Regional banks will be under the gun to return their federal aid after the last big banks struck deals to return their bailout money.

Wells Fargo & Co. and Citigroup Inc. turned the spotlight to smaller rivals like PNC Financial Services Group Inc. and SunTrust Banks Inc. with moves on Monday to return the funds they received in the Troubled Asset Relief Program.

"It probably does put some more pressure on the regionals to step up and look to repay the Tarp," Lana Chan, an analyst with Bank of Montreal's BMO Capital Markets, said.

Chan said investors have shown that they are eager to help banks repay Tarp, given the positive reaction to Wells Fargo's $10.65 billion stock offering on Monday, part of its deal with the Treasury Department to repay $25 billion of bailout funds.

"The capital markets are open," she said. "I think it should be similar for some of these regionals as well."

SunTrust, Comerica Inc. and Fifth Third Bancorp will probably seek to repay their Tarp funds "sooner rather than later," she predicted. Comerica has enough capital to pay back Tarp without having to tap the equity markets, she said. And her financial modeling shows that repaying Tarp could be accretive to earnings in 2011 for SunTrust and Fifth Third, even if they have to raise some capital. SunTrust and Fifth Third's capital raises probably wouldn't be overly dilutive to shareholders and would be offset by no longer having to make dividend payments to the government.

Jeff Davis, an analyst at First Horizon National Corp.'s FTN Equity Capital Markets, said political and internal pressure to repay Tarp is heaviest on regional banks that have the most capacity to do so through high levels of cash.

For instance, he said Keycorp and SunTrust have about $6.5 billion and $4.5 billion of cash at the holding company level, respectively. That means each has the potential to repay Tarp without having to raise any more capital, although they may still have to tap the equity markets to show their regulators they have the strength to weather ongoing losses.

He said the healthier regional banks are eager to repay Tarp because they want to escape the stigma of being a bailed-out bank.

"We're going to find that the Tarp banks have a scarlet "A" on their chest," he said. "But it could just as easily be a scarlet "Z" for 'zombie' for the ones that can't redeem."

Of course, not everyone agrees with that sentiment, or the idea that the clock is now ticking for small and midsize banks to return their Tarp funds.

Fred Dickson, chief market strategist for D.A. Davidson & Co., said the bulk of the local banks his company covers say they are in no hurry to repay their federal aid, as it has been a cheaper source of funds than deposits. Tarp also doesn't carry as much of a stigma with regional banks' investors and clients, he said.

"We haven't been able to determine fallout or a stigma for banks having Tarp," he said. "Investors are more concerned about the quality of the loan portfolio than whether the bank has Tarp or doesn't have Tarp funds."

Paul Miller, the head of financial institutions research at Friedman, Billings Ramsey & Co. Inc., agreed that regional banks have more leeway than large banks when it comes to returning Tarp.

For one thing, regional banks don't have huge capital markets operations like the national money-center lenders. Citigroup and Bank of America were especially eager to get out from under the compensation restrictions imposed by the government out of fear of losing top-performing traders, he said.

"These regionals' business models are not based on high-end bonus structures," he said.

Most regional banks, hampered with ongoing commercial and consumer loan losses, are trading at or under their book values, he said. That means it is prohibitively expensive to raise the capital.

"Even if they could [repay Tarp], they'd want to wait and show some earnings and show some growth," he said. "They want to get the stock price higher so their cost of capital is cheaper."

The chief executives of Fifth Third, Key and PNC said at a banking conference in New York last week that they were in discussions with regulators on the timing and terms of repaying Tarp.

James Rohr, the chairman and CEO of PNC, downplayed any sense of urgency. He said the Pittsburgh company wanted to repay Tarp in a "shareholder-friendly way" and was averse to "rushing" to "issue a lot of capital" it may not need.

"We've talked a lot about paying it back over 2010," he said. "There's not been any pressure on us to do otherwise from regulators or from the customers."

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