Due to some new branches that have lending in surrounding counties where we don't have a branch, our assessment area concentration has dropped. I have talked with our regulator about expanding our AA to include the main "non-branched" county. If that does not fly, what are acceptable AA concentration ratios for a community bank?

My favorite answer...ummm "It depends"

They vary so much Steve that there isn't an answer. I would advise you to pull the exams of several banks of your size with the rating you strive for and make up a chart with their inside outside ratios. I'd stick to agencies that do your exams, but I'd also expand that with exams of local competitors.

The figure is suposed to be "a majority" but if you try to point out that 51% is a majority in this issue, you'd lose the battle. My examiner likes the 90's, I've seen exams that point out good figures in the 60's and others beat to death over a 70.

(Steve is now sitting at his desk saying "Gee thanks for that half arsed answer Dawn...I now know less than I thought I did when I asked the darned question")

That's what I'm here for Ya gotta love CRA....it's always a crap shoot!

(Go for the comparisons, it will help give you a good idea on where you stand).

Dawnie beat me to it (not only is she the queen: she's quick!), but I would advise exactly what she did. In fact, I did just that to demonstrate to our board how we stacked up to our peers. It enabled me to convince them to do all sorts of things that led to our CRA rating increasing at the next exam. And the examiners cited my analysis specifically in their presentation to the board.

We are a small bank. I just talked to my examiner about the inside/outside ratio yesterday. If a bank is thinking "Satisfactory" they are looking for a simple majority 51% by both dollar volume and number of loans. If you are looking for the big "O" as in Outstanding, you better be in the 70% by both $ amount and number of loans. I'd prefer not to name the regulating agency, but the advice really helped me because I keep seeing this 70% number being thrown around on this forum and it has concerned me, because when I see the word majority, I think "51%". We are looking for a satisfactory, so we are not changing our AA to get to 70%!

Hmmm, so much to say. So little time to type. Let me start with SJB's question to his regulator about expanding the AA to include the non-branched counties. Something that's been lost since 1995 is the concept that examiners are not supposed to be in the business of telling bankers whether their assessment area is too small or large. Under the current CRA reg, as long as your AA meets the restrictions of paragraph .41, the AA really isn't to be a topic of discussion for an examiner. This was an attempt to simplify from the old 12 assessment factor CRA reg under which it was somewhat common for a bank to be told at one exam that the delineated community was too big, only to be told at the next exam it was too small. So, if including the nonbranched counties complies with the AA restrictions of .41, your new AA will "fly."

Now to the matter of "acceptable concentration ratios for a community bank." I'm assuming you really are a community bank, meaning you are subject to the small bank CRA test. If that's correct, check out the CRA reg in Appendix A - Ratings, paragraph (d) Banks evaluated under the small bank performance standards. There are 5 performance standards, one of which is lending within the AA. Examiners call it the in/out ratio, which baffles me because we don't calculate a ratio of loans made in the AA to loans made outside of the AA. It's a ratio of loans made in the AA to all loans made during the evaluation period.

Anyway, paragraph (d)(1) talks about eligibility for a Satisfactory rating. Subparagraph (ii) to that speaks to lending in the AA. It says that for satisfactory performance in this one performance category, a bank must have at least a majority of its loans in the AA. So, anything over 50% gets you into satisfactory territory for this one element of the overall CRA rating.

"But AR," you gasp, "this doesn't comport with what The Queen said." Far be it for me to take on Dawnie, but I'm confident her bank was gunning for an Outstanding CRA rating. In that scenario, some examiners would expect to see a "substantial majority" of loans in the AA. Substantial majority is probably something over 80%, maybe even 90%, depending on performance context.

Keep in mind that having, say, 65% of your loans in the AA doesn't preclude an Outstanding rating. The loan-to-deposit ratio and the lending in the AA % just tell us if and where you lend. Clearly, the more important criteria to focus on are borrower and geographic distribution. If your LTD ratio is reasonable, at least a majority of your lending is in the AA, AND you meet or exceed demographics in your borrower and geographic distributions, you may very well be in Outstanding territory. This is consistent with the verbiage in Appendix A regarding eligibility for Outstanding ratings. Hope this helps. AR.

I will demonstrate that I am no CRA guru by any means because this may really be a stupid question. However, isn't it also as equally important to identity the percentage of lending to low-mod's (i.e., 50% and/or 80% below AA/MSA median). It would seem that just demonstrating you're extending credit as an over-51% "penetration" is a nicety; but being able to show that of that 51% figure, one of every four loans is to a low-mod borrower would be a home run. I'm in New England, so AA penetrations don't seem to count as much as how much lending is actually extended to low- and moderate-income borrowers. We were once "Outstanding"; we're now "Satisfactory"; and I feel like Rocky: I just want to "go the distance" and at least stay a Satisfactory.

You are correct, The inside/outside AA numbers and percents are just one measurement. Collecting borrower income allows for another analysis report of the "Borrower Income Classification" This report shows the number, dollars and percent inside and outside the AA by a borrower income regardless of the census tract income classification they live in.

IMO you will find this report becoming more important in light of the changes in MA.s taking place in 2004 and the fact that many banks have AA's that do not have any LMI tracts in them.

Thanks everyone - we are at $900MM and in three states so I guess we are a community bank in several communities. (Two states have only one branch.) One reason our AA concentration has dropped is we are brokering out a lot of loans now. I do a report for the examiners showing where our brokered loans come from and that helps the inside-outside ratios.
Now its on to starting our performance context - what a project!

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Your assessment of what a majority is (over 51%) seems fair and true, but tell that to the FDIC in Chicago.

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We are a small bank in the Chicago region of the FDIC. Our inside percentage at our last CRA exam was in the low 50's. That's what kept us from getting an Outstanding, but we don't consider we were beat up over it.

What irks me, though, is that we lend to a lot of people all over our state, including many low/mod income people, who can't get conventional financing because of the property type or their less than stellar credit. That's why they come to us and that's why our AA percentage is low. But what the regulators are telling us (though not in so many words) is that we would be meeting our CRA obligations better if we denied credit to low/mod people outside our AA just like the conventional banks do. Doesn't make sense to me.

Hello Chicago

I made that statement after talking with someone who had a 67% ratio in Chicago. They got beat up badly in their exam over this and found it frustrating.

Frankly I don't get what your examiner is telling you, but let me make a small guess and give you amo for the future (hopefully). I'm assuming you are meeting the needs of your designated assessment area (how are those numbers?). If this isn't the case, yes your examiner is probably right in saying that you should focus on your AA before you step outside of it to meet the needs of clients from afar.

But...if you are meeting the needs of your AA (this would mean you are posting strong figures in low and mod financing as well as meeting the opportunities out there as they arise and as they work with the goals of the bank). An example...I'm not the biggest mortgage lender in the state, in fact, it's just a side line product for me, I'm a small business bank. Even though I sit at about 8th place in home refi's completed last year, I sit in 1st place if you filter the refi's and look at just the low income category.

Since I am meeting the needs of my AA, I then further want to help low and moderate income people by offering special programs which enable them to purchase homes that are not offered by my competitors. Even though these loans are all outside of my AA, I still receive CRA credit in the lending test for these loans because they're offered on a broader statewide or regional basis. In fact, I actually receive quite a bit of credit for this because these borrowers had no one to go to until I stepped up to the plate. Sounds a lot like what you're doing.

No, the credit won't change my inside/outside ratio, but that ratio is just one small part of the exam, and not the most important. The other areas it helps (service and lending) are much more important to the exam overall and the credit for me, is given in those areas. I hope the same is happening for you....

You're right, we are meeting the needs of our AA. When it comes to low/mod income borrowers and low/mod income census tracts in our AA, I'll stack our numbers up against any bank. I reviewed a number of banks that received Outstanding ratings that were similar in size to ours and our low/mod numbers were better, substantially better in some cases. My impression is that because we do some subprime lending the examiner focused on the in/out percentage in order to avoid having to give a subprime lender an Outstanding rating. Oh well, we'll just keep doing what we're doing and hope for better results next time.

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My impression is that because we do some subprime lending the examiner focused on the in/out percentage in order to avoid having to give a subprime lender an Outstanding rating.

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If your sub-prime loans are not predatory or discriminatory, then I really question the priorities of your examiner and/or his or her understanding of CRA.

Let's face it. Who are the folks that will most likely have blemished credit? Are they the upper middle income folks in the suburbs who are moving from a 3 bedroom to a 5 bedroom home, or those who want $20,000 for landscaping? Or are they more likely the moderate income family of 5, and all of the kids are under 10, and they've been struggling to pay the bills and perhaps did not understand the impact of being 30 to 60 to even 90 days late? When you have a working mom and dad, and the choice is paying a credit card bill this month, or paying the babysitter so you can keep working, which are you going do to?

So you have these folks with blemished credit, and they are now "SubPrime" borrowers because that is how your Safety and Soundness examiners are going to view them. And if your S&S examiners view them as "subprime", then they'll expect a higher reserve against those loans. In order to offset your cost for the higher reserve, you need to charge more.

So "subprime" is going to be more expensive, but if you're not being predatory or discriminatory, then you should be not be penalized for making credit available to people who might otherwise not be able to get it. If anything, you are meeting a credit need and that's what CRA is supposed to be about. CRA was never supposed to be about making loans in a manner that go against safe and sound lending practices.

I agree wholeheartedly. This might be a case where it warrants talking to the examiner's supervisor; in the case of an FDIC bank, that would be either the Field Office Supervisor or the Review Examiner for that office.

Because I am such a child in CRA, how would I retrieve the figures for other institutions? Would it be others in my asset range or area? On their reports do they show their inside/outside numbers? I do not have any CRA software at my institution. I pull the information from the system and work with it on excel. In some cases some of the information you are all using seems to be overwhelming to me due to my lack of knowledge in this area and the lack of updated software.

http://www2.fdic.gov/idasp/main.asp?formname=inst
http://www.ffiec.gov/cracf/crarating/Rtg_spec.cfm

You can link (second link provided) to the agencies CRA ratings pages from the very bottom of that page to pull CRA exams. I pull ooddlleessss of them and file them in my office. Normally I'm looking at asset size, agency and CRA ratings (to compare to me) but also product line and net tier one. All of which are in the CRA exams. I spread these on an excel spreadsheet for various reasons and keep them updated.

The top link will help with current LTD ratios, but those are also in the exams (if you want more current info, you have to use the top link).

You can also look at data from those institutions that had to file a CRA Loan Register:

http://www.ffiec.gov/webcraad/cradiscl.htm

Thanks for the site. I am trying to figure this all out. If I am a small bank should I use the consumer loans to give my assesment area ratio?

Yes, if you want them included. HMDA is a given if you report them since they are geocoded. Otherwise a sample may be selected for the testing of this and you are better off knowing what is there but sampling this yourself or geocoding products.

§228.26 Small bank performance standards.
(a) Performance criteria. The Board evaluates the record of a small bank, or a bank that was a small bank during the prior calendar year, of helping to meet the credit needs of its assessment area(s) pursuant to the following criteria:

(1) The bank’s loan-to-deposit ratio, adjusted for seasonal variation and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments;

(2) The percentage of loans and, as appropriate, other lending-related activities located in the bank’s assessment area(s);

(3) The bank’s record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes;

(4) The geographic distribution of the bank’s loans; and

(5) The bank’s record of taking action, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area(s).

Thanks Andy,

I want to be as good as Dawnie. I think I have a ways to go. You have all been very helpful.

My loan aministrator would like me to include the Brokered loans in my dollar totals. My concern is these are loans that were not originated by our institution, so I would be incorrect to show them in my figures. Am I correct?

If you buy the loans from the broker, then you would include them in your totals. As a CRA reporting bank, I have to report any purchaed loans if they meet the criteria of a "Small Business Loan", and as a HMDA reporter, I have to report any HMDA loans that are purchased.

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I want to be as good as Dawnie.

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Three hints....

1) Drink red wine. It improves brain function (ok I just made that up)

3) Stock up on duct tape. It can be used to tie up anyone who argues with your answers...thus leaving you with only people who think you're smart. (My closets are SOOO FULL!!!!)

2) Add Bonnie to your list of people to be as smart as LOL She answered before I left my meeting. (And she's pretty darned smart too!)

And thank you for the lovely compliment. I'll share it with the geocoder who was just telling me I'm an idiot

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2) Add Bonnie to your list of people to be as smart as LOL She answered before I left my meeting. (And she's pretty darned smart too!)

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Shhh.....you're going to blow my cover!

Heh heh, blown already baby! But I won't tell them your IQ is 1,347,860 ok?