The U.S. Treasury Department announced Friday that it has sold its stake in Exchange Bank for $39.7 million, freeing the bank to resume dividends that fund the Doyle scholarship program.

The bank's board of directors, which halted dividends four years ago, must now decide whether to resume the payments. It will discuss the issue at its next meeting on Aug. 21, said president Bill Schrader.

"We're at a very important point, and we're excited to be able to have that discussion with the board," Schrader said. "And everyone's looking forward to the outcome of that decision."

The Treasury Department stock sale, which was conducted over a four-day auction that ended Thursday, is expected to be finalized by Aug. 10.

The government did not disclose the identities of the buyers. Exchange Bank was expected to be one of the bidders for its own stock, but Schrader would not say whether the bank participated in the auction, citing confidentiality agreements.

Details about the sale will be presented to the board at its next meeting, Schrader said.

"At that time, then the board can have their discussions as to what this means and how does it play into a final decision on a dividend," Schrader said. "This event that happened is one of the last doors in the regulation world to walk through to make that happen. But there are many more challenging issues to walk down that path."

Exchange Bank stopped dividends in 2008 three months before it borrowed $45 million from the Treasury Department under the Troubled Asset Relief Program, or TARP, which was designed to shore up the U.S. banking system during the peak of the financial crisis. In exchange, the Treasury Department received preferred shares of stock in the bank, which entitled the government to interest payments.

The Doyle scholarship program, which is funded by the bank's largest shareholder, the Frank P. Doyle and Polly O'Meara Doyle Trust, was suspended after the bank ceased its dividend. Over the past 60 years, the program has helped 115,000 students attend Santa Rosa Junior College.

The Treasury Department prohibited the bank from resuming dividends until it repaid $43 million it received from the government and $2 million in fees that accompanied the TARP loan.

Last spring, the bank sought permission to resume dividend payments, offering to pay the Treasury Department $10 million up front and discharge the remainder of the loan in installment payments over two years, but its proposal was declined.

"It didn't fit into their plans to exit the other remaining banks," Schrader said.

Instead, the Treasury Department decided to withdraw from the TARP program and sell its stock in banks to private investors.

During an auction this week, the Treasury Department sold 43,000 preferred shares of Exchange Bank stock at $875.25 per share, or a discount of 12.5 percent off their $1,000 face value, and 2,150 shares at $965.10 per share, or a discount of 4.5 percent.

Despite the $5.4 million discount given to the winning bidders, taxpayers still made money off the deal, said Matt Anderson, spokesman for the Treasury Department. Exchange Bank paid about $7 million in interest since it received TARP money in 2008.

"When you look over the life of the investment, it's a positive return," Anderson said. "The point of TARP wasn't to make a profit, but we're pleased that we're recovering a substantial amount of our investment."

Under the TARP program, the Treasury Department invested $245 billion in banks. To date, it has recovered $265 billion, and it still holds $11 billion in bank investments, Anderson said. It auctioned off shares of those banks that were not expected to fully repay their debts within 12 to 18 months, he said.

Exchange Bank was probably one of the bidders at the auction this week, said Fred Ptucha, a financial advisor at Financial West Group, based in Santa Rosa, which has worked with Exchange Bank for decades. Ptucha said it would have been a logical move, considering the bank's current financial condition and the fact that it previously offered to pay off a substantial amount of its debt.

"In a significant number of the prior sales that occurred, the banks were bidders for their own shares," Ptucha said.

Exchange Bank had a major incentive to bid in the auction. Although it no longer owes money to the Treasury Department, it must continue paying more than 5 percent interest to the new holders of its preferred stock, and that rate is set to jump to 9 percent in 2014, Ptucha said.

"Would you rather pay that 5.62 percent to yourself, or to some other institution?" Ptucha asked. "And, especially when those shares are going to jump up to 9 percent a year and a half from now. I think they would want to have done that. This is their opportunity."

When Exchange Bank last paid dividends in 2008, it paid $6 per share per year, said Bruce DeCrona, chief operating officer at Exchange Bank. When the board considers reinstating the dividend, it will weigh the bank's asset quality, its earnings performance and consistency, the current and projected economic conditions, and the outcome of the auction, Schrader said.

"When the dividend returns, it will probably be some fraction of what it was when we discontinued it," DeCrona said. "We were making a lot more money back in &‘07 and &‘06 and &‘05, and the economy was very different at that time."