State Member Bank Branching Considerations
We have received more inquiries from state member banks (SMBs) considering opening additional branches, perhaps due to improved banking conditions. This article provides information to address common questions we receive about application requirements for establishing de novo branches. Acquisition of an existing branch from another institution is treated as a merger and evaluated under the Bank Merger Act.
SMBs wishing to establish a new branch must apply with the Federal Reserve System (System) and the appropriate state banking agency (State). Instructions for applying for a de novo branch are available on the Board of Governors web site. The System does not have an application form; often a copy of the information provided to the State is sufficient. When reviewing a branch proposal, we consider the bank’s financial condition, management (including Bank Secrecy Act compliance), capital adequacy, Community Reinvestment Act performance, and investment in premises as well as the convenience and needs of the community.
The System generally discourages branching proposals for a banking organization in less than satisfactory condition, as expansion could distract management from addressing existing issues. However, the System recently issued Supervision and Regulation Letter SR 13-7 describing the circumstances under which an SMB could potentially branch on a de novo basis even if it or its parent holding company is in less than satisfactory condition. The letter is available on the Board of Governors web site.
The Federal Reserve may permit de novo branching for SMBs in less than satisfactory condition if the bank’s CAMELS composite, management, and consumer compliance ratings and the parent’s composite, risk management, and financial components are rated no worse than 3. Under these circumstances, an SMB must demonstrate that it meets six criteria detailed in SR 13-7, including that it can effectively plan and execute branch expansions. Banks that do not have a history of successful de novo branching should include an execution plan in the material provided to the Federal Reserve. The letter further describes limits on the number of de novo branches an SMB can establish under this policy. We would expect this limit to be one branch annually for Ninth District SMBs subject to this policy given size and complexity.
We also get many questions as to when a bank must file an application and notice of branch closing to move a branch. A branch move considered a “relocation” does not require an application or formal notification of branch closing to customers. A relocation is generally defined as a move within (1) a 1,000-foot radius of the site if the office is located within a central city of a metropolitan statistical area (MSA); (2) a one-mile radius of the site if not located within a central city, but if located within an MSA; or (3) a two-mile radius of the site if not located within an MSA. We do not require an application if the relocation meets these parameters. A move outside these parameters requires an SMB to follow the requirements for closing a branch and to file an application to open the branch at the new location.
SMBs establishing a new ATM or loan production office (LPO) do not need to file an application with the System, but may need to notify the appropriate State (though it is helpful to notify the Reserve Bank). SMBs should ensure that the activities are appropriately limited so that the office does not become a branch when establishing an LPO.
Questions pertaining to the branch application process can be directed to Applications staff or your Relationship Manager. Contact information is available on the Federal Reserve Bank of Minneapolis web site.