Trust Preferred capital to Tier 2 ?

Might make it tougher for Citizens First National Bank and Princeton National Bancorp, Inc. I have only scanned the document, but there is a hue and cry out, and PNBC stats are used in supporting the position that there should be no change. This is all beyond my banking knowledge.

6 comments on “Trust Preferred capital to Tier 2 ?

  1. Trust Preferred Securities (TPS) have been a popular vehicle for raising capital, especially for financial institutions. TPS are a hybrid security, in some ways debt in others capital. For the issuer they get to treat TPS as capital yet deduct the interest paid as if it were interest paid on debt. Dividends on common stock by comparison are paid with after tax dollars.

    The real advantage is TPS are treated as Tier 1 capital subject to requirements and limitations. Tier 1 capital is the most valuable capital for a financial institutions. Other securities like subordinated debt and preferred stock are not Tier 1 capital but rather Tier 2 capital.

    Dodd-Frank set out to exclude TPS from the Tier 1 treatment but had an exception that would allow bank holding companies with less than $15 billion is assets as of 12/31/2009 continue to count TPS as Tier 1.

    I agree that changing the rules for existing TPS is changing the rules in the middle of the game. And it would change at a time that is already difficult to raise capital, especially for banks.

    Having said all of that the challenges PNBC has are so monumental that this change is all but irrelevant in my view.

    Jim

      • I Googled “Trust Preferred Securities.” I didn’t understand all that I read, but I came away with the notion that the “bloom is off the rose” as far as TPS sales are concerned. One thing I read was that a number of banks that raised capital by selling TPSs, later went broke, and their TPS investors were stiffed. Who would have thunk it?

        From what I read, PNBC might have been able to go the TPS route a few years ago.

        • The bloom is off the rose and the rose is banking. Rasing capital by common, preferred, TPS or other means is very difficult and even more so for financial institutions. If the bank goes broke the investors , regardless of investment vehicle, end up with nothing.

          Never invest more in any one security than you can afford to lose.

          Jim

    • Thanks, Jim, for that informative article. I discerned not much enouragement for PNBC.

      I think a large obstacle to PNBC raising capital is their persistent loss situation for the past few years, which continues.

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