Banks Begin Shedding Trust-Preferred Securities

Three regional banks will repay trust-preferred securities in preparation for stricter capital standards that will start being phased in starting in 2013.

Banks with at least $15 billion of assets at Dec. 31, 2009 will no longer be able to count trust-preferred securities as part of their Tier 1 capital under a provision in the Dodd-Frank Act. Because of this, banks, especially healthier ones, will begin the process of "cleaning up their capital structure," said Mark Fitzgibbon, a principal and director of research at Sandler O'Neill.

This week Webster Financial (WBS) of Waterbury, Conn., TCF Financial (TCB) of Wayzata, Minn., and BB&T (BBT) of Winston-Salem, N.C., announced plans to repay their trust-preferred securities in the coming weeks.

With annual meetings and finalizing budgets out of the way, banks now have time to focus on strategic decisions. And with the provision being phased in starting Jan. 1, the number of banks taking this step is likely to accelerate, Fitzgibbon said.

"This should be positive for banks," Fitzgibbon said. "A lot of these trust-preferred securities were issued during a time when interest rates were higher and they haven't been callable. This is a very good refinancing time for banks."

The $19.1 billion-asset Webster has long intended to redeem its trust-preferred shares because of the decline in interest rates and the pending change to the capital standards. The bank just needed a regulatory change by the Federal Reserve, said Bob Guenther, a senior vice president of public affairs at Webster.

Most of the trust-preferred securities have provisions that allow banks, like Webster, to redeem them without paying a premium if there has been a change in regulations, Fitzgibbon said.

"This is very much like a consumer refinancing a high cost mortgage or reducing debt," Guenther said. "In this low-interest-rate environment, high-cost forms of debt are being replaced."

After Webster said Monday that it would redeem roughly $136 million in trust-preferred securities in July, Sandler O'Neill increased its earnings per share estimate for the bank by two cents, to $1.82, for 2012 and by six cents, to $1.91, for 2013.

Like Webster, the $171.7 billion-asset BB&T will redeem its $3.1 billion in trust-preferred securities without raising additional capital, the company said Monday. "A lot of banks are sitting on mountains of liquidity," so from an interest expense perspective, repaying the trust-preferred securities has "very positive ramifications," Fitzgibbon said.

The $17.9 billion-asset TCF said Monday that it will raise up to $172.5 million through the offering of 6.9 million depositary shares at $25 per share. It will use the money to redeem $115 million in junior subordinated notes, which will lead to the repayment of its trust-preferred securities and other high-cost debt, in addition for other general purposes, the bank said.

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