Tuesday, January 7, 2014

Why Call Reports Fall Short

One thing that's great about banks is that they're regulated and that their regulator posts their financials online quarterly in the form of FDIC Call Reports.  No matter the size, large or small a bank's financials will be available to the public through the FDIC.  While this might seem like a great source of information for many investors it isn't without its risks either.  At best Call Reports might be the perfect source of information, or at worst lead an investor down the road of misinformation.

Federally insured banks are required quarterly to file a Call Report with the Federal Deposit Insurance Corporation (FDIC) with financial details pertaining to their most recent quarter.  The FDIC allows anyone to search for bank Call Reports through their website and download them for viewing in PDF or XML format.  A bank’s Call Report contains their latest quarterly financials and certain other information required by their regulator.

Many bankers, investors, consultants and other professionals depend on the data found in Call Reports to get their job done.  Call Reports are used because the information contained in them is critically important, although the format (PDF or XML) leaves much to be desired.   

One of the reasons we founded CompleteBankData.com was to solve three problems with call reports:  (i) the lack of a historic perspective, (ii) the lack of holding company data, and (iii) the inability to search through the data.

Call Reports are filed for a single quarter so a user wanting to see a year’s worth of data would need to download four reports to gather the information for this review.  The numbers then need to be organized in some fashion.  A user might need to put the numbers into a spreadsheet to view the entire year’s financials at once or to make it available for manipulation.

Unlike most financial statements, regulatory banking data is reported in cumulative amounts.  If one wanted to see how a bank performed in the third quarter they would need to download the second and third quarter Call Reports and subtract the second quarter numbers from the third quarter to isolate the third quarter results.  This process of turning cumulative data into non-cumulative data is necessary for creating statistics and quarterly metrics as well. 

Data management and manipulation of Call Report data is difficult, but can be manageable given enough time and resources.  The bigger issue with Call Reports is that vital data useful in making decisions is missing. 

Call Reports only contain financials from the most recent quarter for items that the FDIC has deemed necessary.  The audience for the reports are FDIC regulators, not other bankers or investors.  The fact that anyone else can use them shows the value of the data, but not necessarily the format nor does it imply that it’s complete from an investor’s standpoint.

A Call Report might be an accurate representation of a small bank with few branches that is not owned by a holding company.  Unfortunately that limits the number of banks for which Call Reports are useful to a very small subset of US banks.  Most banks in the US have been long owned by a bank holding company, which has its own set of financial statements that are separate from the banks.

A bank holding company might own multiple banks or hold financial assets at the holding company level.  Even more importantly a holding company can incur financial liabilities that only exist at the holding company level.  Unfortunately for users of Call Reports such information is not included therein.

It’s often easiest to understand some of these issues by looking at examples.  In the case of missing assets consider Hampden Bank, owned by Hampden Bancorp (HNBK).  The bank reports equity of $76.194m for Q3 2013 in their Call Report.  Investors purchasing shares of the stock are buying shares of Hampden Bancorp, which has an equity value of $83.984m in the same period.  The roughly 10% difference between the equity value reported in the bank’s Call Report, and the equity at the holding company, is explained by cash and other assets that the holding company carries on its balance sheet that the banking regulators have not required to be reported on the Call Report.

A 10% difference in the value of the holding company’s equity verses the bank’s equity isn’t just a rounding error.  Users of Call Reports could end up making a decision based on incomplete data.  It might seem like a holding company’s hidden assets are not such a bad thing, but consider the viewpoint of a competitor bank.  If a competitor bank is viewing Call Reports they might make an assessment of financial strength based purely on the Call Report and miss additional assets held by the holding company.  The competitor’s assessment would be incorrect; they would have incorrectly assessed the strength of their competitor by relying solely on Call Reports.

Consider a different scenario, a holding company that borrows money intending to pay interest on the debt from dividends received from their subsidiary bank.  The economy hits a rough patch and the subsidiary bank suspends its dividend to the holding company leaving the holding company with interest expense, but potentially no way to pay it unless they have other sources of income or assets available to be quickly sold.  It’s possible the holding company could declare bankruptcy leaving the subsidiary bank unharmed.  If one were only looking at Call Reports they would never know this situation was unfolding.  From the Call Reports the subsidiary bank might appear healthy while the problems of the bank’s holding company were masked.

Another scenario is one where a holding company owns multiple subsidiary banks.  A holding company can get into trouble by loaning dividend income received from their healthy banks to their underperforming banks.  It might be possible to reconstruct the flow of money between subsidiaries by extracting data from multiple Call Reports, but it would not be an easy task.  An investor or banker relying on Call Reports to assess an investment, or a competitor, might reach an incorrect conclusion for a holding company with multiple bank subsidiaries.

The last problem with Call Reports is they are inaccessible unless you know what you’re looking for.  The FDIC doesn’t provide more than rudimentary search functionality for its users.  If someone wanted to find all of the banks in New York with more than $250m in total assets that search would be impossible.  Let alone searching for a specific value in a past date period, or searching across multiple criteria.

The FDIC Call Reports serve one purpose and one purpose only, to provide data to their banking regulator.  

The issues with Call Reports are why we built CompleteBankData.com.  The site grew out of my desire to view banking financials in a format familiar to users of financial statements, not bank regulators.  We also wanted to provide advanced search, filtering and comparison tools over the data so time could be spent gathering insights from the data rather than searching for it.

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