Virginia National Facing Pressure to Pursue Merger of Equals

Virginia National Bankshares in Charlottesville is facing renewed pressure to increase shareholder value, possibly by selling itself.

Swift Run Capital Management, a firm that Virginia National sold last year to former employee Timothy Mullen, recently met with the $507 million-asset bank's board and submitted a plan for maximizing shareholder value. The presentation, included in a Sept. 25 regulatory filing, suggests several initiatives, including the bank's possible sale or merger with a similar sized institution.

Swift Run has had "serious inquiries [and] interest from multiple motivated entities" about a "doable" merger of equals, the firm said in its presentation, stating a belief that the bank's valuation could improve by up to 30% if it topped $1 billion in assets. The firm said it had also had discussions with parties that might want to buy Virginia National, though more banks were keen on an MOE.

The firm, which owns 9% of Virginia National, provided other options that it believes could nearly double the bank's tangible book value. The recommendations included a disciplined share repurchase program, special dividends and exploring a sale or joint venture for Virginia National's wealth management business.

Mullen has been advocating for such moves for quite some time, said Ron Baron, Virginia National's chief financial officer. The company invited Mullen to present his proposal to the board so that directors could ask questions.

"You can't expect the views of a short-term hedge fund manager and the longer-term views of the bank's managers to be eye to eye," Baron said. "There are just some points that you have to agree to disagree on."

One of those points of disagreement involves Swift Run's suggestion that Virginia National spin off contract rights tied to last year's sale of the investment firm to Mullen. Under terms of the agreement, Swift Run pays Virginia National 20% of all revenues it derives from the bank's former clients through 2023. (Swift Run disclosed that it has been paying the bank $200,000 to $250,000 annually under the pact.)

"Why would we get rid of a nice, diversified source of noninterest income?" Baron said. "It makes sense from his perspective, but we have a lot of shareholders, including some with positions that are close in size to his."

Virginia National also remains cautious about potential mergers of equals, though Baron said it makes sense to target $1 billion in assets. "You just don't do a merger just for the sake of getting to a number," he said.

"There can be big risks involved," Baron added. "A lot of Swift Run's ideas are doable, but you have to get into the weeds and look for the potential flaws."

Virginia National's management team has been quick to point to recent actions that should be viewed positively by shareholders. Glen Rust, the company's chief executive, pointed out earlier this year that earnings are rising and delinquencies are in check.

The company also paid its first cash dividend last year and its three-year average return on equity was 9.5% for 2011 through 2013.

Still, the view is that the relationship between Mullen and his former employer remain amicable, with Baron noting that the board invited the investor in to have a dialogue and exchange views.

Efforts to reach Mullen were unsuccessful, though the investor said earlier this year that he wasn't out to attack Virginia National and that he has maintained "good relations" with its management team. "My primary concern is capital allocation as they go about with long-term planning," Mullen said in a March interview.

Virginia National is "a size that is slightly awkward with the regulatory burden," added Mullen, who bought the vast majority of his holdings from Union Bankshares in Richmond, Va. "The size for operating efficiency gets bigger every day and now it seems to be $1 billion in assets."