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Appeal of "Needs to Improve" CRA Rating - (Second Quarter 1999)


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.


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.


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.