A prominent Wall Street analyst is warning that banks may have to be more cautious about buying back stock after completing mergers using a popular accounting method.
This is because regulators are getting pickier about the conditions under which share repurchases can follow mergers accounted for as poolings of interests, said Norman Jaffe of Fox-Pitt, Kelton Inc.
In a report late last month, Mr. Jaffe said banks may be compelled to at least double the length of time buybacks are suspended after pooling mergers. This, in turn, could reduce earnings per share at some of the country's biggest banks in 1996 and 1997 by 1% to 2%.
Among the institutions that might be affected are the bank that would result if First Bank System Inc. bought First Interstate Bancorp, and First Chicago NBD Corp., CoreStates Financial Corp., and PNC Bank Corp.
"Over the past several weeks it has become increasingly apparent to us that banking companies involved in pooling-of-interests combinations will be more cautious about buying back their common shares after they consummate their transactions," Mr. Jaffe said.
This change is of interest because it affects two of the biggest trends in banking - record-breaking mergers and share buybacks.
Nearly all of the unprecedented number of big bank mergers announced last year were accounted for as poolings of interests. This accounting method is popular because it allows banks to avoid earnings charges from intangible assets.
Similarly, stock buybacks are more popular than ever. According to a recent report by the Federal Reserve Bank of San Francisco, buybacks in 1994 by bank holding companies totaled $10.5 billion, two and a half times more than in 1993. The report said buybacks continued apace in 1995.
The two trends are linked since accounting rules impose limitations on buybacks during pooling mergers in order to maintain the integrity of the deals. Because repurchased shares are paid for in cash, using them in a pooling could be seen as an indirect cash purchase. Such a transaction would unfairly avoid the higher taxes and charges from intangible assets that cash purchases incur.
To avoid such problems, repurchased shares are deemed "tainted" for pooling purposes. In general, tainted shares should not constitute more than 10% of the shares used to execute the transaction. After a deal, the standard practice has been to suspend buybacks for 90 days.
But Mr. Jaffe said he sees evidence that the Securities and Exchange Commission is uncomfortable with this policy, and wants banks to wait longer after pooling deals before resuming share buybacks.
He said suspensions of six months to a year could become standard practice. This, in turn, would reduce earnings per share and return on stockholders' equity, because more shares would be outstanding for longer periods.
As evidence of changing attitudes, Mr. Jaffe noted that the SEC required Mellon Bank Corp. to suspend buybacks for a year after buying Dreyfus Corp. in a pooling deal.
Mr. Jaffe said he suspects that First Bank's proposed acquisition of First Interstate has been a "lightning rod of sorts" in attracting further attention.
This is because First Bank has been an especially active share repurchaser. The Minneapolis-based bank also plans to resume buy-backs three months after buying Los Angeles-based First Interstate in a pooling deal. San Francisco-based Wells Fargo & Co., which is pressing a hostile bid for First Interstate, has argued that First Bank won't be able to qualify for pooling treatment.
