It’s a typical Tuesday morning. You just grabbed some coffee and sat down to work. Then it happens—the CEO announces the acquisition of a $1 billion bank with 14 branches located two states away from your current operations. Your mind quickly begins to assemble a list of the related tasks that need to be accomplished in the coming months. If CRA is at the top of your list, then your typical Tuesday just became “Day One” of an expansive, somewhat worrisome, new experience in CRA management.
The reality is that the announcement of a bank acquisition has actually become quite typical. In the 12 month period from July 2018 to June 2019, a total of 263 banks were acquired, merged into another institution, or failed. That number equates to a bank acquisition announcement basically every single working day during the same time period. Mergers and acquisitions are the normal course of business in today’s banking industry, so much so that, according to the Federal Reserve Economic Data (FRED), the total number of commercial banks operating in the nation has dropped from 6,938 in 2009 to 4,605 today, with no signs of a slowdown in acquisition activity any time soon.
Key Strategies for CRA Management
Even for the most experienced CRA Officers, the excitement of your bank’s growth through acquisition is often dampened by the increased workload needed to ensure CRA success for your next examination, often without any additional staff support or resources. Never fear! Here are six key strategies for managing CRA to ensure a smooth bank acquisition:
Before you explore each nuance of the acquired bank’s CRA program, it is important to spend time creating your acquistion timeline and plan.
1. It Starts with a Plan
As Maria sang so eloquently to the Von Trapp children in The Sound of Music, “Let’s start at the very beginning.” While it may seem important to immediately dig into the piles of documentation and emails quickly accumulating about specific community development activities, the first key to CRA success during a bank acquisition is taking a top-down approach. Before you explore each nuance of the acquired bank’s CRA program, it is important to spend time creating your acquistion timeline and plan. Bank management and other departments will have their own priorities for the transition, but it is your job to give CRA compliance the attention it deserves.
If you manage CRA for your bank on a day-to-day basis, applying the best practices and procedures that are already in place, as the framework for the acquisition, is a great way to use something familiar. Evaluate your weekly, monthly, and annual CRA tasks to compile a detailed acquisition task list, remembering that all of these tasks do not need to be done within the first week, or even the first month, of the acquisition. If your bank has scheduled regular management meetings regarding the acquisition, be sure you are on the invite list. If not, schedule meetings yourself to discuss CRA needs.
I also cannot stress enough that you need to be flexible during the acquisition. While the CRA plan is important, acquisitions are fluid, with another complex organization becoming part of your already complex institution. Each bank has their own way of doing things and sometimes, your way may not be the best way. Use the acquisition as a time to learn more about CRA management and incorporate the best of both programs into your future CRA strategy.
Make sure that your plan includes key tasks such as updating the bank’s CRA Public File and adjusting the Home Mortgage Disclosure Act (HMDA) Loan Application Register (LAR) and CRA Loan Register (for large banks) to report all of the acquired loans in accordance with regulatory requirements. Also, be sure that you identify the location of CRA documentation, whether online or in physical records, to preserve continuity of CRA-qualified activity reporting during the examination cycle.
2. Learn the New Markets
As every CRA Officer knows, one of the most important regulatory factors underpinning each bank’s CRA program is its delineation of assessment areas. Building an understanding of the new markets your bank is enterpting is key to accurately adjusting your assessment areas. Look first to the documentation you have about the acquired bank’s current assessment area composition. How has the bank set the geographical boundaries? Are there any assessment areas that are delineated smaller than a whole county? If so, discuss why the bank has chosen to draw this smaller boundary. Use the bank’s HMDA and other loan data to analyze whether you want to adopt the same assessment area borders or set new boundaries based on your own guidelines. Remember, these assessment areas are now your bank’s to manage, so you should feel completely comfortable with the way they are determined and drawn.
Building an understanding of the new markets your bank is entering is key to accurately adjusting your assessment areas.
After you have selected your new assessment areas, the second factor in learning the new markets is building performance context. Delve into the economic, geographic, demographic, and other data to round out your understanding of general market characteristics and community development needs in each of the new assessment areas. Determine if any of these markets are federally designated as “distressed” or “underserved” geographies or major disaster areas. Explore local government websites to see if any neighborhoods within the assessment areas are part of a local or state plan for revitalization or stabilization. Use regulatory websites to find the most recent CRA Performance Evaluation reports for peer banks and read them closely to gain insights into how the local banks and regulators are discussing market needs and CRA performance.
3. Don’t Let Knowledge Walk Out the Door
With any bank acquisition, there is a CRA expert at the acquired institution that now becomes your most valuable resource. Hopefully, this important person will become part of your team and be around for years to support your expanded responsibilities. Realistically, it is more likely that this employee may resign or be let go during or soon after the acquisition is completed.
As you work through the acquisition, schedule as much time as possible with the acquired bank’s CRA Officer and team to learn about their way of managing CRA. They will understand your new markets and share details that you will never be able to find through online research. Set aside time for them to share their history of CRA at the acquired bank, including not only where documentation can be found, but also the culture and unwritten processes for documenting CRA qualifications and transactional activity. You do not want to be preparing for the next examination and realize that the only person who understood how to read all the cryptic codes on the acquired bank’s reports is long gone.
4. Keep a Close Eye on Branch Closures
In some cases, an acquired bank’s geographic footprint will overlap with your bank’s locations, which results in redundant branches. Economically, it makes sense to close one of the two branches in these cases. While branch closure is an expected and accepted part of bank acquisitions, as the CRA Officer, you must pay close attention to management’s decisions to close branches.
In each case, you should be part of the discussion to close a bank branch before the branch is closed. Be sure to add insights into how the branch closure will impact the accessibility of credit and bank services in the community. Document management’s rationale for closing the branch and where that branch’s customers will gain access to bank services in the future.
If the branch closing is located in a low- or moderate-income census tract or other designated CRA geography, your responsibility grows for documenting impacts of the closure on the community. You should spend time assessing how the branch’s closing will affect residents overall, including access to credit, deposit accounts and other bank offerings. How far will the residents have to travel to obtain bank services and which other banks are going to fill the gap if your bank leaves the community? Is it feasible that the residents will use those other banks or is there a prevalence of non-bank or predatory lenders in the community that will more likely become the residents’ primary financial resource? What impacts will your branch’s closure have on financial literacy, community support, and other programs for the area? You should document in detail your reasons and justifications for why the branch closure will not create a banking desert and how financial stability will be maintained without your bank in the community.
Another consideration is what will happen to the physical bank branch. Management may be looking to sell decommissioned real estate, but could also consider donating the branch building under IRS rules. Specific IRS guidance allows corporations to donate real estate and claim a tax credit for the property donation. If structured the right way, the property donation could also become a CRA-qualified community development opportunity. For example, HBCU Alliance Partners and Tribal Alliance Partners work with banks to receive donated bank branches which they then sell at fair market value to interested buyers. The profits from the sales are then used to fund college scholarships for low- and moderate-income students attending Historically Black Colleges & Universities or Tribal Colleges throughout the nation.
5. Set Staff Expectations
Initially, the acquired bank staff will be focused on relaying information and converting systems into your bank’s format. Some of the staff will be transitioned into new roles and others will continue on in their daily responsibilities like nothing happened. Regardless, it falls to the CRA Officer to ensure that all of the acquired bank’s staff has a clear understanding about CRA procedures and processes at the new institution.
Devote time to outline clearing the bank’s expectations for all areas of CRA requirements, whether you do this through in-person training, online training, or e-mails.
Communication is key to integrating the acquired bank’s staff into your CRA program. Do not skimp on training. Devote time to oultine clearly the bank’s expectations for all areas of CRA requirements, whether you do this through in-person trainingk, online training, or emails. Make sure that the new staff members know that you and your team are their ongoing resource for CRA questions and guidance.
As you look at documenting CRA activity, be sure to train new staff members on requirements and formats for reporting volunteer hours, requesting approvals for bank donations, and accumulating documentation for CRA-qualified loans and activities. Does your bank utilize online systems or worksheets for CRA documentation? If so, be sure to explain the details of using these tools. The more clearly and thoroughly you communicate CRA expectations to the staff, the easier your job will become.
6. Nurture Existing Community Relationships
Much like bank staff, existing community partners will be wondering what will happen to the trusted bank relationship that they have with the acquired bank. As soon as possible, you should reach out to the bank’s CRA partners to communicate how you plan to work with them going forward.
Spending time on the ground in your new markets will help these community partners build rapport with you to preserve the personal relationship with your bank that you both want. Identify the key relationships that have led to CRA-qualified activities in the past, and reach out. Until these community partners hear from you, they will build their own narrative about what the future holds, which may lead to them moving on from your bank before you have even had a chance to talk.
Once you have established contact with your community partners, stay in communication. Be sure to share your bank’s guidelines for working together. Do you have a specific way that you want grant applications or donation requests to be submitted? How do you want partners to promote your community development efforts? Are there timelines or best practices that the community partner needs to follow to make them an ideal match for your bank? The more you share, the easier the transition and ongoing collaboration will be.
One Bank Reinvesting in its Community
Ultimately, as your bank welcomes its new staff, customers, and community partners, the more you share about CRA, the more everyone will benefit. While bank acquisitions may seems complex and confusing, taking it one piece at a time will make the process more comfortable for everyone. Communicate your CRA needs and expectations and keep an open mind about learning new things from the acquired bank’s staff. Together, your banks can unite to achieve the overall spirit of CRA, reinvesting in your new combined community.
ABOUT THE AUTHOR Brian Waters, CRCM, is the President, COO and Co-Founder of findCRA, which offers both online services for banks to identify and document CRA-qualified nonprofit relationships and build instant performance context, as well as traditional CRA consulting and training services. He has over 20 years of experience in banking compliance and community development and is a resident of Louisville, KY. Contact him at brian@findCRA.com.
This article originally appeared in the November / December 2019 issue of the ABA Bank Compliance Magazine published by the American Bankers Association.