Banks involved in mergers have been increasingly working with advocacy groups to strike community benefits agreements even though such pacts are not explicitly required by regulators for deal approvals.

Community groups are often concerned that industry consolidation will reduce services for consumers. Through the benefits agreements, banks involved in M&A transactions pledge to offer certain services such as increased lending in low- and moderate-income communities. The agreements have become more common in recent years.

Since 2021, the National Community Reinvestment Coalition, a group that advocates for fairness in lending, has helped strike nine benefits agreements with financial institutions after working on seven such agreements from 2016 through 2020.

A big deal

One of the largest agreements involves Minneapolis-based U.S. Bancorp's planned acquisition of San Francisco-based MUFG Union Bank NA. Under the community benefits plan, $100 billion will go toward addressing issues such as homeownership access, small business capital access, philanthropy, and workforce and supplier diversity. U.S. Bancorp developed the plan in coordination with the National Community Reinvestment Coalition and California Reinvestment Coalition.

More agreements are on the way. The Toronto-Dominion Bank, which awaits regulatory approval to acquire Memphis, Tenn.-based First Horizon Corp., intends to establish a community benefits plan and has heard from the National Community Reinvestment Coalition and other groups about needs in both banks' markets, Paul Beltrame, TD Bank's U.S. head of merger integration, said in a statement to S&P Global Market Intelligence.

The coalition's CEO, Jesse Van Tol, said he understands that banks are going to pursue M&A deals in an effort to boost their bottom lines. Van Tol said his group wants to ensure that communities do not lose access to financial services after companies are sold and consolidated.

"The reason we engage in bank mergers is to ensure that, when it comes to serving the community, that one plus one doesn't equal less than two," Van Tol said. "In the ideal world, one plus one should equal more than two … that they're able to do more with the size and scale."

Community groups are not always the ones to initiate agreements with banks involved in M&A deals.

"Sometimes banks go out and court community groups before announcing a merger and try to bring them alongside and get them to participate in these comment periods in support of the proposed acquisition," David Zaring, a professor of legal studies and business ethics at The Wharton School at The University of Pennsylvania, said in an interview.

Why banks reach deals

Banks may enter community agreements in an effort to expedite regulatory approval, address issues that groups raise during the merger application process and contribute to overall Community Reinvestment Act, or CRA, compliance, said Chip MacDonald, counsel at Jones Day who focuses on M&A, among other financial services topics. These agreements can help with community relations, such as showing buyers' commitments to sellers' communities.

Regulators evaluate banks' service to communities by monitoring compliance with the CRA. Community needs are also a consideration for deals.

"It used to be that community benefit agreements were customary — all the big deals had them," MacDonald said. "They fell out of favor with the regulators because the regulators said that the banks should have a continuing track record of CRA compliance. It shouldn't just be when they want to do a deal that then they enter into special agreements."

MacDonald added that a potential reason they are coming "back into vogue" is because of a change in attitude among regulators.

"I think there is a greater concern at the regulatory level about compliance and inclusion, et cetera," MacDonald said. "And that's been a theme of the administration."

The Office of the Comptroller of the Currency is looking at the role community benefits agreements or community reinvestment plans could play in approving mergers, acting Comptroller Michael Hsu said May 9.

"On the one hand, they can serve as transparent and clear mechanisms for banks and communities to discuss and agree on what the needs of the community are," Hsu said. "On the other hand, questions may arise as to the representativeness and motivations of the organizations negotiating on behalf of the communities served."

Impact of agreements

It is possible that the agreements could have some unintended consequences, such as reducing the expected benefits of an acquisition, said Alden Abbott, a senior research fellow at the Mercatus Center at George Mason University and former general counsel for the Federal Trade Commission.

"If some acquisitions that might've reduced costs or had some internal organizational benefits that might've benefited consumers, if those cost-benefits are outweighed by the costs of entering into a particularly large community agreement, then you might not go ahead with the merger," Abbott said in an interview.

Another concern is monitoring whether the banks live up to the agreements. Banking regulatory agencies do not enforce or monitor compliance with private party agreements, according to CRA guidance.

But some view the agreements as a step in the right direction.

Banks are not the cause of socioeconomic issues, and they are not going to solve them on their own either, said John Gorman, a partner at Luse Gorman PC whose focus areas include M&A. "But of course, their business is being part of the solution," Gorman said in an interview.

Along with increased lending in certain areas, other goals the National Community Reinvestment Coalition seeks in the agreements include expanding banks' philanthropy and diversity among staff and suppliers, according to Van Tol.

"Bank mergers are not always beneficial to communities, and that's why we engage at that time to make sure that they are," he said.