The Treasury Department has decided to cancel the auction of Coastal Banking Company's Troubled Asset Relief Program shares after the bank received approval to pay dividends.

Coastal, in Beaufort, S.C., was one of eleven banks whose Tarp shares the Treasury said it had agreed to sell at a discount last month.  The auction was scheduled to close Thursday.

But after Coastal received permission from the Federal Reserve Bank of Richmond to pay dividends on its shares, Treasury decided to cancel the auction.  The placement agreement prepared for the auction said that Coastal would not pay these dividends.

"The Treasury obviously felt that we would have more value as a dividend-paying company," said Coastal Banking Company Chief Financial Officer Paul Garrigues.

Coastal, the holding company for the $475 million-asset CBC National Bank in Fernandina Beach, Fla., received $9.95 million in Tarp funds in December 2008, but it has missed its last eight quarterly dividend payments to the Treasury.  Both the bank and the holding company have been under enforcement actions since 2009. The bank has a formal agreement with the Office of the Comptroller of the Currency and the holding company is under a memorandum of understanding with the Richmond Fed that prohibits it from paying dividends without approval.

The Richmond Fed has approved Coastal's request to pay its current dividend on the Tarp funds due Feb. 15 and two of its eight deferred dividends.  The bank has returned to profitability and improved its asset quality, and will continue to request approval to pay Tarp dividends, including the six remaining deferred dividends, Garrigues said.

Coastal has not yet released its fourth-quarter earnings, but in the third quarter of 2012 it earned $773,000, after losing money in the year-prior period.

"They tell me this is kind of unusual," Garrigues said. "The Treasury said there have been a few of these auction agreements they've had to break because of subsequent bad news, but they can't remember one they've had to break because of good news."

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