003.02.05 Ark. Code R. 003
STATE BANK DEPARTMENT - GENERAL PROVISIONS
Requests for non-confidential documents may be made by filling out a request form provided by the department. Telephone requests may be accepted.
Copies of documents provided pursuant to request from the public or in the case of subpoena (if the copies are of confidential records) will be provided based upon the following fee schedule:
* regular copies - $ .50 per page;
* certified copies - $1.00 per page;
* microfilm copies - $1.00 per page;
* faxed copies - $ .50 per page extra.
(Reference A.C.A. § 23-46-101)
LEGAL HOLIDAY (BANK)
The legal holidays applicable to state banks shall be those holidays set forth in A.C.A. § 1-5-101 and such other holidays as shall be established from time to time by the Board of Governors of the Federal Reserve System. A state bank is not required to close on any legal holiday. A bank may close one business day of each week in which event the day of such closing is deemed a legal holiday and not a business day. Business transacted on a holiday is binding and shall have the same effect as if transacted on the next succeeding business day. All items payable on a legal holiday shall be deemed to be payable on the day next succeeding the holiday.
(Reference A.C.A. § 23-46-203)
Certified copies of records and papers furnished to an individual by the State Bank Department will be charged at a rate of $1.00 per page.
Certificates of Good Standing provided by the State Bank Department will be charged at $50.00 per certificate.
State Bank Department employees, subject to A.C.A. § 23-46-207, may be a depositor in any financial institution the Department regulates and may participate in overdraft programs associated with such deposit relationships so long as participation in such programs are regularly offered as a customer service of the institution.
PROCEEDINGS BEFORE THE BOARD AND COMMISSIONER
The Commissioner and the State Banking Board rule that applications forms provided by the State Bank Department for various applications will request information required for submission of an application to the Board or the Commissioner. The Board and the Commissioner reserve the right to request additional information as necessary to consider an application.
The Commissioner and the State Banking Board may permit applications and supporting documentation, or any other documents to be submitted to the State Bank Department in original paper document format, photographic format, or electronic format, which has been determined as acceptable by the Commissioner.
Meetings of the State Banking Board will be held in offices of the State Bank Department, except in the case of meetings at which a large attendance is anticipated. In such a situation, the Commissioner will arrange for a meeting in outside quarters where a larger space is available.
Regular meetings of the Board may be scheduled four (4) times a year. These meetings will be held at 10:00 a.m. on the third Thursday of January, April, July, and October, but if, in the opinion of either the Commissioner or chairman of the State Banking Board, any necessitous reason exists for changing the date of a regular meeting, either said Commissioner or chairman may reset the meeting for a different date after giving notice as required in these regulations for the call of a special meeting. All meetings are public except when the members meet in executive session as permitted under the Arkansas Freedom of Information Act.
Sponsors of the following applications must publish notice of the proposed application three (3) times at equal intervals in a newspaper of statewide circulation. Publication shall be as close as practicable to the date the application is filed with the State Bank Department, but no more than ten (10) calendar days prior to or after the filing date. Publications must provide for a fifteen (15) day comment period beginning with the actual filing of the application. These applications are:
Following is a list of application filing fees:
a) New bank charter | $8,000 |
b) Merger applications (per institution) | $5,000 |
c) Conversion (national bank to state bank) | $8,000 |
d) Conversion (stock savings and loan or federal savings bank to state bank) | $8,000 |
e) Charter amendments | $ 200 |
f) Charter amendments for trust powers | $ 500 |
g) Purchase or assumption (over fifty percent (50%) of assets or liabilities of another depository institution) | $5,000 |
h) Relocation of main office (from one municipality to another)(Application does not include any reorganization or change of bank business plans - must be simple relocation of address only) | $2,500 |
i) Reorganization and Relocation of Bank Charter (Complex Application) | $6,500 |
a) New branch banking office A.C.A. § 23-48-703 | $3,000 |
b) Relocation of existing branch office (inside current municipality) A.C.A. § 23-48-702 | $1,000 |
c) Relocation of existing branch office (outside of current municipality)A.C.A. § 23-48-702 | $2,500 |
d) Plan of exchange (plus expenses of Commissioner; does not include costs associated with appraisals of bank stock) | $ 500 |
e) Filing of fictitious name | $ 25 |
f) Filing of out-of-state bank/bank holding company | $ 300 |
g) Change in Control | $1,500 |
h) Purchase or Assumption (less than fifty percent (50%) of assets or liabilities) | $3,000 |
(Reference A.C.A. § 23-46-406)
The State Banking Board and the Commissioner take the position that until the Findings of Fact, Conclusions of Law, and written decision have been served on the parties, the Board has the power to reverse, modify, or rehear a decision formerly reached.
The State Banking Board and the Bank Commissioner require that assessment fees payable on a semi-annual basis to the State Bank Department be remitted by automated processing as established by the Bank Commissioner. Exceptions for payment of assessment fees by any other method than the automated method established by the Department must be upon prior request and approval by the Bank Commissioner. Exception requests will only be approved on an extraordinary basis.
Arkansas state banks are required to maintain the following records permanently:
All records, other than those described in part a) and b) shall be retained as follows:
Examination reports ................................................................................................................... | . permanent |
Call reports .................................................................................................................................. | . permanent |
General ledger ............................................................................................................................. | . permanent |
Accounts payable ....................................................................................................................... | ....... 7 years |
GENERAL | |
Customer relationship contract, after closing | |
Signature cards ............................................................................................................... | ..... 10 years |
Loan applications - Consumer ...................................................................................... | . 25 months |
Loan applications - Business ........................................................................................ | . 12 months |
Overdraft loan agreement .............................................................................................. | ....... 6 years |
Safe deposit agreement .................................................................................................. | ..... 10 years |
Night depository agreement .......................................................................................... | ........ 1 year |
Financial activity records | |
Deposit tickets ................................................................................................................ | ..... 10 years |
Buy/sell orders for securities (after maturity) ............................................................... | ....... 3 years |
Withdrawal receipts ....................................................................................................... | ..... 10 years |
Cash letters ..................................................................................................................... | ........ 1 year |
Stop payment orders ...................................................................................................... | ....... 6 years |
Safekeeping receipts ...................................................................................................... | ....... 7 years |
Wire transfer receipts ..................................................................................................... | ....... 6 years |
Safe deposit access records ........................................................................................... | ....... 7 years |
Accounting records of financial activity | |
Transaction journal ........................................................................................................ | ....... 7 years |
Note and discount register ............................................................................................. | ..... 10 years |
Draft register .................................................................................................................. | ..... 10 years |
Dividend Checks ............................................................................................................ | ..... 10 years |
Reconciliation record of account activity | |
Customer statements ...................................................................................................... | ....... 6 years |
Checks paid .................................................................................................................... | ....... 7 years |
Supporting and specialized documentation | |
Collateral records or receipts ......................................................................................... | ..... 10 years |
Amortization records ..................................................................................................... | to maturity |
Credit files ...................................................................................................................... | ....... 6 years |
Account analysis records ............................................................................................... | ....... 3 years |
Proof sheets .................................................................................................................... | ....... 3 years |
Overdrafts ....................................................................................................................... | ....... 4 years |
Trial balance ................................................................................................................... | ....... 4 years |
Return or exception items ............................................................................................. | ....... 5 years |
Transit letters .................................................................................................................. | ....... 3 years |
1099 forms ..................................................................................................................... | ....... 5 years |
DEPOSITS | |
Evidence of compliance with Electronic Funds Transfer Act .............................................. | ........... 2 years |
Currency transactions over $10,000 reports .......................................................................... | ........... 5 years |
Exemption reports and written statements for currency Transactions over $10,000, after removal from exemption list ........................................... | ........... 5 years |
Taxpayer identification records for certificates of deposit, After redemption .................................................................................................................... | ........... 6 years |
Signature cards for deposit accounts verifying identity of signer ........................................ | ......... 10 years |
Statements or ledger cards for deposit accounts ................................................................... | ........... 6 years |
Checks, drafts, and money orders over $100 except for accounts Which average 100 checks per month and fall into one of these Categories; payroll, dividend, employee benefit, insurance claims, Medical benefits, government agency, brokers or dealers in Securities, fiduciary accounts, pension or annuity checks, and | |
Checks drawn on other financial institutions ........................................................................ | ........... 6 years |
Certificates of deposit records, purchased ............................................................................. | ........... 5 years |
Certificates of deposit records, redeemed ............................................................................. | ......... 10 years |
Deposit slips or credit tickets for transactions over $100 that identify amount of currency transacted .......................................................................... | ......... 10 years |
LOANS | |
General | |
Credit extension records for transactions over $10,000, excluding real estate required by the Bank Secrecy Act (formerly $5,000) ................................................................................................................... | ........... 5 years |
Commercial | |
Standby letters of credit records (Regulation H) .................................................................. | Not specified |
Installment/Consumer Credit evaluations required by Equal Credit Opportunity Act and Regulation B, after notification or final disposition | |
Consumer ................................................................................................................... | ..... 25 months |
Business ...................................................................................................................... | ..... 12 months |
Evidence of Compliance with Consumer Credit Protection Act Title IX for EFTS services ....................................................................................... | Until final disposition |
Evidence of compliance with Truth in Lending requirements (Regulation Z), after disclosure ............................................................................... | 3 years |
INVESTMENTS | |
Municipal securities deal transactions records. Forms MSD4 and Forms MSD5 (Regulation H), after disclosure ................................................ | 3 years |
Broker/deal transactions and commission records, customer account records and related correspondence ............................................................ | 3 years |
Credit information relating to public and investment securities ................................................................................................................... | 3 years |
Records of lost or stolen securities .......................................................................... | 3 years |
Transaction records for brokers and dealers extending credit (Regulation T) ................................................................................................ | 3 years |
TRUST | |
Fiduciary records, after termination of account or settlement of litigation .............................................................................................. | permanent |
Investments of each trust account shall be kept separate from the assets of the bank ....................................................................................... | 10 years |
Other records not specified ............................................................................... | 6 years |
All records as noted in Act 89 of 1997 may be retained by photographic or other reproduction methods in lieu of retention of original records.
A state bank may appeal an order of the Commissioner to increase its capital stock to the Arkansas State Banking Board. Notice of the bank's request for appeal must be served upon the Commissioner and the members of the State Banking Board by personal service or certified mail within ten (10) days of the date the Commissioner's order was issued. A public hearing on the appeal will be held as soon as practicable by the State Banking Board. Notice of the hearing will be given twenty (20) days prior to the date of the hearing stating the time, date, and location of the hearing. Notice will be provided by United States mail to the parties to the appeal and published one time in a newspaper of statewide circulation. The bank requesting such an appeal will be required to provide a court reporter and transcript of the hearing to the Arkansas State Banking Board free of charge.
GENERAL POWERS OF BANKS
A.C.A. § 23-47-101(a)(14) permits state banks "to warehouse or act as agent in warehousing mortgages and other loans;". The aggregate of mortgages or other loans shall not be applied against the legal lending limit if the state bank is acting as agent in warehousing mortgages or other loans for a subsidiary.
A.C.A. § 23-47-101(b) reads: "In addition to the foregoing, a bank may exercise any other powers which are incidental to the business of banking." This statutory reference to incidental powers is very similar to the National Banking Act. The Commissioner and the Banking Board may give consideration to the interpretations of similar words in the National Bank Act by the Comptroller of the Currency, but shall not utilize this section to permit the exercise of any power or performance of any activity which is beyond the reasonable progression of the business of banking as authorized in the Arkansas Code.
Pursuant to the power granted to the Commissioner by A.C.A. § 23-47-101(c), the Commissioner, by written order, may authorize state banks to engage in any banking activity then permitted to national banks. Such authority may be subject to such conditions and restrictions as the Commissioner may determine to be appropriate, whether or not any such conditions or restrictions are applicable to national banks.
RIGHT OF BANK TO EXECUTE GUARANTY
A state bank is not authorized to be an accommodation guarantor. An accommodation guaranty by a state bank is void and ultra vires. A state bank can execute a valid guaranty agreement if such action is necessary or advisable to protect an economic interest of the bank. In Bank of Morrilton v. Skipper, Tucker & Co., 165 Ark. 49, the bank executed an agreement guaranteeing the payment of certain liabilities by one of its customers. The purpose of the guaranty was to enable the customer (who was indebted to the bank) to collect funds under an improvement district contract that would enable the customer to pay the debt to the bank. The case was remanded for a new trial; but the Supreme Court recognized that a guaranty executed for the purpose stated would be binding on the bank. In Wasson v. American Can Co., 189 Ark. 354, the bank guaranteed the payment of certain drafts by one of its customers that owed it about $3,000. The guaranty by the bank was intended to enable the customer to purchase cans for tomato canning purposes and the intention of the bank was that this guaranty would enable the customer to continue business operations and pay part or all of the indebtedness to the bank, held that this guaranty was to protect an economic interest of the bank and was binding on the bank. The same principle of law was recognized in Citizens Bank of Booneville v. Clements, 172 Ark. 1023. See also Merchants & Planters Bank & Trust Company v. Deaton, 200 Ark. 828; also Nakdimen v. First National Bank, 177 Ark. 303.
(Reference A.C.A. § 23-47-101)
Any state bank, with the approval of the Commissioner, and so long as national banks are so authorized, may furnish computer, data processing, item processing, billing and posting services through its own organization or an operating subsidiary pursuant to A.C.A.§ 23-47-601 (and without the necessity of becoming a stockholder of a Bank Service Company) to other banks, and to non-banking customers who are its depositors.
MESSENGER SERVICE
The Arkansas Banking Code impose no restriction upon a bank's borrowing power except the issuance of capital notes. Excessive borrowing by a bank can affect its capital adequacy and may subject the bank to administrative action by the Commissioner. Except in the case of capital notes, borrowing by a bank does not require prior approval by the Commissioner.
Prior to filing an application with the State Bank Department for a charter amendment to change the corporate name of a state bank, the bank must complete the following procedures:
Once the charter amendment is received by the State Bank Department, notice of the filing of the application will be sent to all state-chartered banks by electronic transmission. Any protestants will have seven (7) days from the date the Department notice was sent to file an official protest to the application. An official protest must be provided to the Department in written form delineating the reasons for the protest and must be accompanied by a filing fee of two hundred dollars ($200).
The State Bank Department will accept a reservation for a bank corporate name only prior to and for the purpose of formation of a new state bank or prior to the consummation of an interstate merger transaction. The reservation will be for a nonrenewable two hundred seventy day period. A name not used permanently prior to the expiration of this period will be cancelled. Prior to filing a reservation of corporate name an applicant must:
Request a current check of both state and federal trademark or servicemark filings on the proposed name. This request may be implemented through the Arkansas State Library, Reference Department, One Capitol Mall, Little Rock, Arkansas 72201. The fax number for the Library is 501-682-1529. Requests must be submitted in writing and the check will be performed in the exact or almost exact name as requested. Evidence must accompany the application for reservation of corporate name verifying the applicant has made a trademark or servicemark search and no trademark or servicemark exists for the proposed name.
Pursuant to both the Federal Reserve and FDIC Regulations, the capital notes must have an original average weighted maturity of five (5) years or more. The five (5) year term begins, not from the date written on the note, but from the date the note is actually issued and placed in circulation.
DEPOSITS
(RESERVED)
INVESTMENTS
A bank may invest in debt securities, not in the purchase of stock, with certain exceptions. As to convertible debentures:
PERMISSIBLE EXCEPTIONS. COMMON STOCK. TRUST PREFERRED SECURITIES.
Common stock is not generally determined to be an investment security. The State Banking Board and Commissioner rule that in some instances the purchase by a bank of common stock may facilitate the exercise of a true banking function and be "incidental to the business of banking." A bank could not purchase and hold common stock solely for the purpose of collecting dividends thereon; but if the acquisition of the common stock is merely incidental to the exercise of some valid banking power, it is permitted. Banks that are active in student loan operations may purchase and hold common stock of the Student Loan Marketing Association ("Sallie Mae"). Banks that participate in the secondary market for agricultural and rural housing real estate mortgages under the direction of the Federal Agricultural Mortgage Corporation ("Farmer Mac") may purchase and hold stock in the Corporation (adopted by the State Banking Board April 19, 1988).
Trust preferred securities are investments also called "trust preferred stock" which possess characteristics similar to debt obligations. Trust preferred securities are authorized investments for a state bank provided the preferred stock meets the investment quality and marketability requirements applicable to investment securities in accordance with the Federal Deposit Insurance Corporation, Financial Institution Letter, FIL-16-99, February 9, 1999, and any amendments thereof. Investments in trust preferred securities will be subject to the bank's legal loan limitation.
A bank may purchase consumer paper without recourse, warranty, or repurchase agreement. If, however, the bank purchases dealer paper under an arrangement whereby the dealer endorsed the paper or guaranteed its payment or repurchase, then under A.C.A. § 23-47-501, the loan limit (so far as the dealer in concerned), would be exceeded if the dealer's liability as endorser plus his/her primary liability, if any, to the bank exceeds twenty percent (20%) of the capital base.
Any single revenue bond issue of a governmental unit or political subdivision shall be subject to the twenty percent (20%) limitation of the capital base of the bank. A political subdivision will be defined to include an improvement district.
NOTE: REVENUE OBLIGATIONS; NOT TO BE COMBINED. For municipal bond obligations payable solely from pledged revenues, the twenty percent (20%) limitation should be applied to each business corporation whose obligation (for rent or otherwise) if being assigned to secure the bonds, and to each bond or note issue payable solely out of revenues; but these revenue bonds should not be combined in determining whether the loan limit of the municipality has been exceeded.
Any state chartered bank, or bank holding company owning a state chartered bank, which establishes a "Trading Account" (a "Trading Account" is a segregated account in which assets are held for resale by a bank that regularly engages in trading activities), should be aware that such trading account activity is a high risk activity. Due to the inherent risk, any state chartered bank establishing such an account is required to maintain a written policy setting forth guidelines by which the purchase and sales may be conducted. Such policy must receive the approval of the bank's board of directors and notices of such approval, with a copy of the policy, forwarded to the Commissioner.
NOTICE: ENGAGING IN TRADING ACCOUNT ACTIVITY IS A HIGH RISK ACTIVITY! Banks that engage in the purchase and sale of investments in anticipation of interest rate changes, price changes, and changes in the market or economic condition or for other speculative purposes are engaging in "Trading Account" type activities. Such transactions must be conducted through the appropriate establishment of a "Trading Account." Failure to conduct such "Trading Account" type activities in a duly authorized "Trading Account" will result in the state or federal bank examiners declaring a bank's entire investment account a "Trading Account" and will require all investments to be marked to the lower of market value or acquisition cost. In establishing a "Trading Account" bank directors are reminded of the high risk and speculative nature of this type of banking activity.
STATE BANKING BOARD REQUIREMENTS.
If, after considering the risk of loss, and the possibility of gain, a bank wishes to establish a "Trading Account," it must consider and adopt a policy addressing the following:
All assets held in "Trading Accounts" are to be reported consistently at lower of the market value or acquisition cost. It is recommended this reporting be made to the bank's board of directors no less frequently than monthly. It is required that this reporting at the lower of market or acquisition cost be done no less frequently than quarterly and reported in accordance with the instructions for the preparation of the Reports of Condition and Income.
Transfers to and from a "Trading Account", or any other account of the bank shall be recorded at market value at the time of the transfer and gains and losses recognized accordingly.
All accounting of gains or losses resulting from "Trading Account" activities shall be consistent with reporting guidelines contained in the instructions for the Report of Condition and Income.
The bank's board of directors shall require written reports to the board which shall include, at a minimum, the following:
BANK SERVICE COMPANIES
State banks may establish, create or invest in bank service companies which may be corporations or limited liability companies to perform the bank services defined in the statute, including computer and data processing services and such other services as the Commissioner may from time to time by order permit. The stock, in the case of a corporation, or the membership interest, in the case of a limited liability company, of a bank service company may also be owned by persons other than state banks. The operation of bank service companies shall be subject to regulation and examination by the Commissioner so long as any state bank utilizes the services thereof and owns any equity interest in such organization or has any loans outstanding to such organization.
The aggregate of the loans to and investment in a bank service company cannot exceed twenty percent (20%) of the capital base of a state bank.
LOAN LIMITS
The use of Certificates of Reliance was repealed by Act 427 of 2005. State Banks are no longer authorized to use Certificates of Reliance.
The Commissioner and State Banking Board rule that separate loans to a parent corporation and its subsidiary must be combined, for the assets of the parent may be represented wholly or in part by the stock of the subsidiary. If separate loans are made to two or more subsidiaries which operate separately and entirely independent of each other, then so far as the loan limit law is concerned, each could borrow up to the full loan limit; but if a subsidiary is dependent is its operations upon another subsidiary of the same parent for some vital service or commodity, the loans should be combined. If the parent corporation is not borrowing, obligations of subsidiary corporations are generally not combined except in the following situations:
Obligations of a corporations must be combined with any other extension of credit the proceeds of which are used for the benefit of the corporation.
The Commissioner and the State Banking Board rule that this exception applies to negotiable drafts and to bills of exchange drawn by the seller of commodities upon the purchaser and bearing the acceptance of the latter, or drawn by the purchaser of commodities upon his bank and endorsed by the seller. In order to qualify under this exception, drafts or bills of exchange must be two name paper. Thus, unaccepted drafts are not eligible, nor are bills of exchange endorsed without recourse or not endorsed.
The Commissioner and the State Banking Board rule that this exception applies to obligations secured by pledge of bill of lading covering goods or commodities in process of shipment. It is immaterial whether the obligation is negotiable and whether it is one-name or two-name paper; but the exception applies only to paper in connection with a sale transaction.
The Commissioner and the State Banking Board rule that one hundred fifteen percent (115%) collateral margin applies both to livestock and readily marketable and nonperishable commodities, etc., covered by transferable documents. "Transferable documents" will be construed to include merely title documents, such as bills of lading or warehouse receipts, and not to include a lien instrument such as a chattel mortgage.
If one hundred fifteen percent (115%) collateral margin should be impaired by depreciation, the failure to restore the margin may result in a loan limit violation.
Even though the bank has previously loaned a borrower up to the statutory loan limit of twenty percent (20%), it may, without committing a loan limit violation, lend the same borrower additional funds against collateral properly margined as provided in the last preceding paragraph.
Obligations, which the Farm Service Agency or United States Department of Agriculture (formerly Farmers Home Administration), guarantees against any loss sustained by the bank are, to the extent of such guarantee, free from loan limitations.
The portion of a loan properly secured by a commercial bank certificate of deposit, whether it is an "own" bank certificate of deposit or a certificate of deposit issued by another commercial bank will not be subject to that bank's legal loan limit.
Loan commitments and standby letters of credit will be subject to a banks legal loan limit in the entire amount on the date the loan commitment or letter of credit is issued in written form whether or not any, a portion of, or all of the loan has been funded.
SUBSIDIARIES
(RESERVED)
TRUST POWERS
A bank acting as escrow holder under an ordinary escrow contract, where the bank has no power to invest the escrowed funds, does not require trust powers. A state bank without trust powers may act as paying agent under a bond or note issue but it may not act as trustee thereunder.
A non-member insured bank may not adopt trust powers without Federal Deposit Insurance Corporation approval. A state member bank must obtain Federal Reserve approval.
A bank or trust company in the administration of a trust may place title to trust securities in the name of a nominee. If there is a co-trustee, consent must be obtained. But a bank or trust company in such a situation, will be absolutely responsible for any loss occasioned by the act of the nominee.
Section 26 U.S.C. 408 et seq. establishes Individual Retirement Accounts. A bank that has trust powers may accept deposits into Individual Retirement Accounts and may, depending on the arrangement between the depositor and the bank, exercise discretion in the investment of such account. If a bank does not have trust powers, it may accept such deposits on a "custodial" arrangement only. However, reference should be made to the above cited federal law and the regulations and rulings promulgated thereunder for the administration of such accounts.
A bank's activities as trustee or custodian under a Keogh Plan is governed by Section 26. U.S.C. 404(e).
All Trust Deposits awaiting investment or distribution which are determined to be eligible under A.C.A. § 28-69-206 for pledging of government securities to the deposit, may be secured by a blanket pledging of eligible securities to those eligible trust deposits subject to the following requirements:
The trust department of a state bank is theoretically subject to the dominion of the board of directors; and the trust department conceivably might in some situations be called upon to vote the bank's own shares for proposals more calculated to benefit the individual directors than the bank. Under the National Banking Act (Section 12 U.S.C. 61) a national bank cannot vote its own shares in the election of directors of the bank unless under the terms of the trust the manner in which the shares shall be voted may be determined by a donor or beneficiary of the trust and unless such donor or beneficiary actually directs how such shares shall be voted. Moreover, if the national bank has a co-trustee, the shares may be voted by the co-trustee. The above stated national bank rule shall be applicable with respect to voting any shares of the bank held by the trust department in the election of the bank's directors. On all other proposals, the trust department is urged to weigh carefully the issues presented and any conflicts of interest which are present before deciding whether to vote or how to vote the shares.
All state banks exercising trust powers shall adopt a trust policy setting forth, at a minimum, trust department investment practices, including investments in the obligations of the bank and its affiliates, voting practices and procedures concerning the banks stock and the stock of any affiliates of the bank, and trust account administration policies and procedures.
FIDUCIARY POWERS OF STATE BANKS AND COLLECTIVE INVESTMENT FUNDS (COMMON TRUST FUNDS)
"Account" means the trust, estate or other fiduciary relationship which has been established with a bank;
"Custodian under a Uniform Gifts to Minors Act " means an account established pursuant to a state law which is substantially similar to the Uniform Gifts to Minors Act as published by the America Law Institute and with respect to which the bank operating such account has established to the satisfaction of the Secretary of the Treasury that it has duties and responsibilities similar to duties and responsibilities of a trustee or guardian.
"Fiduciary" means a bank undertaking to act alone or jointly with others primarily for the benefit of another in all matters connected with its undertaking and includes trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of incompetents, managing agent and any other similar capacity;
"Fiduciary powers" means the power to act in any fiduciary capacity as authorized by Arkansas state law or any applicable federal law;
"Fiduciary records" means all matters which are written, transcribed, recorded, received or otherwise come into possession of a bank and are necessary to preserve information concerning the acts and events relevant to the fiduciary activities of a bank;
"Guardian" means the guardian or committee by whatever name employed by local law, of the estate of an infant, an incompetent individual, an absent individual, or a competent individual over whose estate a court has taken jurisdiction, other than under bankruptcy or insolvency laws;
"Investment authority " means the responsibility conferred by action of law or a provision of an appropriate governing instrument to make, select or change investments, review investment decisions made by others, or to provide investment advice or counsel to others;
"Local law " means the law of the state or other jurisdiction governing the fiduciary relationship;
"Managing agent " means the fiduciary relationship assumed by a bank upon the creation of an account which names the bank as agent and confers investment discretion upon the bank;
"State bank " means any bank, trust company, savings bank, or other banking institution, which is not a national bank and the principal office of which is located in the District of Columbia, any state, commonwealth, or territorial possession of the United States;
"Trust department " means that group or groups of officers and employees of a bank organized under the supervision of officers or employees to whom are designated by the board of directors the performance of the fiduciary responsibilities of the bank, whether or not the group or groups are so named;
CHANGE IN CONTROL
Generally, the Commissioner will consider and make a decision on a change in control application within thirty (30) days of receipt of all requested information. However, the Commissioner reserves the right to extend the such period as necessary to make a complete determination on the application.
If a proposed change in control would result in one person, or group of associated persons, firms or corporations, controlling two or more banks competing in the same market, the Commissioner would be inclined to disapprove the transfer unless the applicant clearly demonstrated that the proposed transaction would not materially reduce competition in the market.
DIVIDENDS
Prior approval of the Commissioner shall be obtained prior to declaration and payment of any dividend by any State Bank which shall amount to seventy-five percent (75%) or more of the net profits of the bank after all taxes for the current year (annualized) plus seventy-five (75%) of the retained net profits for the immediately preceding year.
STOCK ISSUE AND TRANSFER ISSUE OF STOCK
Under Section 8, Article 12 of the Arkansas Constitution, corporate stock can be issued only for "money or property actually received or labor done". A bank may not issue stock against the purchaser's promissory note; and it cannot issue stock at a price less than the par value thereof. Bank of Dermott v. Measel, 172 Ark. 193; Bank of Manila v. Wallace, 177 Ark. 190; Blanks v. American So. Trust Co., 177 Ark. 832; Murray v. Murray Laboratories, Inc., 223 Ark. 907; Bank of Commerce v. Goolsby, 129 Ark. 416.
The issuance of new shares at an inadequate price operates to dilute the value of outstanding shares. Therefore, even when the shareholders agree that shares may be sold free of preemptive rights the directors are under a fiduciary duty to fix a reasonable price for the shares thus sold.
A bank may issue both common and preferred stock of different classifications. It may also issue voting and nonvoting stock; but stock issued as nonvoting may nevertheless vote in respect to a dissolution, merger, consolidation or in respect to any proposal that would adversely affect the preferences, privileges and other rights annexed to the shares; nor may a stockholder's right to vote, under Article 12, Section 8, of the Arkansas Constitution, upon a proposal to increase the capital stock be abridged through the issuance of nonvoting stock.
Unless prohibited by the Articles of Agreement, or any amendment thereto, or By-Laws, a bank may issue a certificate for a fractional share. The creation of fractional shares sometimes occurs in connection with stock dividends. In lieu of issuing certificates for fractional shares the bank may issue scrip. A scrip certificate specifies that the holder has rights in respect to a designated number of fractional shares; and a person holding scrip certificates covering fractional interests equal to a full share may exchange such certificates for a certificate covering one share. Unless otherwise provided in the Articles or By-Laws, a fractional share shall (but scrip will not) entitle the holder to vote or receive dividends. Where scrip is issued, the directors may provide that it shall become void unless exchanged for certificates representing full shares before a specified date. Where scrip is issued it is customary to establish certain officials as a clearing house to handle the sale of the fractional interests whose holders desire to sell and to handle the purchase for those who desire to purchase additional rights for the purpose of matching them into full shares. Further, where scrip is issued, the directors may provide that it will become void if not exchanged for certificates representing full shares before a specified date; or the State Banking Board may provide that the shares for which the scrip is exchangeable may be sold by the bank and the proceeds thereof distributed to the holders of such scrip.
The waiver of preemptive rights of a shareholder, if applicable, involves a personal act by each stockholder; and such waiver cannot be accomplished by a stockholder vote at a stockholders' meeting, except for the waiver by shareholders of any applicable preemptive rights which would attach to shares which are authorized by a due vote of the shareholders to be issued upon the conversion of any convertible capital notes or pursuant to any stock option, stock purchase, employee stock ownership plan or other compensation plan authorized by A.C.A. § 23-47-101(a)(10).
The initial issuance of shares of a state bank or a bank holding company which has a state bank subsidiary pursuant to the provisions of the Articles of Incorporation, or any amendment thereto, authorizing the issuance of additional shares must be reported in each instance as and when issued.
Every transfer of outstanding shares issued by a state bank or a bank holding company which has a state bank subsidiary shall be promptly reported to the Commissioner. If an Arkansas bank holding company is a reporting company under §§13 or 15(d) of the Securities and Exchange Act of 1934, then the reporting of the transfer of shares shall only be required once each calendar year.
Except in the case of bank holding companies which are reporting companies, the bank or the bank holding company must certify to the Commissioner the number of shares held by the transferee prior to such transfer and the name of every person known by it to be holding any shares as nominee of the transferee, or in trust for or otherwise for the benefit of such transferee, and the number of shares so held by each such person. In the case of a bank holding company which is a reporting company under the Securities and Exchange Act of 1934, the bank holding company shall promptly report after the calendar year end all transactions by any record owner of shares (other than a nominee for an institution) which owns as of the end of such calendar year 3% or more of the outstanding stock of the bank holding company. Such report shall show for each transaction by such persons the number of shares held by such person prior to such transfer and the name of every person known by the bank holding company to be holding any shares as nominee of such person, or in trust for or otherwise for the benefit of such person, and the number of shares so held.
STOCKHOLDERS' MEETINGS
Proxy voting is authorized. A proxy, unless it otherwise provides, will expire eleven (11) months from the date of its execution. Ordinarily, a proxy would become void upon the death or insanity of the stockholder who executed the proxy. However, a proxy may be of indefinite duration if it is coupled with an interest.
Written notice of a special meeting must be given to the shareholders by mail according to the bylaws, but in no event for less than ten (10) days. Written notice of an annual meeting, even though only routine matters are to be considered at the meeting, must be given at least ten (10) days before the meeting. If the capital stock or the bonded indebtedness is to be increased at either a special or annual meeting, 60 days notice is required under Article 12, Section 8 of the Arkansas Constitution. The notice of a special or annual meeting should indicate the time, place and purpose of the meeting and be sent by first class mail. The act of mailing constitutes notice. Any officer may sign the notice. Moreover, at an annual meeting, if the charter is to be amended or any other extraordinary matters submitted to the stockholders, the notice of the meeting must specify that such charter amendment or other such extraordinary matters will be submitted.
DIRECTORS AND STOCKHOLDERS
The affairs of every bank organized under the laws of this state shall be managed and controlled by a board of directors of not less than three (3) persons who shall be selected at such times and in such manner as may be provided by its Articles of Incorporation or bylaws. Except as required in the Articles of Incorporation or bylaws, No director of a state bank shall be required to be a stockholder of such bank.
Any officer or director found by the Commissioner to be violating state or federal law, State Bank Department Rules and Regulations, or basic principals of safety and soundness in the operation of a bank may be reported in writing to the directors of the bank of which he is an officer or director, or the Commissioner may cause such officer or director to be removed from service to the institution by means of a cease and desist order issued by the Commissioner against the bank and its board of directors. If the Commissioner reports such activities in writing to the bank's board of directors and the Board neglects or refuses to remove such officer or director, the directors may be individually liable for any loss that may occur to the bank by reason of their lack of action and may be subject to the assessment of monetary penalties for such failure by the Commissioner.
PROCEDURE AT BANK MEETINGS DIRECTORS' MEETINGS
The procedure at the regular and special meeting of the Board of Directors shall be governed by the terms of the Articles of Incorporation and Bylaws of the bank; provided, however, no proxy given by a director for any meeting of the Board of Directors shall be effective for determining a quorum, voting or any other purpose.
RESERVES OF BANKS
If any state bank shall fail during any period to maintain the reserve required under the Banking Code, the Commissioner may require such bank to pay a penalty computed on the basis of eight percent (8%) per annum on the amount of such deficit for the period that the deficit continues; provided that the Commissioner, in his/her discretion, may waive any penalty for a period which is less than twenty-five dollars ($25.00). This penalty shall not prevent the Commissioner, under other applicable provisions of the law, from placing a state bank in liquidation due to a violation of reserve requirements.
BRANCH BANKS
A state bank planning to file an application for use of a fictitious name must complete the following procedures prior to filing an application with the State Bank Department:
Once the application for use of a fictitious name is received by the State Bank Department, notice of the filing of the application will be sent to all state-chartered banks by electronic transmission. Any protestant will have seven (7) days from the date the Department notice was sent to file an official protest to the application. An official protest must be provided to the Department in written form delineating the reasons for the protest and must be accompanied by a filing fee of twenty-five dollars ($25). The Bank Commissioner will make the final determination on the use of a fictitious name.
Notwithstanding the above requirements, an applicant bank that has previously filed and been approved for the use of a specific fictitious name is not required to perform the publication of notice or trademark search requirements for subsequent use of the same fictitious name. However, the bank must file an application for subsequent use of the same fictitious name at a new location.
FULL SERVICE BRANCHES; LIMITED PURPOSE OFFICES
A state bank's application (on a form required by the Commissioner) for authority to establish a new branch or relocate an existing branch shall be filed with the Commissioner. The following rules govern the procedure on such applications:
BANK HOLDING COMPANIES
(RESERVED)
PLAN OF EXCHANGE
The Commissioner requires that the bank, intending to adopt a Plan of Exchange, publish a legal notice of the Commissioner's fairness hearing in a newspaper of state-wide circulation. These notices must be published at least once, ten (10) days prior to the Commissioner's fairness hearing. Proof of publication must be delivered to the Commissioner's office. In addition, the Commissioner requires that the notice of the Commissioner's fairness hearing be included in the proxy material mailed to the stockholders of the bank at least ten (10) days prior to the date of the stockholders meeting at which the Plan of Exchange will be voted upon.
COURT REPORTER REQUIRED.
The Commissioner requires that the bank arrange for a court reporter to be present to transcribe the proceedings of the Commissioner's fairness hearing. The bank is responsible for the fees and costs of the court reporter and transcript of the proceedings.
DISSOLUTION AND LIQUIDATION
When the dissolution of an Arkansas state-chartered bank has been completed, the receiver shall file Articles of Dissolution with the State Bank Department in accordance with the procedures as set out by state statute and accompanied by a filing fee of two hundred dollars ($200.00).
VOLUNTARY LIQUIDATION.
Applications for the voluntary liquidation of an Arkansas state-chartered bank shall be accompanied by a filing fee of two hundred dollars ($200.00).
VOLUNTARY LIQUIDATION. SURRENDER OF CHARTER.
Prior to accepting the surrender of any bank charter, applicant must provide the Commissioner with evidence satisfactory to him that all deposits and trust accounts (if any) have been sold, surrendered, transferred, or terminated.
POLICY REQUIREMENTS
LOAN POLICY
Furthermore, the loan policy will describe the process by which loans shall receive prior approval or subsequent approval by a loan committee and the bank's board of directors, repricing opportunities of loans subject to renewal or extensions, procedures for the purchase and sale of loan participations, and procedures for approving loans to insiders; executive officers, directors, and principal shareholders.
A bank's loan policy, and any revisions or additions, must receive the approval of the board of directors and reviews are recommended on an annual basis.
LOAN PARTICIPATION POLICY
The acceptance by a purchaser of a favorable analysis of a loan issued by the seller, a credit rating institution, or another entity does not satisfy the need to conduct an independent credit analysis. A prudent purchaser may, however, consider such analyses obtained from the seller and other sources as factors when independently assessing a loan.
The absence of prudent transfer agreements may effect a purchaser's ability to obtain, assess, and maintain sufficient credit information. Accordingly, the purchase of a loan or participation absent such transfer obligations may be viewed as an unsafe or unsound banking practice.
Prudent recourse arrangements should be documented in writing and reflected on the books and records of both the buying and selling bank.
_______________________
*References to "full" and "timely" transfers of credit information are made herein to provide supervisory guidelines on safe and sound transfers of credit information. The guidelines describe the scope of transfers required for a purchaser to make an informed and independent credit decision. Apart from such supervisory considerations, use of the terms "full" and "timely" is not intended to suggest that the terms have particular legal significance; thus, other terms may be used. The drafting and negotiation of standards governing transfers of credit information is the responsibility of bank management and counsel.
LOAN LOSS RESERVE
INVESTMENT POLICY
A bank's investment policy, and any revisions and additions, must receive the approval of the board of directors, and reviews are recommended on an annual basis.
ASSET/LIABILITY MANAGEMENT
A bank's asset/liability policy, and any revisions and addition, must receive the approval of the board of directors, and reviews are recommended on an annual basis.
RESOLUTION OF THE STATE BANKING BOARD
MAY 26, 1981
SUBJECT: ADJUSTABLE RATE MORTGAGES
Be it resolved by the Arkansas State Banking Board on this 26th day of May, 1981, that the Board approves a request of Beverly J. Lambert, Jr., as State Bank Commissioner, to use his authority under Arkansas Statutes Ann. 67-501.1(o), otherwise known as the "Wild Card Statute", [A.C.A. § 23-32-701(16) ], to authorize state bank's use of Adjustable Rate Mortgages in the same manner in which national banks are allowed to do so according to the rules of the Comptroller of the Currency.
This resolution was adopted at a meeting of the State Banking Board at 10:00 a.m. on the 26th day of October, 1981.
SIGNED: JAMES H. ATKINS CHAIRMAN
APPROVED:
B.J. LAMBERT, JR.
BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
OCTOBER 20, 1981
SUBJECT: ADJUSTABLE RATE MORTGAGES (CLARIFICATION)
Be it resolved by the members of the Arkansas State Banking Board that this is a resolution for clarification of a recent action by the Commissioner and the State Banking Board which authorized the use of Adjustable Rate Mortgages by state chartered banks according to the authority under Ark. Stat. 67-501.1(o), the "Wild Card Statute," [A.C.A. § 23-32-701(16) ]. Under this resolution for a clarification, state chartered banks may use Adjustable Rate Mortgages should they so desire. State chartered banks will not be restricted in the use of such Adjustable Rate Mortgages to those rules or guidelines set out in the ruling of the Comptroller of the Currency on Adjustable Rate Mortgages. However, nothing in this resolution should be interpreted to relieve a state chartered bank from any compliance, rule, or regulation, concerning disclosures or any other such requirements which may be promulgated by the Federal Deposit Insurance Corporation on the use of Adjustable Rate Mortgages.
This resolution was adopted at a meeting of the Arkansas State Banking Board at 10:00 a.m. on the 20th day of October, 1981.
SIGNED: JAMES H. ATKINS APPROVED:
B.J. LAMBERT, JR.CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
MARCH 8, 1983
SUBJECT: BUY AND SELL OF SECURITIES FOR CUSTOMERS
The Arkansas State Banking Board, with the concurrence of the Arkansas State Bank Commissioner, and pursuant to its authority under Arkansas Statute 67-501.1(o), [A.C.A. § 23-32-701(16) ], does hereby authorize Arkansas state chartered banks to buy and sell securities for its customers and others in the manner in which a national bank is authorized to do the same.
SIGNED: ELMER A. FERGUSON
APPROVED: B.J. LAMBERT, JR.
CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
MAY 17, 1984
SUBJECT: "DUE ON SALE" CLAUSES
The State Banking Board, with the concurrence of the Bank Commissioner, and according to its authority under Ark. Stat. 67- 501.1(o), the "Wild Card" statute, [A.C.A. § 23-32-701(16) ], adopts the following resolution:
Arkansas state chartered banks may enforce "Due on Sale" clauses originated or acquired by state banks. This resolution is adopted pursuant to a similar ruling adopted by the Comptroller of the Currency which permits national banking institutions to enforce "Due on Sale" clauses.
Signed this 17th day of May, 1984.
SIGNED: DR. RALPH RATTONAPPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
MAY 17, 1984
SUBJECT: INVESTMENT IN MUTUAL FUNDS.
The State Banking Board, with the concurrence of the Bank Commissioner, and according to its authority under Ark. Stat. 67-501.1(o), the "Wild Card" statute, [A.C.A. § 23-32-701(16) ], adopts the following resolution:
Arkansas state-chartered banks are permitted to invest in Money Market Funds, sold at par, so long as the portfolios of such companies consist solely of securities which are eligilbe for purchase for state chartered banks, and subject to any applocable loan limits. This resolution is adopted pursuant to a similar ruling adopted by the Comptroller of the Currency permitting such an investment by a national bank.
Signed this 17th day of May, 1984.
SIGNED: DR. RALPH RATTON
APPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
*This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
OCTOBER 16, 1984
SUBJECT: "DUE ON SALE" CLAUSES AMENDMENT TO MAY 17, 1984 RESOLUTION
The Bank Commissioner, with the approval of the State Banking Board, pursuant to the authority of Ark. Stat. Ann 67-501.1(o), commonly called the "Wild Card" Statute, [A.C.A. § 23-32-701(16) ], and in order to maintain state chartered banks on basis of competitive equality with national banks in respect to the enforcement of due-on-sale clauses (Comptroller of the Currency, 12 CFT Paragraph 30.1, 48 Fed. Reg. 51283) and other financial institutions, hereby amends the Resolution of May 17, 1984 to read as follows:
ENFORCEMENT OF DUE-ON-SALE CLAUSES
"Arkansas state chartered banks are hereby authorized to enforce "due on sale" clauses contained in any loan contract regardless of when originated or acquired."
Signed this 16th day of October, 1984.
SIGNED: DR. RALPH RATTON
APPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
JULY 17, 1984
SUBJECT: DEBT CANCELLATION CONTRACTS
The Bank Commissioner, with the approval of the State Banking Board, and according to their authority under Ark. Stat. 67- 501.1(o), the "Wild Card" statute, [A.C.A. § 23-32-701(16) ] adopts the following resolution:
Arkansas state chartered banks are hereby authorized to provide for losses arising from the cancellation of outstanding loans upon the death of borrowers. The imposition of an additional charge in the establishment of necessary reserves in order to enable the bank to enter into such debt cancellation contracts are a lawful exercise of the powers of state banks and are necessary for competitive equity with their national counterparts and necessary to the business of banking within the State of Arkansas and under Arkansas State Laws.
This order is retroactive to April 23, 1984.
Signed this 17th day of July, 1984.
SIGNED: DR. RALPH RATTON
APPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
POLICY STATEMENT
JULY 14, 2003
ORDER OF THE STATE BANK COMMISSIONER
SUBJECT: DEBT CANCELLATION CONTRACTS AND DEBT SUSPENSION AGREEMENTS
AMENDMENT TO RESOLUTION OF THE STATE BANKING BOARD DATED JULY 17, 1984
The Arkansas State Bank Commissioner, in accordance with his authority under A.C.A. § 23-47-101(c), hereby adopts the following policy:
Arkansas state chartered banks are authorized to enter into debt cancellation contracts and debt suspension agreements and charge a fee therefore, in connection with extensions of credit that it makes in accordance with the same guidelines used by the Comptroller of the Currency for national banks. For reference see 12 C.F.R. Part 37, effective June 16, 2003, which is reproduced following this order.
Signed this 14th day of July 2003
SIGNED: ROBERT H. ADCOCK, JR. BANK COMMISSIONER
12 C.F.R. Part 37, Effective June 16, 2003
Debt Cancellation Contracts and Debt Suspension Agreements
For purposes of this part:
Except as provided in §37.3(c)(2), a bank may offer a customer the option of paying the fee for a contract in a single payment, provided the bank also offers the customer a bona fide option of paying the fee for that contract in monthly or other periodic payments. If the bank offers the customer the option to finance the single payment by adding it to the amount the customer is borrowing, the bank must also disclose to the customer, in accordance with § 37.6, whether and, if so, the time period during which, the customer may cancel the agreement and receive a refund.
A national bank must manage the risks associated with debt cancellation contracts and debt suspension agreements in accordance with safe and sound banking principles. Accordingly, a national bank must establish and maintain effective risk management and control processes over its debt cancellation contracts and debt suspension agreements. Such processes include appropriate recognition and financial reporting of income, expenses, assets and liabilities, and appropriate treatment of all expected and unexpected losses associated with the products. A bank also should assess the adequacy of its internal control and risk mitigation activities in view of the nature and scope of its debt cancellation contract and debt suspension agreement programs.
Appendix A to Part 37--Short Form Disclosures
This product is optional
Your purchase of [PRODUCT NAME] is optional. Whether or not you purchase [PRODUCT NAME] will not affect your application for credit or the terms of any existing credit agreement you have with the bank.
Lump sum payment of fee
[Applicable if a bank offers the option to pay the fee in a single payment]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
You may choose to pay the fee in a single lump sum or in [monthly/quarterly] payments. Adding the lump sum of the fee to the amount you borrow will increase the cost of [PRODUCT NAME].
Lump sum payment of fee with no refund
[Applicable if a bank offers the option to pay the fee in a single payment for a no-refund DCC]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
You may choose [PRODUCT NAME] with a refund provision or without a refund provision. Prices of refund and no-refund products are likely to differ. Refund of fee paid in lump sum
[Applicable where the customer pays the fee in a single payment and the fee is added to the amount borrowed]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
[Either:] (1) You may cancel [PRODUCT NAME] at any time and receive a refund; or (2) You may cancel [PRODUCT NAME] within ___ days and receive a full refund; or (3) If you cancel [PRODUCT NAME] you will not receive a refund.
Additional disclosures
We will give you additional information before you are required to pay for [PRODUCT NAME]. [If applicable]: This information will include a copy of the contract containing the terms of [PRODUCT NAME].
Eligibility requirements, conditions, and exclusions
There are eligibility requirements, conditions, and exclusions that could prevent you from receiving benefits under [PRODUCT NAME].
[Either:] You should carefully read our additional information for a full explanation of the terms of [PRODUCT NAME] or You should carefully read the contract for a full explanation of the terms of [PRODUCT NAME].
Appendix B to Part 37--Long Form Disclosures
This product is optional
Your purchase of [PRODUCT NAME] is optional. Whether or not you purchase [PRODUCT NAME] will not affect your application for credit or the terms of any existing credit agreement you have with the bank.
Explanation of debt suspension agreement [Applicable if the contract has a debt suspension feature]
If [PRODUCT NAME] is activated, your duty to pay the loan principal and interest to the bank is only suspended. You must fully repay the loan after the period of suspension has expired. [If applicable]: This includes interest accumulated during the period of suspension.
Amount of fee
[For closed-end credit]: The total fee for [PRODUCT NAME] is _____.
[For open-end credit, either:] (1) The monthly fee for [PRODUCT NAME] is based on your account balance each month multiplied by the unit-cost, which is _____ ; or (2) The formula used to compute the fee is ______ ].
Lump sum payment of fee
[Applicable if a bank offers the option to pay the fee in a single payment]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
You may choose to pay the fee in a single lump sum or in [monthly/quarterly] payments. Adding the lump sum of the fee to the amount you borrow will increase the cost of [PRODUCT NAME].
Lump sum payment of fee with no refund
[Applicable if a bank offers the option to pay the fee in a single payment for a no-refund DCC]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
You have the option to purchase [PRODUCT NAME] that includes a refund of the unearned portion of the fee if you terminate the contract or prepay the loan in full prior to the scheduled termination date. Prices of refund and no-refund products may differ.
Refund of fee paid in lump sum
[Applicable where the customer pays the fee in a single payment and the fee is added to the amount borrowed]
[Prohibited where the debt subject to the contract is a residential mortgage loan]
[Either:] (1) You may cancel [PRODUCT NAME] at any time and receive a refund; or (2) You may cancel [PRODUCT NAME] within ______ days and receive a full refund; or (3) If you cancel [PRODUCT NAME] you will not receive a refund.
Use of card or credit line restricted
[Applicable if the contract restricts use of card or credit line when customer activates protection]
If [PRODUCT NAME] is activated, you will be unable to incur additional charges on the credit card or use the credit line.
Termination of [PRODUCT NAME]
[Either]: (1) You have no right to cancel [PRODUCT NAME]; or (2) You have the right to cancel [PRODUCT NAME] in the following circumstances: _______ .
[And either]: (1) The bank has no right to cancel [PRODUCT NAME]; or (2) The bank has the right to cancel [PRODUCT NAME] in the following circumstances: ________ .
Eligibility requirements, conditions, and exclusions
There are eligibility requirements, conditions, and exclusions that could prevent you from receiving benefits under [PRODUCT NAME].
[Either]: (1) The following is a summary of the eligibility requirements, conditions, and exclusions. [The bank provides a summary of any eligibility requirements, conditions, and exclusions]; or (2) You may find a complete explanation of the eligibility requirements, conditions, and exclusions in paragraphs _______ of the [PRODUCT NAME] agreement.
RESOLUTION OF THE STATE BANKING BOARD
OCTOBER 16, 1984
SUBJECT: LOAN PRODUCTION OFFICES
The Bank Commissioner, with the approval of the State Banking Board, pursuant to the authority of Ark. Stat. Ann. Sec. 67- 501.1(o) commonly called the "Wild Card" Statute, [A.C.A. § 23-32-701(16) ], and in order to maintain state chartered banks on the basis of competitive equality with national banks in respect to the establishment and operation of loan production offices (Comptroller's Manual for National Banks, Int. Ruling 7.7380) and other financial institutions, hereby adopts the following resolution:
LOAN PRODUCTION OFFICES
Signed this 16th day of October, 1984.
SIGNED: DR. RALPH RATTON
APPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
OCTOBER 16, 1984
SUBJECT: INVESTMENT IN COMMUNITY DEVELOPMENT CORPORATIONS
The Bank Commissioner, with the approval of the State Banking Board, and according to his authority under Ark. Stat. 67- 501.1(o), the "Wild Card Statute," [A.C.A § 23-32-701(16) ], adopts the following resolution:
Arkansas state chartered banks are hereby authorized to invest in Community Development Corporations in the same manner in which the national banks are authorized to do so. (See 12 C.F.R. 7.7479 and 12 C.F.R. 7.7480).
Signed this 16th day of October, 1984.
SIGNED: DR. RALPH RATTON
APPROVED: MARLIN D. JACKSON CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
FEBRUARY 17, 1994
SUBJECT: INVESTMENT IN COMMUNITY DEVELOPMENT CORPORATIONS AMENDMENT TO OCTOBER 16, 1984, RESOLUTION
The Bank Commissioner, with the approval of the State Banking Board, and according to his authority under A.C.A. § 23-32-701(16) adopts the following resolution:
A resolution passed by the Arkansas Bank Commissioner and the Arkansas State Banking Board on October 16, 1984, authorizing Arkansas state banks to invest in Community Development Corporations in the same manner in which national banks are authorized to do so is amended to include increased percentages for maximum investments in Community Development Corporations as established by Part 24 of Title 12, Code of Federal Regulations as added December 31, 1993, in 58 Federal Register 68464, December 27, 1993.
Signed this 17th day of February, 1994.
SIGNED: BOB WILLETT
APPROVED: BILL J. FORD CHAIRMAN BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
JULY 21, 1987
SUBJECT: INDEMNIFICATION TO OFFICERS, DIRECTORS
WHEREAS, pursuant to Arkansas Statute Annotated Section 64-309 (Repl. 1980) (the "State Statute"), (A.C.A. § 4-26-814) all business corporations incorporated pursuant to the laws of the State of Arkansas have the power to indemnify officers, directors and other persons for:
WHEREAS, the General Assembly of the State of Arkansas in the 1987 regular legislative session adopted and enacted a new Arkansas Corporate Code, the same being Arkansas Statute Annotated Sections 64-101 through 64-1706, (A.C.A. § 4-26-101 through A.C.A § 4-26-308) inclusive (the "New Code") which is to become effective for all Arkansas business corporations established on or after January 1, 1988 and for existing Arkansas business corporations whose stockholders elect to be governed by the New Code on or after January 1, 1988, and the New Code contains similar provisions of indemnification as the code which it replaces; and
WHEREAS, pursuant to such actions of the General Assembly, it is the public policy of the State of Arkansas to allow Arkansas business corporations to indemnify officers, directors and such other persons as set forth hereinabove and as more particularly specified in the State Statute and the New Code; and
WHEREAS, national banking associations organized pursuant to the laws of the United States of America are granted the power to indemnify officers, directors and other persons pursuant to an Office of the Comptroller of the Currency Interpretive Ruling promulgated at 12 C.F.R. 7.5217 and, under such Interpretive Ruling, the Office of the Comptroller of the Currency will recognize a national banking association's indemnification provisions in its Articles of Association if such substantially reflect general standards of law as evidenced by the law of the state in which a national banking association is headquartered, the law of the state in which the national banking association's holding company is incorporated, or the relevant provisions of the Model Business Corporation Act; and
WHEREAS, liability insurance for officers, directors and other persons has become increasingly cost prohibitive, uneconomical and extremely difficult to obtain for corporations in general including state and nationally chartered banking associations, and even if obtained, such insurance typically contains broad exclusions from its coverage thereby severely reducing the transfer of risk to the insurance carrier; and
WHEREAS, the Arkansas Banking Act, Arkansas Statute Annotated Section 67-101 et seq., (A.C.A. § 23-31-201), does not specifically grant the power to indemnify officers, directors and other persons of an Arkansas state chartered banking institution; and
WHEREAS, it is necessary for Arkansas state chartered banking institutions to be able to offer officers, directors and other persons protection against liability for actions taken by them on behalf of such institutions and in order for such institutions to be able to attract capable and talented individuals to serve as officers, directors and employees thereof; and
WHEREAS, pursuant to Arkansas Statute Annotated Section 67- 501.1(o), [A.C.A. § 23-32-701(16) ], the State Bank Commissioner, with the approval of the State Bank Department Board, is empowered to grant Arkansas state chartered banking institutions the power to engage in any activities in which said institutions could engage were they acting as national banking associations at the time such authority is granted, including, but not limited to, the power to indemnify officers, directors and other persons in the same manner and to the same extent officers, directors and other persons of a national banking association are indemnified pursuant to said Interpretive Ruling of the Office of the Comptroller of the Currency, promulgated at 12 C.F.R. 7.5217;
NOW, THEREFORE, BE IT RESOLVED, that the Arkansas State Banking Board, under the authority granted to it pursuant to said Arkansas Statute Annotated Section 67-501.1(o), [A.C.A. § 23-32-701(16) ], hereby approves and empowers the State Bank Commissioner the right to grant Arkansas state chartered banking institutions the power to indemnify officers, directors and other persons to the maximum extent as such is permitted by the Arkansas Business Corporation Act, including but not limited to the State Statute and the New Code, as the same now exists or may hereafter be amended; provided, however, that such power shall not be construed to allow the indemnification of officers, directors and other persons of an Arkansas state chartered banking institution against expenses, penalties or other payments incurred in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to an Arkansas state chartered banking institution; and
BE IT FURTHER RESOLVED, that the power of an Arkansas state chartered banking institution to provide indemnification to officers, directors and other persons may be specified, in accordance with the terms hereof, under any article of incorporation or bylaw provision, legal agreement or contract, vote of shareholders or disinterested directors, or other lawful means including the right of Arkansas state chartered banking institutions the power to purchase and maintain insurance on behalf of officers, directors and other persons; provided, however, that such insurance shall explicitly exclude coverage for a formal order assessing civil money penalties against a bank officer, director or employee; and
BE IT FURTHER RESOLVED, that the State Bank Commissioner shall have the power to do all things necessary to implement the intents and purposes of the above resolution and to allow Arkansas state chartered banking institutions the power to indemnify, through insurance or otherwise, officers, directors and other persons to the maximum extent as is authorized or permitted by the Arkansas Business Corporation Act, including but not limited to the State Statute and the New Code, as the same now exists or may hereafter be amended.
SIGNED: B.J. FORD VICE CHAIRMAN
APPROVED: MARLIN D. JACKSON BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
JANUARY 19, 1988
SUBJECT: DEFINITION OF PRIMARY CAPITAL (LEGAL LENDING LIMIT)
The Arkansas State Banking Board, pursuant to its authority under A.C.A. § 23-32-701(16), the "Wild Card" statute, and based upon its intention to maintain state chartered banks on the basis of equality with national banks, hereby resolves that the Bank Commissioner shall have the authority to define for legal lending purposes the terms capital and surplus as defined for national banks.
Capital and surplus is defined under 12 CFR 3.2 as "primary capital" which is the sum total of:
The State Banking Board further resolves that the authority to determine the application of the above definition of capital and surplus as it applies to a state bank's legal lending limit shall initially be at the discretion of the Bank Commissioner pending revision of the State Bank Department Rules and Regulations to define the terms capital and surplus.
Signed this 19th day of January, 1988.
SIGNED: DOUGLAS SIMMONS CHAIRMAN
APPROVED: BILL J. FORD BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
AUGUST 22, 1989
SUBJECT: SALE OF TITLE INSURANCE
The Arkansas State Banking Board, with the concurrence of the Bank Commissioner and according to its authority under Arkansas Code Ann. Sec. 23-32-701(16), hereby adopts the following Resolution:
Arkansas state chartered banks may act as an agent in the sale of title insurance, perform title searches, surveys, and obtain title opinions in connection with their real estate mortgage business, "as incidental to their banking business". This Resolution is adopted pursuant to a similar ruling previously authorized by the Comptroller of the Currency which permits national banking associations to perform such activities. See Comptroller of the Currency Staff Interpretive Letters No. 368, July 11, 1986; No. 377, February 6, 1987; and No. 450, September 22, 1988. See also letter from Peter Liebesman, Assistant Director, Legal Advisory Services Division, Comptroller of the Currency, May 4, 1988.
The Arkansas State Banking Board, with the concurrence of the Bank Commissioner, requires that the foregoing activities be performed only through a state bank subsidiary, with the prior approval of the Bank Commissioner.
Signed this 22nd day of August, 1989.
SIGNED: ROBERT M. HILL CHAIRMANAPPROVED: BILL J. FORD BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
AUGUST 15, 1991
SUBJECT: BANK PURCHASES OF LIFE INSURANCE
The Arkansas State Banking Board, with the concurrence of the Bank Commissioner, and in accordance with its authority under A.C.A. § 23-32-701(16) 1987, hereby adopts the following Resolution:
Arkansas state chartered banks are authorized to purchase or take an interest in life insurance for a purpose incidental to the business of banking in accordance with the same guidelines used by the Comptroller of the Currency for national banks. There is no authority for state banks to purchase life insurance for their own account as an investment. For reference see Banking Circular 249 dated May 9, 1991, issued by the Office of the Comptroller of the Currency which is reproduced as follows:
_____________________________________________________
BC 249 (Rev.)
Bank Purchase of Life Insurance
_____________________________________________________
To:Chief Executive Officers of all National Banks, Department and Division Heads, and all Examining Personnel
Purpose
This circular provides general guidelines for national banks to use in determining whether they may legally purchase a particular life insurance product.
Background
In the past, bank purchases of term life insurance and traditional forms of permanent life insurance have raised few legal questions or supervisory concerns. Recently, however, the OCC has become concerned about bank purchases of insurance products with a significant investment component, such as single premium life insurance. In some cases, those purchases have raised serious questions about whether the bank has made an illegal investment in the cash surrender value (CSV) of life insurance. The OCC is also concerned because the unsecured cash surrender value of these policies has sometimes constituted a significant percentage of the bank's capital.
Legal Authority for Purchasing Life Insurance
The authority for national banks to purchase and hold an interest in life insurance is 12 U.S.C. Sec. 24(7). The law provides that national banks may exercise 'all such incidental powers as shall be necessary to carry on the business of banking.' The OCC has further delineated the scope of that authority through regulations, interpretive rulings, and letters addressing the use of life insurance for purposes incidental to banking. Those purposes include: key-person insurance, life insurance on borrowers, life insurance purchased in connection with employee compensation and benefit plans, and life insurance taken as security for loans. There is no authority under 12 U.S.C. Sec. 24(7) for national banks to purchase life insurance for their own account as an investment.
Policy Guidelines
A national bank may purchase or take an interest in life insurance for a purpose incidental to the business of banking. The amount of such insurance must closely approximate the bank's risk of loss or obligation arising from its relationship with the insured. National banks may not purchase life insurance as an investment.
A life insurance policy will be considered to be purchased and held for 'non-investment' purposes if it satisfies the following tests:
or
Based upon reasonable actuarial benefit and financial assumptions, the present value of the projected cash flow from the policy must not substantially exceed the present value of the projected cost of the associated compensation or benefit program liabilities. The bank may include the insurance premiums paid and the associated time value of money in its calculation of the total cost of the liabilities.
The following sections provide more detailed guidance on the specific purposes for which national banks may purchase life insurance.
Key-person Insurance
Interpretive Ruling 7.7115 (insuring lives of bank officers), 12 C.F.R. Sec. 7.7115, addresses those situations in which a national bank may obtain life insurance to protect itself against the loss of 'key-persons' in bank management. The ruling allows a national bank to purchase insurance on the life of an officer whose death would be of such consequence to the bank as to give it an insurable interest in his or her life. Interpretive letters have expanded the scope of this ruling to recognize the possibility that certain directors of the bank may also be key-persons.
Key-person insurance must comply with 'non-investment' tests (A) of these guidelines. The bank's board of directors must adequately document the basis on which it determines an officer or director to be a key-person. Similarly, the board of directors must adequately document the basis for determining the amount of insurance needed to indemnify the bank against the death of each key-person. Interpretive Ruling 7.7115 does not authorize the purchase of life insurance on an individual who is not demonstrably a key-person. Nor does the Ruling permit the purchase of life insurance in an amount that is not reasonably related to the bank's potential loss.
The bank's authority to hold life insurance on a key-person lapses if the individual, because of retirement, resignation, discharge, change of responsibilities, or for any other reason, is no longer a key-person for the bank. The desire to obtain the return of the premium paid, interest, or dividends on the policy does not provide an independent basis under 12 U.S.C. Sec. 24(7) and Interpretive Ruling 7.7115 for retaining life insurance on an individual who no longer qualifies as a key-person. Therefore, the economic consequences of terminating the insurance, or the ability to transfer the coverage to another key-person, should be considerations in selecting a key-person insurance policy.
Life Insurance on Borrowers
State law generally recognizes that a lender has an insurable interest in the life of a borrower to the extent of the borrower's obligation to the borrower. Interpretive Rulings 7.7495 (Debt cancellation contracts), 12 CFR Sec. 7.7495, and 12 CFR Sec. 2.6(c) and (f) (Methods of selling credit life insurance) are relevant for national banks. They recognize that national banks may protect themselves against the risk of loss from the death of a borrower. That protection may be provided through self-insurance in the form of debt cancellation contracts, or by the purchase of life insurance policies on borrowers
Life insurance purchased on borrowers must comply with 'non-investment' tests (A) of these guidelines. For borrowers who are in good standing, a bank's potential loss is generally the principal balance of the borrower's obligations to the bank, including the maximum amount that could be borrowed under a line of credit, at the time the insurance is purchased. That amount would, therefore, be the maximum insurance coverage the bank could purchase on the borrower.
The purchase of life insurance on a borrower is not an appropriate mechanism for effecting a recovery on obligations that have been (or are expected to be) charged-off. Such life insurance purchases are not incidental to banking within the meaning of 12 U.S.C. Sec. 24(7) because the insurance does not protect the bank against a risk of loss. In the case of charged-off loans, the bank has already realized the loss and the purchase of life insurance more closely resembles an investment to recover on that loss.
Life Insurance Purchased in Connection with Compensation Agreements and Benefit Plans
Under 12 U.S.C. Sec. 24(5) and 12 CFR Sec. 7.5220, national banks may enter into employment agreements with their officers and employees upon reasonable terms and conditions. It is the responsibility of the board of directors to establish and be able to justify the reasonableness of the compensation provided to bank employees under these agreements.
A national bank may provide life insurance benefits to its employees through individual or group policies for which the bank pays all or part of the premium. A national bank also may provide deferred compensation and retirement programs for bank employees. Similarly, a national bank may establish programs that permit directors to defer payment of all or a portion of their director fees.
Interpretive letters have established that a national bank may protect itself against its contractual obligations under such agreements through the purchase of life insurance. However, except as part of a reasonable compensation agreement or benefit plan, a national bank may not purchase life insurance as an estate management device for the benefit of officers, directors, or employees who are also controlling shareholders of the bank.
Life insurance purchased in connection with compensation agreements and benefit plans must comply with 'non-investment' tests (B) of these guidelines. Such policies may be held for as long as the bank continues to have any liability under the compensation or benefit plans for which the policies were initially purchased. A bank may, therefore, purchase insurance on a group of persons and continue to hold the insurance as long as it has any liability under the associated compensation or benefit plan.
Life Insurance as Security for Loans
National banks may take an interest in an existing life insurance policy as security for a loan. National banks may also make loans to individuals for the purpose of purchasing life insurance, taking a security interest in the insurance policy. As with any other type of lending, extensions of credit secured by life insurance must be made on terms that are consistent with safe and sound banking principles. For instance, the borrower must be obligated to repay the loan according to an appropriate amortization schedule.
Generally, a national bank may not rely on its security interest in a life insurance policy to extend credit on terms that excuse the borrower from making interest and principal payments during the life of the borrower with the result that the bank is repaid only when the policy matures at the death of the insured. Lending on such terms may be treated as an illegal investment in life insurance under 12 U.S.C. Sec. 24(7) since the bank would be looking to the life insurance benefits as its sole return on the funds it advanced.
Other Considerations
Life insurance death benefits and cash surrender values are unsecured obligations of the insurance company. Cash surrender value of insurance should be reported as an "Other asset" on the bank's financial statements.
Before purchasing a life insurance policy, the bank should evaluate the financial condition of the insurance company and continue to monitor its condition on an ongoing basis. The bank should consider the effect of any significant holdings of this ordinarily long-term asset on the bank's capital and liquidity. It should also determine the tax and other economic consequences of surrendering the insurance before the death of the insured should that become necessary.
Application of the Guidelines
Examiners will evaluate current holdings and future purchases of life insurance by national banks in light of the guidelines in this circular.
Originating Office
Questions about this circular should be directed to the Office of the Chief National Bank Examiner (202) 447-1164.
SIGNED: T.E. PATTERSON CHAIRMAN
APPROVED: BILL J. FORD BANK COMMISSIONER
POLICY STATEMENT
APRIL 7, 2003
ORDER OF THE STATE BANK COMMISSIONER
SUBJECT: BANK PURCHASES OF LIFE INSURANCE
AMENDMENT TO RESOLUTION OF THE STATE BANKING BOARD DATED AUGUST 15, 1991
The Arkansas State Bank Commissioner, in accordance with his authority under A.C.A. § 23-47-101(c), hereby adopts the following policy:
Arkansas state chartered banks are authorized to purchase or take an interest in life insurance for a purpose incidental to the business of banking in accordance with the same guidelines used by the Comptroller of the Currency for national banks. For reference see OCC 2000-23 dated July 20, 2000, issued by the Office of the Comptroller of the Currency, which is reproduced as follows:
_____________________________________________________
OCC 2000-23
Bank Purchase of Life Insurance
_____________________________________________________
To: Chief Executive Officers of all National Banks, Department and Division Heads, and all Examining Personnel
Purpose
This circular provides general guidelines for national banks to use in determining whether they may legally purchase a particular life insurance product.
BACKGROUND
Corporate-owned life insurance (COLI) includes all life insurance that a corporation, such as a bank, purchases and owns or has a beneficial interest in. Life insurance is a financial instrument which serves many necessary and useful business purposes. However, as with most financial instruments, COLI can be complicated and is not without risk. Furthermore, COLI transactions are unique and represent activities which differ greatly from the main business activity of most corporations. Some national banks have purchased COLI without fully understanding the transactions and the associated risks.
This bulletin is designed to help national banks make informed decisions consistent with safe and sound banking practices. Bankers should complete a thorough analysis before purchasing COLI. This bulletin sets forth supervisory policy, including minimum standards for pre-purchase analyses, applicable to the purchase of COLI by national banks. The bulletin also includes discussions of the most common uses of COLI and the associated risks.
LEGAL AUTHORITY
The authority for national banks to purchase and hold life insurance is found in 12 USC 24 (Seventh), which provides that national banks may exercise "all such incidental powers as shall be necessary to carry on the business of banking."Purchases of life insurance that the OCC has found to be incidental to banking include key-person insurance, insurance on borrowers, insurance purchased in connection with employee compensation and benefit plans, and insurance taken as security for loans. 1 The OCC may approve other uses for bank-owned life insurance on a case-by-case basis. However, a purchase of life insurance must address a legitimate need of the bank for insurance. Life insurance may not be purchased to generate funds for the bank's normal operating expenses, for speculation, or for the primary purpose of providing estate planning benefits for bank insiders unless it is part of a reasonable compensation package. In addition, the purchase of life insurance is subject to supervisory considerations, and life insurance holdings must be consistent with safe and sound banking practices.
SUPERVISORY POLICY
The purchase of permanent life insurance (permanent insurance) policies subjects the policyholder to several risks. The cash surrender value (CSV) of most life insurance products is subject to credit risk. 2 Usually, the CSV is a long-term, unsecured, nonamortizing obligation of the insurance company. The CSV is also subject to several other risks, such as transaction risk, interest rate risk, liquidity risk, compliance risk, and price risk.
National banks holding life insurance in a manner inconsistent with safe and sound banking practices may be subject to supervisory action. This bulletin outlines supervisory considerations to be used in making this assessment. Supervisory action may include, but is not limited to, partial surrender or divestiture of affected policies.
Pre-purchase Analysis:
The safe and sound use of bank-owned life insurance depends on effective senior management and board oversight. Regardless of the bank's financial capacity and risk profile, the board must understand the role bank-owned life insurance plays in the overall business strategies of the bank.
The board's role in analyzing and overseeing bank-owned life insurance should be commensurate with the size, complexity, and risk inherent in the transaction. Although the board may delegate decision-making authority related to bank purchases of life insurance to management, the board remains responsible for ensuring that purchases of life insurance are consistent with safe and sound banking practices.
The objective of the pre-purchase analysis is to help ensure that the bank understands the risks, rewards, and unique characteristics of COLI. As such, each purchase or assumption of a beneficial interest in COLI should be preceded by a thorough pre-purchase analysis. At a minimum, the pre-purchase analysis should consider the following standards.
The bank should determine the need for insurance by identifying the specific risk of loss or obligation to be insured against. The existence of a risk of loss or an obligation does not necessarily mean that a national bank can purchase or hold an interest in life insurance. For example, a national bank may not purchase life insurance on a borrower as a mechanism for effecting a recovery on obligations that have been charged-off, or are expected to be charged-off for reasons other than the borrower's death. 3 Also, a national bank should surrender or otherwise dispose of permanent life insurance acquired through debts previously contracted (DPC) within a short time frame, generally 90 days, of obtaining control of the policy. 4
Additionally, the purchase of insurance to indemnify a national bank against a specific risk does not relieve a national bank from other responsibilities related to managing that risk. For example, a national bank may purchase life insurance to indemnify itself from the loss of a "key-person." However, "key-person" life insurance should not be used in place of, nor does it diminish the need for, adequate management or "key-person" succession planning.5
The bank should estimate the size of the obligation or the risk of loss and ensure that the amount of insurance purchased is not excessive in relation to the estimate. For such estimates, national banks may include the cost of insurance and the time value of money in determining the amount of insurance needed. The estimate of the amount of insurance needed should be based on reasonable financial and actuarial assumptions. In situations where a national bank purchases life insurance on a group of employees or a homogenous group of borrowers, it can estimate the size of the obligation or the risk of loss for the group on an aggregate basis and compare that to the aggregate amount of insurance purchased.
Purchasing or holding excessive permanent insurance may be an unsafe and unsound practice if it subjects the bank to unwarranted risks. Bank-owned life insurance subjects the bank to several risks which may be significant. The risks are explained in the "Risks Associated With COLI" section of this bulletin.
The vast majority of COLI purchases are made through vendors, either brokers/consultants or agents. Most corporations have used brokers/consultants. However, some corporations have purchased COLI through agents who work for specific insurance companies. It is also possible to purchase COLI directly from insurance carriers without using a vendor.
The role of the vendor, if any, depends on the type of vendor selected. For example, the vendor may be an agent of a specific insurance company who serves as the bank's primary contact with the insurance company, explains the company's various products, and helps the bank in making product selection. Or, the vendor may be an independent broker who has established working relationships with many insurance companies. In addition to being the bank's primary contact with the insurance company, the broker will work with the bank in selecting a carrier and in designing, negotiating, and administering/servicing the COLI.
The bank does not have to use a vendor. In deciding whether or not to use a vendor or what type of vendor to use, the bank should consider its knowledge of COLI, the amount of resources it can and is willing to spend servicing/administering the COLI, and the benefits a vendor may provide. Depending on the role of the vendor, the vendor's services can be extensive and critical to successful implementation and operation of a COLI plan. If the bank uses a vendor, it should make appropriate inquiries to satisfy itself regarding the vendor's ability to honor its commitments, which may be long term. In assessing the vendor's ability to honor its commitments, the bank should typically review the vendor's services, general reputation, experience, and financial capacity. The nature and thoroughness of the review should be determined by the size and complexity of the potential COLI purchase.
COLI plans are typically of long duration and may represent significant risks for the bank. Therefore, carrier selection is one of the most critical steps in a COLI purchase. The bank should review the product design, pricing, and administrative services of the carrier(s) and compare them with the bank's needs. In addition, the bank should also review the carrier's ratings, general reputation, experience in the market place, and past performance. A broker/consultant, if used, may assist the bank in this regard.
Furthermore, before purchasing life insurance, the bank should perform a credit analysis on the selected carrier(s) in a manner consistent with safe and sound banking practices for commercial lending. A more complete discussion of the credit analysis is included in the "Credit Risk" section of this bulletin.
There are a few basic types of life insurance products in the marketplace. However, these products can be combined and modified in many different ways. The resulting final product can be quite complex. The bank should review the characteristics of the various insurance products available. It should select the product or products with characteristics that match the institution's objectives and needs. To do this, the bank should thoroughly analyze and understand the products being considered.
When purchasing insurance on "key-persons" and individual borrowers, the bank should consider whether the bank's need for the insurance will be eliminated before the insured individual dies. In such cases, term or declining term insurance may be the most appropriate form of life insurance.6
The bank should analyze the benefits of COLI purchases being considered. The analysis should include an assessment of how the purchase will accomplish the objective specified in "I. Determination of the Need for Insurance." It should also include an analysis of the anticipated performance of the insurance. A more complete discussion of this analysis is included in the "Transaction Risk" section of this bulletin.
Split-dollar insurance arrangements7typically provide additional compensation and/or other benefits to the employee. Before a national bank enters into a split-dollar arrangement, it should identify and quantify the compensation objective, and ensure that the arrangement is consistent with the stated objective. Also, the bank should combine the compensation provided by the split-dollar arrangement with all other compensation to ensure that total compensation is not excessive. Excessive compensation is prohibited as an unsafe and unsound practice. Guidelines for determining excessive compensation can be found in Appendix A to 12 CFR Part 30 - Interagency Guidelines Establishing Standards for Safety and Soundness.
Ownership of or beneficial interests in COLI may subject a national bank to several risks. These risks include: transaction, credit, interest rate, liquidity, compliance, and price. A bank's prepurchase analysis should include a thorough evaluation of these risks. An explanation of each risk is included in the "Risks Associated With COLI" section of this bulletin.
Furthermore, the pre-purchase analysis should allow a national bank to determine whether the transaction is consistent with safe and sound banking practices. In making this determination, a national bank should consider, among other things:
*The complexity of the transaction.
*The size of the transaction relative to the bank's capital.
*The diversification of the credit risk.
*The financial capacity of the bank.
*The financial capacity of the insurance carrier(s).
*The bank's ability to identify, measure, monitor, and control the associated risks.
In assessing the size of the transaction, a national bank should consider the CSV relative to its capital levels at the time of purchase. The bank should also consider projected increases in the CSV and projected changes in capital levels for the duration of the contract.
Consistent with prudent risk management practices, a national bank should establish internal quantitative guidelines. These guidelines generally limit the aggregate CSV of policies from any one insurance company and the aggregate CSV of policies from all insurance companies. Among other things, a bank should consider the legal lending limits ( 12 CFR Part 32) and concentration of credit guidelines (OCC Bulletin 95-7, dated February 9, 1995) when establishing the respective limits.
Some COLI purchases involve indemnifying the bank against a specific risk. For example, COLI is sometimes purchased to indemnify the bank against the potential for loss arising from the untimely death of a "key-person." As an alternative to purchasing COLI, a bank may choose to self-insure against this risk. Other COLI purchases are used to recover costs or provide for employee benefits. In these cases, a bank may choose to generate the necessary funds through investments instead of by purchasing insurance. Regardless of the purpose of COLI, a complete pre-purchase analysis will include an analysis of the alternatives.
The primary objective of this bulletin is to provide guidelines that will help national banks make informed decisions consistent with safe and sound banking practices. In doing so, national banks generally should consider the pre-purchase analysis just described. A national bank should maintain documentation adequate to show that the bank made an informed decision. The bank should continue to monitor that decision based on the standards set forth in this bulletin.
RISKS ASSOCIATED WITH COLI
For purposes of the OCC's discussion of risk, examiners assess banking risk relative to its impact on capital and earnings. From a supervisory perspective, risk is the potential that events, expected or unanticipated, may have an adverse impact on the bank's capital or earnings. The OCC has defined nine categories of risk for bank supervision purposes. These risks are: Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic, and Reputation. These categories are not mutually exclusive; any product or service may expose the bank to multiple risks. For analysis and discussion purposes, however, the OCC identifies and assesses the risks separately.
The applicable risks associated with COLI are: Transaction, Credit, Interest Rate, Liquidity, Compliance, and Price. The definitions of these six risks are summarized below. For complete definitions, see the "Bank Supervision Process" booklet of the Comptroller's Handbook. An analysis of how each of these risks impact the decision to purchase and hold COLI is set forth in the following paragraphs.
Transaction Risk
Transaction risk is the risk to earnings or capital arising from problems with service or product delivery. The degree of transaction risk associated with COLI is a function of a bank not fully understanding or properly implementing a transaction. In addition to following the other guidelines included in this bulletin, national banks should take two additional steps to help reduce transaction risk. Bank management should have a thorough understanding of how the insurance product works and the variables that dictate the product's performance. The variables most likely to affect product performance are the policy's interest crediting rate,8mortality cost,9and other expense charges. Typically, the most significant variable is the interest crediting rate, followed by the mortality cost. Therefore, before purchasing COLI, a national bank should analyze projected policy values (CSV and death benefits) from multiple illustrations provided by the carrier. Banks should consider using different interest crediting rates and mortality costs assumptions for each illustration.
Bank management should also understand and analyze how COLI will affect the bank's financial condition. Given the anticipated performance of the insurance, management should analyze the effect on the bank's earnings, capital, and liquidity. Management should also consider the impact on the bank's earnings and capital should the bank, for any reason, surrender the insurance before maturity at the death of the insured.
Credit Risk
Credit risk is the risk to earnings or capital arising from an obligor's failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed. All life insurance policyholders are exposed to credit risk. The credit quality of the insurance company and duration of the contract are key variables. With term insurance, credit risk arises from the insurance carrier's contractual obligation to pay death benefits upon the death of the insured. Credit risk is primarily a function of the insurance carrier's ability (financial condition) and willingness to pay death benefits as promised. Credit risk may be reduced by the support provided by state insurance guaranty associations or funds. A bank's credit exposure through the ownership of term life insurance is not reflected on the bank's balance sheet.
With permanent insurance, credit risk arises from the insurance carrier's obligation to pay death benefits upon death of the insured and from its obligation to return the CSV to the policyholder upon request. The risk is similar to that with term insurance, but there are a few differences. With most permanent insurance COLI plans, the expected time frame for collection of death proceeds is extremely long term. Additionally, the CSV is an unsecured, long-term, and nonamortizing obligation of the insurance carrier. The risk inherent in the insurance company's failure to return the CSV value is, reflected on the bank's balance sheet.
Before purchasing life insurance, bank management should evaluate the financial condition of the insurance company and continue to monitor its condition on an ongoing basis. In addition to reviewing the insurance carrier's ratings, the bank should conduct an independent financial analysis consistent with safe and sound banking practices for commercial lending. As with lending, the depth and frequency of the analysis should be a function of the relative size and complexity of the transaction.
Interest Rate Risk
Interest rate risk is the risk to earnings or capital arising from movements in interest rates. General account 10 products expose the policyholder to interest rate risk. The interest rate risk of these products is primarily a function of the policy's interest crediting rate. Interest crediting rates are established by the insurance carrier. Over the long term, interest crediting rates are primarily a function of the carrier's investment portfolio performance. The policy's CSV is negatively affected (grows at a slower rate) by a declining interest crediting rate. Since a bank's investment in permanent insurance is recorded at the policy's CSV, the bank's earnings decline as the policy's interest crediting rate declines.
Due to the interest rate risk inherent in this product, it is particularly important that management fully understand the risk before purchasing the policy. Before purchasing permanent insurance, bank management should:
*Review the policy's past performance over various business cycles.
*Analyze projected policy values (CSV and death benefits).
*Consider having the carrier use a different interest crediting rate for each set of policy projections.
Variable or separate account 11 products may also expose the bank to interest rate risk depending on the types of assets held in the separate account. For example, if the separate account assets consist solely of Treasury securities, the bank is exposed to interest rate risk in the same way as holding Treasury securities directly in its investment portfolio. However, because the bank does not control the separate account assets, it is more difficult for the bank to control this risk. Therefore, before purchasing a separate account product, bank management should thoroughly review and understand the instruments governing the investment policy and management of the separate account. Management should understand the risk inherent within the separate account and ensure that the risk is appropriate for the bank. Also, the bank should establish monitoring and reporting systems that will enable the bank to monitor and respond to price fluctuations.
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from a bank's inability to meet its obligations when they come due, without incurring unacceptable losses. Usually, life insurance policies are not marketable and are illiquid. A secondary market for life insurance does not exist. Although the CSV of policies can be accessed quickly, it typically involves substantial loss. To access the CSV, the bank must withdraw from or borrow against the policy. This may subject the bank to surrender charges, taxes on the gain, and a tax penalty. In addition, the policyholder generally does not receive any cash flow until the death benefit is paid. The lack of liquidity in the product is more significant given that banks normally purchase life insurance policies through a conversion of a liquid asset (cash or marketable securities).
Before purchasing permanent insurance, management should recognize the illiquid nature of the product and ensure the bank has the long-term financial flexibility to hold this asset in accordance with its expected use. The inability of a bank to hold the life insurance until maturity (collection of death benefits) may compromise the success of the COLI plan.
Compliance Risk
Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Failure to comply with applicable laws, rules, regulations, and prescribed practices (including this bulletin) could compromise the success of a COLI program and result in significant losses for the bank as a result of fines, penalties, or loss of tax benefits. Because tax benefits are critical to the success of most COLI plans, management of a national bank should exercise caution to ensure that its plans comply with all applicable tax laws. In addition, bank management should ensure compliance with other applicable legal and regulatory standards. Other common legal and regulatory considerations include compliance with state insurable interest laws, the Employee Retirement Income Security Act of 1974 (ERISA), sections 23A and 23B of the Federal Reserve Act, 12 CFR Part 215 (Regulation O), and Appendix A to 12 CFR Part 30--Interagency Guidelines Establishing Standards for Safety and Soundness. Due to the significance of the compliance risk, a national bank may want to seek the advice of qualified counsel.
Price Risk
Price risk is the risk to earnings or capital arising from changes in the value of portfolios of financial instruments. Typically, the policyholder of separate account products assumes all price risk associated with the investments within the separate account. Usually, neither the CSV nor the interest crediting rate on separate account products is guaranteed by the carrier. The amount of price risk is dependent upon the type of assets held within the separate account.
Because the bank does not control the separate account assets, it is more difficult for the bank to control the price risk. Therefore, before purchasing a separate account life insurance product, bank management should thoroughly review and understand the instruments governing the investment policy and management of the separate account. Management should understand the risk inherent in the separate account and ensure that the risk is appropriate for the bank. Also, bank management should establish monitoring and reporting systems that will enable them to monitor and respond to price fluctuations.
Banks may purchase separate account insurance products that hold equity securities for the purpose of hedging their obligations under employee compensation and benefit plans. 12 This lessens the effect of price risk on the bank's financial statements because changes in the amount of the bank's liability will be hedged by changes in the value of the separate account assets. An example of such a relationship would be where the amount of the bank's deferred compensation obligation is measured by the value of a stock market index, and the separate account contains a stock mutual fund that mirrors the performance of that index. If the insurance cannot be characterized as an effective hedging transaction, the presence of equity securities in a separate account is impermissible.
In addition to the general considerations discussed above, which are applicable to any separate account product, further analysis should be performed when purchasing a separate account product involving equity securities. At a minimum, national banks should:
ACCOUNTING CONSIDERATIONS
National banks should follow generally accepted accounting principles (GAAP) for financial reporting and Call Report purposes. Financial Accounting Standards Board (FASB) Technical Bulletin 85-4, "Accounting for Financial Purchases of Life Insurance" (TB 85-4) discusses how to account for investments in life insurance. The guidance set forth in TB 85-4 is generally appropriate for all forms of COLI.
Under TB 85-4, a national bank should record its interest in the policy's CSV as an "other asset." The increase in the CSV over time would be recorded as "other noninterest income." In accordance with Call Report requirements, the bank should update its interest in the CSV at least quarterly.
APPLICATION OF THE GUIDELINES
The guidelines in this bulletin are applicable to all purchases of life insurance entered into after the date of this bulletin. Purchases of life insurance policies entered into before the date of this bulletin will be evaluated in the following manner.
Policies purchased after issuance of former Banking Circular (BC)-249, Bank Purchases of Life Insurance
Policies purchased after February 4, 1991, should comply with either the guidelines contained in former BC-249 or with the guidelines in this bulletin.
Policies Purchased before the issuance of former BC-249, Bank Purchases of Life Insurance
Policies purchased before February 4, 1991, are provided a "safe harbor" if the following three conditions are met:
*The policies are convenient or useful in connection with the conduct of the bank's business.
*The policies do not threaten the safety and soundness of the, institution.
*The policies do not represent insider abuse or violate other laws, rules, or regulations.
If these conditions are met, no further action by the bank is needed. However, the OCC may require corrective action at any time during the bank's ownership or while it has a beneficial interest in a policy, if any of the three conditions are not met. Such determinations will be made on a case by case basis.
ORIGINATING OFFICE
For further information about this bulletin, contact the Office of the Deputy Comptroller for Credit Risk at (202) 874-5170.
APPENDIX
COMMON TYPES OF LIFE INSURANCE POLICIES
Life insurance can be categorized into two broad types, temporary insurance and permanent insurance. There are numerous variations of these products. However, basic life insurance provisions generally fall within one or a combination of the following categories.
Temporary Insurance
Temporary insurance consists of the various forms of term insurance. Term insurance provides life insurance protection for a specified time period. Death benefits are payable only if the insured dies during the specified period. If a loss does not occur during the specified term, the policy lapses and provides no further protection. All premiums are retained by the insurance company. Typically, term insurance premiums do not have a "savings component"; thus, term insurance does not usually create cash value.
Permanent Insurance
Permanent insurance is intended to provide life insurance protection for the entire life of the insured. Permanent insurance also differs from term insurance in that its premium structure includes a "savings component." Permanent insurance policy premiums have two components, the insurance cost (mortality cost, 1 administrative fees, sales loads, etc.) and the "savings component." The "savings component" typically is referred to as cash value. The policyholder may use the cash value to make the minimum premium payments necessary to maintain the death benefit protection, may access the cash value by taking out loans or making partial surrenders, or use any combination of these techniques. If permanent insurance is surrendered before death, a surrender charge may be assessed against the cash value. Generally, surrender charges are assessed if the policy is surrendered within the first 10 or 15 years. The amount of money a policyholder will receive upon surrendering a policy is referred to as the cash surrender value (CSV).
There are a variety of types of permanent insurance. Some of these include:
*Whole Life--A traditional form of permanent insurance designed so that fixed premiums are paid for the entire life of the insured. However, premiums may be paid from the CSV. Death benefit protection is provided for the life of the insured, assuming all premiums are paid.
*Universal Life--A form of permanent insurance designed to provide flexibility in premium payments and death benefit protection. The policyholder can pay maximum premiums and maintain a very high cash value. Alternatively, the policyholder can make minimal payments in an amount just large enough to cover mortality and other expense charges.
*General Account--form of whole or universal life insurance where the policyholder's cash value is supported by the general assets of the insurance company.
*Variable or Separate Account--form of whole life or universal life where the policyholder's cash value is supported by assets segregated from the general asset structure of the carrier. Theoretically, the cash value of a separate account insurance policy can go down to zero which would result in termination of the policy. The policyholder assumes all investment and price risk. The separate account is used solely for payment of policyholder benefits.
LIFE INSURANCE AS A FINANCING OR COST RECOVERY VEHICLE FOR BENEFITS PLANS
National banks may, as other corporations frequently do, use corporate-owned life insurance (COLI) as a financing or cost recovery vehicle for pre- and post-retirement employee benefits. In these arrangements, banks and other corporations insure the lives of certain employees to reimburse the corporation for the cost of employee benefits. The group of insured employees is often different from the group of employees who receive benefits. The corporation's obligation to provide employee benefits is separate and distinct from the purchase of the life insurance. The life insurance purchased by the corporation remains a corporate asset even after the employer/employee relationship is terminated. The employees, whether insured or not, have no interest in the insurance (other than their general claim against corporate assets arising from the corporation's obligation to provide the stated benefits). Permanent insurance is used for this purpose.
There are two common methods of financing or effecting cost recovery of employee benefits. The first is the cost recovery method. Under this method, the corporation sustains the cost of providing the employee benefits and the cost of purchasing the life insurance. The corporation holds the life insurance and collects the death benefit to reimburse the corporation for the cost of the benefits and the insurance.
The cost recovery method usually involves present value analysis. The corporation typically projects the dollar amounts of the expected benefits owed to employees and determines the present value of the benefits. Then, the corporation purchases a sufficient amount of life insurance on the lives of certain employees so that the gain (present value of the life insurance proceeds less the present value of the premium payments) from the insurance proceeds reimburses the corporation for the benefit payments.
The second method of financing employee benefits is known as cost offset. With this method, the corporation projects the annual employee benefit expense associated with the benefit plan. Then, the company purchases life insurance on the lives of certain employees. The amount of insurance purchased is great enough so that the income earned on the CSV offsets the benefit expense. The collection of death benefits may further enhance the company's return.
SPLIT-DOLLAR INSURANCE ARRANGEMENTS
National banks may, as many other corporations do, use split-dollar life insurance arrangements to provide retirement benefits and/or death benefits to certain employees. Under split-dollar arrangements, the employer and the employee share the rights to the policy's CSV and death benefits. The employer and the employee may share premium payments. If the employer pays the entire premium, the employee must recognize the economic value of the insurance as taxable income each year. Typically, split-dollar arrangements are set forth in written contracts that specify the terms and conditions of the agreement between the employer and employee.
Split-dollar arrangements may be structured in a number of ways. However, there are three basic types of split-dollar arrangements.
Endorsement Split-Dollar
In endorsement split-dollar arrangements, the employer owns the policy and controls all rights of ownership. The employer provides the employee an endorsement of the death benefit provided to the employee under the plan agreement. The employee may designate a beneficiary for the designated portion of the death benefit.
Under this arrangement, the employer typically holds the policy until the employee's death. At that time, the employee's beneficiary receives the designated portion of the death benefits, and the employer receives the remainder of the death benefits.
Collateral Assignment Split-Dollar
The employee owns the policy and controls all rights of ownership. Under these arrangements, the employer usually pays the entire premium or a substantial part of the premium. The employee assigns a collateral interest in the policy to the employer that is equal to the employer's interest in the policy. The employer's interest in the policy usually is equal to the premium paid by the employer or the premium plus a return on the premium.
Under this arrangement, the employee upon retirement usually has an option to buy the employer's interest in the policy. The employee usually withdraws money from the cash value or borrows against the cash value to purchase the policy. Sometimes, the employer may give the employee a bonus to purchase the employer's interest in the policy, or the employer may simply give the employee the corporation's interest in the policy as a bonus. This transfer of the employer's interest to the employee is typically referred to as a "roll-out."
If a "roll-out" is not provided or exercised, the employer does not receive its interest in the policy until the employee's death. Upon the employee's death, the employer would receive an amount equal to the premium paid or the premium plus a return on the premium. The employee's beneficiary would receive the remainder of the death benefits.
If the employee dies before reaching retirement age, the insurance policy's death benefit may be divided a number of ways. For example, the employer may receive an amount equal to the premium paid or the premium plus a return on the premium, and the employee's beneficiary would receive the remainder of the death benefit. As an alternative, the employer may retain the policy's entire death benefit.
Reverse Split-Dollar
Reverse split-dollar arrangements are very similar to collateral assignment split-dollar. The employee owns the policy and the employee provides the employer with an endorsement of part of the death benefit. The employer's interest in the policy is usually equal to or closely related to the pure insurance protection and used as "key-person" insurance. The employer's share of the premium is equal to the economic value of the pure insurance protection. The employee's interest in the policy is typically equal to or closely related to the cash value of the policy. The employee pays the remainder of the premium. This type of split-dollar arrangement is not frequently used in banks.
Split-Dollar Insurance Arrangements Used for Estate Planning Purposes or to Fund Buy-Sell Agreements
National banks may use split-dollar insurance arrangements as an estate planning tool for insiders or to fund buy-sell arrangements between the bank and insiders. However, such arrangements should be part of a reasonable compensation program. As stated in part VII of the pre-purchase analysis, national banks should combine the additional compensation provided to the insured by the split-dollar arrangement with all other compensation provided to the insured. Furthermore, national banks should ensure that total compensation provided to the insured is not excessive. Excessive compensation is prohibited as an unsafe and unsound practice. Guidelines for determining excessive compensation can be found in Appendix A to 12 CFR Part 30-Interagency Guidelines Establishing Standards for Safety and Soundness.
Typically, shareholders and other insiders who are not bank employees or directors do not provide goods or services to the bank and do not receive compensation. Therefore, national banks should only participate in such arrangements as a means of providing compensation for goods or services provided by insiders.
"KEY-PERSON" INSURANCE
A national bank may obtain life insurance to protect itself against the loss of "key-persons." As such, a national bank may purchase insurance on the life of an employee whose death would be of such consequence to the bank as to give it an insurable interest in his or her life. Certain directors of the bank may also be "key-persons."
The purpose of "key-person" insurance is to indemnify the bank against a potential loss of net income that may result from the untimely death of the insured employee. The determination of whether an individual is a "key-person" does not turn on that individual's status as an officer, but on the nature of the individual's economic contribution to the bank.
The first step in indemnifying a bank against the loss of a "key-person" is to identify the "key- person." In essence, a "key-person" is anyone whose absence for an extended period of time would result in a significant loss of net income for the bank. The next and possibly most difficult step is estimating the value of the "key-person." The value of the employee is an estimate of the potential loss of net income that the bank may incur from the untimely death of the "key-person." This value should be an estimate of the impact on net income from the loss of revenues, increased expenses, loss of operating efficiency, or other profit reductions that may result from the untimely death of the "key-person." This estimate of loss should represent a significant amount of the bank's profit or profit potential.
Determining the value of a "key-person" is not easy. Also, the most appropriate method for determining the value of a "key-person" is dependent upon the individual circumstances that created the "key-person" status. For these reasons, the OCC has not established a formula nor a specific process for estimating the value a "key-person" brings to a bank. Instead, the OCC affords bank management the opportunity to consider and analyze all relevant factors, and use their judgment to make the decision.
Additionally, "key-person" life insurance should not be used in place of, and does not diminish the need for, adequate management or "key-person" succession planning. Indeed, if a bank has an adequate management or "key-person" succession plan, its reliance on a "key-person" should decline as the person gets closer to retirement. Since a bank's reliance on a "key-person" declines as the individual moves toward retirement, the potential loss of net income which may result from the death of a "key-person" also should diminish.
As previously stated, holding permanent insurance in an amount in excess of the bank's risk of loss may be an unsafe and unsound practice. 2 Once an individual, because of retirement, resignation, discharge, change of responsibilities, or for any other reason, is no longer a "key-person" for the bank, the bank's risk of loss has been eliminated. Therefore, national banks may be required to surrender or otherwise dispose of life insurance held on a former "key-person." For this reason, the economic consequences of terminating the insurance should be considered in selecting the type of insurance and in structuring the policy. Typically, term or declining term insurance may be the most appropriate form of life insurance for "key-person" protection. It also may be appropriate to use permanent insurance that allows the substitution of insureds to provide for this protection.
LIFE INSURANCE ON BORROWERS
State law generally recognizes that a lender has an insurable interest in the life of a borrower to the extent of the borrower's obligation to the lender. In some states, the lender's insurable interest may equal the borrower's obligation plus the cost of insurance and the time value of money. Furthermore, national banks may protect themselves against the risk of loss from the death of a borrower. That protection may be provided through self-insurance in the form of debt cancellation contracts, or by the purchase of life insurance policies on borrowers.
National banks can take two approaches in purchasing life insurance on borrowers. First, a. national bank can purchase life insurance on an individual borrower for the purpose of protecting the bank specifically against loss arising from that borrower's death. Second, a national bank may employ a cost recovery technique similar to that used in conjunction with employee benefit plans. Under this method, the bank insures a group of borrowers in a homogenous pool of loans for the purpose of protecting the bank from loss arising from the death of any borrower in the homogenous pool. Examples of homogenous pools of loans include consumer loans that have distinctly similar characteristics such as automobile loans, credit card loans, and residential real estate mortgages.
Regardless of which approach is used, national banks should adhere to part 11 of the pre-purchase analysis. That is, banks should determine the risk of loss and ensure that the amount of insurance purchased is not excessive in relation to that estimate. When purchasing insurance on individual borrowers, bank management should, given the facts and circumstances known at the time of the insurance purchase, take reasonable efforts to ensure that the expected insurance proceeds match the expected repayment terms of the debt. To accomplish this, management should estimate the risk of loss over the life of the loan and match the anticipated insurance proceeds to the risk of loss. The insurance policy should be structured so that the expected death proceeds never substantially exceed the risk of loss. Generally, the risk of loss will be closely related to the outstanding principal of the debt. To properly structure the insurance policy, consideration should be given to the repayment terms of the debt. For example, for amortizing credit, banks should typically choose declining term insurance where the death proceeds are decreasing in amounts that match the loan amortization.
As previously stated, holding permanent insurance in an amount in excess of the bank's risk of loss may be an unsafe and unsound practice. 3 Once a credit is repaid, otherwise satisfied in full, or charged-off, the bank's risk of loss has been eliminated. Therefore, national banks may be required to surrender or otherwise dispose of life insurance on individual borrowers under these circumstances. For this reason, the economic consequences of terminating the insurance should be considered in selecting the type of insurance and in structuring the policy. Typically, term or declining term insurance is the most appropriate form of life insurance for insuring the lives of individual borrowers.
When purchasing life insurance on borrowers in a homogenous pool of loans, bank management should, given the facts and circumstances known at the time of the insurance purchase, take reasonable efforts to match the insurance proceeds on an aggregate basis to the total outstanding loan balances. If allowed by state law, national banks may match the insurance proceeds to the outstanding loan balances plus the cost of insurance on either a present value or future value basis. This relationship should be maintained throughout the duration of the program. When using this aggregate or group concept, it is acceptable for banks to continue to hold policies on the lives of borrowers that have been charged-off. However, loans in the homogeneous pool cannot include loans that have been charged-off. This will help ensure that national banks using this approach do not hold life insurance once the risk of loss has been eliminated.
The purchase of life insurance on a borrower is not an appropriate mechanism for effecting a recovery on obligations that have been charged-off, or are expected to be charged-off for reasons other than the borrower's demise. In the case of charged-off loans, the purchase of life insurance does not protect the bank from a risk of loss since the loss has already occurred. Since the insurance does not protect the bank from a risk of loss, the bank does not need the insurance. Holding insurance the bank does not need may subject the bank to unwarranted risks, an unsafe and unsound banking practice. In the case of loans the bank expects to charge-off for reasons other than the borrower's demise, the risk of loss is so pronounced that the purchase of life insurance by the bank would be purely speculative and an unsafe and unsound bankin gpractice.
LIFE INSURANCE AS SECURITY FOR LOANS
National banks may take an interest in an existing life insurance policy as security for a loan. National banks also may make loans to individuals to purchase life insurance, taking a security interest in the policy. As with any other type of lending, extensions of credit secured by life insurance should be made on terms that are consistent with safe and sound banking practices. For instance, the borrower should be obligated to repay the loan according to an appropriate amortization schedule.
Generally, a national bank may not rely on its security interest in a life insurance policy to extend credit on terms that excuse the borrower from making interest and principal payments during the life of the borrower with the result that the bank is repaid only when the policy matures at the death of the insured. Lending on such terms is generally speculative and an unsafe and unsound banking practice.
Frequently, banks acquire ownership of life insurance policies through debts previously contracted (DPC). That is, banks invoke their security interest in a policy after a borrower defaults. Life insurance policies do not have a secondary market. National banks should surrender or otherwise dispose of permanent life insurance acquired through DPC within a short time frame, generally 90 days, of obtaining control of the policy. It is possible that a national bank may find a means to dispose of permanent life insurance acquired through DPC which would require a longer holding period. Therefore, a national bank may request an extended holding period from its supervisory office. In order to receive an extension, the bank should have a well-documented plan that is reasonably certain to allow the bank to dispose of the policy through means other than speculating on the death of the insured. Additionally, the extended holding period should be in the best interest of the bank.
National banks may retain temporary insurance until the next renewal date or the next premium date, whichever comes first. National banks may not continue to make premium payments on term insurance acquired through DPC. This activity is speculative and an unsafe and unsound banking practice.
Emory W. Rushton
Senior Deputy Comptroller for Bank Supervision Policy
1 The appendix contains a discussion of each of these four uses of COLI.
2 Permanent insurance and cash surrender value are described in the appendix on page 1.
3 The purchase of life insurance on borrowers whose obligations have been charged-off, or are expected to be charged-off, is further discussed in the appendix on pages 6-7.
4 Life insurance acquired through DPC is further discussed in the appendix on page 7.
5 The relationship between "key-person" insurance and management succession planning is discussed in the appendix on pages 4-5.
6 "Key-person" insurance and life insurance on borrowers are discussed further in the appendix on pages 4-7.
7 Split-dollar insurance arrangements are defined and discussed in the appendix on pages 3-4.
8 The interest crediting rate refers to the gross yield on the investment in the insurance policy, i.e., the rate at which the cash value increases before considering any deductions for mortality cost, load charges, or other costs that are periodically charged against the policy's cash value. Insurance companies frequently disclose a current interest crediting rate and a guaranteed minimum interest crediting rate. The guaranteed rate may be less than the current rate. As a result, the potential exists for future declines in the interest crediting rate.
9 Mortality cost represents the cost imposed on the policyholder by the insurance company to cover the amount of pure insurance protection for which the insurance company is at risk.
10 General account products are defined in the appendix on page 2.
11 Variable or separate account products are defined in the appendix on page 2.
12 An economic hedge exists when changes in the value of the liability or other risk exposure being hedged are offset by counterbalancing changes in the value of the hedging instrument.
1 Mortality cost represents the cost imposed on the policyholder by the insurance company to cover the amount of pure insurance protection for which the insurance company is at risk. With term insurance, the insurance company is generally exposed to risk of loss for the entire face amount of the policy. With permanent insurance, the net amount at risk for the insurance company is the difference between the policy's death benefit and the cash value,
2 See part (II), Quantification of the Amount of Insurance Needed, of the pre-purchase analysis on page 4 of the bulletin.
3 See part (II), Quantification of the Amount of Insurance Needed, of the pre-purchase analysis on page 4 of the bulletin.
SIGNED:FRANK WHITE BANK COMMISSIONER
RESOLUTION OF THE STATE BANKING BOARD
SEPTEMBER 21, 1995
SUBJECT: MERGER OR CONSOLIDATION
The Arkansas State Banking Board, with the concurrence of the Bank Commissioner and according to its authority under A.C.A. §. 23-32-701(16), hereby adopts the following Resolution:
Arkansas state chartered banks may merge or consolidate, by vote of two thirds of each class of its capital stock, with a stock federal or state savings association, in the same manner in which a national bank is authorized, pursuant to Title V of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 215c(a)). Merger and/or consolidation provisions of state and federal law and regulations will be applied in consideration of such application.
Signed this 21st day of September 1995.
SIGNED: ROBERT M. HILL CHAIRMAN
APPROVED: BILL J. FORD BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
RESOLUTION OF THE STATE BANKING BOARD
AUGUST 8, 1996
SUBJECT: INVESTMENT, LIMITED LIABILITY COMPANIES
The Arkansas State Banking Board, with the concurrence of the Bank Commissioner and according to its authority under A.C.A. §. 23-32-701(16), hereby adopts the following resolution:
Arkansas state chartered banks may invest in a limited liability company (LLC) to the same extent that a nationally chartered bank may do so provided such investment must be made through a subsidiary and will be subject to the restrictions on investments and loans to bank subsidiaries contained in A.C.A. § 23-32-701. The standards a state chartered bank are subject to for investing in a limited liability company are the same investment standards or requirements that must be met by national banks. These standards, as set by the Office of the Comptroller of the Currency, that must be satisfied by the investing bank are:
(See Office of the Comptroller of the Currency Interpretive Letter No. 692, November 1, 1995)
Signed this 8th day of August 1996.
SIGNED: LARRY NELSON CHAIRMAN
APPROVED: BILL J. FORD BANK COMMISSIONER
* This policy or resolution was adopted by the Arkansas State Banking Board prior to the enactment of the Arkansas Banking Code of 1997.
POLICY STATEMENT
MAY 3, 2000
ORDER OF THE STATE BANK COMMISSIONER
SUBJECT: FINANCIAL SUBSIDIARIES
The Arkansas Bank Commissioner, pursuant to his authority under A.C.A. § 23-47-101(37)(c), hereby authorizes Arkansas state banks to conduct permitted activities through a "financial subsidiary" in the same manner and with the same requirements as those provided for national banks by the Office of the Comptroller of the Currency. State banks that wish to conduct any of the permitted activities through a financial subsidiary must submit an application and receive approval from the Bank Commissioner, as well as any other licensing requirements prior to entering into such activity.
Signed this 3rd day of May 2000.
SIGNED: FRANK WHITE
BANK COMMISSIONER
POLICY STATEMENT
SEPTEMBER 5, 2000
ORDER OF THE BANK COMMISSIONER
SUBJECT: FOREIGN BRANCH BANKING
The Arkansas Bank Commissioner, pursuant to his authority under A.C.A. § 23-47-101(37)(c), hereby authorizes Arkansas State banks to engage in the activity of foreign branch banking in accordance with 12 U.S.C. 601 et seq.
State Banks preparing to engage in such activity must contact the State Bank Department regarding application requirements.
Signed this 5th day of September 2000.
SIGNED: FRANK WHITE
BANK COMMISSIONER
ADMINISTRATIVE POLICY #001
BILL J. FORD, BANK COMMISSIONERRETAIN FOR
NOVEMBER 16, 1987FUTURE
SUBJECT: ELIGIBLE BANK INVESTMENTSREFERENCE
Administrative Policy #001 is being issued to all State chartered banks in regard to the legality of investing in certain instruments such as CMO's (Collateralized Mortgage Obligations), CMO residuals, REMICs and SMBS's (Stripped Mortgage-Backed Securities). The purpose of the directive is to state the position and requirements of the Bank Department with respect to these investment vehicles.
Before consideration can be given to investment into any of these non-traditional instruments it will be necessary for the Board of Directors to approve amendments to the bank's investment policy.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMO'S)
A state chartered bank may only invest in CMO's in which the collateral consists of securities in which repayment of both principal and interest is 100% guaranteed by an agency of the United States government. CMO's which meet this criteria may be purchased without legal lending limitations so long as the CMO meets the definition of "Mortgage related securities" as defined in section 101 of the Secondary Mortgage Market Enhancement Act of 1984 which has been codified at 15 U.S.C. S 78 c(a) (41). The definition includes any security which satisfied all of the following requirements:
- The security must be rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization.
- The security must be secured by one or more promissory notes or certificates of interest or participations in such notes.
- The security must provide for payments of principal in relation to payments or reasonable projections of payments on the underlying notes or certificates.
- The notes or certificates underlying the CMO's must be directly secured by a first lien on a single parcel of real estate, stock allocated to a dwelling unit in a residential cooperative housing corporation, upon which is located a dwelling or mixed residential and commercial structure, or on a residential manufactured home.
- The underlying notes or certificates must have been originated by a savings and loan association, savings bank, commercial bank, credit union, insurance company, or similar institution which is supervised and examined by a Federal or State authority or by a mortgagee approved by the Secretary of Housing and Urban Development.
Banks making such investments are required to maintain the following information in the files of the bank:
Although the CMO's described may be obtained without limitation, management and the board of directors are reminded of the sound tenet of banking of diversification of risk. Consideration should also be given to the liquidity needs of the bank prior to making such investment.
Investments in CMO's which are backed by any other collateral are subject to legal lending limitations.
CMO AND REMIC RESIDUALS
Residual and stripped coupon securities represent packages of various combinations of selected cash flows from a pool of mortgage receivables (either mortgage loans or mortgage-backed securities) and are typically issued under a Real Estate Mortgage Investment Conduit (REMIC) or collateralized mortgage obligation (CMO) structure.
CMO and REMIC Residual instruments reflect an ownership interest in the trust and do not indicate an investment in principal or a stated interest rate. The investor is purchasing an interest in the trustee's ability to earn money sometime in the future. It is the opinion of the State Bank Department that such investments represent an equity interest in the trust, are speculative in nature, and, as such, are not considered eligible investments for state chartered banks.
STRIPPED MORTGAGE-BACKED SECURITIES (SMBS)
Principal-only strips(P/O) represents an undivided percentage ownership interest in the principal portion of the pass through certificate. Banks may invest in principal-only strips provided that payment of the principal portion of the underlying security is 100% guaranteed by an agency of the U. S. Government. Banks that invest in these investments must maintain the same documentation as required for CMO's.
Since a P/0 is essentially a "zero coupon" security, its market value may be extremely volatile in a changing interest rate environment. A bank must have sufficient liquidity to be able to hold the instrument to term despite wide swings in its market value or must have the expertise to react quickly to interest rate changes.
Interest-only strips (I/O) have many of the same characteristics as CMO Residuals. Such investment in future interest, which may or may not be realized, is considered speculative. These instruments are not considered eligible investments for state chartered banks, unless utilized for interest rate hedging purposes.
Any hedging activity must be supported by a board approved hedging policy that sets forth parameters under which the activity will take place. The board of directors must establish limitations applicable to the hedging activity and the board of directors, a duly authorized committee of the board, or the bank internal auditors must review periodically (at least monthly) the hedging position to ascertain performance with the limitations set forth in the policy.
If a bank holds these securities as a hedge, the current accounting guidance on hedging is primarily contained in FASB Statement No. 80, Accounting for Futures Contracts, which includes two criteria that must be met for a futures contract to qualify as a hedge:
Investment in Interest-only strips in any manner other than provided above will be considered an unsafe and unsound banking practice.
Interest-only strips (I/0) investments are subject to the bank's legal lending limit.
ACCOUNTING
Information will be forthcoming from the appropriate federal supervisory agency regarding the recommended accounting for Call Report purposes of the various instruments discussed.
ADMINISTRATIVE POLICY #002REVISED - 06/30/04
Robert H. Adcock, Jr., Bank Commissioner
BILL J. FORD, BANK COMMISSIONER
MAY 31, 1997
SUBJECT: BANK HOLDING COMPANY SUPERVISION
RETAIN FOR
FUTURE
REFERENCE
The Bank Commissioner requires that all bank holding companies owning Arkansas state-chartered banks to submit certain Federal Reserve System reports. Copies of reports submitted to the Federal Reserve Bank, which are executed according to individual report instructions, will comply with this Order. These forms and their instructions may be obtained via Internet at the following address: http://www.federalreserve.gov/boarddocs/reportforms/CategoryIndex.cfm?WhichCategory=1
The following is a list of the bank holding company reports that your institution may be required to file. Retain the list for periodic review as the status of your institution may change.
Note: All FR Y-9 and FR Y-11 reports are now submitted to the Federal Reserve through Internet Electronic Submission (IESUB); therefore, paper copies of these reporting forms are no longer required for submission to Arkansas State Bank Department. In the course of examining holding companies, Arkansas State Bank Department reserves the right to request paper copies of these forms as needed to effectively analyze and complete the examination process.
Paper copies of the following reports are required to be submitted to the Arkansas State Bank Department as follows:
Report:FR Y-6 - Annual Report of Bank Holding Companies.
Frequency: Annually, within 90 days following calendar year end.
Reporting Criteria: All top-tier bank holding companies.
Report:FR Y-8 -- Report of Bank Holding Company Report of Insured Depository Institutions' Section 23A Transactions with Affiliates.
Frequency: Quarterly, submitted to the Arkansas State Bank Department if reportable activity has occurred.
Reporting Criteria: All top-tier bank holding companies, including financial holding companies. A separate FR Y-8 report form should be filed for each depository institution.
Report:FR Y-10 - Report of Changes in Organizational Structure.
Frequency: As needed, submitted within thirty calendar days of a reportable
transaction or event.
Reporting Criteria: All top-tier bank holding companies and state member banks that are not controlled by a bank holding company.
ADMINISTRATIVE POLICY #003
Revised - 09/30/01 Frank White, Bank Commissioner
BILL J. FORD, BANK COMMISSIONER ISSUED: MARCH 30, 1988 SUBJECT: RISK RATING/RESERVE ALLOCATION
FUTURE
RETAIN FOR
REFERENCE
OVERVIEW
The quality of the loan portfolio of many banks has been dramatically affected by recent developments in economic affairs of the state and region. In an effort to prudently assess the quality of the loan portfolio, bankers have developed a wide array of methods to review loans on an ongoing basis. Examiners assess the quality of a bank's loan portfolio in an attempt to determine the associated risk and to determine that adequate reserves are maintained.
Administrative Policy #003 defines a risk rating system and reserve allocation calculation method that is recommended for implementation by bank management. The State Bank Department does not require that the system defined herein be adopted, but does require that a system be implemented. Any system implemented by the bank will be subject to review and analysis by examiners during regularly scheduled examinations and/or visitations.
The risk rating system and reserve allocation calculation method described is recommended for all banks which have total loans in excess of ten million dollars ($10,000,000). It is designed to aid management and the Board of Directors in (1) the management of risk associated with the loan portfolio, (2) the identification of "problem" loans, and (3) maintaining the adequacy of the bank's reserve allocation.
Prior to the implementation of any risk rating/reserve allocation program, it is essential for the bank's Board of Directors to approve the program and consider amendments to the bank's loan policy.
RISK RATING GUIDELINES
All loans, with the exception of loans identified as monthly-pay, consumer- type loans, must be assigned a risk rating. A numbering system from one (1) to six (6) is utilized for the guidelines contained herein. Banks presently utilizing other numbering schemes may wish to continue to use the system already in place. A numbering system is necessary to monitor the quality of the loan portfolio and address the adequacy of the loan loss reserve account.
This rating system is based on the potential risk associated with each loan. The initial rating is assigned by the loan officer and should be reflected on the loan application. The loan review personnel or the individual loan officer is responsible for periodic reviews and the assessment of the adequacy of the rating during the life of the loan. Any differences in ratings between the loan officer and loan review personnel are to be resolved by the loan review committee and the appropriate rating entered into the loan system. Reviews and updates must be made on a quarterly basis, or more frequently if appropriate. Reviews should be noted at least quarterly in the minutes of the meeting of the bank's Board of Directors.
The risk ratings for this system appear below and a definition of each follows. The risk rating system should be implemented in the main computer system to provide for an automated monitoring program. A field in the loan program can be designated to carry the risk rating code.
The bank's EDP/Information Systems servicer can provide this field on the existing loan program.
DEFINITIONS
RISK RATING: 1 - EXCELLENT
A loan secured by a bank's own certificate of deposit, U.S. Government securities, or governmental agency securities. The loan is properly structured with maturities not to exceed one (1) year. No credit or collateral exceptions exist and the loan adheres to the bank's loan policy in every respect. The ability of the borrower to repay is excellent as evidenced by cash flow analysis or the conversion of liquid assets to cash.
RISK RATING: 2 - GOOD
Loans to established borrowers that represent a reasonable credit risk. A financial analysis displays a satisfactory financial condition and earnings ability along with sound asset quality and cash flow capacity to meet debt obligations in a timely manner. Loans in this category are generally limited to short to medium term maturities. The borrower exhibits a good ability to service the debt based on prior history and an ability to service debts through the conversion of liquid assets, cash flow or, perhaps, letters of credit from quality financial institutions.
RISK RATING: 3 - MODERATE
Loans in this category are considered to have satisfactory asset quality and are made to borrowers with proven earnings history, liquidity or other adequate margins of credit protection. Loans are considered collectible in full but may require some additional supervision. Loans in this category are evidenced by a level of slow reduction along with some extensions and/or renewals outside of the original payment plan. The borrower is capable of absorbing normal setbacks without the advent of failure. The ability to repay is considered average through the conversion of liquid assets, cash flow or co-signors ability to reduce the debt.
RISK RATING: 4 - WATCH
Loans in this category are presently protected from apparent loss, however, weaknesses do exist which could cause future impairment of repayment. These loans require more than an ordinary amount of supervision and may exhibit potential weaknesses due to questionable trends in financial position, high debt to worth ratios, or questionable or unproven management capabilities. Loans may be made to new or expanding businesses or borrowers whose ability to repay is considered only average. Collateral values afford marginal protection and the collateral may not be considered immediately marketable. Loans in this category may exhibit early signs of problems such as overdue status, extensions, or overdrafts of demand accounts. Loans in this category may also exhibit weak origination and/or servicing policies and may contain documentation deficiencies. This risk rating category may also be used for new or untested borrowers.
RISK RATING: 5 - SUBSTANDARD
Loans in this category are characterized by deterioration in quality exhibited by any number of well defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: high debt to worth ratios, declining or negative earnings trends, declining or inadequate liquidity, improper loan structure, questionable repayment sources, lack of well-defined secondary repayment source, and unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.
RISK RATING: 6 - DOUBTFUL
Loans in this category exhibit the same weaknesses found in the Substandard loan, however, the weaknesses are more pronounced. Such loans are static and collection in full is improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: acquisition by, or merger with, a stronger entity, injection of capital, alternative financing, liquidation of assets, or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and No definite repayment schedule exists.
MANAGEMENT AND BOARD REPORTS
A risk rating system provides management and the Board of Directors the ability to monitor and assess the quality and soundness of the lending function of the bank and compliance with rules and regulations regarding the adequacy of the loan loss reserve account. Effective management of the loan portfolio is essential if the goals and objectives of the bank's Board of Directors are to be met. Proper implementation of the program provided herein will ensure that information is available for management and the Board to properly analyze its reserve adequacy. The program should be supported by the following reports:
RESERVE ALLOCATION GUIDELINES
Management has the responsibility to use reasonable judgment to arrive at an appropriate loan loss reserve which is adequate and which is based upon reliable information. Historical data, combined with the results of a comprehensive review of the present loan portfolio, provides a prudent basis for determining the adequacy of the loan loss reserve account. Examiners will review the appropriateness of the procedures and methodology utilized by management in attaining the reserve balance. Examination classifications should only be changed during subsequent examinations or visitations, however, management may vary the amount of reserve based on current information.
The Board of Directors has the responsibility of determining the amount of provision for loan losses to be allocated on a monthly, or quarterly, basis. Such determination should be based on the balance of loans in each of the six (6) risk rating categories; the minimum and maximum amounts of the reserve allocations required based on a pre-determined percentage; the specific allocations required on previously identified "problem" loans; and the allocations to be assigned to current and overdue installment loans.
Additional information that the Board may find beneficial in the determination of the adequacy of the reserve includes: the loan portfolio composition; any identifiable concentrations of credit; economic conditions on the local and regional levels; the adequacy of the lending policy and the loan administration function (documentation); and the potential for major losses.
SAMPLE SYSTEM
The following example provides a system to determine the adequacy of the bank's loan loss reserve account. The information needed is obtained from the risk rating program.
RISK RATING/ CATEGORY | SUGGESTED * ALLOCATION | PRINCIPAL BALANCE | REQUIRED RESERVE |
COMMERCIAL LOANS: RESERVE ALLOCATION: | |||
1 - EXCELLENT | 0.000%* | 1,500,000 | 00,000 |
2 - GOOD | 0.275%* | 8,000,000 | 22,000 |
3 - MODERATE | 0.750%* | 12,500,000 | 93,750 |
4 - WATCH | 1.000%* | 3,000,000 | 30,000 |
5 - SUBSTANDARD | 15.000%* | 750,000 | 112,500 |
6 - DOUBTFUL | 50.000%* | 50,000 | 25,000 |
COMMERCIAL LOANS - SUB TOTALS | 25,800,000 | 283,250 | |
ADD: SPECIFIC ALLOCATIONS** | 200,000 | 50,000 | |
SUB: PREVIOUS ALLOCATIONS** | (200,000) | (20,000) | |
COMMERCIAL LOANS - TOTALS | $25,800,000 | 313,250 | |
MONTHLY PAY/CONSUMER LOANS: RESERVE ALLOCATION:
CURRENT 0.225%* OVERDUE | 6,000,000 | 13,500 |
(31-90 DAYS) 7.500%* | 200,000 | 15,000 |
(OVER 90 DAYS) 37.500%* | 25,000 | 9,375 |
INSTALLMENT LOANS - TOTALS | 6,225,000 | 37,875 |
LOAN PORTFOLIO TOTALS: | 32,025,000 | 351,125 |
BALANCE OF RESERVE ACCOUNT | 334,520 | |
AMOUNT IN EXCESS OF RESERVE REQUIREMENT: (DEFICIT) | (16,605) | |
+/-10% = ACCEPTABLE RANGE | 316,013 to 386,238 |
*Suggested allocation based on average of acceptable ranges. Systems may vary. Percentages are to be determined by the bank's Board.
**Loans previously risk rated one (1) through (6) for which specific reserve allocations have been assigned. The adjustment is necessary to prevent duplications. Specific allocations must be fully documented.
ADMINISTRATIVE POLICY #004
BILL J. FORD, BANK COMMISSIONER
AUGUST 22, 1988
SUBJECT: NONACCRUAL OF INTEREST
RETAIN FOR FUTURE REFERENCE
NONACCRUAL OF INTEREST
Banks shall not accrue interest or discount on:
If the principal or interest on an asset becomes due and unpaid for 90 days or more, the asset should be placed in nonaccrual status as of the date it becomes 90 days past due. Interest accrued to date on a loan placed in nonaccrual status must be reversed from current year earnings. The loan must remain in nonaccrual status until it meets the criteria for restoration to accrual status described above.
DEFINITIONS
either through legal action, including judgement enforcement procedures; or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status within 105 calendar days of its due date.
No loan past due 105 days or more will be considered in process of collection.
ADMINISTRATIVE POLICY #005
BILL J. FORD, BANK COMMISSIONER
DATE: FEBRUARY 15, 1989
SUBJECT: STRATEGIC PLANNING
FUTURE RETAIN FOR REFERENCE
Recent legislative action which provides for the expansion of banking through expanded branching powers and regional acquisitions and efforts to repeal antiquated bank laws and thus expand powers for banks make it even more apparent that bankers must address the issues that effect the future of their institution. In this era of deregulation and change, the successful community bank will be the one that is prepared for and able to effectively adjust to change.
An effective means of coping with "change" is the development of a "strategic plan" . Though it may seem difficult to realize where the time will be found to organize and formalize a "plan", it should be noted that a properly utilized and well thought out plan will improve decision making and make time commitments more easily prioritized and allocated. The banker who doesn't have time for planning is the banker who will seldom have time to act rather than react.
THE STRATEGIC PLAN: A strategic plan sets forth the bank's goals and addresses how to achieve them. To be effective, the plan must project beyond the current fiscal year. Given the rapidly changing banking environment, a one year and three year time frame are considered reasonable. The plan must use the best available data to evaluate economic and market conditions and then determine a realistic set of goals.
Profitability is important. However, it may be counterproductive to maximize short-term profits at the expense of achieving long-term goals. A balance must be found between a comfortable profit margin and the resources needed to meet strategic objectives.
Before writing a strategic plan, the following points must be acknowledged and accepted: you and your staff are qualified to write your plan; a strategic plan is basically defining your goals and objectives into written form; and the first attempt will not be perfect, but will be the basis for building an improved plan.
THE PLANNING PROCESS: A plan should address two distinct criteria: one that identifies what the organization is and what it desires to be, often referred to as the "mission statement", and one that defines how to achieve the mission of the organization, .e., goals and objectives.
MISSION STATEMENT: The mission statement identifies the organization and should include an identification of products offered and markets served, as well as a description of the primary factor for determining why you do what you do.
The mission statement can be reduced to a few concise statements addressing basic issues such as: What business are we in? What business should we be in? Who are our customers? Who should our customers be? and, How do we want our customers to know us or view us?
OBJECTIVES: After having determined what the mission is, strategy must be developed giving guidances as to how the mission will be achieved. The objectives defined in the "how to achieve" strategy should never conflict with the bank's stated mission, but should be in harmony with the mission statement. When necessary, an outline of programs needed to accomplish the objectives should be included. Objectives reflect what it is that is to be accomplished and should be measurable; realistic; understandable; and they must have a defined time frame.
If nothing more is accomplished than defining the "mission statement" and outlining the highest priority objectives for the upcoming year, including the financial expectations, the probability of accomplishing those objectives will be dramatically increased. While such an exercise is not the ultimate goal, it should suffice as a temporary plan.
COMMUNICATION AND INVOLVEMENT: It is strongly suggested that the strategic plan be in written form and reviewed by the board of directors. Further, in order for the planning process to achieve maximum effectiveness, it is imperative that the entire plan be presented to all bank personnel. Communication is vital to the success of the plan . Top management must communicate to all employees that it is committed to its long-range plans and that every manager is expected to use it.
Following a presentation of the plan, it is appropriate to conduct meetings between each level of supervision and their subordinates. The primary purpose of such meetings is to respond to subordinates questions and concerns, solicit their ideas and establish their commitment to support the strategic plan.
The secondary purpose is to encourage a sense of employee participation. This idea is based on two management concepts:
REVIEW AND MONITORING: Managers at the highest level will need to consult the plan periodically and even reexamine the plan itself from time to time. To help achieve the goals established, progress must be monitored. Management must meet at regular intervals to evaluate how each department is accomplishing its specific tasks.
The plan must be flexible. Goals that are no longer realistic should be changed or eliminated. However, caution is advised against changing the plan too frequently. Once that happens, employees come to believe that management only uses the plan when it is convenient.
EXAMINER EVALUATION : The personnel of the State Bank Department firmly believe that a well-managed bank is one that conscientiously plans for change rather than merely reacts to change . With this in mind, one objective of the examining process will be to perform a review of management's planning process. The examiner is not to evaluate bank planning based on the preconception that every bank will have a model planning process. In fact, just the opposite will be emphasized - the planning process should be structured to reflect the unique characteristics of the bank in order for the process to be most effective. The examiner's criticism of planned actions will only be appropriate if the action contemplated will seriously harm the bank to a degree that requires regulatory concern or action.
In the event bank management has not developed a formal plan or reduced the plan to writing, the examiner shall obtain from senior management and/or the board of directors information supporting plans for such matters as growth, expansion, capital, dividend payouts, changes and mix of assets, changes in sources of funding, and changes in management and personnel.
The examiner shall review senior management's and the board of directors' commitment to the planning concept. The examiner will detail in the Report of Examination the bank's corporate planning process and determine if the following areas are addressed: adequate involvement of the bank's board; major departments are involved in the planning process; plans are effectively communicated throughout the organization; a monitoring and review process facilitates updates and revisions as warranted; and that future management and personnel needs are addressed and training and advancement policies will keep the organization viable and dynamic.
The examiner will have greater confidence in the management and future viability of the bank when it is determined that management has the ability and has taken the initiative to plan for change and is able to communicate the plan throughout the organization. Such confidence will be communicated to the Bank Commissioner and the bank's board of directors through the Report of Examination.
Strategic planning is not an end, but a means to managing change and focus on emerging opportunities.
ADMINISTRATIVE POLICY #006
BILL J. FORD, BANK COMMISSIONER
DECEMBER 10, 1990
SUBJECT: ENVIRONMENTAL RISK IN LENDING
Environmental issues and the magnitude of costs associated with remedial action regarding hazardous waste has begun to impact financial institutions. Lending transactions involving real estate as collateral are particularly at risk. Two types of environmental risk exist. In addition to the normal risk of loss of bankable assets that can be attributed to hazardous waste, there exists the potentially enormous liability of rectifying hazards existing in violation of state and federal law that far exceed an asset's value. This includes liability to third parties endangered by hazardous waste. Protection from this monetary liability, which can literally eliminate an institution's capital must be the goal of the bank's directorate, management, and legal counsel.
STATUTORY OVERVIEW
State and federal laws enacted to enforce and assess remediation of hazardous waste have been enforced to the detriment of financial institutions. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the Superfund, was created to authorize the Environmental Protection Agency to undertake remedial action or to direct others to do so. Under this law, any person or entity determined to be the owner or operator of an entity producing, causing, transporting, or storing hazardous waste can be assessed clean-up costs. This is the most important and severe law from a lender's point of view.
To be liable under CERCLA, a bank must be determined to be the owner or operator of a hazardous entity. Three defenses are recognized by CERCLA - an act of God, an act of war, or an act or omission by a third party commonly known as the INNOCENT LANDOWNER DEFENSE . To qualify as an innocent landowner, it must be demonstrated that due care has been exercised with respect to hazardous substances once discovered, and that precautions are taken against foreseeable acts or omissions of others. State law is often subjugated to this federal statute. Liability cannot be determined in Arkansas courts.
PRECAUTIONARY MEASURES
Education of personnel to the extent that identification of existing and potential environmental hazards can be recognized, and that appropriate actions follow, is primary in ensuring the success of all precautionary measures. Several important procedures have been identified. These include environmental assessment; loan agreement provisions; loan documentation, review, and monitoring foreclosure or workout procedures; and trust asset assessment. Incorporation of these procedures into current loan underwriting policies will help insulate financial institutions from environmental liability. A loan policy should contain provisions that allow for the identification of potentially risky transactions and include steps to follow through all stages of lending. Also included should be a system of internal checks and balances to provide for complete review, approval, and knowledge within the institution. Protective measures listed above and discussed below must begin at the earliest stage possible. Opening discussions with prospective borrowers whether written or verbal should refer to effects of any current or potential environmental hazards.
ENVIRONMENTAL ASSESSMENT
Assessment of the environmental hazards of a particular transaction is the first step that should be taken and can determine if a loan should ever be approved. The process is very site specific. The most recognized form of evaluation is an environmental audit performed in a phased approach. There is no governing body that regulates the performance of these audits, but industry standards exist. It is recommended that only qualified professionals be used to conduct such audits. Various private engineering and environmental service companies employ environmental engineers to perform these audits. The Federal National Mortgage Association Environmental Assessment Guidelines, Federal Home Loan Bank Thrift Bulletin 16, and Federal Home Loan Mortgage Corporation draft guidelines provide more detailed information on this topic and should be consulted to become familiar with this process. The three phases of environmental audits are highlighted briefly below.
PHASE I
- Historical review of the site
- Review of zoning, building, and regulatory codes
- Review of regulatory agency records
- Inspection of the site
- Written summary report
PHASE II
- To be performed if Phase I reveals apparent hazards
- Testing of underground storage tanks
- Soil, soil gas, bulk soil, groundwater, and surfacewater testing and sampling
- Comprehensive inspection, sampling, and analyzing of building materials
- Written summary report
PHASE III
- Contains all aspects of Phase I and II with the addition of much more involved testing and sampling procedures.
ENVIRONMENTAL QUESTIONNAIRE
A less informative type of assessment is an environmental questionnaire. This may be applied to all credit transactions to determine which steps to pursue thereafter, similar to a screening process. While an environmental questionnaire should not replace an environmental audit, it is a valuable tool and can be utilized for smaller credits when audits may be cost prohibitive.
THE LOAN AGREEMENT
A loan agreement cannot eliminate lender liability under CERCLA if the lender is otherwise liable, but it can make another party liable to the lender. The following covenants provide a starting point for protection from environmental liability in written credit instruments.
LOAN COVENANTS
- Require compliance with all laws, rules, regulations, and supervisory authorities, and notification of release of hazardous substances
- Require borrower to covenant that it will remedy any contamination that occurs
- Require borrower to indemnify lender for any losses or expenses incurred as a result of environmental problems
- Require indemnification or guaranty from a solvent parent company or individual
- Make lender beneficiary of environmental assessments by requiring audits to be addressed to borrower and lender, require access to all relevant documents
- Have borrower establish bond or trust to guarantee remediation of contamination
- Require borrower to obtain environmental impairment liability insurance if available and cost effective
- Insert due on sale clause
- Insert default or acceleration clause subject to use, storage, or disposal of hazardous materials on site
- Require default or acceleration if other breach of contract occurs
- Require additional security in event of contamination
- Require notification of violation of environmental laws
- Require borrower to allow lender access to records regarding environmental compliance and regulatory agencies
DOCUMENTATION, REVIEW, AND MONITORING
In addition to the normal documentation there are numerous items to which banks must devote special attention. These items remain almost entirely within an institution's power to control, and this power should be exercised to the institution's benefit.
- Review prior ownership and use of property
- Monitor manufacturing and operational process
- Monitor resource use and disposal
- Review litigation history
- Maintain current insurance coverage - property, liability, and environmental liability
- Maintain necessary current licenses, permits and inspections - local, state, and federal
- Monitor regulatory compliance for violations - historical and present
- Perform periodic inspection of site and underground storage tanks
FORECLOSURE OR WORKOUT SITUATIONS
As a loan enters a situation where foreclosure action is contemplated or a workout situation is apparent, special caution must be exercised regarding environmental risk. It is prudent to follow the same precautionary procedures used when a credit is originated. Prior to foreclosure, a new environmental audit should be performed to determine if there is sufficient risk of liability to a title holder that would negate any funds realized through foreclosure. Additionally, extreme care should be taken not to exert undue influence in the operation of an entity in a workout situation. A lender can be liable under CERCLA as an operator of an entity. Litigation, although case specific, does indicate that most lenders are not determined operators if their influence is limited to the financial aspects of the entity. However, the recent decision in United States v. Fleet Factors Corporation, 901 F.2d 1550 (11th Cir. 1990) is indicative of the dynamic nature of environmental liability litigation. This decision states that a secured creditor may be determined liable under CERCLA without being an operator if its influence in the financial management of the entity is of a degree that can enable it to impact hazardous waste management or environmental matters if it so chooses. Although not clearly defined by legal precedent, sufficient care must also be exercised and legal counsel consulted to preclude the conclusion that a creditor can control hazardous waste management through loan covenants or written agreements.
ENVIRONMENTAL RISK OF TRUST DEPARTMENT ASSETS
Legislation has been introduced in Congress designed to limit the liability of a fiduciary for hazardous waste contamination of property for which it holds legal title as part of an estate or trust.
Trust department assets at this stage of legislative action are essentially subject to the same environmental risk as those of the loan portfolio . Prior to the acceptance of any real property into trust, steps similar to those delineated above should be initiated. They should include but not be ----limited to environmental assessments or audits where appropriate. The most important aspect as in any transaction affected by environmental hazards is proof of exercising due diligence. Special attention and caution must be exercised regarding decedent estates and dispersion or expenditure of funds relating to preemptive action or remediation of environmental hazards. Education of trust department personnel is paramount.
EXAMINATION CONSIDERATIONS
Examiners, when evaluating the risk inherent in the loan portfolio, will include an assessment of environmental risk. This assessment will primarily be measured against the implementation and enforcement of this policy. Foremost in the examination process is the determination that the financial institution has utilized this policy in exercising all prudent avenues available to protect their interests against the risk of environmental liability. The presence of environmental risk or noncompliance with this policy will adversely affect the determination of the soundness and viability of an institution.
REFERENCE OF APPLICABLE LAWS
There is no well defined procedure that lenders can follow that will guarantee protection from liability for environmental hazards. Nothing can entirely eliminate the risk of liability. Partially responsible for this situation is the nebulous framework of existing state and federal statutes characterized by the volatility of environmental issues and proposed legislation. Lenders may wish to consult the Environmental Protection Agency and request their Draft Rule on Lender Liability under CERCLA which should be finalized in the future. This guidance is informative and contains suggestions similar to those found within this policy. Listed in part below are state and federal laws that impact this policy. It must be recognized that while this policy is designed to protect lenders from environmental liability, noncompliance with the numerous related state and federal statutes can compromise a secured creditor's position in other ways such as monetary penalties and weakened collateral margins.
FEDERAL STATUTES
- Resource Conservation and Recovery Act (RCRA)
- Hazardous and Solid Waste Amendments (HSWA)
- Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), "Superfund Act"
- Superfund Amendments and Reauthorization Act (SARA)
- Clean Water Act
- Clean Air Act
- Toxic Substances Control ActFEDERAL AGENCIES
- Environmental Protection Agency (EPA) Enforcement and administration of federal statutes
- Department of Justice
Justice Department Land and Natural Resource Division litigates RSRA and CERCLA claims for the EPA.
STATE STATUTES
- Arkansas Hazardous Waste Management Act
- Arkansas Remedial Action Trust Fund Act (RATFA)
- Arkansas Emergency Response Fund Act (ERFA)
- Arkansas Water and Air Pollution Control Act
- Recent legislation:
- Act 172 of 1989, Codified at Secs. 8-7-801 -812, A.C.A. Of 1987 (1989 Supp) Regulates underground storage tanks
- Act 173 of 1989, Codified at Secs. 8-7-901 -908, A.C.A of 1987 (1989 Supp.) Cost and damage recovery for storage tank hazards: Compliance with underground storage tank regulations can substantially reduce potential liability and provide availability of fund for remediation.
- Act 260 of 1989, Codified at Secs. 18-49-103, 8-6-205, 8-7-409, 8-7-508, 8-7-403, and 8-7-307, Arkansas Code of 1987 Annotated (1989 Supp.) Innocent landowner's remedies and defenses
STATE AGENCIES
- Arkansas Department of Pollution Control and Ecology Enforcement and administration of state statutes
SUMMARY AND CONCLUSION
There is a general proclivity to address solutions after problems occur in the financial world. This policy is designed to combat that situation by requiring preventive measures. Pollution and hazardous waste problems are having an increasingly large monetary impact on financial institutions. Governments in some instances have the right to assign liability to persons or entities no longer holding title to contaminated property. A lender seeking to enforce a mortgage by foreclosure may be exposed to a risk of liability as the owner or operator of a hazardous waste site that far exceeds the property value or revenue generated by the site. These facts have caused traditional loan underwriting procedures to be inadequate. This policy will aid financial institutions in establishing precautionary procedures that will help them evaluate not only the normal business risk associated with hazardous waste, but the threatening liability that may arise.
ADMINISTRATIVE POLICY #007
REVISED - 09/01/05
Robert H. Adcock, Jr., Bank Commissioner
BILL J. FORD, BANK COMMISSIONER
DATE: JANUARY 31, 1995
SUBJECT: CONTINGENCY PLANNING
RETAIN FOR
FUTURE
REFERENCE
The community bank plays a vital role in rebuilding a community in the event of a catastrophic disaster as well as a localized disaster. In order for the community bank to respond quickly and efficiently to the needs of the community and its own needs, the bank must be prepared to implement a comprehensive and effective contingency plan.
The contingency plan should set forth the bank's plan of action in dealing with various emergency situations. To be effective, the plan should contain as much detail as possible and incorporate each of the bank's departments. The purpose of contingency planning is to minimize disruptions of service, minimize financial loss, and ensure timely resumption of operations.
Contingency planning is an ongoing process. After the plan is written, it should be approved by the Board of Directors and reviewed annually. In order for the plan to be successfully implemented, it must be presented and discussed with all bank personnel. Employees should be appropriately trained to handle certain emergency situations. The areas addressed in this policy apply to in-house systems, remote job entry sites and data processing servicers. Banks and data processing servicers which have not adopted a contingency plan will be cited for contravention of this policy.
Written contingency procedures should, at a minimum address:
The contingency plan should be tested at least every twelve months. For example, if the last test date was March 31, 1994, the bank must test the plan on or before March 31, 1995. If the contingency plan is not tested within the required time frame, the bank will be cited for contravention of this policy. It is also recommended the plan be tested whenever there are major changes in personnel, policies and procedures or hardware and software products.
Backup files should be used when testing is performed at the backup site. After testing, a summary report of the test should be presented to the Board of Directors for review.
If a bank has an out-of-state servicer that performs EDP contingency processing, a representative from the bank generally will not be required to attend the process testing, However, the Commissioner may require such attendance if he should determine it to be necessary for a particular institution. Such determination will be done on a case-by-case basis. If a bank representative is required to attend, the representative should ensure that:
Further guidance for contingency planning and procedures can be found in the Information Systems Handbook prepared by the Federal Financial Institutions Examination Council (FFIEC). Additional materials regarding contingency/disaster recovery planning may be obtained from trade associations, accounting firms, and the disaster recovery industry.
ADMINISTRATIVE POLICY #008
FRANK WHITE, BANK COMMISSIONER
SEPTEMBER 30, 2002
SUBJECT: BANK BOARD OF DIRECTORS
RETAIN FOR
FUTURE
REFERENCE
Business Policies of state banks are formulated by the bank's Board of Directors. These Boards should be composed of persons knowledgeable about economic conditions of their community and their region, competent business persons, and skilled in financial management. The Board of Directors must be attentive to their duties, familiar with banking laws and regulations, and aware of their fiduciary responsibilities. The bank's Board of Directors has the ultimate responsibility and fiduciary liability to ensure the safe and sound operation of their financial institution for the benefit of the shareholders and general public.
In order to assist Directors in their industry education and awareness of responsibilities, all members of a state bank's Board of Directors must attend Director training approved by the Bank Commissioner. Directors first elected to the Board on or after October 15, 2002, must attend one training seminar within the first year of service. Directors first elected prior to October 15, 2002, must attend one training seminar prior to October 15, 2004.
Evidence of Director attendance at a training seminar must be maintained in the Board Minutes of the bank.
COUNTY OR REGIONAL INDUSTRIAL DEVELOPMENT CORPORATIONS
A.C.A. § 15-4-1201 through A.C.A. § 15-4-1228
Purposes of Each Industrial Development Corporation: The purpose of each industrial development corporation organized pursuant to A.C.A. § 15-4-1201 et seq. is to promote, stimulate, develop, and advance the business of and economic welfare of the county or region included in its organization. The Bank Commissioner and the State Banking Board therefore rule that in order to implement the intentions of the act, companies should make every effort to use the assets raised by the corporation to pursue the intentions set out in the act. The Bank Commissioner and the State Banking board recognize that some projects will require a certain period of time to raise capital in order to fund a particular project or to identify a deserving project to fund. However, the Bank Commissioner and the State Banking Board will consider the failure of an industrial development corporation to seriously investigate worthwhile projects or make investments in economic development projects for an unreasonable period of time to be a violation of the intentions of the act.
An industrial development corporation shall not sell shares or units and fail to utilize the proceeds thereof in accordance with the purposes set forth in A.C.A. § 15-4-1214(a). Except as provided below, in the event that such proceeds are not invested, loaned or otherwise utilized in accordance with such purposes within eighteen (18) months from the date on which such funds are received, the industrial development corporation shall immediately cancel all such shares or units and refund to the purchasers of such shares or units all proceeds, plus interest or income derived thereon, on a pro rata basis, as well as all commissions or remuneration paid to any person on account of the sale thereof. Such refund, with the exception of the interest or profit derived thereon, shall not be considered to be a dividend or distribution within the meaning of A.C.A. § 15-4-1215, and shall be treated as set forth in A.C.A. § 15-4-1224(a)(2)(A). Provided however, that upon written application and for good cause shown, the Bank Commissioner may in his discretion extend such period for two additional six (6) month periods, not to exceed a total of thirty (30) months from the date on which the proceeds from the sale of the stock or units were received by the industrial development corporation. Each extension shall require a separate application filed by the industrial development corporation with the Bank Commissioner at least ten (10) days prior to the expiration of the period sought to be extended. Proceeds, unless otherwise clearly accounted for by the industrial development corporation, shall be accounted for on a first in, first out basis.
Single purpose applications shall include information, in sufficient detail for the Bank Commissioner to consider, the potential economic development or community development, or similar project, that the applicant has under serious consideration.
Multiple purpose applications shall include, in sufficient detail for the Bank Commissioner to consider, at least three potential economic development or community development, or similar projects, that the applicant has under serious consideration.
Upon a preliminary approval of an application, applicant is required to provide the Arkansas State Bank Department with evidence that the required initial capital is being held in escrow pending final approval of the Arkansas State Banking Board.
FEES AND ASSESSMENTS SCHEDULE
A.C.A. § 23-51-101 through A.C.A. § 23-51-211
a) Application for new Trust Company ................................................................... | $8,000 |
b) Official protest of application .............................................................................. | .2,000 |
c) Private Trust Company application ..................................................................... | 4,000 |
d) Private Trust Company Annual Certificate .......................................................... | 200 |
e) Acquisition of Control of Trust Company ........................................................... | 1,500 |
f) Charter Amendments ........................................................................................... | 200 |
g) Application for merger ......................................................................................... | 2,500 |
h) Registration of corporate name ............................................................................ | ........ 25 |
i) Additional trust office .......................................................................................... | 300 |
j) Out-of-state office ................................................................................................ | 300 |
k) Registration of out-of-state Trust Company ........................................................ | 300 |
Assessment fees to defray the costs of examinations and the costs of operations of the State Bank Department will be charged in January and July of each year.
The assessment schedule is as follows:
A base assessment fee of $1,250 will be billed by the State Bank Department to each state-chartered trust company on a semi-annual basis in January and July of each year. In addition, an assessment of $360 per examiner per day or partial day of examination times the number of examination days will be billed in January or July immediately following the examination in order to defray the costs of examination to the department. These assessments will be payable within ten (10) days after notice from the Commissioner in January and July of each year.
In addition to information maintained as confidential in accordance with Section 87 of Act 940 of 1997, the following information submitted in support of an application for trust charter, office, or representative office shall be maintained as confidential:
The board of a state trust company shall require protection and indemnity against dishonesty, fraud, defalcating, forgery, theft, and other similar insurable losses on each director, officer, and employee of the company in an amount not less than $1,000,000 or such greater amount which is determined to be reasonable in accordance with the Board of Directors resolution based upon the asset size of the trust company.
003.02.05 Ark. Code R. 003