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The BAN Report: Big 4 Bank Earnings / Powell Dismisses Inflation Concerns / Roubini Speaks Up / Expanded Unemployment Hurting Hiring / Calk Convicted-7/15/21

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 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.

  • One of the more politically controversial reasons has been the availability of unemployment insurance benefits, in particular emergency provisions that were introduced because of the COVID-19 pandemic.

  • Indeed, 26 states opted to cut emergency benefits early with the intention of incentivizing people to take open jobs.

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

  • Of those actively collecting unemployment benefits, 29% said they turned down job offers during the pandemic. In response to a follow-up question, 45% of that group said they turned down jobs specifically because of the generosity of the benefits.

  • Extrapolating from the 14.1 million adults collecting benefits as of June 19, Morning Consult concluded that 1.8 million people turned down job offers because of the benefits.

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: 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 

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.”

The 9MM Midwest CRA Portfolio

Clark Street Capital's Bank Asset Network ("BAN") proudly presents: "The 9MM Midwest CRA Portfolio." This exclusively offered portfolio is offered for sale by one institution ("Seller"). Highlights include:

  • A total outstanding balance of $8,981,900 comprised of three loans to two borrower relationships

  • The loans are secured by first mortgages on 7 multi-family buildings, located in Chicago, IL and Dayton, OH

  • This newly originated portfolio has a weighted average coupon of 5.822%, a weighted average LTV of 69.7%, and all loans have prepayment penalties

  • All loans include full personal guarantees with a weighted average FICO of 731

  • All of the properties are located in low- and moderate income geographies, thus helping institutions meet Community Reinvestment Act ("CRA") requirements


  • Sale announcement: July 1, 2021

  • Due diligence materials available online: Tuesday, July 6, 2021

  • Indicative Bid Date: Tuesday, July 27, 2021

  • Closing Date: Thursday, August 19, 2021


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

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