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Clark Street Capital Featured in American Banker-4/13/18

It may be time to ditch those distressed credits

American Banker

4/13/18

By Jackie Stewart

For banks still holding on to longtime problem assets, now might be the time to consider selling. In the aftermath of the financial crisis, banks were saddled with scores of soured loans. But
even if institutions were looking to sell these assets, and investors were interested in purchasing them, banks were often constrained by capital level requirements from taking the necessary
write-offs associated with fire sales. Now capital levels are higher so banks would be better able to absorb losses, and investors are still hungry to buy distressed assets for good prices. But banks have mostly been reluctant to complete loans sales.

That could be a mistake if credit quality were to take a turn for the worse, and there are a few indicators that new problems could be on the horizon.
“If you are selling assets today, you are probably being more tactical,” said Jeff Davis, a managing director in Mercer Capital’s financial institutions group. “You are thinking strategically as the economic cycle ages, and you are trying to take some chips off the table.”

Credit quality has improved significantly since the depths of the recession. Problem assets for all banks totaled $193 billion at Dec. 31, according to data from the Federal Deposit Insurance
Corp. That figure included other real estate owned, assets that were 30 to 89 days past due and at least 90 days late, and those in non accrual status.

Still the recent number is roughly 42% higher than the $136 billion recorded in 2006, according to data from the FDIC. “Banks still have a pretty elevated level of classified assets because many of them didn’t fully pull off the Band-Aid half a decade ago,” said Jon Winick, CEO Clark Street Capital. “You are starting with a decent sized workout universe to begin with. Now there are new credits coming in.”

There are signs that credit quality could weaken, though certainly no one is predicting an imminent financial collapse. For instance, the Federal Reserve Bank of New York said in a
report on household debt earlier this year that credit card delinquencies increased “notably.” The percent of credit card balances that were at least 90 days late rose to 7.55% in the fourth quarter from 7.14% a year earlier, according to the report. Winick said an uptick in credit card delinquencies can be an early indicator of wider problems to come. Generally, business customers have more resources to keep their loans current when trouble starts to brew.

Interest rate hikes may also put pressure on certain commercial customers, especially in the commercial real estate portfolio. For instance, multifamily housing has been overbuilt in some
cities, meaning that supply has out stripped demand. Owners of these buildings could have problems increasing rents as a result. That may become a problem as their loans come due and they get new financing at higher interest rates, Winick said. Owners of retail properties in some areas may also struggle to raise rents on tenants either because of long-term leases or because the market won’t support such hikes, Winick said.

Retail is also facing pressure from broader changes in consumer behavior as more people shop online. “The 900-pound gorilla is Amazon,” said Lynn David, CEO of Community Bank Consulting Services. “What it is doing to retail is phenomenal. It has to be a concern to everyone. I don’t care if it is paper towels. You can now order it online from Amazon and get them shipped for free.”

To be sure, there have been banks in recent months that have looked to sell loans, both performing ones and problem credits. Substandard loans that banks consider selling may still
be performing, but there could be other concerns, such as a covenant being breached. A bank may decide to unload good loans if they are concerned about concentration levels, are
looking to exit a certain business line or decide they could redeploy the funds into a higher yielding asset.

PacWest Bancorp in Beverly Hills, Calif., announced in December that it would sell cash flow loans worth roughly $1.5 billion as it looked to wind down its commercial lending origination
operations related to healthcare, technology and general purposes. PacWest President and CEO Matt Wagner said in the release that the $25 billion-asset company made the decision “for both cyclical and competitive reasons.”

Other banks looked to pare back their exposure in energy after oil prices tumbled. Still, many banks are deciding to hold onto credits, even ones that are in danger of becoming
distressed. This lack of supply could be helping to drive up pricing for the loans that do become available, said Kip Weissman, a partner at Luse Gorman. “We are at the top of a credit cycle and that means there’s less of a supply,” Weissman said.

“More loans are performing, and it is a countercyclical industry.” Michael Britvan, a managing director in loan sale and asset sale group at Mission Capital Advisors, has observed banks are currently less willing to sell loans at a loss, likely due to the potential impact on earnings. This decision seems counter intuitive as the market is awash inliquidity, resulting in the narrowest bid-ask spread in recent history, he said.  ”Performing, subperforming or nonperforming debt is in vogue,” he said. “We have been in an extended bull market run, therefore investors are targeting fixed-income investment, targeting assets they view to be slightly less risky and less correlated with the broader market.”

Matthew Howe, vice president of special assets at Lakeside Bank in Chicago, said he has seen better pricing on stressed commercial loans than in recent years. He said the bank is seeing bids between 85% to 90% of a loan’s outstanding balance, compared with offers in the low 80s just a few years ago.

Even though the $1.6 billion-asset Lakeside is not suffering from the credit problems that plagued the industry after the recession, management still tries to be proactive in managing its loan portfolio. That means even in a strong economy sometimes the bank offloads distressed credits. Howe says one reason driving buyers’ interest in distressed assets is that foreclosures are
moving faster through the court system. That can eliminate some of the uncertainty for potential buyers of troubled commercial real estate loans.

“It has been aggressive,” Howe said. “There is an appetite in the marketplace for distressed and for performing loans.”

CEO Jon Winick Investor’s Business Daily-3/16/18

Dodd-Frank Reform Is Urgent For U.S. Small Businesses And Consumers

Dodd-Frank Reform Is Urgent For U.S. Small Businesses And Consumers

President Trump’s regulatory rollbacks are a defining element of his agenda, and this week’s Senate vote to send the Dodd-Frank Act reform bill to the House could spark one of the most significant legislative battles of his first term.

The centerpiece of the controversial bill is the loosening of lending restrictions on small banks, a measure needed to protect the marketplace from domination by only the largest global banks. But growing resistance to the reforms — rooted in generic and unwarranted antipathy to all banks — threatens to derail the legislation and significantly reduce lending options for U.S. small businesses and consumers.

Small business lending in the U.S. was strong in 2017, but that could easily change by the time Election Day arrives in November. In the last 14 months, the Trump Administration has quietly ramped up the regulatory pressure on community and commercial banks across the nation.

According to Clark Street Capital’s Regulatory Pendulum Survey with senior-level bank executives, not a single respondent reported a positive change in the regulatory and compliance burden in the past year. Nearly half said the burden increased, and roughly 85% said it had either increased or no change. Bank executives noticed “a change in tenor” but said, “regulators are harsher than ever” with “compliance standards (that are) impossible to meet.”

In particular, the role of the field examiner has taken on new importance at thousands of small banks. Field examiners travel the country to scrutinize anything and everything about a bank’s operations, and contrary to expectations under a new Republican president, they’re slowing down the lending process for small business and consumers. In many cases, they take odd positions on vague regulations and border on being obstructionists.

More than 80% of agricultural loans and 50% of small business loans come from community banks — all of which are now forced to spend significantly more resources and bring on non-revenue producing staff to address scrutiny of internal audit and credit examination departments. And with new requirements forthcoming, such as the expansion of Home Mortgage Disclosure Act data collection, the increased burden is taking its toll.

For all but a few banks, consumer lending has become so toxic since Dodd-Frank that many have abandoned it completely.

This creates monopolies, with the largest global banks increasingly dominating the marketplace. They’re driving smaller competitors out and forcing them to sell or merge. Since 2010, the number of commercial banks in the U.S. plummeted from 6,623 to 4,888. Meanwhile, only 15 banks hold more than 50% of U.S. banking assets. This situation has opened a niche for non-bank mortgage lenders, which are susceptible to the same liquidity issues that caused widespread chaos during the 2008-2009 financial crisis, according to the Federal Reserve.

Few people have sympathy for banks of any kind, but the harsher burdens placed on small banks — comprising 99.5% of all U.S. banks  — are setting the nation up for an economic disaster.

That’s why a compromise on an updated Dodd-Frank bill, sponsored by Sen. Mark Crapo, R-Idaho, and Sen. Mark Warner, D-Va., is so critical. The main purpose is to provide relief for smaller banks by waiving requirements for mortgage qualification and creating exemptions on arduous data collection processes.

The bill has just passed the Senate with relative ease, but there are more than 100 amendments in the House, of which 80% come from Democrats wary of changing Dodd-Frank at all. House Republicans aren’t making it any easier, pushing for more control before they offer their support. It’s possible the bill will be watered down and meaningless by the time it’s passed.

No one wants a repeat of 2008-2009, but cynicism towards all banks is going to backfire and harm consumers and small businesses. Their best protection is fair competition with abundant choice, not over-regulation of the fewer and fewer banks willing to lend. It’s never good when the vast majority of an industry, especially one so fundamental as banking, is controlled by a select few elites.

In spite of the underwhelming results in the first year of the Trump administration, bank executives remain optimistic that the situation will improve during the remaining three years. Still, it’s disturbing that more than one-in-four survey respondents expect it to worsen.

The president’s team must roll up those sleeves and go to work in the House, where logic and bipartisanship don’t always go hand-in-hand. The outcome could go a long way in determining the health of the U.S. economy this year, and consequently, this November’s election.

Clark Street Capital Promotes Robert Strandberg to Vice President

Business Wire

For Immediate Release

Clark Street Capital announces that Robert Trefle Strandberg has been promoted to Vice President after 4 years and over $500MM in loan sales with the company.

Robert Strandberg joined Clark Street Capital in November 2013 as an analyst. In his first two years Robert was key in assisting loan portfolio sales totaling over $250MM. In 2015 Robert was promoted to Senior Analyst, and now has been promoted to Vice President. Robert’s primary focus is loan portfolio sales. He works on underwriting portfolio assets, data management, analyzing assets, reserve levels, and market values of all assets to bring the best return for clients.

Robert received his bachelor’s degree from DePaul University with a double major in entrepreneurship and marketing, as well as a minor in sales. Prior to joining Clark Street Capital, Strandberg owned his own business in college and was a marketing intern for the Chicago Bulls. Robert has been a keynote speaker at a fortune 500 company annual conference, after leading the company in sales. Strandberg originates from Edina, Minnesota.

Robert currently is involved with REIA and their emerging leaders program, and is a volunteer for two local non-profits. Robert also is a member of Olympia Fields Country Club.

CEO Jon Winick Featured in American Banker-12/13/17

Community bankers’ grim reality: This is the new normal

Published December 13 2017, 1:21pm EST

Community bankers seem to expect a lump of coal for the holidays.

The industry has a lot going for it. National unemployment is low, hovering around 4% in October, according to the Bureau of Labor Statistics. Third-quarter banking profits rose more than 5% from a year earlier, based on data from the Federal Deposit Insurance Corp. Bank stocks are up by double digits this year.

Still, bankers have a grim outlook for 2018. Several factors are at work, ranging from concerns over lackluster loan demand and low yields, rising deposit prices and competition and persistent regulatory burden.

In short, bankers are finally adjusting to the industry’s new normal.

“Even though the economy seems a little bit better there’s still a lot of issues out there in the market,” said Tim Scholten, founder of Visible Progress, a consulting firm. “I don’t think things are necessarily as great as what sometimes it feels like it should be. It’s a different world than what we’re used to.”

For the first time in its nearly three-year history, a banker confidence index from Promontory Interfinancial Network remained below 50 for two straight quarters, indicating pessimism among respondents. The index, which is based on a scale of up to 100 points, tracks views on access to capital, loan demand, funding costs and deposit competition.

“Why aren’t bankers more confident?” said Paul Weinstein, a Promontory senior adviser. “We’re trying to figure that out. There are lots of potential possibilities. It could just be the initial exuberance that some had with what they thought would happen in Washington has faded.”

Muted enthusiasm is likely being influenced by customers’ reactions, said Jon Winick, CEO of Clark Street Capital. For instance, many banks are chasing commercial-and-industrial credits at a time when borrower demand is below many bankers’ expectations.

Total C&I loans on Sept. 30 were flat on a linked-quarter basis, according to FDIC data.

Almost 51% of the bankers surveyed by Promontory said current loan demand had moderately or significantly improved from a year earlier. About the same percentage expected demand to rise in the next 12 months.

Bankers often assert that businesses are waiting for certainty, such as last year’s presidential election or tax reform, before deciding to borrow and make investments.

Winick questioned that logic, postulating that potential borrowers may have become more debt-averse since the financial crisis. Others may simply have enough cash on hand to fund their operations.

“I don’t buy that a trucking company in suburban Chicago is holding off on buying new trucks because it is waiting to see what Washington does,” he said.

Concerns over regulatory issues could also be forcing some banks to pass on certain loans, said Trent Fleming at Trent Fleming Consulting. Overall, “a downward creep” in regulation makes lending more difficult for banks, he said.

“I’m little bit pessimistic myself just from the regulatory burden,” Fleming said. “In our industry, the burden of regulation is the single biggest drag on what’s going on. Bankers have been hoping for relief.”

Deposit competition and the possibility of higher funding costs was another concern. About 64% of respondents to the Promontory survey said deposit competition had increased over the past 12 months. About 57% of bankers felt that way in the second quarter.

Nearly 90% of the survey’s participants expect funding costs to rise.

“The price for deposits has gone up, while the loan pricing hasn’t changed all that much,” Scholten said. “It is creating added pressures on margins.”

Deposit competition is on the rise as banks with at least $50 billion in assets look to comply with rules tied to their liquidity coverage ratios, said Ciaran McMullan, president and CEO of Suncrest Bank in Visalia, Calif.

While optimistic about his $529 million-asset bank’s operations, McMullen said he understands why other may have a gloomier outlook.

“I think bankers have always been a bit pessimistic,” McMullan said. “There are plenty of bankers that remember staring at the ceiling at night wondering how they would get out of the fix they were in during the crisis. … It’s hard to shake that.”

The survey, which was conducted during the first half of October, took place before some important developments for banks. Tax reform has since progressed in Congress, and Richard Cordray stepped down as director of the Consumer Financial Protection Bureau.

“If tax reform happens that will probably change the needle a lot,” Winick said. “After the election things haven’t happened as fast as people had wanted. But there are a lot of very encouraging changes, so this [pessimism] could be short term in nature.”

Clark Street Capital Featured in SNL-12/1/17

Wells Fargo CEO to face investors amid drawn-out, mounting woe Exclusive

Friday, December 01, 2017 10:43 AM CT
By  Kevin Dobbs

Regulatory scrutiny of Wells Fargo & Co. could escalate as the bank continues to grapple with fraudulent sales tactics, putting its chief executive in a precarious position as he prepares to meet with investors.

Wells President and CEO Timothy Sloan — who has spent the past year trying to resolve extensive problems that range from phony deposit accounts to blunders in Wells’ auto-insurance and mortgage operations — is scheduled to address investors Dec. 5 at a Goldman Sachs conference in New York.

Sloan was promoted to the San Francisco-based bank’s top job shortly after former CEO John Stumpf stepped down in the wake of regulators, in September 2016, fining the bank and alleging that it had allowed employees to open millions of accounts without customers’ permission. Regulators said retail staffers worked in a pressure-cooker environment to meet exceptionally high sales goals.

Sloan has since tried to win back the trust of customers, investors and regulators. During his tenure as CEO, the bank has made changes to its board, fired managers linked to improprieties and reshaped the ways it motivates employees.

But a cloud of scandal continues to hang over the bank, and regulators reportedly are ramping up their scrutiny. That development could further damage Wells’ reputation at a time when the bank is struggling to attract new customers and grow revenue, observers say.

That in turn would worry investors, said Jon Winick, president of bank advisory Clark Street Capital.

“It is remarkable that it’s taking them so long to deal with this,” Winick said in an interview. “What else is there for regulators to find? That’s what everyone is going to ask.”

Wells has acknowledged that its staffers opened up to 3.5 million fake accounts. In its community bank division, where those bogus sales occurred, net income fell in the third quarter, as did Wells’ overall revenue.

Wells also has reported a range of other problems. These include wrongly charging hundreds of thousands of auto loan borrowers for insurance and unjustly charging some mortgage customers fees to extend interest rate commitments.

At issue now: The Office of the Comptroller of the Currency has cautioned Wells that it is considering a formal enforcement action against the bank over the auto-insurance and mortgage issues, according to a Wall Street Journal report. Such an action would involve ordering the bank to correct problems within a set time period, and with that, regulators would bolster their inspections of Wells’ operations, said Kevin Jacques, the finance chair at Baldwin Wallace University.

Heightened supervision would increase the likelihood of regulators unearthing additional problems, and it would surely consume precious time that Wells managers would otherwise devote to growing the business, said Jacques, who spent a decade from the late 1980s to the late 1990s working on risk management matters for the OCC.

“It is much more than a negative headline,” Jacques said in an interview. “When the OCC takes action, it means they are ratcheting up the steps they are taking against a bank, and that kind of progression is exactly what Wells Fargo does not want to see happen.”

According to the Journal report, which cited people familiar with the matter, the OCC wrote a letter to Wells in November accusing it of willingly hurting the auto and mortgage customers and, additionally, of repeatedly failing to address problems in an array of other areas. Also, this week the Journal separately reported that some business clients in Wells’ foreign-exchange operation were overcharged, though the bank disputed that report.

“At Wells, like at all the really big banks, there is a team of regulators onsite year-round,” Jacques said. “If there is an enforcement action, you can be sure it means that onsite team is really digging in, trying to get ahead of problems rather than responding to them.”

Should substantial new problems emerge, pressure on Sloan could mount. When he was promoted from COO to CEO last year, Wells emphasized that Sloan was not responsible for the division in which the sales scandal erupted. But, with problems widening, it could become increasingly difficult for the 30-year company veteran to avoid blame.

Winick said it “could take years for somebody from the outside to get up to speed” as a new CEO, given Wells’ size and complexity. But he also said that, if Wells’ problems worsen, critics may demand a change in leadership and push the bank to look outside for a turnaround expert.

“It is very disappointing, this continuous drip, drip of problems,” Winick said.

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