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The BAN Report 7/15/21

The BAN Report: Big 4 Bank Earnings / Powell Dismisses Inflation Concerns / Roubini Speaks Up / Expanded Unemployment Hurting Hiring / Calk Convicted

Big 4 Bank Earnings

The four largest banks released their earnings for the second quarter this week. All 4 beat on earnings, but revenue and loan growth were disappointing.

JP Morgan Chase

JP Morgan Chase earned $3.78 / share, exceeding estimates of $3.21 and exceeded its revenue estimate as well. Improving credit added $2.3 billion to their earnings as the $3 billion in released loan loss reserves were off-set by $734 million in charge-offs. In the prior quarter, JP Morgan released $5.2 billion in reserves. A big disappointment was trading revenue.

Trading revenue fell 30% from the year earlier period, an expected outcome after the frenzied activity in the aftermath of Federal Reserve actions to bolster markets during the early stage of the coronavirus pandemic.

Loan growth has also been tough as average loans are down 3% from the prior year, while average deposits are up 25%. It also looks as if the second quarter was particularly tough for loan growth, as the quarter-to-quarter decline was 3%.

Bank of America

Bank of America beat on earnings helped by an income tax benefit, but missed on revenue.

The company said revenue fell 4% from a year earlier, driven by a 6% drop in net interest income because of lower interest rates. Lower trading revenue and the absence of a $704 million gain a year earlier also hit revenue, the bank said.  

Bank of America’s results show the impact of falling interest rates on the industry. Banks gather deposits and extend loans; falling interest rates squeeze the margin between what they pay depositors and charge borrowers. The bank’s net interest margin of 1.61% in the quarter was 26 basis points lower than a year earlier and below the 1.67% estimate of analysts surveyed by FactSet.

CFO Paul Donofrio cited the “continued challenge of low interest rates” in the bank’s earnings release. The 10-year Treasury yield broke above 1.75% in March amid the economic comeback, hitting its highest level since the pandemic began.  But the benchmark rate has pulled back to around 1.40% as of Tuesday.

A 1.61% net interest margin is pretty remarkably skinny. The ‘Q1 Quarterly Banking Profile showed 2.56% for the entire industry – the lowest ever. Moreover, B of A’s margin shrunk by 7 basis points from the prior quarter, which suggests the industry has not yet turned the corner on rates. The good news is B of A grew loans in the second quarter – the first time since early last year.   They also released $1.6 billion in loan loss reserves.

Wells Fargo

The market reacted favorably to Wells Fargo’s earnings, as it beat on both earnings and revenue. Loan growth was disappointing.

Wells also reported a net interest margin — a measure of how much a bank earns from the difference between what it pays on deposits and what it takes in on loans — of 2.02% for the quarter. Analysts were expecting 2.05%, according to FactSet. Persistently low interest rates have continued to weigh on that part of the bank business.

CEO Charlie Scharf said in a press release that demand for the bank’s loans remains somewhat muted despite the economic recovery.

“Wells Fargo benefited from the continued economic recovery, strong markets that helped drive gains in our affiliated venture capital businesses, and our progress on improving efficiency, but the headwinds of low interest rates and tepid loan demand remained,” Scharf said in the earnings release. “Our top priority continues to be building an appropriate risk and control infrastructure for a company of our size and complexity and we continue to invest in additional resources and devote significant management attention to this work.”

Describing loan demand as “tepid” suggests Wells has not yet seen uptick in loan demand. Earlier this month, Wells announced it was shutting down all existing personal lines of credit, so Wells appears to be less focused on loan growth.

Citigroup

Citigroup had a great quarter, beating on earnings, revenue, and showing loan growth from the prior quarter.

The firm’s earnings jumped after it released reserves set aside for loan losses, resulting in a $1.1 billion benefit after $1.3 billion in charge-offs. A year ago, the bank had been forced to set aside billions for expected credit losses, resulting in an $8.2 billion credit cost.  

“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising,” CEO Jane Fraser said in the release. “We saw this across our businesses, as reflected in our performance in investment banking and equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.”

Like other Wall Street rivals, Citigroup posted a sharp decline in fixed income trading revenue in the quarter. Fixed income operations generated $3.2 billion in revenue, below the $3.66 billion estimate.

But the bond trading decline, which was expected, was offset by better-than-expected results in equities and investment banking.  

In the second quarter, Citigroup announced it was exiting retail operations in 13 countries outside of the US.

Overall, banks continue to benefit from releases in loan loss reserves, as credit quality improves. However, margins and loan growth continue to be tough. With higher rates on the way and an economy growing in the high single digits, one would expect the rate environment to finally turn the corner for banks and loan growth should improve. For smaller banks that saw strong PPP originations, loan growth will be especially challenging as PPP forgiveness accelerates in the second half of the year.

Powell Dismisses Inflation Concerns

Yesterday, Fed Chairman Jerome Powell acknowledged rising inflation, but gave no indication that the Fed is considering a change of policy.

Jerome H. Powell, the Federal Reserve chair, told House lawmakers on Wednesday that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.

The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.

Mr. Powell testified before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4 percent in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.

“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.

He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.

Mr. Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.

He said longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.

Given how unprecedented the economic situation has been in the past year and a half, no one really knows how this inflation story plays out. But, others are more worried, including Nouriel Roubini.

Roubini Speaks Up

Nouriel Roubini, professor of economics at New York University’s Stern School of Business, was the go-to economist in the 2008 financial crisis, earning the moniker “Dr. Doom.” He warned earlier this month how surging inflation could present a very difficult challenge to central banks.

We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period. Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for the mother of stagflationary debt crises over the next few years.

For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today’s high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash.

Making matters worse, central banks have effectively lost their independence because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. As inflation rises over the next few years, central banks will face a dilemma. If they start phasing out unconventional policies and raising policy rates to fight inflation, they will risk triggering a massive debt crisis and severe recession; but if they maintain a loose monetary policy, they will risk double-digit inflation – and deep stagflation when the next negative supply shocks emerge.

Mr. Roubini makes a great point – today’s high debt levels make the cure to inflation (higher rates) more painful than it would be otherwise. The Fed argues that much of the inflation is temporary and will ease when COVID-induced frictions wane.

His views on Bitcoin and cryptocurrencies are very interesting. For some reason, the CoinGeek Zurich invited him to give a keynote speech and he just eviscerated Bitcoin, arguing that it has negative value.    This often-hilarious speech is worth watching.

Expanded Unemployment Hurting Hiring

For months, there’s been anecdotal evidence that employers are having difficulty hiring low-wage workers due to the more generous unemployment insurance. A poll this week provided empirical evidence of this unique employment problem.

About 1.8 million out-of-work Americans have turned down jobs because of the generosity of unemployment insurance benefits, according to Morning Consult poll results released Wednesday.

Why it matters: U.S. businesses have been wrestling with labor supply shortages as folks capable of working have opted not to work for a variety of reasons.

By the numbers: Morning Consult surveyed 5,000 U.S. adults from June 22-25, 2021.

Anyone who has traveled recently can see how many employers are operating with skeleton crews despite strong demand.

Calk Convicted

Chicago Banker Stephen Calk was convicted this week of bribery after making loans to Paul Manafort, in exchange for a possible Trump cabinet post.

A federal jury in Manhattan convicted a former bank executive on charges that he helped arrange $16 million in loans to former Trump campaign chairman Paul Manafort, in exchange for help getting a high-level job in the Trump administration.

Stephen M. Calk, the founder and former chairman of the Federal Savings Bank in Chicago, was found guilty on both counts he faced: financial-institution bribery and conspiracy to commit financial-institution bribery. Federal prosecutors said Mr. Calk pushed the bank to approve the loans to Mr. Manafort, despite multiple red flags, because he hoped to be named secretary of the Army.

Mr. Calk’s lawyer, Paul Schoeman, argued at trial that Mr. Calk thought he was making profitable loans—which were unanimously approved by the bank’s loan committee—and said Mr. Calk wasn’t acting in bad faith. Instead, Mr. Schoeman said, Mr. Manafort and one of the bank’s loan officers were defrauding the bank Mr. Calk had dedicated his life to building.

The bank agreed, and Mr. Manafort asked Mr. Calk to join the campaign’s economic advisory council. Bank underwriters soon uncovered trouble with Mr. Manafort: his credit score had plummeted, he had no income in 2016, and he had a $300,000 credit card bill. He was in default, on the outs with the Trump team, and facing foreclosure.

Prosecutors and several witnesses said at trial that nobody at the bank supported the loan—which had grown to $9.5 million—aside from Mr. Calk and Mr. Raico, who stood to earn a commission. Mr. Calk’s lawyers said bank employees and executives didn’t tell Mr. Calk about their concerns.

This wasn’t an easy case for the government to prove, but making a loan in excess of the bank’s lending limit to a borrower with financial problems was such an outlier that the government obtained a conviction without a clear quid pro quo. It does suggest that bank should be extremely careful about making exceptions on loans to politically-connected borrowers.

The BAN Report 7/1/21

The BAN Report: Home Prices Soar / Office Return Battles / Record Stock Sales from Unprofitable Firms / Surfside Tragedy / NCAA Opens Up College Athletes / The 9MM Midwest CRA Portfolio-7/1/21

Home Prices Soar

First off, Happy Bobby Bonilla Day! Today, we fully appreciate the beauty of compound interest. We can also wonder at the remarkable strength of the US housing market. Home prices in April rose by 14.6% from the prior April – the largest increase in the history of the index.

Housing prices accelerated their surge in April 2021,” says Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “The National Composite Index marked its eleventh consecutive month of accelerating prices with a 14.6% gain from year-ago levels, up from 13.3% in March. This acceleration is also reflected in the 10- and 20-City Composites (up 14.4% and 14.9%, respectively). The market’s strength is broadly-based: all 20 cities rose, and all 20 gained more in the 12 months ended in April than they had gained in the 12 months ended in March.

“April’s performance was truly extraordinary. The 14.6% gain in the National Composite is literally the highest reading in more than 30 years of S&P CoreLogic Case-Shiller data. Housing prices in all 20 cities rose; price gains in all 20 cities accelerated; price gains in all 20 cities were in the top quartile of historical performance. In 15 cities, price gains were in top decile. Five cities – Charlotte, Cleveland, Dallas, Denver, and Seattle – joined the National Composite in recording their all-time highest 12- month gains.

“We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. April’s data continue to be consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.

“Phoenix’s 22.3% increase led all cities for the 23rd consecutive month, with San Diego (+21.6%) and Seattle (+20.2%) providing strong competition. Although prices were strongest in the West (+17.2%) and Southwest (+16.9%), every region logged double-digit gains.”

While these increases will likely taper off, the current home price rally is not being driven by loose lending like the last crisis, although it is being fueled by high commodity prices, government stimulus, a loose Fed, and foreclosure and eviction moratoriums. Moreover, home prices are rising globally.

From the U.S. to the U.K. to China, housing is riding an extended boom. Global valuations are soaring at the fastest pace since 2006, according to Knight Frank, with annual price increases in double digits. Frothy markets are flashing the kind of bubble warnings that haven’t been seen since the run up to the financial crisis, a Bloomberg Economics analysis shows.

On the ground, outrageous stories are rife, with desperate buyers promising to name their first-born after sellers and derelict buildings selling for mansion prices.

In the US especially, rapid home price appreciation is a direct result of a lack of new construction.   As we have been arguing for as long as this blog has been in existence, the US went from over-subsidizing home ownership to over-subsidizing renting. It is still difficult for smaller homebuilders to get enough credit to build homes at the rate of demand. Fortunately, lumber futures tanked more than 40% in June, so the lumber bubble appears to be bursting.

Office Return Battles

As companies push their employees to come back to the office, many employees are threatening to quit, as they’ve adjusting to their new lives without daily commutes, setting up one of the most difficult HR challenges for companies in years.

Before Covid, Blaze Bullock, 34, was on the road one week a month as a marketing consultant in the auto industry.

Then, when the country shut down, Bullock began working remotely. “Now they want me to start traveling again and visiting car dealerships,” he said. “I don’t want to do that at all.”

Bullock said he likes working from home and spending more time with his friends and family in Salt Lake City. “I realized this is the only way I want to live.”

The pandemic has caused a lot of people to reevaluate, particularly when it comes to work.

In what’s been dubbed the “Great Resignation,” a whopping 95% of workers are now considering changing jobs, and 92% are even willing to switch industries to find the right position, according to a recent report by jobs site Monster.com. 

Most say burnout and lack of growth opportunities are what is driving the shift, Monster found. 

“When we were in the throes of the pandemic, so many people buckled down, now what we’re seeing is a sign of confidence,” said Scott Blumsack, senior vice president of research and insights at Monster.

Already, a record 4 million people quit their jobs in April alone, according to the Labor Department.

Harvard Business Review argued that Working from Home is corroding trust within companies.

About a third of the employees of a regional bank have returned to working onsite, and the president holds a weekly all-staff town hall meeting by videoconference. Employees are encouraged to submit anonymous questions for him or other senior leaders to answer. For the past six weeks, an increasing number of people have asked, “How do we know if the people who are still working from home are actually working?” Some employees have even suggested specific technology-based monitoring approaches to track remote workers’ onscreen time and activities.

Each week, the president assures his employees that the business is on track and that measures of productivity (like the number of loans taken out) are above expectations. “But it’s exasperating,” he said. “No matter how much I try to convince them or even use numbers and other kinds of evidence, it’s not sinking in. You’d think that if I can trust people, surely they can trust each other, right? But no.”

The crisis of trust this bank is facing is increasingly common as the strains of remote working wear down company culture and people’s goodwill. 

If you have high-performing employees that are performing effectively remotely, how do you let them go if they won’t come back to the office? And, if you make exceptions, does that harm your overall culture? This is such a delicate issue and companies have to balance numerous competing interests.   How organizations deal with this topic will be critical to their futures.

Record Stock Sales from Unprofitable Firms

Many unprofitable companies are leveraging the surging stock market to sell shares in their companies.

Since the end of March, almost 100 unprofitable companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.

Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And it’s further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.

During the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show. “That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies,

“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.” In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear

In fact, the previous two periods in which unprofitable firms dominated the pool of equity offerings, the S&P 500 Index was either at the start of a bear market, or already in one.

Well, bankers always tell unprofitable companies that they need more equity, not less debt. So, it’s certainly better that these firms are improving their balance sheets, thus allowing them to ride out a period of unprofitability. But it certainly could be a sign that the market is overheated, especially if companies with poor current and future prospects are able to tap strong equity markets.

Surfside Tragedy

The collapse of the Champlain Towers South building in Surfside, Florida, has already claimed 18 confirmed lives and is likely to be significantly higher as 145 people are still missing. This tragedy has important implications for condominium and rental buildings everywhere, as the costs to repair structural problems can be exorbitant. The WSJ had a visual analysis of the problems with the building.

A 2018 engineering report on the south tower released by the town alleged the building had a flaw that inhibited proper drainage, allowing water to pool near its base.

“The main issue with this building structure is that the entrance drive/pool deck/planter waterproofing is laid on a flat structure. Since the reinforced concrete slab is not sloped to drain, the water sits on the waterproofing until it evaporates. This is a major error,” Morabito Consultants, which has offices in Florida and Maryland, wrote. “The failed waterproofing is causing major structural damage to the concrete structural slab below these areas. Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”

Condominium owners were set to begin making special assessment payments a week after the building’s collapse.

The Champlain Towers South condo association approved a $15 million assessment in April to complete repairs required under the county’s 40-year recertification process, according to documents obtained by CNN.

The documents show that more than two years after association members received a report about “major structural damage” in the building, they began the assessment process to pay for necessary repairs.

Owners would have to pay assessments ranging from $80,190 for one-bedroom units to $336,135 for the owner of the building’s four-bedroom penthouse, a document sent to the building’s residents said. The deadline to pay upfront or choose paying a monthly fee lasting 15 years was July 1.

Condominium associations are notorious for dragging their feet to complete needed repairs because no one wants a special assessment. Local governments are going to increase building inspections and enforcements, thus forcing buildings to take action sooner. But will every building have the resources to make these repairs?   There will be buildings that need repairs, but the condominium owners may not have the resources, potentially creating unsafe zombie buildings. In Florida, Hurricane Andrew in 1992 led to much tougher building codes, so buildings constructed earlier are especially vulnerable to structural issues and exorbitant repair costs.

NCAA Opens Up College Athletes

Late last month, the US Supreme Court ruled against the NCAA for violating antitrust law by limiting academic benefits for student-athletes. The NCAA then voted this week to allow student-athletes to make money of their brands, thus setting up a frenzy of activity between brands and athletes.

Companies that sell everything from fast food to protein powders are preparing to court student-athletes after the National Collegiate Athletic Association moved to transform the world of college sports and players’ ability to make money.

The NCAA voted on Wednesday to allow student-athletes to exploit their names, images and likenesses — a move that will let players profit from autographs, social-media posts and commercials. With the landscape set to change after decades of strict rules, brands such as Six Star Pro Nutrition are looking to lock in deals with newly eligible athletes.

The potential for partnerships goes beyond just promoting brands and products and could result in big payouts for autographs. Fanatics Inc., a sports-licensing giant with partnerships across the college landscape, expects to connect with student-athletes to make merchandise and collectibles.

“We look forward to doing this the right way and build long-term value for the student-athletes and our campus partners,” said Derek Eiler, an executive vice president for Fanatics’ college division. “This is an evolutionary day in college athletics.”

Jim Walter, a sports agent, and CEO of YSK Agency, gave us some context on what this all means.

“It is arguably the biggest day in college sports, perhaps all sports, since Title IX was passed in 1972.

Today’s college student athletes are resilient.  They are hometown heroes and have an acute understanding of social media and personal branding on a national scale. These young men and women are exceptional at leveraging their NIL for unique influence. It is incredible that they now have the ability to defray and diminish the cost of living and support their families.

The floodgates are now open, and the student athletes are no longer deprived of the Hallmark of American business — simply the opportunity and chance to turn their brand into their own business.

There is a lot of uncertainty from all parties.  However, it is truly refreshing to hear first-hand how respectful and ready both the student athletes and national brands are to partner together to change the collegiate landscape.  The rules and governance are being written right before our eyes.  Today is truly evolutionary.”

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The BAN Report 4/29/21

The BAN Report: Re-Opening Update / Big Four Bank Earnings / Housing Shortage / $12.3 Trillion Matters / Worst Boss Ever-4/29/21

Re-Opening Update

While US GDP grew by 6.4% in the first quarter, the full re-opening of the US economy picks up steam. New York City announced a full re-opening by July 1.

New York City is aiming for a full reopening on July 1, Mayor Bill de Blasio said Thursday, suggesting a total removal of COVID-19 restrictions that have been in place for well more than a year by early summer.

“Our plan is to fully reopen New York City on July 1. We are ready for stores to open, for businesses to open, offices, theaters, full strength,” the mayor said on MSNBC.

De Blasio is expected to elaborate further on the plan later in the day. It’s not clear if additional COVID requirements — like proof of vaccinations — would apply to his plan to bring restaurants, gyms, shops, hair salons and arenas back at full capacity.

The mayor has also said indoor masking will remain the norm for some time — a statement he reiterated Thursday as it relates to the full reopening.

“I want people to be smart about, you know, basic – the rules we’ve learned, you know, use the masks indoors when it makes sense, wash your hands, all the basics,” de Blasio said. “But what we can say with assurance now is we’re giving COVID no room to run anymore in New York City. We now have the confidence that we can pull all these pieces together and get life back really in many ways to where it was, where people can enjoy an amazing summer.”

New York State also announced that all indoor and outdoor curfews for bars and restaurants will be lifted by the end of the month. Las Vegas saw its best March since February 2013.

Las Vegas is bouncing back to pre-coronavirus pandemic levels, with new economic reports showing increases in airport passengers and tourism, and a big jump in a key index showing that casinos statewide took in $1 billion in winnings last month for the first time since February 2020.

“I don’t believe anyone imagined this level of gaming win,” Michael Lawton, senior Nevada Gaming Control Board analyst, said of a Tuesday report showing 452 full-scale casinos in the state reported house winnings at the highest total since February 2013.

The cruise lines have gotten approval from the CDC to start sailings by mid-July.

Cruise operators could restart sailings out of the U.S. by mid-July, the Centers for Disease Control and Prevention said, paving the way to resume operations that have been suspended for longer than a year due to the Covid-19 pandemic.

The CDC, in a letter to cruise-industry leaders Wednesday evening, also said cruise ships can proceed to passenger sailings without test cruises if they attest that 98% of crew members and 95% of passengers are fully vaccinated. The move was a result of twice-weekly meetings with cruise representatives over the past month, the agency said.

The CDC also relaxed its rules for fully vaccinated Americans.

The Centers for Disease Control and Prevention took a major step on Tuesday toward coaxing Americans into a post-pandemic world, relaxing the rules on mask wearing outdoors as coronavirus cases recede and people increasingly chafe against restrictions.

The mask guidance is modest and carefully written: Americans who are fully vaccinated against the coronavirus no longer need to wear a mask outdoors while walking, running, hiking or biking alone, or when in small gatherings, including with members of their own households. Masks are still necessary in crowded outdoor venues like sports stadiums, the C.D.C. said.

The CDC ruling opens the door up for outdoor concerts and sporting events this summer. In Massachusetts, for example, new rules announced by the Governor will allow large venues at 100% by August 1, thus allowing the Boston Marathon, full capacity at Fenway, and full crowds at Gillette Stadium. By the second half of this summer, Americans can enjoy a world that looks more like 2019 than 2020.

Big Four Bank Earnings

Banks reported robust earnings this month, buoyed by strong trading and releases of loan loss reserves.

Bank of America

Bank of America beat expectations for the first quarter.

The bank posted a first-quarter profit of $8.1 billion, or 86 cents a share, exceeding the 66 cents a share expected by analysts surveyed by Refinitiv. The company produced $22.9 billion in revenue, edging out the $22.1 billion estimate.

“While low interest rates continued to challenge revenue, credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” CEO Brian Moynihan said in the release.

Like other banking rivals, Bank of America saw a large benefit from the improving U.S. economic outlook in recent months: It released $2.7 billion in reserves for loan losses in the quarter. Last year, the firm set aside $11.3 billion for credit losses, when the industry believed that a wave of defaults tied to the coronavirus pandemic was coming.

Instead, government stimulus programs appear to have prevented most of the feared losses, and banks have begun to release more of their reserves this quarter.

Expenses were higher than expected and loan growth was not great, but overall a good quarter.

JP Morgan Chase

JP Morgan Chase had a great quarter, exceeding expectations on earnings even without the $5.2 billion release from loan loss reserves.

The bank posted first-quarter profit of $14.3 billion, or $4.50 a share including a $1.28 per share benefit from the reserve release, higher than the $3.10 per share expected by analysts surveyed by Refinitiv. Excluding the impact of a $550 million charitable contribution, which lowered earnings by 9 cents, the bank earned an adjusted figure of $4.59, exceeding the $3.10 estimate.

Companywide revenue of $33.12 billion exceeded the $30.52 billion estimate, driven by the firm’s trading operations, which produced about $1.8 billion more revenue than expected.

JPMorgan’s release of $5.2 billion in reserves is the biggest sign yet that the U.S. banking industry is now expecting to have fewer loan losses than it did last year, when it set aside tens of billions for defaults anticipated from the coronavirus pandemic. A year ago, the firm had added $6.8 billion to credit reserves.

“Overall, this was a great quarter for JPMorgan,” said Octavio Marenzi, CEO of consultancy Opimas. “It is now increasingly clear that the bank over-reserved, and that money is now flowing back into its earnings, concealing some of the weakness in consumer banking.”

Wells Fargo

Wells Fargo also had a strong quarter, beating estimates on earnings and revenue.

Wells Fargo results were helped by a net benefit of $1.05 billion from reserve releases. Banks bulked up their credit loss reserves last year as the pandemic pulled the U.S. economy into a sharp recession, but the financial firms have started to release those reserves as the recovery takes shape.

“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities,” CEO Charlie Scharf said in the earnings release. “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”

The bank expects to see its commercial and middle market loan portfolio to grow later in the year as the economic recovery gains steam, chief financial officer Michael Santomassimo said on the earnings call.

“The demand across most commercial client segments has been pretty weak, and it seems to have stabilized over the last couple of months … we do really expect to see that commercial banking demand start to pick up as the economy picks up,” Santomassimo said.

Commercial loan pipelines take time, so it will be another quarter before any uptick in commercial lending is seen by banks.

Citigroup

Citigroup completed the strong quarters for the major banks, beating on both earnings and revenue.

Citigroup on Thursday posted results that beat analysts’ estimates for first-quarter profit with strong investment banking revenue and a bigger-than-expected release of loan-loss reserves.

The firm also said it was shuttering retail banking operations in 13 countries across Asia and parts of Europe to focus more on wealth management outside the U.S., one of the first big strategic moves made by CEO Jane Fraser, who took over in February.

The bank reported profit of $7.94 billion, or $3.62 a share, exceeding the $2.60 estimate of analysts surveyed by Refinitiv. Revenue of $19.3 billion topped the $18.8 billion estimate.

Citigroup said it had released $3.9 billion in loan-loss reserves in the quarter, which resulted in a $2.06 billion gain after $1.75 billion in credit losses in the period. Analysts had expected a $393.4 million provision in the quarter.

The bank posted record revenue from investment banking and equities trading, similar to rival banks that have reported earlier.

The retrenching of retail banks outside of the US is a big move for Citi, which always strived to be the most international of the large banks.    Shrinking bank branches is not limited to the United States.

Overall, the banks reported strong earnings this quarter, although a good portion of the beats was due to reserve releases. The test for banks will be to show meaningful loan growth this year, which will be especially challenging for banks that were most active in PPP as the run-off in PPP will be a tough headwind.

Housing Shortage

Housing prices are surging due primarily to a shortage of housing, thus giving millennials their second housing crisis in twelve years.

A recent bank note from Jefferies said the US was short 2.5 million homes, while Freddie Mac put that estimate higher at a shortage of 3.8 million. There are 40% fewer homes on the market than last year, a Black Knight report found. 

It’s bad news for many aspiring homebuyers — but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.

Daryl Fairweather, the chief economist at Redfin, told Insider it was unfortunate the generation that suffered from the last housing crisis — entering the job force in the middle of a recession — was now facing a different kind of housing crisis.

“Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”

The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic. It comes at a time when millennials have reached the peak age for first-time homeownership, according to CoreLogic, and led the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.

“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US had been about 6.5 million homes short since 2000 and was facing a two-month supply of homes that should look more like a six-month supply.

There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, according to Fairweather. She added that was not enough homes for millennials, who are the biggest generation, to buy.

Another unmentioned cause is the moratoriums on foreclosures and evictions, which are effectively removing distressed inventory from the market. Fundamentally though, the roots of this problem go back to the Great Recession, as we essentially shifted from over-subsidizing home ownership to over-subsidizing rental buildings. Several years ago, I proposed a hypothetical project to a Houston bank.   Two, identical high-rise buildings adjacent to each other in downtown Houston. One was a high-end apartment building. The other was a condo building. The CCO said “we don’t do condos.” I responded, “You proved my point!”

$12.3 Trillion Matters

$12.3 trillion has effectively put the credit default cycle on hold for now.

First, cheap borrowing costs help companies stay alive longer and more easily. That’s a big part of the reason Fitch Ratings just dropped its expected U.S. junk-bond default rate for 2021 to 2%, the lowest since 2017, and doesn’t see it rising much more from that in 2022. About $90 billion of distressed debt was trading as of April 16, down from almost $1 trillion in March 2020, according to data compiled by Bloomberg.

Second, government officials have flooded the global economy with cash at an unprecedented pace. Monetary and fiscal stimulus for just the U.S. could have amounted to $12.3 trillion from February 2020 through March 2021, according to Cornerstone Macro Research data posted on the Wall Street Journal’s Daily Shot.

That’s a lot of money, leaving a lot of cash sitting in savings accounts and looking for assets to buy. Perhaps some investors feel it’s better to invest it with a company that actually makes something or provides real services than, say, a cryptocurrency started as a joke. 

The more important question perhaps isn’t whether this is a bubble that will pop soon but rather what are the consequences of this era of free-flowing cash. It prevents the dissolution of businesses that perhaps shouldn’t exist, creating so-called zombie companies. And it leaves corporations leveraged to old economies, paying back debt incurred in a past era when they perhaps would rather invest in new technologies amid a quickly changing world.

This debt buildup makes central bankers’ jobs both more difficult and easier in the years to come. It makes it harder because any withdrawal of stimulus, or raising of rates, would be exponentially more painful given the amount of corporate leverage. But it also makes it less likely that conditions will require Federal Reserve officials to raise rates all that much going forward. More debt will pressure longer-term growth and inflation. It reduces economic dynamism. 

We are essentially skipping the clean-up phase during a down-cycle. A normal recession leads to the liquidation and closure of businesses, thus opening up opportunities for the healthy ones to benefit from their better business models and healthier balance sheets. It also is going to make higher rates even more painful, so we may have just delayed the inevitable in some cases.

Worst Boss Ever

An investigation of producer Scott Rudin by the New York Times showed what a brutal boss he was to his employees. Scott is one of only 16 people who have won an EGOT, which is winning at least one Emmy, Grammy, Oscar, and Tony.

Former employees said he threw things at walls, at windows, at the ground, and, occasionally, toward subordinates.

In 2018 he sent a glass bowl airborne, shattering it against a conference room wall, according to several people who were there; another time he smashed a computer on an employee’s hand, several ex-employees said. A former assistant, Jonathan Bogush, said he saw Mr. Rudin hurl a plateful of chicken salad into another assistant’s face when he worked there in 2003.

Sometimes frightened assistants hid in the kitchen or a closet to escape his wrath.

Some assistants kept spare phones to replace those that got destroyed when thrown by Mr. Rudin. There were also extra laptops — to replace those he broke — and his contact list was backed up to a master computer nicknamed the Dragon.

His behavior prompted outrage after it was described earlier this month in The Hollywood Reporter. It had also been described, to less effect, in multiple other accounts over the years.

Mr. Rudin offered both an apology and a bit of pushback to the stories being told about him as a boss. “While I believe some of the stories that have been made public recently are not accurate, I am aware of how inappropriate certain of my behaviors have been and the effects of those behaviors on other people,” he said. “I am not proud of these actions.”

“He’s had a bad temper,” said the billionaire David Geffen, who alongside his fellow mogul Barry Diller has been co-producing Mr. Rudin’s recent Broadway shows, “and he clearly needs to do anger management or something like that.”

Somehow this behavior went on for years, and no other executive, colleague, financier mandated anger-management training? Fortunately, Mr. Rudin is finally getting his long overdue comeuppance.

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:

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CEO Jon Winick Featured in American Banker

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
is 56%.

“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

American Banker

4/13/18

By Jackie Stewart

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clark Street Capital Promotes Robert Strandberg to Vice President

Business Wire

For Immediate Release

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

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

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

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

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