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7/30/2019 Digging Deeper Into Key Areas
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1
Digging Deeper
Into Key Areas
Strictly Financials
Jan. 3 , 2013
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Strictly Financials 2
Donald W. Reynolds National Center
for Business Journalism
at Arizona State University
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n James K. Gentry, Ph.D.n Clyde M. Reed Teaching Professorn School of Journalism and Mass Communicationsn University of Kansasn [email protected]
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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
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Topics
n Goodwill, impairmentn
Pro forman Bank financialsn Comparing companies: A Changing
Industry
n The concepts and your companies
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Goodwill, Impairment
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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.
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Impairment
n Instead of writing off over time, now useimpairment testing
n The impairment is expensed on theincome statement.
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Examples
n Crocsn
McClatchyn Gannettn New York Timesn
HP
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Pro Forma
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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.
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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
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Examples
n Down
Sprintn HP
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Bank Financial Statements
1. The business of a bank2. The balance sheet3.
The income statement
4. Some key financial ratios5. Sources of bank data
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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.
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The Business of a Bank
n Banks also earn fee income forservices.
n Banks two main risks are:n Interest-rate riskn credit risk
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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
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Assets =n Cash +
n Fed Funds loaned
n Securitiesn U.S. Governments
n Loansn Real Estaten Commercialn Consumer
n Premises- FixedAsset
n Misc. Assets
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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
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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%
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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
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Equity + Loan loss Reserves
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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
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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
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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.
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Comparing Companies:
A Changing Industry
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The Traditional Companiesn CVS Caremarkn
Walgreenn Rite Aidn Theyve been evolving.
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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.
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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?
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The Concepts and
Your Companies
n What issues do you want to discuss?
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