Archive for the ‘Banking’ Category

Annual report in two pieces

April 13, 2011

As an investor relations person, I love this time of year. I enjoy working on clients’ year-end reporting, of course – but it’s also a time when I get to experience IR from the other side, as a member of the audience.

Believe me when I say I am a small shareholder of a few companies (not of any clients, by the way – a separate issue). But when the mail brings an annual report, proxy statement and voting materials, I love it! I dive into those reports, to review companies’ performance and see what they’ve done in the way of presentation. And I vote my proxies, as a believer in letting management know where I stand.

Let me share an example: the annual report in two pieces.

One of my reports came from Shore Bancshares, Inc., a smallish bank holding company based in Maryland and listed on Nasdaq. What made it different was the two pieces: a front section with shareholder letter, financial highlights and marketing stuff like bank locations, and a black & white 10-K. (Results were uninspiring – not the point here.)

Not dramatic or unique … but offering two pieces strikes me as a good solution.

The Shore “marketing” annual report, 8 bound pages all on cover stock, has one page of financial highlights and graphs, a 2-page shareholder letter, a page of locations with maps of the market, board and officer lists and an large photo of the board arranged around antique furniture, and contact info for the banks and insurance offices. The cover says Presence. Stability. Strength. Knowledge. Well, OK.

The 10-K, of course, provides data on competitive position in each of the markets, six and a half pages on risks, revenue and expense breakouts, detail on the assets and issues in the loan portfolio, and so on. It’s red meat for the shareholders.

The marketing version is perfect for a coffee table in a bank branch, another accessory to make customers feel comfortable banking there. The 10-K is not so reassuring for the lay person but useful for investors deciding to buy, hold or sell.

Banks are classic examples of companies whose annual reports have at least two audiences: shareholders or potential investors on the one hand, and customers on the other. Bank customers may see the annual report as an assurance of security for their money, though we might hope the FDIC provides even more solid backing.

The other day I walked into my own bank, in Kansas City, and there was a stack of glossy new 2010 annual reports. I picked one up, of course. But this one, a front section and 10-K bound together, ran 160 pages – really overkill for my needs as a depositor. As a bank customer, if I see assets are substantial and the bank has earnings – and maybe a photo assures me the officers or board members are not motorcycle gang members – I’m OK with leaving my money in that bank.

An investor needs the details. So here’s an idea: If your annual report is serving two different audiences, one approach is to print it in two pieces – send both to shareholders, and give the summary version to customers, vendors and employees.

© 2011 Johnson Strategic Communications Inc.


Pushback on ‘TBTF’

September 15, 2009

Propping up banks that are “too big to fail” with taxpayers’ capital doesn’t improve the US financial system or benefit bank customers – it just concentrates more power in the hands of a few giant institutions – Tom Hoenig, president of the Federal Reserve Bank of Kansas City, argues in this week’s Barron’s.

Noting that the 20 largest US banks already own 70% of the banking system’s assets, Hoenig says combining failing banks into bigger institutions only increases that concentration – in turn, further concentrating risk in a few megabanks.

Congress might consider whether the centralization of banking is a good thing as it takes up regulatory reform this fall. At this point, President Obama’s regulatory proposal seems to accept the “TBTF” mantra that has governed US policy so far – proposing to deal with the concentration of risk in megabanks by incrementally increasing their capital requirements, then taking them over after they fail.

Hoenig, the Federal Open Market Committee’s longest-serving member, doesn’t think TBTF is a healthy policy:

“I’ve seen banks close for making mistakes,” says Hoenig. “I’ve seen other banks too big for the regulators, being supported by the U.S. taxpayer. It’s harmful to the infrastructure, and sends the wrong message, that influence is what really matters. If we fail to address ‘too big to-fail,’ it will only get worse.”

Hoenig warns of “an oligarchy of interest” linking megabanks and the Washington power powers-that-be who use government policy to sustain them. Instead, Hoenig advocates more market discipline, decentralization and competition. Now there’s a radical idea for reform. But will it play in Washington?

Schoolmarm & the three Rs

September 14, 2009

FederalHall-GovtPhotoPresident Obama commemorated today’s anniversary of the collapse of Lehman Brothers and the ensuing financial panic by going to the Wall Street playground and delivering a schoolmarm’s lecture to the boys who’ve been acting up. (News story here, text of speech here.)

Like many a grammar school teacher, Mr. O lectured all the kids without differentiating much between those who actually misbehaved and those who followed the rules. For example, the president said:

I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

The president retold the brief history of the financial crisis since September ’08. Not delving much into root causes or the cyclical nature of markets, he focused on the misdeeds of Wall Street. He reminded us (twice) that the crisis was already raging when his administration walked in the door. In this lecture, he made it clear that the schoolboys have failed to learn the three R’s.

The first “R” word is risk. And risk, we gathered from the president, is bad. At least, it’s bad when Wall Street fails to properly anticipate or control it – he spoke of risky loans, risky behavior, reckless risk. These may be seen more easily in hindsight, perhaps, but the president definitely wants financial markets to take less risk.

The president also invoked responsibility. We heard the second “R” word 20 times in its various forms. Mostly, he chastised the giants of the financial world for not acting responsibly … and urged them to grow up and embrace responsibility.

Most of all, Mr. O lectured on regulation. He said the financial crisis came about, essentially, because of a lack of adequate regulation from Washington. And he promised the errant schoolboys more regulation – much more – and by the end of this year if he and Vice Principal Barney Frank have anything to say about it.

Don’t get me wrong. I’m not defending executives on Wall Street, or elsewhere, who failed to disclose risks to investors, dodged responsibility for their actions, or found ways to exploit loopholes in regulation. The wreckage of shareholder value is producing recriminations – and malefactors deserve what they get, you might say.

Mr. O offered one admonition to corporate leaders that I think is correct:

The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before — and you don’t have to wait for a new law to do that.  You don’t have to wait to use plain language in your dealings with consumers.  You don’t have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote.  You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

Those are actions CEOs and boards of directors could begin taking, and if they demonstrate responsibility maybe the powers in Washington will feel less need for severity in imposing all manner of new regulation. Maybe.

President Obama had all the rhetoric right today at Federal Hall. His speech, of course, was short on detail and long on generalities. He really was speaking to people outside the financial markets, those who deeply resent the bailouts and bonuses and (especially) both happening at the same banks. The symbolism of going to Wall Street to deliver the lecture was the main point today.

Whether the new rules that the financial markets eventually do get will actually improve things – or merely shift risks into different forms and sectors while stifling the flexibility (and discipline) of the free market – we will see in time.

Gag rule for bankers

April 10, 2009

Well, so much for transparency and all that. Now it seems the Federal Reserve is telling 19 of the nation’s largest banks not to disclose how they’ve done on the Obama administration’s vaunted “stress tests” (read AP story or Bloomberg).

With earnings season and conference calls upon us, bank CEOs and CFOs might face questions from investors: Does the government think you’re going to survive – or not? Does a rigorous look by regulators show the bank is healthy, or heading back to the Bailout Window?

Mum’s the word, the Fed decrees. Only the government is allowed to disclose the outcome of the stress tests – which it is supposed to do by the end of April.

As AP tells it, the Fed is protecting weak banks against panic if executives of the healthy institutions let the cat out of the bag:

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

After Wells Fargo surprised investors with good earnings on Thursday, CFO Howard Atkins declined to talk about the government’s tests. “We haven’t commented on regulatory matters and we won’t start now,” Atkins said [to Bloomberg]. “We don’t comment on the process.”

The gag rule seems a little Orwellian coming from folks who champion “transparency.” For those of us brought up on efficient markets, open disclosure and so on, it’s an ethical imperative to tell investors about material information in a timely way.

But, then, if the government is going to control the big banks, the big banks are going to be – well, controlled by the government. Sssshhhhhh!

Mergers, the Death Star & IR

January 27, 2009

Not all mergers are marriages made in heaven, and the ongoing Bank of America-Merrill Lynch saga is providing plenty of support for the skepticism many investors hold toward M&A as a way to create value.

Today in The Wall Street Journal, Merrill ex-CEO John Thain responds to a whispering campaign blaming him for the souring of Bank of America’s ownership of Merrill (“Thain Fires Back at Bank of America”).

Thain was shown the door last week by Ken Lewis, B of A’s CEO. The parting came amid talk by sources around Bank of America that Thain surprised the new owner with Merrill’s $15 billion fourth-quarter loss – and rushed out bonuses to Merrill employees without telling B of A. Not so, Thain is now telling everyone.

But the tidbits are as revealing as the central facts …

  • Merrill Lynch employees apparently refer to Bank of America’s I-banking headquarters in midtown New York as the Death Star, the dark and dangerous fortress of the evil empire in “Star Wars.”
  • On the Bank of America equity trading floor, employees reportedly gave a standing ovation to news of the Merrill chief’s departure.
  • Some other top Merrill execs had already fled the company before Thain’s resignation, contributing to the feeling of – well, rats leaving the ship.
  • Bank of America employees, expecting their bonuses this week, reportedly are envious of Merrill people over what looks like a sweet deal – Merrill handed out its checks before the deal closed on Jan. 1.
  • Thain expresses contrition (some) over spending $1.2 million redecorating his office suite as America’s financial system was unraveling. He now says he’ll pay the firm back for the pricey curtains and fancy antiques. (BTW, Thain’s interior designer has a new gig: decorating the Obamas’ White House residence.)
  • Thain has hired PR man-to-the-stars Ken Sunshine – yes, “Mr. Sunshine” – to help spin the defense against the whispering campaign.

None of this points to the happy family image of a merger. Of course, this was a shotgun wedding negotiated at the worst moment of the financial crisis back in September. M&A under duress is bound to lead to more stress.

Forces much more powerful than investor relations, obviously, led to the B of A-Merrill Lynch acquisition. And that may always be the case. CEOs sign deals; IROs only communicate them.

But investor relations professionals should study the risks of M&A. Especially as consolidation becomes a common solution for hard times, we can counsel CEOs on the challenges they must overcome: Integrating two groups of people is the biggest issue. A clash of cultures must be addressed openly, not glossed over with handshake photo-ops. Mutual suspicion, “Us vs. Them,” and comparisons of compensation run rampant in mergers. You must deal with them proactively.

Investors know that integration – the people side of managing a newly combined business – is critical to success. So IROs should counsel management to think deeply and communicate around these issues in M&A.

As Wall Street restructures, IR reconsiders

November 29, 2008

As bulge-bracket investment banks continue consolidating, restructuring and/or imploding, investor relations professionals should be paying attention to present – and future – relationships.

One approach to the sell side, familiar to small caps that never could attract the Merrill Lynches and JPMorgans of the world, is to seek out specialized sell-side firms known as boutiques. Some observers already are completely writing off big Wall Street firms in favor of smaller, more entrepreneurial i-banks:

The supermarket model of investment banking died a very quick death this past fall. The future of the industry, many believe, will be fashioned after the boutiques – firms that focus on just a few key areas, but do so exceptionally well.

Joshua Hamerman, “A Tree Grows on Wall Street,”
Mergers & Acquisitions, December 2008

I personally think it’s premature to write obituaries on broad-based financial institutions as a business model. As the financial crisis works through the system and recovery eventually takes hold, no doubt the structure of Wall Street will continue to evolve. I expect the big players that emerge from the wreckage in the capital markets to operate under more scrutiny in the future – but to remain, well, the big players.

Certainly, IR people should be paying attention to these structural changes. That includes cultivating specialized boutique firms. Regional investment houses, independent research shops and direct relationships with buy-side investors are other options that should figure into the strategy.

Stewardship for shareholders – our mission

October 1, 2008

One of the saddest news stories of the financial crisis, “Loyalty Pays a Bitter Dividend,” appears today in The Wall Street Journal – a reminder that a public company is a stewardship, a relationship in which the owners entrust assets to a management team for safekeeping, profitable use and growth.

The piece leads off with a widow in her 70s who owned stock in a Mississippi bank for many years. Through a series of mergers, that stake morphed into shares in the mighty Wachovia Corp. Owning stock in a “local” bank remained a point of pride, and the dividends made a very substantial contribution to this widow’s livelihood. Until 2008.

On Monday, Wachovia fell victim to the Wall Street crisis. A forced sale of its banking assets may leave some financial services in the Wachovia name, but not a bank. (Update: At week’s end, Wells Fargo & Co. offered a sweeter deal for Wachovia than Citigroup, which is part of the would-be forced sale.) At this point, the widow’s stock is worth something – but a shadow of what it was. The dividend? Well …

According to the Journal, “Mrs. Pace said her son recently reassured her that if things get really bad, she can move out of her home and into his basement, which has a window. Then she began to cry again.”

The paper comments:

The faith of long-term holders is now being punished. … Few investors realized the danger that accompanied banking’s heady growth. Once-stodgy institutions were dabbling in exotic new securities based on high-risk mortgages, leaving them exposed when the housing bubble collapsed.

The crisis says something to all executives: Our core mission is to be faithful stewards, actively serving those long-term shareholders. To investor relations professionals, this argues that companies should proactively analyze and clearly disclose risks – and changes in risk.

Vikram Pandit & his annual reports

August 14, 2008

The September issue of Portfolio magazine carries an interesting profile on Vikram Pandit. Nine months into his role as CEO of Citigroup, Pandit is the subject of a spate of recent news articles probing whether he is up to the job (or whether Citigroup is too enormously complex to fix).

The electrical engineering grad and PhD in Finance (see bio) “has researched his plan to fix Citigroup with a focus bordering on obsession,” Portfolio says, including reading Citi annual reports that go back to 1956. Explaining his interest in a half-century’s worth of annual reports, Pandit comments:

With any organization that’s been around for 200 years, it has a history and culture. It develops a unique DNA in many ways. To get a clear sense of that picture has been very important to me.

You have to admire the recognition that history and culture matter, even in a gigantic business organization. People working up and down the corporate ranks do have some sense of heritage, “a unique DNA,” however mixed those stories may become through innumerable mergers, de-mergers and changes of strategy. Looking into what made a company great may help lead a CEO in charting the path forward to future greatness.

As an IR practitioner, I found the use of annual reports as a chronicle of corporate DNA intriguing – and challenging. Beyond the numbers, each year’s report to investors is an opportunity to capture and describe the life force of a company, not only the business strategy buy also the personality and human drive, that ultimately produces the financial performance investors are seeking. Long-term investors often are betting on that DNA.

(Endnote: Thanks to’s blog for alerting me to this profile.)