We are a $200MM community bank, mainly focused on commercial lending and secondary market residential real estate. Neither of these products have been targeted to LMI areas or borrowers historically. That is not our business niche. Thus, our CRA lending performance needs improvement.

How much (in dollars or as a % of total loans) do we need in CD lending to supplement our commercial and real estate business and maintain a satisfactory rating? Is there some magic range that we should shoot for? Will the examiners look at the various CD services that we perform to supplement some of our shortcomings?

Help!

You're gonna love my first answer:

There is no "magic range" It all..."depends"

Welcome to CRA!

Now, let me see if I can dig out some information that I just sent to another bank on this via email:

(Starting in the middle of the email) "I’m not sure where you saw 1% of net tier one. That is a very low figure. I keep several hundred exams on file and I see an average of about 8.18% of net tier one for at least a HS in the investment test. This is only a target I have based on exams of banks my size spread through the US. Personally in my last exam I had about 5%. But…I have a HUGE net tier one for my bank size ($2.2 billion assets with $444MM net tier one). While I have a huge capacity, I have very limited opportunity. That 5% represented 90% of total investments in the state for banks, so I did well in the test. How would your investment sit in comparison to the local banks? Or even to state totals? My goal is 10% of net tier one. It’s a stretch, but I give it a shot. 10% would be a fairly safe goal for many banks, but you absolutely have to cover that capacity issue. 1% would be VERY VERY low. I’ve heard that number in comparison to assets size, but even that is low. The average of the bank’s I watch (there are 159 of them) would be 2%, but you won’t see many folks talking about the comparison to assets anymore (that was an old FDIC thing). Spend all of your time comparing to net tier one. This is the new and accepted valuation because it’s all about capacity.

To determine your goal I would highly suggest you start pulling exams of all banks in your aa’s, especially those that are considered your peers by your examiner. Compare their investments to Net tier one, (in the front of the PE) as well as investments, and note the score they received in the investment test against your goal. Then pull exams from other banks regulated by your regulator agency and look at their figures as well. This is how I come up with my goal. I also compare their CD lending to net tier one and assets to come up with a goal. I do this because of my weakness in the investment test. I offset my investment figures with my very high CD lending figures (about 25% of net tier one this exam round). That gives me at least an O in lending and a S on the investment test, which added to my service 0 gives me an outstanding rating all around."

In the study I talk about here, the average % of CD lending was 25.88%, but that ran the gambit from 93% to .53%. Throwing out the top and bottom of the scale still put the figures in the range of 24%.

But, don't let the % I'm talking about fool you. It's all about capacity (net tier one) and opportunity. It's also about your lending standing. You say yours is low, so you need to really work your portfolio and find the CD deals in it. I am a commercial bank (largest small business lender in the state) and I don't "target" to LMI areas specifically aside from a few HMDA products. But within my portfolio I found over $100MM in deals that qualified for CD credit. I'm comfortable with a goal of $25MM every year. I then take into consideration what my anticipated services rating will be, as well as my investments, and come up with the final goal. You can do the same, by reviewing your possible score (well that would be when the reg smooths out) and factoring in each area to come up with whatever you feel you need, given market conditions, capacity and opportunity, to get to your eventual overall exam goal.

All this said (it works for small and large banks) I am a large bank $2.4Billion). At $200MM I'm not sure how much you have to worry about the CD lending figures. A few deals of reasonable size will be more than most of your peers report (small banks don't make much effort when it comes to CD reporting). Pulling their exams pronto will give you a feel for a goal. CD lending for the small bank though does not always have the same effect as it does on a large bank. If you're not meeting the needs of your AA, given opportunity, capacity, etc., then the CD lending won't help override that issue.

Excellent information. I appreciate your assistance. I may respond back with additional infomration once I review some of my peer banks and my net tier one capital. Assuming that is what you are referring to. Thank you.

Check out this tool that we provided BOL to help bankers get an idea of the reported community development lending by lenders in their state http://www.bankersonline.com/tools/compliance/2003community_dev.pdf
Checking out the PE's as suggested by Dawn is a good idea too, especially since the small lenders (like you) don't have to report this type of data. However, I know most community bankers under $500 mil don't have the time to do too much research. But checking out a couple of your non-reporting competitors' PE's could yield some insights as suggested by Dawn. My experience consulting with small banks indicates CD lending is not critical. Heck, more than 1/3 of the reporting lenders did not report even 1 CD in the latest year available.

The tool Len provides is great, but remember that some information is missing. For instance, note in Alaska that only a few banks are reporting. This is leaving out all of the major players. Wells, Key, etc., do not report CD lending to our area because they roll it up nationally. In addition, I go by exam figures verses reported figures. Many banks change their figures at exam time, so the one thing I always know is that those figures were approved verses pie in the sky

I never report the exact figure on the LR I sure would like to, but often I just don't have time to get to the write ups so mine is a guestimate. My exam however, is totally accurate...cuz the OCC said so