Mutual thrifts fear that an accounting change the Financial Accounting Standards Board is considering would make it next to impossible for them to merge with other mutuals.
The change - requiring mutuals to use purchase accounting instead of the traditional pooling method for their mergers - seems innocuous. After all, the accounting board required stock-owned companies to make the same switch in 2001, and they have done hundreds of deals since.
But Dennis Hild, the vice president of accounting and financial management policy for America's Community Bankers, said purchase accounting would add a dense layer of complexity to mutual mergers. That is because in mergers of mutuals "no cash or stock changes hands."
"They don't feel like anything has been purchased because there is no price," Mr. Hild said.
Alicia Posta, an assistant project manager for the Financial Accounting Standards Board, said the aim of the proposal is to standardize merger rules for all companies. The FASB expects to release an exposure draft detailing the change in the second quarter; the public would have 90 days to comment. A final rule would probably take effect in the second half of 2006, Mr. Hild said.
Though just a handful of mutuals have merged, a few, including the $775 million-asset HomeTrust Bank in Asheville, N.C., and the $971 million-asset BankNewport in Rhode Island, have been considering growth through acquisition.
HomeTrust was created through the merger of three small mutual thrifts, but Dana Stonestreet, its executive vice president and chief operating officer, said it could probably not do deals if purchase accounting were required.
And if mutuals cannot do more deals, he said, HomeTrust and others would find it increasingly difficult to compete.
"Mutuals are facing unbelievable competition," he said. The FASB rule "will inhibit combinations that should be made."
With no market-driven mechanism to establish a deal price, Mr. Stonestreet said, a mutual acquirer would have to hire a third-party appraiser to determine the target's value. And if that exceeded the capital on its books, the difference would be recorded as goodwill, with which mutuals have never had to grapple.
"The whole basis of purchase accounting is tied to stock institutions," said Mr. Stonestreet. "A willing buyer pays a willing seller a price."
Mr. Hild predicted that the written rule implementing the change would run more than 200 pages - more than long enough to make any mutuals thinking about a merger abandon the idea.
"Bankers just roll their eyes when we talk to them about it," Mr. Hild said.
Credit unions say the change would also make it harder for them to make an acquisition, but mainly for a different reason.
They could no longer count the target's capital as retained earnings; the accounting board wants it classified as "acquired equity."
That is not a problem for thrifts, whose regulators can define what is or is not capital. But the Credit Union Membership Act of 1998 allows for only one source of capital: retained earnings.
Making an acquirer add all of the target's assets but no retained earnings would play havoc with capital ratios.
"Under the purchase method of accounting, two plus two wouldn't equal four, it would equal two," said William J. Donovan, the senior vice president and general counsel at the National Association of Federal Credit Unions. "Every third-grader knows that isn't the case."
This month Rep. Spencer Bachus, R-Ala., the chairman of the House financial institutions and consumer credit subcommittee, introduced a bill, HR 1042, that would permit an acquiring credit union to count a target's capital as retained earnings. Without such permission the number of voluntary mergers between healthy credit unions would probably plummet, Mr. Donovan said.
