Mechanics Bank in Richmond, Calif., is testing the Treasury Department's flexibility for banks participating in the Troubled Asset Relief Program.
The $2.7 billion-asset Mechanics, which received approval for a $60 million capital infusion from the Treasury, says it has asked for permission to issue a fifth dividend for 2008. Under the Treasury program, banks that receive Tarp funds cannot pay dividends more than four times a year unless they receive special permission.
Steve Buster, Mechanics' president and chief executive officer, said the bank intends to accept the Tarp money whether it wins approval to pay a special dividend or not.
"We are preparing for the worst and hoping for the best," he said. "We are extremely well capitalized" — Mechanics' total risk-based capital-to-assets ratio at Sept. 30 was 14.96% — "but nobody is sure if we are approaching a recession or a depression. … We haven't seen anything like the fourth quarter before and we want to make sure the bank is a long-term survivor."
Still, he said the request is not unreasonable considering the privately held company "has a long history" of issuing five dividends a year — four smaller ones and a fifth based on the bank's performance for the year. The amount it will pay for 2008 has not been set, but in 2007 it paid out a performance dividend of $100 per share, for a total of $1.9 million.
"We want to make sure shareholders enjoy the same sort of dividend that they have in the past," Mr. Buster said.
A bank that receives Tarp capital can issue four dividends a year as long as it is in good standing on its Treasury commitment, but the dividend paid cannot exceed the amount of previous payouts without the Treasury's approval.
Alan T. Harris, the principal at Harris Law Firm PC in Houston, said he believes one reason the Treasury is restricting dividend payouts is that it wants to be sure that banks it invests in have the cash available to pay the government back.
Another reason: "Treasury doesn't want the funds to be seen as used to increase payouts to existing shareholders," Mr. Harris said.
The Treasury did not respond to questions about whether it would grant exceptions, but Mr. Harris and another lawyer, Sanford "Sandy" Brown, said Mechanics' case is bolstered by the fact that it has been paying the special dividend for roughly a decade.
"If you were just trying to get more cash in the hands of shareholders on the eve of doing a deal with Treasury then it wouldn't be approved," said Mr. Brown, the Dallas office managing partner of Bracewell & Giuliani LLP. "If this is a long-standing practice by the bank then it would be more likely to be approved."
Others, though, suggested the Treasury might simply have too much work to do to wade through special requests.
"They are extremely busy," said Frank Bonaventure, a partner with the law firm Ober Kaler in Baltimore. "This is a crisis of epic proportions, and I think they have set up a mechanism that Treasury believes works and wants people to play with in the walls of that mechanism."