Three small banks put off their TARP dividend payments

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At least three troubled community banks have stopped paying dividends on $315.4 million worth of investments that they received from the government's financial rescue program. Short on cash and facing mounting losses on bad loans, they say postponing the payments will help them mend their balance sheets.

It's an interesting juxtaposition with last week's moves by giant banks like JPMorgan Chase (JPM), Goldman Sachs (GS) and others to repay nearly $68 billion from the Treasury Department's Troubled Asset Relief Program, or TARP. While about two dozen regional and community banks have also repaid, the trio's postponements show that some smaller financial institutions are struggling mightily.

The three banks putting off payments on preferred stock they sold under TARP are Pacific Capital Bancorp (PCBC), Seacoast Banking Corp. (SBCF) and Midwest Banc Holdings (MBHI), according to The Wall Street Journal.

Two of the banks, Pacific Capital and Seacoast Banking, are under orders from regulators to raise more capital and patch holes in their balance sheets. Postponing dividend payments on the could keep those holes from getting deeper.

Here's how Pacific Capital CEO George Leis put it in a statement: "The actions we have announced today are the most prudent course of action and will improve our flexibility to consider other actions that may need to be taken in order to achieve our targeted capital ratios."

The fact that those "targeted capital ratios" were set by the Office of the Comptroller of the Currency, Pacific Capital's regulator, led the Journal to speculate that the bank was feeling pressure from above to suspend the payments.

Companies that take Treasury's bailout funds have the option to delay dividend payments for up to six quarters -- but they must then pay the entire outstanding amount, so any relief will likely prove temporary.
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