Senate Bill No. 269
(By Senators Minard, Jenkins, Barnes and Plymale)
____________
[Introduced January 25, 2006; referred to the Committee
on Banking and Insurance; and then to the Committee on Finance.]
____________
A BILL to amend and reenact §31A-4-26 of the Code of West Virginia,
1931, as amended, relating to limitations on loans and
extensions of credit; providing for a limitation on
investments; limiting loans to executive officers and
directors of banks and employees of the banking department;
outlining exceptions; and creating a valuation of securities.
Be it enacted by the Legislature of West Virginia:
That §31A-4-26 of the Code of West Virginia, 1931, as amended,
be amended and reenacted to read as follows:
ARTICLE 4. BANKING INSTITUTIONS AND SERVICES GENERALLY.
§31A-4-26. Limitation on loans and extensions of credit;
limitation on investments; loans to executive
officers and directors of banks and employees of
the banking department; exceptions; valuation of
securities.
(a) (1) The total loans and extensions of credit made by a
state-chartered banking institution to any one person or common
enterprise and not fully secured, as determined in a manner
consistent with subdivision (2) of this subsection, shall not
exceed fifteen percent of the unimpaired capital and unimpaired
surplus of that state-chartered banking institution initially
determined for the period such loan or extension of credit is made.
(2) Where the total loans and extensions of credit by a state-
chartered banking institution to any one person or common
enterprise are fully secured by readily marketable collateral
having a market value, as determined by reliable and continuously
available price quotations, at least equal to the outstanding
amount of such loans and extensions, then the bank may provide such
loans or extensions of up to ten percent of the unimpaired capital
and unimpaired surplus of that state-chartered banking institution
initially determined for the period such loan or extension is made.
This limitation shall be separate from and in addition to the
limitation contained in subdivision (1) of this subsection.
(3) For the purposes of this subsection:
(A) The term "loans and extensions of credit" shall include
all direct or indirect advances of funds to a person made on the
basis of any obligation of that person to repay the funds or
repayable from specific property pledged by or on behalf of the
person and to the extent specified by the Commissioner of Banking, such terms shall also include any liability of a state-chartered
banking institution to advance funds to or on behalf of a person
pursuant to a contractual commitment;
(B) The term "person" shall include an individual,
partnership, sole proprietorship, society, association, firm,
institution, company, public or private corporation, not-for-profit
corporation, state, governmental agency, bureau, department,
division or instrumentality, political subdivision, county
commission, municipality, trust, syndicate, estate or any other
legal entity whatsoever, formed, created or existing under the laws
of this state or any other jurisdiction;
(C) The term "unimpaired capital and unimpaired surplus" means
the amount of total equity capital outstanding as indicated in the
bank's most recent quarterly report of condition and income as
filed with the Commissioner of Banking pursuant to section nineteen
of this article, plus the amount of the allowance for loan losses,
minus the amount of goodwill or other nonmarketable intangible
assets included in such quarterly report pursuant to generally
accepted accounting principles. Unrealized gains and losses on the
bank's securities and loan portfolios shall be included in the
calculation of total equity capital to the extent required by
generally accepted accounting principles and applicable federal or
state law, rule or regulation; and
(D) The term "common enterprise" includes, but is not limited to, persons and entities who are so related by business or
otherwise that the expected source of repayment on the loan or
extension of credit is substantially the same for each person or
entity.
(4) The limitations contained in this subsection shall be
subject to the following exceptions:
(A) Loans or extensions of credit arising from the discount of
commercial or business paper evidencing an obligation to the person
negotiating it with recourse shall not be subject to any limitation
based on capital and surplus;
(B) The purchase of bankers' acceptances of the kind described
in section thirteen of the Federal Reserve Act and issued by other
banks shall not be subject to any limitation based on capital and
surplus;
(C) Loans and extensions of credit having a term of ten months
or less and secured by bills of lading, warehouse receipts or
similar documents transferring or securing title to readily
marketable staples shall be subject to a limitation of twenty
percent of unimpaired capital and unimpaired surplus in addition to
the general limitations set forth in subdivision (1) of this
subsection, provided the market value of the staples securing each
additional loan or extension of credit at all times equals or
exceeds one hundred fifteen percent of the outstanding amount of
such loan or extension of credit. The staples shall be fully covered by insurance whenever it is customary to insure such
staples. If collateral values of the staples fall below the levels
required herein, to the extent that the loan is no longer in
conformance with its collateral requirements and exceeds the
general fifteen percent limitation, the loan must be brought into
conformance within five business days, except where judicial
proceedings, regulatory actions or other extraordinary occurrences
prevent the bank from taking action;
(D) Loans or extensions of credit secured by bonds, notes,
certificates of indebtedness or Treasury bills of the United States
or by other such obligations fully guaranteed as to principal and
interest by the United States or by bonds, notes, certificates of
indebtedness which are general obligations of the State of West
Virginia or by other such obligations fully guaranteed as to
principal and interest by the State of West Virginia shall not be
subject to any limitation based on capital and surplus;
(E) Loans or extensions of credit to or secured by
unconditional takeout commitments or guarantees of any department,
agency, bureau, board, commission or establishment of the United
States or of the State of West Virginia or any corporation wholly
owned directly or indirectly by the United States shall not be
subject to any limitation based on capital and surplus;
(F) Loans or extensions of credit secured by a segregated
deposit account in the lending bank shall not be subject to any limitation based on capital and surplus;
(G) Loans or extensions of credit to any banking institution
or to any receiver, conservator or other agent in charge of the
business and property of such banking institution or other
federally insured depository institution, when such loans or
extensions of credit are approved by the Commissioner of Banking,
shall not be subject to any limitation based on capital and
surplus;
(H) (I) Loans and extensions of credit arising from the
discount of negotiable or nonnegotiable installment consumer paper
which carries a full recourse endorsement or unconditional
guarantee by the person or common enterprise transferring the paper
shall be subject under this section to a maximum limitation equal
to twenty-five percent of such unimpaired capital and unimpaired
surplus, notwithstanding the collateral requirements set forth in
subdivision (2) of this subsection;
(ii) If the bank's files or the knowledge of its officers of
the financial condition of each maker of such consumer paper is
reasonably adequate and an officer of the bank designated for that
purpose by the board of directors of the bank certifies in writing
that the bank is relying primarily upon the responsibility of each
maker for payment of such loans or extensions of credit and not
upon any full or partial recourse endorsement or guarantee by the
transferor, the limitations of this section as to the loans or extensions of credit of each such maker shall be the sole
applicable loan limitations;
(I) (I) Loans and extensions of credit secured by shipping
documents or instruments transferring or securing title covering
livestock or giving a lien on livestock when the market value of
the livestock securing the obligation is not at any time less than
one hundred fifteen percent of the face amount of the note covered
shall be subject under this section to a maximum limitation equal
to twenty-five percent of such unimpaired capital and unimpaired
surplus, notwithstanding the collateral requirements set forth in
subdivision (2) of this subsection;
(ii) Loans and extensions of credit which arise from the
discount by dealers in livestock of paper given in payment for
livestock, which paper carries a full recourse endorsement or
unconditional guarantee of the seller and which are secured by the
livestock being sold, shall be subject under this section to a
limitation of twenty-five percent of such unimpaired capital and
unimpaired surplus, notwithstanding the collateral requirements set
forth in subdivision (2) of this subsection;
(iii) If collateral values of the livestock documents,
instruments or discount paper fall below the levels required
herein, to the extent that the loan is no longer in conformance
with its collateral requirements and exceeds the general fifteen
percent limitation, the loan must be brought into conformance within thirty business days, except where judicial proceedings,
regulatory actions or other extraordinary occurrences prevent the
bank from taking action;
(J) Loans or extensions of credit to the Student Loan
Marketing Association shall not be subject to any limitation based
on capital and surplus; and
(K) Loans or extensions of credit to a corporation owning the
property in which that state-chartered banking institution is
located, when that state-chartered banking institution has an
unimpaired capital and surplus of not less than one million dollars
or when approved in writing by the Commissioner of Banking, shall
not be subject to any limitation based on capital and surplus.
(5) (A) The Commissioner of Banking may prescribe rules to
administer and carry out the purposes of this subsection including
rules to define or further define terms used in this subsection and
to establish limits or requirements other than those specified in
this subsection for particular classes or categories of loans or
extensions of credit;
(B) The Commissioner of Banking may also prescribe rules to
deal with loans or extensions of credit, which were not in
violation of this section prior to the effective date of this
article, but which will be in violation of this section upon the
effective date of this article; and
(C) The Commissioner of Banking also shall have authority to determine when a loan putatively made to a person shall for
purposes of this subsection be attributed to another person.
(b) (1) Except as hereinafter provided or otherwise permitted
by law, nothing herein contained shall authorize the purchase by a
state-chartered banking institution for its own account of any
shares of stock of any corporation: Provided, That a state-
chartered banking institution may purchase and sell securities and
stock without recourse, solely upon the order and for the account
of customers.
(2) In no event shall the total amount of investment
securities of any one obligor or maker held by a state-chartered
banking institution for its own account exceed fifteen percent that
percentage of the unimpaired capital and unimpaired surplus of that
state-chartered banking institution as is permitted for investment
by national banks or for any federally insured depository
institution.
(3) For purposes of this subsection:
(A) The term "investment securities" means a marketable
obligation in the form of a stock, bond, note or debenture commonly
regarded as an investment security and that is salable under
ordinary circumstances with reasonable promptness at a fair value.
"Derivative security" means a type of investment security involving
a financial contract whose value depends on the values of one or
more underlying assets or indexes of asset values. The term "derivative" refers inter alia to financial contracts such as
collateralized mortgage obligations ("CMOs"), forwards, futures,
forward rate agreements, swaps, options and caps/floors/collars
whose primary purpose is to transfer price risks associated with
fluctuations in asset values;
(B) The term "person" shall include any individual,
partnership, sole proprietorship, society, association, firm,
institution, company, public or private corporation, not-for-profit
corporation, state, governmental agency, bureau, department,
division or instrumentality, political subdivision, county
commission, municipality, trust, syndicate, estate or any other
legal entity whatsoever, formed, created or existing under the laws
of this state or any other jurisdiction; and
(C) The term "unimpaired capital and unimpaired surplus" shall
have the same meaning as set forth in subsection (a) of this
section.
(4) The limitations contained in this subsection shall be
subject to the following exceptions:
(A) Obligations of the United States or its agencies;
(B) General obligations of any state or of any political
subdivision thereof;
(C) Obligations issued under authority of the federal Farm
Loan Act, as amended, or issued by the thirteen banks for
cooperatives or any of them or the federal home loan banks;
(D) Obligations which are insured by the secretary of housing
and urban development under Title XI of the National Housing Act,
12 U.S.C. §1749aaa, et seq.;
(E) Obligations which are insured by the secretary of housing
and urban development hereafter in this sentence referred to as the
"secretary" pursuant to Section 207 of the National Housing Act, 12
U.S.C. §1713, if the debentures to be issued in payment of such
insured obligations are guaranteed as to principal and interest by
the United States;
(F) Obligations, participations or other instruments of or
issued by the federal national mortgage association or the
government national mortgage association, or mortgages, obligations
or other securities which are or ever have been sold by the federal
home loan mortgage corporation pursuant to Section 305 or 306 of
the federal Home Loan Mortgage Corporation Act, 12 U.S.C. §1454 or
§1455;
(G) Obligations of the federal financing bank;
(H) Obligations or other instruments or securities of the
student loan marketing association;
(I) Obligations of the environmental financing authority;
(J) Such obligations of any local public agency, as defined in
Section 110(h) of the Housing Act of 1949, 42 U.S.C. §1460 (h) as
are secured by an agreement between the local public agency and the
secretary of housing and urban development in which the local public agency agrees to borrow from said secretary and said
secretary agrees to lend to said local public agency, moneys in an
aggregate amount which together with any other moneys irrevocably
committed to the payment of interest on such obligations, will
suffice to pay, when due, the interest on and all installments,
including the final installment of the principal of such
obligations, which moneys under the terms of said agreement are
required to be used for such payments;
(K) Obligations of a public housing agency as that term is
defined in the United States Housing Act of 1937, as amended, 42
U.S.C. §1437a as are secured:
(i) By an agreement between the public housing agency and the
secretary in which the public housing agency agrees to borrow from
the secretary, and the secretary agrees to lend to the public
housing agency, prior to the maturity of such obligations, moneys
in an amount which, together with any other moneys irrevocably
committed to the payment of interest on such obligations, will
suffice to pay the principal of such obligations with interest to
maturity thereon, which moneys under the terms of said agreement
are required to be used for the purpose of paying the principal of
and the interest on such obligations at their maturity;
(ii) By a pledge of annual contributions under an annual
contributions contract between such public housing agency and the
secretary if such contract shall contain the covenant by the secretary which is authorized by Section 11, 42 U.S.C. §1437i
(a)(1)(B) of the United States Housing Act of 1937, as amended, and
if the maximum sum and the maximum period specified in such
contract pursuant to said section, shall not be less than the
annual amount and the period for payment which are requisite to
provide for the payment when due of all installments of principal
and interest on such obligations; or
(iii) By a pledge of both annual contributions under an annual
contributions contract containing the covenant by the secretary
which is authorized by Section 11 of the United States Housing Act
of 1937, 42 U.S.C. §1437i(a)(1)(B), and a loan under an agreement
between the local public housing agency and the secretary in which
the public housing agency agrees to borrow from the secretary, and
the secretary agrees to lend to the public housing agency, prior to
the maturity of the obligations involved, moneys in an amount
which, together with any other moneys irrevocably committed under
the annual contributions contract to the payment of principal and
interest on such obligations will suffice to provide for the
payment when due of all installments of principal and interest on
such obligations, which moneys under the terms of the agreement are
required to be used for the purpose of paying the principal and
interest on such obligations at their maturity; and
(L) Obligations of a corporation owning the property in which
that state-chartered banking institution is located when that state-chartered banking institution has an unimpaired capital and
unimpaired surplus of not less than one million dollars or when
approved in writing by the commissioner of banking.
(5) Notwithstanding any other provision in this subsection, a
state-chartered banking institution may purchase for its own
account shares of stock issued by a corporation authorized to be
created pursuant to Title IX of the Housing and Urban Development
Act of 1968, 42 U.S.C. §3931 et seq., and may make investments in
a partnership, limited partnership, or joint venture formed
pursuant to Section 907 (a) or 907 (c) of that act, 42 U.S.C. §3937
(a) or (c), and may purchase shares of stock issued by any West
Virginia housing corporation and may make investments in loans and
commitments for loans to any such corporation: Provided, That in
no event shall the total amount of such stock held for its own
account and such investments in loans and commitments made by the
state-chartered banking institution exceed at any time five percent
of the unimpaired capital and unimpaired surplus of that state-
chartered banking institution.
(6) Notwithstanding any other provision in this subsection, a
state-chartered banking institution may purchase, for its own
account, shares of stock of small business investment companies
chartered under the laws of this state, which are licensed under
the act of Congress known as the "Small Business Investment Act of
1958", as amended, and of business development corporations created and organized under the act of the Legislature known as the "West
Virginia Business Development Corporation Act", as amended:
Provided, That in no event shall any such state-chartered banking
institution hold shares of stock in small business investment
companies and/or business development corporations in any amount
aggregating more than fifteen percent of the unimpaired capital and
unimpaired surplus of that state-chartered banking institution.
(7) Notwithstanding any other provision of this subsection, a
state-chartered banking institution may purchase for its own
account shares of stock of a bankers' bank or a bank holding
company which owns or controls such bankers' bank, but in no event
shall the total amount of such stock held by such state-chartered
banking institution exceed at any time fifteen percent of the
unimpaired capital and unimpaired surplus of that state-chartered
banking institution and in no event shall the purchase of such
stock result in that state-chartered banking institution acquiring
more than twenty percent of any class of voting securities of such
bankers' bank or of the bank holding company which owns or controls
such bankers' bank.
(8) (4) Notwithstanding any other provision of this
subsection, a state-chartered banking institution may invest its
funds in any investment authorized for national banking
associations or for any other federally insured depository
institution. Such investments by state-chartered banking institutions shall be on the same terms and conditions applicable
to national banking associations or any other federally insured
depository institution: Provided, That: (i) The purchase of
investment securities under this subdivision shall be made only
when in the bank's prudent judgment, which judgment may be based in
part on estimates which it believes to be reliable, there is
adequate evidence that the obligor will be able to perform all it
undertakes to perform in connection with the securities, including
all debt service requirements, and that the securities may be sold
with reasonable promptness at a price that corresponds to their
fair value; and (ii) the purchase conforms to the requirement of
subdivision (9) of this subsection. The Commissioner of Banking
may, from time to time, provide notice to state-chartered banking
institutions of authorized investments under this paragraph.
(9) (5) The purchase of investment securities, including
derivative securities, in which the investment characteristics are
considered distinctly or predominantly speculative, or the purchase
of such securities that are in default, whether as to principal or
interest, is prohibited. The proper management of interest rate
risk through the use of derivative or other investment securities
shall not be held a speculative purpose.
(10) (6) The Commissioner of Banking may prescribe rules to
administer and carry out the purposes of this subsection, including
rules to define or further define terms used in this subsection and to establish limits or requirements other than those specified in
this subsection for particular classes or categories of investment
securities.
(c) In the event of a material decline of unimpaired capital
and unimpaired surplus of a state-chartered bank during any
quarterly reporting period of more than twenty percent from that
amount reported in the bank's most recent report of income and
condition, or where there is a decrease of more than thirty percent
in any twelve-month period, the bank shall review its outstanding
loans, extensions of credit and investments and report to the
Commissioner of Banking those loans, extensions and investments
that exceed the limitations of this section using the bank's
current reevaluated unimpaired capital and unimpaired surplus. The
report shall detail the bank's position in each such loan,
extension of credit and investment. The commissioner may, within
his or her discretion, require that such loans, extensions of
credit and investments be brought into conformity with the bank's
current reevaluated legal lending and investment limitation.
(d) Notwithstanding any other provision of this section, in
order to ensure a bank's safety and soundness, the Commissioner of
Banking retains the authority to direct any state-chartered bank to
recalculate its lending and investment limits at more frequent
intervals than otherwise provided herein and to require all
outstanding loans, extensions of credit and investments be brought into conformance with the reevaluated limitations. In such cases,
the commissioner will provide the bank a written notice explaining
briefly the specific reasons why the determination was made to
require the more frequent calculations.
(e) Loans to directors or executive officers are subject to
the following limitations:
(1) A director or executive officer of any banking institution
may not borrow, directly or indirectly, from a banking institution
with which he or she is connected any sum of money without the
prior approval of a majority of the board of directors or discount
committee of the banking institution, or of any duly constituted
committee whose duties include those usually performed by a
discount committee. Such approval shall be by resolution adopted
by a majority vote of such board or committee, exclusive of the
director or executive officer to whom the loan is made.
(2) If any director or executive officer of any bank owns or
controls a majority of the stock of any corporation, or is a
partner in any partnership, a loan to such corporation or
partnership shall constitute a loan to such director or officer.
(3) For purposes of this subsection, an "executive officer"
means:
(A) A person who participates or has authority to participate,
other than in the capacity of a director, in major policy-making
functions of the company or bank, regardless of any official title, salary or other compensation. The chairman of the board, the
president, every vice president, the cashier, the secretary and the
treasurer of a company or bank are considered executive officers
unless the officer is excluded, by resolution of the board of
directors or by the bylaws of the bank or company from
participation, other than in the capacity of director, in major
policy-making functions of the bank or company and the officer does
not actually participate therein.
(B) An executive officer of a company of which the bank is a
subsidiary, and any other subsidiary of that company, unless the
executive officer of the subsidiary is excluded, by name or by
title, from participation in major policy-making functions of the
bank by resolutions of the boards of directors of both the
subsidiary and the bank and does not actually participate in such
major policy-making functions.
(f) The Commissioner of Banking and any employee of the
Department of Banking may not borrow, directly or indirectly, any
sum of money from a state-chartered banking institution which is
subject to examination by the commissioner or the department.
(g) Securities purchased by a state-chartered banking
institution shall be entered upon the books of the bank at actual
cost. For the purpose of calculating the undivided profits
applicable to the payment of dividends, securities shall not be
valued at a valuation exceeding their present cost as determined by amortization of premiums and accretion of discounts pursuant to
generally accepted accounting principles, that is, by charging to
profit and loss a sum sufficient to bring them to par at maturity:
Provided, That securities held for trade or permissible marketable
equity securities and any other types of debt securities which
pursuant to generally accepted accounting principles are to be
carried on the bank's books at fair market value shall have the
unrealized market appreciation and depreciation included in the
income and capital as permitted by such generally accepted
accounting principles.
(h) The market value of securities purchased and loans
extended by a state-chartered banking institution shall be reported
in all public reports and quarterly reports to the commissioner
pursuant to section nineteen of this article in accordance with
generally accepted accounting principles and any applicable state
or federal law, rule or regulation.
__________
(NOTE: The purpose of this bill is to update references to
federal law and provide parity for state chartered banks in their
investments with those investments permitted for national banks and
other state chartered banks.
Strike-throughs indicate language that would be stricken from
the present law, and underscoring indicates new language that would
be added.)
___________
BANKING AND INSURANCE COMMITTEE AMENDMENT
On page sixteen, section twenty-six, line twelve, by
striking out "(9)" and inserting in lieu thereof "(5)".