We only have 1 main office with an ATM onsite and we are located in a non MSA area we do not report HMDA. We have a adjacent county in an MSA that we have several loans in. In the past we have considered our county (X) and our adjacent county (Y) as part of our assessment area due to the number of loans in both counties.

Examiners are saying that you cannot have a non MSA and an MSA in the same assessment area for the bank. I cannot find this in the regulations, anyone else have insight to this?

You need to establish a second AA to include the MSA. They would be reviewed separately for exam purposes and the bank should evaluate separately to ensure proper support of both AAs is in place.

In the section on delineating an assessment area:

(e) Limitations on the delineation of an assessment area. Each bank's assessment area(s):
(1) Must consist only of whole geographies;
(2) May not reflect illegal discrimination;
(3) May not arbitrarily exclude low- or moderate-income geographies, taking into account the bank's size and financial condition; and
(4) May not extend substantially beyond an MSA boundary or beyond a state boundary unless the assessment area is located in a multistate MSA. If a bank serves a geographic area that extends substantially beyond a state boundary, the bank shall delineate separate assessment areas for the areas in each state. If a bank serves a geographic area that extends substantially beyond an MSA boundary, the bank shall delineate separate assessment areas for the areas inside and outside the MSA.

You have 2 assessment areas. All non-MSA assessment areas, even though not contiguous, are considered by the regulators as a separate assessment area. Like you, it could be one county, or like me, it is a group of 20 rural non-MSA counties in West Texas that comprise a single assessment area. Very artificial, but that is the way its done M.

I don't understand the point of separating the counties into different assessment areas.
We have one county that is located in the Memphis, TN MSA - but it's in Arkansas. The third largest river in the world separates us. We operate primarily in Crittenden Co, Arkansas; its an entirely different world. We are expanding westward into counties that are much like ours.
Why should we separate our main county which happens to be in the MSA because it borders it, from all these other rural Arkansas counties? What difference does it make for us?

It is the rule.

It doesn't make a difference except for measurement purposes. You should make sure you are supporting all AAs proportionately.

The non-MSA area should be separate from the MSA area. MSAs should be separate from other MSAs except in a combined MSA area (generally highly populated areas).

If you don't separate it, the examiners will and that is how you will be examined. You can be deficient in one AA and not in another. Hence the caution to track performance accordingly.

You can't fight city hall!

Here is another interesting aspect to this question. Although neither the regulation nor the Q&A's say that you must have a deposit taking branch inside an Assessment Area (they do clearly say the obverse, that you must include in your AA(s) any tract in which you maintain a deposit taking branch), the agencies have, with very few exceptions (mostly by the OTS) insisted that every AA have at least one deposit taking facility. If your AA includes 2 counties, each in a different MSA or one in a MSA and the other in a non-MSA you would have to delineate two separate AA's. But if you don't have a branch in the second county your regulator may insist that you cannot designate that county as a separate AA.

The whole business regarding AA delineation for CRA purposes badly needs updating and the regulators know it (several agencies heads have publicly commented about this issue in recent years). But for some reason they keep postponing confronting this issue while they address much less pressing issues.

And that makes paying attention to where the bank is lending very important, because if the regulators won't allow that other county as an AA, all of the loans are outside of the bank's assessment area.