CRA & Small Bank Requirements

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Question:

I relatively recently took a position as CEO with a small community bank ($45 million). Formerly, I was President of a $450 million bank. Needless to say, at a smaller institution, we all wear many hats. One of mine is CRA Officer and, since I had a dedicated person before, I'm rusty. I just read your entire section on the CRA regs. I want to be sure I'm not missing anything. As a small bank, is it really true that our total evaluation will be based solely on loan to deposit ratio, having the majority of our lending within our assessment area, reasonable distribution to low to moderate income individuals/families, reasonabel geographic distribution within our assessment area and prompt corrective action to any complaints? Is that really all? And, if we were graded "satisfactory" on those 5 elements, we'd have a crack at an "outstanding"? Small banks may elect to be evaluated on the lending, investment, service tests. Why would a bank want to do this if, as a small bank, they can elect to only be graded on those five areas? Ditto for submitting a Strategic Plan? Is there any benefit to a small bank in electing to be graded on either of these other two options? If, as we do, have a significant level of "service" and "investment" activities, do these get evaluated at all if we ultimately elect to be evaluated as a small bank? Can you give me some concrete examples of "Investments"? We currently participate in a local CEDE (Center for Economic Development) organization and are also involved in several minority organizations (Washtenaw County Homebuyers, POWER) with board positions, loans, agreeing to accept IDA's, participating in financial education seminars . . . are all those activities considered "Investment" activitiesor are there others I'm not recognizing? Other than the five elements of evaluation for a small bank, am I missing any other significant difference between how we would be evaluated and how a bank over 250 million would be evaluated? There seemed to be some di!fferences in data collection . . .please elaborate. Also, our bank is an 80% owner in a mortgage sub servicing company located in the Upper Peninsula of Michigan (we are in Ann Arbor)and that subsidiary also engages in originations. What kind of reporting do we need to be concerned about with the sub, if any, since all loans are sold into the secondary market? I thank you in advance for guidance and elaboration on this so I can relaunch our compliance with the CRA correctly for our small bank.

Answer:

There are so many questions here that I'm going to break apart the answers.

First, small banks truly are evaluated only on those five criteria. However, good performance on all five gets you a "Satisfactory" rating. If you want an "Outstanding" you should be doing something more, such as the investments and service issues you mention. Those will bump you up into an "Outstanding" if the examiners like them and if your lending ratios are good. Generally making about 80% of your loans within the assessment area with good distribution by income level is a strong result.

The only reason why a small bank would want to be evaluated on a strategic plan is if there is something unusual in its community, such as limited credit demand, an unusual balance of competition, or atypical markets. In that case, a strategic plan gives the bank some predictability on how the examiner will look at their program. But, it is a LOT of extra work!

The examples of investments and services, such as working with the CEDE and offering seminars, are strong positives. Development organizations are a rich source of strong CRA performance opportunities for both loans and investments. The staff contribution only counts if the time is compensated bank time. Volunteer work on the weekend doesn't count for the bank.

An investmet involves either money or a commitment of bankpaid time. Work done by an employee while paid by the bank may be treated as an investment or as a service. It sounds like you are strong on all fronts.

Now for the subsidiary in the UP. There could be several ways to look at that, depending on how you want the picture to look. The worst possible way (do not let the examiner do this) is to consider its loans as made by the bank outside of the bank's assessment area. It is, after all, a long, long way from Washtenaw County! Loans made by the subsidiary should be treated as a separate product line offered by a separate but related entity. I would suggest looking at the impact of that activity in the UP market. There is plenty of lowincome to go around up there and you might find that the subsidiary actually strengthens your performance.

First published on BankersOnline.com 8/6/01