Pub. 5 2010-2011

September/October 2010 15 Extraordinary Service for Extraordinary Members. I N TODAY’S CHALLENGING ECONOMY, the ability for regulated financial in- stitutions to raise additional capital has become increasingly important. Changes to the capital requirements for bank holding companies brought about under theDodd-FrankWall Street Reform and Consumer Protection Act (Dodd-Frank Act) also will make rais- ing additional capital more difficult. Under the Collins Amendment to the Dodd-Frank Act, certain bank holding companies will face increased capital requirements andwill no longer be per- mitted to treat trust preferred securities as an element of Tier 1 capital. Without the ability to raise capital through the sale of trust preferred securities, it will become important for bank holding companies to develop alternativemeth- ods for raising capital. With the growth of private-equity firms (PEFs) and their continued search for new acquisition targets, financial institutions should consider Many community banks and their holding companies rely on loan participations as an important source of liquidity for their lending operations. Traditionally, these programs have allowed lenders to diversify assets, comply with lending limits, and spread credit risk by getting participated assets off their balance sheets. Private Equity: Pro$ and Con$ Adam Kirshenbaum & Jeff Makovicka , Husch Blackwell Sanders LLP COUNSELOR’S CORNER Q Pro$ and Con$ — continued on page 16 the potential for private-equity invest- ments as one alternative. However, PEFs looking to invest in banking or- ganizations face unique considerations as a result of the highly regulated envi- ronment in which financial institutions operate. Accordingly, financial institu- tions as well as PEFs must take special care to assure that private-equity investments in financial institutions are properly structured. Tier 1 Capital As a result of the Collins Amend- ment, trust preferred securities have been eliminated as an element of Tier 1 capital for bank holding companies with assets of $500 million or more. To mitigate the effect, existing trust preferred securities issued before May 19, 2010, are grandfathered in for all bank holding companies with less than $15 billion in total consolidated assets as of Dec. 31, 2009. Bank holding companies with $15 billion or more in total assets have three years to phase out their trust preferred securities, beginning on Jan. 1, 2013. As many bank holding companies of all sizes rely on this type of capital at the holding company level, certain bank holding companies will need to find replace- ment Tier 1 capital in order to comply with regulatory requirements. Tier 1 capital typically includes common stock and certain types of pre- ferred stock. Preferred stock meeting the requirements of Tier 1 capital must be non-cumulative, permanent, and be free from significant ongoing rights, such as the right to have the shares re- deemed at a fixed time for a fixed price or the right to guaranteed dividends. As most financial institutions would desire for any new investment to con- stitute Tier 1 capital, investments need to be structured as common stock or limited preferred stock purchases. As a result, the cost of raising Tier 1 capital through private equity can be higher than raising other types of capital.