October 5, 2009

Sonoma Valley Bancorp Suspends Dividend to Investors

An 8-K that Sonoma Valley Bancorp filed with the Securities and Exchange Commission on Sept. 28 contained an attached letter to shareholders that said "After much deliberation, the Board of Directors of Sonoma Valley Bancorp has made the strategic decision to suspend its cash dividend program until further notice."

The California-based companyowns Sonoma Valley Bank, which bills itself as that region's "only local community-owned bank.''It had $342.5 million in assets at the end of June.

On Feb. 20, Sonoma Valley Bancorpgot$8.7 million throughtheTreasury Department'sTroubled Asset Relief Program,in exchange for issuing preferred shares and warrants. As of May 31, it had paiddividends of $111,400 to the Treasury.

While these are relatively small sums of money, we couldn't help but notice that some of the bank's actions fall on an interesting timeline.

First, this filing dated Feb. 19 said that at the company's regularly scheduled board meeting the day before, the company had declared a dividend of 30 cents a share,to be paid in mid-March. At the time, Chairman Bob Nicholas "said the company's growth and earnings record made the declaration possible."

The next day, the bank took government money throughTARP's Capital Purchase Program.

Although Sonoma Valley Bancorp also paid dividends of 30 cents a share in August2008, February 2008, and August 2007, thistime aroundthecompany's directors madea different call.

"We realize that for many shareholders this news may come as a disappointment; however we strongly believe the decision is in the best interest of all shareholders," the letter to investors said.

Nicholas explained in the letter that there were "three key considerations" which led the Board to suspend the dividend:

  1. Regulators' pressure on banks to shore up their capital bases. "In practical terms, with virtually no sensible option to raise additional capital at the present time, the only viable way to do this is to build up our retained earnings."
  2. The fact that the money to repay the TARP money"will likely come from retained earnings."
  3. That while challenging times can present opportunities for growth, those will happen "only if we reserve the capital strength to take advantage of them."Nicholas then concludes by saying, "The bottom line is that continuing payments of cash dividends to shareholders greatly reduces or may even eliminate our ability to accomplish any of these key objectives."

Sonoma Valley Bancorp made no mention ofthe January 2009 guidelines that the California Department of Financial Institutions issued to govern circumstances under which banks that got TARP moneycan pay dividends to shareholders.

Under those guidelines, there arecircumstances in which a bank must seek permission from the DFI's commissionerto declare a dividend to shareholders. And there are criteria that must be met in those cases in order for the commissioner to approve the payout.

While it's not clear whether Sonoma Valley Bank falls under section 642, 643, or 644 of the California Financial Code, and therefore what criteria it would have neededtomeet before it coulddeclare a dividend, it is clear that in some cases state regulators - as well as federal ones - are trying to ensure that banks have the capital they need to stay in business.

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This page contains a single entry by Sonya Hubbard published on October 5, 2009 4:00 PM.

Inspector General: Treasury Misled Public About Bank Health was the previous entry in this blog.

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