A bank
formally appealed the "Needs to Improve" CRA rating assigned at the
most recent examination.
Senior management and the board believed the ratings were
incorrect based on the following:
- A
low percentage (22 percent) of the bank's lending in its
assessment area, and
- A
small percentage of the bank's lending to businesses of
different sizes; 16 percent of the bank's commercial loans were to
small businesses, and 27 percent of the loans were of a loan amount
less than $100,000.
The bank concurred with the percentages
arrived at, but disagreed with the individual component ratings
assigned to "Lending in the Assessment Area" and "Lending
to Borrowers of Different Incomes and to Businesses of Different
Sizes." Senior
management of the bank believed the statistics were reasonable
when their business strategy was taken into account. The appeal also noted the
bank's prior CRA rating was "outstanding."
In the CRA
appeal, the board and management stated that although they agree
with the numerical analysis used to determine the CRA rating, the
statistics are reasonable when the bank's business strategy and
performance context is taken into account. Further, based on dollar
volume of credit extended within the bank's assessment area, the
bank has satisfactorily performed under the CRA regulations. The appeal noted the bank
does not fit the profile of a typical community bank. It specializes in
providing credit, trade, and depository services to small and medium
size manufacturing companies located in the
United
States and several international
emerging markets. The
bank's typical borrower is a privately owned and operated
company with annual sales of $2-25 million, and has been in business
for at least three years.
The bank extensively uses government guaranteed loan programs
and typically will sell either the entire loan or the guaranteed
portion of the loan, while retaining servicing rights.
The bank
accomplishes its business strategy through the operation of one
full-service office and eight loan production offices (LPOs) throughout their geographic region of the
country. In addition,
the bank has contracts with 11 international agents located in
the emerging markets of South America,
Central America,
Mexico, Middle East, Asia, South
Pacific, and
South Africa.
Discussion
Given the
bank's business strategy and performance context, the key issue in
this appeal was if the bank had satisfactorily met the credit needs
of its community. The
facts involved in this appeal are not in dispute. The supervisory office
did not dispute, and indeed used in its evaluation of the bank's CRA
efforts, the statistical analysis prepared by the bank's CRA
officer. The "needs to
improve" rating was based on the determination that the bank "does
not meet standards for satisfactory performance" for two
assessment criteria-"Lending in Assessment Area" and "Lending
to Borrowers of Different Incomes and to Businesses of Different
Sizes." Further, the
"Loan to Deposit Ratio" and "Geographic Distribution of Loans"
were found to "exceed the standards for satisfactory performance"
and "meet the standards for satisfactory performance,"
respectively.
Performance
Context
In evaluating
a bank's CRA activities, a full understanding of the
performance context in which it operates is necessary. 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. In the case of this bank's
CRA evaluation, the performance context was an integral
component of the ombudsman's analysis because of the unique business
plan and product delivery systems employed 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.
Lending in
Assessment Area
In general, an
institution that does not originate more than 50 percent of its
lending in its assessment area will not meet the standards for
satisfactory performance.
However, the significance of this factor may be mitigated
when considering performance context issues such as competition,
economic conditions, a bank's product line, or a bank's business
strategy. In addition,
when an institution has a high level of lending outside its
assessment area because of the use of non-traditional product
delivery systems, favorable consideration may be given for loans to
low- and moderate-income persons and for small businesses and farm
loans that are made outside the assessment area, provided the
institution has adequately addressed the needs of its
assessment area.
During the CRA
evaluation period, the bank originated 16 percent of its loans
within its assessment area and 84 percent of its loans outside its
assessment area. In
addition, only 22 percent of the total number of loans originated
during the evaluation period was made within the bank's assessment
area. The bank's
business strategy of selling either whole loans or the
guaranteed portion of loans allowed it to provide significantly
more small business credit than it could using a more traditional
approach. This strategy
enabled a $200 million dollar bank to originate almost $500 million
in loans during the two-year evaluation period. In terms of total small
business lending, as reported to the Federal Financial
Institutions Examination Council, the bank compares
favorably to two large banks in the area and to the average per
bank data. In 1996, the
average reporting bank in the state originated $12 million in small
business loans, while this bank originated more than $37 million.
While lending
in the bank's assessment area in dollar terms is favorable, the
ratio of total lending inside versus outside of the assessment
area is less than 50 percent. However, it is clear that
the loans made outside of the assessment area through the LPOs are consistent with the bank's business
strategy. Even though
lending in the bank's assessment area technically does not meet the
standards for satisfactory performance, this factor should not
negatively affect the evaluation of the bank's overall CRA
performance. Therefore,
while the ombudsman did not change the conclusion for this
factor, it was determined that the impact of not meeting this
standard should be mitigated on the overall CRA evaluation when the
performance context is considered.
Lending to
Borrowers of Different Incomes and to Businesses of Different Sizes
Under the
small bank CRA procedures, commercial lending performance is
evaluated based on the number and volume of loans to businesses of
different sizes. Loans
made to businesses with revenues less than $1 million are considered
small business loans under the CRA regulation. When sufficient data is not
available to analyze these assessment criteria, examiners may
consider loans that were less than $100 thousand when originated, as
a proxy for business size.
During the CRA
evaluation period, the bank originated 8 percent by dollar amount
and 16 percent by number of the loans in the assessment area to
businesses with gross annual revenues of less than $1 million. While approximately 39
percent of the average bank's small business loans are to businesses
with gross annual revenues of less than $1 million, this bank
only made 11 percent of its small business loans to such
businesses. In
addition, 14 percent of the small business loans the average bank
originates are less than $100 thousand, compared with this bank's 5
percent.
Community
contacts within the bank's assessment area identified the need for
micro-loans and start-up loans to small business owners. By targeting borrowers with
gross annual revenues between $2-25 million, the bank limited its
ability to meet the credit needs of very small business owners. Strict adherence to the
business strategy limits the bank's ability to meet these needs of
their community.
Therefore,
when considering all relevant facts and circumstances, the
ombudsman concurred with the findings of the supervisory office that
the bank does not meet the standards for satisfactory performance
under this factor.
Conclusion
Based on the
available data, the ombudsman concluded that the bank's CRA
performance for the evaluation period was more reflective of a
"satisfactory record of meeting the community's credit needs"
than the assigned "needs to improve." While "Lending in the
Assessment Area" did not meet the standards for satisfactory
performance, the impact of this conclusion on the overall CRA
rating was mitigated by the bank's business strategy, product line,
and performance context issues. This coupled with the
positive conclusions for the "Loan to Deposit Ratio" and the
"Geographic Distribution of Loans" further supports an overall
performance rating of "satisfactory record of meeting the
community's credit needs."
The rating for "Lending to Borrowers of Different Incomes and
to Businesses of Different Sizes" remains unchanged.
