Presentation date: March 21, 2013Presentation date: March 21, 2013

Financial Statement Review Points When Financial Statement Review Points When Considering Acceptance of an Unsecured Considering Acceptance of an Unsecured

Customer IndemnityCustomer IndemnitySal SammartinoSal Sammartino

VPVP--BankingBankingStewart Title Guaranty CompanyStewart Title Guaranty Company

INDEMNITIES AND INDEMNITIES AND READING FINANCIAL READING FINANCIAL

STATEMENTSSTATEMENTS

For For Escrow OfficerEscrow Officer Credit please email Credit please email password, attendees names, and TDI password, attendees names, and TDI License numbers (if you have one) to License numbers (if you have one) to ken.wrider@stewart.comken.wrider@stewart.com for certificates for certificates (please do this as soon as possible and (please do this as soon as possible and make sure the correct spelling of the make sure the correct spelling of the name(sname(s) ) is included as to how it should appear on the is included as to how it should appear on the certificate). certificate). AttorneysAttorneys ee--mail bar card mail bar card number to Ken Wrider for CLE credit.number to Ken Wrider for CLE credit.Send to your training administrator ifSend to your training administrator ifapplicable.applicable.

ADDITIONAL HOUSEKEEPING INFORMATIONADDITIONAL HOUSEKEEPING INFORMATION

Because of recent opinions expressed by the Texas Because of recent opinions expressed by the Texas Insurance Department concerning rebates, legal credit is Insurance Department concerning rebates, legal credit is available only to attorneys who own title agencies which available only to attorneys who own title agencies which are Stewart Title Guaranty Agents, are employed by a are Stewart Title Guaranty Agents, are employed by a title insurance agent licensed with Stewart Title title insurance agent licensed with Stewart Title Guaranty, or a Stewart entity.Guaranty, or a Stewart entity. Fee attorneys who have Fee attorneys who have an Escrow Officer license through a Stewart Title Agent an Escrow Officer license through a Stewart Title Agent or entity may also obtain CLE credit. We welcome any or entity may also obtain CLE credit. We welcome any other lawyers to listen, but cannot provide continuing other lawyers to listen, but cannot provide continuing education credit to you.education credit to you. If you are claiming legal credit If you are claiming legal credit for this web conference, please provide in your email to for this web conference, please provide in your email to Ken Wrider which category you are in.Ken Wrider which category you are in. We regret any We regret any inconvenience but we must take reasonable steps to inconvenience but we must take reasonable steps to protect us and you from enforcement actions by the protect us and you from enforcement actions by the Texas Insurance Department.Texas Insurance Department.

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Financial Statement Review Points When Financial Statement Review Points When Considering Acceptance of an Unsecured Considering Acceptance of an Unsecured

Customer IndemnityCustomer Indemnity

Sal SammartinoSal SammartinoVPVP--BankingBanking

Stewart Title Guaranty CompanyStewart Title Guaranty Company

INDEMNITIES AND INDEMNITIES AND READING FINANCIAL READING FINANCIAL

STATEMENTSSTATEMENTS

VOCABULARY WORD FOR THE DAYVOCABULARY WORD FOR THE DAY

LIQUIDITY:LIQUIDITY:Liquidity is when you look at Liquidity is when you look at your retirement funds and wet your retirement funds and wet your pants!your pants!

AGENDAAGENDAReview scope / source documents Review scope / source documents

Discussion of the financial statement package Discussion of the financial statement package use in evaluating credit quality of indemnity use in evaluating credit quality of indemnity partyparty

A few handy ratiosA few handy ratios

Examples of past considerations Examples of past considerations –– good and good and badbad

Open discussion / questions. Due to the nature Open discussion / questions. Due to the nature of a recorded web conference, all questions will of a recorded web conference, all questions will need to be sent to Fred Schraub via the chat need to be sent to Fred Schraub via the chat feature.feature.

SCOPE / REVIEWSCOPE / REVIEW

Quantify liability and tenor of exposureQuantify liability and tenor of exposureKnow your customerKnow your customer–– Identify party providing the indemnityIdentify party providing the indemnity

Focus is on Short Term liquidity Focus is on Short Term liquidity Source DocsSource Docs–– Public Debt ratings if availablePublic Debt ratings if available–– Audited Financial StatementsAudited Financial Statements–– CustomerCustomer’’s web pages web page–– If public If public –– 10K/10Q10K/10Q–– Direct discussions with customerDirect discussions with customer

FINANCIAL STATEMENT REVIEWFINANCIAL STATEMENT REVIEW

Review period Review period -- most recent 2 most recent 2 –– 3 years 3 years Trends are importantTrends are importantHow are they doing as compared to their How are they doing as compared to their industry as a whole?industry as a whole?GAAP is the accepted standardGAAP is the accepted standardBal Sheet, Inc Stmt, Cash Flow, Shareholders Bal Sheet, Inc Stmt, Cash Flow, Shareholders Equity Equity

FINANCIAL STATEMENT PACKAGEFINANCIAL STATEMENT PACKAGE

Balance Sheet Balance Sheet –– Snapshot of financial condition at a point in time. Indicates iSnapshot of financial condition at a point in time. Indicates if f

sufficient assets are available to meet current and future demansufficient assets are available to meet current and future demands.ds.–– Areas of focus:Areas of focus:

Current AssetsCurrent Assets–– Fund the dayFund the day--toto--day operations day operations –– First resource to meet indemnity if called First resource to meet indemnity if called

Noncurrent AssetsNoncurrent Assets–– Important but difficult to determine liquidated value Important but difficult to determine liquidated value –– Should be evaluated in combination with LT liabilities Should be evaluated in combination with LT liabilities

OwnerOwner’’s Equitys Equity–– OwnerOwner’’s stake in company representing value of company s stake in company representing value of company

after liabilities it owes to outsiders. after liabilities it owes to outsiders. –– Important when considering accepting an indemnity Important when considering accepting an indemnity –– want want

sufficient equity to support any indemnity given. sufficient equity to support any indemnity given.

FINANCIAL STATEMENT PACKAGEFINANCIAL STATEMENT PACKAGE(continued)(continued)

Income Statement Income Statement –– Results of business operations for a particular qtr or year. Results of business operations for a particular qtr or year.

–– Trends are key in evaluating Trends are key in evaluating -- positive or negativepositive or negative–– Results can be viewed in support or weaken balance sheet positioResults can be viewed in support or weaken balance sheet position n

Statement of Cash Flows Statement of Cash Flows –– Shows how much cash a company is making as it works through Shows how much cash a company is making as it works through

operations, makes investments and borrows money. operations, makes investments and borrows money. –– If bottom line is positive company is If bottom line is positive company is ““cash Flow Positivecash Flow Positive”” –– Good Good

Thing!Thing!–– Important to identify source of cash inflows. Rather have from Important to identify source of cash inflows. Rather have from

operations vs. financingoperations vs. financing–– Cash Flow from Operations is arguably the most important line oCash Flow from Operations is arguably the most important line on n

this statement this statement Statement of Changes in ShareholdersStatement of Changes in Shareholders’’ equity equity –– Reconciles the activity in the equity section of the balance sheReconciles the activity in the equity section of the balance sheet from et from

year to year. year to year. Financial Statement Footnotes Financial Statement Footnotes –– Explanatory / supplemental notes to the financial statementsExplanatory / supplemental notes to the financial statements

A FEW HANDY LIQUIDITYA FEW HANDY LIQUIDITYFOCUSED FINANCIAL RATIOSFOCUSED FINANCIAL RATIOS

Current Ratio Current Ratio –– Measure of a companyMeasure of a company’’s ability to use current assets to pay off s ability to use current assets to pay off

current liabilities.current liabilities.–– Current Ratio = Current Assets / Current Liabilities Current Ratio = Current Assets / Current Liabilities –– Looking for a ratio of 1.5 or higherLooking for a ratio of 1.5 or higher

Quick Ratio Quick Ratio –– Also a measure of a companyAlso a measure of a company’’s ability to cover ST liabilities. s ability to cover ST liabilities.

Focuses on liquidity of current assets by removing inventories Focuses on liquidity of current assets by removing inventories from computation since they are often sold at deep discounts in from computation since they are often sold at deep discounts in liquidation.liquidation.

–– Quick Ratio = (Current Assets Quick Ratio = (Current Assets –– Inventories) / Current Liabilities Inventories) / Current Liabilities –– Looking for a ratio in excess of 1.0 Looking for a ratio in excess of 1.0

LIQUIDITY RATIOSLIQUIDITY RATIOS(continued)(continued)

Working Capital Working Capital –– Represents net amount a company has to fund its operations Represents net amount a company has to fund its operations

and meet an indemnity obligation to us. and meet an indemnity obligation to us. Working Capital = Current Assets Working Capital = Current Assets –– Current Liabilities Current Liabilities

–– Looking for a large positive numberLooking for a large positive number

Debt to Equity Ratio Debt to Equity Ratio –– A measure of a companyA measure of a company’’s financial leverage. s financial leverage.

Debt/Equity Ratio = Total Liabilities / Shareholders Equity Debt/Equity Ratio = Total Liabilities / Shareholders Equity –– Dependent upon industry Dependent upon industry

–– Capital intensive trend above 2Capital intensive trend above 2–– Personal computer companies trend under 0.5 Personal computer companies trend under 0.5

LIVE EXAMPLESLIVE EXAMPLES

Acceptable Acceptable –– see attached PDFsee attached PDFQuestionable Questionable –– see attached PDFsee attached PDF

Questions / CommentsQuestions / Comments

THANK YOU!For Escrow Officer Credit please email password, attendees names, and TDI License number (if you have one) to ken.wrider@stewart.com for the certificate (please do this as soon as possible and make sure the e-mail includes the name(s) as it should appear on the certificate). Please be aware that due to TDI's strict policies on issuing credit, you must pay close attention to the password given at the end of the webinar as we are unable to give it out once the presentation has been terminated off of Webex.Attorneys email bar card number to Ken Wrider for CLE creditNext Texas TIPS Online April 18, 2013, “Surveys, Legal Description and Platting” by Bill Pratt.Questions/Comments? Email fred.schraub@stewart.comVisit www.stewarttexas.com for presentation materials within 5 business days of the webinar.