HomeTown Bank raises $14 million from investors

Roanoke’s HomeTown Bank plans to reorganize the financial structure of the company with two profit-driven objectives in mind: to avoid a fall 2014 spike in dividend obligations assumed during the recession and to amass money for growth.

HomeTown Bankshares Corp. said Friday it has raised $14 million in new outside investment.

The influx of money represents “a vote of confidence by the investment community showing strong support for our company and its strategic plan,” Susan Still, president and CEO, said in a prepared release.

Chief Financial Officer Charles Maness said the capital-raising began in April, and the investors won’t be publicly identified, but “a good percentage are local.”

He confirmed that they include people who have invested before in the bank, which was created in 2005 by Roanoke business leaders who said the city needed an additional locally owned and managed community bank. At its inception, the bank took in about $25 million from 2,138 initial investors.

The bank’s announcement is an outgrowth of the recession that began in late 2007. In response to the slowdown, the federal government sought to stabilize the financial system with a bank aid initiative called the Capital Purchase Program. Hoping to avoid a crash in lending, the U.S. Department of Treasury infused cash into 707 healthy banks in 48 states in return for preferred stock that earns a dividend.

The holding company for HomeTown Bank received nearly $10.4 million, while the holding company for Valley Bank in Roanoke received $16 million. Four years later, both banks are gearing up to exit the program, though by different means of paying the money back.

Using its newly received investor funds, HomeTown plans in a few months to redeem all $10.4 million worth of stock it issued to the treasury department in 2009. The shares are now in the hands of a buyer or buyers that purchased the HomeTown shares at a discounted price at a government auction last fall and have continued to collect the dividends.

The “major reason” the bank garnered investments with which to pay off this group of preferred shareholders is the fact that the dividend rate for $10 million of the stock will climb from 5 percent to 9 percent in September 2014, Maness said. HomeTown is already paying 9 percent on $374,000 in stock.

Maness compared the plan to refinancing a mortgage at a lower interest rate.

“That’s a very simple illustration, but that really is the gist of it,” he said.

The plan is not cost-free. In connection with the newly received $14 million, the company issued 14,000 shares of preferred stock with a 6 percent annual dividend. The bank’s annual dividend for those shares, which comes to $840,000, exceeds the $533,000 it has been paying on the Capital Purchase Program shares.

That said, HomeTown expects to do more than refinance an obligation. It expects to have $3.6 million to $3.7 million of the $14 million left with which to try to grow the bank, according to Maness, who said the goal is to increase lending.

HomeTown is not the only bank to raise outside funds to retire Capital Purchase Program stock. It was done by large banks such as Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group, which raised billions, and various small and medium-sized institutions, according to SNL Financial, a Charlottesville-based analytical firm that provides financial information on banking and other types of private and public companies. SNL located more than 70 examples looking at only banks’ common stock offerings.

Valley Bank, in contrast, has been using retained profits to redeem the shares it sold the government. Ellis Gutshall, president and CEO of the company, said the government has held onto the Valley Bank shares on its belief it could get full price for them — $16 million — under the bank’s redemption plan, which is to retire them in 10-percent increments.

In May, the 18-year-old bank announced that the third installment of $1.6 million was about to go out.

By the time the bank’s dividend rate jumps to 9 percent early next year, the stock will be half gone, Gutshall said. The after-tax dividend payments will be $720,000 at that point — versus $800,000 since issuance — and decreasing on a path to zero, he said.

“This action is the result of the continued efforts and commitment of our directors and employees, and is indicative of the strong operating performance and capital position of the company,” Gutshall said.

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