Sonoma Valley Bank shareholders voted to accept $8.5 million in federal stimulus funding despite opposition from a handful of critics who said it would dilute the value of their stock.
The Sonoma-based bank will become the third Sonoma County bank to gain funds under a plan to shore up the nation's financial system. The bank will use the money to increase lending and bolster its ability to withstand loan losses as the recession takes a toll on businesses and homeowners, said Sean Cutting, bank president.
Bank officials acknowledged pressure from Congress to support the local economy by making loans quickly after receiving the federal funds, which will arrive later this month.
"That clearly was the intent," Cutting said. "We continue to lend into the community, but this new capital will increase our lending limits and the amount of new deposits we can receive. Congress doesn't need to worry about our commitment or desire to lend money. That's what we do every day and how we make money, which is to lend money into our community."
The money will come from a $700 billion program Congress approved in the fall to unfreeze financial markets by injecting capital into banks to increase lending to credit-worthy businesses and consumers. The U.S. Treasury Department is using $250 billion of the funds to buy stock in banks large and small considered viable by regulators.
The government pumped more than $51 million into two Santa Rosa banks in December. Exchange Bank, the county's oldest and largest local bank, received $43 million and Summit State Bank received $8.5 million. Both banks have initiated additional lending since receiving the funds.
Sonoma Valley Bank also won funding in December, but needed to change its ownership structure to receive the federal money. Shareholders on Wednesday approved the creation of a new class of preferred stock, a condition required by the Treasury Department.
The plan was approved by a 3-1 margin with shareholders owning 80 percent of the bank's shares voting, Cutting said.
Opponents said taking the federal funds was a bad deal because it weakened the position of existing shareholders, including diluting their stock earnings. Some also contended Sonoma Valley Bank's financial position already was strong and the bank had ample reserves to absorb bad loans and still boost lending.
"That's what they've been telling us all along. If they're doing so well, they should be able to handle the bad loans," said Jerry Marino, a founding director of the bank.
Marino, a Sonoma real estate investor and businessman, contacted about 20 shareholders in an effort to block the ownership change. He contended bank officials were taking advantage of "a chance to put their hands in the cookie jar" with the federal government handing out money to stimulate the economy.
In exchange for the federal funds, the bank will give the government preferred stock and pay a 5 percent dividend on the shares. Bank officials said the terms were a good deal, and noted the bank has an incentive to buy back the preferred shares within five years, when the dividend rises to 9 percent.
Banks also are restricted from raising dividends to ordinary shareholders for the next three years, unless it buys back the stock earlier.
"We've never said we need this money. It's an opportunity to get the money at a good rate while you can," Cutting said. "We're given a little more horsepower."
You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.
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