CHICAGO - Three big Midwest banking companies are joining the parade of institutions seizing upon share redemptions to reduce swollen capital bases and retire higher-cost issues.

Firstar Corp., Milwaukee, said it will redeem all of its Series B adjustable-rate cumulative preferred stock at a cost of $51.5 million, or $103 a share, plus accrued dividends payable.

Pittsburgh-based Mellon Bank Corp. said it will redeem all of its Series B convertible preferred stock at a cost of $68 million, or $25 a share, plus accrued dividends payable.

Redeeming Debentures

Mellon's directors also approved the redemption of its 8.6% debentures, due 2009, for $29.05 million, or 103.74% of par value, plus accrued interest. And they authorized the company to repurchase up to I million of its shares in the open market.

In a third announcement, First of America Bank Corp., Kalamazoo, Mich., said it would redeem all of its Series F convertible preferred stock in a transaction valued at $74.6 million. The company, said the move would lower its annual dividend outlays by roughly $3 million.

The actions come in a slow-growth era when many banks lack ways to profitably deploy all the capital amassed during the industry's rebound. At the same time, banks are seizing opportunities to lower fixed financing costs on debt and preferred equity capital.

Preferred stocks loom as an obvious target for redemption, since yields on such issues often are high, and dividend outlays are not tax deductible, said Kenneth Puglisi, a banking analyst with Chicago Corp.

Capitalization out of Balance

William Risch, chief financial officer at Firstar, said "we needed that preferred" when it was issued in 1986, but he said the company now must address the fact that it is generating capital much faster than it is generating asset growth.

By retiring the issue, he said, Firstar by yearend will lower its tangible equity capitalization to roughly 7.65% of total assets, compared with 8.08% at Sept. 30. Firstar has raised its dividend three times since the start of 1992, but its payout ratio of 31.5% still is lower than the 33% ratio of 1991.

Mellon also issued its preferred in 1986.

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