Digging Deeper Into Key Areas

Strictly Financials

Jan. 3 , 2013
1

Donald W. Reynolds National Center for Business Journalism at Arizona State University

Strictly Financials

n
n n n n

James K. Gentry, Ph.D.

Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu

Strictly Financials

n
n n n n

Gary Trennepohl, Ph.D.

ONEOK Chair and Presidents Council Professor of Finance Oklahoma State University Trustee, Oklahoma Teachers Retirement System Member, OSU Foundation Investment Committee

gary.trennepohl@okstate.edu

Strictly Financials

Topics
n n n n

Goodwill, impairment Pro forma Bank financials Comparing companies: A Changing Industry The concepts and your companies

Strictly Financials

Goodwill, Impairment

Strictly Financials

Goodwill
n

n n

Difference between what a firm pays to buy another company and the book value (total assets minus total liabilities) of that company. Has been written off over time, typically 40 years No longer amortize Other intangible assets will continue to be amortized over useful lives.
Strictly Financials 7

Impairment
n

Instead of writing off over time, now use impairment testing The impairment is expensed on the income statement.

Strictly Financials

Examples
n n n n n

Crocs McClatchy Gannett New York Times HP

Strictly Financials

Pro Forma

Strictly Financials

10

Pro Forma Results

n n

Critics: Selectively defined earnings Expenses against earnings are not standardized across an industry. SECs Regulation G (1/03) states that non-GAAP numbers used in an earnings release must be accompanied by, and reconciled with, the most directly comparable GAAP number.
Strictly Financials 11

Pro Forma Results

n

n n n n

Recommendation: GAAP results should precede pro forma results in earnings releases. Headlines should show GAAP earnings. Many firms say pro forma has value. Common form: EBITDA. Also, OIBDA. As a matter of form
Strictly Financials 12

Examples
n n n

Dow Sprint HP

Strictly Financials

13

Bank Financial Statements

1. 2. 3. 4. 5.

The business of a bank The balance sheet The income statement Some key financial ratios Sources of bank data

The Business of a Bank

n

Banks are a financial intermediary, taking in money from savers and loaning it out to investors - they buy and sell money. For most banks, the majority of their earnings come from interest income on loans, and interest earned on securities.
Strictly Financials 15

The Business of a Bank

n

Banks also earn fee income for services. Banks two main risks are:
n n

Interest-rate risk credit risk

Strictly Financials

16

The Income Statement

Net 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

Strictly Financials

17

The Bank Balance Sheet

Assets
n

= Liabilities + Capital
n

Cash +
n

Primary Reserve
n

Fed Funds loaned U.S. Governments Real Estate Commercial Consumer

n

Deposits
n n n n

Securities
n

Secondary Res.
n

Loans
n n n

Demand Deposits Savings Deposits Now/Money Market Accts. CDs, Time Deposits Fed Funds purchased Repo agreements

Non-deposit Borrowings
n n

Premises- Fixed Asset Misc. Assets

n n

Long term debt Equity Capital

Strictly Financials

18

Three Key Ratios

n

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 Return on Equity = (Net Income)/(Equity capital) n Will be different for publicly traded banks versus private banks Capitalization Ratio = Equity/(Total Avg. Assets) n Tier 1 Capital should be 10%
19

Strictly Financials

The Texas Ratio

n

Texas Ratio = (non-performing loans+OREO) Equity + Loan loss Reserves

n n n

n n n

Think of it as the ratio of troubled loans to capital OREO is Other Real Estate Owned Early-warning system to measure a banks potential for failure. Banks tend to fail as TR approaches 100% (troubled bank) Dont get a mortgage loan from a troubled bank. Data to calculate at http://www2.fdic.gov/sdi/main.asp. Use non-performing assets and bank real estate owned/equity and loss reserves
Strictly Financials 20

Key Issues for Banks in 2013

n

True form and impact of Dodd/Frank Bill

n

n n

CFPB begins life January 2013, and most rules still being written. CFPB answers only to Fed. Banks are either OCC; Fed or State/FDIC regulated. How will these regulators interact with CFPB?

TAG =Transaction Account Guaranty expires in 2012.

n n

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

Basel III - More new and complicated rules for calculating

risk-based capital
Strictly Financials 21

Sources of Banking Data

n

The Uniform Bank Performance Report (UBPR) is provided by federal regulators so analysts can compare bank performance against peer groups. Web link:
n

www.ffiec.gov www.BankRegData.com
Strictly Financials 22

Another source for large banks is:

n

Doing Comparisons
n

Common-size analysis is an excellent tool for comparing companies, regardless of size. Companies in the same industry might have similar or widely differing statements. Common size brings out those similarities and differences.
23

Strictly Financials

Comparing Companies: A Changing Industry

Strictly Financials

24

The Traditional Companies

n n n n

CVS Caremark Walgreen Rite Aid Theyve been evolving.

Strictly Financials

25

Model Is Changing
n

Business models are changing everywhere. Pharmacies have been quietly changing for the past several years. Now, a somewhat new entrant poses a big threat.

Strictly Financials

26

A Disruptive Technology?
n n

Express Scripts How will it change, and how will its model change the business? Is this an example of a disruptive technology in the Clayton Christensen sense?

Strictly Financials

27

The Concepts and Your Companies

n

What issues do you want to discuss?

Strictly Financials

28