Bank Premises
Examination Procedures
General Procedures
Many of the steps in these examination procedures require gathering information from, or reviewing information with, examiners in other areas. Since many other areas (such as earnings, capital, and funds management) include examination procedures that address bank premises, you should discuss your review with them to reduce any burden on the bank and avoid duplication of effort. Sharing examination data also can be an effective cross check of compliance and help examiners assess the integrity of management information systems.
Information from other areas should be appropriately cross-referenced in working papers. Information that is not available from other examiners should be requested directly from the bank.
Objective: Determine the scope of the examination of bank premises and equipment.
Review the following to identify if previous problems require follow-up. Determine if planned corrective action was effected, and if not, why not.
Bank correspondence involving bank premises.
EIC’s scope memorandum.
Supervisory strategy in the OCC’s Electronic Information System.
Overall summary comments.
Previous examination report and working papers.
Audit reports, and working papers, as necessary.
From the EIC, obtain the results of his/her analysis of the UBPR, BERT, and other OCC reports. Identify any concerns, trends, or changes involving bank premises and equipment.
From the examiner assigned Internal/External Audit, obtain a copy of any significant deficiencies with bank premises and equipment. Determine if appropriate corrections have been made.
Obtain and review reports management uses to supervise bank premises and equipment. Some examples include:
Subsidiary asset and depreciation ledger(s).
A reconciliation of bank premises since the last exam.
A listing of any nonperforming (idle, abandoned, or useless) bank premises.
Most recent internal audit and regulatory compliance reports.
Board reports, etc.
Determine if any material changes have occurred since the last examination that would influence the level and direction of bank premises risk.
Determine the following from discussions with management:
How management supervises bank premises and equipment.
If there have been any significant changes in policies, procedures, practices, internal controls, or personnel responsible for managing and supervising bank premises and equipment.
If any additional internal or external factors exist that could affect bank premises and equipment.
While performing examination procedures, determine if officers and employees are operating in conformance with bank policies, procedures, practices, and applicable laws, rules and regulations.
Based on the completion of the general procedures and discussions with the bank EIC, set the objective(s) and scope of the examination.
Select from among the following examination procedures the necessary steps to meet those objectives. Seldom will it be necessary to perform all of the steps in an examination.
Quantity of Risk
Conclusion: The quantity of risk is (low, moderate, high).
Objective: Determine the adequacy and reasonableness of the bank’s present and planned investment in bank premises.
Analyze the reasonableness of the bank’s investment in fixed assets and the annual expenditures required to carry them. Consider the bank’s investment relative to:
Total capital structure.
Current earnings.
Projected earnings.
Nature and volume of operations.
Analyze the bank’s strategic short-term (1—5 year) and long-term (5—10 year) bank premise needs. Consider:
Are future needs adequately planned for?
Are significant bank premise needs incorporated into the strategic planning process?
Are planned investment amounts reasonable in relation to operating projections?
For any bank premises transactions involving insiders or affiliates, determine that they are at arms-length, reasonable, approved by the board of directors, and in compliance with 12 U.S.C. 371c for affiliates and 12 U.S.C. 375 for insiders.
Agree all major acquisitions and disposals of fixed assets and equipment to the general ledger.
On a test basis, foot transactions from subsidiary fixed asset and depreciation ledgers and agree to the general ledger control accounts.
Determine that the bank’s books have been properly adjusted to reflect significant assets that are idle, abandoned, or useless (see guidance in the Introduction section).
Determine that sufficient amounts of fire and hazard insurance are in place for all bank premises.
For bank premises which are leased (bank as lessee) with an initial lease period of more than one year, obtain from the bank the following:
Name of lessor.
Expiration date.
Payment schedule including amounts and due dates.
Current status.
Expiration and renewable option provisions.
Major responsibilities of both the lessor and lessee.
Determine whether the lease has been properly categorized and booked as either an operating or capitalized lease (refer to Introduction section and GAAP).
For bank premises which are leased (bank as lessor), determine if the bank relies on rental income to contribute to the payment of occupancy expenses and if that income is material.
If the rental income is material, analyze the bank’s potential exposure from:
Concentrations among lessees.
The impending expiration of major leases.
A lack of creditworthiness of lessee.
Noncompliance with lease terms.
Using an appropriate sampling technique, select a sample of property acquisitions and sales since the last examination.
For each sample property, review the following to test the accuracy of the summary of changes in the bank premises account since the last examination:
Invoices.
Disbursement checks.
Title data.
Asset file.
For each acquisition or sale, determine if the files contain evidence of proper officer/board approval.
Test the propriety of significant asset acquisitions by:
Comparing their cost to that of other similar assets.
Reviewing the method used to select a vendor.
Physical inspection of the asset.
Test the propriety of the sale price of fixed assets by:
Comparing the price to that of similar assets.
Reviewing the method used to establish the selling price.
Check the computation of any gain or loss on fixed asset sales and trace the proceeds to the appropriate general ledger account.
If the bank has engaged in a sales-leaseback transaction, determine whether gains or losses on the sales are deferred and accreted or amortized in accordance with GAAP.
Perform a limited test of the records to verify that depreciation methods are consistent with bank policy, prior years’ calculations, GAAP, and applicable laws, regulations, and IRS interpretations.
Investigate and explain any significant charges to the accumulated depreciation accounts other than for the current year’s depreciation expense or for the retirement or sale of assets.
Review the construction-in-process account, if any, to determine that any fully completed items are being depreciated at the proper rate.
Reconcile tax values of fixed assets acquired and tax depreciation since the last examination.
Inspect tax receipts on real and personal property, where applicable, and confirm paid or accrued amounts by tracing them to appropriate general ledger expense and/or liability accounts.
Inspect the bank’s books to determine that any deferred taxes resulting from the use of dual deprecation methods are accurately reflected.
Through discussion with the EIC, determine that strategies for managing fixed asset and equipment needs are reasonable and compatible with the bank’s overall strategic goals.
Determine whether management has considered the following in their strategic/contingency planning process:
External factors that could impact bank premises?
Potential obsolescence of bank premises?
Under or over utilization of existing bank premises and equipment?
Adequacy of communication channels and delivery systems?
Adequacy of operating systems?
Test compliance with laws, rulings, and regulations. Ensure that:
The bank’s investment in premises conforms to the limits in 12 U.S.C. 371d.
Approval for an excess investment in bank premises was obtained in accordance with 12 U.S.C. 371d and 12 C.F.R. 5.37.
Bank premises are used in accordance with 12 U.S.C. 29 and 12 C.F.R. 7.1000.
For transactions involving real estate, an appraisal was obtained in accordance with 12 C.F.R. 34.
Quantity of Risk Management
Conclusion: The quality of risk management is (strong, satisfactory, weak).
Policy
Conclusion: The board (has/has not) established effective policies regarding bank premises and equipment.
Objective: Determine the adequacy of the bank’s policies regarding bank premises and equipment.
Review the adequacy of the bank’s policies for acquiring and disposing of fixed assets and major pieces of equipment. Do they:
Establish responsibilities and accountability?
Include written guidelines?
If not, should they be written given the bank’s complexity?
Address fair pricing, selection of vendors or buyers, and a prohibition against self-dealing?
Include the requirement that the board must give prior approval for all major fixed asset sales and disposals?
Determine if policies are approved by the board or a designated committee.
Determine if policies are reviewed and updated at least annually by the board.
Determine if policies are appropriately communicated to those persons having custody of property or who have responsibility for the acquisition, sales, disposal, or record keeping of property.
Conclusion: Management and the board (have/have not) established effective risk management processes regarding bank premises and equipment.
Objective: Determine the adequacy of the bank’s planning processes regarding bank premises and equipment.
Evaluate how management determines fixed asset and equipment needs in the strategic planning process.
Review the bank’s contingency planning process for bank premises and equipment and determine how management plans for the possibility of current premises becoming unusable.
Evaluate the adequacy of internal control procedures. Consider the following:
Records, Control and Custody of Property
Do the bank’s procedures preclude persons who have access to property from having “sole custody of property,” in that its physical character or use would make any unauthorized disposal readily apparent?
Do inventory control methods sufficiently limit accessibility?
Are subsidiary property records posted by persons who do not also have sole custody of property?
Are subsidiary property records reconciled, at least annually, to the appropriate general ledger accounts by persons who do not also have sole custody of property?
Is the physical existence of bank equipment periodically checked or tested, such as by a physical inventory, and are any differences from property records investigated by persons who do not also have sole custody of property?
Are there procedures that provide for serial numbering of equipment?
Are there separate property files that consist of invoices (including settlement sheets and bills of sale, as necessary), titles (on real estate, vehicles, etc.), and other pertinent ownership data as part of the required documentation?
Is the benefit of expert tax advice obtained prior to final decision-making on significant fixed asset transactions?
Does management have a clearly defined method of determining whether fixed assets should be owned or leased, and is supporting documentation maintained by the bank?
Do policies or procedures provide for selecting a seller, service, insurer, or purchaser of major assets (through competitive bidding, etc.) to prevent any possibility of conflict of interest or self-dealing?
Do review procedures provide for an appraisal of an asset to determine the propriety of the proposed purchase or sales price?
Is the addition, sale, or disposal of property approved by the signature of an officer who does not also control the related disbursement or receipt of funds?
Is the approval of the board of directors, or its designated committee, required for all major additions, sales, or disposals of property (if so, indicate the amount that constitutes a major addition, sale, or disposal $____).
Is the preparation of general ledger entries for additions, sales, and disposals of property, prepared by persons or adequately reviewed by persons, who do not also have sole custody of property?
Are any property additions, sales and disposals records balanced, at least annually, to the appropriate general ledger accounts by persons who do not also have sole custody of property?
Do policies or procedures require that all additions be reviewed to determine whether they represent replacements and that any replaced items are cleared from the accounts?
Do procedures require signed receipts for removal of equipment?
Depreciation
Are the preparation, addition, and posting of periodic depreciation records performed and adequately reviewed by persons who do not also have sole custody of property?
Do procedures require that depreciation expenses be charged at least quarterly?
Are the subsidiary depreciation records balanced, at least annually, to the appropriate general controls by persons who do not also have sole custody of property?
Leased Property
Bank as Lessor:
Do policies and procedures provide for the division of duties involved in billing and collection of rental payments?
Are lease agreements subject to the same direct verification program applied to other bank assets and liabilities?
Are credit checks performed on potential lessees?
Do policies provide for a periodic review of lessees for undue concentrations of affiliated or related concerns?
Bank as Lessee:
Are procedures in effect to determine whether a lease is a “capital” or an “operating” lease as defined by GAAP?
For “capital” leases, do operating procedures provide that the amount capitalized is computed by more than one individual and/or reviewed by an independent party?
Personnel
Conclusion: The board, management, and effected personnel (do/do not) display a fundamental understanding of risk concepts and risk management practices related to bank premises and equipment.
Objective: Given the size and complexity of the bank, determine if bank management/personnel possess and display acceptable knowledge and technical skills in managing and performing duties related to bank premises and equipment.
Determine significant current and previous work experience of significant personnel involved in bank premises and equipment management and decision making. Consider:
Previous bank premises management experience.
Previous administrative experience.
Determine formal education and planned continuing education by management.
Assess management’s technical knowledge and ability to manage bank premises based on conclusions developed while performing these procedures.
Controls
Conclusion: Management (has/has not) established effective control systems.
Objective: Determine that effective control systems are in place to monitor compliance with established policies and processes.
Determine the effectiveness of the audit function in identifying risk in bank premises and equipment. Consider the following:
Scope and coverage of review(s).
Frequency of review(s).
Qualifications of audit personnel.
Comprehensiveness and accuracy of findings/recommendations.
Adequacy and timeliness of follow up.
Evaluate the effectiveness of the regulatory review function in identifying compliance risk in bank premises and equipment. Consider the following:
Scope and coverage. Does the review test for compliance with the following?
12 U.S.C. 371d—Investment Limits for Bank Premises.
12 U.S.C. 371d and 12 C.F.R. 5.37—Approval for an Excess Investment in Bank Premises.
12 U.S.C. 29 and 12 C.F.R. 7.1000—Use of Bank Premises.
12 C.F.R. 34—Appraisals for Real Estate Transactions.
If violations/exceptions were noted, determine if the bank took appropriate corrective action.
Adequacy and timeliness of follow up.
Determine the effectiveness of any other control systems used by management and the board in the risk management of bank premises and equipment.
Conclusion
Objective: To communicate findings and initiate corrective action when policies, procedures, processes, or controls are deficient or when violations have been noted.
Provide the EIC with a conclusion memo stating your findings regarding the propriety and adequacy of the bank’s present and projected investment in bank premises. Consider:
The size of the bank.
Cash flow forecasts.
Existing fixed asset investments
Anticipated growth potential.
Bank programs to maintain assets at their most useful capacity.
The adequacy of policies, procedures, practices, and controls.
How bank officers conform to established policy and practices.
Significant internal control deficiencies.
Any recommended corrective actions needed to correct deficiencies.
Determine the impact on the aggregate and direction of risk assessments for any applicable risks identified by performing the above procedures. Examiners should refer to guidance provided under the OCC’s large and community bank risk assessment programs. Consider:
Risk Categories: Compliance, Credit, Interest Rate, Liquidity,
Reputation, Strategic, Transaction.
Risk Conclusions:High, Moderate, or Low.
Risk Direction: Increasing, Stable, or Decreasing.
Determine, in consultation with EIC, if the risks identified are significant enough to merit bringing them to the board’s attention in the ROE. If so, prepare items for inclusion under the heading Matters Requiring Board Attention. Consider:
MRBA should cover practices that:
Deviate from sound fundamental principles and are likely to result in financial deterioration if not addressed.
Result in substantive noncompliance with laws.
MRBA should discuss:
Causative factors contributing to the problem.
Consequences of inaction.
Management’s commitment for corrective action.
Time frames and person(s) responsible for corrective action.
Discuss the following findings with management including conclusions regarding applicable risks:
Any internal control deficiencies.
Any policy or procedural deficiencies.
Any violations of law or regulation.
As appropriate, prepare a brief bank premises and equipment comment for inclusion in the ROE. Consider:
Deficiencies noted.
Violations of law.
Recommended corrective action.
Management’s commitments.
Prepare a memorandum or update the work program with any information that will facilitate future examinations.
Update the OCC’s electronic information system and any applicable report of the examination schedules or tables.
Organize and reference working papers in accordance with OCC guidance.
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