Senate Bill No. 443
(By Senators Manchin, By Request, and Helmick)
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[Introduced February 20, 1995; referred to the Committee
on Banking and Insurance.]
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A BILL to amend and reenact section twenty-six, article four,
chapter thirty-one-a of the code of West Virginia, one
thousand nine hundred thirty-one, as amended, relating to
the limits to which banks can loan or extend credit to any
one person or common enterprise.
Be it enacted by the Legislature of West Virginia:
That section twenty-six, article four, chapter thirty-one-a
of the code of West Virginia, one thousand nine hundred
thirty-one, 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
a person outstanding at
one time any one person or common enterprise and not fully
secured, as determined in a manner consistent with subdivision
(2) of this subsection,
by collateral having a market value of at
least equal to the amount of the loan or extension of credit
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)
The Where the total loans and extensions of credit by a
state-chartered banking institution to
a person outstanding at
one time and 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
the funds
outstanding shall not exceed 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; and
(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.
(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
thirty-five ten percent of
unimpaired capital and
unimpaired
surplus in addition to the general limitations
set forth in
subdivision (1), of this subsection, provided if 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,
notwithstanding the
collateral requirements set forth in subdivision (2) of this
subsection 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,
notwithstanding the collateral requirements set forth in
subdivision (2) of this subsection, 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
and
regulations to administer and carry out the purposes of this
subsection including rules
or regulations 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
and
regulations to deal with loans or extensions of credit, which
were not in violation of this section prior to the effective date
of this act, but which will be in violation of this section upon
the effective date of this act; 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
of the unimpaired capital and unimpaired surplus of that
state-chartered banking institution.
(3) For purposes of this subsection:
(A) The term "investment securities" shall include
marketable obligations, evidencing indebtedness of any person in
the form of stocks, bonds, notes and/or debentures; "investment
securities" may be further defined by regulation of the
commissioner of banking; and
(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.
(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 (b) shall
be subject to the following exceptions:
(A) Obligations of the United States;
(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 USC § 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 USC § 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 Section 306 of the Federal Home Loan Mortgage Corporation
Act (12 USC § 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 USC § 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
USC Sec.
1401 et seq. 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
subsection (b) of Section
22 11
(Section 6 (g) (42 USC Sec.
1421a (b) 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
subsection (b), section
twenty-two eleven, 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
6 (g) 11 of the United
States Housing Act of 1937 (42 USC Sec.
1437d (g) 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 USC Sec. 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 USC Sec.
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) Notwithstanding any other provision of this subsection,
a state-chartered banking institution may invest its funds in any
investment authorized for national banking associations. Such
investments by state-chartered banking institutions shall be on
the same terms and conditions applicable to national banking
associations. The commissioner of banking may, from time to
time, provide notice to state-chartered banking institutions of
authorized investments under this paragraph.
(9) The commissioner of banking may prescribe rules
and
regulations to administer and carry out the purposes of this
subsection, including rules
and regulations 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 re-evaluated 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 re-evaluated 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 re-evaluated 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.
(c)(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 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
policymaking 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 policymaking 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 policymaking 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 policymaking functions.
(d) (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) (e) 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
deducting from the cost of a security purchased at a premium, and
charging to profit and loss a sum sufficient to bring
it them to
par at maturity:
Provided, That securities held for trade or
permissible marketable equity securities and any other types of
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 undivided profits 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 alter the method by
which a banking institution determines the limit for the amount
of loans and extensions of credit that it can make to any one
person or common enterprise, so as to prevent the banking
institution from becoming unsound by relying too heavily on one
source for obtaining repayment and generating profits.
Strike-throughs indicate language that would be stricken
from present law, and underscoring indicates new language that
would be added.
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