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TARP weighs on small banks

By David McMillin · Bankrate.com
Saturday, October 29, 2011
Posted: 12 pm ET

Remember when taxpayers threw up their arms in disgust when Congress agreed to give America's banks hundreds of billions of dollars in 2008? Much of the news around the Troubled Asset Relief Program initially focused on the big banks who received taxpayer dollars, but a new report shines a light on another segment of TARP recipients: community banking institutions.

While the biggest banks have reportedly repaid their loans, the latest findings from the Special Inspector General for the Troubled Asset Relief Program, SIGTARP, show that more than 400 local and community banks who received TARP funds still owe the government money.

Additionally, the report warns that the future may hold serious challenges for some of these members of the banking industry. While these banks have been paying 5 percent dividends on their TARP loans since 2008, those dividends will increase to a hefty 9 percent in 2013 -- a figure that many of them will not be able to pay.

From the report:

Compared to larger banks, community banks may have an uphill battle to exit TARP. Community banks do not have the same access to capital as the larger banks. They are more exposed to distressed commercial real estate related assets and nonperforming loans. … Community banks need a clear exit path out of TARP that is put into action well before a scheduled rise in the TARP dividend.

It's no secret that the financial crisis claimed many community banks as victims, and it doesn't look like the road is going to get any smoother for them anytime soon. As many of them work to adjust their business models to meet new financial reforms while working to maintain customer satisfaction, this report shows that some of the nation's smallest banks may be in a hole that they cannot escape.

What do you think? Can community banks rebound and repay their portion of TARP funds? Or are changes to the banking industry giving the little guy some of the biggest problems?

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