We have seen more than 400 bank and thrift closures since the beginning of 2008. We have also seen an increase in the number of “good bank” acquisitions. These acquisitions have presented healthy banks with a significant opportunity to expand their banking footprint and their asset base.
Unfortunately, it is easy to underestimate the data integration challenges involved in a bank acquisition, even if both institutions are sound.
Fortunately, however, there is a better alternative—an approach that allows acquiring institutions to take advantage of the benefits offered through acquisitions. By employing a systematic, methodical approach to data integration and reporting challenges, the complexity of any type of merger or acquisition can be greatly reduced. For its part, the board should ask for an overall data integration plan for each department’s main systems prior to agreeing to an acquisition. The board should receive an inventory of all applicable systems being acquired and the corresponding system needed for integration within the acquiring bank.
Loans acquired as part of any transaction are subject to various additional recordkeeping and reporting requirements, including:
Internal loan accounting. Each loan must be accounted for, rated for risk, and tracked for regular servicing and transactions. Although the acquiring institution will have its own systems for handling these tasks, the historical loan accounting data must be left intact in order to support loss recognition and accurate reporting.
GAAP accounting. 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 estimates, which might not be included with the original loan contract and documentation.
Tax accounting. Acquired loans are handled differently for tax purposes and 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 bank or a bank’s loan portfolio. Following are some of the most common concerns they encounter:
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 struggling with loan data being stored in several different systems that do not adequately talk to each other. Integrating systems from an acquired institution only adds to the challenge.
An acquiring bank also needs to understand the acquired bank’s credit and risk review rating structure and identify where that information is kept. It then needs to incorporate the acquired loan portfolio into its own internal reporting systems for credit risk, financial and operational reporting. This step requires gathering data from new systems and transforming it into a normalized form that the organization can use.
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 their data. In some instances, data also might be stored on outsourced systems.
Customer retention is always a critical concern. 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.
Transparency is a critical requirement in all acquisition reporting. After several years of controversy, regulators are especially sensitive about verifying the institutions they monitor have systems with auditable processes. Those systems have to aggregate data from multiple sources and present reports quickly, cleanly and on demand.
One of the first criteria for a healthy bank considering acquisitions is to become a great steward of its own data. Doing so requires the bank to implement projects in six strategic information management areas.
- Inventory and assessment. What information do we have? What is the true source of the information? How was it created?
- Consolidation. What mechanisms will we need to get all of the disparate data normalized and consistent?
- Quality. How will we facilitate accuracy, integrity and trust in the data? How will we improve data quality over time?
- Speed and responsiveness. How will we deliver required information in a timely fashion?
- Integration. In the long term, how will we establish smooth integration between legacy systems and new systems in the event of another acquisition?
- Adaptability. How will we respond to a very dynamic environment in which data reporting requirements are certain to change over the five- or 10-year duration of a typical loss-sharing agreement?
Boards and executive management should keep a close eye on the system and data integration that will be driven by an acquisition. Systems and data integration issues can create spiraling costs in an acquisition. A solid review of all data integration plans should be in place prior to the actual acquisition. This would include an overall data integration plan agreed to by all IT management. Although the challenges can be considerable, the potential upside—including the opportunity to gain a foothold in new markets and establish new customer relationships—can make the effort worthwhile.