Since what counts and what doesn't count is the subject recently, here goes...

Our first exam as a large bank is probably coming up very soon (but not 1st quarter!). From the CRA officer's discussion with examiners and other bankers, he thinks we need to have "about $250,000" in qualified investments.

My question is, are all qualified investments treated the same, dollar-for-dollar. For example, if we purchased $50,000 in tax credits that met CRA purposes, would that receive the same credit as if we made donations totaling $50,000 to help build habitat for humanity homes?

Everyone here seems to think so. I am the auditor, and to me this just is NUTS! Maybe it's kosher to the examiners, but it makes no logical sense at all - the bank has a positive P&L impact from purchasing the tax credits, but drops $50,000 on the donation, and they receive the same credit??? In between, say we have purchased an MBS that qualifies - again does it get the same credit on whatever amount we invest?

I know better than to confuse logic with the law, but I just can't quite accept this yet. Thanks for any clarification you can offer!

No, all investments are not treated the same. Factors that are considered:
*dollar amount
*innovativeness or complexity
*responsiveness to needs of the community
*degree to which the investment is not routinely provided by private investors

The formula for the CRA Investment Credit test is akin to the process for making sausage.

You have no clear idea what goes into it, you just hope the final result is palatable.

That is why the Investment Test of the CRA exam is roundly criticized by just about everyone involved.

Ok, so to clarify, if $250,000 really is our magic number, any combination of "investments" (whether they be tax credits or direct contributions or purchases of actual investments) that gets us to that number is considered equal? Not a lot of thought put into that one...

That isn't my interpretation - it's more subjective & "touchy-feely" than that.

I'd imagine our banks are pretty similar, based solely on your comment about your first large bank exam coming up, so let's look at an example. Let's say your bank drops $250k into a pool of mortgage-backed securities, and mine ponys up $200k for the same investment, but also donates $50,000 to the local chapter of LISC.

We both have $250,000 in qualifying investments, but which bank was more 'flexible & innovative'? On the MBS side, your net effect is a) an investment with a return to the bottom line and b) maybe half a dozen lower income people are in homes in your market.

At my bank, we have the same effect with our $200,000 MBS investment (although probably a couple fewer families in homes) - but the LISC contribution is leveraged by other national donations through a matching program; and the funds are turned around upwards of 10 times (at least they are in the Grand Rapids market, where LISC has been active off & on for about a dozen years). LISC spreads that (now) $100,000 donation around the community, as grants to CDCs, as guarantees for loans, as direct contributions to housing organizations, etc.

Now admittedly, this is a contrived example. And I need to state that I'm not affiliated with LISC. However, if you look at the two banks side by side, which one gets a higher investment test score in the eyes of the examiners?

The challenge is out-doing yourself every examination - you might get by with a Satisfactory rating with those MBS investments the first time, but probably not the second or third. And when you're the smallest "large" bank in the competitive market, finding these investment opportunities is next to impossible. Part of the struggle, too, is selling your efforts. (Packaging counts!)

Hope that helps -

If that $250000 target came from an examiner, I'd challenge him/her on it. To arrive at such a target requires an analysis of the community needs, available opportunities in which to invest, and your bank's capacity to invest. I would be very interested in seeing that analysis if I were a banker. Heck, I'm an examiner and I'm interested in seeing it!

If the examiner can't back up the $250000 with an analysis like I described, then don't be married to that target. Instead, take the offensive, do your own analysis and come up with what makes sense for your bank.

As for whether investments are treated the same, the answer is no. While mere dollars invested are a large part of our analysis, we also have to assess the impact of your investments on your community. One of the other posters made that very point. So it's possible that one bank may have $250000 in investments that impacts way more people than the $250000 of another bank. That could lead to different ratings. And that is why it is so difficult to compare investments, or lending & services for that matter, from bank to bank and try to gauge what the rating or target should be. It's because performance context is everything in CRA.

As for how we view donations or grants, which are a one time expense and earn the bank no return on investment, versus booked investments that may have a return, that doesn't matter as far as the CRA rating goes. Impact and responsiveness are more important for the rating, although we do not expect a bank to lose money simply for the sake of CRA. That's not what CRA is about. Banks simply have a choice of how to achieve an investment rating. If it were me, I'd be trying to find booked investments that give me credit from period to period and possibly give a return on investment, too. You do, however, have the option to donate if booked investments aren't available. AR.

Thank you all for your thoughts - I do appreciate it!