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The first two quarterly reports from regionals spoke volumes about the widening gap between healthy banks and those in recovery.
April 18 -
Fourth-quarter results at JPMorgan Chase & Co. and M&T Bank Corp. suggest that growing loans right now may be akin to winning Olympic gold in curling: It's darn hard, admirable and not all that lucrative.
January 14 -
Wilmington Trust's two big fee engines — wealth management and corporate services — make M&T Bank willing to buy its problems.
November 1
Though investors naturally embraced the shareholder-friendly way that M&T Bank Corp. plans to return most of its bailout money, its chief financial officer stressed another benefit: diversification of its capital structure.
The $68 billion asset-company plans to return $700 million of its $1.08 billion in federal aid by issuing preferred shares, not common stock like other giant banks have done.
CFO Rene Jones said that approach not only minimizes shareholder dilution but bolsters the Buffalo, N.Y., company's balance sheet with more than just common equity. That is important because new regulations have been phasing out the hybrid debt and equity instruments that banks used to include in its regulatory capital.
"What you have to do is kind of look out and understand all of those new rules - where is your capital structure going?" Jones said in an interview Wednesday. "The most logical thing to do in our minds was some kind of preferred [issuance]. We don't have any preferred today," excluding the preferred shares it has outstanding to the government under the Troubled Asset Relief Program.
"It's still allowed to be included in the Tier 1 capital ratios," he said, so preferred shares will probably become more popular over the next several years.
M&T late Tuesday said it plans to issue $500 million of preferred shares by the end of June and pay $370 million to Tarp. The new preferred shares will replace $700 million of preferred shares that were being held by the Treasury Department.
It also plans to pay $330 million of Tarp debt that it will assume from the acquisition of Delaware's Wilmington Trust Corp. The Federal Reserve Board approved the deal Tuesday; it still awaits OKs from state overseers.
M&T will still owe about $380 million to Tarp. Jones declined to say how or when that remainder would be paid.
"This is the first step. … We'll pay it back in due course," Jones said. "At the end of the day we're obviously focused on being shareholder friendly. Management and directors and employees own 20% of the company. It's very much in our interest to be patient."
M&T's average common equity rose $118 million, or 1.5% more, in the first quarter.
Joseph Fenech, managing director of Sandler O'Neill & Partners LP, said that "pretty fast rate" of capital generation is an important reason the lender may pull off the rare feat of getting out of Tarp by either raising no or relatively little common equity.
"A common equity raise can't be ruled out," he said. "There is still the possibility they get out of Tarp without raising common equity at all. They'd stand alone among the large banks in the country."
Three banks in M&T's asset class that repaid Tarp this year did so in conjunction with big equity and debt raises: Fifth Third Bancorp., SunTrust Banks Inc. and KeyCorp. For example, in March, KeyCorp issued $625 million of common stock and sold $2 billion of senior debt to refund its $2.5 billion of Tarp aid.
A crucial difference between M&T and those others, Fenech said: It wasn't part of the government stress tests of the 19 largest public banks. M&T would have been No. 20. All of the stress test banks were required to raise some common equity to get out of Tarp, Fenech said.
"To some extent, M&T is going to benefit here from flying under the radar," he said.
For his part, Jones said M&T can only speak to what M&T does.
"It's hard for me to comment on what everybody else has done," he said, adding that "it's a hard one for me to answer" when asked if avoiding the stress tests worked to its benefit.
M&T, with more than 725 branches from New York to Maryland, held up better than other large banks during the downturn because it got out of problem areas like subprime home and auto lending earlier than those other banks did. It has a reputation as a good underwriter of business property loans, and has benefited from operating in the Northeast, which has fared better than other parts of the country.
M&T, which counts Warren Buffett as a major investor, stayed profitable and never cut its dividend.
Jones said M&T's approach to banking is about being patient and taking the long view. That is why it took Tarp funds later than most of its rival banks and paid them back later. It also took less aid than most big banks, he said.
M&T's shares rose 2.2%, to $89.15, on Wednesday.
Robert Ramsey, a vice president of equity research with FBR Capital markets & Co., said in a research note that redeeming preferred shares to the government by issuing new ones would be "relatively neutral" to M&T's profits. Right now, it is paying a 5% annual dividend on $700 million of preferred shares it is buying back from the Treasury. He and others analyst estimate that the preferred shares it plans to issue will pay an annual dividend of 6% to 8%. So the swap will probably be break even, financially.
