Bankers are in the business of managing risk, which is critical, not only in an institution’s day-to-day oversight, but also in its evaluation of strategic acquisitions. While obvious acquisition-related risks, such as credit or operational risks, may be appropriately addressed through careful due diligence, banks often overlook the more indeterminate risk that its acquisition application will draw adverse public comments.
The application review process for each of the federal bank regulatory agencies involves a notice and comment procedure through which the agencies may receive adverse comments or “protests” to an application from individuals or interested community groups. These comments are typically based upon the applicant’s Community Reinvestment Act (CRA) or fair lending records, and regardless of their merit, are increasingly employed with an apparent intent to gain leverage over the applicant.
Although the percentage of protested applications is small, the cost of a single public comment can be significant. For example, during the first half of 2016, the average Federal Reserve processing time for an application that received adverse public comments was 213 days, versus 54 days for an application not receiving comments. Even though nearly all protested applications are ultimately approved, the extended review process creates a significant amount of deal uncertainty; enhances the risk of employee and customer loss, which may diminish the value of the target; and generally results in higher professional fees. A history of protested applications may also affect the attractiveness of an acquirer’s offer to a potential target.
Fortunately, the risk of adverse application comments is not completely unmanageable. Although a bank cannot eliminate the risk of a protest, it may employ certain best practices to reduce that likelihood and minimize any related processing delays. As part of its regular CRA program, an acquisitive institution should proactively work to establish and preserve productive, two-way relationships with activist community groups, with a particular focus on groups with a history or growing reputation for application protests. Community participants who feel that an institution is listening and responsive to their needs are less likely to damage that growing goodwill through a formal application protest. These relationships should have the added benefit of enhancing the long-term effectiveness of the institution’s CRA program.
An acquisitive institution should also project a consistent, positive image in its community and be mindful about how all of the information that it provides to the public may be used. For example, a bank touting that it is “ranked first in deposit market share” should ensure that it also maintains a similar rank for meeting credit needs in its assessment area with products such as mortgages and small business loans. An acquisitive bank should also emphasize its CRA and other community service initiatives as a part of its marketing strategy.
In summary, bankers cannot avoid the risk or effects of adverse public comments in the context of regulatory applications. However, proactive and engaging institutions with strong, well documented CRA and compliance management systems are much less likely to attract public protests and will be better positioned to address those received.