Background
A community
bank appealed its Community Reinvestment Act (CRA) rating of "needs
to improve" assigned by the supervisory office. The PE (PE) stated that the
bank's lending performance was in need of improvement, and that the
loan-to-deposit (LTD) ratio was les than reasonable, given the
bank's size, financial condition, capacity to lend, and assessment
area credit needs. It
also stated that the public was not aware of the loan products
offered by the bank, bank management had a reputation for
conservative lending practices, and the community perception was
that submitting a loan application would be futile.
The appeal
focused on the LTD ratio component of the CRA evaluation
process. The bank
believed the LTD ratio was reasonable given the demographics,
economic factors, and limited lending opportunities in the
area.
Discussion
The CRA
regulation performance standards' criteria for evaluating a small
bank's record of helping to meet the credit needs of its community
include an evaluation of the bank's LTD ratio adjusted for seasonal
variations and, as appropriate, other lending-related activities,
such as loan originations for sale to the secondary markets,
community development loans, or qualified investments, the
reasonableness of the ratio is assessed considering the performance
context in which the bank operates including its size, financial
condition, and assessment area credit needs. This ratio is one indicator
of a bank's ability and willingness to help meet the assessment
area's credit needs.
The OCC
recognizes that every bank is unique in its own right and evaluates
each bank's CRA performance based on the context in which it
operates. In reviewing
the bank's performance in their assessment area, the ombudsman
considered the following factors:
- The bank's
LTD ratio during the examination was 32 percent with an average of
26 percent since the last examination, two years ago. The bank's deposit base
included a significantly high level of deposit accounts from
public funds, insider relationships, and other large
depositors.
Depositors with certificate-of-deposit balances of
$28,000,000 have only $2,600,000 in loans outstanding. It is also important to
note that of the $20,000,000 in demand deposit accounts, $9.5MM or
89 accounts have balances over $50,000, with an average deposit
balance of $106,000.
These large depositors contributed to the bank's relatively
low LTD ratio.
- The
community is heavily banked, with one financial institution for
every 800 residents.
- The largest
sector of the assessment area is upper-income families; however,
in general, the population is declining. In addition, there are no
low- and moderate income census tracts in the assessment
area.
- When
considering the number of financial institutions in the assessment
area and the significant level of lending to low- and
moderate-income borrowers, additional lending opportunities to
this segment of the population is limited.
Conclusion
The
performance context under which this bank operates is unique. It
includes:
- A high level
of deposit accounts from public funds, insider relationships, and
other large depositors with low level of loan
demand;
- The
community is heavily banked with one financial institution for
every 800 residents;
- A high level
of upper-income individuals within the assessment
area;
- A declining
population;
- No low- and
moderate-income census tracts;
Therefore,
considering the above factors the ombudsman opined that the bank's
loan-to-deposit ratio was reasonable. In determining the
appropriate overall CRA rating, the ombudsman also considered the
following:
- The bank's
loan distribution reflected a very good penetration among
borrowers of different income levels. The bank's loan
composition level of 32 percent to low and 27 percent to moderate
income borrowers exceeded the assessment area's composition
percentages of 17 percent and 21 percent,
respectively.
- The sample
of commercial and agricultural loans reviewed indicated that a
substantial majority was extended to entities with annual gross
revenues of less than $1 million per year.
Based on the
bank's performance context and the small bank performance criteria,
the bank's performance under the Community Reinvestment Act was
found to be more reflective of a "satisfactory" rating. In accordance with the
regulation, the bank is helping to meet the credit needs of the
communities in which it operates. A revised PE reflecting this
change was forwarded to the bank from the supervisory
office.
Appeal of "Satisfactory"
CRA Rating-Lending and Service Tests - (First Quarter
2000)
Background
A large
interstate bank filed a formal appeal concerning its Community
Reinvestment Act (CRA) composite rating of "satisfactory record of
meeting community credit needs"
(Satisfactory). Specifically, the bank
appealed its lending test and service test ratings in one
multi-state MSA and one state rating. The bank
requested:
- Rating
upgrades for the lending test and service test and the overall
rating in the multi-state MSA and one state, which the bank
believed would lead to a composite rating of
outstanding;
- Inclusion of
additional data in the investment test analysis that inadvertently
had not been provided to examiners during the CRA
examination.
Subsequently, the bank requested an expansion of the
ombudsman's review to include a re-evaluation of the
investment test for the multi-state MSA, one state rating, and the
overall rating; and
- Exclusion of
a merged institution's data from the review of the bank's CRA
performance due to its recent acquisition. Additionally, the bank
asked that the examination scope be amended to include more
full-scope reviews of bank assessment areas within the state.
The bank
offered four rationales to support its appeal for upgraded
ratings. First, it felt
that the selection of areas for a full-scope evaluation unfairly
skewed the results of the examination, due to the recent merger and
the additional assessment areas created. It also felt that more
assessment areas within the one state should have received a
full-scope review to provide a more balanced picture of the bank's
performance in the state.
Second, the bank stated that it had an even higher level of
performance in the lending and service areas of community
development than it had in the prior period when it was rated
outstanding. Third, the
bank felt its performance compared favorably to another large bank
that had been rated outstanding during the same time period. Lastly, the bank provided
additional investments made during the period that were
inadvertently not provided to the examiners during the exam.
The bank's
composite rating and ratings for the one state and multi-state MSA,
in question, were based on the examiner's assignment of the
following individual test ratings:
Discussion
Lending
Test
In evaluating
a bank's lending performance, the OCC considers a
bank's:
|
Performance
Tests and Composite Ratings
|
Rating
Area
|
Lending
Test
|
Investment
Test
|
Service
Test
|
Composite
|
Bank
|
High
Satisfactory
|
Low
Satisfactory
|
Low
Satisfactory
|
Satisfactory
|
State
|
High
Satisfactory
|
Low
Satisfactory
|
Low
Satisfactory
|
Satisfactory
|
Multi-state
MSA
|
High
Satisfactory
|
High
Satisfactory
|
High
Satisfactory
|
Satisfactory
|
Number and
amount of home mortgage, small business, small farm and consumer
loans, if applicable, in the bank's assessment
area(s);
- Geographic
distribution of home mortgage, small business, small farm and
consumer loans, if applicable, within and throughout its
assessment area(s), and within low- and moderate-income
geographies located in its assessment area(s);
- Distribution
of home mortgage, small business, small farm and consumer loans,
if applicable, by borrower income level and small businesses and
farms of different sizes;
- Community
Development lending, including the number and amount of loans,
their complexity and innovativeness; and
- Use of
innovative or flexible lending practices to address credit needs
of low- and moderate-income individuals or
geographies.
The
ombudsman's analysis of bank and examination prepared work papers
and the CRA Performance Evaluation (PE) identified that the
bank:
1) Did not
provide its consumer loans for review as part of the lending test
evaluation.
2) Home
mortgage and small business lending levels, in terms of number or
dollars had increased since the prior evaluation. However, when the lending
volume was compared to demographic data, including the percent of
owner-occupied housing units by geography, percent of low- and
moderate-income families within the bank's assessment areas, and the
number and location of small businesses, the bank's performance was
determined to be similar to the prior period.
3) Home
mortgage and small business lending performance was mixed throughout
the state. In one
significant assessment area, the bank demonstrated excellent lending
performance. However,
performance in the remaining state assessment areas, which represent
more of the bank's deposits than the above-mentioned assessment
area, was generally adequate to poor.
4) Community
development lending within the state was adequate. However, half of the dollar
volume of these loans was concentrated within one assessment
area.
5) Several
flexible home mortgage-lending products had been developed
specifically for low- and moderate-income
borrowers.
6) Overall
home mortgage, small business, and community development lending in
the multi-state MSA was considered excellent.
Additionally,
the ombudsman concluded that the descriptions of lending performance
in the CRA PE were not consistent when describing similar
performance among the various rating areas. Consequently, the PE
provided a confusing picture of the bank's actual
performance.
Investment
Test
In evaluating
a bank's investment performance, the OCC considers
the:
- Dollar
amount of qualified investments;
- Innovativeness
or complexity of the qualified investments;
- Responsiveness
of the qualified investments to credit and community development
needs; and,
- Degree to
which the qualified investments are not routinely provided by
private investors.
The
ombudsman's analysis of bank and examination prepared work papers
and the CRA PE identified that:
1) Several of
the investments the bank provided with its appeal were "qualified
investments" and were added to the investment
totals.
2) The
examiners evaluated the bank's performance using the funded value of
the bank's qualified investments rather than the book value. Using the book value
increased the total investment dollars in the state and multi-state
MSA.
3) The
increase in both dollar and number of qualified investments had a
positive impact on the investment test rating in the state and bank
overall.
4) The
qualified investments were responsive to community credit and
development needs, but generally did not evidence innovation or
complexity and were routinely provided by other private
investors.
Service Test
In evaluating
a bank's service performance, the OCC considers
the:
- Distribution
of bank branches among low-, moderate-, middle-, and upper-income
geographies.
- Record of
opening and closing bank branches, particularly in low- and
moderate-income geographies or primarily serving low- and
moderate-income individuals;
- Availability
and effectiveness of the bank's delivery systems for providing
traditional and non-traditional retail banking services in low-
and moderate-income geographies and to low- and moderate-income
individuals;
- Range of
services provided in low-, moderate-, middle-, and upper-income
geographies and the degree to which the services are tailored to
meet the needs of those geographies; and;
- Extent to
which the bank provides community development services and
innovative and responsive they are to assessment area
needs.
The
ombudsman's analysis of bank and examination prepared work papers
and the CRA PE identified that:
1)
Generally, the
bank's branch and ATM distribution was commensurate with the
percentage of households living within the state assessment areas
and the multi-state MSA.
2)
The bank had a
net increase in branches in low-income geographies within the
multi-state MSA.
3)
Generally, the
bank's branch and ATM network was accessible to all portions of the
bank's assessment areas.
4)
The bank's
provision of community development services was significant in the
multi-state MSA and adequate overall within the
state.
5)
A number of
community development services provided within the multi-state MSA
were not included in the PE.
6)
Community
contacts and government officials, in the multi-state MSA, indicated
that the bank was a community leader and strongly influenced
community development, especially in economically depressed
areas.
Examination
Scope
The ombudsman
agreed with the bank that the merged institution's data should not
have been included in the evaluation of the bank's performance. Additionally, the examiners
should have performed a full-scope review of more state assessment
areas to better ascertain the bank's performance. However, the ombudsman
concluded that altering the examination scope would not change the
bank's state or composite rating.
Comparison of
Performance with Other Institutions
The bank
provided comparisons of its lending and investment data with that of
another large bank.
Comparing one bank's raw data to another bank's, without an
appropriate context is difficult and does not necessarily result in
being able to conclude that performance is similar or
dissimilar. In the
ombudsman's review, this bank's lending data was compared to nine
other large banks examined during the same time period. The conclusion was that this
bank's lending data was not inconsistent with other large banks that
received a high satisfactory under the lending
test.
Conclusion
Based on the
above findings and others contained within the PE, the ombudsman
concluded that some of the individual test ratings for the
multi-state MSA, the state, and the bank overall should be
upgraded.
Additionally, it
was concluded that the merged institution's data should remain in
the PE. The decision to
leave the data in the evaluation was based on the bank having an
assessment area in the applicable state prior to the merger. Accordingly, performance in
the state would have to be rated and the inclusion of the merged
institution's data did not negatively impact the bank's composite
CRA rating.
Changing the
examination scope in the state, in question, may have helped develop
a better context in which to assess the bank's performance and
provided more support for the rating assigned. However, analysis of this
additional data would not change the state and composite
ratings.
The revised ratings are reflected in the
following table.
|
Performance
Tests and Composite Ratings*
|
Rating
Area
|
Lending
Test
|
Investment
Test
|
Service
Test
|
Overall
Rating
|
Bank
|
High
Satisfactory
|
High
Satisfactory
|
High
Satisfactory
|
Satisfactory
|
State
|
High
Satisfactory
|
High
Satisfactory
|
High
Satisfactory
|
Satisfactory
|
Multi-state
MSA
|
Outstanding
|
High
Satisfactory
|
Outstanding
|
Outstanding
|
*Ratings in bold
italic were upgraded.