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

1. 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)

2. What is Required? Ronald H. Janis Day Pitney LLP Design by McMIM Design Studio (www.mcmim.com)

3. 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. Design by McMIM Design Studio (www.mcmim.com) 3

4. 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. Design by McMIM Design Studio (www.mcmim.com) 4

5. 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. Design by McMIM Design Studio (www.mcmim.com) 5

6. 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. Design by McMIM Design Studio (www.mcmim.com) 6

7. 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. Design by McMIM Design Studio (www.mcmim.com) 7

8. 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. Design by McMIM Design Studio (www.mcmim.com) 8

9. 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.” Design by McMIM Design Studio (www.mcmim.com) 9

10. 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. Design by McMIM Design Studio (www.mcmim.com) 10

11. 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. Design by McMIM Design Studio (www.mcmim.com) 11

12. 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. Design by McMIM Design Studio (www.mcmim.com) 12

13. 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. Design by McMIM Design Studio (www.mcmim.com) 13

14. Why do more? Jeff Schoenborn Casteel Schoenborn Design by McMIM Design Studio (www.mcmim.com)

15. 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 Design by McMIM Design Studio (www.mcmim.com) 15

16. 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 Design by McMIM Design Studio (www.mcmim.com) 16

17. What is common practice 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 Design by McMIM Design Studio (www.mcmim.com) 17

18. What is common practice © NIRI 2011 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 Design by McMIM Design Studio (www.mcmim.com) 18

19. What is common practice 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 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 Design by McMIM Design Studio (www.mcmim.com) 19

22. What is best practice? Heather Wietzel InsuranceIR Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 22

23. 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 Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 23 2

24. 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 Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 24 3

25. 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 Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 25 4

26. 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 Design by McMIM Design Studio (www.mcmim.com) 26

27. 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 Design by McMIM Design Studio (www.mcmim.com) 27

28. 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 Design by McMIM Design Studio (www.mcmim.com) 28

29. 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.” Design by McMIM Design Studio (www.mcmim.com) 29

30. Earnings release example: KeyCorp See Travelers or Arch Capital for insurance company examples Design by McMIM Design Studio (www.mcmim.com) 30

31. 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 Design by McMIM Design Studio (www.mcmim.com) 31

32. 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 Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 32

33. Financial data example: Arch Capital Design by McMIM Design Studio (www.mcmim.com) 33

34. Earnings call presentation example: Associated Design by McMIM Design Studio (www.mcmim.com) 34

35. 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 Design by McMIM Design Studio (www.mcmim.com) 35

36. Procedural gaffes = another reputation risk • Leaked news (intentional or error in document handling) • Inaccurate data • Management stumble on call • Various technological glitches Design by McMIM Design Studio (www.mcmim.com) 36

37. Bank and Insurance Company Specifics Insurance Companies Design by McMIM Design Studio Studio (www.mcmim.com) Design by McMIM Design (www.mcmim.com) 37

38. 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 Design by McMIM Design Studio (www.mcmim.com) 38

39. 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 Design by McMIM Design Studio (www.mcmim.com) 39

40. 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 Design by McMIM Design Studio (www.mcmim.com) 40

41. 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 Design by McMIM Design Studio (www.mcmim.com) 41

42. 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 Design by McMIM Design Studio (www.mcmim.com) 42

43. Bank and Insurance Company Specifics Banks Design by McMIM Design Studio (www.mcmim.com)

44. Special Considerations for Banks • Differentiation • Guidance • Look ahead to Q3 Design by McMIM Design Studio (www.mcmim.com) 44

45. 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 Design by McMIM Design Studio (www.mcmim.com) 45

46. 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 Design by McMIM Design Studio (www.mcmim.com) 46

47. 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 Design by McMIM Design Studio (www.mcmim.com) 47

48. 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 Design by McMIM Design Studio (www.mcmim.com) 48

49. 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 Design by McMIM Design Studio (www.mcmim.com) 49

50. 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 Design by McMIM Design Studio (www.mcmim.com) 50

51. Q&A Design by McMIM Design Studio (www.mcmim.com)

52. 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

53. 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)

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