There’s a hidden way to get detailed financial data on publicly traded U.S. banks days before the companies release their earnings. The information is accurate, free, and—most important—totally legal.
The source is the federal government, which publishes snapshots of banks’ financial pictures, known as call reports, on a hard-to-find website. Banks, sometimes days later, distribute similar information in earnings releases that are followed closely by investors, analysts, and the media. On those occasions when call reports are published before earnings, savvy stock-pickers can glean useful information before other investors.
“This is a very unusual way to release earnings information,” said Jeffrey Burks, a University of Notre Dame accounting professor who co-wrote a study on the practice. “You have a regulatory agency quietly putting it up on their website with no advance warning.”
Most of the potentially market-moving information pertains to small and medium-sized banks. Larger firms such as Citigroup Inc. and JPMorgan Chase & Co. typically report earnings well before call reports are released. Still, the early release represents a rare discrepancy in a financial-reporting system that’s supposed to provide all investors with the same information at the same time.
The gap exists because U.S. bank regulators tried to make data available to the public more quickly, by setting up an online repository for the information in 2005. But few people know they can get that data before earnings reports by checking an obscure website run by a consortium of agencies that regulate banks and credit unions.
In one example cited by Burks, who authored the study with fellow Notre Dame professors Brad Badertscher and Peter Easton, investors who noticed a 2012 call report on BOK Financial Corp. would have been able to determine that its banking unit had US$60.4 million of profits in the fourth quarter, indicating the company would fall short of the $75.2 million that analysts expected for the entire firm.
The Tulsa, Oklahoma-based firm’s stock price dropped slightly between the Jan. 30, 2012, call report and the Feb. 1 earnings release, though trading volumes remained average. When the earnings report came out—with earnings per share at $0.98 instead of the $1.10 consensus estimate—the stock’s slide accelerated, losing 4.3 percent that day.
A sophisticated investor who saw the call report and decided to short-sell BOK’s shares would have made money. In a short sale, an investor borrows stock from a third party, betting that the price will fall, and pockets the difference if it does.
Spokesmen from the three agencies responsible for the call reports—the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency—declined to comment.
Reports Issued in Advance Increase Stock Price Volatility
Getting the call reports before earnings can be an advantage even though they provide raw data without any commentary from the bank, said Matt Olney, who covers BOK and other banks in the Southwest U.S. as managing director of Stephens Inc., a Little Rock, Arkansas-based investment manager.
If a decline in a bank’s credit quality is evident, that would probably be “a very telling sign,” said Olney, who uses the reports in his coverage.
From January 2012 to March 2014, call reports were published ahead of earnings reports for banks including CIT Group Inc.; First Citizens BancShares Inc.; a bank unit of Franklin Resources Inc.; and a bank then owned by insurer MetLife Inc., according to the Notre Dame study. When call reports were issued in advance, a stock’s price volatility was higher than usual, the study showed.
Though the study said there’s a “flood of market-moving information” in call reports, it’s unclear how much it influences trading.
The information can be especially meaningful if the parent company’s earnings are almost entirely reliant on its bank subsidiary, whose numbers are revealed in the call report. Last year, while Tyler, Texas-based Southside Bancshares Inc. prepared to release Feb. 10 earnings that would far surpass expectations, regulators put out the bank’s financial data in a call report that clearly laid out the good news for investors more than a week in advance.
Information out Early, and Hard to Find
So what’s the problem with putting out the early information, as long as it’s public? One answer: It’s not so easy to find—since it comes out on different days at different times, savvy investors could have an edge if they actively monitor the website of the Federal Financial Institutions Examination Council.
Banks have to send the data within 30 days of the end of each quarter, and within about six hours of sending it, the information is available on the FFIEC’s website. If a bank is planning its earnings announcement more than 30 days after the quarter-end, chances are good that investors can get a preview through the call report.
Hedge funds that specialize in smaller banks would get “highly pertinent” information in these call reports, said Art Wilmarth, a George Washington University law professor, but “you wouldn’t expect most casual investors to be doing this.”
Other investors could be left “behind the curve,” he said.