Originally established in 1977, The Community Reinvestment Act (CRA) was designed to encourage banks to meet the credit needs of their entire community (and end redlining), with a particular focus on low to moderate income areas.
A fresh look at CRA is certainly long overdue.
Eight banks have been downgraded from “Satisfactory” to “Needs to Improve” during the first half of this year. You can find them all in this issue of Jumbo Rate News along with all banks listed that received less than “Satisfactory” scores on their latest CRA exam.
New CRA Rules Coming Soon
Originally established in 1977, The Community Reinvestment Act (CRA) was designed to encourage banks to meet the credit needs of their entire community (and end redlining), with a particular focus on low to moderate income areas.
That was 46 years ago and the last comprehensive revision to the regulation was back in 1995. Think about that. Only 14% of American adults had internet access in 1995. Today, according to Forbes, only about 29% still prefer to bank in person. A fresh look at CRA is certainly long overdue.
Instead of just looking at where a bank has branches, the new CRA rule will require large and mid-size banks to lend to lower income communities in areas where they have a concentration of mortgage and small business loans. This change won’t apply to the smallest banks (those with total assets under $600 million) as their lending areas still tend to be close to home.
Yet, it appears CRA exams are already becoming more stringent. Eight banks have been downgraded from “Satisfactory” to “Needs to Improve” already this year. You can find them all on page 5 (highlighted in yellow) along with all banks listed that received less than “Satisfactory” scores on their latest CRA exam. There can be years in between CRA assessment exams, so many of the banks were also listed in April (JRN 40:14) in our last CRA report.
Zero-Star Liberty Bank, Salt Lake City, UT (also listed on page 5) received its second “Substantial Noncompliance (SN)” CRA rating on May 1st. It has since reported that all deficiencies have been remedied, but we cannot verify that ...yet.
Liberty Bank is an interesting case. Established in 1956, it still operates through a single office at 326 South 500 East in Salt Lake City. With less than $10 million in deposits, Liberty Bank ranks almost last (45th of 47) in deposit market share in the Salt Lake Metropolitan Statistical Area.
Liberty Bank has been on Bauer’s Troubled and Problematic Bank Report (i.e. rated 2-Stars or below) for over six years and has also been operating under one or more FDIC enforcement actions since 2017.
As for its loans, Liberty Bank has a healthy 80.7% loan to deposit ratio. However, 94% are consumer loans and 5% are for residential real estate. That doesn’t leave much room for other loans. While its overall loan quality at was stellar at June 30th, that has not always been the case.
Liberty Bank saw a 3.5% increase in its loans during the 12 months ending June 30, 2023. It is building that loan portfolio by partnering with manufacturers of Tiny Homes. It’s a new niche in the vehicle category (secured, yes, but not considered real estate).
In spite of that loan growth, Liberty Bank’s June 30th assets, net worth and deposits were all considerably lower than a year ago. We look forward to its third quarter call report to see whether its struggles are dissipating.
There is huge difference between Liberty Bank’s miniscule deposit share in the Salt Lake City Market to 3-Star Bank of England’s 100% deposit share in the small city of England, AR (population < 3,000). This town may have two funeral homes, but only one bank has offices in England. Bank of England has two branch offices in its hometown with deposits totaling $197 million.
Total deposits at Bank of England’s six branch locations are $322 million. Its affiliate, however, Bank of England Mortgage has well over 100 loan production offices spanning from coast to coast. Up until its latest CRA rating was made public (June 1, 2023), Bank of England had been skating through its previous several CRA exams with “Satisfactory” ratings, even scoring a couple of “Outstanding” ratings back in the 1990s.
The new CRA rule could actually make compliance easier for Bank of England and others like it as the new rule requires banks to lend in low or moderate income areas where it makes loans, as opposed to just where it has physical branches.
2-Star Community Bank of Raymore, MO is a three-branch community bank that operates solely in Cass County, MO. Within the tri-town area in which its branches are located, CB of Raymore is the top deposit gatherer, with $332 million in deposits which translates to just over 34% of local deposit share.
However, CB of Raymore doesn’t make nearly enough loans. Its loan to deposit (LTD) ratio is just 26%. Of course business models vary, but generally an ideal LTD would be well north of 60%. The new rules won’t help this bank.
In fact, the new rules won’t change much for small banks like this. Only the definition of small bank has changed to raise the asset threshold from $376 million to $600 million.
Another, 3-Star First NB, Chisolm, MN, with assets of just $82 million, is one of just two banks operating in the towns of Chisolm and Cook, Minnesota. First NB holds over 57% of the combined deposit share of the two towns.
FNB is walking a CRA tightrope. On one hand, it needs to improve its CRA rating and lend more to low and moderate income borrowers. On the other hand, it was issued a formal agreement this summer that criticized its loan review policies and procedures. Better under-writing will accomplish both. Nonperforming loans at First NB are well above its peers.
