Who knew something negative could be so positive?

An accounting rule change that took effect this year is allowing bankers who buy institutions for a price below the value of their net assets to record "negative goodwill" as a one-time earnings gain for the quarter in which the transaction closes.

The gain on the income statement is also reflected in additional capital in the form of retained earnings, which can benefit the buyer in future quarters.

"Bank values have gone down, and so banks, in some cases, are now making acquisitions below fair value," said Alan Zimmermann, a managing director at Fox-Pitt Kelton Cochran Caronia Waller, an investment bank focused on the financial services industry.

"Now that the rules have changed, negative goodwill will simultaneously be added to capital," Zimmermann said.

James Bradshaw, an analyst at Bridge City Capital LLC in Portland, Ore., said those financial institutions that are making purchases with help from the Federal Deposit Insurance Corp. stand to benefit the most from the rule change.

That is because those government-assisted deals tend to have the lowest prices, he said.

So far this year 36 financial institutions have failed, and Bradshaw said that he expects the full-year total to reach at least 100.

They are "going to turn out to be pretty attractive transactions for those who structure them appropriately," he said.

The $5.4 billion-asset Westamerica Bancorp in San Rafael, Calif., appears to be the biggest beneficiary of the revised rule, FAS 141R.

In the first quarter Westamerica recorded a one-time pretax gain of $48.8 million from the negative goodwill generated from its February acquisition of $1.3 billion of deposits and $1.3 billion of assets from the failed County Bank in Merced from the FDIC. The deal included a loss-sharing agreement estimated to cost the agency $135 million.

Westamerica's capital ratios were also boosted, in part because of the gain from negative goodwill.

The company's Tier 1 capital ratio rose 115 basis points from a year earlier, to 7.27% as of March 31, and its total risk-based capital ratio rose 71 basis points, to 11.35%.

The $1.3 billion-asset Community Bankers Trust Corp. in Glen Allen, Va., recorded a pretax gain of $21.3 million for the first quarter from negative goodwill generated from its FDIC-assisted acquisition of certain assets and all the deposits of Suburban Federal Savings Bank in Crofton, Md., which failed in January.

Since bankers also acquire assets in such deals, not every transaction would boost regulatory capital ratios, Bradshaw said — it depends on the amount of risk-weighted assets acquired that would affect the denominator in those particular ratios. For example, cash that is acquired carries less risk than commercial real estate loans.

Before the accounting rule change, banks had to first write down the nonfinancial assets that were not held for sale against the negative goodwill.

Any negative goodwill remaining would then be recognized as a one-time gain.

Such was the case for JPMorgan Chase & Co. when it acquired Washington Mutual Inc.'s banking operations after the Seattle thrift company failed in September.

After writing down part of the negative goodwill, the New York banking company posted a one-time pretax gain of $1.9 billion for the third quarter.

JPMorgan Chase would not discuss the matter.

Westamerica and Community Bankers Trust did not return phone calls.

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