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It Pays to Write Well

René Jones had big shoes to fill when, at the end of last year, he became chairman and chief executive officer of M&T Bank Corp., a $119 billion asset bank based in Buffalo, New York.

His predecessor, Robert Wilmers, who passed away in December, produced extraordinary returns at M&T. Of the 100 largest banks in the country in 1983, the year Wilmers became CEO, M&T’s share price has since increased the most. Every $1 invested in the bank at the time is now worth more than $120.

Wilmers was also an eloquent spokesman. He wrote one of the most widely read, and readable, shareholder letters in the industry each year. It was to bankers what Warren Buffett’s annual letter is to investors.

“[The letter’s] preparation is a team sport,” wrote Jones, Wilmers’ successor, in this year’s letter. “Many colleagues are involved and countless hours are spent researching topics and trends as they emerge throughout the year.”

For a bank that prides itself on efficiency, Wilmers’ decision to spend so much time and effort on his annual letter to shareholders might strike some as paradoxical. Few, if any, other banks do the same. Wouldn’t those resources be better spent generating business?

Not necessarily. A growing body of research has found a link between the quality of disclosures in annual reports and variables such as stock volatility, analyst forecast accuracy, trading volume and even a company’s valuation.

A 2016 study published in the Journal of Financial Economics used copy-editing software to count common writing faults in the annual reports of closed-end investment companies-things like passive voice, superfluous words, long sentences and legal jargon. The study concluded that companies with less readable annual reports tended to trade at a discount to companies with more readable reports.

What explains the correlation? Among other things, the authors of the study found “hints in the data that higher readability generates more trust and higher perceived managerial skill.”

Other studies have come to similar conclusions. One found that companies with less readable annual reports get less favorable loan terms. Another found that people in the investment community interpret opaque annual reports as an indicator a company is hiding bad news.

To be clear, none of these studies have focused solely on shareholder letters. But there’s little reason to think the same rules don’t hold true in that context.

Write your annual reports well-starting with the CEO’s annual letter, as it is the most widely-read part of the 10-K,” says Mufaddal Baxamusa, an associate professor of finance at the University of St. Thomas. “The investors will trust you and other firms will find you to be an attractive partner.”

At M&T, Jones is committed to carrying on Wilmers’ legacy. “The annual Message to Shareholders was extremely important to Bob,” says Jones. “We consider it our privilege, and our duty, to continue to prepare [it] in this tradition of candor, fulfilling the legacy that defines M&T.”

It’s a tall order, but Jones’ letter this year shows he is up to the task. It offers a blend of compelling information, keen insights and prescient warnings. To the untrained eye, it seems all but indistinguishable from the letter Wilmers himself might have written.

How Big Was the Tax Windfall?

Thanks to last year’s tax break, the banking industry is earning more money than ever before.

The FDIC’s recent Quarterly Banking Profile showed banks produced a record $56 billion in aggregate profits in the first quarter of 2018. That’s more than twice the figure in the fourth quarter of last year and it’s 28 percent higher than the year-ago quarter.

That’s a huge jump for an industry as mature as banking which, on average, should grow roughly in line with the country’s gross domestic product. The catalyst for the jump was the Tax Cut and Jobs Act of 2017, which reduced the federal corporate income tax rate from 35 percent to 21 percent.

It isn’t hyperbole to call the tax cut historic. The last time the corporate income tax rate was this low was 1939, the same year Germany sparked World War II by invading Poland.

The change is so significant it shifted performance benchmarks in the banking industry that have been cited for more than half a century. A well-run bank was previously expected to earn at least 1 percent on its assets and 10 percent on its equity through a complete cycle. Because of the tax cut, those numbers today are 1.2 percent and 12 percent, respectively.

What are banks doing with this windfall? Bank of America Corp. gave more than half its employees a $1,000 bonus, while Wells Fargo & Co., PNC Financial Services Group, BB&T Corp., Fifth Third Bancorp and others have increased their minimum wages to $15 an hour.

It’s also fair to expect a deluge of share buybacks. Most banks have more capital than they know what to do with right now, much of which is just languishing on their balance sheets and suppressing their return on equity. Companies in other industries have already scaled up repurchase programs, and big publicly traded banks will almost certainly follow suit after clearing this year’s stress tests.

Profiting from Partnerships

When Radius Bank was going through its due diligence process to make one of its most critical moves as a digital bank, it wanted to be absolutely certain that the decision it was about to make was the right one.

Frankly, it had to be. The digital-only bank, based in Boston, was making a move to overhaul its customer acquisition process through a new partnership with Alloy, a Brooklyn, New York-based firm focused on technologies that improve compliance with Know Your Customer and anti-money laundering rules. Chief Executive Officer Mike Butler knew the relationship would involve a break from conventional practice-a process that probably makes a lot of risk officers queasy just thinking about.

“Prove it to me in a weekend that you think you can get this, and how can you do it,” Butler says about how their due diligence was more focused on culture and references, rather than poring over years of audited financials, although they did that too.

Fintechs and banks have long had a love-hate relationship for myriad reasons, but slowly are understanding that they can, in fact, work together.

Radius Bank, with $1.2 billion in assets, and Alloy are among the most noteworthy cases that were recognized for transformative partnerships at the FinXTech Annual Summit, sponsored by Bank Director and Promontory Interfinancial Network, a fintech firm that partners with U.S. banks. Radius and Alloy won the Startup Innovation award, which spotlights innovative partnerships with fintechs younger than 5 years old. Citizens Bank and Fundation were given the Best of FinXTech Partnership award, which is based on growth in revenue, customers or reputation and strength of the integration, and CBW Bank and Yantra Financial Technologies took the Innovative Solution of the Year award, which highlights forward-thinking ideas in partnership.

Other partnerships that were named finalists include: U.S. Bancorp and SpringFour, USAA and Clinc, Seacoast Bank and SmartBiz Loans, ChoiceOne Bank and Autobooks, Pinnacle Financial Partners and Built Technologies, MVB Financial Corp. and BillGO, and TCF Bank and D3 Banking Technology.

Each of the winners, as well as the seven finalists, talk about the give-and-take involved with their new partners, but also eagerly hype the benefits to both firms that have materialized.

Banks often follow a common storyline: They know what they want to achieve in efficiencies, compliance or another significant area of the company, but also understand that accomplishing that goal will involve some concessions with traditional third-party relationships.

While some banks still engage in a more traditional vetting process of potential fintech partners, others are willing to take more risk to enhance their operation and position themselves for an unstoppable wave of technology through the industry.

To be sure, some are far ahead of others in this growth process. CBW’s Chief Technology Officer Suresh Ramamurthi and his wife, Suchitra Padhmanaban, used their savings to buy the tiny $33 million asset bank in Kansas largely to provide a platform on which to build 500 application programming interfaces, or APIs, that help automate everything from payments and remittances to compliance. More than 100 companies in health care, technology and beyond have signed up for the Y-Labs Marketplace, which Yantra developed and Ramamurthi runs as CEO.

He describes what he and his wife have done as “common sense,” and something that would have happened whether he did it or not. “The wheel was revolutionary for about a minute before people realized they could do it too,” he quips.

On the other hand, Citizens, at $152 billion in assets, took more than a year to establish its relationship with Fundation and come to market with its automated commercial lending process. The bank knew what it wanted but pared down a list of two dozen firms through a more typical process that involved a year of research alone.

These two approaches differ, but both ended up with highly transformative technologies that have benefited more than just the bank.

What’s clear is there is no formula for establishing these partnerships between banks and fintechs. And there may never be with the pace at which evolution occurs in this space. What’s also clear is that any bank that’s not willing to come to the table and make compromises that might conflict with a traditionalist’s sensibilities will only put their bank further behind, which might be a greater risk than accepting a less clear picture of the stability of the fintech it aims to partner with.

Banks like Radius, CBW, Citizens and others that were included among the finalists have demonstrated successful pathways and progressive ideologies that have clearly been beneficial to their respective institutions, customers and shareholders. No doubt, they too had to assuage some concerns within their ranks, but their big-picture perspective has positioned them for long-term growth and a competitive advantage over their peers.

It’s in the best interest of any board or executive to identify exactly how much risk they are willing to take for the sake of the future of the institution.

Bank Director Staff Writer

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