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.

1. Digging Deeper
Into Key Areas
Strictly Financials
Jan. 3 , 2014
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2. Donald W. Reynolds National Center
For Business Journalism
At Arizona State University
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3. n
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James K. Gentry, Ph.D.
Clyde M. Reed Teaching Professor
School of Journalism and Mass Communications
University of Kansas
jgentry@ku.edu
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Gary Trennepohl, Ph.D.
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ONEOK Chair and President’s Council Professor of Finance
Oklahoma State University
Trustee, Oklahoma Teachers Retirement System
Member, OSU Foundation Investment Committee
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gary.trennepohl@okstate.edu
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5. Topics
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Goodwill, impairment
Pro forma
Bank financials
Comparing companies
And a “disruptive technology”
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6. Goodwill, Impariment
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7. Goodwill
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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
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8. Impairment
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Instead of writing off over time, now use
“impairment testing”
The impairment is expensed on the
income statement
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9. Examples
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Crocs
McClatchy
Gannett
New York Times
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10. Pro Forma
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11. Pro Forma Results
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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”
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12. Pro Forma Results
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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”
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13. Examples
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Sprint
Lowe’s
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14. Bank Financial Statements
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The business of a bank
The balance sheet
The income statement
Some key financial ratios
Sources of bank data

15. The Business of a Bank
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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.
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16. The Business of a Bank
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Banks also earn fee income for
services.
Banks’ two main risks are:
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interest rate risk
“credit risk”
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17. “CAMELS” and Banks
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Most bank analysis is based on the
“Camels” acronym:
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Capital adequacy
Asset quality
Management quality
Earnings
Liquidity
Systematic risk
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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
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19. The Bank Balance Sheet
Assets
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Primary Reserve
Cash +
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Secondary Res.
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Fed Funds loaned
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U.S. Governments
Real Estate
Commercial
Consumer
Premises- Fixed
Asset
Misc. Assets
Deposits
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Loans
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Securities
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= Liabilities + Capital
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Non-deposit Borrowings
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Demand Deposits
Savings Deposits
Now/Money Market Accts.
CDs, Time Deposits
Fed Funds purchased
Repo agreements
Long term debt
Equity Capital
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20. Three Key Ratios
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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%
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21. The Texas Ratio
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Texas Ratio = (non-performing loans+OREO)
Equity + Loan loss Reserves
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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”
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22. Key Issues for Banks in 2014
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True form and impact of Dodd/Frank Bill
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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.
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23. Sources of Banking Data
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The Uniform Bank Performance Report
(UBPR) is provided by U.S. Federal
regulators so analysts can compare
bank performance against peer groups.
Web link:
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www.ffiec.gov
Another source for large banks is:
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www.BankRegData.com
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24. Comparing Companies
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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.
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25. The “Traditional” Companies
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CVS Caremark
Walgreen
Rite Aid
They’ve been evolving
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26. Model is Changing
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The business model for pharmacies has
been changing for several years. Now,
a somewhat new entrant poses a bigger
threat.
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27. A “Disruptive Technology”?
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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?
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