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The BAN Report: Big Bank Earnings Wrap-Up / Treasury Pushed PPP Lenders to Prioritize Existing Customers / Air Travel Update / Resilient Restaurants / Emerging Trends Report / The 5MM Hotel Portfolio-10/22/20

Big Bank Earnings Wrap-up

The largest four banks (JP Morgan, Wells, B of A, and Citigroup) reported earnings last week.

JP Morgan Chase

JP Morgan Chase beat analyst estimates on both top and bottom line with EPS at $2.92 versus $2.23 estimate and revenue $1.5 billion higher than projected.   The big surprise was on reserves, as JP Morgan Chase actually reduced reserves.

The key question for the quarter: Whether American banks would show that they’re largely done setting aside money for loan defaults tied to the pandemic. That appears to be the case at JPMorgan, the biggest U.S. bank by assets, which had a $611 million provision for credit costs in the period, compared with $10.5 billion in the previous quarter.

Rather than building loan-loss reserves, as it had done aggressively in the first half of the year, JPMorgan actually reduced them by $569 million in the quarter, citing a runoff in its mortgage portfolio. The bank had added more than $15 billion to loan loss reserves in the first two quarters of 2020.

Most analysts had assumed the bank would continue to add to reserves. For instance, last week, Barclays analyst Jason Goldberg wrote that he expected the bank to build third-quarter reserves by $857 million.

Trading surged 30% higher as the Wall Street side is performing much better than the traditional commercial bank. Deferrals basically dropped in half on consumer loans from $62 billion to $29, so the drop in loan loss reserves was not surprising.


Citigroup also reported better than expected earnings. Earnings were $1.40 per share (versus 93 cents expected) and revenue slightly exceeded estimates.

Citigroup reported that net credit losses declined to $1.9 billion in the third quarter from $2.2 billion in previous three-month period. The company’s overall cost of credit also dropped to $2.26 billion from $7.9 billion on a quarter-over-quarter basis.

Trading revenues for the bank’s fixed income and equities divisions topped expectations as well. Fixed income trading yielded revenue of $3.8 billion while equities raked in $875 million in sales. Analysts polled by FactSet expected fixed income and equities trading revenues to come in at $3.5 billion and $851 million, respectively.

Citigroup’s results come in the midst of a major management change for the third-biggest U.S. bank by assets. Last month, the bank announced that Corbat will be replaced by his deputy Jane Fraser in February, marking the first big Wall Street bank to have a female CEO.

Corbat’s departure was hastened by a sagging share price and pressure from regulators, CNBC reported last month. The bank last week agreed to pay the $400 million penalty for failing to address “several longstanding deficiencies” in its risk controls.

Disappointingly, Citigroup provided the least transparency of the largest banks on their deferrals.

Bank of America

Bank of America had a tougher quarter, as it missed revenue estimates but met earnings estimates.

Analysts have long considered Bank of America, with its vast deposit base, as the big bank most sensitive to swings in interest rates. The industry has been under pressure after the Federal Reserve said it will maintain a zero-rate policy for years in response to the coronavirus pandemic. That squeezes the spread that banks earn by taking in deposits and making loans.

The bank’s net interest income fell by 17% in the quarter from a year earlier to $10.2 billion. CEO Brian Moynihan has said that the key figure will likely bottom in the third quarter. The firm also missed on net interest margin, a related metric, which was 1.72%, 10 basis points below the estimate. 

While rivals JPMorgan Chase and Goldman Sachs each posted trading results that exceeded expectations by hundreds of millions of dollars, Bank of America didn’t fare as well. The firm’s bond trading desks produced $2.1 billion in revenue, under the $2.28 billion estimate of analysts surveyed by Refinitiv. The bank’s equities operations matched estimates at $1.2 billion.

Hard to make money on traditional banking at a 1.72% NIM. And it appears B of A’s Wall Street Bank underperformed relative to its peers.

Wells Fargo

Wells Fargo missed slightly on earnings but exceeded revenue estimates.

“Our third quarter results reflect the impact of aggressive monetary and fiscal stimulus on the US economy,” Wells Fargo CEO Charles Scharf said in a statement. “Strong mortgage banking fees, higher equity markets, and declining sequential charge-offs positively impacted our results, while historically low interest rates reduced our net interest income and our expenses continued to remain elevated.”

The bank’s net interest income fell by 19% to $9.368 billion from the year-earlier period. That steep decline comes as the Federal Reserve has kept interest rates at historically low levels in response to the coronavirus pandemic.

Slide 19 of their investor presentation gave some good color on challenges in CRE, as Wells as the largest CRE lender.    Office building nonaccruals represented nearly all of their increases in CRE nonaccruals.

Overall, traditional banking is challenging now due to the rate environment, difficulty in finding good loan origination opportunities outside of residential mortgages, and higher credit costs.We believe the drops in reserves this quarter are not meaningful, as the banks increased reserves before they saw any deterioration in their credit portfolios, which have held up better than expected due to massive stimulus and the ability to offer deferrals without becoming TDRS.The TDR relief ends at year-end, so we expect increases to classified assets in 2021.Wall Street banking is doing incredibly well, so the diversified banks are simply doing better right now.

Treasury Pushed PPP Lenders to Prioritize Existing Customers

According to a House oversight committee, the Treasury Department privately encouraged lenders to prioritize existing customers for PPP loans.

The Treasury Department privately encouraged lenders to prioritize existing customers when issuing loans for the federal government’s small-business coronavirus aid program, according to a report released Friday by a Democratic-led congressional oversight subcommittee.

The Treasury Department’s actions were one of several ways the Trump administration and several large banks put underserved businesses, including those owned by women and minorities, at a disadvantage when applying for the $670 billion Paycheck Protection Program, said the report from the House Select Subcommittee on the Coronavirus Crisis. Banks and other lenders issued PPP loans, and the Small Business Administration guaranteed them.

The Treasury Department, which helped run the program along with the Small Business Administration, denied to the subcommittee that it had told banks to prioritize existing customers, the report said.

The report said that documents obtained by the subcommittee show the Treasury Department instructed PPP lenders to “go to their existing customer base” when issuing the loans.

“We encouraged all banks to offer loans to their existing small business customers, but no Treasury official ever suggested that banks should do so to the exclusion of new customers,” a Treasury Department spokesperson said. “The subcommittee’s conclusion to the contrary is false and unsupported by its own record.”

It’s only natural that banks would prioritize existing customers over new customers.   And, since the PPP dollars were not fully used, there was plenty of capacity to serve all borrowers.

Air Travel Update

The good news is air travel is seeing a noticeable rebound.    Last weekend was the best weekend since the COVID-19 pandemic.

More people flew in the U.S. over the weekend of Oct. 16-18 than at any other point in the COVID-19 pandemic, the Transportation Security Administration said Monday.

The TSA crossed a long-awaited threshold Sunday, screening 1 million passengers at airport checkpoints for the first time since March 17, spokesperson Lisa Farbstein said in a release.

That wasn't the only new record: TSA also screened 6.1 million passengers at checkpoints nationwide during the week (Monday, Oct. 12, through Sunday, Oct. 18), its highest weekly number since the start of the pandemic.

Consumers have come back to the airlines.    Back in April, TSA was doing less than 100K passengers per day.   Still, even on the day that TSA showed 1,031,505 passengers (October 18), it is still about 40% of the prior year.   So, the airlines continue to burn cash.    The more lucrative business travel has not recovered at all.

United Airlines doesn't anticipate business demand getting back to "normal" until 2024, CNBC's Carl Quintanilla reports, after the COVID-19 pandemic has forced the airline industry into a near-shutdown. Per Quintanilla, United CEO Scott Kirby revealed the prediction on a Thursday conference call, echoing what some analysts predicted in April.

There are some conferences happening.   We are aware of two banking conferences (KY & Alabama) that went on as planned, albeit at lower capacity.    Without a meaningful recovery in business travel, the airlines and ancillary businesses will continue to struggle.

Resilient Restaurants

Despite a challenging environment for restaurants, there are still people opening new restaurants.

New restaurants continued to open this year at a relatively fast pace despite the pandemic, data released Thursday show.

The rate of recent openings is ahead of 2018, 2017 and 2016, according to data compiled by Yelp Inc., which books online restaurant reservations and posts business reviews.

In September, there were only 100 fewer new restaurant openings nationwide compared with a year earlier, Yelp said. Moreover, new restaurant openings last quarter were only down 10% compared to the third quarter of 2019.

After a sharp drop in April, restaurants started rebounding with a 29% monthly increase of new openings from May to July, Yelp said. August and September were relatively flat -- but more than 6,000 new restaurants still opened each of those months, according to the report.

In addition to restaurants, more seafood and farmers’ markets as well as food trucks launched this year, Yelp said.

Restaurants are also adapting for the colder weather, and cities have been experimenting with Al Fresco options.

On Oct. 8, as Illinois recorded what was then the highest count of newly confirmed Covid cases since May, Chicago announced the winners of a month-long design challenge that fielded hundreds of winter dining solutions from around the world. The winning submissions include a pop-up cabin inspired by ice-fishing huts, a movable heated booth just big enough to fill a parking space and a heated table inspired by a kind of traditional Japanese furniture known as kotatsu.

In Chicago, there has been a mad push by restauranters to buy space heaters, which are often going for 3-5x their retail price.

Emerging Trends Report

The 2021 Emerging Trends in Real Estate report by PWC and ULI was released earlier this month.This important publication is the most important survey annually of 1,600 real estate industry experts.One highlight is called the “Great American Move.”

A significant single-family-housing market trend emanating from the COVID-19 pandemic is “the Great American Move.” People (and businesses) are moving in all sorts of ways—to different geographies, from denser cities to the suburbs, from an apartment to a home, and, for some, back “home” to live with family members. There is no better evidence of the Great American Move than the booming single-family-housing markets—especially in the more attainably priced areas of the United States. Some observers argue that large events, like a pandemic, do not create new trends but rather accelerate existing ones. That certainly seems to be the case with housing today. The “move” was occurring prior to the pandemic, already spurred by geographic, demographic, and consumer shifts in the United States.

The report cited Austin, Phoenix, Salt Lake City, and Tampa metro areas as areas least impacted by COVID-19.    Top overall real estate markets were as follows: Raleigh/Durham, Austin, Nashville, Dallas/Fort Worth, and Charlotte.    Another common theme was the state of office space.

However, many office tenants will use WFH to shrink their footprints as a cost-saving measure, as well as an employee benefit. The overall impact on total office demand is unclear, with experts’ forecasts ranging from minimal impact (WFH reductions offset by lower density) to an overall decline in office space demand of 10 to 15 percent. An institutional investor echoed the uncertainty, “[The] future of office demand is the most challenging to predict. Many technology companies are going fully remote, while other companies still see a need for physical space.” While some companies are making long-term pronouncements about office strategy, it is not clear whether a likely decline in rents is factored into their thinking.

While this is a great report, predicting whether current COVID-19 changes are permanent or temporary is a tough one!

The 5MM Hotel Portfolio

Clark Street Capital's Bank Asset Network ("BAN") proudly presents: "The 5MM Hotel Portfolio". This exclusively offered portfolio is offered for sale by one institution ("Seller"). Highlights Include:

  •  A total unpaid principal balance of $4,618,692, comprised of loans on two budget limited-service hotels

  • The loans are secured by a 128-room Budgetel, and a 112-room Days Inn in North Carolina and Florida

  • The weighted average coupon is 6.06% with prepayment penalties on the loans

  • Low-leverage LTVs with the average on the portfolio of 46.19%

  • Properties are performing well with DSCR ratios in excess of 1.5X during 2020 with improving trends

  • All loans are personally guaranteed by experienced operators with excess liquidity

  • All loans will trade for a premium to par and any bids below par will not be entertained

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with Asset Summary Reports, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.






Sale Announcement

Thursday, October 8, 2020


Due Diligence Materials Available Online

Monday, October 12, 2020


Indicative Bid Date

Thursday, October 29, 2020


Closing Date

Thursday, November 12, 2020

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

The BAN Report: PPP Forgiveness / Retail Woes / Indoor Dining Expands / Office Re-Opening Slow / Booming Small Towns-10/1/20

PPP Forgiveness 

Who ever thought forgiveness would take this long?   The SBA is finally starting to approve forgiveness requests as soon as the end of this week.

The Small Business Administration will begin forgiving loans granted to small-business owners under the Paycheck Protection Program, the Treasury Department said Tuesday, following banks’ and borrowers’ complaints that the process had been bogged down.

The government expects to approve and pay forgiveness requests by late this week or early next, a Treasury spokesperson said. The applications are generally expected to be approved quickly, with the exception of loans above $2 million that will get added scrutiny.

Business advocates, banks and lawmakers have raised concerns that the process of turning the loans into grants is too complex and slow under the $670 billion federal program, designed to help small businesses respond to the economic fallout of the pandemic with forgivable government-backed loans distributed through banks.

“The ultimate success of the program will depend on forgiveness, so small-business owners are eager to learn of [Treasury officials’] decisions,” said Kevin Kuhlman, senior director of government relations for the National Federation of Independent Business, which advocates for small businesses, adding that the group welcomes the development.

Since it launched an online portal for loan forgiveness in early August, the Small Business Administration has received more than 96,000 applications from businesses seeking to have their loans forgiven—but none had been approved, William Manger, SBA’s chief of staff and associate administrator, told House lawmakers last week.

Those applications represent roughly 2% of the 5.2 million loans, worth $525 billion, issued under the program before it expired on Aug. 8.

Treasury Secretary Steven Mnuchin told Senate lawmakers last week he would support simplified forgiveness but that legislation is needed. He also said the administration would seek to monitor loans for fraud.

As Mnuchin said, there are two things holding this up. One, Congress may act to simplify the forgiveness process by some sort of blanket forgiveness for loans under a certain threshold. Two, the stories about fraud have forced the SBA & Treasury to beef up their protocols in order to weed out the bad actors.It is surprising though that only 2% of PPP loans have been submitted for forgiveness so far, although this may be due to lenders not submitting the applications to SBA yet.

The delay on forgiveness is creating a problem.Consultant and ex-banker Daniel Kaminski sent us this email:

Great report; I thought I shared with you three of my clients experience with PPP loans.

  1. Client with a loan through a large regional bank.  Was told today, they are only processing loan forgiveness applications for loans over $150,000; His is less so he is just sitting tight. Loan was distributed on April 13, 2020.  See below.

  2. Client with a loan from another large regional bank for over $225,000; Ready to file in August, was told by its banker he was not yet trained, and the bank would not be ready until at least September 28th. Loan was distributed on April 13, 2020.  See comment below.

  3. Client had a loan under $100,000 from a community bank. Last week they sent us an email asking us to file for forgiveness, which we did yesterday;  but also sent us an amendment to loan agreement deferring interest payment to after we received either approval or denial of loan forgiveness. They explained that the deferment was due to the fact that the loan could start to accrue interest before the SBA approves forgiveness.  

So, my comment which is not addressed by your report, if the SBA does not start to approve, the April loans could soon be approaching interest payments before they are forgiven…then what happens?  Are other banks deferring interest payments?

Excellent points, Dan. Banks certainly do not want to modify hundreds of loans because they have now not been forgiven prior to the first contractual interest payment.    We are hearing that the SBA is likely next week to allow up to ten months of deferment, so that loans can be forgiven prior to the first payment being made.   No one has seen anything in writing, but one bank did send this in writing to one of their customers:

SBA advises they can take up to 90 days to review loan forgiveness application which may run past the required starting of payments called for in the note you signed. The SBA has now allowed for an extension of the start of that payment date until 10 months after your covered period ends. To accomplish this extension we have prepared a loan modification agreement…

Oy vey! “No one ever said this would be this hard” is an applicable phrase. To be fair, our good friends at the SBA has been put in a very difficult position, put out a record amount of money in a short period and now process billions of loan forgiveness requests while keeping an eye on fraud while asking for Congress to make this easier.

Retail Woes

BDO’s Bi-Annual Bankruptcy Update quantified the record number of bankruptcies in retail so far this year as well as store closings.

In the first six months of 2020, 18 retailers filed for Chapter 11 bankruptcy, with an additional 11 filing in July through mid-August. These defaults were concentrated in apparel and footwear, home furnishings, food and department stores, with many prominent retailers filing during this time period, including Pier 1, J. Crew, Neiman Marcus, Stage Stores, J.C. Penney, Tuesday Morning, GNC, Lucky Brand, RTW Retailwinds (New York & Co.), Brooks Brothers, Ascena (Ann Taylor, LOFT, Lane Bryant, Justice, Catherines), Le Tote (Lord & Taylor), Tailored Brands (Men’s Wearhouse, Jos. A. Bank, Moores Clothing, K&G) and Stein Mart.

Alongside the uptick of bankruptcy filings and liquidations so far in 2020, the industry has also seen a substantial rise in the number of store closings announced, with bankrupt retailers alone announcing almost 6,000 store closings. From January through mid-August, there have been more store closure announcements in 2020 than the record 9,500 stores that closed throughout 2019. The majority of store closures have taken place in malls, which have seen far less foot traffic due to sustained COVID-19 disruption. 

However, retailers on the brink of bankruptcy are not the only ones looking to shed their brick-and-mortar locations. In fact, there are more than 15 retailers that have not filed for bankruptcy—including Macy’s, Bed Bath & Beyond and Gap—that have announced the closing of 50 or more stores, totaling a combined 4,200+ stores.

10,000 closed stores are a lot of vacant real estate.   Online retail is projected to grow 18% this year, but the physical stores are struggling. Even Rodeo Drive in Beverly Hills, which is one of the most famous shopping areas in the world, is struggling.

Rodeo Drive, only three blocks long, has nearly a dozen vacant storefronts and has seen Michael Kors, Lacoste, Tumi, Battaglia and Piaget close; similarly, Melrose Place has seen the shuttering of BLDWN, Rebag and Violet Grey; and Robertson Boulevard has an additional Michael Kors closure, along with All Saints and Ted Baker. Stores that are open are generally limiting the number of shoppers.

The good news is closings reduce competition for retailers and make it easier for the remaining retailers to survive.    COVID-19 has accelerated a trend from brick-and-mortar to online sales that would have likely occurred anyway.

Indoor Dining Expands 

The good news for restaurants is major cities are either opening or expanding indoor dining.

New York opens indoor dining on Wednesday, restricting capacity to 25%. San Francisco may do the same as early as this week. Chicago is raising its indoor capacity from 25% to 40% on Thursday but says restaurants still can’t seat more than 50 people in one room.

It’s a dose of reality for an industry that was able to stem at least some of its losses by pivoting to outdoor dining this summer, setting up tables and chairs on sidewalks and parking lots and offering some semblance of normalcy.

But as temperatures start to slide across the country, restaurants will have to coax patrons to come back inside, and it’s anyone’s guess how many actually will. That could spell trouble for an industry that has already lost nearly 100,000 U.S. restaurants — or 1 in 6 — since the start of the pandemic, according to the National Restaurant Association. The future remains uncertain for thousands more.

“We’re all a little apprehensive, but that was the case when we started outdoor dining, too,” said Samantha DiStefano, owner of Mama Fox, a restaurant and bar in Brooklyn.

Mama Fox can only seat 18 people inside at 25% capacity, so DiStefano will still rely heavily on her 14 outdoor tables. She thinks many New York restaurants won’t open indoor dining until the limit reaches 50% because they can’t cover their costs at 25%.

In the meantime, Mama Fox and others are trying to figure out how to extend the outdoor dining season using space heaters, tents, temporary igloos and even blankets. Heat lamps are already in short supply.

Restaurants are also promoting delivery and carryout. Nearly 70% of 3,500 restaurants surveyed in September by the National Restaurant Association said they added curbside takeout during the pandemic; 54% added delivery.

US restaurants sales bottomed out in April at $30 billion, but have since rebounded to $55 billion in August, which is still $10 billion less than last year. Fast-food restaurants with drive-thru are performing the best, as drive-thru visits increased by 26% in the second quarter according to the NPD group. From our standpoint, it seems obvious that people miss their favorite restaurants, and are more likely than not to dine out like they always did, providing it can be done safely.   But restaurants can only do so much business at limited capacity, so a full recovery is unlikely prior to a vaccine.

Office Re-Opening Slow

The slow pace of workers returning to their offices is disappointing and causing significant damage to our major cities.    In New York City, only 10% of workers have returned.

Overall, about 10% of Manhattan office workers were back as of Sept. 18, according to CBRE Group Inc., a commercial real estate services firm.

That represents only a modest uptick from the 6% to 8% who were back in July, a month after the city allowed nonessential workers to return for the first time since offices closed in March because of the pandemic. The monthslong stretch of near-empty office buildings has had a debilitating knock-on effect in Midtown Manhattan and other business districts, leading many small shops and restaurants to shut down for good.

Nationally about 25% of office workers have returned as of this month, on average, according to real-estate services firms. Some large metropolitan areas are considerably higher, such as Dallas at 40% and the Los Angeles metro area at 32%, industry professionals say. The reoccupation rate in New York’s suburbs is 32%, according to CBRE, which manages 20 million square feet of office property in the region.

We talked to the head of a major department at a large bank and he told us that some of his employees are just traveling the country and working out of their hotel rooms.

Without kids, mortgages or offices to tie them down, some Americans are city hopping in search of new scenery and open space.

Driving that trend are a few large employers that have made clear that they don’t expect workers to return well into 2021. Even though some Wall Street banks are already putting pressure on employees to come back to the office, big tech companies including Google parent Alphabet Inc., Facebook Inc. and Inc. are extending work from home policies — and some are even making the arrangement permanent. 

People like Collazzi who can work remotely are finding that the restrictions placed on international travel have spurred them to go domestic sightseeing.

The complete lack of leadership amongst our large companies is incredibly disappointing, especially since these companies have done so much to invest in their workplaces. Imagine the boost a large company could do to a major city if they announced that most workers would be returning to their offices. Obviously, this needs to be done safely and not all workers will be able to return, but we should be doing better than 10%!

Booming Small Towns

Many small towns are seeing their populations expand dramatically, as refugees from large cities look for some more space and affordability.   Winhall, Vermont is one small town seeing an influx of people fleeing urban areas.

For years, Vermont’s population has been stuck at around 620,000, a plateau so threatening to the labor force and tax base that in 2018 the state began offering a cash incentive of up to $10,000 for remote workers who moved to Vermont.

In towns like Winhall, that is really not the problem anymore.

Instead, officials are hard-pressed to keep up with the burst of growth. 

Elizabeth Grant, the town clerk, reckons that over the summer the town’s population topped 10,000. When school reopened this month, the number of enrolled students had increased by 54, a jump of more than 25 percent, so the costs to taxpayers will exceed projections by half a million dollars.

The post office ran out of available P.O. boxes in mid-June. Electricians and plumbers are booked until Christmas. Complaints about bears have quadrupled. And as far as the dump is concerned, as Mr. Bushee put it, “the closest word I can tell you is sheer pandemonium.”

Winhall is 220 miles from NYC and 140 miles from Boston. With good Wi-fi and access to the best skiing on the east coast, it’s not surprising they are seeing an influx of residents. There are examples like Winhall all over the country, typically within a 3-hour drive of a major city. But will these new residents sour on small-town life when the big cities are back again?   Time will tell if this COVID-impacted trend is a blip or a permanent shift.

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