Yardville National Bancorp wanted to raise cash last summer to build its assets and fund its growth. Trouble was, directors of the $530 million- asset bank in Hamilton, N.J., didn't want to hurt its share price by selling more shares.

So Yardville used a relatively new kind of financing that many big banks have employed over the past year: It issued $11.5 million of trust- preferred securities.

The technique "is allowing us to grow and produce more net income without diluting current ownership," said Yardville president Patrick M. Ryan.

Trust-preferred securities are slowly catching on with community banks.

In recent weeks Yardville and Penn-fed Financial Services Inc., West Orange, N.J., have raised a combined $46 million selling trust-preferred securities to investors. Since January, 31 other community banks have raised more than $900 million through trust-preferred issues, according to the Livingston, N.J., investment banking firm Ryan, Beck & Co.

"It takes some intellectual effort to figure out how they work," said Thomas K. Ferguson, president of $1 billion-asset Mason-Dixon Bancshares, Westminster, Md. "But it's something that any CEO or CFO should be factoring into their thinking in terms of capital management."

To sell trust-preferred securities, a bank or a bank holding company must establish a trust company. The trust company issues preferred stock to investors and lends the proceeds to the bank. The bank pays interest on the loan, and the trust company forwards that interest to investors.

In the year since the financing tool came into vogue, some 150 banks and bank holding companies have raised $25 billion selling trust-preferred securities.

Bankers are attracted to trust-preferred issues for two reasons: First, thanks to a ruling by the Federal Reserve Board last fall, banks can count the cash as Tier 1 capital. An increase in Tier 1 can keep all-important capital-asset ratios in line and regulators at bay.

Second, because the bank pays interest, and not dividends, it can deduct the payments from its taxes.

That tax break, however, nearly put an end to trust-preferred financing last spring. As part of his efforts to balance the federal budget, President Clinton proposed eliminating the tax break provision in the sale of trust-preferred securities.

Congress rejected the measure, which would have left banks little incentive to sell the issues, said James T. Hill, senior vice president, corporate finance, at Ryan, Beck.

Proceeds from trust-preferred issues can be used in various ways. For example, Republic Bancshares, a $1.5 billion-asset bank holding company in St. Petersburg, Fla., expanded its real estate lending with some of the $28.7 million it raised in July. The extra cash should also keep Republic's capital-to-asset ratio in line if the company makes more acquisitions, said chairman and chief executive officer John W. Sapanski.

Mason-Dixon used some of the $20 million it raised in July to buy back stock from dissident shareholders-a tactic analysts say can ward off hostile suitors.

So why aren't more community banks selling trust-preferred securities?

Analysts said some don't need the capital or fear that carrying too much cash on their books will drag down earnings. And many small community banks can't issue enough shares to entice investors, or can't afford an investment banker.

A community bank would probably pay about 4% of what it raises in an offering to an investment banker, Mr. Ryan said.

Some community bankers simply aren't sold on trust-preferreds or don't know enough about them to consider them a viable option.

"The banks I'm familiar with really aren't looking at it," said Robert D. Clore, a community banking analyst at Cowen & Co., Albany.

Community banks, "slow to adapt to change," he added. "Unless they see everyone else doing, it they're not going to jump on the bandwagon." uBy ALAN KLINE

Yardville National Bancorp wanted to raise cash last summer to build its assets and fund its growth. Trouble was, directors of the $530 million- asset bank in Hamilton, N.J., didn't want to hurt its share price by selling more shares.

So Yardville used a relatively new kind of financing that many big banks have employed over the past year: It issued $11.5 million of trust- preferred securities.

The technique "is allowing us to grow and produce more net income without diluting current ownership," said Yardville president Patrick M. Ryan.

Trust-preferred securities are slowly catching on with community banks.

In recent weeks Yardville and Pennfed Financial Services Inc., West Orange, N.J., have raised a combined $46 million selling trust-preferred securities to investors. Since January, 31 other community banks have raised more than $900 million through trust-preferred issues, according to the Livingston, N.J., investment banking firm Ryan, Beck & Co.

"It takes some intellectual effort to figure out how they work," said Thomas K. Ferguson, president of $1 billion-asset Mason-Dixon Bancshares, Westminster, Md. "But it's something that any CEO or CFO should be factoring into their thinking in terms of capital management."

To sell trust-preferred securities, a bank or a bank holding company must establish a trust company. The trust company issues preferred stock to investors and lends the proceeds to the bank. The bank pays interest on the loan, and the trust company forwards that interest to investors.

In the year since the financing tool came into vogue, some 150 banks and bank holding companies have raised $25 billion selling trust-preferred securities.

Bankers are attracted to trust-preferred issues for two reasons: First, thanks to a ruling by the Federal Reserve Board last fall, banks can count the cash as Tier 1 capital. An increase in Tier 1 can keep all-important capital-asset ratios in line and regulators at bay.

Second, because the bank pays interest, and not dividends, it can deduct the payments from its taxes.

That tax break, however, nearly put an end to trust-preferred financing last spring. As part of his efforts to balance the federal budget, President Clinton proposed eliminating the tax break provision in the sale of trust-preferred securities.

Congress rejected the measure, which would have left banks little incentive to sell the issues, said James T. Hill, senior vice president, corporate finance, at Ryan, Beck.

Proceeds from trust-preferred issues can be used in various ways. For example, Republic Bancshares, a $1.5 billion-asset bank holding company in St. Petersburg, Fla., expanded its real estate lending with some of the $28.7 million it raised in July. The extra cash should also keep Republic's capital-to-asset ratio in line if the company makes more acquisitions, said chairman and chief executive officer John W. Sapanski.

Mason-Dixon used some of the $20 million it raised in July to buy back stock from dissident shareholders-a tactic analysts say can ward off hostile suitors.

So why aren't more community banks selling trust-preferred securities?

Analysts said some don't need the capital or fear that carrying too much cash on their books will drag down earnings. And many small community banks can't issue enough shares to entice investors, or can't afford an investment banker.

A community bank would probably pay about 4% of what it raises in an offering to an investment banker, Mr. Ryan said.

Some community bankers simply aren't sold on trust-preferreds or don't know enough about them to consider them a viable option.

"The banks I'm familiar with really aren't looking at it," said Robert D. Clore, a community banking analyst at Cowen & Co., Albany.

Community banks, "slow to adapt to change," he added. "Unless they see everyone else doing, it they're not going to jump on the bandwagon."

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