Investment in Bank Premises

Investment in Bank Premises

Comptroller’s Licensing Manual

Washington, DC
December 2005

Investment in Bank Premises

Table of Contents

Introduction............................................................................................................. 1
Multiple Transactions ................................................................................... 1
Key Policies ............................................................................................................. 2
Decision Criteria........................................................................................... 2
Special Conditions........................................................................................ 2
Application and Notice............................................................................................ 3
After-the-Fact Notice ..................................................................................... 3
Standard Processing ...................................................................................... 4
Timing Considerations .................................................................................. 4
Specific Requirements ............................................................................................. 4
Investment in Real Estate .............................................................................. 4
Transactions with Insiders............................................................................. 5
Accounting ................................................................................................... 6
Appraisal ...................................................................................................... 6
Options to Purchase ..................................................................................... 6
Procedures............................................................................................................... 8
After-the-Fact Notice ..................................................................................... 8
Application ................................................................................................... 9
Glossary ................................................................................................................ 11
References ............................................................................................................. 13

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Investment in Bank Premises
Introduction
A national bank may hold property directly or invest in bank premises indirectly
through a subsidiary, such as a bank premises corporation (that is, by owning the
stock, bonds, or debentures of such a corporation). Loans to a bank premises
corporation or upon the security of its stock also are considered to be investments in
bank premises.
A bank premises corporation is a statutory subsidiary under 12 USC 371d, not an
operating subsidiary. Accordingly, a national bank may establish a subsidiary to
hold bank premises in another corporate entity without seeking the Comptroller of
the Currency’s (OCC’s) prior approval, subject to capital limitations. Any bank
having a composite CAMELS rating of 1 or 2 that also is well capitalized, as defined
in 12 CFR 6.4(b)(1), may make an aggregate investment in bank premises of up to
150 percent of its capital and surplus without OCC’s prior approval. However, the
OCC does require an after-the-fact notice in certain circumstances (see After-the-Fact
Notice section for complete discussion).
A bank that intends to invest an amount greater than its capital stock in its bank
premises, directly or indirectly, must file and obtain the OCC’s prior approval,
unless it satisfies certain requirements (see the Exception section). This booklet
contains policies and procedures to guide a bank in requesting an additional
investment in bank premises.
Investments in real estate necessary for the transaction of the bank’s banking
business must comply with 12 USC 29 and 12 CFR 7.100. A bank should contact
the appropriate supervisory office or district counsel if it has questions whether or
not an investment in real estate would comply. (Refer to Investment in Real Estate
section for details.)
This booklet should be used together with other booklets of the Comptroller’s
Licensing Manual; for example, the “General Policies and Procedures” booklet for a
discussion of general filing instructions. Users also should refer to the “Business
Combinations” and “Branches and Relocations” booklets for additional discussion
of filing instructions and procedures, if an investment in bank premises is related to
one of those filings. There is also a step-by-step procedures section for applicants
and the OCC to follow and a glossary of the terms used in this booklet. The
reference section includes applicable laws, regulations, and OCC issuances to assist
applicants in completing the filing process. Throughout the booklet, there are
hyperlinks to other related booklets and to filing samples.

Multiple Transactions
A bank may submit a request for an investment in bank premises with an
application for a business combination (12 CFR 5.33), branch or branch relocation
(12 CFR 5.30), change in main office location (12 CFR 5.40), or another corporate
application filed with the OCC. The processing review period for the investment in
bank premises runs concurrently with the OCC’s processing of the principal
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application. The OCC will include the approval for the investment and any
appropriate conditions in its decision letter for the principal application.

Key Policies
A bank may acquire and hold bank premises by any reasonable and prudent means,
including ownership in fee (refer to the Glossary), a leasehold estate, or an interest
in a cooperative. The bank may hold such property directly or through one or more
subsidiaries. A bank premises subsidiary may be organized as a corporation, a
partnership, or similar entity; for example, a limited liability company.
The amount invested in bank premises and fixed assets generally is considered to be
a matter within the discretion of bank management. Fixed assets include furniture,
fixtures, data processing, and other equipment necessary for the transaction of the
bank’s business.

Decision Criteria
When analyzing an application for an excess investment in bank premises, the OCC
will consider:
•

Consistency with safe and sound banking practices and OCC policy.

•

Whether any transaction involves bank insiders, and if so, whether the terms are
the same as those prevailing at the time for comparable transactions with
independent parties.

•

The reasonableness of the amount of bank premises and the annual expenditures
required to carry them relative to the bank’s total capital structure and the nature
and volume of operations.

•

The effect of the investment on future earnings.

The OCC will consider denying a request for an additional investment in bank
premises when:
•

The additional investment would have a material negative effect on the bank’s
earnings, capital, or liquidity.

•

The board of directors and management have not demonstrated a reasonable
need for the additional investment.

•

The additional investment involves an unsafe and unsound transaction with a
bank insider.

Special Conditions
The OCC may impose appropriate special conditions for an approval of an
additional bank premises investment, if it determines that they are necessary or
appropriate to protect the safety and soundness of the bank; to prevent conflicts of
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interest; or to further other supervisory or policy considerations. Such conditions
include, but are not limited to:
•

Maintenance of adequate capital levels.

•

Development of specific plans to improve earnings.

•

Development of specific plans to improve liquidity.

•

A statement that the investment in bank premises may not be increased further
without prior OCC approval if the resulting total exceeds the bank’s capital
stock.

•

Submission of an appraisal to support the transaction.

The OCC may apply these conditions as “conditions imposed in writing” within the
meaning of 12 USC 1818. The conditions remain in effect after the effective date or
consummation date of an approved transaction or activity and continue until the
OCC removes them.

Application and Notice
Generally, a bank need not obtain OCC’s prior approval to invest in: (1) bank
premises; (2) the stock, bonds, debentures, or other such obligations of any
corporation holding the premises of such bank; or (3) loans to or on the security of
the stock of any such corporation. However, prior approval is required if the
aggregate of all such investments and loans, together with any indebtedness
incurred by any such corporation that is an affiliate (see Glossary) of the bank,
exceeds the amount of the bank’s capital stock. The OCC’s approval for a specified
amount remains valid up to that amount until the OCC notifies the bank otherwise.
The bank will file with the appropriate supervisory office, unless the investment in
bank premises is combined with a corporate application for another transaction.
(See Procedures section of this booklet for specific guidance.) Also a bank that
meets certain criteria as discussed below may file an after-the-fact notice with the
appropriate supervisory office rather than obtain prior approval.

After-the-Fact Notice
In certain instances, a bank that wishes to invest an amount in excess of its capital
stock in its bank premises may proceed without seeking prior OCC approval. A
bank that has a composite CAMELS 1 or 2 rating may notify the appropriate
supervisory office in writing within 30 days following any transaction that increases
its aggregate bank premises investment to an amount that is in excess of its capital
stock, but is not more than 150 percent of its capital and surplus. The bank must be
well capitalized as defined at 12 CFR 6.4(b)(1) and continue to be well capitalized,
after the investment or loan is made to qualify for the after-the-fact notice process.
The bank must include in its notice a description of the bank’s investment or loan.
A bank must notify the OCC each time a purchase raises the bank premises
investment above the capital stock amount but is within the 150 percent safe harbor
amount.
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Standard Processing
A bank that does not qualify for an after-the-fact notice must submit a written
application to the appropriate supervisory office to request approval to exceed the
amount of its capital stock. If the filing is combined with a corporate application
and received in Licensing, Licensing will forward the bank premises portion to the
appropriate supervisory office for a decision.
A bank may choose to apply on either a transaction-by-transaction or a specified
amount basis that is designed to accommodate future transactions. The bank must
provide:
•

A description of the present bank premises investment.

•

The amount of the investment that the bank intends to make and whether it
involves a transaction with an insider.

•

The amount by which the investment or the specified amount will exceed its
capital stock.

•

The business reason for the requested level of investment.

The bank also may wish to discuss its present annual and projected future earnings
in the application. A bank’s request for a higher specified amount should relate to
its business reason or strategic plan. A bank may file a single application for a
specified amount that will establish an approved amount of bank premises and
eliminate the need to file repeated after-the-fact notices for a series of premises
investments. This specified amount remains valid until the OCC notifies the bank
otherwise.

Timing Considerations
The OCC considers an application approved as of the 30th day after it receives the
filing, unless the OCC notifies the bank prior to that date that the filing presents a
significant supervisory or compliance concern or raises a significant legal or policy
issue.

Specific Requirements
Investment in Real Estate
A national bank may invest in real estate necessary for the transaction of its
business. This real estate includes:
•

Premises that are owned or occupied (or to be occupied, if under construction)
by the bank, its branches, or its consolidated subsidiaries.

•

Real estate acquired and intended, in good faith, for use in future expansion.
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•

Parking facilities used by customers or employees of the bank, its branches, and
its consolidated subsidiaries.

•

Residential property for the use of bank officers or employees who are: (1)
located in remote areas in which suitable housing at a reasonable price is often
unavailable; or (2) temporarily assigned to a foreign country, including foreign
nationals temporarily assigned to the United States.

•

Property for the use of bank officers, employees, or customers, or for the
temporary lodging of such persons in areas in which suitable commercial
lodging is often unavailable, provided that the purchase and operation of the
property qualifies as a deductible business expense for federal tax purposes.

In addition, to facilitate the efficient use of bank personnel, a bank may purchase
the residence of an employee who has been transferred to another area to spare the
employee a loss in the prevailing real estate market. The bank must arrange for
early divestment of the property’s title (12 CFR 7.1000(d)(2)).

Transactions with Insiders
Examples of bank insider (see Glossary) transactions include: (1) a direct purchase of
real estate from an insider; (2) leasing property that is owned, directly or indirectly,
by an insider; (3) transactions in which the proceeds benefit, or are transferred to, an
insider; and, (4) situations in which an insider will benefit from the transaction (for
example, an insider owns an adjacent parking facility or provides janitorial or other
services to the property). The OCC expects full disclosure to all directors of any
material arrangement with an insider.
If the investment involves a bank insider, the bank must provide additional
information about the terms of the transaction; for example:
•

The name of the bank insider and his/her relationship to the bank.

•

A description of how the bank determined the fairness of the terms, which may
include providing a copy of an independent appraisal or other evidence of the
fairness of the transaction.

•

A copy of the board of directors’ resolution approving the transaction that
reflects the bank insider’s abstention from the discussion and voting.

•

A copy of the executed lease or purchase agreement (contingent upon OCC
approval).

•

An accounting determination of whether a lease should be capitalized.

•

A justification of the expenditure.

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Accounting
Depreciation
The OCC calculates a bank’s total investment in bank premises using net book
value. The bank must deduct accumulated depreciation when calculating the total
investment for 12 USC 371d purposes.
Capitalized Leases
FASB Statement No. 13 states that a bank must account for a lease as a capital lease,
if the lease meets any one of the following conditions:
•

Ownership of the property is transferred automatically to the lessee at the end of
the lease term.

•

The lease contains a bargain purchase option.

•

The lease term represents at least 75 percent of the estimated economic life of
the lease property.

•

The present value of the minimum lease payments at the beginning of the lease
term is 90 percent or more of the fair value of the leased property to the lessor at
the inception of the lease, less any related investment tax credit that the lessor
retains and expects to realize.

In a capitalized lease situation, the bank would account for the capital lease as an
asset financed with a debt obligation. If none of the conditions listed above are
present, the lease is accounted for as an operating lease, and the bank would
normally expense the lease payments when incurred. The call report instructions
include detailed information on lease accounting.
Municipal Parking Lots
Expenditures toward the acquisition and operation of municipal parking lots
ordinarily represent a business expense that the bank should charge off rather than
treat as an investment in bank premises.

Appraisal
The OCC considers the sale, lease, purchase, investment in, or exchange of bank
premises involving real property a real estate-related transaction under 12 CFR
34.42(i). Unless specifically exempted in 12 CFR 34.43(a), the OCC requires a
conforming appraisal for such transactions.

Options to Purchase
The OCC does not consider an unexercised option to purchase bank premises or
stock in a corporation holding bank premises as an investment in bank premises.
However, a bank must receive OCC approval to exercise the option, if its price plus
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other existing investments in bank premises would exceed the amount of the bank’s
capital stock.

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Procedures -- After-the-Fact Notice
Supervisory Staff
1. Refers a bank that requests instructions to this booklet and any related specialty
booklet of the Comptroller’s Licensing Manual.

Filing the Notice
Bank
2. Completes and submits an after-the-fact notice to the appropriate supervisory
office. The notice contains:
•

A description of the bank’s investment or loan in bank premises.

•

A verification of well-capitalized status before and after the investment.

Review
Supervisory Staff
3. Reviews the notice and any other relevant information about the bank and
verifies that:
•

It has a composite CAMELS rating of 1 or 2.

•

It contains the information stated in step 2.

•

The transaction is consistent with safe and sound banking practices and
OCC policy.

•

The transaction does not involve a bank insider.

4. If the notice is insufficient or the bank is not qualified, requests the necessary or
missing information from the bank and includes a specific due date, or requests
the bank to file an application.
5. Reviews any additional information. Enters an Other Significant Event (OSE)
comment in the appropriate supervisory information system.

Close Out
6. Forwards the notice to the bank’s examiner-in-charge and national filing system
file no. 5.

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Procedures -- Application
Inquiry
Licensing or Supervisory Staff
1.

Refers a bank that requests instructions about bank premises to this booklet
and any related specialty booklet of the Comptroller’s Licensing Manual.

Filing the Application
Bank
2.

3.

Completes and submits an “application for increase” to the appropriate
supervisory office. The application contains:
•

A description of the present bank premises investment.

•

The amount by which the aggregate investment or specified amount
will exceed the bank’s capital stock.

•

The investment in bank premises that it intends to make and the
business reason for the level of investment or loan requested.

•

Any specified dollar amount requested and its reasonableness to the
business reason or strategy.

•

If applicable, information about any bank insiders involved in the
transaction.

If the transaction is combined with a corporate application, such as branch
or business combination filing, files the bank premises portion with the
appropriate supervisory office.

Licensing Staff
4.

If a bank premises transaction is included in a corporate filing, refers the
bank premises request to the supervisory staff for decision.

Review
Supervisory Staff
5.

Determines if the application will be considered with a related corporate
filing, such as business combination or branch.
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•

If so, verifies with the Licensing staff the application’s time frame for
decision.

•

If not, supervisory staff begins review.

6.

Sends an acknowledgment letter within five business days of receipt.

7.

Reviews the application and any other relevant information about the bank
and verifies that:
•

It contains the required application criteria described in step 2.

•

The proposal is feasible for the bank’s size, services, projected
earnings, and target market.

•

The proposal is consistent with safe and sound banking practices and
OCC policy.

•

Any arrangements or transactions involving bank insiders are made on
substantially the same terms as those prevailing at the time for
comparable transactions with independent parties (review appraisal or
appraiser’s statement of fairness).

8.

If related to a corporate application, within five business days of receipt,
solicits comments from the Licensing staff.

9.

If the application is insufficient, requests the necessary or missing
information from the bank and includes a specific due date.

10.

Reviews any additional information.

Decision
11.

Prepares the decision letter and decides the application under delegated
authority.

12.

Documents the analysis and decision in an Other Significant Event (OSE)
comment in the appropriate supervisory information system.

13.

If combined with a corporate application, notifies the Licensing staff of the
decision and provides a copy of the decision letter.

14.

Sends the bank the decision letter.

Close Out
15.

Forwards the bank’s request and the decision letter to the national filing
system file no. 5

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Glossary
An affiliate, in this booklet, includes a bank’s subsidiaries. However, any company
engaged exclusively in holding a bank’s premises is not an affiliate for purposes of
sections 23A and 23B of the Federal Reserve Act (12 USC 371c, 371c-1).
Bank premises includes: (1) premises that are owned and occupied (or to be
occupied, if under construction) by the bank, its branches, or its consolidated
subsidiaries; (2) capitalized leases and leasehold improvements, vaults, and fixed
machinery and equipment; (3) remodeling costs to existing premises; (4) real estate
acquired and intended, in good faith, for use in future expansion; or (5) parking
facilities or lots that are used by bank customers or employees, its branches, and its
consolidated subsidiaries.
A bank premises subsidiary includes a corporation, partnership, limited liability
company, or similar entity that owns a bank’s premises.
A branch includes any branch bank, branch office, branch agency, additional office,
or any branch place of business established by a bank in the United States or its
territories at which deposits are received, checks paid, or money lent.
A business combination is any merger or consolidation between a bank and one or
more depository institutions in which the resulting institution is a bank; acquisition
by a bank of all, or substantially all, of the assets of another depository institution; or
the assumption by a bank of deposit liabilities of another depository institution.
Capital and surplus means the sum of: (1) a bank’s Tier 1 and Tier 2 capital
calculated under the OCC’s risk-based capital standards in Appendix A to 12 CFR 3;
plus (2) the balance of a bank’s allowance for loan and lease losses not included in
the bank’s Tier 2 capital to calculate risk-based capital described in (1), as reported
in the bank’s Consolidated Report of Condition and Income filed under
12 USC 161.
Capital stock means common and preferred stock.
Fee, in real property law, means an estate of complete ownership, which can be
sold by the owner.
A bank insider is a director, executive officer, employee, or principal shareholder
(owning 10 percent or more of any class of voting stock).
Investments in bank premises means: (1) any direct or indirect expenditure of funds
upon bank premises; (2) the purchase of stock, bonds, or debentures of a bank
premises subsidiary; (3) loans to a bank premises subsidiary; or (4) loans upon the
security of the stock of a corporation that owns the investing bank’s premises.

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Leasehold improvements include: (1) construction of a building on leased property
and capitalization of disbursements for vaults, alterations, and fixed machinery and
equipment directly related to leased quarters; and (2) the costs of resurfacing or
other improvements directly related to leased parking lots, all of which will become
an integral part of the property and revert to the lessor upon expiration of the lease.

12

References
Appraisal
Regulation

12 CFR 34

Bank Ownership of Property
Law
Regulation

12 USC 29
12 CFR 7.1000

Branches
Law
Regulation

12 USC 36
12 CFR 5.30

Business Combinations
Laws
Regulation

12 USC 24(Seventh), 214a, 215, 215a,
215c, 1828(c), 1831o
12 CFR 5.33

Capital Requirements
Laws
Regulations

12 USC 3907, 3909
12 CFR 3, 5.46

Decisions
Regulation

12 CFR 5.13

Insider Activities
Laws
Regulations
Publication

12 USC 375, 375a, 375b, 376
12 CFR 31, 215
Comptroller’s Handbook, “Insider
Activities”

Investment in Bank Premises
Law
Regulation

12 USC 371d
12 CFR 5.37

Sharing Space and Employees
Regulation

12 CFR 7.3001

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