Bank teller counts out moneyIf you keep up on banking news, you may have heard the most recent dire report on small banks: If your small bank has taken bailout money from the federal government, that's a good sign your financial institution may be in trouble.

That's the latest from the Congressional Oversight Panel, which last week unveiled a report that drew attention to the fact that most of the small banks that received bailout money are struggling to pay it back.
If you're doing business with a small bank and are suddenly worrying about its health, here's some perspective:

Most of the small banks out there are doing just fine. The U.S. has approximately 8,000 banks, from a handful of giant, nationally known banks and all their branches (Bank of America, for instance, has approximately 7,500 branches across the country) to all those regional and local banks scattered across the 50 states.

Out of the more than 7,900 small banks that remain after you take away, say, the nation's 30 largest banks, a scant one-tenth -- just 707 banks -- took $205 billion of the $700 billion in bailout money. So plenty of small banks out there didn't take any bailout money and are doing quite well.

Unfortunately, of the 707 banks that did take bailout money, less than 10% have repaid the government, and one in seven of the small banks have missed making dividend payments.

While just a small portion of the small banks that needed a bailout have rebounded, that doesn't necessarily mean the other 90% of the banks out there are about to crumble, says banking attorney Jim Wheeler, who heads the bank practice at Morris, Manning & Martin LLP, a prominent commercial law firm in Atlanta.

Wheeler told me that "many small banks who received a TARP investment from Treasury are in great shape. Many accepted the investment out of an abundance of caution and deemed the program as a relatively inexpensive source of capital in an environment that was extremely unclear as to where additional capital sources might be available."

But Wheeler added, "It's true that many smaller banks don't have the multiple revenue sources that the large international money center banks have at their disposal and rely primarily on interest revenue from loans, many of which have not fared nearly as well as they have historically."

But it's important to keep things in perspective and understand that, statistically speaking, most small banks are faring pretty well.

As for the banks that aren't...There's been a shift in how we treat struggling banks, says Matthew Zifrony, an attorney who specializes in banking and real estate and is a director with Tripp Scott, a well-known law firm in Fort Lauderdale, Fla. Prior to 2008, Zifrony said, if a wealthy investor or a group of investors wanted to turn a struggling small bank around, they would have gone directly to the bank and worked something out.

"But those people aren't going to the banks any longer," said Zifrony. "Instead, they're now going to the bank regulators and saying in effect: 'Take over that bank, and we'll buy it from you.' "

So while banks used to be able to get investors to work with them, the investors are no longer helping the banks and serving as partners--they're taking them over.

"It has really, really dried up the avenues that community banks [used to sue to] raise money," said Zifrony.

What this actually means: If your bank is one of the 690 that hasn't repaid Uncle Sam, it could be in line for a takeover (which won't really impact your life other than one day, you'll notice that your bank has a new name). On the other hand, it's quite likely that nothing will happen and your friendly neighborhood bank will be doing business as usual.

"There's definitely consolidation going on in the industry, without a doubt," said Zifrony, "but I'm seeing instances where the regulators aren't just judging the banks on the capital requirements, but on how well the banks are being run. They seem to be going a little easier on the banks that are well run as opposed to the less-well-run banks. If that becomes more of a trend, I think a lot of those 690 banks should be able to survive this."

That said, Zifrony concedes that the 690 banks could probably use a bailout from the bailout loan: "I think the government will have to modify these loans and give them more time to pay back the money."

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of the book Living Well with Bad Credit.

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