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The BAN Report: Bank Mergers Soar / Inflation Reaches 30-Year High / Record Home-Price Growth / Pandemic Aftershock

Bank Mergers Soar

Bank mergers this year are at the fastest pace since before the financial crisis, according to an analysis by the Wall Street Journal.

It is a sharp turnaround from last year, when the economy spiraled and many regional and community banks put merger plans on the shelf. Now, bank executives are feeling more certain about what the future holds, but some are finding it hard to make it on their own. Though the economy has in many ways recovered from 2020, loan demand is still low and profits from lending are slim.

It is a sharp turnaround from last year, when the economy spiraled and many regional and community banks put merger plans on the shelf. Now, bank executives are feeling more certain about what the future holds, but some are finding it hard to make it on their own. Though the economy has in many ways recovered from 2020, loan demand is still low and profits from lending are slim.

It is a sharp turnaround from last year, when the economy spiraled and many regional and community banks put merger plans on the shelf. Now, bank executives are feeling more certain about what the future holds, but some are finding it hard to make it on their own. Though the economy has in many ways recovered from 2020, loan demand is still low and profits from lending are slim.

Smaller banks have also struggled to compete with the high-end digital offerings and technology of the megabanks.

Sacramento, Calif.-based Bank of Commerce Holdings began courting potential merger partners in the spring of 2021. The board and management of the $1.9-billion-assets bank had for years considered different options to overcome ever-narrowing industry margins, including being acquired by a larger bank, CEO Randy Eslick said. It took less than three months to iron out a deal with $18 billion Columbia Banking System Inc. of Tacoma, Wash.

The deal was announced in June, and the combined bank will have the resources to invest in technology and other areas—trust departments, wealth management, specialty lending—that the smaller Bank of Commerce wouldn’t have been able to fund on its own.

Through the second quarter there were 4,951 FDIC-insured institutions. In the second quarter of 2008, there were 8,451. In 13 years, half of the banks have disappeared. And, there doesn’t seem to be any end in sight for this trend.     

Inflation Reaches 30-Year High

Today, the Commerce Department announced that inflation reached a new 30-year high in August, driven by supply chain disruptions and high demand.

The Personal Consumption Expenditures index continued to climb at its fastest pace since 1991, rising by 4.3 percent in the year through August. That beat out the prior month’s reading of 4.2 percent.

The monthly index also remained elevated, climbing by 0.4 percent for a second straight month.

Inflation has surged thanks to pandemic-related problems, including shipping trouble as strong demand for goods from Asia and elsewhere has taxed freight routes and pushed transit costs higher. Shortages in key parts have pushed up prices for everything from cars to washing machines. Officials at the Fed and in the White House have been clear that they expect those pressures to fade as the economy more fully reopens and business returns to normal.

But the fresh data comes as economists regard the horizon with apprehension. Factory shutdowns in Asia continue to ripple through the global supply chain. Commodity costs, including those for oil and gas, are rising. Rents are rebounding at a breakneck pace after a pandemic swoon, threatening to push housing inflation — an important part of the overall price index — higher.

Officials at the Fed are watching those trends as they consider when — and how quickly — to remove the economic support that the central bank has been providing during the pandemic.

While they say that they still expect inflation to fade, they acknowledge that the process is taking longer than they had expected or hoped.

The “inflation is transitory” argument loses luster the longer it goes on. It’s puzzling that the Fed has done virtually nothing to tame inflation, except to argue that it is temporary.

Record Home-Price Growth

Speaking of inflation, home-price growth reached a new record in July.

The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 19.7% in the year that ended in July, up from an 18.7% annual rate the prior month. July marked the highest annual rate of price growth since the index began in 1987.

“The last several months have been extraordinary not only in the level of price gains but in the consistency of gains across the country,” said Craig Lazzara, managing director and global head of index investment strategy at S&P Dow Jones Indices.

July marked the fourth consecutive month of record price appreciation, he said.

From looking at the data from Case-Shiller, the broadness of the housing rally is remarkable. Of the 20 different markets tracked, the lowest was Chicago at 13.3%, versus the average of 19.7%. Even markets where COVID was especially difficult like Las Vegas saw 22.4% growth in the past year. Phoenix led the nation with 32.4% appreciation.

Surveys of homebuyers suggest that they are increasingly pessimistic about the direction of home prices, so perhaps we have reached a peak and are now in a more stable environment.   

Pandemic Aftershock

Now that federal stimulus efforts have run their course, the NCUA is warning its members to expect a rise in problems with credit quality.

Todd Harper, the chairman of the National Credit Union Administration, warned last week that the industry should expect delinquencies and charge-offs to rise in the months ahead. He urged credit unions to pay careful attention to their capital, asset quality, earnings and liquidity.

“To protect the share insurance fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system,” he said at an agency board meeting Thursday.

“The return to in-person exams may reveal that some credit unions will not be able to withstand the pressures of the environment and will close or be merged,” Fryzel said. “The full impact may not be felt until well into 2022 or even 2023.”

That time frame might also apply to banks, said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates. He said the massive level of government stimulus injected into the economy during the pandemic — from emergency small loans to direct federal payments to households — played a vital role in warding off coronavirus-induced credit woes for small lenders.

But that stimulus has begun to wear off and, should the economy falter in the months ahead or next year, credit quality could reemerge as a concern for the industry. Ultimately, he said, at least some banks will grapple with significant losses and failures are likely to bubble up in coming years.

“When the dust settles from this pandemic, we will probably see failures again,” Jamesson said. “It takes time for loans to go bad and the full extent of problems to surface, so I’d predict this is likely to be a 2023 issue.”

It is our view that the banks are well-capitalized and have the ability to absorb any losses in the future. But, failing to recognize that the low-level of problem loans is due to extraordinary stimulus, and not due to superior management teams is foolhardy. We are seeing extraordinary pricing in the secondary market for problem loans, so our advice is to act while market conditions are strong!

The BAN Report: Sluggish Job Report / America is Running Out of Everything / The Evergrande Blow Up / Restaurants Still Struggle

Sluggish Job Report

The Labor Department released its unemployment report for September, and September was an incredibly disappointing month for job growth.

The Labor Department said in its closely watched employment report on Friday that nonfarm payrolls increased by 194,000 jobs last month. Data for August was revised to show 366,000 jobs created instead of the previously reported 235,000 positions.

Economists polled by Reuters had forecast payrolls increasing by 500,000 jobs. Estimates ranged from as high as 700,000 jobs to as low as 250,000.

The unemployment rate fell to 4.8% from 5.2% in August.

The modest gain in jobs could temper expectations for a swift acceleration in economic growth following an apparent sharp slowdown in the third quarter. The labor market and economy remain constrained by worker and raw material shortages caused by the pandemic.

COVID-19 infections are decreasing in the United States, with 100,815 new infections reported on average each day, according to a Reuters analysis of data from state and local governments, as well as health authorities.

September's employment report is the only one available before the Federal Reserve's Nov. 2-3 policy meeting. The U.S. central bank signaled last month that it could start tapering its monthly bond buying as soon as November.

The additional unemployment benefits expired on Labor Day, so this is surprising.  While economists are often wrong, the fact that the actual number was 40% of what was projected is quite the big miss. Companies are so hungry for workers that many are increasingly looking at convicted felons.

All across the country, as the economy surges and employers struggle to find enough workers, former prisoners like Urioste are finding a sliver of a silver lining in the dark cloud of the pandemic.

This summer, U.S. employers reported an unprecedented 10.9 million job openings. That was equal to more than one job for every unemployed person in the country.

In response, a growing number of companies are beginning to tap into a huge, largely ignored labor pool: the roughly 20 million Americans, mostly men and many unemployed, who have felony convictions.

A tiny fraction of businesses, including U.S. Rubber Recycling, have long made a point of hiring ex-convicts. And in recent years, California and about a dozen other states have sought to remove some of the discrimination against these job candidates by banning employers from directly asking applicants about criminal records.

While obviously risky, it does appear that tapping into an underutilized work force of 20 million Americans offers some benefits for companies that employ cheaper labor. But the sluggish job growth in the face of record job openings is a conundrum that is a threat to the economy.

America Is Running Out of Everything

A year-and-a-half into COVID, and the global supply chain is still backed up. The Atlantic pondered whether America is running out of everything.

The coronavirus pandemic has snarled global supply chains in several ways. Pandemic checks sent hundreds of billions of dollars to cabin-fevered Americans during a fallow period in the service sector. A lot of that cash has flowed to hard goods, especially home goods such as furniture and home-improvement materials. Many of these materials have to be imported from or travel through East Asia. But that region is dealing with the Delta variant, which has been considerably more deadly than previous iterations of the virus. Delta has caused several shutdowns at semiconductor factories across Asia just as demand for cars and electronics has started to pick up. As a result, these stops along the supply chain are slowing down at the very moment when Americans are demanding that they work in overdrive.

The most dramatic expression of this snarl is the purgatory of loaded cargo containers stacked on ships bobbing off the coast of Los Angeles and Long Beach. Just as a normal traffic jam consists of too many drivers trying to use too few lanes, the traffic jam at California ports has been exacerbated by extravagant consumer demand slamming into a shortage of trucks, truckers, and port workers. Because ships can’t be unloaded, not enough empty containers are in transit to carry all of the stuff that consumers are trying to buy. So the world is getting a lesson in Econ 101: High demand plus limited supply equals prices spiraling to the moon. Before the pandemic, reserving a container that holds roughly 35,000 books cost $2,500. Now it costs $25,000.

The container situation is even weirder than it looks. With demand surging in the United States, shipping a parcel from Shanghai to Los Angeles is currently six times more expensive than shipping one from L.A. to Shanghai. J.P. Morgan’s Michael Cembalest wrote that this has created strong incentives for container owners to ship containers to China—even if they are mostly empty—to expedite the packing and shipping of freights in Shanghai to travel east. But when containers leave Los Angeles and Long Beach empty, American-made goods that were supposed to be sent across the Pacific Ocean end up sitting around in railcars parked at West Coast ports. Since the packed railcars can’t unload their goods, they can’t go back and collect more stuff from filled warehouses in the American interior.

And what about the truckers who are needed to drive materials between warehouses, ports, stores, and houses? They’re dealing with a multidimensional shortage too. Supply-chain woes have backed up orders for parts, such as resin for roof caps and vinyl for seats. But there’s also a crucial lack of people to actually drive the rigs. The Minnesota Trucking Association estimates that the country has a shortage of about 60,000 drivers, due to longtime recruitment issues, early retirements, and COVID-canceled driving-school classes.

In short, supply chains depend on containers, ports, railroads, warehouses, and trucks. Every stage of this international assembly line is breaking down in its own unique way. When the global supply chain works, it’s like a beautifully invisible system of dominoes clicking forward. Today’s omnishambles is a reminder that dominoes can fall backwards too.

This was a great article on the bottlenecks in the US economy.   What’s frustrating is why these bottlenecks continue to persist and how they get fixed.   Labor shortages are not just in the US – China is having similar issues. It’s concerning how acute this problem is, yet no one in government seems to be addressing it.   

The Evergrande Blow Up

The Wall Street Journal had an excellent story on how Evergrande ended up on the brink of collapse. The stunning lack of oversight by the Chinese banks and their regulators allowed Evergrande to somehow accumulate over $300 billion in debts they could not repay.

China Evergrande Group’s  path to the brink of default was littered with financial red flags. The property giant carried heavy debt loads, grew at breakneck pace and made it hard for outsiders to understand the company’s financial situation.

But a combination of financial regulators, local Chinese governments, yield-hungry investors and insiders kept the critics at bay. Ultimately, the only pressure that Evergrande couldn’t resist came from Beijing.

The company recently reported more than $300 billion of total liabilities, including $89 billion of debt. It obscured its financial liabilities with complex financing arrangements and did extensive share buybacks despite the debt levels, a review of financial filings shows. The buybacks helped boost the share price, making it risky to bet against the stock.

Evergrande could avoid defaulting on its debt with asset sales, capital injections or a government bailout, although the latter appears unlikely. An Evergrande property-management subsidiary said Monday that it was the target of a takeover bid, signaling a possible new deal that could bring in billions of dollars of much-needed cash for the parent company.

Evergrande was the subject of several critical financial research reports over the past decade. In 2012, Andrew Left, a prominent American short seller, claimed the company was insolvent. He said Evergrande had used “at least six accounting shenanigans” to hide its financial problems. Evergrande at the time denied and rebutted the allegations.

Hong Kong’s markets regulator, the Securities and Futures Commission, came to Evergrande’s defense. It filed its first civil proceedings against a short seller, accusing Mr. Left of spreading false and misleading information about the company.

So rather than investigate the accusations of Andrew Left, they banned him from trading in Hong Kong and fined him! Particularly remarkable was how the company classified its empty parking spaces.

The company had roughly 400,000 mostly empty parking spaces on its books, which it classified as investments. This allowed the company to value them at around $20,000 each, Mr. Stevenson said at the time.

The parking spots should have been considered inventory, he argued. He estimated that the assets could be worth less than half their book value, potentially requiring a multibillion-dollar write-down. “Evergrande is the only major developer to adopt this treatment,” he wrote in a later piece.

Since the Chinese government ignored these red flags for years, do you really think they are going to let Evergrande collapse without a resolution strategy? The clock is ticking and the bondholders are now exploring their options. 


Restaurants Still Struggle

The US restaurants, after some boom times this summer, are struggling again and many may not be able to survive this upcoming winter.

Data and interviews with restaurateurs point to a deterioration in finances due to surging costs for everything from salmon to uniforms and labor shortages. A survey found that 51% of small restaurants in the country couldn’t pay their rent in September, up from 40% in July.

Unlike during most of 2020, today’s struggles aren’t visible with the naked eye: Customers are still flocking to eateries, for the most part, in spite of rising prices and lingering fears of the delta coronavirus variant. But the anxiety over mounting expenses is palpable among restaurant owners from New York City to Nashville, Tennessee.

“You might see a restaurant that’s doing well on a Friday night, but that doesn’t at all tell the story of how they’re doing. Probably not good,” said Daisuke Utagawa, a Washington, D.C., chef whose restaurants include Haikan and Daikaya. “For us, personally, we haven’t seen any sort of recovery. We are still underwater.”

The industry is raising the alarm. Its main lobbying group this week called on Congress for more aid to help meet payroll and pay down debt, citing a survey showing that a majority of restaurant operators have seen business conditions deteriorate in the past three months. Like many companies around the world, food-service firms are also hit by supply-chain bottlenecks. 

Underscoring the surge in expenses, a closely watched price gauge hit its highest since 1991 in August, driven by energy and food, the Commerce Department said Friday.

“Our kitchen labor costs are up 20%, maybe more,” said Jeff Katz, partner at Crown Shy and Saga in New York City. “The question is, how much more can the customer handle. We haven’t raised our prices yet, but these costs are real.”

We believe this is also the direct consequence of not allowing restaurants to fail. By attempting to save every restaurant, we have made it more difficult for anyone to make any money. Restaurants are preparing to be better equipped for winter outdoor dining.

Restaurant owners say they are better prepared this winter for the mass of pandemic-weary diners who still want an outdoor option.

A year ago, restaurants threw together improvised tents, finicky propane heaters and utilitarian patio furniture. Diners showed up, but even some who were eager for a safe way to dine felt like they were overpaying for a subpar experience.

With more time to make arrangements, owners are making expensive bets on what diners want when temps go down. Some of them are using the money to speed up service, add decor and invest in higher-quality permanent setups. Others are tweaking menus to offer warm, well-executed dishes and hot-themed drinks.

Few would have predicted year-round outdoor dining in cold weather climates, but this is a COVID habit that seems permanent.  

The BAN Report: Bank Earnings Report / Direct SBA 7(a) Loans Debate / LA Port Relief / Food & Retail Workers Quit / The Bremer Bank Saga

Bank Earnings Report

The 4 largest banks released earnings this week. Overall, this was a much better quarter than previous quarters, as banks finally showed top-line growth.  

Bank of America

Bank of America posted strong results on all fronts.  

The company’s profit surged 58% to $7.7 billion, or 85 cents a share, as revenue climbed 12% to $22.87 billion. Results were helped by a $1.1 billion reserve release that led to a $624 million boost after chargeoffs.

Shares of the bank climbed 2.5%.

“We reported strong results as the economy continued to improve and our businesses regained the organic customer growth momentum we saw before the pandemic,” CEO Brian Moynihan said in the release. “Deposit growth was strong and loan balances increased for the second consecutive quarter, leading to an improvement in net interest income even as interest rates remained low.”

Net interest income, a closely watched figure for banks, jumped 10% to $11.1 billion, exceeding the $10.6 billion StreetAccount estimate.

Investors had wanted to see loan growth improve from a weak first half of the year because that helps banks produce more interest income. Indeed, loan balances increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the bank said.

More loan growth is expected from here, Moynihan told analysts Thursday in a conference call.

After disappointing loan growth in the first half of the year, loan growth was very encouraging.  


Citigroup exceed expectations on both earnings and revenue, led by strong trading revenue.

The bank reported $2.15 in earnings per share on $17.15 billion in revenue. Wall Street was anticipating earnings per share of $1.65 on revenue of $16.97 billion, based on Refinitiv consensus estimates.

Net income came in at $4.6 billion, compared with $3.1 billion a year ago. That is a 48% increase year over year.

Trading revenue for fixed income and equity markets topped estimates at $3.18 billion and $1.23 billion, respectively. Analysts expected $3.07 billion in revenue from fixed income trading and $909.7 million in revenue from equities trading, according to StreetAccount estimates.

Equity trading revenue was up 40% year over year. Investment banking revenue saw a similar jump.

“The recovery from the pandemic continues to drive corporate and consumer confidence and is creating very active client engagement as you can see through our strong results in Investment Banking and Equity Markets, both up approximately 40% year-over-year, in addition to double-digit fee growth in Treasury and Trade Solutions as we help our clients reposition their supply chain,” CEO Jane Fraser said in a statement.

New CEO Jane Fraser is off to a good start. Guidance for the rest of the year remained unchanged, which was a bit puzzling.

JP Morgan Chase

JP Morgan Chase had a great quarter and continued to release reserves ($2.1 billion in the 3rd quarter) due to an improving credit picture.

The bank produced $3.74 per share in earnings, which includes a 52 cent per share boost from reserve releases and a 19 cent per share benefit tied to a tax filing.

The bank “delivered strong results as the economy continues to show good growth - despite the dampening effect of the Delta variant and supply chain disruptions,” CEO Jamie Dimon said in the statement. “We released credit reserves of $2.1 billion as the economic outlook continues to improve and our scenarios have improved accordingly.”

Companywide revenue rose 2% to $30.4 billion, mostly driven by booming fees in the firm’s investment banking and asset and wealth management divisions. Net interest income of $13.2 billion edged out the $12.98 billion StreetAccount estimate on higher rates and balance sheet growth.

Fixed income revenue dropped 20% to $3.67 billion, below the $3.73 billion StreetAccount estimate. But equities trading revenue more than made up the shortfall, producing $2.6 billion, beating the $2.16 billion estimate.

Companywide loan growth has stabilized and should pick up next year, driven by higher spending and increased revolving of debts by credit-card users, CFO Jeremy Barnum told analysts during a conference call.

Loan growth showed a modest increase from the prior quarter. As we’ve stated earlier, loan growth is critical to showing top-line growth for banks, as the banks have mostly exhausted the benefits or releasing reserves.

Wells Fargo

Wells Fargo beat earnings and revenue estimates, but its loan growth remains sluggish.

  • Net income: $5.1 billion, a 59% increase from $3.2 billion during the same quarter a year ago.

  • Earnings per share: $1.22 a share, adjusted, topping the consensus estimate of 99 cents per share, according to Refinitiv.

  • Revenue: $18.83 billion, compared with consensus estimate of $18.35 billion.

Results were helped by a $1.65 billion reserve release that led to a $1.4 billion benefit after charge-offs, the bank said. Wells Fargo continued to release funds it had set aside during the pandemic to safeguard against widespread loan losses.

The bank paid a $250 million fine for its “unsafe or unsound practices” tied to its loan modification program, according to the Office of the Comptroller of the Currency.

Wells Fargo saw its net interest income decrease by 5%, primarily due to soft demand and elevated prepayments and the impact of lower yields on earning assets.

Loan growth is still flat across these banks. Below is a table of gross loans in billions, excluding any allowances.

Loan growth was positive in the third quarter, but only grew modestly, and overall loan growth is still almost 1% down from the prior year.   

Direct SBA 7(a) Loans Debate

The banking industry and its Republican allies have criticized a plan by the SBA to make direct SBA 7(a) loans for $150,000 or less. Congressional Republicans have argued that SBA lending is best made through banks.

Unfortunately, the American taxpayer has already assumed the brunt of il-suited direct lending approaches by the federal government. Not only has the SBA’s EIDL program been plagued with delays and underwhelming communication efforts, but it has also been susceptible to fraudulent activity due to a lack of oversight controls.   According to one of the SBA Inspector General’s earliest COVID reports, “preliminary review and investigative findings have identified concerns with internal controls and potentially rampant fraud in the program.”   Not surprisingly, the report also mentions the role of private sector lenders and how they have assisted with fraud protections within a program they are not party to.   The report states that “OIG has been inundated with contacts to investigative field offices from financial institutions across the nation…”  In a follow-up report published on October 28, 2020, the SBA’s Inspector General found that nearly $80 billion in EIDL dollars could be potentially fraudulent.  While any illegal activity within a government program is unacceptable, a fraud rate of approximately 30 percent is a warning sign for proponents of federal direct lending.

Others argue that the banking lobby is just trying to protect its turf and that the SBA could do a better job at serving under-served communities.

As the head of a small-business advocacy organization, I agree that, generally, the government should not create programs that compete with the private sector.

However, the reality is that private lenders do not want to make small startup and microloans, especially in rural and underserved communities, and particularly to entrepreneurs of color and women. Such loans are viewed as too risky and not very profitable.

Add to this reluctance the fact that there are simply fewer private banking opportunities in rural and underserved areas.

In our view, there is no question that few lenders want to make SBA 7(a) loans under $150K. Not only are the loans unprofitable, but the underwriting is tough as these small loans tend to be grossly undercollateralized. I have witnessed first-hand how tough it is to find good 7(a) loans under $150K. If the goal is simply to get money out, then yes, there will be demand for these loans that is not being met by the SBA lending community. But expect a high level of losses.

LA Port Relief

The Biden Administration announced yesterday progress on alleviating the bottlenecks of the LA and Long Beach ports, which have caused supply chains to completely break down. The Port of Los Angeles, following an earlier move by the Port of Long Beach, will now be operating 24/7.

One of the country’s busiest ports will operate around the clock in an effort to ease cargo bottlenecks that have led to shortages and higher consumer costs, a change announced by the White House as it seeks to alleviate supply-chain issues ahead of the holidays.

By going to 24/7, the Port of Los Angeles will join the neighboring Port of Long Beach, Calif., which started doing a similar thing last month. Major ports in Asia and Europe have operated around the clock for years.

Expanded operations at the Port of Los Angeles would nearly double the hours that cargo can move, according to the White House. It said the extra shifts have been agreed to by the International Longshore and Warehouse Union, which represents dock workers.

The Port of Long Beach struggled to increase cargo flows after it extended its opening hours, with truckers complaining that restrictions put on them for picking up and dropping off containers were too onerous. Shortages of truck drivers and warehouse workers have also posed problems across supply chains. It remains unclear how many of the terminals in Los Angeles will operate 24/7 and when those operations will begin.

These moves will help, but it’s not clear that 24/7 operations will unclog supply chains by itself.   

John McLaurin, president of the Pacific Merchant Shipping Association, which represents ocean carriers and terminal operators, said the White House plan only addressed one part of the supply chain.

“Marine terminal gates are open, and most are providing extended hours but are not being utilized,” he said in a statement. “The problem is that trucks are not using the extended hours due to a shortage of drivers, warehouses are full and also suffer from a lack of personnel, chassis that carry containers are not being returned, causing equipment shortages. It is a system of systems all dependent upon each other.”

Next to COVID, it’s hard to see a bigger problem disrupting the global economy than the supply chain issues. And how will these supply chains handle the holidays? This is a good year to do your Holiday shopping early!

Food & Retail Workers Quit

Staffing issues in the restaurant, retail and accommodation industries appear to be getting worse.  A total of 4.3 million workers left their jobs in August – the highest since 2000.

Quits have been seen historically as a level of confidence from workers who feel they are secure in finding employment elsewhere, though labor dynamics have changed during Covid-19 crisis. Workers have left their jobs because of health concerns and child care issues unique to the pandemic’s circumstances.

A total of 892,000 workers in the food service and accommodation industries left their jobs, while 721,000 retail workers departed along with 534,000 in health care and social assistance.

“As job openings and hires fell in August, the quits rate hit a new series high, surging along with the rise in Covid cases and likely growing concerns about working in the continuing pandemic,” said Elise Gould, senior economist at the Economic Policy Institute.

“There is an enormous labor shortage in the country right now and it is not just because people are quitting or have child care problems, or can’t get to work due to the Delta variant,” wrote Chris Rupkey, chief economist at Fwdbonds. “The economy is strong as a bull, that is why there is a tremendous demand for labor.”

Hopefully, this is a short-term phenomenon, related to the rise of the Delta variant. Unfortunately, COVID may be permanently harming the work ethic for a portion of the population. 

The Bremer Bank Saga

Banking is often boring, but there is nothing boring about the battle surrounding the future of $15 billion Bremer Bank, Minnesota’s fourth largest bank. After failing to sell the bank in 2019, the ownership of the bank is locked in a dispute with the management of the bank as well as its board of directors. All of the dirty laundry is now being aired during a trial in which the state Attorney General is trying to remove the three trustees who control the Otto Bremer Trust, which owns the bank.

The future of Bremer Financial Corp., which operates Minnesota's fourth-largest bank, and the charitable trust that owns it is on trial this week in St. Paul.

The state Attorney General's Office will face off against the Otto Bremer Trust, which owns the bank in an arrangement unlike anything else in the U.S. banking industry.

State attorneys will try to convince a judge that the three Bremer trustees who tried to sell the bank two years ago should be removed because of alleged mismanagement and self-dealing.

Bremer is the only bank in the US owned by a charitable trust. The Trust owns 90% of Bremer Financial, the bank holding company, but it only controls about 20% of the voting shares of the company. The Trust is run by three trustees, all of which used to be on the board of Bremer Financial, but the other directors removed the remaining two trustees from the board earlier this year.

The fight began two years ago when Bremer Financial explored a sale. In 2019 bank executives held merger talks with Great Western Bank, but the trustees objected to the deal.

But trustees of Otto Bremer Trust, which held a 92% stake in the bank at the time, objected to the deal structure, one trustee, Brian Lipschultz, said at the hearing.

"It was an existential question of the trustees," Lipschultz said. He added, "We had an absolute crisis on our hands."

The trustees feared that the trust's stake in the ongoing company, at around 45%, might constrain its annual dividend so much that it wouldn't be able to meet federal distribution requirements for a charitable trust.

After the Great Western deal failed to materialize, the Trustees wanted to sell the bank against the wishes of the bank’s board, and they hired their own investment banker. The Trustees then talked to a number of banks, including Huntington & BMO, but they appeared to walk when they realized they were stepping into a potential hostile takeover. And then it got even uglier.       

Their split with the bank's board spilled into the open in October 2019 and they sold some shares to hedge funds in hopes of taking control of the board. The bank then sued the trust and last year the Minnesota Attorney General's office, which reviews the operations of large charities, joined the legal battle.

The three trustees booted their executive director 7 years ago, promoted themselves to co-CEOs, and began paying themselves half a million salaries. Late last year, a judge allowed them to keep their jobs, but cut their salaries and placed additional curbs on their power. Ultimately, the current trial will determine whether the trustees were acting in the best interests of the trust. 

The BAN Report: Who Blinks on Vaccine Mandates? / Hotel Recovery Rates / Foreclosure Actions Rise / How United Navigated COVID / The 5MM Chicago Hotel Relationship

Who Blinks on Vaccine Mandates?

While details have not yet been released by the Biden Administration on the proposed vaccination-or-testing rule covering all companies with 100 or more workers, it is creating a standoff between employees and employers, at the very time that there is a labor shortage. Federal contractors will need to enforce mandatory vaccination by December 8. Southwest Airlines, facing strong resistance from their employees, backed off a plan to place unvaccinated employees on unpaid leave.

Southwest Airlines has scrapped a plan to put unvaccinated employees who have applied for but haven’t received a religious or medical exemption on unpaid leave as of a federal deadline in December.

Southwest Airlines and American Airlines are among the carriers that are federal contractors and subject to a Biden administration requirement that their employees are vaccinated against Covid-19 by Dec. 8 unless they are exempt for medical or religious reasons.

Rules for federal contractors are stricter than those expected from the Biden administration for large companies, which will allow for regular Covid testing as an alternative to a vaccination.

Executives at both carriers in recent days have tried to reassure employees about job security under the mandate, urging them to apply for exemptions if they can’t get vaccinated for a medical reason or for a sincerely held religious belief. The airlines are expected to face more questions about the mandate when they report quarterly results Thursday morning. Pilots’ labor unions have sought to block the mandates or sought alternatives such as regular testing.

Southwest’s senior vice president of operations and hospitality, Steve Goldberg, and Julie Weber, vice president and chief people officer, wrote to staff on Friday that if employees’ requests for an exemption haven’t been approved by Dec. 8, they could continue to work while following mask and distancing guidelines until the request has been reviewed.

The Allied Pilots Association, which represents American’s roughly 14,000 pilots, wrote to the White House and several key lawmakers on Sept. 24, urging an alternative to the mandate such as regular testing, warning the mandate “could result in labor shortages and create serious operational problems for American Airlines and its peers.”

Hundreds of Southwest employees, customers and other protesters demonstrated Monday against the vaccine mandate outside Southwest Airlines’ headquarters in Dallas, The Dallas Morning News reported.

About 1/3 of the Chicago police department has missed the deadline to report vaccination status to the city.

CPD Superintendent David Brown said less than two dozen officers have been sent home without pay for refusing. He also said the number of officers in compliance has gone up a percentage point again to more than 68% Wednesday.

Officers who have not complied with the mandate by either refusing to upload vaccine status to the city's online portal or who have not gotten vaccinated and won't submit to testing are being taken off the streets and put on no-pay status, as the mandate requires.

Since the vaccine mandates were announced in early September, the percentage of Americans who are fully vaccinated has increased from 54% to 58%, but there is still a strong group of workers who will not get vaccinated.    If the government holds firm on these mandates, what happens to the labor market this holiday season? Labor and supply chain issues could get much worse, unless a bunch of workers change their stance and get vaccinated.

Hotel Recovery Rates

According to research from Trepp, which tracks the performance of CMBS loans, hotel recovery rates since March 2020 have performed better than prior periods. In other words, liquidated hotel loans are recovering more than they did pre-COVID.

The loss numbers from 2010 to 2019 are staggering, with an average realized loss of 50.1% (slightly higher for limited-service hotels, slightly lower for full-service hotels.) The data set includes more than 700 CMBS loans with a balance of more than $9 billion (excluding single-asset, single-borrower (SASB) and large portfolio loans).

Why are the numbers for that time period so high? Several reasons.

First, many of the loans that suffered losses were originated from 2006 to 2008, meaning the loans were made during a period of inflated values and high leverage. Some of these loans were resolved in 2010 to 2012 when liquidity was limited, an explosive combination when it came to driving up realized losses. In addition, because liquidity was in short supply (and for other reasons) the time between loan default and loan resolution often spanned many years which led to large accumulations of servicer advances, fees, and (frequently) deferred maintenance to the collateral. This also helped drive up realized loss percentages.

Thus far, loss severities in the COVID-19-era have been much smaller. In fact, realized losses have averaged less than half of those from 2010 to 2019. (For this data set, Trepp looked for loans that were resolved with losses after March 2020. We excluded loans that were either delinquent or with the special servicer before March 2020 and we, again, excluded SASB and large portfolio loans.)

On average, hotels resolved since March 2020 are showing a loss of 23.6% of the outstanding balance, which. While the hit can still be painful, this reflects the strong efficiency of the distressed debt market, and the continued availability of financing for turnaround properties.

Foreclosure Actions Rise

As stimulus programs wear off, foreclosure actions are increasing for mortgage lenders.

Mortgage lenders began the foreclosure process on 25,209 properties in the third quarter, a 32% increase from the second quarter. On a year-over-year basis, it’s a 67% increase from the third quarter of 2020, according to ATTOM, a mortgage data firm.

While the increases in foreclosures are dramatic, they are coming off extreme lows that were created by the forbearance programs. New foreclosures, also known as starts, usually number around 40,000 per month. They fell to as low as 3,000 to 4,000 in the first year of the pandemic, when forbearance programs were in full force.

Government and private-sector relief programs allowed borrowers with financial difficulties to delay their monthly payments for up to 18 months. The missed payments could then be tacked on to the end of the loan period or repaid when the home was sold or the mortgage refinanced.

States with the largest number of new foreclosures were:

  • California: 3,434

  • Texas: 2,827

  • Florida: 2,546

  • New York: 1,363

  • Illinois: 1,362

“Despite the increased level of foreclosure activity in September, we’re still far below historically normal numbers,” said Rick Sharga, executive vice president at RealtyTrac, an ATTOM company.

September foreclosure actions were almost 70% lower than they were pre-pandemic. Total foreclosure activity is also still 60% lower than it was a year ago.

“Whether the increase is a prelude to a more serious problem, or just a return to normal levels of foreclosure is one of the bigger debates going on inside the industry right now,” said Sharga.

Due to the strong performance in the housing market, we expect many of these foreclosure filings to end without a foreclosure sale, as borrowers are more likely to come up with better solutions. But we do expect these numbers to grow well into next year as lenders start losing patience with distressed borrowers.

How United Navigated COVID

The WSJ had a great article on how United Airlines navigated COVID-19, ultimately deciding to

Cut costs and flights quicker than its competition did.

Even as United was preparing for a long travel drought, Mr. Kirby, who became United’s CEO in May 2020, was thinking about how to return to the ambitious growth plans he had begun to put in place before the pandemic. In calls that month, United executives debated the airline’s budget for the next year, say Mr. Kirby and other United executives.

The most basic questions—such as how much to fly in 2021—were impossible to answer, they say, without making wild guesses about the pandemic’s course. That could lock in bad assumptions and set United up for whiplash if its predictions didn’t come true.

The executives eventually gave up. There would be no budget. “We couldn’t make that work,” says United Chief Commercial Officer Andrew Nocella. Instead of having one plan, the airline would need to plan for many scenarios. “We need a plan where we can bounce back and do it really quickly,” he says. “But we also need to plan that if we’re going to be small for a long time we need to variablize our costs.”

United executives in the summer of 2020 assembled the “bounceback team” representing the airline’s operations, network planning, finance, labor relations, IT, safety and several other divisions, say United executives involved in the effort.

For each scenario it considered, the group created a ramp-up schedule, quizzing operational units about how many people they would have to hire and whether they had resources needed. Capt. Curtis Brunjes, who oversees United’s work recruiting pilots and who worked with the team, says, “We were looking for the blind spots.”

The group talked airports into speeding up security-badge processing to reduce the time needed to bring aboard new and returning employees. Realizing it would take upward of six months to get flight instructors in place, some of the people involved in the bounceback team appealed to COO Jon Roitman for permission to start hiring even at the depths of Covid in the summer of 2020. They set up infrastructure for training—virtual or in-person—for employees who would return from leaves and need iPads, computers and desk space.

They created a dashboard to monitor suppliers’ financial health to make sure the suppliers could keep up with United no matter how quickly traffic returned. Pivoting from weekly town halls with rank-and-file pilots worried about downsizing to meetings about the details of eventual growth was “almost surreal,” Mr. Brunjes says.

United needed to become a just-in-time organization in the Covid era, as did other airlines, responding on the spot to demand fluctuations. It reoriented business-heavy hubs like Dulles airport near Washington, D.C., into leisure-travel conduits, adding destinations so travelers from Northern cities could pass through that airport to the Caribbean and Florida.

United’s decision to forgo big plans and just react to events as they unfold reminds me of the Mike Tyson quote. Tyson said, “Everyone has a plan until they get punched in the mouth.”   Time will tell if United got it right, but their approach was interesting and worthy of further analysis.

The 5MM Chicago Hotel Relationship

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

  • A total outstanding balance of $5,334,237 comprised of two loans to one borrower

  • The loans are secured by first mortgages on a single hotel located in suburban Chicago

  • The subject property is a full-service hotel with 93 rooms and operating under a franchise agreement with Marriott

  • The loans are performing under a forbearance agreement that expires in early 2022

  • All loans have personal guarantees


  • Sale announcement: Thursday October 21, 2021

  • Due diligence materials available online: Monday October 25, 2021

  • Indicative Bid Date: Thursday November 11, 2021

  • Closing Date: Tuesday November 23, 2021

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

The BAN Report: The 140MM Buckeye Hotel Portfolio / Falling COVID Cases Vs. Business Mandates / Small Banks Show Loan Growth / The Electric Car Disruption / Chick-Fil-A's Unique Franchise Model

The 140MM Buckeye Hotel Portfolio

Clark Street Capital's Bank Asset Network ("BAN") proudly presents: "The 140MM Buckeye Hotel Portfolio." This exclusively offered portfolio is offered for sale by one institution ("Seller"). Highlights Include:

  • A total outstanding balance of $135,716,048 comprised of thirteen loans and nine relationships

  • The loans are secured by first mortgages on fifteen hotels located in Ohio (77%) and Indiana (23%)

  • The properties have a weighted average age of 9 years with 79% constructed since 2013

  • The weighted average LTV of the entire portfolio is 73.62%

  • All loans are performing without any current modifications, except for a single relationship in bankruptcy

  • 98% of the properties are major hotel franchises (Hilton, Marriott, Choice, IHG)

  • All loans include personal guarantees

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, 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 28, 2021

  • Due diligence materials available online: Monday, November 1, 2021

  • Indicative bid date: Monday, November 22, 2021

  • Closing date: Tuesday, December 14, 2021

Bids will be entertained on individual assets, a combination of assets, or the entire portfolio. 

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

Falling COVID Cases Vs Business Mandates

After spiking this summer, COVID cases are in full retreat with the number of new daily cases plunging.

The number of new daily Covid-19 cases has plunged 57 percent since peaking on Sept. 1. Almost as encouraging as the magnitude of the decline is its breadth: Cases have been declining in every region.

Forecasting Covid’s future is extremely difficult, as we all should know by now, and it’s certainly possible that cases will rise again in the coming weeks. But the geographic breadth of the decline does offer reason for optimism.

Past Covid increases have generally started in one part of the country — like the South this past summer or the New York region in early 2020 — and then gone national. Today, there is no regional surge that seems to have the makings of a nationwide surge.

Yes, there are some local hot spots, as has almost always been the case since the pandemic began. Several of the hot spots are in northern parts of the country, like Alaska, Idaho, Montana, North Dakota and a few counties near the Canadian border in New Hampshire and Vermont. This pattern has led to some speculation that the onset of cold weather is causing the increases by moving more activity indoors — and that the entire country will soon experience a rise in caseloads.

That does not seem to be the most likely scenario, however. In most colder regions, including both Canada and the densely populated parts of the northern U.S., cases are still falling. The biggest problem for Alaska and the Mountain West is probably not the weather; it’s the vaccine skepticism. Idaho is the nation’s least vaccinated state, and several other Western states are only slightly ahead of it.

While increased vaccination is helping to bring the case level down, we brought up the challenge of federal vaccine mandates, especially during this holiday season. Apparently, business groups read the BAN Report!   

Worried that President Joe Biden’s Covid vaccine mandate for private companies could cause a mass exodus of employees, business groups are pleading with the White House to delay the rule until after the holiday season.

White House officials at the Office of Management and Budget held dozens of meetings with labor unions, industry lobbyists and private individuals last week as the administration conducts its final review of the mandate, which will require businesses with 100 or more employees to ensure they are vaccinated against Covid or tested weekly for the virus. It is estimated to cover roughly two-thirds of the private sector workforce.

OMB officials have several meetings lined up Monday and Tuesday with groups representing dentists, trucking companies, staffing companies and realtors, among others.

The American Trucking Associations, which will meet with the OMB on Tuesday, warned the administration last week that many drivers will likely quit rather than get vaccinated, further disrupting the national supply chain at time when the industry is already short 80,000 drivers.

The trucking association estimates companies covered by the mandate could lose 37% of drivers through retirements, resignations and workers switching to smaller companies not covered by the requirements.

According to research this week from the Kaiser Family Foundation, 5% of unvaccinated adults have let a job due to a vaccine mandate. While we believe the vaccines are our best hope to manage COVID and inducements to get vaccinated will help, firing productive employees who won’t get vaccinated creates massive unintended consequences.    

Small Banks Show Loan Growth

As more banks report their earnings, it appears that loan growth is turning the corner.

For banks with under $10 billion of assets, second quarter commercial and industrial loans were down 13.7% from a year earlier and down 10.1% from the prior quarter, according to Federal Deposit Insurance Corp. data.

National Bank Holdings in Denver, for one, said it generated record quarterly loan originations of $413 million in the third quarter, led by commercial loans of $302 million and fueled by demand across a footprint that spans Colorado and four neighboring western states.

The $7.1 billion-asset bank said total loans ended the quarter at $4.4 billion, up $121 million over the prior quarter after loan paydowns and payoffs. Excluding Paycheck Protection Program loans, which are rolling off banks’ books in the second half of this year, total loans increased $174 million, or 16.5% annualized.

For banks with under $10 billion of assets, second quarter commercial and industrial loans were down 13.7% from a year earlier and down 10.1% from the prior quarter, according to Federal Deposit Insurance Corp. data.

National Bank Holdings in Denver, for one, said it generated record quarterly loan originations of $413 million in the third quarter, led by commercial loans of $302 million and fueled by demand across a footprint that spans Colorado and four neighboring western states.

The $7.1 billion-asset bank said total loans ended the quarter at $4.4 billion, up $121 million over the prior quarter after loan paydowns and payoffs. Excluding Paycheck Protection Program loans, which are rolling off banks’ books in the second half of this year, total loans increased $174 million, or 16.5% annualized.

Since smaller banks did a disproportionate share of PPP loans, the headwind of PPP run-off has made it more difficult to grow loans in 2021, as the vast majority of PPP loans will be forgiven by the end of the year. Next month, when the FDIC Quarterly Banking Profile is released, we will see how banks in aggregate did in growing loan portfolios, but the earnings so far show growth rather than contraction.

The Electric Car Disruption

Hertz announced this week that it was purchasing 100,000 Tesla's in a plan to electrify its rental-car fleet – the single-largest purchase ever for electric vehicles. By allowing consumers and business to rent electrical cars, many renters could become owners themselves. While Tesla’s market tap topped $1 trillion on the news, the electric vehicle market is expected to get a lot more competitive.

Americans aren’t buying electric vehicles, they’re buying Teslas.

That’s been a relatively true statement for U.S. consumers in recent years, with Tesla accounting for the majority of EVs sold, including 79% in 2020, according to IHS Markit. But that’s starting to change as so-called traditional automakers and start-ups invest billions in a slew of new electric vehicles to compete against Tesla.

The influx of EVs — from a couple dozen today to estimates of hundreds of new models by 2025 — are expected to eat away at Tesla’s market share in the coming years. The new EVs are planned as larger automakers, such as General Motors and Volkswagen, transition to build electric vehicles almost exclusively over the next decade or so.

Tesla’s market share of all-electric vehicles this year is already expected to drop to 56% in 2021, as new vehicles such as the Ford Mustang Mach-E and Volkswagen ID.4 have been introduced, IHS Markit said.

The research and forecasting company expects Tesla’s U.S. market share of all-electric vehicles to be 20% in 2025, which also is when LMC Automotive expects General Motors to surpass Tesla as the country’s largest EV seller.

The EV revolution though will have collateral damage to the traditional auto industry, including suppliers and body and service shops.

Making, selling and servicing vehicles employ an estimated 4.7 million people in the U.S., according to the Bureau of Labor Statistics. Some of the jobs won’t go away, of course — there will still be a need for dealerships and tire shops.

Making the massive batteries that line the bottom of electric cars promises to employ thousands. But where a conventional car’s engine and transmission have hundreds of parts, some electric-vehicle powertrains have as few as 17, according to the Congressional Research Service. That doesn’t take into account the radiators, fuel tanks or exhaust systems that electric vehicles don’t need. Once operating, an electric car has no spark plugs or oil that need changing or mufflers that wear out. And with so few moving parts, service stations could be relegated to changing tires and windshield wipers.

Conventional cars will probably remain on the road for years, softening the blow for repair shops and other affiliated industries. But with an average lifespan of 12 years, the trend lines for gasoline-powered vehicles will be heading down.

The shift will reduce demand for oil nearly by 4.7 million barrels a day by 2040 in the U.S. alone, according to projections by BloombergNEF. That’s about 26% of U.S. consumption, roughly equivalent to the amount that Germany and Brazil combined consumed daily in 2020. Less gasoline being sold also means the need for ethanol, which is blended into motor fuels and consumes a third of the U.S. corn crop, will also fall.

At this point, electric vehicles only account for 2.2% of the global vehicle market share, so the transition will happen over years and perhaps decade, but it will be highly disruptive.  

Chick-Fil-A’s Unique Franchise Model

The Wall Street Journal had a great video feature on how Chick-Fil-A’s franchise model differs from its competitors. This model appears to be working well, as the average Chick-fil-A restaurant generates more revenue than any other chain, and its really not even close, which is remarkable given the  competitiveness of the fast food industry.

A key part of their success is they are not interested in franchisees with multiple locations. As they say on their website, “Being a Chick-fil-A Franchisee is a life investment.”

Franchising is not an opportunity for passive financial investment, working from the sidelines, or adding to a portfolio of business ventures. This business opportunity is a hands-on, life investment to own and operate a quick-service restaurant. It often requires long hours and leading a team of mostly young, hourly-paid employees. It’s hard work – but it’s exceedingly rewarding. 

Out of approximately 8,000 applications, they only add 130 new operators a year, which is more selective than getting into virtually any Ivy League University. They want hands-on operators that will focus on a single location. These operators only need to invest $10K to become an operator, versus 7-figures to open a McDonalds store, for example.  

Because Chick-fil-A is private and intends to stay that way, its success is less heralded but anyone in business could adopt some of their best practices.

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