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The BAN Report: FDIC Quarterly Banking Profile / Buffett's Letter / Trump's PFS / Amazon Ditches NYC-2/28/19

FDIC Quarterly Banking Profile

The FDIC released its Quarterly Banking Profile, the most comprehensive report on the health of the banking industry.   A few highlights:

  • The fourth quarter was the last quarter in which bank earnings showed favorably comparisons due to tax reform.     Net income improved year-over-year by 133.4%, or 18.5% without the tax reform benefit.

  • Net interest margin (NIM) continues to improve significantly.    ‘Q4 NIM was 3.48% - 17 basis points better than the prior year.    It improved from 3.45% in the third quarter.   Since it appears that the Fed is curtailing future interest rate hikes for now, we don’t expect banks to improve this metric materially going forward.

  • Loan loss provisions increased in the fourth quarter – the highest level of provisions since the fourth quarter of 2012.     However, both net charge-offs and noncurrent loans fell, so this simply means that banks are improving their coverage ratios.

  • Loan growth was strong in the fourth quarter, growing 2.1% from the prior quarter.

  • FDIC “Problem Bank List” is down to just 60 banks totaling $48.5 billion in assets. It should be noted that there were not bank failures in all of 2018.

Overall, the banking industry continues to perform very well. The bad news is the interest rate environment is becoming less favorable to banks going forward, especially with a flat yield curve, no more rate increases, and more challenging quarterly comparisons going forward.

Buffett’s Letter

Warren Buffett released his annual letter to shareholders of Berkshire Hathaway last week.     It was noteworthy that Berkshire does not see many opportunities to deploy its excess cash in new acquisitions.

Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash. 

In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects. 

That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)

So, Berkshire’s preference is to deploy its excess cash into buying whole businesses, but they just don’t see many attractive opportunities. Perhaps, that’s a sign that we are in the midst of an asset bubble, at least for large M&A transactions.

Trump’s PFS

Testifying in front of the House Oversight Committee this week, Michael Cohen provided the committee with three different personal financial statements from Donald Trump – the years 2011-2013. Most notably, there was a significant increase in Trump’s net worth in 2013.

Notable items on Trump's balance sheets include a "brand value" of $4 billion in 2013 — the highest valued asset in that year's statement — which bumped his total assets to $9.1 billion that year and raised his total net worth to $8.6 billion.

The line item for Trump's "brand value" is absent from his 2011 and 2012 statements. In both of those years, the total value of his assets was about $5 billion.

His net worth was shown as $4.26 billion in 2011, and $4.6 billion in 2012, according to the financial statements.

Trump’s brand value of $4 billion is an intangible asset, and not consistent with GAAP. It was added in 2013 ostensibly to help Trump acquire the Buffalo Bills. While we are not going to comment on other items Mr. Cohen brought before the committee, these Personal Financial Statements are hardly a smoking gun. Real estate and non-liquid assets are difficult to value, and any bank such as Deutsche Bank is going to make its own adjustments to a borrower prepared Personal Financial Statement, especially if the Personal Financial Statement is not reviewed by a CPA.  We have rarely seen a conservative borrower PFS.  For one thing, there is rarely a provision for accrued, but unpaid taxes.

Amazon Ditches NYC

In a stunning reversal, Amazon announced earlier this month that it was abandoning its plans to build a regional headquarters in Long Island City.

Amazon’s retreat was a blow to Gov. Andrew M. Cuomo and Mayor Bill de Blasio, damaging their effort to further diversify the city’s economy by making it an inviting location for the technology industry.

The agreement to lure Amazon to Long Island City, Queens, had stirred intense debate in New York about the use of public subsidies to entice wealthy companies, the rising cost of living in gentrifying neighborhoods, and the city’s very identity.

“A number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward,” Amazon said in a statement.

The company made its decision late Wednesday, after growing increasingly concerned that the backlash in New York showed no sign of abating and was tarnishing its image beyond the city, according to two people with knowledge of the discussions inside the company.

For his part, Mr. de Blasio turned on the company after having steadfastly backed the deal.

“We gave Amazon the opportunity to be a good neighbor and do business in the greatest city in the world,” Mr. de Blasio said. “Instead of working with the community, Amazon threw away that opportunity.”

It’s noteworthy that the mayor of New York City immediately turned on Amazon for backing out of the deal at the first sign of opposition. While the Mayor’s harsh comments amplify why Amazon shouldn’t have come in the first place, it’s hard not to be critical of their decision to cut and run.

Anyone who knows New York knows that this deal was going to invite local opposition. If Amazon wanted a city that truly welcomed it, why would it consider New York in the first place? Let’s go back to its original requirements from its RFP.

In choosing the location for HQ2, Amazon has a preference for:

  • Metropolitan areas with more than one million people

  • A stable and business-friendly environment

  • Urban or suburban locations with the potential to attract and retain strong technical talent

  • Communities that think big and creatively when considering locations and real estate options 

Where is community and local support? It was obvious in this process that Amazon was attracting a lot of negative press, as this public process created a nationwide debate on the merits of corporate subsidies. So, while Amazon should have avoided NYC, why did they choose them in the first place? Pulling out the way they did just made them look worse.

Moreover, pulling out of NYC is now inviting similar efforts in Northern Virginia, as it becomes obvious that Amazon can’t take the heat.

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