David L. Kalkbrenner's phone has been ringing off the hook since the Financial Standards Accounting Board voted last month to eliminate pooling- of-interest mergers.

His company, Greater Bay Bancorp in Palo Alto, Calif., has tripled its assets in the last 18 months by buying small Northern California banks. And with the FASB rules set to take effect in less than two years, Mr. Kalkbrenner is suddenly fielding more calls from community banks that may be looking to sell.

The rule change "is of substantial concern to banks with assets under $500 million," said Mr. Kalkbrenner, chairman and chief executive officer of $1.8 billion-asset Greater Bay. "They need to seriously talk about their future."

Pooling has recently emerged as the more popular-and more lucrative- method of structuring bank acquisitions. Of the 455 mergers announced in 1998, 56% were accounted for as pooling deals, according to Sheshunoff Information Services.

But the merger game is likely to change dramatically on Jan. 1, 2001, when rules requiring purchase instead of pooling accounting will take effect. Because pooling deals generally mean higher premiums for sellers, bankers and analysts are predicting an explosion of small-bank mergers in the 18 months before the change.

"If a bank board is thinking about selling in three years, they better evaluate it right now," said Robert J. Rogowski, principal at Seattle-based Columbia Financial Advisors Inc., an investment banking firm.

"I've already told my investment bankers they can start planning for retirement," added Darrell D. Pittard, chairman of Premier BancShares Inc., a $1.5 billion-asset company in Atlanta that is actively looking to acquire community banks.

Indeed, he said two bank companies that recently sold to Premier-North Fulton Bancshares in Roswell, Ga., and Farmers and Merchants Bank in Summerville, Ga.-did so in part because their boards were worried about the future of pooling.

FASB's board had been contemplating a rule change for several years. In explaining the board's unanimous vote last month, chairman Edmund L. Jenkins said it has become difficult for investors to "make sound decisions about combining companies when two different accounting treatments exist for what is essentially the same transaction.

"The purchase method gives investors a better idea of the initial cost of the transaction and the investment's performance over time than does the pooling-of-interests method," Mr. Jenkins said.

Depending on the strength of the buyer's stock, pooling deals generally fetch premiums 25% to 40% higher than do stock purchases, investment bankers say.

That's because pooling treats the combining companies as if they had always been one, thus abolishing goodwill. Purchase accounting requires that goodwill-a non-tax-deductible asset that is created when a bank pays a premium for the assets of another company-be written off over 12 to 15 years.

That writeoff takes a bite from the future earnings per share of the acquirer.

"The difference (between poolings and purchases) is pretty staggering," said Gregory A. Mitchell, senior vice president of Hovde Financial Inc. in Walnut Creek, Calif. "It could mean the loss of millions for shareholders."

Some bank companies have already taken action. Days after FASB's announcement, Community West Bancshares in Goleta, Calif., issued a statement saying it had hired the Memphis law firm of Gerrish & McCreary to evaluate all potential opportunities-either buying or selling.

"You can't stick your head in the sand," said Lew Stone, president and chief executive officer of $313 million-asset Community West.

David L. Payne, chairman and chief executive officer of Westamerica Bancorp., a $3.7 billion-asset company in San Rafael, Calif., agreed that FASB's ruling should "intensify" discussions with other prospective sellers.

"This should drive a number of buyers and sellers to do deals," said Mr. Payne, adding that his company hopes to make at least one acquisition this quarter.

However, some uncertainty looms that would affect how deals are priced. FASB has yet to determine how goodwill would be handled in purchase combinations, once poolings are eliminated. One option is allowing goodwill to be written off over a longer period of time, which could make purchase deals more attractive.

FASB plans to issue a proposal on goodwill in late July.

"It's hard to predict what will happen to values," said David Baris, general counsel of the American Association of Bank Directors.

Still, there's no question that the FASB's ruling has created a lot of uncertainty. For that reason alone, said Peter Wirth, managing director of investment banking at Keefe, Bruyette & Woods, the "fear factor will drive people to do deals." u

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.