Wachovia Corp. is the latest bank this year to announce it will take what accountants call a "big bath."
The Winston-Salem, N.C., banking company said Friday that it would take a $303 million pretax charge against fourth-quarter earnings to account for charges related to its mergers earlier this year and the disposal of 21,000 personal computers.
The charge, about double analysts' estimates, caused Wachovia's net worth to fall by about 25 cents per share, and the bank's stock price took a hit.
The bank could have avoided this by spreading out the charges over time, but, like most companies nowadays, Wachovia elected to wipe its books clean all at once-take the big bath. In the past year, such companies as Citicorp, NationsBank, and U.S. Bancorp have all taken massive charges against earnings to account for job restructurings or costly mergers.
By taking a single big hit to earnings, companies say their shareholders can benefit faster from their ever-larger mergers or other changes in corporate direction.
"By getting the costs out of the way all at once, the investment community gets a feel for the run-rate of the new company," said Jay Gould, director of investor relations at Banc One Corp., which took a $467 million second-quarter charge due to the cost of merging with credit card specialist First USA Inc.
Analysts say rising charges are to be expected as the price of acquisitions grows and are of little concern because the banking industry has enough capital to absorb them. As long as banks don't add extra charges in subsequent quarters, most investors are willing to ignore a single charge of several hundred million dollars.
Nevertheless, some observers wonder if companies aren't occasionally overstating charges to make future earnings growth appear better than they would otherwise.
"The thinking on Wall Street is: Let them take the charge, and the earnings will look great after that," said George Salem, bank analyst at Gerard Klauer Mattison & Co. "But I wonder if it's really so automatic. And I wonder what accounting rules are guiding these charges."
Edmund L. Jenkins, chairman of the Financial Accounting Standards Board, said as long as charges are confined to expected losses resulting from mergers or job restructurings, "the size of the charges isn't disturbing."
But Michael P. Pinto, chief financial officer at First Empire State Corp., Buffalo, said that regulators are indeed getting skittish about the growing size of companies' big baths.
"I think the SEC is poised to make an example of someone," he said. "Certainly the temptation to overstate one-time charges is always there."
In the case of Wachovia, the higher-than-expected charge stems from the difficulty companies experience trying to forecast exactly how mergers will affect their business.
The $303 million charge was higher than anticipated because about 2,100 employees are leaving the recently acquired Central Fidelity and Jefferson Bankshares-300 more than originally forecast-according to Anthony R. Davis, bank analyst at SBC Warburg Dillon Read.
But on the positive side, Mr. Davis said, the bank is expected to save $6 million by closing the acquisitions in late March, a couple of weeks earlier than most analysts had predicted.
