Bailout Banks Look to Escape TARP Trap

As Congress imposes greater restrictions on financial institutions that received government bailout money, a number of smaller banks are beginning to express a desire to give the money back -- and some question whether they even needed it in the first place.

Limits Congress has placed on executive compensation packages and other perks have caused widespread grumbling among banks of all sizes that have received aid through the Troubled Asset Relief Program. But some also worry about tarnishing their brand with the stigma now being associated with accepting government money, thanks to repeated bailouts for companies like Citigroup (C), Bank of America (BAC) and AIG (AIG).

"My sense is a lot of banks are looking at [paying back TARP money]," says Jean Everett, a partner at Hiscock & Barclay's financial institutions and lending practice. "It's a tough call because you don't know what's going to happen in three to six months or three to six days ... Maybe sitting on that capital will still be a good idea even though it's not economic at these rates to lend it."

TCF Financial (TCB), a $17 billion-asset company located outside of Minneapolis, announced Monday that it applied to the Treasury Department to redeem its preferred stock for a total price of $361.2 million, plus a final pro-rated accrued dividend. The company provides retail and commercial customers in five states across the Midwest and in Colorado and Arizona.

TCF -- known to have strong deposit gathering skills -- says it has sufficient capital to complete the redemption payment and will not have to issue any additional common equity.