A poor CRA rating has derailed many mergers in the past. Community activists, in particular, get involved to protest these combinations.
In the case of 5-Star Capital One, N.A., McLean, VA, there is nothing in the CRA report to protest against. 4-Star Discover Bank, however, could prove to be a different story.
A list of all banks that Bauer has identified that currently have a CRA rating of less than “Satisfactory” can be found on page 5 of this week's Jumbo Rate News.
Will CRA Derail Capital One-Discover Merger
Only three banks currently have Community Reinvestment Act (CRA) ratings of Substantial Noncompliance (SN). All three are quite small, each having well under $100 million in total assets.
One, 3-Star Lemont National Bank, Lemont, IL, was established in 1901 and currently operates through five local offices that employ a total of ten local staff members. Two of the offices are located in assisted-living centers and provide limited services to the residents that live there. The other three are full-service.
In 2012 Lemont NB received a CRA rating of “Needs to Improve” because:
- Its loan-to-deposit ratio (LTD) was “less than reasonable”; and
- Its record of extending credit to individuals of different income levels was poor and needed to be improved.
A 2015 follow-up CRA evaluation indicated:
- Its LTD ratio had worsened to “unreasonable and reflects a very poor level of lending”; and
- The bank had not originated a single loan in its assessment area to low- or moderate-income borrowers.
As a result, Lemont’s CRA rating was downgraded to the lowest level: “Substantial Noncompliance” (SN).
By 2021, three CRA evaluations later, Lemont was still at SN. Little, if any, improvement was noted.
That was the latest CRA evaluation for Lemont NB that is available. We do have data, though. Today, at just 10.77%, LNB’s LTD ratio is even lower than it was in 2021. (For comparison, its peers have an average LTD ratio of 68.25%.)
Most of Lemont’s loans (93.5%) are for 1-4 residential real estate; the other 6.5% is Commercial Real Estate, which is not very diverse, but doesn’t begin to tell LNB’s loan story. Of its paltry $5 million in loans outstanding, almost $1 million (19%) is to bank insiders.
Where loans constitute the major asset category at most banks, LNB has 64% of its assets tied up in securities or other investments.
However, in spite of increasing its assets, LNB witnessed a 3.6% drop in loans in 2023. None of this will help its CRA rating.
How does this relate to the merger plans of Capital One and Discover?
The intent of the CRA law, enacted in 1977, was to ensure that banks were meeting the needs of all of the residents withing their assessment area. That hasn’t changed. The debate over CRA today revolves primarily around what constitutes an assessment area.
How an assessment area is defined could be pivotal for banks that operate principally online, as internet banking did not exist when CRA definitions originated in 1977.
A poor CRA rating has derailed many mergers in the past. Community activists, in particular, get involved to protest these combinations. In the case of 5-Star Capital One, N.A., McLean, VA, there is nothing in the CRA report to protest against. Its rating is Outstanding.
The assessment area for Capital One includes 12 states—from Massachusetts to California. It aced both the lending and investment tests—in all 12 states. Capital One has a plethora of “Flexible and Innovative” Lending and Investment programs and promotes financial literacy programs for low- to moderate-income communities. It is the poster child for community reinvestment.
While most would likely think of Capital One as a “credit card bank,” it does have hundreds of branch offices and dozens of “cafes”. Therefore, for CRA purposes, it is considered a limited service bank. Its assessment area is as broad as its branch network.
4-Star Discover Bank, Greenwood, DE, conversely, has no branches. It delivers financial services nationwide by way of the internet, mail and phone. Although it takes deposits and makes loans nationwide, its assessment area for CRA, is limited to 59 census tracts in and around Sussex County, DE (where it is headquartered).
Discover Bank’s latest public CRA evaluation (March 2022) was Satisfactory and is based on an FDIC approved Strategic Plan that is supposed to be effective through 2025. The report cites deficits in student loan servicing as the reason the bank was not Outstanding. We would not expect that, by itself, to have a material consequence in the merger decision.
However, under competition (same report), Capital One is listed as the first of four other large financial institutions that operate in Delaware, and therefore compete directly with Discover Bank. That could be the thing that gets this train off the rails, if anything can.
Federal regulators each have their own way of releasing CRA evaluations and ratings and we (Bauer) cannot guarantee that what we have is the most current. What we can tell you is that we made every effort to get you a list of all banks that are not currently rated at least “Satisfactory”. You will find them on page 5.
As we reported at the start of this article, only three are currently rated “SN”. Lemont NB is one of them. The other two are tiny: 4-Star Independence Bank, East Greenwich, RI (downgraded to SN as of July 2023); and Zero-Star Liberty Bank, SLC, UT, which dropped to SN in November 2021 and remained there in its subsequent exam (May 2023).
