation and do the right thing for their shareholders.
There are about 1400 shareholders of record, mostly those from the local community. I don’t think there are any institutional holders.
I know one member of the board of directors hold a significant portion of the shares, and she also owns the largest real estate company in Burlington. Around 90% of the banks loans are in real estate.
However, I’m not sure how many shares are owned by management and the board totally, and if they have controlling interest (>50% of shares). If so, then a vote from shareholders is only a technicality, since those few (if they agree) will actually decide what the bank will do or not.
Posted 03 Jul 2009 at 7:27 pm ¶I just received the Notice of Annual Meeting, Proxy Statement, Annual Report to Shareholders, the Offering Circular, and 10Q in the mail. Information found in these documents helped clear up some of my questions -
The Annual Meeting is scheduled for September 10, 2009.
You can send any email shareholder communications to
lsharpe[at]vantagesouth.com or through snail mail at:
VantageSouth Bank
Attention: Corporate Secretary
PO Box 1520
Burlington, NC 27216
Two reasons are given for the stock offering – because the bank needs to quickly increase it’s capital in order to meet newer regulatory requirements, and also to support continued operations in order to reach an asset size large enough to be profitable.
The reason the bank gives for not raising capital by selling additional shares of common stock to existing shareholders is that the BOD does not believe that, under current economic conditions, they can significantly increase bank capital in that manner because of unfavorable conditions in the capital markets.
I don’t understand exactly why not, but if they have the ability to offer preferred shares at significant discounts to Piedmont Community Bank Holdings, Inc. (Piedmont), why couldn’t those same shares be offered to existing shareholders instead of Piedmont?
I also couldn’t find anything in these documents addressing TARP funding – whether or not the bank considered or applied for funding, did or did not qualify for TARP funding, was turned down for TARP
funding, or outright rejected TARP funding. Nothing..
One thing that I did find very interesting, and wasn’t aware of beforehand – as of January 1, 2008, approximately 65% of outstanding loan balances belonged to VantageSouth insiders/associates. Approximately 53% of those loans were attributed to just four members of the board of directors. Wow, what a deal for them, huh?
So, after reviewing these documents, I’ve come to the following conclusions:
In hindsight, it seems to me that the creation of VantageSouth Bank was a way for a few individuals to raise funds in an attempt to profit from a (then) rising real estate market. Now that the real estate market has tanked, the bank’s leveraged bets in this sector have affected the bottom line and they won’t be able to survive without an infusion of more capital.
But where should they get that capital?
TARP funding would seem the best answer, but since the bank didn’t address it in these documents, I’m going to assume that they didn’t qualify.
I could argue that existing shareholders should be offered the preferred shares instead of Piedmont, but if that worked out, what would change? I’m not sure that current management and the board of directors are be capable of making VantageSouth Bank a profitable venture for shareholders.
However, if Piedmont was to take over the business, they would be in a position to make some changes and perhaps turn things around. As venture capitalists that’s what they do, and according to what I’ve read over the internet, they’re successful at it. I also tend to think that since they’re infusing their own capital they must see some potential for profitability.
So, if I don’t vote for the amendments to the charter in order to allow Piedmont to take over, in time the bank will probably fail and my shares become worthless. As such, I voted FOR the amendments to the charter to allow Piedmont to buy their preferred shares.
While it may turn out to be worth the risk in the long run, I’m also not going to buy any more shares of VantageSouth Bank, even with the discount to book value.
Posted 19 Aug 2009 at 7:49 pm ¶Well, it looks like a done deal according to Alamance County’s local newspaper, The Times-News.
According to this article:
It’s strange, but as a shareholder, one would think that I would have been mailed details of the event, but I haven’t received anything in the mail from VantageSouth since I wrote this post.
I’m going to have to look into that.
Here’s some more info about Piedmont Community Bank Holdings – Private Equity-Backed Piedmont Eyes Buyouts
Posted 09 Mar 2010 at 5:35 pm ¶Received a copy of the notice of annual meeting and the 2009 Annual Report to Shareholders this past week.
The annual meeting is scheduled to be held at 5:30pm EDT on June 9th at the main office of VantageSouth Bank in Burlington.
Since Piedmont is in the driver’s seat now voting for any changes other than what Piedmont wants is a moot point. However, it may be worth attending if you just want to meet the new people running the show and hear what they have planned.
Although already dated, here are some specific highlights from that Annual Report -
Posted 19 May 2010 at 2:51 pm ¶Almost two years after being elected Burlington City Councilman, Larry Sharpe has resigned his his position as executive vice-president and chief lending officer for VantageSouth Bank, and is now receiving what some might consider his “Golden Parachute” for services rendered.
Posted 17 Aug 2010 at 1:48 pm ¶Post a Comment