Under the Collins Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, most trust preferred securities were excluded from banks' regulatory Tier 1 capital. The spirit of the Collins Amendment was to improve the "quality" of regulatory capital by excluding most trust-preferred shares and cumulative preferred shares, because these types of capital offered less flexibility to banks' management. If a bank decides to suspend dividend payments on cumulative preferred shares, the dividends accrue in arrears. If dividends on non-cumulative preferred shares are suspended, the company never has to pay the dividends to investors.
The Federal Reserve's proposed rules last June were considered a "capital-treatment event," allowing the banks in many instances to repurchase outstanding trust preferred shares at par value. This was very painful for some investors, since they not only lost very attractive income streams, but many took capital losses since they had paid significant market premiums for the trust preferred shares being redeemed.
Among the largest U.S. banks, JPMorgan Chase (JPM) led the way with $9 billion in trust preferred share redemptions in early July, all at face value, with nearly $4.2 billion having coupons higher than 6.5%. Bank of America (BAC) later in July redeemed $3.9 billion in trust preferred shares, all of which had coupons of 6% or higher, with $2.3 billion paying over 7.3%. Bank of America did pay a premium on the redemption of $1.8 billion of the trust preferred shares.
Many regional banks had no choice but to take similar actions, including BB&T (BBT) of Winston-Salem, N.C., which redeemed $3.1 billion in trust preferred shares in July. Of that total, $350 million paid a fixed rate of 8.10%, while $575 million paid a fixed rate of 9.6%. BB&T issued $1.2 billion in non-cumulative preferred shares during the third quarter, with a coupon of 5.625%.
Harralson rates Cullen/Frost "underperform," with a price target of $54, even though he considers the company to be a "high-quality bank." The analyst said in a report on Jan. 31 that he saw "minimal near-term negative catalyst to send the stock materially lower," but that he also expected the shares to underperform the market because of their high valuation.