bank-ratings-9-2-15.pngAs we move further away from the recent economic crisis, an increasing number of financial institutions are considering becoming buyers or sellers. It is therefore important that potential acquirers position themselves to be attractive suitors, and sellers demonstrate that they are healthy candidates. Although much of this focus is directed toward an institution’s overall safety and soundness and numerous other factors, one issue that should not be overlooked is its record of meeting the credit needs of its local communities when measured against the requirements of the Community Reinvestment Act.

CRA Primary Factors
There are two relevant factors related to CRA. First, an acquiring institution’s CRA rating can dictate whether a potential deal will receive regulatory approval. Depending on the severity, a potential acquirer with a less than “satisfactory” rating, or even one with more narrow weaknesses in its CRA program, will find it difficult if not impossible to obtain regulatory approval for any transaction until it improves its rating and its internal CRA program. Also, the CRA condition of the seller is significant, and the buyer should determine how that will impact the bank after consummation.

Even an institution with an “outstanding” CRA rating can still face difficulties executing a transaction. The CRA allows individuals and community groups to take an active part in the regulatory application and approval process of a transaction by providing a mechanism for the submission of public comments regarding any perceived CRA compliance weakness or criticism of a party to the transaction. Because the CRA rating is publicly reported, unlike the institution’s other confidential examination ratings, this becomes an easy target. By taking advantage of the publicly available data concerning financial institutions, including CRA ratings, groups located far outside the acquirer’s market area can file comment letters that pass the very low threshold set by regulators to entertain these protests. In some cases, these activist groups have been able to extract significant commitments from acquirers just to get deals done.

Regulatory Approval Process
Most often, these public comments do not, in and of themselves, prevent an otherwise viable transaction from occurring. They can, however, significantly slow down a pending transaction. Under current procedures, written public comments are included as part of the record that the federal agencies review in the evaluation of an application for a transaction. In connection with these public comments, the regulators may make several requests for additional information before ultimately determining whether those public comments will impact their approval of the proposal. This process can take several months, and can even drag on for significantly longer. From deal uncertainty, to the potential that key talent will leave in the wake of a long transition, to the potential for major shifts in the market or rapid economic change, delaying the closing of a transaction while this process unfolds can be quite costly and damaging for the parties involved.

The importance of the CRA comment process to banking M&A has existed for decades, although historically, it generally has been confined to transactions involving very large financial institutions, such as the recent CIT Group-OneWest Bank acquisition. With the current paucity of larger bank transactions, smaller deals are attracting more public scrutiny and suffering significant delays of, in some cases, many months. Discussions and negotiations with the regulators on this issue may be difficult and frustrating. If CRA comments are submitted to regulators for a particular transaction, it is important to quickly develop with legal counsel a clear strategy to address and resolve any issues that have been raised.

Practical Takeaways
To mitigate the CRA risk in M&A transactions, the following are some strategies that an organization should consider, either as a buyer or a seller:

  • Continue to develop a strong CRA program and strategy.
  • Proactively develop or deepen relationships with local community groups.
  • Be extremely careful and consult with legal counsel when deciding whether and how to respond to broad “informational” questionnaires from community groups.
  • Engage with banking regulators early in the transaction process regarding each party’s CRA status, strengths and potential challenges.
  • In the transaction agreement, consider specifically providing for community-based outreach or support programs following the transaction.
  • Provide clear evidence of community support by both parties, pre- and post-transaction, in the deal announcement.
  • Take all protests seriously, and be cognizant that all communication and information may become public.

WRITTEN BY

Robert Fleetwood

Partner

Rob Fleetwood is a partner at Barack Ferrazzano Kirschbaum & Nagelberg LLP.  Mr. Fleetwood concentrates his practice on advising financial institutions on strategic, securities and general corporate matters.  He regularly represents financial institutions on public and private securities offerings, recapitalizations, mergers and acquisitions and contract negotiations.  Additionally, he works closely with clients on their continued compliance with federal and state securities laws, including reporting under the Securities Exchange Act and with corporate governance.

 

Mr. Fleetwood is an adjunct professor in banking law at the Northwestern University Pritzker School of Law.  He was an adjunct professor of securities law in the graduate program in financial services law at the Chicago Kent College of Law for 5 years.  Mr. Fleetwood is also a frequent speaker in the financial institutions and securities law areas to trade associations and professionals.

 

WRITTEN BY

John Geiringer

John is a nationally recognized banking attorney who advises financial institutions on regulatory, governance, and investigative matters. He regularly provides focused training sessions to boards and management on a wide range of legal and risk management topics. Working at the forefront of banking law and regulation, John is a thought leader in the field, primarily through teaching, writing, and frequent media interviews.