The Texas House of Representatives is scheduled to consider a bill this week intended to modernize the state's Finance Code and reduce some bank burdens.
The bill, authored by Rep. Burt Solomons, R-Carrollton, would create higher lending limits and reduce exam requirements for some state-chartered banks and could give banks the authority to keep energy and mineral royalties in their portfolios. The House Financial Institutions Committee, which Mr. Solomons chairs, passed the bill March 26. The full House will consider it today.
"We need to constantly be looking at laws to modernize and improve, and that is what this bill intends to do," Texas Banking Commissioner Randall James said in an interview last week.
Karen Neeley, independent counsel for the Independent Bankers Association of Texas, said she had been advocating a change in the status of energy and mineral royalties for several years.
"It's been a problem hanging over our heads," she said in an interview last month. "Banks wind up owning mineral interest, and they can't sell it or they don't want to, because it's bringing in royalties. With this, they'd be able to hold onto it indefinitely."
Federal law prohibits banks from investing in real estate, but banks will end up with real estate in their portfolios through foreclosure. Such real estate must be unloaded, generally within 10 years.
Typically royalties associated with energy or minerals are considered real estate and cannot be kept in a portfolio over the long term. But Mr. Solomons' bill seeks to change the "real estate" designation of such royalties to "personal property."
It is believed Texas would become the first state to allow the royalties to remain in a bank's portfolio, but federal regulators likely would have to be persuaded to accept the change in definition before the measure could become meaningful to banks.
The rationale behind the change is that a nonworking mineral or royalty interest offers the benefit of shared production or mining revenue without exposure to expenses of exploration, production, operation, maintenance or other expenses associated with extracting and marketing minerals, Mr. James said in testimony last month. If minerals are not being produced at a site, or if the revenue generated is merely nominal and sporadic, the subsurface rights have little or no value and are difficult to sell, he said.
The bill would let banks attain royalty interest only through foreclosure. The banking commissioner would be allowed to determine how much interest banks could obtain this way. Mr. James said the amount would be "minimal" - no more than 1% to 2% of a bank's total capital.
Another part of the bill would bring the Finance Code in alignment with a federal law passed last year that doubled, to $500 million, the maximum size for banks to qualify for an 18-month examination cycle.
The bill also would align Texas' lending limits more closely with federal law. Under Texas law, a state-chartered bank's lending limit is 25% of "unimpaired capital and certified surplus." The use of "certified" is believed to be unique to Texas. It requires a bank's board to determine how much surplus will be allowed in the equation. In his testimony, Mr. James said that dropping the word "certified" would increase lending limits.
