National Bank Appeals Process:
Appeal of "Satisfactory" CRA Rating - (Third Quarter 1998)

A formal appeal was filed concerning the bank's Community Reinvestment Act (CRA) rating of "Satisfactory Record of Meeting Community Credit Needs."  The bank believed that the rating should be "Outstanding Record of Meeting Community Credit Needs."

The appeal centered on the bank's assertions that:

• The OCC placed undue weight on the application of the "market share test" in circumstances inappropriate for it;
• The OCC compared the bank's performance with some of the largest banks in the United States, and that this comparison was unfair and contrary to the CRA regulation; and
• The bank also believed that the OCC was unaware of many of their unique credit-related programs that were not fully described in the Public Evaluation.

The evaluation of a bank's CRA activities requires a full understanding of the performance context in which it operates.  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 evaluation of the lending test, a bank's market share of HMDA reported loan activity is only one of the multiple sources of data considered and analyzed.  Market share is not considered in isolation, but rather as one of a family of measures used in the evaluation process. 

In evaluating the bank's performance under the "lending test," the ombudsman's market share analyses consistently demonstrated that the bank served middle- and upper-income geographies significantly better than low and moderate-income geographies within its markets.  The appeal questioned the applicability of market share analysis because of competition in low- and moderate income geographies from subprime lenders.  However, the HMDA data (e.g., number of lenders doing business in low- and moderate-income geographies compared to the number of lenders doing business in more affluent geographies) indicated that the competition for loans is much more intense in middle- and upper-income geographies than in low- and moderate-income geographies within its markets.  The ombudsman concluded that the OCC's market share analyses in the evaluation process were properly considered with other pertinent measures of performance in assigning the "lending test" rating. 

While the CRA activities of other similarly situated financial institutions were considered, bank-by-bank comparisons are not a component of the overall rating process.  The ombudsman concluded that the consideration of the activities of other financial institutions was not a component of the rating process.

The ombudsman acknowledged and appreciated the bank's overall commitment to the spirit and intent of the CRA.  While the initiatives and unique credit-related programs undertaken as part of the CRA program are noteworthy, the assessment area is a challenge with unique needs and demands that a financial institution must convert into positive opportunities.  The bank has been a positive influence in its market with successful initiatives; however, there are still obvious gaps to fill.

After a detailed and extensive assessment of all the facts and circumstances surrounding the appeal, and comparing all of the findings with the CRA rating guidelines, the ombudsman determined that the "Satisfactory Record of Meeting Community Credit Needs" rating as assigned in the CRA Public Evaluation was appropriate at the time of the examination.

The ombudsman's office received a formal appeal from a large bank affiliate concerning the bank's composite CRA rating of "Needs to Improve Record of Meeting Community Credit Needs."  In particular, the bank appealed the assigned "service test" rating of the individual test ratings.  The individual ratings and overall point scores that supported the composite "Needs to Improve" rating were as follows:

Lending test              Low Satisfactory       6 points

Investment test         Low Satisfactory       3 points

Service test               Needs to Improve     1 point

Composite rating     Needs to Improve     10 points

The "Needs to Improve" rating on the "service test" prevented the bank from achieving the minimum 11 points needed for an overall "Satisfactory" CRA rating.  As a result, the "service test" performance was the focus of the bank's appeal.  The appeal stated that the OCC did not consider several important factors that had a direct bearing on the level of the bank's services.  In particular, the bank felt that the examiners did not appropriately consider the accessibility of the bank's branch network to residents of low- and moderate-income (LMI) geographies, and they inappropriately discounted the bank's record of serving the banking needs of the local university community, which constituted a large portion of the population along with the residents in their surrounding LMI census tracts.

The bank's recent CRA Public Evaluation lists the following factors in support of the bank's "Needs to Improve" performance under the "service test":

• Branch and automated teller machine (ATM) delivery systems are not accessible to all parts of the bank's assessment area.
• Bank management could not affirmatively demonstrate that alternative delivery systems reached the portions of the assessment area not serviced directly by a branch or ATM.
• The bank has not closed any branches since the last evaluation; however, it has opened one branch in an upper-income tract and one branch on the campus of a local state university.
• The bank provided an adequate level of community development services.  The appeal letter raised six points that the bank believed warranted the raising of the "service test" rating.  These points were:
• The proximity of bank branches to LMI census tracts makes them very accessible to residents in those tracts.
• The fact that the bank has captured a large percentage of LMI tract residents as its customers provides further evidence of the accessibility of its branches.
• The accessibility and convenience of the branch system has substantially improved since the previous examination, in which the bank's performance was rated "Outstanding."
• The bank's new state university branch should be characterized as being located in a LMI tract.
• The OCC staff discounted or disregarded the bank's successes in serving the members of the local state university community residing in LMI areas.
• The products and services offered in the university branch are not exclusive to the university student body, and, since the branch continues to mature, it will have additional opportunities to serve the residents of the surrounding LMI areas who are not associated with the university.

The "service test" evaluates a bank's record of helping to meet the credit needs of its assessment area by analyzing both the availability and effectiveness of a bank's system for delivering retail banking services and the extent and innovativeness of its community development services.  The definitions for the "service test" rating of "Low Satisfactory" and "Needs to Improve" are:

(iii) Low satisfactory.  The OCC rates a bank's service performance "low satisfactory" if, in general, the bank demonstrates:

(A) Its service delivery systems are reasonably accessible to geographies and individuals of different income levels in its assessment area(s);

(B) To the extent changes have been made, its record of opening and closing branches has generally not adversely affected the accessibility of its delivery systems, particularly in low- and moderate-income geographies and to low- and moderate-income individuals;

© Its services (including, where appropriate, business hours) do not vary in a way that inconveniences its assessment area(s), particularly low- and moderate-income geographies and low- and moderate-income individuals; and (D) It provides an adequate level of community development services.

(iv)  Needs to improve.  The OCC rates a bank's service performance "needs to improve" if, in general, the bank demonstrates:

(A) Its service delivery systems are unreasonably inaccessible to portions of its assessment area(s), particularly to low- or moderate-income geographies or to low- or moderate income individuals;

(B) To the extent changes have been made, its record of opening and closing branches has adversely affected the accessibility of its delivery systems, particularly in low- or moderate-income geographies or to low- or moderate-income individuals;

© Its services (including, where appropriate, business hours) vary in a way that inconveniences its assessment area(s), particularly low- or moderate-income geographies or low or moderate-income individuals; and (D) It provides a limited level of community development services [12 CFR 25, Appendix A, (b) (3) (iii)-(iv)].

The review of the bank's product delivery systems included an analysis of the information provided in the appeal, an on-site visit to the bank by members of the ombudsman's staff, and various discussions with OCC personnel.  In arriving at a decision, the bank's branch network was carefully evaluated, taking into consideration the size of the institution, the demographic characteristics of the assessment area, and competition from other financial institutions.

As stated in the bank's appeal letter, no branches had been closed since the last evaluation, and in fact, two branches had been opened, one in an upper-income tract and one on the campus of the local university.  While no branches were located in LMI census tracts, two of the bank's branches were close to a significant portion of the assessment area's LMI tracts.  In fact, the branch located on the university campus is easily accessible to LMI residents living adjacent to the university, and to the large number of LMI individuals employed by the university.  Additionally, because of the open nature of the university campus coupled with the areas high population density, the ombudsman concluded that the bank had improved accessibility by opening a branch location in this area.  The services offered at the branches, including the two branches close to the LMI census tracts; do not vary in a way that inconveniences its assessment area.  In fact, lobby hours and operations have been tailored to better serve the community.  Based on the above, the ombudsman concluded that the bank's level of performance under the "service test" was more indicative of a "Low Satisfactory" rating than the assigned "Needs to Improve" rating.  The change in the "service test" rating increased the bank's overall CRA rating to a "Satisfactory Record of Meeting Community Credit Needs."  A revised CRA Public Evaluation was prepared to reflect these changes and forwarded to the bank by the OCC's supervisory office.

A formal appeal was filed with the ombudsman's office regarding a bank's Community Reinvestment Act (CRA) rating of "Needs to Improve."  The supervisory office concluded that the bank did not meet the guidelines for satisfactory performance under the CRA.  The Public Evaluation states that the bank's loan-to-deposit ratio did not meet the standards for satisfactory performance given the bank's size, financial condition, and assessment area credit needs.

The appeal indicated that the board of directors and management agreed that the loan-to-deposit ratio was much lower than that of other banks in the assessment area; however, several underlying factors should be considered to accurately compare it to other banks.

These factors are:

1. The bank is a community bank providing services to the predominately rural area immediately west of a major metropolitan city.  Growth of the agricultural business around the bank's city is stifled by the existence of large, well-established family-owned farms.  In contrast, the other surrounding cities are experiencing dramatic growth from their unencumbered geography.

2. The bank is approximately three miles from a major thoroughfare.  A comparison between the bank and other banks in the assessment area is not practical since the other institutions have significantly higher visibility and accessibility from both the major interstate and the state highway.

3. Four of the six banks used for comparison purposes have total assets twice as large as the bank.  This highlights the fact that the resources available to these financial institutions far exceed those available to the bank.  In addition, the bank's having only one loan officer limits available time for business development.

4. As noted in the Uniform Bank Performance Report, the bank's loan growth for the years ended 1994, 1995, and 1996 was 24 percent, 24 percent, and 6 percent, respectively.  This substantially exceeded peer growth of 8 percent, 6 percent, and 7 percent, respectively, over the same period.  Additionally, for the first nine months of 1997, the bank's loan growth was 36 percent compared to the peer's 8 percent average.  These numbers indicate that the bank's loan originations far exceed those of its peer group.

5. The city where the bank is located is predominately in the low- to moderate-per-capita-income level.  6. The bank exceeds the standards in "Lending within the Assessment Area," and it meets the standards in "Lending to Borrowers of Different Incomes" and "Geographic Distribution of Loans."  Also, the bank did not receive any complaints regarding CRA since the prior examination.  This indicates that the bank is cognizant of the complete picture of reinvesting within the community.

The appeal further detailed that comparing the bank to other banks within the assessment area should be greatly discounted, as the subject bank is unique.  Management states the uniqueness of this bank is evident by the fact that the bank does not have the accessibility and resources afforded the other institutions within the assessment area but nonetheless has successfully increased its loan portfolio by over 75 percent in almost three years.

The ombudsman's review of the appeal included an analysis of the information provided by management, an on-site visit to the community and the bank by members of his staff, and discussions with OCC personnel. 

While the community where the bank is located is primarily agricultural and has experienced little growth, the bank's designated assessment area includes six other communities and some of the southwestern tracts of a major metropolitan area.  These areas do reflect significant growth and lending opportunities particularly, because of urban flight from the large metropolitan city.  Also, an analysis of the ATM activity at the bank's on-site location indicated that over half of all transactions were from nonbank customers.  All of which supports the position that the bank's accessibility does not seem to be a problem for ATM users.  This level of nonbank customer usage presents an opportunity to cultivate additional customers.

While four of the financial institutions in the bank's assessment area have twice the total assets, two of the banks are of comparable total asset size and have fewer resources (capital).  These banks have loan-to-deposit (L/D) ratios of 40 percent and 50 percent, respectively, more than twice the L/D ratio of the bank.  Furthermore, while the bank's loan growth, as a percentage, is increasing at a faster rate than its peer group, it had the same incremental dollar change.

The appeal mentioned performance based on a "per capita" income basis; however, census tracts are categorized and CRA performance is evaluated using median family income.  The bank's assessment area includes 26 census tracts of which six are moderate, 14 are middle, and six are upper income.  There are no low income tracts, and the community where the bank is located is in an upper-income census tract.

The ombudsman acknowledges that the Public Evaluation states that the bank had met or exceeded the standards in "Lending within the Assessment Area," "Lending to Borrowers of Different Incomes," and "Geographic Distribution of Loans" for the level of lending done by the bank during the assessment period.  Also, the bank's efforts in making small dollar loans effectively meet a credit need identified by local community contacts.  Forty percent of the loans originated during the assessment period were for less than $1,000. 

When evaluating CRA performance, a bank's L/D ratio is a strong indicator of its ability or willingness to fulfill the assessment area's credit needs.  The bank's L/D ratio is significantly lower than similarly situated institutions.  The bank's L/D ratio as of a particular month in 1997 was 18.14 percent.  The bank's average L/D ratio during the assessment period was 15.23 percent compared to local competitors' average of 45.42 percent.  Although there is strong competition in the assessment area, the board's and management's conservative lending practices and lack of commercial and residential lending expertise are the primary reasons for the low L/D ratio.

The ombudsman concurred with the "Needs to Improve" rating assigned during the examination.  Consistent with the safe and sound operation of the bank, more and/or new lending opportunities should be explored.  Lending opportunities clearly exist as demonstrated by the fact that the lowest L/D ratio of a competing bank is 40.61 percent. 

The OCC recognizes that every bank is unique in its own right and evaluates each bank on a case-by-case basis.  The bank is atypical in that its loan portfolio is less than its total capital, which indicates that the bank is able to take on more risk in the loan portfolio.  The ombudsman is not advocating relaxation of the bank's high credit standards, but rather a program to increase lending slowly and gradually, and most importantly, safely.