An Act concerning banks; limitations on loans and borrowing; amending K.S.A. 1995 Supp. 9-1104 and repealing the existing section.

Be it enacted by the Legislature of the State of Kansas:

Section 1. K.S.A. 1995 Supp. 9-1104 is hereby amended to read as follows: 9-1104. (a) The total liability to any bank of any person, copart- nership, association or corporation, including in the liability of a copart- nership or association the greatest of the individual liabilities of the re- spective members thereof other than limited partners who, under the limited partnership agreement, are not liable for the debts or actions of the limited partnership, and, except as provided herein for the liability of a limited partner, including in the liability of a member of a copartnership or association the liability of the copartnership or association, shall not at any time exceed 15% of the amount of the capital stock paid in and unimpaired and the unimpaired surplus fund of such bank. If under the limited partnership agreement a limited partner is not liable for the debts or actions of the partnership, the liability of the limited partnership shall not be included in the liability of the limited partner. These limitations on total liability to any bank are subject to the following:

(1) So long as the obligation of a drawer, endorser or guarantor re- mains secondary, it shall not be included within the meaning of the term liability; but the discount of bills of exchange, whether or not accepted by the drawee, drawn in good faith against actual existing values, loans upon produce in transit, loans upon bonded warehouse receipts issued to the borrower by some other person, firm or corporation as collateral se- curity, the discount of commercial or business paper actually owned by the person negotiating the same, loans secured by not less than a like amount of treasury bills, certificates of indebtedness, or bonds or notes of the United States of America or instrumentalities or agencies thereof, or those fully guaranteed by them, or general obligation bonds or notes of the state of Kansas, or of any municipality or quasi-municipality thereof, or of other states of the United States, or of any municipality or quasi-municipality thereof, shall be exempt from any limitation;

(2) the whole or that portion of any loan which is secured or covered by a guaranty, or by a commitment or an agreement to take over or to purchase, made by any federal reserve bank, or by the United States of America, or any department, bureau, board, commission, agency or es- tablishment of the United States of America, including any corporation wholly owned, directly or indirectly by the United States, shall be exempt from any limitation if such guaranty, agreement or commitment must be performed by the payment of cash or its equivalent within 60 days after demand;

(3) the total liability in the form of notes or drafts to any bank of any person, copartnership, association or corporation, including in the liability of a copartnership or association the greatest of the individual liabilities of the respective members thereof other than limited partners who, under the limited partnership agreement, are not liable for the debts or actions of the limited partnership, and, except as provided herein for the liability of a limited partner, including in the liability of a member of a copart- nership or association the liability of the copartnership or association, may equal but not exceed 25% of the amount of the capital stock paid in and unimpaired and the unimpaired surplus fund of such bank provided a portion of the liability, in an amount equal to or greater than the amount by which the total liability exceeds 15% of such capital stock and surplus, is secured by shipping documents or instruments transferring or securing title covering readily marketable nonperishable grains, seeds or livestock or giving a lien on readily marketable nonperishable grains, seeds or live- stock having a market value at all times of not less than 115% of the amount by which such total liability exceeds 15% of the amount of such capital stock and surplus of such bank. To qualify for the expanded limit provided by this subsection, the market value of the livestock shall be supported by an accurate written appraisal of an officer of the bank or an independent professional appraiser made not more than six months pre- viously, and the grains and seeds shall be adequately insured. If under the limited partnership agreement a limited partner is not liable for the debts or actions of the partnership, the liability of the limited partnership shall not be included in the liability of the limited partner;

(4) the discount of bills of exchange drawn against or issued against a consignee or purchaser for materials or commodities previously sold and shipped, and which materials or commodities, or the proceeds thereof, are in the possession, control or custody of the purchaser or consignee shall be considered as the discount of bills of exchange drawn in good faith and against actual existing values, without the necessity of the acceptance of a draft or the necessity of a lien on the materials or commodities, or their proceeds; but such bills shall be subject to a limi- tation of 15% of such capital stock and unimpaired surplus fund for and upon each purchaser or consignee;

(5) the total liability in the form of notes or drafts to any bank of any person, copartnership, association or corporation, including in the liability of a copartnership or association the greatest of the individual liabilities of the respective members thereof other than limited partners who, under the limited partnership agreement, are not liable for the debts or actions of the limited partnership, and, except as provided herein for the liability of a limited partner, including in the liability of a member of a copart- nership or association the liability of the copartnership or association, may exceed limitations otherwise imposed by this subsection by 10% of the amount of the capital stock paid in and unimpaired and the unimpaired surplus fund of such bank provided a portion of the liability, in an amount equal to or greater than the amount by which the total liability exceeds limitations otherwise imposed by this section, is secured as to payment by first lien or liens upon real estate in fee simple. To qualify for the expanded limit provided by this subsection, the amount of the first lien or liens shall be at least twice the amount by which such total liability exceeds limitations otherwise imposed by this section and shall be fully supported by the appraised value of the property. Additionally, such ex- cess liability shall be secured by a lien instrument under the terms of which any installment payments are sufficient to amortize the entire prin- cipal amount of such excess liability within a period of not more than 20 years. If under the limited partnership agreement a limited partner is not liable for the debts or actions of the partnership, the liability of the limited partnership shall not be included in the liability of the limited partner;

[aw(6) the limitations of this subsection shall not apply to time deposits which are considered to be loans to the extent such time deposits are insured by: (A) The federal deposit insurance corporation or its succes- sors; or (B) the federal savings and loan insurance corporation or its suc- cessors;

(7) the whole or that portion of any loan which is secured as to pay- ment by a time deposit of the borrower in the bank in an amount equal to 115% of the amount of the indebtedness shall be exempt from any limitation under this subsection.

(b) The liability of any active officer or employee of any bank shall not exceed 15% of the amount of its paid-in and unimpaired capital stock and unimpaired surplus fund. Any loan made to any officer first must be approved by the board of directors and entered upon their minutes where the total liability of the officer to the bank, including the loan made, will exceed $50,000. The limitations on liability of any active officer or em- ployee under this subsection, shall be subject to the provisions of para- graphs (1) through (7) of subsection (a).

(c) The legality of a loan or written commitment to advance funds, under the provisions of subsection (a) or (b), whichever occurs first, shall be determined as of the date the loan or written commitment to advance funds is made.

(d) For purposes of this section, the term ``unimpaired surplus fund'' includes all capital accounts (other than capital stock) derived from either paid-in capital funds or retained earnings, not subject to known charges, and which are considered interchangeable by resolution of the bank's board of directors. The state bank commissioner, with approval of the state banking board, may further define the term ``unimpaired surplus fund'' by regulation, and the provisions of article 4 of chapter 77, of the Kansas Statutes Annotated shall not be applicable to such regulation or regulations.

(e) The commissioner may order any excess loan reduced to the legal limit, and after 60 days from the receipt of the commissioner's order no bank shall carry the excess of such loan and a failure to comply with any order made hereunder shall be grounds for the hearing provided in K.S.A. 9-1805, and amendments thereto. (a) Definitions. As used in this section:

(1) ``Borrower'' means an individual, sole proprietorship, partner- ship, joint venture, association, trust, estate, business trust, corporation, limited liability company, not for profit corporation, government unit or agency, instrumentality, or political subdivision thereof, or any similar entity or organization.

(2) ``Capital'' means the total of capital stock, surplus, undivided prof- its, 100% of the allowance for loan and lease loss, capital notes and de- bentures, and reserve for contingencies. Intangibles, such as goodwill, shall not be included in the definition of capital when determining lending limits.

(3) ``Loan'' means:

(A) A bank's direct or indirect advance of funds to or on behalf of a borrower based on an obligation of the borrower to repay the funds;

(B) a contractual commitment to advance funds;

(C) an overdraft;

(D) loans that have been charged off the bank's books in whole or in part, unless the loan is unenforceable by reason of:

(i) Discharge in bankruptcy;

(ii) expiration of the statute of limitations;

(iii) judicial decision; or

(iv) the bank's forgiveness of the debt.

(b) General Lending Limit Rule. Subject to the provisions in (d), (e) and (f), loans to one borrower, including any bank officer or employee, shall not exceed 25% of a bank's capital.

(c) Calculation of the Lending Limit. (1) The bank's lending limit shall be calculated on the date the loan or written commitment is made. The renewal or refinancing of a loan shall not constitute a new lending limit calculation date unless new funds are advanced.

(2) If the bank's lending limit increases subsequent to the origination date, a bank may use the current lending limit to determine compliance when advancing funds. An advance of funds includes the lending of money or the repurchase of any portion of a participation.

(3) If the bank's lending limit decreases subsequent to the origination date, a bank is not prohibited from advancing on a prior commitment that was legal on the date the commitment was made.

(d) Exemptions. That portion of a loan which is continuously secured on a dollar for dollar basis by any of the following will be exempt from any lending limit:

(1) A guaranty, commitment or agreement to take over or to purchase, made by any federal reserve bank or by any department, bureau, board, commission, agency or establishment of the United States of America, including any corporation wholly owned, directly or indirectly by the United States;

(2) a perfected interest in a time deposit account in the lending bank. In the case of a time deposit which may be withdrawn in whole or in part prior to maturity, the bank shall establish written internal procedures to prevent the release of the deposit;

(3) a bonded warehouse receipt issued to the borrower by some other person;

(4) treasury bills, certificates of indebtedness, or bonds or notes of the United States of America or instrumentalities or agencies thereof, or those fully guaranteed by them;

(5) general obligation bonds or notes of the state of Kansas or any other state in the United States of America;

(6) general obligation bonds or notes of any Kansas municipality or quasi-municipality; or

(7) a perfected interest in a repurchase agreement of United States government securities with the lending bank.

(e) Special Rules. (1) The total liability of any borrower may exceed the general 25% limit by up to an additional 10% of the bank's capital. To qualify for this expanded limit:

(A) The bank shall have as collateral a first lien or liens on real estate securing a portion of the liability equal to at least the amount by which the total liability exceeds the 25% limit;

(B) the amount of the recorded lien or liens shall equal at least the amount of the excess liability;

(C) the appraised value of the real estate shall equal at least twice the amount of the excess liability; and

(D) a portion of the loan equal to at least the excess liability shall have installment payments sufficient to amortize that portion within 20 years.

(2) That portion of any loan endorsed or guaranteed by a borrower will not be added to that borrower's liability until the endorsed or guar- anteed loan is past due 10 days.

(3) If the total liability of any active bank officer will exceed $50,000, prior approval from the bank's board of directors shall be noted in the minutes.

(4) To the extent they are insured by the federal deposit insurance corporation, time deposits purchased by a bank from another financial institution shall not be considered a loan to that financial institution and shall not be subject to the bank's lending limit.

(5) Third-party paper purchased by the bank will not be considered a loan to the seller unless and until the bank has the right under the agreement to require the seller to repurchase the paper.

(f) Combination Rules.

(1) General Rule. Loans to one borrower will be attributed to another borrower and their total liability will be combined:

(A) When proceeds of a loan are to be used for the direct benefit of the other borrower, to the extent of the proceeds so used; or

(B) when a common enterprise is deemed to exist between the bor- rowers.

(2) Direct Benefit. The proceeds of a loan to a borrower will be deemed to be used for the direct benefit of another person and will be attributed to the other person when the proceeds, or assets purchased with the proceeds, are transferred to another person, other than in a bona fide arm's length transaction where the proceeds are used to acquire prop- erty, goods or services.

(3) Common Enterprise. A common enterprise will be deemed to exist and loans to separate borrowers will be aggregated:

(A) When the expected source of repayment for each loan or extension of credit is the same for each borrower and neither borrower has another source of income from which the loan, together with the borrower's other obligations, may be fully repaid;

(B) when both of the following circumstances are present:

(i) Loans are made to borrowers who are related directly or indirectly through common control, including where one borrower is directly or indirectly controlled by another borrower. Common control means to own, control or have the power to vote 25% or more of any class of voting securities or voting interests or to control, in any manner, the election of a majority of the directors, or to have the power to exercise a controlling influence over the management or policies of another person; and

(ii) substantial financial interdependence exists between or among the borrowers. Substantial financial interdependence is deemed to exist when 50 percent or more of one borrower's gross receipts or gross expenditures (on an annual basis) are derived from transactions with the other bor- rower. Gross receipts and expenditures include gross revenues, expenses, intercompany loans, dividends, capital contributions and similar receipts or payments; or

(C) when separate persons borrow from a bank to acquire a business enterprise of which those borrowers will own more than 50% of the voting securities or voting interests, in which case a common enterprise is deemed to exist between the borrowers for purposes of combining the acquisition loan.

(D) An employer will not be treated as a source of repayment for purposes of determining a common enterprise because of wages and sal- aries paid to an employee.

(4) Special Rules for Loans to a Corporate Group. (A) Loans by a bank to a borrower and the borrower's subsidiaries shall not, in the ag- gregate, exceed 50% of the bank's capital. At no time shall loans to any one borrower or to any one subsidiary exceed the general lending limit of 25%, except as allowed by other provisions of this section. For purposes of this paragraph, a corporation or a limited liability company is a sub- sidiary of a borrower if the borrower owns or beneficially owns directly or indirectly more than 50 percent of the voting securities or voting in- terests of the corporation or company.

(B) Loans to a borrower and a borrower's subsidiaries that do not meet the test contained in subsection (f)(4)(A) will not be combined unless either the direct benefit or the common enterprise test is met.

(5) Special Rules for Loans to Partnerships, Joint Ventures and Asso- ciations. (A) As used in this subpart (5), the term ``partnership'' shall include a partnership, joint venture or association. The term partner shall include a partner in a partnership or a member in a joint venture or association.

(B) General Partner. Loans to a partnership are considered to be loans to a partner, if by the terms of the partnership agreement that partner is held generally liable for debts or actions of the partnership.

(C) Limited Partner. If the liability of a partner is limited by the terms of the partnership agreement, the amount of the partnership debt attrib- utable to the partner is in direct proportion to that partner's limited part- nership interest.

(D) Notwithstanding the provisions of subsections (f)(5)(B) and (f)(5)(C), if by the terms of the loan agreement the liability of any partner is different than delineated in the partnership agreement, for the purpose of attributing debt to the partner the loan agreement shall control.

(E) Loans to a partner are not attributed to the partnership unless either the direct benefit or the common enterprise test is met.

(F) Loans to one partner are not attributed to other partners unless either the direct benefit or common enterprise test is met.

(G) When a loan is made to a partner to purchase an interest in a partnership, both the direct benefit and common enterprise tests are deemed to be met, and the loan is attributed to the partnership.

(6) Notwithstanding the provisions of this subsection, the commis- sioner may determine, based upon an evaluation of the facts and circum- stances of a particular transaction, that a loan to one borrower may be attributed to another borrower.

(g) The commissioner may order a bank to correct any loan not in compliance with this section. A violation of this section shall be deemed corrected if that portion of the borrower's liability which created the vi- olation could be legally advanced under current lending limits. Failure to comply with the commissioner's order within 60 days shall be grounds for the proposed removal of a bank officer or director pursuant to K.S.A. 9-1805 and amendments thereto.

Sec. 2. K.S.A. 1995 Supp. 9-1104 is hereby repealed.

Sec. 3. This act shall take effect and be in force from and after its publication in the statute book.

Approved April 14, 1996.