This episode of FinPod covers understanding bank financial statements and analysis. We highlight the unique aspects of bank financial statements compared to typical company statements, plus the significance of the balance sheet and the importance of understanding interest income and expenses.

You’ll learn about specific ratio calculations used in banking and how regulatory capital requirements, like Basel III guidelines, impact banks. The episode also discusses the practical applications of using real-world data for hands-on learning.

Listen in for practical tips on mastering bank financial analysis!

Transcript

Ryan (00:14)
Hi and welcome to this episode of What’s New at CFI. My name’s Ryan Spendelow, SVP here at CFI and today I’m joined by my colleague Jeff Schmidt. Hey Jeff, how are you doing today?

Jeff Schmidt (00:27)
How are you? I’m glad to be here personally.

Ryan (00:31)
Good, good. I’m doing really well. Thanks for ever so much. So, Jeff, what course are we going to be talking about today?

Jeff Schmidt (00:40)
We recently updated the course reading financial statements. It’s brand new, hot off the press, just came out within the past month.

Ryan (00:50)
Brilliant. And Jeff, why did we decide to update or refresh this course reading financial statements?

Jeff Schmidt (00:58)
A couple of reasons. The most important reason is we wanted to make it really hands-on, really, really, really practical. So as part of the course, we actually go through three different company filings. We do two US GAAP, and we even do a company that uses international financial reporting standards. And all of our exercises and the quiz at the end is all based on real-world companies. So it’s not

fictitious, it’s not made up, so you have to deal with a lot of the real-world nuances that you find when companies report.

Ryan (01:37)
Brilliant. So very, very practical. And it sounds like the kind of topic that lots of different types of CFI learners would be interested in. Quite wide applicability. Okay.

Jeff Schmidt (01:46)
Yes. Yep. We go through a lot of tips and tricks. So even if you are a practitioner of reading financial statements or if you’re brand new to it, we’ve got a lot of tips and tricks to go through, a lot of shortcuts to memorize to help people navigate through financial statements.

Ryan (02:05)
Okay, all right, here’s a question for you then, Jeff. What are some of those key tips for learners that are particularly new to reading financial statements?

Jeff Schmidt (02:07)
Mm-hmm.

The first thing I have to say is don’t be intimidated. I’m based in the US and I haven’t read every company filing of all companies in the US, but the shortest 10K, the 10K is the annual report in the United States. The shortest 10K I’ve ever seen is 90 pages, which is still pretty long.

Ryan (02:35)
Sure.

Jeff Schmidt (02:36)
And the longest I’ve seen is probably in the 400 or 500-page area. And those are usually banks, like JP Morgan Chase. They have huge filings. And then if you go to Europe, for instance, and they file their annual report, those can be in these several hundred pages. So first thing, don’t be intimidated. It’s very easy when you

even a 90-page 10K, it’s very easy to get intimidated, get bogged down, get stressed. So don’t do that. But here’s some other kind of key tips. so read through the business overview first.

Now, this assumes that you’re relatively new to the company and reading financial statements. That business overview is very, very crucial. Now if you already happen to understand the industry or the business really well, maybe just give it a glance. Then move on to the management discussion and analysis or the MD&A section. And this is an opportunity for management to discuss

its past fiscal year, it compares it to previous years, it explains why one number might be up, or one number might be lower. That’s absolutely crucial to read, the management discussion and analysis. Read those before even going to the financial statements. And as always with any skill, repetition is always key. So, even if it’s just one company,

You pick one company, read several years, whether they’re 10K or their annual report, and you’ll see a lot of similarities. You’ll see that they’re all basically laid out in the same order, especially in the US, when a specific section is required to have the MD&A.

Ryan (04:31)
Well, Jeff, those are some really, really good tips there. So, let’s say that I’m a learner, and I want to start reading financial statements and filings. Is there a good way that you can suggest that I actually start doing

Jeff Schmidt (04:46)
Yes, what I would recommend is pick a company that you are interested in and you know something about. You don’t have to be an expert. No one’s expecting you to be a world-class analyst. Just pick a company that you know. You know their products, or Apple. One of the financial statements that we go through in the course is Starbucks. Straightforward business model.

Millions of people go to Starbucks every day. Just pick a company that’s relatively straightforward, relatively easy to understand, and something that you’re interested in. Because if you’re interested in something…

you’re going to be extra diligent when you go through the financial statements. Don’t pick something obscure like a regulated utility or oil and gas or something that no one really understands unless you have some kind of specialized industry knowledge. So just pick a company, download its filings and just dive in. And again, it can get a little repetitive, but you will build up that muscle memory

really, really, really quickly. And you’ll start being able to navigate and you’ll see the shortcuts in our course and be like, I’m just gonna quickly jump to this section. Boom, there you are.

Ryan (06:11)
Awesome. Hey Jeff, that sounds like some really, really good advice there. I guess I’ve got a question. My last question for you actually is, is there any sections that’s part of a company’s financial statements that’s often overlooked that you can maybe recommend that people actually spend some time reviewing?

Jeff Schmidt (06:28)
There’s there’s a few So in the u .s. Just because I’m just more familiar with reading us gap 10 K’s and 10 Q’s There’s always a huge section on risk factors. So for instance in Starbucks Managing their brand is very important the Starbucks brand is their business effectively.

They also discuss things like foodborne illnesses, right? If somebody gets sick due to some E. coli outbreak or something that could negatively impact the business. there’s a litany of risk factors and that’s often overlooked, but it’s really important and it helps you understand the business and some of the pressures the business faces that you have to think about.

Another one, the notes to the financial statements. So, the financial statements are very, very important, but the notes are almost just as important as these statements themselves. You go through the notes, you can find a lot more details, types of debt. If you look at a balance sheet, you see one line out of debt. But if you go to the debt footnote, you’ll see…

all of the debt tranches a company might have and you can think about, okay, do they have enough money to pay off this debt? Maybe it’s due in two years. Maybe they should think about refinancing it. So, the footnotes are extremely important. Again, almost as important as the financial statements themselves. And the last, and this one is a little advanced.

I’m only saying this after you feel really comfortable with financial statements. In annual reports, especially non-US annual reports, there’s usually a significant discussion on management compensation. And what you can do, you can go through there and you can…

think critically about how management is compensated. If they’re compensated, for instance, just on revenue growth, revenue growth is easy. Just go buy a bunch of companies. engage in lot of mergers and acquisitions, revenue growth will go up. But that doesn’t mean it actually adds value to the company. you can kind of think, if you look at the management compensation plan, you start to think critically, what is management rewarded on and how might that

their decision-making as they manage the business.

Ryan (09:11)
Brilliant. Jeff, those are some fantastic insights for our listeners. No, thank you. All right then. So that’s our newly refreshed course, our updated course called Reading Financial Statements. Jeff, thanks ever so much for taking through that new course refresh and thanks for answering my questions. I really appreciate it. Hopefully, we’ll have you back soon for another What’s New at CFI podcast.

Jeff Schmidt (09:14)
Thanks.

Great. Happy to be here.

Ryan (09:40)
Brilliant. All right, everybody. Hey, thanks for tuning in, everybody, and we’ll see you next time. Take care. Bye.