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Nebraska bank receives 'needs to improve' CRA rating despite low-income lending

One Nebraska bank was given a "needs to improve" rating on its most recent Community Reinvestment Act exam, despite a significant portion of its lending going to affordable housing loans.

Waverly, Neb.-based Horizon Bank received the rating on its most recent CRA exam because "a substantial majority of the bank's lending volume is outside of its assessment areas," according to a report from the Federal Deposit Insurance Corp., the bank's regulator.

According to the report, Horizon specializes in financing affordable housing through the Low-Income Housing Tax Credit program, which provides housing for low- and moderate-income individuals. However, the bank did not receive credit for this activity because it fell outside its branch-based assessment area.

"Due to the nature of the LIHTC program, Horizon Bank has no control over where the affordable housing projects are located," the examiner wrote. Horizon did not respond to requests for comment.

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Lining up deposits and lending in a similar area is an important part of CRA assessment, said Joseph Lynyak, a partner at Dorsey & Whitney LLP who specializes in the financial services industry.

"It's kind of a square peg, round hole," Lynyak said in an interview. "They're doing some definite socially beneficial activity, but that's not the way that CRA works."

A lower rating can affect a bank's ability to expand, either through de novo branch expansion or through acquisition activity, said William Stern, a partner at Goodwin Procter LLP who works with banks, thrifts and financial services companies.

"This puts the bank into a penalty box," Stern said.

Nine U.S. banks have received "needs to improve" ratings on CRA exams in 2020. Horizon is the most recent, and it also received a "needs to improve" rating on its 2018 CRA exam, which pointed to the same issue of lending activity outside the bank's assessment area. Horizon's 2015 exam, which resulted in a "satisfactory" rating, noted that a majority of its small-business and small farm loans by volume and dollar amount were inside its assessment areas.

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The new CRA modernization from the Office of the Comptroller of the Currency may not help banks like Horizon, even if they were to switch regulators. The OCC's modernization changes the current lending, deposit and services tests and replaces them with two assessment areas: one based on traditional facilities like branches and ATMs and the other based on deposit gathering. If the expanded deposit areas do not match with the lending assessment areas, the OCC's new method would not improve a bank's rating.

"The fact that [Horizon] has got a very, very large geographic set of operations for their lending, it simply is highly probable that the new rules would still not benefit them," Lynyak said.

But the modernization still represents a "real advancement," Lynyak added, by providing a greater range of CRA-qualifying activities and standardizing ratings metrics.

The current examination process makes it difficult to determine how much lending in an assessment area is considered "enough," Stern said. "It's hard to quantify," he said. "It's not something that you can put into a mathematical formula and come out with the results."

Horizon can use one of two options to improve its CRA rating, said Lynyak. The bank can increase lending in its assessment area, or it can create a special CRA plan with regulators. "You can do a special CRA plan because you're just an unusual type of bank," Lynyak said. The plan would have to be approved by community groups and regulators.

"It does present a challenge," Lynyak said. "It appears that [Horizon is] really expert in doing this type of low-income lending, and they need a wide footprint in order to be able to do that work."

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The vast majority of banks receive "satisfactory" ratings on CRA exams. According to an analysis by S&P Global Market Intelligence, 151 banks in Nebraska have a rating of "satisfactory," with eight banks achieving an "outstanding" rating. Only two, Horizon Bank and Farmers and Merchants Bank, have a rating of "needs to improve." No banks in the state have the lowest rating, "substantial noncompliance."

The largest bank with a "needs to improve" rating is Wells Fargo & Co., which received its rating in 2017, covering its lending from 2009 to 2012. Only two other banks with over $10 billion in total assets have "needs to improve" ratings.

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