Three Banks Suspend Their TARP Dividends

By DAVID ENRICH and GREGORY ZUCKERMAN At least three small, cash-strapped banks have stopped paying the U.S. government dividends that they owe because they got $315.4 million in capital infusions under the Troubled Asset Relief Program. Pacific Capital Bancorp, a Santa Barbara, Calif., lender that got $180.6 million from the Treasury Department in November, has since posted net losses of $49.7 million. Pacific Capital 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, citing the banking industry's turmoil and a desire to fortify their balance sheets. Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government. "Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base." The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week. "Here the government has given the banks money at great terms, but the fact that they can't keep up with it is worrisome," said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. "It tells you of the deep problems of community and regional banks." Since last October, TARP's Capital Purchase Program has pumped about $200 billion into more than 600 banks across the U.S. The government got preferred shares that generally churn out annual 5% dividends for the first five years, followed by 9% a year until the capital is repaid. The dividends, which are supposed to be paid each quarter, were established to ensure taxpayer funds were being put to good use and weren't handouts. So far, the Treasury Department has collected about $4.5 billion in dividends from TARP recipients. Pacific Capital, Seacoast and Midwest, which got their TARP money in December, were set to pay the government a total of $16 million a year in dividends. None of the banks mentioned TARP in news releases announcing suspension of the payments, but representatives confirmed Monday that the dividends had been stopped at least temporarily. Gerard Cassidy, a banking analyst at RBC Capital Markets, said he was surprised that some TARP recipients "already are in such difficult financial situation" that they are no longer making dividend payments. "It goes to show you that the due diligence performed by the Treasury was not sufficient." Some lawmakers and banking-industry officials have criticized what they view as a lack of transparency and consistency in Treasury's decisions about which banks received aid. Ms. Reilly, the Treasury spokeswoman, said the injections "helped to stabilize the financial system." 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. George Leis, Pacific Capital's chief executive, said in a statement Monday that hoarding the bank's cash "will improve our flexibility to consider other actions that may need to be taken in order to achieve our targeted capital ratios." The bank, which is wrestling with a spike in loan defaults, plans to resume dividend payments when doing so "would be consistent with our overall financial performance and capital requirements," Mr. Leis said. The decision to halt the dividends appears to stem partly from federal pressure. In April, the bank entered into a memorandum of understanding with regulators that requires it to boost its capital levels by June 30. Write to David Enrich at david.enrich@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com