Magazine article American Banker

A (Final?)Rebound in Pooled Trust-Preferreds

Magazine article American Banker

A (Final?)Rebound in Pooled Trust-Preferreds

Article excerpt

Is this the last hurrah for pooled trust-preferred securities?

Volume has rebounded in recent months after dropping sharply this spring, and issuers expect the growth to carry over into 2005. But refinancings -- not new business -- will probably account for the lion's share of activity next year.

That would be a turnabout for trust-preferreds, which went on a run that started in late 1996, when the Federal Reserve Board first allowed them to be counted as core capital, and lasted until spring of this year, when the Fed proposed new rules on the use of trust-preferreds. The central bank estimates that more than 800 banking companies collectively issued nearly $80 billion of the securities during that span.

A section of that proposal governing the treatment of goodwill may block scores of community banks, which are among the heaviest users of the pools, from issuing new trust-preferreds.

Banks have embraced the securities for several reasons. First, they may make up 25% of core capital. Another advantage is that the interest paid to noteholders is tax-deductible, and since trust-preferreds count as long-term subordinated debt rather than as equity, they do not dilute ownership.

Those features make trust-preferreds "an incredibly attractive piece of paper," said Brian R. Sterling, a co-head of investment banking at Sandler O'Neill & Partners LP in New York.

But the Fed's planned changes, announced May 6, seem certain to make trust-preferreds a lot less appealing.

The key one is a requirement to take effect April 1, 2007, that banks deduct any goodwill on their books from their total Tier 1 capital before calculating the ratio of trust-preferreds to the whole. Trust-preferreds could still count for up to 25% of total core capital, but the netting of goodwill would make that total much smaller, thus reducing the amount of trust-preferreds eligible for core capital treatment.

The goodwill rule would have the biggest impact on active acquirers and other companies that have recently completed deals, a class that includes hundreds of community banks. A Fed spokesman said the agency hopes to release a final rule by the end of the year.

Thomas W. Killian, a principal at Sandler O'Neill, said the plan is already rippling through the marketplace.

"There's no question that we're going to see a more complex analysis" in decisions on whether to issue trust-preferreds, Mr. Killian said. "Banks are starting to take that into account."

"I absolutely see" the proposed goodwill rule as "a potential problem," said David Mills, the president of the $1.5 billion-asset Busey Bank in Urbana, Ill., a subsidiary of First Busey Corp. "We're looking at several deals on the Street, but I'd have to put acquisitions on the shelf as a growth strategy," if the rule takes effect.

Here, in short, is why. First Busey's June purchase of the $254 million-asset First Capital Bank of Peoria, Ill., left it with $36.2 million of goodwill on its books. Under the proposed rule, First Busey would have to subtract that amount from its total core capital in order to determine the amount of trust-preferreds it would be eligible to issue.

With $40 million of trust-preferreds outstanding -- including $15 million it issued in April as part of a pooled offering -- First Busey is already at its core-capital limit. …

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