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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

DIVISION OF CONSUMER AND 

COMMUNITY AFFAIRS

SR 13-7

CA 13-4

April 5, 2013

TO THE OFFICER IN CHARGE OF SUPERVISION 

AT EACH FEDERAL RESERVE BANK AND TO STATE MEMBER BANKS AND 

BANK HOLDING COMPANIES

SUBJECT: State Member Bank Branching Considerations

Applicability to Community Banking Organizations: This guidance applies to all state 

member banks and their parent bank holding companies, including community banking 

organizations, which are defined as institutions supervised by the Federal Reserve with total 

consolidated assets of $10 billion or less.

The Federal Reserve is issuing this letter to clarify its policy concerning the application 

process for a state member bank in less-than-satisfactory condition for the establishment of a de 

novo branch.1

 This letter describes the circumstances under which a state member bank may be 

permitted to branch on a de novo basis if it or its parent bank holding company (collectively, a 

“banking organization”) is in less-than-satisfactory condition. While this letter explains the 

criteria for the establishment of a de novo branch, a banking organization’s proposal must be 

consistent with general safety-and-soundness standards and adhere to the Federal Reserve’s 

application process.

A state member bank in less-than-satisfactory condition, or which has a less-thansatisfactory record of consumer compliance or performance under the Community Reinvestment 

Act (“CRA”), generally should not pursue expansionary proposals and should focus on 

remediating identified supervisory issues. Expansionary transactions such as mergers and 

acquisitions require a significant amount of management’s time and can distract an organization

 1 Refer to 12 CFR 208.6 (Board’s Regulation H, Establishment and maintenance of branches) and 12 CFR 262.3 

(Board’s Rules of Procedures, Applications). Approval may be warranted for proposals to replace existing 

branch(es) with a new branch or to complete a branch for which construction had commenced well before the bank 

was informed of a rating downgrade and such approvals may not necessarily count towards branching limits 

discussed below. This letter does not apply to proposals by state member banks to acquire existing branches from 

unaffiliated depository institutions or proposals to establish foreign branches.
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from restoring a bank holding company or state member bank to a safe-and-sound condition or 

establishing an effective consumer compliance program in a timely manner. However, the 

establishment of a limited number of de novo branches generally should not require a significant 

amount of time or distract management from continuing to address the organization’s 

supervisory issues. Accordingly, the Federal Reserve is clarifying its criteria for expansionary 

proposals and will consider proposals involving the establishment of a limited number of de 

novo branches by state member banks that are in less-than-satisfactory condition or have a lessthan-satisfactory consumer compliance record. A state member bank should be able to 

demonstrate that it can effectively plan and execute branch expansions; absent a history of 

successful de novo branching, the branching proposal should include an execution plan. 

Definitions of Less-than-Satisfactory Condition

For purposes of this letter, “less-than-satisfactory condition” refers to a banking 

organization with any of the following factors:2

• A composite CAMELS supervisory rating of “3” for the state member bank at the most 

recent safety-and-soundness examination.

• A management component rating of “3” at the most recent safety-and-soundness 

examination of the state member bank, even if the composite CAMELS rating is “1” or 

“2.”

• A composite consumer compliance rating for the state member bank of “3” at the most 

recent compliance examination or assessment.

3

 

• A less than Satisfactory CRA rating at the most recent performance evaluation.

• A composite RFI rating of “3” at the most recent bank holding company inspection.

4

• A composite RFI rating of “1” or “2,” but with a risk management or financial factors 

component rating of “3” at the most recent inspection.

The Federal Reserve generally will discourage branching proposals for a banking organization 

with supervisory ratings that are more severe than those listed above. 

De Novo Branching Criteria

In submitting a request to establish a de novo branch, a state member bank should be able to 

demonstrate that it meets the following criteria:

1. Well-defined rationale for branching that will not materially increase risk. Overall, the 

state member bank should provide a well-defined rationale in the proposal that the branch 

would not materially increase the bank’s risk profile and would not exacerbate existing 

 2 For information on the CAMELS rating system, refer to SR letter 96-38, “Uniform Financial Institutions Rating 

System,” and for the RFI/C(D) rating system (commonly known as “RFI”), refer to SR letter 04-18, “Bank Holding 

Company Rating System.”

3 See the Community Reinvestment Act, 12 U.S.C. 2906(b)(2), and CA letter 80-15, “Uniform Interagency 

Consumer Compliance Ratings System.”

4 More specifically, this would be the “C” rating in the RFI/C (D) rating system.
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supervisory issues at the organization. Furthermore, the proposal must be consistent with 

the organization’s ongoing business strategy and strategic plan as confirmed by the 

Reserve Bank’s examination staff. 

2. Satisfactory progress in remediating outstanding supervisory issues. The state member 

bank should be proactively remediating any identified supervisory issues. Additionally, 

given that a banking organization in less-than-satisfactory condition often is under a

supervisory action, the organization also should be in substantial compliance with the 

majority of the provisions of any such action. If a state member bank is permitted to 

branch under this policy and subsequently does not remediate outstanding issues prior to 

its next examination, the bank may be prohibited from branching further until it is in 

satisfactory condition.

3. Stable or improving risk management and financial factors at the organization. A state 

member bank will be evaluated for stability in its financial performance metrics,

comprised of capital, earnings, liquidity, and asset quality measures. Financial 

performance should be stable or improving, and analysis of financial indicators should 

demonstrate that the bank is not taking excessive risk (for instance, the state member 

bank’s allowance for loan and lease losses should be adequately funded and its balance 

sheet should not reflect significant funding mismatches). 

The banking organization’s risk management function should be rated satisfactory

or clearly moving towards a satisfactory rating. While the organization’s risk 

management framework may need some improvement, as evidenced by Matters 

Requiring Immediate Attention and/or Matters Requiring Attention cited in 

examination/inspection reports, the banking organization should be proactively

addressing deficiencies, so that any branching activity would not impede the pace of 

progress in advancing to a satisfactory risk management rating. In all cases, the bank’s 

Bank Secrecy Act/Anti-Money Laundering program needs to be considered satisfactory.

The Federal Reserve will also consider a state member bank’s performance under 

the CRA in deciding on branch applications. A less-than-satisfactory CRA rating can 

impede a favorable action on an application. However, consideration may be given for a 

branch opening to address a particular weakness in the bank’s CRA performance 

identified by examiners or for a branch opening in a low- or moderate-income or minority 

census tract, provided that the opening of the branch would address an unmet need for 

banking services.

For a state member bank with a less-than-satisfactory consumer compliance 

rating, the Federal Reserve will consider the nature and severity of the weakness(es) that 

led to its less-than-satisfactory rating, as well as whether the state member bank has 

received consecutive less than satisfactory consumer compliance ratings. In addition, the 

Federal Reserve will require examiner documentation indicating substantial and verified

corrective action. 

4. Strong or satisfactory capital at the banking organization. A capital assessment will be 

based on the adequacy of the banking organization’s consolidated capital position as well 
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as the state member bank’s capital component rating from its most recent examination. 5 

In the case of a stale inspection or examination rating (for example, if the most recent

onsite examination was conducted more than 12 months ago), examiners will be 

consulted regarding whether capital is strong or satisfactory, considering the 

organization’s risk profile and ability to manage risks. In addition to assessing pretransaction metrics, the organization’s post-transaction capital level will need to remain

satisfactory.

5. Acceptable component supervisory ratings. Capital must be rated “2” or better and all 

other financial factors, with the exception of earnings, must be rated no more severely

than “3.” Given its lagging nature, the earnings component is the only factor that may be 

rated more severely than “3.” While current earnings may be weak, the overall trend of 

the organization’s supervisory rating for earnings needs to be stable or improving and 

should demonstrate that excessive risks will not threaten or weaken the sustainability of 

future earnings.

6. Branching limited to within, or contiguous to, the bank’s existing market area. 

Consistent with the intent of minimizing risk and absent other overriding factors, the 

branch proposal should reflect limited geographic expansion. Any geographic expansion 

should be either within or contiguous to the state member bank’s existing market area. 

Branching Limits

Absent an overriding supervisory objection, a state member bank that meets the criteria 

outlined above would be limited to de novo branch expansion of up to one percent of its total 

number of existing branches per quarter, with a maximum limit of 40 branches annually. In 

addition, a state member bank whose branch network is not large enough to meet the one percent 

test would be permitted to expand by at least one branch annually.6

 Also, if a state member bank 

meets the criteria above and is part of a multi-bank holding company, the state member bank 

would have its branching limitation calculated independently of its sister state member banks.

Potential applicants should contact Reserve Bank applications staff prior to submitting an 

application. Any proposals will be reviewed in accordance with all applicable statutory factors

and regulatory guidance, including those related to financial condition and future prospects, 

managerial resources, and convenience and needs of the community.

Federal Reserve Banks should distribute this letter to the state member banks and bank 

holding companies in their districts and to appropriate supervisory staff. Questions regarding 

this guidance may be directed to the following Division of Banking Supervision and Regulation

staff in the Domestic Banking Acquisitions and Activities section: Katie Cox, Manager, at (202) 

452-2721 or Susan Motyka, Manager, at (202) 452-5280; or the following Division of Consumer 

and Community Affairs staff in the Applications section: Melissa Vanouse, Manager, at (202) 

 5 For the state member bank, the “C” component of the CAMELS rating would need to be “1” or “2.”

6 For example, if a state member bank has 50 branches, it would be allowed to open two branches during one year. 

A state member bank with 100 branches would be allowed to open one branch per quarter or four branches annually. 
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452-3488, or Charles Fleet, Senior Supervisory Consumer Financial Services Analyst, at (202)-

452-2776. In addition, questions may be sent via the Board’s public website.7 

Michael S. Gibson

Director

Division of Banking Supervision

and Regulation

Sandra F. Braunstein

Director

Division of Consumer

and Community Affairs

Cross-References:

• CA letter 80-15, “Uniform Interagency Consumer Compliance Ratings System”

• SR letter 04-18, “Bank Holding Company Rating System”

• SR letter 96-38, “Uniform Financial Institutions Rating System” 

 7 http://www.federalreserve.gov/apps/contactus/feedback.aspx.