Purpose À This paper examines the profitability and performance measurement of U.S. regional banks during the period 1994À2011, using the GMM estimator technique. Our study extends prior research by including several factors not previously considered using U.S. data.Approach À We use bank-specific, industry-specific, and macroeconomic determinants of profitability contemporaneous with our performance indicators. We follow the accounting fundamental analysis path in explaining the bank performance.Findings À Among the performance measures, the efficiency ratio and provisions for credit losses are negatively and equity scaled by assets is positively related to profitability. However, these relationships either reverse (efficiency ratio and provisions for credit losses) or become insignificant (equity scaled by assets) when the target becomes change in profitability. The level of nonperforming assets is negatively related to profitability across all measures of profitability used. Macroeconomic variables are largely unrelated to profitability during the year they are measured. However, they have a significant relationship with earnings change measures, suggesting they have a lagged effect on profitability. The slope of the yield curve is especially strong in this regard.Originality À We use our determinants to model changes in bank profitability one year ahead, in addition to including several factors not previously considered, using the predictive focus of the fundamental analysis research.Keywords: Banking profitability; return on assets (ROA); return on equity (ROE); efficiency ratio; macroeconomic factors; fundamental analysis research LITERATURE REVIEWWe review the literature on the determinants of bank profitability. Because of its widespread acceptance, for the sake of conciseness, and to facilitate comparisons across studies, we cite ROA results unless otherwise specified. We will also describe the approach of fundamental analysis to earnings prediction. Geographic Scope of Banking Profitability StudiesSeveral studies have focused on bank profitability in individual countries. Single country studies are of

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SYNOPSIS Traditional depreciation methods used by financial accounting as well as the capacity-based depreciation method recommended by managerial accounting literature assume that assets either lose value due to obsolescence or wear and tear. Recognizing that many assets lose value due to both obsolescence and use, Balakrishnan, Sivaramakrishnan, and Sunder, in the September 2004 issue of Accounting Horizons, propose a granularity framework that creates a nonlinear allocation by simultaneously considering an asset's use-based and time-based losses. However, their approach over-allocates and assigns all resource costs to periods before its usefulness has expired. We introduce several adjustments to the Balakrishnan et al. (2004) methodology with the notion of “flexibility value” and a partitioning of the cost of the acquired resources into a time-based and use-based component that avoids any over-allocation of resource costs. This approach also permits a further partitioning of those expired costs into costs that should be allocated to production or products and costs that should be allocated to periods as cost of unused or idle capacity—that is, to produce more accurate product costs for pricing and planning purposes. Finally, we offer a real-world example for partitioning a resource's acquisition cost into a use-based component and a time-based component.

The General Motors/UAW strike in June-July 1998 involved a 54-day work stoppage. General Motors and automobile analysts have attempted to quantify the loss from this strike and have come up with varied numbers. The stock market analysts' reactions to the strike, and consequently, the stock market price reaction, vary depending on which estimation method is employed. There is no real consensus among these various sources because their “economic loss” estimates rely on predictions of how many of the vehicles could not be produced and sold as a result of the strike (or recovered in future quarters). Using recent developments in the cost management literature, we determine the cost of unused capacity or the “accounting loss” suffered by General Motors during the second and third quarters of 1998. We show that General Motors may have lost about $2,332.7 million after taxes (excluding Delphi) due to the strike and an additional $1,313.8 million after taxes (excluding Delphi) due to capacity unused for other reasons. More importantly, such “accounting losses,” to the extent they are not strike-related, are expected to continue each year unless market conditions improve or the company takes action to reduce its capacity.

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