The federal government has tentatively agreed to send economic rescue money to the Roanoke Valley by investing in a local bank.

Subject to final paperwork, the U.S. Department of Treasury has approved Valley Financial Corp.'s voluntary application to participate in the "bailout" program approved by Congress and President Bush in October to save a sinking economy.

Valley Financial, the operator of Valley Bank, is expecting $16 million from the $700 billion Emergency Economic Stabilization Act of 2008, subject to signing of paperwork on Dec. 12.

Valley Bank announced the news Wednesday before the long Thanksgiving break. TowneBank in Hampton Roads is also planning to participate. More announcements are possible.

Valley Bank President and Chief Executive Officer Ellis Gutshall said Monday the money comes during a dramatic contraction in business credit available through financial institutions, especially large banks. Businesses that are accustomed to borrowing for normal operations can't get the money they need. The new money can help the businesses become stable or expand and enable 13-year-old Valley Bank to grow at a faster rate, Gutshall said.

When the federal government first intervened in the economy earlier this fall, it set forth with ambitions to insulate financial institutions from their toxic debt. It named the effort the Troubled Assets Relief Program. But Gutshall said the plan has evolved into strategic investments in healthy banks so they can lend more.

As one of the banks picked, he said, Valley Bank should not be considered a bailed-out bank.

"It's not a bailout. It's an economic stimulus," Gutshall said. "It will give us the framework to extend $200 million of new loans that we would not have been able to do without the capital."

That's over and above the $150 million in new loans the bank makes each year, he said.

John Crockett, deputy state banking commissioner, agreed with the characterization.

"Bailout was a misnomer," he said. "It's an attempt to rescue the economy."

In addition, the plan could end up making money for the government with its various stock features, he said.

Crockett said 28 Virginia banks applied for or made expressions of interest in Capital Purchase Program money. Some banks applied because they can use the money; others applied because they perceive it as the right thing to do, he said. But others have concluded they don't need or want this kind of help and did not submit a voluntary application. Applications were due Nov. 14.

Crockett said the federal government is running the program and he did not know which institutions were approved, but he said some Virginia banks in addition to Valley Bank were approved. Virginia is home to about 83 state-chartered banks and a number of national banks, too. Valley Bank is the 18th largest state-chartered bank, with assets of $643 million and eight branches. Its profits rose 18 percent during the third quarter to $717,000.

Eric Fitzwater, a senior analyst at SNL Financial Inc. in Charlottesville, said the potential downsides of the program include restrictions on executive compensation that go along with the money. There are dividend costs to be paid. The banks must abide by more rules set up by the government.

"Most banks not participating are using it as a badge of pride that they're not needing to get involved in this," he said.

Gutshall released no specific plans for the money, saying Valley Bank intends to continue lending to businesses and individuals according to its usual operating practices. No mandate exists to soften terms so more borrowers qualify. In fact, underwriting standards will remain as strict as ever, he said.

At the end of September, Valley Bank, whose primary service area is the Roanoke Valley, had loans out for commercial and multifamily real estate purchases (37 percent), home purchases (25 percent), construction and development projects (19 percent) and general business needs (18 percent), according to third-quarter figures.

The $16 million is 3 percent of Valley Bank's risk-weighted assets, the program maximum. In return for the infusion, the bank will pay the government annual dividends of 5 percent, or about $800,000, for five years before the dividend increases to 9 percent a year unless Valley Bank returns the money and buys the stock back.

Shares of Valley Financial Corp. closed Monday at $5.82, down 18 cents, or 3 percent.