Lesson in high-profile foreclosure: Resist temptation to relax terms
By John Reosti
Published May 04 2018, 2∶24pm EDT
A high-profile foreclosure in New York is highlighting the importance of disciplined underwriting.
Preferred Bank in Los Angeles disclosed recently that it has begun foreclosure proceedings on a pair of luxury apartment buildings in Manhattan, a move that will dramatically increase the level of nonperforming assets on its balance sheet. The loans have an outstanding balance of $41.7 million.
If there’s a silver lining, it’s that the $3.8 billion-asset bank expects the financial hit to be minimal because the loan-to-value ratio — the balance divided by the appraised value at
origination — for each of the loans is below 70%.
Preferred’s experience serves a reminder of how important terms will be as loan demand increases, interest rates rise and lenders try to gain a competitive edge. Those who get too
aggressive could be burned when the economic cycle takes the inevitable turn for the worse, bankers and industry observers said.
“If you’re going to compete on commodities — that’s where the cycle starts to turn,” said Joseph Campanelli, CEO at the $2.1 billion-asset Needham Bank in Massachusetts, adding
that it can be tempting to follow the pack in areas such as rate and terms.
“Well, so-and-so is doing this rate, so let’s match it,” Campanelli said. “Or so-and-so is doing it without recourse, or doing a higher loan-to-value, let’s match it. That’s the slippery slope.”
The average loan-to-value ratio for commercial real estate deals increased to about 80% in the fourth quarter from 73% a year earlier, according to PrecisionLender, a technology firm
that helps lenders fine-tune pricing and terms. The firm evaluated more than $2 billion in quarterly volume by its clients.
To be sure, many banks are sticking to their guns when it comes to LTV.
Campanelli and Edward Czajka, Preferred’s chief financial officer, said they are seeing very few signs that lenders are throwing caution to the wind.
“I don’t see any trends pushing standards in the opposite direction,” Czajka said, adding that the average loan-to-value ratio in Preferred’s $1.3 billion-asset commercial real estate portfolio
“One of the things we’re seeing this go-around is a lot more liquidity going into deals,” Campanelli said. “It’s not uncommon to do a deal at 65% loan-to-value.”
Needham, like Preferred, is a significant commercial real estate lender with more than $400 million of CRE-related loans on its books.
While Preferred did not disclose the reason for the foreclosures, other media outlets have noted that Michael Paul D’Alessio, a developer and one of the properties’ owners, is facing lawsuits alleging that funds intended for a number of projects were improperly diverted for other uses.
D’Alessio is also being sued by three New York banks — Greater Hudson Bank, Westchester Bank and BNB Bank — that are trying to recoup $6.4 million through an involuntary
bankruptcy petition filed last month in the U.S. Bankruptcy Court for the Southern District of New York.
D’Alessio did not respond to a request for comment.
The situation at Preferred shows how important it is to fully vet a borrower and not just an isolated deal, industry experts said.
“Problems can cascade,” said Jon Winick, CEO of the Chicago advisory firm Clark Street Capital. “Trouble with one project drags down another one. … A borrower can be highly coveted and, all of the sudden, no one wants to touch them.”
“What else does that developer or real estate group have going on?” Campanelli said. “If they’re overleveraged in other areas, you would have to conclude that, on a global basis, the
cash flows aren’t strong enough, even though the individual project looks OK.”
Preferred still considers itself a conservative lender, Czajka said, noting that the bank’s credit quality had been uniformly excellent for years. While the bank is pursuing foreclosure now, it is
is keeping all its options — including selling the loans — on the table.
In its first-quarter call report, Preferred reported $3.3 million of nonaccrual loans, or 0.11% of total loans.
Winick said he expects loan-to-value ratios to be lower on large CRE loans, which seems to be the case with Preferred’s deals. As a result, the bank’s minimal-loss forecast “seems
reasonable,” but there are no guarantees.
“It does take time to sell buildings,” Winick said. “They’re probably fine, but it’s hard to tell.”
Clark Street Capital Featured in American Banker-5/4/18
Small banks count on new appraisal rule to boost CRE lending
By Andy Peters
Published May 04 2018, 2∶27pm EDT
Community bankers are counting on a new federal rule that relaxes requirements on real estate appraisals to help them better compete with nonbank lenders on smaller commercial real estate loans, but appraisers themselves say that the change will only encourage banks to take more risks.
The three federal bank regulatory agencies last month increased the threshold for loans that require an outside appraisal on the property used as collateral from $250,000 to $500,000. The rule was last updated in 1994 and lenders say regulators changed it because it did not accurately reflect current property values.
The rule change will remove the costly appraisal requirement on tens of thousands of commercial properties, which could allow banks to make more loans in this size range, said Justin Bakst, the director of capital markets at CoStar. As of April 20, roughly 154,000 properties nationwide were each valued at between $250,000 and $500,000, according to CoStar. Those properties are valued at about $68 billion.
Though these loans should be right in community banks’ wheelhouse, many small banks have actually shied away from them because they became too costly to make once appraisal fees were factored in, said Jon Winick, CEO at Clark Street Capital, a Chicago firm that advises banks on loan sales.
“To spend $3,500 for an appraisal on a $250,000 loan, that wasn’t worth it,” Winick said.
Community bankers said that the rule change should help them better compete with insurance companies, individual investors and other nonbank lenders that were not subject to the same appraisal requirements.
Eliminating in-person appraisals for loans of less than $500,000 will both reduce costs for small banks — allowing them to offer better rates and terms — and speed up decision-making, they said.
Banks had not officially asked for an increase in the threshold since it was last updated in 1994, said Chris Capurso, an attorney at Hudson Cook in Richmond, Va., who advises banks on lending laws. But a federal law that requires federal agencies to review their regulations every decade opened the door for the current push, Capurso said.
Additionally, the price of commercial real estate has significantly increased since the financial crisis, which made it more palatable for regulators to boost the threshold, said Curt Everson, president of the South Dakota Bankers Association.
Banks will still need to value their collateral, but instead of hiring a certified independent appraiser, they now can commission an evaluation of properties in this value range using publicly available real estate data.
“Evaluations cost less than appraisals, take less time than appraisals and do not require the bank to go out and find a certified appraiser,” Capurso said. “All of this adds up to banks, especially banks with fewer resources, being able to make more CRE loans.”
However, appraisers have questioned why regulators are making it easier for banks to make CRE loans at a time when they’ve been concerned about overexposure to the sector. The rule change is “yet another relaxation of sound collateral risk policies that provide minimal benefit to financial institutions while creating significant potential risk to the financial markets as well as
consumers,” the Collateral Risk Network, which represents appraisers and risk managers, wrote in a September letter to regulators.
The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve Board dismissed concerns about the change posing increased risk to the financial system. “The agencies … determined that the increased threshold will not pose a threat to the safety and soundness of financial institutions,” they said in a joint press release on April 2.
Bankers in rural areas have also supported the rule change, as they believe it will help address the problem of a dearth of commercial real estate appraisers in certain sections of the country.
“The supply of licensed and certified appraisers, especially those willing to work in rural areas, has diminished,” Everson wrote in a September letter to regulators. “In too many instances … owners of small businesses on main street, farmers and ranchers seeking to restructure current year operating loans into longer term notes incur higher costs … because of appraisal threshold
requirements that have not been updated in decades.”
Some bankers had called for regulators to raise the appraisal-requirement threshold to $1 million, saying that the $500,000 cap would still shut them out of too many deals. However, Capurso noted that regulators based the $500,000 figure on the increase in the Federal Reserve’s Commercial Real Estate Price Index over the past 24 years.
“The agencies didn’t come to the limit haphazardly by merely doubling the previous limit,” Capurso said. “There’s a basis to it, and I think it’s a fair one to use.”
Clark Street Capital Featured in American Banker-4/13/18
It may be time to ditch those distressed credits
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.”
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.
Clark Street Capital Promotes Robert Strandberg to Vice President
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
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 woeExclusive
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 Journalreport. 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.
SNL: Latest Midland States Bancorp Deal-10/17/17
Latest Midland States Bancorp Deal Lands Company in Community Bank Sweet Spot
On Oct. 16, the Effingham, Ill.-based company announced it will acquire Belvidere, Ill.-based Alpine Bancorp. Inc. in a cash-and-stock deal valued at about $181.0 million, making it the fourth-largest community bank in the state, according to executives.
“This will be our 12th announced acquisition since 2008, so we have a very good process in place for evaluating, negotiating and integrating acquisitions that add value to our franchise,” Vice Chairman, President and CEO Leon Holschbach said on an Oct. 17 call to discuss the deal.
Stephens analyst Terry McEvoy noted in an interview that the Alpine deal comes on the heels of Midland completing a similarly sized transaction in June — the nearly $173 million buyout of Centrue Financial Corp.
Midland also announced it completed a $40 million private placement of subordinated debt to certain institutional investors. The company will use the funding for the cash portion of the Alpine deal. “This debt issuance will help us maintain strong capital ratios following the acquisition, so that we can continue to execute on our organic and acquisitive growth opportunities,” Holschbach said.
The two deals together would tack on more than $2 billion in assets and push Midland to around the $6 billion-asset level, giving it heft to absorb costs, more deposits to fund loan growth and business-line diversity to bolster earnings when lending is slower, McEvoy said. The deal will also add a boost to its wealth management business, giving it just under $3.0 billion in assets under administration, the company said.
Jon Winick, president of bank consultancy Clark Street Capital in Illinois, said that with the latest deal Midland would get into a sweet spot of sorts for larger community banks. It would be big enough to spread regulatory costs and other expenses over a broader base, compete for larger loan deals and attract the attention of more institutional investors. But yet, at around $6 billion in assets, it still would have plenty of room for growth before reaching the $10 billion threshold, a point at which banks face more regulatory scrutiny and compliance costs.
“So Midland is getting into a range where they can really benefit from economies of scale,” Winick said in an interview.
Alpine will provide Midland with about $1.0 billion in assets under management, and the seller would also provide Midland with about $830 million in gross loans and $1.1 billion in deposits, based on June 30 data. The target has a loan-to-deposit ratio of 73%, leaving plenty of room to put more deposits to work via loans to the combined company’s larger customer bases. Alpine’s deposits, too, are lower-cost at 19 basis points, McEvoy noted. Core deposits compose 94% of Alpine’s total deposits, executives said.
According to Holschbach, Alpine’s loan portfolio is “very similar” to Midland’s. He said there will be “almost no change” in the overall mix once the two portfolios are combined, but it will reduce the company’s commercial real estate regulatory ratio to 233%.
Alpine “appears to be a solid community bank with a very strong deposit base,” McEvoy said. “I think this is a nice move. It’s good to see them back with another deal that will help them really build out the business.”
Although analysts on the call sounded mostly positive regarding the deal’s metrics, some questioned whether projected cost savings, at 36%, could be higher. Midland will gain 19 branches in the transaction, but Holschbach said there are no branch consolidation opportunities. He said the greatest opportunity for cost savings will stem from consolidating systems.
Holschbach said Midland will focus on the Alpine deal in the “near horizon,” but will continue building capital for future transactions.
“And frankly, the stronger our stock price gets, the more likely we’ll look at opportunities to boost capital with [an] equity raise,” he said.
The deal is expected to be 10% accretive to 2019 EPS. Tangible book valued dilution of about 6% is estimated to be earned back in 3.5 years, using the crossover method.
CEO Jon Winick Interview SNL-8/14/17
Seasonality helps big banks grow loans in Q2 but forecast remains dim for year
Lending at the nation’s largest banks grew compared to a seasonally sluggish first quarter of 2017, but the industry remains subdued on expectations for growth in the coming quarters.
All 10 of the largest banks saw quarter-over-quarter growth in total loans and leases, with stronger performance coming from consumer lending. But commercial and industrial, or C&I, lending did not appear as strong for the quarter, namely at three of the big four banks: JPMorgan Chase Bank NA, Wells Fargo Bank NA and Bank of America NA. In its most recent survey of senior loan officers, the Federal Reserve noted that the flattening activity in C&I is the result of weaker demand in the second quarter, since banks left their standards “basically unchanged.”
In residential real estate, the Fed noticed banks slightly easing standards as demand strengthened. Most of the largest banks saw higher mortgage and home equity lending, although Capital One NA saw its portfolio fall 4.5% quarter over quarter as it continues to carry out a planned runoff of its mortgages.
On commercial real estate, or CRE, the Fed saw tighter lending standards as demand weakened. But most of the big banks saw quarter-over-quarter increases in lending, with the exception of Bank of America NA and U.S. Bank NA.
Chris Kotowski, analyst at Oppenheimer & Co. Inc., said in an interview that the big banks have broadly grown more slowly than the industry. S&P Global Market Intelligence data shows that only three of the 10 largest banks grew loans in the second quarter at a higher rate than the U.S. commercial bank aggregate of 1.7%: Wells Fargo, Citibank and PNC Bank NA.
“We are in a slow, steady state,” Kotowski said in an interview.
On earnings calls, executives of the largest banks also painted a bleak forecast of loan growth in coming quarters.
At Bank of America Corp., CFO Paul Donofrio said July 18 that the company expects only a “little bit of growth,” with total loans expanding at a rate in the low single digits. Wells Fargo & Co. CFO John Shrewsberry said July 14 that his company is also targeting low single-digit loan growth for the year.
SunTrust Banks Inc. Chairman, CEO and President William Rogers Jr. said his company is focused on adapting to pockets of different lending categories where there are growth opportunities.
“If we’ve been in a cycle and we’ve been unable to achieve that kind of return, we’re totally willing to move on and move to another opportunity where we think we can benefit more substantially,” Rogers said.
As executives exuded cautious optimism for future loan growth, analysts appear to be closely watching credit markets. A July 31 Oppenheimer note acknowledges that current year-over-year growth, based on the Federal Reserve’s H.8 data, is cause for concern because it is running just under nominal GDP.
“What would really worry us is if banks and borrowers had started pulling in their horns because of signs of credit issues,” the note reads.
Jon Winick, president of bank adviser Clark Street Capital, said in an interview that his overall outlook for loan growth is “flat to negative,” pointing to weaker C&I lending that can’t be overcome with stronger residential mortgage activity. He added that he talked with one corporate lender at a large bank who described current loan pipelines as “dead,” presenting some anecdotal evidence that loan growth may not pick up soon.
“In the aggregate it’s hard to be optimistic on loan growth,” Winick said.
Clark Street Capital in American Banker: The Two Ways to Read into Lenders’ Low Chargeoffs-8/8/17
Net chargeoffs are at a 10-year low. That’s a good thing … right?
Well, as a wise grandma might reflect, the answer to such questions depends on where you are at in life, or in the case of lenders, where they are at in the business cycle.
Look at the numbers over the past decade: Net chargeoffs peaked at 3.14% in the fourth quarter of 2009, according to data from the Federal Reserve Bank of St. Louis. Then they began to plummet, and since the first quarter of 2014 the chargeoff ratio has hovered around a half of a percentage point, which is right where it stood in the first half of 2007, before the financial crisis began.
A chargeoff rate of 0.47% — the reading for the first quarter of this year — would have seemed like a gift from the heavens for most banks in the immediate years after the crisis, but now, in an era when lenders are scrounging for growth and the tepid economic recovery persists, the low figure raises questions about whether bankers are being too cautious for their own good and everyone else’s.
One reason that chargeoffs are low is that the value of assets has increased “so that you’re not taking a loss when these deals go bad,” said Jon Winick, CEO of the banking advisory firm Clark Street Capital in Chicago.
Banks, too, perhaps have learned from the past and improved their risk management skills.
“Certainly chargeoffs are at a level where bank lending is very profitable,” Winick said.
At the same time, it could be argued that several years of such low chargeoffs means banks are not taking enough risk, he said.
What is the optimal rate, the right balance between systemic risk and macroeconomic reward? Winick said his estimate “is probably somewhere between where we are and 1%.” When the rate tops 1%, it typically means real estate prices have fallen or the economy is in a recession, Winick said.
Eventually the ratios have to rise, but bank executives recently have sounded content with the status quo. In fact, some seemed to relish it.
Thomas Reddish, the chief financial officer for TriCo Bancshares in Chico, Calif., said the $4.5 billion-asset company’s current loan-loss allowance is 1%.
“It’s hard to establish an allowance when you don’t have any losses,” Reddish said at the Keefe, Bruyette & Woods Community Bank Investor Conference last week. “I don’t think we’ve had any net chargeoffs in the last five years.”
Susan Cullen, CFO at Flushing Financial in Uniondale, N.Y., said the $6.3 billion-asset company has not recorded a loan-loss provision for the past 18 months and charged off only $54,000 of credits in the second quarter.
“Those are very low numbers that we’ve had for a long time,” Cullen said at the KBW conference. “We have not taken a charge in quite a while.”
Michael Scudder, CEO of the $14 billion-asset First Midwest Bancorp in Itasca, Ill., said its chargeoff rates are lower than normal.
“Our credit performance in the quarter was also favorable again, reflective of the current benign credit environment, as chargeoffs of 16 basis points were well below what we would call our normalized range of 25 to 40 basis points,” he said during a July 26conference call on second-quarter results.
Andy Schornack, president and CEO of Flagship Bank Minnesota in Wayzata, said there is some speculation that marketplace lenders are possibly “taking some of the high-risk borrowers out of the banking market.” While banks are doing well, the online lenders are seeing higher chargeoff rates, he said.
“You’re looking at two models that are seeing diverging paths, and you’ve got one with the banks that are really performing really well on a credit-quality standpoint,” Schornack said in an interview.
As much as ever, the numbers and the satisfaction that bankers are expressing about them can be alternatively viewed as signs of success, underachievement or a calm before the storm.
The current environment is good in that it means portfolio performance is safe, Winick said, but the problem is now things can only get worse.
“What comes next I think is harder to predict,” Winick said.