We record all CRA data and intend to continue to do so. We were a large bank and now are considered an intermediate bank. Other than pushing the “send” button to submit the data, what are the advantages and disadvantages of being examined as an intermediate as opposed to a large bank?

One of the touted "benefits" is the "new flexible" community development activities test which commingles the 3 separate tests (CD loan, investment and service) into one test that would evaluate any combination of the foregoing. Supposedly this means you don't have to risk a less than satisfactory rating on the service or investment tests that are evaluated separately on the Large Bank test. However, under the these separate tests under the Large Bank 24 point rating system, you could get a neeeds to improve under both and still get an overall satisfactory if you get at least 9 points under the lending test. So imo the advantage of the new flexible test is illusory and misleading because you must pass the CD test as an ISB to get an overall satisfactoy whereas you could flunk the investment and service tests as a Large Bank and still get an overall satisfacory PE.

One advantage is the lack of need to record the data (which, if you're doing it right, means cutting down on data entry, geocoding, scrubbing, and the biggie, data integrity). Hopefully you're doing more than hitting the send button

So then, the other changes would be, you go back to a LTD ratio. How does yours look next to your peers? This might be a deciding factor for some banks. Or it may be no big deal.

In addition, you do not have a service component in the main exam (tracking branch locations etc.) as an ISB. This also might be of great value to banks who are located mostly in mid and high income tracts. How does your concentration look in comparison to your population? Many smaller banks get hit hard by this portion of the test.

Then you have the CD test. Yes it's all CD "stuff" (lending, investment and service) wrapped into one test. Your prep for this should be no different than your prep for the large bank exam. Each category should be documented, and supported by community assessments showing a need for the CD "Stuff" reported. Lack of any one category should be substiantiated (ie we have a boat load of CD loans because we have very little opportunity to purchase CD investments). Again, this is no different than your prep for the large bank test. From my chats with examiners, I'm not seeing that they're going to "go easy" on you in the CD area if you choose the large bank exam over the ISB exam. Only time will tell though. I personally wouldn't recommend going half arse on the CD test (as well as the justifications) for either ISB or large bank.

Dawnie is this the same as a Large bank CD exam?

ISB CD Test performance will be evaluated on 4 criteria:

1.Number and amount of CD loans
2.Extent to which bank provides services (this includes branches and product offering)
3.Number and Amount of CD Investments
4.Responsiveness of such activities to community needs

An institution should
Appropriately assess The needs IN ITS community

Engage in different types of CD activity based on those needs and institutions capabilities

Take reasonable steps to apply its community development resources strategically to meet those needs

Examiners will:
Evaluate number and amount of CD and investments
Evaluate the extent to which the bank provides CD services including provision and availability of services to LMI people

Consider results of any assessment performed by the bank of needs and opportunities

Review performance context information

Determine whether "amount and combination" of CD activities including qualitative aspects are responsive to community needs and opportunities

Definition of Community Development

Revitalizing and stabilizing LMI geographies, has been expanded to include more geographies.

Revitalizing disaster areas now qualifies as a community development

Distressed or underserved "middle income rural areas, not just LMI rural areas are now eligible for community development activity

In general, yes Don.

There is a lack of need to show innovative, complex or new types of CD activities (it's more quantitative than the large bank test). For smaller banks this is a big deal.

Many feel that the availability of investments and loans that qualify for CD credit are few and far between. Trying to show that they're innovative, complex, or new to the market is another level that challenges the smaller banks. This means, that for me, purchasing mortgage bonds still continues to be a boring practice that gets me little CD credit other than the numbers. To excel I have to find some "innovative" types of investments as well as the bonds. For an ISB a purchase of bonds is enough to meet the requirements.

The branch location piece is now a CD piece to be considered in regards to performance context, (capacity) verses a specific test as it is in the large bank exam.

Justification (provided in the performance context) for lack of activity in any of the categories is no different than in the large bank test. The examiners want to know why you chose to meet the needs of your communities through whatever avenues you've chosen, which means you can still have low CD lending numbers and high investments, and still pass the test. But the same holds true for the most part in the large bank test as well.

The main question I have is the subjectivity of the examiners in deciding if you have done "enough" for Community Development.

It's one thing when your lending numbers are sufficient to carry you through a lackluster management and skeptical examiner on the CD "stuff."

It's quite another to be sitting on the edge of the knife when you have the same lackluster management (Well doesn't our sponsorship of the March of Dimes Walkathon count? -ggrrrrr....) and skeptical examiner.

It's been my experience that the innovative and flexible stuff is not a requirement but is more of a bonus when it comes to performance rating. I think the OCC examiner handbook mentions something along that line, but I can't check it out now because I'm in bed recuperating from surgery earlier this week. Maybe somebody could check that out and I can read it later in threads to keep me from getting totally bored in bed where I've got to stay for the next 3 days!!!!
By the way I spoke with my client who is now undergoing CRA PE by Fed and who told me about the ISB bank rated "needs to improve" and she said she will try to write about this after her exam.

Actually the OCC handbook specifically addresses the issue, discussing quantative and qualative factors in full scope exams in the area of CD activity. Innovative and felxible is a specific line item of the examination of CD lending and investments in full scope areas. Limited scope areas do not have this factor added into the rating criteria.

It's been my experience that "innovative" and "flexible" can boost your rating from a High Satisfactory to an Outstanding.

However "innovative" and "flexible" will not save you from getting a "Needs to Improve" if your basic Satisfactory Lending performance is not there.

I'm trying to prepare a bulleted list of pros and cons of the ISB test. I've tried to collate the comments in this thread and the other on the subject. Could you help me with any more in either category? It seems that former large banks would have a better time at going ISB and small banks would do better getting their feet wet by going large until they get comfortable with CD expectations. Maybe if we get this in an agreeable form, we could make it a Bankers Tool in order that it could be presented to a CRA committee or directors when making the decision. Yes, it's still early, having no exams to look at, but for us that may have to report next year, it's more imminent.

As I get comments, I'll edit this to fit!

Pros and Cons of ISB selecting Intermediate Small Bank (ISB) Test

Pros
--Would not have to report data (if electing large bank test, would be required to collect and report ). No resubmissions for later errors or omissions found.

--The "flexible" Community Development Test does not weigh as heavily on the separate areas of lending, investment or service.

--If the bank (former large) has been proactive at community development activities and has historically scored high satisfactory or above in any of the community development areas, along with at least a satisfactory in the lending tests, then the ISB test would be a viable option.

--"Innovative" and "Flexible" are not measurable parts of the exam. Some banks cannot afford the extra cost for such programs. Also, as other banks offer the same services, they are no longer considered innovative.

--Lending tests are more focused on bank's primary product lines rather than a broader spectrum found in the large bank test


Cons
--Bank would be better prepared for exam if it collected data in self-assessment. The bulk of time would still be spent in scrubbing and verifying data, then analyzing.

--Bank must pass both lending and community development tests. (Flexibility gained in the community development test is lost)

--The expanded Community Development definition applies to all banks, so there is no advantage in the ISB exam over the large bank exam in having distressed or underserved areas.

--If no distressed or underserved communities in assessment area, then the "broadness" of the new Community Development definition is nullified.

--Those banks which have historically received low marks on large bank exams in the community development tests would have to greatly improve their efforts to pass the exam.

--Small banks going to ISB might find the "leap" too difficult if they are not active in community development activity.

--Certain smaller banks may not have the resources to devote to much community development activity.

--Former large banks would now be concerned with an adequate loan-to-deposit ratio.

--Increased emphasis on determining community needs and bank performance context.

--Not reporting makes peer data even more useless and examiners will rely even more heavily on census figures for comparisons.

--Data, if sampled by the examiners, will still be subject to the same comparisons (plugged into CRA Wiz and compared to census, peer)

--Former Large Banks which abandoned the reporting would eventually have to report again when they reach $1 Billion. Is the retraining, possible new software cost worth a couple of years off? (depending on growth rate)

Chris, just a couple of quick comments. The new distressed, underserved and disaster area tracts apply to all lenders, no matter their size. The fact that the definition of eligible tracts for the geographic component of CD activity has been expanded is a two-edged sword. It means more opportunities for CD lending, but concommitantly it means higher examiner expectations because this has been a big excuse for the lack of CD activity in rural areas in the past. This should be a real concern to ISB's because they can't afford to fail the CD test.
Let's fact it, the only really potentially attractive aspect about the ISB status is the relief from reporting (the "flexible" element of CD is really misleading because many Large Banks do very poorly on CD activities now, yet score satisfactory on their overall PE. In other words,the existing CD tests are "flexible" in that they are more tolerant of poor CD activity, whereas the new test is more "rigid" because it is less tolerant of any failure). Any responsible banker is going to maintain some type of self-assessment program which means you need some way of collecting or reliably sampling your data. It's been data collection and maintenance that is the most expensive part of CRA. Sending the data is only a fraction of the cost of collecting and maintaining the information.
So the tradeoff is any savings realized by not reporting versus the risk of betting your entire PE on passing the CD test (and the increased costs of trying to book more CD deals in the frenzy to get to a safe level of CD activity). It seems to me that the savings are minimal and the risk is great. (My gut feel is that the regulators will relax the CD standards to avoid a big increase in SNC and NI PE's, but don't bet on it!)
In another recent thread I observed that innovative and flexibile loan programs can only help you and never hurt you. Therefore, removing that as a consideration doesn't help ISB's, it hurts them. I would consider that to be a disadvantage, not an advantage.
I also note that the size and growth of an ISB should be considered. If you are in the $750 million or more range and have a high growth rate then you are likely to get to the Large Bank status in a few short years which means you will have to restart your data reporting program. Which means buying software, training people, and instilling the discipline into your commercial loan people again!!

Thanks Len! I have some questions to your comments:
As Don mentioned, we will have to see how actual exams flesh out. I think there is also a measure of subjectivity to your examiners. Some have a good feel for the area and apply give and take, and some are notoriously rigid. I wouyld think that Innovative and Flexible in an ISB exam would still be considered icing on the cake if submitted to the examiners. (Then again, depending on the examiner) It is an excellent idea to actually have a conversation with the examiner(s), and/or sponsor/attend examiner education classes for area banks. The FDIC is sponsoring these in our area.
Do you think that an ISB that would continue to collect, but not report would abandon software if they had it? If they did, then, with growth, they would encounter the problems with "re-reporting" Without software, or services such as yours, a responsible CRA officer could not efficiently assess periodic CRA performance.

The more I look at this, the less benefits there are to the ISB exam. I'll update my list with your observations!

If you collect the data, I would assume you would maintain the software you had been using to collect and report it in the first place. Why abandon a system that was good enough to meet the reporting standards even if you use it only for data collection and analysis? Of course, that would offset much of the "savings" afforded by the revised regulation.
I want to clarify that my business provides compliance and market consulting services as well as loan, demographic and depository databases for compliance and market analysis purposes, not software for data collection and reporting. We use special mapping software to create pictures of the data for compliance and market analysis. In addition, we use "relational" database technology to bring together different databases (e.g., loan data and income demographics) that help with the analysis of the dynamics of a market.