ALEXANDRIA, VA (April 3, 1998) -- Welcome to Touchstone Friday! If you like glossaries, you've come to the right place, because that's what we spent our time on this week. I realized starting out this week that it would be a difficult to talk about the various financial statements of financial services companies without a glossary of terms to which we could refer as needed. The financial statements of financial services companies and banks are not hieroglyphic, but you do need a bit of coaching to get started.
On Monday, we started off the income statement glossary with a look at the basic components of revenues. For a financial services company, revenues are reported as net revenues. Revenues are presented as net of the interest costs necessary to create gross revenues. If I'm being cryptic here, I hope I was less so in Monday's presentation of these income statement items.
On Tuesday, we moved onto another set of glyphs -- provision for loan losses, loan loss reserves, and charge-offs. If you're ready for a good read on a rainy Saturday afternoon, print out this baby! I hope my writing and the material I write about aren't like a rabies shot -- painful, but necessary. These are some of the basics we have to deal with before going forward, though.
Ever hear of a bank's efficiency ratio? We dealt with that on Wednesday. This is a key profitability measure for banks.
And now, for la piece de resistance. On Thursday, we looked at amortization of goodwill expense. Another barnburner for accounting geeks like me, but a snoozer for normal non-mutants. Again, though, a necessary evil we have to deal with. I hope I added some insight on this income statement item that will help your analysis of financial services companies going forward.
By the way, a point of clarification from Thursday. In my haste, I left the crucial word "not" out of yesterday's statement on goodwill's role on the balance sheet. I said "goodwill is an asset than can be used as collateral ," which is incorrect. There's a funny story there, actually, about the implosion of the S&L industry. We'll deal with that in time. The sentence, which has been corrected in the archived version, should read, "Since goodwill is not an asset against which banks can make loans or use as collateral in taking on debt themselves, it is also not a useful balance sheet account when assessing the capital strength of a company."
With that, I bid you a happy weekend and hope the sun is shining wherever you are.