Alert July 03, 2012

OCC Issues Corporate Decision Authorizing Federal Savings Association to Count Value of Bank-Owned Life Insurance as Capital

The OCC issued a Corporate Decision (“Corporate Decision 2012-11”) in which it concluded that the cash surrender value (“CSV”) of bank-owned life insurance (“BOLI”) policies contributed by a holding company to its federal savings association (“FSA”) subsidiary could be counted as capital by the FSA. In the matter that was the subject of Corporate Decision 2012-11, the FSA did not need to raise additional capital, but stated that it intended to use the capital to support potential long-term growth.

In reaching its decision, the OCC found that an FSA may hold BOLI as an activity incidental to the FSA’s powers under the Home Owners’ Loan Act and that the FSA had complied with the legal requirements and supervisory guidance of the 2004 federal banking agencies’ Interagency Statement on the Purchase and Risk Management of Life Insurance.

In Corporate Decision 2012-11, the OCC further concluded the FSA could count the CSV of the BOLI contributed to it by the FSA’s holding company because: (1) the BOLI is clearly identifiable and can be sold separately from the FSA; (2) the FSA had established an independent market value for the BOLI and the BOLI was likely to hold its market value; (3) the transaction did not involve a purchase of assets from an affiliate or another type of covered transaction under the FRB’s Regulation W; (4) the FSA was well capitalized; and (5) the proposed noncash contribution of capital to the FSA involved less than 25% of the FSA’s capital.

The OCC concluded in Corporate Decision 2012-11 by stating that the CSV of BOLI could be included in the FSA’s common stock surplus and therefore could be counted for bank regulatory capital purposes as part of the FSA’s core (Tier 1) capital.