With accounting practices under scrutiny, most large banking companies played it safe and shunned the once-popular pro forma methods and relied on generally accepted accounting principles to present fourth-quarter results.
Of the nation's 20 largest banking companies, just three - BB&T Corp., U.S. Bancorp, and M&T Bank Corp. - prominently featured "operating" or "cash-basis" measures in fourth-quarter results.
But even Scott Reed, BB&T's chief financial officer, acknowledged GAAP's new weight.
"We greatly altered our press release to have even more of an emphasis on pure GAAP earnings," he said in an interview while still plugging an alternative. "It is meaningful information for the investing public to know what we think our core, ongoing operation earnings are."
Most of the large banking firms, including Citigroup Inc., J.P. Morgan Chase & Co., and Bank One Corp., started to move away from operating earnings early last year.
Take Morgan Chase. It led its first-quarter 2002 report with operating earnings but moved to GAAP net income in the third paragraph. In its second-quarter report, it led with GAAP figures but covered operating earnings in the second paragraph - just as it did in the third quarter. But in its fourth-quarter release, it mentioned operating expenses and operating revenues but did not mention operating earnings anywhere.
As long as all the data is there, analysts say they do not care which form banks use.
"I can add back and take out as long as they disclose all the pieces of the puzzle," said Jason Goldberg, an analyst at Lehman Brothers. "We've always taken the number that banks report and made adjustments to get a better run rate to see what the next quarter is going to be."
Bankers appear to be split on the effect of GAAP's new domination.
Tom Richlovsky, the treasurer at National City Corp. in Cleveland, said he welcomes the change. "We've always had a preference and a bias towards GAAP numbers."
But Bob Kelly, the chief financial officer of Wachovia Corp., said operating earnings are better. "GAAP is not at all useful for valuing stocks. Operating is obviously much more helpful, and that's why analysts use it."
In the past the Charlotte-based company has emphasized operating earnings, but it in its fourth-quarter presentation on Jan. 16 it avoided the term entirely. Instead, it reported its net income per share, followed immediately by merger and restructuring expenses. By showing earnings per share of 66 cents and merger costs of 6 cents a share in close juxtaposition, it conveyed results that matched the analyst consensus of 72 cents a share.
Other companies used various methods to communicate the effect of charges for things such as amortization, outsized provisioning, mergers, and changes in accounting principles, but they all displayed GAAP net income far more prominently.
That was in part because of the notoriety that accounting tricks gained over the past year. But banks also clung to GAAP because the Securities and Exchange Commission has been writing a new rule explaining how "non-GAAP financial measures" may be used.
Regulation G was finished last week and will take effect on March 28. It requires the display of non-GAAP financial measures to include "the most directly comparable GAAP financial measure," and a reconciliation between the two. It aims to clarify pro forma financial statements by requiring companies to annotate any discrepancies from GAAP results.
It may make things easier for investors, but it is also aimed at the research industry - which uses pro forma, or operating, results to calculate the earnings estimates upon which market valuations depend.
"It's the first time the SEC has really taken an interest, and a role, in the earnings release," said Chuck Hill, the director of research at Thomson First Call, an American Banker affiliate that collects analyst estimates. "Their attitude before was, 'As long as they do the filings right, we can't really tell them what to put in the earnings release.' "
Under the new rule, analysts may have an easier time figuring out how to treat various charges.
"If there are several charges, they should be broken out specifically, the analyst can pick and choose and hopefully put more thought into it," Mr. Hill said. "We'll get back to where the adjusted number is truly something that is reflecting operations."
While the corporate scandals of the past year have called into question whether GAAP is, or can be, consistently applied, operating earnings have generated even more skepticism.
"The problem was that everyone would have a different definition of operating earnings, and who the heck knew what they were excluding?" said Steve Covington, an analyst at Stifel, Nicolaus & Co.
A bank could simply change its definition to hit the analysts' consensus estimate.
Mr. Hill of First Call said there is "universal agreement" that extraordinary items, as defined by GAAP, should not be considered in operating results. These include the effects of accounting changes, certain debt prepayments, tax-loss carry-forwards, and discontinued operations.
The trouble comes when determining how to handle "footnote-type items," he said. "Things like restructuring charges, inventory writedowns, litigation charges, acquisition charges, or even the cost of making an acquisition, legal fees, etc. - these are not as precisely defined. What's a restructuring charge for one company may make sense to exclude [from operating earnings], but for another it doesn't."
Other questionable "nonrecurring" charges go straight to the heart of banking.
"Over the years in the bank world, we have seen people take special charges for loan losses," said Jim Bradshaw, an analyst at D.A. Davidson & Co. of Portland, Ore. "Should that be a special charge? Hell, no. Loan losses are part of your business."
Mitch Zacks, the director of research for Zacks Investment Research in Chicago, says he is skeptical about whether the new regulation will make much difference.
"There is absolutely no regulation that can be passed to prevent the money-center bank from managing the earnings," he said. "If the management of a money-center bank says, 'We absolutely have to beat analyst estimates, and I want an extra 3 cents on the bottom line. Find it,' they'll find it. If they want to hide something, if they want to disguise something, they'll do it."
