Mirror, mirror on the wall ... is your CRA self-assessment process an effective one at all? The answer you receive may surprise you.

For years, bank and thrift executives have been hearing about the need to perform self-assessment of their institutions' performance under the Community Reinvestment Act. Before the new CRA regulations were adopted, institutions often found themselves standing in front of the self- assessment mirror to demonstrate to examiners that a comprehensive CRA program with all the right bells and whistles was indeed in place.

Under the new regulations and related examination guidelines, examiners are not likely to care that an institution has developed a comprehensive CRA program or, for that matter, undergone a self-assessment. Nevertheless, periodic self-assessment should continue to be viewed as a critical - and valuable - management tool for monitoring performance, identifying and addressing weaknesses, and preparing for agency examinations.

Each institution, large or small, wholesale or retail, limited-purpose or full-service, would be wise to assess its performance under the new standards well in advance of an examination. (Evaluations under the small bank performance standards began Jan. 1. For large institutions, the data collection requirements are now in effect and evaluations under the applicable tests will begin July 1, 1997, although such institutions may elect earlier evaluations.)

Since a self-assessment involves analyzing an institution's loan volume and distribution (by geography and borrower characteristics), community development activities, service delivery systems, and qualified investments and their benefit to the assessment areas, it would seem reasonable to think that having the necessary data concerning your institution's activities under the appropriate tests would enable you to accurately assess your institution's performance, right?

Not so fast.

Unless you have a solid understanding of the demographics, economic conditions, lending, service, and investment opportunities, and similar factors affecting the institution's assessment area, you'll most certainly be assessing your performance in a vacuum.

In examination lingo, these various factors make up an institution's "performance context." Although examiners have been considering many of these factors for years, the new regulation formalizes and standardizes the concept of judging each institution's performance relative to its own unique circumstances.

This critical piece of the new regulation presents particularly significant implications for large institutions. The performance context forms the standard by which CRA performance will be judged (or by which a proposed strategic plan will be evaluated by the regulator). The regulation does not require all institutions to prepare and understand their performance context, but it is certainly in an institution's best interest to do so.

The performance context includes:

Demographic data. Information about opportunities and limitations can be gleaned from analyzing population make-up and trends; income levels and distribution; the age, condition, and nature of the housing stock; home prices; and similar data. For example, if a relatively large percentage of the population in an institution's assessment area lives below the poverty line, this would need to be taken into account when determining the reasonableness of the institution's lending and other activities.

Information about lending, service, and investment opportunities. This is similar to the kind of information that institutions have always collected for purposes of ascertaining community credit needs. However, focus is now directed toward identifying opportunities rather than documenting ascertainment efforts. Community organizations, government and economic development agencies, and census and Home Mortgage Disclosure Act data are excellent for obtaining this type of information.

Product offerings and business strategy. The CRA fortunately does not require institutions to be all things to all people. However, with respect to the products and services that are offered, an institution is expected to have a reasonable distribution based on geography and borrower characteristics. In addition, an institution should be well prepared to explain the rationale behind its menu of products and services if its strategy addresses only certain needs identified in an assessment area.

Institutional capacity and constraints. The size and financial condition of the institution, the economic climate, and similar factors significantly affect the institution's ability to provide lending, investments, or services in its assessment area. For instance, the institution's loan volume may be affected by recent corporate down sizings or plant closings in the local area.

The institution's past performance and the performance of similarly situated lenders. An institution's lending or other performance trends over time could be relevant. Even more significant is how the institution stacks up against others with similar attributes. Market share and other comparative analyses may be called upon by examiners when assessing the institution's geographic distribution.

The institution's public file. Written public comments, maps of assessment areas, lists of branches and services, and similar documents constitute an institution's "public file."

Any other relevant information. This is a catch-all provision, covering other factors that may fall out of any specific category, but still hold the potential to significantly affect an institution's capabilities. Examples of this might include the unexpected loss of critically important employees or facilities, which would substantially impact an institution's performance.

All of these factors are expected to play a significant role in determining how examiners react to a large institution's lending, investment, and service activities. The performance context could be an important issue for small banks as well, especially for those whose loan- to-deposit ratios or other benchmarks are not up-to-par.

You know your market better than the examiners do. Don't sit back and wait for them to determine the context in which your institution's performance will be judged. Be proactive and take the necessary steps to be prepared so that you can maintain some degree of control over the examination process.

A good hard look in the mirror can help you fix problems before others have time to point them out.

Mr. Sawicki is a manager at KPMG Barefoot Marrinan, a business unit of KPMG Peat Marwick, in Washington.

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