Digging Deeper
Into Key Areas
Strictly Financials

Jan. 3 , 2014
1
Donald W. Reynolds National Center
For Business Journalism
At Arizona State University

Strictly Financials

2
n 
n 
n 
n 
n 

James K. Gentry, Ph.D.
Clyde M. Reed Teaching Professor
School of Journalism and Mass Communications
...
n 

Gary Trennepohl, Ph.D.

n 

ONEOK Chair and President’s Council Professor of Finance
Oklahoma State University
Trust...
Topics
n 
n 
n 
n 
n 

Goodwill, impairment
Pro forma
Bank financials
Comparing companies
And a “disruptive technolog...
Goodwill, Impariment

Strictly Financials

6
Goodwill
n 

n 

n 
n 

Difference between what a firm pays to buy
another company and the book value (total
assets mi...
Impairment
n 

n 

Instead of writing off over time, now use
“impairment testing”
The impairment is expensed on the
inco...
Examples
n 
n 
n 
n 

Crocs
McClatchy
Gannett
New York Times

Strictly Financials

9
Pro Forma

Strictly Financials

10
Pro Forma Results
n 
n 

n 

Critics: Selectively defined earnings
Expenses against earnings are not
standardized acros...
Pro Forma Results
n 

n 
n 
n 
n 

Recommendation: GAAP results should
precede pro forma results in earnings
releases...
Examples
n 
n 

Sprint
Lowe’s

Strictly Financials

13
Bank Financial Statements
1. 
2. 
3. 
4. 
5. 

The business of a bank
The balance sheet
The income statement
Some key fina...
The Business of a Bank
n 

n 

Banks are a “financial intermediary,”
taking in money from “savers” and
loaning it out to...
The Business of a Bank
n 

n 

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

interest rat...
“CAMELS” and Banks
n 

Most bank analysis is based on the
“Camels” acronym:
n 
n 
n 
n 
n 
n 

Capital adequacy
Ass...
The Income Statement
Net interest Income
- Provision for loan losses
= Net Income after PLL
+/- Net non-interest income
= ...
The Bank Balance Sheet
Assets
n 

Primary Reserve

Cash +
n 

n 

Secondary Res.

n 
n 

n 

Fed Funds loaned

n 

...
Three Key Ratios
n 

n 

n 

Return on Assets = Net Income/Avg. Total Assets
n  Typically runs around 1.0% to 1.5%
n ...
The Texas Ratio
n 

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

n 
n 
n 

Think...
Key Issues for Banks in 2014
n 

True form and impact of Dodd/Frank Bill
n 

n 
n 

n 

CFPB begins life January 2013...
Sources of Banking Data
n 

n 

The Uniform Bank Performance Report
(UBPR) is provided by U.S. Federal
regulators so ana...
Comparing Companies
n 

n 

Common size analysis is an excellent
tool for comparing companies,
regardless of size.
Compa...
The “Traditional” Companies
n 
n 
n 
n 

CVS Caremark
Walgreen
Rite Aid
They’ve been evolving

Strictly Financials

25
Model is Changing
n 

The business model for pharmacies has
been changing for several years. Now,
a somewhat new entrant ...
A “Disruptive Technology”?
n 
n 

n 

Express Scripts
How will it change and how will its
model change the business?
Is...
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Strictly Financials 2014: Digging Deeper Into Key Areas by Jimmy Gentry

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Jimmy Gentry presents "Digging Deeper into Key Areas" during the Reynolds Center for Business Journalism's annual Business Journalism Week, Jan. 3, 2014. Gentry is the Clyde M. Reed Teaching Professor at the University of Kansas' School of Journalism and Mass Communications.

The annual event features two concurrent seminars, Business Journalism Professors and Strictly Financials for journalists.

For more information about business journalism training, please visit http://businessjournalism.org.

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Transcript of "Strictly Financials 2014: Digging Deeper Into Key Areas by Jimmy Gentry"

  1. 1. Digging Deeper Into Key Areas Strictly Financials Jan. 3 , 2014 1
  2. 2. Donald W. Reynolds National Center For Business Journalism At Arizona State University Strictly Financials 2
  3. 3. 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 3
  4. 4. n  Gary Trennepohl, Ph.D. n  ONEOK Chair and President’s Council Professor of Finance Oklahoma State University Trustee, Oklahoma Teachers Retirement System Member, OSU Foundation Investment Committee n  gary.trennepohl@okstate.edu n  n  n  Strictly Financials 4
  5. 5. Topics n  n  n  n  n  Goodwill, impairment Pro forma Bank financials Comparing companies And a “disruptive technology” Strictly Financials 5
  6. 6. Goodwill, Impariment Strictly Financials 6
  7. 7. Goodwill n  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
  8. 8. Impairment n  n  Instead of writing off over time, now use “impairment testing” The impairment is expensed on the income statement Strictly Financials 8
  9. 9. Examples n  n  n  n  Crocs McClatchy Gannett New York Times Strictly Financials 9
  10. 10. Pro Forma Strictly Financials 10
  11. 11. Pro Forma Results n  n  n  Critics: Selectively defined earnings Expenses against earnings are not standardized across an industry SEC’s 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
  12. 12. Pro Forma Results n  n  n  n  n  Recommendation: GAAP results should precede pro forma results in earnings releases Headlines should show GAAP earnings Companies say pro forma has value Common form: EBITDA. Also, OIBDA “As a matter of form” Strictly Financials 12
  13. 13. Examples n  n  Sprint Lowe’s Strictly Financials 13
  14. 14. 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
  15. 15. The Business of a Bank n  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
  16. 16. The Business of a Bank n  n  Banks also earn fee income for services. Banks’ two main risks are: n  n  interest rate risk “credit risk” Strictly Financials 16
  17. 17. “CAMELS” and Banks n  Most bank analysis is based on the “Camels” acronym: n  n  n  n  n  n  Capital adequacy Asset quality Management quality Earnings Liquidity Systematic risk Strictly Financials 17
  18. 18. 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 18
  19. 19. The Bank Balance Sheet Assets n  Primary Reserve Cash + n  n  Secondary Res. n  n  n  Fed Funds loaned n  U.S. Governments Real Estate Commercial Consumer Premises- Fixed Asset Misc. Assets Deposits n  n  Loans n  n  n  Securities n  n  = Liabilities + Capital n  n  Non-deposit Borrowings n  n  n  n  Strictly Financials Demand Deposits Savings Deposits Now/Money Market Accts. CDs, Time Deposits Fed Funds purchased Repo agreements Long term debt Equity Capital 19
  20. 20. Three Key Ratios n  n  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% Strictly Financials 20
  21. 21. 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 Owned Real Estate Owned Early warning system to measure a bank’s potential for failure. Banks tend to fail as TR approaches 100% (troubled bank) Don’t 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 21
  22. 22. Key Issues for Banks in 2014 n  True form and impact of Dodd/Frank Bill n  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? Basel III - More new and complicated rules for calculating “risk based” capital. Strictly Financials 22
  23. 23. Sources of Banking Data n  n  The Uniform Bank Performance Report (UBPR) is provided by U.S. Federal regulators so analysts can compare bank performance against peer groups. Web link: n  n  www.ffiec.gov Another source for large banks is: n  www.BankRegData.com Strictly Financials 23
  24. 24. Comparing Companies n  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. Strictly Financials 24
  25. 25. The “Traditional” Companies n  n  n  n  CVS Caremark Walgreen Rite Aid They’ve been evolving Strictly Financials 25
  26. 26. Model is Changing n  The business model for pharmacies has been changing for several years. Now, a somewhat new entrant poses a bigger threat. Strictly Financials 26
  27. 27. A “Disruptive Technology”? n  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
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