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More bailed-out community banks failing to pay U.S. dividends

By Binyamin Appelbaum
Washington Post Staff Writer
Tuesday, December 22, 2009; A14

A growing number of community banks that got federal bailouts are failing to pay quarterly dividends they owe to the government, including two banks that got aid after congressional intervention on their behalf, according to data released Monday by the Treasury Department.

Fifty-five banks failed to make dividend payments in November, a 67 percent jump over the number of delinquent banks three months earlier.

The missed payments reflect the struggles of many community banks, which have not benefited from the Wall Street windfalls that have helped return the largest banks to profitability. Many smaller banks focused their lending on real estate development in recent years, particularly in the suburbs of sprawling Sun Belt cities. The banks now are losing money as developers default on those loans.

The Obama administration has expressed concern about the problems faced by smaller banks because they play a key role in the economy through their lending to small businesses.

President Obama plans to meet at the White House on Tuesday with a group of community bankers to discuss ways to spark increased lending. The president met earlier this month to discuss the same subject with the heads of the nation's largest banks, which have not increased lending despite renewed profitability of their investment banking operations. Treasury is planning to offer banks about $30 billion in federal aid for a mix of programs to support lending to small businesses, according to people familiar with the matter.

$200 billion invested

Treasury has invested more than $200 billion in almost 650 banks under its Troubled Assets Relief Program. Many of the largest banks have repaid the government, but almost 600 banks still hold federal aid. Under the program, most of those banks agreed to pay the government an annual 5 percent dividend in quarterly installments. In most cases, if a bank misses payments, it must make them up later.

The government collected about $1.2 billion in dividend payments from banks in November. But that was about $60 million less than it was owed, a shortfall of about 5 percent.

"Treasury does not force institutions to pay dividends," said Meg Reilly, a department spokeswoman. "Institutions must make their own determination about whether to declare, and therefore pay, a dividend."

Reilly noted that in many cases, banks are required to make up missed payments if they return to health. But two of the largest companies that have missed payments, CIT and UCBH, have filed for bankruptcy, wiping out Treasury's initial investment and eliminating any obligation to make up missed payments. An additional 14 of the delinquent banks signed contracts with the government that do not require them to make up missed payments. The government allowed those terms because the ownership structures of those companies made it impossible for the government to invest on other terms.

The Bush administration initially presented the plan to invest in banks as a way to support increased lending. Instead, lending has declined for five consecutive quarters.

Both the Bush and Obama administrations also described the investments as available only to healthy banks. But many recipients faced significant financial problems, and the number of banks missing dividend payments has climbed each quarter. Fifteen banks failed to make the required payments in May, federal data show. The number climbed to 33 banks in August, and 55 banks failed to make the dividend payments due Nov. 17.

Special consideration

OneUnited Bank in Massachusetts got aid after Rep. Barney Frank (D-Mass.) inserted language into the bailout bill that effectively directed Treasury to give the bank special consideration. Rep. Maxine Waters (D-Calif.) also helped the bank, in which her husband held shares, by arranging a meeting between government officials and a group including OneUnited's chief executive. The bank got $12.1 million last December, but it has made only a single dividend payment. It has now missed payments in three straight quarters, and it is not required to make up the missed payments.

Central Pacific Financial of Hawaii got aid after an inquiry about the status of its application by the office of Sen. Daniel K. Inouye (D-Hi.), one of the bank's founders. The financially troubled company got $135 million in January. It has now missed two straight dividend payments. Unlike OneUnited, however, the company is required to make up those payments.

Treasury has the right to assert greater control over companies that miss dividend payments in six consecutive quarters.

Three banks in Maryland and Virginia also made the delinquent list.

Hampton Roads Bankshares of Norfolk missed its first dividend payment in November on $80 million in aid it took from Treasury last December. The company, which also has suspended dividend payments on preferred shares held by private investors, said it is trying to preserve capital. Maryland Financial Bank of Towson, which got $1.2 million in March, and Rising Sun Bancorp in Rising Sun, Md., which got $6 million in January, also missed dividend payments for the first time in November.

Other local banks are faring better. Middleburg Financial of Middleburg said Monday that it had received regulatory approval to repay $22 million in federal aid after it raised $24.3 million from investors. Eagle Bancorp of Bethesda, which got $38.2 million last December, said Monday that it would make a partial repayment of $15.1 million this week. The company's chief executive, Ron Paul, said the company had no "definitive plans" to repay the rest of the government's investment.

Staff writer David Cho contributed to this report.

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