Business News : Small banks in bailout pool under pressure

WASHINGTON (Business News) - More than 100 smaller banks were able to tap government programs to pay off bailout money they received during the financial crisis but those still owing face a perilous future, a federal watchdog said on Wednesday.

In its latest quarterly report to Congress, the Special Inspector General for the Troubled Asset Relief Program, known as SIGTARP, noted that as of March 31 there were still 351 regional and community banks in the bailout program.

Banks had to agree to give the Treasury Department an ownership interest in the form of preferred stock and warrants to buy more stock as a condition of receiving bailout money. They have to buy the stock back to exit the program.

SIGTARP noted that 137 banks were able to refinance out of the bailout program by using money they received through another program, the Small Business Lending Fund, which was set up in 2010 to let Treasury make capital investments in banks and so boost credit availability for small businesses.

The report notes that the hundreds of banks left behind, still owing bailout money, are mostly smaller and they face a new risk because dividend payments that they are required to pay the government nearly double in late 2013 to 9 percent from 5 percent.

Smaller banks typically have a harder time raising capital than big banks, and are more reliant on lending in smaller communities, many of which still are recovering from the severe recession the economy endured as part of the financial crisis.

The increased dividend kicks in after a bank has been in the bailout program for five years and was intended to be an incentive to pay off bailout money though it now is a fast-approaching new burden for those unable to do so.

SIGTARP said there were signs that some community banks were facing a squeeze as the healthy banks leave the bailout program and the less-healthy remain in it.

"Of the 351 banks remaining in TARP as of March 31, 2012, there were 163, or 46 percent, that were not current in making dividends and interest payments totaling $ 306 million," the report said.

It noted that industry experts predict a wave of mergers and takeovers among community banks in the next three to five years.

Some 95 of the banks still owing TARP money had missed six or more payments. That gives Treasury the right to appoint directors to their boards, though it had done so only at nine banks by March 31.

SIGTARP said it had already recommended to the Treasury that it prepare "a clear TARP exit path" for the remaining community banks and it consider amending terms of the contracts for banks unable to get out before higher dividend payments start.

"Getting these banks back on their feet without Government assistance must remain a high priority of Treasury and the federal banking regulators," SIGTARP said.