Communities Deserve Transparency in Bank M&A

Since a wave of foreclosures swept through the U.S. and pushed our economy into a recession, trust in banks has remained low. If nothing else, the financial crisis demonstrated that bank regulators need to be even more vigilant in their duties—which include evaluating mergers and acquisitions. A recent acquisition proposal in Southern California serves as a national test case as to how closely bank regulators should scrutinize mergers and acquisitions.

Banc of California is seeking approval from the Office of the Comptroller of the Currency to purchase 20 Banco Popular branches, more than half of which are located in Los Angeles.  Banco Popular’s Latino, Asian and immigrant customers represent a new market for Banc of California, which has traditionally focused on an affluent customer base.  Unfortunately, Banc of California plans to eliminate three Banco Popular checking account features, including cash incentives for opening new accounts, interest rate bonuses on savings when customers maintain their checking accounts and a debit card reward program.  This is disappointing, as these features can be important incentives for low- and middle-income people to become and stay “banked.”

Even more troubling is Banc of California’s lack of transparency with regards to meeting and reporting on its obligations under the Community Reinvestment Act. When analyzing mergers or acquisitions, regulators must consider the acquiring bank’s record of investing in local communities in addition to bank management and safety and soundness concerns.  A bank’s Community Reinvestment Act exam results are one such indicator. The exams demonstrate how much priority a bank’s leadership places on engaging in activities that qualify for credit in CRA exams, such as small business lending, philanthropy, community development investments, supplier diversity programs and customer accounts.  

Banc of California’s most recent CRA exam looked at CRA activity from January 2010 to December 2011. At the time, the bank was named Pacific Trust Bank, classified as an intermediate small bank and received a “satisfactory rating.”  However, in the past two and a half years, the bank has grown considerably and is now classified as a large bank, meaning that its next CRA exam will be more extensive.  

Given that it’s been two and a half years since Banc of California’s last CRA exam, it would have been helpful for Banc of California to list more CRA qualifying activity listed in its acquisition application. However, outside of noting one recent investment in a community development financial institution and the fact that bank staff members serve on the boards of local nonprofits, Banc of California has not provided information about CRA qualifying activity since its last CRA exam. 

Without a recent CRA exam or information provided in an application, regulators and advocates can look to a bank’s CRA plan for information.  In these plans, banks outline their future goals related to community development.  However, Banc of California declined to make any plans for future CRA qualifying activity publicly available as part of this acquisition, outside of the investment in the CDFI and staff members’ board involvements.  The bank’s community development officer was recently quoted in American Banker advising other banks to keep their CRA plans out of the public eye.

Banc of California claims that its CRA plan contains proprietary information, so it can’t share it with the public.  But CRA plans don’t outline specific transactions or deals.  Instead, a CRA plan serves as a road map in which a bank articulates its goals related to products, programs, and investments in the communities where it operates. 

Given this lack of transparency, especially as Banc of California attempts to enter a new market, the California Reinvestment Coalition is opposing the acquisition and urging the OCC to obtain more information before making a decision.

Regulators that engage with banks and community groups during mergers and acquisitions can bring about better outcomes for the banks, their customers and the communities in which the banks conduct business. For example, in 2012, after meeting with our member community organizations and other groups, Union Bank filed an amendment to its application with the OCC to outline additional community reinvestment act commitments as part of its acquisition of Santa Barbara Bank and Trust. More recently, after our coalition members opposed Umpqua’s acquisition of Sterling Bank, the Federal Reserve made its approval for the acquisition contingent on Umpqua developing a CRA plan.

In another example, PacWest Bank sought approval to purchase CapitalSource Bank last year.  Our coalition members opposed it, citing concerns that PacWest had failed to prioritize community reinvestment, as reflected in its “low satisfactory” ratings in lending, investment, and service tests during its CRA exam. In response, prior to giving approval for the merger, the FDIC facilitated a meeting between the bank and community groups. PacWest subsequently developed a public CRA plan that reflects community input. 

In all of these cases, communities benefit when they are given the opportunity to meet with the bank and to provide input into a bank’s CRA plan as it is developed.  In the specific case of the sale of the Banco Popular branches, it is even more pressing for the OCC to require this level of transparency.  A “just trust us” attitude is not enough, especially when a bank is entering a new community. We also believe the plans need to be made publicly available so that banks, their regulators, and community organizations like our members can hold banks accountable for creating and then achieving the community reinvestment goals. 

Given that banks must still regain lost customer trust—particularly in communities that have not been historically well-served by banks—the OCC needs to carefully weigh the community benefit of Banc of California's proposed acquisition. We expect the OCC to hold Banc of California to a high standard to ensure that customers and communities are not left behind if this acquisition is approved.

Paulina Gonzalez is executive director of the California Reinvestment Coalition. She has worked for over 20 years leading economic justice organizing campaigns to expand worker rights, immigrant rights, and the rights of low income and underrepresented communities of color.