Cracking Down on Net Branching

Increasingly, I am finding that particular states are taking a regimented approach to their review of branch manager agreements to ensure that branches paid on a "profit and loss" basis are not “net branches.” In particular, some states are denying branch applications where they see anything in a branch manager agreement that appears to give the bank the ability—directly or indirectly—to pass on operation costs to the branch.

Often, the changes required are not substantive, but to avoid delays associated with having to revise and resubmit branch applications, consider the following:

1. Indemnification clauses should specifically carve out operations costs, liabilities for non-delegable supervisory duties, and any other liabilities inconsistent with state or federal laws and/or HUD/FHA regulations.

2. Required operating accounts and/or minimum reserve requirements should explicitly state that branch managers are not in control of such accounts and not liable for deficits.

3. Branch agreements should specifically spell out that operations costs and liabilities will not be borne by the branch manager.

The above does not suggest that operations costs and liabilities may not be deducted in determining compensation for a branch manager. However, states are increasingly requiring clarity that such expenses will never be borne by branch managers.