An Evaluation of the Use of Preferred Stock by Commercial Banking Concerns

Abstract

The objective of this thesis is to analyze the use of preferred stock as a means of raising bank capital. This is performed with particular reference to the $14 million issue floated by Bancorp Hawaii in August of 1980. The banking industry is undergoing tremendous change. Unprecedented and fluctuating interest rate levels are changing the management of banks. New players are entering banking's traditional turf, the accumulation and lending of funds. With deregulation, the competitive environment is changing and banks may be unable to compete or to take advantage of the opportunities available because of inadequate capital positions. Thus, obtaining access to adequate supplies of capital and developing new sources of capital are challenges facing bank financial managers. In the past, preferred stock has been a relatively neglected source of capital for U.S. corporations. Debt issues have provided most of the externally raised funds. Both debt and preferred stock are senior securities, in that they rank ahead of common stock, yet there is an important difference to bank managers: preferred stock can be included in certain capital measures used in the regulation of banks while debentures cannot. Given this potential advantage, this paper will analyze the advantages and disadvantages of using preferred stock as a source of capital for commercial banking concerns. Part I of this paper investigates the present capital position of the banking industry, describes the general characteristics of preferred stock issues, compares the relative advantages and disadvantages of using preferred stock, and presents a method of analyzing the use of preferred financing by banks. Part II of this paper focuses on a specific issue of preferred stock, the $14 million issue floated by Bancorp Hawaii. Part II applies the methodology provided in Part I to an actual preferred stock issue.