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Bank regulators give more adverse Community Reinvestment Act ratings this year

The number of banks receiving "needs to improve" Community Reinvestment Act ratings jumped in the second quarter, reaching the highest quarterly total in nearly three years.

Seven US banks have received "needs to improve" ratings so far in the second quarter, up from four in both the first quarter and year-ago period. This is the highest quarterly total since nine banks received that rating in the third quarter of 2020. Also during the second quarter, one bank received a "substantial noncompliance" rating, the lowest possible score.

The uptick in adverse ratings comes as regulators take a harder look at banks' Community Reinvestment Act (CRA) compliance. That focus has particularly impacted bank mergers, leading to prolonged closing timelines and uncommon provisions for some deals.

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2023 ratings so far

Regulators have handed down 11 "needs to improve" ratings so far this year, just three shy of the 14 "needs to improve" ratings banks received in all of 2022.

Just one bank — Liberty Bank Inc. — has received the lowest rating of substantial noncompliance so far this year.

Among the banks that have received either a "needs to improve" or "substantial noncompliance" rating since 2022, all but one had less than $4 billion in assets. That one bank was USAA Federal Savings Bank, which had $110.98 billion in assets at March 31.

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Impact on growth

Adverse CRA ratings can sometimes impact banks' growth, namely as it relates to M&A. Speaking at S&P Global Market Intelligence's 2023 Community Bankers Conference in May, a Federal Deposit Insurance Corp. official said CRA weaknesses can easily hold up deals.

An uptick in protests from community groups has only exacerbated that issue, the official added. "One thing that will slow down application for a branch or a merger is a CRA protest," said Rafael Valle, the Federal Deposit Insurance Corp.'s assistant regional director of the division of depositor and consumer protection for Arkansas, Colorado, the western part of Texas, New Mexico and Oklahoma. "So if you are properly managing fair lending risk and CRA, that helps expedite the process."

Two banks that received "needs to improve" ratings this year — MapleMark Bank and Oakwood Bank — had previously announced a merger of equals in January 2022 but later terminated and withdrew the application in August 2022. The banks' "needs to improve" ratings came less than a year after the withdrawal.

A poor CRA rating can also restrict a bank's other growth initiatives and its CAMELS rating, experts told S&P Global Market Intelligence in a story discussing USAA Federal Savings Bank's recent regulatory tumult. The CAMELS rating system measures capital adequacy, asset quality, management, earnings, liquidity and sensitivity on a scale of one to five, with five being the worst.

'Outstanding' ratings

While the number of adverse CRA ratings are on the rise, some bucked that trend. For example, Cadence Bank received the highest rating, "outstanding," in its most recent exam, according to a press release, after receiving a "satisfactory" rating on its three previous exams and "needs to improve" on the two exams before that.

"It's a lot of work that goes into all the different parts of CRA," Chairman and CEO James Rollins III said in an interview. "Any one problem can cause a bank to not receive an outstanding rating. We're just really proud of the team effort that it took to get where we are."