Banks Find Upside in the End of Trups: Interactive Graphic

By Harry Terris August 29, 2012, 4:27 p.m. EDT 2 Min Read

Community banking

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August 17

The demise of trust-preferred securities may not be so bad for the banking industry after all.

First, it will do little harm. The vast majority of about 600 bank holding companies with outstanding trups at June 30 would maintain Tier 1 ratios above 8.5% without the securities. (The data here covers institutions that reported consolidated financials to regulators.) And that minimum requirement would not be fully phased in until 2019 under the U.S. proposal to implement Basel III. Moreover, trups’ end has an upside for some banks. Many have been using the phaseout of trups from Tier 1 capital as an opportunity to retire the high-cost funding and strengthen net interest margins. (The sortable table below shows holding companies that reported outstanding trust-preferreds to regulators as of June 30. Use the check boxes at the top to show only those institutions that would drop below the 8.5% threshold, or only those that would not, or both groups. Text continues below.)

Sixty-five holding companies with Tier 1 ratios higher than 8.5% would fall below the threshold without their trust-preferreds, and some could face a painful and anxious scramble to fill the gap by raising new capital. (The calculations here assume that holding companies raise no other Tier 1 capital to replace the trust-preferred securities, and that they do not reduce risk-weighted assets.)

Among the 114 overall that would have Tier 1 ratios below 8.5% (including the 49 that are already shy of the mark), however, about half have Texas ratios (percentages of bad debt to capital and loss reserves) higher than 75% - suggesting deeper problems than the reclassification of trust-preferreds under regulatory capital rules.

Meanwhile, Susquehanna Bancshares (SUSQ) in Lititz, Pa., where trust-preferreds accounted for about a fifth of Tier 1 capital at June 30, raised $150 million this month through the sale of senior notes, using the proceeds to pay off about $200 million of higher-cost funding, mostly the trust-preferred variety. Analysts at KBW, noting other banks that had executed similar transactions, declared the move “a low-risk method to boost earnings.”

CVB Financial (CVBF) in Ontario, Calif. – which had a Tier 1 common capital ratio of 16.3% at June 30, well above the proposed minimum of 7% that would go into effect in 2019 – estimated in July that the $20 million of trust-preferred debt it redeemed the month before would save it $650,000 annually.

Chief Executive Chris Myers told investors on a conference call that the company was “floating in cash like crazy,” and might continue to “chip away” at its remaining trust preferred obligations.

“We want to get as lean and mean on the cost side and the funding cost side as we can,” he said.

Harry Terris

Reporter, American Banker