West Chester based Stonebridge Bank, which had nearly $500 million in total assets at its peak but was crushed by the recession and had to file for Chapter 11 bankruptcy protection in June this year, is to be auctioned off by its holding company.

The sale is scheduled to take place on October 19, with a group of local business leaders signing on as bidders through an asset purchase agreement, to make sure a base level is set for all following offers. The sale will be conducted under section 363 of the federal bankruptcy code.

The banks problems can be traced back to March ten years ago, said Jeff Manning of Cohn Reznick Capital Markets. Manning, who will be running the auction as a trustee. Manning explained that the parent company of the bank, Stonebridge Financial Corp., issued $10 million in subordinated debt in the form of trust preferred securities in an attempt to find the least expensive way to push for growth.

Trust preferred securities are a low-cost method to raise capital without diluting the stake of shareholders and has the advantage of very favorable tax, accounting and regulatory capital treatments. As a result it is often the preferred method used by bank holding companies as a way to raise additional financing.

The proceeds from the financing were forwarded to the bank subsidiary to grow the bank’s capital and allowing it to purchase investments and make loans. Unfortunately, as the financial crises hit in 2008, and Stonebridge exercised its five-year option to defer payments to investors in the trust preferred securities, it caused the interest payments to start piling up, finally resulting in the bank owing $1.2 million in interest.

Due to the fact that the bank is under a consent order from the Pennsylvania Department of Banking and Securities and the FDIC, Stonebridge is now unable to transfer the funds back to the parent company in order to secure the capital with which to repay its investors.

Manning, who said he expects significant interest in the assets but not the liabilities of the company, stated that the outstanding debt will be repaid by the proceeds from the auction.

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