Sonoma Valley Bank has been awarded $8.5 million in funding from the federal stimulus program, the third Sonoma County bank to win funds under a plan to shore up the nation?s financial system.
However, the bank must revamp its ownership structure before the Treasury Department will release the money. The proposal, which would create a new type of preferred stock that would be sold to the government, is drawing criticism from some shareholders.
Sonoma Valley Bank officials said the money would allow them to expand lending, largely in business and home equity loans.
The Treasury Department is buying stock in banks large and small to boost lending with credit tightening during the deepening recession.
Only healthy banks can expect to receive the money. Sonoma Valley Bank?s latest earnings report, issued Thursday, shows the bank is in solid shape, though the number of troubled loans is rising as the economy worsens.
?It?s providing us a larger buffer in very uncertain times. That?s why most banks are taking the money,? said Sean Cutting, the bank?s president and chief loan officer. ?But it also has long-term benefits. It allows us to make more loans and grow more.?
The funding comes from the Troubled Asset Relief Program, or TARP. Congress approved the $700 billion financial bailout in October.
Banks play a critical role in breathing life into the flagging economy by making loans to credit-worthy businesses and consumers.
?It?s freezing up out there. That?s what the Treasury says they?re trying to do, to get these banks to make more loans,? said Fred Ptucha, who tracks community bank stocks as investment adviser for Financial West Group in Santa Rosa.
So far, the Treasury Department has invested nearly $400 billion in banks through the program, with stock purchases ranging from $1 million to $25 billion per bank. In December, Exchange Bank received $43 million and Summit State Bank received $8.5 million, the maximum amounts allowed based on risk associated with total loans and investments by each bank.
Sonoma Valley Bank was also awarded the $8.5 million in December.
While both Exchange Bank and Summit State Bank are beginning to make some loans, Sonoma Valley Bank first must gain shareholder approval to issue a new class of preferred stock to the Treasury Department ? a condition to receive the federal money. Results of the shareholder vote will be announced Feb. 11, said Mel Switzer, the bank?s chief executive.
The bank?s board of directors is asking shareholders to approve the stock issue. Bringing in additional capital to make loans will boost earnings for the bank and increase dividends for shareholders, Switzer said.
?We think there?s more upside with having the additional capital. We?re well capitalized now, but economically this makes a lot of sense,? he said.
Some shareholders oppose the move, contending the bank has enough capital for lending to support the local economy. Further, existing shareholders would be pushed behind the Treasury Department when dividends are paid.
Shareholders would see the return on their investment reduced by 5 cents a share because dividends paid to the Treasury Department would dilute earnings available to pay dividends to common stock holders, Switzer said.
The bank Thursday reported $3.32 million in earnings for all of 2008, down 23.7 percent from 2007.
The decline primarily stemmed from the bank setting aside more income to cover loan losses. The bank increased its reserves for troubled loans to $4.93 million in 2008, up from $3.68 million in 2007.
You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.
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