Now that you've prepared your bank's computer systems for the year 2000, have you fully considered the implications of another critical deadline Jan. 1, 2001?

That is when U.S. accounting regulators have proposed eliminating a popular merger accounting method that has contributed to high deal prices in recent years.

Earlier this year, the Financial Accounting Standards Board sent a chill through the banking industry by proposing to end pooling-of-interests accounting, a procedure whereby a seller can pair its balance sheet with a buyer's and avoid generating the costly intangible asset known as goodwill.

In the past year, about half of the bank deals involving sellers with less than a $1 billion in assets have been done using the pooling method, according to Sheshunoff Information Services, a unit of Thomson Corp., which also owns American Banker.

Community bankers and the investment bankers that advise them are predicting that the death of pooling will reduce deal prices. Without pooling, they point out, buyers will have rely on standard purchase accounting, which requires a buyer to amortize over a period of time the amount that it paid for a bank in excess of the marked-to-market value of the acquired bank's assets. Writing off this so-called goodwill, they said, will put a crimp of the buyer's future reported net income, the standard measure of a bank's performance.

This price difference has been borne out by history. As of the second quarter, for example, banks under $1 billion in assets went for 2.59 times book value in pooling deals, a 53% premium over the ratio for small banks that were purchased using purchase accounting.

"Most buyers of small independent banks are slightly larger independent banks and they don't have the ability to take goodwill on their books," says Jean-Luc Servat, a managing director with Hoefer-Arnet, a San Francisco investment bank.

With the prospect of an accounting rule change only 15 months off, sellers and buyers need to decide whether they should make moves to get in under the deadline. For buyers, acting now can save them needless goodwill amortization. For likely sellers, who have watched deal prices fall over the past year, acting before the deadline can put more money in their shareholders' pockets.

"We will see a lot of banks making the decision to go ahead and sell or we will at least see a toe being stuck in the water,'' says J. Daniel Speight, chief executive officer of Flag Financial Corp, a $600 million-asset bank company in LaGrange, Ga. "The thinking going on now is, 'We know what the rules are today. Let's take advantage of it.' "

Mr. Speight's advice to sellers: "If you're looking to sell out sometime in the next five years, you should get out now, before the rules change. But if you expect to be in this business for longer, you shouldn't even worry about this."

To be sure, it is still not clear what final action the board will take. The seven-member board was expected to issue a more detailed proposal sometime in September, after this publication went to press, a board spokeswoman said. One detail that will be addressed: how long a bank would have to write off merger-related goodwill.

Bankers naturally want to have as long as possible as much as 40 years to lessen the yearly hit to earnings. But there is talk that the board may decide on as little as 10 years, says Steven Nelson, a vice president with Hovde Financial Inc., a Washington-based investment bank. "Frankly, that's not good news,'' he says. "Either you want to want to write it off for 40 years or you want to write it off immediately, to get rid of it right away.''

The FASB proposal will be subject to a comment period ending in early December, according to the FASB spokeswoman. And hearings will be held next February.

"Right now, the board believes that pooling of interests should be eliminated,'' said the spokeswoman. "But that's subject to the comment process.''

Such a remark suggests that FASB could change it mind based on the feedback it receives in the coming months. But bankers are not counting on that.

"It sounds like it's very real and they are going to make it happen,'' says Michael W. Gullion, chief executive officer of Gold Banc Corp., a $1.2 billion-asset bank company in Leawood, Kan.

This reality has bankers trying to figure out whether they should act or sit back. They are wondering aloud whether analysts will start to report cash earnings rather than net earnings, a change in thinking that would nullify the negative effect that goodwill has on income statements and potentially lead to higher share prices.

While they fully expect Wall Street to report the cash income for large banks and other widely covered companies throughout the United States, they are less certain that community banks will get the same treatment.

"The elimination of pooling will have an impact of the pricing of banks for at least one or two years," says James R. Kenny, chief executive officer of SJNB Financial Corp., the $400 million-asset parent company of San Jose National Bank. "The question is, will prices rebound when the market gets used to reporting on a cash basis? I don't have an answer. And no one can provide me with one.''

Mr. Kenny is not saying what he plans to do with his bank, though at least one investment banker believes that SJNB Financial is the kind of institution that could benefit from a pooling-of-interests sale in the next year.

By contrast, David L. Kalkbrenner, the chief executive officer of Greater Bay Bancorp, a $2.1 billion asset bank company in Palo Alto, Calif., is a likely buyer in this marketplace. Given that poolings are his preferred way of merging with other companies, he is not shy about discussing his bank's virtues and suggesting fast action by potential sellers.

"Can a $200 million-asset bank build what we are building here?" he asks. "Can a small bank maintain the resources and technology into the future?

"This accounting change presents an opportunity for banks to join us.''

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