Acquiring Bank Assets Kpmg


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Acquiring Bank Assets Kpmg

  1. 1. Meeting the Challenges of Acquiring Bank Assets KPMG LLP
  2. 2. 2 Meeting the Challenges of Acquiring Bank Assets In today’s environment, you may be considering the acquisition of assets of a failing institution or you may have already acquired assets from a failed institution. Acquisitions of this type can provide Integration Program • Identify program milestones, time strategic opportunities to grow and Management (IMO/PMO) lines, and key dependencies diversify in your marketplace while The scope and complexity of acquiring • Provide early warning mechanisms for allowing you to obtain some risk and integrating bank assets hits upon both potential risks and issues mitigation provided through FDIC multiple operations and stakeholders, guarantees. While the benefits of • Establish decision support, from accounting and tax to data and FDIC-assisted acquisitions can be critical issue escalation procedures, systems to reporting and compliance significant, acquiring institutions will and remediation processes. Throughout, proactive confront myriad issues and challenges, communication and change management • Develop initial and ongoing risk virtually overnight. Because of the can allow for a more effective transition. mitigation alternatives and procedures dynamics of the required time lines of working with the FDIC on these Establishing an effective Project • Coordinate resources and monitor acquisitions, you may not have the Management Office (PMO) can help to: work stream progress typical lead time to evaluate the assets • Develop the project charter and • Establish change or to integrate them into your business plan management procedures operations. Additionally, you may need • Identify the future-state business • Provide regular analysis of actual to enhance your infrastructure to both operating model including progress against plan comply with FDIC requirements and organization, process, people, FDIC audit reviews. and technology aspects With all that is at stake when acquiring Credit File Review • Assign both internal and external Detailed credit file review is bank assets, the right advisor can be personnel accountabilities an integral step in the preacquisition critical to efficiently and effectively address execution and compliance • Delineate Day One Priorities, plan, “buy” decision, as well as the needs within the context of your execution, First 90 Days project phase, postacquisition assessment of the business objectives. We believe KPMG and long-term business purchased portfolio. KPMG provides this is the right advisor, with the industry optimization activities credit review across all loan products and depth, knowledge, and insights to help geographic footprints. We specialize in • Establish internal and external completing large reviews in condensed clients address their needs during an stakeholder communications time frames with short notice. Our team FDIC-assisted transaction. plans, risk register, issue resolution of former bankers and regulators processes, status reporting schedules, participated in many of the highest profile and standards acquisitions of 2009. We advise private • Kick off cross-functional teams and equity investors, strategic acquirers, and provide them with supporting tools, participants in public offerings with their templates, and helping guides buy-side decision and postacquisition © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG , International Cooperative, a Swiss entity. 21552NSS
  3. 3. 3 Meeting the Challenges of Acquiring Bank Assets Meeting the Challenges of Acquiring Bank Assets 3 review. Our credit review services KPMG’s advisory professionals can Valuation assist our clients in assessing: assist assuming banks in evaluating FDIC-assisted transactions provide the failed bank’s assets and operations. the buyer the opportunity to acquire • Accuracy of asset Specifically, we offer: the failed institution’s loan portfolio, quality representations • Wide-ranging transaction advisory and assume certain liabilities such as • Reliability of risk ratings applied to deposits and FHLB advances, which support including transaction planning individual loans is often coupled with a loss sharing and structuring • Potential values for real estate assets agreement with the FDIC. In these • Multidisciplinary due diligence services underlying individual loans situations, applicable U.S. accounting to assist in the assessment of all standards require the recognition at fair • Refinancing gap on major real elements of the failed bank, including: value of identifiable intangible assets, estate loans 9 Loan portfolio analysis and credit financial instruments, and indemnifi- • Probability of loss on impaired loans, file review cation assets (i.e., the FDIC Loss Sharing aka the “credit mark” Agreement) for acquisition accounting 9 Investment portfolio and depositor purposes. Under current standards, the • Trends and direction of asset quality base assessments acquirer no longer recognizes a separate • Quality of underwriting and 9 Financial and accounting valuation allowance (i.e., loan loss loan supervisions due diligence reserve) on the acquired loans as part of • Skill-sets of existing management the transaction. Rather, the fair value of 9 Assessment of historical and the acquired loans must now reflect both current operations and practices credit and noncredit related valuation (underwriting, monitoring, Due Diligence and adjustments. Since acquirers must apply collections, etc.) Transaction Support the “exit price” concept in determining Time frames are condensed when the • Assistance in developing and fair values, an adjustment for liquidity FDIC moves in on a struggling bank. The executing an integration plan to take discounts may be necessary. Finally, the opportunity for an acquirer to conduct over the failed bank’s operations premium paid for the assumed deposits due diligence on the acquired bank can may not necessarily represent fair value. • Development of a risk portfolio inventory be limited, both because of the timing • Benchmarking of risk portfolios against To help address these complexities, and because of the implicit — or explicit industry information, including default KPMG’s valuation professionals — loss sharing agreements that become data, asset performance data, and can provide: part of the transaction. As such, the acquiring bank may need to move quickly asset fair value information • Both preliminary estimates of value to in understanding what they are incorpo- aid management in their assessment • Model validation services, including rating onto their books. All of this is of the transaction as well as derive review of model input assumptions, in an environment where valuation is specific conclusions of fair value upon sources, approaches, and techniques highly challenging, and where unrealistic transaction close valuation and risk exposure assumptions may have been made in the past. © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of , independent member firms affiliated with KPMG International Cooperative, a Swiss entity. 21552NSS
  4. 4. 4 Meeting the Challenges of Acquiring Bank Assets Meeting the Challenges of Acquiring Bank Assets 4 • Independent valuations associated forecast potential future cash flows on Accounting Advice with key acquired assets and assumed their acquired assets. There is the need The accounting nuances and implications liabilities such as: to effectively monitor loan performance, of acquiring failed bank assets are forecast possible borrower behavior, numerous and can be daunting. It is likely 9 Core Deposit Intangibles estimate credit losses, and help mitigate the acquirer will not expect to receive all 9 Favorable/Unfavorable Leases credit risks. of the contractual cash flows on certain 9 Loan Portfolios Our team includes economists, financial of the acquired loans due to evidence analysts, transaction specialists, and of credit deterioration of the borrowers. 9 Fixed-Term Deposits securitization analysts, combining In these situations, the postacquisition 9 FHLB Advances industry, transaction, and modeling accounting for differences between experience with strategic advisory skills to expected and contractual cash flows can 9 Derivatives assist clients in addressing these issues. be complex. 9 Loss Sharing Agreements Our credit forecasting services include: Moving beyond the initial acquisition, (Indemnification Assets) • Credit file reviews to understand critical Day 2 accounting considerations • A wide-ranging valuation report detailing potential risk exposure may include: conclusions on value, the valuation • Identification of key model • Determination and recording of approaches utilized, and the basis for the input assumptions accretable versus nonaccretable yield assumptions used in the valuation on acquired loans Our professionals possess a strong • Development of customized modeling tools appropriate for the specific • Determination and recording of understanding of stakeholder credit exposures ongoing transactions affecting the expectations for report content, FDIC indemnification asset methodology, and depth of analysis, • Cash flow forecasting to carry forward which can enable successful interaction loan portfolio groupings from initial fair • Continual evaluation of expected with both client valuation review teams value through the life of the loans cash flows on acquired loans and independent auditors. and determining the appropriate • Implementation of stress testing and accounting recognition when scenario analysis expectations change Credit Forecasting • Assessment of assumption Once the loan portfolio is in hand, • Subsequent recognition of governance and internal controls how might it perform going forward? valuation allowances surrounding the credit risk process It is important for acquiring banks to • Adjustments for the removal of loans understand the risk characteristics of • Benchmarking of assumptions, upon foreclosure, bankruptcy, or payoff the portfolio, including probabilities approach, and results with of prepayment or default, in order to market observations appropriately track, account for, and © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG , International Cooperative, a Swiss entity. 21552NSS
  5. 5. 5 Meeting the Challenges of Acquiring Bank Assets Meeting the Challenges of Acquiring Bank Assets 5 • Tracking, reporting, and disclosure Tax Advice Regulatory Implications of acquired loan activity The integration of the acquired loan When an acquiring bank enters into a Additional topics beyond those listed portfolio and other assets such as Real purchase agreement with the FDIC as above may require accounting advice Estate Owned (REO) from a financial the receiver of a failed bank’s assets, including other-than-temporary reporting perspective can also present it is entering into a well-defined and impairment issues. significant tax implications, such as the detailed contract. Such a contract determination of the initial tax basis in typically involves a loan loss-sharing KPMG’s Accounting Advisory Services the assets acquired and the determi- agreement, mitigating the risk exposure professionals provide “on-call” complex nation of future accruals of market but also subjecting the acquirer to certain accounting and industry experience discount on the loans. Under certain measurement and reporting activities. to assist companies with respect to circumstances, the acquirer may also It may also require the acquiring bank transactional related activities that realize taxable income as the result of an to adhere to the FDIC’s Mortgage Loan will be reflected in a client’s financial asset acquisition. Modification program. statements. We assist with: Our tax professionals can provide: Compliance will mean the need to • Insight into and education about establish appropriate infrastructure to emerging practices of other leading • Ongoing assistance with tax reporting track loans and report to the FDIC on any financial services firms with respect and compliance matters for the number of data elements on a loan-level to acquired loan portfolios acquired loan portfolios including basis, all of which may be complicated by market discount calculations • Drafting position papers and loan modification requirements. documenting changes to policies • Assistance in identifying potential KPMG professionals — including former and processes state and local tax implications caused regulators, supervisors, and examiners — by additional nexus issues • Development and review of can help implement effective programs, comment letters • Tax valuation assistance along with associated governance and coordinated with financial accounting controls, to help meet the FDIC obligations • Evaluation of initial and subsequent valuation issues including initial tax and mitigate regulatory risk. Our regulatory accounting entries, controls, basis determination advisory services may involve: and disclosures • Tax compliance assistance with the • Benchmarking of leading integration of potential new entities compliance practices • Tax accounting assistance related • Assistance with assessment, design, to establishment of deferred tax implementation, and monitoring inventories of the acquired assets associated with governance, • Assistance with ongoing book tax regulatory risk management, and differences potentially created by compliance programs complex accounting rules © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG , International Cooperative, a Swiss entity. 21552NSS
  6. 6. 6 Meeting the Challenges of Acquiring Bank Assets Bank Operations Implications and deployment of KPMG’s effective yield model software application — For decades, Underlying the activities surrounding a standard functionality includes: our Financial Services practice bank acquisition is the need for sound 9 Accounting calculations for implementation and integration activities. discounts on acquired loans, In particular, systems for loan tracking, cash flow forecasting, accounting and including impaired loans under SOP 03-3 has been tax calculations and loss sharing tracking and reporting — along with mechanisms 9 FDIC indemnification asset recognized for its for incorporating outcomes into financial accounting presence in and and tax reporting systems — will be commitment 9 Tax calculations including Market necessary. Discount accruals From a financial operations perspective, 9 FDIC loss share tracking and to the industry. acquirers will expect their software reporting functionality systems to meet their data processing 9 Transaction matrix and chart of and calculation functionality, both for account mapping accounting and tax reporting needs. Development of such systems will 9 Journal voucher and reporting: require documentation of the business accounting, tax, FDIC loss share, objectives, technical specifications, and managerial, regulatory, and ad hoc end-user instructions along with extensive 9 System control features: testing, reporting transparency, and a rule base security, audit log, and robust systems control environment that change management controls direct experience with the implemen- is appropriately documented. tation and practice issues that go We can help with: Why KPMG? along with FDIC-assisted transactions, • Assistance in diagnostic reviews For decades, our Financial Services and we are one of the leaders among of existing methodologies, metrics, practice has been recognized for its accounting firms in the development tools, and models, with gap analysis presence in and commitment to the of tax and accounting model software and remediation, as necessary industry. Our strength in the marketplace to support our services in the areas is why nearly three-quarters of the top of risk management, valuation, and • Model development and 100 largest financial services companies business decision-making purposes. Our validation services have chosen KPMG as their auditor or proprietary loan tracking and monitoring • Identification of requirements professional services advisor. models provide extensive capabilities for data capture and are anchored on an amortization Our professionals bring in-depth engine that has been battle tested for • Assistance with process and knowledge of the issues, enhanced over 15 years. data mapping by technical know-how and a tested track record of proactive client service. Some of our recent experiences include: • Assistance with systems implementation Industry focus also allows us to bring • Assisting a number of clients with together our Audit, Tax, and Advisory the valuation of loan portfolios, loss • Assistance with automation of functions in multidisciplinary teams — sharing agreements, core deposit various processes one source to deliver exceptional quality intangibles, FHLB advances, and • Model software development for both and help you achieve your goals. fixed-term deposits associated with Web-based and client server Perhaps most important, we have FDIC-assisted transactions. applications including customization © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG , International Cooperative, a Swiss entity. 21552NSS
  7. 7. Meeting the Challenges of Acquiring Bank Assets 7 • Assisting a major bank with the • Assisting our audit colleagues as they building, complex system implemen- fair value estimate of assets of a worked through accounting issues in tations, and successful significant acquisition. The process a large bank acquisition. This included PMO structures, such as: included use of models to assess the process review and documentation in 9 IT governance and oversight fair value of consumer and commercial the establishment of the accretable committee structures, roles and portfolios at the time of acquisition, as yield and nonaccretable amounts for responsibilities, and escalation well as the evaluation of the client’s the acquired loans. procedures modeling approach to those portfolios. • Building of prepayment, default 9 Project and program charters, • Assisting a major bank with its credit and loss curves for numerous budgets, work and resource portfolio stress testing process for financial services companies across schedules, dependency maps, compliance with U.S. regulators. The various consumer and mortgage and earned value models engagement involved benchmarking asset classes the client’s portfolio to economic 9 Progress reporting standards and • Deployment of KPMG’s effective assumptions, external ratings and early warning mechanisms that help yield software application at several external default probabilities, and then prevent significant issues institutions including a leading assisting the client with estimation of 9 Communication and stakeholder banking client portfolio values under the scenarios management plans, risk identifi- developed by the regulator. • Assisting banking clients with various cation and mitigation plans programs that have involved model © 2010 KPMG LLP a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG , International Cooperative, a Swiss entity. 21552NSS
  8. 8. Contacts If you would like to learn more or discuss any of these issues in more detail, please contact any of these professionals: Project Management Valuation Tax Advice Bob Stevens David Miller Mark Price Senior Manager – Advisory Managing Director – Principal – Tax 404-222-7758 Economic & Valuation Services 202-533-4364 312-665-2024 Credit File Review Paul Kunkel John Hale Credit Forecasting Director – Tax Principal – Advisory Steven Whiting 312-665-2051 208-389-6511 Principal – Advisory 212-872-6289 Regulatory Implications Due Diligence and Linda Gallagher Transaction Support Jeff Bower Principal – Advisory Miguel Sagarna Managing Director – Advisory 703-286-8248 Partner – Advisory 610-989-3668 212-872-5543 Bank Operations Implications Accounting Advice Doug Williams Timothy Johnson Michael Hall Partner – Advisory Partner – Advisory Partner – Advisory 703-286-8380 312-665-1450 212-872-5665 Chris Boyles Senior Manager – Advisory 949-885-5523 The information contained herein is of a general nature and is not intended to address the circumstances of any particular ©2010 KPMG LLP a Delaware limited liability partnership , individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such and the U.S. member firm of the KPMG network of information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on independent member firms affiliated with KPMG such information without appropriate professional advice after a thorough examination of the particular situation. International Cooperative, a Swiss entity. All rights The services described herein may not be permissible for Audit clients or their affiliates. reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International KPMG LLP the audit, tax and advisory firm (, is the U.S. member firm of KPMG International , Cooperative, a Swiss entity. 21552NSS Cooperative (“KPMG International”). KPMG International's member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.