My favorite title for one of my articles was "Should Bank Annual Reports Be in the Fiction Section of the Library."
Banks, like many publicly traded companies, occasionally use creative accounting to paint a brighter financial picture.
In fact, my father once told me about a New York bank shrugging off the fact that it had lost its deposits from a minor auto company in the last week of December.
The bank's explanation: "We are moving the money to make their Detroit banks look good for statement day. We will have the money back in a week."
But an accounting change initiated by the Financial Accounting Standards Board could soon have a major impact on some community banks and the way they report their financials.
Starting Jan. 1, 2001, the board said, all mergers must be subject to purchase accounting instead of pooling-of-interest accounting.
Under pooling, merging banks simply combine their assets and liabilities as if they had always operated as one. The acquiring bank need not set up goodwill to be written off-for as long as 20 years. Future earnings statements would not reflect payment of purchase prices well over book value.
But with purchase accounting the acquiring bank must account for that premium as goodwill.
Not surprisingly, acquirers dislike the FASB change intensely. After all, goodwill to be written off could be a drag on earnings for a long time.
The death of pooling will force banks to tell shareholders just how big the acquisition premium is, and how much they will have to absorb through lower earnings in the years ahead.
What could this mean for community banks in particular?
First of all, it could lead to a spate of acquisitions in the time remaining before the FASB decision takes effect. "Last chance to acquire or be acquired before the rules change" will be the likely cry.
Also, warns analyst Larry Cohn of Ryan Beck & Co., "there will be a lot of less attractive banks and converted thrifts that will not find a buyer unless they are willing to sell out at prices much closer to book than are generally found today."
Most important, FASB's ruling is going to force banks to make accounting decisions based on what's best for the bank, not what looks best.
After this rule changes, maybe annual reports can be moved to the nonfiction section of the library. Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management.
