There's a surprising risk lurking in the details of bank mergers

Big mergers don't get approved today without big Community Benefit Agreements.

Big as in $100 billion in the recent U.S. Bank deal, $88 billion with PNC, and likely over $100 billion on the pending TD Bank-First Horizon merger.

These agreements are primarily organized by the National Community Reinvestment Coalition, which has been responsible for 23 CBAs totaling over $550 billion. The NCRC is a coalition of more than 600 community-based organizations around the country.

Sarah Silbiger/Bloomberg News

These CBAs between a bank and a community coalition promise local community development loans, investments and other activities typically totaling about 3% to 5% of post-merger assets per year on recent deals. This is much greater than the first CRA commitment of $1 billion by Wells Fargo in 1990, representing just 0.25% of its annual assets.   

The California Reinvestment Coalition, representing over 300 statewide organizations, has been responsible for CBAs totaling over $50 billion invested in California communities in the last six years. Those CBAs represent 10% to 20% of California deposits of the subject banks.

National and state coalitions and local community groups would like merger approvals conditioned on these agreements. While both the Treasury Department and the Federal Reserve clearly state there is no legal or regulatory requirement for CBAs, bankers and their Wall Street and legal advisors understand "there is no big M&A today without a CBA." 

What they do not understand, however, are the CBA pitfalls, the biggest being possible reputation risk in the event there is disagreement with a coalition over meeting existing or setting new CBA goals.

This recently happened with the five-year, $16.5 billion CBA that KeyBank established in 2016 when it bought First Niagara Bank. Everything was going well until KeyBank announced a new and expanded 10-year, $40 billion plan in 2021 without consulting the NCRC, which was involved with the original CBA. Such a unilateral effort is known as a Community Benefit Plan (CBP).

While KeyBank said it completed the five-year CBA a year ahead of schedule at a $26.5 billion level, the NCRC said the bank "failed to complete their agreement" in an "egregious manner." Among the many disagreements was the coalition's focus on purchase and refinance lending on owner-occupied homes, and the bank's insistence on also counting reverse mortgages and vacation and rental lending toward their commitments to promoting homeownership.

The NCRC's press release, referring to KeyBank as "the worst major mortgage lender for black homebuyers," complained that the bank "abandoned the commitments" in the 2016 CBA, which "helped the bank win regulatory approval for a merger."

A coalition publication titled "Why We're Breaking Up With KeyBank" claimed "they grew their home mortgage business but left people of color behind." Another coalition report was titled "REDLINED: KeyBank Failed Black America Despite Its Commitments To Improve."

The coalition further declared, "If you want to buy a house with KeyBank's money, you better make sure it's not in one of your city's Black neighborhoods." It concluded the bank's leadership team was "not sincere in their public claims about their bank's commitment to economic equity."

There were several local news stories in KeyBank's Cleveland headquarters and other key markets like Buffalo, New York, and Pittsburgh, where a local community group indicated its next step was to seek a CRA ratings downgrade, despite the fact that KeyBank has had 10 consecutive outstanding ratings.

Unlike the coalition's releases, the local news stories carried the bank's response that it "strongly disagreed" with the coalition's characterization of its CBA performance and lending activities.

How could KeyBank have avoided this problem?

It could have moved forward with its own CBP in 2016 despite likely national coalition and local community group protests. However, once it made a CBA with the NCRC to help get merger approval, it should have made every effort to work with the group on the original agreement and certainly not moved ahead without it. KeyBank's unilateral decision was not worth the reputational risk.

An academic study of that CBA, the largest at that time, concluded that "at the end of five years, KeyBank will have full authority to define its future levels of investment and the contours of its generosity."  Although it apparently had the legal right to move forward on its own, KeyBank and other banks with outstanding CBAs should realize they are like Hotel California agreements: "You can check out any time you like, but you can never leave." 

My public testimony in last year's megamergers argued that the Fed should not only require all financial details of CBAs be made public, but also monitor and enforce them, since they are a de facto condition of merger approval.

Without a public accounting of a CBA, there is no way to know how much money is going to the communities and how much to the coalitions and local community groups. Since my testimony, the coalitions have expanded their summaries of past CBAs, but they fall short of total disclosure.

At least one member of Congress agreed on the need for total disclosure, arguing it would be consistent with the CRA sunshine requirements of the 1999 Gramm-Leach-Bliley Act. Though CBAs are the real basis for approval, the Fed fails to monitor or enforce them by conveniently footnoting that "neither the CRA nor the federal banking agencies' CRA regulations require depository institutions to make pledges or enter into commitments or agreements with any private party."

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The CBA regulatory climate may be changing, according to the acting comptroller of the currency Michael J. Hsu, because "questions may arise as to the representativeness and motivations of the organizations negotiating on behalf of the communities served. Greater transparency and consistency in the governance of how CBAs are negotiated could help mitigate such concerns."

If a merging bank is contemplating a CBA or updating an existing one, I recommend a strong and enforceable nondisparagement clause, especially at the end of the CBA, to hopefully avoid reputational risk.

CBAs are no longer limited to megamergers, as they are increasingly demanded in community bank mergers. An alternative for merging banks is to publish their own five-year CBP, working directly with local community groups rather than a state or national coalition. CBPs must have comprehensive, quantitative, and inclusive community development goals consistent with previous CBAs. This option is not feasible without reputational risk for banks operating under an existing CBA with a coalition, as in the KeyBank case.

A unilateral CBP would be similar in concept to a CRA Strategic Plan, where input is obtained from local community groups and specific annual goals are made public. Besides being financially transparent, such CBPs would be monitored and enforced by regulators and also considered during CRA and fair-lending exams. Assuming such CBPs were truly responsive to the needs of low- and moderate-income communities, merging banks would have reduced reputational and regulatory risk.