Filed Pursuant to Rule 424(b)(4)
Registration No. 333-200147
PROSPECTUS
Common Stock Underlying Subscription Rights
To Purchase Up To 1,051,866 Shares of Common
Stock
We are distributing, at no charge, to holders
of our common stock, par value $4.00 per share, non-transferable subscription rights to purchase up to an aggregate of 1,051,866
shares of our common stock, which we refer to as the offering. You will receive one subscription right for each share of common
stock you own as of 5:00 p.m., Eastern Time, on January 20, 2015. Each subscription right will entitle you, as a holder of our
common stock, to purchase three shares of common stock at the subscription price of $13.87 per share, which we refer to as the
basic subscription privilege. As of the close of business on January 20, 2015, 350,622 shares of our common stock were issued
and outstanding.
If you fully exercise your basic subscription
privilege, you will not experience any dilution in the percentage of our outstanding shares of common stock that you own immediately
after the completion of the offering. You may also subscribe for additional shares, which we refer to as the oversubscription
privilege, for allocation in the event that not all available shares are purchased pursuant to the shareholders’ basic subscription
privilege or by the standby investor (described below). However, the oversubscription privilege will only be offered for an aggregate
number of shares that, when combined with the number of shares purchased pursuant to the shareholders’ basic subscription
privilege and by the standby investor, does not exceed 1,051,866 shares. We reserve the right to accept or reject oversubscriptions
for any reason. If we accept your subscription pursuant to your oversubscription privilege, then in all circumstances the percentage
of our outstanding shares that you own immediately after the offering will be higher than it was before the offering. Notwithstanding
any other information presented in this prospectus, we do not intend to accept any oversubscriptions that we believe may have
an unfavorable effect on our ability to preserve our net operating loss deferred tax asset. Purchases of shares pursuant
to the offering are also subject to certain other limitations described in this prospectus.
Subscription
rights will expire if they are not exercised by 5:00 p.m., Eastern Time, on March 20, 2015, which we refer to as the expiration
date, unless we extend the offering period for up to 30 days until April 19, 2015. You should carefully consider whether to exercise
your subscription rights before the expiration of the offering. In general, exercises of subscription rights are irrevocable.
Our board of directors makes no recommendation regarding your exercise of the subscription rights.
We reserve the right to amend or cancel
the offering at any time. Computershare, Inc., our subscription agent for the offering, will hold all funds it receives in an
escrow account until completion of the offering. If we decide to extend, amend or modify the terms of the offering for any reason,
subscriptions received prior to such extension, amendment or modification generally will remain irrevocable. However, if we amend
this offering in a way which we believe is material, we will extend the offering and offer all subscription rights holders the
right to revoke any subscription submitted prior to such amendment upon the terms and conditions we set forth in the amendment.
The extension of the expiration date of this offering will not, in and of itself, be considered a material amendment for these
purposes. If we cancel the offering, all subscription funds will be returned promptly, without interest or penalty.
We have engaged Compass Point Research
& Trading, LLC and Boenning & Scattergood, Inc. to assist us in selling the shares on a best efforts basis. The sales
agents are not required to purchase any shares that are sold in the offering, but will use their best efforts to sell the shares
offered.
To facilitate the offering, we have entered
into a Standby Purchase Agreement (the “Standby Purchase Agreement”) with Kenneth R. Lehman, a private investor, whom
we refer to as the standby investor in this document. The standby investor has agreed, subject to there being sufficient shares
available after purchases by shareholders exercising their basic subscription privilege, to purchase from us, and we have agreed
to sell to him, at the subscription price, the lesser of (i) $8.0 million of our common stock (based on the subscription
price per share), (ii) all shares of common stock not purchased by shareholders exercising their basic subscription privilege,
and (iii) the maximum number of shares that he may purchase without causing an “ownership change” under Section 382(g)
of the Internal Revenue Code of 1986, as amended (the “Code”). For a description of the maximum number of shares that
may be purchased by the standby investor, which is dependent on the participation of shareholders in the offering, please see
the section of this prospectus entitled “The Standby Purchase Agreement.”
We are not requiring an overall minimum
subscription amount in order to complete the offering. As a result, if the Standby Purchase Agreement is terminated, any shareholder
that elects to purchase shares may be the only investor (or one of a limited number of investors) that participates in the offering.
In addition, there can be no assurance that we will raise sufficient capital in this offering to achieve full compliance with
our Written Agreement with the Federal Reserve Bank of Richmond or Village Bank’s Consent Order with the Federal Deposit
Insurance Corporation and the Virginia Bureau of Financial Institutions. We may elect to close the offering even though we have
not raised sufficient capital to achieve such compliance, and shareholders that elect to participate in the offering would not
be able to revoke their subscriptions.
Our common stock is listed on the NASDAQ
Capital Market under the symbol “VBFC.” On February 9, 2015, the last reported sale price of our common stock was
$18.47 per share. See “Risk Factors” and “Market Price of Common Stock and Dividend Policy − Market
Price of Common Stock” regarding our noncompliance with NASDAQ Listing Rule 5550(a)(4) and the potential for delisting of
our common stock.
| |
Per Share | | |
Aggregate (1) | |
Subscription price | |
$ | 13.87 | | |
$ | 14,589,381 | |
Estimated sales agent commissions and expenses (2) | |
$ | 0.71922 | | |
$ | 756,522 | |
Estimated proceeds to us, before expenses | |
$ | 13.15078 | | |
$ | 13,832,859 | |
__________________
| (1) | Assumes
that 525,933 shares (50% of the shares offered) are purchased in the offering
by shareholders exercising their basic subscription privilege and the remaining 525,933
shares are purchased by the standby investor. Assumes that, in lieu of accepting cash,
we elect to exchange all of the 9,023 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (the “Series A preferred stock”) that the standby investor
owns for shares of our common stock in the offering based
on a $500.34 per share valuation for 4,023 of such shares of Series A preferred stock
owned by the standby investor as of the date of the Standby Purchase Agreement, a $516.4980
per share valuation for 2,221 of such shares of Series A preferred stock acquired by
the standby investor on December 23, 2014 and a $525.2238 per share valuation for 2,779
of such shares of Series A preferred stock acquired by the standby investor on February
6, 2015. The valuations of the shares of Series A preferred stock that were acquired
by the standby investor on December 23, 2014 and February 6, 2015 were calculated based
on an assumed closing date of March 31, 2015. There can be no assurance that all or any
of the shares of common stock offered will be sold because the Standby Purchase Agreement
may be terminated in certain circumstances and we are not requiring an overall minimum
subscription amount in order to complete the offering. See “Use of Proceeds”
and “The Standby Purchase Agreement − Termination Provisions.” |
| (2) | Payable to Compass Point Research & Trading, LLC and Boenning
& Scattergood, Inc., our sales agents. Assumes that 525,933 shares (50% of
the shares offered) are purchased in the offering by shareholders exercising their basic
subscription privilege and the remaining 525,933 shares are purchased by the standby
investor. The terms of our arrangement with the sales agents are described under “Plan
of Distribution.” |
Investing in our common stock involves
a high degree of risk. See “Risk Factors” beginning on page 17 of this prospectus.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal offense.
These securities are not savings accounts,
deposits, or other obligations of a bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental
agency.
Compass Point |
Boenning & Scattergood |
The date of this prospectus is February
10, 2015
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
You should rely only on the information
contained or incorporated by reference in this prospectus. We have not, and the sales agents have not, authorized anyone to provide
you with any other or different information. If anyone provides you with information that is different from, or inconsistent with,
the information contained or incorporated by reference in this prospectus, you should not rely on it. You should not assume that
the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus,
or that the information incorporated by reference herein is accurate as of any date other than the date of the relevant report
or other document in which such information is contained. Our business, financial condition, results of operations and prospects
may have changed since such dates.
Neither we, nor any of our officers, directors,
agents, or representatives, make any representation to you about the legality of an investment in our common stock. You should
not consider any information in this prospectus or in the documents incorporated by reference herein to be investment, legal,
or tax advice. You should consult your own counsel, accountant, and other advisors for legal, tax, business, financial, and related
advice regarding the purchase of our securities.
The distribution of this prospectus, the
offering and sale of shares of our common stock in certain jurisdictions may be restricted by law. This prospectus does not constitute
an offer of, or a solicitation of an offer to buy, any shares of common stock in any jurisdiction in which such offer or solicitation
is not permitted.
The industry and market data and other
statistical information contained in this prospectus and the documents incorporated herein are based on management’s own
estimates, independent publications, government publications, reports by market research firms or other published independent
sources and, in each case, are believed by management to be reasonable estimates. Although we believe these resources to be reliable,
neither we nor the sales agents have independently verified the information.
In this prospectus, all references to the
“Company,” “we,” “us” and “our” refer to Village Bank and Trust Financial Corp.
and its subsidiaries, unless the context otherwise requires or where otherwise indicated. References to the “Bank”
refer to our wholly-owned banking subsidiary, Village Bank.
FORWARD-LOOKING STATEMENTS
In addition to historic information, this
prospectus and the documents incorporated by reference contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. These forward-looking statements
represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs
concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements
are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply
future results, performance or achievements, and are typically identified with words such as “anticipates,” “believes,”
“can,” “continue,” “should,” “could,” “would,” “estimates,”
“expects,” “intends,” “may,” “plans,” “seeks,” “potential,”
“predicts,” “should,” or “will” or the negative of these terms or other comparable terminology.
A variety of factors could cause our actual
results and experiences to differ materially from the anticipated results or other expectations expressed in our forward-looking
statements. These factors include, but are not limited to: adverse economic conditions and the impact on us and our customers;
changes in interest rates that impact our loans and deposits; the impact of competitive products and pricing; an inability to
improve our regulatory capital position; failure to maximize potential capital raising opportunities or effectively deploy capital;
legislative and regulatory actions impacting the financial services industry; increased regulatory capital requirements; an insufficient
allowance for loan losses as a result of inaccurate assumptions; our ability to manage growth; changes in the quality or composition
of our loan or investment portfolios, including adverse developments in borrower industries, declines in real estate values in
our markets, or in the repayment ability of individual borrowers or issuers; failure of our internal controls to work as expected;
environmental liability associated with our lending activities; inadequate resources to make technological improvements; interruption
or breach in security of our information systems; and other factors, many of which are beyond our control.
You should also consider carefully the
statements under “Risk Factors” and other sections of this prospectus and the documents we incorporate by reference,
which address additional facts that could cause our actual results to differ from those set forth in the forward-looking statements.
We caution investors not to place significant reliance on the forward-looking statements contained in this prospectus and the
documents we incorporate by reference.
Because of these and other uncertainties,
our actual future results, performance or achievements, or industry results, may be materially different from the results contemplated
by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results.
Our forward-looking statements speak only as of the date they were made. We do not intend to update these forward-looking statements,
even though our situation may change in the future, unless we are obligated to do so under the federal securities laws. We qualify
all of our forward-looking statements by these cautionary statements.
QUESTIONS AND ANSWERS RELATING TO THE
OFFERING
The following are examples of what we
anticipate will be common questions about the offering. The answers are based on selected information from this prospectus and
the documents incorporated by reference in this prospectus. The following questions and answers do not contain all of the information
that may be important to you and may not address all of the questions that you may have about the offering. This prospectus and
the documents incorporated by reference contain more detailed descriptions of the terms and conditions of the offering and provide
additional information about us and our business, including potential risks related to the offering, our common stock, and our
business.
Exercising your subscription rights
and investing in our common stock involves a high degree of risk. We urge you to carefully read the section entitled “Risk
Factors” beginning on page 17 of this prospectus, and all other information included or incorporated by reference in
this prospectus in its entirety before you decide whether to exercise your rights.
What is the offering?
We are distributing to holders of our common
stock as of 5:00 p.m., Eastern Time, on January 20, 2015 (the “record date”), subscription rights, on a pro rata basis
and at no cost, to purchase an aggregate of 1,051,866 shares of our common stock in the offering. If you are a holder of our common
stock as of the record date, you will receive the right to subscribe for three shares of common stock for every one share of our
common stock you owned as of the record date, at the subscription price of $13.87 per share pursuant to your basic subscription
privilege. If you fully exercise your basic subscription privilege, you will also be entitled to request to purchase shares pursuant
to your oversubscription privilege, as described below. The subscription rights are evidenced by subscription rights certificates.
Why are we conducting the offering?
We are conducting the offering to raise
equity capital to improve our capital position, provide additional capital for the Bank to help achieve and maintain the
capital ratios required by the Bank’s Consent Order (the “Consent Order”) with the Federal Deposit Insurance
Corporation (the “FDIC”) and the Virginia Bureau of Financial Institutions (the “Virginia BFI”), and for
general corporate purposes. If sufficient proceeds are generated in the offering, we intend to infuse the Bank with approximately
$5.0 million of additional capital. If contributed to the Bank, such capital will cause the Bank’s regulatory capital
ratios to exceed the thresholds required by the Consent Order and exceed the capital levels established under the prompt corrective
action regulations for well-capitalized institutions. See “Summary − Village Bank and Trust Financial Corp.”
Such capital will also improve the Bank’s ratio of capital to nonperforming assets and provide support for asset growth
for the foreseeable future. However, we experienced operating losses in the years ended December 31, 2011, 2012 and 2013 and for
the nine months ended September 30, 2014, and the amount of capital necessary to improve the Bank’s capital ratios and support
our future operations may increase in the event of future operating losses or other events.
We believe that raising additional capital
is prudent in light of current market conditions and the related impact on our financial condition. Our board of directors has
chosen to raise capital through a rights offering to give our shareholders the opportunity to prevent ownership dilution by acquiring
additional shares of common stock in the offering. Our board of directors also considered several alternative capital-raising
methods prior to concluding that the offering was the best option under the current circumstances. We believe that the offering
will strengthen our financial condition by raising additional capital; however, our board of directors is making no recommendation
regarding your exercise of the subscription rights. We cannot assure you that we will not need to seek additional financing or
engage in additional capital raising transactions in the future.
What is the basic subscription right and oversubscription
privilege?
The basic subscription privilege of each
subscription right entitles the holder to purchase three shares of our common stock at the subscription price. For example, if
you owned 100 shares of our common stock on the record date, you would be granted 100 subscription rights and you would have the
right to purchase 300 shares of our common stock. You may exercise all or any number of your subscription rights, or you may choose
not to exercise any subscription rights. If you exercise less than your full basic subscription privilege, you will not be entitled
to purchase shares under your oversubscription privilege.
If you are a record holder, your subscription
rights certificate accompanies this prospectus. If you hold your shares in street name through a broker, dealer, custodian bank,
or other nominee who uses the services of The Depository Trust & Clearing Corporation (“DTC”), then you will not
receive a subscription rights certificate. Instead, DTC will issue one subscription right to your nominee for every share of our
common stock you owned as of the record date. Each subscription right entitles you to purchase three shares of our common stock
at the subscription price. For more information, see “What should I do if I want to participate in the offering, but my
shares are held in the name of my broker, dealer, custodian bank, or other nominee?” in this section.
If you exercise your basic subscription
privilege in full by purchasing three shares of common stock for each share that you own, you will not experience any dilution
in the percentage of our outstanding shares of common stock that you own immediately after the completion of the offering.
If you purchase all of the shares of our
common stock available to you pursuant to your basic subscription privilege, you may also subscribe to purchase additional shares
should they be available after purchases by (i) all shareholders exercising their basic subscription privilege and (ii) the standby
investor under the Standby Purchase Agreement. However, the oversubscription privilege will only be offered for an aggregate number
of shares that, when combined with the number of shares purchased pursuant to the shareholders’ basic subscription privilege
and by the standby investor, does not exceed 1,051,866 shares. We reserve the right to accept or reject oversubscriptions for
any reason. In addition, purchases pursuant to the oversubscription privilege will be limited as described under “Are there
limits on the number of shares of common stock I may purchase in the offering?” in this section. We can provide no assurances
that you will actually be able to purchase any shares of common stock upon the exercise of your oversubscription privilege.
In order to properly exercise your oversubscription
privilege, you must deliver the subscription payment related to your oversubscription privilege prior to the expiration of the
offering. Because we will not know the total number of unsubscribed shares prior to the expiration of the offering, if you wish
to maximize the number of shares you purchase pursuant to your oversubscription privilege, you will need to deliver payment in
an amount equal to the aggregate subscription price for the maximum number of shares of our common stock that may be available
to you (i.e., assuming you fully exercise your basic subscription privilege and are allotted the full amount of your oversubscription
as elected by you).
If oversubscription requests exceed the
number of shares of common stock available for sale after purchases by (i) all shareholders exercising their basic subscription
privilege and (ii) the standby investor under the Standby Purchase Agreement, then we will have discretion to allocate the available
shares of common stock among shareholders who oversubscribed as we deem appropriate. When determining how to allocate such remaining
shares, we may give priority to those oversubscription purchasers that we believe will develop future business relationships with
us, refer business to us or purchase additional shares of our common stock on the open market after the closing of the offering.
To the extent the aggregate subscription
price of the maximum number of unsubscribed shares allocated to you pursuant to exercise of the oversubscription privilege is
less than the amount you actually paid in connection with the exercise of the oversubscription privilege, you will be allocated
only the number of unsubscribed shares available to you, and any excess subscription payments received by the subscription agent
will be returned to you, without interest or penalty, as soon as practicable. To the extent the amount you actually paid in connection
with the exercise of the oversubscription privilege is less than the aggregate subscription price of the maximum number of unsubscribed
shares allocated to you pursuant to the oversubscription privilege, you will be allocated the number of unsubscribed shares for
which you actually paid in connection with the oversubscription privilege.
How will the standby investor participate in the offering?
To facilitate the offering, we have entered
into the Standby Purchase Agreement with the standby investor. The standby investor has agreed, subject to there being sufficient
shares available after purchases by shareholders exercising their basic subscription privilege, to purchase from us, and we have
agreed to sell to him, at the subscription price of $13.87 per share, the lesser of (i) $8.0 million of our common stock (based
on the subscription price per share), (ii) all shares of common stock not purchased by shareholders exercising their basic subscription
privilege, and (iii) the maximum number of shares that he may purchase without causing an “ownership change” under
Section 382(g) of the Code. If for any reason we do not complete the offering, we have no obligation to sell shares to the standby
investor pursuant to the Standby Purchase Agreement.
We also agreed to enter into a registration
rights agreement with the standby investor (the “Registration Rights Agreement”) which will provide the standby investor
demand registration and piggyback registration rights with respect to the standby investor’s resale of the Company’s
equity securities, subject to customary limitations. The Registration Rights Agreement is expected to be executed in connection
with closing of the sale of shares to the standby investor. We have agreed to pay the expenses associated with any registration
statements filed with the Securities and Exchange Commission (the “Commission”) pursuant to the Registration Rights
Agreement. The standby investor’s demand registration rights will be immediately exercisable upon execution of the Registration
Rights Agreement for, subject to certain limitations, the number of shares of common stock held by the standby investor and any
equity securities issued or issuable directly or indirectly with respect to the shares of common stock held by the standby investor
by way of conversion, exercise or exchange thereof or stock dividend or stock split or in connection with a combination of shares,
recapitalization, reclassification, merger, amalgamation, arrangement, consolidation or other reorganization.
Are there limits on the number of shares of common stock
I may purchase in the offering?
Yes. Other than the standby investor or
any shareholder that owns, as of the date of this prospectus, more than 5% of our common stock, a person or entity, together with
related persons or entities, may not exercise subscription rights (including the oversubscription privilege) to purchase shares
of our common stock that, when aggregated with their existing ownership, would result in such person or entity, together with
any related persons or entities, owning 5% or more of our issued and outstanding shares of common stock following the offering,
or that would otherwise require regulatory approval. In addition, any person or entity, together with related persons or entities,
that exercises subscription rights (including the oversubscription privilege) to purchase shares of our common stock that, when
aggregated with their existing ownership, results in such person or entity, together with any related persons or entities, owning
3% or more of our issued and outstanding shares of common stock following the offering will be required to enter into an agreement
prohibiting such person or entity from purchasing additional shares that would result in such person or entity owning more than
5% of our common stock. For more information, see the section entitled “The Offering − Limitations on Amount You May
Purchase.”
In addition, the Standby Purchase Agreement
requires that we not accept any subscriptions or oversubscriptions in the offering that we believe may have an unfavorable effect
on our ability to preserve our net operating loss deferred tax asset. Notwithstanding any other information presented in this
prospectus, we do not intend to accept any oversubscriptions that we believe may have an unfavorable effect on our ability to
preserve our net operating loss deferred tax asset. For more information, see the section of this prospectus entitled “Our
Net Operating Loss Deferred Tax Asset” on page 56.
How do I exercise my subscription rights?
If you wish to participate in the offering,
you must deliver your payment along with your properly completed and signed subscription rights certificate, and any other subscription
materials, to the subscription agent. Payments must be made in full in U.S. dollars for the full number of shares for which you
are subscribing by:
| · | personal
check payable to “Computershare, Inc., as Subscription Agent for Village Bank and
Trust Financial Corp.” drawn upon a U.S. bank; or |
| · | certified
check payable to “Computershare, Inc., as Subscription Agent for Village Bank and
Trust Financial Corp.” drawn upon a U.S. bank. |
Please note that funds paid by personal
check may take seven or more business days to clear. Accordingly, if you wish to pay by means of a personal check, we urge you
to make payment sufficiently in advance of the expiration date to ensure that the subscription agent receives cleared funds before
that time. We also urge you to consider payment by means of a certified check drawn upon a U.S. bank in order to expedite the
receipt of your payment.
Please follow the payment and delivery
instructions accompanying the subscription rights certificate. DO NOT DELIVER DOCUMENTS TO THE COMPANY OR THE BANK. As
described in this prospectus and in the instructions accompanying the subscription rights certificate, in certain cases additional
documentation or medallion guarantees may be required. For more information, see the section entitled “The Offering −
Method of Exercising Subscription Rights.” You are solely responsible for completing delivery to the subscription agent
of your subscription rights certificate, any other subscription materials, and payment. We urge you to allow sufficient time for
delivery of your subscription materials to the subscription agent so that the subscription agent receives them by 5:00 p.m., Eastern
Time, on Friday, March 20, 2015. We are not responsible for subscription materials sent directly to our offices.
If you send a payment that is insufficient
to purchase the number of shares you requested, or if the number of shares you requested is not specified in the forms, the payment
received will be applied to exercise your subscription rights to the fullest extent possible based on the amount of the payment
received, subject to the availability of shares under the oversubscription privilege and purchase limitations. Any excess subscription
payments received by the subscription agent will be returned promptly, without interest or penalty, following the expiration of
the offering. We reserve the right to reject any attempted subscription that does not include proper documentation or matching
payment.
What should I do if I want to participate in the offering,
but my shares are held in the name of my broker, dealer, custodian bank, or other nominee?
If you hold your shares of common stock
in the name of a broker, dealer, custodian bank, or other nominee, then your broker, dealer, custodian bank, or other nominee
is the record holder of the shares you own. You will not receive a subscription rights certificate. The record holder must exercise
the subscription rights on your behalf for the shares of common stock you wish to purchase in the offering.
If you wish to purchase shares of our common
stock through the offering, please promptly contact your broker, dealer, custodian bank, or other nominee as record holder of
your shares. We will ask your record holder to notify you of the offering. However, if your broker, dealer, custodian bank, or
other nominee does not contact you, then you should promptly initiate contact with it. Your broker, dealer, custodian bank, or
other nominee may establish a deadline prior to 5:00 p.m., Eastern Time, on March 20, 2015, which we established as the expiration
date of the offering, by which you must provide it with your instructions to exercise your subscription rights and pay for your
shares.
Will I be entitled to subscribe for shares in the offering
if I failed to return my old stock certificates in connection with the reverse stock split?
Yes. All shareholders will be permitted
to participate in the offering. We will calculate the number of rights each holder is entitled to receive on a post-split basis,
regardless of whether a holder has failed to return his or her old stock certificates. Old certificates that were not returned
to the Company in connection with the reverse split represent the right of the holder to exchange his or her certificates for
new certificates representing post-split shares. If you failed to return your old certificates, please do so by following the
instructions set forth on the transmittal materials that were sent to you in connection with the reverse stock split.
Am I required to exercise all of the rights I receive in
the offering?
No. You may exercise any number of your
subscription rights, or you may choose not to exercise any subscription rights. However, if you choose not to exercise your basic
subscription privilege in full, the relative percentage of our shares of common stock that you own will decrease as a result of
the offering, and your voting and other rights will be diluted. In addition, if you do not exercise your basic subscription privilege
in full, you will not be entitled to participate in the oversubscription privilege. For more information, see “How many
shares of common stock will be outstanding after the offering?” in this section.
Will our officers and directors be exercising their subscription
rights?
Certain of our directors and officers have
indicated that they intend to participate in the offering, although they are not required to do so. Collectively, we expect our
directors and officers, together with their affiliates, to purchase up to approximately 92,000 shares in the offering. As of the
record date, our directors and officers, together with their affiliates, beneficially own approximately 105,512 shares of common
stock (excluding shares underlying options) and are entitled to purchase approximately 316,536 shares in the offering by exercising
their respective basic subscription privileges on the same terms and conditions applicable to all shareholders. Following the
offering, our directors and officers, together with their affiliates, are expected to own an aggregate of approximately 197,512
shares of common stock, or approximately 14.1% of our total outstanding shares of common stock if we sell all 1,051,866 shares
offered in the offering.
Has our board of directors made a recommendation to our
shareholders regarding the exercise of rights under the offering?
No. Neither our board of directors nor
our sales agents are making any recommendation to you about whether you should exercise any subscription rights. Shareholders
who exercise their subscription rights risk a loss on their investment. We cannot assure you that the market price of our common
stock will be above the subscription price or that anyone purchasing shares at the subscription price will be able to sell those
shares in the future at the same price or a higher price. You are urged to make your decision based on your own assessment of
our business and the offering. Please review the section entitled “Risk Factors” for a discussion of some of the risks
involved in investing in our common stock.
What other agreements do we have in place with the standby
investor and will the standby investor receive any compensation for his commitment?
In the Standby Purchase Agreement, the
standby investor has granted to the Company an option to redeem for cash, or exchange in connection with the offering at the subscription
price, (i) all of the 4,023 shares of Series A preferred stock, that he owned as of the date of the Standby Purchase Agreement
based on a valuation of $500.34 per share of Series A preferred stock, and (ii) any additional shares of Series A preferred stock
that he subsequently acquires based on a valuation of the Series A preferred stock that equates to a 5% annualized return on the
amount that the standby investor pays to purchase such additional shares of Series A preferred stock. The standby investor acquired
an additional 2,221 shares of Series A preferred stock on December 23, 2014 for $509.656 per share, as well as an additional 2,779
shares of Series A preferred stock on February 6, 2015 for $521.44 per share. Any redemption by the Company of Series A preferred
stock for cash will be contingent upon approval from the Federal Reserve Bank of Richmond (the “Reserve Bank”).
In addition, if the Company terminates
the Standby Purchase Agreement because of a breach of the agreement by the standby investor or because the standby investor is
unable to obtain regulatory approval to acquire the shares he has committed to purchase, the Company will have an option expiring
June 30, 2015 to redeem all of the shares of Series A preferred stock that he owns based on a valuation of the greater of (i)
$500.34 per share, (ii) the average price paid by the standby investor to purchase any additional Series A preferred stock increased
by an amount that equates to a 5% annualized return on such purchases, and (iii) the average redemption price paid to other holders
of Series A preferred stock whose shares have been redeemed for cash by the Company on or prior to such date.
We have agreed to enter into the Registration
Rights Agreement, which will provide the standby investor demand registration and piggyback registration rights with respect to
the standby investor’s resale of the Company’s equity securities, subject to customary limitations. The Registration
Rights Agreement is expected to be executed in connection with closing of the sale of shares to the standby investor. We have
also agreed reimburse the standby investor up to $37,500 of his actual out-of-pocket expenses.
In the event that the Standby Purchase
Agreement is terminated because the Company determines that the offering is not in the best interests of the Company or its shareholders,
we are required to pay the standby investor liquidated damages of $150,000.
How many shares will the standby investor own after the
offering?
Purchasers in the offering will not know
the number or percentage of our outstanding shares of common stock that the standby investor will own after the completion of
the offering until the expiration of the offering period, but the Standby Purchase Agreement contemplates that the standby investor
will be permitted to own up to $8.0 million (based on the subscription price per share) of our outstanding shares following the
offering. The actual number of shares and percentage ownership will depend on the number of shares purchased by shareholders exercising
their basic subscription privilege. The chart below presents the standby investor’s ownership if the basic subscription
privilege is exercised with respect to 0%, 25%, 50% and 100% of the subscription rights held by shareholders.
| |
0% of Basic
Subscriptions Exercised | | |
25% of Basic
Subscriptions Exercised | | |
50% of Basic
Subscriptions Exercised | | |
100% of Basic
Subscriptions Exercised | |
| |
| | |
| | |
| | |
| |
Shares of Common Stock Sold Pursuant to the Basic Subscription Privilege | |
| 0 | | |
| 262,966 | | |
| 525,933 | | |
| 1,051,866 | |
Shares of Common Stock Issued to Standby Investor in Exchange for Preferred Stock (1) | |
| 333,065 | | |
| 333,065 | | |
| 333,065 | | |
| 0 | |
Shares of Preferred Stock Owned by the Standby Investor After Offering (1) | |
| 0 | | |
| 0 | | |
| 0 | | |
| 9,023 | |
Total Shares of Preferred Stock Outstanding After Offering (1) | |
| 5,715 | | |
| 5,715 | | |
| 5,715 | | |
| 14,738 | |
Shares of Common Stock Purchased by Standby Investor for Cash (1)(2) | |
| 3,807 | | |
| 243,720 | | |
| 192,868 | | |
| 0 | |
Total Shares of Common Stock Issued in Offering | |
| 336,872 | | |
| 839,751 | | |
| 1,051,866 | | |
| 1,051,866 | |
Total Shares of Common Stock Outstanding After Offering | |
| 687,494 | | |
| 1,190,373 | | |
| 1,402,488 | | |
| 1,402,488 | |
Percentage Ownership of Common Stock of Standby Investor After Closing of the Offering | |
| 49.00 | % | |
| 48.45 | % | |
| 37.50 | % | |
| 0.00 | % |
Total Cash Investment of Standby Investor | |
$ | 52,803 | | |
$ | 3,380,396 | | |
$ | 2,675,079 | | |
$ | 0 | |
____________
| (1) | Assumes that the standby investor will be permitted to own a maximum
of 49% of the Company’s outstanding shares of common stock on a fully-diluted basis
after the offering without the Company incurring an “ownership change” under
Section 382(g) of the Code. The actual percentage that he will be permitted to own may
be slightly less than 49% and will depend on a number of factors that will not be known
until completion of the offering. Assumes that, in lieu of accepting cash, we elect to
exchange as many as possible of the 9,023 shares of Series A preferred stock that the
standby investor owns for shares of our common stock in the offering based on a $500.34
per share valuation for 4,023 of such shares of Series A preferred stock owned by the
standby investor as of the date of the Standby Purchase Agreement, a $516.4980 per share
valuation for 2,221 of such shares of Series A preferred stock acquired by the standby
investor on December 23, 2014 and a $525.2238 per share valuation for 2,779 of such shares
of Series A preferred stock acquired by the standby investor on February 6, 2015. The
valuations of the shares of Series A preferred stock that were acquired by the standby
investor on December 23, 2014 and February 6, 2015 were calculated based on an assumed
closing date of March 31, 2015. |
| (2) | Pursuant to the Standby Purchase Agreement, the standby investor’s
total investment (whether by purchase and/or exchange) in the offering is limited to
$8.0 million of our common stock (based on the subscription price of $13.87 per
share). |
The purchase of shares of common stock
by the standby investor is subject to conditions to closing as set forth in the Standby Purchase Agreement, including obtaining
the required regulatory approvals and non-objections and a letter from an independent accounting firm related to the Company’s
deferred tax asset. If any of such conditions to closing are not satisfied or, where permissible, not waived, the standby investor
will not participate in the offering. In addition, the standby investor may choose to terminate the Standby Purchase Agreement
under certain circumstances, including if there is a material adverse change in our financial condition or operations. See “The
Standby Purchase Agreement − Termination Provisions.”
How was the subscription price determined?
The board of directors and the standby
investor agreed in the Standby Purchase Agreement that the subscription price would be determined by dividing “Modified
Tangible Book Value” by the number of shares of common stock outstanding as of the month-end prior to declaration of effectiveness
of the registration statement of which this prospectus is a part (the “Determination Date”). The term “Modified
Tangible Book Value” is defined in the Standby Purchase Agreement to mean the Company’s total consolidated equity
as of the Determination Date (i) less preferred shareholder equity included in total consolidated equity on that date, (ii) less
intangible assets recorded on the balance sheet on that date, (iii) plus dividends accrued from October 1, 2014 through the
Determination Date on the shares owned by the standby investor, (iv) plus dividends accrued from October 1, 2014 through the Determination
Date on any additional shares of Series A preferred stock purchased by the standby investor in addition to the 4,023 shares he
owned as of the date of the Standby Purchase Agreement (the “Purchased TARP Shares”), (v) plus dividends accrued from
October 1, 2014 through the Determination Date on any shares of Series A preferred stock redeemed by the Company (the “Redeemed
TARP Shares”), and (vi) less the “TARP Purchase Premium.” The term “TARP Purchase Premium” is defined
in the Standby Purchase Agreement to mean the product determined by multiplying (x) the price per Purchased TARP Share paid by
the standby investor, as applicable, less $500.34 and (y) the number of Purchased TARP Shares plus 4,023. The standby investor
acquired an additional 2,221 shares of Series A preferred stock on December 23, 2014 for $509.656 per share, as well as an additional
2,779 shares of Series A preferred stock on February 6, 2015 for $521.44 per share.
In negotiating the formula for determining
the subscription price, our board of directors consulted with our sales agents and considered a number of factors, including the
need to offer the shares at a price that would be attractive to investors relative to the then current trading price of our common
stock, the tangible book value of a share of our common stock, historical and current trading prices of our common stock, general
conditions in the financial services industry, the need for capital and alternatives available to us for raising capital, potential
market conditions, and the desire to provide an opportunity to our shareholders to participate in the offering on a pro rata basis.
In conjunction with its review of these factors, our board of directors also reviewed our history and prospects, including our
past and present earnings, our prospects for future earnings, and the outlook for our industry, our current financial condition
and regulatory status, and a range of discounts to market value represented by the subscription prices in various other rights
offerings.
You should not consider the subscription
price as an indication of value of our company or our common stock. You should not assume or expect that, after the offering,
our shares of common stock will trade at or above the subscription price in any given time period. The market price of our common
stock may decline during or after the offering, and you may not be able to sell the shares of our common stock purchased during
the offering at a price equal to or greater than the subscription price. You should obtain a current quote for our common stock
before exercising your subscription rights and make your own assessment of our business and financial condition, our prospects
for the future, and the terms of the offering. On February 9, 2015, the last reported sale price of our common stock was $18.47
per share.
How soon must I act to exercise my rights?
If you received a subscription rights certificate
and elect to exercise some or all of your subscription rights, the subscription agent must receive your completed and signed subscription
rights certificate and complete payment prior to the expiration of the offering, which is March 20, 2015, at 5:00 p.m., Eastern
Time. If you hold your shares in the name of a broker, dealer, custodian bank, or other nominee, your broker, dealer, custodian
bank, or other nominee may establish a deadline prior to 5:00 p.m. Eastern Time, on March 20, 2015 by which you must provide it
with your instructions to exercise your subscription rights and pay for your shares.
Although we will make reasonable attempts
to provide this prospectus to holders of subscription rights, the offering and all subscription rights will expire at 5:00 p.m.,
Eastern Time, on March 20, 2015 (unless extended for up to 30 days until April 19, 2015), whether or not we have been able to
locate each person entitled to subscription rights.
May I transfer my subscription rights?
No. You may not transfer your subscription
rights.
Are we requiring a minimum subscription to complete the
offering?
No. There is no minimum subscription requirement
in order to complete the offering. However, our board of directors reserves the right to cancel the offering for any reason in
its discretion.
Can the board of directors extend, cancel, or amend the
offering?
Yes. We have the option to extend the period
for exercising your subscription rights for up to 30 days until April 19, 2015. Our board of directors may cancel the offering
at any time for any reason. If the offering is cancelled, all subscription payments received by the subscription agent will be
returned promptly, without interest or penalty. Our board of directors reserves the right to amend or modify the terms of the
offering at any time, for any reason.
What will happen if I choose not to exercise my subscription
rights?
If you do not exercise any subscription
rights, the number of shares of our common stock you own will not change. Because shares may be purchased by other shareholders
or the standby investor, however, your percentage ownership will be diluted after the completion of the offering unless you exercise
your basic subscription privilege in full. For more information, see “How many shares of common stock will be outstanding
after the offering?” in this section.
After I send in my payment and subscription rights certificate,
may I change or cancel my exercise of rights?
No. All exercises of subscription rights
are irrevocable, even if you later learn information that you consider to be unfavorable to the exercise of your subscription
rights. If we decide to extend, amend or modify the terms of the offering for any reason, subscriptions received prior to such
extension, amendment or modification generally will remain irrevocable. However, if we amend this offering in a way which we believe
is material, we will extend the offering and offer all subscription rights holders the right to revoke any subscription submitted
prior to such amendment upon the terms and conditions we set forth in the amendment. The extension of the expiration date of this
offering will not, in and of itself, be considered a material amendment for these purposes. You should not exercise your subscription
rights unless you are certain that you wish to purchase shares of our common stock at the subscription price.
When will I receive my new shares?
All shares of our common stock that you
purchase in the offering will be issued electronically in book-entry (uncertificated) form. If you are a shareholder of record
as of the record date and purchase shares in the offering by submitting a subscription rights certificate and payment, we will
issue your new shares as soon as practicable after the completion of the offering, and you will receive confirmation from the
subscription agent by mail that your shares were electronically issued. If, as of the record date, your shares were held by a
broker, dealer, custodian bank, or other nominee, and you participate in the offering, your broker, dealer, custodian bank, or
other nominee will be credited with the shares of common stock you purchase in the offering as soon as practicable after the completion
of the offering, and your nominee will credit your account with such shares. Until your shares have been issued in book-entry
form or your account is credited with such shares, you may not be able to sell your shares.
How many shares of common stock will be outstanding after
the offering?
As of January 20, 2015, 350,622 shares
of our common stock were issued and outstanding. Assuming that there are no other transactions by us involving shares of our common
stock, no outstanding options for shares of our common stock are exercised prior to the expiration of the offering, and the full
1,051,866 shares of our common stock are subscribed for in the offering or purchased (or issued in exchange for Series A preferred
stock) by the standby investor, we expect 1,402,488 shares of common stock to be outstanding immediately after completion of the
offering. As a result of the offering, the ownership interests and voting interests of the existing shareholders that do not fully
exercise their basic subscription privilege will be diluted.
Are there risks in exercising my subscription rights?
Yes. The exercise of your subscription
rights involves risks. Exercising your subscription rights involves the purchase of additional shares of common stock and should
be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider
the risks described in the section entitled “Risk Factors” in this prospectus and the documents incorporated by reference
in this prospectus.
If the offering is not completed, will my subscription payment
be refunded to me?
Yes. The subscription agent will hold all
funds it receives in an escrow account until completion of the offering. If the offering is not completed, all subscription payments
received by the subscription agent will be returned promptly, without interest or penalty. If you hold shares through a broker,
dealer, custodian bank, or other nominee, it may take longer for you to receive payment because the subscription agent will return
payments through the record holder of your shares.
What fees or charges apply if I purchase the shares in the
offering?
We are not charging any fee or sales commission
to issue subscription rights to you or to issue shares to you if you exercise your subscription rights. If you exercise your subscription
rights through your broker, dealer, custodian bank, or other nominee, you are responsible for paying any fees your nominee may
charge you.
What are the U.S. federal income tax consequences of exercising
my subscription rights?
For U.S. federal income tax purposes, you
should not recognize income or loss upon receipt or exercise of subscription rights. You should consult your tax advisor as to
your particular tax consequences resulting from the offering. For a more detailed discussion, see the section entitled “U.S.
Federal Income Tax Consequences.”
Whom should I contact if I have other questions?
For a more complete description of the
offering, see “The Offering” beginning on page 40. If you have any questions regarding completing a subscription rights
certificate or submitting payment in the offering, please contact our sales agents, Compass Point Research & Trading, LLC
and Boenning & Scattergood, Inc., at (216) 378-1297. If you have any general questions regarding the offering, the Company,
or the Bank, please contact our Chief Financial Officer, C. Harril Whitehurst, Jr., at (804) 419-1232.
SUMMARY
This summary contains basic information
about us and this offering. Because it is a summary, it does not contain all of the information that you should consider before
investing. You should read this entire prospectus carefully, including the section entitled “Risk Factors,” our financial
statements and the notes thereto incorporated by reference to our annual report and quarterly reports, and the other documents
we refer to and incorporate by reference in this prospectus for a more complete understanding of us and this offering before making
an investment decision. In particular, we incorporate important business and financial information in this prospectus by reference.
Village Bank and Trust Financial Corp.
Village Bank and Trust Financial Corp.
was incorporated in January 2003 under the laws of the Commonwealth of Virginia as a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company has three active wholly owned subsidiaries: Village Bank, Southern Community
Financial Capital Trust I, and Village Financial Statutory Trust II. The Bank has one active wholly owned subsidiary: Village
Bank Mortgage Corporation (the “mortgage company”), a full service mortgage banking company.
The Bank operates 11 retail branch offices
offering a wide range of banking and related financial services, including checking, savings, certificates of deposit and other
depository services, and commercial, real estate and consumer loans, primarily in the Richmond, Virginia metropolitan area. The
Bank also operates four mortgage banking offices, two in the Richmond, Virginia metropolitan area and one in each of Manassas,
Virginia and Newport News, Virginia. The Bank was organized in 1999 as a Virginia chartered bank to engage in a general banking
business to serve the communities in and around Richmond, Virginia. The Bank offers a comprehensive range of financial services
and products and specializes in providing customized financial services to small and medium sized businesses, professionals, and
associated individuals. The Bank provides its customers with personal customized service utilizing the latest technology and delivery
channels.
The Bank’s revenues are derived from
interest and fees received in connection with loans, deposits, and investments. Administrative and operating expenses are the
major expenses, followed by interest paid on deposits and borrowings. Revenues from the mortgage company consist primarily of
gains from the sale of loans and loan origination fees, and its major expenses consist of personnel, advertising, and other operating
expenses. As of September 30, 2014, we had total consolidated assets of $433.0 million, total loans of $275.1 million, total deposits
of $380.7 million and total shareholders’ equity of $18.7 million. For the year ended December 31, 2013, we had a net loss
of $(4.0) million and a net loss available to common shareholders of $(4.9) million. For the nine months ended September 30, 2014,
we had a net loss totaling $(701,000) and a net loss available to common shareholders of $(1.8) million. For the three months
ended September 30, 2014, we had net income of $134,000 and net loss available to common shareholders of $(411,000). The net loss
available to common shareholders reflects the impact of the accrued dividends on our preferred stock.
As a bank holding company, we are subject
to the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). We are required
to file with the Federal Reserve reports and other information regarding our business operations and the business operations of
our subsidiaries. As a state-chartered non-member institution, the Bank is subject to supervision, periodic examination and regulation
by the FDIC, its primary federal regulator, and by the Virginia BFI. Deposits with the Bank are insured to the maximum amount
provided by the FDIC, and the Bank is also subject to regulation and examination by the FDIC.
In February 2012, the Bank entered into
a Consent Order with the FDIC and the Virginia BFI. Among other things, the Consent Order required the Bank to maintain Tier 1
and total risk-based capital in excess of 8% and 11%, respectively, to develop and submit plans to reduce and improve its problem
loan portfolio, reduce its commercial real estate concentration, maintain an appropriate allowance for loan losses, review its
management performance, and correct certain violations of law. In June 2012, the Company entered into a Written Agreement (the
“Written Agreement”) with the Reserve Bank. Under the terms of the Written Agreement, the Company developed and submitted
to the Reserve Bank for approval written plans to maintain sufficient capital and correct violations of Section 23A of the
Federal Reserve Act and Regulation W. See “Use of Proceeds” on page 34 for more information regarding the Bank’s
current regulatory capital ratios and the potential impact of the net proceeds from the offering.
We are currently in partial compliance
with the Written Agreement and Consent Order, and gaining full compliance will require securing additional capital through the
offering described in this prospectus or otherwise, continuing to improve asset quality and curing the Company’s violation
of Regulation W. The Company is seeking to cure the Regulation W violation by selling its headquarters building and relocating
headquarters staff to another property already owned by the Company. The Company has not been successful in efforts to sell its
headquarters building and continues to update the Reserve Bank on such efforts.
Our common stock is listed on the NASDAQ
Capital Market under the ticker symbol “VBFC.” See “Risk Factors” and “Market Price of Common Stock
and Dividend Policy − Market Price of Common Stock” regarding our noncompliance with NASDAQ Listing Rule 5550(a)(4)
and the potential for delisting of our common stock.
Corporate Information
Our principal executive offices are located
at 13319 Midlothian Turnpike, Midlothian, Virginia 23113 and our telephone number is (804) 897-3900. Our principal website is
http://www.villagebank.com. The information on, or that can be accessed through, our website is not incorporated by reference
into this prospectus and should not be considered to be a part of this prospectus.
The Offering
The following summary describes the
principal terms of the offering, but is not intended to be complete. See the information in the section entitled “The Offering”
beginning on page 40 of this prospectus for a more detailed description of the terms and conditions of the offering.
Shares available in offering |
|
1,051,866 |
|
|
|
Rights distributed |
|
We are distributing to you, at no charge, one non-transferable
subscription right for each share of our common stock that you own as of 5:00 p.m., Eastern Time, on the record date, either
as a holder of record or, in the case of shares held of record by brokers, dealers, custodian banks, or other nominees on
your behalf, as a beneficial owner of such shares. |
|
|
|
Basic subscription privilege |
|
The basic subscription privilege of each subscription right will
entitle you to purchase three shares of our common stock at the subscription price. |
|
|
|
Determination of subscription price |
|
The subscription price of $13.87 per share was determined pursuant
to the formula set forth in the Standby Purchase Agreement. The formula was determined by the board of directors
through negotiations with the standby investor and consideration of a variety of factors. To be effective, any
payment related to the exercise of a subscription right must clear prior to the expiration of the offering. |
|
|
|
Oversubscription privilege |
|
If you fully exercise your basic subscription privilege, you may
also subscribe for additional shares in the event that not all available shares are purchased pursuant to the shareholders’
basic subscription privilege or by the standby investor. However, the oversubscription privilege will only be offered for
an aggregate number of shares that, when combined with the number of shares purchased pursuant to the shareholders’
basic subscription privilege and by the standby investor, does not exceed 1,051,866 shares. We reserve the right
to accept or reject oversubscriptions for any reason. |
|
|
|
Limitations on amount purchased |
|
Other than the standby investor or any shareholder that owns, as
of the date of this prospectus, more than 5% of our common stock, a person or entity, together with related persons or entities,
may not exercise subscription rights (including the oversubscription privilege) to purchase shares of our common stock that,
when aggregated with their existing ownership, would result in such person or entity, together with any related persons or
entities, owning 5% or more of our issued and outstanding shares of common stock following the offering, or that would otherwise
require regulatory approval. In addition, any person or entity, together with related persons or entities, that
exercises subscription rights (including the oversubscription privilege) to purchase shares of our common stock that, when
aggregated with their existing ownership, results in such person or entity, together with any related persons or entities,
owning 3% or more of our issued and outstanding shares of common stock following the offering will be required to enter into
an agreement prohibiting such person or entity from purchasing additional shares that would result in such person or entity
owning more than 5% of our common stock. In addition, we do not intend to accept any oversubscriptions that we believe
may have an unfavorable effect on our ability to preserve our deferred tax asset. |
|
|
|
Record date |
|
5:00 p.m., Eastern Time, on January 20, 2015. |
|
|
|
Expiration date of offering |
|
5:00 p.m., Eastern Time, on March 20, 2015, unless we extend the
offering period for up to 30 days until April 19, 2015. |
Use of proceeds |
|
Although the actual amount of proceeds will
depend on participation in the offering, if the offering is fully subscribed, we expect the gross proceeds from the offering
to be $14,589,381. We intend to use the proceeds from the offering to raise equity capital to improve our capital
position, provide additional capital for the Bank to help achieve and maintain the capital ratios required by the Bank’s
Consent Order, and for general corporate purposes. See “Use of Proceeds” on page 34 for more information. |
|
|
|
No transfer |
|
The subscription rights are not transferable. |
|
|
|
No board recommendation |
|
Neither our board of directors nor our sales agents, Compass Point
Research & Trading, LLC and Boenning & Scattergood, Inc., are making any recommendation to you about whether you should
exercise any subscription rights. You are urged to make an independent investment decision about whether to exercise your
subscription rights based on your own assessment of our business and the offering. Please see the section of this prospectus
entitled “Risk Factors” beginning on page 17 for a discussion of some of the risks involved in investing in our
common stock. |
|
|
|
No revocation |
|
Any exercise of subscription rights is irrevocable, even if you
later learn information that you consider to be unfavorable to the exercise of your rights. You should not exercise your subscription
rights unless you are certain that you wish to purchase shares of common stock at the subscription price. |
|
|
|
U.S. federal income tax consequences |
|
For U.S. federal income tax purposes, you should not recognize
income or loss upon receipt or exercise of subscription rights. You should consult your own tax advisor as to your particular
tax consequences resulting from the offering. For a detailed discussion, see “U.S. Federal Income Tax Consequences”
on page 57. |
|
|
|
Extension, cancellation, and amendment |
|
We have the option to extend the period for exercising
your subscription rights, for up to 30 days until April 19, 2015. If we extend the offering period, we will give notice
to the subscription agent prior to the expiration of the offering and will issue a press release announcing such extension
no later than 9:00 a.m., Eastern Time, on the next business day after the most recently announced expiration date of the
offering.
Our board of directors may cancel the offering at any
time for any reason. In the event that the offering is cancelled, all subscription payments received by the subscription
agent will be returned promptly, without interest or penalty. We also reserve the right to amend or modify the terms of
the offering. If we decide to extend, amend or modify the terms of the offering for any reason, subscriptions received
prior to such extension, amendment or modification generally will remain irrevocable. However, if we amend this rights
offering in a way which we believe is material, we will extend the offering and offer all subscription rights holders
the right to revoke any subscription submitted prior to such amendment upon the terms and conditions we set forth in the
amendment. The extension of the expiration date of this offering will not, in and of itself, be considered a material
amendment for these purposes. |
|
|
|
Procedure for exercising rights |
|
To exercise your subscription rights, you must take
the following steps:
·
If you are a registered holder of our shares of common
stock, you must deliver payment and a properly completed subscription rights certificate, and any other subscription
materials, to the subscription agent before 5:00 p.m., Eastern Time, on March 20, 2015. You may deliver the documents and
payments by mail or commercial carrier. If regular mail is used for this purpose, we recommend using registered mail,
properly insured, with return receipt requested. |
|
|
· If
you are a beneficial owner of shares that are registered in the name of a broker, dealer, custodian bank, or other nominee,
you should instruct your broker, dealer, custodian bank, or other nominee to exercise your subscription rights on your behalf
and deliver all documents and payments before 5:00 p.m., Eastern Time, on March 15, 2015. |
|
|
|
Subscription agent |
|
Computershare, Inc. |
|
|
|
Shares outstanding before the offering |
|
350,622 shares of common stock as of January 20, 2015. |
|
|
|
Shares outstanding after completion of the offering |
|
Assuming that there are no other transactions by us involving shares
of our common stock, no outstanding options for shares of our common stock are exercised prior to the expiration of the offering,
and the full 1,051,866 shares are subscribed for in the offering or otherwise sold or exchanged for Series A preferred stock
in connection with the offering, we expect 1,402,488 shares of common stock will be outstanding immediately after completion
of the offering. |
|
|
|
Risk factors |
|
Shareholders considering exercising their subscription
rights should carefully consider the risk factors described in the section of this prospectus entitled “Risk Factors,”
beginning on page 17 of this prospectus. |
|
|
|
Fees and expenses |
|
We will pay the fees and expenses relating to the offering. However,
if you exercise your subscription rights through your broker, dealer, custodian bank, or other nominee, you are responsible
for paying any fees your nominee may charge you. |
|
|
|
Trading symbol |
|
Shares of our common stock are listed on the NASDAQ Capital Market
under the symbol “VBFC.” The last reported sale price of our common stock on the NASDAQ Capital Market on February
9, 2015 was $18.47. |
|
|
|
Questions |
|
If you have any questions regarding completing a subscription rights
certificate or submitting payment in the offering, please contact our sales agents, Compass Point Research & Trading,
LLC and Boenning & Scattergood, Inc., at (216) 378-1297. If you have any general questions regarding the offering, the
Company, or the Bank, please contact our Chief Financial Officer, C. Harril Whitehurst, Jr., at (804) 419-1232. |
RISK FACTORS
Investing in our common stock involves
a high degree of risk. You should carefully consider the specific risks described below and any risks described in our other filings
with the Commission that are incorporated by reference in this prospectus before making an investment decision. Any of the risks
we describe below or in the information incorporated by reference in this prospectus could cause our business, financial condition,
results of operations, or future prospects to be materially adversely affected. The market price of our common stock could decline
if one or more of these risks and uncertainties develop into actual events and you could lose all or part of your investment.
Risks Related to the Offering
The standby investor’s purchase of shares pursuant
to the Standby Purchase Agreement is subject to conditions to closing that could result in such transaction being delayed or not
consummated, which could negatively impact our stock price and future business operations.
The purchase of shares by the standby investor
is subject to conditions to closing as set forth in the Standby Purchase Agreement, including obtaining the required regulatory
approvals and non-objections and a letter from an independent accounting firm related to the Company’s deferred tax asset.
If any of such conditions to closing are not satisfied or, where permissible, not waived, the standby investor will not participate
in the offering. In addition, the standby investor may choose to terminate the Standby Purchase Agreement under certain circumstances,
including if there is a material adverse change in our financial condition or operations. Failure to sell shares to the standby
investor could negatively impact our stock price, future business and operations, and financial condition. In addition, any delay
in the consummation of such sale, or any uncertainty about the participation of the standby investor, may adversely affect our
future business, growth, revenue, and results of operations.
The subscription price determined for the offering may
not be indicative of the value of our common stock.
Our board of directors determined the subscription
price of the common stock after negotiations with the standby investor, discussions with our sales agents and consideration of
a variety of factors. You should not consider the subscription price as an indication of value of our company or our common stock.
You should not assume or expect that, after the offering, our shares of common stock will trade at or above the subscription price
in any given time period. The market price of our common stock may decline during or after the offering, and you may not be able
to sell the underlying shares of our common stock purchased during the offering at a price equal to or greater than the subscription
price. The value of our common stock may also be subject to significant fluctuations in response to our future operating results
and other factors.
Neither our board of directors nor our
sales agents are making any recommendation to you about whether you should exercise any subscription rights. Shareholders who
participate in the offering risk the loss of their entire investment.
The offering may cause the trading price of our common
stock to decrease immediately, and this decrease may continue.
The subscription price at which we are
selling shares in the offering is less than the recent trading prices of our common stock as reported by the NASDAQ Capital Market.
Additionally, the number of shares we expect to issue if we complete the offering may result in an immediate decrease in the per
share market value of our common stock. If the holders of the shares purchased in this offering choose to sell some or all of
those shares, the resulting sales could further depress the market price of our common stock. On February 9, 2015, the last reported
sale price of our common stock was $18.47 per share.
Your ownership interest may be significantly diluted
if you do not exercise your subscription rights in the offering.
To the extent that you do not exercise
your basic subscription privilege and shares are purchased by the standby investor or other shareholders in the offering, your
proportionate voting interest will be reduced, and the percentage that your original shares represent of our outstanding common
stock after the offering may be significantly diluted.
If you do not act promptly and follow the subscription
instructions, your exercise of rights will be rejected.
If you desire to purchase shares of our
common stock in the offering, you must act promptly to ensure that the subscription agent receives all required forms and payments
before the expiration of the offering at 5:00 p.m., Eastern Time, on March 20, 2015. If you own your shares in street name, you
must act promptly to ensure that your broker, dealer, custodian bank, or other nominee acts for you and that the subscription
agent receives all required forms and payments before the offering expires. We are not responsible if your nominee fails to ensure
that the subscription agent receives all required forms and payments before the offering expires. If you fail to complete and
sign the subscription rights certificate and other required subscription forms, send an incorrect payment amount, or otherwise
fail to follow the subscription procedures that apply to the exercise of your rights before the offering expires, the subscription
agent will reject your subscription or accept it only to the extent of the payment received before the offering expires. Neither
we nor our sales agents or subscription agent undertake any responsibility or action to contact you concerning an incomplete or
incorrect subscription form or payment, nor are we or they under any obligation to correct such forms or payment. We have the
sole discretion to determine whether a subscription exercise properly complies with the subscription procedures.
You will not be able to sell the shares of common stock
for which you subscribe in the offering until such shares are issued to you.
If you subscribe for shares in the offering
by submitting a completed and signed subscription rights certificate with other required subscription forms and payment, we will
issue your shares as soon as practicable following the expiration of the offering. If your shares are held by a broker, dealer,
custodian bank, or other nominee and you subscribe for shares in the offering, your nominee will be credited with the shares you
purchase and your account will be credited by your nominee at such time. Until the shares of common stock for which you subscribe
are issued to you, you may not be able to sell your shares. The stock price may decline between the time you decide to sell your
shares and the time you are actually able to sell your shares.
Since you cannot revoke the exercise of your subscription
rights and the market price of our common stock may decline after you elect to exercise the subscription rights, you could be
committed to buying shares above the market price of our common stock.
Your exercise of subscription rights is
irrevocable, even if you learn information about us that you consider unfavorable during the offering period subsequent to your
exercise and even if the terms of the offering are amended or modified. The market price of our common stock may decline after
you elect to exercise your subscription rights. If you exercise your subscription rights and, afterwards, the public trading market
price of our common stock decreases below the subscription price, you will have committed to buying shares of our common stock
at a price above the prevailing market price and could have an immediate unrealized loss. Our common stock is listed on the NASDAQ
Capital Market under the symbol “VBFC,” and the closing sale price of our common stock on February 9, 2015, as reported
by the NASDAQ Capital Market, was $18.47 per share. Following the exercise of your subscription rights you may not be able to
sell your common stock at a price equal to or greater than the subscription price. We will not pay you interest on any funds delivered
to the subscription agent pursuant to the exercise of subscription rights.
Because our management will have broad discretion over
the use of the net proceeds from the offering, you may not agree with how we use the proceeds.
We will have broad discretion over the
use of the net proceeds of this offering. We currently intend to use the net proceeds from the offering to improve our capital
position, provide additional capital for the Bank to help achieve and maintain the capital ratios required by the Bank’s
Consent Order, and for general corporate purposes. However, our management may allocate the proceeds as it deems appropriate.
Accordingly, you will be relying on the judgment of our management with regard to the use of the proceeds of the offering, and
you will not have the opportunity, as part of your investment decision, to influence how the proceeds are being used.
The standby investor may have significant influence over
our business and his interests may not align with your interests as a holder of our common stock.
The percentage of our outstanding shares
that the standby investor will own after the completion of the offering will vary based on the number of subscription rights that
are exercised by shareholders and the number of shares purchased by the standby investor under the Standby Purchase Agreement.
Pursuant to the Standby Purchase Agreement, the standby investor may hold up to $8.0 million (based on the subscription price
per share) of our outstanding shares after completion of the offering. The standby investor has agreed in the Standby Purchase
Agreement to abide by certain standstill provisions that restrict his ability to, among other things, vote more than 40% of the
outstanding shares of the Company’s common stock or support director nominees and business combination transactions that
are not supported by the Company’s board. However, such restrictions are only applicable for a period of three years from
the date of the Standby Purchase Agreement and are contingent upon (i) the Company achieving certain performance objectives, and
(ii) the standby investor being a director or beneficial holder of 10% or more of a bank or bank holding company with one or more
offices in the Richmond, Virginia metropolitan statistical area. The standby investor is currently a director and a beneficial
holder of greater than 10% of the outstanding common stock of First Capital Bancorp, Inc., the parent holding company for First
Capital Bank which has eight branch offices in the Richmond, Virginia metropolitan statistical area. Notwithstanding such restrictions,
because of the percentage of our common stock that may be held by the standby investor, he may be able to influence the outcome
of any matter submitted to a vote of our shareholders. In addition, if he makes a significant investment in the Company, we will
likely seek the standby investor’s input on significant operational matters given his experience in the banking industry.
The interests of the standby investor may
not align precisely with your interests as a holder of our common stock. In addition to being a director and a significant shareholder
of First Capital Bancorp, Inc., the standby investor is also currently a significant shareholder of Four Oaks Fincorp, Inc., the
parent holding company for Four Oaks Bank which is headquartered in Four Oaks, North Carolina. These affiliations may create conflicts
of interest. For example, his affiliation with First Capital Bancorp, Inc., a competitor operating in our market, could incentivize
him to take or approve actions with respect to First Capital Bancorp, Inc. that may have a negative impact on us (e.g. marketing
efforts, product pricing, lending policies, business combination transactions, etc.). While we believe his potentially significant
investment in the Company may provide some protection in this regard, he will not owe a fiduciary duty to the Company and we will
have no control over his actions with regard to his other investments.
Significant sales of our common stock, or the perception
that significant sales may occur in the future, could adversely affect the market price for our common stock.
The sale of substantial amounts of our
common stock could adversely affect the price of the shares. The availability of shares for future sale, including up to 1,051,866
shares of our common stock to be issued in the offering, could adversely affect the prevailing market price of our common stock
and could cause the market price of our common stock to remain low for a substantial amount of time. Additionally, we are obligated
under the Standby Purchase Agreement to establish a restricted stock plan (the “Restricted Stock Plan”) immediately
following the offering under which a number of shares of our common stock equal to 4.0% of the number of outstanding shares immediately
after the closing of the offering will be reserved for issuance to our directors and officers. Under NASDAQ rules, adoption of
the Restricted Stock Plan must be approved by the Company’s shareholders. Additional equity awards may also be granted under
our existing incentive plan. It is possible that if a significant percentage of such available shares were attempted to be sold
within a short period of time, the market for our shares would be adversely affected. It is unclear whether or not the market
for our common stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which
they might be offered. Even if a substantial number of sales do not occur within a short period of time, the mere existence of
this “market overhang” could have a negative impact on the market for our common stock and our ability to raise additional
capital.
A substantial percentage of the proceeds from the offering
may be used to pay for the offering expenses, and there is not a minimum number of shares that we must sell to complete the offering.
There is no condition in the offering to
sell any minimum number or dollar amount of shares. To the extent that shareholders do not purchase significant shares through
the exercise of basic subscription rights or oversubscription privilege, or the Standby Purchase Agreement is terminated, you
may be one of only a small number of investors who elect to purchase shares of our common stock. In addition, a substantial percentage
of the offering proceeds may be used to pay for the offering expenses, and not for providing additional capital to the Company
and the Bank, which may have an adverse effect on our financial condition and future operations.
We may cancel the offering at any time, and neither we
nor the subscription agent will have any obligation to you except to return your subscription payments.
We may, in our sole discretion, decide
not to continue with the offering or cancel the offering at any time. If the offering is cancelled, all subscription payments
received by the subscription agent will be returned promptly, without interest or penalty. We currently have no intention to terminate
the offering, but are reserving the right to do so. If we elect to terminate the offering, none of the Company, the subscription
agent or the sales agents will have any obligation with respect to subscriptions except to return, without interest or penalty,
the previously submitted subscription payments.
We may not be able to realize the benefit of our net
operating loss deferred tax asset.
As of December 31, 2013 and September 30,
2014, we had a total deferred tax asset of $14.0 million and $13.1 million, a valuation allowance of $11.9 million and $12.2
million, and a deferred tax liability of $100,000 and $79,000, respectively, for a net deferred tax asset of $2.0 million and
$829,000, respectively. As of December 31, 2013, and September 30, 2014, the amount of the gross deferred tax asset attributable
to our net operating loss carryforwards was $5.3 million and $7.4 million, respectively, and was fully reduced by a valuation
allowance at both dates. A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available,
it is more likely than not that some portion or all of the total deferred tax asset will not be realized. We believe that, subject
to certain limitations including federal tax laws relating to “ownership changes,” should we return to profitability
over a sustained period of time and project future profits while remaining well capitalized, then we would be able to reverse
some or all of the deferred tax asset valuation allowance, including the portion allocable to our net operating loss carryforwards,
and our shareholders’ equity would increase accordingly. Even if we are able to reverse the deferred tax asset valuation
allowance, however, the only portion of a deferred tax asset that may be included in Tier 1 capital for regulatory capital purposes
is the amount that may be utilized over the next 12 months.
We have attempted to structure the offering
to avoid an “ownership change” under Section 382 of the Code. However, an ownership change may still occur as a result
of the offering or otherwise, which would significantly limit the amount of the net operating loss carryforwards that we might
otherwise be able to utilize once we have returned to profitability. Therefore, even if our results of future operations allow
us to reverse the deferred tax valuation allowance allocable to our net operating loss deferred tax asset, the amount of that
deferred tax asset could be significantly less than the $7.4 million balance at September 30, 2014. Accordingly the aforementioned
increase in our shareholders’ equity that would result from the reversal of the valuation allowance allocable to our net
operating loss deferred tax asset would also be significantly reduced.
Risks Related to Our Common Stock
An investment in our common stock is not an insured deposit,
and as with any stock, inherent market risk may cause you to lose some or all of your investment.
Our common stock is not a bank deposit
and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.
Investment in our common stock is inherently risky and is subject to the same market forces that affect the price of common stock
in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
Our common stock is thinly traded which may limit the
ability of shareholders to sell their shares and may increase price volatility.
Our common stock is listed on the NASDAQ
Capital Market under the symbol “VBFC.” Our common stock is thinly traded and has substantially less liquidity than
the average trading market for many other publicly traded companies. We cannot assure you that a more active trading market for
our common stock will develop or be sustained following the offering. The development of a liquid public market depends on the
existence of willing buyers and sellers, the presence of which is not within our control. The number of active buyers and sellers
of our common stock at any particular time may be limited. Therefore, our shareholders may not be able to sell their shares at
the volume, prices, or times that they desire. You should consider the limited trading market for the shares and be financially
prepared and able to hold your shares for an indefinite period.
In addition, thinly traded stocks can be
more volatile than more widely traded stocks. Our stock price has been volatile in the past and several factors could cause the
price to fluctuate substantially in the future. These factors include, but are not limited to, changes in analysts’ recommendations
or projections, developments related to our business, operations, stock performance of other companies deemed to be peers, news
reports of trends, concerns, irrational exuberance on the part of investors, and other issues related to the financial services
industry. Over the past several years, the stock market has experienced a high level of price and volume volatility, and market
prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations
that have not necessarily been related to operating performance. Our stock price may fluctuate significantly in the future, and
these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially
in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market
price may not be indicative of future market prices.
If our common stock is delisted from the NASDAQ Capital
Market, the market value of, and your ability to sell, shares of our common stock may be materially and adversely affected.
On August 8, 2014, we received a letter
from NASDAQ informing us that we were no longer in compliance with NASDAQ Listing Rule 5550(a)(4), which requires that we have
at least 500,000 publicly held shares of common stock. The phrase “publicly held shares” is defined by NASDAQ to mean
the total number of shares outstanding less any shares held by officers, directors or beneficial owners of 10% or more. According
to the letter from NASDAQ, we had 227,276 publicly held shares as of August 8, 2014. On September 22, 2014, we submitted to NASDAQ
a plan to regain compliance with such rule. The plan was accepted by NASDAQ and we were given a deadline of February 4, 2015 to
implement our plan and regain compliance. On February 5, 2015, we received a determination letter from NASDAQ indicating that
because we did not regain compliance by the February 4, 2015 deadline, our common stock will be delisted effective February 17,
2015 unless we appeal the determination to a NASDAQ Hearings Panel. We intend to appeal the determination and request that we
be provided additional time to regain compliance. If an appeal is timely made, our common stock will continue to trade on the
NASDAQ Capital Market until the Hearings Panel issues a determination otherwise. No assurance can be given as to the decision
that the Hearings Panel may make.
This offering was one of the alternatives
presented to NASDAQ in our plan to regain compliance. If the offering is fully subscribed, we expect to issue 1,051,866 new shares
of common stock and exceed the minimum of 500,000 publicly held shares following the offering. However, if the standby investor
purchases, or receives in exchange for Series A preferred stock, sufficient shares of common stock such that he will own more
than 10% of our outstanding common stock after the offering, his shares will not be considered publicly held shares and the Company
may not be able to issue a sufficient number of other shares to regain compliance. In the event that we do not issue sufficient
shares in the offering to meet such minimum, we intend to explore alternative actions to maintain our listing. However, there
is no guarantee that such actions will be effective in increasing our publicly held shares, or that we will be able to comply
with the other standards that we are required to meet in order to maintain a listing of our common stock. If our common stock
is delisted from the NASDAQ Capital Market, your ability to sell your shares of common stock may be limited, and the market value
of our common stock may be materially adversely affected as a result of lower trading volumes or trade delays. Delisting from
NASDAQ could also result in negative publicity, adversely affect our ability to raise additional capital, adversely affect the
liquidity of our common stock, limit our ability to meet our liquidity needs, and diminish investor, business partner and employee
confidence.
As part of our capital raising efforts, we may issue
additional shares of common stock or convertible securities that would dilute the percentage ownership interest of existing shareholders,
and may dilute the book value per share of common stock. This could adversely affect the terms on which we may obtain additional
capital.
Our authorized capital includes 10,000,000
shares of common stock. As of January 20, 2015, we had 350,622 shares of common stock outstanding and had 6,830 shares of common
stock underlying options that are or may become exercisable at a weighted average exercise price of $92.34 per share. As of January
20, 2015, we had the ability to issue 19,596 shares of common stock pursuant to options that may be granted in the future under
our existing equity compensation plans. Up to 1,051,866 shares of common stock may be issued to our existing shareholders and
the standby investor pursuant to the offering. Additionally, we are obligated under the Standby Purchase Agreement to establish
the Restricted Stock Plan immediately following the offering under which a number of shares of our common stock equal to 4.0%
of the number of outstanding shares immediately after the closing of the offering will be reserved for issuance to our directors
and officers. Under NASDAQ rules, adoption of the Restricted Stock Plan must be approved by the Company’s shareholders.
Subject to applicable law, our board of
directors generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but
unissued shares of common stock for any corporate purpose, including issuance of equity-based incentives under or outside of our
equity compensation plans. Any issuance of additional shares of common stock or convertible securities will dilute the percentage
ownership interest of our shareholders, may dilute the book value per share of our common stock, and could adversely affect the
terms on which we may obtain additional capital.
In addition, as described in further detail
under “Description of Capital Stock − U.S. Treasury Warrant,” the Treasury owns a warrant to purchase 31,189.31
shares of our common stock. The warrant includes provisions providing for an adjustment of the exercise price and the number of
shares underlying the warrant if we issue common stock at or below a specified price relative to the then-current market price
of common stock. We believe that the offering will cause minimal or no adjustment to the warrant. However, if the Treasury takes
a different position or future issuances of our common stock result in adjustments to the warrant, our shareholders could experience
additional dilution.
Our ability to pay dividends and interest on our outstanding
securities is currently restricted.
We have not paid any cash dividends on
our common stock since inception, and we do not expect to pay cash dividends on our common stock for the foreseeable future. In
order to preserve capital, we have deferred interest payments on our junior subordinated debt securities and dividends on our
Series A preferred stock. Pursuant to the terms of the indenture governing the junior subordinated debt securities and our Articles
of Incorporation, as amended (the “Articles”), we may not pay any cash dividends on our common stock until we are
current on interest payments on such junior subordinated debt securities and current on dividend payments on our Series A preferred
stock. In addition, under the terms of our Written Agreement with the Reserve Bank, we may not pay cash dividends on our common
stock or certain interest payments or dividends on our other securities without the prior consent of the Reserve Bank. Accordingly,
our ability to pay dividends on our common stock will be restricted until the Written Agreement is terminated. As a bank holding
company, our ability to declare and pay dividends also depends on certain federal regulatory considerations, including the guidelines
of the Federal Reserve regarding capital adequacy and dividends. The Bank is also prohibited under the Consent Order from paying
dividends to the Company without the prior approval of the FDIC and the Virginia BFI. See “Market Price of Common Stock
and Dividend Policy − Dividends.”
The Company’s governing documents and Virginia
law contain provisions that may discourage or delay an acquisition of the Company that is supported by shareholders.
Certain provisions of the Company’s
Articles and Bylaws could delay or make a merger, tender offer or proxy contest involving the Company more difficult, even in
instances where the shareholders deem the proposed transaction to be beneficial to their interests. These provisions, among others,
provide that a plan of merger, share exchange, sale of all or substantially all of our assets, or similar transaction must be
approved and recommended by the affirmative vote of two-thirds of the directors in office or by the affirmative vote of 80% or
more of all of the votes entitled to be cast on such transaction by each voting group entitled to vote, and limit the ability
of shareholders to call a special meeting. In addition, certain provisions of state and federal law may also have the effect of
discouraging or prohibiting a future takeover attempt in which our shareholders might otherwise receive a substantial premium
for their shares over then-current market prices. To the extent that these provisions discourage or prevent takeover attempts,
they may tend to reduce the market price for the Company’s common stock.
The Company’s board of directors is authorized
to issue preferred stock without shareholder approval.
The Company’s board of directors,
without shareholder approval, is empowered under the Company’s Articles to authorize the issuance, in one or more series,
of shares of preferred stock at such times, for such purposes and for such consideration as it may deem advisable. In connection
with any such issuance, the board of directors may by resolution determine the designation, voting rights, preferences as to dividends,
in liquidation or otherwise, participation, redemption, sinking fund, conversion, dividend or other special rights to powers,
and the limitations, qualifications and restrictions of such shares of preferred stock. Such preferred stock may have voting and
conversion rights that could adversely affect the voting power of the holders of common stock and, under certain circumstances,
discourage an attempt by others to gain control of the Company.
Risks Related to Our Business
We are subject to agreements with our regulators, which
will require us to dedicate a significant amount of resources and which could otherwise adversely affect us.
In February 2012, the Bank entered into
a Consent Order with the FDIC and the Virginia BFI. Among other things, the Consent Order required the Bank to maintain Tier 1
and total risk-based capital in excess of 8% and 11%, respectively, to develop and submit plans to reduce and improve our loan
portfolio, reduce our commercial real estate concentration, maintain an appropriate allowance for loan losses, review our management
performance, and correct certain violations of law. In addition, the Consent Order requires the Bank to limit asset growth to
no more than 10% per year and maintain certain capital ratios higher than those required to be considered “well capitalized.”
The Bank has also agreed not to declare or pay any dividends, pay bonuses or make any other form of payment outside the ordinary
course of business resulting in a reduction of capital without prior regulatory approval.
In June 2012, the Company entered into
a Written Agreement with the Reserve Bank. Under the terms of the Written Agreement, the Company developed and submitted to the
Reserve Bank for approval written plans to maintain sufficient capital and correct any violations of Section 23A of the Federal
Reserve Act and Regulation W. In addition, the Company submitted a written statement of its planned sources and uses of cash for
debt service, operation expenses, and other purposes. In addition, under the terms of the Written Agreement, the Company may not
pay any dividends or repurchase any shares of its capital stock without obtaining prior approval from the Reserve Bank.
While subject to these agreements, we expect
that our management and board of directors will be required to continue to focus considerable time and attention on taking corrective
actions to comply with the terms. In addition, certain provisions of these regulatory agreements could adversely impact the Company’s
businesses and results of operations.
There also is no guarantee that we will
successfully address our regulators’ concerns in the agreements or that we will be able to comply with them. If we do not
comply with these regulatory agreements, we could be subject to the assessment of civil monetary penalties, further regulatory
sanctions or other regulatory enforcement actions.
The Company’s business has been adversely affected
by conditions in the financial markets and economic conditions generally, and could be further impacted by continued stagnation.
From December 2007 through June 2009, the
U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced.
Although economic conditions have improved, certain sectors, such as real estate, remain weak and unemployment remains relatively
high. Local governments and many businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity
in the credit markets. Market conditions also led to the failure or merger of several prominent financial institutions and numerous
regional and community-based financial institutions. These failures, as well as potential future failures, have had a significant
negative impact on the capitalization level of the Deposit Insurance Fund of the FDIC, which, in turn, has led to a significant
increase in deposit insurance premiums paid by financial institutions. Such conditions have adversely affected the credit quality
of the Company’s loans, and the Company’s results of operations and financial condition. The Company’s financial
performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans
and the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers,
is highly dependent upon the business environment in the markets where the Company operates. If economic conditions do not improve,
our financial condition and results of operations could be adversely impacted.
Improvements in economic indicators disproportionately
affecting the financial services industry may lag improvements in the general economy.
If the U.S. economy continues to improve,
the improvement of certain economic indicators, such as unemployment and real estate asset values and rents, may nevertheless
continue to lag behind the overall economy. These economic indicators typically affect certain industries, such as financial services,
more significantly. For example, improvements in commercial real estate fundamentals typically lag broad economic recovery by
12 to 18 months. The Company’s clients include entities active in these industries. Furthermore, financial services companies
with a substantial lending business are dependent upon the ability of their borrowers to make debt service payments on loans.
Should unemployment or real estate asset values fail to recover for an extended period of time, the Company could be adversely
affected.
Our mortgage banking revenue is cyclical and is sensitive
to the level of interest rates, changes in economic conditions, decreased economic activity, and slowdowns in the housing market,
any of which could adversely impact our profits.
Our mortgage banking operations have at
times contributed a large portion of our total revenues. Maintaining this revenue stream is dependent upon our ability to originate
loans and sell them to investors at or near current volumes. Loan production levels are sensitive to changes in the level of interest
rates and changes in economic conditions. Loan production levels may suffer if we experience a slowdown in the local housing market
or tightening credit conditions. Any sustained period of decreased activity caused by fewer refinancing transactions, higher interest
rates, housing price pressure or loan underwriting restrictions would adversely affect our mortgage originations and, consequently,
could significantly reduce our income from mortgage banking activities. As a result, these conditions would also adversely affect
our results of operations.
Deteriorating economic conditions may also
cause home buyers to default on their mortgages. In certain cases where we have originated loans and sold them to investors, we
may be required to repurchase loans or provide a financial settlement to investors if it is proven that the borrower failed to
provide full and accurate information on, or related to, their loan application, if appraisals for such properties have not been
acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor. Such repurchases
or settlements would adversely affect our results of operations.
Our results of operations are significantly affected
by the ability of our borrowers to repay their loans.
A significant source of risk is the possibility
that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms
of their loan agreements. Most of the Company’s loans are secured but some loans are unsecured. With respect to the secured
loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans.
Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in
the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, widespread
disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are
out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized
when it is not. The Company has adopted underwriting and credit monitoring procedures and policies, including regular reviews
of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. During
the recent recession, we sustained significant loan losses that resulted in operating losses. For the year ended December 31,
2013, we had a net loss of $(4.0) million and a net loss available to common shareholders of $(4.9) million. For the nine months
ended September 30, 2014, we had a net loss totaling $(701,000) and a net loss available to common shareholders of $(1.8) million.
For the three months ended September 30, 2014, we had net income of $134,000 and net loss available to common shareholders of
$(411,000). The net loss available to common shareholders reflects the impact of the accrued dividends on our preferred stock.
The loan losses were the result of borrowers’ inability to repay coupled with a decline in the value of the collateral,
primarily real estate. Beginning in the fourth quarter of 2012, we have been able to significantly reduce our provision for loan
losses as our loan portfolio improves. While we are encouraged by this decline in the provision for loan losses, overall asset
quality continues to be a concern as there continues to be uncertainty in the economy and the level of nonperforming assets remains
significant.
As of September 30, 2014, approximately
25.3% of the Company’s loan portfolio consisted of land acquisition, development and construction, and non-owner occupied
commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate
loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans.
Because the Company’s loan portfolio contains a significant number of construction, land acquisition and development, and
non-owner occupied commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans
could cause a significant increase in nonperforming loans. An increase in nonperforming loans could result in a net loss of earnings
from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a
material adverse effect on the Company’s financial condition and results of operations.
The Bank relies upon independent appraisals to determine
the value of the real estate which secures a significant portion of its loans and the value of foreclosed properties carried on
its books, and the values indicated by such appraisals may not be realizable if the Bank is forced to foreclose upon such loans
or liquidate such foreclosed property.
A significant portion of the Bank’s
loan portfolio consists of loans secured by real estate and the Bank still holds a significant portfolio of foreclosed properties.
The Bank relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value
and the independent appraisers may make mistakes of fact or judgment that adversely affect the reliability of their appraisals.
In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a
result of any of these factors, the real estate securing some of the Bank’s loans, and the foreclosed properties held by
the Bank, may be more or less valuable than anticipated. If a default occurs on a loan secured by real estate that is less valuable
than originally estimated, the Bank may not be able to recover the outstanding balance of the loan. The Bank may also be unable
to sell its foreclosed properties for the values estimated by their appraisals.
The Company’s credit standards and its on-going
credit assessment processes might not protect it from significant credit losses.
The Company assumes credit risk by virtue
of making loans and leases and extending loan commitments and letters of credit. We manage our credit risk through a program of
underwriting standards, the review of certain credit decisions and a continuous quality assessment process of credit already extended.
Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while
avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company’s credit administration
function employs risk management techniques to help ensure that problem loans and leases are promptly identified. While these
procedures are designed to provide us with the information needed to implement policy adjustments where necessary and to take
appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.
Purchased loans may carry a greater level of risk than
loans originated by us.
As of September 30, 2014, $22.1 million
or 7.84% of our loan portfolio consisted of purchased loans that were originated by other entities. Approximately $19.1 million
of such loans consisted of Federal Rehabilitated Student Loans that were purchased in July of 2014. These loans were originated
under the Federal Family Education Loan Program, authorized by the Higher Education Act of 1965, as amended, and carry an approximate
98% federal government guaranty as to the payment of principal and interest in the event of default. We also have $2.9 million
of loan participations purchased from other banks in our portfolio. We often pay a premium on loans that we purchase. In any instance
where we pay a premium to purchase a loan, we bear the risk that the purchased loan is repaid or defaults before we have fully-amortized
the premium, which would cause us to suffer an economic loss. Likewise, on purchased loans, we generally will not have direct
knowledge of the borrower nor will we have a history of dealing with the borrower. As a result, there is a heightened exposure
to fraud. We consider these risks in our due diligence and underwriting and attempt to mitigate these risks, but they are still
present in any situation where we purchase loans.
The Company’s allowance for loan losses may be
insufficient.
The Company maintains an allowance for
loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management’s
best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment
of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.
The level of the allowance reflects management’s
continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality;
present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination
of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company
to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing
deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional
problem loans and other factors, both within and outside the Company’s control, may require an increase in the allowance
for loan losses. In addition, bank regulatory agencies periodically review the Company’s allowance for loan losses and have
in the past required an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments
different than those of management. Further, if charge-offs in future periods exceed the allowance for loan losses, the Company
will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will
result in a decrease in net income and, possibly capital, and may have a material adverse effect on the Company’s financial
condition and results of operations.
Nonperforming assets take significant time to resolve
and adversely affect the Company’s results of operations and financial condition.
At September 30, 2014 and December 31,
2013, the Company had $23.6 million and $35.4 million of nonperforming assets, respectively, which represented 5.4% and 8.0%
of the Company’s total assets, respectively, on such dates. The Company’s nonperforming assets adversely affect its
net income in various ways. The Company generally does not record interest income on nonaccrual loans, which adversely affects
its income and increases loan administration costs. When the Company receives collateral through foreclosures and similar proceedings,
it is required to mark the related loan to the then fair market value of the collateral less estimated selling costs, which may
result in a loss. An increase in the level of nonperforming assets also increases the Company’s risk profile and may affect
the capital levels regulators believe are appropriate in light of such risks. We utilize various techniques such as workouts,
restructurings, and loan sales to manage problem assets. Increases in or negative adjustments in the value of these problem assets,
the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect our business,
results of operations, and financial condition. In addition, the resolution of nonperforming assets requires significant commitments
of time from management and staff, which can be detrimental to the performance of their other responsibilities, including origination
of new loans. There can be no assurance that the Company will avoid further increases in nonperforming loans in the future.
The Company’s focus on lending to small to mid-sized
community-based businesses may increase its credit risk.
Most of the Company’s commercial
business and commercial real estate loans are made to small business or middle market customers. These businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to
economic conditions. If general economic conditions in the market areas in which the Company operates negatively impact this important
customer sector, our results of operations and financial condition may be adversely affected. Moreover, a portion of these loans
have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle.
Any deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could
have a material adverse effect on our financial condition and results of operations.
Changes in interest rates may have an adverse effect
on the Company’s profitability.
The operations of financial institutions
such as the Company are dependent to a large degree on net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings. An institution’s net interest income is significantly
affected by market rates of interest that in turn are affected by prevailing economic conditions, by the fiscal and monetary policies
of the federal government and by the policies of various regulatory agencies. The Federal Reserve regulates the national money
supply in order to manage recessionary and inflationary pressures. In doing so, the Federal Reserve may use techniques such as
engaging in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements
against bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits. The interest
rate environment, which includes both the level of interest rates and the shape of the U.S. Treasury yield curve, has a significant
impact on net interest income and may also impact the value of the Company’s securities portfolio. Like all financial institutions,
the Company’s balance sheet is affected by fluctuations in interest rates. Volatility in interest rates can also result
in disintermediation, which is the flow of deposits away from financial institutions into direct investments, such as U.S. Government
and corporate securities and other investment vehicles, including mutual funds, which, because of the absence of federal insurance
premiums and reserve requirements, generally pay higher rates of return than bank deposit products.
An inability to improve our regulatory capital position
could adversely affect our operations.
Federal regulatory agencies are required
by law to adopt regulations defining five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. As of September 30, 2014, the Bank exceeded applicable thresholds to be considered
well capitalized; however, as a result of our Consent Order with the FDIC and Virginia BFI, the Bank currently is considered adequately
capitalized. Until we are no longer subject to the capital directives contained in the Consent Order and become well capitalized
for regulatory capital purposes, we cannot renew or accept brokered deposits without prior regulatory approval and we may not
offer interest rates on our deposit accounts that are significantly higher than the average rates in our market area. As a result,
it may be more difficult for us to attract new deposits as our existing brokered deposits mature and do not rollover, and to retain
or increase non-brokered deposits. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely
affected. As a result of being adequately capitalized, we also could be subject to more frequent examinations by FDIC, restrictions
on new branches and other potential limitations. In addition, we will pay higher insurance premiums to the FDIC, which will reduce
our earnings.
In addition, federal law establishes mandatory
and discretionary restrictions on insured depository institutions that fail to remain at least adequately capitalized, which could
include: submissions and implementations of capital plans, restrictions on payment of dividends and certain management fees, increased
supervisory monitoring, restrictions as to asset growth, and branching and new business lines without regulatory approval.
Declines in value may adversely impact our investment
portfolio.
We have not realized any non-cash, other-than-temporary
impairment charges during 2014 as a result of reductions in fair value below original cost of any investments in our investment
portfolio. However, we could be required to record future impairment charges on our investment securities if they suffer any declines
in value that are considered other-than-temporary. Considerations used to determine other-than-temporary impairment status to
individual holdings include the length of time the stock has remained in an unrealized loss position, and the percentage of unrealized
loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and
other pertinent news that would affect expectations for recovery or further decline.
The Company may not be able to meet the cash flow requirements
of its depositors and borrowers or meet its operating cash needs.
Liquidity is the ability to meet cash flow
needs on a timely basis at a reasonable cost. The liquidity of the Company is used to service its debt. The liquidity of the Bank
is used to make loans and leases and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies
and limits are established by the board of directors. The overall liquidity position of the Company and the Bank are regularly
monitored to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Funding
sources include Federal funds purchased, securities sold under repurchase agreements and non-core deposits. The Bank is a member
of the Federal Home Loan Bank of Atlanta, which provides funding through advances to members that are collateralized with mortgage-related
assets.
If the Company is unable to access any
of these funding sources when needed, we might be unable to meet customers’ needs, which could adversely impact our financial
condition, results of operations, cash flows, and level of regulatory-qualifying capital.
We may have to rely on dividends from the Bank, but the
Written Agreement prohibits payment of such dividends without prior regulatory approval.
We are a separate legal entity from the
Bank. Although we have never received any dividends from the Bank, we may need such dividends in the future to pay our operating
expenses. The Consent Order prohibits the Bank from paying dividends to us without the prior written approval of the FDIC and
the Virginia BFI. Accordingly, our ability to receive dividends from the Bank will be restricted until the Consent Order is terminated.
In addition, various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their
holding companies without regulatory approval. The Bank is also subject to limitations under state law regarding the payment of
dividends, including the requirement that the Bank not pay dividends that would reduce its capital below its applicable required
capital. In addition to these explicit limitations, it is possible, depending upon the financial condition of the Bank and other
factors, that the federal and state regulatory agencies could take the position that payment of dividends by the Bank would constitute
an unsafe or unsound banking practice. Without the payment of dividends from the Bank, we may not be able to service our future
obligations as they become due. Consequently, the inability to receive dividends from the Bank could adversely affect our financial
condition, results of operations, cash flows, and prospects.
We will be subject to more stringent capital requirements
in the future, which could adversely affect our results of operations and future growth.
In 2013, the Federal Reserve, the FDIC
and the Office of the Comptroller of the Currency approved a new rule that substantially amended the regulatory risk-based capital
rules applicable to us. The final rule implements the “Basel III” regulatory capital reforms and changes required
by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The final rule includes new minimum
risk-based capital and leverage ratios which became effective for us on January 1, 2015, and refines the definition of what constitutes
“capital” for purposes of calculating these ratios. The new minimum capital requirements are (i) a common equity Tier
1 capital ratio of 4.5% and (ii) a Tier 1 to risk-based assets capital ratio of 6%, which increased from 4%. The requirements
of a total capital ratio of 8% and a Tier 1 leverage ratio of 4% remained unchanged. The final rule also establishes a “capital
conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and when fully effective in 2019, will result
in the following minimum ratios: (a) a common equity Tier 1 capital ratio of 7.0%; (b) a Tier 1 to risk-based assets capital ratio
of 8.5%; and (c) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in
January 2016 at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution
will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital
level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can
be utilized for such activities. In addition, the final rule provides for a number of new deductions from and adjustments to capital
and prescribes a revised approach for risk weightings that could result in higher risk weights for a variety of asset categories.
The application of these more stringent
capital requirements to us could, among other things, result in lower returns on equity, require us to raise additional capital,
adversely affect our future growth opportunities, and result in regulatory actions such as a prohibition on the payment of dividends
or on the repurchase shares if we were unable to comply with such requirements.
New regulations could adversely impact our earnings due
to, among other things, increased compliance costs or costs due to noncompliance.
The Consumer Financial Protection Bureau
has issued a rule, effective as of January 10, 2014, designed to clarify for lenders how they can avoid monetary damages under
the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that
satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the new ability-to-repay standard.
Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain
specified features, including but not limited to:
| · | excessive upfront
points and fees (those exceeding 3% of the total loan amount, less “bona fide discount
points” for prime loans); |
| · | negative-amortization;
and |
| · | terms longer
than 30 years. |
Also, to be considered a “qualified mortgage,”
a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and
financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment
schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.
The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain
types of loans or loans to certain borrowers, or could make it more expensive or time consuming to make these loans, which could
adversely impact our growth or profitability.
Additionally, on December 10, 2013, five
financial regulatory agencies, including our primary federal regulator, the FDIC, adopted final rules implementing a provision
of the Dodd-Frank Act commonly referred to as the Volcker Rule. The final rules prohibit banking entities from, among other things,
engaging in short term proprietary trading of securities, derivatives, commodity futures and options on these instruments for
their own account; or owning, sponsoring, or having certain relationships with hedge funds or private equity funds, referred to
as “covered funds.” On January 14, 2014, the five financial regulatory agencies approved an adjustment to the final
rule by allowing banks to keep certain collateralized debt obligations (“CDOs”) acquired before the Volcker Rule was
finalized, if the CDOs were established before May 2010 and are backed primarily by trust preferred securities issued by banks
with less than $15 billion in assets. The rules were effective April 1, 2014, but the conformance period has been extended from
its statutory end date of July 21, 2014 until July 21, 2017. While we do not believe that the Volcker Rule will require us to
divest any securities in our portfolio, our investment strategy could be limited and our compliance costs could increase as a
result of the rule.
Holders of the Series A preferred stock currently have
the right to elect two directors to our board of directors.
On May 1, 2009, the Company issued 14,738
shares of Series A preferred stock to the United States Department of the Treasury (the “Treasury”) in connection
with the Troubled Asset Relief Program. In November 2013, we participated in a successful auction of the Series A preferred stock
by the Treasury that resulted in the purchase of the securities by private and institutional investors. This freed us from some
constraints and costs that were in place while the Treasury held the shares. However, in accordance with our Articles, because
we have failed to pay dividends on the Series A preferred stock for six dividend periods, the holders of the Series A preferred
stock are entitled to nominate up to two directors to serve on our board. We would be required to increase the size of the board
to accommodate such additional directors and holders of the Series A preferred stock, together with the holders of any outstanding
parity stock with like voting rights, voting as a single class, would be entitled to elect the two additional members of our board
of directors at the next annual meeting (or at a special meeting called for the purpose of electing these directors prior to the
next annual meeting), and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods
have been paid in full. The holders of the Series A preferred stock have not nominated directors to our board and have not indicated
to us that they plan to do so.
The Company’s dependency on its management team
and the unexpected loss of any of these personnel could adversely affect operations.
The Company’s success is, and is
expected to remain, highly dependent on our senior management team. This is particularly true because, as a community bank, we
depend on our management team’s ties to the community and customer relationships to generate business for us. The Company’s
growth will continue to place significant demands on our management, and the loss of any such person’s services may have
an adverse effect upon our growth and profitability. If the Company fails to retain, or continue to recruit, qualified employees,
our growth and profitability could be adversely affected.
The soundness of other financial institutions could adversely
affect us.
Our ability to engage in routine funding
transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services
institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry.
As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services
industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.
Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit
risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover
the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and
adversely affect our results of operations.
Changes in economic conditions and related uncertainties
may have an adverse effect on the Company’s profitability.
Commercial banking is affected, directly
and indirectly, by local, domestic, and international economic and political conditions, and by governmental monetary and fiscal
policies. Conditions such as inflation, recession, unemployment, volatile interest rates, tight money supply, real estate values,
international conflicts and other factors beyond the Company’s control may adversely affect the potential profitability
of the Company. Any future rises in interest rates, while increasing the income yield on the Company’s earnings assets,
may adversely affect loan demand and the cost of funds and, consequently, the profitability of the Company. Any future decreases
in interest rates may adversely affect the Company’s profitability because such decreases may reduce the amounts that the
Company may earn on its assets. A return to a recessionary climate could result in the delinquency of outstanding loans. Management
does not expect any one particular factor to have a material effect on the Company’s results of operations. However, downtrends
in several areas, including real estate, construction and consumer spending, could have a material adverse impact on the Company’s
profitability.
The supervision and regulation to which the Company is
subject can be a competitive disadvantage.
The operations of the Company and the Bank
are heavily regulated and will be affected by present and future legislation and by the policies established from time to time
by various federal and state regulatory authorities. In particular, the monetary policies of the Federal Reserve have had a significant
effect on the operating results of banks in the past, and are expected to continue to do so in the future. Among the instruments
of monetary policy used by the Federal Reserve to implement its objectives are changes in the discount rate charged on bank borrowings
and changes in the reserve requirements on bank deposits. It is not possible to predict what changes, if any, will be made to
the monetary policies of the Federal Reserve or to existing federal and state legislation or the effect that such changes may
have on the future business and earnings prospects of the Company.
The competition the Company faces is increasing and may
reduce our customer base and negatively impact the Company’s results of operations.
There is significant competition among
banks in the market areas served by the Company. In addition, as a result of deregulation of the financial industry, the Bank
also competes with other providers of financial services such as savings and loan associations, credit unions, consumer finance
companies, securities firms, insurance companies, the mutual funds industry, full service brokerage firms and discount brokerage
firms, some of which are subject to less extensive regulations than the Company with respect to the products and services they
provide. Some of the Company’s competitors have greater resources than the Company and, as a result, may have higher lending
limits and may offer other services not offered by our Company.
Our deposit insurance premium could be substantially
higher in the future which would have an adverse effect on our future earnings.
The FDIC insures deposits at FDIC-insured
financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance
Fund at a certain level. The recent recession increased bank failures. Further failures, or the expectation that such failures
are likely, may result in the FDIC raising deposit premiums. In addition, the deposit insurance limit on FDIC deposit insurance
coverage has increased from $100,000 to $250,000, which may result in even larger losses to the Deposit Insurance Fund. These
developments and our financial condition have caused an increase to our assessment, and the FDIC may be required to make additional
increases to the assessment rates and levy additional special assessments on us. Higher assessments increase our non-interest
expense.
Changes in accounting standards could impact reported
earnings.
The authorities that promulgate accounting
standards, including the Financial Accounting Standards Board, the Commission, and other regulatory authorities, periodically
change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial
statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial
condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively,
resulting in the restatement of financial statements for prior periods. Such changes could also require the Company to incur additional
personnel or technology costs.
Concern of customers over deposit insurance may cause
a decrease in deposits.
With the continuing news about bank failures,
customers are increasingly concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw
deposits in an effort to ensure that the amount they have on deposit with us is fully insured. Decreases in deposits may adversely
affect our liquidity, funding sources and costs and net income.
If the Company fails to maintain an effective system
of internal controls, it may not be able to accurately report its financial results or prevent fraud. As a result, current and
potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the
trading price of its common stock.
The Company has established a process to
document and evaluate its internal controls over financial reporting in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 and the related regulations, which require annual management assessments of the effectiveness of the
Company’s internal controls over financial reporting. In this regard, management has dedicated internal resources, engaged
outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal controls over financial
reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning
as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting.
The Company’s management and audit committee have made the Company’s compliance with Section 404 a high priority and
believe that its system of internal controls is effective. However, the Company cannot be certain that these measures will ensure
that the Company implements and maintains adequate controls over its financial processes and reporting in the future. Any failure
to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s
operating results or cause the Company to fail to meet its reporting obligations. If the Company fails to correct any issues in
the design or operating effectiveness of internal controls over financial reporting, or fails to prevent fraud, current and potential
shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price
of its common stock.
The Company is subject to a variety of operational risks,
including reputational risk, legal and compliance risk, and the risk of fraud or theft by employees or outsiders.
The Company is exposed to many types of
operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders,
and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting
from faulty or disabled computer or telecommunications systems. Negative public opinion can result from its actual or alleged
conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken
by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect
its ability to attract and keep customers and can expose the Company to litigation and regulatory action.
Because the nature of the financial services
business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully
rectified. The Company’s necessary dependence upon automated systems to record and process its transaction volume may further
increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult
to detect. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially
beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption
of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors
may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by
their respective employees as the Company is) and to the risk that its (or its vendors’) business continuity and data security
systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of the Company to operate
its business, potential liability to clients, reputational damage and regulatory intervention, which could adversely affect its
business, financial condition and results of operations, perhaps materially.
The Company relies on other companies to provide key
components of its business infrastructure.
Third parties provide key components of
the Company’s business infrastructure, for example, system support and network access. While the Company has selected these
third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including those
resulting from their failure to provide services for any reason or their poor performance of services, could adversely affect
the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Replacing these
third party vendors could also entail significant delay and expense.
The Company is a defendant in a variety of litigation
and other actions, which may have a material adverse effect on its financial condition and results of operation.
The Company may be involved from time to
time in a variety of litigation arising out of its business. The Company’s insurance may not cover all claims that may be
asserted against us, and any claims asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should
the ultimate judgments or settlements in any litigation exceed the Company’s insurance coverage, they could have a material
adverse effect on our financial condition and results of operations for any period. In addition, the Company may not be able to
obtain appropriate types or levels of insurance in the future, nor may the Company be able to obtain adequate replacement policies
with acceptable terms, if at all.
Consumers may increasingly decide not to use the Bank
to complete their financial transactions, which would have a material adverse impact on the Company’s financial condition
and operations.
Technology and other changes are allowing
parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers
can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose
reloadable prepaid cards. Consumers can also complete transactions such as paying bills or transferring funds directly without
the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result
in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The
loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our
financial condition and results of operations.
The Company’s operations may be adversely affected
by cyber security risks.
In the ordinary course of business, the
Company collects and stores sensitive data, including proprietary business information and personally identifiable information
of our customers and employees in systems and on networks. The secure processing, maintenance and use of this information is critical
to operations and our business strategy. The Company has invested in accepted technologies, and continually reviews processes
and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these
security measures, the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached
due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored
there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption
in operations, and damage to the Company’s reputation, which could adversely affect our business.
USE OF PROCEEDS
The proceeds to us from the offering will
depend on the number of subscription rights that are exercised by shareholders and the number of shares purchased by the standby
investor pursuant to the Standby Purchase Agreement. We estimate that the gross proceeds of the offering to us, before expenses,
will be $14,589,381, assuming that the offering is fully subscribed. The following table sets forth the calculation of our net
proceeds from the offering. Because we have not conditioned the offering on the sale of a minimum number of shares, we are presenting
this information assuming the basic subscription privilege is exercised with respect to 0%, 25%, 50% and 100% of the subscription
rights held by shareholders.
| |
0% of Basic
Subscriptions Exercised | | |
25% of Basic
Subscriptions Exercised | | |
50% of Basic
Subscriptions Exercised | | |
100% of Basic
Subscriptions Exercised | |
| |
| | |
| | |
| | |
| |
Shares sold pursuant to the basic subscription privilege (1) | |
| 0 | | |
| 262,966 | | |
| 525,933 | | |
| 1,051,866 | |
Shares issued to standby investor in exchange for preferred stock (2) | |
| 333,065 | | |
| 333,065 | | |
| 333,065 | | |
| 0 | |
Shares purchased by standby investor for cash (2)(3) | |
| 3,807 | | |
| 243,720 | | |
| 192,868 | | |
| 0 | |
Gross offering proceeds (4) | |
$ | 52,803 | | |
$ | 7,027,735 | | |
$ | 9,969,770 | | |
$ | 14,589,381 | |
Sales agents’ fees and expenses (5) | |
| 333,620 | | |
| 572,946 | | |
| 756,522 | | |
| 683,575 | |
Other offering expenses | |
| 287,500 | | |
| 287,500 | | |
| 287,500 | | |
| 287,500 | |
Net proceeds (expenses) to us | |
$ | (568,317 | ) | |
$ | 6,167,289 | | |
$ | 8,925,748 | | |
$ | 13,618,306 | |
____________
| (1) | If enough shares are purchased by shareholders through the exercise
of their basic subscription rights, there will not be sufficient shares of common stock
available to exchange all of the 9,023 shares of Series A preferred stock that the standby
investor is expected to own as of the closing date. In such a scenario, we may seek to
repurchase for cash any or all of the shares of Series A preferred stock owned by the
standby investor that are not exchanged in the offering. Prior to repurchasing shares
of Series A preferred stock for cash, we would be required to bring current the deferred
interest payments on our junior subordinated debt securities ($1,009,712 as of September
30, 2014). We would also need to obtain the prior approval of the Reserve Bank to both
bring current such deferred interest payments as well as to repurchase the shares of
our Series A preferred stock for cash. No assurances can be given that the necessary
approvals would be granted or would be granted without unacceptable conditions. |
| (2) | Assumes that the standby investor will be permitted to own a maximum
of 49% of the Company’s outstanding shares of common stock on a fully-diluted basis
after the offering without the Company incurring an “ownership change” under
Section 382(g) of the Code. The actual percentage that he will be permitted to own may
be slightly less than 49% and will depend on a number of factors that will not be known
until completion of the offering. Assumes that, in lieu of accepting cash, we elect to
exchange as many as possible of the 9,023 shares of Series A preferred stock that the
standby investor owns for shares of our common stock in the offering based on a $500.34
per share valuation for 4,023 of such shares of Series A preferred stock owned by the
standby investor as of the date of the Standby Purchase Agreement, a $516.4980 per share
valuation for 2,221 of such shares of Series A preferred stock acquired by the standby
investor on December 23, 2014 and a $525.2238 per share valuation for 2,779 of such shares
of Series A preferred stock acquired by the standby investor on February 6, 2015. The
valuations of the shares of Series A preferred stock that were acquired by the standby
investor on December 23, 2014 and February 6, 2015 were calculated based on an assumed
closing date of March 31, 2015. |
| (3) | Pursuant to the Standby Purchase Agreement, the standby investor’s
total investment (whether by purchase and/or exchange) in the offering is limited to
$8.0 million of our common stock (based on the subscription price of $13.87 per share). |
| (4) | Only cash proceeds are reflected as gross offering proceeds. |
| (5) | Payable to Compass Point Research & Trading, LLC and Boenning
& Scattergood, Inc., our sales agents. The terms of our arrangement with the sales
agents are described under “Plan of Distribution.” |
In order of priority, we intend to use
approximately $500,000 of the net proceeds to improve our capital position, approximately $5.0 million of the net proceeds to
infuse the Bank with additional capital to help achieve and maintain the capital ratios required by the Bank’s Consent Order,
and any remaining net proceeds for general corporate purposes. The following table shows the impact on the Bank’s capital
ratios assuming $5.0 million of net proceeds from the offering are contributed to the Bank. In addition to improving the following
capital ratios, such additional capital will also improve the Bank’s ratio of capital to nonperforming assets and provide
support for asset growth for the foreseeable future.
| |
Capital Ratios of Village Bank September 30, 2014 | |
| |
Actual | | |
Pro forma (1) | | |
Requirements of Consent Order | |
| |
| | |
| | |
| |
Total risk-based capital to risk-weighted assets | |
| 11.88 | % | |
| 13.60 | % | |
| 11.00 | % |
Tier 1 capital to risk-weighted assets | |
| 10.62 | % | |
| 12.35 | % | |
| — | % |
Tier 1 capital to average assets | |
| 7.11 | % | |
| 8.27 | % | |
| 8.00 | % |
____________
| (1) | Assumes we contribute to the Bank $5.0 million of the net proceeds
from the offering. |
In 2013, the Federal Reserve, the FDIC and the Office of the
Comptroller of the Currency approved a new rule implementing the “Basel III” regulatory capital reforms and changes
required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios which became effective
for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these
ratios. See “Risk Factors.”
We experienced operating losses in the
years ended December 31, 2011, 2012 and 2013 and for the nine months ended September 30, 2014, and the amount of capital needed
to improve the Bank’s capital ratios and support our future operations may increase in the event of future operating losses
or other events. We cannot assure you that we will not need to seek additional financing or engage in additional capital raising
transactions in the future. If we are unable to raise sufficient capital to meet our objectives, including our objective to provide
additional capital for the Bank to help achieve and maintain the capital ratios required by the Bank’s Consent Order, we
would expect to explore alternative methods of raising additional capital. These alternatives may include, among others, a public
offering or private placement of common stock or securities convertible into common stock, preferred stock or debt. Our board
of directors considered several alternative capital-raising methods prior to concluding that the offering was the best option
under the current circumstances. Any future issuance of additional shares of common stock or convertible securities will dilute
the percentage ownership interest of our shareholders, may dilute the book value per share of our common stock, and could adversely
affect the terms on which we are able to obtain additional capital. Such shares may also be sold at prices that are lower than
the subscription price and/or the prevailing market price of shares of our common stock, which could cause the market price of
our common stock to fall.
CAPITALIZATION
The following table presents our capitalization
as of September 30, 2014 (i) on an actual basis, and (ii) on an as-adjusted basis to give effect to (a) the sale of shares
of common stock in this offering, and (b) the exchange of as many as possible of the 9,023 shares of Series A preferred stock
that are expected to be held by the standby investor as of the closing date for shares of our common stock in the offering based
on a $500.34 per share valuation for 4,023 of such shares of Series A preferred stock owned by the standby investor as of the
date of the Standby Purchase Agreement, a $516.4980 per share valuation for 2,221 of such shares of Series A preferred stock acquired
by the standby investor on December 23, 2014 and a $525.2238 per share valuation for 2,779 of such shares of Series A preferred
stock acquired by the standby investor on February 6, 2015. The valuations of the shares of Series A preferred stock that were
acquired by the standby investor on December 23, 2014 and February 6, 2015 were calculated based on an assumed closing date of
March 31, 2015. We are presenting this information assuming the basic subscription privilege is exercised with respect to 0%,
25%, 50% and 100% of the subscription rights held by shareholders, for net expenses of $(568,317) and net proceeds of $6.17 million,
$8.93 million and $13.62 million, respectively, as set forth under “Use of Proceeds.”
The following data should be read in conjunction
with the section entitled “Use of Proceeds” and the financial information incorporated by reference in this prospectus,
including our historical financial statements and related notes.
| |
September
30, 2014 (dollars in thousands) | |
| |
Actual | | |
Pro Forma | |
| |
| | |
0% | | |
25% | | |
50% | | |
100% | |
Shareholders’ equity: | |
| | | |
| | | |
| | | |
| | | |
| | |
Preferred stock, $4.00 par value; $1,000 liquidation preference; 1,000,000 shares authorized; 14,738 shares issued and outstanding (actual); 6,795, 5,715, 5,715 and 14,738 shares issued and outstanding (pro forma) (1) | |
$ | 59 | | |
$ | 23 | | |
$ | 23 | | |
$ | 23 | | |
$ | 59 | |
Common stock, $4.00 par value; 10,000,000 shares authorized; 350,622 shares issued and outstanding (actual); 687,494, 1,190,373, 1,402,488 and 1,402,488 shares issued and outstanding (pro forma) | |
| 1,402 | | |
| 2,749 | | |
| 4,761 | | |
| 5,609 | | |
| 5,609 | |
Additional paid-in capital | |
| 58,059 | | |
| 58,165 | | |
| 62,889 | | |
| 64,799 | | |
| 67,470 | |
Retained deficit | |
| (39,829 | ) | |
| (39,829 | ) | |
| (39,829 | ) | |
| (39,829 | ) | |
| (39,829 | ) |
Common stock warrant | |
| 732 | | |
| 732 | | |
| 732 | | |
| 732 | | |
| 732 | |
Stock in directors rabbi trust | |
| (878 | ) | |
| (878 | ) | |
| (878 | ) | |
| (878 | ) | |
| (878 | ) |
Directors deferred fees obligation | |
| 878 | | |
| 878 | | |
| 878 | | |
| 878 | | |
| 878 | |
Accumulated other comprehensive loss | |
| (1,688 | ) | |
| (1,688 | ) | |
| (1,688 | ) | |
| (1,688 | ) | |
| (1,688 | ) |
Total shareholders’ equity | |
$ | 18,735 | | |
$ | 20,152 | | |
$ | 26,888 | | |
$ | 29,646 | | |
$ | 32,353 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Consolidated Capital Ratios: | |
| | | |
| | | |
| | | |
| | | |
| | |
Total capital to risk-weighted assets | |
| 11.15 | % | |
| 11.63 | % | |
| 13.93 | % | |
| 14.87 | % | |
| 15.80 | % |
Tier 1 capital to risk-weighted assets | |
| 7.47 | % | |
| 7.95 | % | |
| 10.25 | % | |
| 11.20 | % | |
| 12.12 | % |
Tier 1 capital to average assets | |
| 5.02 | % | |
| 5.35 | % | |
| 6.89 | % | |
| 7.53 | % | |
| 8.15 | % |
(Footnote
appears on the following page)
____________
| (1) | Assumes that, in lieu of accepting cash, we elect to exchange
as many as possible of the 9,023 shares of Series A preferred stock that the standby
investor owns for shares of our common stock in the offering based on a $500.34 per share valuation for 4,023 of such shares of Series A
preferred stock owned by the standby investor as of the date of the Standby Purchase
Agreement, a $516.4980 per share valuation for 2,221 of such shares of Series A preferred
stock acquired by the standby investor on December 23, 2014 and a $525.2238 per share
valuation for 2,779 of such shares of Series A preferred stock acquired by the standby
investor on February 6, 2015. The valuations of the shares of Series A preferred stock
that were acquired by the standby investor on December 23, 2014 and February 6, 2015
were calculated based on an assumed closing date of March 31, 2015. If enough shares
are purchased by shareholders through the exercise of their basic subscription rights,
there will not be sufficient shares of common stock available to exchange all of the
9,023 shares of Series A preferred stock that the standby investor owns. In such a scenario,
we may seek to repurchase for cash any or all of the shares of Series A preferred stock
owned by the standby investor that are not exchanged in the offering. Prior to repurchasing
shares of Series A preferred stock for cash, we would be required to bring current the
deferred interest payments on our junior subordinated debt securities ($1,009,712 as
of September 30, 2014). We would also need to obtain the prior approval of the Reserve
Bank to both bring current such deferred interest payments as well as to repurchase the
shares of our Series A preferred stock for cash. No assurances can be given that the
necessary approvals would be granted or would be granted without unacceptable conditions.
Assumes that the standby investor will be permitted to own a maximum of 49% of the Company’s
outstanding shares of common stock on a fully-diluted basis after the offering without
the Company incurring an “ownership change” under Section 382(g) of the Code.
The actual percentage that he will be permitted to own may be slightly less than 49%
and will depend on a number of factors that will not be known until completion of the
offering. Pursuant to the Standby Purchase Agreement, the standby investor’s total
investment (whether by purchase and/or exchange) in the offering is limited to $8.0 million
of our common stock (based on the subscription price of $13.87 per share). |
DILUTION
Dilution represents the difference between
the amount per share paid by purchasers of common stock in the offering and the tangible common equity per share of common stock
immediately after the offering. The following table presents the tangible common equity of the Company as of September 30, 2014
(i) on an actual basis, and (ii) on an as-adjusted basis to give effect to (a) the sale of shares of common stock in this
offering, and (b) the exchange of as many as possible of the 9,023 shares of Series A preferred stock held by the standby
investor for shares of our common stock in the offering based on a $500.34 per share valuation for 4,023 of such shares of Series
A preferred stock owned by the standby investor as of the date of the Standby Purchase Agreement, a $516.4980 per share valuation
for 2,221 of such shares of Series A preferred stock acquired by the standby investor on December 23, 2014 and a $525.2238 per
share valuation for 2,779 of such shares of Series A preferred stock acquired by the standby investor on February 6, 2015. The
valuations of the shares of Series A preferred stock that were acquired by the standby investor on December 23, 2014 and February
6, 2015 were calculated based on an assumed closing date of March 31, 2015. We are presenting this information assuming
the basic subscription privilege is exercised with respect to 0%, 25%, 50% and 100% of the subscription rights held by shareholders,
for net expenses of $(568,317) and net proceeds of $6.17 million, $8.93 million and $13.62 million, respectively, as set forth
under “Use of Proceeds.”
| |
September 30, 2014 | |
| |
(dollars in thousands except per share amounts) | |
| |
Actual | | |
Pro Forma | |
| |
| | |
0% | | |
25% | | |
50% | | |
100% | |
| |
| | |
| | |
| | |
| | |
| |
Total equity | |
$ | 18,735 | | |
$ | 18,735 | | |
$ | 18,735 | | |
$ | 18,735 | | |
$ | 18,735 | |
Preferred equity (1) | |
| (14,738 | ) | |
| (5,715 | ) | |
| (5,715 | ) | |
| (5,715 | ) | |
| (14,738 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Common equity | |
| 3,997 | | |
| 13,020 | | |
| 13,020 | | |
| 13,020 | | |
| 3,997 | |
Intangibles | |
| (222 | ) | |
| (222 | ) | |
| (222 | ) | |
| (222 | ) | |
| (222 | ) |
Net proceeds (expenses) to us | |
| 0 | | |
| (568 | ) | |
| 6,167 | | |
| 8,926 | | |
| 13,618 | |
Dividends forgiven on Series A preferred stock (1) | |
| 0 | | |
| 1,986 | | |
| 1,986 | | |
| 1,986 | | |
| 0 | |
Tangible common equity | |
$ | 3,775 | | |
$ | 14,215 | | |
$ | 20,951 | | |
$ | 23,710 | | |
$ | 17,393 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Shares of common stock outstanding (1) | |
| 350,622 | | |
| 687,494 | | |
| 1,190,373 | | |
| 1,402,488 | | |
| 1,402,488 | |
Tangible common equity per share | |
$ | 10.77 | | |
$ | 20.68 | | |
$ | 17.60 | | |
$ | 16.91 | | |
$ | 12.40 | |
Offering price per share | |
$ | 13.87 | | |
$ | 13.87 | | |
$ | 13.87 | | |
$ | 13.87 | | |
$ | 13.87 | |
Dilution (accretion) per share | |
$ | 3.10 | | |
$ | (6.81 | ) | |
$ | (3.73 | ) | |
$ | (3.04 | ) | |
$ | 1.47 | |
____________
| (1) | Assumes that, in lieu of accepting cash, we elect to exchange
as many as possible of the 9,023 shares of Series A preferred stock that the standby
investor owns for shares of our common stock in the offering based on a $500.34 per share
valuation for 4,023 of such shares of Series A preferred stock owned by the standby investor
as of the date of the Standby Purchase Agreement, a $516.4980 per share valuation for
2,221 of such shares of Series A preferred stock acquired by the standby investor on
December 23, 2014 and a $525.2238 per share valuation for 2,779 of such shares of Series
A preferred stock acquired by the standby investor on February 6, 2015. The valuations
of the shares of Series A preferred stock that were acquired by the standby investor
on December 23, 2014 and February 6, 2015 were calculated based on an assumed closing
date of March 31, 2015. If enough shares are purchased by shareholders through the exercise
of their basic subscription rights, there will not be sufficient shares of common stock
available to exchange all of the 9,023 shares of Series A preferred stock that the standby
investor owns. In such a scenario, we may seek to repurchase for cash any or all of the
shares of Series A preferred stock owned by the standby investor that are not exchanged
in the offering. Prior to repurchasing shares of Series A preferred stock for cash, we
would be required to bring current the deferred interest payments on our junior subordinated
debt securities ($1,009,712 as of September 30, 2014). We would also need to obtain the
prior approval of the Reserve Bank to both bring current such deferred interest payments
as well as to repurchase the shares of our Series A preferred stock for cash. No assurances
can be given that the necessary approvals would be granted or would be granted without
unacceptable conditions. Assumes that the standby investor will be permitted to own a
maximum of 49% of the Company’s outstanding shares of common stock on a fully-diluted
basis after the offering without the Company incurring an “ownership change”
under Section 382(g) of the Code. The actual percentage that he will be permitted to
own may be slightly less than 49% and will depend on a number of factors that will not
be known until completion of the offering. Pursuant to the Standby Purchase Agreement,
the standby investor’s total investment (whether by purchase and/or exchange) in
the offering is limited to $8.0 million of our common stock (based on the subscription
price of $13.87 per share). |
As the table above shows, the proposed
exchange of the standby investor’s Series A preferred stock for common stock, and the associated forgiveness of accrued
dividends on such shares of Series A preferred stock, would cause the offering to be accretive to tangible common equity. If,
however, we are unable to exchange some or all of the standby investor’s shares of Series A preferred stock for common stock,
purchasers of common stock in the offering may experience immediate dilution on new shares based on the difference between pro
forma tangible common equity per share and the subscription price per share.
THE OFFERING
The Subscription Rights
We are distributing, at no charge, to the
record holders of our shares of common stock as of January 20, 2015, non-transferable subscription rights to purchase up to an
aggregate of 1,051,866 shares of our common stock at the subscription price.
Each eligible holder of record of shares
of our common stock will receive one subscription right to purchase three shares of common stock for each share of common stock
owned by such holder as of 5:00 p.m., Eastern Time, on the record date. Each subscription right will entitle the holder to a basic
subscription privilege and an oversubscription privilege.
We intend to keep the offering open until
March 20, 2015, unless our board of directors, in its sole discretion, extends the offering period for up to 30 days until April
19, 2015.
The Subscription Privilege
The basic subscription privilege of each
subscription right entitles you to purchase three shares of our common stock, upon delivery of the required documents and payment
of the subscription price, prior to the expiration of the offering. You will receive one subscription right for each share of
our common stock you own as of 5:00 p.m., Eastern Time, on the record date. You may exercise all or a portion of your basic subscription
privilege; however, if you exercise less than your full basic subscription privilege, you will not be entitled to purchase shares
under your oversubscription privilege.
We will not issue fractional shares of
common stock in the offering, and holders will only be entitled to purchase a whole number of shares of common stock, rounded
down to the nearest whole number that a holder would otherwise be entitled to purchase, with the total subscription payment being
adjusted accordingly. Any excess subscription payments received by the subscription agent will be returned promptly, without interest
or penalty.
Oversubscription Privilege
If you purchase all of the shares of our
common stock available to you pursuant to your basic subscription privilege, you may also subscribe to purchase additional shares
should they be available after purchases by (i) all shareholders exercising their basic subscription privilege and (ii) the standby
investor under the Standby Purchase Agreement. However, the oversubscription privilege will only be offered for an aggregate number
of shares that, when combined with the number of shares purchased pursuant to the shareholders’ basic subscription privilege
and by the standby investor, does not exceed 1,051,866 shares. We can provide no assurances that you will actually be able to
purchase any shares of common stock upon the exercise of your oversubscription privilege.
In order to properly exercise your oversubscription
privilege, you must deliver the subscription payment related to your oversubscription privilege prior to the expiration of the
offering. Because we will not know the total number of unsubscribed shares prior to the expiration of the offering, if you wish
to maximize the number of shares you purchase pursuant to your oversubscription privilege, you will need to deliver payment in
an amount equal to the aggregate subscription price for the maximum number of shares of our common stock that may be available
to you (i.e., assuming you fully exercise your basic subscription privilege and are allotted the full amount of your oversubscription
as elected by you).
If oversubscription requests exceed the
number of shares of common stock available for sale after purchases by (i) all shareholders exercising their basic subscription
privilege and (ii) the standby investor under the Standby Purchase Agreement, then we will allocate the available shares of common
stock among shareholders who oversubscribed as we deem appropriate. When determining how to allocate such remaining shares, we
may give priority to those oversubscription purchasers that we believe will develop future business relationships with us, refer
business to us or purchase additional shares of our common stock on the open market after the closing of the offering.
We will credit the account of each rights
holder with shares of our common stock purchased pursuant to the exercise of the oversubscription privilege as soon as practicable
after the offering has expired.
To the extent the aggregate subscription
price of the maximum number of unsubscribed shares available to you pursuant to the oversubscription privilege is less than the
amount you actually paid in connection with the exercise of the oversubscription privilege, you will be allocated only the number
of unsubscribed shares available to you, and any excess subscription payments received by the subscription agent will be returned
to you, without interest or penalty, as soon as practicable. To the extent the amount you actually paid in connection with the
exercise of the oversubscription privilege is less than the aggregate subscription price of the maximum number of unsubscribed
shares available to you pursuant to the oversubscription privilege, you will be allocated the number of unsubscribed shares for
which you actually paid in connection with the oversubscription privilege.
Limitations on Amount You May Purchase
Other than the standby investor or any
shareholder that owns, as of the date of this prospectus, more than 5% of our common stock, a person or entity may not exercise
subscription rights (including the oversubscription privilege) to purchase shares of our common stock that, when aggregated with
their existing ownership, would result in such person or entity, together with any of the following related persons or entities,
owning 5% or more of our issued and outstanding shares of common stock following the offering, or that would otherwise require
regulatory approval:
| · | your
immediate family, including your spouse, father, mother, stepfather, stepmother, brother,
sister, stepbrother, stepsister, son, daughter, stepson, stepdaughter, grandparent, grandson,
granddaughter, father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law,
daughter-in-law, and the spouse of any of the foregoing; |
| · | companies,
partnerships, trusts, or other entities in which you are a trustee, have a controlling
beneficial interest, or hold a senior management position; or |
| · | other
persons who may be your associates or persons acting in concert with you. |
The term “associate” is used above to indicate
any of the following relationships with a person:
| · | any
corporation or organization, other than the company or a subsidiary thereof, of which
a person is a senior officer or partner, or beneficially owns, directly or indirectly,
10% or more of any class of equity securities of the corporation or organization; |
| · | any
trust or other estate, if the person has a substantial beneficial interest in the trust
or estate or is a trustee or fiduciary of the estate (although a person who has a substantial
beneficial interest in one of our tax-qualified or non-tax-qualified employee plans,
or who is a trustee or fiduciary of the plan is not an associate of the plan, and our
tax-qualified employee plans are not associates of a person); |
| · | any
person who is related by blood or marriage to such person and who is a director or senior
officer of the company or a subsidiary thereof; and |
| · | any
person acting in concert with the persons or entities specified above. |
A person or company that acts in concert
with another person, company, or other party shall also be deemed to be acting in concert with any person or company who is also
acting in concert with that other party, except that any tax-qualified employee plan will not be deemed to be acting in concert
with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the
trustee and stock held by the plan will be aggregated.
Any person or entity, together with related
persons or entities, that exercises subscription rights (including the oversubscription privilege) to purchase shares of our common
stock that, when aggregated with their existing ownership, results in such person or entity, together with any related persons
or entities, owning 3% or more of our issued and outstanding shares of common stock following the offering will be required to
enter into an agreement prohibiting such person or entity from purchasing additional shares that would result in such person or
entity owning more than 5% of our common stock.
In addition, we will not issue shares of
common stock pursuant to the exercise of the basic subscription privilege or the oversubscription privilege to any shareholder
who, in our sole opinion, could be required to obtain prior clearance or approval from or submit a notice to any state or federal
bank regulatory authority to acquire, own, or control such shares, or if other regulatory approvals may be required. If we elect
not to issue shares in such case, such shares will become available to satisfy any oversubscription by other shareholders pursuant
to their oversubscription privilege.
Furthermore, the Standby Purchase Agreement
requires that we not accept any subscriptions or oversubscriptions that we believe may have an unfavorable effect on our ability
to preserve our net operating loss deferred tax asset. Notwithstanding any other information presented in this prospectus, we
do not intend to accept any oversubscriptions that we believe may have an unfavorable effect on our ability to preserve our net
operating loss deferred tax asset. For more information, see the section of this prospectus entitled “Our Net Operating
Loss Deferred Tax Asset” on page 56.
Uncertified Delivery of Shares of Common Stock Acquired
in the Offering
All shares of our common stock that you
purchase in the offering will be issued electronically in book-entry (uncertificated) form. If you are a shareholder of record
as of the record date and purchase shares in the offering by submitting a subscription rights certificate, other subscription
materials, and payment, we will issue the new shares as soon as practicable after the completion of the offering, and you will
receive confirmation from the subscription agent by mail that your shares were electronically issued. If, as of the record date,
your shares were held by a custodian bank, broker, dealer, or other nominee, and you participate in the offering, your custodian
bank, broker, dealer, or other nominee will be credited with the shares of common stock you purchase in the offering as soon as
practicable after the completion of the offering, and your nominee will credit your account with such shares. Until your shares
have been issued in book-entry form or your account is credited with such shares, you may not be able to sell your shares.
Reasons for the Offering
We are conducting the offering to improve
our capital position, provide additional capital for the Bank to help achieve and maintain the capital ratios required
by the Bank’s Consent Order, and for general corporate purposes. If sufficient proceeds are generated in the offering, we
intend to contribute to the Bank approximately $5.0 million of additional capital. If contributed to the Bank, such capital will
cause the Bank’s regulatory capital ratios to exceed the thresholds required by the Consent Order and exceed the capital
levels established under the prompt corrective action regulations for well-capitalized institutions. See “Summary −
Village Bank and Trust Financial Corp.” Such capital will also improve the Bank’s ratio of capital to nonperforming
assets and provide support for asset growth for the foreseeable future. We believe that raising additional capital is prudent
in light of current market conditions and the related impact on our financial condition. Our board of directors has chosen to
raise capital through a rights offering to give our shareholders the opportunity to prevent ownership dilution by acquiring additional
shares of common stock in the offering. Our board of directors also considered several alternative capital-raising methods prior
to concluding that the offering was the best option under the current circumstances. We believe that the offering will strengthen
our financial condition by raising additional capital; however, our board of directors is making no recommendation regarding your
exercise of the subscription rights. We cannot assure you that we will not need to seek additional financing or engage in additional
capital offerings in the future.
Effect of Offering on Existing Shareholders
The ownership interests and voting interests
of the existing shareholders that do not fully exercise their basic subscription privilege may be significantly diluted. For more
information, see below under the heading “− Outstanding Shares of Common Stock After the Offering.”
Insider Participation
Certain of our directors and officers have
indicated that they intend to participate in the offering, although they are not required to do so. Collectively, we expect our
directors and officers, together with their affiliates, to purchase up to approximately 92,000 shares in the offering for an aggregate
investment of approximately $1,276,040. As of the record date, our directors and officers, together with their affiliates, beneficially
own approximately 105,512 shares of common stock (excluding shares underlying options) and are entitled to purchase approximately
316,536 shares in the offering by exercising their respective basic subscription privileges on the same terms and conditions applicable
to all shareholders. Following the offering, our directors and officers, together with their affiliates, are expected to own an
aggregate of approximately 197,512 shares of common stock, or approximately 14.1% of our total outstanding shares of common stock
if we sell, or exchange for shares of Series A preferred stock, all 1,051,866 shares offered in the offering.
Although directors and officers will be
investing their own money in the offering, our board of directors makes no recommendation regarding your exercise of the subscription
rights. You are urged to make your decision based on your own assessment of our common stock, our business, and the offering.
Method of Exercising Subscription rights
The exercise of subscription rights is
irrevocable and may not be cancelled or modified. You may exercise your subscription rights as follows:
Subscription by Record Holders
If you are a record holder of our common
stock, the number of rights you may exercise pursuant to the basic subscription privilege will be indicated on the subscription
rights certificate delivered to you. You may exercise your subscription rights by (i) properly completing and executing the subscription
rights certificate and forwarding it to the subscription agent at the address set forth below in this section under the heading
“− Subscription Agent,” and (ii) delivering your full subscription payment to the subscription agent through
the method described below in this section under the heading “− Payment Method” and in the subscription materials,
each prior to the expiration of the offering.
Subscription by Beneficial Owners
If your shares of common stock are held
in the name of a broker, dealer, custodian bank, or other nominee, you are a beneficial owner of our shares of common stock and
will not receive a subscription rights certificate. Instead, one subscription right will be issued to the nominee record holder
for each share of our common stock that you own as of the record date, and you will receive an instruction form to exercise your
subscription rights through the nominee record holder. Each subscription right entitles you to purchase three shares of our common
stock at the subscription price. We will ask your nominee record holder to notify you of the offering. If you are not contacted
by your broker, dealer, custodian bank, or other nominee but believe you are entitled to subscription rights, you should promptly
contact your broker, dealer, custodian bank, or other nominee in order to subscribe for shares of our common stock in the offering.
If you hold your shares of our common stock
in the name of a broker, dealer, custodian bank, or other nominee, your nominee must exercise the subscription rights on your
behalf in accordance with your instructions. Your nominee may establish a deadline that may be before the 5:00 p.m., Eastern Time,
March 20, 2015 expiration date we have established for the offering, by which you must provide it with your instructions to exercise
your subscription rights and pay for your shares. We are not responsible if you do not receive notice from your broker, dealer,
custodian bank, or other nominee or if you do not receive notice in time to respond to your nominee by the deadline established
by the nominee.
If you have any questions regarding completing
a subscription rights certificate or submitting payment in the offering, please contact our sales agents, Compass Point Research
& Trading, LLC and Boenning & Scattergood, Inc., at (216) 378-1297. If you have any general questions regarding the offering,
the Company, or the Bank, please contact our Chief Financial Officer, C. Harril Whitehurst, Jr., at (804) 419-1232.
If you wish to participate in the offering,
you must deliver your payment along with your properly completed and signed subscription rights certificate, and any other subscription
materials, to the subscription agent. Payments must be made in full in U.S. dollars for the full number of shares for which you
are subscribing by:
| · | personal
check payable to “Computershare, Inc., as Subscription Agent for Village Bank and
Trust Financial Corp.” drawn upon a U.S. bank; or |
| · | certified
check payable to “Computershare, Inc., as Subscription Agent for Village Bank and
Trust Financial Corp.” drawn upon a U.S. bank. |
Payments made by check, as described above,
should be delivered to Computershare, Inc., the subscription agent, as follows:
If by registered certified or express mail, to:
Computershare Trust Company, N.A.
c/o Voluntary Corporation Actions
P.O. Box 43011
Providence, RI 02940
If by courier, to:
Computershare Trust Company, N.A.
c/o Voluntary Corporate Actions
250 Royall Street Suite V
Canton, MA 02021
Payment received after the expiration of
the offering will not be honored, and the subscription agent will return your payment to you, without interest or penalty, as
soon as practicable. The subscription agent will be deemed to receive payment upon:
| · | receipt
by the subscription agent and clearance of a personal check drawn upon a U.S. bank; |
| · | receipt
by the subscription agent of a certified check drawn upon a U.S. bank; or |
| · | receipt
of collected funds in the subscription agent’s escrow account. |
Please note that funds paid by personal
check may take seven or more business days to clear. Accordingly, if you wish to pay by means of a personal check, we urge you
to make payment sufficiently in advance of the expiration date to ensure that the subscription agent receives cleared funds before
that time. We also urge you to consider payment by means of a certified check drawn upon a U.S. bank in order to expedite the
receipt of your payment.
You should read the instruction letter
accompanying the subscription rights certificate carefully and strictly follow it. DO NOT SEND SUBSCRIPTION RIGHTS CERTIFICATES
OR PAYMENTS TO THE COMPANY OR THE BANK. We are not responsible for subscription materials sent directly to our offices. We
will not consider your subscription received until the subscription agent has received delivery of a properly completed and duly
executed subscription rights certificate and payment of the full subscription amount. The method of delivery of subscription rights
certificates and payment of the subscription amount to the subscription agent will be at the risk of the holders of subscription
rights. If sent by mail, we recommend that you send certificates and payments by overnight courier or by registered mail, properly
insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the subscription
agent and clearance of payment prior to the expiration of the offering.
Medallion Guarantee May Be Required
Your signature on each subscription rights
certificate must be guaranteed by an “eligible guarantor institution,” as such term is defined in Rule 17Ad-15 of
the Exchange Act, subject to any standards and procedures adopted by the subscription agent, unless:
| · | your
subscription rights certificate provides that shares are to be issued to you as record
holder of those subscription rights, as imprinted on the face of the subscription rights
certificate; or |
| · | you
are an eligible institution. |
You can obtain a signature guarantee from
a financial institution, such as a commercial bank, savings and loan association, brokerage firm, or credit union that participates
in one of the Medallion signature guarantee programs. The three Medallion signature guarantee programs are the following:
| · | Securities
Transfer Agents Medallion Program, or STAMP, whose participants include more than 7,000
U.S. and Canadian financial institutions; |
| · | Stock
Exchanges Medallion Program, or SEMP, whose participants include the regional stock exchange
member firms and clearing and trust companies; and |
| · | New
York Stock Exchange Medallion Signature Program, or MSP, whose participants include NYSE
member firms |
If a financial institution is not a member
of a recognized Medallion signature guarantee program, it would not be able to provide signature guarantees. Also, if you are
not a customer of a participating financial institution, it is likely the financial institution will not guarantee your signature.
Therefore, the best source of a Medallion Guarantee would be a bank, savings and loan association, brokerage firm, or credit union
with which you do business. The participating financial institution will use a Medallion imprint or stamp to guarantee the signature,
indicating that the financial institution is a member of a Medallion signature guarantee program and is an acceptable signature
guarantor.
Subscription Agent
The subscription agent for this offering
is Computershare, Inc. Subscription documents and subscription rights certificates should be delivered to Computershare, Inc.
as follows:
If by registered certified or express mail, to:
Computershare Trust Company, N.A.
c/o Voluntary Corporation Actions
P.O. Box 43011
Providence, RI 02940
If by courier, to:
Computershare Trust Company, N.A.
c/o Voluntary Corporate Actions
250 Royall Street Suite V
Canton, MA 02021
You are solely responsible for completing
delivery to the subscription agent of your subscription materials. The subscription materials are to be received by the subscription
agent on or prior to 5:00 p.m., Eastern Time, on March 20, 2015. We urge you to allow sufficient time for delivery of your subscription
materials to the subscription agent. If you deliver subscription materials in a manner different from those described in this
prospectus, we may not honor the exercise of your subscription rights.
Missing or Incomplete Subscription Information
If you do not indicate the number of subscription
rights being exercised, or the subscription agent does not receive the full subscription payment for the number of subscription
rights that you indicate are being exercised, then you will be deemed to have exercised the maximum number of subscription rights
that may be exercised with the aggregate subscription payment you delivered to the subscription agent. If the subscription agent
does not apply your full subscription payment to your purchase of our shares of common stock, any excess subscription payment
received by the subscription agent will be returned promptly, without interest or penalty.
Expiration Date, Extensions
The period during which you may exercise
your subscription rights expires at 5:00 p.m., Eastern Time, on March 20, 2015, which is the expiration of the offering period.
If you do not exercise your subscription rights prior to that time, your subscription rights will expire and will no longer be
exercisable. We will not be required to issue shares of common stock to you if the subscription agent receives your subscription
rights certificate and subscription payment after that time, regardless of when the subscription rights certificate and subscription
payment were sent by you. We have the option to extend the offering period for up to 30 days until April 19, 2015, although we
do not presently intend to do so. We may extend the offering period by giving oral or written notice to the subscription agent
prior to the expiration of the offering period. If we elect to extend the offering period, we will issue a press release announcing
such extension no later than 9:00 a.m., Eastern Time, on the next business day after the most recently announced expiration date
of the offering.
Determination of Subscription Price
The board of directors and the standby
investor agreed in the Standby Purchase Agreement that the subscription price would be determined by dividing “Modified
Tangible Book Value” by the number of shares of common stock outstanding as of the month-end prior to declaration of effectiveness
of the registration statement of which this prospectus is a part (the “Determination Date”). The term “Modified
Tangible Book Value” is defined in the Standby Purchase Agreement to mean the Company’s total consolidated equity
as of the Determination Date (i) less preferred shareholder equity included in total consolidated equity on that date, (ii) less
intangible assets recorded on the balance sheet on that date, (iii) plus dividends accrued from October 1, 2014 through the
Determination Date on the shares owned by the standby investor, (iv) plus dividends accrued from October 1, 2014 through the Determination
Date on any additional shares of Series A preferred stock purchased by the standby investor in addition to the 4,023 shares he
owned as of the date of the Standby Purchase Agreement (the “Purchased TARP Shares”), (v) plus dividends accrued from
October 1, 2014 through the Determination Date on any shares of Series A preferred stock redeemed by the Company (the “Redeemed
TARP Shares”), and (vi) less the “TARP Purchase Premium.” The term “TARP Purchase Premium” is defined
in the Standby Purchase Agreement to mean the product determined by multiplying (x) the price per Purchased TARP Share paid by
the standby investor, as applicable, less $500.34 and (y) the number of Purchased TARP Shares plus 4,023. The standby investor
acquired an additional 2,221 shares of Series A preferred stock on December 23, 2014 for $509.656 per share, as well as an additional
2,779 shares of Series A preferred stock on February 6, 2015 for $521.44 per share.
In negotiating the formula for determining
the subscription price, our board of directors consulted with our sales agents and considered a number of factors, including the
need to offer the shares at a price that would be attractive to investors relative to the then current trading price of our common
stock, the tangible book value of a share of our common stock, historical and current trading prices of our common stock, general
conditions in the financial services industry, the need for capital and alternatives available to us for raising capital, potential
market conditions, and the desire to provide an opportunity to our shareholders to participate in the offering on a pro rata basis.
In conjunction with its review of these factors, our board of directors also reviewed our history and prospects, including our
past and present earnings, our prospects for future earnings, and the outlook for our industry, our current financial condition
and regulatory status, and a range of discounts to market value represented by the subscription prices in various other rights
offerings.
You should not consider the subscription
price as an indication of value of our company or our common stock. You should not assume or expect that, after the offering,
our shares of common stock will trade at or above the subscription price in any given time period. The market price of our common
stock may decline during or after the offering, and you may not be able to sell the shares of our common stock purchased during
the offering at a price equal to or greater than the subscription price. You should obtain a current quote for our common stock
before exercising your subscription rights and make your own assessment of our business and financial condition, our prospects
for the future, and the terms of the offering. On February 9, 2015, the last reported sale price of our common stock was $18.47
per share.
Amendment or Cancellation
We reserve the right to amend or cancel
the offering at any time and for any reason. We may cancel the offering, in whole or in part, if at any time before completion
of the offering there is any judgment, order, decree, injunction, statute, law, or regulation entered, enacted, amended, or held
to be applicable to the offering that in the sole judgment of our board of directors would or might make the offering or its completion,
whether in whole or in part, illegal or otherwise restrict or prohibit completion of the offering. We may waive any of these conditions
and choose to proceed with the offering even if one or more of these events occur. If we cancel the offering, we will issue a
press release notifying shareholders of the cancellation and all subscription payments received by the subscription agent will
be returned promptly, without interest or penalty.
Sales Agents
Compass Point Research & Trading, LLC
and Boenning & Scattergood, Inc. have been engaged to assist us in selling the shares on a best efforts basis. The sales agents
are each broker-dealers registered with the Financial Industry Regulatory Authority (“FINRA”). The sales agents have
agreed to assist in the offering by among other things, consulting as to the structure of the offering, helping identify potential
standby investors including the standby investor, reviewing all offering documents, including this prospectus, stock order forms
and related offering materials, assisting in the design and implementation of a marketing strategy for the offering, assisting
management in scheduling and preparing for meetings with potential investors and providing such other general advice and assistance
as may be reasonably necessary to complete the offering. The sales agents are not required to purchase any shares in the offering,
but will use their best efforts to sell the shares offered.
The sales agents express no opinion and
make no recommendation to holders of the subscription rights as to the purchase by any person of shares of common stock in the
offering. The sales agents also express no opinion as to the prices at which shares to be distributed in connection with the offering
may trade if and when they are issued or at any future time.
As compensation for their financial advisory
services, we have agreed to pay to the sales agents the following consideration:
| · | A
retainer fee equal to $40,000, which was paid at the time of execution of the engagement
letter among the sales agents and the Company and will be credited towards the expense
reimbursement due to the sales agents; |
| · | Two
percent (2%) of the gross proceeds from shares sold to shareholders exercising their
basic subscription privilege; |
| · | An
additional two percent (2%) of the gross proceeds from shares sold to shareholders exercising
their basic subscription privilege, if shareholders purchase, in the aggregate, 35% of
the shares available through the exercise of their basic subscription privilege; |
| · | Five
percent (5%) of the gross proceeds from shares sold to shareholders exercising their
oversubscription privilege; and |
| · | Five
percent (5%) of the gross proceeds from shares sold to the standby investor. |
The fees described above will be divided
between the sales agents as described in the sales agency agreement. In addition to such fees, we have agreed to reimburse the
sales agents for their reasonable out-of-pocket expenses, not to exceed $100,000 (including the amount of the retainer fee), incurred
in connection with their engagement, subject to certain limitations depending on the aggregate amount of shares sold in connection
with the offering.
We have also agreed to indemnify the sales
agents and certain of their affiliated persons against certain claims, liabilities and expenses arising in connection with the
offering, or contribute to payments they may be required to make in respect thereof.
The sales agents and their respective affiliates
are financial institutions engaged in various activities, which may include investment banking, securities trading, financial
advisory, investment management, investments, hedging, financing, and brokerage activities. The sales agents and certain of their
affiliates have in the past provided, and they may from time to time in the future provide, certain financial advisory, investment
banking, or other services to us, for which they in the past received, and may in the future receive, customary fees and reimbursement
for their expenses. In the ordinary course of its business as a broker-dealer, the sales agents may purchase securities from and
sell securities to the Company and its affiliates. The sales agents may also actively trade the equity or debt securities of the
Company or its affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
Fees and Expenses
We will pay all fees charged by the subscription
agent and the sales agents. If you exercise your subscription rights through your broker, dealer, custodian bank, or other nominee,
you are responsible for paying any fees your nominee may charge you.
Notice to Nominees
If you are a broker, dealer, custodian
bank, or other nominee that holds shares of our common stock for the account of others on the record date, you should notify the
beneficial owners of the shares for whom you are the nominee of the offering as soon as possible to learn their intentions with
respect to exercising their subscription rights. You should obtain instructions from the beneficial owner, as set forth in the
instructions we have provided to you for your distribution to beneficial owners. If the beneficial owner so instructs, you should
submit subscription information and payment for shares. If you hold shares of our common stock for the account(s) of more than
one beneficial owner, you may exercise the number of subscription rights to which all beneficial owners in the aggregate otherwise
would have been entitled had they been direct holders of our common stock on the record date, provided that you, as a nominee
record holder, make a proper showing to the subscription agent by submitting the form entitled “Nominee Holder Certification”
which is provided with your offering materials.
Procedures for The Depository Trust & Clearing Corporation
Participants
We expect that subscription rights may
be exercised through the facilities of DTC. If your subscription rights are held of record through DTC, you may exercise your
subscription rights for each beneficial holder by instructing DTC, or having your broker instruct DTC, to transfer your subscription
rights from your account to the account of the subscription agent, together with certification as to the aggregate number of subscription
rights you are exercising and the exercise price.
No Transfer of Subscription Rights
You may not sell, or otherwise transfer,
your subscription rights. We are not applying for listing or quotation of the subscription rights on any exchange or dealer quotation
system.
Validity of Subscriptions
We will resolve all questions regarding
the validity and form of the exercise of your subscription rights, including time of receipt and eligibility to participate in
the offering. Our determination will be final and binding. Once made, subscriptions and directions are irrevocable, and we will
not accept any alternative, conditional, or contingent subscriptions or directions. We reserve the absolute right to reject any
subscriptions or directions not properly submitted or the acceptance of which would be unlawful. You must resolve any irregularities
in connection with your subscription before the subscription period expires, unless waived by us in our sole discretion. Neither
we nor the subscription agent or our sales agents shall be under any duty to notify you or your representative of defects in your
subscription. A subscription will be considered accepted, subject to our right to cancel the offering, only when a properly completed
and duly executed subscription rights certificate and any other required documents and the full subscription payment have been
received by the subscription agent. Our interpretations of the terms and conditions of the offering will be final and binding.
Return of Funds
The subscription agent will hold funds
received in payment for shares of our common stock in a segregated account pending completion of the offering. Such funds will
be held in escrow until the offering is completed or is cancelled. If the offering is cancelled for any reason, all subscription
payments received by the subscription agent will be returned promptly, without interest or penalty.
Shareholder Rights
You will have no rights as a holder of
our shares of common stock that you purchase in the offering until such shares of common stock are issued to you or until your
account at your record holder is credited with shares of common stock purchased in the offering.
No Revocation or Change
Once you submit the form of subscription
rights certificate to exercise any subscription rights, you are not allowed to revoke or change the exercise or request a refund
of monies paid. All exercises of subscription rights are irrevocable, even if you later learn information about us that you consider
to be unfavorable. If we decide to extend, amend or modify the terms of the offering for any reason, subscriptions received prior
to such extension, amendment or modification generally will remain irrevocable. However, if we amend this rights offering in a
way which we believe is material, we will extend the offering and offer all subscription rights holders the right to revoke any
subscription submitted prior to such amendment upon the terms and conditions we set forth in the amendment. The extension of the
expiration date of this offering will not, in and of itself, be considered a material amendment for these purposes. You should
not exercise your subscription rights unless you are certain that you wish to purchase shares of common stock at the subscription
price.
U.S. Federal Income Tax Consequences
For U.S. federal income tax purposes, you
should not recognize income or loss upon receipt or exercise of subscription rights. For a more detailed discussion, see the section
titled “U.S. Federal Income Tax Consequences” in this prospectus.
No Recommendation to Rights Holders
Our board of directors is not making a
recommendation regarding your exercise of the subscription rights. Shareholders who exercise subscription rights risk investment
loss on money invested. The market price of our common stock may decline to a price that is less than the subscription price and,
if you purchase shares at the subscription price, you may not be able to sell the shares in the future at the same price or a
higher price. You should make your decision based on your assessment of our business and financial condition, our prospects for
the future, and the terms of the offering. Please see the section entitled “Risk Factors” in this prospectus for a
discussion of some of the risks involved in investing in our common stock.
Trading Symbol
Our common stock is listed on the NASDAQ
Capital Market under the symbol “VBFC.” On February 9, 2015, the last reported sale price of our common stock was
$18.47 per share. We urge you to obtain a current market price for the shares of our common stock before making any determination
with respect to the exercise of your rights.
Outstanding Shares of Common Stock After the Offering
As of January 20, 2015, 350,622 shares
of our common stock were issued and outstanding. Assuming that there are no other transactions by us involving shares of our common
stock, no outstanding options for shares of our common stock are exercised prior to the expiration of the offering, and all 1,051,866
shares of our common stock are subscribed for, or exchanged for Series A preferred stock, in the offering, we expect 1,402,488
shares of common stock to be outstanding immediately after completion of the offering. As a result of the offering, the ownership
interests and voting interests of the existing shareholders that do not fully exercise their basic subscription privilege will
be diluted.
Questions
If you have any questions regarding completing
a subscription rights certificate or submitting payment in the offering, please contact our sales agents, Compass Point Research
& Trading, LLC and Boenning & Scattergood, Inc., at (216) 378-1297. If you have any general questions regarding the offering,
the Company, or the Bank, please contact our Chief Financial Officer, C. Harril Whitehurst, Jr., at (804) 419-1232.
THE STANDBY PURCHASE AGREEMENT
To facilitate the offering, we have entered
into the Standby Purchase Agreement with the standby investor. The standby investor is a private investor, attorney, and banking
entrepreneur. He was an attorney with the Commission from 1988 through 1992, and in 1993, he co-founded a nationally recognized
law firm that specializes in securities, mergers and acquisitions, and banking. He retired from that firm in 2002. Since 2003,
he has co-founded three banks and served as a director of several banks and bank holding companies. The publicly traded companies
on whose boards he has served over the last five years include Tower Bancorp, Inc. (2009-2012), Virginia Commerce Bancorp, Inc.
(2009-2013), and First Capital Bancorp, Inc. (since 2011).
Background of the Standby Purchase Agreement
In November 2013, we participated in a
successful auction of the 14,738 shares of our Series A preferred stock that was originally issued to the Treasury in connection
with the Troubled Asset Relief Program. The Series A preferred stock was purchased in the auction by private and institutional
investors, including 4,023 of such shares that were purchased by the standby investor. We sought guidance from Compass Point Research
& Trading, LLC and Boenning & Scattergood, Inc. on the auction and also received their advice on potential capital raising
transactions.
After being notified that he was a winning
bidder in the auction, the standby investor sent a letter to our board of directors indicating his potential interest in exchanging
his shares of Series A preferred stock for common stock of the Company. He also indicated a preliminary interest in acquiring
additional shares of our common stock through a private placement or by serving as a standby investor in a rights offering. The
board of directors reviewed the initial proposal and discussed it with the board’s financial and legal advisors. The board
of directors concluded that the terms of the proposal were not in the best interests of the Company or its shareholders, partly
because the transaction proposed may have had an unfavorable effect on the Company’s ability to preserve its net operating
loss deferred tax asset.
In April 2014, the standby investor reached
out to the Company with a new proposal that included terms that the board of directors viewed as more favorable to the Company
and its shareholders. The board of directors was exploring alternatives for raising additional capital prior to the second approach
from the standby investor, and his proposal was particularly attractive to the board of directors because it would allow the Company
to raise additional capital while redeeming a portion of the Series A preferred stock at a discount. Our Series A preferred stock
became more expensive on May 1, 2014 when, pursuant to its terms, the annual dividend rate on such shares increased from 5% to
9%. The board of directors also believed the new proposal could be structured to preserve the Company’s net operating loss
deferred tax asset.
On July 11, 2014, we entered into a nondisclosure
agreement with the standby investor and began negotiating a written letter of intent outlining the structure of a proposed transaction.
On July 18, 2014, we formally engaged Compass Point Research & Trading, LLC and Boenning & Scattergood, Inc. as financial
advisors to explore various alternatives for raising additional capital, including a potential transaction with the standby investor.
Over the next several months, we continued negotiating with the standby investor. During such time, we also separately entered
into nondisclosure agreements and participated in discussions with other potential investors, some of whom were also holders of
our Series A preferred stock.
After considering the effects on shareholder
value, the Bank’s long-term viability, regulatory burdens and restrictions, and alternative transactions with other potential
investors, we decided that pursuing a transaction with the standby investor was in the best interests of the Company and its shareholders.
Thereafter, the standby investor and his agents conducted a detailed due diligence review of the Company and we, the standby investor
and our respective counsels then negotiated the Standby Purchase Agreement. We entered into the Standby Purchase Agreement on
November 11, 2014.
Terms of the Standby Purchase Agreement
The terms of the Standby Purchase Agreement
apply only to the standby investor and the Company. Purchasers in the offering are not parties to the Standby Purchase Agreement,
and they do not receive any rights pursuant to it. The following summary includes a description of all the material terms of the
Standby Purchase Agreement. The Standby Purchase Agreement is incorporated by reference as an exhibit to the registration statement
of which this prospectus forms a part.
Pursuant to the Standby Purchase Agreement,
the standby investor has agreed, subject to there being sufficient shares available after purchases by shareholders exercising
their basic subscription privilege, to purchase from us, and we have agreed to sell to him, at the subscription price, the lesser
of (i) $8.0 million of our common stock (based on the subscription price per share), (ii) all shares of common stock not
purchased by shareholders exercising their basic subscription privilege, and (iii) the maximum number of shares that he may purchase
without causing an “ownership change” under Section 382(g) of the Code.
We will not know the aggregate amount of
common stock to be sold to the standby investor until the completion of the offering. The consummation of the sale of our common
stock to the standby investor is conditioned on the completion of the offering and upon the number of unsubscribed shares available.
The chart below presents different scenarios that may occur depending on the number of subscription rights that are exercised
by shareholders and the number of shares purchased by the standby investor under the Standby Purchase Agreement. The chart below
presents the standby investor’s ownership if the basic subscription privilege is exercised with respect to 0%, 25%, 50%
and 100% of the subscription rights held by shareholders.
| |
0% of Basic
Subscriptions Exercised | | |
25% of Basic
Subscriptions Exercised | | |
50% of Basic
Subscriptions Exercised | | |
100% of Basic
Subscriptions Exercised | |
| |
| | |
| | |
| | |
| |
Shares of Common Stock Sold Pursuant to the Basic Subscription Privilege | |
| 0 | | |
| 262,966 | | |
| 525,933 | | |
| 1,051,866 | |
Shares of Common Stock Issued to Standby Investor in Exchange for Preferred Stock (1) | |
| 333,065 | | |
| 333,065 | | |
| 333,065 | | |
| 0 | |
Shares of Preferred Stock Owned by the Standby Investor After Offering (1) | |
| 0 | | |
| 0 | | |
| 0 | | |
| 9,023 | |
Total Shares of Preferred Stock Outstanding After Offering (1) | |
| 5,715 | | |
| 5,715 | | |
| 5,715 | | |
| 14,738 | |
Shares of Common Stock Purchased by Standby Investor for Cash (1)(2) | |
| 3,807 | | |
| 243,720 | | |
| 192,868 | | |
| 0 | |
Total Shares of Common Stock Issued in Offering | |
| 336,872 | | |
| 839,751 | | |
| 1,051,866 | | |
| 1,051,866 | |
Total Shares of Common Stock Outstanding After Offering | |
| 687,494 | | |
| 1,190,373 | | |
| 1,402,488 | | |
| 1,402,488 | |
Percentage Ownership of Common Stock of Standby Investor After Closing of the Offering | |
| 49.00 | % | |
| 48.45 | % | |
| 37.50 | % | |
| 0.00 | % |
Total Cash Investment of Standby Investor | |
$ | 52,803 | | |
$ | 3,380,396 | | |
$ | 2,675,079 | | |
$ | 0 | |
____________
(1) Assumes that the standby
investor will be permitted to own a maximum of 49% of the Company’s outstanding shares of common stock on a fully-diluted
basis after the offering without the Company incurring an “ownership change” under Section 382(g) of the Code. The
actual percentage that he will be permitted to own may be slightly less than 49% and will depend on a number of factors that will
not be known until completion of the offering. Assumes that, in lieu of accepting cash, we elect to exchange as many as possible
of the 9,023 shares of Series A preferred stock that the standby investor owns for shares of our common stock in the offering
based on a $500.34 per share valuation for 4,023 of such shares of Series A preferred stock owned by the standby investor as of
the date of the Standby Purchase Agreement, a $516.4980 per share valuation for 2,221 of such shares of Series A preferred stock
acquired by the standby investor on December 23, 2014 and a $525.2238 per share valuation for 2,779 of such shares of Series A
preferred stock acquired by the standby investor on February 6, 2015. The valuations of the shares of Series A preferred stock
that were acquired by the standby investor on December 23, 2014 and February 6, 2015 were calculated based on an assumed closing
date of March 31, 2015.
| | (Footnotes continue on the following
page) |
| (2) | Pursuant to the Standby Purchase Agreement, the standby investor’s
total investment (whether by purchase and/or exchange) in the offering is limited to
$8.0 million of our common stock (based on the subscription price of $13.87 per
share). |
The Standby Purchase Agreement requires
that, for a period of three years from the date of the agreement, the standby investor will not (i) serve as a director of the
Company unless nominated by the Company’s board, (ii) nominate anyone to serve as a director of the Company, (iii) vote
his shares in support of a director candidate that has not been nominated by the Company’s board, (iv) vote his shares in
support of a business combination transaction with another entity unless such transaction has been approved by at least 80% of
the Company’s board, or (v) vote any shares beneficially owned in excess of 40% of the Company’s total outstanding
shares; provided, however, that such restrictions will only apply for so long as Company achieves certain performance targets
and the standby investor is a director or beneficial holder of 10% or more of a bank or bank holding company with one or more
offices in the Richmond, Virginia metropolitan statistical area. The standby investor is currently a director and a beneficial
holder of greater than 10% of the outstanding common stock of First Capital Bancorp, Inc., which has branch offices in the Richmond,
Virginia metropolitan statistical area.
The Standby Purchase Agreement requires
our board of directors to adopt the Restricted Stock Plan as part of or immediately following the offering under which a number
of shares of our common stock equal to 4.0% of the number of outstanding shares immediately after the closing of the offering
will be reserved for issuance to our directors and officers. Under NASDAQ rules, adoption of the Restricted Stock Plan must be
approved by the Company’s shareholders. It is expected that the Restricted Stock Plan will be submitted to shareholders
for approval no later than the 2015 annual meeting of shareholders. The number of shares that the Company will be required to
reserve for the Restricted Stock Plan will be approximately 56,100 shares, assuming the offering is fully subscribed. Each award
granted under the Restricted Stock Plan would be divided into four tranches that may vest at the end of 2015, 2016, 2017 and 2018
if we achieve certain performance targets established in pro forma financial projections that are mutually agreed to by us and
the standby investor. Participants will forfeit all shares that do not vest in a particular year. The number of shares to be issued
to individual officers under the Restricted Stock Plan will be determined by our board of directors in its sole discretion.
Additional Agreements with the Standby Investor
In the Standby Purchase Agreement, the
standby investor has granted to the Company an option to redeem for cash, or exchange in connection with the offering at the subscription
price, (i) all of the 4,023 shares of Series A preferred stock that he owned as of the date of the Standby Purchase Agreement
based on a valuation of $500.34 per share of Series A preferred stock, and (ii) any additional shares of Series A preferred stock
that he subsequently acquires based on a valuation of the Series A preferred stock that equates to a 5% annualized return on the
amount that the standby investor pays to purchase such additional shares of Series A preferred stock. The standby investor acquired
an additional 2,221 shares of Series A preferred stock on December 23, 2014 for $509.656 per share, as well as an additional 2,779
shares of Series A preferred stock on February 6, 2015 for $521.44 per share. Any redemption by the Company of Series A preferred
stock for cash will be contingent upon approval from the Reserve Bank. If enough shares are purchased by shareholders through
the exercise of their basic subscription rights, there will not be sufficient shares of common stock available to exchange all
of the 9,023 shares of Series A preferred stock that the standby investor owns. In such a scenario, we may seek, but are not obligated,
to repurchase for cash any or all of the shares of Series A preferred stock owned by the standby investor that are not exchanged
in the offering. Prior to repurchasing shares of Series A preferred stock for cash, we would be required to bring current the
deferred interest payments on our junior subordinated debt securities ($1,009,712 as of September 30, 2014). We would also need
to obtain the prior approval of the Reserve Bank to both bring current such deferred interest payments as well as to repurchase
the shares of our Series A preferred stock for cash. No assurances can be given that the necessary approvals would be granted
or would be granted without unacceptable conditions.
In addition, if the Company terminates
the Standby Purchase Agreement because of a breach of the agreement by the standby investor or because the standby investor is
unable to obtain regulatory approval to acquire the shares he has committed to purchase, the Company will have an option, subject
to certain conditions, expiring June 30, 2015 to redeem all of the shares of Series A preferred stock that he owns based on a
valuation of the greater of (i) $500.34 per share, (ii) the average price paid by the standby investor to purchase any additional
Series A preferred stock increased by an amount that equates to a 5% annualized return on such purchases, and (iii) the average
redemption price paid to other holders of Series A preferred stock whose shares have been redeemed for cash by the Company on
or prior to such date.
We also agreed to enter into the Registration
Rights Agreement with the standby investor which will provide the standby investor demand registration and piggyback registration
rights with respect to the standby investor’s resale of the Company’s equity securities, subject to customary limitations.
The Registration Rights Agreement is expected to be executed in connection with closing of the sale of shares to the standby investor.
We have agreed to pay the expenses associated with any registration statements filed with the Commission pursuant to the Registration
Rights Agreement. The standby investor’s demand registration rights will be immediately exercisable upon execution of the
Registration Rights Agreement for, subject to certain limitations, the number of shares of common stock held by the standby investor
and any equity securities issued or issuable directly or indirectly with respect to the shares of common stock held by the standby
investor by way of conversion, exercise or exchange thereof or stock dividend or stock split or in connection with a combination
of shares, recapitalization, reclassification, merger, amalgamation, arrangement, consolidation or other reorganization.
Conditions to Closing
The obligations of the Company and the
standby investor to consummate the transactions contemplated by the Standby Purchase Agreement are subject to fulfillment of the
following conditions:
| · | The
Company must obtain any required federal, state and regulatory approvals on conditions
reasonably satisfactory to the Company and the standby investor; |
| · | The
Reserve Bank must have issued a letter of nonobjection to the notice of change in control
filed by the standby investor without the imposition of any restrictions or conditions
that the standby investor determines are, in his reasonable discretion, unreasonably
burdensome; |
| · | The
Virginia BFI must have approved the standby investor’s acquisition of shares of
the Company under Virginia law without the imposition of any restrictions or conditions
that the standby investor determines are, in his reasonable discretion, unreasonably
burdensome; |
| · | The
Company must have received a letter from BDO USA, LLP, its outside accounting firm, to
the effect that, among other things, the transactions contemplated by the Standby Purchase
Agreement will not cause the Company to undergo an “ownership change” for
purposes of Section 382 of the Code; |
| · | No
judgment, injunction, decree, regulatory proceeding or other legal restraint prohibits,
or has the effect of rendering unachievable, the consummation of the offering or the
material transactions contemplated by the Standby Purchase Agreement; and |
| · | No
stop order suspending the effectiveness of the registration statement of which this prospectus
forms a part, or any part thereof, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission; and any request of the Commission
for inclusion of additional information in the registration statement or otherwise shall
have been complied with. |
The obligations of the Company to consummate
the transactions contemplated by the Standby Purchase Agreement are further subject to the condition that the representations
and warranties of the standby investor set forth in the Standby Purchase Agreement are true and correct in all material respects
and the standby investor must have performed all of his obligations under the Standby Purchase Agreement.
The obligations of the standby investor
to consummate the transactions contemplated by the Standby Purchase Agreement are further subject to the fulfillment of the following
conditions:
| · | The
representations and warranties of the Company set forth in the Standby Purchase Agreement
are true and correct in all material respects and the Company must have performed all
of its obligations under the Standby Purchase Agreement; |
| · | There
has not been any material adverse effect with respect to the Company and the Company
must not have breached its covenants under the Standby Purchase Agreement; |
| · | Trading
in the Company’s common stock must not have been suspended by the Commission or
trading in securities generally on the NASDAQ Capital Market must not have been suspended
or limited or minimum prices must not have been established on the NASDAQ Capital Market; |
| · | If
the Company’s common stock remains listed on the NASDAQ Capital Market as of the
closing date, the common stock issued in the offering must have been authorized for listing
on the NASDAQ Capital Market; and |
| · | The
Company’s disinterested directors must have approved the standby investor’s
acquisition of share under Virginia’s Affiliated Transactions statute, and opted
out of Virginia’s Control Share Acquisition statute, and taken all action necessary
to ensure that the voting or other rights of shares acquired by the standby investor
are not limited by such laws and/or regulations. |
Termination Provisions
The Standby Purchase Agreement may be terminated
under the following circumstances:
| · | By
the standby investor at any time prior to the closing date if there is (i) a material
adverse change in the Company’s business or results of operations, or (ii) trading
in the Company’s common stock has been suspended by the Commission or trading in
securities generally on the NASDAQ Capital Market has been suspended or limited or minimum
prices have been established on the NASDAQ Capital Market, and such events have not been
cured within 21 days of their occurrence; |
| · | By
the Company or the standby investor by written notice to the other party: |
| o | At any time prior to the closing date, if there is a material
breach of the Standby Purchase Agreement by the other party that is not cured within
15 days after notice; |
| o | At any time after June 30, 2015, unless the closing has occurred
prior to such date; or |
| o | If consummation of the offering is prohibited by law, rule
or regulation; or |
| · | By
the Company in the event that the Company determines that it is not in the best interests
of the Company or its shareholders to go forward with the offering. |
In the event that the Standby Purchase
Agreement is terminated because we determine that the offering is not in the best interests of the Company or its shareholders,
we are required to pay the standby investor liquidated damages of $150,000.
Expenses
We are obligated to pay the reasonable
actual out-of-pocket expenses of the standby investor up to $37,500 upon closing of the offering or if the Standby Purchase Agreement
is terminated for any reason.
OUR NET OPERATING LOSS DEFERRED TAX
ASSET
As of September 30, 2014, we had a total
deferred tax asset of $13.1 million, a valuation allowance of $12.2 million, and a deferred tax liability of $79,000, for a net
deferred tax asset of $829,000. A total deferred tax asset is reduced by a valuation allowance if, based on the weight of the
evidence available, it is more likely than not that some portion or all of the total deferred tax asset will not be realized.
We believe that, subject to certain limitations including federal tax laws relating to “ownership changes” discussed
below, should we return to profitability over a sustained period of time and project future profits while remaining well capitalized,
then we would be able to reverse some or all of the deferred tax asset valuation allowance including the portion allocable to
our net operating loss carryforwards, and our shareholders’ equity would increase accordingly. Even if we are able to reverse
the deferred tax asset valuation allowance, however, the only portion of a deferred tax asset that may be included in Tier 1 capital
for regulatory capital purposes is the amount that may be utilized over the next 12 months.
As of September 30, 2014, we had net operating
loss carryforwards of approximately $21.7 million, which begin to expire in 2028. As of September 30, 2014, $7.4 million
of our total deferred tax asset related to our net operating loss carryforwards and was fully reduced by a valuation allowance.
While we cannot estimate the exact amount of net operating loss carryforwards that we can use to reduce future income tax liability
because we cannot predict the amount and timing of our future taxable income, we believe our net operating loss carryforwards
represent a very valuable asset that could save substantial amounts of federal and state taxes over the next 20 years.
Our ability to utilize our net operating
loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,”
as determined under Section 382 of the Code. Under Section 382 of the Code, an “ownership change” occurs if, over
a rolling three-year period, there has been an aggregate increase of 50 percentage points or more in the percentage of our common
stock owned by one or more of our “5-percent stockholders” (as determined under the rules of Section 382 of the Code
and the related regulations and guidance thereunder). An entity that experiences an ownership change generally will be subject
to an annual limitation on its pre-ownership change tax losses and credit carryforwards equal to the equity value of the corporation
immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the Internal Revenue Service
(the “IRS”) (subject to certain adjustments). The annual limitation would be increased each year to the extent that
there is an unused limitation in a prior year. The limitation on our ability to utilize our net operating loss carryforwards arising
from an ownership change under Section 382 of the Code would depend on the value of our equity at the time of any ownership change.
If an ownership change were to occur, the
limitations imposed by Section 382 of the Code could result in a material amount of our net operating loss carryforwards expiring
unused, which would significantly impair their value. While the complexity of Section 382’s provisions and the limited knowledge
any public company has about the ownership of its publicly traded stock make it difficult to determine whether an ownership change
has occurred, we currently believe that an ownership change will not occur as a result of the offering.
We have attempted to structure the offering
so as to avoid an “ownership change” under Section 382 of the Code. We will not accept a subscription pursuant to
the oversubscription privilege if we believe that doing so will have an unfavorable effect on our ability to avoid an “ownership
change” or preserve our net operating loss deferred tax asset. We do not believe that the exercise of basic subscription
rights will have any unfavorable effect on our ability to avoid an “ownership change” or preserve our net operating
loss deferred tax asset.
It is important to note that, notwithstanding
this measure, an ownership change may occur, which would significantly limit the amount of the net operating loss carryforwards
that we might otherwise be able to utilize once we have returned to profitability. Therefore, even if our results of future operations
allow us to reverse the deferred tax valuation allowance allocable to our net operating loss deferred tax asset, the amount of
that deferred tax asset could be significantly less than the $7.4 million balance at September 30, 2014. Accordingly, the aforementioned
increase in our shareholders’ equity that would result from the reversal of the valuation allowance to our net operating
loss deferred tax asset would also be significantly reduced.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following summary describes our management’s
understanding of the U.S. federal income tax consequences of the receipt and exercise (or expiration) of the subscription rights,
including the basic subscription privilege and the oversubscription privilege, acquired through the offering and owning and disposing
of the shares of common stock received upon exercise of the subscription rights. This summary is based upon the Code, Treasury
regulations promulgated thereunder and administrative and judicial interpretations thereof, all as currently in effect and all
of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that
the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below.
This summary does not purport to discuss
all aspects of U.S. federal income taxation that may be important to a particular holder in light of its particular circumstances
or to holders that may be subject to special tax rules, including, but not limited to, partnerships or other pass-through entities,
banks and other financial institutions, tax-exempt entities, employee stock ownership plans, certain former citizens or residents
of the United States, insurance companies, regulated investment companies, real estate investment trusts, dealers in securities
or currencies, brokers, traders in securities that have elected to use the mark-to-market method of accounting, persons holding
subscription rights or shares of common stock as part of an integrated transaction, including a “straddle,” “hedge,”
“constructive sale,” or “conversion transaction,” persons whose functional currency for tax purposes is
not the U.S. dollar, persons holding our common stock through a foreign financial account, and persons subject to the alternative
minimum tax provisions of the Code.
This summary applies to you only if you
are a U.S. holder (as defined below) and receive your subscription rights in the offering, and you hold your subscription rights
or shares of common stock issued to you upon exercise of the subscription rights as capital assets for tax purposes. This summary
does not apply to you if you are not a U.S. holder. We recommend that non-U.S. holders consult with their own tax advisors with
respect to U.S. federal income tax consequences that may apply to them.
We have not sought, and will not seek,
a ruling from the IRS regarding the federal income tax consequences of the offering or the related share issuances. The following
summary does not address the tax consequences of the offering or the related share issuance under foreign, state, or local tax
laws.
You are a “U.S. holder” if
you are a beneficial owner of subscription rights or common stock and you are:
| · | An
individual who is a citizen or resident of the United States for U.S. federal income
tax purposes; |
| · | A
corporation (or other business entity treated as a corporation for U.S. federal income
tax purposes) created or organized in or under the laws of the United States, any state
thereof, or the District of Columbia; |
| · | An
estate, the income of which is subject to U.S. federal income tax regardless of its source;
or |
| · | A
trust (a) if a court within the United States can exercise primary supervision over its
administration and one or more U.S. persons are authorized to control all substantial
decisions of the trust or (b) that has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person. |
If a partnership (including any entity
treated as a partnership for U.S. federal income tax purposes) receives the subscription rights or holds the common stock received
upon exercise of the subscription rights including, if applicable, the oversubscription privilege, the tax treatment of a partner
in such partnership generally will depend upon the status of the partner and the activities of the partnership. Such a partner
or partnership is urged to consult its own tax advisor as to the U.S. federal income tax consequences of receiving and exercising
the subscription rights and acquiring, holding or disposing of our shares of common stock.
We recommend that you consult your own
tax advisor with respect to the U.S. federal, state, local, non-U.S., and other tax consequences of the receipt and ownership
of the subscription rights acquired in the offering and the ownership of shares of common stock received upon exercise of the
subscription rights.
Taxation of Subscription Rights
Receipt of Subscription Rights
Your receipt of subscription rights pursuant
to the offering should not be treated as a taxable distribution with respect to your existing shares of common stock for U.S.
federal income tax purposes. The discussion below assumes that the receipt of the subscription rights will be treated as a non-taxable
distribution.
Tax Basis in the Subscription Rights
If the fair market value of the subscription
rights you receive is less than 15% of the fair market value of your existing shares of common stock on the date you receive the
subscription rights, the subscription rights will be allocated a zero basis for U.S. federal income tax purposes, unless you elect
to allocate your basis in your existing shares of common stock between your existing shares of common stock and the subscription
rights in proportion to the relative fair market values of the existing shares of common stock and the subscription rights determined
on the date of receipt of the subscription rights. If you choose to allocate basis between your existing shares of common stock
and the subscription rights, you must make this election on a statement included with your tax return for the taxable year in
which you receive the subscription rights. Such an election is irrevocable.
However, if the fair market value of the
subscription rights you receive is 15% or more of the fair market value of your existing shares of common stock on the date you
receive the subscription rights, then you must allocate your basis in your existing shares of common stock between your existing
shares of common stock and the subscription rights you receive in proportion to their fair market values determined on the date
you receive the subscription rights. The fair market value of the subscription rights on the date the subscription rights will
be distributed is uncertain. In determining the fair market value of the subscription rights, you should consider all relevant
facts and circumstances.
Exercise and Expiration of Subscription Rights
Generally, you will not recognize gain
or loss on the exercise of a subscription right. If you allow subscription rights received in the offering to expire, you should
not recognize any gain or loss for U.S. federal income tax purposes, and you should re-allocate any portion of the tax basis in
your existing shares of common stock previously allocated to the subscription rights that have expired to the existing shares
of common stock.
Taxation of Shares of Common Stock
Basis and Holding Period
Your tax basis in a new share of common
stock acquired when you exercise a subscription right will be equal to your adjusted tax basis in the subscription right, if any,
plus the subscription price. The holding period of a share of common stock acquired when you exercise your subscription rights
will begin on the date of exercise.
Distributions
Distributions with respect to shares of
common stock acquired upon exercise of subscription rights will be taxable as dividend income when actually or constructively
received to the extent of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes.
Subject to the discussion below concerning the additional 3.8% tax on net investment income, dividends received by non-corporate
shareholders of common stock are taxed at the shareholder’s capital gain tax rate (a maximum rate of 20%), provided that
the shareholder meets applicable holding period and other requirements. To the extent that the amount of a distribution exceeds
our current and accumulated earnings and profits, such distribution will be treated first as a tax-free return of capital to the
extent of your adjusted tax basis in such shares of common stock and thereafter as capital gain. We currently do not make any
cash distributions on our shares of common stock.
Dispositions
If you sell or otherwise dispose of the
shares of common stock acquired upon exercise of the subscription rights, you will generally recognize capital gain or loss equal
to the difference between the amount realized and your adjusted tax basis in the shares of common stock. Such capital gain or
loss will be long-term capital gain or loss if your holding period for the shares of common stock is more than one year. Long-term
capital gain of an individual is generally taxed at favorable rates (currently a maximum rate of 20%). Long-term capital gains
recognized by corporations are taxable at ordinary corporate tax rates. If you have held your shares of common stock for one year
or less, your capital gain or loss will be short-term. Short-term capital gains are taxed at a maximum rate equal to the maximum
rate applicable to ordinary income. The deductibility of capital losses is subject to limitations.
Net Investment Income Tax
U.S. shareholders who are individuals,
estates, or trusts are subject to a 3.8% tax on net investment income. Net investment income includes, among other things, dividends
on and capital gains from the sale or other disposition of stock. More specifically, the 3.8% tax applies to the lesser of (i)
“net investment income” and (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000
if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals
the taxpayer’s gross investment income reduced by the deductions that are attributable to such income. U.S. shareholders
should consult their tax advisors regarding the effect, if any, of the net investment tax on their ownership and disposition of
our common stock.
Information Reporting and Backup Withholding
You may be subject to information reporting
or backup withholding with respect to dividend payments on, or the gross proceeds from the disposition of, our common stock acquired
through the exercise of subscription rights. Backup withholding may apply under certain circumstances if you (1) fail to furnish
your social security or other taxpayer identification number (“TIN”), (2) furnish an incorrect TIN, (3) fail to report
interest or dividends properly, or (4) fail to provide a certified statement, signed under penalty of perjury, that the TIN provided
is correct, that you are not subject to backup withholding, and that you are a U.S. person. Any amount withheld from a payment
under the backup withholding rules is allowable as a credit against (and may entitle you to a refund with respect to) your U.S.
federal income tax liability, provided that the required information is furnished to the IRS. Certain persons are exempt from
backup withholding, including corporations and financial institutions. You are urged to consult your own tax advisor as to your
qualification for exemption from backup withholding and the procedure for obtaining such exemption.
EXECUTIVE COMPENSATION
Director Compensation
Members of the board of directors of the
Company do not receive fees for their service as directors. However, all of the directors of the Company also serve as
directors of the Bank. In 2014, as compensation for their service to the Bank, each non-employee member of the board of directors
received the following fees:
| · | a
retainer fee of $10,000, paid quarterly in increments of $2,500; |
| · | an
attendance fee of $500 for each meeting of the board attended ($650 for the Chair of
the board); and |
| · | an
attendance fee of $200 for each meeting of a committee attended ($300 for the Chair of
the committee), with the exception that the Audit Committee members receive $300 for
each meeting attended ($450 for the Chair of the committee). |
In 2015, the Chairman of the board of directors
of the Bank will receive a $22,000 retainer payable semi-annually in increments of $11,000. Each other non-employee member of
the board of directors of the Bank will receive a $20,000 retainer payable semi-annually in increments of $10,000.
Board members who are also officers of
the Company or the Bank receive compensation only for their executive roles. They do not receive additional compensation for board
service or attending committee meetings.
In 2005, the Bank adopted the Outside Directors
Deferral Plan under which non-employee directors of the Bank have the opportunity to defer receipt of all or a portion of their
compensation until retirement or departure from the board of directors. Any amounts deferred under this plan are maintained in
an account for the benefit of the director and are credited annually with interest on the deferred amount at a market rate established
at the beginning of each plan year (5.55% for 2014).
In August 2013, Thomas W. Winfree stepped
down from his position as President of the Company and the Bank and entered into a new employment agreement pursuant to which
he continued to serve as Chief Executive Officer until his retirement in February 2014. Mr. Winfree continues to serve as a member
of the board of directors of the Company and the Bank. Further information about Mr. Winfree’s employment agreements is
included under “– Executive Officer Compensation – Employment and Change-in-Control Agreements with Named Executive
Officers.”
The following table provides information
concerning the compensation of all non-employee directors for the year ended December 31, 2014:
Director Compensation for
2014
Name | |
Fees Earned
or Paid in Cash ($) | | |
Total ($) | |
| |
| | |
| |
R.T. Avery, III | |
$ | 24,050 | (1) | |
$ | 24,050 | |
Donald J. Balzer, Jr. | |
| 19,900 | (1) | |
| 19,900 | |
Craig D. Bell | |
| 22,400 | (1) | |
| 22,400 | |
William B. Chandler | |
| 22,250 | (1) | |
| 22,250 | |
R. Calvert Esleeck, Jr. | |
| 22,100 | | |
| 22,100 | |
O. Woodland Hogg, Jr. | |
| 21,900 | | |
| 21,900 | |
Michael A. Katzen | |
| 26,050 | (1) | |
| 26,050 | |
Michael L. Toalson | |
| 22,850 | | |
| 22,850 | |
Charles E. Walton | |
| 21,800 | | |
| 21,800 | |
John T. Wash, Sr. | |
| 23,300 | | |
| 23,300 | |
George R. Whittemore | |
| 26,100 | | |
| 26,100 | |
Thomas W. Winfree | |
| 20,133 | (2) | |
| 20,133 | |
____________
| (1) | All fees earned by the director were deferred for the year
ended December 31, 2014. |
| (2) | Mr. Winfree earned these fees as a nonexecutive director subsequent
to his retirement as an executive officer on February 28, 2014. |
Executive Officer Compensation
The following table presents information
concerning the compensation of the named executive officers for services rendered in all capacities to the Company and the Bank.
Summary Compensation Table
Name and Principal | |
| |
| | |
Stock Awards | | |
Option Awards | | |
Nonqualified Deferred Compensation | | |
All Other Compensation | | |
| |
Position | |
Year | |
Salary ($) | | |
($)(2) | | |
($)(2) | | |
Earnings | | |
($)(4) | | |
Total | |
Thomas W. Winfree (1) | |
2014 | |
$ | 35,700 | | |
$ | - | | |
$ | 13,008 | | |
$ | 29,692 | | |
$ | 3,333 | | |
$ | 81,733 | |
President and Chief | |
2013 | |
| 211,925 | | |
| - | | |
| - | | |
| 163,384 | (3) | |
| 9,260 | | |
| 384,569 | |
Executive Officer | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William G. Foster (1) | |
2014 | |
| 243,750 | | |
| 92,316 | | |
| - | | |
| 48,646 | | |
| 12,549 | | |
| 397,261 | |
President and Chief | |
2013 | |
| 181,573 | | |
| 84,048 | | |
| - | | |
| 61,776 | | |
| 10,675 | | |
| 338,072 | |
Executive Officer | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
James E. Hendricks, Jr. | |
2014 | |
| 180,000 | | |
| 98,248 | | |
| - | | |
| 18,017 | | |
| 10,905 | | |
| 307,170 | |
Executive Vice President/ | |
2013 | |
| 59,308 | | |
| - | | |
| - | | |
| 2,844 | | |
| 2,385 | | |
| 64,537 | |
Chief Credit Officer | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
C. Harril Whitehurst, Jr. | |
2014 | |
| 178,500 | | |
| 43,968 | | |
| - | | |
| 38,109 | | |
| 10,678 | | |
| 271,255 | |
Executive Vice President/ | |
2013 | |
| 175,852 | | |
| - | | |
| 4,845 | | |
| 50,557 | | |
| 10,790 | | |
| 242,044 | |
Chief Financial Officer | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
____________
| (1) | Mr. Winfree retired effective February 28, 2014 and Mr. Foster
assumed the duties of Chief Executive Officer of the Company and the Bank. |
(Footnotes continue on the
following page)
| (2) | The amounts represent the aggregate grant date fair value
of each award calculated in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) Topic 718. Assumptions used in the calculation of these amounts are included in Note 14 of the
Company’s audited financial statements for the year ended December 31, 2013 included in the Annual Report on Form 10-K filed
with the Commission on March 26, 2014 and incorporated herein by reference. Assumptions used for the December 31, 2014 amounts
are consistent with those used for the year ended December 31, 2013. |
| (3) | Amount reflects, in part, an increase in the duration of
his supplemental retirement plan benefit payments from 15 years to 20 years. |
| (4) | Amounts shown in the “All Other Compensation”
column are detailed in the following table: |
All Other Compensation
Name and Principal
Position | |
Year | |
Life
Insurance Premium | | |
Company
Contributions to Retirement
and 401(k) Plans | | |
Company
Vehicle/ Automobile
Allowance | | |
Telephone
Allowance | | |
Financial
Planning | | |
Cancer
Policy Insurance
Premium | | |
Total | |
Thomas W. Winfree | |
2014 | |
$ | 858 | | |
$ | 904 | | |
$ | - | | |
$ | - | | |
$ | 1,500 | | |
$ | 71 | | |
$ | 3,333 | |
| |
2013 | |
| 4,591 | | |
| 4,242 | | |
| - | | |
| - | | |
| - | | |
| 427 | | |
| 9,260 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William G. Foster, Jr. | |
2014 | |
| 368 | | |
| 4,875 | | |
| 6,000 | | |
| 600 | | |
| - | | |
| 705 | | |
| 12,549 | |
| |
2013 | |
| 338 | | |
| 3,632 | | |
| 6,000 | | |
| - | | |
| - | | |
| 705 | | |
| 10,675 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
James E. Hendricks, Jr. | |
2014 | |
| - | | |
| 3,600 | | |
| 6,000 | | |
| 600 | | |
| - | | |
| 705 | | |
| 10,905 | |
| |
2013 | |
| - | | |
| - | | |
| 2,000 | | |
| 150 | | |
| - | | |
| 235 | | |
| 2,385 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
C. Harril Whitehurst, Jr. | |
2014 | |
| 1,176 | | |
| 3,124 | | |
| 6,000 | | |
| - | | |
| - | | |
| 378 | | |
| 10,678 | |
| |
2013 | |
| 1,026 | | |
| 3,386 | | |
| 6,000 | | |
| - | | |
| - | | |
| 378 | | |
| 10,790 | |
Mr. Foster was promoted to the position
of President of the Company and the Bank effective August 19, 2013, assuming those duties from Mr. Winfree. Prior to this promotion,
Mr. Foster served as Senior Vice President-Chief Credit Officer of the Bank since March 2012. Upon Mr. Winfree’s retirement
on February 28, 2014, Mr. Foster assumed the position of President and Chief Executive Officer of the Company and the Bank.
Prior to his retirement, Mr. Winfree had
an employment agreement with the Company and the Bank. Mr. Foster currently has an employment agreement with the Company and Mr.
Hendricks has an employment agreement with the Bank. Additional information on these employment agreements is included below under
“− Employment and Change-in-Control Agreements with Named Executive Officers.” Information on the components
of executive compensation is set forth below.
Salary. The Company believes
that a competitive salary for executive management is essential. Furthermore, flexibility to adapt to the particular skills of
an individual or the specific needs of the Company is required. Proposed salary adjustments for executive management are presented
to the Compensation Committee by the Chief Executive Officer, typically during the second quarter. The Compensation Committee
reviews the recommendations, makes any further adjustments and generally approves the recommendations with input from the Compensation
Committee’s external compensation advisor. Recommendations regarding adjustments to Mr. Foster’s salary are reviewed
and, if appropriate, approved by the Executive Committee. Mr. Foster received a salary increase in March 2014 upon his promotion
to President and Chief Executive Officer of the Company and the Bank. The other named executive officers received no salary increases
in 2014.
Stock-Based Compensation.
The Compensation Committee recommends for approval by the board of directors stock option and restricted stock awards to employees
under the Village Bank and Trust Financial Corp. Incentive Plan, as amended and restated February 25, 2014. These awards of stock
options and restricted stock are utilized to attract new employees, reward existing employees for performance, and retain key
employees.
In granting stock awards in 2014, the Compensation
Committee asked its external compensation advisor to provide a recommendation regarding stock awards for executive management.
The Compensation Committee’s advisor recommended stock awards for each executive based on the Company’s executive
compensation philosophy statement. As a result of this evaluation, the Compensation Committee and Board approved a combination
of time-vested restricted stock grants, performance-based restricted stock grants and one option grant to reward and retain the
named executives and other key officers of the Company and Bank. The stock-based compensation for the named executives includes
the full value of the time-vested restricted stock grants as of the date of grant.
For performance-based restricted stock
grants, the Company adopted the Village Bank & Trust 2014-5 Management Incentive Plan (“MIP”) that will award
grants to each executive officer based on achieving identified goals. The performance period is July 1, 2014 to December 31, 2015.
Goals were established for the following categories and carry the following weighting:
| · | 40%
Consolidated Net Income Before Taxes and Preferred Stock Dividends |
| · | 15%
Consolidated Total Nonperforming Assets to Total Assets |
| · | 15%
Consolidated Classified Assets to Total Assets |
| · | 15%
Tier 1 Capital Ratio for the Bank |
| · | 15%
Total Risk-Based Capital Ratio for the Bank |
100%
The stock based compensation for the named
executives includes the full value as of the date of grant of the performance-based restricted stock grants assuming management
receives the stock awards associated with achieving the targeted goals.
In conjunction with his promotion to President
on August 19, 2013, Mr. Foster was granted a time-vested restricted stock award of 3,835 shares (adjusted for the 1 for 16 reverse
stock split effective August 8, 2014) which vested 25% after one year, will vest an additional 25% after two years and the remaining
50% after three years. In accordance with FASB ASC Topic 718, the compensation expense for these restricted stock awards was recognized
in the 2013 fiscal year.
Information on restricted stock and option
awards to the named executive officers in 2014 is provided in the following table:
Name | |
Grant Date | |
All Other Stock Awards (1): Number of Shares of Stock or Units (#) (2) | | |
All Other Option Awards (1): Number of Securities Underlying Options (#) | | |
Exercise or Base Price of Option Awards ($/Sh) | | |
Grant Date Fair Value of Stock and Option Awards ($) (3) | |
| |
| |
| | |
| | |
| | |
| |
Thomas W. Winfree | |
1/3/2014 | |
| - | | |
| 885 | | |
$ | 25.28 | | |
$ | 13,008 | |
| |
| |
| | | |
| | | |
| | | |
| | |
William G. Foster | |
7/30/2014 | |
| 1,750 | | |
| | | |
| | | |
| 47,320 | |
| |
8/20/2014 | |
| 1,625 | | |
| | | |
| | | |
| 44,996 | |
| |
| |
| 3,375 | | |
| | | |
| | | |
$ | 92,316 | |
| |
| |
| | | |
| | | |
| | | |
| | |
James E. Hendricks, Jr. | |
3/25/2014 | |
| 2,235 | | |
| | | |
| | | |
$ | 47,548 | |
| |
7/30/2014 | |
| 1,062 | | |
| | | |
| | | |
| 28,716 | |
| |
7/30/2014 | |
| 813 | | |
| | | |
| | | |
| 21,984 | |
| |
| |
| 4,110 | | |
| | | |
| | | |
$ | 98,248 | |
| |
| |
| | | |
| | | |
| | | |
| | |
C. Harril Whitehurst, Jr. | |
7/30/2014 | |
| 813 | | |
| | | |
| | | |
$ | 21,984 | |
| |
7/30/2014 | |
| 813 | | |
| | | |
| | | |
| 21,984 | |
| |
| |
| 1,626 | | |
| | | |
| | | |
$ | 43,968 | |
____________
| (1) | All stock awards prior to August 8, 2014 have been adjusted for
a 1 for 16 reverse stock split effective August 8, 2014. |
| (2) | Consists of restricted stock awards. |
| (3) | The amounts reported reflect the aggregate grant date fair value
of the awards computed in accordance with the FASB ASC Topic 718, Compensation –
Stock Compensation. |
Supplemental Executive Retirement
Plan. We believe that retirement compensation plays an important role in retaining key executives, as well as helping
them provide for retirement. In 2014, the Compensation Committee engaged an independent compensation advisor to analyze the total
retirement benefits provided by the Company and/or the Bank and Social Security to employees with various levels of compensation
and years of service so that the Compensation Committee could determine the projected replacement ratio of income at retirement
compared with active employment. Because of limits under our qualified retirement plan on the amount of deferrals that
our executives can make, several of our executives can expect to have a lower retirement replacement ratio than we have targeted
for all employees. Consequently, as a matter of “pension equity”, we have adopted a supplemental plan which should
provide a benefit for designated executives that will help approach the targeted retirement replacement ratio.
The Company provides a potential supplemental
retirement plan benefit of $50,000 annually for 20 years to Mr. Foster and a potential benefit of $25,000 annually for 15 years
to each of Messrs. Whitehurst and Hendricks. The benefits vest ratably each year over a 10 year period. Under the plan’s
vesting schedule, Mr. Foster is in his third year of service, Mr. Hendricks is in his second year of service and Mr. Whitehurst
has completed his 10 year vesting requirement and is fully vested in his benefit. In the event of a pre-retirement death, vesting
is accelerated and the executive’s named beneficiary receives the benefit under the applicable payout schedule. In the event
of a post-retirement death, the executive’s named beneficiary receives any remaining benefit payments under the applicable
payout schedule. In the event of a termination of employment resulting from a change in control of the Company, vesting is accelerated
and the benefit is paid under the applicable payout schedule.
Outstanding Equity Awards
The following table sets forth certain
information with respect to the amount and value of outstanding equity awards on an award-by-award basis held by the named executive
officers at December 31, 2014.
Outstanding Equity Awards at Fiscal
Year-end
| |
| |
Option
Awards (1) | | |
Stock
Awards (1) | |
| |
Grant | |
Number of Securities
Underlying Unexercised Options (#) | | |
Option Exercise | | |
Option Expiration | |
Number of Shares or Units
of Stock that
Have Not | | |
Market Value of
Shares or Units
of Stock That Have Not | |
Name | |
Date | |
Exercisable | | |
Unexercisable | | |
Price ($) | | |
Date (2) | |
Vested (#) | | |
Vested ($)(3) | |
| |
| |
| | |
| | |
| | |
| |
| | |
| |
Thomas W. Winfree | |
1/3/2014 | |
| - | | |
| 885 | | |
$ | 25.28 | | |
1/3/2024 | |
| - | | |
| - | |
| |
| |
| | | |
| | | |
| | | |
| |
| | | |
| | |
William G. Foster, Jr. | |
8/20/2012 | |
| - | | |
| 313 | | |
$ | 16.00 | | |
8/20/2022 | |
| | | |
| | |
| |
8/19/2013 | |
| | | |
| | | |
| | | |
| |
| 2,876 | (4) | |
$ | 63,272 | |
| |
7/30/2014 | |
| | | |
| | | |
| | | |
| |
| 1,750 | | |
| 38,500 | |
| |
8/20/2014 | |
| | | |
| | | |
| | | |
| |
| 1,625 | (4) | |
| 35,750 | |
| |
| |
| | | |
| | | |
| | | |
| |
| 6,251 | | |
$ | 137,522 | |
| |
| |
| | | |
| | | |
| | | |
| |
| | | |
| | |
James E. Hendricks, Jr | |
3/25/2014 | |
| | | |
| | | |
| | | |
| |
| 1,676 | (4) | |
$ | 36,878 | |
| |
7/30/2014 | |
| | | |
| | | |
| | | |
| |
| 1,062 | (4) | |
| 23,364 | |
| |
7/30/2014 | |
| | | |
| | | |
| | | |
| |
| 813 | | |
| 17,886 | |
| |
| |
| | | |
| | | |
| | | |
| |
| 3,551 | | |
$ | 78,128 | |
| |
| |
| | | |
| | | |
| | | |
| |
| | | |
| | |
C. Harril Whitehurst, Jr. | |
9/26/2013 | |
| - | | |
| 313 | | |
$ | 25.28 | | |
9/26/2023 | |
| | | |
| | |
| |
7/30/2014 | |
| | | |
| | | |
| | | |
| |
| 813 | (4) | |
$ | 17,886 | |
| |
7/30/2014 | |
| | | |
| | | |
| | | |
| |
| 813 | | |
| 17,886 | |
| |
| |
| | | |
| | | |
| | | |
| |
| 1,626 | | |
$ | 35,772 | |
____________
| (1) | All stock awards prior to August 8, 2014 have been adjusted for
a 1 for 16 reverse stock split effective August 8, 2014. |
| (2) | Each of the incentive stock option awards cliff vests at the end
of three years from date of grant. |
| | Once the shares vest and become exercisable, the award recipient
may exercise such options, or any portion thereof, for a term of ten years after the
date of grant. |
| (3) | The market value of the stock awards that have not vested was
determined based on the per share closing price of the Company’s common stock on
December 31, 2014 ($22.00). |
| (4) | Stock award is time vested according to the following schedule:
25% after one year, an additional 25% after two years and the remaining 50% after three
years. |
Employment and Change-in-Control Agreements with Named Executive
Officers
Securing the continued service of key executives
is essential to the successful future of the Company. Employment agreements and management continuity agreements (which help retain
key executives during a possible change of control situation) assist the Company by providing security to key executives.
The Company has an employment agreement
with Mr. Foster and the Bank has an employment agreement with Mr. Hendricks. In addition, the Company and the Bank had an employment
agreement with Mr. Winfree prior to his retirement on February 28, 2014.
Mr. Foster’s employment agreement
was entered into on August 8, 2013 with an initial term of three years. Pursuant to the terms of his agreement, Mr. Foster was
employed initially as the President of the Company and the Bank and became Chief Executive Officer and a director of the Company
and the Bank upon Mr. Winfree’s retirement. The agreement may be extended by mutual agreement of the parties at any time.
Annually, the Executive Committee of the board of directors reviews Mr. Foster’s performance for the immediately preceding
year and, after such review, may extend his employment agreement (it has not yet been extended). Mr. Foster currently receives
a base salary of $250,000 per year, an increase from the initial base salary of $200,000 per year set forth in his employment
agreement. Pursuant to his agreement, he is entitled to participate in the Village Bank Supplemental Executive Retirement Plan
with a potential annual benefit of $50,000 for 20 years. In addition, he was granted restricted stock awards in the amount of
$100,000 upon being named President on August 19, 2013 and is entitled to participate in benefit plans available to senior executives
of the Company and the Bank. Mr. Foster is not entitled to any severance benefits pursuant to his employment agreement. The Company
has applied for approval from the Reserve Bank and the FDIC of a separate severance and change of control agreement for Mr. Foster.
Mr. Hendrick’s employment agreement
was entered into on May 16, 2014 and will expire on May 16, 2016 unless renewed or extended in writing by the parties. Pursuant
to the agreement, Mr. Hendricks serves as Executive Vice President and Chief Credit Officer of the Bank and receives an annual
base salary of $180,000. The Bank’s board of directors will review his base salary at least annually and may make adjustments
in its discretion. Mr. Hendricks will be entitled to cash bonuses and stock-based awards in such amounts as may be determined
by the Company’s or the Bank’s board of directors in accordance with the terms and conditions of the applicable incentive
plans in effect for senior executives of the Company and the Bank. Pursuant to his agreement, Mr. Hendricks is entitled to certain
benefits in the event of a “Change of Control” (as defined in his agreement) of the Bank. If, following a Change of
Control of the Bank, he is terminated by the Bank without Cause (as defined in his agreement), he terminates his employment for
Good Reason (as defined in his agreement) or the Bank fails to renew his agreement, he will be entitled to receive a lump sum
cash payment equal to his annual base salary, payable in equal monthly installments for a period of 12 months succeeding the date
of his termination.
Mr. Winfree’s employment agreement
with the Company and the Bank was entered into on May 1, 2001 with an initial term of three years. Under the agreement, Mr.
Winfree agreed to perform the services and duties appropriate to his positions at that time of President and Chief Executive Officer
of the Company and the Bank. Such agreement was effective until September 28, 2013, at which time Mr. Winfree stepped down as
President and entered into a new employment agreement covering the period from September 28, 2013 to September 27, 2014. His new
agreement was effective until his retirement from his position as Chief Executive Officer on February 28, 2014.
MARKET PRICE OF COMMON STOCK AND DIVIDEND
POLICY
Market Price of Common Stock
Our common stock trades on the NASDAQ Capital
Market under the symbol “VBFC.” As of January 20, 2015, there were 350,622 shares of our common stock issued and outstanding
held by approximately 1,645 shareholders of record. On February 9, 2015, the last reported sale price of our common stock was
$18.47 per share. The following table shows the high and low sales prices of our common stock during the periods indicated.
| |
Sales Prices (1) | |
| |
High | | |
Low | |
2013 | |
| | | |
| | |
First Quarter | |
$ | 41.12 | | |
$ | 15.36 | |
Second Quarter | |
| 37.76 | | |
| 26.56 | |
Third Quarter | |
| 30.08 | | |
| 21.76 | |
Fourth Quarter | |
| 27.20 | | |
| 17.92 | |
| |
| | | |
| | |
2014 | |
| | | |
| | |
First Quarter | |
$ | 30.40 | | |
$ | 20.16 | |
Second Quarter | |
| 24.00 | | |
| 20.64 | |
Third Quarter | |
| 40.80 | | |
| 19.04 | |
Fourth Quarter | |
| 27.22 | | |
| 16.22 | |
| |
| | | |
| | |
2015 | |
| | | |
| | |
First Quarter (through February 9, 2015) | |
$ | 26.00 | | |
$ | 18.47 | |
____________
| (1) | On August 8, 2014, we completed a 1-for-16 reverse split of our
common stock. All prices are presented as if the reverse split was effective at the beginning
of the earliest period presented. |
On August 8, 2014, we received a letter
from NASDAQ informing us that we were no longer in compliance with NASDAQ Listing Rule 5550(a)(4), which requires that we have
at least 500,000 publicly held shares of common stock. The phrase “publicly held shares” is defined by NASDAQ to mean
the total number of shares outstanding less any shares held by officers, directors or beneficial owners of 10% or more. According
to the letter from NASDAQ, we had 227,276 publicly held shares as of August 8, 2014. On September 22, 2014, we submitted to NASDAQ
a plan to regain compliance with such rule. The plan was accepted by NASDAQ and we were given a deadline of February 4, 2015 to
implement our plan and regain compliance. On February 5, 2015, we received a determination letter from NASDAQ indicating that
because we did not regain compliance by the February 4, 2015 deadline, our common stock will be delisted effective February 17,
2015 unless we appeal the determination to a NASDAQ Hearings Panel. We intend to appeal the determination and request that we
be provided additional time to regain compliance. If an appeal is timely made, our common stock will continue to trade on the
NASDAQ Capital Market until the Hearings Panel issues a determination otherwise. No assurance can be given as to the decision
that the Hearings Panel may make. See “Risk Factors” for a discussion of the potential consequences of our common
stock being delisted.
This offering was one of the alternatives
presented to NASDAQ in our plan to regain compliance. If the offering is fully subscribed, we expect to issue 1,051,866 new shares
of common stock and exceed the minimum of 500,000 publicly held shares following the offering. However, if the standby investor
purchases, or receives in exchange for Series A preferred stock, sufficient shares of common stock such that he will own more
than 10% of our outstanding common stock after the offering, his shares will not be considered publicly held shares and the Company
may not be able to issue a sufficient number of other shares to regain compliance. In the event that we do not issue sufficient
shares in the offering to meet such minimum, we intend to explore alternative actions to maintain our listing. However, there
is no guarantee that such actions will be effective in increasing our publicly held shares, or that we will be able to comply
with the other standards that we are required to meet in order to maintain a listing of our common stock.
Dividends
We have not paid any dividends on our common
stock since inception. We intend to retain all of our earnings to finance our operations and we do not anticipate paying cash
dividends for the foreseeable future. Any decision by the board of directors to declare dividends in the future will depend on
our future earnings, capital requirements, financial condition and other factors deemed relevant by the board. Banking regulations
limit the amount of cash dividends that may be paid without prior approval of the Bank’s regulatory agencies. Such dividends
are limited to the Bank’s accumulated retained earnings. The Federal Reserve has issued guidelines that bank holding companies
should inform and consult with the Federal Reserve in advance of declaring or paying a dividend that exceeds earnings for the
period for which the dividend is being paid or that could result in a material adverse charge to the organization’s capital
structure.
We also are subject to a Written Agreement
with the Reserve Bank that restricts our ability pay dividends on our capital stock, including our Series A preferred stock, trust
preferred securities or common stock without the prior consent of the Federal Reserve. In addition, the Bank is subject to a Consent
Order with the FDIC and the Virginia BFI that prohibits the Bank from paying dividends, paying bonuses or making any other form
of payment outside the ordinary course of business that would result in a reduction of capital without approval.
We have deferred interest payments on our
junior subordinated debt securities of $1,009,712 as of September 30, 2014. Although we elected to defer payment of the interest
due, the amount has been accrued and is included in interest expense. In addition, the Company has deferred dividend payments
on our outstanding Series A preferred stock, including dividends that accrue on the unpaid balance. The total arrearage on our
Series A preferred stock as of September 30, 2014 is $3,243,600 and has been accrued and reflected as a reduction of retained
earnings. Pursuant to the terms of the indenture governing the junior subordinated debt securities and our Articles, we may not
pay any cash dividends on our common stock until we are current on interest payments on such junior subordinated debt securities
and current on dividend payments on our Series A preferred stock.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital
stock is qualified by reference to applicable provisions of federal and state law and to our Articles of Incorporation, as amended,
and Bylaws, as amended. Our Articles and Bylaws are incorporated by reference as exhibits to the registration statement of which
this prospectus forms a part.
General
Our authorized capital stock consists of
10,000,000 shares of common stock, par value $4.00 per share, and 1,000,000 shares of preferred stock, par value $4.00 per share.
As of January 20, 2015, there were 350,622 shares of common stock outstanding and 14,738 shares of Series A preferred stock outstanding.
Common Stock
General
Each share of our common stock has the
same relative rights as, and is identical in all respects to, each other share of our common stock. Our common stock is traded
on the NASDAQ Capital Market under the symbol “VBFC.” All outstanding shares of common stock are, and any common stock
issued or sold under this prospectus will be, fully paid and nonassessable.
Voting Rights
Except as otherwise provided by law, each
holder of our common stock has one vote per share on all matters voted upon by shareholders. With respect to the election of directors,
cumulative voting is not available to our shareholders.
Dividends
Holders of shares of common stock are entitled
to receive dividends when and as declared by our board of directors out of funds legally available therefor. We are a corporation
separate and distinct from the Bank and most of our revenues are received in the form of dividends or interest paid by the Bank.
Any decision by the board of directors
to declare dividends in the future will depend on our future earnings, capital requirements, financial condition and other factors
deemed relevant by the board. Banking regulations limit the amount of cash dividends that may be paid without prior approval of
the Bank’s regulatory agencies. Such dividends are limited to the Bank’s accumulated retained earnings. The Federal
Reserve has issued guidelines that bank holding companies should inform and consult with the Federal Reserve in advance of declaring
or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material
adverse charge to the organization’s capital structure.
We also are subject to a Written Agreement
with the Reserve Bank that restricts our ability pay dividends on our capital stock, including our Series A preferred stock, trust
preferred securities or common stock without the prior consent of the Reserve Bank. In addition, the Bank is subject to a Consent
Order with the FDIC and the Virginia BFI that prohibits the Bank from paying dividends, paying bonuses or making any other form
of payment outside the ordinary course of business that would result in a reduction of capital without approval.
We have deferred interest payments on our
junior subordinated debt securities of $1,009,712 as of September 30, 2014. Although we elected to defer payment of the interest
due, the amount has been accrued and is included in interest expense. In addition, the Company has deferred dividend payments
on our outstanding Series A preferred stock, including dividends that accrue on the unpaid balance. The total arrearage on our
Series A preferred stock as of September 30, 2014 is $3,243,600 and has been accrued and reflected as a reduction of retained
earnings. Pursuant to the terms of the indenture governing the junior subordinated debt securities and our Articles, we may not
pay any cash dividends on our common stock until we are current on interest payments on such junior subordinated debt securities
and current on dividend payments on our Series A preferred stock.
Liquidation Rights
In the event of our liquidation, dissolution
or winding up, the holders of shares of our common stock shall be entitled to receive, in cash or in kind, our assets available
for distribution remaining after payment or provision for payment of our debts and liabilities.
Directors and Classes of Directors
Our board of directors is divided into
three classes, apportioned as evenly as possible, with directors serving staggered three-year terms. Currently, our board of directors
consists of 13 directors. Under the Articles, directors may be removed with or without cause with the affirmative vote of a majority
of the outstanding shares entitled to vote.
No Preemptive or Conversion Rights
Holders of shares of our common stock do
not have preemptive rights to purchase additional shares of our common stock, and have no conversion or redemption rights.
Calls and Assessments
All of the issued and outstanding shares
of our common stock are non-assessable and non-callable.
Shares are Not Insured by the FDIC
Investments in our common stock will not
qualify as deposits or savings accounts and will not be insured or guaranteed by the FDIC or any other governmental agency and
are subject to investment risk, including the possible loss of principal.
Transfer Agent
Computershare, Inc., 250 Royall Street,
Suite V, Canton, Massachusetts, is the transfer agent for our common stock.
Preferred Stock
The board of directors may, from time to
time, without shareholder approval, issue shares of our authorized, undesignated preferred stock, in one or more classes or series.
In connection with any such issuance, the board of directors may by resolution determine the designation, voting rights, preferences
as to dividends, in liquidation or otherwise, participation, redemption, sinking fund, conversion, dividend or other special rights
or powers, and the limitations, qualifications and restrictions of such shares of preferred stock.
As of the date hereof, the board of directors
has created one series of preferred stock, the Series A preferred stock, which was issued to the Treasury in connection with the
Troubled Asset Relief Program. The Series A preferred stock consists of 14,738 shares having a liquidation amount per share of
$1,000. In November 2013, we participated in a successful auction of the Series A preferred stock by the Treasury that resulted
in the purchase of the securities by private and institutional investors. This freed us from some constraints and costs that were
in place while the Treasury held the shares. The Series A preferred stock pays cumulative dividends at a rate of 9% per year,
prior to the payment of dividends on any shares of common stock or other Junior Stock, as defined in the Articles.
The Series A preferred stock is non-voting,
except in limited circumstances. In accordance with our Articles, because we have failed to pay dividends on the Series A preferred
stock for six dividend periods, the holders of the Series A preferred stock are entitled to nominate up to two directors to serve
on our board. We would be required to increase the size of the board to accommodate such additional directors and holders of the
Series A preferred stock, together with the holders of any outstanding parity stock with like voting rights, voting as a single
class, would be entitled to elect the two additional members of our board of directors at the next annual meeting (or at a special
meeting called for the purpose of electing these directors prior to the next annual meeting), and at each subsequent annual meeting
until all accrued and unpaid dividends for all past dividend periods have been paid in full. The holders of the Series A preferred
stock have not nominated directors to our board and have not indicated to us that they plan to do so.
U.S. Treasury Warrant
In addition to the Series A preferred stock
that was initially issued to the Treasury, we also issued a warrant to purchase 499,029 shares of our common stock at an exercise
price of $4.43 per share for up to 10 years so long as the Series A preferred stock is outstanding. The warrant provides for the
adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution
provisions, such as upon stock splits or distributions of securities or other assets to holders of common stock, and upon certain
issuances of common stock at or below a specified price relative to the then-current market price of common stock. The number
of shares of common stock underlying the warrant was adjusted to 31,189.31 shares, and the exercise price was adjusted to $70.88,
to reflect the 1-for-16 reverse split of our common stock that was completed on August 8, 2014. We believe that the offering will
cause minimal or no adjustment to the warrant. However, if the Treasury takes a different position or future issuances of our
common stock result in adjustments to the warrant, our shareholders could experience additional dilution. The Treasury has agreed
not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant.
Anti-Takeover Considerations
The following is a summary of certain provisions
of the Articles and the Bylaws that may have the effect of discouraging, delaying, or preventing a change of control, change in
management, or an unsolicited acquisition proposal that a shareholder might consider favorable, including proposals that might
result in the payment of a premium over the market price for the shares held by the Company’s shareholders. This summary
does not purport to be complete and is qualified in its entirety by reference to our Articles and Bylaws and to the relevant provisions
of Virginia law.
While these provisions of the Articles
and the Bylaws might be deemed to have some “anti-takeover” effect, the principal effect of these provisions is to
protect our shareholders generally and to provide the board of directors and shareholders a reasonable opportunity to evaluate
and respond to unsolicited acquisition proposals.
Classified Board of Directors.
Our Articles divide the board of directors
into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the board of directors
will be elected at each annual meeting of shareholders. The classification of directors, together with the provision in the Articles
that permits the remaining directors to fill any vacancies on the board of directors, will have the effect of making it more difficult
for shareholders to change the composition of the board of directors. As a result, at least two annual meetings of shareholders
may be required for the shareholders to change a majority of the directors, whether or not a change in the board of directors
would be beneficial and whether or not a majority of shareholders believe that such a change would be desirable.
Authorized Preferred Stock.
The Articles authorize our board of directors,
subject to applicable Virginia law and federal banking regulations, to authorize the issuance of preferred stock at such times,
for such purposes and for such consideration as the board may deem advisable without further shareholder approval. The issuance
of preferred stock under certain circumstances may have the effect of discouraging an attempt by a third party to acquire control
of the Company by, for example, authorizing the issuance of a series of preferred stock with rights and preferences designed to
impede the proposed transaction.
Supermajority Voting.
The Virginia Stock Corporation Act (the
“Virginia SCA”) provides that, unless a corporation’s articles of incorporation provide for a higher or lower
vote, certain significant corporate actions must be approved by the affirmative vote of the holders of more than two-thirds of
the votes entitled to be cast on the matter. Corporate actions requiring a two-thirds vote include:
| · | adoption of
plans of merger or exchange; |
| · | sales of all
or substantially all of a corporation’s assets other than in the ordinary course
of business; and |
| · | adoption of
plans of dissolution. |
The Virginia SCA provides that a corporation’s articles
may either increase the vote required to approve those actions or may decrease the required vote to not less than a majority of
the votes entitled to be cast.
Our Articles provide that the actions set
out above must be approved by the vote of a majority of all the votes entitled to be cast on such transactions by each voting
group entitled to vote, provided that the transaction has been approved and recommended by at least two-thirds of our directors
in office at the time of such approval and recommendation. If the transaction is not so approved and recommended by at least two-thirds
of our directors, then the transaction must be approved by the vote of at least 80% of all the votes entitled to be cast on such
transactions by each voting group entitled to vote.
Increasing the Number of Directors.
Under Virginia law, a board of directors
may amend or repeal bylaws unless articles of incorporation or other provisions of Virginia law reserve such power exclusively
in the shareholders or the shareholders, in adopting or amending particular bylaws, expressly prohibit the board of directors
from amending or repealing that bylaw. Our Articles require that our board be composed of no fewer than seven and no more than
25 directors, and we currently have 13 directors. Our Articles do not reserve the power to amend the Bylaws to increase or decrease
the number of directors exclusively to the shareholders and no bylaw, and no amendment thereto, expressly prohibits the board
of directors from amending the Bylaws to increase or decrease the number of directors. According to Virginia law, our board of
directors may amend our Bylaws at any time to increase or decrease the number of directors by up to 30% of the number of directors
of all classes immediately following the most recent election of directors by the shareholders. In addition, the newly created
directorships resulting from an increase in the number of authorized directors shall be filled by the affirmative vote of a majority
of the directors then in office. As a result, if faced with an attempt to take control of our board, our directors may increase
the size of the board and install directors opposed to the hostile takeover attempt.
Inability of Shareholders to Call Special Meetings.
Pursuant to our Bylaws, special meetings
of shareholders may be called only by our president or the board of directors. As a result, shareholders are not able to act on
matters other than at annual shareholders’ meetings unless they are able to persuade the president or a majority of the
board of directors to call a special meeting.
Advance Notification Requirements.
Our Bylaws also require a shareholder who
desires to raise new business, or nominate a candidate for election to the board of directors, at an annual meeting of shareholders
to provide us advance notice of at least 60 days and not more than 90 days before the date of the scheduled annual meeting; provided
that in the event that less than 70 days’ notice or prior public disclosure of the date of the scheduled annual meeting
is given or made, notice by a shareholder, to be timely, must be received not later than the close of business on the 10th
day following the earlier of the date on which such notice of the meeting was mailed or the date public disclosure of the
meeting was made. The Bylaws require a shareholder who desires to raise new business to provide certain information to the Company
concerning the nature of the new business, the shareholder and the shareholder’s interest in the business matter. Similarly,
a shareholder wishing to nominate any person for election as a director must provide the Company with certain information concerning
the nominee and the proposing shareholder. Such requirements may discourage the Company’s shareholders from submitting nominations
and proposals.
Amendments to Articles of Incorporation and Bylaws.
An amendment to our Articles must be approved
by the vote of a majority of all the votes entitled to be cast on the amendment by each voting group entitled to vote, provided
that the amendment has been approved and recommended by at least two-thirds of our directors in office at the time of such approval
and recommendation. If the amendment is not so approved and recommended by at least two-thirds of our directors, then the amendment
must be approved by the vote of at least 80% of all the votes entitled to be cast on such amendment by each voting group entitled
to vote.
Our Bylaws may be amended or repealed by
our board of directors except to the extent that: (i) the power of amendment is reserved exclusively to the shareholders
by law or the Articles, or (ii) the shareholders, in adopting or amending a particular bylaw, provide expressly that the board
of directors may not amend or repeal such bylaw.
Affiliated Transactions.
The Virginia SCA contains provisions governing
“Affiliated Transactions.” Affiliated Transactions include certain mergers and share exchanges, material dispositions
of corporate assets not in the ordinary course of business, any dissolution of the corporation proposed by or on behalf of an
Interested Shareholder (as defined below), or reclassifications, including reverse stock splits, recapitalizations or mergers
of the corporation with its subsidiaries which have the effect of increasing the percentage of voting shares beneficially owned
by an Interested Shareholder by more than 5%. For purposes of the provisions governing Affiliated Transactions, an “Interested
Shareholder” is defined as any beneficial owner of more than 10% of any class of the voting securities of a Virginia corporation.
Subject to certain exceptions discussed
below, the provisions governing Affiliated Transactions require that, for three years following the date upon which any shareholder
becomes an Interested Shareholder, a Virginia corporation cannot engage in an Affiliated Transaction with such Interested Shareholder
unless approved by the affirmative vote of the holders of two-thirds of the voting shares of the corporation, other than the shares
beneficially owned by the Interested Shareholder, and by a majority (but not less than two) of the “Disinterested Directors.”
A “Disinterested Director” is, with respect to a particular Interested Shareholder, a member of a corporation’s
board of directors who (i) was a member before the later of January 1, 1988 and the date on which an Interested Shareholder became
an Interested Shareholder, and (ii) was recommended for election by, or was elected to fill a vacancy and received the affirmative
vote of, a majority of the Disinterested Directors then on the board. At the expiration of the three-year period, these provisions
require approval of Affiliated Transactions by the affirmative vote of the holders of two-thirds of the voting shares of the corporation,
other than those beneficially owned by the Interested Shareholder.
The principal exceptions to the special
voting requirement apply to Affiliated Transactions occurring after the three-year period has expired and require either that
the transaction be approved by a majority of the Disinterested Directors or that the transaction satisfy certain fair price requirements
set forth in the statute. In general, the fair price requirements provide that the shareholders must receive the highest per share
price for their shares as was paid by the Interested Shareholder for his shares or the fair market value of their shares, whichever
is greater. They also require that, during the three years preceding the announcement of the proposed Affiliated Transaction,
all required dividends have been paid and no special financial accommodations have been accorded the Interested Shareholder unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special
voting requirements applies to an Affiliated Transaction with an Interested Shareholder whose acquisition of shares making such
person an Interested Shareholder was approved by a majority of the corporation’s Disinterested Directors. A majority of
the Company’s Disinterested Directors approved of the Standby Purchase Agreement and the offering.
These provisions were designed to deter
certain takeovers of Virginia corporations. In addition, the statute provides that, by affirmative vote of a majority of the voting
shares other than shares owned by any Interested Shareholder, a corporation may adopt, by meeting certain voting requirements,
an amendment to its articles of incorporation or bylaws providing that the Affiliated Transactions provisions shall not apply
to the corporation. The Company has not adopted such an amendment.
Control Share Acquisitions.
The Virginia SCA also contains provisions
regulating certain “Control Share Acquisitions,” which are transactions causing the voting strength of any person
acquiring beneficial ownership of shares of a public corporation in Virginia to meet or exceed certain threshold percentages (20%,
33 1/3% or 50%) of the total votes entitled to be cast for the election of directors. Shares acquired in a Control Share Acquisition
have no voting rights unless: (i) the voting rights are granted by a majority vote of all outstanding shares other than those
held by the acquiring person or any officer or employee director of the corporation, or (ii) the articles of incorporation or
bylaws of the corporation provide that these Virginia law provisions do not apply to acquisitions of its shares. The acquiring
person may require that a special meeting of the shareholders be held to consider the grant of voting rights to the shares acquired
in the Control Share Acquisition. These provisions were designed to deter certain takeovers of Virginia public corporations. The
Bylaws of the Company do not contain a provision that makes these statutes inapplicable to acquisitions of our common stock. However,
issuances of shares directly from the issuer are exempt from these provisions so the issuance of shares to the standby investor
will not trigger these provisions.
PLAN OF DISTRIBUTION
On or about February 16, 2015, we intend
to issue subscription rights and distribute the subscription rights certificates and copies of this prospectus to individuals
who owned shares of common stock on January 20, 2015. Upon completion of the offering, we intend to issue shares of our common
stock directly to those persons who properly exercised their subscription rights prior to the expiration of the offering. We have
also entered into the Standby Purchase Agreement with the standby investor pursuant to which he has committed to buy certain shares
in the offering to the extent shares are available after issuances to shareholders exercising their basic subscription rights.
Compass Point Research & Trading, LLC
and Boenning & Scattergood, Inc. have been engaged to assist us in selling the shares on a best efforts basis. The sales agents
are each broker-dealers registered with FINRA. The sales agents have agreed to assist in the offering by among other things, consulting
as to the structure of the offering, helping identify potential standby investors including the standby investor, reviewing all
offering documents, including this prospectus, stock order forms and related offering materials, assisting in the design and implementation
of a marketing strategy for the offering, assisting management in scheduling and preparing for meetings with potential investors
and providing such other general advice and assistance as may be reasonably necessary to complete the offering. The sales agents
are not required to purchase any shares in the offering, but will use their best efforts to sell the shares offered.
The sales agents express no opinion and
make no recommendation to holders of the subscription rights as to the purchase by any person of shares of common stock in the
offering. The sales agents also express no opinion as to the prices at which shares to be distributed in connection with the offering
may trade if and when they are issued or at any future time.
As compensation for their financial advisory
services, we have agreed to pay to the sales agents the following consideration:
| · | A
retainer fee equal to $40,000, which was paid at the time of execution of the engagement
letter among the sales agents and the Company and will be credited towards the expense
reimbursement due to the sales agents; |
| · | Two
percent (2%) of the gross proceeds from shares sold to shareholders exercising their
basic subscription privilege; |
| · | An
additional two percent (2%) of the gross proceeds from shares sold to shareholders exercising
their basic subscription privilege, if shareholders purchase, in the aggregate, 35% of
the shares available through the exercise of their basic subscription privilege; |
| · | Five
percent (5%) of the gross proceeds from shares sold to shareholders exercising their
oversubscription privilege; and |
| · | Five
percent (5%) of the gross proceeds from shares sold to the standby investor. |
The following shows the per share and the
total sales agent advisory fees based upon the assumptions set forth below.
| |
Per Share | | |
Aggregate (1) | |
Subscription price | |
$ | 13.87 | | |
$ | 14,589,381 | |
Estimated sales agent commissions and expenses (2) | |
$ | 0.71922 | | |
$ | 756,522 | |
Estimated proceeds to us, before expenses | |
$ | 13.15078 | | |
$ | 13,832,859 | |
____________
| (1) | Assumes that 525,933 shares (50% of the shares offered)
are purchased in the offering by shareholders exercising their basic subscription privilege
and the remaining 525,933 shares are purchased by the standby investor. Assumes that,
in lieu of accepting cash, we elect to exchange all of the 9,023 shares of Series A preferred
stock that the standby investor owns for shares of our common stock in the offering based
on a $500.34 per share valuation for 4,023 of such shares of Series A preferred stock
owned by the standby investor as of the date of the Standby Purchase Agreement, a $516.4980
per share valuation for 2,221 of such shares of Series A preferred stock acquired by
the standby investor on December 23, 2014 and a $525.2238 per share valuation for 2,779
of such shares of Series A preferred stock acquired by the standby investor on February
6, 2015. The valuations of the shares of Series A preferred stock that were acquired
by the standby investor on December 23, 2014 and February 6, 2015 were calculated based
on an assumed closing date of March 31, 2015. See “Use of Proceeds” and “The
Standby Purchase Agreement − Termination Provisions.” |
| | (Footnotes continue on the following
page) |
| (2) | Payable to our sales agents, Compass Point Research & Trading,
LLC and Boenning & Scattergood, Inc. Assumes that 525,933 shares (50% of the
shares offered) are purchased in the offering by shareholders exercising their basic
subscription privilege and the remaining 525,933 shares are purchased by the standby
investor. |
The fees described above will be divided
between the sales agents as described in the sales agency agreement. In addition to such fees, we have agreed to reimburse the
sales agents for their reasonable out-of-pocket expenses, not to exceed $100,000 (including the amount of the retainer fee), incurred
in connection with their engagement, provided, however, that the aggregate amount of expenses of the sales agents that we reimburse,
when aggregated with the advisory fees that we will pay them as described above, shall not exceed eight percent of the aggregate
gross proceeds of the shares issued in the offering, including to the standby purchaser.
We have also agreed to indemnify the sales
agents and certain of their affiliated persons against certain claims, liabilities and expenses arising in connection with the
offering, or contribute to payments they may be required to make in respect thereof.
In July 2014, the Company engaged Compass
Point Research & Trading, LLC and Boenning & Scattergood, Inc. to serve as the co-managers for a standby rights offering
or any other offering of common equity of the Company. Under the terms of the engagement, which has a term of one year, the Company
granted Compass Point Research & Trading, LLC and Boenning & Scattergood, Inc., a right of first refusal to serve as Company’s
lead managing underwriters or lead placement agents and joint book runners in connection with any public or private offering of
equity securities, including preferred securities and preferred securities convertible into common equity, that the Company determined
to pursue during the one year period subsequent to the date of completion of this offering.
The sales agents and their respective affiliates
are financial institutions engaged in various activities, which may include investment banking, securities trading, financial
advisory, investment management, investments, hedging, financing, and brokerage activities. The sales agents and certain of their
affiliates have in the past provided, and they may from time to time in the future provide, certain financial advisory, investment
banking, or other services to us, for which they in the past received, and may in the future receive, customary fees and reimbursement
for their expenses. In the ordinary course of its business as a broker-dealer, the sales agents may purchase securities from and
sell securities to the Company and its affiliates. The sales agents may also actively trade the equity or debt securities of the
Company or its affiliates for its own account and for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities.
Our directors and officers may participate
in the solicitation of the exercise of subscription rights for the purchase of common stock. Other trained employees of the Company
may assist in the offering in ministerial capacities, providing clerical work in effecting an exercise of subscription rights,
or answering questions of a ministerial nature. Our officers, directors, and employees will rely on the safe harbor from broker-dealer
registration set forth in Rule 3a4-1 of the Exchange Act. None of our officers, directors, or employees will be compensated in
connection with their participation in the offering by the payment of commissions or other remuneration based either directly
or indirectly on the transactions in the shares of common stock.
We will pay the fees and out-of-pocket
expenses of Computershare, Inc., the subscription agent, which are estimated to be approximately $50,000. We have also agreed
to indemnify the subscription agent for certain losses in connection with the offering.
If you have any questions regarding completing
a subscription rights certificate or submitting payment in the offering, please contact our sales agents, Compass Point Research
& Trading, LLC and Boenning & Scattergood, Inc., at (216) 378-1297. If you have any general questions regarding the offering,
the Company, or the Bank, please contact our Chief Financial Officer, C. Harril Whitehurst, Jr., at (804) 419-1232.
LEGAL MATTERS
The validity of the shares of common stock
issuable upon exercise of the subscription rights and offered by this prospectus has been passed upon for us by LeClairRyan, A
Professional Corporation, Richmond, Virginia. Certain legal matters will be passed upon for Compass Point Research & Trading,
LLC and Boenning & Scattergood, Inc. by Silver, Freedman, Taff & Tiernan LLP.
EXPERTS
The consolidated balance sheets of Village
Bank and Trust Financial Corp. and Subsidiary as of December 31, 2013 and 2012, and the related consolidated statements of operations,
comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December
31, 2013, have been incorporated by reference herein in reliance upon the report of BDO USA, LLP, independent registered public
accounting firm, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current
reports, proxy statements, and other information with the Commission. Our filings with the Commission are available to the public
on the Internet at the Commission’s website at http://www.sec.gov and on the Investor Relations section of our website at
http://www.villagebank.com. Information on our website is not part of this prospectus. You may also read and copy any document
we file with the Commission at the Commission’s Public Reference Room at 100 F Street N.E., Washington, DC 20549. Please
call the Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our Commission file
number is 000-50765.
We have filed a registration statement,
of which this prospectus is a part, covering the securities offered hereby. As allowed by Commission rules, this prospectus does
not contain all of the information and exhibits included in the registration statement. We refer you to the information and exhibits
included in the registration statement for further information. This prospectus is qualified in its entirety by such information
and exhibits.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Commission allows us to incorporate
by reference the information we file with it, which means that we can disclose important information to you by referring you to
those documents. The information incorporated by reference is an important part of this prospectus. Information in this prospectus
supersedes information incorporated by reference that we filed with the Commission prior to the date of this prospectus. We incorporate
by reference into this registration statement and prospectus the documents listed below, except for portions of such reports that
were deemed to be furnished and not filed:
| · | Our
Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with
the Commission on March 26, 2014. |
| · | Our
Quarterly Reports on Form 10-Q for the quarters ended September 30, 2014, as filed with
the Commission on October 31, 2014; June 30, 2014, as filed with the Commission on August
1, 2014; and March 31, 2014, as filed with the Commission on May 15, 2014. |
| · | Our
Current Reports on Form 8-K, as filed with the Commission on May 22, 2014, May 27, 2014,
June 6, 2014, August 11, 2014, August 13, 2014, November 12, 2014, December 19, 2014,
January 9, 2015, January 27, 2015 and February 9, 2015. |
| · | The
information specifically incorporated by reference into our Annual Report on Form 10-K
for the fiscal year ended December 31, 2013 from our definitive proxy statement on Schedule 14A,
as filed with the Commission on April 16, 2014. |
The information contained in this prospectus should be read
together with the information in the documents incorporated in this prospectus by reference.
You may obtain any of these incorporated
documents from us without charge, excluding any exhibits to these documents unless the exhibit is specifically incorporated by
reference in such document, by requesting them from us in writing or by telephone at the following address:
C. Harril Whitehurst, Jr.
Executive Vice President and Chief Financial
Officer
Village Bank and Trust Financial Corp.
13319 Midlothian Turnpike
Midlothian, Virginia 23113
(804) 419-1232
These incorporated documents may also be
available on the Investor Relations section of our website at http://www.villagebank.com. The information on, or that can be accessed
through, our website is not incorporated by reference into this prospectus and should not be considered to be a part of this prospectus.
Common Stock Underlying Subscription Rights
To Purchase Up To 1,051,866 Shares of Common
Stock
February 10, 2015
We have not authorized any dealer, salesperson
or other person to give you written information other than this prospectus or to make representations as to matters not stated
in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or
our solicitation of your offer to buy these securities in any jurisdiction where that would not be permitted or legal. Neither
the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that
the information contained herein nor have the affairs of the company not changed since the date of this prospectus.
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