Smaller and mid size banks are not repaying TARP funds

The ‘too big to fail’ big banks are rushing to repay the TARP funds across the country so that they can get out from under the executive pay restrictions, but that is generally not a concern at the community and regional banks.  The Distressed Commercial Notes that are backed mostly be commercial real estate will be the biggest problem facing these smaller banks in 2010.  That is because many of these loans are constructions loans, bridge loans or have their roll overs during the year and the banks will not be able to lend due to reduced appraisal valuations.

While overall the Troubled Asset Relief Program (TARP) is outperforming expectations and this is good news for taxpayers, most banks are still not lending.  The smaller banks don’t have the executive pay levels high enough for them to rush to repay the TARP funds, and since they will face a large share of troubled commercial notes coming due in the next year they must preserve their capital.   This is NOT good news for small business owners or the economy in general since most small business rely on community and regional bank lending for the expansion and operations.

And while note explicitly stated, it is also related to the goal of decreasing the overall number of banks in the country.  The larger banks don’t have to have near the FDIC capital levels that are required of the smaller banks.  Thus smaller and community bank shareholders are in a precarious position in 2010 and need to realize that the old ways of holding OREO and other distressed assets while waiting for an economic recovery and bank earnings to allow liquidation of the REO is probabaly not going to work this time.

Eventually the small and mid size banks will have to repay the TARP funds, the question is, will they be around long enough to do so?