NEW YORK ( TheStreet) -- Trust preferred securities are becoming a big issue for little banks, although they don't appear to present as much of a problem for large, Bank of America ( BAC)- and Citigroup ( C)-scale financial services firms. In pre-crisis days, trust preferreds -- or TruPS -- were often issued as a way to boost regulatory capital levels without diluting common stockholders. Interest payments could also be deducted for tax purposes. From an investor standpoint, TRUPs not only paid interest, but are "safer" instruments than common stock, because they're higher in the ownership structure and therefore a higher priority in case of liquidation. TruPS grew so popular that issuance quintupled from $31 billion outstanding at 110 bank holding companies at the end of 1999 to nearly $150 billion at 1,400 firms at the end of 2008, according to the Philadelphia Fed. But now, the TruPS market has gotten so discounted that in some cases banks are offering to outright repurchase the securities from investors for as little as 20 cents on the dollar. Unfortunately, this hurts not just the investors, but the banks themselves, which purchased pools of TruPS in the form of collateralized debt obligations, or CDOs. Last week, Fitch Ratings became the latest agency to take further negative action on such CDOs. It downgraded 295 notes from 76 CDOs due to losses and defaults, and placed 179 notes on ratings watch negative. Most were already below investment-grade level. Looking at fourth-quarter results at small banks across the country, the story appears grim.
East West Bancorp ( EWBC) took a $46 million write-down in the fourth quarter, mostly related to TruPS. For all of 2009, the firm took $107 million in such impairment charges. Washington Trust ( WASH) also posted $14.7 million in unrealized losses on its investment securities portfolio, nearly all of which were related to TruPS holdings. Eastern Virginia Bankshares ( EVBS) took a $18.9 million impairment charge, while SCBT Financial ( SCBT) recorded a $5 million charge as well. The Bancorp ( TBBK) and Independent Bank ( INDB) each took $2.2 million impairment charges; Harleysville National ( HNBC) recorded a $1.9 million charge; Virginia Commerce ( VCBI) took a $1.4 million charge; and -- well, you get the picture. Boston Private Financial ( BPFH) recently repurchased $44.5 million worth of TruPS at a 44% discount to their initial value, but other investors may not be so fortunate. Earlier this month, the struggling lenders Sterling Financial ( STSA) and BankAtlantic ( BBX) and privately held HomeStreet Bank each offered to buy back TruPS at a price of 20 cents on the dollar. Sterling's stock has plummeted from above $5 in the spring to trade recently below 50 cents. BankAtlantic has slumped from above $6 in the summer to around $1.25 of late. Its CEO, Alan Levan, has warned that enough investors may not want to sell the TruPS at the offered price, and that the Florida-based lender may not be able to raise enough capital to buy back the TruPS anyway. But the biggest news on trust preferred securities as far as banking titans go is when the Treasury Department will sell its $2.2 billion worth of Citigroup TruPS. The government received the securities in exchange for a guarantee that was never redeemed, so even if they are sold at a discount to face value, taxpayers will still earn money on them. -- Written by Lauren Tara LaCapra in New York.