November ’18

The BAN Report: The $8MM LA Industrial Portfolio / FDIC Quarterly Banking Profile / New Appraisal Requirements / Facebook COO Sandberg on Hot Seat-11/28/18

The $8MM LA Industrial Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $8MM LA Industrial Portfolio.”  This exclusively-offered portfolio is offered for sale by one institution (“Seller”). Highlights include:
Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.
Event Date
Sale Announcement Wednesday, November 28, 2018
Due Diligence Materials Thursday, November 29, 2018
Indicative Bid Dates Thursday, December 13, 2018
Closing Dates Thursday, December 27, 2018

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

 

FDIC Quarterly Banking Profile

The FDIC last week released its quarterly banking profile, the most comprehensive report on the health of the US banking industry. A few highlights:

Nothing but good news for the banks right now.   Perhaps, loan growth could be better, and there are certainly some warning signs about the economy, but banks are enjoying a record year right now.

And to make Christmas even better, the FDIC announced that it is ending quarterly deposit surcharges, as the Deposit Insurance Fund (DIF) is above the 1.35% reserve ratio.

“Since the reserve ratio was 1.36 percent on Sept. 30, it has achieved the minimum reserve ratio of 1.35 percent that is required by law,” Ellis said. “As a result, the third quarter of 2018 marks the last period that large banks will be assessed quarterly surcharges by the FDIC.

“When the reserve ratio is at or above 1.38 percent, small banks will receive credits for the portion of their assessments that contributed to growth in the reserve ratio from 1.15 percent to 1.35 percent. We estimate these credits to be approximately $750 million in aggregate,” she added.

This is especially good news for the large banks, which pay out about $5.2 billion annually.

New Appraisal Requirements

Earlier this year, we reported on the appraisal requirement thresholds changing, and the impact that would have on commercial real estate transactions. The FDIC proposed last week to update their requirements on residential real estate as well. Transactions of $400,000 and less no longer will require an appraisal. The last time this policy changed was in 1994.

Rather than requiring an appraisal, the proposal would require that residential real estate transactions exempted by the threshold obtain an evaluation consistent with safe and sound banking practices. Evaluations provide an estimate of the market value of real estate but could be less burdensome than appraisals because the FDIC’s appraisal regulations do not require evaluations to be prepared by state licensed or certified appraisers. In addition, evaluations are typically less detailed and costly than appraisals. Evaluations have been required for transactions exempted from the appraisal requirement by the current residential threshold since the 1990s.

 

This proposal responds, in part, to comments that the current exemption level for residential transactions had not kept pace with price appreciation in the residential real estate market. These comments were received during the recent Economic Growth and Regulatory Paperwork Reduction Act review process and during the rulemaking process that led to a final rule, issued in April 2018, which raised the appraisal threshold for commercial real estate transactions from $250,000 to $500,000.

 

The FDIC adapting this change would directly impact the time and costs associated with residential real estate transactions, and would ease the burden that many face when completing these deals.

 

Facebook COO Sandberg on Hot Seat

Facebook COO Sheryl Sandberg has had a rough couple of weeks, receiving intense criticism in how she has handled Russian election meddling. Two reports, one in the Wall Street Journal and another in the New York Times painted a negative picture in her management. The New York Times story was titled “Delay, Deny, and Deflect: How Facebook’s Leaders Fought Through Crisis.”

But as evidence accumulated that Facebook’s power could also be exploited to disrupt elections, broadcast viral propaganda and inspire deadly campaigns of hate around the globe, Mr. Zuckerberg and Ms. Sandberg stumbled. Bent on growth, the pair ignored warning signs and then sought to conceal them from public view. At critical moments over the last three years, they were distracted by personal projects, and passed off security and policy decisions to subordinates, according to current and former executives.

Many on Wall Street piled on with numerous calls for her resignation. Jim Cramer said “stock goes up” if she resigns. One Vanity Fair writer blamed the leadership industry as personified by Harvard Business School.

The truth is, Harvard Business School, like much of the M.B.A. universe in which Sandberg was reared, has always cared less about moral leadership than career advancement and financial performance.

Since its practically impossible for Mark Zuckerberg to be fired, Ms. Sandberg is receiving the lion share of the blame for Facebook’s woes. Zuckerberg gave her a vote of confidence last week. It makes it especially uncomfortable because Ms. Sandberg has become a role model to many women. It remains to see if she can survive as growth slows down.

The BAN Report: Amazon Backlash / Buffett Bets on Banks / Mixed Opinions on Corporate Debt / Walmart Projects Strong Holiday / The Dairy Portfolio-11/15/18

Amazon Backlash

While Amazon certainly succeeded in getting a great deal for itself, the whole process has initiated a backlash against the practice of cities and states offering economic incentives to large companies.   In New York especially, criticism was especially high.    New York got fleeced, said the New York Post editorial board.

New York is offering vastly more than Virginia for its half of the new Amazon headquarters. What’s up with that?

The city and state ponied up nearly $3 billion in grants, credits and so on over 25 years. Down south, Amazon is getting $573 million plus $195 million in infrastructure upgrades. Sure looks like Amazon’s Jeff Bezos just fleeced Gov. Andrew Cuomo and Mayor Bill de Blasio as rubes.

Most important, Amazon simply isn’t that big a “get.” As Nicole Gelinas notes, it’s offering to create 2,500 jobs a year — a drop in the bucket of the city’s employment growth since 2008.

Meaning “the city, as a whole, will barely notice these new jobs.”

Plus, she points out: “Google has hired 10,000 people in New York without massive subsidies.”

The Atlantic offered three main issues with the practice.

First, they’re redundant. One recent study by Nathan Jensen, then an economist at George Washington University, found that these incentives “have no discernible impact on firm expansion, measured by job creation.” Companies often decide where they want to go and then find ways to get their dream city, or hometown, to pay them to do what they were going to do anyway. 

Second, companies don’t always hold up their end of the deal. 

Third, even when the incentives aren’t redundant, and even when companies do hold up their end of the bargain, it’s still ludicrous for Americans to collectively pay tens of billions of dollars for huge corporations to relocate within the United States.

But, how do you stop this race to the bottom, in which cities cave to local pressure to offer giveaways to companies?    The Atlantic suggested that the federal government should either make them illegal as a form of bribery, or they could tax these subsidies at 100%.     While these steps are unlikely, there is a growing attack on corporate relocation welfare.   Amazon eventually chose two places where CEO Jeff Bezos had a home, so did many other cities really have a shot?   Moreover, is it fair to the companies who already reside in a city to subsidize a relocation of a competitor?    Fortunately, this exhausting and time-wasting effort by Amazon has spurned a backlash.

Buffett Bets on Banks

In the third quarter, Berkshire Hathaway substantially increased its exposure to banks, focusing on the largest US banks.

The billionaire’s company piled more than $13 billion into those stocks in third quarter, making Berkshire a major shareholder in four of the five largest U.S. banks, according to a regulatory filing Wednesday.

Berkshire disclosed a new stake in JPMorgan Chase and increased bets on Bank of America and Goldman Sachs Group.

Buffett, 88, has long been one of the most influential bank investors and has been diversifying his bets in the industry. He’s already near a regulatory cap with a 10% stake in Wells Fargo and is now also the biggest shareholder in Bank of America, U.S. Bancorp and the Bank of New York Mellon.

Berkshire also disclosed new investments in PNC Financial Services Group and Travelers meaning three of the conglomerate’s four new investments were financial firms, with Oracle being the exception.

No reasons were given for the investment, but it seems clear that Mr. Buffett likes the large banks today and they need to put their $100 billion in cash to work somewhere.

Mixed Opinions on Corporate Debt

In light of GE’s troubles, many money managers are looking at other corporates that could see their debt ratings fall if the economy loses steam.

The good times are coming to an end in the corporate debt market, and this week’s turmoil in General Electric Co. credit is a sign that things can get much worse.

That’s what a growing chorus of money managers are saying. About half of the $5 trillion market for investment-grade bonds now resides in the lowest tier of ratings. Many investors fear that as global economic growth shows signs of slowing, the rosy assumptions built into companies’ profit forecasts could prove wrong, and at least some of the lowest-rated high-grade debt may end up getting cut to junk.

Blue-chip company debt has been clobbered this week, and is on track for its worst year since 2008. One of the biggest whipping boys in corporate bond markets has been GE, which is facing weak demand for gas turbines, high debt levels and a federal accounting probe. Now investors are looking at other companies with big borrowings, including Anheuser-Busch InBev NV and Ford Motor Co., for any signs of fragility.

Bank of America says the opposite, touting the credit-quality of corporate issuers today.

When the next slowdown strikes, investment-grade bonds will see a record-low rate of cuts to junk, according to Bank of America Corp.

“The credit quality of high-grade companies is the best it has been in decades, as companies and industries have been tested and forced to improve,” Hans Mikkelsen wrote in a note dated Nov. 14. And that’s “one key reason that in the next downturn the rate of downgrades to high yield is likely to be the lowest ever.”

Walmart Projects Strong Holiday

Walmart posted strong sales growth this week for their third quarter and was optimistic about holiday prospects.

Sales at U.S. stores open at least a year rose 3.4% in the fiscal third quarter ended Oct. 26, including a 43% jump in e-commerce sales. Walmart executives said same-store results, which exclude volatile gasoline sales, will show growth of at least 3% for the full fiscal year.

Walmart’s results followed a strong earnings report from Macy’s Inc. on Wednesday, signs that retailers are heading for a healthy holiday shopping season. American consumers picked up their spending in October after two consecutive months of declining retail sales, the Commerce Department reported Thursday.

But not everyone is benefiting from the rebound in consumer spending. Sears HoldingsCorp. filed for bankruptcy protection last month, capping years of shrinking sales and hundreds of store closures.

J.C. Penney Co. on Thursday reported lower sales and a wider net loss in its latest quarter. It also lowered its full-year sales guidance

In the U.S., Walmart said sales growth was driven by market share gains in groceries, household goods and other categories. Executives highlighted demand for fresh food and apparel, including Walmart’s house brands, as well as toys as the company expanded its selection after the collapse of Toys R Us Inc. It is selling 30% more toys in stores and 40% more toys online this fall versus last year.

Walmart’s results bode well for the retailing industry, but not all retailers will benefit.

The $40MM Dairy Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $40MM Dairy Portfolio” This exclusively-offered portfolio is offered for sale by one bank (“Seller”).   Highlights include:

  • A total unpaid principal balance of $42,456,491, comprised of 33 loans in five relationships
  • 100% of the loans are in Wisconsin
  • 4 of the 5 relationships are dairy farms, with one cattle farm
  • All loans are personally guaranteed
  • Collateral types include: Farm (62%), Equipment (16%), Cattle (16%), Crops (5%), and vacant land (1%)
  • 93% of the loans are performing

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 their due diligence remotely.

Event Date
Sale Announcement Tuesday, November 6, 2018
Due Diligence Materials Available Online Wednesday, November 7, 2018
Indicative Bid Date Tuesday, December 4, 2018
Closing Date Thursday, December 27, 2018

 

Please click here for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically.

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