It’s that time of the year again! Regular readers know I make a special point to read and absorb the one section of a company’s annual report most investors ignore: the CEO’s annual letter to shareholders. The letter is potentially the single most important communication a CEO makes to all his company’s constituencies. It’s a chance for him to provide a broad discussion of the company’s performance, its strategy and plan to execute it, and even discuss major challenges and opportunities he believes the industry faces. I’m surprised more CEOs don’t make more of the opportunity. Too often the, letter is a cliché-ridden jumble that reads as if it’s been turned out by the P.R. people, which it probably has been. As I say, a missed opportunity.
I haven’t read all the banking and finance letters yet; but am farther along than I usually am. This year, I’ve classified the letters into five categories, with grades ranging from “F” to “A.” Let’s take a look:
F = No letter with the annual report. Apparently CEO Charles Hageboeck of City Holding (CHCO) is too busy with other important things to write a letter to his shareholders. That’s unfortunate. Here’s a company with an outstanding growth record over the last decade that faces unique challenges as a result of recent changes in the banking environment. One would think City Holdings shareholders would be interested in hearing how the company plans to deal with them. Instead . . . nothing.
D = Short and pro forma. One of my favorite bank CEOs, Betsy Cohen of The Bancorp (TBBK), is one of the most capable executives in the business (we’re a large holder). Yet her letter to shareholders is extremely brief and doesn’t provide any real insight into the company. That’s too bad: The Bancorp, in my view, is in the midst of a phenomenal transition from a mediocre, less-than-$10-billion commercial bank into a true growth company that happens to have a bank charter. It is the prime beneficiary of the rapid growth in pre-paid cards. Last year, the company’s revenue from its pre-paid business was up over 90%. The Bancorp reminds me (and I’ve told Betsy this) of one of my first bank stock recommendations, State Street in 1980, as that company began its transformation from a traditional bank into the first specialized custodian. Shareholders made billions as the company’s earnings per share growth accelerated and the stock’s multiple expanded. Betsy has never failed to be very generous with her time with us to explain what’s happening at her company and answer our questions. I believe she should use her annual letter as an important outlet to tell The Bancorp’s story. It’s certainly one investors should be interested in hearing.
C = Perfunctory. This describes the vast majority of financial services letters I read. They inevitably include some generic comments about the prior year’s performance, along with additional generic comments about how challenging the operating environment is. Next, changes to the board will be noted and outgoing directors thanked for their faithful service. Then at the end, we’ll be reminded that the company’s employees are its most valuable asset. Warning! Do not operate heavy machinery after reading one of these types of letters.
B = Insightful. These letters are vastly superior to the Cs above, but still leave me wanting more. For example, one of the most thoughtful CEOs in banking is Rich Fairbank at Capital One (COF). For years he wrote some of the best letters by any financial-services CEO. If you know Rich, you’d hear his distinctive voice coming through. This year, sure enough, Rich’s letter is predictably insightful, but I came away from it feeling it might have been even better. Rich is a huge sports nut, so let me put it this way: the team won, but didn’t play especially well.
Another B letter came from Mike Corbat of Citigroup (C). In fairness, that’s perhaps the best to be expected since Mike’s only been CEO for a few months. Based on his first seven months, though, I believe he’s going to be one outstanding CEO. It is definitely worth reading and watching for future letters.
A = Exceptionally Insightful. The A-rated letters have all sorts of nuggets. Some letters are worthwhile because of the CEO’s thoughts on national issues, while others stand out because of what they have to say about industry or company-specific issues. Not surprisingly, the CEO’s who wrote A-rated letters this year tend to do so year in and year out. Six CEOs stand out on my short list this year: Mick Blodnick of Glacier Bancorp (GBCI), Jamie Dimon (JPMorgan Chase–JPM), Dick Evans (Cullen/Frost–CFR), Kelly King (BB&T–BBT), Ed Wehmer (Wintrust–WTFC) and Bob Wilmers (M&T–MTB).
Most years, one letter stands out as the best of the best. This year, though two do.
M&T’s Bob Wilmers’ letters are always good, but his letter this year could be his best ever. The entire letter is worth your time, but a particular highlight is his discussion of “The Banking Climate” starting on page XVIII.
In addition to Wilmers’ letter, the letter by Ed Wehmer, CEO of Wintrust, an $18 billion bank headquartered in the Chicago area, is outstanding. Ed’s letter are always extremely insightful, and usually have a theme that ties everything together. (Last year’s was a comparison of the company’s performance to the U.S. space program.) This year, though, Ed goes themeless. “This year we will be a bit more traditional and discuss the state of community banking,” Ed writes. It really is a must-read not just for bankers, but also for anyone who wants to know exactly what Wintrust’s differentiating strategy is and how the company is going about executing it.
As I said, I’m not done reading letters yet, so if you have one you’ve read that you think is a “A” or a “B” please let me know.
What do you think? Let me know!