At Least Three Small Banks Already Halting Their TARP Dividends

resize_cashburnAccording to reports from the Wall Street Journal, at least three small, cash-strapped banks have stopped paying dividends to the U.S. government and other investors to conserve cash.

Pacific Capital Bancorp, a Santa Barbara, Calif, which received $180.6 million in TARP money, said Monday that it suspended dividend payments on its common and preferred stock as part of a wider effort to save about $8 million per quarter. A bank spokeswoman confirmed that the U.S.’s preferred shares are included in the dividend freeze.

Seacoast Banking Corp. of Florida, of Stuart, Fla., and Midwest Banc Holdings Inc., of Melrose Park, Ill., have also halted their TARP-related dividends.

Treasury spokeswoman Meg Reilly told the Journal, said, “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions.”

RBC Capital banking analyst Gerard Cassidy said he was surprised by the news and said “it goes to show you that the due diligence performed by the Treasury was not sufficient.”

According to the Journal, under a provision in the TARP contracts between banks and the U.S. government, a bank usually can defer dividend payments for as long as six quarters, though it eventually will have to cover the entire amount. In a smaller number of contracts in which the Treasury got so-called noncumulative preferred stock, the bank can skip dividend payments without penalty. But if the bank misses six quarterly payments in a row, the Treasury Department can appoint two directors to the bank’s board.

Related Regional Bank ETFs: Regional Bank HOLDRs (NYSE: RKH), SPDR KBW Regional Banking (NYSE: KRE).

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