"digging deeper" by jimmy gentry and gary trennepohl

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Digging Deeper Into Key Areas

Strictly Financials

Jan. 3 , 2013

Strictly Financials 2

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


n  James K. Gentry, Ph.D. n  Clyde M. Reed Teaching Professor n  School of Journalism and Mass Communications n  University of Kansas n  [email protected]

n  Gary Trennepohl, Ph.D. n  ONEOK Chair and President’s Council Professor of Finance n  Oklahoma State University n  Trustee, Oklahoma Teachers Retirement System n  Member, OSU Foundation Investment Committee

n  [email protected]



Topics n  Goodwill, impairment n  Pro forma n  Bank financials n  Comparing companies: A Changing

Industry n  The concepts and your companies

Goodwill, Impairment



Goodwill n  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 amortize n  Other intangible assets will continue to be

amortized over useful lives.


Impairment n  Instead of writing off over time, now use “impairment testing”

n  The impairment is expensed on the income statement.

Examples n  Crocs n  McClatchy n  Gannett n  New York Times n  HP


Pro Forma



Pro Forma Results n  Critics: Selectively defined earnings n  Expenses against earnings are not

standardized across an industry. n  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.”


Pro Forma Results n  Recommendation: GAAP results should

precede pro forma results in earnings releases.

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”

Examples n  Dow n  Sprint n  HP


Bank Financial Statements

1.  The business of a bank 2.  The balance sheet 3.  The income statement 4.  Some key financial ratios 5.  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.

n  For most banks, the majority of their earnings come from interest income on loans, and interest earned on securities.


The Business of a Bank n  Banks also earn fee income for

services. n  Banks’ two main risks are:

n  Interest-rate risk n  “credit risk”


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


Assets = n  Cash +

n  Fed Funds loaned

n  Securities n  U.S. Governments

n  Loans n  Real Estate n  Commercial n  Consumer

n  Premises- Fixed Asset

n  Misc. Assets

Strictly Financials

Liabilities + Capital

Primary Reserve

Secondary Res.

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

n  Non-deposit Borrowings n  Fed Funds purchased n  Repo agreements

n  Long term debt n  Equity Capital

The Bank Balance Sheet

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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 n  Return on Equity = (Net Income)/(Equity capital)

n  Will be different for publicly traded banks versus private banks

n  Capitalization Ratio = Equity/(Total Avg. Assets) n  Tier 1 Capital should be ≥10%


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

n  Think of it as the ratio of troubled loans to “capital” n  OREO is Other Real Estate Owned n  Early-warning system to measure a bank’s potential for

failure. n  Banks tend to fail as TR approaches 100% (troubled bank) n  Don’t 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/equity and loss reserves”


Equity + Loan loss Reserves

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

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

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 in 2012. 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 calculating “risk-based” capital


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.

n  Web link: n  www.ffiec.gov

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


Doing Comparisons n  Common-size analysis is an excellent

tool for comparing companies, regardless of size.

n  Companies in the same industry might have similar or widely differing statements. Common size brings out those similarities and differences.


Comparing Companies: A Changing Industry


The “Traditional” Companies n  CVS Caremark n  Walgreen n  Rite Aid n  They’ve been evolving.


Model Is Changing n  Business models are changing

everywhere. n  Pharmacies have been quietly changing

for the past several years. Now, a somewhat new entrant poses a big threat.


A “Disruptive Technology”? n  Express Scripts n  How will it change, and how will its

model change the business? n  Is this an example of a “disruptive

technology” in the Clayton Christensen sense?


The Concepts and Your Companies n  What issues do you want to discuss?


"digging deeper" by jimmy gentry and gary trennepohl

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