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The BAN Report 2/11/21

The BAN Report: PPP Update / Loan Growth? / Remote for Much of 2021? / Remote Boomtown / The Peloton Story / The 9MM Brooklyn Multi-Family Relationship-2/11/21

PPP Update

Through Sunday, about $101 billion in PPP loans have been approved for PPP Round 2. The SBA’s presentation had a few noteworthy highlights:

A hurdle so far for lenders has been error codes, which prevent banks from processing PPP loans. These error codes have been the result of efforts to root out some of the fraudulent loans originated last year.

The Small Business Administration has announced a series of steps to address a nagging problem with error codes that Paycheck Protection Program lenders claim are needlessly delaying the approval of thousands of loans.

In perhaps its biggest step to remedy an issue that has dogged the program for weeks, the SBA said on Wednesday that it would permit lenders to certify borrowers whose loans are impacted by validation errors to hasten their receipt of funds.

The agency also said it would allow lenders to upload supporting documents for loans hit by the error messages.

Relief can’t come soon enough for many PPP lenders.

Error codes emerged as a leading bone of contention for shortly after lending resumed on Jan. 12. In the weeks immediately following the program’s relaunch, the codes interrupted the processing of as many as 30% of the loans submitted for approval.

Attached is the new SBA procedural notice to address the issues with error codes.

Loan Growth?

2020 was a bad year for loan growth at banks, as loan growth shrank for the first time in a decade and just the second decline in 28 years.

Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase  & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

For banks, this weighed on profit. Net interest income, the spread between what banks charge borrowers and pay depositors, fell 5% across the industry last year—a consequence of shrinking loan portfolios and near-zero interest rates. It was the biggest drop in more than 80 years of record-keeping, according to research by Mike Mayo, a banking analyst at Wells Fargo.

At the start of last year, it didn’t look like this would happen. When the pandemic first hit, big companies rushed to draw down credit lines from their banks, fearful they wouldn’t be able to raise money from investors in the bond market. The loans on bank balance sheets spiked.

Loan books would have shrunk more if not for government support for small businesses. Banks doled out hundreds of billions of dollars in loans through the Paycheck Protection Program. Those loans have stacked up on bank balance sheets, but are slowly being whittled away as the government forgives them.

For the regional and community banks, a disproportionate of loan growth came from PPP, much of which will have run off by the end of the year as these loans eventually get forgiven. Banks are flush with cash, but how do you prudently underwrite new loans in this environment when so many borrowers had choppy 2020s and would be struggling if it were not for unprecedented government intervention? The bond market seems to be picking up the slack.

The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.

The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.

Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.

Banks are simply acting more prudently than their Wall Street brethren, who seem to be able to issue debt for any company, even those with the worst financial prospects. If AMC can issue debt despite as poor prospects as any public company, anyone can.   Chesapeake Energy, after emerging from bankruptcy recently, issued bonds this week at 5.875% with yields in the mid-4s with over $2 billion in orders before its $1 billion launch Tuesday. Perhaps, banks are better off accepting limited loan growth than chasing loan growth.

Remote for Much of 2021?

The long-delayed return to offices keeps getting pushed further back, and some are now seeing returns in the late summer / early fall.

From Silicon Valley to Tennessee to Pennsylvania, high hopes that a rapid vaccine rollout in early 2021 would send millions of workers back into offices by spring have been scuttled. Many companies are pushing workplace return dates to September—and beyond—or refusing to commit to specific dates, telling employees it will be a wait-and-see remote-work year.

The delays span industries. Qurate Retail Inc., the parent company of brands such as Ballard Designs, QVC and HSN, recently shifted its planned May return to offices in the Philadelphia area, Atlanta and other cities until September at the earliest. TechnologyAdvice, a marketing firm in Nashville, initially told employees to plan on Feb. 1 as their return date. The company then pushed the date back to August. Now, TA has decided it will begin a hybrid in-office schedule in the fall of 2021, letting workers choose whether to work remotely or come in, the company says.

Return-to-office dates have shifted so much in the past year that some companies aren’t sharing them with employees. Shipping giant United Parcel Service Inc., based in Atlanta, and financial-services firm Fidelity Investments Inc., based in Boston, haven’t announced return dates, instead telling workers signing on from home that the companies are monitoring the coronavirus pandemic and will call workers back when it is safe.

Nearly a year of makeshift work at home has weighed on employees, leaders say. While many companies say productivity is up, executives worry that creativity is suffering and say that burnout is on the rise. Even so, bosses struggle to say when things will change.

Current office-occupancy rates are highest in parts of the country where large school districts have reopened, according to data from Kastle Systems, a security firm that monitors access-card swipes in more than 2,500 office buildings, from skyscrapers to suburban office campuses.

Right now, that means Texas: In Dallas, Austin and Houston, major school districts have offered in-person learning for many months, and offices are roughly 35% full, according to Kastle. By comparison, in New York City, where schools are open part-time for in-person learning, office occupancy is less than 15%.

While we believe that some employees function well remotely, there are others it is bad for, especially young workers who are missing out in-person training and mentorship and management teams. Management teams usually function better when they see each other on a regular basis. But, visiting a downtown office building right now is like going to the airport, so many would rather work remotely until its both safe and convenient to go to the office.

Remote Boomtown

As working remote continues, many workers are fleeing to smaller cities with cheaper rents and outdoor amenities. Bozeman, Montana is one of them.

For the white-collar worker fleeing a pandemic-ravaged metropolis, Bozeman has a lot to offer. The Montana city of just under 50,000 is an hour’s drive from the award-winning Big Sky ski resort, and local businesses like the Rocking R Bar and Cactus Records radiate small-town charm. The one thing newcomers won’t be able to escape: big-city prices.

The average rent for a 2-bedroom apartment in Bozeman hit $2,050 a month in early February, a 58% surge from a year earlier, according to rental site Zumper. The cost of a home also jumped by almost 50%, fueled in part by an influx of office types who switched to remote work when cities locked down — and ultimately decided to relocate when it became clear they wouldn’t go back any time soon. “People who can afford it are buying housing sight unseen and driving the cost of housing up,” says Amanda Diehl, a Bozeman native who returned in 2018 and now runs Sky Oro, a women-focused coworking space.

For Bozeman residents, however, the frenzy has made their plight more acute. The cost of living is more than 20% higher than the national average, while the median income is  about 20% lower, limiting buying power in a market crowded with flush out-of-towners. More housing is coming: According to the city, a handful of new neighborhoods have recently broken ground and apartments are going up downtown. But locals are still getting squeezed out. 

“We have such low vacancy rates, that if they lose a rental, there’s literally no other place to go,” says Heather Grenier, who runs a local nonprofit focused on housing and poverty called the Human Resources Development Council. The Bozeman boom has fueled an “incredible increase” in the local homeless population, as well as a spate of pop-up RV communities for those who’ve been displaced, according to Grenier. “This work was challenging before, but feels impossible now.”

Of course, this is creating its own set of problems – a lack of affordable housing for one. Other places, like much of West Virginia, see an opportunity to capture from the remote trend.

The pandemic, for all its pain, has hastened a number of trends that could aid West Virginia. It has driven a shift toward telehealth, a vital tool in rural communities. It has pushed more consumers into outdoor recreation, a market West Virginia’s scenic gorges and mountain trails are primed to capture. It has boosted political will in the state to prioritize broadband. And the pandemic has sped up a move toward remote work to parts of the country with a more affordable cost of living.

This last trend, which is tied to the other three, could have broad consequences for how states think about economic development. If more workers can live anywhere, states don’t have to throw tax breaks at companies to attract them. They can try to attract workers directly.

“Making a place a good place to live becomes much more important now,” said Adam Ozimek, the chief economist at the freelance platform Upwork. “That’s also a much healthier type of competition than who’s going to give the Bass Pro outlet the biggest tax cut.”

Many people grow up in rural communities and are forced to leave to find good jobs in larger cities. If the remote work trend becomes a permanent phenomenon, it does open up the appeal of affordable places with good quality of life and abundant outdoor recreation. Due to Senator Manchin’s status as the key swing vote in a 50/50 Senate, states like West Virginia could see huge federal investments in broadband, which allows these communities to compete more effectively for remote workers.

The Peloton Story

Fortune had a great story on Peloton’s rapid ascent, as they interviewed four of their five cofounders. A key takeaway is just how difficult it can be to raise capital for a start-up.

Foley: This is important for the founder story. I had a vision and recruited these guys. Within a couple months, I was no longer involved in creating Peloton as you know it. I thought of something, and these guys took it, ran with it, and built it while I was gone. I was on the road for two or three years with a PowerPoint trying to raise money, very much ineffectively.

Cortese: The noes were all stupid. They would be things like, “Oh, well, this doesn’t fit our portfolio thesis.” Or, “No, we don’t like that you have a hardware component. We only think Facebook-style software is going to work.” It’s like, “Are you guys idiots?” Most of these pieces were things that existed in the world—the bike, video streaming. Our job was to bring them together. It’s not like we were inventing a stationary bike from scratch.

Let’s finish off with a lightning round. When was the moment you realized this thing was actually going to work?

Cortese: 2013, Black Friday. Me, John, and others were standing in the Short Hills mall [in N.J.], which was supposed to be a pop-up store. We had the first six bikes we ever made. The only six bikes we had ever made. We put them in that store just to get it open. We were standing there when, all of a sudden, people started coming in. By the end of the day, I think we sold four to six bikes. We went out and celebrated like it was a million bikes. I remember thinking like, “Holy shit, people get it. We’ve got a business.”

Angela Duckworth wrote a great book called Grit, which I highly recommend, which talks about how grit, not talent, determines who succeeds and fails.    The Peloton founders had grit, and plowed on after several years of rejection and now are growing at an exponential rate since the pandemic.

The 9MM Brooklyn Multi-Family Portfolio

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


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


The BAN Report 2/4/21

The BAN Report: Gamestop Madness / Bezos Steps Down / Death of Cities Exaggerated / Lack of Bargains for Debt Funds / Weed Legalization? / The 9MM Brooklyn Multi-Family Relationship-2/5/21

Gamestop Madness

The most unlikely big story of the financial markets continues to grow as Treasury Secretary Janet Yellen announced today that she is going to examine that matter. Gamestop reached as high as 483 in the past week and is now trading in the low 80s.  

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day. “We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”

Thursday’s meeting puts the newly installed Treasury chief in the spotlight after populist politicians from both sides of the aisle called for investigation of recent events. While the Securities and Exchange Commission is investigating for signs of fraud behind sudden surges in stocks including GameStop Corp., others have drawn attention to trading curbs that some platforms imposed for smaller, retail investors.

The session will give the administration the chance to demonstrate that it’s attuned to the complaints about potential manipulation after two congressional committees moved to hold hearings, yet it’s unclear what action – if any – will result.

The gathering will include the heads of the Federal Reserve – formerly led by Yellen – as well as the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Bank of New York, which serves as the central bank’s main monitor of Wall Street.

“This is the first test for the Biden administration in the reorientation of consumer and investor protections,” said Christopher Campbell, a former assistant secretary of the Treasury for financial institutions from 2017 to 2018. The meeting telegraphs to the market that the administration “will play an active role in maintaining or upgrading consumer protections,” he said.

One thing we can rule-out is the post-truth, twitter-led conspiracy that Robinhood was secretly doing the bidding of the Wall Street elite by shutting down the purchasing of a collection of Reddit-promoted stocks. As evidenced by a $3.4 billion capital raise in the past week, Robinhood was in over their heads with too many leveraged long bets on these stocks.

The reality is more prosaic. Robinhood and other brokers were deluged by traders looking to invest in GameStop and other shares, often with options contracts that can increase leverage and trading risk. A clearinghouse that processes and settles trades watched the volatile trading and demanded more collateral to cope with potential losses.

A margin call is not a conspiracy. A clearinghouse is an intermediary between buyers and sellers in a financial market. It “clears,” or finalizes, trades and makes sure the parties fulfill the contract and assets are delivered. It also mitigates risk by requiring that trades be backed by enough capital to reduce the chances that one of the trading parties goes bankrupt. This protects investors as well as brokers.

But, it does show the investment public that doing business with unproven firms like Robinhood carries a different set of risks than an account with E-Trade, which is owned by Morgan Stanley. But, few were prepared for this, and trader Peter Borish described last week as a “plumbing issue.”

“If I’m short options. I’m short a call, and the price starts to go up, I have to buy GameStop as it goes up to hedge the position, the more it goes up, the more I have to buy,” Borish explained. It’s a key reason behind why Robinhood was forced to restrict trades, a controversial move that unleased lawsuits and a torrent of criticism.

Borish added: “The protection of the system is Robinhood has to get money from the customer and then put it up at the clearinghouse. If [the customer] doesn’t have it, Robinhood has to put the money up at the clearinghouse.”

Dozens of lawsuits have already been filed against Robinhood and others. Clearly, by limiting purchases of Gamestop and others but allowing liquidations, the brokerage houses essentially tipped the scales to the bears. If the brokerage houses had better risk parameters, then this scenario would not have unfolded. No one wants to see the retail investors take it on the chin, so expect more heads to roll.

Bezos Steps Down

This week, Amazon CEO and the richest man in the world Jeff Bezos announced that he was stepping down as CEO, and becoming executive chairman. In recent years, Jeff has been less involved in the day-to-day decisions.

Mr. Bezos would quip that the only time he really knew all that was going on at Amazon was in its annual budget meetings.

“He’s not super involved in the day-to-day operations,” Matt Garman, a veteran of Amazon’s cloud-computing division and top lieutenant to Mr. Jassy, said of Mr. Bezos in a 2019 interview. “I met with him more in the first 18 months than I probably have since.”

In an interview on stage at the Economic Club of Washington, D.C., in 2018, Mr. Bezos emphasized his hands-off approach, saying he rarely took meetings before 10 a.m. or after 5 p.m., and focused on strategy over detail. “If I make, like, three good decisions a day, that’s enough,” he said.

He had long championed innovation and reinvention, exhorting his employees to treat Amazon as a startup long after it had become a colossus.

In that spirit of reinvention, he increasingly became fixated on projects and goals beyond Amazon. He purchased the Washington Post in 2013, and had started rocket company Blue Origin in 2000.

Founders of the tech giants have shown a penchant for taking on ambitious new projects. Bill Gates stepped aside as Microsoft CEO after 25 years and devoted himself to reinventing philanthropy. Google co-founder Larry Page, even before stepping back from his management role in 2019, had devoted his time and wealth to side projects developing flying cars.

Mr. Bezos has taken particular interest in Blue Origin, which competes with Space Exploration Technologies Corp., or SpaceX, run by Elon Musk —Mr. Bezos’s rival for the title of world’s wealthiest person.

Losing Bill Gates or Steve Jobs didn’t seem to slow down Microsoft or Apple, so Amazon is unlikely to have major difficulties, especially since Jeff will continue to be involved. And, it appears he’s found someone like him in Andy Jassy.

Tech founders are often succeeded by their opposites, typically older executives with greater managerial experience. Mr. Bezos wanted someone more like him.

Andy Jassy, whom Mr. Bezos promoted five years ago to CEO of Amazon’s cloud business and who will take over as CEO of the company later this year, fit the bill. He started his career at Amazon in 1997, acted as Mr. Bezos’s technical assistant early on, and drove the creation of Amazon Web Services, which dominates cloud computing and accounts for the bulk of Amazon’s operating income.

Death of Cities Exaggerated

As Mark Twain famously said, “The reports of my death are greatly exaggerated.” COVID-19 has certainly battered large cities, but predicting their demise seems premature. According to an analysis today by Zillow, US housing prices rose at the same rate in both urban and suburban areas.

U.S. housing prices rose at essentially the same rate in urban and suburban areas last year, jumping 8.8% and 8.7% respectively, according to an analysis by Zillow released on Thursday.

The data complicates the narrative that workers are fleeing urban areas for the suburbs or even “Zoom towns” out West near ski resorts and national parks.

“The for-sale housing market is experiencing a pandemic-fueled surge in both urban and suburban areas,” Zillow economist Alexandra Lee said in a statement. “Homes have become more important than ever, and buyers are eager to hit the market to find their next place to live.”

In some more affordable metro areas — including Kansas City, Cleveland and Cincinnati — urban home values accelerated faster than suburban ones, according to Zillow.

The fact that home prices are increasing faster in urban areas of smaller cities makes intuitive sense.   If someone is leaving New York or Chicago for Kansas City, the suburbs may be too much of a lifestyle change, so downtowns make more sense. Another survey by the Harris Poll and the Chicago Council on Global Affairs on the six largest metro areas showed similar appeal to urban living.

Notably, big city residents are especially eager to stay in cities. Seven in 10 of the people we surveyed in metro New York, Los Angeles, Chicago, Houston, Phoenix and Philadelphia say they prefer to live in a big city; only 8% say they would prefer to live in the suburbs. By contrast, fewer suburbanites (61%) prefer suburban living, and three in 10 would choose a city — big or small — instead.  

When asked specifically how their pandemic experience has affected their preferences, half of city residents say it has not changed where they prefer to live. Another 25% say the pandemic actually makes them more likely to move to another urban area. 

A better answer is this question will be answered at a later date. Many people have left the largest cities because their isn’t a whole lot to do in Manhattan right now during a pandemic. Six months from now, they may come roaring back. And, it doesn’t hurt when housing costs drop as well. 

Lack of Bargains for Debt Funds

While distressed-debt hedge funds had a strong 2020, returning 13% on average, they are finding a limited amount of distressed credit available to purchase today.

In March, the amount of bonds and loans trading at distressed levels in the U.S. quadrupled in less than a week to almost $1 trillion, just about reaching the 2008 peak. This week, a report from S&P Global Ratings found that the U.S. distress ratio — the proportion of speculative-grade securities that yield at least 10 percentage points above Treasuries — fell to just 5% in December, the lowest since 2014.

Junk-rated U.S. companies issued about $52 billion of debt in January, the third-busiest month ever. According to Bloomberg’s Caleb Mutua, triple-C borrowers accounted for about 21% of those sales; energy represented almost one-third of the total. In a telling quote, David Knutson, head of credit research for the Americas at Schroder Investment Management, told Mutua: “The demand is driven by a desperate need for yield combined with hope.”

Howard Marks, the co-founder of Oaktree Capital Group and a legendary distressed-debt buyer, put it this way in a recent memo: “In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency.” Effectively, the world is more efficient now, he says. “The investment industry is wildly competitive, with tens of thousands of funds managing trillions of dollars … not only is information broadly available and easily accessed, but billions of dollars are spent annually on specialized data and computer systems designed to suss out and act on any discernible dislocation in the marketplace.”

Of course, this is a function of massive stimulus and federal intervention which cannot last forever. As we are seeing in our portfolio sales, there is a favorable seller-buyer dynamic for the sellers. But, as we noted last week, if AMC can raise debt and equity, than few can argue that there isn’t plenty of liquidity in the system. 

Weed Legalization?

Earlier this week, Senate Majority Leader Chuck Schumer and other Senators spoke out in favor of ending the federal prohibition on marijuana, thus ending the conflicts between federal and state law, and possibly opening up the banking industry services to the cannabis industry.

Senate Majority Leader Chuck Schumer and two other Democratic senators said Monday that they will push to pass this year sweeping legislation that would end the federal prohibition on marijuana, which has been legalized to some degree by many states.

That reform also would provide so-called restorative justice for people who have been convicted of pot-related crimes, the senators said in a joint statement.

“The War on Drugs has been a war on people — particularly people of color,” said a statement issued by Schumer, of New York, and Sens. Cory Booker, of New Jersey, and Ron Wyden, of Oregon.

“Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” they said.

“But that alone is not enough. As states continue to legalize marijuana, we must also enact measures that will lift up people who were unfairly targeted in the War on Drugs.”

The senators said they will release “a unified discussion draft on comprehensive reform” early this year and that passing the legislation will be a priority for the Senate.

The trio also said that in addition to ending the federal pot ban and ensuring restorative justice, the legislation would “protect public health and implement responsible taxes and regulations.”

Since the federal government as not intervened as many states have legalized marijuana in both recreational and medicinal forms, ending this inconsistency seems like a logical step. For the record, our firm does have an investment in one of the cannabis stocks, so we are obviously high on the industry (pun intended). A cyclical with the growth rate of cannabis is unprecedented as people are drinking less, smoking less, but using more cannabis.  

The 9MM Brooklyn Multi-Family Portfolio

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


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

CEO Jon Winick American Banker Feature-December ’20

Jon Winick, CEO featured in American Bankers December ’20 monthly magazine.


Pandemic puts bank M&A on pause Merger and acquisition activity proved robust in 2019, as buyers searched for scale and efficiencies. Banks announced 257 deals, driving one of the liveliest years of the past decade. Expectations ran high early in 2020 for another banner run as buyers announced 17 deals in January alone. But then the pandemic arrived in March and “brought almost
everything to a standstill — M&A included,” said Jacob Thompson, a managing director of investment banking at
SAMCO Capital Markets. Deal activity has yet to recover — a few notable deals aside — and may not do so until deep into 2021, Thompson
and others say. Several deals announced late last year or early this year have been called off and many would-be buyers are staying
on the sidelines because they say it’s simply too difficult to assess what troubles could be lurking in sellers’ loan
portfolios. Banks made clear in third-quarter earnings calls that they did not know how the health crisis would affect credit quality because there was no telling how long it
would last.

“We could see the worst of the impact on banks next year,” said Jon Winick, chief executive of Clark Street Capital. Winick and others say that once clarity returns, bank M&A is bound to increase to the pace of 2019 — or perhaps exceed it because of pent-up demand. The principal motivators for M&A, scale and cost savings, have only become more important amid the economic malaise
of 2020.

The few deals announced this year touted those benefits. The $489 million merger of Bridge Bancorp in Bridgehampton, N.Y., and Dime Community Bancshares in Brooklyn, N.Y.,
announced in July, is a case in point. The combined company would instantly double its assets, to more than $12 billion, and the plan is to carve out more than $30
million in overlapping expenses. “Increased size and scale cannot be scoffed at,” Kevin O’Connor, Bridge’s president and CEO, said shortly after
announcing the deal. “We’d be able to use the scale to invest in some revenue-generating areas.” — Jim Dobbs

CSC American Banker Feature 9/23/20

CRE concerns intensify as stimulus programs expire
By Jim Dobbs
September 23, 2020, 2:23 p.m. EDT

Uncertainty about exposure to commercial real estate continues to dog banks.

While many lenders have reported a steady decline in loan deferrals, industry observers are concerned about future demand for retail and office space and what would happen if legislators fail to approve more stimulus for existing tenants. And a number of CRE borrowers are barred from participating in federal pandemic-relief initiatives like the Main Street Lending Program.

The overall CRE delinquency rate for banks increased to 0.92% on June 30 from 0.83% a quarter earlier and 0.68% at the end of last year, according to Federal Reserve data. While much lower than levels seen during the financial crisis, it is the highest rate since early 2016, and some industry observers fear it will continue to climb in coming quarters.

As stimulus programs expire, more tenants will likely miss rent payments, putting more pressure on commercial landlords trying to pay their mortgages.

“What happens when all this stimulus goes away, when these deferral periods end?” said Jon Winick, CEO of Clark Street Capital. “I think we’re going to see many more challenges. The credit picture right now is a mirage.”

“It is sobering to think about what things could look like for banks without any more stimulus,” said Matthew Anderson, a managing director at Trepp.

And there are signs some borrowers are purposefully defaulting after realizing they would be unable to extend or refinance their loans — a development that could hasten a wave of foreclosures later this year.

Loans set to mature over the next five quarters have delinquency rates that are materially higher than other loans, Trepp researchers said in a recent report. Within that group, delinquency rates for loans with balances greater than $25 million are significantly higher than those for smaller loans.

“Larger borrowers are typically more sophisticated and less likely to be encumbered by recourse or guarantees, making strategic default a more rational decision,” Trepp’s researchers said.

High vacancies are crippling many hotels and reduced foot traffic is hurting retailers in malls and shopping centers. Office buildings are another potential source of weakness as more Americans work remotely and more employers consider reducing their physical space.

“Those areas continue to be under the most pressure,” Anderson said. “The numbers now are not as dramatic as feared, but because of the various stimulus, they are understated.”
Lawmakers are also concerned.

At a hearing of the House Financial Services Committee on Tuesday, members pressed Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin to allow CRE borrowers to access government relief programs.

Deloitte has forecast that charge-offs for loans secured by office, retail, industrial and hotel properties could rise to 0.47% of the outstanding balances for those credits. While well below the 1.65% mark reached in 2010, it would mark a surge from just 0.05% before the pandemic.

While some markets and industries recovered over the summer, sectors that were struggling pre-pandemic face steepening challenges.

Deloitte noted in a recent report that 90% of the newly distressed assets in the second quarter were tied to the hotel and retail industries. Retail developers are dealing with the added challenge tied to consumers’ shifting preference for digital commerce.

While a number of bankers have said that the overall economy seems to be slowly healing and that most borrowers are making loan payments, a lot of uncertainty still exists.

“There are still a lot of unknowns,” said Brian Martin, an analyst at Janney Montgomery Scott.

Deferral rates, though down, remain historically high, averaging 7% of total loans at banks covered by Janney. The credit picture could darken notably if a meaningful chunk of those loans become delinquent, Martin said.

“We may not really figure out where things stand until the fourth quarter or even next year,” Winick said. “But anyone who would claim victory now, in terms of credit quality, would be highly misleading.”


The BAN Interview with Glen Messina, President & CEO of Ocwen Financial-8/13/20

Clark Street Capital CEO Jon Winick interviews Glen Messina, President & CEO of Ocwen Financial.    Glen shares his insights on residential servicing, default management, and the mortgage industry.

Jon Winick KCBS All News 740AM SF Interview-8/7/20

Clark Street Capital New York Times Feature-8/6/20

Small-Business Owners Are Wary as Relief Program Ends

The Paycheck Protection Program provided respite for hard-hit small businesses, but it is ending soon. With no word on further government help, owners worry about their fate.

In early April, three weeks after Connecticut issued shutdown orders, Ken Bodenstein borrowed $148,000 from the federal government to help cover payroll expenses at the Westport day care center he runs with his wife, Kristen.

The small-business loan, along with the Bodensteins’ own cash reserves, allowed the couple to continue to pay their 21 workers for nearly three months. But by June 5, the day the money ran out, only 11 of the 75 children who attended the day care before the pandemic had returned, forcing the Bodensteins to furlough or lay off all but nine employees.

“We were just about to hit break-even, and then everything collapsed,” Mr. Bodenstein said. The Goddard School of Westport had been open less than a year when the pandemic hit.

The federal government’s Paycheck Protection Program was a hastily created and chaotically executed effort to preserve jobs through what lawmakers initially believed would be a sharp but short disruption. Since April, it has injected $523 billion into the economy, allowing small-business owners to stay afloat and keep employees on payrolls.

The numbers are already dire.

On Thursday, the government reported that nearly 1.2 million Americans filed for state unemployment benefits last week — the 20th straight week that new jobless claims have topped one million, although it was the lowest weekly total since March. Economists estimate that 30 million Americans are unemployed. By the time the economy gets back on track, which could take months if not years, entire industries — especially restaurants, bars, hotels, movie theaters, concert venues, gyms and other fields dominated by small businesses — could be decimated, shrinking the pool of available jobs.

So far, there is little agreement in Washington about how to continue to help millions of floundering businesses. Lawmakers are considering extending the P.P.P. in some form. Senate Republicans have proposed letting companies whose sales have fallen by 35 percent or more get a second loan. Other ideas kicking around in Congress include expanding existing low-interest loan programs offered by the Small Business Administration and increasing tax credits for companies that retain workers. Lobbyists are also pleading for bailouts for specific hard-hit industries.

“There’s absolutely a need for more help in some industries,” said Carson Lappetito, president of Sunwest Bank, a regional lender based in Irvine, Calif., that has made more than 2,000 P.P.P. loans. “In the hotel and restaurant and hospitality sectors, those areas have been completely hammered.”

Sunwest, like many other banks that were the main conduits through which P.P.P. money flowed to small-business owners, stopped making loans weeks ago. Mr. Lappetito said demand had fallen off and the bank wanted to focus on other business areas. On Monday, when the S.B.A. begins accepting applications from banks to have their small-business loans forgiven, the complexities of the process are likely to further bedevil lenders and borrowers. Sunwest has around 100 forgiveness applications from borrowers that it’s currently reviewing.

Small businesses employ nearly half of America’s nongovernment workers, and the paycheck program preserved at least 1.4 million jobs through early June, a recent economic analysis concluded. More than five million companies received loans, averaging $102,000 each.

There was a frenzied rush when the program began in April: The fund’s initial $342 billion ran out in just 13 days, stranding hundreds of thousands of applicants and prompting Congress to add another $310 billion. A chunk of it went fast, but months later, more than $125 billion remains unspent.

Lenders said demand slowed because nearly every eligible business that wanted a loan was, in the end, able to get one. But as the economic downturn became prolonged, strict rules about how the cash could be used also made P.P.P. loans less attractive for some business owners. For a loan to be forgiven, most of the money had to be used to pay workers, rather than on other expenses like buying protective equipment or renovating spaces to accommodate social-distancing rules — which became more important for businesses trying to adapt to the new reality.

Jon Winick, chief executive of Clark Street Capital, a firm that advises lenders, called the program a “successful bipartisan effort.” It was created in a hurry based on expectations that the economic recovery would be “V-shaped” — with a sharp dip, followed by a sharp rebound within a brief period — that eventually proved wrong, he said. However, the program “did provide a bridge for thousands of businesses to stay in the game long enough to make it to the other side,” Mr. Winick said.

A bridge was exactly what the relief loan provided for Bob Starekow, the co-owner of two restaurants in Frisco, Colo., a resort town with heavy winter and summer tourism. The P.P.P. loan he got in May allowed him to keep paying his 28 workers while his restaurants, the Silverheels Bar & Grill and Kemosabe Sushi, were closed.

They reopened in June, and business is running profitably, although at a smaller scale, Mr. Starekow said. To cut costs, he slashed his menu. His restaurants could seat about 200 people indoors, but are now mainly using their 90 outdoor seats. Mr. Starekow has not had to lay anyone off, but he has not hired the 20 or so additional people he normally would to handle the summer demand. He worries about what cooler weather will mean for foot traffic.

“I’m not concerned about up or down with revenue,” Mr. Starekow said. “I’m concerned about broke or not broke.”

Mr. Starekow thinks he can make it without more government aid, but others said they would welcome another P.P.P. loan if it were available. At A&J Transportation, a trucking company in Ada, Okla., sales are down sharply from last year, and the company is struggling to stay in the black.

A&J got a $699,000 loan in April and used it to keep paying more than 70 drivers through early June. But after the money ran out, around 30 drivers quit. A&J, which used to work exclusively on oil fields, shifted to over-the-road trucking after the pandemic shut down the state’s oil production. Many of its drivers — who had mostly been paid to stay home while the company hunted for new contracts — did not want to do long-haul work, said Dana Sanford, the company’s office manager.

Now, the company is desperate for workers. “Any driver that wants a job, we’ll give them one,” Ms. Sanford said. If A&J got another loan, she said, the company would use it to meet payroll costs and free up money for other expenses.

Mr. Bodenstein also said a second round of funding would be a godsend for his day care center. For the two months it was closed, his school had zero revenue, but his landlord refused to defer or discount the space’s $30,000 monthly rent. Utilities, insurance and other expenses add $10,000 more to his monthly overhead. A $150,000 disaster loan from the S.B.A. helped him catch up on bills and stave off the eviction notice his landlord sent after he fell two months’ behind, but he’s still trying to dig out from the crater left by the shutdown.

Mr. Bodenstein also got caught by a midstream change in the P.P.P. rules, one of many that have frustrated both borrowers and lenders. Congress initially required that borrowers seeking to have their loans forgiven spend all of the money within eight weeks. So Mr. Bodenstein did what Congress intended: He paid all of his workers to stay home while his business was shut, and kept them off the unemployment rolls.

But Congress later loosened those rules, allowing borrowers to instead take months to bring back their employees and use their loan funds. By the time that change happened in early June, Mr. Bodenstein had already spent his money.

“I felt like it was unfair,” Mr. Bodenstein said. “Those of us who did the right thing and followed the spirit of the program were penalized.”

Jon Winick CEO in 7/24/20 American Banker

Banks sharpen focus on cost-cutting as revenue outlook dims

By Jim Dobbs July 24, 2020, 11:24 a.m. EDT

Banks large and small, resigned to the uncertainty of a coronavirus pandemic that is dimming
hopes for a 2020 economic recovery, are sharpening their collective focus on expenses, looking to
pare down branch networks, cut back consultant fees and reduce costs wherever they can to
offset hits to revenue and the potential for mounting credit losses.

Among the biggest banks, Wells Fargo said this month that it plans to carve out roughly $10
billion from annual costs — nearly a fifth of its expense base — with the effort expected to
involve cutting thousands of jobs, including layers of management, once the worst of the public
health crisis passes. The plan will span years, executives at the $1.9 trillion-asset company said,
though reviews are underway to assess redundant facilities and technology platforms, with jobs
cuts to follow.

“We’re trying to be very careful about making it clear that we are going forward and actively
going to start to take actions to reduce expenses,” President and CEO Charlie Scharf said on the
San Francisco company’s earnings call July 14. “We have layers at the company” that make it
“very, very inefficient. … We have duplicative platforms, duplicative processes across the

The $54 billion-asset Synovus Financial in Columbus, Ga., said that, while pandemic-related costs
such as bonuses to front-line staffers nudged its costs up modestly in the second quarter, it
expects expenses to fall in the second half of the year as it scales back spending on consultants
and other third-party partners. Like many other banks, it also continues to close branches to rein
in brick-and-mortar costs. The company closed six branches in the first half of 2020 and intends
to close another seven before the end of this year.

Executives said they had launched the cost-control effort before the pandemic. Now cutting
costs is more urgent.

“It’s been 130 days since the declaration of the national emergency on March 13. And the
consequences continue to weigh heavily on individuals, families, businesses, certainly our
economy overall,” Synovus Chairman and CEO Kessel Stelling Jr. said on the company’s July 21
earnings call. “No one knows when normal will return or what it will look like when it finally does.”

The virus continues to spread rapidly over swaths of the country, forcing some local governments
to pause economic reopening plans or even impose new restrictions that could draw out the recession caused by the pandemic. While improved from the spring, unemployment remains
historically high and bankers, based on earning call commentary, are bracing for a prolonged
slowdown that hinder loan growth and interest income this year.

“Anytime it gets difficult to generate revenue — and this could be very difficult — you have to
take a closer look at the expense side,” said Jon Winick, CEO of Clark Street Capital in Chicago.
“It’s not a pretty picture for employment in the banking industry.”

Winick said the social distancing measures necessitated by the pandemic have accelerated an
enduring trend toward digital banking and away from in-person transactions at branches. As
such, he said, he expects branch closings to lead the cost-cutting charge over the rest of 2020
and beyond.

He also said that, with large shares of their staffs working remotely for the first time, banks have
learned to manage a dispersed workforce and are now beginning to look at scaling back-office
space to cut costs.

The $504 billion-asset Truist Financial in Charlotte, N.C., for example, has formed an internal task
force to review its corporate real estate with a goal of eliminating office space it no longer needs.

In addition to fewer branches, increased telecommuting could take hold after this crisis, providing
opportunities to save not just on space but also utilities, furniture and parking.

Already, banks are announcing new plans to close more physical locations.

Five Star Bank in Warsaw, N.Y., is planning to shrink its workforce by 6% and its branch network
by 10% as more customers bank remotely. The $4 billion-asset bank unit of Financial Institutions
said it plans to close six of its 53 branches and consolidate those operations into five existing

Simmons First National in Pine Bluff, Ark., said in July it is planning to shutter 23 branches and a
loan production office in the fourth quarter after closing 11 branches in June. Combined, the
closings should save the $21.9 billion-asset company more than $9 million a year.

Great Southern Bancorp in Springfield, Mo., said during its earnings call this month that it hired a
consultant to review the $5.6 billion-asset company’s branch network. “We fully understand …
that our industry is evolving, and the traditional banking center is a part of that evolution,” Kelly
Polonus, Great Southern’s marketing director, said on the call.

Several other banking companies disclosed plans to close branches before reporting secondquarter
results, including CB Financial Services in Carmichaels, Pa., Mercantile Bank in Grand
Rapids, Mich., and Nicolet Bankshares in Green Bay, Wis.

The $19.7 billion-asset Atlantic Union Bancshares in Richmond, Va., said it plans to close 14
branches, or about a tenth of its locations, in mid-September. It also intends to reduce its
headcount by about 6% from its March staffing levels, or roughly 125 positions. The latter moves
follow a hiring freeze put in place in March.

“I’ve told our team that the current normal is not the new normal. However, we think the next
normal post-COVID-19 will be different still, and we must adjust now for that coming reality and
not wait for it to arrive,” Atlantic Union CEO John Asbury said during a Thursday earnings call.

When a recovery eventually takes hold and buyers can better assess the credit quality of sellers,
more banks are likely to pursue mergers and acquisitions to further cut costs.

The $83 billion-asset First Horizon National in Memphis, Tenn., for one, said it has no immediate
M&A plans, but Chairman and CEO Bryan Jordan said he expects to see more banks weigh deals similar to First Horizon’s just-completed merger with Iberiabank to improve efficiency and reduce
costs. The First Horizon-Iberia deal is expected to yield $170 million in annual expense savings —
nearly a tenth of the companies’ pre-merger operating costs.

“The efficiencies you get with scale are only going to be more important,” Jordan said in an

CSC American Banker Feature 5/22/20

Pandemic prompts banks flush with capital to raise more

By Jim Dobbs May 22, 2020, 12:02 p.m. EDT

For all the talk about the banking industry being well capitalized, a number of banks aren’t taking any chances during the corona virus crisis.

Several dozen banks have raised capital since COVID-19 was declared a global pandemic. Some are raising capital to provide an extra buffer for credit losses. Others are stocking up now for
potential acquisition and lending opportunities.

More banks are expected to turn to investors in coming months.

Ocean First Financial in Toms River, N.J., has raised capital twice in the past month, issuing subordinated debt on April 29 and preferred stock two days later. While there is a defensive
reason, the $10.5 billion-asset company also wants to be ready to expand when the crisis passes.

“Typically, on the back side of any period of stress, there’s strong demand for credit,” said Christopher Maher, OceanFirst’s chairman and CEO.

“Banks have an opportunity to play important roles in recoveries,” Maher added. “I do think there will be acquisition opportunities again going into 2021. The additional capital opens up our
strategic options.”

Banks in general are finding receptive investors and reasonable pricing. Low interest rates have also provided an opportunity to affordably raise capital by issuing senior and subordinated debt.
That may not always be the case, industry experts said.

“It’s times like this that banks are reminded it can be really smart to raise capital before you need it,” said Jacob Thompson, a managing director of investment banking at SAMCO Capital

“The markets are open now, but you really don’t know when that door will slam shut, given all the uncertainty,” Thompson added. “I can tell you more banks are looking at this, and regulators,
generally, are of the mind that the more capital the better.”

Capital hasn’t been a problem for banks in recent years.

The total risk-based capital ratio for all banks was 14.63% on Dec. 31, according to the Federal Deposit Insurance Corp. That was an improvement from 12.77% at the end of 2007, when banks
were heading toward the financial crisis.

If the steep and sudden downturn drags on for several quarters, capital needs will mount across the industry — with the possible exception of banks that are extremely well capitalized, said Jon
Winick, CEO of Clark Street Capital.

“We may have a long way to go,” Winick said. “There’s a lot more that we don’t know than we do about this thing.”

A survey of 104 bankers conducted by D.A. Davidson as part of its virtual conference in early May found that nearly one in five expect to raise capital over the near term.

“That’s significant,” said Russell Gunther, an analyst at D.A. Davidson. “I think the real number could even be higher than that. I suspect some bankers are not quite ready to check the box on
raising capital but will get there before long.”

An overwhelming majority of bankers who participated in the conference expect steep loan-loss rates and a protracted economic slump that likely will extend through much of this year — or

Against that backdrop, even companies with solid capital levels are bound to need more, or would stand to benefit from having more on hand when conditions improve.

“A lot of banks are focused internally now — on their balance sheets and where there could be losses,” Gunther said. “I think that some really strong, very well-capitalized banks could take
advantage of the lack of competition. It could be an incredible time to take market share.”

Hilltop Holdings in Dallas raised about $200 million in subordinated debt earlier this year. Beforepricing the offering, the $15.7 billion-asset company intends to be among the banks benefiting
from an eventual recovery, Hilltop President and CEO Jeremy Ford said.

“I think first and foremost, we’re going to continue to be patient and work on our own businesses,” Ford said during the company’s earnings call. “When the environment presents itself, we’re going to be very aggressive.”

Larger banks also are boosting capital levels, including Citizens Financial Group, Fifth Third Bancorp and Regions Financial.

The $178 billion-asset Citizens and its bank each priced a $750 million offering of senior debt in late April.

“Maintaining a strong capital and liquidity position is of paramount importance in managing through this stress period,” Bruce Van Saun, Citizens’ chairman and CEO, said at a recent

Citizens also wants to forge ahead with growth initiatives, including investments in digital platforms and payments offerings.

“Our philosophy here at Citizens is to keep making those investments, not to pause, but look to drive top-line growth and come out of this period stronger relative to our peers,” Van Saun said.

American Banker 5/11/20 Feature

Lenders worry they could be stuck with billions in PPP loans

By Jim Dobbs May 11, 2020, 3:12 p.m. EDT

Bankers are becoming increasingly concerned that they will end up holding billions of dollars of Paycheck Protection Program loans on their books.

Lenders have made roughly $520 billion in PPP loans since the program’s debut in early April. Under the coronavirus stimulus law that created the program, loans should be forgiven if
borrowers use the funds to cover payroll and certain other expenses.

The Small Business Administration and Treasury Department, the agencies running the program, have yet to provide complete guidance on forgiveness as mandated by the law. One key
yardstick in the program — a requirement that borrowers use 75% of the funds for payroll —wasn’t specified in the legislation.

Lenders are worried that many borrowers will fall short of the standards necessary for forgiveness, leaving them with two-year loans with nominal 1% interest rates — along with jaded and irate customers.

“I am fearful that the original intent of Congress is being lost and small businesses … are confused and no longer willing or able to comply with the program’s requirements,” said Clem Rosenberger, CEO of the $1.4 billion-asset NexTier Bank in Kittanning, Pa., which has originated about $100 million PPP loans.

“Forgiveness must be as simplified and assured as possible,” Rosenberger added. Some industry advocates are pressing Congress to step in after the SBA’s inspector general
warned in a Friday report that “tens of thousands of borrowers” could fail to qualify for full forgiveness because of the payroll threshold.

While banks are in line to bring in origination fees ranging from 1% to 5% of a loan’s value, few lenders thought they would have to service significant portions of the loans over the next 24 months. They may also have to shoulder the reputation risk as some borrowers realize they must repay some of their loans.

Valley National Bancorp said in its recent quarterly filing with the Securities and Exchange Commission that 15% to 20% of the loans it had made under the program may not be forgiven.
The $39 billion-asset company had 5,000 loans, totaling $1.6 billion, approved during the initial PPP round.

“We’re definitely concerned about this,” said Chris Nichols, chief strategy officer at the $18.6 billion-asset CenterState Bank in Winter Haven, Fla., which has originated about $1.3 billion in
Paycheck Protection loans.

“We know it’s going to be hard for a lot of our small businesses to hire back all their people and qualify” for forgiveness, Nichols added.

“Everyone just dove into this, assuming the forgiveness,” said Jon Winick, CEO of the bank consultant Clark Street Capital in Chicago. “It was good for customers and the banks got the
upfront fees. But there were not a lot of serious discussions about whether these loans actually made sense under any other circumstances.”

Efforts to reach the SBA and Treasury were not immediately successful.

Treasury Secretary Steven Mnuchin told CNBC on Monday that the payroll threshold requires a legislative fix, adding that he would work with Congress if there was bipartisan support.

The Independent Community Bankers of America, the Consumer Bankers Association and the American Bankers Association are calling on the SBA and Treasury to lower hurdles for

The ICBA is also pushing its members to directly lobby Congress to intervene. They want lawmakers to lower the payroll threshold to 50%, require the SBA to create a forgiveness
calculator and exempt small-dollar loans from detailed review, among other things.

“Why torment these small businesses just as they’re coming out of these shutdowns and trying to get people back to work?” said Paul Merski, the ICBA’s head of congressional relations and
strategy. “We just need some realistic adjustments and some clarity.”

Taking on the task of servicing and collecting on scores of low-rate loans would come at a time when banks are already grappling with national unemployment that hit 14.7% in April, broader
margin pressure and higher credit costs tied to the coronavirus pandemic.

The Federal Reserve noted in a recent report that banks’ profits and capital levels fell in the first quarter, with their overall financial health also declining.

“Current market valuations are already incorporating another 20 basis points of net interest margin contraction over the next year,” Marty Mosby, an analyst at Vining Sparks, wrote in a
recent note to clients.

“Credit is going to be a big issue,” Winick said. “And I don’t think anybody knows how severe this is going to get. What we know is that we still have a long way to go to get past this thing.”

There is also a growing belief that small businesses that haven’t applied for PPP loans have cooled on the program. While the initial $349 billion in funding ran out in 13 days, the $320 billion
authorized for the second round is only 60% depleted after two weeks. While he said the slowdown is likely because lenders have met demand, Nichols said “there are some borrowers who have rethought their positions” on PPP given their uncertainty on forgiveness.

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