Despite Good Health, Bank Holds Tight to TARP Funds

It’s the bank bailout mystery.

M&T Bank performed solidly during the financial crisis. Now, in the aftermath, the lender isn’t cutting dividends or selling shares to bolster capital, in contrast to regional bank peers. And M&T’s stock has traded with a relatively high valuation, illustrating investors’ faith in the bank.

Yet M&T, which is based in Buffalo, finds itself in the company of financial sector slackers — those banks that have yet to fully pay back the bailout money they received as part of the Troubled Asset Relief Program. While M&T redeemed $700 million of the government’s preferred shares, it still owes taxpayers $382 million.

Many banks, particularly the stronger ones, repaid TARP as quickly as they could to free themselves from the restrictions that came with the program, as well as the stigma of having the government as a stakeholder. Banks typically sold new common shares to pay off their preferred shares. Most recently, Regions Financial raised $900 million in early April to return the bailout money. The only two other big regional banks that owe money to the Treasury Department, Synovus and Zions Bancorporation, fared far worse than M&T in the turmoil.

So why is M&T still hanging onto taxpayer money?

Like many relatively strong players, M&T capitalized on the crisis to acquire ailing firms like Wilmington Trust and Provident Bankshares. As a result, M&T ended up with a larger pile of bailout money. The bank originally received a $600 million TARP investment in 2008, but then assumed another $482 million as it purchased other banks.

To pay off the remaining $382 million, the bank could easily issue new shares without depressing its stock price, analysts say. But M&T Bank may want to boast that it never let TARP damage existing shareholders, whose stakes would be diluted by the issue of new stock.

“I think they want to keep it that way,” said Jason Goldberg, a bank analyst at Barclays.

As an alternative, M&T Bank could take $382 million out of its cash holdings and pay off TARP. Such a sum would not appear to put a large dent in its $8.4 billion of shareholders’ common equity.

M&T may have offered a clue about its reluctance to repay TARP in a statement it made after the stress tests the Federal Reserve conducted in March. Then, M&T Bank said, “To the extent that M&T wishes to increase its common stock dividend, repurchase common shares or repay its remaining $381.5 million in TARP preferred stock, M&T would need to submit another capital plan to the Federal Reserve.”

The implication is that M&T didn’t include TARP repayments in its recent plan to the Fed. The bank may have left it off the list rather than risk the Fed denying the request. Such a refusal could have raised questions with investors and analysts about the strength of the bank.

One metric at M&T that might give regulators pause is a crucial measure of capital called the Tier 1 common ratio. This shows how high a bank’s loss buffer is as a percentage of its assets. At M&T, that capital buffer is at 6.86 percent of assets, whereas most of the bank’s peers have ratios above 8.5 percent.

“We’ll work with Treasury and others to pay back the remaining balance when appropriate and practical,” said C. Michael Zabel, a spokesman for M&T. “We’re committed to paying it in full, and at the same time, we’re committed to our careful, conservative and consistent management principles, which have helped keep us strong and stable throughout the crisis.”

On its lower Tier 1 ratio, Mr. Zabel said, “Our capital isn’t depleted by losses — as demonstrated by our results, both long term and especially through the credit crisis.”

The TARP question probably won’t hang over M&T forever, though. The bank is likely to want to return the bailout money before November 2013. That’s when M&T will need to start paying more to the government for its bailout, a dividend of 9 percent, up from the current 5 percent.

“We expect the bank to be out of them by then,” Mr. Goldberg of Barclays said.