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Digging Deeper Into Key Areas
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Jan. 3 , 2013
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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 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
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Topics n Goodwill, impairment n Pro forma n Bank financials n Comparing companies: A Changing
Industry n The concepts and your companies
Goodwill, Impairment
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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.
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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
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Pro Forma
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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.”
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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
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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.
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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”
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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
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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
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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%
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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”
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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
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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
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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.
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Comparing Companies: A Changing Industry
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The “Traditional” Companies n CVS Caremark n Walgreen n Rite Aid n They’ve been evolving.
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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.
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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?
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The Concepts and Your Companies n What issues do you want to discuss?
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