Without a national footprint, dedicated analysts or the ample press attention that the megabanks receive, smaller banks really only get four opportunities a year to tell their story to investors. The quarterly earnings press release is the cornerstone of the relationship between banks and the investment community. It is the key piece of information that helps smaller institutions bridge potential information gaps. But unfortunately, the vast majority of publicly traded, lesser-known banks are woefully behind in preparing adequate disclosures.
Too many of their earnings press releases raise more questions than answers and simply do not provide enough information to properly value a company. Generally speaking, the level of disclosure is typically correlated with the size of a bank, meaning smaller institutions tend to disclose less than their larger counterparts. Because of the more limited disclosures, reduced coverage of smaller banks by stock analysts and often a lack of access to management, the potential investor is often left in the dark.
Examples of sub-optimal disclosures for small banks include truncated financial statements which limit an analyst's ability to achieve greater insight into what's driving the business. More granular disclosures are necessary to address loan and deposit trends. An investor or analyst needs to be able to assess the balance sheet not just at a snapshot in time but as an average over the entire quarter. Balance sheet items need to include corresponding yield trends to identify the direction of the net interest margin, one of the more critical components of a bank's earnings stream.
Smaller banks' disclosures on mortgage banking do not consistently provide sufficient detail on originations, gain-on-sale margins and market color to confidently arrive at a near-term outlook for the mortgage sector. Simply providing summary level net chargeoff and nonperforming loan balances is not enough to gauge the health of the individual portfolios, particularly during inflection periods where identifying credit trends is the most critical.
The effect of transparency on stock value speaks for itself. Institutional investors prefer to own banks that are transparent, and tend to shy away from buying shares of banks that are more of a mystery. And the stocks of banks with greater institutional ownership trade higher. When analyzing the more than 950 publicly traded banks with under $10 billion in assets, KBW found a direct linkage between valuation and shareholder base. More specifically, banks with over 50% ownership comprised of institutional investors currently trade at over 1.4 times of tangible book value, or a 35% premium. By comparison, those with a minority institutional ownership base trade at less than 1.1 times.
So what makes a good earnings press release? At bare minimum, banks should provide a healthy mix of text and tables. Provide a brief, but substantive review of major underlying issues and driving factors. This should include information on things like net interest income and margin, loan and deposit trends, asset quality, and capital. Commentary by the chief executive officer is especially helpful as it provides analysts and investors with a better appreciation of current trends and the fundamental outlook for the company and industry as a whole. Financial tables are necessary to illustrate income statement, average balance sheet, capital position and asset quality for the current, prior and year-ago quarters.
There are a number of small and mid-cap banks that set the gold standard for public disclosure. While many of these companies are larger than $10 billion in assets, they can serve as role model for smaller institutions. They include Ameris Bancorp ($5.6 billion), Associated Bank ($27.7 billion), Bank of Hawaii ($15.4 billion), Independent Bank Corp. of Michigan ($2.4 billion), Old National Bancorp ($12.0 billion), Sterling Bancorp ($11.9 billion), Trustmark Corp. ($12.7 billion) and Western Alliance (14.3 billion).
Even banks with sufficient earnings releases should go further. The quarterly reports should include data for the previous five quarters, including subportfolio granularity and how the institution's data compared with regional trends. The discussion of recent quarters could also include mortgage banking activity and a detailed explanation of how acquisitions filter through the financial statements, especially since these are among the more volatile revenue sources for banks. Institutions could also provide the math behind calculating ratios of tangible common equity to tangible assets, in order to better assess the capital base. Institutions should provide data on net charge-offs and nonperforming loans, by portfolio. Regional data, earnings-per-share guidance and other factors can help align expectations with the company outlook.
Knowledge is power. Those willing to put forth the effort to narrow the information gap that exists with the investment community will reap the benefits of greater transparency.
Thomas Michaud is the chief executive of Keefe, Bruyette & Woods. Christopher McGratty is a managing director of equity research for KBW.