Former Insider Urges Virginia National to Consider Selling

Virginia National Bankshares (VABK) in Charlottesville is getting pressure to consider selling itself from a very familiar face.

Timothy Mullen, who was its chief investment officer until December, is urging the $513 million-asset company to informally evaluate the "best avenue to enhance long-term shareholder value," according to a recent regulatory filing. Virginia National has "built an attractive banking franchise located in a stable, growing marketplace ... that is potentially desirable to many bank merger partners."

In an added twist, the filing came from hedge fund Swift Run Capital Management, which Virginia National sold to Mullen in July. Swift Run, which recently amassed a 9% stake in Virginia National to become its biggest shareholder, has been contacted by a potential suitor and there could be "many others who may have an interest," the filing said.

Banks often face outside pressure to consider selling. But this case is intriguing because a former executive is leading the charge.

"It could indicate that he has an appreciation of the company's unlocked value," says Lawrence Kaplan, a partner at the law firm Paul Hastings.

Moreover, Swift Run might be hesitant to buy more of Virginia National's stock since Mullen's firm would be subject to heightened regulatory oversight, including increased filing requirements, if its stake exceeds 10%.

Virginia National's executives were very diplomatic in discussing recent developments with Mullen, who also urged management to significantly boost its dividend and consider buying back stock. Mullen "likes to buy things with a huge upside," says Glenn Rust, Virginia National's president and chief executive.

"He sees the value in what we have, which explains why he bought a huge block of stock," Rust adds. As for calls to review strategic options, Rust says good management teams must "be open to all options but, as of right now, no one has ever approached management or the board" about selling.

Mullen says he is not on the attack and has "good relations" with Rust and the other managers. "There is no hostility here," says Mullen, who is well known in Charlottesville as a member of the last University of Virginia basketball team to make the Final Four nearly 30 years ago.

"My primary concern is capital allocation as they go about with long-term planning. … And they are a size that is slightly awkward with the regulatory burden. The size for operating efficiency gets bigger every day and now it seems to be $1 billion in assets."

Mullen bought the vast majority of his Virginia National holdings — more than 190,000 shares — from Union First Market (UBSH) in Richmond, Va., in early March for $3.8 million.

Union First obtained the stock in January 2013 after an unnamed borrower transferred the shares to partially address a debt. At that time, local speculation swelled that Union First might attempt to buy Virginia National, Rust says. Union First instead agreed to buy StellarOne, also in Charlottesville, in June for $445 million.

"We would rather have [Mullen] as an investor instead of Union First Market," Rust says.

That rationale makes sense, Kaplan says. "At the end of the day, you'd rather deal with the devil you know rather than the devil you do not know," he says.

There have been other instances where an individual investor has snagged a large block of a bank's stock following debt resolution. In February 2013, Kenneth Lehman acquired a 27.8% stake in Liberty Bell Bank (LBBB) in Marlton, N.J., after buying some of its stock from Beneficial Mutual Bancorp (BNCL) in Philadelphia. Beneficial obtained the shares after a borrower group — which included a former Liberty chairman — defaulted on loans backed by the shares.

Swift Run is also open to options at Virginia National other than its sale. The investment firm said in its filing that it believes Virginia National has strong enough earnings to pay quarterly dividends ranging from 20 cents to 25 cents a share. "In addition, earnings from the new wealth management business could be used to pay shareholder an additional, variable dividend," the filing said.

The firm also wants management to consider buying back stock. "The dividend and share repurchase policy, together, could serve as a return benchmark which the issuer can use to measure the relative attractiveness of investing shareholder capital on any internal or external growth initiatives, such as acquisitions or entry into new business lines," the filing said.

Swift Run is even open to putting in more capital if Virginia National finds a suitable target to buy, though Mullen says he hopes management avoids any "disastrous" acquisitions. "So far, they have done well with that," he adds.

Swift Run has stakes in several banking companies, including Eastern Virginia Bankshares (EVBS) and Malvern Bancorp (MLVF). It was also an investor in West Coast Bancorp when the Lake Oswego, Ore., company sold to Columbia Banking System (COLB) in Tacoma, Wash., Mullen says.

"There is no overarching theme" to Swift Run's investments, Mullen says. "We tend to like firms that are recapitalizing or thrift conversions that appear to be overcapitalized."

Virginia National's management team quickly points to its actions in the past year to support its decisions. The company's earnings rose 25%, to $6.9 million, in 2013. Delinquencies made up just 0.12% of outstanding loans at Dec. 31.

The company also paid its first cash dividend last summer, starting shareholders out with a quarterly payout of 5 cents a share. Forming the holding company will also help management buy back stock, Rust says.

"The job of management is to make sure we deploy capital in a way that is best for shareholders," Rust says. Mullen "would like to see more of a dividend, but it is our job to [decide] that."