A federal program that was intended to strengthen banks and jump-start lending across the country has had very little impact in Minnesota -- one of the nation's largest banking states.

Nearly 10 months after the U.S. Treasury Department began investing billions of taxpayer dollars in the financial system, the vast majority of Minnesota's banks have yet to benefit from the stimulus.

About a dozen of 430 Minnesota-based banks are currently receiving federal money under the U.S. Treasury's Troubled Asset Relief Program (TARP). Of the $218 billion that has been doled out to the country's banks, Minnesota banks have gotten just $123.3 million in federal money. That works out to less than six-hundredths of 1 percent of the TARP funds, according to an analysis done for the Star Tribune by SNL Financial of Charlottesville, Va.

About three-fourths of the federal money has gone to banks in three states -- New York, North Carolina and California -- where most of the large banks are based. Yet Minnesota is getting a lot less than many states that have much smaller banking sectors.

All told, Minnesota ranks 36th in the amount of TARP dollars flowing to its banks -- even though the state has the third-most community banks in the country, behind Illinois and Texas. One reason that Minnesota ranks so low is that the state's two largest banks -- TCF Financial Corp. and U.S. Bancorp -- have already repaid their TARP loans. Together, the two banks repaid the U.S. Treasury about $7 billion in federal funds.

And the spigot is beginning to run dry. A Treasury spokesman said Friday that the agency has already allocated almost 90 percent of the $250 billion that was earmarked under the program.

"This is one more incident of Minnesota taxpayers paying more into the federal system than we're getting back in benefits," said David Vang, chairman of the Finance Department at the University of St. Thomas.

It is unclear why so little federal money has flowed to Minnesota banks, because the Treasury Department does not disclose information about banks that have been denied funding. One theory is that many small banks which populate the state have opted not to participate in TARP because of the costs and restrictions involved. Another theory is that many Minnesota banks are too overwhelmed with losses on real estate loans to qualify; the TARP program was meant for banks that are fundamentally healthy.

However, for the Minnesota banks that are participating in the program, the payments are a welcome source of capital at a time when private money is very hard to come by. Banks can leverage that capital to make millions of dollars in loans that they would otherwise not make.

David Reiling, chief executive officer of St. Paul-based Sunrise Community Banks, which owns Franklin National, Park Midway and University National Banks, said that he expects to make $120 million in loans over the next five years using the $12 million in assistance his company received from TARP. Of that, he hopes to book about $20 million in new loans by the end of the year.

"It's up to us to deliver this money on the street," Reiling said. "What the capital allows us to do is to lend, and lend more, as other banks exit out of the lending arena."

The parent company of Private Bank Minnesota in Minneapolis received $4.9 million under TARP in February, which served to replace other forms of capital that no longer were available. Without the extra capital cushion, the bank would not have been able to pursue new loans as aggressively, said David Waldo, chief executive officer. Raising money from private investors was no longer feasible, he said.

"Who wanted to take half of their net worth and put it in a community bank when Chicken Little says the sky is falling?" Waldo asked. "Their appetite for risk is severely diminished."

Stearns Bank of St. Cloud is the largest bank in Minnesota still participating in the TARP program.

On June 26, the Treasury Department invested $24.9 million in the bank. That same day, Stearns Bank acquired most of Pine City-based Horizon Bank's assets and deposits for an undisclosed sum, after the bank was closed by state regulators.

On Friday, Stearns Bank continued its buying spree, assuming all the deposits of First State Bank and Community National Bank, both of Sarasota County, Fla. That marks 71 banks that have failed so far this year, compared with 25 in all of 2008.

Banks that participate in TARP must comply with limits on executive compensation during the time in which the Treasury Department holds the shares, and must also agree to limits on dividends and stock repurchases. For some banks, that might have been a deal-breaker.

"Imagine having a business partner who has the power to do anything from print money to call out the military," said Vang, at the University of St. Thomas.

"A lot of these banks don't want the TARP money, because no matter how much or how little money they take, they now have a business partner who can tell them what to do in any part of their business."

Chris Serres • 612-673-4308