2nd Substantial Noncompliance for Small Bank

2nd Substantial Noncompliance for Small Bank

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The small bank ($59 million asset) 3-Star Lemont National Bank, Lemont, IL just received its second consecutive “Substantial Noncompliance”  (SN) Community Reinvestment Act (CRA) rating. One of the major factors contributing to this lending test rating, assigned by Lemont NB’s regulator, Office of the Comptroller of the Currency (OCC), was a very low loan to deposit ratio (LTD).

According to the report, which was dated July 19, 2021, Lemont NB had made only 18 loans in the previous three years. Of those, only 11 home loans and two small business loans were made in its assessment area (AA), which includes parts of Cook, DuPage and Will counties in Illinois.

What’s worse, according to the report, lending to low and moderate income borrowers was very poorly distributed. The bank’s limited, 14 tract AA, includes three moderate and 11 upper income, highly competitive tracts. However, of the 21,221 households living in those tracts: 15.7% are low-income and 10% are moderate income. So, while the vast majority of residents are better off financially (16% are middle  income; and 58.3% upper-income) there is plenty of room for Lemont to improve its lending distribution.

Looking at families, instead of individuals, 11% are low-income. None of those received a home loan from Lemont. Only one home loan was extended to a moderate-income family, which account for 12% of the total. Lending opportunities were available for these lower-income groups, as evidenced by aggregate peer lending of 10%.

Given all of this, we wanted to look at other community banks that have very low LTD ratios and compare their CRA reports. The 50 community banks listed on page 7 each have LTDs less than 22% based on June 30, 2021 financial data. Lemont is the only one listed that is rated “SN”. A couple of them are even rated Outstanding (O).

5-Star First Century Bank, Gainesville, GA, is one such bank. At 16.1%, First Century Bank’s LTD is slightly higher than the 11% of Lemont, but still well below the 80-90% that is widely considered ideal. There are 26 tracts in First Century Bank’s AA and the income distribution among them is not much different from that of Lemont. Of 61,992 households: 5.14% are low-income and 16.59% are moderate-income. Combined, that’s 21.73% compared to 25.7% in Lemont’s AA. The big differentiator here is location.

Even with over $324 million in assets, First Century has just one office, and it is located in a low-income tract. As a result, Community Development Lending,  Investments, Grants, Donations and hours of service all exceeded First Century Bank’s minimum goals. First Century Bank has been on two other lists this year as well: JRN 38:30 for having one of the highest interest margins in the nation (6.38%)and 38:37 for having over 30% of its loans in the Paycheck Protection Program (PPP). Kudos for being such a big help to the community.

Most CRA ratings we see, though, are simply Satisfactory “S”, like that of 5-Star Columbus State Bank, TX. Unlike First Century Bank (above) Columbus State Bank did not ask for special consideration for its investments and services. With one of the lowest LTD ratios in the country, it is doubtful that would have made a difference.  Approximately 1/3rd of Columbus’ AA is low or moderate-income, and 44% is either under the age of 17 or over the age of 65. These groups generally have limited credit needs.

While credit needs are limited in this area, small businesses, small farms and consumers each have some credit needs. Examiners determined that the LTD at Columbus State Bank was “less than reasonable” to support those needs given what competition is doing in the same area. However, “less than reasonable” is not the same (according to examiners) as “unreasonable”.

When examiners compare the LTD with other lenders in the area, they look for a difference of less than 10%. Columbus State Bank fell under that 10% threshold so was not docked for its “less than reasonable” performance.

Given that, and the fact that Columbus State Bank’s borrower profile distribution for small farm loans was “excellent”, its CRA rating remains Satisfactory.

As you know, the Community Reinvestment Act was established to encourage investment in low and moderate income neighborhoods. There has been a lot of talk about updating and modernizing the rules, but that has taken a back seat to other urgencies. In the meantime, it is up to examiners to determine if, based on the bank’s business model, it is doing its fair part to help boost low and moderate-income people in its AA.

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