Whether we liked the concept of it or not, the TARP portion of the U.S. government-sponsored bailout has been reasonably successful. Out of $250 billion that the government injected into banks that needed a financial lifeline, $216 billion has already been repaid.

Understandably, the primary focus of these funds was on banks considered "too big to fail," and we sometimes forget to examine how the smaller banks are faring. Many of the regional and community banks are struggling to repay the bailout money.

With nearly 600 institutions holding on to more than $30 billion of taxpayers' money, payback seems like a tall order for some of them. Bear in mind, the government can profit from all its emergency investments only if these institutions avoid defaulting on their payments.

The sad picture
Two years into the bailout, some of these banks are still unprofitable on a banking basis. For example, Synovus Financial (NYSE: SNV) has been posting losses for the last 10 consecutive quarters. With a net loss of $791 million in 2010, it does not seem that the bank holding company will pay off its $968 million that it borrowed from the government any time soon -- barring some serious asset sales. While it was proactive in bringing down its leverage ratio (asset-to-equity) to 9.95 in 2010 from 11.43 in the previous year, non-depository liabilities have actually increased. This definitely does not bode well for the bank or for taxpayers in terms of repayment.

Wilmington Trust (NYSE: WL) has posted a net loss of $720 million for 2010 largely due to spiking loan loss provisions, and it carries a $330 million bailout from the Federal Reserve. The only way out was to find a deep-pocketed buyer -- which is precisely what happened. New York-based M&T Bank (NYSE: MTB) acquired Wilmington for $351 million in stock. This once-solid local bank was badly hit by the housing market collapse of 2008.

Another loss-making bank is Sterling Financial (Nasdaq: STSA). Declining loan loss provision charges have helped it to bring down its year-over-year net loss from $838 million to $224 million. Also, there has been an impressive turnaround in its leverage ratio -- down to 12.3 from 33.6 in 2009. The bank will probably be unable to repay the government, however, and Treasury will convert its $303 million bailout from preferred stock to $76 million in common stock.

Comparably better
These are just a few banks that are still making losses while sitting on bailouts. In fairness, there are many that are in a better position, such as SunTrust Banks (NYSE: STI), which has managed to generate net income of $189 million, and intends to raise $2 billion via the markets to help repay $4.85 billion in federal bailouts. With the money raised, the bank plans to buy back its preferred stock issued under TARP. This should come as good news to the shareholders, as SunTrust works its way toward normalcy once again.

Yet, it must also be noted that SunTrust has a market cap of $15 billion. Just as megabanks are finding it easier to repay the government that small- and medium-sized banks, even among the non-megabanks it's the bigger ones who are surviving. Clearly, the moral hazard inherent in TARP has come into play. This is where the smaller banks find it difficult to compete against giants such as Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) because creditors feel safer loaning their money to "too big to fail" institutions.

The Foolish concern
According to the chairman of the Congressional Oversight Panel, the government has not done enough to enforce capital requirements -- the very thing that allows banks to have a cushion in case their investments lose money. Many of the smaller banks lack exactly that, which shows in the desperation to be bought by bigger and more liquid institutions that can capitalize off of larger economies of scale and greater political and regulatory access.

In order to restore the financial security of banks -- both large and small -- minimum capital ratios must be strictly imposed in order to prevent banks from opting for high-risk and unpredictable investments that may or may not yield huge short-term profits.

But the bigger issue here is whether small banks in general stand a chance at survival over the long term. For big banks, the worst of the financial crisis is over. For many small and regional banks, however, the crisis is still very much on.