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Thursday, October 17, 2013
With a payment of $9.7 million, the parent company of Valley Bank completed its reimbursement of the U.S. government Wednesday for a cash infusion nearly five years ago, company officials said.
Valley Financial Corp. had already repaid $6.4 million of $16 million it received in December 2008 under a U.S. Treasury Department program in which the government tried to awaken the struggling economy in 2008 by investing in banks — to enable them to lend more money.
With Wednesday’s final payment, Valley Financial has bought back all shares of preferred stock it sold to the government and exited the Troubled Asset Relief Program, according to Ellis Gutshall, president and CEO, who said the repayment was possible because of the company’s “strong operating performance and capital position.”
Gutshall emphasized that Valley Financial repaid the U.S. government in full. Some of the government’s TARP investments lost money, he said.
In addition, Valley Financial avoided selling stock, which would have diluted the value of its shareholders’ stock, Gutshall said. Instead, it generated several payments out of profits and then recently borrowed $11 million at what Gutshall called an attractive rate.
Gutshall said Valley Financial, in a negotiated transaction with an independent third party, obtained a current, effective rate on the $11 million below the dividend rate it would have paid if the U.S. Treasury still held its stock, he said.
Specifically, considering the applicable tax benefits, the bank will pay an effective borrowing rate on the loan of 3.85 percent, more than a point below the 5 percent dividend rate for the shares, Gutshall said. The dividend rate was scheduled to jump to 9 percent in December, he said.
In hindsight, the program didn’t work out quite as bank officials expected. When it received the $16 million in 2008, the bank hoped the money would anchor additional lending of between $80 million and $100 million. But lending grew by $30 million to $40 million during the first 12 months and that was it, Gutshall said.
After that, “the financial crisis was here in full force and there weren’t any loans to be made,” he said. “Everybody was trying to get out of debt versus taking on new debt.”
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