Reporting Requirements for FDIC-Assisted Transactions

6/10/2010

The recent economic troubles and resulting banking crisis have created a significant increase in the number of distressed and failing banks. Often stronger community banks are finding opportunities for growth, geographic market diversification, and other opportunities for improvements in loan portfolio diversification through the acquisition of these distressed and failing banks. These FDIC-assisted transactions, while providing growth opportunities, can also potentially mitigate down-side risks due to the FDIC’s loss-sharing agreements (LSAs).

Community banks are finding that the technical nature of properly accounting for acquired loans resulting from FDIC-assisted transactions subject to LSAs are stretching their resources in personnel and systems as their organization attempts to put enhanced accounting systems, processes, procedures, and internal controls in place. Community banks are also gearing up for inquiries from auditors and regulators. In addition to the increased demands on bank organizations related to these types of aspects, banks need to ensure they are prepared to comply with FDIC reporting requirements. FDIC-assisted transactions subject to LSAs create reporting requirements which may demand significant personnel and system resources. Community banks making such acquisitions need to take steps to ensure they are prepared to manage and administer these FDIC reporting requirements.

Acquiring community banks must be prepared for filing loan-loss certificates on a quarterly basis for single family loans subject to LSAs when claiming loss reimbursements from the FDIC. These same institutions must be prepared for filing loan-loss certificates on a quarterly basis for commercial loans subject to LSAs when claiming loss reimbursements from the FDIC. Each of these types of loan-loss certificates has a number of specific reporting requirements.

Community banks loss-sharing agreements with the FDIC may require the acquiring bank to provide the FDIC an auditor’s report that addresses the accuracy of the LSA reporting requirements within 90 days following the bank’s fiscal year-end. This 90-day window may be extended to 120 days for nonpublic companies. Each bank should evaluate the audit requirements appearing in their own LSA and discuss the timing and audit requirements with their primary regulator.

Many well managed community banks that have remained financially strong through this economic and financial crisis are determining that their bank is in a unique position for growth and geographic market diversification while having potentially limited downside risks through participation in a FDIC-assisted transaction subject to a LSA. While the FDIC may serve to limit down-side risks, the technical nature of the related accounting, reporting, and administrative requirements tend to stretch the human and system resources of these banks.