Digging Deeper Into Key Areas

7/30/2019 Digging Deeper Into Key Areas

1/28

1

Digging Deeper

Into Key Areas

Strictly Financials

Jan. 3 , 2013


2/28

Strictly Financials 2

Donald W. Reynolds National Center

for Business Journalism

at Arizona State University


3/28


n James K. Gentry, Ph.D.n Clyde M. Reed Teaching Professorn School of Journalism and Mass Communicationsn University of Kansasn [email protected]


4/28

n Gary Trennepohl, Ph.D.n ONEOK Chair and Presidents Council Professor of Financen Oklahoma State Universityn Trustee, Oklahoma Teachers Retirement Systemn Member, OSU Foundation Investment Committeen

[email protected]



5/28


Topics

n Goodwill, impairmentn

Pro forman Bank financialsn Comparing companies: A Changing

Industry

n The concepts and your companies


6/28

Goodwill, Impairment



7/28


Goodwilln Difference between what a firm pays to buy

another company and the book value (total

assets minus total liabilities) of that company.n Has been written off over time, typically 40

years

n No longer amortizen Other intangible assets will continue to be

amortized over useful lives.


8/28


Impairment

n Instead of writing off over time, now useimpairment testing

n The impairment is expensed on theincome statement.


9/28

Examples

n Crocsn

McClatchyn Gannettn New York Timesn

HP



10/28

Pro Forma



11/28


Pro Forma Results

n Critics: Selectively defined earningsn

Expenses against earnings are notstandardized across an industry.

n SECs Regulation G (1/03) states thatnon-GAAP numbers used in an

earnings release must be accompaniedby, and reconciled with, the mostdirectly comparable GAAP number.


12/28


Pro Forma Results

n Recommendation: GAAP results shouldprecede pro forma results in earningsreleases.

n Headlines should show GAAP earnings.n Many firms say pro forma has value.n Common form: EBITDA. Also, OIBDA.n As a matter of form


13/28

Examples

n Down

Sprintn HP



14/28

Bank Financial Statements

1. The business of a bank2. The balance sheet3.

The income statement

4. Some key financial ratios5. Sources of bank data


15/28

The Business of a Bank

n Banks are a financial intermediary,

taking in money from

savers

andloaning it out to investors - they buyand sell money.

n For most banks, the majority of theirearnings come from interest income onloans, and interest earned on securities.



16/28

The Business of a Bank

n Banks also earn fee income forservices.

n Banks two main risks are:n Interest-rate riskn credit risk



17/28

The Income StatementNet interest Income

- Provision for loan losses

= Net Income after PLL

+/- Net non-interest income

= Net Income Before Taxes

- Taxes (many small banks are S corps)= Net Income



18/28

Assets =n Cash +

n Fed Funds loaned

n Securitiesn U.S. Governments

n Loansn Real Estaten Commercialn Consumer

n Premises- FixedAsset

n Misc. Assets

Strictly Financials

Liabilities + Capital

Primary Reserve

Secondary Res.

n Depositsn Demand Depositsn Savings Depositsn Now/Money Market Accts.n CDs, Time Deposits

n Non-deposit Borrowingsn Fed Funds purchasedn Repo agreements

n Long term debtn Equity Capital

The Bank Balance Sheet

18


19/28

Three Key Ratiosn Return on Assets = Net Income/(Avg. Total Assets)

n Typically runs around 1.0% to 1.5%n Averages 4 quarters of total assets for the

denominator to smooth effect of asset swings

n Return on Equity = (Net Income)/(Equity capital)n Will be different for publicly traded banks versus

private banksn Capitalization Ratio = Equity/(Total Avg. Assets)

n Tier 1 Capital should be 10%



20/28

The Texas Ration Texas Ratio = (non-performing loans+OREO)

n Think of it as the ratio of troubled loans to capitaln OREO is Other Real Estate Ownedn Early-warning system to measure a banks potential for

failure.

n Banks tend to fail as TR approaches 100% (troubled bank)n Dont get a mortgage loan from a troubled bank.n Data to calculate at http://www2.fdic.gov/sdi/main.asp. Use

non-performing assets and bank real estate owned/equityand loss reserves


Equity + Loan loss Reserves


21/28

Key Issues for Banks in 2013n True form and impact of Dodd/Frank Bill

n CFPB begins life January 2013, and most rules still beingwritten.

n CFPB answers only to Fed.n Banks are either OCC; Fed or State/FDIC regulated. How

will these regulators interact with CFPB?

n TAG =Transaction Account Guaranty expires in2012.

n FDIC-insurance limits revert to $250,000 maximum.n Will consumers withdraw funds from local banks now?

n Basel III - More new and complicated rules for calculatingrisk-based capital



22/28

Sources of Banking Datan The Uniform Bank Performance Report

(UBPR) is provided by federalregulators so analysts can comparebank performance against peer groups.

n Web link:n www.ffiec.gov

nAnother source for large banks is:n www.BankRegData.com



23/28

Doing Comparisonsn Common-size analysis is an excellent

tool for comparing companies,regardless of size.

n Companies in the same industry mighthave similar or widely differing

statements. Common size brings outthose similarities and differences.



24/28

Comparing Companies:

A Changing Industry



25/28

The Traditional Companiesn CVS Caremarkn

Walgreenn Rite Aidn Theyve been evolving.



26/28

Model Is Changingn Business models are changing

everywhere.

n Pharmacies have been quietly changingfor the past several years. Now, asomewhat new entrant poses a big

threat.



27/28

ADisruptive Technology

?

n Express Scriptsn How will it change, and how will its

model change the business?

n Is this an example of a disruptivetechnology in the Clayton Christensen

sense?



28/28

The Concepts and

Your Companies

n What issues do you want to discuss?


Digging Deeper Into Key Areas

Documents