Mary L. Bailey
Bank mergers and acquisitions (M&As) give community groups and regulators a chance to weigh in on the community development track record of each financial institution involved. During a merger, bankers must take into account both the buyer’s and seller’s compliance with the Community Reinvestment Act (CRA). They must be able to show exactly how each counterpart is meeting the credit and banking needs of the communities in both the acquiring and selling markets.
Bankers should also begin to develop and communicate a post-merger CRA strategy prior to the completion of any deal. Community groups and other interested parties will want to know how the combined institutions will perform in the future, and many of these groups have the means to ensure that regulators help them get answers as part of the approval process. The way a bank presents its future CRA strategy could result in either a quick approval or delay, conditional approval, or even a denial of the merger plans. Any outcome other than approval could come at a significant cost, reputational damage, and loss of opportunity.
Proactive bankers should always maintain a current CRA picture and formulate plans to improve it, as necessary, to better the chances of any future M&A plans. This approach can also prevent banks from making promises during the regulatory approval process that cannot be fulfilled due to inadequate research, resources, or infrastructure.
Assessing Current CRA Performance
CRA compliance assessments should include the following:
- Data Integrity. The starting point of any CRA exam is the integrity of the data used to evaluate the institution’s performance. The margin of error for reportable data under CRA rules is very slim. Banks should test their CRA data for errors. If any are found, the data should be scrubbed before moving forward with further CRA analysis.
- Community Demographics. Bankers should analyze the demographics of all communities in which both banks have deposit-taking branches or deposit-taking ATMs (i.e., their CRA assessment areas) to determine the percentage of low- to moderate-income individuals, households, and census tracts; small business demographics; and minority and ethnicity makeup.
- Community Information Regarding Each Assessment Area. Bankers should gather information on housing stock, economic conditions, median income, community needs, education, competition, and community partners such as non-profit organizations serving low- to moderate-income individuals and areas.
- Fair Lending. Fair lending is considered when regulators evaluate the CRA performance of an institution. Each institution should be evaluated for fair lending performance—separately and on a combined basis. Consider whether applications for products match the demographics of the communities served. Analyze originations versus non-originations as well as loan pricing.
- Lending Products. Review the banks’ range of lending products, including home mortgages, small business loans, community development loans, and consumer loans. Evaluate the products of each institution separately and then combined. This is especially important if the banks serve some of the same communities.
- Community Development Investments. Consider how these investments meet the needs of low- to moderate-income individuals and communities or small businesses.
- Branches and Services. Determine where branches are located and which branches, if any, would likely be serving overlapping areas if the merger took place. Determine where each bank’s deposits originate and which types of products both institutions offer. Finally, consider other types of services the banks provide to help meet the financial needs of low- to moderate-income individuals, such as financial literacy training, mobile banking, and financially-related service on non-profit boards.
- Personnel. Determine the personnel each bank has in positions that require high levels of expertise, such as mortgage finance, community development lending, commercial lending, and compliance with the CRA, Home Mortgage Disclosure Act (HMDA), and fair lending rules. Identify personnel gaps that will need to be filled in the event of a merger.
- Infrastructure. Consider whether the infrastructure of the institutions will support a robust CRA program—for example, would the existing loan origination and mortgage servicing systems support the combined organization?
- Community Relationships. Inventory the current community relationships of each financial institution. Consider whether there are gaps and whether other community relationships should be cultivated.
- Loans within Assessment Areas. Determine whether either institution has products available nationally, such as internet-based loans or purchase agreements with lenders or sellers that are not in the bank’s assessment areas. If there are such products, calculate the ratio of the loans that are inside versus outside the bank’s assessment areas (commonly known as the “in/out ratio”). If this ratio is low, consider what the bank can do to improve it.
Developing a Post-merger CRA strategy
The combined institution will also need a new strategy for CRA, covering the following:
Takeaway: Develop and Sustain a CRA Focus
- Products. Determine which lending and deposit products are needed and can be offered profitably within the bank’s service areas. Consider the number of loans, not just the dollar amount; this is the method used in CRA evaluations.
- Mortgages: Based on the personnel and infrastructure required, consider how much the bank could realistically grow the portfolio over time if needed.
- Small business loans: Consider whether either bank has specialized products and experts in areas such as Small Business Administration (SBA) lending. If not, determine if this is something the merged bank should build.
- Small farm loans: Consider whether there is a need for small farm loans within the bank’s communities and whether the bank has the expertise to originate and service them.
- Community development loans: Consider whether a lender or lenders should be designated to develop the market for these loans. Also, consider whether the bank should establish a Community Development Corporation to cultivate community development loans.
- Home equity lines of credit and other consumer loans: Determine which current products of the merged institutions will survive and what will need to be created. Consider how these loans will be marketed, originated, and serviced.
- Community Development Investments. Analyze the types of investment opportunities available, including charitable donations within the bank’s assessment areas. Determine the targeted dollar level for investments.
- Branches and Services. Consider the CRA impact when deciding which branches and types of services will remain. Also, determine whether there will be a need to expand any service lines.
- Personnel. Determine which personnel expertise should be retained or expanded to ensure successful execution of the strategy.
- Infrastructure. Consider the type and quality of infrastructure required to offer new or increased products or services as well as the time needed to implement any additional equipment or systems.
The bottom line is that bankers need to focus on CRA matters during the M&A process, establish an accurate assessment, acknowledge any shortfalls, and institute a CRA strategy for the future. While bankers should be aware of their CRA status at all times, they face an absolute necessity when there are immediate growth plans. Making the effort ahead of time could significantly decrease the bank's future costs and prevent lost opportunities.
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