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Data Integration for FDIC loss share assists
1. June 2011
Integrating and Reporting Loss-
Sharing Data: A Critical Challenge
in FDIC-Assisted Acquisitions
By David W. Keever and Tapan P. Shah, PMP
After a record-setting 157 bank failures in 2010, the
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Federal Deposit Insurance Corporation (FDIC) reports
a bit of a slowdown in this trend, with 43 bank closures
through May 20, 2011. For healthier banks, such closures
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often present an attractive opportunity to expand their
business through a transaction in which the FDIC
agrees to absorb a significant portion of the risk.
Unfortunately, it is easy to underestimate
the data integration challenges involved
in a bank acquisition, even if both
institutions are sound. It is even easier
to underestimate the accounting and
reporting challenges presented by the
loss-sharing agreements the FDIC uses to
encourage the purchase of troubled banks.
The picture is complicated further by the
continuing evolution of FDIC and other
regulatory requirements, both as a result of
new legislative actions and as a response
to the changing economic environment.
Partly because of these complications, a number of financial institutions are choosing
not to pursue an FDIC loss-sharing agreement when bidding on failed banks. Some
have stated that, in exchange for a more favorable purchase price, they would prefer to
take on all of the risk associated with the portfolio rather than undergo the additional
accounting, reporting, and compliance requirements a loss-sharing agreement imposes
on their already overburdened staff.
Fortunately, there is a better alternative – an approach that allows acquiring institutions
to take advantage of the risk-mitigation benefits offered by a loss-sharing agreement
without incurring an unacceptable administrative burden in order to comply with
FDIC accounting and reporting requirements. By employing a systematic, methodical
approach to the data integration and reporting challenges, the complexity of an
FDIC-assisted transaction can be greatly reduced.
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2. Crowe Horwath LLP
Loss-Sharing Agreement Data
and Reporting Requirements
When one financial institution acquires the assets of another as part of an FDIC-
assisted transaction, the FDIC requires regular reports – either monthly or quarterly
– on the status of the acquired assets. These reports must be submitted in the form
of loss-share certificates, which contain summary data on the acquired assets, and
FDIC download files, which contain more details.
Typically, a loss-sharing agreement requires:
■ Monthly reporting of single-family loan-loss certificates (sometimes called 415a), with
details on each loan for which the bank is submitting a loss claim during the month; and
■ Quarterly reporting of commercial loan-loss certificates (sometimes called 415b), detail-
ing commercial loan charge-offs, recoveries, and net charge-offs during the quarter.
After the initial purchase, the FDIC provides
the acquiring bank with an initial listing Loss-Sharing Agreements: Key Facts
of all the loans covered under the loss-
■ Under a loss-sharing agreement, the FDIC absorbs a portion of the loss on a
sharing agreement. In general, the agency
specified pool of assets. This arrangement offers healthier banks an incentive to
requires the bank to send back a test file to
acquire troubled institutions, which minimizes the FDIC’s losses when a bank fails.
demonstrate its ability to fulfill the reporting
requirements. The first certificates typically ■ For commercial assets, loss-sharing agreements typically cover a five-year
are due three months after the purchase date. period, during which the FDIC will reimburse 80 percent of losses incurred by the
acquirer on covered assets up to a stated threshold amount, with the acquiring
Loans acquired as part of an FDIC- bank absorbing 20 percent.
assisted transaction are subject to various ■ For single-family mortgages, loss-sharing agreements usually run 10 years and
additional recordkeeping and reporting have the same 80/20 split as the commercial assets. The FDIC also provides
requirements, including: coverage on some second-lien loans for certain types of losses.
■ Internal loan accounting. To effectively ■ Since the inception of loss-sharing agreements in 1991, the basis for sharing
manage the portfolio, each loan must be losses has undergone some changes. At one time, the FDIC shared losses with
accounted for, rated for risk, and tracked an acquirer on an 80/20 basis until the losses exceeded an established threshold,
for regular servicing and transactions. after which the loss-sharing basis shifted to a 95/5 basis. This 95/5 split was
Although the acquiring institution will eliminated in March 2010.
have its own systems for handling these ■ From 2008 through September 2010, the FDIC entered into 200 loss-sharing
tasks, the historical loan accounting data agreements, with $159.2 billion in assets under loss sharing.3
must be left intact in order to support
■ As part of its oversight of loss-sharing agreements, the FDIC requires acquiring
loss recognition and accurate reporting.
banks to provide quarterly reports to verify compliance with the program and to
■ GAAP accounting. For regular report- monitor the performance of the assets. It also conducts periodic on-site reviews
ing to shareholders and other interested of the records of covered losses and overall compliance.
parties, loan data must be structured in
accordance with U.S. generally accepted
accounting principles (GAAP), as spelled out in the Financial Accounting Standards
Board’s Accounting Standards Codification. Verifying the fair valuation of loans and
other assets often entails significant data requirements and complex cash flow esti-
mates, which might not be included with the original loan contract and documentation.
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3. Integrating and Reporting Loss-
Sharing Data: A Critical Challenge
in FDIC-Assisted Acquisitions
■ Tax accounting. There are important differences in the way acquired loans are
handled for tax purposes and the way they are handled for GAAP accounting.
Examples include accounting for charge-offs, other real estate owned (OREO),
appraisals, expenses, and taxes. Despite the differences, however, the two
accounting approaches must rely on standardized and consistent data to satisfy
auditors’ and regulators’ tracking and accounting requirements.
Complicating Factors – What
Acquiring Banks Need to Address
Institutions also face a number of broader data integration and reporting issues when
acquiring a failing bank’s loan portfolio. Following are some of the most common
concerns they encounter.
The data used for managing ■ As banks have grown, so has the number of information systems they rely on to
manage their assets. Even before an acquisition, most institutions already are
customer interactions must
struggling with loan data being stored in several different systems that do not talk
be accurate and timely to to each other adequately. Integrating the systems from the acquired institution only
demonstrate strong customer adds to the challenge.
■ The acquiring bank also needs to understand the failed bank’s credit and risk
service and establish acquired
review rating structure and identify where that information is kept. It then needs
customers’ confidence with to incorporate the acquired loan portfolio into its own internal reporting systems
the new bank. for credit risk and financial and operational reporting. This step requires gathering
data from new systems and transforming the data into a normalized form that the
organization can use.
■ If the actual servicing of the loans was handled by an external servicing
organization, the acquiring bank also must coordinate its data acquisition efforts
with this servicer in order to incorporate into the bank’s reporting systems the
information stored by the servicer.
■ In the case of older loans, some important data elements might be stored in paper
files and not reflected in any electronic storage systems. Often banks attempt
to retrieve this information manually and store it in a spreadsheet format, only to
encounter even more demands on their resources as they attempt to integrate this
information with the rest of the data. In some instances, data also might be stored
on outsourced systems.
■ Loss-sharing agreements generally allow the acquiring bank to expense direct
external acquisition and restructuring costs including professional fees for appraisals,
legal and accounting services, and real estate maintenance. This creates additional
data integration, tracking, and reporting requirements to confirm these costs are
aligned with existing accounting systems and allocated to the appropriate loans.
■ Customer retention is always a critical concern since it is one of the factors that
drove the acquisition in the first place. As such, the data used for managing
customer interactions must be accurate and timely to demonstrate strong customer
service and establish acquired customers’ confidence with the new bank.
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