DEALTALK-Small US banks need capital, but it's hard to get

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By Paritosh Bansal and Dan Wilchins

NEW YORK, April 2 (Reuters) - Small U.S. banks will have to raise tens of billions of dollars this year to cover bad loans, and must choose from three unappetizing options: selling stock or bonds, selling assets -- or selling themselves.

The need to raise capital comes as regulators clamp down on regional and community banks, many of which are heavily exposed to consumer mortgages, commercial real estate developers who can't make interest and principal payments, or both.

In recent days, investors have grown less worried about the banking sector, as announcements that Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research) had raised $4 billion and UBS AG (UBSN.VX: Quote, Profile, Research) and Deutsche Bank AG (DBKGn.DE: Quote, Profile, Research) had set big write-downs fueled optimism that the worst may be behind, at least for big banks.

Large banks have already raised more than $100 billion from sovereign wealth funds and public markets to shore up their balance sheets.

Regional banks have been much less assertive about raising capital and may find it harder to come by, especially those heavily exposed to mortgages and commercial real estate, analysts said.

"It's just a matter of boards and management teams of these distressed institutions deciding that they have to throw in the towel and that they must raise capital," said Matthew Kelley, an analyst at Sterne Agee & Leach. "It's going to be painful."

Not every regional bank is in trouble. There are more than 8,500 banks in the United States, and more than 90 percent of them are regional. Many are well capitalized and have no trouble borrowing in financial markets or attracting deposits.