March ’17

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!

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