How to Spot a Really Bad Bank

Now that banks have begun paying back their bailout cash, it should be easier to separate the good banks from the bad ones. The faster a bank is able to pay back its TARP funds, the better. But want to spot a really bad bank? Just look for the ones so cash-strapped that they stop making dividend payments on the preferred stock the government got in exchange for their bailout dollars. The Wall Street Journal reports today that three banks have stopped paying dividends. And by the way, according to the article, that's totally okay.

Those three banks include Pacific Capital Bancorp, (Santa Barbara, Calif.), Seacoast Banking Corp. of Florida (Stuart, Fla.) and Midwest Banc Holdings Inc. (Melrose Park, Ill). In the case of Pacific Capital and Seacost, given their locations, I'm not so surprised they're having such trouble. They're based in regions crippled by the housing bubble in two of the hardest hit states. I'm not one to cause panic, but if you've got more than the FDIC insured $250,000 in any of these three banks, then you're braver than me.

Interestingly, those dividend payments turn out to be deferrable for some and entirely optional for others. Also from the article:

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."

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. If a bank misses a total of six quarterly payments, the Treasury can appoint two directors to the bank's board.

Sounds like taxpayers might not have gotten the best end of the deal. Shocking!