For the government's evolving bailout program, the hits keep on coming — Tuesday, TCF Financial Corp. in Wayzata, Minn., became the latest banking company to say it plans to return the government's money.

The $16.3 billion-asset company, which said it is well capitalized, follows the example of Iberiabank Corp. in Lafayette, La., and Chicago's Northern Trust Corp.

TCF and Iberia attributed their decisions to the changing nature of the Treasury Department's capital program, a part of the Troubled Asset Relief Program, or Tarp, which was begun last fall as a way to encourage healthy banks to lend more but has morphed into a means to buoy weak banks.

More banks are expected to add their names to the list.

"I think we'll see a number of banks who don't really need the capital say, 'Why bother?' " said Walter Moeling, a bank lawyer in the Atlanta office of Bryan Cave LLP.

In an interview Tuesday, TCF chief executive William Cooper explained his reasoning.

"Regulators strongly suggested we take the money, saying that, if we didn't, we'd be considered a weaker bank by the public," he said. "But now, because Congress is setting the tune, the perception is that if we took Tarp money we did something wrong, that the money was a bailout and that we are using it for unsavory purposes."

Daryl G. Byrd, the CEO of the $5.4 billion-asset Iberiabank, said that the public increasingly feels Tarp banks are troubled and, therefore, "open to all kinds of changes to the way you do business."

Cooper also said the rules of the game keep changing.

When TCF got $361.2 million, regulators said it should be leveraged to make more loans or to buy banks. Cooper said they told TCF not to worry about the effects on the bank's tangible common equity ratio.

But now regulators are making tangible common equity an important measure in planned stress testing, and Cooper said this puts him in a tough spot. "If I lever the money, and lower that ratio, the stress test will say that now you are a problem bank."

Alternatively, if TCF maintains its tangible common equity ratio by curtailing lending and dealmaking, "all it does is sit and causes us to pay $18 million after taxes each year on that preferred stock."

Additional Tarp-related headaches include closer public scrutiny of spending by banks that accepted the government's investment.

TCF was criticized in local newspapers for contributing $200,000 toward an employee trip to Snowmass Village, a ski resort near Aspen, Colo. — something Cooper at the time strongly defended as a way of boosting morale.

Northern Trust on Friday said it would repay $1.6 billion after a storm of negative publicity tied to its multimillion-dollar sponsorship of a golf tournament.

Other banks that were on the brink of taking government money, like the $441 million-asset Sussex Bancorp in Franklin, N.J., have balked.

Sussex said Tuesday that it chose at the last minute not to sell $10 million in preferred shares to the government because public perception puts it at a "marketplace disadvantage." The company also said loan demand was slow and it did not believe it could profitably deploy the additional capital.

Iberia is redeeming 90,000 shares of preferred stock it sold to the government and paying back $90.6 million, plus a $575,000 dividend.

TCF would like to redeem all 361,172 shares of preferred stock it sold to the government in November, for $361.2 million, plus any accrued dividend it would owe. TCF has notified the government and must wait 30 days before getting regulatory approval, it said.

On Tuesday, David Rochester, an analyst at Friedman, Billings, Ramsey & Co., increased his 2009 core-earnings-per-share estimate for TCF by 7 cents, to 37 cents, and in a research note wrote that the change primarily reflects the expected repayment to the government. However, Rochester also wrote that he expects earnings to decline materially during the next six months on worsening credit quality and weaker fee income.

"Unemployment continues to increase at a strong pace within" TCF's "footprint, as home prices continue to decline, applying further stress to the home equity portfolio" of $2 billion, he wrote. "We expect" TCF "to cut its dividend substantially over the next three to six months as earnings dip well below the current payout."

Cooper conceded that conditions have worsened in the marketplace but that those particular loans were only made to borrowers with FICO scores above 720 and at loan-to-value ratios above 70%. Delinquencies in that portfolio are flat to down, he said, though he would not specify the amounts. At Dec. 31, net chargeoffs for "junior lien" home equity loans were 1.76% of average loans and leases.

His company would be well-capitalized after it returns the government money, Cooper said, with pro forma Tier 1 and total risked-based ratios of 8.88% and 11.74%, respectively. Its tangible common equity ratio, 5.85% at Dec. 31, would be unchanged by the redemption of the government's preferred shares.

"We did our own stress tests and believe we have adequate capital to survive anything," Cooper said. A dividend cut remains a possibility, he said, "but it really depends on what our prognosis is for earnings going forward and our capital levels." On Feb. 28, TCF paid a 25-cent dividend to shareholders.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.