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CRA updates could have 'unintended consequences' on bank M&A strategy

A new revision of a 1977 rule that encourages banks to lend to low- and moderate-income communities could influence the M&A process, analysts said.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. proposed their plans to modernize the Community Reinvestment Act on Dec. 12. The CRA currently requires banks to serve communities where they have a physical presence, but the update would expand assessment areas to better account for online banking, which allows banks to lend far outside their branch footprints.

It also seeks to provide more clarity on activities that qualify a bank for CRA credit. The new rule would use a ratio that evaluates the dollar value of CRA-qualified activities divided by a bank's total retail deposits as the first test to determine a bank's CRA rating.

Analysts and experts said the changes to CRA would not have a dramatic impact on deal volume or activity. But the merger process itself could become smoother, and measuring CRA credits differently could change how banks pick their M&A targets or lead to somewhat fewer deals.

Concerns about CRA violations are often brought to the front of merger discussions by community groups protesting proposed deals. One analyst said the proposed CRA changes may provide less opportunity for activists to protest. Additional clarity around the rule may make merger completion easier, said Catherine Mealor, an analyst with Keefe Bruyette & Woods.

"In theory, these rules give more clarity to CRA lending, so banks are better at CRA lending — then you could argue over time there will be less CRA issues," Mealor said in an interview. "There won't be as much opportunity for those activists to use CRA" as an argument against a merger, she said.

But she cautioned that this would be unlikely to change merger activity greatly, as it would "take a while to play out."

"Activists will always be there," she said.

The new CRA rules may reduce the number of mergers, said Stephen Scouten, an analyst with Sandler O'Neill. Under the old rule, banks were required to have a certain amount of CRA lending in their branch footprint. They may have targeted banks in areas where they could increase CRA credit, Scouten said.

"There were times when banks have done things that would help their CRA rating, and they've bought banks that might help their CRA rating. This probably diminishes the need to do that," he said. "It's kind of hard to play out those unintended consequences."

The Independent Community Bankers of America, a trade group for community banks, does not expect M&A activity to slow down as a result of the rule changes since they are mainly clarifying how activities are measured, said Lilly Thomas, the group's senior regulatory counsel.

"If somebody's consistently meeting their CRA requirements, then under this new proposal they're all of a sudden not meeting it, then I think there's something wrong," Thomas said in an interview. "We would like to see that this doesn't change M&A activity."