FAS 159 - WAKE UP CALL

FASB Statement #159, The Fair Value Option for Financial Assets and Financial Liabilities is a big wake up call for independent bankers. In the past few weeks, legions of salespeople at broker-dealers throughout the country have been aggressively calling independent banks and telling them FAS 159 offers a one-time opportunity to restructure TRUPs or HTM securities portfolios without recognizing any losses in earnings. The urgency for independent bankers is that since nearly all file audited financial statements on a calendar year, the opportunity to take advantage of early adoption Goes Away on April 30 2007 (after that, banks can no longer revalue their existing financial instruments). Understand that we are not providing ANY accounting advice and that the goal of this piece is to raise awareness and provide assistance to independent banks. We urge anyone considering early adoption to talk to their own banking regulators, auditors, tax specialists and the SEC (if public) for specific advice. So, what is the big deal about FAS 159 and specifically, early adoption? In essence, early adoption allows banks to "reach back" into their current balance sheet and "reset" assets (or liabilities) to fair value. Since stock prices are driven by earnings (more than a multiple of book value), this opportunity is significant for banks. For example, banks with fixed rate assets on their books carrying below-market coupons could reset the price on those assets to fair value and book any resulting loss through equity (retained earnings) and not through current earnings. While equity may be adjusted lower, the bank's earnings have effectively been reset to the current market, so future income rises (i.e. lower coupon assets have been removed from the balance sheet and higher coupon assets have now replaced them). Know also that individual assets and liabilities can be selected by the bank and that early adoption is optional. Essentially this gives banks an immediate opportunity to restructure certain underperforming assets (for coupon, credit or structure). Some of the most obvious reasons banks are considering early adoption include the ability to remove low coupon HTM and/or AFS securities (without tainting HTM) or refinance existing TRUPs (take the unamortized fees and/or prepayment penalties against retained earnings and lower the cost from perhaps Libor+300bp to Libor+150bp). Beyond these strategies, there are many others that are worthy of consideration (we have compiled a list of over 30 unique strategies bankers should consider). Banks should closely read both FAS 159 & 157 (requires simultaneous adoption) and seek immediate advice from auditors. Remember, the window slams shut on April 30 and early adoption is no easy task (it requires extensive analysis, documentation, policy changes, enhanced controls, board approval and additional disclosures). It is critical to understand the following - YOU ONLY HAVE TO MAKE THE ELECTION BY APRIL 30, YOU DO NOT HAVE TO IMMEDIATELY SELL ANYTHING. Many of the big banks have already elected early adoption, so we urge banks to take the time to review and understand this potential opportunity. Call us to get assistance.