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Virginia Regulatory Town Hall

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Action:
Amend Bank Franchise Regulation to Conform to Law Changes and ...
Stage: Fast-Track
23VAC10-330-20

23VAC10-330-20. Computation of net capital.

A. Generally. The net capital of a bank is computed as follows:

1. Compute gross capital by adding the following accounts as reported on the report of condition: (1) (i) preferred stock, (2) (ii) common stock, (3) (iii) surplus, (4) (iv) undivided profits and reserve for contingencies and other capital reserves, and (v) one half of any reserve for loan losses net of applicable deferred tax.

2. Deducting from the gross capital: (1) (i) assessed value of real estate as set forth in 23VAC10-330-30, (2) (ii) book value of certain tangible personal property as set forth in 23VAC10-330-30, (3) (iii) the pro rata share of capital attributed to U.S. government obligations as set forth in 23VAC10-330-30, (4) (iv) certain capital accounts of bank subsidiaries as set forth in 23VAC10-330-30, (5) the total of (a) the applicable amount of any reserve for loan losses as regulated herein and (b) (v) the applicable amount of any reserve for marketable securities valuation as regulated herein in this section, and (vi) the value of goodwill as defined by subdivision B 8 of this section.

B. Terms used in this section. The terms used in this section, requiring further explanation, and which that are not regulated elsewhere are as follows:

1. Capital stock. "Capital stock" shall include all outstanding shares of capital stock of all classes as shown on the official report of condition of the bank or trust company.

2. Surplus. "Surplus" shall be the amount as shown on the official report of condition of the bank or trust company and shall include, if any, reserves for contingencies and other capital account reserves.

3. Undivided profits. "Undivided profits" shall be the amount as shown on the official report of condition of the bank or trust company.

4. Gross capital. "Gross capital" shall be the total of capital stock, surplus, and undivided profits, and one half of any reserve for loan losses net of applicable deferred tax as regulated herein in this section.

5. Reserve for loan losses. An established reserve for loan losses, not in excess of the amount of reserve allowable by the Internal Revenue Service for federal taxable income tax purposes, is allowable in computing the net taxable capital of a bank.

If a portion of the reserve for loan losses allowable for federal income tax purposes is included in gross capital (surplus, undivided profits or surplus reserves) on the bank's official report of condition, such portion may be deducted from total capital in computing net taxable capital.

If the amount of reserve for loan losses deducted by the bank in computing total capital accounts shown on its report of condition exceeds the amount of reserve for loan losses allowable for federal income tax purposes, such excess must be added to total capital accounts in computing net taxable capital.

The details of all reserves for loan losses and any such deduction or addition must be reflected in Schedule G of Form 64, Bank Franchise Tax Return.

5. Reserve for loan losses. An addition to gross capital must be made equal to one half of the reserve for loan losses net of applicable deferred tax.

a. "Reserve for loan losses" is the amount of the reserve for loan losses as shown on the bank's official report of condition.

b. "Applicable deferred tax" equals the "reserve for loan losses" divided by two and then multiplied by the bank's effective federal and state income tax rates that were used to calculate any deferred tax amounts included in the bank's official report of condition, but not less than zero.

6. Valuation reserve for marketable securities. For purposes of computing net taxable capital, an established reserve carried on the books of the bank for valuation of marketable securities is allowable to the extent that such valuation reserve does not decrease the carrying value of securities (gross value of securities included in report of condition less valuation reserve) below the current market value of the securities on December 31 next preceding the due date for filing the bank franchise tax return.

If any portion of such allowable reserve is included in total capital accounts on the bank's report of condition, such portion may be deducted from total capital in computing net taxable capital.

Any portion of a valuation reserve included in computing total capital accounts which is in excess of an allowable reserve must be added to total capital in computing net taxable capital.

The details of all valuation reserves for marketable securities and the details of any such deduction or addition must be reflected on Schedule A of Form 64, Bank Franchise Tax Return.

7. Official report of condition. "Official report of condition" shall be the report of condition required by the Comptroller of the Currency, Department of the Treasury, or the Bureau of Financial Institutions, State Corporation Commission.

8. "Goodwill" shall be determined using generally accepted accounting principles.

23VAC10-330-30

23VAC10-330-30. Deductions from gross capital.

A. Generally. In addition to items explained in 23VAC10-330-20 B, deductions from gross capital include the (1) (i) assessed value of real estate, (2) (ii) book value of certain tangible personal property, (3) (iii) capital attributable to qualifying U.S. government obligations, and (4) (iv) amount of capital accounts of certain bank subsidiaries. These items are regulated herein in this section.

B. Assessed value of real estate.

1. Deductible assessed value of real estate for bank franchise tax purposes is limited to the assessed value of real estate if:

a. If otherwise taxed in this Commonwealth which that is (1) (i) owned by such bank, or (2) (ii) used or occupied by such bank if held in the name of (a) of a majority-owned subsidiary of the bank or, (b) of a bank holding company which that owns a majority of the capital stock of such bank, or (c) of any wholly owned subsidiary of the bank holding company which that owns a majority of the capital stock of such bank.

b. If real estate is in the nature of improvements to real estate owned by and assessed in the name of another person (the underlying land owner) and such improvements are (a) (i) owned by the bank, or (b) (ii) used or occupied by the bank and owned by a majority-owned subsidiary or by a wholly owned subsidiary of a bank holding company, the assessed value up to the amount of unencumbered equity is deductible. The unencumbered equity shall be deemed to mean the assessed value of such improvements less the unpaid balance of all encumbrances thereto.

Example 1: Bank F constructs a bank building on land owned by and leased from Corporation C. While the total value is assessed in the name of Corporation C, the land owner, Bank F may deduct the portion of the total real estate tax assessment attributable to the value of the building to the extent not encumbered.

2. Real estate used or occupied by a subsidiary or real estate originally conveyed as collateral for loans made by a subsidiary of the bank and reacquired upon foreclosure of mortgage loans will be deemed to be used or occupied by the bank.

1. a. The assessed value for the deduction of real estate shall be the value for the most recent tax assessment made prior to January 1 of the current bank franchise tax year for real estate owned by the bank or affiliate on January 1 of the current franchise tax return year and shall include the assessment for real estate acquired during the preceding year even though assessed for such preceding year in the name of the prior owner.

2. b. If the same real estate is assessed by more than one taxing jurisdiction, such as town, district and county, the assessed value of only one of such jurisdictions may be deducted from gross capital.

3. c. If the real estate is owned by a majority-owned subsidiary of a bank, and the bank does not own all the stock of such subsidiary, the bank shall be entitled to deduct only such portion of the assessed value of the real estate as the common stock it owns in such subsidiary bears to the outstanding common stock of such corporation.

C. Book value of certain tangible personal property. Tangible personal property qualifying for deduction must be (1) (i) owned by the bank or a majority-owned subsidiary of the bank, and (2) must be (ii) held for lease, and (3) must be (iii) otherwise taxed in Virginia.

1. The deductible amount shall be the book value of the qualifying tangible personal property owned as of January 1 of the current year franchise tax return.

2. If the tangible personal property is owned by a majority-owned subsidiary, and the bank does not own all the stock of such subsidiary, the bank shall be entitled to deduct only such portion of the book value of such tangible personal property as the common stock it owns in such subsidiary bears to the whole issue of common stock of such corporation.

D. Capital attributed to U.S. government obligations. The allowable deduction for government U.S. obligations shall be an amount which shall equal the same percentage of the gross capital account at December 31 next preceding the bank franchise tax year, as the obligations of the United States bear to the total assets of the bank. Qualifying government U.S. obligations means all obligations of (1) (i) the United States exempt from taxation under 31 U.S.C. Section USC § 3124, or the United States Constitution, or any other statute, or (2) (ii) any instrumentality or agency of the United States which obligations shall be exempt from State state or local taxation under the United States Constitution, or any statute of the United States.

1. Computation of deduction. The percentage of U.S. obligations shall be determined by averaging the percentage of U.S. obligations to total assets for the four most recent (or less in case of a new bank) Reports of Condition. The average percentage shall be multiplied by the gross capital of the bank as defined in 23VAC10-330-20. The result shall be the capital attributed to U.S. obligations and is the deduction.

2. Merger of banks. Banks merging during the year must use the four most recent quarterly Reports of Condition, including any reports filed in the name of the banks prior to merger, to compute the capital attributable to U.S. government obligations. Those quarterly Reports of Condition filed in the name of each bank prior to merger, and used in the computation of capital attributed to U.S. obligations, must be combined on a quarterly basis to properly reflect the total U.S. obligations and total assets of the merging banks.

Gross capital account means the capital, surplus and undivided profits at December 31 next preceding the tax year. See 23VAC10-330-20.

E. Retained earnings and surplus of certain subsidiaries. The deduction from gross capital of the bank is limited to the amount of increase in the bank's recorded investment in its subsidiaries resulting from undistributed earnings of such subsidiaries.

The deduction from gross capital of the bank is limited to the amount included in gross capital on the bank's report of condition which represents the undistributed earnings of its subsidiaries during the period of the bank's investment in such subsidiaries. Accordingly, it may be applicable only if a bank reports its subsidiary investment accounts at equity values.

F. Interest expenses and costs paid by a related member. Any portion of the amount added to federal taxable income pursuant to subdivision B 9 of § 58.1-402 of the Code of Virginia by a corporation that is for interest expenses and costs paid to the bank for a loan or other obligation made by the bank to such corporation shall be deducted from the gross capital of the bank provided that the requirements set forth in subdivision A 4 of § 58.1-1206 of the Code of Virginia are satisfied.