Appeal of "Needs to Improve" CRA Rating - (Fourth Quarter 1998)
A bank filed an appeal of their Community Reinvestment Act (CRA) rating of "needs to improve" (NTI) assigned by the supervisory office. The Public Evaluation (PE) stated that the bank's loan-to-deposit (L/D) ratio was less than reasonable, considering seasonal variations, given the bank's size, financial condition, capacity to lend and assessment area credit needs.
The appeal indicated that the board of directors believes the CRA rating should have been "outstanding" or at least "satisfactory" based on the following:
- The NTI resulted from a "litmus test" of the L/D ratio and that the federal act imposed no such legalistic test.
- The bank's officers and directors had already considered many of the suggestions in the report of examination to improve the rating. The particular circumstances of FNB and the economic conditions of the surrounding community supported a higher rating.
- There was no evidence of discrimination, self-dealing, or insider abuse.
The analysis of the appeal included a review of the issues highlighted in the bank's letter, the PE and all supporting documentation, discussions with OCC personnel, and an on-site visit to the bank.
While the community where the bank is located is experiencing stagnant population growth, its designated assessment area is the whole county which includes the six other communities. The bank has made the majority of its loans within the assessment area, and the banker's familiarity with the county was evidenced during the community tour. The PE noted that the distribution of loans reflected a reasonable penetration among individuals of different income levels and businesses of different sizes.
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 L/D ratio adjusted for seasonal variation. The reasonableness of the ratio is assessed given the bank's size, financial condition, and assessment area credit needs. This ratio is a clear indicator of a bank's ability or willingness to help meet the assessment area's credit needs.
The bank's 21 percent L/D ratio at the quarter-end of the evaluation period was significantly lower than similarly situated institutions. There are six other commercial banks serving the assessment area, three are locally owned and three are branches of community banks headquartered outside of the county. The three locally owned banks all had L/D ratios which far exceeded the bank's, ranging from 59 percent to 80 percent at the same quarter-end. The bank's average L/D ratio during the CRA assessment period was 17 percent compared to the other three banks' average of 62 percent. Although there is strong competition in the assessment area, the board and management's lending practices are the primary reasons for the bank's low L/D ratio.
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. This bank was atypical in that its loan portfolio was less than its total capital, indicating new lending opportunities could be explored in a safe and sound manner. The ombudsman is not advocating relaxation of credit standards, but rather a program to increase lending slowly and gradually, and most importantly, safely. The absence of evidence of discrimination, self-dealing, or insider abuse are not significant factors in the assignment of an overall CRA rating.
The ombudsman concurred with the "needs to improve" rating.
Appeal of Community Reinvestment Act Rating - (Fourth Quarter 1998)
A formal appeal was filed concerning a rating of "substantial non-compliance record of meeting community credit needs" received during the Community Reinvestment Act (CRA) examination.
The OCC's CRA Performance Evaluation (PE) listed the following factors in support of the bank's rating:
- Lending patterns show conspicuous gaps in lending in low- and moderate-income (LMI) geographies which are predominately African-American and Hispanic neighborhoods;
- The geographic distribution of loans originated show very poor lending penetration in LMI geographies; and
- Lending levels reflect very poor responsiveness to assessment area credit needs.
The PE designated the performance ratings as "substantial non-compliance" for the Lending Test and "low satisfactory" for the Investment and Service Tests. The PE also noted, consistent with the CRA regulation, that the Lending Test is weighted more heavily than the Investment and Service Tests when arriving at a composite CRA rating. The bank believed that each of the three performance ratings should have been higher than assigned during the examination, and that the overall rating should have been "satisfactory record of meeting community credit needs."
The evaluation of a bank's CRA activities requires a full understanding of the performance context in which it operates. The performance context considers the economic condition and demographics of the assessment area, competition, and the types of products and services offered by the bank. While the CRA activities of other similarly situated financial institutions are considered, bank-by-bank comparisons are not a component of the overall rating process.
The ombudsman's analysis included a review of the issues highlighted in the bank's appeal letter, the Report of Examination, the PE, and all supporting documentation. Additionally, extensive discussions were held with appropriate bank management and OCC supervisory personnel.
The Lending Test
The Lending Test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through its lending activities by considering a bank's home mortgage, small business, small farm, and community development lending. Based upon the ombudsman's analysis of the bank's lending performance during this evaluation period, it was clear that there were conspicuous gaps in lending, particularly, in LMI geographies. The lending gaps identified during the examination were inclusive of small business, home mortgage, home improvement, and community development loans. Further review of the Home Mortgage Disclosure Act (HMDA) data indicated that lending opportunities did exist within these same geographies.
The bank's limited offering of HMDA products and a lack of marketing efforts had affected its ability to effectively compete with other lenders within these geographies. Therefore, because of the significance of a potential SNC rating, the ombudsman expanded the analysis to include retail (non-HMDA) lending products for the same evaluation period.
The ombudsman carefully reviewed the Lending Test analyses, related information contained in the examiners' working papers, and the additional data provided by the bank. In considering all loan products, the ombudsman found that the volume of the bank's lending within its assessment area to LMI geographies essentially mirrored the examination findings. The inclusion of retail (non-HMDA) products was not a significant factor. Some material conspicuous gaps in both lending and in the origination of loan applications remained, particularly in LMI geographies.
Comparing all findings with the Lending Test rating guidelines and after a detailed and extensive assessment of all the facts and circumstances, the ombudsman concluded that the bank's performance under the Lending Test was more appropriately reflective of a "needs to improve" rating and not the "substantial non-compliance" rating as assigned in the PE.
The Investment Test
The Investment Test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) through qualified investments that benefit its assessment area(s) or a broader statewide or regional area that includes the bank's assessment area(s).
The ombudsman performed a detailed review of the examiners' findings, supporting working papers and information contained in the appeal and provided by the bank. Most notable was the bank's investment in and support of two local community development corporations. Qualified investments in these types of organizations are consistent with the CRA. The regulation further encourages banks to make investments that are innovative, complex, and not routinely provided by the private sector. While the bank had some participation in qualified investments, the ombudsman determined that the bank's investment activity did not represent innovative and/or complex transactions or investments that are not routinely provided by private investors. As a result of a detailed analysis of all documentation, and the application of the CRA Investment Test rating guidelines, the ombudsman concluded that the "low satisfactory" rating assigned in the PE was appropriate.
The Service Test
The Service Test evaluates a bank's record of helping to meet the credit needs of its assessment area(s) by analyzing both the availability and effectiveness of a bank's systems for delivering retail banking services and the extent and innovativeness of its community development services.
The ombudsman performed a detailed review of the examiners' findings, supporting working papers and information contained in the appeal and provided by the bank. The ombudsman recognized and considered the other efforts the bank has made relative to the service test including alternative product delivery systems, the introduction of debit cards, and the opening of a new branch in a moderate-income geography. However, as a result of a detailed analysis of all documentation, and application of the CRA Service Test rating guidelines, the ombudsman concluded that the "low satisfactory" rating assigned in the PE was appropriate.
The intent of CRA is to encourage banks to help provide credit products and services throughout its assessment area, including LMI geographies and individuals. While the ombudsman recognized the bank's efforts in general, its overall performance was poor, specifically under the Lending Test.
Owing to the heavier weighting of the Lending Test in the overall rating process, the "needs to improve" Lending Test rating consequently changed the bank's overall CRA rating from the "substantial non-compliance record of meeting community credit needs" to a "needs to improve record of meeting community credit needs." A revised CRA PE was prepared to reflect these changes and forwarded to the bank by the supervisory office.