BBCN Bank and Wilshire Bank are the latest lenders whose high-profile union has prompted an announcement of greater commitment to community investment.
In advance of their merger, BBCN Chief Executive Kevin S. Kim, 58, and Wilshire Bank Chief Executive Jae Whan Yoo, 67, pledged to use at least 10 percent of the merged entity’s statewide deposits next year to provide annual loans, investments, services, charitable contributions, and grants to low- and moderate-income and historically underserved communities.
Declarations of this sort are common from banks involved in such combinations, thanks to the 1977 Community Reinvestment Act, which mandates federal regulators take into account whether lenders are meeting the credit needs of the entire community when deciding to bless or spurn a deal.
But how do those commitments impact the bottom line of the banks themselves?
After City National Bank announced its merger with Royal Bank of Canada last spring, it committed $11 billion over five years for community lending, investments, charitable contributions, and other activities. Irvine’s Banc of California, which counts 19 branches in Los Angeles, pledged 20 percent of its deposits annually to community reinvestment act-qualifying activities in 2014 as it prepared to acquire Popular Community Bank’s California branch network.
Those hefty pledges could make one wonder whether banks must commit to taking a loss on such community-oriented activities.
“We believe it is good business,” Sal Mendoza, City National’s head of community reinvestment, wrote in an email. “We make community reinvestment loans to creditworthy borrowers. We expect them to pay us back, and they do.”
Banc of California Chief Executive Steven Sugarman, 41, added that community reinvestment activities are in fact linked to his bank’s rapid deposit growth.
“They are profitable,” he said. “We believe that California’s entrepreneurs and business owners want to know that their bank is serving all of the local communities. They don’t want to be embarrassed by their bank cutting services along different regional lines and by excluding different groups or different ZIP codes from their lending.”
The federal scrutiny of these activities is meant to ensure low- and moderate-income consumers and minorities aren’t being marginalized. That’s because when banks are built to make profits as quickly as possible, they often don’t see such groups as the quickest path to profit, said Paulina Gonzalez, executive director of the San Francisco-based California Reinvestment Coalition.
Other times it boils down to whether or not a bank has the infrastructure in place to offer such products and services to underserved communities.
“Oftentimes banks are not making these small-business loans and the mortgages because they don’t have bank branch presence (in these areas),” she said, noting many are moving to a more virtual model. “Or they don’t have officers that speak the language. In some ways, it does require these banks taking a different approach.”
One option for community reinvestment or public benefit is lending funds to a community development financial institution, which will in turn lend that capital to a small business, nonprofit, or some other project that encourages community development.
“We’ll do the lending they can’t really do in any economical sense,” said Tom De Simone, 34, chief executive of Genesis LA, a downtown L.A. community development financial institution. “Maybe they’re loans that are too small and too much work for too little return. CDFIs are uniquely set up to that do that work.”
After the merger, set to close in the third quarter, BBCN will dedicate one-quarter of 1 percent of its California deposits to community development investments, which can include investments in institutions similar to De Simone’s.
De Simone said his nonprofit charges interest on its loans to the community, and in turn pays interest to the banks from which it borrows, though it might be a little below market rates or what a bank could get by dealing directly with the end user.
“When you don’t participate in those ZIP codes and have to give money to a third party to originate (these loans),” said Sugarman, “the returns you get are lower and someone else is taking the preponderance of returns because they have the relationships.”
Many banks going through mergers meet with community groups and other stakeholders to get input when formulating their plans. That’s what happened with BBCN and Wilshire, said Gonzalez, noting that the banks’ executives met with her group before announcing their goals this month.
“We wanted to make sure that when these two banks merged, the sum would create a greater good rather than a decrease of CRA activity,” she explained. “These banks have a history of doing strong CRA activity in the community separately.”
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