Seeking to lessen its capital load, First Bank System Inc. announced that it plans to repurchase as much as $125 million of outstanding preferred shares.
The company said Tuesday that it would redeem the entire $100 million outstanding amount of an adjustable-rate, cumulative preferred stock Oct. 27. And the Minneapolis banking company is likely to redeem $25 million of another preferred issue.
"We have to much capital," said Richard A. Zona, chief financial officer at First Bank. "The repurchase will take some of that excess capital out of the balance sheet and give some of it to the common shareholders in the form of earnings.
Robust Capital Ratio
First Bank System's Tier 1 capital was 9.51% at midyear, one of the highest ratios for a regional bank. But it is only one of dozens of regional and supperegional banks with too much capital, said analysts.
Because of sluggish loan growth, banks are stockpiling retained earnings. Equity is rising, and analysts believe return on equity at many banks is under pressure. "The problem these banks have is that they have growing capital bases and have to leverage that," said Sandra Flannigan, a Merrill Lynch & Co. analyst.
Banks are wrestling with the problem. To protect their ROE, many have increaed dividends or have bought back preferred or common shares. Analysts said that, even with those actions, the problem of overcapitalization remains. Analysts worry that banks may overpay for acquisitions because they can't use the funds productively elsewhere.
"It makes much more sense for a bank to buy back capital than to push itself to do an acquisition with the extra cash that doesn't make economic sense," said Dennis Shea, an analyst at Morgan Stanley & Co.
By repurchasing the full amount of the preferred shares, which carry a coupon of at least 6.75%, First Bank will reduce its cost of funds, said Ms. Flannigan.
The company will use cash and some of the proceeds from $200 million in debt it recently issued to finance the repurchase. Given current low interest rates, issuing debt is cheaper than paying the coupons on some preferred issue. Preferred dividends aren't tax-deductible; interest expense is.
Net Income Bolstered
Mr. Zona said the repurchase will boost the bank's net income available for common shareholders by $4 million to $5 million a year, or about 4 cents per share.
First Bank System's return on equity has been rising for the past year, reaching 15.7% in the second quarter. But the company's excess capital could impair further growth in returns.
"Looking forward, we could improve even more if we get rid of the excess capital," said Mr. Zona. "It is a drag on return on common equity."
Mr. Zona said the company would continue to examine options to manage capital.