9-1104.   Limitation on loans and borrowing; determination of limits;compliance with section; definitions.(a) Definitions. As used in this section:

      (1)   "Borrower" means an individual, sole proprietorship,partnership, joint venture, association, trust, estate, business trust,corporation, limited liability company, not for profit corporation, governmentunit or agency, instrumentality, or political subdivision thereof, orany similar entity or organization.

      (2)   "Capital" means the total of capital stock, surplus, undividedprofits, 100% of the allowance for loan and lease loss, capital notes anddebentures, and reserve for contingencies. Intangibles, such as goodwill,shall not be included in the definition of capital when determininglending limits.

      (3)   "Loan" means:

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

      (B)   a contractual commitment to advance funds;

      (C)   an overdraft;

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

      (i)   Discharge in bankruptcy;

      (ii)   expiration of the statute of limitations;

      (iii)   judicial decision; or

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

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

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

      (2)   If the bank's lending limit increases subsequent to the originationdate, a bank may use the current lending limit to determine compliance whenadvancing funds. An advance of funds includes the lending of money or therepurchase of any portion of a participation.

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

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

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

      (2)   a perfected interest in a time depositaccount in the lending bank. In the case of a time deposit which may bewithdrawn in whole or in part prior to maturity, the bank shall establishwritten internal procedures to prevent the release of the deposit;

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

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

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

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

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

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

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

      (B)   the amount of the recorded lien or liens shall equal at leastthe amount of theexcess liability;

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

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

      (2)   That portion of any loan endorsed or guaranteed by a borrower will notbe added to that borrower'sliability until the endorsed or guaranteed loan is past due 10 days.

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

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

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

      (f)   Combination Rules.

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

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

      (B)   when a common enterprise is deemed to exist between the borrowers.

      (2)   Direct Benefit. The proceeds of a loan to a borrower will bedeemed to be used for the direct benefit of another person and will beattributed to the other person when the proceeds, or assets purchased with theproceeds, are transferred to another person, other than in a bona fide arm'slength transaction where the proceeds are used to acquire property,goods or services.

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

      (A)   When the expected source of repayment for each loan orextension of credit is the same for each borrower and neither borrower hasanother source of income from which the loan, together with the borrower'sother obligations, may be fully repaid;

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

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

      (ii)   substantial financial interdependence exists betweenor among the borrowers. Substantial financial interdependence is deemed toexist when 50 percent or more of one borrower's gross receipts or grossexpenditures (onan annual basis) are derived from transactions with the otherborrower. Gross receipts and expenditures include gross revenues, expenses,intercompany loans, dividends, capital contributions and similar receipts orpayments; or

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

      (D)   An employer will not be treated as a source of repayment forpurposes of determining a common enterprise because of wages and salaries paidto an employee.

      (4) Special Rules for Loans to a Corporate Group. (A)   Loans by a bank to aborrower and the borrower'ssubsidiaries shall not, in the aggregate, exceed 50% of the bank'scapital. At no time shall loans to any one borrower or to any onesubsidiary exceed the general lending limit of 25%, except as allowed by otherprovisions of this section. For purposes of this paragraph, a corporation or alimited liability company is a subsidiary of a borrower if the borrower owns orbeneficially owns directly or indirectly more than 50 percent of the votingsecurities or voting interests of the corporation or company.

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

      (5)   Special Rules for Loans to Partnerships, Joint Ventures andAssociations. (A)   As used in this subpart (5), the term"partnership" shall include a partnership, joint venture or association. Theterm partner shall include a partner in a partnership or a member in a jointventure or association.

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

      (C)   Limited Partner. If the liability of apartner is limited by the terms of the partnership agreement, the amount of thepartnership debt attributable to the partner is in direct proportion to thatpartner's limited partnership liability.

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

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

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

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

      (6)   Notwithstanding the provisions of thissubsection, the commissioner may determine, based upon an evaluation of thefacts and circumstances of a particular transaction, that a loan to oneborrower may be attributed to another borrower.

      (g)   The commissioner may order a bank to correct any loan not in compliancewith this section. A violation of this section shall be deemed corrected ifthat portion of the borrower's liability which created the violationcould be legally advanced under current lending limits. Failure to complywith the commissioner's orderwithin 60 days shall be grounds for the proposed removal of a bank officeror director pursuant to K.S.A. 9-1805 and amendments thereto.

      History:   L. 1947, ch. 102, § 33; L. 1949, ch. 110, § 2; L. 1951,ch. 120, § 1; L. 1975, ch. 44, § 14; L. 1976, ch. 56, § 1; L. 1982,ch. 51, § 1; L. 1983, ch. 47, § 1;L. 1986, ch. 56, § 2;L. 1989, ch. 49, § 1;L. 1990, ch. 57, § 1;L. 1994, ch. 50, § 1;L. 1995, ch. 34, § 1;L. 1996, ch. 171, § 1;L. 1997, ch. 180, § 11; May 29.