A national bank can acquire and retain a printing company to sell printing services to other financial institutions as a correspondent service. (12/18/97)

Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

Interpretive Letter #811

January 1998

12 U.S.C. 24(7)18

December 18, 1997

12 U.S.C. 24(7)1

John W. Alderman, III

Vice President & Chief Legal Counsel

City Holding Company

P.O. Box 4168

Charleston, West Virginia 25364-4168

Dear Mr. Alderman:

This responds to your request that the Office of the Comptroller of the Currency (“OCC”)

confirm that the proposed acquisition of [ ] (“Printing Company”)

by [ ], [ City, State ] (“Bank”) is permissible. Based on

the information and representations provided, and for the reasons discussed below, we agree

with your conclusion that the proposed acquisition and contemplated activities of the Printing

Company would be permissible under the National Bank Act.

Background

The Bank and its affiliates currently contract with the Printing Company and other third parties

for bank printing and related design services which include the printing of checks, forms,

marketing materials, and similar items. The Printing Company also offers similar services and

supplies to other customers, some of whom are not financial institutions. The Bank proposes

to acquire the Printing Company and to operate it as a division of the Bank. The Bank’s

primary business objective in acquiring the Printing Company is to reduce its printing costs

and achieve greater control over the production of its printed materials. The Bank believes

that the acquisition of an existing printing business, including its trained employees and assets,

would achieve these objectives more efficiently and with less risk than acquiring printing

capability de novo.

Following its acquisition, the Printing Company would continue to provide printing services to

the Bank and its affiliates as described. Additionally, the Bank plans to use the Printing

Company’s “excess capacity” to provide printing services to third-parties, including non-

financial entities

achieve these objectives more efficiently and with less risk than acquiring printing

capability de novo.

Following its acquisition, the Printing Company would continue to provide printing services to

the Bank and its affiliates as described. Additionally, the Bank plans to use the Printing

Company’s “excess capacity” to provide printing services to third-parties, including non-

financial entities. This excess capacity would exist in part because initially the Bank and its

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OCC recognizes that projections of future needs of printing services cannot be made with complete

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accuracy because, among other reasons, unforseen changes in technology could change patterns of internal

consumption of such services.

affiliates will not consume all of the printing and design capacity of the Printing Company.

Specifically, the Bank expects that immediately after the acquisition approximately 80-85% of

the Printing Company's printing and design capacity will be consumed by the businesses of the

Bank and its affiliates. However, the Bank expects that this excess capacity in the Printing

Company will decrease over time as the operations of the Bank and its affiliates expand and as

their need for printing services increase concomitantly. Although the precise amount and

timing of this reduction in excess capacity cannot be predicted with certainty, based on current

growth rates and assuming no increase in the Printing Company's capacity, the Bank believes

that the initial excess would be consumed by its operations and those of its affiliates within five

years.1

The Bank reports that the owners of the Printing Company will not sell to the Bank less than

100% of the Company, and the Bank does not believe that it can cost-effectively acquire assets

and attract employees de novo that would adequately substitute for the assets, employees and

expertise that it could acquire through the Printing Company

operations and those of its affiliates within five

years.1

The Bank reports that the owners of the Printing Company will not sell to the Bank less than

100% of the Company, and the Bank does not believe that it can cost-effectively acquire assets

and attract employees de novo that would adequately substitute for the assets, employees and

expertise that it could acquire through the Printing Company. The Bank also states that,

assuming it did not need the excess capacity for anticipated future internal growth, it would be

unable following the acquisition of the Printing Company to segregate and divest the excess

printing capacity since substantially all of the excess is represented by individual, indivisible

assets (e.g., presses, printers, copiers, and other fixed assets) and employees with special

expertise. The Bank represents that simply divesting or not using the excess capacity would

result in substantial loss to the Bank from increased overhead and reduced return on assets.

Discussion

The National Bank Act provides that national banks shall have the power:

[t]o exercise . . . all such incidental powers as shall be necessary to carry on the

business of banking; by discounting and negotiating promissory notes, drafts, bills of

exchange, and other evidences of debt; by receiving deposits; by buying and selling

exchange, coin, and bullion; by loaning money on personal security; and by obtaining,

issuing, and circulating notes. . . .

12 U.S.C. § 24 (Seventh).

The Supreme Court has expressly held that the “business of banking” is not limited to the

enumerated powers in 12 U.S.C. § 24 (Seventh), but encompasses more broadly activities that

are part of the business of banking. See NationsBank of North Carolina, N.A., v Variable

Life Annuity Co., 115 S. Ct. 810, 814 n.2 (1995) (“VALIC”). The VALIC decision further

established that banks may engage in the activities that are incidental to the enumerated powers

as well as the broader “business of banking.”

owers in 12 U.S.C. § 24 (Seventh), but encompasses more broadly activities that

are part of the business of banking. See NationsBank of North Carolina, N.A., v Variable

Life Annuity Co., 115 S. Ct. 810, 814 n.2 (1995) (“VALIC”). The VALIC decision further

established that banks may engage in the activities that are incidental to the enumerated powers

as well as the broader “business of banking.”

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See, e.g., 12 U.S.C. § 78 (persons ineligible to be bank employees).

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Memorandum dated November 18, 1996, to Eugene A. Ludwig, Comptroller of the Currency, from Julie

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L. Williams, Chief Counsel, “Legal Authority for Revised Operating Subsidiary Regulation,” reprinted at [1996-

Prior to VALIC, the standard that was often considered in determining whether an activity was

incidental to banking was the one advanced by the First Circuit Court of Appeals in Arnold

Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972) (“Arnold Tours”). The Arnold Tours

standard defined an incidental power as one that is “convenient or useful in connection with

the performance of one of the bank’s established activities pursuant to its express powers under

the National Bank Act.” Arnold Tours at 432 (emphasis added). Even prior to VALIC, the

Arnold Tours formula represented the narrow interpretation of the “incidental powers”

provision of the National Bank Act. OCC Interpretive Letter 494 (December 20, 1989). The

VALIC decision, however, has established that the Arnold Tours formula provides that an

incidental power includes one that is convenient and useful to the “business of banking,” as

well as a power incidental to the express powers specifically enumerated in 12 U.S.C. §

24(Seventh).

Printing Services for the Bank and its Affiliates

The acquisition and operation of the Printing Company to provide printing services for the

Bank and its affiliates are permissible for a national bank under 12 U.S.C. § 24(Seventh)

one that is convenient and useful to the “business of banking,” as

well as a power incidental to the express powers specifically enumerated in 12 U.S.C. §

24(Seventh).

Printing Services for the Bank and its Affiliates

The acquisition and operation of the Printing Company to provide printing services for the

Bank and its affiliates are permissible for a national bank under 12 U.S.C. § 24(Seventh).

With respect to printing services for the Bank, the proposed activity is “convenient” and

“useful” to the business of banking. Some printing operations will be used directly for

banking services, e.g., to provide forms used by the Bank in its lending and deposit functions.

Indeed, the OCC has previously concluded that the printing of checks, drafts, loan payment

coupons, and similar documents for use in the national bank’s business is a permissible

incidental activity for a national bank. See Letter from Mary Wheat (April 7, 1988)

(Unpublished).

Other printing activities of the Company will not be used directly for banking activities, but

are permissible incidental activities because they facilitate, support and, hence, are “necessary

to” the operation of the Bank as a business. Examples of these would be the design and

printing of internal personnel forms and telephone message pads for the Bank. These printing

services fall within the category of permissible incidental activities of national banks that are

not incident to specific banking services or products, but rather to the operation of the bank as

a business: they facilitate general operation of the bank as a business enterprise. Examples of

these facilitating activities include hiring employees, issuing stock to raise capital, owning or

renting equipment, borrowing money for operations, purchasing the assets and assuming the

liabilities of other financial institutions. While no express grants of authority to conduct these

activities exist, various federal statutes have implicitly recognized and regulated these business

activities of national banks

ing activities include hiring employees, issuing stock to raise capital, owning or

renting equipment, borrowing money for operations, purchasing the assets and assuming the

liabilities of other financial institutions. While no express grants of authority to conduct these

activities exist, various federal statutes have implicitly recognized and regulated these business

activities of national banks. For example, the statutes refer to limits on persons who can serve

as bank employees. In each case, the statutes have assumed the existence of the corporate

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power to conduct the activity. These powers are incidental to the general grant of power to

conduct a “business” under 12 U.S.C. § 24(Seventh) and do not need express enumeration.

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1997 Transfer Binder] Fed. Banking Law. Rep. (CCH) ¶ 90-464 (“Williams Memo”).

Producing printed materials needed for the Bank's internal administration as a business is,

thus, a permissible incidental activity.

Finally, providing printing services for affiliated banks (and for nonaffiliated banks) is part of

the business of banking because it is a valid correspondent banking function. National banks

have traditionally performed for other financial institutions an array of activities called

“correspondent services.” United States v. Citizens and Southern Nat’l Bank, 422 U.S. 86,

114-15 (1975). These correspondent activities are part of the business of banking. OCC

Interpretive Letter No. 754, reprinted in [1996-1997 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¶ 81-118 (Nov. 6, 1996). Among the permissible correspondent activities are

designing and producing banking related forms and documents. See OCC Interpretive Letter

No. 513, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,215

(June 18, 1990).

Retained Excess Capacity

The Bank notes that acquisition of the Printing Company will provide more printing capacity

than can be consumed initially by the Bank and its affiliates

espondent activities are

designing and producing banking related forms and documents. See OCC Interpretive Letter

No. 513, reprinted in [1990-1991 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,215

(June 18, 1990).

Retained Excess Capacity

The Bank notes that acquisition of the Printing Company will provide more printing capacity

than can be consumed initially by the Bank and its affiliates. Accordingly, it proposes to use

this excess capacity to provide a limited amount of printing services for third parties. For the

reasons below, this is a permissible use of retained excess capacity.

As noted above, a national bank may acquire a non-financial company where the company’s

non-financial operations are incidental to the production or distribution of banking products.

In some cases the acquired company may have more productive capacity than can be currently

used for banking operations. See, e.g., OCC Interpretive Letter No. 677, reprinted in [1994-

1995 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 83,625 (June 28, 1995) (acquisition of

a financial services software company).

The OCC and the courts have long held that if a bank acquires excess capacity in good faith to

meet the needs of the bank or its customers, the bank may use the excess capacity profitably

even though the specific activities involving the excess capacity are not, themselves, part of or

incidental to the business of banking. This doctrine has been applied to excess capacity in real

are company).

The OCC and the courts have long held that if a bank acquires excess capacity in good faith to

meet the needs of the bank or its customers, the bank may use the excess capacity profitably

even though the specific activities involving the excess capacity are not, themselves, part of or

incidental to the business of banking. This doctrine has been applied to excess capacity in real

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See Brown v. Schleier, 118 F. 981, 984 (8th Cir. 1902), aff'd, 194 U.S. 18 (1904); Wingert v. First

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National Bank, 175 F. 739 (4th Cir. 1909); Perth Amboy National Bank v. Brodsky, 207 F. Supp. 785, 788

(S.D.N.Y. 1962); and Unpublished letter from Comptroller James J. Saxon dated February 16, 1965.

OCC Interpretive Letter No. 742, reprinted in [1996-1997 Transfer Binder] Fed. Banking L. Rep.

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(CCH) ¶ 81-106 (Aug. 19, 1996) (excess capacity in Internet access); OCC Interpretive Letter No. 677, supra

(excess capacity in software production and distribution); Unpublished letter from William Glidden dated June 6,

1986 (excess capacity in electronic security system); Unpublished letter from Stephen Brown dated December 20,

1989 (excess capacity in long line communications); and 12 C.F.R. 7.1019.

Unpublished letter from Mary Wheat dated April 7, 1988 (excess capacity in acquired printing

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equipment); Unpublished letter from William Glidden dated 7/11/89 (excess capacity in messenger services); and

Unpublished letter from Peter Liebesman dated December 13, 1983 (excess capacity in mail sorting machine).

estate , electronic facilities , and non-electronic facilities . Further, this doctrine applies to the

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acquisitions of companies as well as equipment and facilities. OCC Interpretive Letter No.

677, supra

lliam Glidden dated 7/11/89 (excess capacity in messenger services); and

Unpublished letter from Peter Liebesman dated December 13, 1983 (excess capacity in mail sorting machine).

estate , electronic facilities , and non-electronic facilities . Further, this doctrine applies to the

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acquisitions of companies as well as equipment and facilities. OCC Interpretive Letter No.

677, supra.

The excess capacity doctrine recognizes that a bank acquiring an asset in good faith to conduct

its banking business should, under its incidental powers, be permitted to make full economic

use of the acquired property if use of the property for purely banking purposes would leave the

property underutilized. The underlying rationale is essentially that of avoidance of economic

waste. The market price of the acquired property necessarily reflects its potential full

economic use and if a bank cannot obtain that full economic value from owning the property,

the bank would incur economic waste and could be unable to purchase the property it needs for

its banking business. Thus, in the leading case of Brown v. Schleier, supra, the court

observed:

Nor do we perceive any reason why a national bank, when it purchases or leases

property for the erection of a banking house, should be compelled to use it

exclusively for banking purposes. If the land which it purchases or leases for

the accommodation of its business is very valuable, it should be accorded the

same rights that belong to other land owners of improving it in a way that will

yield the largest income, lessen its own rent, and render that part of its funds

which are invested in realty most productive.

Similarly, the OCC has said regarding excess computer capacity:

If a bank . . . has legitimately acquired data processing equipment with excess

capacity, it need not allow the excess capacity to go unused. Thus, the

bank . .

f improving it in a way that will

yield the largest income, lessen its own rent, and render that part of its funds

which are invested in realty most productive.

Similarly, the OCC has said regarding excess computer capacity:

If a bank . . . has legitimately acquired data processing equipment with excess

capacity, it need not allow the excess capacity to go unused. Thus, the

bank . . . may, incident to its legitimate acquisition of that equipment, sell the

excess time even where the data processing services thus sold will not be data

processing functions which are, of themselves, part of the business of banking.

This allows a bank . . . to lower its costs of performing those data processing

services which part of the banking business more profitable and competitive.

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Merely ceasing the operations of the “excess” portion without a sale, even though it would save on

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variable costs, will frequently result in a loss where the “excess” portion produces net revenues. The purchasing

bank will usually have paid a premium for the company based in part upon the net present value of that expected

revenue stream which will be lost if the operation is simply ceased without sale.

In light of the express statutory limitation on national bank holding of realty under 12 U.S.C. § 29, the

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OCC expects that a national bank will normally use real estate acquired for future expansion within five years. See

12 C.F.R. § 34.84. However, the appropriate period of time for expected consumption of non-realty excess capacity

should depend upon the nature of the specific asset and its use.

Unpublished letter from Peter Liebesman, dated December 13, 1983 (hereinafter: the

“Liebesman Letter”).

In its excess capacity letters, OCC recognizes that good faith excess capacity can arise for

several reasons

See

12 C.F.R. § 34.84. However, the appropriate period of time for expected consumption of non-realty excess capacity

should depend upon the nature of the specific asset and its use.

Unpublished letter from Peter Liebesman, dated December 13, 1983 (hereinafter: the

“Liebesman Letter”).

In its excess capacity letters, OCC recognizes that good faith excess capacity can arise for

several reasons. For example, the excess may be unavoidable where “due to the

characteristics of the [desired equipment or facilities] available on the market, the capacity of

the most practical optimal equipment [or facilities] available to meet the bank’s needs may also

exceed its precise needs.” OCC Interpretive Letter No. 742, supra. See also, Liebesman

Letter, supra; Unpublished letter from Mary Wheat dated April 7, 1988; and Unpublished

letter from William Glidden dated June 6, 1986. With equipment, this can occur because the

equipment is not marketed in a size that meets the specific needs of the bank. With a

company, this can occur in good faith because, for example, (1) the acquisition of an existing

company is more economical than acquiring or developing needed capability de novo, (2) the

seller refuses to sell just the portion of the company the bank needs and, (3) as a practical

matter, the purchasing bank is unable to divest the excess portion of the company without loss

or injury because purchasers for that portion of the company cannot realistically be found at a

price that would fully compensate the bank for its investment in the excess portion of the

company.7

Retention of excess capacity may also be necessary for future expansion or to meet the

expected future needs of the bank. OCC Interpretive Letter No. 677, supra; and Unpublished

letter from Stephen Brown dated December 20, 1989. By way of analogy, national banks are

permitted to acquire and to sell excess space in real property that they hold in good faith for

future banking use. See, e.g., Unpublished letter from Comptroller James J

necessary for future expansion or to meet the

expected future needs of the bank. OCC Interpretive Letter No. 677, supra; and Unpublished

letter from Stephen Brown dated December 20, 1989. By way of analogy, national banks are

permitted to acquire and to sell excess space in real property that they hold in good faith for

future banking use. See, e.g., Unpublished letter from Comptroller James J. Saxon dated

February 16, 1965 and Unpublished letter from Wallace Nathan dated July 22, 1986.

Property acquired for future use can be retained if there is a “reasonable expectation that, in

the foreseeable future, the property will be useful” for banking purposes. Unpublished letter

from Thomas DeShazo dated August 6, 1975; Unpublished letter from Peter C. Kraft dated

February 13, 1986; Unpublished Letter from John Powers dated December 23, 1986.

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Finally, good faith excess capacity can also arise after the initial acquisition of capacity

thought to be fully needed for banking operations. This can occur due to a decline in level of

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See, e.g., Unpublished letter from William Glidden dated June 6, 1986.

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See, e.g., Unpublished letter from William Glidden dated July 11, 1989.

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banking operations using the capacity or because banking operations become more efficient in

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their use of the capacity.10

The underlying reason for the acquisition or retention of excess capacity in any particular case

is significant because, among other things, it can affect the analysis of whether the retention of

the specific quantity of excess capacity is permissible in that particular case. For example, the

rationale permitting retention of excess capacity acquired in reasonable anticipation of future

growth might reasonably support fairly large amounts of initial excess capacity that will

decline quickly

is significant because, among other things, it can affect the analysis of whether the retention of

the specific quantity of excess capacity is permissible in that particular case. For example, the

rationale permitting retention of excess capacity acquired in reasonable anticipation of future

growth might reasonably support fairly large amounts of initial excess capacity that will

decline quickly. On the other hand, excess capacity that is acquired due to the “market

availability” rationale will not necessarily decline over time and the likelihood that such excess

will persist indefinitely may be considered in assessing the amount of permissible retained

excess. Therefore, one cannot develop fixed rules on what specific quantity of excess capacity

will meet the good faith standard in all retention cases.

Here, the Bank proposes to retain the excess capacity in the Printing Company in good faith

for two reasons. First, the Bank has demonstrated a reasonable expectation that it will need

the excess printing capacity for future expansion within the foreseeable future. The Bank has

attested that it believes that, based upon projected growth, it will probably consume the entire

printing capacity of the Company for banking purposes within five years. Second, the Bank

also justifies retention of the excess capacity due to the necessities of market availability. The

Bank credibly represents that it could not acquire de novo the needed printing capacity more

economically, that the Company cannot be acquired without the excess, and that the excess

cannot be divested without undue economic loss. Under either rationale, since the excess

printing capacity will have been acquired and retained in good faith, it follows that the Bank

may acquire the Printing Company and make full economic use of its excess capacity,

including for non-banking functions.

I trust the foregoing is responsive to your inquiry

ed without the excess, and that the excess

cannot be divested without undue economic loss. Under either rationale, since the excess

printing capacity will have been acquired and retained in good faith, it follows that the Bank

may acquire the Printing Company and make full economic use of its excess capacity,

including for non-banking functions.

I trust the foregoing is responsive to your inquiry. If you have any questions concerning this

opinion, please contact Assistant Chief Counsel James Gillespie at (202) 874-5200.

Sincerely,

/s/

Julie L. Williams

Chief Counsel