BANK ANALYSIS WORKSHOP From: judithrl@juno.com (Judith R Leon) Subject: Bank SSG Workshop To: i-club-list@better-investing.org Date: Fri, 10 Apr 1998 10:01:26 -0400 A workshop that explains how to analyze a bank stock with the NAIC Stock Selection Guide will take place on I-Club-List beginning Monday, April 13, 1998. Gary Simms will lead the workshop that will take place via e-mail messages sent to I-Club-List. Gary will post daily "lecture-like" sessions that will describe what kind of data to use, where to find it, and how to interpret the study. Questions and comments are welcome. The workshop will last for approximately two weeks. No registration. No fees. No grades. Homework? Yes. :) An SSG Datafile of the example bank, Synovus Financial (SNV:NYSE), is available in the Shared Datafile Library. http://www.better-investing.org/content/filelib.html The name of the file is SNV_ICL_0498.SSG It may be downloaded into any NAIC software program. Judith Russ Leon Special Features Editor, NAIC Web Site JudithRL@juno.com http://www.better-investing.org *********************************************************************** From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #1 Date: Sun, 12 Apr 1998 19:45:51 -0500 Topic: Bank SSG Workshop #1 Date: April 13, 1998 Leader: Gary Simms Topic: Introduction & Materials Welcome to the I-Club-List Bank Stock Selection Guide (SSG) Workshop. The workshop will be a beginner's level tutorial that will describe how to apply the SSG process in order to analyze a bank stock. Synovus Financial (SNV:NYSE) will be the sample company. I say that this is a beginner's guide because until recently I had no idea how to evaluate banks! Our club volunteered me to present a financial sector stock. I am happy to share my research and findings with I-Club-List. I wish to thank everyone who tolerated my endless questions and pointed me in the right direction. Thanks All!! A special *Thank You* to Susan Maciolek for her recommendations which made this a better workshop and also to Judith Russ Leon for her support and editing which made this workshop much more pleasant to read. Thanks!!! Synovus Financial Corporation (SNV:NYSE) was featured in Better Investing magazine in June 1992 as the Stock to Study. The company was number 26 in the 1997 Better Investing 100, a list of the stocks most widely held by NAIC investment clubs. The March 1998 BI, p33, reported 441% price appreciation from the date that Synovus was recommended in June 1992 through December 21, 1997! That type of return inspired my desire to learn about banks! Synovus was also the BI Undervalued Stock. I found that I only had to look to the NAIC Web Site for expert guidance. The SE Florida NAIC Council published an article in the Winter 1995 NAIC Computer Group BITS magazine entitled, "A Common Sense Approach to Analyzing Bank Stocks." Workshop participants are encouraged to download and print the article for reference. It is available as a reprint on the NAIC Web Site. http://www.better-investing/bits/bits-bnk.html I found that the two-sided Standard & Poor's Stock Reports are much preferred over the Value Line reports because they contain virtually all of the data required to complete a bank SSG. However, I am much more familiar with Value Line so I obtained both. Although references are given specifically for Synovus, comparable resources have data for other companies. Check with your local library or broker in order to obtain the Synovus Financial (SNV:NYSE) S&P Stock Report 2178F dated 11-Jan-98 and the Value Line report 2131 dated December 5, 1997. In addition, we will need the latest financial data for SNV. There are three alternatives. 1. FreeEDGAR: Get the reported data for the past 5 quarters. (10Q's &10K) http://fe.freeedgar.com/companies/index.htm 2. Edgar-Online: Get the reported data for the past 5 quarters. (10Q's & 10K) Search for ticker SNV. http://www.edgar-online.com/bin/esearch/fullsearch.shtml 3. Synovus Financial Web Site: Get the "Extended Financial Information - Fourth Quarter 1997" and the "Five-Year Financial Analysis." http://198.78.253.14/snv/financial.html I used (and recommend) the information from the Synovus Web Site. The information is very handy and complete. You can order a complete investor's package from the company and/or download the material electronically. Studying the financial sheets provides and education unto itself. They describe how a bank makes money! In the next session we begin the analysis!! Questions? Comments? Ask them here on the I-Club-List! Gary +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: judithrl@juno.com (Judith R Leon) Subject: Re: Bank Workshop #1 Date: Mon, 13 Apr 1998 09:38:51 -0400 Gary wrote: > The March 1998 BI, p33, reported 441% price appreciation from the date that Synovus was recommended in June 1992 through December 21, 1997! That type of return inspired my desire to learn about banks! < And . . . the Monday, April 13, 1998 Barron's column by Alan Abelson, "Up and Down Wall Street" attributes much of the success of big banks like Citicorp to lower interest rates. When Alan Greenspan took control of the Federal Reserve at the beginning of the 90s, he began a policy of reduced interest rates. All banks benefit from the policy because loans and mortgages are more affordable. Therefore businesses and consumers are more likely to use them. Barron's articles are available online as part of Wall Street Journal Interactive although there is a subscription fee. http://interactive.wsj.com/edition/current/articles/UpAndDown.htm Judith Russ Leon Special Features Editor, NAIC Web Site JudithRL@juno.com http://www.better-investing.org ************************************************************************* From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #2 Date: Mon, 13 Apr 1998 19:29:24 -0500 Topic: Bank SSG Workshop #2 Date: April 14, 1998 Leader: Gary Simms Topic: Bank's Yearly *Sales* Welcome back to part 2 of the I-Club-List Bank SSG Workshop! I hope that you all have gathered the recommended data. I will supply the needed data for the Synovus SSG analysis. However, learning "How and where you get the data" and "Why you use it" will best be learned by looking at the original sources. The biggest source of confusion about bank stocks is: "What figures do I use for yearly and quarterly sales?" All of the rest of the data can be taken directly from the S&P Stock Report!!! Now . . . can't you breath easier?? The Winter 1995 BITS magazine article, http://www.better-investing/bits/bits-bnk.html makes an excellent point when it states: "The basic business of banks is buying and selling money. They collect deposits, then lend those dollars to customers. Banks buy money, so interest expense is like the cost of goods sold. Banks sell money, so interest income from loans and investments represents income. For many banks, non-interest income (fees for trust services, other service charges, data processing income, rent on safety deposit boxes, credit card fees, net mortgage revenue, & brokerage revenues) has grown significantly. This new avenue of growth could be the basis of a bank's increased profitability and equally important, it is a revenue source that is less susceptible to the economic cycle." Bank *Sales* are known as *Operating Revenues.* The article explains four values that are reported in various sources: A. Net Interest Income (NII) Interest income from loans minus interest paid on customer's deposits. I think that it is noteworthy that by using Net Interest Income we have automatically removed the effect of interest rate variations from this source of a bank's income. B. Non-Interest Income (Non-II) Fees from all of the above-listed non-lending activities. C. Loan Loss Provision (LLP) An amount subtracted for bad loans. (Similar to the adjustment to account's receivable for doubtful accounts.) D. Tax Equivalent Adjustment (TEA) An adjustment added to revenues which accounts for some of the bank's interest being tax exempt. Some of the interest a bank earns is tax exempt. All of the other sources of income are all at the pre-tax profit stage. TEA is an amount which is added to these tax exempt amounts which adjusts them to this pre-tax stage so we are comparing apples to apples. The article lists several possibilities for obtaining a *Sales* figure. It also states that A and B (NII and Non-II) are the main factors. C and D (LLP and TEA) are used to fine tune the "Sales" figure. *A* (NII), *B* (Non-II), and *C* (LLP) are readily available. *D* (TEA) was only found listed on the Yearly Data section of the S&P Stock Report. So I chose to use the formula: Operating Revenue = A + B - C or Net Interest Income + Non Interest Income - Loan Loss Provision --------------------- = Operating Revenue Year 96 95 94 93 92 91 90 89 88 87 ------------------------------------------------------------------------- A. NII 375 342 260 229 211 144 118 95 86 76 B. NON-II 426 340 264 225 195 161 121 92 74 70 C. LLP 31.8 25.8 22.1 23.5 30.5 21.3 12.3 8.6 8.3 12.2 ------------------------------------------------------------------------ Operating Revenue (Sales) (rounded) 769 656 502 431 376 284 227 178 152 134 ----------------------------------------------------------------------- There! Now, wasn't that painless? Next time we tackle the question of "What do we use for quarterly *Sales* data?" Questions? Comments? Ask them here on the I-Club-List! Gary +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: Dottie Aiken Subject: Bank Workshop #2 Date: Tue, 14 Apr 1998 10:46:39 -0400 >The biggest source of confusion about bank stocks is: >"What figures do I use for yearly and quarterly sales?" >All of the rest of the data can be taken directly from >the S&P Stock Report!!! Gary, After downloading all of the info. you suggested in Workshop #1, I understand where you got the figures for the operating revenue. WHEW! But, I opened the NAIC datafile on Synovus and was surprised to see entirely different numbers for revenue. A. Numbers You Generated (from http://198.78.253.14/snv/5yr_pl.html): > Year 96 95 94 93 92 91 90 89 88 87 >------------------------------------------------------------- >A. NII 375 342 260 229 211 144 118 95 86 76 > >B. NON-II 426 340 264 225 195 161 121 92 74 70 > >C. LLP 31.8 25.8 22.1 23.5 30.5 21.3 12.3 8.6 8.3 12.2 >------------------------------------------------------------- > >Operating Revenue (Sales) >(rounded) 769 656 502 431 376 284 227 178 152 134 >------------------------------------------------------------- B. Numbers from NAIC datafile: 713 616 467 404 352 266 215 169 145 121 I guess I'm somewhat surprised at the difference, since, like many others, I assume that you can use the numbers sent out without adjustments. Mind explaining what gives? Does the S&P data make different assumptions about what should be included? BTW, I'm determined to keep up this time with the workshop. Great effort and I look forward to more. Dottie [Gary Simms replied: I sent a message requesting clarification to the datafile tech support e-mail address, but I have not received an answer back from them yet. I did open the S&P datafile for SNV and looked at the values they used for *sales*. I compared those values to our calculated values and saw that they seem to increase in step with one another, but I could not find any set of numbers from the SNV 5-year data sheet (from their web site) that came close to the S&P numbers. It remains a mystery! ] ************************************************************************* From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #3 Date: Tue, 14 Apr 1998 21:15:42 -0500 Topic: Bank SSG Workshop #3 Date: April 15, 1998 Leader: Gary Simms Topic: Bank's Quarterly *Sales* Welcome back to part 3 of the I-Club-List Bank SSG Workshop! Hang in there! This is the last painful part. The rest is easy! The Winter 1995 BITS article described how to analyze a bank stock. The article made the recommendation to calculate the Quarterly *Sales* figure using the same method that you chose to calculate the Yearly Sales figure. Part 2 of the I-Club-List Bank SSG Workshop selected Operating Revenues as the Sales proxy. Operating Revenues = Net Interest Income + Non-Interest Income - Loan Loss Provision OR = NII + Non-II - LLP The Standard & Poor's Stock Reports use the term *Revenues* rather than Operating Revenues for the quarterly data. However, S&P does not report the NII, Non-II, and LLP for quarters, only for the year. In order to calculate quarterly Operating Revenues, it is necessary to obtain the data for the latest quarter and the corresponding quarter of the previous year from 10Q and 10K reports. Toolkit users will also need to acquire this for the latest five quarters in order to fill in the ToolKit data section. A publicly traded company is required to make an annual report to its shareholders every year. The Security & Exchanges Commission (SEC) imposes minimum standards that require certain data in the annual report. In fact, I have read that the annual report is little more than an advertisement to buy the company's stock. There is another report that is similar to the annual report. Indeed, it is sometimes referred to as an annual report without all the glossy pictures and color. It is known as a 10K and, like the annual report, it is published some time after the end of the company's fiscal year. The 10K reports the year's activity through the 4th quarter of the company's fiscal year. For each of the remaining quarters, the company issues a 10Q (Q for quarterly). The 10Q reports the results for the latest quarter and discusses recent problems that occurred since the previous 10K or 10Q. I found the *Revenues* figure by examining the Extended Quarterly Data report on the Synovus Web Site. This data is the same data that the company reports to the SEC in its 10K and 10Q's. S&P Quarterly *Revenues* definition: *Gross* Interest Income + Non Interest Income. *Gross* Interest Income is the interest received from the loans which the bank has made. We dealt with *Net* Interest Income in our calculation of Yearly Operating Revenues (Sales). The two are related by the equation: Gross Interest income (Interest earned from the bank's loans) - Interest Expense (Interest paid to the checking & saving accounts) -------------------- = Net Interest income The difference between interest paid and interest earned is called Net Interest Income. It automatically takes fluctuations in interest rates into account when making year to year comparisons. If interest rates rose from last year to this year, the bank can loan its money at a higher rate. However, it must also pay its depositors more interest on their money. For example, last year the bank could lend its money out at 9% and it paid depositor's 5%. If interest rates go down two percentage points this year, the bank can only lend its money at 7%. However, they only have to pay their depositors 3%. In both cases the *Net* Interest Income is 4%. Without this automatic adjustment to the Gross Interest Income, the bank would show negative growth when interest rates go from 9% to 7%. In reality, the *real* earnings (Net Interest Income) remain the same. I have come to realize that the Recent Quarterly Figures section on the front of the SSG is the reincarnation of the PERT Worksheet A. It checks current performance. A red flag here is a warning to investigate further and determine if the trouble is short-term or a long-term trend. Based on this finding, I believe that the *Revenues* figure from the S&P Stock Reports is satisfactory only for screening purposes. The S&P data does *not* allow us to monitor the current activity of a bank's *Sales* because interest rate fluctuations influence quarterly values. Therefore, I suggest that it is necessary to calculate Quarterly Operating Revenues from the 10K and 10Q. It is just as easy to calculate Quarterly Operating Revenues from the 10K and 10Q as it is to calculate Quarterly *Revenues.* In addition, this makes it possible to monitor the bank's stock on PERT Worksheet A without recalculating the values. We will keep the apples and oranges separate! :-) If we use the A + B - C formula, (Net Interest Income + Non-Interest Income - Loan Loss Provision we will need the data for the latest quarter and the corresponding quarter a year ago that is calculated from the 10Q's or 10K. ToolKit users may wish to do these calculations for the five most recent quarters. The 1997 fourth quarter extended financial information retrieved from the Synovus Web Site shows: Quarter 4Q 97 3Q 97 2Q 97 1Q 97 4Q 96 ---------------------------------------------------------- Net Interest 106.8 104.8 102.6 98.2 97.4 Income Loan Loss Provision (minus) 9.4 7.6 8.3 7.0 9.1 Non Interest Income 131.7 124.3 120.9 112.2 116.6 ----------------------------------------------------------- Operating Revenues 229.1 221.5 215.2 203.4 204.9 The 4th Q 1997 EPS and dividend values and the 4th Q 1996 dividend were obtained from the 1997 4th quarter extended financial information. Here is the quarterly data for Synovus: Quarter 4Q 97 3Q 97 2Q 97 1Q 97 4Q 96 -------------------------------------------------------- Operating Revenues 229.1 221.2 215.2 203.4 204.9 EPS .27 .25 .23 .21 .24 Dividends .09 .09 .09 .09 .07 ------------------------------------------------------- So, there you have the "What, Why, and How" for quarterly SSG data. OK, time for the primordial scream! ARG!!!!!!!!!!!!!!! Congratulations!! You made it!! Next time we will define the rest of the data necessary for the SSG, and plug it into the Toolkit! Questions? Comments? Ask them here on the I-Club-List Gary +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: KAREN M PHILLIPS Subject: Re:Bank Workshop #3 Date: Fri, 17 Apr 1998 21:13:56 +0000 If you use "loans" for your quarterly data, isn't that going to botch up your PERT reports? If you use the net interest income + non-interest income-loan loss provision for annual data, and loans for quarterly, your numbers won't match up, will they? Or am I missing something? IMHO, its not that difficult to use the formula for quarterly numbers; at least SNV puts out an income statement with their press release, so you have all the numbers you need. Do other companies do this also? Karen Phillips [Gary Simms replied: I agree. This is why we chose to use this formula.] +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: glsimms@juno.com Subject: Re: Bank Workshop #3 Date: Fri, 17 Apr 1998 12:37:14 EDT I had some private e-mail asking about why I used the calculated quarterly data for Synovus. I'll make a short statement and then open the discussion up to the list. The two most common sources of data are from Value Line and from Standard & Poor's. Standard & Poor's uses *Revenues* for its quarterly data. We rejected the use of this short term activity monitor because it uses Gross Interest Income rather than Net Interest Income which automatically adjusts for interest rate changes. Value Line uses *Loans* for it quarterly data. We rejected the use of this short term activity monitor because it ignores income from other sources. These other sources can be a major component of income and should not be ignored. The new Toolkit 3.0 manual states that you should use the Value Line's *Loans* for the quarterly data. Mr. Ellis Traub, the author of Toolkit 3.0, is a member of this list so I'm hoping he will share his thoughts about the use of VL's *Loans* as a monitor of short term activity. 1. Is it OK to use *Loans*? 2. Will this work OK with PERT Worksheet A? 3. Were VL's *Loans* used because of availability? 4. Is the difference between *Loans* and our calculated *Operating Revenues* really worth all of the work? Also, does anyone know how the value for *Sales* in the S&P data files are calculated. this seems to have stumped the tech support people. Please be candid! Remember, we chose to use: Net Interest Income + Non interest Income - Loan Loss Provision This does two things: 1. It automatically compensates for interest rate changes. (While this might not be extremely important for quarter over quarter changes, it could be significant when you use PERT Worksheet A to monitor activity over extended periods of time.) 2. It takes all aspects of the banking business into account. (Both the loans and the non loan sources of revenue) Your thoughts are always welcome! Gary +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: Ellis Traub Subject: RE: Bank Workshop #3 Date: Mon, 20 Apr 1998 17:12:25 -0400 Gary: Bank stocks have always been a dilemma for NAIC investors because they're in a class by themselves--and because there are sundry variations within that class. SNV, the stock that you're discussing, is a good example of the problem since it derives about 25% of its consolidated revenues from its card processing business; and because it's a holding company that provides resources for its subsidiary banks but permits them to operate almost autonomously in their respective communities. Also, the criteria that professional analysts use are a bit different from those we're accustomed to as NAIC investors. Such ratios as %Return on Assets and %Net Interest Margin have more meaning to them than our familiar %Pre-tax Profit on Sales and %Return on Equity, respectively. I think that, as usual, the best approach is to keep it as simple as we can. Revenues for a bank come primarily from the "manufacture" and sale of money. The interest paid on the money the bank "sells" is a part of the "cost of goods sold". So in this respect, they're not so far different. The "non-interest income" takes into account the increasing revenues that banks generate from a variety of other sources. In Synovus' case, the portion of the revenue that comes from credit card servicing is the "service" portion of the business. So, SNV is a combination of "manufacturing" and service. There are parallels outside of the financial arena--companies that both manufacture products and provide services as well. A fine article in the 1995 BITS identified the four components of income for the banks: A] Net Interest Income - the "spread" between the money borrowed and that loaned; B] Non-interest Income - the revenue from all other sources; C] Tax Equivalent Adjustments - an adjustment derived from the conversion of interest on tax exempt assets to the equivalent figure were the interest to be taxable; and D] Loan Loss Provision - the amount set aside to cover bad debt (the equivalent of "returned goods and allowances" in a manufacturing setting). The most "accurate" revenue data is derived from the sum of A+B+C-D. The following four questions (asked by Gary) all make the assumption that there is a ready source of quarterly A, B, and D that I'm not aware of. So I can't judge how much work it might be to calculate the quarterly results. However, in our opinion, you quickly reach the point of diminishing returns if you have to do much more than import the data. Certainly, if there is a ready source of A, B, C, and D, it's not much of a task to add and subtract. The question is only how valuable it is. [Gary Simms replied: I was using the company's 10K and 10Q's. Not really easy. Using a proxy of loans or revenues for screening purposes sounds reasonable.] >>1. Is it OK to use *Loans*?<< It's true that loans (VL) and Gross Interest (S&P) don't take into account the other sources of income. Yet those other sources are not nearly so volatile as are the sources of interest income. This measure of activity would provide you with that kind of info. >>2. Will this work OK with PERT Worksheet A?<< So far as whether you can use it on the PERT Worksheet-A is concerned, of course you can gain something of value in checking the percent change between the quarters and the same period in the previous year. If I'm looking at loans, of course, I'm going to take that data with a grain of salt and focus mostly on the earnings. >>3. Were VL's *Loans* used because of availability?<< Of course. >>4. Is the difference between *Loans* and our calculated *Operating Revenues* really worth all of the work?<< !! I'm not sure about "all the work." As I said, I don't have a notion as to where to find the quarterly components of revenue without going to more trouble than I think it to be worth; but, if you'll share with me your source of information, I can tell you better whether I think it's worth it or not. [Remember, Gary Simms' reply with respect to this subject was: I was using the company's 10K and 10Q's. Not really easy. Using a proxy of loans or revenues for screening purposes sounds reasonable.] >>Also, does anyone know how the value for *Sales* in the S&P data files are calculated. this seems to have stumped the tech support people.<< I've asked our friends at S&P Compustat to respond and should be able to post an answer soon. Please be candid! Vott else? Gary also stated: >>Remember, we chose to use: Net Interest Income + Non interest Income - Loan Loss Provision This does two things: 1. It automatically compensates for interest rate changes. (While this might not be extremely important for quarter over quarter changes, it could be significant when you use PERT Worksheet A to monitor activity over extended periods of time.<< I'm not sure that I understand the distinction, Gary. Generally, interest rate changes inbound are pretty well matched by interest rates outbound, so the quarter to quarter net will not change appreciably. I'm also not sure I understand what we're monitoring about quarterly revenue over an extended period of time. [Gary Simms replied: S&P's 2 sided stock report uses *revenues* to report quarterly data. These *revenues* are *gross interest income* plus *non interest income* rather than our preferred *net interest income* which does automatically adjust for interest rate changes. The quarterly data we are monitoring is in PERT Worksheet A. We gave a lot of thought to what to use for quarterly activity so it would be coherent with the annual data and the PERT Worksheet A in TK 3.0 I'm looking for trends in revenues growth just like I would look for them in a *normal* company.] >>2. It takes all aspects of the banking business into account. (Both the loans and the non loan sources of revenue)<< You're right, of course. If you can access the information comfortably, then it's always good to use your most comprehensive data. As for the quarterly data, the only place that I know of to get the actual revenue information is from the 10Q's and/or quarterly reports from the companies themselves. As with Quarterly Pre-tax Profit, that information is not generally published in our data sources unless you include the NAIC DataFiles where the information appears. To sum up: So far as we're concerned, quarterly "sales" are used in no other calculation. The PERT Worksheet-A, of course, tracks the quarterly sales data if it's available. If you enter "Loans" it will do the same for them and provide you with some measure of activity. QUARTERLY data is useful for looking at recent performance and determining whether or not the company continues to operate as well as we had expected it to. Where "sales" figures--or the components that make up the revenue--aren't available, a reasonable "proxy" is the quarterly loan activity. Obviously, that quarterly figure is not as "accurate" as the real revenue data; but the purpose is adequately served in our opinion; especially if the effort to find and/or construct it surpasses the point of diminishing returns. Financial institutions like SNV that derive substantial revenue from other activities will surely not be as "accurately" portrayed; but, with a company like SNV, the earnings are eminently more important than the Revenue changes. I hope that this helps. Ellis Traub, President Inve$tWare Corporation (954) 723-9910 +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: Ellis Traub Subject: RE: Bank Workshop #3 To: "'glsimms@juno.com'" , Date: Wed, 22 Apr 1998 14:06:32 -0400 Gary and friends: I received the following from the folks at Compustat re Revenue definition: Our quarterly definition is: Total Interest Income + Trust Department Income + Service Charges on Deposit Accounts + Other Service Charges, Collection and Exchange Charges, Commissions and Fees. The annual definition is: Total Interest Income + Trust Department Income + Service Charges on Deposit Accounts + Other Service Charges, Collection and Exchange Charges, Commissions and Fees. I've asked them to tell me where the cost of their product (interest on the borrowed money) shows up in the data after standardization and I'll report that when I receive it. It's my best guess that it shows up as mapped to the equivalent of the "cost of goods sold" in a mfg. company; i.e., a variable cost item in the operating statement. Compustat apparently does not include in their reporting of consolidated statements the income from a base company's holdings. (You'll find an even more obvious discrepancy between VL and Compustat in Hilton Hotels [HLT].) In the case of SNV, the fact that they own 80+% of TSS doesn't appear to show up at the top line (at least as the definition is described above). When they standardize their data, they likely show the holdings just as we do--the cost of the shares they own being reflected in their balance sheet with unrealized gains not being taxable but income from the shares rather than from the company being subject to tax. Ellis Traub, President Inve$tWare Corporation (954) 723-9910 +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: Ellis Traub Subject: Bank information Date: Tue, 28 Apr 1998 17:59:31 -0400 The following is a summation of the information that Compustat sent me concerning the data that they provide for bank stocks--in particular, revenue. My question to them: I have to presume that a) the revenue from holdings (narrowly interpreted as with Synovus and broadly interpreted as with Hilton) simply does not show up in the data and b) the cost of a bank's money is not ignored but is mapped into the fields that represent cost (similar to the "cost of goods sold" fields in a manufacturing company). Are these presumptions valid? We're still getting questions. Here are their answers, so far . . . Revenues from holdings, we are assuming are the interest income: all of the loans, investment securities, fed funds and interest earning deposits are included in Sales, but this is not pure as it also includes some non-interest income components. The cost of a bank's money again is subject to interpretation. COGS includes all interest expense plus provision for loan losses, which is the way I would view this. Just for more information, SGA includes Salaries and Wages, Pension and Employee Benefits, Occupancy expense, and expense for Furniture and Equipment. Depreciation is collected as a separate component and not netted from either of these totals. and . . . On Synovus, the sales are equal to: Interest Income (Interest & Fees on Loans Interest & Dividends on Investments Int. Income on Fed Funds Sold & Securities Int on Due from Banks Trading Accts Income Other Interest Income) For Synovus' Balance Sheet it is: Total Interest Income 725673 Data Processing Services 343946 Service charges on deposit accts 56215 Fees for Trust Services 12645 Credit Card Fees 11001 I am consulting with Compustat on the conversion of the other income statement items. It appears that Depreciation is subtracted from Non- operating income/expense, and I would like to verify a reason why before forwarding further information. I don't know whether this stuff is helpful or confusing. Ellis Traub, President Inve$tWare Corporation (954) 723-9910 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: "Barbara DalMaso" Subject: Re: Bank Workshop #3 Date: Mon, 20 Apr 1998 22:11:25 -0700 Gary Simms wrote regarding calculated quarterly data for Synovus: >Standard & Poor uses *Revenues* for its quarterly data. We rejected the >use of this short term activity monitor because it uses Gross Interest >Income rather than Net Interest Income which automatically adjusts for >interest rate changes. > >Value Line uses *Loans* for it quarterly data. We rejected the use of >this short term activity monitor because it ignores income from other >sources. These other sources can be a major component of income and >should not be ignored. >Is it OK to use *Loans*? IMHO, it is OK to choose to use numbers from one of these services as a screening device. However, they must be used in a consistent manner. For example, if I were doing a quick look at some banks to find a couple for more in-depth analysis, I would be happy to use the most convenient numbers. As long as I used the same type of numbers for each bank, it would be a fair comparison. However, when it came to examining the best 2 or 3 banks from the group which I had quickly "screened", I would be much fussier about the numbers I used. In this case, I would contact each company and get the detailed financial reports (10K, 10Qs for the past year, annual report, proxy statement, news releases, and anything else they would care to send). Then I would use the formula that you suggested: >>Net Interest Income + Non interest Income - Loan Loss Provision <<< I would use this formula for both yearly and quarterly revenue numbers. Gary also said: >>2. It (the formula) takes all aspects of the banking business into account. (Both the loans and the non loan sources of revenue)<< I particularly agree that using these two sources of income is important, as more and more banks are reaping the rewards from their non-interest income portion of revenues. Look at Synovus, which owns 80% of Total Systems Services, a bank card data processor. Value Line says that SNV's stake in TSS is worth about $15 of SNV's share price. The other point to make is that the non interest income comes from banking services which entail less risk than the loans side and the income can be very profitable. Another reason to ask the bank for its financial reports is to examine the Balance Sheet and the notes section of the annual report. I realize that perhaps this is a more advanced area of the analysis, but there are a couple of ideas that you can check out. Keep in mind that the quality of assets is very important to the success of the bank. Look for the type of loans held in the loan portfolio. Home mortgage loans are less risky than commercial real estate and construction. Table 6 of the Annual Report shows that loans by type are roughly: Commercial 66%, Retail 33%. (The retail portion includes the credit card and consumer loans, for example.) This relationship has been relatively stable since about 1993. We also see in the Notes that SNV's "nonperforming assets as a percentage of loans and other real estate are at their lowest level in more than 20 years at 0.44%". There has been a trend in 1997 to a higher number of credit card chargeoffs due to bankruptcies. However, I can say that I am comfortable with how the Synovus management has handled their position in the past and have no reason at this time to feel unhappy with what is going on at present. In summary, I think that it is important to be consistent in whatever numbers you choose to use. I also think that when you are getting serious about investing in a company, you really should "go for the gusto" and dig as deeply as you are capable to uncover why you should invest in that company. Barbara bdalmaso@stbinvestorsoftware.com +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: judithrl@juno.com (Judith Russ Leon) Subject: Re: Bank SSG #3 Date: Wed, 22 Apr 1998 09:57:45 -0400 Barbara DalMaso wrote: > Look at Synovus, which owns 80% of Total Systems Services, a bank card data processor. Value Line says that SNV's stake in TSS is worth about $15 of SNV's share price. < Indeed, the Synovus representative at last year's Boston Council Investor's Fair made the point that SNV warranted a higher P/E ratio because of its earnings from fast-growing TSS. Nevertheless, SNV currently trades at 35 with a trailing twelve month P/E of 37. :) > The other point to make is that the non interest income comes from banking services which entail less risk than the loans side and the income can be very profitable. < Good point. Judith Russ Leon Special Features Editor, NAIC Web Site JudithRL@juno.com http://www.better-investing.org ***************************************************************** From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #4 Date: Wed, 15 Apr 1998 19:02:14 -0500 Topic: Bank SSG Workshop #4 Date: April 16, 1998 Leader: Gary Simms Subject: Synovus Data Values Welcome back to Part 4 of the I-Club-List Bank SSG Workshop! This session will list the data values that are necessary to complete a paper or computer version SSG. I want to really encourage you to do an SSG. Pick either method! We already calculated the 10-year historical data for Operating Revenues (Sales) using the formula A + B - C. Net Interest Income + Non Interest Income - Loan Loss Provision The Synovus Web Site, http://198.78.253.14/snv/financial.html provides the necessary data to calculate the 1997 Operating Revenues figure: 1997 in (000) Net Interest Income 412,389 + Non Interest Income 489,269 - Loan Loss Provision 32,296 ---------------------------------- 869,362 or 869.4 million. We will add this Operating Revenues value to those we calculated in the second session. Since we only need 10 years of historical data, when we add 1997 data we also drop 1987's data. Here are the Operating Revenue values: 97 96 95 94 93 92 91 90 89 88 Operating Revenue (sales) (rounded) 869 769 656 502 431 376 284 227 178 152 ------------------------------------------------------------- Here are the quarterly data in session three. Quarter 4Q 97 3Q 97 2Q 97 1Q 97 4Q 96 ------------------------------------------------------------- Operating Revenues 229.1 221.2 215.2 203.4 204.9 EPS .27 .25 .23 .21 .24 Dividends .09 .09 .09 .09 .07 ------------------------------------------------------------- OTHER DATA (source VL, or S&P. 1997 data from Synovus Web Site) ---------- Synovus Financial (NYSE:SNV) Sector: Financial Industry: Bank Industry (VL) 52 week high price 35.25 52 week low price 19.625 Current price 2/27/98 35.25 Preferred Stock VL None Preferred Dividend VL None Common Stock S&P 175.0 million Debt S&P 127.2 million % to Total Cap ? ? % pot. dil. ? ? some? % insiders VL 16.8% % institutions VL 25.1% 10 year data (S&P Stock Reports) ------------ Year 97 96 95 94 93 92 91 90 89 88 ---------------------------------------------------------------- Hi pr 35.25 13.50 9.00 5.625 5.75 22.25 8.875 7.375 5.625 4.50 Lo pr 19.625 7.875 6.625 3.875 3.375 11.625 7.375 5.00 3.75 3.50 Year 97 96 95 94 93 92 91 90 89 88 ---------------------------------------------------------------- EPS .95 .80 .67 .57 .49 .41 .33 .31 .30 .26 Div'd .36 .29 .24 .20 .17 .14 .12 .11 .10 .08 BV/S 5.16 4.49 3.99 3.33 3.17 2.78 2.33 1.99 1.81 1.57 Operating Revenues (Sales) 869 769 656 502 431 376 284 227 178 152 Net profit 165 140 115 86.4 74.1 61.2 40.5 35.1 31.4 26.8 %Tax Rate 36.2 36 36 36 34 33 30 28 n/a n/a Other 10 year data (S&P) ------------------------ Year 97 96 95 94 93 92 91 90 89 88 ---------------------------------------------------------------- Pre tax profit 259 219 179 134 118 95.6 62.1 52.1 44.9 36.3 Ret. on Equity 19.8 19.1 18.0 17.5 16.8 15.5 15.3 16.4 18.0 17.6 Ret. on Assets 1.87 1.7 1.5 1.5 1.4 1.2 1.2 1.3 1.5 1.5 % Net Interest Margin 5.26 5.19 5.15 5.11 4.84 4.79 4.84 5.21 5.52 5.81 % Expense/Operating Revenues ? 67 70 69 68 68 72 71 69 69 ------------------------------------------------------------------- I know, It's boring, but at least you didn't *have* to go and dig it all up! The next session will discuss the SSG and the modifications that are necessary to make in order to analyze a bank stock. So get out your pencils, calculator, and ruler or turn on the computer and prepare to learn! Questions? Comments? Ask them here on the I-Club-List! Gary ******************************************************************** From: glsimms@juno.com Subject: Bank Workshop #5 Date: Thu, 16 Apr 1998 20:02:35 EDT Topic: Bank SSG Workshop #5 Date: April 17, 1998 Leader: Gary Simms Topic: Synovus SSG, Sections 1 & 2 Welcome back to the fifth session of the I-Club-List Bank SSG Workshop! The next two sessions will discuss how to enter data on the SSG. I uploaded an .ssg Datafile for Synovus to the Shared Datafile Library on the NAIC Web Site. All SSG sanctioned software programs can use the .ssg Datafile format. The Synovus .ssg Datafile is called SNV_ICL_0498.SSG There are two ways on the NAIC Web Site to download this Datafile. 1) The *Easy Way* at: http://www.better-investing.org/content/filelib.html Follow the directions. Attention! Right click on the mouse to bring up a menu. Save the file to disk. Place the file in a special directory that you create for downloaded files. Note: If you merely select File | Save As, a vertical row of numbers appears on the screen. The numbers don't serve your purpose. 2) The *old way*, via FTP: ftp://better-investing.org/pub/ssg-files/ssg-file-library If you do not have a software program which reads .ssg Datafiles, you may view the file by downloading the Toolkit demo program at: http://www.better-investing.org/computer/toolkit.html An Excel .ssg Data File reader is another alternative. Download it from: ftp://better-investing/pub/ssg-files/ Get ssg-read.xls ---------------------------------------------------------- Instead of downloading an electronic datafile of historical data for Synovus, you may gather raw data yourself. Either plot the data manually on the Visuual Analysis graph or type it into a computer version of the software such as Toolkit. The recent quarterly data shows: (Operating) Sales(Revenues) EPS latest quarter 229.1 .27 year ago quarter 204.9 .24 ------------------------------------------------------- % change 11.8% 12.5% These are a bit below the historical averages. [Note: If we had used the S&P Stock Report quarterly values which are labeled *revenues*, the *Sales* % change would have been 11.3% vs. the 11.8% value reported above from our calculated *Operating Revenues.*] **********Bank Workshop Update!!***************** On Monday, April 13, 1998, Synovus Financial announced first quarter earnings. Since it is the policy to use the latest data available we will update the workshop in progress! http://biz.yahoo.com/prnews/980413/ga_synovus_1.html This URL will bring you to the company's press release. Using the formula for *Operating Revenues*: Net Interest Income + non Interest Income - Loan Loss Provision we get: 106.1 + 132.3 - 7.6 = 230.8 for *Operating Revenues* (Operating) Sales(Revenues) EPS latest quarter 1Q/98 230.8 .24 year ago quarter 1Q/97 203.4 .21 ------------------------------------------------------- % change 13.5% 14.3% This is still a bit below our historical averages. The trend lines for Sales (Operating Revenues), Earnings Per Share, and Pretax Profit all show smooth, parallel, lines that trend upwards. This indicates good management. Toolkit 2.6 calculates the historical growth trend for Sales at 22.2% and historical growth trend for EPS at 15.8%. The Earnings per Share trend moved upward in the last several years. Between '91 to '97, historical rates of growth for Sales and EPS were 20.4% and 18.8% respectively. The Winter 1995 BITS article suggests that Book Value per Share should also be plotted on the front of the SSG. Since the computer software versions of the SSG do not plot Book Value per Share on the graph, it must be done manually. Even computer users have to get our pencils and rulers out from time to time! The article states that the trend line for Book Value should be parallel to the EPS trend line. A Book Value trend line that is not parallel to the EPS trend line may signal deterioration in the company's fundamentals. In addition, the company may be paying out a high percentage of its earnings. That prevents it from reinvesting the earnings for future growth. The Synovus Book Value per Share trend line looks parallel to the EPS trend line to me! Section 2A and 2B. The debut of 2C & 2D! -------------------------------------- We are familiar with sections 2A, % Pretax Profit on Sales (Profit Margin) and 2B % Earned on Invested Capital (ROE). Additionally, the Winter 1995 BITS article states that we need to add sections 2C, % Return on Assets (ROA) & 2D, % Net Margin Interest. Simply copy Parts 2C & 2D from the S&P Stock Report! yr 88 89 90 91 92 93 94 95 96 97 -------------------------------------------------------- 2A n/a n/a 21.5 20.4 24.3 26.0 30.0 27.4 28.4 29.8 2B 16.6 16.6 15.6 14.2 14.7 15.5 17.1 16.8 17.8 18.4 2C 1.5 1.5 1.3 1.2 1.2 1.4 1.5 1.5 1.7 1.87 2D 5.81 5.52 5.21 4.84 4.79 4.84 5.11 5.15 5.19 5.26 Now take a look at the last 5 years of data: yr 93 94 95 96 97 5 yr ave. trend -------------------------------------------------------- 2A 26.0 30.0 27.4 28.4 29.8 28.3 UP :-) 2B 15.5 17.1 16.8 17.8 18.4 17.1 UP :-) 2C 1.4 1.5 1.5 1.7 1.87 1.6 UP :-) 2D 4.84 5.11 5.15 5.19 5.26 5.1 UP :-) All of the above data reveals that Synovus is a company that is growing rapidly and that management is in control of the helm !! ;-) Well . . . enough tables for now! The only table I want to look at is in the kitchen! What do all these numbers mean? 2A % Pretax Profit to Sales --------------------------- This is a familiar measure of the quality of the company's management. It measures management's performance by showing how effectively management controls costs. Since we are looking for growth stocks, we want to see that sales are trending upward at an acceptable rate. In addition, look to see that the trend of the ratio of % Pretax Profit to Sales is level or trends upward. These qualities indicate that management is in control. 2B % Earned on Invested Capital (ROE) ------------------------------------- This section measures management's ability to generate returns on the investor's equity. I look for around 15% since I am seeking 15% return on my investments as NAIC recommends. The NAIC Official Guide says that the best investment opportunities exist when the ROE is around 20%. A higher value is desirable but also look for an upward trend. 2B, ROE, is the ratio of Net Profit to owners Equity. Net Profit (Net Income) ROE = ----------------------- Shareholders Equity ROE is a measure of efficient use of owner's equity. Banks are highly leveraged because their deposits are loans that customers make to the bank. The deposits count as assets, but they are classified as liabilities rather than under the equities section. Recall: Assets = Liabilities + Equity Hence, ROE (2B) does not factor these into the equation, but ROA (2C) does. 2C Return on Assets (ROA) ------------------------- ROA is a measure of efficient use of the company's assets which includes the customer's deposits. A value of 1% or more, (e.g. 1.5%) is good and an upward trend is desirable. Net Profit (Net Income) ROA = ----------------------- Total Assets 2D % Net Interest Margin ------------------------ % Net Interest Margin is a measure of the company's success in the basic banking business. The BITS Winter 1995 article's glossary defines it as "the difference paid to depositors and other sources of funds and the interest collected on loans and other investments (i.e. interest earned and interest paid) divided by the Average Earning Assets." Interest Income - Interest Expense = Net Interest Margin Average Earning Assets = those monies allocated to be loaned out by the bank to earn the Interest Income. Interest Income - Interest Expense ---------------------------------- X 100 = % Net Margin Income Average Earning Assets For example, given two financial institutions with the same average earning assets, the one that generates the greatest difference between interest earned and interest paid will have the highest % Net Interest Margin. % Net Interest Margin measures a bank's success in the basic banking business because it reveals which bank can command the highest profit from its average earning assets. As we earlier discussed: the difference between interest paid and interest earned is called *Net Interest Income.* It automatically takes into account fluctuations in interest rates when making year to year comparisons. When interest rates rise froom last year to this year the bank can loan its money at a higher rate, but it must also pay its depositors more interest on their money. For example, last year the bank could lend its money out at 9% and had to pay its depositor's 5%. This year rates go down so the bank can only lend its money at 7%, but they only have to pay their depositors 3%. In both cases the Net Interest Income is 4%. Without this automatic adjustment the Interest Income would have shown negative growth from 9% to 7% when in reality the real earnings (Net Interest Income) remained the same. Values range from 3% to 5%. Look for a level or upward trend. The next session will complete the SSG and see if this well-managed company is "a good buy", "a bye the bye", or "a good bye". Questions? Comments? Ask them here on the I-Club-List! Gary ****************************************************************** From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #6 Date: Sun, 19 Apr 1998 20:23:43 -0500 Topic: Bank SSG Workshop, #6 Date: April 20, 1998 Leader: Gary Simms Subject: Synovus SSG Sections 3, 4, & 5 Glad to see you back! After Part 5, many people might have developed MEGO (Mine Eyes Glaze Over.) I'm glad you didn't! Since we concluded that Synovus is a well-managed, company we are ready to do some projections and finish SSG Sections 3, 4, & 5. The NAIC manual says that the most likely rate of growth for the next 5 years is the historical 10-year growth rate. Toolkit shows the following rates of Operating Revenues (Sales) growth for Synovus: 10 years 22.2% 7 years 19.4% 5 years 19.8% 3 years 15.1% I select 15% *Sales* growth for the next 5 years because it appears that the rate of *Sales* has been slowing over the last ten years. The NAIC states that the 5-year sales estimate is much easier to estimate than the 5-year EPS. They recommend using the *Preferred Procedure* to estimate the 5-year EPS. The *Preferred Procedure* allows you to apply your judgment at five levels: sales, pre-tax profit margins, tax rate, number of shares outstanding, and dividends. Just as I examined recent changes in the rate of growth for *Sales* and applied my judgment in selecting 15%, here is another example. Observe the %Pre-Tax Profit to Sales ratios (Profit Margins, Section 2A) for the last 10 years. Note that they been trending upward. Therefore, you can feel comfortable accepting the 5-year Average Profit Margins. Likewise, you might inspect the SNV S&P Stock Report and notice that the Number of Shares Outstanding has been declining in the last few years so that you decide to adjust the data to reduce the Number of Shares outstanding in the next 5-years. The new ToolKit 3.0 improved the capability to make the adjustments in the Preferred Procedure. Although the ToolKit 2.6 Preferred Procedure is pretty limited, I used it because that is what I currently have available. [Armin Fields commented: Since there are many people still using TK 2.x, they should know about the program "preferred procedure.zip" that is available for download at: ftp://better-investing.org/pub/misc This program lets you vary all 5 factors of the preferred procedure and overcomes what I consider to be very serious limitations of the "old" Toolkit. ] Toolkit 2.x Preferred Procedure: Projected 5YR Sales 1747.9 less Ave. Expenses 1252.7 less taxes 179.3 less Pref. Div'ds 0.0 divided by shares outsdg 174.5 5-year projected EPS 1.81 Based on the Preferred Procedure's $1.81 EPS, Toolkit reports projected 13.7% EPS growth rate. Value Line estimates 5 yr. EPS growth of $1.95 (17%). S&P reports an EPS growth rate of 16%. Our projections of 15% growth for sales and 13.7% growth for EPS seem conservative. STOCK SELECTION GUIDE SECTION 3 --------------------------------------------------- Present price $35.25 52 week high $35.25 52 week low $19.625 Yr Price EPS P/E Divd %Pay- %High Hi Lo Hi Lo out Yield ----------------------------------------------------- 93 9.0 6.6 .49 18.4 13.5 .17 34.7 2.6 94 8.9 7.4 .57 15.6 12.9 .20 35.1 2.7 95 13.5 7.9 .67 20.1 11.8 .24 35.8 3.0 96 22.3 11.6 .80 27.8 14.5 .29 36.3 2.5 97 35.3 19.6 .95 37.1 20.7 .36 37.9 1.8 ---------------------------------------------------- Avg. 10.6 23.8 14.7 35.9 Avg P/E = 19.2 Current P/E = 36.7 Projected P/E = 32.3 Relative value 190.8% Projected Relative Value 167.8% SECTION 4 ---------------------------------------------------- 4A High Price Next 5 Years -- Avg High P/E 23.8 X Est. High EPS 1.81 = High Pr. $43.00 4B Low Price Next 5 Years -- (A)Avg Low P/E 14.7 X Low EPS .95 = $13.90 (B)Avg Low Price of the Last 5 Years $10.60 (C) Recent Severe Low Price $7.90 (D) Price Dividend will Support $11.80 Since Synovus is a growth stock, I selected 4A ($13.90) as the Low Price for the Next 5 Years. 4C Zoning -- $43.00 (High Pr.) - $13.90 (Lo Pr.) = $29.00 range 1/3 of Range = $9.70 Buy $13.90 - $23.6 Maybe $23.60 - $33.3 Sell/ Reevaluate $33.3 - $43.00 Present price of $35.25 is in the *Sell* range. 4D Upside/Downside Ratio -- High Price 43.00 Minus Current Price 35.25 ------------------------------------------ Current Price 35.25 minus Low Price 13.90 7.7 equals ------ equals 0.4 to 1 21.3 4E -- 5-year High Price 43.00 ------- = 1.22 X 100 - 100 divided by Current Price 35.25 Equals 22% Simple Appreciation. SECTION 5 5-YR Potential ------------------------ 5A -- Present Full Year's dividend .36 ----- = .01 X100 = 1.0% Present Price of Stock 35.25 5B Average Yield over the Next 5 Years -- !! Avg. EPS next 5 Yrs 1.40 X Avg %Payout 35.9 = 1.4% 5C Estimated Average Annual Return Over the Next 5 Years -- % Year Appreciation Potential 22% ----- = 4.4% 5 Average Yield = 1.4% -------------------------------------------- Average Total Annual Return Over the Next 5 Years 5.8% I converted Simple growth rate to Compound rate automatically in ToolKit 2.6. Recently revised paper versions of the SSG have a handy conversion chart in the bottom right hand corner of the back page. Simply (no pun intended) find the Simple Growth Rate and read off the corresponding Compound Growth Rate. I follow the numbers on the top chart over to 5.8%. Then I read the bottom scale directly beneath the Simple growth rate number on top. This bottom number is the Compound rate of return. I read 5.3% 5.8% simple equals 5.3% compounded rate Total Return = 5.3% And there you have the rest of the story! The next session, Part 7, will use a another tool, "The Guide to the Bank SSG" to answer the two major questions we ask of any stock: 1) Is this a well-managed company? 2) At its current price, is it an investment representing an opportunity to double in value in 5 years with minimal risk? Questions? Comments? Ask them here on the I-Club-List! Gary +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: KAREN M PHILLIPS Subject: Re: Bank Workshop #6 Date: Mon, 20 Apr 1998 07:38:50 +0000 Do you really feel that a selected low price of $13.90 is reasonable for this company, given that it's current price is $36.50? It seems awfully low to me. It would have to drop almost 2/3's to reach that point! A company as well-managed as this one doesn't seem likely to do this, IMO. Karen Phillips +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: glsimms@juno.com Subject: Re: Bank Workshop #6 Date: Mon, 20 Apr 1998 10:16:55 EDT Karen, This is the great thing about the SSG... no two are the same and they allow for an individual's judgment. Considering that the 5-year average p/e is 19.2 and the current p/e is 36.7, if the current p/e were to return to its 5-year average you would lose almost 50% of the current price. Couple this with what seems to be a slowing *Operating Revenue* growth rate and it seems feasible to me. You are welcome to use whatever low price you wish in *your* analysis. Another thing that ToolKit allows you to do is to do is run different scenarios. See what effect changing the low price will have on the major points of sections 3, 4, & 5. Then see if it makes a difference. Mark Robertson is famous for his *first run* SSG analysis and then his *second run* analysis in NAIC's BITS magazine . Gary ********************************************************************* From: glsimms@juno.com Subject: Bank Workshop #7 Date: Mon, 20 Apr 1998 18:15:52 EDT Topic: Bank SSG Workshop #7 Date: April 21, 1998 Leader: Gary Simms Topic: The Guide to the Bank SSG Welcome to the seventh session of the I-Club-List Bank SSG Workshop! We created a modified SSG in this workshop in order to evaluate a bank stock. The version of the SSG is based on the recommendations in the Winter 1995 BITS article that explains how to use the SSG to evaluate banks. However, the basic question to answer is the same for any potential stock investment. At the current price, does this stock have the potential to double in value over the next 5 years? The SSG is designed to answer questions about two key concerns for shareholders - management and purchase price. The quality of the management is a major consideration. Prospective shareholders need to be assured that high caliber management with a proven track record operates the company. Good management is required to meet shareholder's expectations so that it is important to determine whether or not the company has superior management. Another major consideration is the price at which the stock purchase is made. Ralph Seger is an experienced financial analyst who advocates NAIC investing principles. Mr. Seger writes the Repair Shop column for Better Investing magazine and the NAIC Investor Advisory Service. He often states, "The most common mistake a club makes in buying a stock is paying too much for it." When my club started out a couple of years ago, we developed a set of questions to answer when we inspect the SSG. We concentrated on finding answers to our concerns about purchase price, the quality of management, and whether or not the stock has the potential to double in value over the next five years. We call this list of questions, *The Guide to the SSG *. We will adapt it for bank stocks and call it, *The Guide to the Bank SSG*. Using the guide is quite simple. Place the SSG on the left and *The Guide to the Bank SSG* on the right. Simply answer the questions on the guide by inspecting the SSG. Here's an example of how it works using this workshop's SSG analysis of Synovus. The Guide to the Bank SSG ----------------------------------------------------- There are two main questions to be answered by the SSG: 1) Is this a well-managed company? If the company is not well-managed we do not want to own it at any price. If it is well managed, we proceed to question number two. 2) Does the current price offer a reasonable opportunity to double our money in 5 years with minimal risk? QUALITY OF MANAGEMENT ------------------------------------------------------- Section 1 Visual Analysis -------------------------- Acceptable rates of growth vary by company size and sales. Sales EPS Growth Small company <400 million 12 - 15+% Medium company 400 million to 4 billion 10 - 12% Large company > 4 billion 5 - 10% Synovus Financial's 1997 *Sales* were $869 million. Therefore, it is a *medium* size company. Is the historical rate of SALES growth acceptable? (22.2%) ___X__ Yes _____ No Is the historical rate of EARNINGS growth acceptable? (15.8%) ___X__ Yes _____ No Is the projected rate of SALES growth acceptable? (15.0%) ___X__ Yes _____ No Is the projected rate of EARNINGS growth acceptable (13.7%) ___X__ Yes _____ No Is the growth rate of the Book Value similar to the growth rate of the EPS? (yes) ___X__ Yes _____ No Are the latest Quarter-Over-Quarter growth rates for *Operating Revenues* (OR) and EPS in line with historical norms? OR 13.5% (3/31), 11.8% (12/31) vs. projected 15% growth EPS 14.3% (3/31), 12.5% (12/31)vs. 13.7% projected growth ___X__ Yes ______No Section 2A, 2B, 2C, & 2D ------------------------ Is the trend of 2A, % Pretax Profit to Sales, up? ___X__ Yes _____ No (1997 29.8% vs. 5 year ave. of 28.3%) Is the trend of 2B, % Earned on Invested Cap'l, up? ___X__ Yes _____ No (1997 18.4% vs. 5 year ave. of 17.1) Is the trend of 2C, % Return on Assets up? ___X__ Yes _____ No (1997 1.87% vs. 5 year ave. of 1.6%) Is the trend of 2D, % Net Profit Margin, up? ___X__ Yes _____ No (1997 5.26% vs. 5 year ave. of 5.1%) If you answered "no" to any of the above questions you must justify why you can accept the answer and move on with the analysis. I conclude that Synovus is a well-managed company from the answers above. --------------------------------------------------------- Now, on to question number 2! Does the current price offer a reasonable opportunity to double our money in 5 years with minimal risk? I ask four additional questions from Sections 4 & 5 in order to answer this question. Is the price in the *BUY* zone? _____ Yes __X__ No $35.25 is in the sell range 33.4 - 43.1 Is the Relative Value < 110% _____ Yes __X__ No (190.8%) Is the Upside/Downside ratio 3:1 or greater? _____ Yes __X__ No (0.4:1) Is the Total Return 15% (minimum, compounded) per year or more? _____ Yes __X__ No (5.4%) ---------------------------------------------------------- I conclude that although Synovus Financial is a well managed company, at its current price it does not represent an opportunity to double my money over the next 5 years with minimal risk. If I find a well-managed company such as Synovus Financial (NYSE:SNV) that is overpriced do I forget about it? Absolutely not! The ToolKit computer program makes it possible to easily find a price which answers the last four valuation questions as *Yes.* Therefore, it is possible to determine a purchase price where this well-managed company will have the potential to double in value over the next 5 years with minimal risk. I use the alternate method of zoning (25/50/25) for the Buy, Hold, and Sell zones rather than the default 33/33/33. It helps to determine a fair buy price to use. Toolkit PC users can select the 25/50/25 Zoning by pressing Alt/R together when viewing the back side of the SSG. The command for Mac users is Alt/Option/R. Recalculate the Zoning if you use the paper SSG. See Section 4C, Zoning. 4C Zoning -- $43.00 (high pr.) - $13.90 (Lo pr.) = $29.00 range ****1/3**** of range is $9.70 Change this to: ****1/4**** of range is $7.25 Zoning Choice 33/33/33 25/50/25 Buy $13.90 - $23.6 $13.90 - $21.15 Maybe $23.60 - $33.3 $21.15 - $35.75 Sell/ Reevaluate $33.3 - $43.00 $35.75 - $43.00 Select the price at the top of the 25/50/25 Buy range. If $21.15 is the Current Price, Toolkit shows that the stock has these characteristics: 1) *Buy* zone 2) US/DS 3:1 3) RV 114.8% 4) Total Return 16.7% These are pretty good answers to the previous four questions! Now consider that the 52 week low price was 19 5/8. Indeed, it was possible to purchase Synovus below our Fair Value price within the last year. So.....If we could buy Synovus for $21.15 or less should we? The answer is maybe! In this case, Synovus is a candidate for purchase. That is, it meets all of our criteria for purchase. We want to purchase the best stock in this industry. To achieve this goal, we should find two to four other candidates for purchase in this industry and use the NAIC Stock Comparison Guide to select the best of the bunch. In our last session, number 8, we will look at other information that may help us further understand and evaluate bank stocks. Questions? Comments? Ask them here on the I-Club-List! Gary ***************************************************************** From: glsimms@juno.com (Gary L. Simms) Subject: Bank Workshop #8 Date: Tue, 21 Apr 1998 21:16:23 -0500 Topic: Bank SSG Workshop #8 Date: April 22, 1998 Leader: Gary Simms Topic: Value Line & Banks What other ratios or evaluation of a bank's performance do you use? Here are some thoughts from a Value Line (VL) article: VL Selection & Opinion, page 7450, May 17, 1996 ------------------------------------------------ VL states that the main business of a bank is lending money. Thus, VL measures growth, on a quarterly basis, by the total of loans outstanding. The loans are shown *net* of Loan Loss Provision. That is, the Loan Loss Provision has already been subtracted out of the *gross* loan figure so that the values are called *net*. In addition, banks typically have a lower multiple (P/E Ratio) due to their inherent interest rate sensitivity. Most banks have deposits available as a low cost source of loan funds. However, they will tap the capital market especially when interest rates are low. All in all, the presence of a large debt burden does not necessarily indicate an excessive amount of leverage. It seems that the 33% or less debt rule doesn't apply. Borrowing for a bank from other sources is no different than accepting deposits from its customers. What does matter is its ability to earn income on those borrowed dollars. Debt usually carries a higher interest rate (cost) than do customer's deposits. We measure this in Section 2C, Return on Assets. Loan Loss Provision should grow in line with loans. A provision growing faster than loans is often a sure sign of potential problems. It could be a slowdown in the economy or an aggressive lending strategy. >From the December 5, 1997 Synovus Value Line: Year 97 96 95 94 93 92 91 90 89 88 ------------------------------------------------------------- A. Loans 6450 5970 5430 4249 3770 3493 2767 1961 1566 1300 B. Loan Loss Provision (LLP) 35 31.8 25.8 22.1 23.5 30.5 21.3 12.3 8.6 8.3 ------------------------------------------------------------- % LLP to Loans .54% .53% .48% .52% .62% .87% .77% .62% .54% .64% You can see that the last several years have been pretty steady. I noted a build up in LLP for years '90 to '92. Value Line shows a dark gray area during this time indicating a recession. The build up in LLP during this time would indicate that the bank was preparing for an increase in loan defaults resulting from the recession. Also consider the revenue diversification. It can be monitored by some measure of Net Interest Income and Non-Interest Income. It can show where income comes from and which portion is growing faster. You could also compare values and trends among banks. As we discussed before, Non- Interest Income is less interest rate sensitive so that the higher it is relative to interest income, the less interest rate sensitivity there is for the institution. Year 97 96 95 94 93 92 91 90 89 88 --------------------------------------------------------------- Net Interest Income (NII) 410 374 341 259 229 211 143 129 95 86 Non Interest Income (Non-II) 515 425 340 263 226 195 162 110 92 73 Total (NII + Non-II) 925 799 681 522 455 406 305 239 187 159 % NII/Total 44% 47% 50% 49% 50% 52% 47% 54% 51% 54% % NonII/Total 56% 53% 50% 51% 50% 48% 53% 46% 49% 46% ---------------------------------------------------------------- It appears that Synovus derives more of its total income from sources other than its basic banking business. This decreases Synovus' sensitivity to interest rates and makes earning more stable. You can further evaluate the Net Interest Income by looking at the loan portfolio. Value Line indicates : Real Estate Mortgage 36% Commercial 34% Construction 12% Consumer 18% Mortgages are 36% of loans and the other three categories are 64% of the loans. The other categories are more risky than the mortgages. Value Line predicted that mergers will abound in the future. Banks can often realize a cost savings on the order of 50% of the acquired bank's cost base by eliminating redundancy in operations and facilities (Non Interest Expenses aka NIE.) Investors can monitor a bank's ability to control the NIE via the Overhead Ratio. A low or declining ratio is favorable. Non-Interest Expenses NIE Overhead Ratio = --------------------- = ------------------ Operating Revenues NII + Non II - LLP >From S&P Stock Reports and the 1997 Synovus financial data. Year 97 96 95 94 93 92 91 90 89 88 --------------------------------------------------------------- % Expense/Operating Revenues ? 67 70 69 68 68 72 71 69 69 It looks pretty level to me! ---------------------------------------------------------------------- Here are some other pointers from an article I just received on April 20, 1998 The following ideas are taken from a reprint from the July 1987 Better Investing magazine's article entitled: Following Financial Stocks Using NAIC's Stock Selection Guide by Ralph Seger. The very interesting, well-written, informative article is now available on the Web Site: http://www.better-investing.org/bi/rs-jul87.html Mr Seger also plots *Operating Revenues*, EPS, and PreTax Profit in section one of the front page. In addition, he plots Book Value per Share and Dividends per Share just like we did in the workshop. 5 year Operating Revenues Growth 19.4% 5 year EPS Growth 18.1% 5 year Pre Tax Profit Growth 22.0% 5 year Book Value per Share Growth 13.2% 5 year Dividend per Share growth 20.8% 5 year Payout Ratio Growth 2.3% He then forecasts the future EPS growth rate at the lowest rate. Therefore, Mr. Seger would project future EPS growth at 13.2% so our projection of 13.7% seems on target. Mr. Seger suggests that investors should obtain a copy of the institution's 10K report. He states, "Look for losses on loans sold that are being amortized over the life of the loans. In my opinion, accepted accounting practices matches income (or losses) against revenue in the same time period." He also advises examining Non Performing Assets (loans 90 days past due) as a percentage of total assets. Make sure that the trend is not going up and that it is below the national average of 1.94%. (Keep in mind that was a 1987 figure!) The Synovus financial data gives us: 97 96 95 94 93 92 0.31% 0.42% 0.44% 0.51% 0.65% 1.03% The trend is down and this is good! Although we plotted Book Value per Share on the front of our SSG, the original BITS article did not expound upon the reason *why* we do this. Mr. Seger explains this quite nicely. He states "... the sum of the equity capital and the reserve for loan losses, as a percentage of total assets, is *Primary Capital*. Regulatory authorities require *Primary Capital* of at least 5.5% to 6.0% depending on the types of stock and debt issued." Equity + Loan Loss Reserve ---------------------------- X 100% Total Assets Banks grow by accepting additional deposits from current and/or new customers. This increases the bank's total assets. However, The bank must also grow its Equity and Loan Loss Reserves by an equal percentage in order to maintain the 5.5% to 6.0% *Primary Capital* ratio. Moreover, If the growth rate of the Book Value per Share is less than the growth rate of the EPS, the EPS growth rate eventually is limited. The Synovus financial data reports Tier 1 Capital Ratio: 97 96 95 94 93 92 12.34% 11.68% 11.28% 11.58% 11.68% 10.93% The Capital Ratio trend is *up* and well above the 5.5% to 6.0% guidelines. Mr Seger recommends "Avoid banks that are skirting the edge of permissible limits of primary capital. It's nice to have a cushion in the case of unexpected events." As mentioned above, Mr. Seger also plots the dividends in the visual analysis on page one of the SSG to determine the institution's dividend policy. "This is an expression of the board of directors feeling of future growth. Directors like to play it safe and retain adequate capital for future growth and liquidity." Dividends are the part of earnings that the bank pays out to its shareholders. The rest of the earnings are placed into *Retained Earnings.* *Retained Earnings* are a part of *Equity Capital*. They allow *Total Assets* (new bank deposits) to grow while maintaining the *Primary Capital* ratio. Mr. Seger gauges the bank's expected future growth rate by looking at its dividend policy. A bank that plans to grow its banking business will need to retain more of its earnings in *Equity Capital.* That way it can also increase customer's deposits (Total Equity) while maintaining the *Primary Capital* ratio. If customer's deposits increase, the bank will have more money to loan out. Therefore, the bank will make more profit and ultimately increase earnings per share. This completes the Bank SSG Workshop! I hope you have overcome your hesitation about using the SSG to evaluate financial institutions and will consider adding them to your portfolio to enhance your return and diversification. And just for you die-hard ratio fans (Are you listening Jay Berry & Phil Weiss?) here is a link to an advanced set of ratios which are categorized, listed, and explained at the Synovus Financial site: http://198.78.253.14/snv/glossary.html Questions? Comments? Ask them here on the I-Club-List! Gary ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ From: judithrl@juno.com (Judith Russ Leon) Subject: Re: Bank Workshop #8 To: i-club-list@better-investing.org Date: Wed, 22 Apr 1998 09:27:28 -0400 Gary wrote: >> The following ideas are taken from a reprint from the July 1987 Better Investing magazine's article entitled: Following Financial Stocks Using NAIC's Stock Selection Guide by Ralph Seger. The very interesting, well-written, informative article is now available on the Web Site: http://www.better-investing.org/bi/rs-jul87.html << Many thanks to Larry Warren, NAIC Web Site Assistant Editor, Investment Clubs for his diligent research and success tracking down this article and many others. Many reprints from Better-Investing magazine are available: http://www.better-investing.org/bi/bi_reprints.html Ralph Seger writes the popular *Repair Shop* column in Better Investing magazine. He is also the author of the Investor Advisory Service, a monthly newsletter that analyzes 3 undervalued stocks on completed Stock Selection Guides. Seger gives follow-up reports on the stocks, a review of the economy, and much more. IAS has a good performance record and is an excellent learning tool for SSG analysis. http://www.better-investing.org/store/ias.html Many, many thanks to Gary Simms for leading the Bank SSG Workshop. His hard work has shed a lot of light on the task of analyzing bank stocks. Gary will gladly answer further questions. Judith Russ Leon Special Features Editor, NAIC Web Site JudithRL@juno.com http://www.better-investing.org ************************************************************************