Bank and Insurance Investor Relations Best Practices: Building an Effective Earnings Package

Bank and Insurance Investor
Relations Best Practices:
Building an Effective Earnings
Package
SNL Financial Webinar
August 16, 2012

Design by McMIM Design Studio (www.mcmim.com)

What is Required?

Ronald H. Janis
Day Pitney LLP


Background

• Earnings calls before the Internet and EDGAR:
– Murky History – Earnings Releases Went Out by FAX List or By
Hand.
– Only buy-side and sell-side analysts were on the call.
– No SEC “requirements” but analysts receiving material non-public
information may be subject to 10b-5 liability if they trade.
– Listing agreements require public disclosure of material
information by press release.
• Requirements change with the SEC adoption of
Regulation FD on August 15, 2000.
• Internet availability of information pushes the adoption
of Regulation FD and continues to push further changes.
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Regulation FD (Fair Disclosure)

• For the quarterly press release and earnings conference
call:
– News Release announcing the time and call-in number for
Earnings Conference Call must be sent out by news release and
widely dispersed, usually several weeks in advance.
– Earnings news release needs to be widely disseminated (i.e., sent
out on PR newswire), usually after market closes or an hour
before market opens.
– Form 8-K with the earnings release must be filed on EDGAR
BEFORE conference call. If no conference call, filed within four
business days.
– Conference call must be available to everyone.
– No requirement that everyone be allowed questions.

Regulation FD – Related Compliance Issues

• All material non-public information about earnings should be
contained in the Earnings Release, although additional
information will inevitably be heard in the conference call.
• The Earnings Release and the conference call cannot include
material misstatements or omit material information.
• Follow-up one-on-one calls cannot discuss material non-
public information not disclosed in the release or the call.
• Initial Press Release must disclose play-back locations for
recorded calls. Often on company website. But make
playback available for a limited time (about one month on
the website is sufficient).
• Audit Committee should pre-approve earnings release and
any guidance.


Forward Looking Statements –
Private Securities Reform Act of 1995
• Forward looking statements should be made in
compliance with Securities Reform Act Safe Harbor.
Include list of material factors that may cause actual
results to differ from the forward looking statements. In
Earnings Release – list factors. On conference call may
refer to earnings release.
• Not boilerplate list.
• This is a safe harbor to protect forward looking
statements. It does not provide protection against
liability for misstating known facts.
• If providing guidance, must have reasonable basis for
the guidance.


Non-GAAP Information

• Regulation G – Non-GAAP Financial Information:
– Applies to any public disclosure of Non-GAAP Information in press
release, webcast or orally.
– Requires:
• Presentation of most directly comparable GAAP measure.
• A reconciliation with GAAP.
– Cannot be misleading.
– Does not apply to business combinations if information on filed SEC
forms for business combinations.
– For oral presentations reconciliation can be on company website.
• SEC Filings – Item 10(e) Non-GAAP Financial Information:
– Different rule applies to SEC filings – Regulation S-K, Item 10(e).
– More requirements and limitations; applies to 8-K, 10-Q, 10-K, S-1, S-
3.
– Requires including management’s reasons why Non-GAAP is useful
to investors.

Requirements for the 10-Q or 10-K

• Cannot include material misstatements or material
omissions.
• Requires a rule check to make sure every item is
covered as required by the SEC rules and the
Accounting Pronouncements.
• Among other hot buttons for the SEC:
– Requires description of "known trends". Known trends are
material events and uncertainties that would cause the reported
information not to be necessarily indicative of future operating
results.
– Requires disclosure of material pending legal proceedings.


SOX Requires CFO and CEO Certification of
Disclosures in 10-Q and 10-K
• CEO and CFO Responsible for Disclosure in 10-Q
and 10-K.
• Disclosure Committees Recommended to Assure Proper
Disclosure Controls.
• Who is responsible for disclosure in the Earnings
Releases?
• SONY CORPORATION and SUMIO SANO, SEC Administrative
Proceeding (8/5/1998).
• SEC Sanctions Sony’s General Manager of Investor Relations and
requires that CFO be “primarily responsible for ensuring that Sony’s
public financial disclosures…are accurate.”


Most Recent Guidance from SEC on Use of
Company Website
• SEC Release in 2008 “Commission Guidance on the Use
of Company Websites”.
• “Company’s website can be a valuable channel of
distribution for information…”
• “For some companies in certain circumstances” posting
on the website may satisfy Regulation FD. (Can you
count on this?)
• Investors can access older postings on website and they
are not “republished” if dated and separated from
current postings.
• SEC encourages use of Company website.

Regulatory Filing Deadlines/Impact Earnings
Release Dates
• SEC Filing Deadlines for 10-Qs range from 40 to 45 days after
the close of the quarter and for 10Ks from 60 to 90 days after
the close of the year.
• Bank Call Reports are due 30 days after the close of the
quarter and are immediately available on the FDIC website.
FRY-9s are due 40 days after the close and are available
under a FOI Act request.
• Quarterly insurance company filings are due on May, August
and November 15; annual insurance company filings are due
March 1. These filings are available on the NAIC website.
• Pointer – Earnings Releases should go out before the
regulatory filings are available.


Legal Risks in Earnings Release and
Conference Call
• A Good Example of the Risks - BankAtlantic cases.
• State-Boston Retirement System v. BankAtlantic Bancorp,
Inc., et al. (7/23/2012).
– Class Action against BankAtlantic.
– Based upon material omissions by the CFO and CEO in
conference calls in November 2006 and April 2007 concerning a
deterioration in Florida commercial real estate loans.


Legal Risks in Earnings Release and
Conference Calls
– Also claimed the CEO of the Bank (who is the son of Alan Levan
(the BHC CEO)) misled investors at an Investor Conference.
– Omissions involved the failures to disclose certain types of builder
loans that were kept on accrual status.
– A jury holds BankAtlantic liable.
– The jury verdict is reversed in 2012 by the Federal Appeals Court
because of no proof of damages.
• SEC v. BankAtlantic Bancorp and Alan Levan (1/18/12).
– In January 2012, the SEC brings an administrative case against
both BankAtlantic and its CEO (Alan Levan) for the same
misstatements in earnings conference calls.
– May 29, 2012, the Federal District Court in Miami refuses to
dismiss the SEC claims.

Why do more?

Jeff Schoenborn
Casteel Schoenborn


Why do more

Possible objectives for quarterly communications above
and beyond required disclosure
• Provide Reg FD “air cover”
• Disclosure ahead of insider trading
• Showcase management quality
• Offer context
• Be persuasive
• Acknowledge challenges
• Introduce your stock and story
• Address non-investor audiences
• Facilitate following and coverage

What is common practice

• National Investor Relations Institute (NIRI) survey of
public company quarterly conference call practices
– NIRI “Earnings Call Practices Survey,” April 2011
• Across industries
• Primarily IRO respondents
• www.NIRI.org



According to respondents answers to NIRI survey about
their companies‟ conference call practices
• 98% hold quarterly earnings calls

National Investor Relations Institute “Earnings Call Practices Survey,” www.niri.org/Main-Menu-
Category/resource/publications/Executive-Alert/NIRI-Survey-Reveals-the-Latest-Earnings-Call-
Practices-4411.aspx



© NIRI 2011

Practices-4411.aspx



According to respondents answers to NIRI survey about
their companies‟ conference call practices
• 98% hold quarterly earnings calls
• 75% rehearse, with 63% doing so > 1 hour
• 80% screen who may ask questions
• 76% script answers to potential questions

While not addressed in the survey
• Prepared remarks for intro, commentary and closing
Practices-4411.aspx



© NIRI 2011

Practices-4411.aspx


What is best practice?

Heather Wietzel
InsuranceIR

Design by McMIM Design Studio Studio (www.mcmim.com)
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What is best practice -- Differentiation

• Articulate the strategy (not the “accomplishments”)
• Be wary of “institutional memory”
– Small group of investors look at companies in specific sectors
– Event-driven concerns
– Disclosure “legacy” (of your company and of your peers)
• Be proactive to meet needs of other audiences

2

Reputation risk – Integrated communications

• Investors
– Focus of today’s presentation
– Time and data overload
• “Tiered” materials offer important advantages
– Shareholders – lost audience, often discouraged by complexity of materials
for professional investors
– Print and online media – challenged by time, focused on “interests of
readers”
• Unintended takeaways suggest value in additional outreach
– Rating agencies – interpret financial information through their own
perspective, react poorly to surprises
– Employees – also interpret financial information through their own
perspectives of financial and job security
– Other audiences might include agents, depositors, borrowers, policyholders,
vendors, local community – what is their perspective and where might it
take them

3

What is best practice -- Philosophy

• Enhance transparency and credibility
– Banking and insurance perceived as difficult to follow
– Focus on long-term valuation creation not short-term stock price movement
– Attract investors interested in your long-term value proposition (view price
weakness as buying opportunity)
– Quarterly dialog is an opportunity to enhance relationships with investors
• Balance the look back with a look forward
– View interim results as an update on progress toward benchmarks
– Focus on the “real news” (be realistic about investor reactions)
• Offer guidance appropriate for your company and your industry
– Consider pros and cons of short-term EPS and ROE point estimates
– Evaluate disclosure requirement of “known future trends, events, etc.”
– Understand value of long-term performance targets that investors consider
meaningful
– Place long-term targets in context of strategic plan

4

What is best practice -- Implementation

• Be consistent
– Stick to the same schedule
– Offer the same data and information
– Have management available on the same terms (to the extent
possible)
• Make your processes “easy” on your audience
(push vs. fetch)
– Call invite and registration process
– Material availability and formats
– And the mundane, e.g., file naming
• Social media
– Let marketing and human resources lead the way for your
organization

What is best practice -- Preparation

• Leverage disclosure committee
– Gather insights on business drivers from throughout the organization
– Allow corporate business leaders to react to information across disciplines
• Consider separate “planning meetings”
– Bring senior spokespeople together with relevant communications teams
BEFORE pen goes to paper
– Provides opportunity to develop appropriate messages, ensure consistency
across documents and conduct devil’s advocate Q&A practice
• Establish formal review process
– Create ownership by relevant contributors
• Rehearse!
• Remember that “progress” often will make the IR job simpler
– When appropriate, change what you do!
– Seek outside counsel and/or participate in professional development
– Use “best in class” vendor tools


What is best practice – Content

• Analysis
– Release
– 10-K and 10-Qs
– Annual and quarterly reports
– Social media items (e.g., tweets)
– Special purpose materials for defined audiences
• Data
– Financial supplement
– Call presentation


Earnings releases for all audiences

• Echoing the MD&A • Extrapolate from SEC guidance:
• Tiering of information from simple to “Where the consolidated financial
complex statements reveal material changes
from year to year in one or more line
• Summary financial statements for items, the causes for the changes shall
quick reference be described to the extent necessary to
• Allows focus on business strategy an understanding of the registrant„s
businesses as a whole; Provided,
• Combines with supplement and call
however, that if the causes for a
presentation to remove burden of change in one line item also relate to
“numbers” from conference call other line items, no repetition is required
and a line-by-line analysis of the
financial statements as a whole is not
required or generally appropriate.
Registrants need not recite the amounts
of changes from year to year which are
readily computable from the financial
statements. The discussion shall not
merely repeat numerical data
contained in the consolidated financial
statements.”

Earnings release example: KeyCorp

See Travelers or
Arch Capital for
insurance
company
examples


Web presentation of quarterly earnings package

• Quick links to all GAAP materials Example: The Hanover
• Formatted appropriately for user
Group
convenience
– Supplement in excel
• Better practices
– Name files for easy future
reference
– Statutory filings included


More best practices

• Know what investors are measuring for your company
and your peer group
– Focus on “ease of use”
• Opportunity to present data in tabular form
(or graphs/charts)
– Put the same measurements in the same place every quarter
– Offer sequential look at data presented year-over-year in
release and 10-K/10-Qs
– Consider “echoing” the data format of larger peer companies
• Allows you to “tell story”
• Allows you to avoid reading numbers and writing
unwieldy paragraphs


Financial data example: Arch Capital


Earnings call presentation example: Associated


What is over the top

• Anything a company cannot do But it is okay to consider new ideas
well such as
• Anything a company cannot do • Social media
every quarter • Quarterly management videos
• Anything that is “excessive” for the • Video conference calls
company’s relative market • Internal town hall meetings
position or business complexity


Procedural gaffes = another reputation risk

• Leaked news (intentional or error in document handling)
• Inaccurate data
• Management stumble on call
• Various technological glitches


Bank and Insurance Company
Specifics

Insurance Companies


Special considerations for insurance companies

• Key differentiators
• Complex data
– GAAP and statutory
– Preparation
– Focus investors on value-added information by using the
supplement and/or call presentation effectively
• Guidance
• Look ahead to the third quarter


Favorably differentiating your insurance company

• Make your long-term reputation the priority
– Transparency and credibility
• Business strategy
– Where we are going is much more important than how we got
to today
• Investors need to understand the quality of your reserves
and investments, each quarter
• Capital management
– Explaining management’s priorities for excess capital
– Discuss in business context (rating agency and regulatory
concerns)
• Insurance investors are polite


Complex data
Discuss the measures that drive the business But remember what drives value
• All insurance • Operating return on equity
– Operating income – Underwriting performance
– Relevant statutory details, e.g., surplus, RBC – Investment performance
ratios – Other/fee income
– Investment portfolio, e.g., yield, duration – Tax rate
• Property casualty insurance • Book value expansion
– Growth sources and opportunities – Return on equity
– Accident year vs. calendar year/reserve data – Growth in invested assets
– Catastrophe loss data
– Operating metrics
• Rates
• Retention
• Life insurance
– Growth sources and opportunities
– DAC and other “unlocking”
– Spreads
– Operating metrics
• Mortality
• Morbidity


Insurance companies and guidance

• Insurance investor views of point EPS guidance
– Sell-side – EPS estimates are their job (their differentiator)
– Buy-side – Useful context, not given great credence
• More useful
– Business drivers, in ranges, such as premium growth, combined
ratio, investment income growth, book value growth
– External drivers, such as target market economic data, industry
data for key sectors served
– Qualitative commentary about relative strength or weakness
• Potentially most useful
– Target operating ROE model linked to business strategies


Looking ahead to the third quarter

• Property casualty
– Economy and trends in rate increases
– Catastrophe events and related losses
– Reserve releases (how much is left) and loss cost trends
– Interest rates and attainable ROEs in sustained low rate environment
• Life insurance
– Economy and new business development
– Stat and GAAP reserving and relationship to:
• Lower future profits (due to lower NII)
• Changing discount rates (lower absolute interest rates)
– Spread compression
– Attainable ROEs in sustained low rate environment
• “Are you a winner?”
– Investors seem primed to begin to differentiate


Bank and Insurance Company
Specifics

Banks


Special Considerations for Banks

• Differentiation

• Guidance

• Look ahead to Q3


Competition for Investors

• >7,200 U.S. banks and thrifts
• >1,100 trade OTC and on major exchanges
(NASDAQ, NYSE and NYSE MKT/AMEX)
• >460 on major exchanges
• >300 on major exchanges with ≤$5B in assets

Source: SNL Financial


Abundance of Bank Peers

Assets $4B-$6B
Average volume ≥ 10,000 shares daily
Dividend yield ≥ 1.3%
NIM ≥ 3.5%
Efficiency ≤ 68.0%
NPAs as a % assets ≤ 2.7%
Regulatory capital ratios “Well-Capitalized”

14 banks and thrifts


Favorably Differentiating Your Bank

• Numbers trump words
• Management quality
– Vision, track record, credibility, intangibles
• Long-term corporate reputation
• Geography
• Balance sheet composition and management
• Business model
• Credit quality management
• Growth management


Banks and Guidance

• Not to be undertaken without strong internal basis
• Specific EPS guidance continues to be uncommon
– Nonetheless, very common to be pressured to provide it
• More common are:
– Management’s long-term target ranges on measures such as ROA,
ROE, efficiency, NIM, cost of funds, etc.
• E.g., “Our long-term target for ROE is to be in the range of X-Y%”
• Or, “We reported ROE of X% for our latest quarter, and our long-term
target is to maintain (or attain) top quartile returns, as compared to our
$5-10B asset peers”
– Management’s long-term targets for credit quality metrics
– Proxies for loan-growth trends such as pipelines
– External drivers, such as local-market economic data, industry data
for key sectors served
– Qualitative commentary about relative strength or weakness


Look Ahead to Q3-2012

More of the same topics and concerns among analysts
and institutional investors following banks
• Balance sheet management given rate environment
• Loan growth, organic and through asset buys
• Niche lending interest … and skepticism
• Competition for good credits; pricing and terms
• Operating efficiency
• Capital and Basel III implications for community banks
• Opinion on outlook for industry following Election Day


Summary – For banks and insurers

• Consider why you should go beyond compliance

• Evaluate your objectives and audiences

• Evaluate your processes, tools and tactics

• Know that best practices are practical and
well within reach


Q&A


Panelists
• Ronald H. Janis, Partner
– Day Pitney LLP
– 212-297-5813
– rjanis@daypitney.com
– www.daypitney.com

• Jeffrey A. Schoenborn, Principal
– Casteel Schoenborn Investor Relations & Corporate Communications
– 888-609-8351
– schoenborn@csirfirm.com
– www.csirfirm.com
– www.linkedin.com/in/schoenborn

• Heather J. Wietzel, Principal
– InsuranceIR LLC
– 513-252-8259
– hwietzel@InsuranceIR.com
– www.InsuranceIR.com
– www.linkedin.com/in/heatherjwietzel

Presentation design by McMIM Design Studio (www.mcmim.com) -- Kaori Mims, 203-285-5134, kaori@mcmim.com 52

Bank and Insurance Investor Relations Best Practices: Building an Effective Earnings Package

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