Georgia Legal Lending Limit Changes
By: Ken Bennett, CPA
In 2017 (effective – July 1, 2017), Georgia revised legal lending limit rules under Chapter 1 of Title 7 of the Official Code of Georgia Annotated (“OCGA”). Excerpts from the new OCGA 7-1-285 is shown below:
(a.1) A bank shall not at any time:
(1) Make loans to any one person or corporation;
(2) Have obligations owing to it from any one person or corporation as a result of purchasing or discounting evidences of indebtedness or agreements for the payment of money; or
(3) Have credit exposure as a counterparty in derivative transactions with any one person or corporation, where the aggregate of such loans, obligations, and credit exposure together exceeds 15 percent of the statutory capital base of the bank at the time of issuance of a binding commitment unless each loan, discount, purchase, or derivative transaction in excess of such 15 percent limit is approved in advance by the board of directors or a committee authorized to act for it subject to the provisions set forth in subsections (b) and (c) of this Code section. Approval by the board of directors or authorized committee shall be recorded in the formal minutes of the actions of the board or its committee by name of borrower, amount of loan, maturity of loan, general type of collateral, and such other information as required pursuant to the rules and regulations of the department. Any action required by this subsection may be taken pursuant to Code Section 7-1-483, provided that the minutes of the proceedings of the board or of the committee reflect such action and each director taking such action signs the minutes reflecting such action by no later than the next regular meeting of the board or committee attended by such director.
(b) Except as provided in subsection (c) of this Code section, a bank shall not directly or indirectly make loans, have obligations, or have credit exposure as a counterparty in derivative transactions to any one person or corporation which in aggregate exceed 15 percent of the statutory capital base of the bank at the time of issuance of a binding commitment unless the entire amount of such loans, obligations, and credit exposure in derivative transactions is secured by good collateral or other ample security and does not exceed 25 percent of the statutory capital base at the time of issuance of a binding commitment. Except as otherwise indicated in subsection (c) of this Code section, the purchase or discount of agreements for the payment of money or evidences of indebtedness shall be regarded as indirect loans to the person or corporation receiving the proceeds of such transactions. In estimating the legal lending limit for any one person or corporation, loans to related corporations, partnerships, and other entities shall be combined subject to regulations established by the department.
In summary, unsecured credit extensions (loans, committed loan balances, overdrafts, etc.) are limited to 15% of the bank’s Statutory Capital Base (“SCB” – defined below). For extensions of credit exceeding 15% of the bank’s SCB, the extension must be approved in advance by the board of directors or a committee authorized to act for it (as a potential example: the directors loan committee), all debts must then be fully secured, and the total exposure should not exceed 25% of the bank’s SCB. Note that the July 2017 update added further clarification for how approval should be documented under section (a.1)(3).
The largest change is the revision of the definition (OCGA 7-1-4) of (35) ‘Statutory Capital Base’ (“SCB”).
Old definition:
(35) ‘Statutory capital base' means the sum of the capital stock, paid-in capital, appropriated retained earnings, and capital debt of a bank or trust company less any amount of good will, core deposit intangibles, or other intangible assets related to the purchase, acquisition, or merger of a bank charter or accumulated deficit (negative retained earnings).
New definition:
(35) 'Statutory capital base' means the sum of the common equity tier 1 capital, as defined by applicable federal law, and the allowance of loan and lease losses, as defined by applicable federal law, as reported in the bank's most recent Consolidated Report of Condition and Income; provided, however, that the department may enact regulations to phase in the revision to this definition for those banks that will have a decreased statutory capital base as of July 1, 2017. If significant capital changes occur after the filing of the Consolidated Report of Condition and Income which causes the common equity tier 1 capital to increase or decrease by 5 percent or more, then the statutory capital base will be immediately recalculated at the time of the capital change and it will be effective until the filing of the next Consolidated Report of Condition and Income.
Per the FDIC (Risk Management Manual of Examination Policies, Part II, 2.1 Capital) regarding Tier 1 Common Equity, “It includes qualifying common stock and related surplus net of treasury stock; retained earnings; certain accumulated other comprehensive income (AOCI) elements if the institution does not make an AOCI opt-out election (refer to opt-out election discussion in next paragraph), plus or minus regulatory deductions or adjustments as appropriate; and qualifying common equity tier 1 minority interests.”
For most DBF and FDIC-regulated banks in Georgia, the definition change increases the institution’s legal lending limit by effectively allowing inclusion of non-appropriated (and positive) retained earnings and the ALLL in the SCB. For comparative purposes, federal regulations (12 CFR 32) allow extensions of credit of up to 15% of the institution’s capital and surplus (tier 1 and tier 2 capital). Extensions of up to 25% are allowed, but the excess (over 15%) must be secured by readily marketable collateral.
(v) Readily marketable collateral means financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.
In general, this results in higher credit exposure allowed (if readily marketable collateral is not pledged) under the Georgia rules than under national rules. Georgia banks should consider:
Note that capital debt was included in the old SCB definition:
(9) "Capital debt" means the sum of the face value of the subordinated securities of a financial institution issued pursuant to Code Section 7-1-419.
Some institutions with subordinated securities that constitute capital debt could see a decrease in their legal lending limits under OCGA 7-1-285 and should assess the portfolio accordingly.
The reader is reminded that the exceptions above are not comprehensive and exclude other information in the regulations / codes (notably OCGA 7-1-285). The full text should be consulted for legal lending limit decisions.
(a.1) A bank shall not at any time:
(1) Make loans to any one person or corporation;
(2) Have obligations owing to it from any one person or corporation as a result of purchasing or discounting evidences of indebtedness or agreements for the payment of money; or
(3) Have credit exposure as a counterparty in derivative transactions with any one person or corporation, where the aggregate of such loans, obligations, and credit exposure together exceeds 15 percent of the statutory capital base of the bank at the time of issuance of a binding commitment unless each loan, discount, purchase, or derivative transaction in excess of such 15 percent limit is approved in advance by the board of directors or a committee authorized to act for it subject to the provisions set forth in subsections (b) and (c) of this Code section. Approval by the board of directors or authorized committee shall be recorded in the formal minutes of the actions of the board or its committee by name of borrower, amount of loan, maturity of loan, general type of collateral, and such other information as required pursuant to the rules and regulations of the department. Any action required by this subsection may be taken pursuant to Code Section 7-1-483, provided that the minutes of the proceedings of the board or of the committee reflect such action and each director taking such action signs the minutes reflecting such action by no later than the next regular meeting of the board or committee attended by such director.
(b) Except as provided in subsection (c) of this Code section, a bank shall not directly or indirectly make loans, have obligations, or have credit exposure as a counterparty in derivative transactions to any one person or corporation which in aggregate exceed 15 percent of the statutory capital base of the bank at the time of issuance of a binding commitment unless the entire amount of such loans, obligations, and credit exposure in derivative transactions is secured by good collateral or other ample security and does not exceed 25 percent of the statutory capital base at the time of issuance of a binding commitment. Except as otherwise indicated in subsection (c) of this Code section, the purchase or discount of agreements for the payment of money or evidences of indebtedness shall be regarded as indirect loans to the person or corporation receiving the proceeds of such transactions. In estimating the legal lending limit for any one person or corporation, loans to related corporations, partnerships, and other entities shall be combined subject to regulations established by the department.
In summary, unsecured credit extensions (loans, committed loan balances, overdrafts, etc.) are limited to 15% of the bank’s Statutory Capital Base (“SCB” – defined below). For extensions of credit exceeding 15% of the bank’s SCB, the extension must be approved in advance by the board of directors or a committee authorized to act for it (as a potential example: the directors loan committee), all debts must then be fully secured, and the total exposure should not exceed 25% of the bank’s SCB. Note that the July 2017 update added further clarification for how approval should be documented under section (a.1)(3).
The largest change is the revision of the definition (OCGA 7-1-4) of (35) ‘Statutory Capital Base’ (“SCB”).
Old definition:
(35) ‘Statutory capital base' means the sum of the capital stock, paid-in capital, appropriated retained earnings, and capital debt of a bank or trust company less any amount of good will, core deposit intangibles, or other intangible assets related to the purchase, acquisition, or merger of a bank charter or accumulated deficit (negative retained earnings).
New definition:
(35) 'Statutory capital base' means the sum of the common equity tier 1 capital, as defined by applicable federal law, and the allowance of loan and lease losses, as defined by applicable federal law, as reported in the bank's most recent Consolidated Report of Condition and Income; provided, however, that the department may enact regulations to phase in the revision to this definition for those banks that will have a decreased statutory capital base as of July 1, 2017. If significant capital changes occur after the filing of the Consolidated Report of Condition and Income which causes the common equity tier 1 capital to increase or decrease by 5 percent or more, then the statutory capital base will be immediately recalculated at the time of the capital change and it will be effective until the filing of the next Consolidated Report of Condition and Income.
Per the FDIC (Risk Management Manual of Examination Policies, Part II, 2.1 Capital) regarding Tier 1 Common Equity, “It includes qualifying common stock and related surplus net of treasury stock; retained earnings; certain accumulated other comprehensive income (AOCI) elements if the institution does not make an AOCI opt-out election (refer to opt-out election discussion in next paragraph), plus or minus regulatory deductions or adjustments as appropriate; and qualifying common equity tier 1 minority interests.”
For most DBF and FDIC-regulated banks in Georgia, the definition change increases the institution’s legal lending limit by effectively allowing inclusion of non-appropriated (and positive) retained earnings and the ALLL in the SCB. For comparative purposes, federal regulations (12 CFR 32) allow extensions of credit of up to 15% of the institution’s capital and surplus (tier 1 and tier 2 capital). Extensions of up to 25% are allowed, but the excess (over 15%) must be secured by readily marketable collateral.
(v) Readily marketable collateral means financial instruments and bullion that are salable under ordinary market conditions with reasonable promptness at a fair market value determined by quotations based upon actual transactions on an auction or similarly available daily bid and ask price market.
In general, this results in higher credit exposure allowed (if readily marketable collateral is not pledged) under the Georgia rules than under national rules. Georgia banks should consider:
- Participations previously sold that are subsequently repurchased (under normal circumstances) should be prior approved by the board (or committee to act for it) if it exceeds 15% of the bank’s SCB as it is likely an increase in exposure over what was previously approved.
- It may be a prudent time for bank management and directors to institute an in-house limit if one is not already in place. An in-house limit (less than the legal lending limit) is typically a trigger for additional caution and underwriting/due diligence scrutiny.
Note that capital debt was included in the old SCB definition:
(9) "Capital debt" means the sum of the face value of the subordinated securities of a financial institution issued pursuant to Code Section 7-1-419.
Some institutions with subordinated securities that constitute capital debt could see a decrease in their legal lending limits under OCGA 7-1-285 and should assess the portfolio accordingly.
The reader is reminded that the exceptions above are not comprehensive and exclude other information in the regulations / codes (notably OCGA 7-1-285). The full text should be consulted for legal lending limit decisions.