2017

The BAN Report: Tax Reform Winners and Losers / Homebuilders are Giddy / Puerto Rico Foreclosures Surge / RIP Bob Wilmers-12/19/17

Tax Reform Winners and Losers
After a myriad of fits and starts, changes, last-second holdouts, tax reform is expected to be enacted this week and signed into law prior to Christmas.    The biggest change is lowering the corporate tax rate to 21%, and the reduction of the pass-through tax rate to 20%., financed partly by limiting state, local, and property tax deductions to $10,000.   For the banking industry, tax reform should be a big win, especially for banks that earn their income in the US.     The seven largest banks, according to Goldman, will see an average increase of 14% increase, led by Wells Fargo at 18%.     The New York Times had a good analysis of the winners and losers.
PRESIDENT TRUMP AND HIS FAMILY Numerous industries will benefit from the Republican tax overhaul, but perhaps none as dramatically as the industry where Mr. Trump earned his riches: commercial real estate. Mr. Trump, along with his son-in-law Jared Kushner, who is part owner of his own real estate firm, will benefit from lower taxes on so-called “pass through” income, which is money earned by partnerships and other types of businesses whose income is passed through to its owner and taxed at the individual tax rate. Mr. Trump and Mr. Kushner benefit since they own properties through limited liability companies and other similar vehicles.
Under current law, that income is taxed at rates as high as 39.6 percent. Under the bill, much of that income could be taxed at a rate as low as 29.6 percent, subject to some limitations. Real estate also avoided new limits on interest deductions and retained its ability to defer taxes on the exchange of similar kinds of properties. The benefits of lower rates on pass-through income will extend to Mr. Trump and Mr. Kushner’s partners at real estate investment trusts as well. At the last minute, lawmakers added language to make it easier for real estate owners to avoid some of the pass-through provision’s restrictions and maximize the tax benefits even more.
BIG CORPORATIONS Industries like big retailers will benefit from the new corporate rate of 21 percent, since those companies pay relatively close to the full 35 percent rate. Other aspects of the corporate tax cuts will be enjoyed by an array of multinational industries, particularly technology and pharmaceutical companies, like Google, Facebook, Apple, Johnson & Johnson and Pfizer. Such multinational companies have accumulated nearly $3 trillion offshore, mostly in tax haven subsidiaries, untouched by the United States taxman. The tax bill will force those companies to gradually bring that money home, but it will be taxed at rates ranging from 8 percent to 15.5 percent. That’s far lower than the current 35 percent tax rate on corporate profits and even lower than the new 21 percent rate.
The biggest loser seems to be:
PEOPLE IN HIGH PROPERTY TAX, HIGH INCOME STATES Homeowners in high-tax states like New York, New Jersey and California could be big losers, particularly if they have high property taxes. Their ability to deduct their local property taxes and state and local income taxes from their federal tax bills is now capped at $10,000. In some cases, that could be offset by the lower tax rates that all taxpayers will owe on their ordinary income.
Some are projecting a decline in real estate prices in high-tax, high-income areas.     According to Moody’s analytics, many counties in the New York metro area (especially in high-tax New Jersey) will see home price declines of approximately 10%. This is largely due to the limitation on state, local, and property taxes, as well as reducing the mortgage interest deduction to $750,000.     High-income earners may flee these areas for more tax-friendly states.   
While few people have actually read the legislation, the complete text is available here.     Click here for a great summary by the Tax Foundation.  
Homebuilders are Giddy
US homebuilders are feeling more confident today than at any time since July 1999, according to data Monday from the National Association of Home Builders/Wells Fargo.   
Confidence among U.S. homebuilders jumped in December to the highest level since July 1999, exceeding all analyst estimates, as a growing economy boosts housing demand, according to data Monday from the National Association of Home Builders/Wells Fargo.
The surprisingly strong reading shows developers expect demand to advance amid steady economic growth and a tightening job market. Mortgage rates remain close to record lows, making borrowing attractive for prospective buyers, while the homebuilders also cited easier regulation under President Donald Trump as helping the housing market.
Demand for properties is rising, with a gauge of homebuyer traffic rallying to a 19-year high, according to the survey. A host of data this week will give a fuller picture of the housing market, including sales of new and existing homes, as well as groundbreakings and building permits.
Their optimism is not irrational, as US housing starts in November were at their highest levels in a decade, according to figures released this week.    For over a year, we have been bullish on the residential housing market, but bearish on the multi-family market.    So, while this is mostly good news, it is not for the residential apartments coming online in major cities.    This imbalance is the direct result of banks avoiding lending to homebuilders while growing multi-family portfolios.
Puerto Rico Foreclosures Surge
After a brutal recession, a debt crisis, and Hurricane Maria, Puerto Rico is facing a massive foreclosure crisis similar to the one faced in towns like Detroit.
About one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages. Tens of thousands have not made payments for months. Some 90,000 borrowers became delinquent as a consequence of Hurricane Maria, according to Black Knight Inc., a data firm formerly known as Black Knight Financial Services.
Puerto Rico’s 35 percent foreclosure and delinquency rate is more than double the 14.4 percent national rate during the depths of the housing implosion in January 2010. And there is no prospect of the problem’s solving itself or quickly.
“If there is no income, the people cannot make payments,” said Ricardo Ramos-González, coordinator of a consumer legal aid clinic at the University of Puerto Rico School of Law. “Thousands have lost their jobs, thousands of small business have closed, and thousands more have left the country.”
The 35% foreclosure rate dwarfs that worst national rate in 2010 of 14.4%.    Currently, there is a moratorium on foreclosure filings, but that will be lifted early next year.    In our view, this painful process is a necessary part of the island’s recovery.  Moratoriums in Greece, for example, have not worked and have kept economic growth stagnant.   
RIP Bob Wilmers
Robert G. Wilmers, the longtime Chairman and CEO of M&T Bank Corp, passed away last weekend.   Mr. Wilmers transformed M&T from a small local bank to one of the nation’s largest banks, leading the bank for a whopping 35 years.  
Wilmers was a larger-than-life figure in banking, business and Buffalo circles. He transformed M&T into a powerful economic force while also leaving his stamp on cultural institutions and public education in the region. He led the bank for almost 35 years, establishing a reputation for cautious but opportunistic growth while sticking mostly to conservative and traditional banking.
He also played a major role in the Western New York region and the state, and was widely viewed as the dean of the local business community. He was known for being outspoken on topics ranging from the financial services industry and regulation to taxes, public policy and education.
And he was viewed as a convener of influential voices, bringing business, community and political leaders together to push for changes. At a banking conference in New York City, for instance, Wilmers introduced Gary Crosby, CEO of First Niagara Bank, to Beth Mooney, the CEO of KeyBank. Key went on to acquire First Niagara.
“He was a remarkable banker, an even more remarkable citizen and a wonderful friend,” said Warren E. Buffett, chairman and CEO of Berkshire Hathaway, and a longtime M&T shareholder. Berkshire Hathaway owns The Buffalo News and Buffett is its chairman.
“Buffalo just lost its best friend,” Buffett told M&T Vice Chairman Rene Jones on Sunday morning.
Mr. Wilmers was a giant of a man and the banking industry mourns his loss.     

The BAN Report: Bitcoin Now Biggest Bubble Ever / Could this Expansion Break Records? / Gaming Tax Reform / Rockefeller’s Rolodex-12/13/17

Bitcoin Now Biggest Bubble Ever
According to an analysis by Convoy Investments, the recent run-up of the price of Bitcoin now eclipses every other bubble in history, including the Tulip Mania in the early 1600s.
Conveniently, overnight the former Bridgewater analysts Howard Wang and Robert Wu who make up Convoy, released the answer in the form of an updated version of their asset bubble chart. In the new commentary, Wang writes that the Bitcoin prices have again more than doubled since the last update, and “its price has now gone up over 17 times this year, 64 times over the last three years and superseded that of the Dutch Tulip’s climb over the same time frame.”
And with that we can say that crypto pioneer Mike Novogratz was right once again when he said that “This is going to be the biggest bubble of our lifetimes.” Which, of course, does not stop him from investing hundreds of millions in the space: when conceding that cryptos are the biggest bubble ever, “Novo” also said he expects bitcoin to hit $40,000 and ethereum to triple to $1,500.
“Bitcoin could be at $40,000 at the end of 2018. It easily could,” Novogratz said Monday on CNBC’s “Fast Money.” “Ethereum, which I think just touched $500 or is getting close, could be triple where it is as well.”
The price of Bitcoin is up more than 17-fold in 2017.   While we expect this bubble to burst, there seems to be no evidence that it is running out of steam.    This week, the CBOE Global Markets began trading US bitcoin futures.    Action was so intense that trading was halted twice in the first day.    Many investors are borrowing heavily to finance their purchases.    If it does end up ending badly, there will be significant collateral damage.
Could this Expansion Break Records?
Economists are increasingly optimistic about the durability of the current US economic expansion, which is now likely to continue into the second half of 2019, thus exceeded the 10-year record in the 1990s.  
Most of the private-sector economic forecasters surveyed in recent days by The Wall Street Journal said the odds of a new recession by late 2020 were below 50%. The average probability of a recession in the next year was 14%, with the odds creeping up to 29% in two years and 43% in three years.
Economists were more pessimistic about the outlook before Donald Trump was elected president in November 2016. In the Journal’s October 2016 survey, economists on average saw a 58% probability of a recession starting in the next four years.
The lower recession odds could reflect a number of factors, not least the economy’s strong performance over the past year. Another possible contributor is legislation overhauling the tax code that Congress may soon send to Mr. Trump’s desk.
Some 90% of economists surveyed said the tax bill would increase the pace of growth for the next two years, with most seeing a modest boost to the annual growth rate for gross domestic product. Forecasters remain split over its likely long-term effects: Nearly half, 47%, said growth in the long run would be unchanged or weaker than its current trend.
The continued strength of the economy will embolden the Fed to continue tightening, as they are expected to raise rates again today.     But, the lack of inflation is a conundrum, so the Fed may not act as aggressively as they would be in a normal recovery.      
Gaming Tax Reform
13 professors of taxation authored a report last week on tax reform, and how (if enacted), taxpayers will look to game the system.
This report describes various tax games, roadblocks, and glitches in the tax legislation currently before Congress. The complex rules proposed in the House and Senate bills will allow new tax games and planning opportunities for well-advised taxpayers, which will result in unanticipated consequences and costs. These costs may not currently be fully reflected in official estimates already showing the bills adding over $1 trillion to the deficit in the coming decade. Other proposed changes will encounter legal roadblocks that will jeopardize critical elements of the legislation. Finally, in other cases, technical glitches in the legislation may improperly and haphazardly penalize or benefit individual and corporate taxpayers. This report highlights particular areas of concern that have been identified by a number of leading tax academics, practitioners, and analysts.
A few examples cited included:
Using Corporations as Tax Shelters
If the corporate tax rate is reduced in the absence of effective anti-abuse measures, taxpayers may be able to transform corporations into tax-sheltered savings vehicles through a variety of strategies. For instance, at the most extreme, it may be possible to shield labor income in a C-corporation so that it faces a final tax rate of only 20%.
Pass-Through Eligibility Games
Taxpayers may be able to circumvent the limitations on eligibility for the special tax treatment of pass-through businesses. For instance, under the Senate bill, many employees—such as law firm associates—could become partners in new pass-throughs and potentially take full advantage of the special tax treatment.
Restructuring State and Local Taxes to Maintain Deductibility
The denial of the deduction for state and local taxes will incentivize these jurisdictions to restructure their forms of revenue collection to avoid this change. This could undercut one of the largest revenue raisers in the entire bill.
Many of the issues may be resolved in conference, as the House and Senate are negotiating a compromise bill.    But, it is a good idea to be prepared for what is in store, as there may be some decisions that one may want to make by year-end.   For example, the Senate Bill requires individual investors to use the “first-in, first-out” method for calculating capital gains on a stock, which will likely increase the amount of capital gains taxes owed in the short-term, especially for stocks that have been owned for several years.   If the bill does pass, it may make sense for some investors to sell stock this year, to avoid higher capital gains taxes in 2018.  
Rockefeller’s Rolodex
David Rockefeller, former CEO of Chase Manhattan Bank, had one of the most legendary Rolodex’s in business.    9 months after his death at 101, the Wall Street Journal got a peak behind the curtain of a networker without peers.
Some might say David Rockefeller, a scion of America’s greatest fortune and the veteran chief executive of Chase Manhattan Bank, was a dedicated networker long before the age of Facebook.
That would grossly understate his horizons. Mr. Rockefeller recorded contact information along with every meeting he had with about 100,000 people world-wide on white 3-by-5-inch index cards. He amassed about 200,000 of the cards, which filled a custom-built Rolodex machine. He kept the 5-foot high electronic device at his family’s suite of offices in New York City’s Rockefeller Center for about half a century.
“In the annals of CEO history, the breadth and depth of this record of contacts stand out,’’ said Nancy Koehn, a Harvard business professor and historian.  “This is a man with a large, long reach.’’
“I can quickly review the nature of my past associations before seeing someone again,’’ Mr. Rockefeller wrote in his 2002 memoir.
Even if Mr. Rockefeller hadn’t seen someone for years, “he was able to pick up as though he had seen you the week before,’’ said James Wolfensohn, a friend and former World Bank president who was introduced while a Harvard M.B.A. student in 1959. “It was because of this extraordinary record system.”
Mr. Rockefeller kept track of a diverse group of contacts, ranging from Bill Gates, the Shah of Iran, Donald Trump, John F. Kennedy, Neil Armstrong, Richard Nixon, Anwar Sadat, and one of his best friends, Henry Kissinger.
While there are a multitude of ways to keep track of contacts today, ranging from outlook to Salesforce, is there anyone using these platforms as well as Mr. Rockefeller did?   

The BAN Report: FDIC Releases Quarterly Banking Profile / Black Friday Exceeds Expectations / SBA Loosens-11/30/17

FDIC Releases Quarterly Banking Profile

The FDIC released its third quarter Quarterly Banking Profile, the most comprehensive overview of the performance of the banking industry.    A few highlights:

  • As most banks benefit from higher interest rates, net interest margin (expanded 12 basis points from a year earlier to 3.30%.  It improved by 8 basis points from 3.22% in the prior quarter, so that is pretty good progress in one quarter.
  • Non interest income was down 1% from the prior year, driven by reduced loan sale revenue and servicing fee income
  • Overall, quarterly net income increased by 5.2% from the prior year.   Average ROA rose from 1.12% to 1.10%.
  • While noncurrent loans declined overall, noncurrent credit card and auto loans spiked by 12.4% and 20.3%, respectively.     With higher interest rates on the horizon, noncurrent loan balances are likely to increase.
  • Loan growth was disappointing, as total loan and lease balances only grew by 1% during the quarter and 3.5% in the last 12 months.   Credit card balances and C & D lending grew at higher levels, while C & I loans grew only 0.3% from the prior year.     The lack of loan growth, especially within C & I, is confounding since GDP has grown at over 3% for two straight quarters.     Nevertheless, community banks have showed stronger loan growth than the larger banks, as they grew loans at about twice the rate of the overall industry.

With respect to loan growth, the Wall Street Journal observed:

While loan balances are still rising, the slowing rate of growth has defied the expectations of bankers. Many have spent the year looking for growth-reviving catalysts that never came and remain puzzled by the slowdown.

Even more surprising is that falling rates of loan growth are occurring as many signals point to a more buoyant U.S. economy. Unemployment continues to decline, gross domestic product growth came in at 3% in the third quarter and business investment is rising.

Tepid rates of loan growth along with continued low long-term interest rates have taken some of the sizzle out of bank stocks.

This is putting 2017 on track to be the worst year for business-loan growth since 2010, when the economy was still wrestling with the immediate aftermath of the financial crisis.

Why that is remains unclear. Throughout the year, some banks have said that more subdued business lending was due to a lack of clarity from Washington on the fate of key initiatives such as taxes and health care.

Such worries should eventually fade, though, said Darren King, finance chief at M&T Bank Corp. , where loans in the third quarter were down 2% versus a year earlier. “Business owners are eventually going to get to the point where they say, ‘I can’t wait to find out what is going to happen in Washington,’ ” he said.

Fortunately, the next few weeks should see some clarity in tax reform, so perhaps Washington uncertainty will wane.

Black Friday Exceeds Expectations

From Thanksgiving day through Cyber Monday, more than 174 million Americans shopped in stores and online, beating prior estimates, according to a survey by the National Retail Federation.

From Thanksgiving Day through Cyber Monday, more than 174 million Americans shopped in stores and online during the just-concluded holiday weekend, beating the 164 million estimated shoppers from an earlier survey by the National Retail Federation and Prosper Insights & Analytics.

Average spending per person over the five-day period was $335.47, with $250.78 — 75 percent — specifically going toward gifts. The biggest spenders were older Millennials (25-34 years old) at $419.52.

“All the fundamentals were in place for consumers to take advantage of incredible deals and promotions retailers had to offer,” NRF President and CEO Matthew Shay said. “From good weather across the country to low unemployment and strong consumer confidence, the climate was right, literally and figuratively, for consumers to tackle their holiday shopping lists online and in stores.”

Top shopping destinations included department stores (43 percent), online retailers (42 percent), electronic stores (32 percent), clothing and accessories stores (31 percent) and discount stores (also 31 percent). Some of the most popular gifts purchased included clothing or accessories (58 percent), toys (38 percent), books and other media (31 percent), electronics (30 percent) and gift cards (23 percent).

Increasingly, consumers are shopping both online and in stores, and those consumers spend more, on average.

SBA Loosens

This week the SBA made a significant change to the 7(a) program, reducing the equity requirements for business acquisition loans from 25 to 10%.

The SBA recently disclosed that it will slash the equity required for most change-in-ownership loans from 25% to 10%, a move that should make financing for acquisitions more accessible. The change is part of a broader overhaul of the standard operating procedure, or SOP, that governs 7(a) and 504, the SBA’s largest lending programs.

While the rewrite has dozens of modifications intended to streamline and improve the SOP, the lower equity requirement “is the big one,” said Gregory Caruso, a partner at Harvest Business Advisors in Princeton, N.J.

Even with the current, higher equity requirement, the 7(a) program has grown in popularity in recent years. In the first six weeks of the SBA’s 2018 fiscal year, which began Oct. 1, the 7(a) program backed loans totaling roughly $3 billion, a nearly 11% increase from a year earlier. Overall 7(a) volume has set records in three straight years, reaching $25.8 billion in fiscal 2017.

An easing on equity standards for change-in-control loans is likely to push the numbers even higher because it meshes almost perfectly with forces that are currently driving the market, said Tom Pretty, head of SBA lending at the $285.4 billion-asset TD Bank.

We think this change is ill-advised as these loans are some of the riskiest loans in the SBA portfolio.    With 7(a) volume well exceeded small business loan growth, which often signals trouble ahead, we can only scratch our heads.

The BAN Report: Puerto Rico Bonds Plunge on Trump’s Comments / Post Equifax, Credit Bureau Reform? / Yellen Changes Tone / The West is the Best-10/5/17

Puerto Rico Bonds Plunge on Trump’s Comments

Earlier this week, President Trump said, “They owe a lot of money to your friends on Wall Street and we’re going to have to wipe that out.   You’re going to say goodbye to that, I don’t know if it’s Goldman Sachs, but whoever it is you can wave goodbye to that.”    These comments sent prices plunging on Puerto Rican bonds.

Puerto Rico’s general-obligation bonds due in 2035, the most frequently traded securities, fell to as little as 30 cents on the dollar — down from an average of 46 cents a day earlier — as investors and traders tried to parse whether the president wanted to, or even could, forgive what’s owed outright.

Those bonds ended the day around 38 cents, after the White House budget director said not to take Trump too literally. Still, some on Wall Street said his remarks could encourage Puerto Rico to push for deeper concessions in court.

“This strengthens their position to haircut this debt even further,” said Nicholos Venditti, a portfolio manager with Thornburg Investment Management, who was inundated with emails about Trump’s comments.

Municipal bankruptcies are extremely rare, so even initially it was difficult for investors to handicap what the outcome would be as various bondholders stake rival claims on the island’s cash. The hurricane has made such forecasting harder by leaving billions of dollars of damage and causing the economy there to grind to a halt.

Thornburg, which doesn’t own Puerto Rico bonds, reckons recovery rates will be “terrible,” less than even Wednesday’s rout suggests. Venditti said he thinks general-obligation bonds — which have the highest claim on the central government’s revenue — will be worth around 20 cents on the dollar.

The next day, the White House backed off from Trump’s earlier remarks.

“I wouldn’t take it word for word with that,” Mick Mulvaney, director of the Office of Management and Budget, said on CNN in reference to President Trump’s suggestion that the United States might clear Puerto Rico’s debt.

Mr. Mulvaney said that the administration would be focusing its efforts on helping Puerto Rico rebuild from storm damage but that the commonwealth would continue to proceed through the debt restructuring process it was undertaking before the storm.

“Puerto Rico is going to have to figure out how to fix the errors that it’s made for the last generation on its own finances,” Mr. Mulvaney said.

This is a tough problem to solve, as one wonders whether Puerto Rico could solve its problems without driving away its tax base to the mainland.   Already, its population has shrunk by 8.4% since 2010.

Post Equifax, Credit Bureau Reform?

Spurred by Equifax’s massive data breach, lawmakers this week opened the door for bipartisan credit bureau reform.

Speaking after the Senate Banking Committee hearing, Chairman Mike Crapo, R-Idaho, predicted the anger would soon take the form of legislation to revamp the industry.

“[The] interest you saw on a bipartisan basis here will generate further discussion and I would expect that legislation would be generated from” that, he said.

Exactly what he and other lawmakers have in mind is unclear. But several lawmakers, particularly Democrats, have taken aim at the credit bureau business model itself, which involves collecting information on consumers without their knowledge or consent and selling it to businesses looking to extend credit or offer other products.

During the hearing Tuesday, Sen. Elizabeth Warren, D-Mass., said it is consumers, as well as financial institutions, who pay the cost of a data breach like Equifax, while the credit bureaus may even make a profit.

Warren has already introduced two bills to reform the industry—one to force credit bureaus to allow consumers to freeze their credit reports for free and another that would prohibit employers from accessing the credit reports of prospective employees. But she signaled she wanted to go further than that.

“Equifax and this whole industry should be completely transformed,” she said.

Expect to see more power for consumers to opt-out of sharing their credit information without their consent.    Ironically, Equifax pushed for free credit locks this week, while Experian declined to participate.

After decades of maintaining high walls between the credit data that his company collects and the citizens like you and me who simply want to know what it says and means, he claimed that he and his former company now want to put us in control. We should have the ability to lock any new creditor out of our credit files, he said, and the forthcoming service that makes it possible will be free forever.

Then, he threw down a gauntlet of sorts. “I would encourage TransUnion and Experian to do the same,” he said, referring to Equifax’s primary competitors. “It’s time we change the paradigm and give the power back to the consumer to control who accesses his or her credit.”

Experian’s response came about six hours later: Go pound sand. “We are looking at broader solutions that can help consumers effectively and securely operate in the credit economy, but it shouldn’t be done based on crisis-mode responses from Equifax,” Michael Troncale, an Experian spokesman, said in an emailed statement.

Nevertheless, reform is coming as the bureaus will have trouble finding a friend in Washington.

Yellen Changes Tone

Just a few weeks after defending new banking regulations in Jackson Hole, Federal Reserve Chair this week changed her tone, supporting efforts to reduce the regulatory burden.    And, we thought the Fed was completely removed from politics?    Perhaps, a possible re-appointment by President Trump may have an influence.

“The Fed has been working hard to ensure that its regulation and supervision of banks are tailored appropriately to the size, complexity and role different institutions play in the financial system,” she said Wednesday at a community banking conference here.

“For community banks, which by and large avoided the risky business practices that contributed to the financial crisis, we have been focused on making sure that much-needed improvements to regulation and supervision since the crisis are appropriate and not unduly burdensome,” she said.

The Trump administration is spearheading an effort to roll back some of the financial regulation adopted after the financial crisis. Ms. Yellen has defended many of those measures, but her remarks Wednesday served as a reminder that she has expressed openness to adjusting some.

She called attention to recent steps by the Fed and other federal agencies to cut red tape by simplifying several regulatory requirements.

Ms. Yellen last week cast a key vote in favor of releasing American International Group Inc. from federal oversight. She said in a statement Monday that “since the financial crisis, AIG has largely sold off or wound down its capital markets businesses, and has become a smaller firm that poses less of a threat to financial stability.”

Predict It now lists Yellen as the third most likely Fed Chair, behind Kevin Warsh and Jerome Powell, but ahead of Neel Kashkari and Gary Cohn.    In fairness, Ms. Yellen has spoken out previously in favor of reducing the burden on community banks.

The West is the Best

Western states are leading the nation in national consumer spending growth, with Utah leading the way.

People in the Rocky Mountains and Far West ramped up their spending in 2016 by 5.2% and 4.8%, respectively, exceeding the U.S.’s overall 4.0% spending growth in the same year, according to a Commerce Department report that uses non-inflation adjusted figures. Utahns increased their purchases by 6.2% in 2016, far outpacing their region and the country overall.

For six years the two regions have consistently held top spots for the fastest spending growth, and Utah has also shown some of the strongest consumption growth in recent years, taking one of the top-five spots since 2012.

The U.S.’s blossoming tech industry, which is concentrated in several West Coast cities, is helping to drive the region’s economic growth. Utah, for example, is home to tech companies including Qualtrics and Adobe Systems and has seen an influx of new residents.

“[They] not only are creating jobs, but also pay higher wages. This is especially true for areas like Seattle, Silicon Valley and the Bay Area, Denver, Salt Lake City, and Boise,” said Gus Faucher, the chief economist at PNC Financial Services Group.

The West also has strong trade ties with expanding Asian economies, boosting regional jobs, income, and spending, Mr. Faucher said.

Every other region, except for the Southeast, was lagging the national average.

The BAN Report: Equifax Under Attack / Inflation Too Low? / Irma Impact on Florida’s Economy / Dimon Trashes Bitcoin / Chemical Gets It-9/14/17

Equifax Under Attack

Last week, Equifax, announced a massive data breach impacting 143 million American consumers.

Equifax, one of the three major consumer credit reporting agencies, said on Thursday that hackers had gained access to company data that potentially compromised sensitive information for 143 million American consumers, including Social Security numbers and driver’s license numbers.

The attack on the company represents one of the largest risks to personally sensitive information in recent years, and is the third major cybersecurity threat for the agency since 2015.

Equifax, based in Atlanta, is a particularly tempting target for hackers. If identity thieves wanted to hit one place to grab all the data needed to do the most damage, they would go straight to one of the three major credit reporting agencies.

“This is about as bad as it gets,” said Pamela Dixon, executive director of the World Privacy Forum, a nonprofit research group. “If you have a credit report, chances are you may be in this breach. The chances are much better than 50 percent.”

Criminals gained access to certain files in the company’s system from mid-May to July by exploiting a weak point in website software, according to an investigation by Equifax and security consultants. The company said that it discovered the intrusion on July 29 and has since found no evidence of unauthorized activity on its main consumer or commercial credit reporting databases.

In addition to the other material, hackers were also able to retrieve names, birth dates and addresses. Credit card numbers for 209,000 consumers were stolen, while documents with personal information used in disputes for 182,000 people were also taken.

The US population is 326MM, and 24% are under 18, so that leaves almost 250MM Americans that have a credit profile, so it seems more likely than not that most people were impacted by this massive breach.   Senator Charles Schumer had some harsh words this week.

The Equifax Inc. data breach is “one of the most egregious examples of corporate malfeasance since Enron,” and the credit-reporting company’s chief executive officer and board should quit if they don’t act to address the situation within a week, Senate Minority Leader Chuck Schumer said Thursday.

It isn’t clear yet the extent of the breach, and what the hackers did with this information.   It’s hard to be sympathetic, as the credit bureaus for years have been known for sloppy behavior, and massive inaccuracies.

Inflation Too Low?

The Federal Reserve is grappling with a high-class problem: how can inflation and unemployment be so low at the same time?     Not surprisingly, the party poopers at the Fed are worried about this.

What looks like a dream economy could be a nightmare for the Federal Reserve chairwoman. Ms. Yellen’s worldview assumes that when unemployment is this low—4.4% in August—inflation should move up to the Fed’s target of 2%. Instead, it may have stabilized around 1.5%. That presents the Fed with some unpalatable options: deliberately overheat the economy for years to get inflation back up, then potentially induce a recession to stop it from overshooting; or give up on the 2% target, which could hobble its ability to combat future recessions.

This isn’t scaremongering: It’s the logical consequence of how central banks believe inflation operates. At the center of their model is the Phillips curve, according to which inflation edges lower when unemployment is above its natural, equilibrium level and putting downward pressure on prices and wages. Below that natural rate, also known as full employment, inflation crawls higher.

So, if the Fed continues to raise rates, could it push inflation even lower?     Inflation should be higher now, and the rate increases should be taming it.    There are three theories.

One is that the economy actually isn’t at full employment; either the natural rate has dropped or many unemployed aren’t being counted properly. But history and mounting reports of labor shortages militate against that.

The second, and Ms. Yellen’s preferred theory, is noise: One-off drops in prices such as for cellphone plans, prescription drugs and online purchases are masking the underlying trend. But one-off movements can’t explain years of undershooting. As Lael Brainard, a Fed governor, noted last week, some one-offs, such as drug-price hikes last year, must be pushing the other way.

That leaves the third explanation: Trend inflation has fallen. Until recently, Fed officials scoffed at the possibility. 

Pity the poor economists, as their beloved Philips curve may no longer be reliable.     Moreover, many have been preparing for a rise in rates that may never happen.

Irma Impact on Florida’s Economy

Hurricane Irma, which was fortunately less devastating than expected, caused significant damage to two important segments of Florida’s economy, tourism and agriculture.

Its citrus groves are littered with knocked-down fruit and felled trees. Beach hotels and restaurants are cleaning up after being shut for a week with forced evacuations. After the cancellation of hundreds of flights and numerous cruises, the state’s airports and seaports are just reopening. And on the Space Coast, home to the Kennedy Space Center, officials were still assessing potential damage and disruptions to launch schedules.

In the tourism magnet of Miami Beach, where the city’s roughly 22,000 hotel rooms stood virtually empty for a week, the lost revenue from that stream alone could top $25 million, according to city and industry tourism figures.

Losses in agriculture, the state’s second largest industry after tourism, are expected to be in the billions of dollars, according to the Florida Farm Bureau. In Okeechobee County in southern Florida, for instance, an informal evaluation cited by the Farm Bureau pegged the loss at $16 million.

Overall, the total economic cost of Irma, including property damage and lost economic output, could reach $83 billion, according to an estimate by Moody’s Analytics. That compares with a toll as high as $108 billion for Hurricane Harvey, which struck Texas last month, the firm said.

An executive at a beverage company told us that “due to the economics, we are evaluation 2018 business priorities and strategies, recognizing that some significant changes may be needed to correct against the crop shortage.”   Prices for orange juice, for example, could skyrocket.

As we discussed during Harvey, it will be weeks until the damages are quantified, and who is footing the bill?    Floridians have less home equity than Houstonians, but losses will be far more tied to wind damage, as opposed to the flood damage in Houston.     Nevertheless, we believe the long-term impact of natural disasters is generally positive after a short-term decline in output.

Dimon Trashes Bitcoin 

Jamie Dimon came out swinging this week against Bitcoin.

JPMorgan Chase CEO Jamie Dimon took a shot at bitcoin, saying the cryptocurrency “is a fraud.”

“It’s just not a real thing, eventually it will be closed,” Dimon said Tuesday at the Delivering Alpha conference presented by CNBC and Institutional Investor.

Dimon joked that even his daughter bought some bitcoin, looking to cash in on a trend that has seen it soar more than 300 percent this year.

“I’m not saying ‘go short bitcoin and sell $100,000 of bitcoin before it goes down,” he said. “This is not advice of what to do. My daughter bought bitcoin, it went up and now she thinks she’s a genius.”

In an appearance at a separate conference earlier in the day, Dimon said bitcoin mania is reminiscent of the tulip bulb craze in the 17th century.

“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,” Dimon said at a banking industry conference organized by Barclays. “Currencies have legal support. It will blow up.”

Dimon also said he’d “fire in a second” any JPMorgan trader who was trading bitcoin, noting two reasons: “It’s against our rules and they are stupid.”

Predictably, Bitcoin prices plunged and are now down 25% since their September 1 high, due to Dimon’s comments and China’s steps to shut down exchanges.

Chemical Gets It

This week Chemical Financial, whose branch network swelled due to a series of accusation, announced a plan to slash branches.

The $19 billion-asset company disclosed in a regulatory filing Wednesday that it is in the process of closing 38 branches, or 15% of its network. It will also cut about 7% of its workforce, or roughly 235 jobs, by the end of this month. Among those leaving is Leonardo Amat, Chemical’s chief operating officer of business operations.

The effort should reduce annual expenses by $20 million, with some of the savings factoring into the bottom line in the fourth quarter. The cuts are in addition to the $52 million in annual expenses Chemical eliminated nearly a year ago in association with the Talmer deal.

Chemical said it plans to use some of the new savings to hire commercial lenders and pursue higher-yielding loans.

The company will incur a total of $18 million in charges during the third and fourth quarters, largely to cover severance and retirement expenses.

The latest initiative is “substantial,” Scott Siefers, an analyst at Sandler O’Neill, wrote in a note to clients, estimating that the targeted expenses represent about 5% of the company’s annualized core expense run rate.

We have complained for years that banks have been far too slow to adapt to changing consumer preferences, as branch visits have effectively free-fallen in the past decade.    Too many bank executives overestimate the value of their branch network and have not moved fast enough.    We think most banks could slash their branches from anywhere from 10-35%.    Kudos to new CEO David Provost for making a bold move

The BAN Report: The $8MM Eastern SBA 504 Portfolio / Fed Waffling Over Rate Increases? / Family-Owned Banks Near Endgame / Loosen De Novo Capital Requirements? / Total Solar Eclipse Monday-8/16/17

The $8MM Eastern SBA 504 Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $8MM Eastern SBA 504 Portfolio.”  This exclusively-offered portfolio is offered for sale by two institutions (“Seller”).   Highlights include:

  • A total unpaid principal balance of $8,123,034, comprised of 4 loans
  • All loans are performing SBA 504 1st mortgages
  • Portfolio has a weighted average coupon of 6.32%
  • All loans are secured by first mortgages on limited service hospitality properties
  • Assets are located in Florida, New York, Ohio, and Indiana
  • All loans have personal guarantees
  • All loans have prepayment penalties
  • Opportunity to acquire depository relationships
  • Community Reinvestment Act (“CRA”) eligible
  • All loans will trade for a premium to par and any bids below par will not be entertained

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.

Please read the executive summary for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

Fed Waffling over Rate Increases?

The Federal Reserve is split on the timing of the next rate increase, according to the minutes from the meeting last month.

Minutes from the July 25-26 meeting released Wednesday reveal growing concern among some officials that recent soft inflation numbers could be a sign that something has fundamentally changed in the economy, leading them to suggest holding off on raising rates again for the time being.

But officials also agreed to soon begin the yearslong process of shrinking the central bank’s securities holdings, perhaps as early as September, according to the minutes released following the customary three-week lag.

The Fed has raised its benchmark short-term rate twice this year and in June penciled in one more for 2017, without indicating when that might occur. But some officials at the July meeting argued against another increase until the data “confirmed that the recent low readings on inflation were not likely to persist and that inflation was more clearly on a path toward” their 2% target.

The Fed “could afford to be patient under current circumstances,” they said.

Others, however, worried that the strong labor market could produce a spurt of inflation above 2% that could be difficult to control. This group cautioned that waiting too long to raise rates “could result in an overshooting of the [Fed’s] inflation objective that would likely be costly to reverse,” the minutes said.

Yields on the 10-year Treasury note fell following the release of the minutes, and the dollar weakened.

Conflicting economic data is the culprit and markets are no longer sure there will be another rate increase this year, as investor surveys show only 50% believe there will be one.     We think another rate increase is highly probable, and the question is when, not if.    But, after the next rate increase, it might be awhile before the Fed acts again.

Family-Owned Banks Near Endgame

While family-owned banks are not going anywhere, many are approaching a critical juncture, as the next generation has different attitudes during the industry, according to a great story in the American Banker.

Many face the same hurdles as other banks, including regulatory costs, heightened competition and revenue challenges. A large number of family owned banks are small and closely held, creating concerns about scale and raising capital.

Other wrinkles include family succession and tax and estate planning. Many members of the current generation were responsible for navigating their banks through the financial crisis and its aftermath.

To be sure, there are advantages to being family owned. Owners have more skin in the game than many other institutions. And being closely held often allows management to be nimble and make long-term decisions without having to sell their strategy to a large investor base.

All of these factors weigh on family-owned banks, particularly when one generation is looking to step aside. In that moment, the family is left with three options: promote a new leader from within, hire an outsider or hire an investment bank to sell the bank.

We have worked with several family-owned banks and we have noticed a lack of interest from the next generation in the bank.   Perhaps, continuous regulation isn’t as fun as managing an office building portfolio or an operating business.

The trigger point will be either the death or retirement of the primary family owner.    Death brings a fat estate tax bill that needs to be paid.   Many self-made owners don’t want to see their asset mismanaged by outsiders, so retirement often means a sale or recapitalization.

There are several large family-owned banks, including First Citizens, BOK Financial, and Arvest Bank, all of which are over $10 billion.

Loosen De Novo Capital Requirements?

Federal Financial Analytics released a paper this week, advocating lowering the capital requirements of De Novo Banks, in order to encourage more formations.   It’s a provocative idea that is worth discussion, although mostly from an economic development standpoint.

The post-crisis capital requirement for start-ups regardless of business plan and actual risk profile is essentially a sin tax levied against new charters for the sins of old ones before the crisis and, perhaps, those of the FDIC and other regulators that chartered them. As with so much in post-crisis regulation, regulatory-capital requirements lie at the heart of each new bank’s strategic dilemma.

When we looked at a new bank, the FDIC required that it hold an eight percent leverage ratio (LR) – more than double the LR otherwise required of small banks and even well above the six percent enhanced supplementary LR required of the nation’s largest and, the FDIC believes, riskiest banks. The FDIC has belatedly recognized the cost of its sin tax on new charters. As a result, it has shortened the time a new bank has to be in the penalty box. In its most recent handbook on new-bank charters, the FDIC has relented somewhat – now, the eight percent LR is required only for three years, not the initial seven-year span that deterred virtually all possible new entrants.

A necessary change, but far from sufficient to spur new charters. Shortening the time investors lose money doesn’t mean they still won’t lose it in amounts and for longer than likely in other investment opportunities – and there are many of them.

Is the three-year sin tax an insuperable barrier to new charters? Rising interest rates may boost profitability along with improved economic growth, but three years of punitive capital standards and uncertain relief in subsequent years make the twenty percent ROI conservative investors demand difficult, if not impossible. In short, few new charters are to be had since new, traditional charters take investors and the investors we know whom the FDIC might approve have taken a hike.

There’s no question that investor interest in de novo banks has been slim, so yes, lowering regulatory standards for de novos would prompt more interest.    But, a lot of de novos did poorly in the last decade, so the risks from a safety and soundness protective are high.     Moreover, there are still many existing charters that are seeking capital, so why work too hard to create new ones while there is still excess supply?   Nevertheless, the total lack of charter formations is a problem and should be addressed.

Total Solar Eclipse Monday

Lunch breaks on Monday may be longer than usual, as millions observe the first total eclipse of the sun in decades.    If you miss it, the next one won’t be until 2024.   The best places to view the eclipse are in the middle part of the country from Charleston, SC west towards Nashville, St. Louis, and west through southern Oregon.   NASA listed hundreds of events by location on their website.

On Monday, August 21, 2017, all of North America will be treated to an eclipse of the sun. Anyone within the path of totality can see one of nature’s most awe inspiring sights – a total solar eclipse. This path, where the moon will completely cover the sun and the sun’s tenuous atmosphere – the corona – can be seen, will stretch from Salem, Oregon to Charleston, South Carolina. Observers outside this path will still see a partial solar eclipse where the moon covers part of the sun’s disk. NASA created this website to provide a guide to this amazing event. Here you will find activities, events, broadcasts, and resources from NASA and our partners across the nation.

Mashable had a great video on what is exactly going to happen on Monday.    Be sure to check it out!

The BAN Report: SNC Portfolio Risk Declines / New GE CEO Takes Reins / The Benefits of Tax Reform / US Auto Sales Slump-8/3/17

SNC Portfolio Risk Declines

The Agencies released their semi-annual review of the Shared National Credit Program (SNC).    The findings suggest that, while still elevated, risk in the portfolio is declining.

Risk in the portfolio of large syndicated bank loans declined slightly but remains elevated, according to the Shared National Credit (SNC) Program Review released today by the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

The high level of credit risk in the SNC portfolio stems primarily from distressed borrowers in the oil and gas (O&G) sector and other industry sector borrowers exhibiting excessive leverage. The review also found that credit risk management practices at most large agent banks continued to improve, consistent with the 2013 Interagency Guidance on Leveraged Lending.

The percentage of non-pass commitments decreased year-over-year from 10.3 percent to 9.7 percent of the SNC portfolio. Commitments rated special mention and classified decreased from $421.4 billion in 2016 to $417.6 billion in 2017.

A shared national credit is any loan or formal loan commitment, and any asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates, that aggregates to $20 million or more and is shared by three or more unaffiliated federally supervised institutions, or a portion of which is sold to two or more unaffiliated federally supervised institutions.

Credit must be given to the Agencies for their foresight in attacking leveraged lending in 2013, which is responsible for much of the risk in this portfolio.     Problems in the oil and gas sector appear to have peaked as well.

New GE CEO Takes Reins

John Flannery started work this week as CEO of General Electric, replacing Jeff Immelt, who served for 16 years.    On his first day, he sent a letter to his employees.

“I have a relentless focus on three things: customers, team, and execution/accountability,” the letter said. “When we bring those three things together we will create ‘our GE’.”

Flannery is encouraging employees in every role and function to always have customers as the “guiding principle.” He is also outlining expectations for a great team, including transparency, candor and an ability to debate real issues, adding that when those aren’t discussed, “we are an accident waiting to happen.”

But it’s the third topic — execution and accountability — Wall Street is sure to key in on.

The new CEO said that over the past month he met with 100 investors face-to-face to get their views on the company as he begins a deep dive into GE’s different businesses, a review expected to culminate in updated guidance come November.

“Investors want us to win — they know that GE has world class businesses and technology with unprecedented global reach and scale. They understand the importance of GE in the world but they think we are underperforming. They are expecting better execution on cash, margins and there is a focus on taking cost out,” he wrote.

“They understand how massive the portfolio transformation has been since 2001, but now we need an intense focus on running the company well. They also expect more accountability internally and externally and asked that we find a way to simplify our metrics.”

“I heard them loud and clear,” he said.

GE’s stock price languished under prior CEO Jeff Immelt, dropping nearly 30% during his tenure.   While he did reorganize the company, shed some lagging businesses and trimmed GE Capital, Mr. Immelt didn’t have Jack Welch’s toughness and single-minded focus on results.    Flannery is calling for some of the candor that Mr. Welch was famous for.    We especially like his three tenets.

“Let’s be amazing for our customers. Let’s be the best team players in the world. Let’s execute and produce results we can be proud of. Let’s win.”

SNC Portfolio Risk Declines

The Agencies released their semi-annual review of the Shared National Credit Program (SNC).    The findings suggest that, while still elevated, risk in the portfolio is declining.

Risk in the portfolio of large syndicated bank loans declined slightly but remains elevated, according to the Shared National Credit (SNC) Program Review released today by the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

The high level of credit risk in the SNC portfolio stems primarily from distressed borrowers in the oil and gas (O&G) sector and other industry sector borrowers exhibiting excessive leverage. The review also found that credit risk management practices at most large agent banks continued to improve, consistent with the 2013 Interagency Guidance on Leveraged Lending.

The percentage of non-pass commitments decreased year-over-year from 10.3 percent to 9.7 percent of the SNC portfolio. Commitments rated special mention and classified decreased from $421.4 billion in 2016 to $417.6 billion in 2017.

A shared national credit is any loan or formal loan commitment, and any asset such as real estate, stocks, notes, bonds, and debentures taken as debts previously contracted, extended to borrowers by a federally supervised institution, its subsidiaries, and affiliates, that aggregates to $20 million or more and is shared by three or more unaffiliated federally supervised institutions, or a portion of which is sold to two or more unaffiliated federally supervised institutions.

Credit must be given to the Agencies for their foresight in attacking leveraged lending in 2013, which is responsible for much of the risk in this portfolio.     Problems in the oil and gas sector appear to have peaked as well.

New GE CEO Takes Reins

John Flannery started work this week as CEO of General Electric, replacing Jeff Immelt, who served for 16 years.    On his first day, he sent a letter to his employees.

“I have a relentless focus on three things: customers, team, and execution/accountability,” the letter said. “When we bring those three things together we will create ‘our GE’.”

Flannery is encouraging employees in every role and function to always have customers as the “guiding principle.” He is also outlining expectations for a great team, including transparency, candor and an ability to debate real issues, adding that when those aren’t discussed, “we are an accident waiting to happen.”

But it’s the third topic — execution and accountability — Wall Street is sure to key in on.

The new CEO said that over the past month he met with 100 investors face-to-face to get their views on the company as he begins a deep dive into GE’s different businesses, a review expected to culminate in updated guidance come November.

“Investors want us to win — they know that GE has world class businesses and technology with unprecedented global reach and scale. They understand the importance of GE in the world but they think we are underperforming. They are expecting better execution on cash, margins and there is a focus on taking cost out,” he wrote.

“They understand how massive the portfolio transformation has been since 2001, but now we need an intense focus on running the company well. They also expect more accountability internally and externally and asked that we find a way to simplify our metrics.”

“I heard them loud and clear,” he said.

GE’s stock price languished under prior CEO Jeff Immelt, dropping nearly 30% during his tenure.   While he did reorganize the company, shed some lagging businesses and trimmed GE Capital, Mr. Immelt didn’t have Jack Welch’s toughness and single-minded focus on results.    Flannery is calling for some of the candor that Mr. Welch was famous for.    We especially like his three tenets.

“Let’s be amazing for our customers. Let’s be the best team players in the world. Let’s execute and produce results we can be proud of. Let’s win.”

The Benefits of Tax Reform

Writing in the New York Times, Eduardo Porter made a convincing case for the benefits of tax reform, beginning with a reduction in the US corporate tax rate.

As multinational corporations have hopscotched around the globe to find the most profitable base from which to run their affairs, they have set off furious competition among governments hoping to lure investment by slashing tax rates to the bone.

Smaller countries like Ireland or Hungary have been the most aggressive in this race. But big industrial powers have followed, too. Among the 35 members of the Organization for Economic Cooperation and Development, the policy think tank of the world’s industrialized countries, almost every one has reduced its corporate tax rate over the last 17 years.

There are two exceptions: Chile and, alone among the world’s wealthy nations, the United States.

In the United States, the federal tax rate on corporate profits is stuck at 35 percent— the same as 17 years ago, and more. This inability to adapt to economic reality is a signal of the impossibility, in the United States, of pragmatic, sensible tax reform.

Once one of the lowest among economically advanced countries, the American tax rate on corporate profits is by now the highest. And still, corporate tax revenues amount to only 2.2 percent of the nation’s gross domestic product, half a percentage point less than the O.E.C.D. average. Even Ireland collects more as a share of its economy.

A produced reduction of the corporate tax rate from 35 to 20 percent will cost $1.5 trillion over ten years, so the tough part is where to find the savings.    Lowering deductions sounds great, but the largest ones are so popular.    According to Pew, the largest tax deductions could make up the cost fairly easily, but which ones to cut?     Eliminating deductions for home mortgage interest, and state and local taxes would make up the difference, but these tax breaks are extremely popular.

While there is bipartisan support for tax reform, it is going to be very difficult to achieve.    For example, the last major tax reform effort (The Tax Reform Act of 1986) took two brutal years to accomplish, and led to some unforeseen consequences, such as a real estate recession and SNL crisis.    The author though makes a convincing argument that our current tax code is counterproductive and loaded with distortions.

US Auto Sales Slump

July saw the biggest decline in US vehicle sales this year, dropping 7% from the prior year.

U.S. sales of new cars and trucks fell 7 percent to 1.4 million in July, according to Autodata Corp. It was the seventh straight month of lower sales, and the biggest percentage drop so far this year.

July is often a slower month as buyers vacation and wait for dealers to offer model year clearance events in August and September. This year, big cuts in sales to rental car fleets and commercial customers were also a factor. Hyundai, for example, cut its fleet sales by 77 percent in July.

General Motors said its sales fell 15 percent in July, while Hyundai’s dropped 28 percent. Ford’s sales were down 7.5 percent. Fiat Chrysler’s sales declined 10 percent. Volkswagen’s sales fell 5.8 percent, while Nissan’s sales fell 3 percent. Honda’s sales were down 1.2 percent.

Two major automakers bucked the trend. Toyota’s sales rose 3.6 percent while Subaru’s were up 7 percent.

Analysts have been predicting lower U.S. sales this year as demand levels out after an unprecedented seven straight years of growth. U.S. new vehicle sales hit a record 17.55 million last year.

July’s pace would put annual sales at 16.7 million. That was lower than expected for Alec Gutierrez, a senior market analyst with the car shopping site Kelley Blue Book. Still, he’s maintaining his full-year forecast of 17.1 million sales.

The auto industry is responding with increased incentives.    Nevertheless, this year’s decline is not alarming after such a strong run for the industry, culminating in last year’s record year.    Weaknesses in auto lending may be playing a factor as used car prices have fallen due to an uptick in defaults.

The BAN Report: Bye, Bye LIBOR / The GSE Profit Sweep / Margin Loans Spike / The Downside of High Rents-7/27/17

Bye, Bye LIBOR

This week, the UK’s Financial Conduct Authority announced a plan to phase out LIBOR by the end of 2021, causing massive disruption in loans tied to this index.

On Thursday a top U.K. regulator said it would phase out the London interbank offered rate, a scandal-plagued benchmark that is used to set the price of trillions of dollars of loans and derivatives across the world.

Andrew Bailey, the chief executive of the U.K.’s Financial Conduct Authority, which regulates Libor, said that work would begin to plan for a transition to alternate benchmarks by the end of 2021. “We do not think markets can rely on Libor continuing to be available indefinitely,” he said.

Libor is calculated every working day by polling major banks on their estimated borrowing costs. Its integrity was called into question following a rate-rigging scandal where traders at numerous banks were able to nudge it up or down by submitting false data. Banks were fined billions of dollars and several traders were sent to jail.

Over the last five years regulators have tried to find ways to tie Libor submissions to actual trades, as opposed to estimations. But in several cases that proved impossible because interbank lending has hugely diminished, Mr. Bailey said.

The push to ditch Libor creates a headache for authorities who should drum up alternative benchmarks and banks that face having to rewrite trillions of dollars’ worth of contacts. In financial markets Libor is ubiquitous, being used to price financial products ranging from mortgages to complex derivatives. Industry bodies have yet to agree on fall back rates that can be inserted into existing contracts if Libor suddenly ceases to exist.

This is a big problem for loans that are priced off LIBOR.   Here’s what many standard loan documents say:

“If the 5-Year LIBOR SWAP Rate becomes unavailable at any time, Lender shall select a new index or other appropriate measure as a basis for setting the Interest Rate.”

Jason Kuwayama of Godfrey and Kahn said, ““A great number of lenders switched away from using LIBOR as an interest index after the price manipulation scandal in 2012.  I don’t see this as a huge issue for commercial loans because most will mature before LIBOR is phased out.  But for those that still use LIBOR, the bigger issue arises with longer term loans for which the bank entered into an interest rate swap or a similar derivative instrument that was indexed to LIBOR.    Lenders who have hedged themselves into that position should look to amend their documents sooner rather than later.”

The GSE Profit Sweep

The New York Times had a great article about how the US Treasury opportunistically changed the terms of the bailout of Fannie and Freddie in 2012, so that they could seize the expected spike in profits from the GSEs.

In August 2012, the federal government abruptly changed the terms of the bailout provided to Fannie Mae and Freddie Mac, the mortgage finance giants that had been devastated by the financial crisis. Instead of continuing to receive payments on the taxpayer assistance, Treasury officials decided to begin seizing all the profits both companies generated every quarter.

It was an unusual move, given that the companies still had public shareholders. But it was necessary, the Treasury said, to protect taxpayers from likely future losses in their operations. Justice Department lawyers have reiterated this view in court, saying that the bailout terms were modified because the companies were in a death spiral.

But newly unsealed documents show that as early as December 2011, high-level Treasury officials knew that Fannie and Freddie would soon become profitable again. The materials also show that government officials involved in the decision to divert the profits knew the change would most likely generate more money for Treasury than the original rescue terms, which required the companies to pay taxpayers 10 percent annually on the bailout assistance they had received.

The US government advanced 187.5 billion to bail out Fannie and Freddie, but they have since returned 270.9 billion to the government, 83.4 billion more than their investment.     This is all coming out because Fannie and Freddie shareholders are claiming that many of these profits belong to them, and the government essentially took private property without compensation.

Margin Loans Spike

Fueled by a boom in asset values, Wall Street has been pushing consumers to borrow against their stock and bonds.

Executives at Morgan Stanley earlier this month highlighted these loans to individuals as a big growth area and revenue driver, saying the loans helped expand the bank’s overall wealth lending by about $3.5 billion, or 6%, in the second quarter. On Thursday, Goldman Sachs Group Inc. took a step toward growing its securities-based lending business through a new partnership with Fidelity Investments.

For brokerages, these so-called securities-backed loans have become a reliable source of revenue in the years since the financial crisis as firms have begun moving away from a business model of charging commissions for trading to a system of fees based on assets under management. The loans themselves help brokers retain these assets because customers don’t have to sell stocks and other securities when they need cash. These loans have also become a big factor in brokers’ compensation.

Clients, in turn, are able to borrow money at relatively low interest rates because the loans are secured.

Margin loans are usually fairly low-risk for the lender, as the leverage is limited to 50% at the time of purchase.   The problem with a spike in margin loans is it can accelerate a downturn in asset prices, as securities firms must liquidate assets if margin calls cannot be met.   It can also be expensive to the borrower, as most margin loans are priced in the high single digits.

The Downside of High Rents

Bloomberg had a great story about how independent restaurants in trendy neighborhoods are being pushed out by higher rents.    The irony is the very reason many of these neighborhoods became popular was due to their unique restaurants, which are being replaced in many cases by bland corporate tenants.

In 1995, the restaurateur Jonathan Morr opened a 3,800-square-foot noodle shop called Republic on Union Square West in New York City, paying an annual rent of $220,000. “The rent was relatively inexpensive for what it was,” he said. “But remember, when I opened, Union Square was very different than it is today. There was very little there along with the drugs in the park. At the time we were taking a risk.”   

Twenty-two years later, Union Square has been gentrified beyond recognition. It’s home to a Whole Foods supermarket and an apartment building whose penthouse sold for more than $16 million. And now Republic is on its way out. Morr said he expects to close the space by the end of 2017, three and a half years before the lease expires. “It’s just a fact of life—there’s no way that we’re staying there after the lease is up,” he said. Taking advantage of an impatient landlord, Morr plans to leave the space early and will “split the difference between what [the landlord] gets from us and what he’ll get from the next tenant, and call it a day,” he said.

Republic is joining a slow but distinct restaurant exodus from the area, following in the footsteps of Danny Meyer’s Union Square Cafe, whose prohibitively high rent forced it to search for a new space in 2015.  “There’s no such thing as a New York restaurant that’s immune to real estate,” said Richard Coraine, the chief of staff for Union Square Hospitality Group. He noted that the original, 1985 rent for USQ was $4,500 a month. A roughly fivefold increase over 30 years is what prompted Meyer to move his beloved restaurant to its current home, on a corner a few blocks northeast of Union Square.

This phenomenon is pushing out many tenants that were vital to the fabric of these neighborhoods.   Diners, pizza shops, and high-end restaurants are being replaced by Starbucks and other corporate tenants.    The rent for Blue Water Grill was raised to over $2MM a year, which means the restaurant might have to generate $20MM a year in sales just to break even.   According to Restaurant Business, only 19 independent restaurants in the country generated $20MM in sales in 2016.    Moreover, in expensive cities, very few restaurants own their own real estate, which would allow them to maintain some cost certainty.

The BAN Report: What’s Eating the Examiners? / Banks Stay Stingy on Deposits / CFPB Curbs Arbitration / Fed to Slow Rate Increases? / After Walmart Leaves-7/13/17

What’s Eating the Examiners?

The Office of the Comptroller of the Currency, the primary regulator for most of the US banks by assets, published its “Semiannual Risk Perspective for Spring 2017” last week.   This important publication tells industry participants what issues are most at the forefront of bank examiners concerns today.   A few concerns of note:

  • Strategic risk remains elevated as banks make decisions to expand into new products or services or consider new delivery channels and continue merger and acquisition (M&A) activity. Banks face competition from nonfinancial firms, including financial technology (fintech) companies entering the traditional banking industry. This competition is causing changes in the way customers and financial institutions approach banking.
  • Credit underwriting standards and practices across commercial and retail portfolios remain an area of OCC emphasis. Over the past two years, commercial and retail credit underwriting has loosened, showing a transition from a conservative to an increasing risk appetite as banks strive to achieve loan growth and maintain or grow market share.
  • Strong CRE loan growth has resulted in increasing credit concentrations. Results from recent supervisory activities raise concern over the quality of CRE risk management, particularly as it relates to managing concentration risk.
  • Operational risk continues to challenge banks because of increasing cyber threats, reliance on concentrations in significant third-party service providers, and the need for sound governance over product service and delivery.
  • Some banks continue to face challenges complying with Bank Secrecy Act (BSA) requirements as money laundering and terrorism financing methods evolve.
  • Multiple new or amended regulations are posing challenges to change management processes and increasing operational, compliance, and other risks.

These concerns are basically unchanged from the last report in Fall of 2016.    However, a few larger macro risks were added:

  • Heavy reliance on third-party service providers for critical activities and the increasing changes driven by new products offered by emerging fintech companies create increased risk relating to third-party risk management.
  • Credit risk in banks with high concentrations in agricultural lending is increasing. Commodity prices for grain crops have declined over the past three years and livestock, and dairy prices have declined over the last two years, resulting in lower income and cash flow for agriculture industry borrowers.
  • Changes in interest rates and the yield curve are raising interest rate risk. This increased risk is evident in changes in unrealized gains and losses in bank investment portfolios with long duration assets

Sometimes, one gets the impression that the OCC does not know what to do with fintech.    They are very worried about banks relying on third-party service providers to offer additional products to their customers, while they are still considering a fintech charter.

The concern about agricultural lending is a new concern, as lower commodity prices could cause problems through agricultural portfolios.   Fortunately, a large portion of agricultural lending involves government support.    The worry about interest rate risk has been elevated as well.

Banks Stay Stingy on Deposits

Still flush with deposits, banks have not budged on increasing deposit yields despite four rate increases.    So far, consumers have stood pat, perhaps conditioned for low yields for nearly a decade.

Banks have been dealing with interest-rate cycles and depositors for decades, but a number of factors, both psychological and technological, make this time of rising rates different. A decade of near-zero rates, more competition from online firms, less loyalty from customers and new capital rules, among other factors, are making preparations more difficult.

Of course, banks don’t want to raise deposit rates until they have to. Though they tend to raise certain loan rates as soon as the Fed makes a move, they prefer to let deposit rates lag, bolstering profits.

And when they do raise rates, it is often because competition has forced them. “Nobody wants to be first,” said Greg Carmichael, chief executive of Fifth Third Bancorp. “But nobody wants to lose deposits.”

Bank of America is a case in point. Its cost for U.S. interest-bearing deposits in the first quarter was just 0.09%—unchanged from the prior quarter and the lowest among its peers.

Talking with analysts recently, finance chief Paul Donofrio said it seemed unlikely that customers would leave the bank to chase rates because many had their primary checking accounts there.

Or at least they used to care. A complicating factor is that depositors haven’t thought of bank accounts as income-producing instruments in nearly a decade, thanks to the Fed’s near-zero interest-rate policies.

Given that, many customers have come to view banks in terms of the services they offer, such as mobile banking, rather than the rates they pay.

How long will this continue?    With lagging loan growth this year, banks are not lacking in funding, so it makes little sense to pay up for more deposits.    We suspect that someone will eventually go first and other banks will have to follow.   But, in the meantime, this is great for bank earnings as banks can continue to increase loan yields while funding costs are flat, thus boosting net interest margins.

CFPB Curbs Arbitration

This week, the Consumer Financial Protection Bureau adopted a rule that would make it easier for consumers to sue financial firms by  breaking up mandatory arbitration clauses common in consumer loans.

The nation’s consumer watchdog adopted a rule on Monday that would pry open the courtroom doors for millions of Americans, by prohibiting financial firms from forcing them into arbitration in disputes over their bank and credit card accounts.

The action, by the Consumer Financial Protection Bureau, would deal a serious blow to banks and other financial firms, freeing consumers to band together in class-action lawsuits that could cost the institutions billions of dollars.

“A cherished tenet of our justice system is that no one, no matter how big or how powerful, should escape accountability if they break the law,” Richard Cordray, the director of the consumer agency, said in a statement.

The new rule, which could take effect next year, is almost certain to set off a political firestorm in Washington. Both the Trump administration and House Republicans have pushed to rein in the consumer finance agency as part of a broader effort to lighten regulation on the financial industry.

Lawmakers have 60 legislative days to overturn this rule, and there will undoubtedly be lots of pressure from the banking industry, which had worked for a decade to move consumer disputes from the courts to arbitration.

Rob Nicholas, ABA President and CEO, said “We’re disappointed that the CFPB has chosen to put class action lawyers – rather than consumers – first with today’s final rule.  Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration.  The Bureau’s own study found that arbitration has significant benefits over litigation in general and class actions in particular.  Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation, which helps keep costs down for all consumers.”

From a practical standpoint, this rule would dramatically increase the number of class action lawsuits, as the arbitration clauses have made class action suits very difficult.    Consumer lending has already been viewed as toxic by many banks, and this ruling, if it stands, will not make it any easier.

Fed to Slow Rate Increases?

Traders often hear what they want to hear to support their market view, and yesterday’s hearing by Janet Yellen was no exception.

Ms. Yellen added, however, that the Fed was paying close attention to the recent weakness of inflation. While emphasizing that she expected prices to start rising more quickly, she said persistent weakness could lead the Fed to raise interest rates more slowly.

“It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years,” she said. “We’re watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot will be persistent.”

Ms. Yellen’s testimony before the House Financial Services Committee lifted stock prices and lowered bond yields on Wednesday. Investors tend to celebrate any sign that the Fed might slow the pace of its interest-rate increases.

So, rates will probably continue to go up, unless inflation is not as bad as we thought.

After Walmart Leaves

While there are better sources for one’s sympathy, Walmart, the nation’s largest retailer, gets blamed for destroying communities when it opens a store, and then destroying them when they leave.

Much has been written about what happens when the corporate giant opens up in an area,with numerous studies recording how it sucks the energy out of a locality, overpowering the competition through sheer scale and forcing the closure of mom-and-pop stores for up to 20 miles around. A more pressing, and much less-well-understood, question is what are the consequences when Walmart screeches into reverse: when it ups and quits, leaving behind a trail of lost jobs and broken promises.

The subject is gathering increasing urgency as the megacorporation rethinks its business strategy. Rural areas like McDowell County, where Walmart focused its expansion plans in the 1990s, are experiencing accelerating depopulation that is putting a strain on the firm’s boundless ambitions.

When you combine the county’s economic malaise with Walmart’s increasingly ferocious battle against Amazon for dominance over online retailing, you can see why outsized physical presences could seem surplus to requirements. “There has been a wave of closings across the US, most acutely in small towns and rural communities that have had heavy population loss,” said Michael Hicks, an economics professor at Ball State University who is an authority on Walmart’s local impact.

On 15 January 2016, those winds of change swept across the country with a fury. Walmart announced that it was closing 269 stores worldwide, 154 of them in the US. Of those, 14 were supercenters, the gargantuan “big boxes” that have become the familiar face of the company since the first opened in Missouri in 1988.

While these stories are unfortunate, towns with shrinking populations in a tough retail environment are going to continue to see loss of large retailers.

The BAN Report: Oil Prices in Bear Market Again While Banks Step Up Lending / Banks Curb Provisioning:SNL / Cred Report Black Marks Vanish / Uber CEO Out-6/21/17

Oil Prices in Bear Market Again While Banks Step Up Lending
Steps by OPEC members to limit oil production have not worked, as US producers have stepped up production, sending oil prices back into a bear market as with a 20% decline since February.    
Oil prices are back in bear-market territory, frustrating OPEC members that cut production in an attempt to boost prices and renewing fears that falling prices could spill into stocks and other markets.
A persistent glut has weighed on prices for most of the past three years, a blow to investors who believed that the Organization of the Petroleum Exporting Countries’ move this year to limit production would provide relief.
Instead, U.S. producers ramped up production when the world was already swimming in oil as OPEC members, Russia and other producing nations curtailed output.
U.S. oil production is up 7.3% to 9.3 million barrels a day since OPEC announced plans in November to cut output, and the number of active rigs in the U.S. is at a two-year high.
Prices are down 20.6% since Feb. 23, marking the sixth bear market for crude in four years and the first since August. Crude prices have lost 62% since settling at $115.06 a barrel three years ago. A bear market is typically defined as a decline of 20% or more from a recent peak, while a bull market is a gain of 20% or more from a recent trough.
Obviously, this is good news for consumers, the airline industry, and hotels, but could cause problems in regions dependent on energy.    Meanwhile, many US banks are increasing lending in the energy sector, after paring back in prior years.   Comerica, Zions, and BOK Financial are growing their energy portfolios again. 
The current price range in the $40s is more economically feasible for lenders that specialize in exploration-and-production loans — essentially mortgages secured by the mineral rights, said Jared Shaw, an analyst at Wells Fargo Securities.
“Oil … seems to have stabilized in the high-$40s, low-$50s kind of range,” Harris Simmons, chairman and CEO of the $64 billion-asset Zions, in Salt Lake City, said at a May 31 investor conference. “At that level, there is enough activity going to … continue [loan] demand.”
Cheaper oil has also created a credit environment that is more appealing for some banks, such as the $33 billion-asset BOK Financial in Tulsa, Okla., which has added $1 billion of energy loan commitments in the past 12 months, said Stacy Kymes, executive vice president of corporate banking. Key segments of the industry “are exhibiting growth characteristics that are positive for loan demand,” Kymes said.
About three-quarters of BOK’s energy loans are to oil and gas producers, which means the loans are secured by oil and gas reserves. That provides BOK with some insulation from the sector’s volatility, Shaw said. “They’re seeing better pricing and better structure, and it’s less competitive than it was before,” he said.
A recovery after a correction is often a good time for banks to increase lending, as they can see which energy producers are viable when the price of oil is in the 40s.     Moreover, many banks moved so quickly to shed energy loans that some very strong companies saw their access to credit curtailed.   
Banks Curb Provisioning: SNL
Smaller banks, on the other hand, have elevated provisioning, providing community banks with a larger buffer against loan losses if delinquencies rise. A key measure of provisioning looks at the amount set aside for losses relative to the bank’s net charge-offs for the quarter. If the amount exceeds 100%, it means banks have provisioned more than their loans lost, typically resulting in an increase of aggregate reserves. But if the ratio is below 100%, banks have likely released reserves, providing a boost to profits but shrinking the bank’s buffer against a credit downturn.
After years of releasing a mountain of reserves built up from the 2008 credit crisis, banks with more than $250 billion in assets increased the ratio of provisioning to charge-offs to above 100% in the first and second quarters of 2016. But since then, the ratio has fallen below the key threshold and declined again in the 2017 first quarter, reaching 85%. Meanwhile, banks with less than $10 billion in assets have continued to build reserves, posting a ratio of provisioning to charge-offs of 147% in the first quarter of 2017.
Banks have enjoyed exceptionally strong credit quality in recent years, but some analysts warn that could be coming to an end. In a June 15 report, analysts at Sandler O’Neill wrote that credit had reached a Jack Nicholson moment: “Credit is ‘As Good As It Gets’ right now.” Analysts from Credit Suisse offered a similar assessment in a June 9 note on large-cap banks, writing that “credit costs have passed their cyclical trough and that the predominant trend is now upwards.” At the same time, the analysts did not express concern at the current low level of provisioning of the largest banks as there are not many signs of credit quality deterioration.
It’s very hard for outsiders to determine whether a bank is skimping on reserves, as it would require a better understanding of the bank’s credit quality.    A bank could be increasing reserve levels, but they may still be woefully inadequate.   Or, they could be reducing them and still have excess provisions.    And, there are differences between the risk profile of a bank’s loans.   For example, Capital One reserves 2.89% of all gross loans, but they are a large player in credit cards, especially sub-prime borrowers.     Nevertheless, these banks are all heavily scrutinized by multiple banking agencies, the investment community, and their auditors.    
Credit Report Black Marks Vanish Next Month
Starting July 1, many Americans will see substantial increases to their credit scores, as many liens and judgement will be removed from consumer credit files.   
On July 1, about half of tax liens and almost all civil judgments — both big negatives — will be expunged from consumer credit files, thanks to an agreement the big three credit bureaus made under pressure from regulators and state attorneys general to improve the accuracy of credit reporting.
In September, the three bureaus — Experian, Equifax and TransUnion — will also make consumer-friendly changes in the way medical debts are reported.
Studies suggest that people with liens and judgments could see their credit scores rise after these items are expunged, generally by less than 20 points but in some cases by 40 points or more. In some cases, scores could decrease. How it actually plays out depends on how lenders and credit-scoring companies respond to the changes.
Lenders who want the missing data could simply ask borrowers on a loan application if they have outstanding liens or judgments. Or they could obtain the information from the public record.
Starting on that date, the bureaus will no longer display tax liens and civil judgments on a credit report unless they include the person’s name, address and either Social Security number or date of birth. About half of tax liens and virtually all judgments do not have a Social Security number or birth date, which can cause mix-ups, especially for people with common names or large families.
This creates some big problems from lenders, as they will have to work harder to identify outstanding liens and civil judgments.   Lending based solely on credit bureau scores that does not take these items into account could be significantly mispricing credit.   Naturally, there will be products available to supplement the credit file, but lenders will have to rethink “FICO-only” underwriting.     
Uber CEO Out
Despite a board of directors controlled by loyal allies and significant ownership of the company (estimated at about 10%), investors in Uber forced CEO Travis Kalanick out, making a temporary leave of absence a permanent one.
Pressure from investors, who’ve poured more than $15 billion into a company that has burned through billions, ultimately did what the board could, or would, not: It convinced the 40-year-old chief executive to step aside. Five of Uber’s major investors, including Fidelity and Benchmark, asked Kalanick to step aside in a letter to him entitled “Moving Uber Forward,” according to people familiar with the matter.
Kalanick began an indefinite leave of absence on June 13 and left the day-to-day management of the company to a committee of 14 top executives. Regional operations heads continue to oversee much of the company’s business.
Uber’s been searching for a chief operating officer. With Kalanick’s departure, the company is now also looking for a chief executive officer–a far more desirable position for a business leader. Whoever takes the helm will have to plug a leadership vacuum. Uber needs to hire a COO, an independent board chair, a chief marketing officer, and a general counsel. Many of the company’s top executives were promoted internally after their bosses left, including heads of business, policy and communications, and product.
What’s interesting and noteworthy here is that Uber, like many other tech companies, was set up to ensure that the founder maintained control of the company.    But, Uber is burning cash and reliant on continued funding from outside investors.   If those investors are not on board with the current CEO, they can make continued funding difficult.     Mr. Kalnick’s missteps were plentiful:
He called the company “Boob-er.” He argued with a driver about pay in a video published by Bloomberg. He’s said to have questioned whether a female passenger had been raped by a driver who was convicted of the crime in India. Kalanick co-authored corporate values that included “Let Builders Build, Always Be Hustlin’, Meritocracy and Toe-Stepping, and Principled Confrontation.” Uber now plans to scrap many of those tenets on the advice of former U.S. Attorney General Eric Holder, who just concluded an investigation into the cultural failings of a company built in Kalanick’s image.
Since he owns 10% of the company, his continued involvement was hurting his investment.   Uber had hired Eric Holder, former attorney general, to make recommendations in improving the work culture, and all the findings were adopted by the Board.    Here’s a timeline of the downfall, which came in just a few months.      Even if you are not in a heavily regulated industry, investors and boards are just not going to tolerate a cowboy CEO and culture for too long!

The BAN Report: Fed Raises Rates and Begins the Great Unwind / Treasury Weighs in on Regulatory Reform / Hedge Funds in Crisis / Property Tax Inequality-6/15/17

Fed Raises Rates and Begins the Great Unwind
Plans revealed by the Fed on Wednesday would start reducing the central bank’s holdings gradually by allowing a small amount of net maturities every month. It would start by allowing up to $6 billion in Treasury securities and $4 billion in mortgage bonds to roll off without reinvestment, and let those amounts rise each quarter, essentially setting a speed limit for the wind-down.
The limits would ultimately rise to a maximum of $30 billion a month for Treasurys and $20 billion a month for mortgage-backed securities.
Ms. Yellen said if the economy performed in line with the central bank’s forecasts, the Fed could set those plans into motion “relatively soon,” which market strategists believe could mean September or October.
Officials have taken pains to communicate their strategy in advance to avoid a rerun of the 2013 “taper tantrum,” when investor concerns over the Fed’s decision to slow down asset purchases triggered market turmoil, including a sharp increase in Treasury yields and capital outflows from emerging markets.
The big question is what impact this will have on asset prices, as the Fed will be running off a massive portfolio in a short period.    There will likely be one more hike in interest rates as well.  
Treasury Weighs in on Regulatory Reform
The Treasury Department outlined its views on regulatory reform with the publication of “Summary of Recommendations for Regulatory Reform.”  
Treasury’s recommendations to the President are focused on identifying laws, regulations, and other government policies that inhibit regulation of the financial system according to the Core Principles. In developing the recommendations, several common themes have emerged. First, there is a need for enhanced policy coordination among federal financial regulatory agencies. Second, supervisory and enforcement policies and practices should be better coordinated for purposes of promoting both safety and soundness and financial stability. Increased coordination on the part of the regulators will identify problem areas and help financial regulators prioritize enforcement actions. Third, financial laws, regulations, and supervisory practices must be harmonized and modernized for consistency.
Some specific recommendations included reducing regulations for mid-sized and community banks so they can better compete with the larger banks; reducing the stress testing burden for the regional banks; making sure that the foreign banks don’t have lower capital ratios than the US banks during the Basel process; increased regulatory transparency, encouraging De Novo activity; subjecting regulation to cost/benefit analysis; a total review of CRA including updating assessment areas; limit the applicability of the Volker rule to smaller institutions and those who do very little trading; reform and limit the CFPB, and simplify some of the new mortgage rules.
Overall, the Treasury Department is not diverting materially from the House bill that was passed last week.    Many of their recommendations do not require legislation, so expect at least some of these policies to filter down to the examiners in the next several months.
Hedge Funds in Crisis
With just over $3 trillion in assets under management globally, hedge fund magnates are anxiously awaiting a recovery from last year’s feeble industry returns of 5.5 percent, compared with 10 percent for the S&P 500-stock index. 
Investors already withdrew $111.6 billion from hedge funds last year, according to eVestment, as some 1,100 funds — the largest total since the 2008 financial crisis — closed, and thousands of pros were axed.
About 9,700 hedge funds remain. “These funds have very good marketing,” said Ng. “But you can also lose 50 or 100 percent of your money.”
While some individual funds certainly had market-beating returns and this year had early glimmers of hope, the year-to-date performance of the HFRI Fund Weighted Composite Index stands at a paltry 3.5 percent.
That’s easily eclipsed by the more than 9 percent return for the S&P 500, meaning the hedge fund industry overall is way behind. 
Sensing that funds were trailing the market indexes, investors in April pulled $930 million, according to eVestment data. 
This isn’t exactly shocking.   Because of the high fees of hedge funds (typically 2% for management and 20% for profits), they must produce above-average risk-adjusted returns to justify their existence.    While there are some that outperform the market, the vast majority cannot justify their fees.  
Property Tax Inequality
In some great journalism, the Chicago Tribune investigated the property tax system in Chicago and Cook County, concluding that the poorer residents pay a disproportionate share of the tax burden.
In unprecedented analysis by the Tribune reveals that for years the county’s property tax system created an unequal burden on residents, handing huge financial breaks to homeowners who are well-off while punishing those who have the least, particularly people living in minority communities.
The problem lies with the fundamentally flawed way the county assessor’s office values property.
The valuations are a crucial factor when it comes to calculating property tax bills, a burden that for many determines whether they can afford to stay in their homes. Done well, these estimates should be fair, transparent and stand up to scrutiny.
But that’s not how it works in Cook County, where Assessor Joseph Berrios has resisted reforms and ignored industry standards while his office churned out inaccurate values. The result is a staggering pattern of inequality.
From North Lawndale and Little Village to Calumet City and Melrose Park, residents in working-class neighborhoods were more likely to receive property tax bills that assumed their homes were worth more than their true market value, the Tribune found.
Meanwhile, many living in the county’s wealthier and mostly white communities — including Winnetka, Glencoe, Lakeview and the Gold Coast — caught a break because property taxes weren’t based on the full value of their homes.
As a result, people living in poorer areas tended to pay more in taxes as a percentage of their home’s value than residents in more affluent communities. Known as the effective tax rate, the percentage should be roughly the same for everyone living in a single taxing district.
Most likely, this is not unique to Chicago, as wealthier households are more likely to protest property tax increases.    But, the disparity in Cook County is depressing to say the least.   

The BAN Report: Credit Suisse Makes Dire Call on Malls / House Moving on Regulatory Reform / Credit Unions to Discuss CECL with FASB / Overhaul at Mayo-6/8/17

Credit Suisse Makes Dire Call on Malls
In a report earlier this month, Credit Suisse predicted a surge in store closings and a loss of up to ¼ of all shopping malls within five years.
According to the Swiss bank’s calculations, on a unit basis approximately 2,880 store closings were announced as of the end of April, more than twice as many closings as the 1,153 announced during the same period last year. Historically, roughly 60% of store closure announcements occur in the first five months of the year. By extrapolating the year-to-date announcements, CS estimated that there could be more than 8,640 store closings this year, which will be higher than the historical 2008 peak of approximately 6,200 store closings, which suggests that for brick-and-mortar stores stores the current transition period is far worse than the depth of the credit crisis depression.
Which brings us to the latest report from Credit Suisse, according to which a staggering 20-25% of the 1,100 US shopping malls – between 220 and 275 shopping centers – will shut down within the next five year, resulting in a shockwave within the US retail and mall REIT sector, and slamming everything from equities to CMBS.
The Swiss bank cited mass store closings, the rise of e-commerce, and the growing popularity of off-price chains, which tend to be located outside shopping malls, among the reasons for the potential mall closings.
While we do see challenging times ahead for retail, many shopping centers have successfully reinvented themselves to become more relevant.   Clearly, there are too many clothing stores, for example.    And, we’ve seen malls rent spaces to office tenants, for example.    But, the trend is certainly not good and few large retailers are adding stores today.
House Moving on Regulatory Reform
The House of Representative is taking up regulatory reform, and the Financial Choice Act is expected to be passed by the chamber soon.
The House’s Financial Choice Act would unwind major parts of Dodd-Frank by relieving healthy banks of some regulatory requirements and forcing failing firms through bankruptcy rather than a liquidation process spearheaded by the regulators. It would also repeal the Volcker rule restricting banks from speculative trading. Supporters of the Choice Act say scrapping what they view as onerous regulatory requirements will ultimately help smaller businesses, allowing them to grow and create jobs.
“Dodd-Frank represents the greatest regulatory burden on our economy,” Rep. Jeb Hensarling (R., Texas), the author of the Choice Act, told reporters Wednesday.
To garner sufficient votes to pass the measure, Mr. Hensarling agreed last month to remove a controversial provision that capped the fees banks charge merchants for debit-card transactions. The provision pitted retailers and banks against one another and had divided GOP lawmakers.
The main trade-off embedded in the Choice Act: Banks can win significant regulatory relief if they maintain a so-called leverage ratio of 10%, meaning they must fund every $100 of loans or investments with at least $10 of equity raised from investors, as opposed to borrowed money like deposits.
While there are some good aspects of this effort, we can’t quite comprehend why anyone would support removing the FDIC’s ability to liquidate non-depository institutions.    If we learned anything from Lehman Brothers, the federal bankruptcy courts are an expensive and inefficient way of winding down a non-bank lender.    The FDIC can do the job far cheaper and with less contagion to the financial system.
Credit Unions to Discuss CECL with FASB
Next week, the National Association of Federally-Insured Credit Unions will meet again with FASB, in order to delay the implementation of CECL.
CECL will replace the financial services industry’s current incurred-loss standard with an expected-loss model that requires institutions to project losses when a loan is booked. Regulators, meanwhile, have sought to convince bankers and credit unions that they will not force institutions to invest in expensive software to make calculations.
While NAFCU may hold high hopes for an eleventh-hour action, suspending CECL implementation, which is set to occur in stages from 2019 to 2021, remains a long shot. The FASB spokeswoman said the transition resource group that will meet on Monday lacks the authority to approve a delay. Rather, the group will tackle questions tied to a limited number of issues such as credit card receivables and troubled-debt restructurings.
Most likely, the credit unions will be merely banging their heads against the wall, as CECL is coming and there is almost nothing anyone can do to stop it.     But, we suppose it doesn’t hurt to try.
Overhaul at Mayo
It’s always difficult to overhaul an organization like the Mayo which is extremely well-regarded.    But, Mayo is going through the most dramatic reorganization in its history.
Each year, some 1.3 million patients from all 50 states and 140 countries come to Mayo. Scores of doctors, hospital administrators, politicians and health researchers visit each month in hopes of emulating it.
To maintain its approach, it must adapt to new payment policies from Medicare, high-deductible health plans and insurers’ restrictions on out-of-network care that are putting pressure on hospital revenue across the U.S. And while the Medicaid expansion under the Affordable Care Act extended coverage in many states, efforts by President Donald Trump and his Republican Party to repeal it could change that.
Mayo, long insulated from many such forces, is no longer immune, says Dr. Noseworthy. “We’re going to be paid a lot less for the work we do.”
The overhaul, called the Mayo Clinic 2020 Initiative, is well past the halfway point, and officials are seeing results of more than 400 projects aimed at squeezing costs and improving quality in services ranging from heart surgery to emergency-room waiting time. Dr. Noseworthy says dozens of major re-engineering projects have helped cut an accumulated $900 million in costs in the past five years.
For great organizations to stay great, they can’t lose sight of the need to often reinvent themselves to changing business environments.    If you’re going to be paid less for the work you do, you better get on with rethinking your entire business model.

The BAN Report: Curry Out / CIBC Blinks Again / Auto Loan Problems Stress Used-Auto Prices / Family Offices Go Solo-5/3/17

Curry Out

Thomas Curry, an appointee of President Obama, is stepping down tomorrow with Keith Noreika set to become acting Comptroller of the Currency.     As head of the largest US banking agency (the primary regulator for 75% of the US banks by asset size), this is President Trump’s first major step in re-shaping the regulatory regime in Washington.

“This is the Trump administration’s long-awaited first step, albeit small, toward replacing Obama administration bank regulators,” said Ian Katz, an analyst with Capital Alpha Partners. “There will be many more.”

The administration’s critics have taken notice, with Sen. Sherrod Brown, the lead Democrat on the Senate Banking Committee, knocking Curry’s ouster as a further example of the Trump administration eroding the regulatory safeguards put in place since the 2008 financial crisis.

Marcus Stanley, policy director for Americans for Financial Reform, said Curry’s departure — itself a somewhat unusual circumstance — puts the controls of a critical supervisory agency in the hands of a bank-friendly administration.

“This is where they’re really getting their hands on the controls,” Stanley said. “The combination of head of the OCC and [Federal Reserve’s] vice chair for supervision, those are really the two crucial positions as far as risk controls at the ‘too big to fail’ banks. It’s seems like they put unusual pressure to push Curry out.”

The new acting Comptroller is Keith Noreika, a DC attorney, but he is not expected to become the permanent Comptroller.   Joseph Otting, a former executive who worked with Treasury Secretary Mnuchin at Onewest, is expected to be named as the nominee to become permanent Comptroller.

CIBC Blinks Again

We expect bigger Holiday gifts from our friends at PrivateBancorp, which has renegotiated its sale to CIBC for the second time!

Canadian Imperial Bank of Commerce CM -1.08% again sweetened its offer for PrivateBancorp Inc., PVTB +3.65% its latest attempt to win over the shareholders of the Chicago-based bank.

The new offer, announced Thursday, would give PrivateBancorp shareholders the same amount of stock, but it increases the amount of cash. It now values PrivateBancorp at $60.43 per share, or $4.9 billion overall, based on Wednesday’s closing price. It is the second time in five weeks that CIBC has increased its offer.

CIBC’s attempts to purchase PrivateBancorp have been fraught with turmoil, including a rise in U.S. bank stocks after the election that caused PrivateBancorp shareholders to protest the original offer as too low. More recently, CIBC’s own shares have declined along with the rest of Canadian banking stocks amid the fallout from a run on deposits at Canadian lender Home Capital Group Inc.

CIBC’s second offer, in March, was worth about $61 a share when it was first made. It was worth $57.43 by Wednesday’s close. CIBC’s initial offer, made more than 10 months ago, valued PrivateBancorp at $47 a share.

Thursday’s announcement was made by both banks. CIBC also said that PrivateBancorp shareholders will be eligible for the next CIBC dividend. PrivateBancorp shareholders will meet in Chicago next week to vote on whether to sell the bank to CIBC.

The deal is still subject to approval by PrivateBancorp’s shareholders, but one must think that they have a majority at this point.    The problem with stock-based transactions is the market reaction can make the deal less attractive for the seller, who still must sell the deal to its shareholders, thus giving the seller some powerful negotiation leverage.   According to Karl Ostby, Managing Director of Ambassador Financial Group, “When one company’s stock appreciates materially in relation to the other, it obviously makes the seller think twice.”

Auto Loan Problems Stress Used-Auto Prices

As credit problems emerge in auto loans, banks are pulling back from auto loans, while used auto prices are plummeting.   This is can be a negative feedback loop as reduced lending and delinquencies lead to excess supply of used cars, which leads to more losses and less lending.

Wells Fargo WFC +0.62% & Co., one of the largest U.S. auto lenders, last month reported a 29% fall in its auto loan originations for the first quarter from a year earlier. The decline, the biggest for the San Francisco-based bank in at least five years, was part of a common refrain in quarterly announcements from lenders including J.P. Morgan Chase & Co. , Ally Financial Inc. ALLY -0.53% and Santander Consumer USA Holdings Inc. SC +0.48%

Bankers’ caution is increasingly showing up in car sales, which Tuesday came in worse than expected for April. The declines are mostly occurring in lending to riskier borrowers, in particular those with low credit scores, where lending had ramped up for years.

“A very accommodating finance environment had been in place for some time,” said Bruce Clark, lead auto analyst and senior vice president at Moody’s Investors Service .“What you’re seeing right now is a pullback and the resulting pressure on unit vehicle sales.”

Some banks, including regionals Fifth Third Bancorp and Citizens Financial Group Inc., are beginning to retreat from higher-quality “prime” auto loans as new risks emerge. “It’s been an overheated sector,” said Fifth Third Chief Executive Greg Carmichael. “The auto business just isn’t as attractive right now.”

Recovery rates on liquidated car loans have dropped from 65% on 2011 loans to 51% on 2015 loans.     And, if used cars appear cheap, it is going to put pressure on new car sales.   For those of you have auto loans nearing the end of a lease, now is a good time to renegotiate your buy-out option!

Family Offices Go Solo

Family offices, which manage the financed and personal affairs for many of the wealthiest families in the world, are increasingly investing directly in real estate and companies, rather than investing indirectly through private equity firms.

About 81 percent of offices have at least one full-time employee sourcing and evaluating direct investments, according to an annual survey by the Family Office Exchange released Wednesday. Of the 118 offices polled, firms had an average of three employees involved in the investment process, two of whom had some responsibility for direct stakes.

Driving this push is the perceived lack of returns elsewhere, said Kristi Kuechler, president of the organization’s private-investor center. The average family office surveyed reported a 7.2 percent return last year and there’s less conviction that stocks, bonds and hedge funds will provide stellar returns. In fact, those surveyed reduced their allocation to hedge funds on average in 2016 and most don’t plan to increase it this year.

“The one place family offices think they can still generate double-digit returns is in operating businesses and real estate,” Kuechler said.

Direct investing in companies has become increasingly popular among wealthy families that see value in sidestepping private equity firms’ fees, which typically are 2 percent for annual management and 20 percent of profits. Going direct can also give families more say in investments and allow them to hold stakes longer than many funds permit.

Fees for private equity firms and hedge funds are under pressure on many fronts.   However, for the largest deals, it’s unlikely that family offices could do these deals themselves, so the large private equity firms will still get their share.   It will be harder though for them to compete on smaller transactions.

The BAN Report: Big 4 Report Earnings / CIBC & PrivateBancorp in Danger? / Grocery Wars-4/20/17

Big 4 Report Earnings

The nation’s four largest banks (Bank of America, Wells Fargo, Citigroup, JP Morgan) all have reported 1st quarter earnings.

Citigroup

Citigroup had a great start for the year, beating estimates on both revenue and earnings.    Net income rose 17 percent from the prior year to $4.1 billion, led by higher revenue, lower credit costs, and strong fixed income trading revenue.

Interest revenue dropped from a year ago, but they except a significant increase in interest income for the rest of year, largely due to higher interest rates.    They are expecting one more Fed rate hike in June.    Their revenue beat was impressive – as they generated $18.12 billion versus the estimate of $17.76.

Wells Fargo

Wells Fargo, still reeling from the reputational hit from the account scandal, beat expectations on earnings, but fell short on revenue.

“Wells Fargo continued to make meaningful progress in the first quarter in rebuilding trust with customers and other important stakeholders, while producing solid financial results,” Wells Fargo CEO Tim Sloan said in a statement.

The bank said total average loans were $963.6 billion in the quarter, down $502 million from the fourth quarter. Mortgage banking revenue fell 23 percent to $1.23 billion.

The earnings report came three days after the bank’s independent directors decided to initiate corporate pay clawbacks, following a six-month investigation into the scrutinized institution’s retail banking sales practices.

Wells has been also hurt due to its lack of an investment banking operation, which has boosted the earnings of its peers.     Loan growth dropped by nearly 1% from the prior quarter, which was the largest decline since 2011, which was blamed by seasonality, reductions in oil and gas lending, and tighter underwriting standards for auto loans.

Bank of America

Bank of America has a great quarter, beating expectations across the board.

Here’s Bank of America’s report card for the quarter:

  • EPS: 41 cents versus 35 cents expected by Thomson Reuters analysts’ consensus
  • Revenue: $22.2 billion versus $21.611 billion expected by Thomson Reuters analysts’ consensus
  • Net interest income: $11.1 billion versus $11.1 billion expected by StreetAccount analysts’ consensus
  • Fixed income trading revenue: $2.9 billion versus $2.62 billion expected by StreetAccount analysts’ consensus
  • Net charge-offs: $934 million versus $964.2 million expected by StreetAccount analysts’ consensus

The bank also said its loans business grew by 6 percent in the first quarter.

Bank of America is also cheering higher rates, as it expects earnings to be boosted by additional rate increases from the Federal Reserve.

JP Morgan Chase

JP Morgan Chase had a great quarter, boosted by strong loan growth and trading revenue.

“We are off to a good start for the year with all of our businesses performing well and building on their momentum from last year,” CEO Jamie Dimon said in a statement.

“U.S. consumers and businesses are healthy overall and with pro-growth initiatives and improving collaboration between government and business, the U.S. economy can continue to
improve,” he said.

  • EPS: $1.65 versus $1.52 expected by Thomson Reuters analysts’ consensus
  • Revenue: $25.586 billion versus $24.877 billion expected by Thomson Reuters analysts’ consensus
  • Trading revenue: $6.515 billion versus $5.51 billion expected by StreetAccount analysts’ consensus
  • Average core loans: up 9 percent year over year versus an expected uptick of 2 percent

Like Citigroup, Chase saw a surge in revenue from fixed income trading, rising 17 percent.   It was remarkable that trading revenue was nearly one billion higher than estimates.

Overall, the largest US banks are enjoying a great start to the year, and most expect to benefit from higher rates.    The biggest concern for investors is on valuations, as bank stocks have soured since Trump won the presidency.

CIBC & PrivateBancorp in Danger?

The bank stock rally has caused problems in bank mergers, as sellers are reconsidering whether to walk away from deals consummated before the rally in bank stocks.     The proposed acquisition of PrivateBancorp by CIBC is in jeopardy, as both sides are under pressure to walk away from the altar.

Under normal circumstances, a deal to buy PrivateBancorp might have been barely a blip on the banking radar. But the election-inspired run-up in U.S. bank stocks has upped its visibility. Since the U.S. election, the company’s shares have risen about 30%, compared with CIBC’s 10% gain.

The deal has drawn high-powered hedge-fund investors. Daniel Loeb’s well-known activist investor firm, Third Point LLC, invested in PrivateBancorp late last year and recently had a 3.75% stake, according to FactSet. Another investor, Glazer Capital, said in an open letter to fellow shareholders in December that PrivateBancorp should push for better terms since there had been a “seismic shift” in bank valuations since the deal was first announced. Both Third Point and Glazer Capital declined to comment.

Chris McGratty, an analyst at Keefe, Bruyette & Woods, said he would vote no if he were a shareholder. He calculates that PrivateBancorp has a stand-alone value of about $63 per share, and that a buyer should plan to spend a premium price of $70. CIBC’s current offer valued PrivateBancorp shares at $58.84 as of Wednesday’s closing price, 40 cents above the bank’s actual closing price.

PrivateBancorp’s shareholders are scheduled to vote on the deal on May 12, which was already improved by about $1 billion last month from the initial agreement last summer.

Grocery Wars

In an effort to battle Amazon and other online retailers, Wal-Mart has slashed prices on groceries, forcing its competitors to drop as well.

The world’s biggest retailer is investing heavily to lower prices in its U.S. stores, the company’s executives say, as competition heats up against Amazon.com Inc. and European deep discounters Aldi and Lidl. Wal-Mart is spending to beat competitors’ prices and test strategic price drops, mostly on food and household goods sold at Wal-Mart stores in the Southeast and the Midwest, say people familiar with the tactics.

Wolfe Research recently found prices for a basket of grocery items at Philadelphia area Wal-Mart stores were 5.8% lower than a year ago, while those in the Atlanta and Southern California markets were 4.9% and 2.7% cheaper, respectively.

The price war, coupled with Wal-Mart’s renewed focus on refurbishing stores, is hurting the nation’s biggest grocers. Operating profits for U.S. supermarkets declined about 5% last year, Moody’s Investors Service said.

Kroger Co., the biggest U.S. supermarket chain, recently reported its first quarterly decrease in same-store sales in 13 years. Cincinnati-based Kroger’s shares fell 3% in February after Wolfe Research reported that Wal-Mart was cutting prices in the Midwest. The stock later recovered, but remains down 13% this year.

2016 was the first year since 1959 that the consumer-price index for food at home was negative at 1.3%, and grocery prices should stay low for the future.   Like lower oil prices, what’s bad for producers is good for the rest of us!

The BAN Report: Apartment Cranes Everywhere, While Home Supply Tight / Top Performing Banks / Regulators Scrutinize Sales Incentives / Agencies Review Regulations-3/21/17

Apartment Cranes Everywhere, While Home Supply Tight

According to the Crane Index, Chicago leads the nation for cranes for residential projects at 31 cranes.    Most of the cranes are for rental buildings, as opposed to condo towers in the last cycle.

As of November, Chicago had 56 construction cranes at work, 31 of which were being used for residential buildings, the survey found. Seattle had the second most residential cranes at 23, followed by Denver, with 10.

“There’s been a big increase, predominantly in the residential market,” said Paul Brussow, an RLB executive vice president.

In all, 33% of all cranes in the cities observed were dedicated to residential projects.

Construction in the most active cities differs from past building booms, where condo towers dominated the skyline. Instead, cities such as Chicago are bulking up their luxury rental stock, agents said.

This trend is not unique to Chicago.

In Seattle, nearly all of the new residential construction is for luxury rentals, said Dean Jones of Realogics Sotheby’s International Realty. “Those crane towers are also building offices, hotels, mixed-use [projects]. The only one left behind is condos,” he said, noting that there are just 44 condos currently for sale in a city with about 650,000 people.

Only 44 condos for sale while nearly two-dozen luxury apartment rentals are being constructed?   Existing home sales declined in February due to tight inventory and rising prices.

Purchases of previously owned homes, which account for the vast majority of U.S. sales, decreased 3.7% from January to a seasonally adjusted annual rate of 5.48 million last month, the National Association of Realtors said Wednesday.

The decline followed a strong performance in January, when sales rose 3.3%. February’s sale pace was 5.4% above the same month a year earlier.

Economists said the combination of rising prices and mortgage rates is expected to push some buyers out of the market this year, especially in expensive coastal markets where first-time purchasers are already stretching to afford homes.

“You either have to believe that we’re in a bubble right now or you have to believe that sales are going to decline,” said Todd Tomalak, vice president of research at John Burns Real Estate Consulting.

Nela Richardson, chief economist at Redfin, said the company has seen a slight decline in the number of buyers touring properties and making offers—indicating they are frustrated by a lack of homes for sale.

“Inventory may be having a bigger effect on sales [this year] than last year,” Ms. Richardson said. “It’s just there’s not a lot for sale.”

Especially in our must urban areas, we are seeing significant imbalances between the supply of rental apartments and the availability of single family homes and condominium units.    Is there an excess supply of high-end apartments in major cities like Chicago, Seattle, and others?   We have argued that the financing of apartments is almost too easy while financing a condominium project is very difficult, so it’s not shocking that developers are building luxury apartments instead.     Perhaps, we have gone from incenting home-ownership to incenting renters.

Top Performing Banks

SNL ranked the top performing community banks between $1 and $10 billion in assets, selecting Metro City Bank of Georgia as the top-performing banks, followed by Sterling Bancorp in Michigan, and Royal Business Bank in California.

Founded in 2006, Metro City operates 13 branches across six states. The Korean-American bank expanded its footprint significantly last year, opening two de novo branches in New York and New Jersey and acquiring two Texas branches from Lubbock, Texas-based South Plains Financial Inc.

Metro City’s total loans increased by almost 70% during 2016, hitting $967.3 million at year-end 2016. This growth was driven primarily by one- to four-family loans, which grew by 274% last year to $495.2 million.  The bank was highly profitable as well, posting a 37.07% return before tax on

average tangible common equity and a 4.86% taxable-equivalent net interest margin for 2016. Despite growing at a fast pace, Metro City reported an efficiency ratio of 44.26% for the year.

All of the top ten banks had strong long growth, ranging from 19.6% to as high as 69.7%, and efficiency ratios in the 50s or better.

Regulators Scrutinize Sales Incentives

In light of Wells Fargo’s issues, banking regulators are taking a close look at sale incentive programs at banks.

Regulators are focusing on sale incentive programs in the wake of the Wells Fargo fake account scandal last year, but are also trying not to drop the hammer too hard, a panel of agency officials said Tuesday.

“We understand that all of you use and need incentives programs to incent the type of behavior that you want to see out of your employees, but we also want to see that you’re adopting appropriate compliance management systems” and manage risk that might cause harm to consumers, said Chris D’Angelo, associate director for supervision, enforcement and fair lending at the Consumer Financial Protection Bureau.

Speaking alongside D’Angelo at the American Bankers Association conference, Toney Bland, senior deputy comptroller at the Office of the Comptroller of the Currency, added that sales incentives have “been a big focus at the OCC over the past six months, especially for midsize and large banks, so generally those in the $20 [billion] and $30 billion” asset size and higher.

We hope that the regulators take a balanced approach and scrutinize, but not destroy sales incentives.   We’ve always believed that incentive-based compensation when properly scrutinized, is an effective tool to attracting and retaining the best employees.

Agencies Review Regulations

The banking Agencies, as part of a once-a-decade review of existing regulations, issued a report to Congress this week.

In particular, the agencies’ review focused on the effect of regulations on smaller institutions, such as community banks and savings associations. The federal banking agencies published four requests for written comment in the Federal Register and hosted six public outreach meetings across the country. NCUA, which regulates credit unions, routinely conducts town-hall meetings, listening sessions, and other outreach activities to hear and discuss stakeholders’ views. Altogether, the agencies received more than 250 comment letters from financial institutions, trade associations, and consumer and community groups, as well as numerous comments obtained at the outreach meetings.

The report describes several joint actions planned or taken by the federal financial institutions regulators, including:

The report also describes the individual actions taken by each agency to update its own rules, eliminate unnecessary requirements, and streamline supervisory procedures.

The community bank call report for institutions under $1 billion in assets will be reduced from 85 to 61 pages, while they are continuing to simplify the call report for larger banks.    Another interesting development is that the threshold for requiring an appraisal for a commercial real estate loan will increase from $250,000 to $400,000.

The BAN Report: Fed Raises Interest Rates, Markets Yawn / Overdraft Fees Roar Back / SBA Interest Soars Amongst Banks / The Lone Star Multi-Family Portfolio-3/16/17

Fed Raises Interest Rates, Markets Yawn
Almost as predictable as the sun rising this morning, the Federal Reserve yesterday raised rates 25 basis points, which took the Federal Funds Rate to 1.00%.    Markets responded favorably, partly because the Fed’s tone was not too hawkish.
Officials said they would raise their benchmark federal-funds rate by a quarter percentage point to a range between 0.75% and 1%, and penciled in two more increases this year.
“The simple message is the economy’s doing well,” said Fed Chairwoman Janet Yellen in a news conference following the Fed’s two-day policy meeting. “We have confidence in the robustness of the economy and its resilience to shocks.”
Ms. Yellen was careful to note that the Fed hadn’t significantly changed its forecasts for economic growth, unemployment or inflation, but it expected continued improvement.
Another reason for the decision: the Fed, in its policy statement released after the meeting, said inflation in recent quarters was “moving close” to its 2% target after undershooting that level for years.
The bank also said the target remains a “symmetric” goal, meaning that, though the Fed doesn’t want inflation to run above or below that mark, it expects it will happen at times. “It’s a reminder [that] 2% is not a ceiling on inflation. It’s a target,” Ms. Yellen said.
Because the markets have anticipated these increases, they’ve had less impact on fixed rate loans.   For example, the average yield on a 30-year fixed rate mortgage surprisingly fell on Wednesday from 4.39% to 4.27%, said Mortgage News Daily.    Chris Friis, a residential mortgage expert at Royal Savings Bank, said, “Mortgage rates are tied to the bond market.  With a rally in bonds increasing prices, have led to lower rates.  In addition, the market was prepared for the increase in the fed funds target rate, the focus is on future increases.” 
Overdraft Fees Roar Back
Bank overdraft fees in 2016 exceeded 2009 levels for the first time, a positive development for banks given the litany of rules implemented by the Fed to limit overdraft fees.
Banks and other financial firms in 2016 generated the highest level of fees in seven years related to overdrafts on checking accounts, marking a turnaround for a charge crisis-era regulation tried to rein in.
So-called overdraft fees totaled $33.3 billion in 2016, up about 2.5% from 2015 and by 5.4% from 2011, according to Moebs Services Inc., an economic-research firm. Overdrafts occur when consumers make transactions that are larger than their checking-account balance.
Most banks will cover the shortfall, no matter how little in savings or assets the consumer has, in exchange for what is usually a hefty fee.
The 2016 fees were the highest since 2009, the year before the Federal Reserve implemented a rule that stopped banks from automatically charging consumers overdraft fees on debit-card and automated-teller-machine transactions. Instead, the rule required banks to get permission from consumers before charging a fee for such transactions. Such fees can run as much as $45 a transaction, according to Moebs Services, although the median fee across banks and other financial institutions is $30.
Non-interest income has been a struggle for many banks, as fee income sources such as overdraft fees and interchange revenue have been negatively impacted by Dodd / Frank.   
SBA Interest Soars Amongst Banks
More and more banks have jumped into SBA lending the last few years, by either hiring experienced SBA teams from other banks, or by purchasing SBA platforms.  
Gulf Coast Bank & Trust in New Orleans is the latest institution to dive into national SBA lending, after buying CapitalSpring SBLC. The deal should allow the $1.5 billion-asset Gulf Coast to become one of the program’s 50 biggest lenders.
“We’ve been one of the largest SBA lenders in Louisiana,” said Guy Williams, Gulf Coast’s CEO. “This lets us step up and be a national player.”
The effort adds Gulf Coast to a growing list of expansion-minded banks.
The $9.2 billion-asset Berkshire Hills Bancorp in Pittsfield, Mass., paid $57 million in May for 44 Business Capital, an SBA lender in Pennsylvania that lends throughout the mid-Atlantic. Around that time, the $950 million-asset Radius Bank in Boston hired a veteran SBA lender to oversee a nationwide expansion of its SBA program.
The $4.2 billion-asset State Bank Financial in Atlanta and the $27.9 billion-asset BankUnited in Miami Lakes, Fla., have also made big moves to expand SBA lending.
While we are encouraged that more banks are lending to small business borrowers, the spike in 7(a) production is a bit concerning, because it well exceeds small business loan growth, which has been essentially flat the last few years.    Clearly, some banks are doing deals 7(a) that may have been conventional loans previously.    Moreover, the SBA 504 program has been essentially flat during that period.
Chris Hurn, CEO of Fountainhead Commercial Capital, observed:
“While there have been a tremendous amount of what I call “secondary market premium chasers” over the past few years, some of these new folks may be a little late to the game.  Many SBA BDO’s push borrowers into (almost exclusively) floating rate 7(a) loans on real estate-only SBA projects, so they can maximize their secondary market premium income when they sell off the SBA-guaranteed portion.  In a stable, flat rate environment, there have been many hungry buyers of this paper at record premiums.  But now that we’re in a rising short-term interest rate environment, SBA 7(a) loans will see increased prepays as business owners cycle out of floating rate loans and into fixed rate loans.  Premiums paid will be lowered, normalizing to historic levels, as well. 
I would expect some of these refinancings will benefit SBA 504 lenders and other conventional lenders at the expense of 7(a) loans, but I also expect to see new originations of owner-occupied commercial real estate loans swing heavily toward 504 as borrowers become less susceptible to accept rising floating rates on fixed assets.  There will still be an active and profitable secondary market for 7(a) loans, as there should be, but it won’t be quite the draw that it’s been over the past few years.”
The $10MM Lone Star Multi-Family Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $10MM Lone Star Multi-Family Portfolio.”  This exclusively-offered portfolio is offered for sale by one institution (“Seller”).   Highlights include:

  • A total unpaid principal balance of $9,470,656, comprised of 9 loans
  • All loans are high performing 1st liens on income-producing commercial real estate
  • The largest asset, a multi-family loan in Houston, TX, comprises 25% of the portfolio
  • Portfolio has a weighted average coupon of 4.41%
  • Portfolio has a weighted average LTV of 69% with a weighted average DSCR of 1.58
  • All loans have declining 5,4,3,2,1% prepayment penalties
  • Collateral types include: Multi-family (82%), Retail (10%), and Mobile Home Park (8%)
  • Assets are located in Texas (68%), Illinois (10%), Colorado (8%), Florida (8%), and Tennessee (6%)
  • Portfolio will be sold as two pools, the largest one will be All or None (Texas)
  • Opportunity to acquire depository relationships
  • Two-thirds of the loans are in low- and moderate-income (“LMI”) geographies, thus helping institutions meet Community Reinvestment Act (“CRA”) and Fair Lending requirements
  • All loans will trade for a premium to par and any bids below par will not be entertained
Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.  
Please read the executive summary for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

The BAN Report: The $10MM Lone Star Multi-Family Portfolio / The Fed Is Just Getting Warmed Up / Bank Bear Turns Bull-3/9/17

The $10MM Lone Star Multi-Family Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $10MM Lone Star Multi-Family Portfolio.” This exclusively-offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total unpaid principal balance of $9,470,656, comprised of 9 loans
  • All loans are high performing 1st liens on income-producing commercial real estate
  • The largest asset, a multi-family loan in Houston, TX, comprises 25% of the portfolio
  • Portfolio has a weighted average coupon of 4.41%
  • Portfolio has a weighted average LTV of 69% with a weighted average DSCR of 1.58
  • All loans have declining 5,4,3,2,1% prepayment penalties
  • Collateral types include: Multi-family (82%), Retail (10%), and Mobile Home Park (8%)
  • Assets are located in Texas (68%), Illinois (10%), Colorado (8%), Florida (8%), and Tennessee (6%)
  • Portfolio will be sold as two pools, the largest one will be All or None (Texas)
  • Opportunity to acquire depository relationships
  • Two-thirds of the loans are in low- and moderate-income (“LMI”) geographies, thus helping institutions meet Community Reinvestment Act (“CRA”) and Fair Lending requirements
  • All loans will trade for a premium to par and any bids below par will not be entertained

Loan files are scanned and available in a secure deal room for review.  Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.

Please read the executive summary for more information on the portfolio. You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

The Fed Is Just Getting Warmed Up

The Federal Reserve is expected to raise rates next week.   Last Friday, Federal Reserve Chair Janet Yellen essentially told the Executives’ Club of Chicago that a rate increase was on the way.

“The economy has shown great improvement,” she said, noting that employment is growing at a strong pace despite median family incomes still lagging pre-recession levels.

The Fed committee will have to judge during its meeting March 14-15 whether the most recent data continue to support the current outlook, but she said “the economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective.”

Economic data this week has been positive, including nearly 300,000 jobs added in February according to ADP with the official jobs report coming out tomorrow.    The Bloomberg Consumer Comfort Index rose to its highest level since March 2007.    Jamie Dimon this week talked about the influence of President Trump’s economic politicies.

Jamie Dimon said President Trump’s economic agenda has ignited U.S. business and consumer confidence and he expects at least some of the administration’s proposals to be enacted.

“It seems like he’s woken up the animal spirits,” Dimon, chairman and chief executive officer of JPMorgan Chase & Co., said Thursday in a Bloomberg Television interview in Paris. Confidence has “skyrocketed because it’s a growth agenda,” Dimon said, adding that he’s not overly concerned about the possibility of a correction in equities markets, which have surged since the November election.

Craig Torres in Bloomberg predicts about a 200 basis point increase in rates by 2019.

One guide for Chair Yellen is the setting of rates now based on estimates of something called the “neutral rate,” a policy setting that neither speeds nor slows the economy. The current neutral rate might be around zero after adjusting for inflation, and it could rise to 1 percent in the longer run, Yellen said in her March 3 remarks, referencing Fed estimates which she admits are rough. Right now, the real federal funds rate is negative, so policy is stimulative.

The committee’s strategy is to gradually lift the real federal funds rate to around zero by 2018, and then up to 1 percent by 2019, according to their December forecasts.

With higher rates, most banks will benefit, although it could push special mention credits into substandard.

Bank Bear Turns Bull

Mike Mayo, formerly of CLSA, has been bearish on banks for a long time, and has been known to be one of the few bank analysts to ask tough questions on earnings calls.    However, he turned bullish this year in a report entitled “Back in Black.”

The “free agent analyst” and infamous thorn in the side of Wall Street’s biggest chief executives is telling investors — finally! — to bet big on banks.

“Banks are transitioning from 10 years of value destruction to value creation,” he told The Post, summarizing the report.

Mayo’s January report, “Back in Black,” marks the first time that he’s been bullish on the companies since Bill Clinton was in the White House.

Mayo is bullish on banks despite the stocks in the sector adding roughly 30 percent to their value since Election Day.

Banks are staring at a time when they can make more money as rates rise and headwinds from regulatory fines subside, Mayo said, explaining why he turned bullish. Plus, the cost of money remains low, he said.

While he’s not every bank CEOs favorite analyst, Mr. Mayo’s insights are noteworthy and his bullish call is good news for bank stocks.

Manhattan Apartment Rents Fall, Mixed Elsewhere

A construction boom in Manhattan is finally showing its impact in the nation’s tightest apartment market, causing rents to actually fall for the first time in years.

Last month, landlords whittled an average of 3.3 percent off their asking prices, compared with 2.5 percent a year earlier, according to Miller Samuel and Douglas Elliman. On top of that, they offered concessions such as a free month or payment of broker’s fees on 26 percent of all new leases, the second highest share in the firm’s records.

Median rents for two-bedroom apartments fell 5.2 percent from a year earlier to $4,500, the firms said. One-bedroom costs slipped 1.3 percent to $3,350, and the median for units with three bedrooms or more dropped 3.7 percent to $6,031.

New York is no longer the most expensive housing market, losing ground to San Francisco.    Zumper’s National Rent Report for March 2017 showed that while overall rents are still increasing nationally, there is greater disparity.

Rent prices this month experienced mixed changes across the nation’s top 100 rental markets. In the top 10 list, about half of the cities’ prices went up while the other half went down. The same behavior follows for the middle tier and bottom tier markets. Overall, the Zumper National Rent Index showed one bedroom units down less than one percent to a median of $1,142, while two bedroom units grew 0.5% to $1,353. Check out the table below to see how prices in your city have changed.

San Francisco, Boston, Chicago and San Jose, saw rent decreases, while Washington, DC, Seattle, Long Beach, and Houston saw decreases.   Red-hot Nashville saw one bedroom prices plummet by 5%, although still up 15% year over year.

The BAN Report: FDIC Quarterly Banking Profile / How Bankers Got Their Groove Back / Worst Not Over at Wells? / PWC’s Brand Stumbles-3/2/17

FDIC Quarterly Banking Profile
The FDIC this week released its Quarterly Banking Profile, the most comprehensive overview of the performance of the US banking industry.   A few highlights of note:
  • The entire industry made $43.7 billion in the fourth quarter, an increase of 7.7% in the prior year (all comparisons are prior year unless stated otherwise)
  • Net operating revenue, which is net interest income plus noninterest income, was up 4.6%, led entirely by net interest income while noninterest income actual declined.    This suggests that banks are benefiting from a higher interest rate environment and loan growth.    The decline in fee income is partially attributable to lower reduced interchange fees (a $432 million decline) that may be reversed if the Durbin Amendment is repealed by Congress.
  • Net interest margin actually declined slightly in the fourth quarter from the third quarter (3.18 to 3.13%), but the Fed raised rates in December, so expect to see some improvement in 2017.   
  • Increases in loan-loss provisioning has tapered out, and was less than the prior year.    Higher rates should lead to some slight increases in provisioning.
  • For the entire year, total loans and leases increased by 5.3%.    Only farm loans and HELOCs saw declines, and the largest growth category was…. Construction and Development (13.7%)!    Let’s hope that a spike in construction lending doesn’t lead to many problems.   To be fair, banks held $313MM in construction loans at the end of 2016, versus 629MM at the end of 2017.   
  • 2016 saw only 5 bank failures – the lowest since 2007.   
For the complete report, click here.
How Bankers Got Their Groove Back
Since Donald Trump was elected President, US bank stocks have soared, jumping 32% since November 8.    
The KBW Nasdaq Bank index, a measure of 24 of the biggest U.S. bank stocks, rose more than 3% to touch its highest level since late 2007. The gain, which followed President Donald Trump’s address to Congress on Tuesday night, brought its rise since Nov. 8 to about 32%. The index has outperformed the S&P 500 by around 20 percentage points during this time.
Among big banks, Bank of America has led the charge higher. It is up 50% since the election; on Wednesday the stock gained 3.6%.
Investors aren’t the only ones who believe the outlook for banks has changed drastically—and for the better. Bank executives themselves are now looking to reinvest in their businesses rather than just hoping to return more capital to shareholders. That is a big change from recent years when executives were mostly in a defensive crouch.
“We have the capacity to increase our balance sheet if the opportunity presents itself,” Morgan Stanley finance chief Jonathan Pruzan told analysts earlier this year after the firm’s fourth-quarter earnings report. “That’s certainly an opportunity that we haven’t seen in the past.”
While many of President Trump’s promises may be difficult to achieve (Jamie Dimon dismissed any tax reform in 2017), changing the regulatory climate can happen very quickly and without any legislative action.    Since the financial crisis, Banks have been absorbing a lot of difficult changes, including Dodd/Frank, record legal settlement, the creation of the CFPB, etc.  A shift to a more accommodative regulatory environment will be welcomed by most bankers.   We hope that common-sense regulation does not mean no regulation. 
Worst Not Over at Wells?
This week, Wells Fargo announced that eight top executives (including the CEO) will not receive bonuses.    More importantly, there may be more problems at the Bank from the account scandal.  
Wells Fargo had previously said that as many as 2.1 million people were potentially affected by the problematic sales practices. But the bank disclosed Wednesday that an expanded review of the sales practices could lead to “an increase in the identified number of potentially impacted customers.”
The bank is still conducting an internal review of the behavior, and is looking as far back as 2009 to figure out how many unauthorized accounts were created. Those findings could also lead to “additional legal or regulatory proceedings,” increased compliance costs or the discovery of other problematic practices, the bank said in the filings.
Still, Wells Fargo said it does not expect any additional costs from offering remediation to customers to “have a significant financial impact.”
Come on, guys, this is amazing.    It’s been 5 months since this scandal was announced and they are still doing an internal investigation?   How about working weekends, late nights, holidays, etc., so the investigation can be completed sooner?     We have pushed back against the excoriation of Wells, pointing out that the estimated harm to consumers was minimal, but their management of this issue is difficult to defend.
PWC’s Brand Stumbles
PWC, perhaps the most prestigious accounting firm in the world, could not be trusted on Sunday to handle a very difficult responsibility: hand the correct envelope to Warren Beatty and Faye Dunaway.   It was the first time in Oscar’s history that the wrong winner was announced.   
“The accountants have one job to do — that’s to give Warren Beatty the right envelope,” Leslie Moonves, the chief executive of CBS, said in a videotaped interview after the show, which was broadcast on ABC. “That’s what these people are paid a lot of money to do. If they were my accountant, I would fire them.”
On Monday, the hashtags #envelopegate and #Oscarfail were trending on Twitter, and PwC, a business that markets its services to other businesses, was newly on the tip of many consumers’ tongues in an unforgiving fashion.
“You had one job!” several people remarked, tagging the company’s username and the two partners who oversaw the ballots, who were the public faces of PwC’s efforts before and during the show. Some criticized PwC, formerly known as PricewaterhouseCoopers, on an unofficial Facebook page for the business, with one person remarking its acronym could stand for “probably wrong card.”
The two star-struck PWC partners were removed from the account, but were retained as partners.   While PWC was to blame, let’s not absolve two dim-witted actors from being completely unable to improvise.   Why not pause and go to a commercial and sort it out?    Or, say they have the wrong envelope?    I suppose there is a reason that actors act and directors direct, but Warren Beatty has done both very capably.   
What’s interesting about this event is how one innocent mistake can potentially damage the reputation of a global brand.    Defending your brand is a full-time job!   If you need a good laugh, go ahead and watch again!

The BAN Report: CFPB, Please Delete Your Account: Banks / B of A Opening Branches / Here Come the De Novos! / Companies Still Moving Jobs to Mexico / Badger Relationship-2/6/17


CFPB, Please Delete Your Account: Banks

The Consumer Financial Protection Bureau’s future is in question with a new regulatory attitude permeating the White House, although few believe the Agency will actually be disbanded.   The Banks would love to see the CFPB delete this massive public database of consumer complaints.

Johnson Tyler, a longtime legal aid attorney in Brooklyn, often spends his days battling financial companies on behalf of aggrieved low-income clients. Not much has changed in the wake of the Great Recession, despite new federal rules meant to better protect households from financial misconduct, except in one area: When Tyler complains about a large company, the company actually responds.

“It’s the biggest change” Tyler says he has has noticed in the consumer finance industry since the 2007-09 financial crisis. The reason is simple: a government-maintained public database that collects consumers’ complaints, tracks companies’ responses, and records whether consumers ended up satisfied.

The consumer complaint database, created by the federal Consumer Financial Protection Bureau, may be the part of the 2010 Dodd-Frank act that has had the biggest tangible impact on American households, some consumer advocates say.

Among the changes enacted through Dodd-Frank was the creation of the database, which catalogues consumer complaints about financial products and services. The law called for the CFPB to maintain it and provide Congress with annual updates analyzing the complaints.

Reviled by banks, the database is a prime target for a Trump administration that has vowed to rewrite Obama-era financial rules and has suggested it will change the consumer bureau’s approach to policing financial markets. Richard Cordray, the bureau’s director, is among the complaint portal’s biggest proponents.

We didn’t even know this existed.   Attached is the current log of complaints.   This database essentially pressures banks to respond to consumer complaints, no matter what their validity.    We are unsure if this database should be disbanded, as it does seem to serve a useful public function.

B of A Opening Branches

Earlier this week, Bank of America announced it was opening as many of 60 branches this year in affluent and growing markets, bucking the trend of most banks to shed expensive branch networks.

Speaking at an industry conference Tuesday, Dean Athanasia, co-head of consumer banking, said the Charlotte company is taking a targeted approach to branching, focusing on 30 markets that generate the most economic activity.

Athanasia, who is also president of small-business banking, declined to provide specifics about the locations of the new branches. Still, he said the branches will be “well placed” and that the company’s recent push into Denver and Minneapolis provide an example of what is in store.

In 2014, for instance, B of A opened a flagship branch in Denver’s tony Cherry Creek neighborhood across the street from a mall that is anchored by Neiman Marcus, Nordstrom and Macy’s. The branch broke even after two years even though the industry average is between seven and 10 years, Athanasia said.

B of A will continue to close less profitable centers, Athanasia said. He did not provide details about the number of branches the company plans to close in 2017.   B of A had 4,579 branches across the country as of Dec. 31, down 3% from a year earlier. Total deposits grew 5% to $1.3 trillion.

However, B of A is still closing or selling unprofitable branches, and has sold 330 branches already.    The trend seems to be to reduce branches in less attractive metro areas, while potentially adding smaller, better located branches in the markets with the most growth opportunities.   We have argued for years that the banking industry has been woefully slow to adapt by closing unprofitable branches as branch visits have essentially free fallen over the last few years.

Here Come the De Novos!

After nearly a decade of practically no activity, de novo banks are sprouting up again, as 8 different groups have filed applications with the FDIC recently to open new banks.

Eight groups have filed applications in recent months with the Federal Deposit Insurance Corp. to open new banks, spurred by an improving economy and an expected deregulatory push by Republicans in Washington.

That is the most in a year since regulators clamped down on bank startups following the financial crisis, though it pales in comparison to the hundreds of applications regulators routinely received annually in the precrisis period.

President Donald Trump last week signed executive actions aimed at unwinding parts of the 2010 Dodd-Frank Act. Some in the financial industry hope reduced regulation will spur broader interest in starting community banks and, over time, more lending that will bolster economic growth.

“We believe that hopefully the new administration will bring some relief to the regulations that have come down the last eight to nine years,” said David Dotherow, the founder and chief executive for the proposed Winter Park National Bank in Central Florida.

We believe de novos serve an important function, as there are always underserved markets.    Over 2,000 bank charters have been lost in the past decade, so its good to see charter creation again.   But, this is merely a trickle, and many applicants are not successful in getting their banks started.

Attorney Lawrence Spaccasi of Luse Gorman said, “We have not seen too much real interest in new charters, particularly, given the high start up cost and tough regulatory hurdles.  Yes, the FDIC has technically ‘loosened’ its regulatory conditions on paper, including a shortening of the de novo period that it will require higher levels of capital and observance of the business plan from seven to three years, but the hurdle on getting ‘qualified’ personnel, in the view of the regulators, to run the de novo is still relatively high.  If a few de novos get approved that are not just “niche” type banks, it will start attracting others to look at it.”   Attorney John Gorman added: “There appear to be a growing opportunity for de novo banks in certain geographic markets where often the universe of banks has dwindled in recent years.”

Companies Still Moving Jobs to Mexico

Despite President Trump’s attacks on US companies moving to Mexico, many companies are still plowing ahead and moving jobs across the border.

Milwaukee-based Rexnord is one of many companies plowing ahead with plans to invest in Mexico despite Mr. Trump’s vows to cajole companies into keeping their assembly lines in the U.S. Some, including heavy-equipment maker Caterpillar Inc. and steelmaker Nucor Corp., are overseen by officials who belong to a panel advising Mr. Trump on manufacturing policy.

Executives at Peoria, Ill.-based Caterpillar are moving ahead with a restructuring that includes shifting jobs from a Joliet, Ill., factory to Monterrey, Mexico. “We’re just going to have to wait and see how this plays,” Caterpillar Chief Financial Officer Brad Halverson said in a January interview, referring to potential Trump-era shifts in trade policy.

A Caterpillar spokeswoman said the company has been reducing its workforce world-wide to stay viable “in the longest downturn in our 92-year history.”

Charlotte, N.C.-based Nucor is moving forward with Japan’s JFE Steel to build a new plant in Mexico to make steel for car makers.

The cost savings in some of these deals are substantial.    Rexnord’s move will help save the company $30 million annually.    Smaller companies will be less likely to get the attention of President Trump, so perhaps they can go ahead without being in the crosshairs of his Twitter account.

The $9MM Badger Relationship

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $9MM Badger Relationship.”  This exclusively-offered loan relationship is offered for sale by one institution (“Seller”).   Highlights include:

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.

Event Date
Sale Announcement Friday, January 27, 2017
Due Diligence Materials Available Online Tuesday, January 31, 2017
Indicative Bid Date Tuesday, February 14, 2017
Closing Date Thursday, March 2, 2017

Please read the executive summary for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

The BAN Report: The $9MM Badger C&I Relationship / Energy Woes Wane / Small Businesses Struggle to Hire / No Children in San Fran / Loss of Anchors Crushes Small Town Malls-1/26/17

The $9MM Badger Relationship

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $9MM Badger C&I Relationship.”  This exclusively-offered loan relationship is offered for sale by one institution (“Seller”).   Highlights include:

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.   

Event

Date

Sale Announcement

Friday, January 27, 2017

Due Diligence Materials Available Online

Tuesday, January 31, 2017

Indicative Bid Date

Tuesday, February 14, 2017

Closing Date

Thursday, March 2, 2017

Please read the executive summary for more information on the portfolio. You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.  

Energy Woes Wane

Last year, US banks were building up loan loss reserves as the price of oil plummeted, sending billions of energy loans into workout departments.    Some banks like Green Bank in Houston got out of energy completely.   But, recent earnings and comments from three Texas and Oklahoma banks suggest that the energy sector is recovering, and no longer a drag on bank earnings.

Texas’ energy sector may not yet have fully recovered from last year’s plunge in oil and gas prices, but the rest of the state’s economy appears to be doing just fine.

That message that came through loud and clear Wednesday on the earnings calls of Cullen/Frost Bankers in San Antonio, Prosperity Bancshares in Houston and BOK Financial in Tulsa, Okla.  All reported healthy loan growth in the state in 2016 and all predicted even stronger demand for commercial, consumer and residential and commercial real estate loans this year. Even with some energy firms still struggling, bankers seemed confident that the Texas economy would remain one of the nation’s strongest in 2017.

BOK Financial is beginning to make new loans in the sector, while Cullen/Frost is in run-off mode, and Prosperity never had much exposure to the sector.   What’s noteworthy and refreshing here is that US banks moved fast to classify, downgrade, and reserve for potential losses in energy loans, setting themselves up for future earnings surprises if provisions exceed actual losses.    One wonders if the problem with expected loss has been corrected without any need for the 2020 change to the Current Expected Credit Loss Standard for ALLL (CECL).   Market and regulatory pressure have essentially forced banks to take earlier losses on problem credits, thus solving the problem with bank being too slow to build up reserves.    

Small Businesses Struggle to Hire

The JP Morgan Chase Institute released its latest report on the financial condition of small businesses, specifically the struggle for small businesses to increase employment.   

“The Ups and Downs of Small Business Employment” reports that most small businesses experience substantial volatility in payroll expenses. Moreover, more than two-thirds (68 percent) of small employer businesses either reduced their number of employees or added less than the equivalent of one full-time employee in a calendar year.

The typical small business saw payroll expenses grow by 8.5 percent per year. These payroll expenses were significant for small employer businesses, with the typical owner paying $18,700 in payroll expenses a month, or 18 percent of all outflows for their business. Making their financial situation even more difficult to manage, small businesses with employees had only 18 cash buffer days, compared to 27 cash buffer days for small businesses overall.

The full report is available here.    The struggle to manage payroll and minimize layoffs makes it hard for small businesses to hire workers.   While small businesses are a key component in job creation, its actually new small businesses that create net new jobs, while existing small businesses do not.       

New small businesses create new net job; existing small businesses do not. While policy makers have historically focused on the contributions of small businesses to job creation (Birch, 1981), recent research has emphasized the impact of young firms on net job creation (Haltiwanger, et al., 2013; Decker, et al., 2014). In fact, after their first year of employment, existing small businesses lose more jobs than they create, principally through firm failure. For every 100 small business jobs that existed in 2013, new small businesses created 5.6 new jobs, while existing small businesses lost 3.9 jobs—mostly due to losses from the exit of these small businesses. Policy makers, advocates, and private-sector partners should focus on the incentives and sustainability of the new small businesses that create these jobs. This is especially concerning in light of the overall decline in startup rates, which have fallen from 17.1 percent in 1977 to 10 percent in 2014.

This research suggests that more needs to be done to encourage the creation of start-ups and small businesses.   Unfortunately, most banks do not lend money to small businesses unless they’ve been in business for three years.   

No Children in San Fran

The city of San Francisco is becoming a tough place to raise children, as families move out to the suburbs, leaving a city with as many dogs as children.   This has obvious public policy and economic considerations, and could become a trend for other highly expensive cities.

There is one statistic that the city’s natives have heard too many times. San Francisco, population 865,000, has roughly the same number of dogs as children: 120,000. In many areas of the city, pet grooming shops seem more common than schools.

In an interview last year, Peter Thiel, the billionaire Silicon Valley investor and a co-founder of PayPal, described San Francisco as “structurally hostile to families.”

Prohibitive housing costs are not the only reason there are relatively few children. A public school system of uneven quality, the attractiveness of the less-foggy suburbs to families, and the large number of gay men and women, many of them childless, have all played roles in the decline in the number of children, which began with white flight from the city in the 1970s. The tech boom now reinforces the notion that San Francisco is a place for the young, single and rich.

“If you get to the age that you’re going to have kids in San Francisco and you haven’t made your million — or more — you probably begin to think you have to leave,” said Richard Florida, an expert in urban demographics and author of “The Rise of the Creative Class.”

Mr. Florida sees a larger national trend. Jobs in America have become more specialized and the country’s demography has become more segmented, he says. Technology workers who move to San Francisco and Silicon Valley anticipate long hours and know they may have to put off having families.

“It’s a statement on our age that in order to make it in our more advanced, best and most-skilled industries you really have to sacrifice,” Mr. Florida said. “And the sacrifice may be your family.”

We think the cost of housing is the culprit, caused largely by the indifference the city has towards satisfying the housing demand.   Many of the new housing developments are low-density on sites that could support five times as many units.   For all the talk about downtown revivals in our largest cities, their growth is going to be constrained by their inabilities to support families.  

Loss of Anchors Crushes Small Town Malls

Most enclosed malls are anchored by large department stores, the loss of which can be devastating to a retail property.   Consider the example of the Fort Steuben Mall in Steubenville, Ohio, birthplace of Dean Martin.    The mall recently lost two of its four anchors, as Macy’s and Sears closed shop.  

The Fort Steuben Mall in this former steel town on the edge of the Ohio River is battling a double whammy of store closures that have thrust it into a fight for survival.

On one side of the mall is an empty space that housed a Sears department store and automotive center until the struggling retailer closed the location last June.  On the opposite side sits a Macy’s set to close in early spring, the retail chain said early this month, as part of 100 closures announced last summer. Together, the two anchor locations make up 37% of the property’s leasable space.

Fort Steuben Mall is being swept up in a wave of store closings that is buffeting landlords across the U.S. Specialty retailers such as the Limited and department stores such as Sears and Macy’s in recent months have announced plans to close hundreds of stores nationwide and slash jobs as online shopping takes a growing share of revenue.

DLC purchased the mall for $43 million in 2006, just before the recession. Since then, the mall has suffered from store closures including apparel retailer Steve & Barry’s, Waldenbooks and Toys “R” Us.

Kroll now values the mall at just $7.4 million, taking into account the coming loss of Macy’s. It projects creditors face a loss of $31.3 million.

Unfortunately, there are just not enough large retailers to fill large anchor spaces.   Once they are gone, it can cause a snowballing effect, as many tenant leases have “co-tenancy clauses,” which allow them to vacate the space if certain anchor tenants vacate.    Patrick Forkin of Baum Realty Group said, “Landlords are scrambling to figure out what to do with their soon-to-be vacant mall-anchor spaces.  Many landlords are getting creative to back-fill these spaces by considering experiential and destination-oriented users to the retail mix such as fitness clubs, outdoor outfitters, arcades, and storage.  Some of the active tenant in these areas include Planet Fitness, Cabela’s, Dave and Busters, and Life Storage.”


Bank Earnings Review
The BAN Report: Bank Earnings Review / Wells Tweaks Pay Plan While Former Exec Slams / Will New Falcons’ Stadium Revitalize Neighborhood?-1/19/17

The Big 4 Banks have all released earnings for ‘Q4 2016, wrapping up an overall strong 2016 earnings picture.   Last week, we discussed Wells Fargo, so let’s see how JP Morgan Chase, Citigroup, and Bank of America performed.   

JP Morgan Chase

JP Morgan Chase had a great fourth quarter as earnings were 30% greater than the prior quarter, although revenue was only up 2%.    Earnings of $6.7 billion (1.71 / share) beat expectations of $1.43.   For the year, revenue of $99 billion just missed the coveted 12-figure club, which JP Morgan Chase last reached in 2010.

The best news perhaps is that the gains J.P. Morgan saw in the fourth quarter seem to be coming from the so-called real economy, and not the financial one. Its investment banking revenue was decent in the fourth quarter, but profits improved in part because compensation declined. The firm’s trading revenue fell in the fourth quarter compared with the prior three months.

One of the bank’s biggest boosts, in fact, came from having fewer bad loans, and that trend is expected to continue. The bank’s provision for bad loans dropped nearly $400 million in the fourth quarter from a year ago. That’s another sign that the bank thinks the real economy is still strong.

The market reaction was flat, but after the Trump rally in bank stocks, this was too be expected.

Citigroup

Citigroup slightly exceeded expectations on earnings as they beat by 2 cents, but missed the revenue number by $300MM.    

“We had a strong finish to 2016, bringing momentum into this year. We drove revenue growth in our businesses and demonstrated strong expense discipline across the firm,” Citi CEO Michael Corbat said in a release.

The bank reported a 36-percent rise in fixed income markets revenue to $3 billion, and a 15-percent rise in equity markets revenue.   Full-year 2016 net income of $14.9 billion on revenue of $69.9 billion marked 13 percent and 8.5 percent declines from the prior year, respectively. 

A bright spot was Citi Holdings.

The quarter marks the last time the financial institution will report the results of Citi Holdings separately. That business segment now represents only 3 percent of Citigroup’s balance sheet, with $54 billion in assets but was profitable for the tenth quarter in a row. 

At its peak, Holdings had more than $800 billion in assets and sometimes posted multi-billion dollar losses in a quarter.

The decline of Citi Holdings is a microcosm for the broad recovery in the banking system as a whole, as it shows how much bad assets banks have shed over the last few years.   For Citi, it was over $700 billion.

Bank of America

Bank of America was the most optimistic of the large banks in reporting 4th quarter earnings and bragged about a boost in net interest income expected in the first quarter.

Bank of America reported fourth quarter earnings Friday that topped expectations and said it expects a “significant increase” in net interest income for the current quarter. Revenue came in a touch below expectations.

The firm reported earnings per share of 40 cents on revenue $19.99 billion. Analysts polled by Reuters expected Bank of America to report a profit of 38 cents a share on revenue of $20.85 billion.

“Strong client activity and good expense discipline created solid operating leverage again this quarter,” Chief Financial Officer Paul M. Donofrio said in a release. “While the recent rise in interest rates came too late to impact fourth-quarter results, we expect to see a significant increase in net interest income in the first quarter of 2017.”

The bank said it expects to earn an additional $600 million in additional net interest income in the current quarter. 

The story is fairly simply – higher interest rates mean more net interest income for consumer-oriented banks like Bank of America.    A 25 basis point increase in the Prime lending rate means higher rates on credit cards and other short term loans, yet Bank of America has to do little to attract deposits.   For example, Bank of America’s Interest Checking Account pays a whopping 0.01% APY for accounts under $50,000.    

Overall, the large banks have a lot to be optimistic about the prospects of a friendlier regulatory environment and higher interest rates.

Wells Tweaks Pay Plan While Former Exec Slams

The banking industry has been eagerly awaiting for the revised Wells Fargo new pay plan, a change resulting from the phony account scandal.     Early indications from the American Banker is the new plan is not a radical departure.

Banks large and small have been waiting anxiously to see how much regulators’ expectations are going to change in the wake of the Wells scandal. The fear was that the San Francisco bank, on a short leash with its regulators, would eliminate performance-based pay, putting pressure on other banks to follow suit.

Wells Fargo is keeping many details under wraps, but the revised scheme appears to bring the $1.9 trillion-asset company into closer alignment with the rest of the sector, consultants said. Notably, the new plan does not get rid of incentive pay, which has long been a staple of compensation plans throughout the retail banking industry.

“I think the construct was not that radical, and I’m happy that it wasn’t,” said Darryl Demos, an executive vice president at Novantas. “They could have easily overreacted.”

We sincerely hope that the Wells scandal doesn’t sink performance-based pay for everyone, as there is nothing wrong with rewarding good performance, providing that there are appropriate internal controls in place.  

A former senior executive at Wells has disagreed with our defense of Wells Fargo last week, when we said: “We think the bashing of Wells Fargo has gone too far, and they have paid far more in penalties than the estimated $5 million in damages caused to their customers by unauthorized accounts.”   Here was his response:

“I respectfully disagree. The Wells Fargo managers who implemented the unforgivable strategic plan created by Carrie Tolstedt, brutally harassed, insulted, pressured, and also fired hundreds and thousands of employees (for doing what the managers themselves forced down their throats). What management did was calculated and with intent. They micromanaged, cross sold to death, and forced employees into unsafe positions of fear to keep their families clothed, fed, and sheltered. This was a coordinated effort which translates to organized crime and thus RICO Act investigation worthy. In addition, there may be numerous cases of EEOC violations from this scenario. Paying a fine from the shareholders pockets and permitting the same managers to run free is not solving the problem. The government is aware of this and the fire is still smoldering awaiting a possible inquiry and then the house of cards could come tumbling and it is all the senior management’s fault. In the meantime, depositors and borrowers are clearly voting with their pocketbooks by pulling funds out of anything Wells and choosing more ethically responsible alternative banks. I survived Wells and let me tell you, they deserve what they are getting and it was only a slap on the wrist so far.”

Strong words, and we appreciate spirited discussions in this publication!

Will New Falcolns’ Stadium Revitalize Neighborhood?

There is a mixture of optimism and disappointment from the community as the finishing touches are completed on the Mercedes-Benz Stadium, a $1.5 billion facility located in the west side of Atlanta.

There the team owner and home improvement magnate Arthur Blank is building the Falcons’ new home, Mercedes-Benz Stadium, a $1.5 billion palace with eye-popping features: a 30-story-high retractable roof shaped like petals, the N.F.L.’s largest video board and enormous windows that face the Atlanta skyline.

The view through the windows at the other end of the building tells a very different story, one that many fans go out of their way to avoid: English Avenue and Vine City, two of the poorest neighborhoods in the Southeastern United States.   Home to drug dealers, swaths of empty plots and abandoned houses, they are part of the Westside, where 42 percent of the households are in poverty and the unemployment rate is twice that of the rest of Fulton County.   

The stadium’s place in that chasm between the rich and poor is an uncomfortable reminder of the disconnect between the vast wealth of the N.F.L. and the cities to which they extend open palms.   Immensely wealthy team owners, back by a $13 billion-a-year league, routinely push local lawmakers to provide hundreds of millions of dollars in subsidies that, they claim, will pay for themselves through the creation of new jobs, new tax revenue and the intangible prestige of professional sports (the new stadium will host the Super Bowl in 2019.)

Public financing for sports stadiums cannot be justified under almost any circumstances, although the article dumps on Arthur Blank, who is in good faith trying to revitalize this section of Atlanta.   

Blank’s plans are ambitious not only because of the neighborhood’s history and decay, but also because he said he hopes to effect real change in the lives of his neighbors – though critics say it will be on his terms.

It’s his money!   Not only is he placing a $1.5 billion investment in the community, but he has also donated $20 million via his foundation for job training, and new parks.    We agree that the public investment is a lousy deal for the taxpayers of Atlanta, but that’s the fault of the elected officials and the citizens – you can’t blame the owners for looking for public subsidies.   Blank got over $200MM for constructions and potentially hundreds of millions more for its upkeep.

We applaud San Diego voters for rejecting the Chargers stadium plan, and allowing them to leave for Los Angeles.   According to an analysis, the public has spent $7 billion since 1996 to finance NFL stadiums.    

Meanwhile, Los Angeles has not exactly rolled out the red carpet for the Los Angeles Chargers.  The LA Times had this to say:

Every relationship is built on honesty, so the San Diego Chargers should hear this as their moving vans are chugging up the 5 Freeway on their noble mission of greed.

We. Don’t. Want. You.

Hopefully, voters and politicians elsewhere come to their senses and stop subsidizing sports stadiums.   Whether the NFL owners are wealthy or not is irrelevant – these are just bad deals for the public.    

The BAN Report: Mnuchin Under Fire for OneWest / De Novos Open for Business / CMBS Delinquencies Spike / US Auto Industry Sets Record in 2016 / Can’t Give It Away-1/5/17

Mnuchin Under Fire for OneWest

Proposed Treasury Secretary Steven Mnuchin is under fire due to how OneWest Bank, which he ran from 2009 – 2015, handled foreclosures in California.   Elizabeth Warren called Mnuchin “the Forrest Gump of financial crisis.”    Earlier this week, a confidential memo was released by The Intercept, in which attorneys at the state attorney general recommended a civil enforcement action.

The memo obtained by The Intercept alleges that OneWest rushed delinquent homeowners out of their homes by violating notice and waiting period statutes, illegally backdated key documents, and effectively gamed foreclosure auctions.

In the memo, the leaders of the state attorney general’s Consumer Law Section said they had “uncovered evidence suggestive of widespread misconduct” in a yearlong investigation. In a detailed 22-page request, they identified over a thousand legal violations in the small subsection of OneWest loans they were able to examine, and they recommended that Attorney General Kamala Harris file a civil enforcement action against the Pasadena-based bank. They even wrote up a sample legal complaint, seeking injunctive relief and millions of dollars in penalties.

Senate Democrats have even set up a website to submit foreclosure complaints about Steve Mnuchin.    As a vigorous proponent of the rights of lenders to take action when borrowers break their contract to repay their loans (it’s called a promissory note, after all), it is exceedingly rare that a lender successfully forecloses on a property without clear evidence that there is an unpaid secured debt.    Sure, lenders sometimes act improperly and cut corners, but does that mean they shouldn’t be able to enforce their rights?   Moreover, OneWest did not make any of these loans – they merely paid the highest possible price to acquire IndyMac Bank from the FDIC, which indirectly reduced the potential cost to the taxpayer.   

De Novos Open for Business

The FDIC late last month sought comment on a new handbook for De Novo bank organizers, in an effort to reignite the stale market for De Novo banks.   

The Federal Deposit Insurance Corporation (FDIC) is seeking comment on a handbook developed to facilitate the process of establishing new banks. Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions provides an overview of the business considerations and statutory requirements that de novo organizers will face as they work to establish a new depository institution and apply for deposit insurance. It offers guidance for navigating three phases of establishing an insured institution: pre-filing activities, the application process, and pre-opening activities.

“De novo institutions add vitality to our local banking markets, providing credit and services to communities that may be overlooked by larger institutions,” FDIC Chairman Martin J. Gruenberg said. “This handbook is the latest in a series of steps we have taken to support the establishment of de novo institutions. Our goal is to increase transparency about the application approval process and resources available to assist potential organizers. The FDIC has developed this handbook as a practical and plain language guide to help organizers navigate the application review process.”

Last year, the FDIC reduced the enhanced supervisory monitoring period of De Novos from 7 to 3 years, and started a series of outreach events which will continue in 2017.  

CMBS Delinquencies Spike

In December CMBS delinquencies spiked, and the new rate is at the highest level in over a year, according to Trepp, who predicts further increases in delinquencies as rates continue to rise.

The Trepp CMBS Delinquency Rate moved sharply higher in December, with the new rate hitting its highest level in 14 months. The delinquency rate for US commercial real estate loans in CMBS is now 5.23%, an increase of 20 basis points from November. The delinquency rate has now moved higher in nine of the last 10 months, and all of the gains from early 2016 have been reversed. The rate is now at its highest level since October 2015.

With a cascade of loans from the 2007 vintage coming due in 2017, it is hard to see the rate going down any time in the near future. Many of the stronger performing loans from 2006 and 2007 were either defeased prior to maturity or paid off during their open period. Those that make it to their maturity date tend to be loans with more middling debt service coverage or uncertainty in their rent rolls.

Many have been sounding the alarm about the maturity wall for years, but we don’t expect major problems.   For the most part, these are cash-flowing properties that may need some more equity to be refinanced, but only a few will become REO.    Higher rates though can tilt some loans from performing to non-performing status.   Even though 100 basis points does not sound like a lot, increasing the rate from say 4 to 5%, is a 25% increase in interest expense.   

US Auto Industry Sets Record in 2016

A strong fourth quarter propelled US light-vehicle sales to a second consecutive annual high, albeit with some heavy discounting.

U.S. light-vehicle sales hit a second consecutive annual high, aided by a fourth-quarter surge in demand that exceeded expectations and bolstered the outlook for an industry that has been a key engine for economic growth.

Such gains, however, are coming with a steep price tag. December’s sales pace, one of the strongest monthly performances in the industry’s history, was fueled by discounts of $3,542 per vehicle on average, according to J.D. Power, an independent research firm.

Auto makers sold 1.69 million vehicles in December, 3.1% more than the same period in 2015 despite one fewer sales day. The seasonally adjusted selling pace of 18.43 million was the highest since July 2005, when General Motors Co. and other auto makers stoked demand with a new campaign that offered employee pricing to all customers. A total of 17.55 million vehicles were sold in 2016, roughly 60% of which were classified as light trucks.

That compares with 17.48 sales million a year earlier and a mix of 56% light trucks. Growth in demand for pricier pickups, sport-utility vehicles and crossover wagons has helped pad auto maker profits as executives invest to speed development of autonomous cars and spend heavily to meet stricter emissions standards.

At the peak of the recession, US auto sales were barely above 10MM in sales, so this represents a dramatic recovery.     In December, GM and Nissan saw 10% increases from the prior year, while Fiat Chrysler was down 10%.  

Can’t Give It Away

Is there a better example of the difficulty in building new projects in America’s largest cities than George Lucas’s inability to find a city willing to take a $1.5 billion museum?    After being turned down by San Francisco and then Chicago, Mr. Lucas is trying once more in California with potential sites in San Francisco and Los Angeles.

He wants to construct a Lucas museum to house and display his art collection—much of it proudly lowbrow, such as works by the sentimentalist Norman Rockwell; original Flash Gordon comic book art; Mad magazine covers; and memorabilia from his own Star Wars films.  According to an early plan for the museum, his trove of Star Wars material includes 500,000 artifacts from the prequels alone. Lucas refers to such works as “narrative art,” the kind that “tells a story.” He believes they’ve been unfairly ignored by snooty critics and curators, and he wants his museum to rectify that.

Lucas has offered to build his museum in a major American city for free. Including construction costs, an endowment, and the value of the artwork, his organization says the total value of his gift is $1.5 billion. “It’s an epic act of generosity and altruism,” says Don Bacigalupi, the museum effort’s president. “George Lucas, as with any person of great resources and great success, could choose to do whatever he wants to do with his resources, and he has chosen to give an extraordinary gift to the people of a city and the world.”

But so far, Lucas hasn’t found a permanent home for his museum. Lucas tried to build in San Francisco’s Presidio, which is a national park, and then on Chicago’s downtown waterfront, only to abandon both sites after being assailed by local forces. Some people derided his architecture. Others knocked the artwork. Lucas seemed to find most irritating those who said they didn’t mind his proposal but thought he needed to be more flexible about where he put his building. He had long suffered highfalutin critics as a nuisance when he was selling tickets to movies. Now they were thwarting his will when he was trying to give something away.

In Chicago, groups like “Friends of the Parks” stopped the construction of the museum on Chicago’s waterfront, filing a federal lawsuit and unleashing a local PR campaign against the project.   Lucas bailed and turned back to California.  

The BAN Report: The $9MM Badger C&I Relationship / Energy Woes Wane / Small Businesses Struggle to Hire / No Children in San Fran / Loss of Anchors Crushes Small Town Malls-1/26/17

The $9MM Badger Relationship

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $9MM Badger C&I Relationship.”  This exclusively-offered loan relationship is offered for sale by one institution (“Seller”).   Highlights include:

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.   

Event

Date

Sale Announcement

Friday, January 27, 2017

Due Diligence Materials Available Online

Tuesday, January 31, 2017

Indicative Bid Date

Tuesday, February 14, 2017

Closing Date

Thursday, March 2, 2017

Please read the executive summary for more information on the portfolio. You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.  

Energy Woes Wane

Last year, US banks were building up loan loss reserves as the price of oil plummeted, sending billions of energy loans into workout departments.    Some banks like Green Bank in Houston got out of energy completely.   But, recent earnings and comments from three Texas and Oklahoma banks suggest that the energy sector is recovering, and no longer a drag on bank earnings.

Texas’ energy sector may not yet have fully recovered from last year’s plunge in oil and gas prices, but the rest of the state’s economy appears to be doing just fine.

That message that came through loud and clear Wednesday on the earnings calls of Cullen/Frost Bankers in San Antonio, Prosperity Bancshares in Houston and BOK Financial in Tulsa, Okla.  All reported healthy loan growth in the state in 2016 and all predicted even stronger demand for commercial, consumer and residential and commercial real estate loans this year. Even with some energy firms still struggling, bankers seemed confident that the Texas economy would remain one of the nation’s strongest in 2017.

BOK Financial is beginning to make new loans in the sector, while Cullen/Frost is in run-off mode, and Prosperity never had much exposure to the sector.   What’s noteworthy and refreshing here is that US banks moved fast to classify, downgrade, and reserve for potential losses in energy loans, setting themselves up for future earnings surprises if provisions exceed actual losses.    One wonders if the problem with expected loss has been corrected without any need for the 2020 change to the Current Expected Credit Loss Standard for ALLL (CECL).   Market and regulatory pressure have essentially forced banks to take earlier losses on problem credits, thus solving the problem with bank being too slow to build up reserves.    

Small Businesses Struggle to Hire

The JP Morgan Chase Institute released its latest report on the financial condition of small businesses, specifically the struggle for small businesses to increase employment.   

“The Ups and Downs of Small Business Employment” reports that most small businesses experience substantial volatility in payroll expenses. Moreover, more than two-thirds (68 percent) of small employer businesses either reduced their number of employees or added less than the equivalent of one full-time employee in a calendar year.

The typical small business saw payroll expenses grow by 8.5 percent per year. These payroll expenses were significant for small employer businesses, with the typical owner paying $18,700 in payroll expenses a month, or 18 percent of all outflows for their business. Making their financial situation even more difficult to manage, small businesses with employees had only 18 cash buffer days, compared to 27 cash buffer days for small businesses overall.

The full report is available here.    The struggle to manage payroll and minimize layoffs makes it hard for small businesses to hire workers.   While small businesses are a key component in job creation, its actually new small businesses that create net new jobs, while existing small businesses do not.       

New small businesses create new net job; existing small businesses do not. While policy makers have historically focused on the contributions of small businesses to job creation (Birch, 1981), recent research has emphasized the impact of young firms on net job creation (Haltiwanger, et al., 2013; Decker, et al., 2014). In fact, after their first year of employment, existing small businesses lose more jobs than they create, principally through firm failure. For every 100 small business jobs that existed in 2013, new small businesses created 5.6 new jobs, while existing small businesses lost 3.9 jobs—mostly due to losses from the exit of these small businesses. Policy makers, advocates, and private-sector partners should focus on the incentives and sustainability of the new small businesses that create these jobs. This is especially concerning in light of the overall decline in startup rates, which have fallen from 17.1 percent in 1977 to 10 percent in 2014.

This research suggests that more needs to be done to encourage the creation of start-ups and small businesses.   Unfortunately, most banks do not lend money to small businesses unless they’ve been in business for three years.   

No Children in San Fran

The city of San Francisco is becoming a tough place to raise children, as families move out to the suburbs, leaving a city with as many dogs as children.   This has obvious public policy and economic considerations, and could become a trend for other highly expensive cities.

There is one statistic that the city’s natives have heard too many times. San Francisco, population 865,000, has roughly the same number of dogs as children: 120,000. In many areas of the city, pet grooming shops seem more common than schools.

In an interview last year, Peter Thiel, the billionaire Silicon Valley investor and a co-founder of PayPal, described San Francisco as “structurally hostile to families.”

Prohibitive housing costs are not the only reason there are relatively few children. A public school system of uneven quality, the attractiveness of the less-foggy suburbs to families, and the large number of gay men and women, many of them childless, have all played roles in the decline in the number of children, which began with white flight from the city in the 1970s. The tech boom now reinforces the notion that San Francisco is a place for the young, single and rich.

“If you get to the age that you’re going to have kids in San Francisco and you haven’t made your million — or more — you probably begin to think you have to leave,” said Richard Florida, an expert in urban demographics and author of “The Rise of the Creative Class.”

Mr. Florida sees a larger national trend. Jobs in America have become more specialized and the country’s demography has become more segmented, he says. Technology workers who move to San Francisco and Silicon Valley anticipate long hours and know they may have to put off having families.

“It’s a statement on our age that in order to make it in our more advanced, best and most-skilled industries you really have to sacrifice,” Mr. Florida said. “And the sacrifice may be your family.”

We think the cost of housing is the culprit, caused largely by the indifference the city has towards satisfying the housing demand.   Many of the new housing developments are low-density on sites that could support five times as many units.   For all the talk about downtown revivals in our largest cities, their growth is going to be constrained by their inabilities to support families.  

Loss of Anchors Crushes Small Town Malls

Most enclosed malls are anchored by large department stores, the loss of which can be devastating to a retail property.   Consider the example of the Fort Steuben Mall in Steubenville, Ohio, birthplace of Dean Martin.    The mall recently lost two of its four anchors, as Macy’s and Sears closed shop.  

The Fort Steuben Mall in this former steel town on the edge of the Ohio River is battling a double whammy of store closures that have thrust it into a fight for survival.

On one side of the mall is an empty space that housed a Sears department store and automotive center until the struggling retailer closed the location last June.  On the opposite side sits a Macy’s set to close in early spring, the retail chain said early this month, as part of 100 closures announced last summer. Together, the two anchor locations make up 37% of the property’s leasable space.

Fort Steuben Mall is being swept up in a wave of store closings that is buffeting landlords across the U.S. Specialty retailers such as the Limited and department stores such as Sears and Macy’s in recent months have announced plans to close hundreds of stores nationwide and slash jobs as online shopping takes a growing share of revenue.

DLC purchased the mall for $43 million in 2006, just before the recession. Since then, the mall has suffered from store closures including apparel retailer Steve & Barry’s, Waldenbooks and Toys “R” Us.

Kroll now values the mall at just $7.4 million, taking into account the coming loss of Macy’s. It projects creditors face a loss of $31.3 million.

Unfortunately, there are just not enough large retailers to fill large anchor spaces.   Once they are gone, it can cause a snowballing effect, as many tenant leases have “co-tenancy clauses,” which allow them to vacate the space if certain anchor tenants vacate.    Patrick Forkin of Baum Realty Group said, “Landlords are scrambling to figure out what to do with their soon-to-be vacant mall-anchor spaces.  Many landlords are getting creative to back-fill these spaces by considering experiential and destination-oriented users to the retail mix such as fitness clubs, outdoor outfitters, arcades, and storage.  Some of the active tenant in these areas include Planet Fitness, Cabela’s, Dave and Busters, and Life Storage.”


Bank Earnings Review
The BAN Report: Bank Earnings Review / Wells Tweaks Pay Plan While Former Exec Slams / Will New Falcons’ Stadium Revitalize Neighborhood?-1/19/17

The Big 4 Banks have all released earnings for ‘Q4 2016, wrapping up an overall strong 2016 earnings picture.   Last week, we discussed Wells Fargo, so let’s see how JP Morgan Chase, Citigroup, and Bank of America performed.   

JP Morgan Chase

JP Morgan Chase had a great fourth quarter as earnings were 30% greater than the prior quarter, although revenue was only up 2%.    Earnings of $6.7 billion (1.71 / share) beat expectations of $1.43.   For the year, revenue of $99 billion just missed the coveted 12-figure club, which JP Morgan Chase last reached in 2010.

The best news perhaps is that the gains J.P. Morgan saw in the fourth quarter seem to be coming from the so-called real economy, and not the financial one. Its investment banking revenue was decent in the fourth quarter, but profits improved in part because compensation declined. The firm’s trading revenue fell in the fourth quarter compared with the prior three months.

One of the bank’s biggest boosts, in fact, came from having fewer bad loans, and that trend is expected to continue. The bank’s provision for bad loans dropped nearly $400 million in the fourth quarter from a year ago. That’s another sign that the bank thinks the real economy is still strong.

The market reaction was flat, but after the Trump rally in bank stocks, this was too be expected.

Citigroup

Citigroup slightly exceeded expectations on earnings as they beat by 2 cents, but missed the revenue number by $300MM.    

“We had a strong finish to 2016, bringing momentum into this year. We drove revenue growth in our businesses and demonstrated strong expense discipline across the firm,” Citi CEO Michael Corbat said in a release.

The bank reported a 36-percent rise in fixed income markets revenue to $3 billion, and a 15-percent rise in equity markets revenue.   Full-year 2016 net income of $14.9 billion on revenue of $69.9 billion marked 13 percent and 8.5 percent declines from the prior year, respectively. 

A bright spot was Citi Holdings.

The quarter marks the last time the financial institution will report the results of Citi Holdings separately. That business segment now represents only 3 percent of Citigroup’s balance sheet, with $54 billion in assets but was profitable for the tenth quarter in a row. 

At its peak, Holdings had more than $800 billion in assets and sometimes posted multi-billion dollar losses in a quarter.

The decline of Citi Holdings is a microcosm for the broad recovery in the banking system as a whole, as it shows how much bad assets banks have shed over the last few years.   For Citi, it was over $700 billion.

Bank of America

Bank of America was the most optimistic of the large banks in reporting 4th quarter earnings and bragged about a boost in net interest income expected in the first quarter.

Bank of America reported fourth quarter earnings Friday that topped expectations and said it expects a “significant increase” in net interest income for the current quarter. Revenue came in a touch below expectations.

The firm reported earnings per share of 40 cents on revenue $19.99 billion. Analysts polled by Reuters expected Bank of America to report a profit of 38 cents a share on revenue of $20.85 billion.

“Strong client activity and good expense discipline created solid operating leverage again this quarter,” Chief Financial Officer Paul M. Donofrio said in a release. “While the recent rise in interest rates came too late to impact fourth-quarter results, we expect to see a significant increase in net interest income in the first quarter of 2017.”

The bank said it expects to earn an additional $600 million in additional net interest income in the current quarter. 

The story is fairly simply – higher interest rates mean more net interest income for consumer-oriented banks like Bank of America.    A 25 basis point increase in the Prime lending rate means higher rates on credit cards and other short term loans, yet Bank of America has to do little to attract deposits.   For example, Bank of America’s Interest Checking Account pays a whopping 0.01% APY for accounts under $50,000.    

Overall, the large banks have a lot to be optimistic about the prospects of a friendlier regulatory environment and higher interest rates.

Wells Tweaks Pay Plan While Former Exec Slams

The banking industry has been eagerly awaiting for the revised Wells Fargo new pay plan, a change resulting from the phony account scandal.     Early indications from the American Banker is the new plan is not a radical departure.

Banks large and small have been waiting anxiously to see how much regulators’ expectations are going to change in the wake of the Wells scandal. The fear was that the San Francisco bank, on a short leash with its regulators, would eliminate performance-based pay, putting pressure on other banks to follow suit.

Wells Fargo is keeping many details under wraps, but the revised scheme appears to bring the $1.9 trillion-asset company into closer alignment with the rest of the sector, consultants said. Notably, the new plan does not get rid of incentive pay, which has long been a staple of compensation plans throughout the retail banking industry.

“I think the construct was not that radical, and I’m happy that it wasn’t,” said Darryl Demos, an executive vice president at Novantas. “They could have easily overreacted.”

We sincerely hope that the Wells scandal doesn’t sink performance-based pay for everyone, as there is nothing wrong with rewarding good performance, providing that there are appropriate internal controls in place.  

A former senior executive at Wells has disagreed with our defense of Wells Fargo last week, when we said: “We think the bashing of Wells Fargo has gone too far, and they have paid far more in penalties than the estimated $5 million in damages caused to their customers by unauthorized accounts.”   Here was his response:

“I respectfully disagree. The Wells Fargo managers who implemented the unforgivable strategic plan created by Carrie Tolstedt, brutally harassed, insulted, pressured, and also fired hundreds and thousands of employees (for doing what the managers themselves forced down their throats). What management did was calculated and with intent. They micromanaged, cross sold to death, and forced employees into unsafe positions of fear to keep their families clothed, fed, and sheltered. This was a coordinated effort which translates to organized crime and thus RICO Act investigation worthy. In addition, there may be numerous cases of EEOC violations from this scenario. Paying a fine from the shareholders pockets and permitting the same managers to run free is not solving the problem. The government is aware of this and the fire is still smoldering awaiting a possible inquiry and then the house of cards could come tumbling and it is all the senior management’s fault. In the meantime, depositors and borrowers are clearly voting with their pocketbooks by pulling funds out of anything Wells and choosing more ethically responsible alternative banks. I survived Wells and let me tell you, they deserve what they are getting and it was only a slap on the wrist so far.”

Strong words, and we appreciate spirited discussions in this publication!

Will New Falcolns’ Stadium Revitalize Neighborhood?

There is a mixture of optimism and disappointment from the community as the finishing touches are completed on the Mercedes-Benz Stadium, a $1.5 billion facility located in the west side of Atlanta.

There the team owner and home improvement magnate Arthur Blank is building the Falcons’ new home, Mercedes-Benz Stadium, a $1.5 billion palace with eye-popping features: a 30-story-high retractable roof shaped like petals, the N.F.L.’s largest video board and enormous windows that face the Atlanta skyline.

The view through the windows at the other end of the building tells a very different story, one that many fans go out of their way to avoid: English Avenue and Vine City, two of the poorest neighborhoods in the Southeastern United States.   Home to drug dealers, swaths of empty plots and abandoned houses, they are part of the Westside, where 42 percent of the households are in poverty and the unemployment rate is twice that of the rest of Fulton County.   

The stadium’s place in that chasm between the rich and poor is an uncomfortable reminder of the disconnect between the vast wealth of the N.F.L. and the cities to which they extend open palms.   Immensely wealthy team owners, back by a $13 billion-a-year league, routinely push local lawmakers to provide hundreds of millions of dollars in subsidies that, they claim, will pay for themselves through the creation of new jobs, new tax revenue and the intangible prestige of professional sports (the new stadium will host the Super Bowl in 2019.)

Public financing for sports stadiums cannot be justified under almost any circumstances, although the article dumps on Arthur Blank, who is in good faith trying to revitalize this section of Atlanta.   

Blank’s plans are ambitious not only because of the neighborhood’s history and decay, but also because he said he hopes to effect real change in the lives of his neighbors – though critics say it will be on his terms.

It’s his money!   Not only is he placing a $1.5 billion investment in the community, but he has also donated $20 million via his foundation for job training, and new parks.    We agree that the public investment is a lousy deal for the taxpayers of Atlanta, but that’s the fault of the elected officials and the citizens – you can’t blame the owners for looking for public subsidies.   Blank got over $200MM for constructions and potentially hundreds of millions more for its upkeep.

We applaud San Diego voters for rejecting the Chargers stadium plan, and allowing them to leave for Los Angeles.   According to an analysis, the public has spent $7 billion since 1996 to finance NFL stadiums.    

Meanwhile, Los Angeles has not exactly rolled out the red carpet for the Los Angeles Chargers.  The LA Times had this to say:

Every relationship is built on honesty, so the San Diego Chargers should hear this as their moving vans are chugging up the 5 Freeway on their noble mission of greed.

We. Don’t. Want. You.

Hopefully, voters and politicians elsewhere come to their senses and stop subsidizing sports stadiums.   Whether the NFL owners are wealthy or not is irrelevant – these are just bad deals for the public.    

The BAN Report: Mnuchin Under Fire for OneWest / De Novos Open for Business / CMBS Delinquencies Spike / US Auto Industry Sets Record in 2016 / Can’t Give It Away-1/5/17

Mnuchin Under Fire for OneWest

Proposed Treasury Secretary Steven Mnuchin is under fire due to how OneWest Bank, which he ran from 2009 – 2015, handled foreclosures in California.   Elizabeth Warren called Mnuchin “the Forrest Gump of financial crisis.”    Earlier this week, a confidential memo was released by The Intercept, in which attorneys at the state attorney general recommended a civil enforcement action.

The memo obtained by The Intercept alleges that OneWest rushed delinquent homeowners out of their homes by violating notice and waiting period statutes, illegally backdated key documents, and effectively gamed foreclosure auctions.

In the memo, the leaders of the state attorney general’s Consumer Law Section said they had “uncovered evidence suggestive of widespread misconduct” in a yearlong investigation. In a detailed 22-page request, they identified over a thousand legal violations in the small subsection of OneWest loans they were able to examine, and they recommended that Attorney General Kamala Harris file a civil enforcement action against the Pasadena-based bank. They even wrote up a sample legal complaint, seeking injunctive relief and millions of dollars in penalties.

Senate Democrats have even set up a website to submit foreclosure complaints about Steve Mnuchin.    As a vigorous proponent of the rights of lenders to take action when borrowers break their contract to repay their loans (it’s called a promissory note, after all), it is exceedingly rare that a lender successfully forecloses on a property without clear evidence that there is an unpaid secured debt.    Sure, lenders sometimes act improperly and cut corners, but does that mean they shouldn’t be able to enforce their rights?   Moreover, OneWest did not make any of these loans – they merely paid the highest possible price to acquire IndyMac Bank from the FDIC, which indirectly reduced the potential cost to the taxpayer.   

De Novos Open for Business

The FDIC late last month sought comment on a new handbook for De Novo bank organizers, in an effort to reignite the stale market for De Novo banks.   

The Federal Deposit Insurance Corporation (FDIC) is seeking comment on a handbook developed to facilitate the process of establishing new banks. Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions provides an overview of the business considerations and statutory requirements that de novo organizers will face as they work to establish a new depository institution and apply for deposit insurance. It offers guidance for navigating three phases of establishing an insured institution: pre-filing activities, the application process, and pre-opening activities.

“De novo institutions add vitality to our local banking markets, providing credit and services to communities that may be overlooked by larger institutions,” FDIC Chairman Martin J. Gruenberg said. “This handbook is the latest in a series of steps we have taken to support the establishment of de novo institutions. Our goal is to increase transparency about the application approval process and resources available to assist potential organizers. The FDIC has developed this handbook as a practical and plain language guide to help organizers navigate the application review process.”

Last year, the FDIC reduced the enhanced supervisory monitoring period of De Novos from 7 to 3 years, and started a series of outreach events which will continue in 2017.  

CMBS Delinquencies Spike

In December CMBS delinquencies spiked, and the new rate is at the highest level in over a year, according to Trepp, who predicts further increases in delinquencies as rates continue to rise.

The Trepp CMBS Delinquency Rate moved sharply higher in December, with the new rate hitting its highest level in 14 months. The delinquency rate for US commercial real estate loans in CMBS is now 5.23%, an increase of 20 basis points from November. The delinquency rate has now moved higher in nine of the last 10 months, and all of the gains from early 2016 have been reversed. The rate is now at its highest level since October 2015.

With a cascade of loans from the 2007 vintage coming due in 2017, it is hard to see the rate going down any time in the near future. Many of the stronger performing loans from 2006 and 2007 were either defeased prior to maturity or paid off during their open period. Those that make it to their maturity date tend to be loans with more middling debt service coverage or uncertainty in their rent rolls.

Many have been sounding the alarm about the maturity wall for years, but we don’t expect major problems.   For the most part, these are cash-flowing properties that may need some more equity to be refinanced, but only a few will become REO.    Higher rates though can tilt some loans from performing to non-performing status.   Even though 100 basis points does not sound like a lot, increasing the rate from say 4 to 5%, is a 25% increase in interest expense.   

US Auto Industry Sets Record in 2016

A strong fourth quarter propelled US light-vehicle sales to a second consecutive annual high, albeit with some heavy discounting.

U.S. light-vehicle sales hit a second consecutive annual high, aided by a fourth-quarter surge in demand that exceeded expectations and bolstered the outlook for an industry that has been a key engine for economic growth.

Such gains, however, are coming with a steep price tag. December’s sales pace, one of the strongest monthly performances in the industry’s history, was fueled by discounts of $3,542 per vehicle on average, according to J.D. Power, an independent research firm.

Auto makers sold 1.69 million vehicles in December, 3.1% more than the same period in 2015 despite one fewer sales day. The seasonally adjusted selling pace of 18.43 million was the highest since July 2005, when General Motors Co. and other auto makers stoked demand with a new campaign that offered employee pricing to all customers. A total of 17.55 million vehicles were sold in 2016, roughly 60% of which were classified as light trucks.

That compares with 17.48 sales million a year earlier and a mix of 56% light trucks. Growth in demand for pricier pickups, sport-utility vehicles and crossover wagons has helped pad auto maker profits as executives invest to speed development of autonomous cars and spend heavily to meet stricter emissions standards.

At the peak of the recession, US auto sales were barely above 10MM in sales, so this represents a dramatic recovery.     In December, GM and Nissan saw 10% increases from the prior year, while Fiat Chrysler was down 10%.  

Can’t Give It Away

Is there a better example of the difficulty in building new projects in America’s largest cities than George Lucas’s inability to find a city willing to take a $1.5 billion museum?    After being turned down by San Francisco and then Chicago, Mr. Lucas is trying once more in California with potential sites in San Francisco and Los Angeles.

He wants to construct a Lucas museum to house and display his art collection—much of it proudly lowbrow, such as works by the sentimentalist Norman Rockwell; original Flash Gordon comic book art; Mad magazine covers; and memorabilia from his own Star Wars films.  According to an early plan for the museum, his trove of Star Wars material includes 500,000 artifacts from the prequels alone. Lucas refers to such works as “narrative art,” the kind that “tells a story.” He believes they’ve been unfairly ignored by snooty critics and curators, and he wants his museum to rectify that.

Lucas has offered to build his museum in a major American city for free. Including construction costs, an endowment, and the value of the artwork, his organization says the total value of his gift is $1.5 billion. “It’s an epic act of generosity and altruism,” says Don Bacigalupi, the museum effort’s president. “George Lucas, as with any person of great resources and great success, could choose to do whatever he wants to do with his resources, and he has chosen to give an extraordinary gift to the people of a city and the world.”

But so far, Lucas hasn’t found a permanent home for his museum. Lucas tried to build in San Francisco’s Presidio, which is a national park, and then on Chicago’s downtown waterfront, only to abandon both sites after being assailed by local forces. Some people derided his architecture. Others knocked the artwork. Lucas seemed to find most irritating those who said they didn’t mind his proposal but thought he needed to be more flexible about where he put his building. He had long suffered highfalutin critics as a nuisance when he was selling tickets to movies. Now they were thwarting his will when he was trying to give something away.

In Chicago, groups like “Friends of the Parks” stopped the construction of the museum on Chicago’s waterfront, filing a federal lawsuit and unleashing a local PR campaign against the project.   Lucas bailed and turned back to California.  

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