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F.N.B. eyes Philadelphia, Atlanta for commercial lending expansion

Pittsburgh-based bank did two acquisitions in 2022 but says the present environment is challenging......»»

Category: topSource: bizjournalsJan 24th, 2023

F.N.B. eyes Atlanta for commercial lending expansion

The Pittsburgh-based bank did two acquisitions in 2022 but says the present environment is challenging......»»

Category: topSource: bizjournalsJan 24th, 2023

Macleod: Gold In 2023

Macleod: Gold In 2023 Authored by Alasdair Macleod via GoldMoney.com, This article is in two parts. In Part 1 it looks at how prospects for gold should be viewed from a monetary and economic perspective, pointing out that it is gold whose purchasing power is stable, and that of fiat currencies which is not. Consequently, analysts who see gold as an investment producing a return in national currencies have made a fundamental error which will not be repeated in this article. Part 2 covers geopolitical issues, including the failure of US policies to contain Russia and China, and the consequences for the dollar. By analysing recent developments, including how Russia has secured its own currency, the Gulf Cooperation Council’s political migration from a fossil fuel denying western alliance to a rapidly industrialising Asia, and China’s plans to replace the petrodollar with a petro-yuan crystalising, we can see that the dollar’s hegemonic role will rapidly become redundant. With about $30 trillion tied up in dollars and dollar-denominated financial assets, foreigners are bound to become substantial sellers - even panicking at times. The implications are very far reaching. This article limits its scope to big picture developments in prospect for 2023 but can be regarded as a basis for further debate. Part 1 — The monetary perspective Whether to forecast values for gold or fiat currencies This is the time of year when precious metal analysts review the year past and make predictions for the year ahead. Their common approach is of investment analysis — overwhelmingly their readership is of investors seeking to make profits in their base currencies. But this approach misleads everyone, analysts included, into thinking that precious metals, particularly gold, is an investment when it is in fact money. Most of these analysts have been educated to think gold is not money by schools and universities which have curriculums which promote macroeconomics, particularly Keynesianism. If their studies had not been corrupted in this way and they had been taught the legal distinction between money and credit instead, perhaps their approach to analysing gold would have been different. But as it is, these analysts now think that cash notes issued by a central bank is money when very clearly it has counterparty risk, minimal though that usually is, and it is accounted for on a central bank balance sheet as a liability. Under any definition, these are the characteristics of credit and matching debt obligations. Nor do the macroeconomists have an explanation for why it is that central banks continue to hoard massive quantities of gold bullion in their reserves. Furthermore, some governments even accumulate gold bullion in other accounts in addition to their central banks’ official reserves. The wisdom of central banks and Asian governments to this approach was illustrated this year when the western alliance led by America emasculated the Russian central bank of its currency reserves with little more than the stroke of a pen. This is the other side of proof that the legal distinction between money and credit remains, despite any statist attempts to redefine their currency as money. That it can be reneged upon further confirms its credit status. We must therefore amend our approach to analysing gold and its bed-fellow, silver. Other precious metals have never been money, so are not part of this analysis. Silver was dropped as an official monetary standard long ago, so we can focus on gold. With respect to valuing gold, the empirical evidence is clear. Over decades, centuries, and even millennia its purchasing power measured by commodities and goods on average has varied remarkably little. But we don’t need to go back centuries: an illustration of energy prices since the dollar was on a gold standard, in this case of crude oil, makes the point for us. The first point to note is that between 1950—1971, the price of oil in dollars was remarkably stable with almost no variation. Pricing agreements stuck. It was also the time of the Bretton Woods agreement, which was suspended in 1971. Bretton Woods tied the dollar credibly to gold, until the expansion of dollar credit became too great for the agreement to bear. The link was then broken, and the price of oil in dollars began to rise. Priced in US dollars, not only has the price of crude been incredibly volatile but before the Lehman crisis by June 2008 it had increased fifty-four times. Measured in gold it had merely doubled. Therefore, macroeconomists have a case to answer about the suitability of their dollar currency replacement for gold in its role as a stable medium of exchange.  The next chart shows four commodity groups, consolidating a significant number of individual non-seasonal commodities, priced in gold. Over the last thirty years, the average price of these commodities has fallen a net 20%, with considerably less volatility than priced in any fiat currency. Whichever way we look at the relationships between commodities and mediums of exchange, the evidence is always the same: price volatility is overwhelmingly in the fiat currencies. The only possible conclusions we can draw from the evidence is that detached from gold, fiat currencies as money substitutes are not fit for purpose. Our next chart shows how the four major fiat currencies have performed priced in gold since the permanent suspension of the Bretton Woods agreement in 1971. Since 1970, the US dollar, which establishment economists accept as the de facto replacement for gold, has lost 98% of its purchasing power priced in gold which we have established as still fulfilling the functions of sound money by pricing commodities with minimal variation. The other three major currencies’ performance has been similarly abysmal. Analysts analysing the prospects for gold invariably assume, against the evidence, that price variations emanate from gold, and not the currencies detached from legal money. There is little point in following this convention when we know that priced in legal money commodities and therefore the wholesale values of manufactured goods can be expected to change little. The correct approach can only be to examine the outlook for fiat currencies themselves, and that is what I shall do, starting with the US dollar. 2023 is likely to make or break the US dollar Outlook for dollar credit We know that the commercial banking system is highly leveraged, measured by the ratio of balance sheet assets to shareholders’ equity, typical of conditions at the top of the bank credit cycle. While interest rates were firmly anchored to the zero bound, lending margins became compressed, and increasing balance sheet leverage was the means by which a bank could maintain profits at the bottom line. Now that interest rates are rising, the bankers’ collective attitude to bank credit levels has altered fundamentally. They are increasingly aware of risk exposure, both in financial and non-financial sector lending. Already, losses in financial markets are accumulating both for their customers and for banks themselves, where they have bond exposure on their balance sheets. Consequently, they have begun to modify their business models to reduce their exposure to falling asset values in bond, equity, and derivative markets. Furthermore, while US banks appear less leveraged than, say, the Eurozone and Japanese banking systems, paring down bank equity to remove intangibles and other elements to arrive at a Tier 1 capital definition severely restricts an American bank’s ability to maintain its balance sheet size. There are two ways a bank can comply with Basel 3 Tier 1 regulations: either by increasing shareholders’ capital or de-risking their balance sheets. With most large US banks capitalised in the markets at near their book value, issuing more stock is too dilutive, so there is increased pressure to reduce lending risk. This is set by the net stable funding ratio (NSFR) introduced in Basel 3, which is the ratio of available stable funding (ASF) to required stable funding (RSF). The application of ASF rules is designed to ensure the stability of a bank’s sources of credit (i.e., the deposit side of the balance sheet). It applies a 50% haircut to large, corporate depositors, whereas retail deposits being deemed a more stable source of funding, only suffer a 5% haircut. This explains why Goldman Sachs and JPMorgan Chase have set up retail banking arms and have turned away large deposits which have ended up at the Fed through its reverse repo facility. The RSF applies to a bank’s assets, setting the level of ASF apportionment required. To de-risk its balance sheet, a commercial bank must avoid exposure to loan commitments of more than six months, deposits with other financial institutions, loans to non-financial corporates, and loans to retail and small business customers. Physically traded commodities, including gold, are also penalised, as are derivative exposures which are not specifically offset by another derivative. The consequences of Basel 3 NSFR rules are likely to see commercial banking move progressively into a riskless stasis, rather than attempt the reduction in balance sheet size which would require deposit contraction. While individual banks can reduce their deposit liabilities by encouraging them to shift to other banks, system-wide balance sheet contraction requires a net reduction of deposit balances and similar liabilities across the entire banking network. Other than the very limited ability to write off deposit balances against associated non-performing loans, the creation process of deposits which are always the counterpart of bank loans in origin is impossible to reverse unless banks actually fail. For this reason, system-wide non-performing loans can only be written off against bank equity, stripped of goodwill and other items regarded as the property of shareholders, such as unpaid tax credits. For this reason, US money supply (a misnomer if ever there was one, being only credit — but we must not be distracted) has stopped increasing.  Short of individual banks failing, a reduction in system-wide deposits is therefore difficult to imagine, but banks have been turning away large deposit balances. These have been taken up instead by the Fed extending reverse repurchase agreements to non-banking institutions. In a reverse repo, the Fed takes in deposits removing them from public circulation. More to the point, they remove them from the commercial banking system, which is penalised by holding large deposits.  The level of reverse repos at the Fed started to increase along with the coincidence of the introduction of Basel 3 regulations and a new rising interest rate trend. In other words, commercial banks began to reject large deposit balances under Basel 3 NSFR rules as a new set of risks began to materialise. Today, reverse repos stand at over $2.2 trillion, amounting to about 10% of M2 money supply. Further rises in interest rates seem bound to undermine financial asset values further, encouraging banks to sell or reclassify any that they have on their balance sheets. According to the Federal Deposit Insurance Commission, in the last year securities available for sale totalling $3.186 trillion have fallen by $750bn while securities held to maturity at amortised cost have risen by $720bn. This sort of window dressing allows banks to avoid recording losses on their bond positions.  This treatment cannot apply to collateral liquidation against financial and non-financial loans. In the non-financial sector, many borrowers will have taken declining and very low interest rates for granted, encouraging them to enter into unproductive borrowing. The continuing survival of uneconomic businesses, which should go to the wall, has been facilitated. By putting a cap on banking activities the Basel 3 regulatory regime appears to starve both the financial and non-financial economy of bank credit. In any event, the relationships between shareholeders’ equity and total assets has become very streached. Even without bank failures the maintenance of credit supply will now fall increasingly on the shoulders of the Fed, either by abandoning quantitative tightening and reverting to quantitative easing, or by the inflationary funding of growing government deficits. But the Fed already has substantial undeclared losses on its assets acquired through QE, estimated by the Fed itself to have amounted to $1.1 trillion at end-September. Not only is the US Government sinking into a debt trap requiring ever-increasing borrowing while interest rates rise, but the Fed is also in a debt trap of its own making. We have now established the reasons why broad money supply is no longer growing. Furthermore, commercial banks are thinly capitalised, and therefore some of them are at risk of insolvency under Tier 1 regulations, which strip out goodwill and other intangibles from shareholders’ capital. Working off the FDIC’s banking statistics for the entire US banking system at end-2022Q3, these factors reduce the US banking system’s true Tier 1 capital from $2,163bn to only $1,369bn, on a total balance sheet of $23,631bn. Shifting on-balance sheet debt from mark-to-market to holding to redemption conceals losses on a further $720bn.  Furthermore, with counterparty risks from highly leveraged banking systems in the Eurozone and Japan where asset to equity ratios average more than twenty times, systemic risk for the large American banks is an additional threat to their survival. The ability of the Fed to ensure that no major bank fails is hampered by its own financial credibility. And given that the only possible escape route from a crisis of bank lending and the US Government’s and the Fed’s debt traps is accelerating monetary inflation, foreign holders of dollars and dollar-denomicated assets are under pressure to turn sellers of dollars. The euro system faces its own problems The euro system’s exposure to bond losses (collectively the ECB and national central banks) are worse proportionately than those of America’s Fed, with the euro system’s balance sheet totalling 58% of the Eurozone’s GDP (versus the Fed’s at 37%). The yield on the German 10-year bond is now higher than at its former peak in October, leading the way to further Eurozone bond losses at a time when Eurozone governments are increasing their funding requirements. While Germany and the Netherlands are rated AAA and should not have much difficulty funding their deficits, the problem with the Club Med nations will become acute.  With the ECB belatedly turning hawkish on interest rates, a funding crisis seems certain to hit Italy in particular, repeating the Greek crisis of 2010 but on a far larger scale. Furthermore, in the face of falling prices Japanese investment which had supported French bond prices in particular is now being liquidated. The Eurozone’s global systemically important banks (G-SIBs) are highly leveraged, with average asset to equity ratios of 20.1. Rising interest rates are more of a threat to their existence than to the equivalent US banks, with a bloated repo market ensuring systemic risk is fatally entwined between the banks and the euro system itself. The Club Med national central banks have accepted dubious quality collateral against repos, which will have a heightened default risk as interest rates rise further. It should be borne in mind that the ECB under Mario Draghi and Christine Lagarde exploited low and negative rates to fund member states’ national debt without the apparent consequences of rising price inflation. This has now changed, with international holders of euros on inflation-watch. It is probably why Lagarde has turned hawkish, attempting to reassure international currency and debt markets. But does a leopard really change its spots?  A combined banking and funding crisis brought forward by a rising interest rate trend is emerging as a greater short-term threat to the euro system and the euro itself than runaway inflation. The importance of the latter is downplayed by official denial of a link between inflation of credit and rising prices. Instead, in common with other central banks, the ECB recognises that rising prices are a problem, but not of its own making. Russia is seen to be the culprit, forcing up energy prices. In response, along with other members of the western alliance the EU has capped Russian oil at $60. This is meaningless, but for the ECB it allows the narrative of transient inflation to be sustained. The euro system hopes that the dichotomy between Eurozone CPI inflation of 10.1% while the ECB’s deposit rate currently held at 2% can with relatively minor interest rate increases be ignored. This amounts to a policy based on hope rather than reality. It also assumes central banks will maintain control over financial markets, a policy united with the other central banks governing the finances of the entire western alliance. But foreign exchange markets are slipping out of their control, because in terms of humanity, the western alliance covers about 1.2 billion souls, with the rest of the world’s estimated 8 billion increasingly disenchanted with the alliance’s hegemony. Part 2 — Geopolitical factors The foreign exchange influence on currency values A currency’s debasement and the adjustment to its purchasing power is realised in two arenas. First and foremost, economists tend to concentrate on the effects on prices in a domestic economy. But almost always, the first realisation of the consequences of debasement is by foreign investors and holders of the currency.  According to the US Treasury TIC system, in September foreigners had dollar bank deposits and short-term securities holdings amounting to $7.422 trillion and a further $23.15 trillion of US long-term securities for a combined total of $30.6 trillion. To this enormous figure can be added Eurodollar balances and bonds outside the US monetary system, and additionally foreign interests in non-financial assets. These dollar obligations to foreign holders are the consequence of two forces. The first is that the dollar is the world’s reserve currency and dollar liquidity is required for global trade. The second is that declining interest rates over the last forty years have encouraged the retention of dollar assets due to rising asset values. Now that there is a new rising trend of interest rates, the portfolio effect is going into reverse. Since October 2021, foreign official holdings of long-term securities (including US Treasuries) have declined by $767bn, and private sector holdings by $3,080bn. Much of this is due to declining portfolio valuations, which is why the dollar’s trade weighted index has not fully reflected this decline. Nevertheless, the trend is clear. By weaponizing the dollar, the US Government chose the worst possible timing in the context of a financial war against Russia. By removing all value form Russia’s foreign currency reserves, a signal was sent to all other nations that their foreign reserves might be equally rendered valueless unless they toe the American line. Together with sanctions, the intention was to cripple Russia’s economy. These moves failed completely, a predictable outcome as any informed historian of trade conflicts would have been aware. Instead, currency sanctions have handed power to Russia, because together with China and through the memberships of the Shanghai Cooperation Organisation, the Eurasian Economic Union, and BRICS, effectively comprising nations aligning themselves against American hegemony, Russia has enormous influence. This was demonstrated last June when Putin spoke at the 2022 St Petersburg International Economic Forum. It was attended by 14,000 people from 130 countries, including heads of state and government. Eighty-one countries sent official delegations. The introductory text of Putin’s speech is excerpted below, and it is worth reflecting on his words.  It amounts to an encouragement for all attending governments to dump dollars and euros, repatriate gold held in financial centres controlled or influenced by partners in the American-led western alliance, and favour reserve policies angled towards commodities and commodity related currencies. More than that, it amounts to a declaration of financial conflict. It tells us that Russia’s response to currency and commodity sanctions is no longer reactive but has turned aggressive, with an objective to deliberately undermine the alliance’s currencies. Being cut off from them, Russia cannot take direct action. The attack on the dollar and the other alliance currencies is being prosecuted by the supra-national organisations through which Russia and China wield their influence. And Russia has protected the rouble from a currency war by linking it to an oil price which it controls. And as we have seen in the discussion of the relationship between oil prices and gold in Part 1 above, the rouble is effectively tied more to gold than to the global fiat currency system. Other than looking at the dollar overhang from US Treasury’s TIC statistics, we can judge the forces aligning behind the western alliance and the Russia-China axis in terms of population. Together, the western alliance including the five-eyes security partners, Europe, Japan, and South Korea total 1.2 billion people who by turning their backs on fossil fuels are condemning themselves to de-industrialising. Conversely, the Russia-China axis through the SCO, EAEU, and BRICS directly incorporates about 3.8 billions whose economies are rapidly industrialising. Furthermore, the other 3 billions, mainly on the East Asian fringes, Africa and South America while being broadly neutral are economically dependent to varying degrees on the Russia-China axis. In terms of trade and finance, the geopolitical tectonic plates have shifted more than is officially realised in the western alliance. Led by America, it is fighting to retain its hegemony on assumptions that might have been valid twenty years ago. But in recent months, we have even seen Saudi Arabia turn its back on America and the petrodollar, along with the entire Middle East. Admittedly, part of the reason for the ending of the petrodollar, which has sustained the dollar’s hegemony since 1973, must be the western alliance’s policies on fossil fuels, set to cut Saudi Arabia off from Western markets entirely in the next few decades. Contrast that with China, happy to sign a gas supply agreement with Qatar for the next 27 years, and the welcome Mohammed bin Salman, Saudi Arabia’s de facto leader gave to President Xi earlier this month. In return for guaranteed oil supplies, China will recycle substantial sums into Saudi Arabia and the Gulf region, linking it into the Silk Roads, and a booming pan-Asian economy. The Saudis are turning their backs not only on oil trade with the western alliance but on their currencies as well. There is no clearer example of Putin’s influence, as declared at the St Petersburg Forum in June. Instead, they will accumulate trade balances with China in yuan and bring business to the International Shanghai Gold Exchange, even accumulating bullion for at least some of its net trade surplus. The alignment of the Saudis and the Gulf Cooperation Council behind the Russia-China axis gives Putin greater control over global energy prices. With reasonably consistent global demand and cooperation from his partners, he can more or less set the oil price as he desires. Any response from the western alliance could even lead to a blockade of the Straits of Hormuz, and/or the entrance to the Red Sea, courtesy of Iran and the Yemeni Houthis.  He who controls the oil price controls the purchasing power of the dollar. The weapons at Putin’s disposal are as follows: At a moment of his choosing, Putin can ramp up energy prices. He would benefit from waiting until European gas reserves begin to run down in the next few months and when global oil demand will be at its peak. By ramping up energy prices, he will undermine the purchasing power of the dollar and the other western alliance currencies. At a time of economic stagnation or outright recession, he can force the alliance’s central banks to raise their interest rates to undermine the capital values of financial assets even further, and to undermine their governments’ finances through escalating borrowing costs. Putin is increasing pressure on Ukraine. He is doing this by attacking energy infrastructure to force a refugee problem onto the EU. At the same time, he is rebuilding his military resources, possibly for a renewed attack to capture the Ukraine’s Eastern provinces, or if not to maintain leverage in any negotiations. He can bring forward the plans for a proposed trade settlement currency, currently being considered by a committee of the Eurasian Economic Union. The development of this currency, provisionally to be backed by a basket of commodities and participating national currencies can easily be simplified into a commodity alternative, perhaps represented by gold bullion as proxy for a commodity basket. By giving advance warning of his strategy to undermine the dollar, he can accelerate selling pressure on the dollar through the foreign exchanges. Already, members of the Russia-China axis know that if they delay in liquidating dollar and euro positions they will suffer substantial losses on their reserves. While he is in a position to control energy prices, it is in Putin’s interest to act. By a combination of escalating the Ukraine situation before battlefields thaw and the need to ensure that inflationary pressures on the western alliance are maintained, we can expect Putin to escalate his attack on the western alliance’s currencies in the next two months. China’s renminbi (yuan) policy While Putin took a leaf out of the American book by insisting on payment for oil in roubles in order to protect its purchasing power, less obviously China has agreed a similar policy with Saudi Arabia. Instead of dollars, it will be renminbi, or “petro-yuan”. Payments for oil and gas supplies to the Saudis and other members of the Gulf Cooperation Council will be through China’s state-owned banks which will create the credit necessary for China and other affiliated nations importing energy to pay the Saudis. Through double-entry bookkeeping, the credit will accumulate at the banks in the form of deposits in favour of the exporters, which will in turn be reflected in the energy exporters’ currency reserves, replacing dollars which will no longer be needed. Through its banks, China can create further credit to invest in infrastructure projects in the Middle East, Greater Asia, Africa, and South America. This is precisely what the US did after the agreement with the Saudis back in 1973, leading to the creation of the petrodollar. The difference is that the US used this mechanism to buy off regimes, principally in Latin and South America, so that they would not align with the USSR.  We can expect China to follow a commercial, and not a political strategy. Bear in mind that both China and Russian foreign policies are not to interfere in the domestic politics of other nations but to pursue their own national interests. Therefore, the expansion of Chinese bank credit will accelerate the industrialisation of Greater Asia for the overall benefit of China’s economy. So long as the purchasing power of the yuan is stabilised, this petro-yuan policy will not only succeed, but generate reserve and commercial demand for yuan. It was the policy that led to the dollar’s own stabilisation. With the yuan prospectively replacing the US dollar, we can see that the dollar’s hegemony will also be replaced with that of the yuan. The Saudis will be fully aware of their role in providing stability for the dollar. Triffin’s dilemma describes how a reserve currency needs to be issued in large quantities for it to succeed in that role. The creation of the petrodollar assisted materially. In America’s case, the counterpart of that was deliberate budget and trade deficits. But China has a savings culture, which tends to lead to a trade surplus. Therefore, it must satisfy Triffin by credit expansion. Looking through an initial phase of currency disruption, which we are bound to experience as markets gravitate towards petro-yuan, in the longer-term China might find itself in the position of having to put a lid on the yuan’s purchasing power to stop it rising to a point which becomes economically disruptive. Bizarrely, this might end up being the role for China’s undoubted massive hidden gold reserves. By introducing a gold standard for its currency, China could put a cap on the yuan’s purchasing power. Given the initial disruption to global foreign exchanges as the dollar loses its status, there would be sense in China declaring a gold standard sooner rather than later. Remember, gold retains a stable purchasing power over the long term with only modest fluctuations, the characteristics the Chinese planners are bound to want to see in their currency as the transacting and financing medium for its pan-Asian plans. In this scenario the US Government and the Fed will be faced with collapsing currency, which can only be stabilised by going back onto a gold standard. But this igoes so against ingrained US policy, a move back to securing the dollar’s purchasing power is hardly even a last resort. Finally, some comments on gold From the foregoing analysis, it should be clear that in estimating the outlook for gold it is not a question of forecasting what the gold price will be in 2023, but what will happen to the dollar, and therefore the other major fiat currencies. These currencies have shown themselves not fit to be mediums of exchange, only being stealthy fund raising media for governments. While western market analysts appear to have failed to grasp this point, President Putin certainly has, as his speech in Leningrad last June demonstrated. If he follows through on his comments with action, he has the potential to inflict serious damage on the dollar and the other western alliance currencies. Furthermore, China has also made a major step forward with its agreement with Saudi Arabia to replace the petrodollar with a petro-yuan. Throughout history, gold, which is legal money, has maintained its value in general terms with only modest variation. It is fiat currencies which have lost purchasing power to the point where from 1970 the dollar has lost 98% of it. The comparison between gold and the dollar is simply one between legal money and fiat credit — the only way in which relative values can be determined between them. Our last chart will not be a technical presentation of gold, but of the dollar, for which we will use a log scale so that we can think in terms of percentages. Watch for the break below the support line at about 2%.  The modest fall projected by the pecked line is a halving of the dollar’s purchasing power, measured in real money, which suggests a gold price for the dollar at 1/3,600 gold ounces. This is not a forecast but gently chides those who think it is the gold price which changes. Where the rate actually settles in 2023 will depend on President Putin, who more than any technical analyst, more than any western investment strategist, and even more than the Fed itself has the power to set the dollar’s future price measured in gold. One thing we will admit, and that is when fiat currencies begin to slide to the point where domestic Americans realise that it is the dollar falling and not gold rising, a premium will develop for gold’s value against consumer items and assets, such as residential property, reflecting the awful damage a currency collapse does to the collective wealth of the people. Tyler Durden Sat, 12/31/2022 - 08:10.....»»

Category: dealsSource: nytDec 31st, 2022

Inflation, Recession, & Declining US Hegemony

Inflation, Recession, & Declining US Hegemony Authored by Alasdair Macleod via GoldMoney.com, In the distant future, we might look back on 2022 and 2023 as pivotal years. So far, we have seen the conflict between America and the two Asian hegemons emerge into the open, leading to a self-inflicted energy crisis on the western alliance. The forty-year trend of declining interest rates has ended, replaced by a new rising trend the full consequences and duration of which are as yet unknown. The western alliance enters the New Year with increasing fears of recession. Monetary policy makers face an acute dilemma: do they prioritise inflation of prices by raising interest rates, or do they lean towards yet more monetary stimulation to ensure that financial markets stabilise, their economies do not suffer recession, and government finances are not driven into crisis? This is the conundrum that will play out in 2023 for the US, UK, EU, Japan, and others in the alliance camp. But economic conditions are starkly different in continental Asia. China is showing the early stages of making an economic comeback. Russia’s economy has not been badly damaged by sanctions, as the western media would have us believe. All members of Asian trade organisations are enjoying the benefits of cheap oil and gas while the western alliance turns its back on fossil fuels. The message sent to Saudi Arabia, the Gulf Cooperation Council, and even to OPEC+ is that their future markets are with the Asian hegemons. Predictably, they are all gravitating into this camp. They are abandoning the American-led sphere of influence. 2023 will see the consequences of Saudi Arabia ending the petrodollar. Energy exporters are feeling their way towards new commercial arrangements in a bid to replace yesterday’s dollar. There’s talk of a new Asian trade settlement currency. But we can expect oil exports to be offset by inward investment, particularly between Saudi Arabia, the GCC, and China. The most obvious surplus emerging in 2023 is of internationally held dollars, whose use-value is set to drop away leaving it as an empty shell. It amounts to a perfect storm for the dollar, and all those who sail with it. Those of us who live long enough to look back on these years are likely to find them to have been pivotal for both currencies and global alliances. They will likely mark the end of western supremacy and the emergence of a new, Asian economic domination. The interest rate threat to the west’s currencies It is a mark of how bad the condition of Western economies has become, when interest rate rises of only a few cent are enough to threaten to precipitate an economic crisis. The blame can be laid entirely at the door of post-classical macroeconomics. And like a dog with a bone, their high priests refuse to let go. Despite all the evidence to the contrary, they would now have you believe that inflation is transient after all, though they have conceded the possibility of inflation targets being raised slightly. But the wider concern is that even though interest rates have yet to properly reflect the extent of currency debasement, they have risen enough to tip the world into recession.  In their way of thinking, it is either inflation or recession, not both. A recession is falling demand and falling demand leads to falling prices, according to macroeconomic opinions. When both inflation and a recession are present, they cannot explain it and it does not accord with their computer models. Therefore, government economists insist that consumer price rises will return to the 2% target or thereabouts, because rising interest rates will trigger a recession and demand will fall. It will just take a little longer than they originally thought. They now saying that the danger is no longer just inflation. Instead, a balance must be struck. Interest rate policy must take the growing evidence of recession into account, which means that bond yields should stop rising and after their earlier falls equity markets should stabilise. For them, this is the path to salvation. In pursuing this line, the authorities and a group thinking establishment have had success in tamping down inflation expectations, aided by weakening energy prices.  Since March, West Texas intermediate crude has retraced 50% of its rise from March 2020 to March 2022. Natural gas has fallen forty per cent from its August high. If the western media is to be believed, Russia is continually on the brink of failure, the suggestion being that price normality will return soon. And the inflationary pressures from rising energy and food prices will disappear. What is really happening is that bank credit is now beginning to contract. Bank credit represents over 90% of currency and credit in circulation and its contraction is a serious matter. It is a change in bankers’ mass psychology, where greed for profits from lending satisfied by balance sheet expansion is replaced by caution and fear of losses, leading to balance sheet contraction. This was the point behind Jamie Dimon’s speech at a banking conference in New York last June, when he modified his description of the economic outlook from stormy to hurricane force. Coming from the most influential commercial banker in the world, it was the clearest indication we can possibly have of where we were in the cycle of bank credit: the world is on the edge of a major credit downturn. Even though their analysis is flawed, macroeconomists are right to be very worried. Over nine-tenths of US currency and bank deposits now face a meaningful contraction. This is a particular problem earlier exacerbated by covid lockdowns and for businesses affected by supply chain issues. It gives commercial banks a huge problem: if they begin to whip the credit rug out from under non-financial businesses, they will simply create an economic collapse which would threaten their entire loan book. It is far easier for a banker to call in loans financing positions in financial assets. And it is also a simple matter to call in and liquidate financial asset collateral when any loan begins to sour. This is why the financial sector and relevant assets have been in the firing line so far. Central banks see these evolving conditions as their worst nightmare. They are what led to the collapse of thousands of American banks following the Wall Street crash of 1929-1932. In blaming the private sector for the 1930s slump which followed and was directly identified with the collapse in bank credit, central bankers and Keynesian economists have vowed that it must never happen again. But because this tin-can has been kicked down the road for far too long, we are not just staring at the end of a ten-year cycle of bank credit, but potentially at a multi-decade super-cyclical event, rivalling the 1930s. And given the greater elemental forces today, potentially even worse than that. We can easily appreciate that unless the Fed and other central banks lighten up on their restrictive monetary policies, a stock market crash is bound to ensue. And this is what we saw when the interest rate trend began a new rising trajectory last January. For the Fed, preventing a stock market crash is almost certainly a more immediate priority than protecting the currency. It is not that the Fed doesn’t care, it’s because they cannot do both. Their mandate incorporates unemployment, and their ingrained neo-Keynesian philosophies are also at stake. Consequently, while we can see the dangers from contracting bank credit, we can also see that the Fed and other major central banks have prioritised financial market stability over increasing interest rates to properly reflect their currencies’ loss of purchasing power. The pause in energy price rises together with media claims that Russia will be defeated have helped to give markets a welcome but temporary period of stability. The policy of threatening continually higher interest rates must be temporary as well. In effect, monetary policy makers have no practical alternative to prioritising the prevention of bank credit deflation over supporting their currencies. Realistically, they have no option but to fight recession with yet more inflation of central bank currency funding increased government budget deficits, and through further expansion of commercial bank reserves on its own balance sheet, the counterpart of quantitative easing.  Besides central bank initiatives to keep bond yields as low as practicably possible, runaway government budget deficits due to falling tax income and extra spending to counteract the decline in economic activity will need to be funded. And given that the world is on a dollar standard, in the early stages of a recession the Fed will probably assume that the consequences for foreign exchange rates of a new round of currency debasement can be ignored. While currency debasement can then be expected to accelerate for the dollar, all the other major central banks can be expected to cooperate. The point about global economic cooperation is that no central bank is permitted to follow an independent line. The private sector establishment errs in thinking that the choice is between inflation or recession. It is no longer a choice, but a question of systemic survival. A contraction in commercial bank credit and an offsetting expansion of central bank credit will almost certainly take place. The former leads to a slump in economic activity and the latter is a commitment too large for an inflating currency to bear. It is not stagflation, a condition which according to neo-Keynesian beliefs should not occur, but a doppelgänger rerun of what did for John Law and France’s economy in 1720. The inconvenient truth is that policies of monetary stimulation invariably end with the impoverishment of everyone. The role of credit and the final solution To clarify how events are likely to unfold in 2023, we must revisit the basics of monetary theory, and the difference between money and credit. It is the persistent debasement of the latter which has been the problem and is likely to condition the plans for any nation seeking to escape from the monetary consequences of a shift in hegemonic power from the western alliance to the Russian Chinese partnership. It is probably too late for any practical solution to the policy dilemma faced by monetary policy committees in western central banks today. When commercial bankers collectively awaken to the lending risks created in large part by their earlier optimism, survival instincts kick in and they will reduce their exposure to risk wherever possible. A credit cycle of boom and bust is the consequence. Inevitably in the bust phase, not only are malinvestments weeded out, but over-leveraged banks fail as well. While the intention is to smooth out the cyclical effects on the economy, the response of the state and its central bank invariably makes things worse, with monetary policy undermining the currency. It is important to appreciate that with a sound currency system, which is a currency that only changes in its quantity at the behest of its users, excessive credit expansion must be discouraged. The opposite is encouraged by central banks. Extreme leverage of asset to equity ratios for systemically important banks of well over twenty times in Japan and the Eurozone are entirely due to central bank policies of suppressing interest rates. It is only by extreme leverage that commercial banks, which are no more than dealers in credit, can make profits from the slimmest of credit margins when zero and negative deposit rates are forced upon them. Since bank credit is reflected in customer deposits, a cycle of excessive bank credit expansion and contraction becomes economically destructive. The solution advocated by many economists of the Austrian school is to ban bank credit entirely, replacing mutuum deposits, whereby the money or currency becomes the bank’s property and the depositor a creditor, with commodatum deposits where ownership remains with the depositor. Separately, under these arrangements banks act as arrangers of finance for savers wishing to make their savings available to borrowers for a return. The problem with this remedy is that of the chicken and the egg. Production requires an advance of capital to provide products at a profit in due course. The real world of free markets therefore requires credit to function. And savings for capital reinvestment are also initially funded out of credit. So, whether the neo-Austrians like it or not we are stuck with mutuum deposits and banks which function as dealers in credit.  That is as far as we can go with commercial banks and bank credit. The other form of credit in public circulation is the liability of the issuer of banknotes. To stabilise their value, the issuer must be prepared to exchange them for gold coin, which is and always has been legal money. And once the issuer has established sufficient gold reserves, the issue of any additional banknotes must be covered by additional gold coin backing. But much more must be done. Government budget deficits must not be permitted except strictly on a temporary basis, and total government spending (including state, regional, and local governments) reduced to the smallest possible segment of the economy. It means pursuing a deliberate policy of rescinding legal obligations for government agencies to provide services and welfare for the people, retaining only a bare minimum for government to function in providing laws, national defence and for the protection of the interests of everyone without favour. All else can only be the responsibility of individuals arranging and paying for services themselves. It means that most bureaucrats employed unproductively in government must be released and made available to be redeployed in the private sector productively. A work ethic perforce will return to replace an expectation that personal idleness will always be subsidised. Given political realities, this cannot happen except as a considered response following a major credit, currency, and economic meltdown. It is a case of crisis first, solution second. Therefore, there is no practical alternative to the continual debasement of currencies until their users reject them entirely as worthless. Money is only gold, and all the rest is credit For a lack of any alternative outcome, the eventual collapse of unbacked currencies is all but guaranteed. To appreciate the dynamics behind such an outcome, we must distinguish between money and credit. Currency in circulation is not legal money, being only a form of credit issued as banknotes by a central bank. It has the same standing as credit in the form of deposits held in favour of the commercial banks. The distinction between money and credit, with money wrongly being assumed to be banknotes is denied by the macroeconomic establishment today. Officially and legally, money is only gold coin. It is also silver coin, though silver’s official monetary role fell into disuse in nineteenth century Europe and America.  Gold and silver coin as money were codified under the Roman Emperor Justinian in the sixth century and is still the case legally in Europe today. In English law, the unification of the Court of Chancery and common law in 1875 formally recognised the Roman position, and gold sovereigns, which were the monetary standard from 1820, became unquestionably recognised as money in common law from then on. Attempts by governments to restrict or ban ownership of gold as money must not be confused with the legal position. FDR’s executive order in 1933 banning American citizens from owning gold did not change the status of money. Nor did similar government moves elsewhere. And the neo-Keynesian denigration of a gold standard doesn’t alter its status either. Nor do the claims from cryptocurrency enthusiasts that their schemes are a modern replacement for gold’s monetary role. As John Pierpont Morgan stated in his testimony before Congress in 1912, “Gold is money. Everything else is credit”. He was not expressing an opinion but stating a legal fact. That gold does not commonly circulate as a medium of exchange is explained by Gresham’s law, which states that bad money drives out the good. Originally describing the difference between clipped coins and their wholly intact counterparts, Gresham’s law also applies to gold’s relationship with currency. Worldwide, unrelated societies hoard gold coin, spending currency banknotes and bank deposits first, which are universally recognised as lower forms of media of exchange. Even central banks hoard gold. And as they have progressively distanced themselves from their roles as servants of the public, they refuse to allow the public access to their gold reserves in exchange for their banknotes. The importance of gold as a store of value, that is as sound money, appears to be difficult to understand for people not accustomed to regarding it as such. Instead, they regard it is a speculative investment, which can be held in securitised or derivative form while it is profitable to do so. When it comes to hedging a declining currency’s purchasing power, the preference today is for assets that outperform the cost of borrowing. As an example of this, Figure 1 shows London’s residential housing priced in fiat sterling and gold. Housing is the most common form of public investment in the UK, further benefiting from tax exemptions for owner-occupiers. According to government data, since 1968 when house price statistics began median house prices in London have risen on average by 115 times. But priced in gold, they have risen only 29% in 54 years. With prices having generally risen by less outside London and its commuter belt, some areas might have seen falls in prices measured in gold. It is virtually impossible to get people to understand the implications. They correctly point out the utility of having somewhere to live, which is not reflected in prices. They might also point out that property held by landlords produces a rental income. Furthermore, most buyers leverage their investment returns by having a mortgage. In investing terms, these arguments are entirely valid. But they only prove that the purpose of owning an asset is to obtain a return or utility from it, with which we can all agree. The purpose of money or currency is different: it is a medium for purchasing an asset which will give you a benefit. What is not understood is that far from giving property owners a capital return which exceeds the debasement of the currency, they have just about kept pace with it. And if you had bought property elsewhere in the UK, your capital values might even have fallen, measured in real legal money, which is gold. Since the end of the Bretton Woods agreement, the consequences of currency debasement for asset prices such as residential property have hardly mattered. The debasement of currencies has never been violent enough to undermine assumptions that residential property will always retain its value in the long run. Other assets, such as a portfolio of financial equities are seen to offer similar benefits of apparent protection against currency debasement. But we now appear to be on the cusp of a major currency upheaval. The global banking system is more highly leveraged on balance sheet to equity measures than ever before, and bank credit is beginning to contract. All the major central banks have undeclared loses which wipe out their nominal equity, affecting their own credibility as backstops to their commercial banking systems. Systemic risks are escalating, even though market participants have yet to realise it. And as economic activity turns down, government budget deficits are going to rapidly escalate. A practical remedy for the situation cannot be entertained, so the debasement of currencies is bound to accelerate. Mortgage borrowing costs are already rising, undermining affordability of residential property in fiat money terms. The relationship between currency and real money, which is gold coin, will almost certainly break down. Measured in gold, a banking and currency crisis will have the effect of driving residential property prices significantly lower, while they could be maintained or even move somewhat higher measured in more rapidly depreciating fiat currencies. The transition from financialised fiat currencies to… what? There is an overriding issue which we must consider now that the long-term decline of interest rates appears to have come to an end, and that is how the dollar will fare in future. While the dollar has lost 98% of its purchasing power since the ending of Bretton Woods, it has generally been gradual enough not to undermine its role as the world’s international medium of exchange and for the determination of commodity prices. It has retained sufficient value to act as the world’s reserve currency and is the principal weapon by which America has exercised her hegemony. It is in its role as the weapon for waging financial wars which may finally lead to the dollar’s undoing, as well as undermining the purchasing powers of the currencies aligned with it. By cutting Russia off from the SWIFT settlement system, thereby rendering her fiat currency reserves valueless, the western alliance hoped that together with sanctions Russia would be brought to her knees. The policy has failed, as sanctions usually do, while the message sent to all non-aligned nations was that America and its western alliance could render national currency reserves valueless without notice. Consequently, there has been a worldwide rethink over the dangers of relying on dollars, and for that matter the other major currencies issued by member nations of the western alliance. At this time of transition away from a weaponised dollar, there is a general uncertainty in nations aligned with the Russian Chinese axis over how to respond, other than to sell fiat currencies to buy more gold bullion. But the sheer quantities of fiat currency relative to the available bullion suggests that at current values the bullion is not available in sufficient quantities to credibly turn fiat currencies into gold substitutes. Nevertheless, it would be logical for the gold-rich Russian Chinese axis and nations in their sphere of influence to protect their own currencies from a rapidly developing fiat currency catastrophe. So far, none of them appear to be prepared to do so by introducing gold standards for the benefit of their citizens. Only Russia, under pressure from currency and trade sanctions has loosely tied its rouble to energy and commodity exports. In the vaguest of terms, it might be regarded as a synthetic equivalent of linking the rouble to gold. Why this is so is illustrated in Figure 2. Measured in fiat currencies, the oil price is exceedingly volatile, while in true money, gold, it is relatively stable. Measured in gold, the oil price today is about 20% lower than it was in 1950. Since then, the maximum oil price in gold has been a doubling and the minimum a fall of 85%. That compares with a rise in US dollars of 5,350% and no fall at all. Undoubtedly, if gold had traded free from statist intervention and speculation in currency and commodity markets and from the effects of fiat-induced economic booms and busts, the price of oil in gold would most likely have been even steadier. By insisting that those dubbed by Putin as the unfriendly nations must buy roubles to pay for Russian oil, demand for roubles on the foreign exchanges became linked to demand for Russian oil, which in turn is linked more closely to gold than the unfriendlies’ currencies. But it seems that in official minds, making this link between the rouble, oil, and gold is a step too far. When it comes to replacing the dollar with a new trade currency for the Asian powers, their initial discussions have suggested a more broadly based solution. The Eurasian Economic Union (EAEU), consisting mainly of a central Asian subset of the Shanghai Cooperation Organisation (SCO) earlier this year announced that plans for a trade settlement currency were being considered, backed by a mixture of commodities and the currencies of member states.  So far, members of the SCO have restricted their discussion to ways of replacing the dollar for the purpose of transactions between them, a long-term project driven not so much by change in Asia but by US trade aggression and American hegemonic dollar policies over time. Following Russian sanctions imposed by the West, it is likely that the dangers of an immediate dollar crisis are now being more urgently addressed by governments and central banks throughout Asia.  With the West plunging into a combined systemic and currency crisis, no national government outside the dollar-based system appears to know what to do. Only Russia has been forced into action. But even the Russians are feeling their way, with vague reports that they are looking at a gold standard solution, and others that they are considering Sergey Glazyev’s EAEU trade currency project. As well as heading a committee set up to advise on a new trade settlement currency, Glazyev is a senior economic advisor to Vladimir Putin. From the little information made available, it appears that Glazyev’s EAEU monetary committee is ruling out a gold standard for the new trade currency. Instead, it has been considering alternative structures without achieving any agreement so far. But for the project to go ahead, proposals reported to include national currencies in its valuation basket must be abandoned. Not only is this an area where Glazyev is unlikely to obtain a consensus easily from member states, but to include a range of fiat currencies is unsound and will not satisfy the ultimate objective, which is to find a credible replacement for the US dollar for cross-border trade settlements. For confidence in the new currency to be maintained, the structure must be both simple and transparent. Since the currency committee’s press release earlier this year, there have been further developments likely to influence it construction. Led by Saudi Arabia, the Gulf Cooperation Council is turning its back on the dollar as payment for oil and gas. Again, this development is attributable to climate change policies of the US-led western alliance. Not only has the alliance demonstrated that foreign reserves held in its fiat currencies can be rendered valueless overnight, but climate change policies send a clear message that for the GCC the future of their trade is not with the western alliance. For long-term stable trade relationships, they must turn to the Russian Chinese axis. It is happening before our eyes. China has signed a 27-year supply agreement with Qatar for its gas. President Biden attempted to secure a agreement with Saudi Arabia for additional oil output. He left with nothing. President Xi visited earlier this month and secured a long-term energy and investment agreement, whereby Saudi’s currency exposure to the yuan is minimised through Chinese capital investment programmes in the kingdom Already, an increase in China’s money supply is an early indication that propelled by cheap energy and infrastructure investment programmes, her economy is in the early stages of a new growth phase, while the western alliance faces a potentially deep recession. The currency effect is likely to be supportive of the yuan/dollar cross rate, which the Saudis are likely to have factored into their calculations. But they will almost certainly need more than that. They will want to influence settlement currencies for the balance of their trade. Their options are to minimise balances on the back of inward investment flows, as mentioned above. They can seek to influence the construction of the proposed EAEU trade settlement currency. Or they can build their gold reserves, to the extent they might wish to hedge currencies accumulating in their reserves. For the western alliance, the death knell for the petrodollar means that 2023 will see a substantial reduction of dollar holdings in the official reserves of all nations in the Russian Chinese axis and those friendly to it. The accumulation of dollars in foreign reserves since the end of the Bretton Woods regime is considerable, and its reversal is bound to create additional difficulties for the US authorities. Foreign owned US Treasuries are starting to be sold, and the $32 trillion mountain of financial assets and bank deposits are set to be substantially reduced. The potential for a run on the dollar, driving up commodity input prices in dollars, is likely to become a considerable problem for both the US and the entire western alliance in 2023. Conclusion We have noted the deteriorating systemic and monetary prospects for fiat currencies, predominantly those of the dollar-based Western currency system. Both sound economic and Marxist theory indicates that a final crisis leading to the end of these fiat currencies was going to happen anyway, and the financial war against Russia has become an additional factor accelerating their collapse.  After suppressing interest rates to zero and below, rising interest rates are finally being forced upon the monetary authorities by markets. With good reason, it has become fashionable to describe developments as an evolution from a currency environment driven by and dependent on financial assets into one driven by commodities — in the words of Credit Suisse’s Zoltan Pozsar, Bretton Woods II is ending, and Bretton Woods III is upon us. For this reason, there is growing interest in how a new world of currencies based somehow on commodities or commodity-based economies will evolve. This year, Russia successfully protected its rouble by linking it to energy and commodity exports and in the process undermined Western currencies. While it is always a mistake to predict timing, the fact that no one in the financial establishment is debating how to use gold reserves to protect their currencies clearly indicates that we are still early in the evolution of the developing fiat currency crisis. Officially at least, the forward thinkers planning a new pan-Asian trade settlement currency alternative to the dollar are looking at backing it with commodities and not a gold standard. Since Sergei Glazyev announced an enquiry into the matter, the Middle Eastern pivot away from the petrodollar to Asian currencies not only injects a new urgency into his committee’s deliberations but is bound to have a significant bearing on its outcome.  The implications for the western alliance play no part in current monetary policies. Their central banks act as if there’s no danger to their own currencies from these developments. But any doubt that fiat currencies will be replaced by currencies linked to tangible commodities, whether represented by gold or not, is fading in the light of developments. With neither the economic establishment nor the public having a basic understanding of what is money and why it is not currency, it is hardly surprising that current financial and economic developments are so poorly understood, and the correct remedies for our current monetary and economic conditions are so readily dismissed. These errors and omissions are set to be addressed in 2023. Tyler Durden Fri, 12/23/2022 - 21:25.....»»

Category: blogSource: zerohedgeDec 23rd, 2022

Transcript: Anat Admati

       Transcript: Anat Admati The transcript from this week’s, MiB: Anat Admati on Regulations and Techlash, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~… Read More The post Transcript: Anat Admati appeared first on The Big Picture.        Transcript: Anat Admati The transcript from this week’s, MiB: Anat Admati on Regulations and Techlash, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~  VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio. BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have yet another extra special guest, Professor Anat Admati, teaches at the Stanford Graduate School of Business. She is an expert in so many fascinating areas that you wouldn’t think are related but they really are. Why has technology developed the way it has and, more or less, exempt from a lot of government regulations or protected by government regulations? It turns out their business model is a little similar to the way the banking industry has managed to capture a lot of regulators and continue to operate fairly freely without this sort of regulation and capital requirements and equity requirements that would make banking safer. Really a fascinating conversation about everything from misinformation to technology, to banking and financial fragility, I found the discussion to be quite fascinating and I think you will also. With no further ado, my interview with Professor Anat Admati of the Stanford Graduate School of Business. So, let’s talk a little bit about your background. You have a lot of degrees. You have a bachelors from Hebrew University then a Masters in Arts, a Masters in Philosophy and a PhD from Yale University. Tell us a little bit about your academic journey. ANAT ADMATI, PROFESSOR OF FIANCE AND ECONOMICS, STANFORD GRADUATE SCHOOL OF BUSINESS: So, my journey starts where I took a lot of math. I was good in math and I love the math. It was very pretty. It was all — but I decided I probably won’t be good enough to be a mathematician. So, I was kind of, in my romantic mind when I was in my early 20s, I was going to take but not give back to math, that kind of thing. RITHOLTZ: Right. ADMATI: And so, I had to find something and at first, it was going to be sort of applied math like Operations Research, which was the worst kind of math, like optimization. RITHOLTZ: Yes. ADMATI: It’s kind of boring and — but I got an opportunity to go to Yale and these degrees were just kind of simultaneously gotten. I mean, I was at Yale in three and a half years with all those degrees. RITHOLTZ: OK. ADMATI: And I just — an opportunity landed on my lap to go to this program in Operations Research at Yale and I was promised that Yale is very interdisciplinary and once you passed your qualifying exams, you can do whatever you want. RITHOLTZ: But? ADMATI: And I had never taken an economics course before that. But when I got to Yale, my advisor said, why don’t u take microeconomics and take mathematical economics and take some economics. And by the end of the first year, I kind of knew a new language like I — and it was all much more interesting because there was interactions with people and equilibrium and all of that. And by second year, I took the course that was absolutely a must-take in the crowd that I was hanging with, which was Steve Ross’ Financial Economics. Yale didn’t even have a programming in finance. The School of Management was just created. This was back in the late ’70s, early ’80s and he was just teaching people all they needed to know about finance, which was just coming up. RITHOLTZ: They had become professionalized when before it was just a bunch of … ADMATI: Exactly. RITHOLTZ: … disparate theories. So, you find your calling in economics. But you really take some of your background and dig pretty deep into financial regulations in technology. Where did the tech background come from? ADMATI: And then — I’ll tell you. So, that all — I was totally in the sort of finance bubble, first kind of market microstructure, trading mechanism. This is the quaint 1987, a little Black Monday, small Black Monday. RITHOLTZ: Just that little one day glitch. Sure. ADMATI: The little — 19 percent decline in one day. RITHOLTZ: Twenty-two, twenty-two point something. Yes. ADMATI: Yes. So, it was program training and insurance … RITHOLTZ: Yes. ADMATI: Portfolio insurance and all these application strategies and all this stuff. And so, that was kind of the little crisis of the day, right, in the little detail and this before high frequency trading and all the rest of it. RITHOLTZ: Right. ADMATI: But then I worked on trading mechanisms and information getting to prices and informed and uninformed trading and markets for information and newsletters and managed money portfolio theory. And then I got more interested in kind of governance but governance in the narrow sense, corporate governance and contract, which was all about the problems between shareholders and managers. So, that was that and then comes the financial crisis. So, until the financial crisis of 2007 and 2009 or however you go — you actually time it, I was in this finance bubble. I was teaching corporate finance. I did research, theoretical research. I built on mathematical models and analyzed them. And I lived in that little bubble thinking all is well until this crisis, I was like, what just happened? And so, I never was interested in banking particularly we have a lot of silos even within economics … RITHOLTZ: Sure. ADMATI: … let alone in all the social sciences and law and all of that. So, we’re itching our little silo with our little journals, all this stuff. So, I just go curious, wait a minute, I teach corporate finance, the bank is also a corporation, now why does it have like almost no equity funding, what’s going to there? I teach people capital structure theory and what — how are bank so different, why are they so different? They hate equity with this fashion. And so, the more I dug, the weirder it got. It really like I fell in a rabbit hole. It totally was rabbit hole, like curious or uncurious or that kind of thing. RITHOLTZ: Well, tell me if I’m oversimplifying banking because what we’ve seen over the past half century before the financial crisis was simply banks figured out that the less capital they keep on the books, the better their profit margins appear even though they’re essentially just assuming more risk and the better their profit margins are, the richer everybody got. And so, we’ve seen a half century of first deregulation then fairly radical deregulation, all of which works to the banks’ advantages until suddenly it no longer did. ADMATI: So, in the book, we go through a lot of the history of banking, including the basic banking model, which is sort of it’s a wonderful life kind of 363 boring banking model and that too had a crisis in savings and loan and in many other banking crisis. RITHOLTZ: Right. ADMATI: So, it’s not like — banking is inherently risky because inherently, the banks taking risk with depositors’ money and the depositors are unable to really behave like normal creditor. And that’s really sort of the beginning of the sort of original sin in banking that they’re always overleveraged. Always. They’re never efficient in providing any of the services on both sides of the balance sheet because they always have the temptation and the ability to take just a little bit more risk on both sides of the balance sheet. RITHOLTZ: That’s the nature of fractional reserve lending, you get … ADMATI: Well, but it’s their incentives. So, the key to understand it it’s not like essential or efficient. It’s just that that’s how they want it. So, the thing is that banking is sort of inherently fragile because banking is inherently inefficient that way or forever poorly regulated or poorly controlled by their investors, including the depositors. So, to that, you add expansion in the business model that allows taking more risk, hiding more risk with derivatives, with universal banking, all of that, and the increase in safety net, implicit and explicit, with deposit insurance, with all of that. They became able and obviously interested in living more and more and more in debt. Now, even my research, even after the first — after the book, we were already beginning to do this research, I understood a lot better. Stuff that we teach in basic courses is very static theory of how companies fund and it’s like one round of funding, debt and equity, and then the world is over. But for well-living breathing companies, any company, their funding decision as well as investment decisions are always made by shareholders or managers on behalf of shareholders maybe in light of previous commitment. So, in the dynamics of it, once you took debt, your preference has changed completely. You’re no longer maximizing total value of the firm. You’re maximizing the value of equity in the firm. And from that perspective, equity seems expensive to all heavily indebted corporations, banks in particular, because for other corporations, if they take on more and more debt, the creditors will start pushing back. The creditors will start putting covenants. The creditors will jack up their rates because the creditors will worry about all the distorted incentives of the borrower or lender. That happen. Gambled the money in Las Vegas or under investing things because there’s not enough upside. All of those things that characterize sort of the fortunes that characterize heavy indebtedness. RITHOLTZ: So, that makes the finance sector very different than the rest of the stock market? ADMATI: Well, the banking especially because the creditors in banking are particularly passive. And so, therefore, the usual market forces that push against high leverage in other companies that just naturally with no regulation would limit. There’s no corporation that lives its healthy — unless they’re on their way to bankruptcy that lives with single digit equity numbers. Of course, it depends how you measure it and there’s book market, all kinds of other things that we can discuss. But the banks basically got used to — and got stuck and it’s very addictive to be there especially at this extremely low equity level. From that vantage with the overhang of debt being so, so heavy that you’re effectively insolvent all the time but you just not recognize as such. Then you hate equity … RITHOLTZ: Hold on a second. ADMATI: … you want to take money out. RITHOLTZ: So, let’s stay with that point… ADMATI: Yes. RITHOLTZ: … because that’s pretty fascinating. It was pretty clear to observers that the reason Lehman brothers didn’t get bailed out is they were not just a little insolvent but deeply insolvent. The rest of the banks that were out there that survived seem to recapitalize. They sold equity. They brought more money in. Goldman Sachs took a big chunk of money from Warren Buffett. JPMorgan Chase bought Washington Mutual. They did more capital reserves and they ended up buying Bear Stearns as well. ADMATI: When you say capital reserve, again, I mean, people get very confused about what that is. You mean … RITHOLTZ: They put more cash … ADMATI: No. No. No cash. Not cash. Capital is not … RITHOLTZ: Just straight-up equity. ADMATI: Capital is not cash. It’s on the other side of the balance sheet. Capital is about how you fund. It’s not cash reserve. OK. So, it’s — this is really important, there’s a pile of cash. RITHOLTZ: So, let’s put shelves (ph) into that. ADMATI: It’s — let’s dive into that because it’s very, very confusing. To this day, you can find people saying set aside cash. That’s not what capital is about. Capital is about — obviously, there is the measurement to get at a given point of time but when you take a snap shot and you say — talk about capital ratios or risk-weighted capital ratios or all of that, they’re entirely on the funding side. So, you got your assets whatever they are. They have some risk and whatever — however you put numbers on that sort of accounting or — and what’s allowed and not allowed and all of that is like a big can of worms actually. But –and netting of derivatives and all of that. But then the question is how do you fund those assets. And so, the question is how much gets funded by making promises to investors by debt. Any kind, collateral, non-collateral. Now, deposit is very unique because deposits are unsecured debt to the bank. But … RITHOLTZ: To the depositors. ADMATI: To the depositors. They don’t have collateral. RITHOLTZ: Right. ADMATI: OK. So, it’s the FDIC that’s holding the bag there. Now does the FDIC even know how much risk they’re bearing 0 when all the assets are so encumbered that they’re all pledged as collateral? RITHOLTZ: Do they? Because one would assume … ADMATI: No, they don’t. RITHOLTZ: … they — now, I have a very vivid recollection during the financial crisis of the FDIC talking about their reserves dropping from 90 to 60, I think it dropped as low as $40 billion ADMATI: Yes. RITHOLTZ: And hey, if we get a bunch more disasters, we’re not going to be able to cover the depositors. ADMATI: Exactly. Because they stopped charging. Also because there were no defaults before the crisis. They stopped charging deposit insurance and all of a sudden, there was a lot of bank failures, not the big ones except for Lehman but Lehman wasn’t an FDIC insured bank. RITHOLTZ: Right. Right. ADMATI: And so — but when the other banks, small banks, started failing, what do they — what can the FDIC do in general? Well, they can go back to the large banks and just assess them more because they have no way and I can assert this you, no good way to risk adjust their deposit insurance fees. They’re supposed to be self-financing the FDIC through fees but they really are taking a huge leap for insuring what by now must be like, I don’t know, $13 trillion and more will come if there were tremors because money moves back in deposit from money market funds and all of that. RITHOLTZ: From uninsured money market to ensured bank deposits. ADMATI: Exactly. And so, the FDIC, which is assist for corporation, is totally backed by the government. However, in practice, they can — they have a line to treasury for, I think, 500 billion or something. But if — should something actually happen? So, we’re all on trust with the system. They tell us don’t run, don’t rush, your money is safe. And I trust that, RITHOLTZ: No bank runs. ADMATI: No bank runs. RITHOLTZ: So, when you … ADMATI: So, we saw the problem … RITHOLTZ: When you say that they stopped charging fees, I’ve been under the impression that the banks that have that nice little logo, the emblem, FDIC insured, aren’t those banks paying some small percentage of … ADMATI: Usually, they do and basically, I once asked a 40-year veteran of banking in all the biggest banks through the ’60s, ’70s, ’80s, ’90s who was basically came out of retirement to being a private equity firm that was buying distressed banks from the FDIC and he said to me, you’re looking at the big banks, let me tell you what goes on in the small banks. And then I asked him the following simple question because there are thousands of small banks in his country. RITHOLTZ: Right ADMATI: I said, what’s the business model of a small bank? And the answer … RITHOLTZ: They get purchased. ADMATI: The answer was three words, the business model, in other words, the positive net present value of the bank, he said, subsidized deposit insurance. RITHOLTZ: Subsidized deposit insurance. ADMATI: That’s it. In other words, their entire finding — so what they do on the asset side, anybody can do, zero NPV, commercial real estate, whatever. RITHOLTZ: Right. ADMATI: And how they fund is where they’re privileged. Now, what happens, my model of banking safety — basic safety net is that big banks may well be overpaying for the deposit insurance part to the FDIC and the FDIC — and they pass on some subsidies down to the small bank. So, they keep happy enough. And because the big banks have implicit guarantees that are priceless because they have access to the Fed and that is worth a ton. In the financial crisis, let’s remember, Goldman Sachs and Morgan Stanley became bank holding companies RITHOLTZ: Right. Previously, they were brokerage firms. ADMATI: They were investment banks. RITHOLTZ: Right. ADMATI: Regulated by the SEC which also Lehman was and at that time, the commercial banks, so Citibank within Citigroup, were regulated among others by the FDIC and the FDIC had Sheila Bair and Sheila Bair refused to implement this Basel II that had fancy-schmancy risk weights. Manipulable ways, model-based ways to allow the banks to tell us how risky they are and therefore, determined their equity requirements. RITHOLTZ: In other words, mislead regulators … ADMATI: And there’s research that showed that banks in Germany that were allowed to use this advanced approach to this fancy scientific approach to regulation were misrepresenting their own risk and making more loans with less risk weights. In other words, inappropriately low risk weights. RITHOLTZ: Just for that one small leverage. ADMATI: And the — yes. And, of course, the epitome of the failure of this regulation is assets that had zero risk weight but were risky like AAA rated security like Greek government, lending to Greek government in Europe. I mean, the banks in Europe basically fed this subprime lending to the Greek government. RITHOLTZ: Havong stories and he is in RITHOLTZ: Why should Greece pay more in interest rates than another country like Germany? That doesn’t make any … ADMATI: Well, they paid a tiny sliver but the French banks just went and lent them a ton and when they couldn’t pay, the European Union and all these other countries and the regulators that — who allowed these banks to make this reckless loan who had just bailed out these banks from investing in our real estate bubble … RITHOLTZ: Right. ADMATI: … couldn’t admit to their citizens that they would bail out their banks again if Greece default. So, that — they blamed all the things on the lazy Greeks and they kept bailing out Greece so Greece could pay the banks until the banks got out. So, that was the zero risk weight for sovereign lending in Europe and it’s just one example of how awful, awful the regulation was pre-crisis. And then you tell me that they recapitalized and did all of that. I’m not so impressed. Yes. First of all, Bank of America and Citi were zombies coming out of the crisis. RITHOLTZ: Right. ADMATI: Despite multiple bailout of Citi. RITHOLTZ: Citi for sure. Bank of America, not much better. ADMATI: Both of it. (inaudible) and zombie banks, I mean, I believe that. They were the examples where if you wanted to have this systemic resolution through the FDIC, we could have tried it in a — not in a crisis. RITHOLTZ: Meaning put them into a pre-packaged bankruptcy. ADMATI: Yes. Show me that it works. Show me that it works. Outside the crisis where everybody’s failing. I was in this FDIC Systemic Resolution Advisory Committee, was part of Dodd-Frank, was saying, if Lehman Brothers was sent to the FDIC for resolution because FDIC knows so well how to do the small bank resolution just come over the weekend, take over small bank and the people don’t even know. RITHOLTZ: Because they’re the same. Because Lehman Brothers are — so, Lehman Brothers had repo 105 where they were moving all of this risk in order … ADMATI: Thousands of subsidiaries. RITHOLTZ: Right. Just hundreds of billions of dollars and misrepresenting their books … ADMATI: Do you know … RITHOLTZ: … to their – to the regulators and to the investments. ADMATI: Do you know that the Lehman bankruptcy is not even over yet? Every year, I go back and check. RITHOLTZ: Yes. Still going on. Right.0 ADMATI: Still going on. RITHOLTZ: Still on though. ADMATI: So, this is how unresolvable this. Now, in the first … RITHOLTZ: To be fair, it was only 15 years ago. ADMATI: And it was a small — it was a small one by — I mean, this was the biggest bankruptcy at that time but there were … RITHOLTZ: Right. ADMATI: There were fraction of JPMorgan Chase or Citi or all of these that they tell you now can fail without and they have them do living with this all kind of stupid things. RITHOLTZ: I don’t think JPMorgan Chase had failed. ADMATI: No way. No. Because we don’t even … RITHOLTZ: If they did, it would just be incredibly disruptive. ADMATI: Exactly. So, I’m not even blaming for bailing out. I am blaming for not doing basic prevention RITHOLTZ: So, that raises really interesting point. You mentioned the French banks and the lazy Greeks When you offer people free money or dramatically discounted money, we shouldn’t blame the Greeks who took, hey, this is a great deal, we’re going to take this. You have to look at the banks that lent it to them and said, why these banks being so irresponsible and reckless to make such cheap loans to … ADMATI: Under the eyes of their regulators. RITHOLTZ: Yes. ADMATI: Under the eyes of their regulators. So, the regulators are not being called to why they allowed these loans to be made by too-big-to-fail French and German banks. RITHOLTZ: Right. ADMATI: French banks had in 2010 40 percent of Greek bond, government bonds. RITHOLTZ: That’s amazing. ADMATI: Yes. And Greece only did a little bit of restructuring after the banks pretty much got out, left the troika creditors to be a bailout fund of European nations. ECB and IMF, those where the troika. Now, why did IMF invest all? Because IMF was led by some French. No. Because IMF should not have intervened in a European … RITHOLTZ: It’s not their chore. ADMATI: Into European thing. Europe had enough to be able to resolve this. They just didn’t want to. So, IMF, being led by French people, Dominique Strauss-Kahn and then later by Lagarde who had to deal with it later in 2015 when they were kind of adopting their room if you want to call it. RITHOLTZ: So, let’s throw a parallel. The French banks and the Greek borrowers, there were a lot of people criticizing in the 2000s the U.S. homeowners who were taking HELOCs and refinancing and taking loans and I look at it as it’s not the responsibility of the consumer when an institution like a large bank says we’re going to loan you money and we’re not going to charge you interest for three years and then we’ll reset but don’t worry about it. The individual consumer doesn’t understand that. Wait, free cash, where do I sign? It’s the banks and the regulation, the regulatory … ADMATI: It’s the lady in the hot tub in “The Big Short” saying she’s got five houses. RITHOLTZ: Right. That’s right. ADMATI: Exactly. So, the question is how … RITHOLTZ: There is parallel decrease. ADMATI: No. Exactly. So, that’s why I used subprime to kind of raise a parallel. Yes. So, reckless loans were made to people who couldn’t pay, liar’s loans who are clearly couldn’t pay because of the commissions of the mortgages … RITHOLTZ: The whole structure was stuck. ADMATI: The whole structure. And you still had the Fed assuring us everything was fine there and you had a system incredibly levered and interconnected, create through all these contagion mechanisms that we explained in the book. A perfect storm from a small decline in housing prices. I mean, this should — the correction, the price collection itself was much smaller than … RITHOLTZ: Thirty percent of elevated … ADMATI: Than like Internet bubble burst. RITHOLTZ: Right. ADMATI: Which wiped out a lot of paper wealth. RITHOLTZ: And to put some numbers on that, the Internet peak to trough was about 81 percent decline in the NASDAQ comp whereas I think houses fell about 32 percent. Some sector — some areas that … ADMATI: And then there was some default. OK. But it means the amounts were trivial really. And how do they create a global financial crisis from a little housing bubble burst in the U.S.? RITHOLTZ: Securitization and it spread through everywhere. ADMATI: And super-duper triple securitization that are side bets basically on the mortgages and only the big short, they made money. RITHOLTZ: I mean, quite amazing. One of your research pieces really caught my eye. I love this title, “Is The Internet Broken?” Tell us about it. ADMATI: That was actually the title of a course that I taught with one of the producers of HBO “Silicon Valley” where … RITHOLTZ: Which we’ll talk more about later. ADMATI: Which — yes, which I got to be involved in in the last season only and therefore, it was — it was one of the ones I streamed kind of had to been stream sort of to see also the season I ended up at also being a cameo in the last, last show with Middleditch, the whole thing and being there in the Stanford graduation and decorating his office and all that stuff. Anyway, banking is super regulated but poorly regulated but it’s like born — kind of born tied at the hip with the state, with the government because of central banks, because of — so they’re just — because they’re about money, they’re kind of intertwined with government in ways that not everybody understands because they’re still private corporations but they are super-duper connected. RITHOLTZ: And just to put a little context about that, in the first, I don’t know, century of American history, they were completely independent and they failed with shocking irregularities (ph). ADMATI: Because they were all — because we had regulations that also prevented them from diversifying. So, they were very subject to local calamities and they just kept failing and their privately issued money was good as long as it was good and it wasn’t. So, then we decided to have a currency and the whole history of banking et cetera until we got to have national banks and these mammoth banks that consolidated and consolidated and still thousands of other banks. So, just a bloated huge system anyway. So, I was basically — I’ve seen banking since I started looking at it in 2009, 2010 and then becoming involved in that, consumed with that lobbying for policy, how I get to … RITHOLTZ: So, how did you go from banking to technology and the Internet? ADMATI: So, here’s what happened. So, then it’s over 2015, I’m kind of have already spent like literally five years of my life, fulltime, on banking where I just came to look and here I was just — and it’s just kind of — it’s a little bit sickening to kind of being in that environment. I’m like, wait a minute, I’m in Silicon Valley and now, at that point, there was already the first round of what’s called techlash.....»»

Category: blogSource: TheBigPictureAug 8th, 2022

The Challenges Ahead For Britain"s New Prime Minister

The Challenges Ahead For Britain's New Prime Minister Authored by Alasdair Macleod via GoldMoney.com, Britain’s next Prime Minister must address two overriding problems: London is at the centre of an evolving financial and currency crisis brought forward by a change in interest rate trends; and the reality of emerging Asian superpowers must be accommodated instead of attacked. This article starts by examining the economic challenges the next Prime Minister faces domestically. Are the two candidates equipped with a strategy to improve the nation’s economic prospects, and why can we expect them to succeed where others have failed? It is unlikely that either candidate is aware that there has been a fundamental shift in the direction of interest rates, the consequences of which are undermining debt mountains everywhere. The problem is particularly acute for the euro system. As well as for other major currencies, London operates as the clearing centre for transactions between the Eurozone’s commercial banks. If the euro system fails, London’s survival as a financial centre could be jeopardised. The other major challenge is geopolitical. Being tied into America’s five-eyes intelligence network, coupled with policies to remove fossil fuels as sources of energy Britain is condemned to falling behind the Asian superpowers, and sacrificing trading relationships with which her true interests must surely lie. And then there were two… The selection process for a new Conservative Prime Minister has whittled it down to two — Rishi Sunak and Liz Truss. The former is a wealthy meritocrat, former Goldman Sachs employee and hedge fund manager, the latter a self-made woman. Sunak was Chancellor (finance minister). Among several other high-office roles, Truss has been First Secretary to the Treasury. Both, in theory at least, should understand government finances. Both studied PPE at Oxford, so are certain to have been immersed in the Keynesian version of economics, which also informs Treasury thinking. Despite their common Treasury experience and being on that same page, Sunak’s and Truss’s pitches on economic affairs have been very different. Sunak aims to maintain a balanced budget, reducing taxes afterwards as economic growth increases tax revenues. This is Treasury orthodoxy. Truss is claiming she will cut taxes more immediately in an emergency budget to stimulate growth. She is emulating the Thatcher/Reagan supply-side playbook. The politics are straightforward. The electorate is comprised of about 160,000 paid up Conservative Party members, mostly leaning towards less government, free markets, and lower taxes. As a subset of over 40,000,000 voters nationwide, they may be reasonably representative of a silent majority in the middle classes which believe in conservative societal values. The one issue that matters above all for Conservative Party members is taxes. Given their different stances on tax, Truss has emerged as the early favourite. Furthermore, to the disadvantage of Sunak very few Chancellors make it to Prime Minister for a reason: like Sunak, they nearly always push the Treasury line on maintaining balanced budgets over the cycle, which means that they are for ever trying to pluck the goose for more tax with the minimum of hissing. Don’t expect geese to willingly vote for yet more exfoliation. The issue of less government in the total economy is not properly addressed by either candidate or is restricted to vague promises to do something about unnecessary bureaucracy. In arguing for free markets, Truss is stronger in this respect than Sunak who appears to be more captured by the permanent establishment. With the exception of Treasury ministers, all politicians in office are naturally inclined to seek increased departmental budgets, which is a problem for all tax cutters. But to understand the practical difficulties of reducing government spending, we must make a distinction between departmental expenditure limits and annually managed expenditure. The former is budgeted for by the Treasury in its allocation of financial resources. The latter can be regarded as including additional costs arising from public demand for departmental services. This explains why total departmental expenditure for fiscal 2020-21 was £566.2bn, representing about half of total government spending of £1,112bn.  With government spending split 50/50 overall on departmental expenditure limits and public demands for services, both issues must be addressed when reducing costs meaningfully. Failing to do so means only departmental expenditure limits are tackled, resulting in less resources to deliver mandated public services. That would be seen by the opposition and the public to be a government failing. Therefore, it is not sufficient to merely say to ministers that they must cut departmental expenditure, but laws and regulations must also be changed to reduce public service obligations as well. That takes time. Imagine tackling this problem with respect to the National Health Service. The NHS takes 34% of total departmental expenditure limits, yet it clearly fails to efficiently provide the public with the services required of it. Health ministers always argue that it needs more financial resources. This is followed by education (13% of total departmental expenditure). What do you do: sack teachers? And Scotland at 8% is another no-go area, where cuts would likely encourage the nationalist movement. And that is followed to a similar extent by defence spending at a time of a proxy war against Russia… One could go on about other ministry spending and the costly provision of their services, but it should be apparent that any realistic cuts in public services are likely to be minor and overwhelmed by rising and unbudgeted departmental input costs which are indirectly the consequence of the Bank of England’s monetary policies. It is therefore hardly surprising that neither Sunak nor Truss is seriously engaged with the subject of reducing state spending, merely fluffing around the topic. But total state spending is going to be an overriding problem for the future PM. Figure 1 shows the long-term trend of total managed expenditure relative to GDP, admittedly exacerbated by covid. Since then, there has been a recovery in GDP to £2,239bn in the four quarters to Q1 2022, and covid related disbursements have materially declined, so that in the last fiscal year, total government spending is estimated to have dropped to 46.5% of GDP from the high point of 51.9%. However, rising interest rates globally are set to drive the UK economy into recession. Even if the recession is mild, while GDP falls this will increase public spending on day-to-day public services back up to over 50% of GDP. The philosophical problem for the new PM can be summed up thus: with half the economy being unproductive and the productive economy shouldering the burden, how can economic resources be restored to producers in a deteriorating economic outlook? Inflation is not going away Orthodox neo-Keynesians in the government and its (supposedly) independent Office for Budget Responsibility do not recognise that the root of the inflation problem is the debasement of currency and credit. Furthermore, by thinking it is a short-term supply chain problem, or a temporary energy price spike due to sanctions against Russia, the OBR, in common with the Bank of England takes the view that consumer price rises will return to the targeted 2% level. Only, it might take a little longer than originally thought. Figure 2 shows the OBR’s latest forecasts (in March) for inflation (panel 1) and real GDP (panel 2). Note how the October forecast failed to reflect an annual CPI rising to more than 4%. In March that was raised to 8%, which is already outdated. Price inflation rising to over 10% is on the cards, and it should be noted that the retail price index, abandoned by government because of the cost of using it for indexation, already shows annual consumer inflation to be rising at 11.8%. The OBR’s response to these unwelcome developments is simply to push out an expected return to the 2% inflation target a little more into the future. Similarly, it expects the trajectory of GDP growth will be maintained, having just slipped a little. On this evidence, the OBR’s advice to a future prime minister and his chancellor will be badly flawed. Instead of going down the macroeconomic approach of modelling the economy, instead we need to apply sound, unbiased economic and monetary theories.  We know that the Bank of England’s monetary policies have debased the currency, reflected inevitably in a falling purchasing power for the pound. That is what drives the increase in the general level of prices. The primary cause is not, as government and central bank officials have stated, supply chain disruptions and the consequences of the war in Ukraine. That has only made things worse, in the sense that higher energy and commodity prices along with supply bottlenecks have encouraged the average citizen to adjust the ratio of personal liquidity to purchases of goods and services, bringing forward purchases and driving prices even higher. The debasement of fiat currencies everywhere is encouraging their users to dump them in what appears to be a slowly evolving crack-up boom encouraged by a background of product shortages. The common view that consumer price inflation is a temporary phenomenon is little more than wishful thinking, as is the latest argument developing, that rising interest rates will deflate economic demand. The official line is that lower demand will lead to lower prices. Realistically, less demand is the product of less supply, so it does not lead to lower prices. And here we must turn to the second panel in Figure 2, of the OBR’s modelling of real GDP. With the annual increase in the RPI already at 11.8% and that of the CPI at 9.1%, a bank rate of 1.25% fails to recognise the changed environment. Interest rates, bond yields and therefore the cost of government funding are all set to rise substantially. The consequences for financial assets will be to drive their market values lower. And unprofitable businesses relying on finance for their existence risk being wiped out, either because they will lose hope of ever being economic, or bank credit will be withdrawn from them. All empirical evidence is that currency debasement accompanies the destitution of an economy. Therefore, it is a mistake to think that a slump in business activity will neutralise the inflation problem. To deal with the inflation problem, the new prime minister will have to resist intervening and let all failing businesses go to the wall. But whoever becomes PM, there is no mandate to simply let events take their course. Instead, the burden of sustaining a failing economy will certainly lead to a soaring fiscal deficit — financed, of course, by yet more monetary debasement. Without quantitative easing, the appetite of commercial banks for financing the fiscal deficit at a time of rising bond yields is uncertain. It is a different environment from a long-term trend of declining interest rates, underwriting bond prices. A trend of rising interest rates is likely to lead to funding dislocations, as we saw in the 1970s. Furthermore, commercial banks have more urgent problems to deal with, which is our next topic. Banks will be in self-preservation mode GDP is no more than a measure of currency and credit in qualifying transactions. Growth in nominal GDP is a direct consequence of an increase in currency and bank credit, particularly the latter. An old rule of thumb was credit was larger than currency in the ratio of perhaps ten to one. The evolution of banking, the war on cash, and the advent of debit cards have changed that, and since covid, the ratio has increased to 37:1. This means that changes in nominal GDP are almost entirely dependent on the supply of bank credit for the production of goods and services. The availability of customer deposits to draw down for spending reflect the commercial banking network’s willingness to maintain the asset side of their balance sheets, comprised of lending and financial investment. Customer deposits, which are a bank’s liabilities, will contract if bank lending, recorded as a bank’s assets, contract. This is already evident in the slowing down of broad measures of money supply growth. Given that bank balance sheets are highly leveraged, and that the economic outlook is deteriorating, bank lending is almost certainly beginning to contract. This vital point appears to be completely absent in the OBR’s modelling of the economic outlook. By the usual metrics, commercial banks are extremely over-leveraged after thirteen years of the current bank credit cycle, in other words since the Lehman failure. Table 1 below summarises the position of the three British G-SIBs (designated global systemically important banks). They can be regarded as a banking proxy for exposure to global systemic risks. Important points to note are that balance sheet leverage, the relationship of assets to total equity, are as much as double multiples of between eight and twelve times at the top of a normal bank credit cycle. Balance sheet equity includes accumulated undistributed profits as well as the common equity entitled to them.[i] All three banks’ common shares trade at substantial discounts to their book value.  Their share prices tell us that markets have assessed that there is a high level of systemic risk in these banks’ shares. It would be extraordinary if the directors of these banks are blind to this message. Before covid when economic dangers were less apparent, it would have been understandable though not necessarily excusable for them to use this leverage to maximise profits, particularly since all banks were following similar lending policies.  Covid came, and all banks had no option but to extend loan facilities to businesses affected, for fear of triggering substantial loan losses on a scale to take down the banks themselves. Furthermore, the government put in loan guarantee schemes. Post-covid, bankers face the withdrawal of government loan guarantees, rising interest rates and the consequences for their risk exposure to higher interest rates, as well as declining values for mark-to-market financial assets — the latter affecting both bank investments and collateral against loans. Clearly, the cycle of bank credit is on the turn and will contract. The dynamics behind this phase of the cycle indicate that to take leverage back down to more conservative levels the contraction will have to be severe. But an excessive restriction of credit both causes and produces a run for cash notes and gold. And thus, without intervention banks and businesses all collapse in a universal crash.  With very little of GDP recorded in pound notes and coin, as a statistic it is driven overwhelmingly by the quantity of bank credit outstanding. In a credit contraction the GDP statistic will collapse — unless the Bank of England takes upon itself the replacement of credit in a massive economic support programme.  The consequences are sure to undermine government finances badly. Sunak’s hope that a balanced budget can be maintained, let alone permit him to oversee tax cuts when government finances permit, becomes a fairy tale when tax revenues slump and spending commitments increase. So, too, is Truss’s belief that immediate tax cuts will benefit economic growth and restore tax revenues. The reality of office is likely to decree fiscal policies very different being those being touted by both candidates. The impending collapse of the euro system I wrote recently for Goldmoney about the inevitable crisis developing in the euro system, here. Since that article was published, the European Central Bank has raised its deposit rate to zero and instituted a rescue package for the highly indebted PIGS in its awkwardly named Transmission Protection Instrument. In plain language, the ECB will continue to buy PIGS government debt to ensure their yields do not rise much further relative to benchmark German bunds. It is increasingly clear that the euro system is in deep trouble, caught out by the surge in consumer price inflation. Rising interest rates, which have only just started, will undermine Eurozone commercial bank balance sheets because they obtain much of their liquidity by borrowing through the repo market.[ii] TARGET2 imbalances threaten to collapse the system from within as the interest rate environment changes. The ECB and its shareholding network of national central banks all face escalating losses on their bonds, which earlier this month I calculated to be in the region of €750bn, nearly seven times the combined euro system balance sheet equity. Not only does the whole euro system require to be refinanced, but this is at a time when the Eurozone’s G-SIBs are even more highly leveraged than the three British ones. Table 2 updates the one in my article referred to above. With the average Eurozone G-SIB asset to equity ratios of over 20 times, the euro’s G-SIBs are one of the two most highly leveraged networks in global banking, the other being Japan’s. The common factor is negative interest rates imposed by their central banks. The consequence has been to squeeze credit margins to the extent that the only way in which banks can sustain profit levels is to increase operational gearing. Furthermore, an average balance sheet leverage of over 20 times does not properly identify systemic risks. Bank problems come from extremes, and we can see that at 27 times, Group Credit Agricole should concern us most in this list. And we don’t see all the other Eurozone banks trading internationally that don’t make the G-SIB list, some of which are likely to be similarly exposed. The problem for Britain is twofold. Including its banks, Britain’s financial system is more exposed to Eurozone risks than any other, and a Euro system failure would be a catastrophe for it. Furthermore, Eurozone banks and fund managers use UK clearing houses for commercial euro settlements. Counterparty failures will contaminate systemically all participants, not only dealing in euros but all the other major currencies settled in London as well. The damage is sure to extend to forex and credit markets, including all OTC derivatives which are an integral part of bank clearing facilities. At the last turn of the bank lending cycle, it was the securitisation of liar loans in the US which led to what is commonly referred to as the Great Financial Crisis. This is a term I have rarely used, preferring to call it the Lehman Crisis because I knew, along with many others, that the non-resolution of the excesses at the time would store up for an even greater crisis in the future. We can now begin see how it will be manifested. And this time, it looks like being centred on London as a financial centre rather than New York. We must hope that a collapse of the euro system will not happen, but there is mounting evidence that it will indeed occur. The falling row of dominoes is pointing at London, and it could even happen before the Conservative Party membership have voted for either Truss or Sunak in early-September. Dealing with a banking crisis fall out On the advice of the Bank for International Settlements, following the Lehman crisis the G20 member states agreed to make bail-ins mandatory, replacing bailouts. This was a politically motivated move, fuelled by the emotive belief that bailing out banks are at the taxpayers’ expense. In fact, bank bailouts are financed by central banks, both directly and indirectly. The only taxpayer involvement is marginally through their aggregated savings in pension funds and insurance companies. But these funds have been over-compensated with extra cash through quantitative easing. The audit trail leads to the expansion of currency and credit every time, and not to taxes as the phrase “taxpayer liabilities” implies. All the G20 nations have passed legislation enabling bail-in procedures. In the Bank of England’s case, it retains discretion to what extent bail-in as opposed to other rescue methods might be used. As to specifics for the other G20 members it is unclear to what extent they have retained this flexibility and understand bail-in ramifications. And it could be an additional confusion likely to complicate a global banking rescue, compared with the previously accepted bail-out procedures. In theory, a bail-in reallocates a bank’s liabilities from deposits and loans into shareholders’ capital — excepting, perhaps, smaller depositors covered by deposit guarantee schemes. But even that is at the authorities’ discretion.  The objective can only make sense for single bank, as opposed to systemic failures. But if it were to be applied to an individual banking failure in the current unstable situation, it would almost certainly undermine other banks, as bank loans and other non-equity interests would be generally liquidated, and deposits flee to banks deemed to be safer as panic sets in. The risk is that bail-in procedures could set off a system-wide failure, particularly of the banks rated by the market with substantial discounts to book value — including all the UK’s G-SIBs (see Table 1 above). Even assuming the Bank’s bail-in procedures are ruled out in dealing with a systemic banking crisis, to keep banks operating will require a massive expansion of credit from the Bank of England. In effect, the central bank will end up taking on the entire banking system’s obligations. With London at the centre of a global banking crisis, all other major central banks whose banking and currency networks are exposed to it must be prepared to take on all their commercial banking obligations as well. Britain’s place in the world must be secured The problems attendant on currencies afflict all the majors, with the UK at the centre of the storm because of its pre-eminent role in international markets. There is no evidence that the leadership at the Bank of England is equipped to understand and deal with an increasingly inevitable economic and monetary crisis which will take sterling down. Nor has there been any attempt by the Treasury to rebuild the nation’s depleted gold reserves to protect the currency, which is a gross dereliction of public duty. But we must now turn our attention to geopolitical matters, where there is currently no pragmatism in Britain’s foreign policies. Since President Trump’s aggressive stance against the challenge to America from Chinese technology, the UK as America’s most important partner in the five-eyes intelligence sharing agreement has sided very firmly with America against both Chinese and Russian interests. The recent history of the five-eyes partnership is one of political blindness — ironic given its title. Wars against terrorism, more correctly US intelligence operations which destabilise Muslim nations before the military go in to sort the mess out have been a staple since the overthrow of Saddam Hussein. A series of wars in the Middle East and Afghanistan have yielded America and her NATO allies only pyrrhic victories at best, created business for the US armaments industry, and resulted in floods of refugees attempting to enter Europe. Meanwhile, these actions have only served to cement the partnership between Russia, China, and all the Asian members of the Shanghai Cooperation Organisation amounting to over 40% of the world population. They have a common mission to escape from the dollar’s hegemony. America’s abandonment of Afghanistan was pivotal. As America’s closest intelligence partner, Britain following Brexit is no longer a direct influence in Europe’s domestic politics. Together, these factors have surely encouraged Putin to adopt more aggressive tactics with the objective of undermining the NATO partnership, always seen as the principal threat to Russia’s borders. This is the true objective behind his proxy war against Ukraine. Supported by Britain, the US response has been to fuel the Ukrainian proxy war by supplying military hardware. But the biggest mistake made by the NATO partnership has been to impose sanctions on Russian trade. The consequences for energy and other vital commodity prices do not bear unnecessary repetition. The knock-on effects for global food prices and the shortages emerging ahead of the winter months are still evolving. Sanctions have become NATO’s suicide note — it is beginning to look like a modern version of Custer’s last stand.  It is surely to the private horror of Western strategists that the sense behind Putin’s strategy is emerging: it is to further the economic consolidation of Asia with the unfettered advantages of fossil fuels traded at significant discounts to world prices. At their own behest, America and its NATO allies are shut out of it entirely. Global fears of climate change and the war against fossil fuels are essentially a Western concept, not shared by the great Asian powers and the Middle East. The hysteria over fossil fuel consumption has led European nations to eliminate their own production in favour of renewables. Consequently, to make up energy shortfalls they have become dependent on imported oil and gas from Russia. And that is what will split Europe away from US hegemony. Unrestricted energy supply is crucial for positive economic outcomes. The result of US-led sanctions is that energy starvation faces all her allies, including Britain and the members of the European Union. As an oil-producing nation herself, America is less affected, her allies suffering the brunt of sanctions against Russian energy supplies.  By committing to policies to lessen climate change without fossil fuel sources of energy, the economic prospects for Europe and the UK are of economic decline.  Only last weekend agreements have been signed between Russia, Iran, and Turkey, with Iran due to become a full member of the Shanghai Cooperation Organisation later this year. Other than Turkey’s wider economic interest, it is essentially about oil. In addition to these developments, Russia’s Foreign Secretary Sergei Lavrov went on to address the Arab League in Cairo. It is clear that Russia is building its relationship with oil producers in the Middle East as well, whose members are faced with declining Western markets and growing Asian demand. Therefore, British policy tied into US hegemony with a self-imposed starvation of energy is untenable. It is worse than being on the losing side. It guarantees economic decline relative to the emerging Asian powers. A future Prime Minister needs to pursue a more pragmatic course than the bellicose stance against Russia and China, currently espoused by Liz Truss. As Britain’s current Foreign Secretary, she is briefed by the UK’s intelligence services, which are closely aligned with their American colleagues. There is groupthink going on, which must be overcome. The interest rate trend and the looming threat of the mother of all financial crises on London’s doorstep requires a leadership strong enough to take on the civil service, always complacent, and guide the wider electorate through some troubling times. Following the financial and currency crisis, mindsets must be radically changed, steered away from perpetual socialisation of economic resources back towards free markets. Which of these two candidates for the premiership see us through? Probably neither, though being less a child of the establishment Liz Truss might offer a slim chance. The task is not impossible. Currencies have completely collapsed before, and nations survived. Instead of being restricted to one or a group of nations, the looming crisis threatens to take out what we used to call the advanced economies in their entirety, so it will be a bigger deal. Fortunately for Britain, her citizens are less likely to riot than their continental cousins. But as a warm-up for the main event, our new leader will have to navigate through growing discontent brought on by rising prices, labour strikes and all the other forms of economic pestilence which bought Margaret Thatcher to power. Tyler Durden Mon, 08/01/2022 - 05:00.....»»

Category: personnelSource: nytAug 1st, 2022

The UK And Its Lost Opportunities

The UK And Its Lost Opportunities Authored by Alasdair Macleod via GoldMoney.com, Two years after leaving the EU Britain has made almost none of the promised progress towards economic liberalisation. While Brussels hasn’t been helpful, libertarian ministers in the Tory government have been both conquered by the bureaucracy of the civil service and even turned into high spending statists. There has been no attempt to reduce the state’s suffocating dominance over the economy. On current policies, the private sector is set to continue its long-term decline, with higher taxes and ever-increasing regulation. But it needn’t be so. This article looks at the dangers and opportunities that Britain faces, principally inflation, the challenge of government spending, of maintaining a balanced budget, trade policy and why Britain should just declare unilateral free trade, foreign policy in a world where the future is American decline and a rising Russia—China partnership, and the economic craziness of the green agenda. There is no sign that these important issues are being addressed in a constructive and statesman-like manner. Fortunately or unfortunately, rising interest rates threaten to bring forward a crisis of bank credit of such magnitude that fiat currencies are likely to be undermined. Most of the policies recommended herein should be incorporated after the banking and currency crisis has passed as part of a reset designed to avoid repeating the mistakes of big government, Keynesianism, and the socialisation of economic resources. Decline and fall “This is the week a government that began with such promise finally lost its soul. Its great policy relaunch is a tragic mush, proof that it no longer believes in anything, not even in its self-preservation.” Allister Heath, Editor of The Sunday Telegraph writing in today’s Daily Telegraph 3 February Two years ago this week, Britain formally left the EU. Yet, it is estimated there are 20,000 pieces of primary EU legislation still on the statute books. And only now is there going to be an effort to remove or replace them with UK legislation. Obviously, going through them one by one would tie the legislative calendar up for years, so it is proposed to deal with them through an omnibus Brexit Freedoms Bill. Excuse me for being cynical, but one wonders that if the Prime Minister had not come under pressure from Partygate, would this distraction from it have got to first base? After two years of inaction, why now? And it transpires that instead of doing away with unnecessary regulations as suggested in the Brexit Freedoms Bill, legislative priority will be given to the economically destructive green agenda. This underlines Allister Heath’s comment above. There is also irrefutable evidence that a remain-supporting civil service has continually frustrated the executive over Brexit and has discouraged all meaningful economic reform. The way the Brexit Freedoms Bill is likely to play out is for every piece of EU legislation dropped, new UK regulations of similar or even tighter restrictions on production freedom will be introduced — drafted by the civil service bureaucracy with its Remainer sympathies. For improvement, read deterioration. It will require ministers in all departments to strongly resist this tendency — there’s not much hope of that. The track record of British government is not good. Since Margaret Thatcher was elected, successive conservative administrations have pledged to reduce unnecessary state intervention and ended up fostering the opposite. They raise taxes every time they are elected, even though they market themselves as the low tax party. While the number of quangos (quasi-autonomous national government organisations) has been reduced, in practice it is because they have been merged rather than abandoned and their remits have remained intact. Another measure of government intervention, the proportion of government spending to total GDP, has risen from about 40% to over 50% in 2020. An unfair comparison given the impact of covid, some would say. But there is little sign that the explosion of government spending will come back to former levels. Like the unelected bureaucracy in Brussels from which the nation sought to escape, the UK’s civil service has no concept of the economic benefits of free markets. Without having any skin in the game, they believe that government agencies are in the best position to decide economic outcomes for the common good. Decades of Keynesian reasoning, belief in bureaucratic process and never having had to work in a competitive environment have all fostered an arrogance of purpose in support of increasing statist economic management. It is a delusion that will end in crisis, as it did in 1975 when under a Labour government Britain was driven to borrow funds from the IMF that were reserved for third world nations. Against this background of restrictions to economic progress, the nation is unprepared to deal with some major issues appearing on the horizon. This article examines some of them: inflation, state spending, trade policies, foreign policies, and the economic harm from the green agenda. These are just some of the areas where policies can be improved for the good of the nation and create opportunities for greatness through economic strength. Inflation In common with other central banks, the Bank of England would have us believe that inflation is of prices only, failing to mention changes in the quantity of currency and credit in circulation. Yet even schoolchildren in primary education will tell you that if a cake is cut into a greater number of pieces, you do not end up with more cake; you end up with smaller pieces. It is the same with the money supply, or more correctly the quantity of currency and credit. Instead, central banks seem to believe in the parable of the feeding of the five thousand: five loaves and two fishes can be subdivided to satisfy the multitudes with some left over. The source of an increase in the general price level is increasing quantities of currency and credit, leading to each unit buying less, just like the smaller slices of cake. And measured by the Bank of England’s M4 (the broadest measure of currency and credit) the currency cake has been subdivided into many more smaller pieces in recent times. Figure 1 shows that M4 has increased from £1.82 trillion at the time of the Lehman failure to £2.96 trillion last September, an increase of 63%. But the rate of increase accelerated substantially in the first six months of 2020 to an annualised rate of 19.3%. This is the engine driving prices of goods higher, and to a lesser extent, services. At that time, currency inflation was everywhere, leading to significantly higher commodity prices. The commodity inputs to industry represent sharply rising production costs, coupled with skill shortages and supply chain disruptions. But these are merely the evidence of the currency cake being more thinly sliced. Buying and installing a new kitchen in your house requires more of the smaller slices of the currency cake than it did last year. All else being equal, there are still significant price effects to come with past currency debasements yet to work their way through to prices. And given that monetary policy is to meet rising prices by raising interest rates while still inflating, higher interest rates will follow as well. The effect on bond yields and equity prices will be beyond doubt. But all else is never equal, and the effect of higher production costs will be to close uneconomic production and put overindebted manufacturers out of business. This development is already becoming evident globally, with the post-pandemic bounce-back already fading. Being undermined, the effect on financial collateral values is likely to make banks more cautious, reduce bank lending, and at the margin increase the rate of foreclosures. The problem is that most currency in circulation is the counterpart of bank credit. A bond and equity bear market will lead to a contraction of bank credit, triggering policies designed to counter deflation. What will the Bank of England do? Undoubtedly, it will want to increase its monetary stimulation at a time of rising interest rates and falling financial values. The Bank will also find itself replacing contracting bank credit to keep the illusion of prosperity alive. The issuance of base currency will not be a trivial matter. But according to the Keynesians, who can only equate price levels with consumer demand, inflation during an economic slump should never happen. Worse, it will come at a time when UK banks are highly leveraged at record levels — Barclay’s, for example, has a ratio of assets to equity of about twenty times. And as the European financial centre, London is highly exposed to counterparty risk from the Eurozone which, being in a desperately fragile condition, is a major systemic threat. With these increased dangers so obviously present, it would behove the Bank and the Treasury to rebuild the national gold reserves, so foolishly sold down by Gordon Brown when he was Chancellor. It is the only insurance policy against a systemic and currency collapse that is becoming more likely as inflationary policies are pursued. Government spending As mentioned above, in 2020 the government’s share of GDP rose to over 50% and there appears to be no attempt to rein it in. And for all the rhetoric about post-Brexit Britain being an attractive place to do business, any government taking half of everyone’s income and profits in the form of taxes will fail to attract as many international businesses to locate in Britain as would otherwise be possible. Government spending is inherently wasteful. To enhance economic performance, the solution is to cut government spending to as low as possible in the shortest possible time and to reduce taxes with it. But instead, the Treasury is seeking to cover the budget deficit, which was £250bn in the last fiscal year (11.7% of GDP) by increasing taxes without reforming wasteful government spending. The civil service has protected its practices by seeing off attempts by government appointees, such as Dominic Cummings, to remodel the civil service on more effective lines. Critics of the Treasury’s policies say it is better to cut taxes to encourage growth which in future will generate the taxes to cover the deficit. But with the state already taking half of everyone’s income on average in taxes, the increase in the deficit while maintaining government spending will only add to inflationary pressures. The transfer of wealth from the private sector to the public sector by the expansion of currency will more than negate any benefit to the private sector from lower taxes. And the higher interest rates from yet higher price inflation will bankrupt overindebted borrowers in a highly leveraged economy. Those who think the Bank of England is clueless about finances and economics should not omit the Treasury from their criticisms. About the only thing the Treasury gets right is the necessity to eliminate the budget deficit, albeit by the wrong approach which is simply to increase the tax burden on the private sector. But in this objective it has consistently failed, as shown in Figure 2. From the seventies, budget deficits have only been eliminated briefly in the boom times of fiscal 1989/90 and 2000/01. The OBR’s forecast of a return to near balance in 2023/24 is a demonstration of wishful thinking. On the verge of a new downturn in production brought about by unsustainable cost pressures, the deficit is likely to decline only marginally, if at all. Budget deficits create an additional problem, because without an increase in consumer savings (discouraged by the Keynesians), national accounting shows that a twin trade deficit is the consequence. And without the trade deficit contracting, the Remainers in the establishment are bound to claim that Brexit has not delivered the benefits in trade promised by the Brexiteers. Trade policy Besides gaining political independence, Brexit was said to lead to an opportunity for better terms of trade than could be obtained as a member of the EU. Britain’s industrial history and heritage is as an entrepôt, whereby goods were imported, processed, and re-exported to international markets. The concept of freeports was promoted with this in mind. The UK government has so far made laborious progress in signing trade agreements in a protectionist world. A far better approach would be to abandon trade agreements and tariffs altogether, with the sole exception of protecting some agricultural produce, for which special treatment can be justified. Today, agriculture is a small part of the economy, and the benefits to the consumer of scrapping tariffs are relatively minor, but risk fundamentally bankrupting important parts of the rural economy. To understand why Britain should abandon trade agreements for tariff free trade, we should refer to David Ricardo’s theory of comparative advantage. Ricardo argued that if a distant producer was better at producing a good or service than a local one which is therefore unable to compete, then it is better to reap the benefit of the distant production and for the local producer to either find a better way of manufacturing the product, or to deploy the capital of production elsewhere. The theory was put to the test by Robert Peel, who as Prime Minister rescinded and finally repealed the Corn Laws between 1846—1849. The consequence for the British economy was that lower food prices in what was for most of the population a subsistence economy allowed the labouring masses to buy other things to improve their standard of living. Not only did living standards improve, but employment was created in the woollen, cotton, and tobacco industries and much else besides. Furthermore, other countries began to adopt free trade policies, which combined with sound money led to widespread economic improvement. By the First World War, over 80% of the world’s shipping then afloat, central to international trade, had been built in Britain. The situation today is different, in that the effect of removing food tariffs from what has become a relatively small sector is far too emotive for the potential gain. This is less true of industry, despite the undoubted cries that would emanate from protectionists. But a Glaswegian is perfectly free to buy a product made in Birmingham, or to contract for a service provided from London, even if there is an equivalent available in Glasgow. But what’s the difference between our Glaswegian buying something from Birmingham, compared with Stuttgart, or Lyons, or China? The answer is none, other than he gets more choice, and the signal sent to domestic manufacturers is they are uncompetitive. And it’s no good claiming that foreigners are unfair competition. If a foreign manufacturer is subsidised in its production, that is all to the benefit of UK consumers. Tariffs are a tax on consumers and lead to less efficient domestic production. The benefit for Britain is that if it becomes a genuinely free trade centre, international manufacturing and service activities would gravitate to the UK, providing additional employment — all the empirical evidence confirms this is what happens. It would be a direct challenge to the EU’s Fortress Europe trade policies designed to keep foreigners out. And to the degree that tariff reform is promoted, Britain would be doing the world a favour, because as in Robert Peel’s time, other nations would likely follow suit. The dirty truth about tariffs is that they are a tax on one’s own people as well as an unnecessary restriction of trade. Instead of recognising this truth and the evidence of its own experience, Britain is pursuing a halfway-house of laborious trade agreements. Through limited relief on taxes, the half-hearted proposal to set up free ports is an admission of the burden the government places on business in the normal course: otherwise, why are free ports an incentive? Far better to reduce taxes on all production and remove the tariff burdens on everyone. This conservative administration started with constructive trade policies, but the permanent establishment has whittled them down to the point where they are likely to be minimised and ineffective, confirming in its Remainer yearnings that Brexit was a political and economic blunder. Foreign policy One of the opportunities presented by Brexit was for the UK government to think through its foreign policy agenda, and how Britain can best serve itself and the rest of the world. The history of its foreign policy might have provided a guide, though it seems to have been ignored. Instead, Britain is sticking to the Foreign Office’s and intelligence services’ status quo, which is basically to be unquestioningly allied through the five-eyes partnership with America. Admittedly, it would have been difficult to do otherwise in the wake of President Trump’s successful takedown of Huawei, spreading fear of Chinese spying in a modern version of reds under the bed. But the reality of modern geopolitics is that Halford Mackinder’s Heartland Theory, first presented to the Royal Geographical Society in London in 1904, is coming true: “Who rules East Europe commands the Heartland; who rules the Heartland commands the World-Island; who rules the World-Island commands the world.” — Mackinder, Democratic Ideals and Reality, p. 150 There can be no doubt that the alliance between Putin’s Russia and Xi’s China together with the other members of the Shanghai Cooperation Organisation are proving Mackinder’s prophecy and that they are destined to become the dominant geopolitical force in the world. Therefore, Britain remains hitched in the long term to the eventual loser when it should be reconsidering its relationship with Eastern European nations, for which read Russia. A substantial rethink over foreign policy is due, and instead of the status quo, there is profit to be had in studying the status quo ante — Britain’s foreign policies at the time of the Napoleonic wars and subsequently. Lord Liverpool was Prime Minister, with Castlereagh as Foreign Secretary and Wellington as commander-in-chief of the army. They had an iron rule never to interfere in a foreign state’s domestic policies but only to act to protect British interests. Those interests principally concern trade, and they guided foreign policy and protected British property in the colonies until the First World War. Compared with the foreign policy principals of the nineteenth century, the support given to American hegemony in attacking nations in the Middle East and North Africa on purely political grounds has been a disaster, leading to unnecessary deaths and the displacement of millions of refugees. Some of these ventures could have been prevented if Britain had not joined in. Britain’s refusal to support a Syrian invasion after a parliamentary vote turned it down was a rare example of Britain standing up for its own interests, no thanks to a government which would otherwise have sent the troops in. The US is dragging its heels with respect to a trade agreement with the UK, and that should be considered as well. A modern Castlereagh would take these factors into consideration in proposing a new treaty securing trade and defence considerations for both European nations and Russia, thereby respecting their sovereignties. There are enough elements in play for a sensible outcome, particularly if America is made to accept that its role in Europe is divisive and that it has no option but to accommodate compromise. The British government is in a unique position to broker a deal, if it can demonstrate political independence from all parties, including America. The green agenda The government’s green agenda, whereby the nation is mandated to cut carbon emissions by 78% from 1990 levels by 2035 with a target of net zero by 2050 is a deliberate policy of economic destruction. After the boost to non-fossil fuel investment, initially funded by yet more government spending, the costs imposed on the population to replace domestic heating by gas and oil with heat pumps is prohibitive and impractical. It can only be achieved by the destruction and rebuilding of swathes of existing residential and commercial properties. The energy available will be overdependent on unreliable wind and solar panel sources, and the available supply will be facing far larger demands on the grid than imposed today. Keynesians advising the government seem to believe that all the investment and rebuilding to new ecological standards stimulates economic activity — this has been argued by them before in the context of post-war reconstruction. But then Bastiat’s broken window fallacy, whereby the alternative use of economic resources is not being considered, appears to have passed them by. The green replacement of transport logistics, which is well over 95% diesel driven, is a destruction of efficient and current capacity to be replaced by electrical powered transportation whose energy source is to be shared with all other energy demands. The only possible solution to the problem created by climate change activism involves the rapid development of nuclear energy. But besides taking decades from drawing board to switch on, nuclear is stymied on cost grounds, with wind and solar being far cheaper on a per therm basis. Furthermore, only 16% of Britain’s electricity supply is nuclear, and almost half of that is due to be decommissioned by 2025, with only one new plant under construction. The UK government’s green policies are propelling the nation into an energy disaster, when it has substantial fossil fuel reserves available in the form of coal and natural gas. Coal driven electricity supply has been reduced to under 3%. Instead of being phased out it should be brought back into supply production, because scrubbers remove almost all particulates and sulphates, and doubtless can be further developed to deal with CO2 emissions as well. There are good reasons to reinstate coal and for that matter gas fracking. China and India retain and are increasing their coal powered supplies, giving them a significant energy price advantage for their own economies over the West. And while they have signed up to eventually reducing their coal dependency, it is a promise to do so at a vanishingly future date. On energy grounds alone, Britain along with other European nations are committing themselves to swapping their economic status with emerging nations, so that when the latter have fully emerged, Britain and Europe will then have the third world status. Whatever climate change debate merits, it is an argument which is not to be confused with economics. It must be admitted that in the enthusiasm for doing away with fossil fuels and primary and reliable sources of energy, under this current government the outlook for Britain’s economy is of an accelerated decline. The likely outcome of government policies From what started as a government of ministers with a strong libertarian approach, two years later we see the opportunity to improve Britain’s economic consequences sadly squandered. Politically, the position is fragile, with the Prime Minister struggling to survive in the wake of the report on Partygate and the ongoing police investigation. Furthermore, he appears to have found it far easier and more pleasurable to increase spending than address wasteful government spending. It is difficult to be optimistic, with the signs that the permanent civil service establishment remains firmly in charge and is increasing its economic and bureaucratic influence over weak ministries. Perhaps the most important of the difficulties outlined above is monetary inflation, likely to lead to higher interest rates in the coming months. This is not a trend isolated to sterling, and even on a best-case basis whereby a Conservative government addresses the issues raised in this article, it is very likely that attempts at economic, monetary, trade policy, foreign policy, and administrative reforms will be overtaken by the repetitive cycle of bank lending contraction. So highly geared have banks in the Eurozone become, for which London acts as the principal financial centre, that rising interest rates seem sure to trigger a global banking crisis with London as an epicentre on a scale larger than that of thirteen years ago when Lehman failed. Such an event is likely to destroy not only banking and central banking as we know it today, but currencies, the debasement of which socialising governments increasingly rely upon. Nevertheless, the issues raised in this article will remain and need to be addressed after a currency and credit crisis has passed and economic stability begins to return. The role for a British government with respect to foreign policy will become more important, particularly for post-crisis European political stability when the euro and possibly the entire Brussels construct have been destroyed. In this event the threat of another European war cannot be dismissed, and we will need the wisdom of a modern Lord Liverpool and Viscount Castlereagh. The destruction of the fiat currency system will provide opportunities for a reset, based on the lessons learned. The post-crisis government must learn from the mistakes of past errors and be the servant of the people and not its master. It must not interfere in the economy, and keep its size to the minimum possible, taxing no more than 10—15% of everyone’s income and profits. It must restrict its role to providing a framework for contract and criminal law and the policing of the latter, as well as the defence of the realm. It must not respond to any demands for special treatment from either businesses or individuals. Individuals must take full responsibility for their own actions, and any welfare strictly limited. And most importantly, the state must ensure that currency is sound, backed by and exchangeable for gold coin. Tyler Durden Sun, 02/06/2022 - 07:35.....»»

Category: blogSource: zerohedgeFeb 6th, 2022

3 Bank Stocks for 2022 With Federal Reserve in the Spotlight

Banks will benefit from the Fed's hawkish monetary policy stance. Hence, we pick - Bank of America (BAC), East West Bancorp (EWBC) and Western Alliance (WAL) - for profitable returns in 2022 and beyond. All eyes are on the Federal Reserve, as the two-day FOMC policy meeting is scheduled on Dec 14-15. There have been increasing speculations among market participants that the central bank’s monetary policy stance will likely turn a bit more hawkish.This, along with subsiding COVID Omicron variant fears, has turned the tide in favor of banks. Today, we are choosing three bank stocks – Bank of America BAC, East West Bancorp, Inc. EWBC and Western Alliance Bancorporation WAL. These banks are fundamentally strong and will benefit from robust economic growth, rising loan demand and higher interest rates.Effective November, the Fed began tapering its $120-billion bond purchase program, with plans to end the quantitative easing in June 2022. Subsequently, the first interest rate hike since March 2020 wasn’t expected before the second half of next year.Nonetheless, on Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said, “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.” Powell also got rid of his long-used “inflation is transitory” remark.Thus, this will allow the central bank to raise rates earlier. Per the CME FedWatch Tool data, at present, there is an 80.8% probability that the Fed will move ahead with a 25 basis points (bps) interest rate hike in June 2022. Further, market participants anticipate two more rate increases of 25 bps each following the June hike.Banks thrive in the rising rate environment. Thus, banks, witnessing shrinking net interest margin and net interest income (NII) since March 2020, are expected to benefit. Improving economy, increase in demand for loans and efforts to diversify operations will also support banks’ financial performance, going forward.Our PicksOn the back of these favorable developments, this is the right time to buy bank stocks to generate solid returns in 2022 and beyond.Short-listed banks have a long-term (three-five years) earnings growth rate of 5% or more, and a market cap of not less than $10 billion. Also, all three banks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.So far this year, these banks have outperformed both Zacks Finance sector’s rally of 21.1% and the S&P 500 Index gain of 26.2%.Year-to-Date Price Performance Image Source: Zacks Investment ResearchBank of America is one of the largest banks in the United States. With total assets worth $3.09 trillion as of Sep 30, 2021, this Charlotte, NC-based bank provides a diverse range of banking and non-banking financial services and products across North America and globally.BAC is on track to open 500 centers in new cities and redesign existing centers with upgraded technology. These efforts, along with the success of Zelle and Erica, have enabled the company to improve digital offerings and cross-sell products. The acquisition of Axia Technologies will strengthen its healthcare payments business.The company is also massively benefiting from the global deal-making frenzy. With deal-making and underwriting businesses likely to continue at a robust pace and the investment banking (IB) pipeline remaining strong, BAC is expected to record steady growth in IB fees.Prudent cost management continues to support BAC’s financials. Over the last several quarters, Bank of America has incurred on an average $14 billion in expenses, despite undertaking strategic growth initiatives.In July 2021, following the Fed’s approval, Bank of America announced a dividend hike of 17% to 21 cents per share. In October, its share repurchase plan of $25 billion was also renewed.With a market cap of $361.4 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will aid financials. The stock has gained 46.8% so far this year. BAC’s long-term projected earnings growth rate of 7% promises rewards for shareholders.Headquartered in Pasadena, CA, East West Bancorp serves as a financial bridge between the United States and China by providing various consumer and commercial banking services to the Asian-American community. EWBC operates through more than 120 locations in the United States and China.East West Bancorp is focused on its organic growth strategy. Though the company’s NII, which is the primary source of its revenues, declined in 2020, the same witnessed a CAGR of 5.1% over the last four years (2017-2020). The momentum persisted in the first nine months of 2021 as well. Improvement in loans and deposits is expected to further support NII.East West Bancorp has a solid balance sheet. Also, investment-grade credit ratings of BBB and a stable outlook from both S&P and Fitch Ratings render EWBC favorable access to the debt markets.East West Bancorp’s capital deployment activities seem impressive. This January, the company hiked its quarterly dividend by 20% to 33 cents per share. EWBC also has a share repurchase plan in place. As of Sep 30, 2021, $354.1 million worth of shares were left to be repurchased under the buyback plan.Growth in loans and deposits, along with a strong balance sheet position, is likely to keep supporting East West Bancorp’s financials. The stock, with market cap of $11.1 billion, has jumped 54.6% in the year-to-date period. EWBC’s long-term projected earnings growth rate of 10% promises rewards for shareholders.Western Alliance, based in Phoenix, AZ, provides a wide range of deposit, lending, treasury management, international banking and online banking products and services. As of Sep 30, 2021, WAL had $48.3 billion in total assets, $34.6 billion in net loans held for investments and $45.3 million in total deposits.Western Alliance has been witnessing a steady improvement in revenues. Over the last five years, the top line recorded a CAGR of 15.3%, with the uptrend continuing in the first three quarters of 2021. Rising loans and deposit balance, efforts to strengthen fee income sources and an improving economy will aid revenues in the upcoming quarters.The company has been growing through strategic acquisitions too. In April, Western Alliance closed the previously announced buyout of Aris Mortgage Holding Company, LLC for total consideration of nearly $1.22 billion. The acquisition complements the company’s national commercial businesses and expands its mortgage-related offerings. This also diversifies WAL’s revenue mix by expanding sources of non-interest income.WAL’s capital deployment activities seem impressive. During the third quarter 2021, the company hiked its quarterly dividend by 40% to 35 cents per share. This was the first dividend hike by the company since it started paying the same from August 2019.The stock, with a market cap of $11.2 billion, has surged 79.4% so far this year. WAL’s long-term projected earnings growth rate of 26.7% promises rewards for shareholders. 5 Stocks Set to Double Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%. Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.Today, See These 5 Potential Home Runs >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Bank of America Corporation (BAC): Free Stock Analysis Report Western Alliance Bancorporation (WAL): Free Stock Analysis Report East West Bancorp, Inc. (EWBC): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research.....»»

Category: topSource: zacksDec 10th, 2021

One Ring To Rule Us All: A Global Digital Fiat Currency

One Ring To Rule Us All: A Global Digital Fiat Currency Via SchiffGold.com, We’ve written extensively about the “war on cash.” In a nutshell, governments would love to do away with cash in order to better track and control their citizens. There have been numerous moves closer to a cashless society in recent years, from capping ATM withdrawals to doing away with large-denomination bills. Last year, China launched a digital yuan pilot program and the US has floated moving toward a digital dollar. We got a first-hand look at what happens when governments restrict access to cash when India plunged into a cash crisis after the country’s government enacted a policy of demonetization in November 2016. It’s bad enough that various countries are exploring ways to move toward cashlessness, but there’s an even worse scenario - a global digital currency. Economist Thorsten Polleit compares it to the “master ring” in J.R.R. Tolkien’s classic Lord of the Rings. The following article was originally published by the Mises Wire. 1. Human history can be viewed from many angles. One of them is to see it as a struggle for power and domination, as a struggle for freedom and against oppression, as a struggle of good against evil. That is how Karl Marx (1818–83) saw it, and Ludwig von Mises (1881–1973) judged similarly. Mises wrote: The history of the West, from the age of the Greek Polis down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the officeholders. But unlike Marx, Mises recognized that human history does not follow predetermined laws of societal development but ultimately depends on ideas that drive human action. From Mises’s point of view, human history can be understood as a battle of good ideas against bad ideas. Ideas are good if the actions they recommend bring results that are beneficial for everyone and lead the actors to their desired goals; At the same time, good ideas are ethically justifiable, they apply to everyone, anytime and anywhere, and ensure that people who act upon them can survive. On the other hand, bad ideas lead to actions that do not benefit everyone, that do not cause all actors to achieve their goals and/or are unethical. Good ideas are, for example, people accepting “mine and yours”; or entering into exchange relationships with one another voluntarily. Bad ideas are coercion, deception, embezzlement, theft. Evil ideas are very bad ideas, ideas through which whoever puts them into practice is consciously harming others. Evil ideas are, for example, physical attacks, murder, tyranny. 2. With Lord of the Rings, J. J. R. Tolkien (1892–1973) wrote a literary monument about the epic battle between good and evil. His fantasy novel, published in 1954, was a worldwide success, not least because of the movie trilogy, released from 2001 to 2003. What is Lord of the Rings about? In the First Age, the deeply evil Sauron—the demon, the hideous horror, the necromancer—had rings of power made by the elven forges. Three Rings for the Elven-kings under the sky, Seven for the Dwarf-lords in their halls of stone, Nine for Mortal Men doomed to die, One for the Dark Lord on his dark throne In the Land of Mordor where the Shadows lie. One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them. In the Land of Mordor where the Shadows lie. But Sauron secretly forges an additional ring into which he pours all his darkness and cruelty, and this one ring, the master ring, rules all the other rings. When Sauron puts the master ring on his finger, he can read and control the minds of everyone wearing one of the other rings. The elves see through the dark plan and hide their three rings. The seven rings of the dwarves also fail to subjugate their bearers. But the nine rings of men proved to be effective: Sauron enslaved nine human kings, who were to serve him. Then, however, in the Third Age, in the battle before Mount Doom, Isildur, the eldest son of King Elendils, severed Sauron’s ring finger with a sword blow. Sauron is defeated and loses his physical form, but he survives. Now Isildur has the ring of power, and it takes possession of him. He does not destroy the master ring when he has the opportunity, and it costs him his life. When Isildur is killed, the ring sinks to the bottom of a river and remains there for twenty-five hundred years. Then the ring is found by Smeagol, who is captivated by its power. The ring remains with its finder for nearly five hundred years, hidden from the world. Over time, Sauron’s power grows again, and he wants the Ring of Power back. Then the ring is found, and for sixty years, it remains in the hands of the hobbit Bilbo Baggins, a friendly, well-meaning being who does not allow himself to be seduced by the power of the One Ring. Years later, the wizard Gandalf the Gray learns that Sauron’s rise has begun, and that the Ring of Power is held by Bilbo Baggins. Gandalf knows that there is only one way to defeat the ring and its evil: it must be destroyed where it was created, in Mordor. Bilbo Baggins’s nephew, Frodo Baggins, agrees to take the task upon himself. He and his companions—a total of four hobbits, two humans, a dwarf, and an elf—embark on the dangerous journey. They endure hardship, adversity, and battles against the dark forces, and in the end, they succeed at what seemed impossible: the destruction of the ring of power in the fires of Mount Doom. Good triumphs over evil. 3. The ring in Tolkien’s Lord of the Rings is not just a piece of forged gold. It embodies Sauron’s evil, corrupting everyone who lays hands or eyes on it, poisons their soul, and makes them willing helpers of evil. No one can wield the cruel power of the One Ring and use it for good; no human, no dwarf, no elf. Can an equivalent for Tolkien’s literary portrait of the evil ring be found in the here and now? Yes, I believe so, and in the following, I would like to offer you what I hope is a startling, but in any case, entertaining, interpretation. Tolkien’s Rings of Power embody evil ideas. The nineteen rings represent the idea that the ring bearers should have power over others and rule over them. And the One Ring, to which all other rings are subject, embodies an even darker idea, namely that the bearer of this master ring has power over all other ring bearers and those ruled by them; that he is the sole and absolute ruler of all. The nineteen rings symbolize the idea of establishing and maintaining a state (as we know it today), namely a state understood as a territorial, coercive monopoly with the ultimate power of decision-making over all conflicts. However, the One Ring of power stands for the particularly evil idea of creating a state of states, a world government, a world state; and the creation of a single world fiat currency controlled by the states would pave the way toward this outcome. 4. To explain this, let us begin with the state as we know it today. The state is the idea of the rule of one over the other. This is how the German economist, sociologist, and doctor Franz Oppenheimer (1864–1946) sees it: The state … is a social institution, forced by a victorious group of men on a defeated group, with the sole purpose of regulating the dominion of the victorious group over the vanquished and securing itself against revolt from within and attacks from abroad…. This dominion had no other purpose than the economic exploitation of the vanquished by the victors. Joseph Stalin (1878–1953) defined the state quite similarly: The state is a machine in the hands of the ruling class to suppress the resistance of its class opponents. The modern state in the Western world no longer uses coercion and violence as obviously as many of its predecessors. But it, too, is, of course, built on coercion and violence, asserts itself through them, and most importantly, it divides society into a class of the rulers and a class of the ruled. How does the state manage to create and maintain such a two-class society of rulers and ruled? In Tolkien’s Lord of the Rings, nine men, all of them kings, wished to wield power, and so they became bearers of the rings, and because of that, they were inescapably bound to Sauron’s One Ring of power. This is quite similar to the idea of the state. To seize, maintain, and expand power, the state seduces its followers to do what is necessary, to resort to all sorts of techniques: propaganda, carrot and stick, fear, and even terror. The state lets the people know that it is good, indispensable, inevitable. Without it, the state whispers, a civilized coexistence of people would not be possible. Most people succumb to this kind of propaganda, and the state gets carte blanche to effectively infiltrate all economic and societal matters—kindergarten, school, university, transport, media, health, pensions, law, security, money and credit, the environment—and thereby gains power. The state rewards its followers with jobs, rewarding business contracts, and transfer payments. Those who resist will end up in prison or lose their livelihood or even their lives. The state spreads fear and terror to make people compliant—as people who are afraid are easy to control, especially if they have been led to believe that the state will protect them against any evil. Lately, the topics of climate change and coronavirus have been used for fear-mongering, primarily by the state, which is skillfully using them to increase its omnipotence: it destroys the economy and jobs, makes many people financially dependent on it, clamps down on civil and entrepreneurial freedoms. However, it is of the utmost importance for the state to win the battle of ideas and be the authority to say what are good ideas and what are bad ideas. Because it is ideas that determine people’s actions. The task of winning over the general public for the state traditionally falls to the so-called intellectuals—the people whose opinions are widely heard, such as teachers, doctors, university professors, researchers, actors, comedians, musicians, writers, journalists, and others. The state provides a critical number of them with income, influence, prestige, and status in a variety of ways—which most of them would not have been able to achieve without the state. In gratitude for this, the intellectuals spread the message that the state is good, indispensable, inevitable. Among the intellectuals, there tend to be quite a few who willingly submit to the rings of power, helping—consciously or unconsciously—to bring their fellow men and women under the spell of the rings or simply to walk over, subjugate, dominate them. Anyone who thinks that the state (as we know it today) is acceptable, a justifiable solution, as long as it does not exceed certain power limits, is seriously mistaken. Just as the One Ring of power tries to find its way back to its lord and master, an initially limited state inevitably strives towards its logical endpoint: absolute power. The state (as we know it today) is pushing for expansion both internally and externally. This is a well-known fact derived from the logic of human action. George Orwell put it succinctly: “The object of power is power.”  Or, as Hans-Hermann Hoppe nails it, “[E]very minimal government has the inherent tendency to become a maximal government.” Inwardly, the state is expanding through all sorts of interventions in economic and social life, through regulations, ordinances, laws, and taxes. Outwardly, the economically and militarily strongest state will seek to expand its sphere of influence. In the most primitive form, this happens through aggressive campaigns of conquest and war, in a more sophisticated form, by pursuing political ideological supremacy. In recent decades the latter has taken the form of democratic socialism. To put it casually, democratic socialism means allowing and doing what the majority wants. Under democratic socialism, private property is formally upheld, but it is declared that no one is the rightful owner of 100 percent of the income from their property. People no longer strive for freedom from being ruled but rather to participate in the rule. The result is not people pushing back the state, but rather coming to terms and cooperating with it. The practical consequence of democratic socialism is interventionism: the state intervenes in the economy and society on a case-by-case basis to gradually make socialist ideals a reality. All societies of the Western world have embraced democratic socialism, some with more authority than others, and all of them use interventionism. Seen in this light, all Western states are now acting in concert. What they also have in common is their disdain for competition, because competition sets undesirable limits to the state’s expansive nature. Therefore, larger states often form a cartel. Smaller, less powerful states are compelled to join—and if they refuse, they will suffer political and economic disadvantages. But the cartel of states is only an intermediate step. The logical endpoint that democratic socialism is striving for is the creation of a central authority, something like a world government, a world state. 5. In Tolkien’s Lord of the Rings, the One Ring, the ring of power, embodies this very dark idea: to rule them all, to create a world state. To get closer to this goal, democracy (as we understand it today) is proving to be an ideal trailblazer, and that’s most likely the reason why it is praised to the skies by socialists. Sooner or later, a democracy will mutate into an oligarchy, as the German-Italian sociologist Robert Michels pointed out in 1911. According to Michels, parties emerge in democracies. These parties are organizations that need strict leadership, which is handed to the most power-hungry, ruthless people. They will represent the party elite. The party elite can break away from the will of the party members and pursue their own goals and agendas. For example, they can form coalitions or cartels with elites of other parties. As a result, there will be an oligarchization of democracy, in which the elected party elites or the cartel of the party elites will be the kings of the castle. It is not the voters who will call the tune but oligarchic elites that will rule over the voters. The oligarchization of democracy will not only afflict individual states but will also affect the international relations of democracies. Oligarchical elites from different countries will join together and strengthen each other, primarily by creating supranational institutions. Democratic socialism evolves into “political globalism”: the idea that people should not be allowed to shape their own destiny in a system of free markets but that it should be assigned and directed by a global central authority. The One Ring of power drives those who have already been seduced by the common rings to long for absolute power, to elevate themselves above the rest of humanity. Who comes to mind? Well, various politicians, high-level bureaucrats, court intellectuals, representatives of big banking, big business, Big Pharma and Big Tech and, of course, big media—together they are often called the “Davos elite” or the “establishment.” Whether it is about combating financial and economic crises, climate change, or viral diseases—the one ring of power ensures that supranational, state-orchestrated solutions are propagated; that centralization is placed above decentralization; that the state, not the free market, is empowered. Calls for the “new world order,” the “Great Transformation,” the “Great Reset” are the results of this poisonous mindset inspired by the one ring of power. National borders are called into question, property is relativized or declared dispensable, and even a merging of people’s physical, digital, and biological identities—transhumanism—is declared the goal of the self-empowered globalist establishment. But how can political globalism be promoted at a time when there are (still) social democratic nation-states that insist on their independence? And where people are separated by different languages, values, and religions? How do the political globalists get closer to their badly desired end of world domination, their world state? 6. Sauron is the undisputed tyrant and dictator in his realm of darkness. He operates something like a command economy, forcing his subjects to clear forests, build military equipment, and breed Orcs. There are neither markets nor money in Sauron’s sinister kingdom. Sauron takes whatever he wants; he has overcome exchange and money, so to speak. Today’s state is not quite that powerful, and it finds itself in economies characterized by property, division of labor, and monetary exchange. The state wants to control money—because this is one of the most effective ways to gain ultimate power. To this end, the modern state has already acquired the monopoly of money production; and it has replaced gold with its own fiat money. Over time, fiat money destroys the free market system and thus the free society. Ludwig von Mises saw this as early 1912. He wrote: It would be a mistake to assume that the modern organization of exchange is bound to continue to exist. It carries within itself the germ of its own destruction; the development of the fiduciary medium must necessarily lead to its breakdown. (6) Indeed, fiat money not only causes inflation, economic crises, and an unsocial redistribution of income and wealth. Above all, it is a growth elixir for the state, making it ever larger and more powerful at the expense of the freedom of its citizens and entrepreneurs. Against this backdrop, it should be quite understandable why the political globalists see creating a single world currency as an important step toward seizing absolute power. In Europe, what the political globalists want “on a large scale” has already been achieved “on a small scale”: merging many national currencies into one. In 1999, eleven European nation-states gave up their currencies and merged them into a single currency, the euro, which is produced by a supranational authority, the European Central Bank. The creation of the euro provides the blueprint by which the world’s major currencies can be converted into a single world currency. This is what the 1999 Canadian Nobel laureate in economics, Robert Mundell, recommends: Fixing the exchange rates between the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound against each other and also fixing them against a new unit of account, the INTOR. And hocus pocus: here is the world fiat currency, controlled by a cartel of central banks or a world central bank. 7. Admittedly, creating a single world fiat currency seems to have little chance of being realized at first glance. But maybe at second glance. First of all, there is a good economic reason for having a single world currency: if all people do business with the same money, the productive power of money is optimized. From an economic standpoint, the optimal number of monies in the world is one. What is more, nation-states have the monopoly of money within their respective territory, and since they all adhere to democratic socialism, they also have an interest in ensuring that there is no currency competition—not even between different state fiat currencies. This makes them susceptible to the idea of reducing the pluralism of currencies. Furthermore, one should not misinterpret the so-called rivalry between the big states such as the US and China and between China and Europe, which is being discussed in the mainstream media on a regular basis. No doubt that there is a rivalry between the national rulers: they do not want to give up the power they have gained in their respective countries; they want to become even more powerful. But the rivalry between the oligarchic democracies of the West has already weakened significantly, and there are great incentives for the oligarchic party elites to work together across borders. In fact, it is the oligarchization of democracy in the Western world that allowed for the rapprochement with a socialist-communist regime: the state increasingly taking control of the economic and societal system. This development could be called “the Chinacization of the West.” The way the Western world has dealt with the coronavirus—the suspension, perhaps the termination of constitutional rights and freedoms—undoubtedly shows where the journey is headed: to the authoritarian state that is beyond the control of the people—as is the case in Communist China. The proper slogan for this might be “One System, Many Countries.” Is it too farfetched to assume that the Western world will make common cause with Communist China not only on health issues but also on the world currency issue? The democratic socialists in the West and the Chinese Communist Party have a great deal of common ground and common interest, I would think. It is certainly no coincidence that China has pushed hard for the Chinese renminbi to be included in the International Monetary Fund’s special drawing rights, and that the IMF already agreed in November 2015. 8. The issue of digital central bank money, something the world’s major central banks are working on, could be a catalyst in the creation of a single world currency. The issue of digital central bank money not only heralds the end of cash—the anonymous payment option for citizens and entrepreneurs. Once people start using digital central bank money, it will be easy for the central bank and the state to spy on people’s transactions. The state will not only know who pays what, when, where, and what for. It will also be in a position to determine who gets access to the deposits: who gets them and who doesn’t. China is blazing the trail with its “social credit system”: behavior conforming to the Communist regime is rewarded, behavior that does not is punished. Against this backdrop, digital central bank money would be particularly effective at stifling unwanted political opposition. Digital central bank money will not only replace cash, but it will also increasingly compete with money from commercial banks. Why should you keep your money with banks that are exposed to the risk of default when you can keep it safe with the central bank that never goes bankrupt? Once commercial bank deposits can be exchanged one to one for digital central bank money—and this is to be expected—the credit and monetary system is de facto fully nationalized. Because under these conditions, the central bank transfers its unlimited solvency to the commercial banking sector. This completely deprives the financial markets of their function of determining the cost of capital—and the state-planned economy becomes a reality. In fact, this is the type of command and control economy that emerged in National Socialist Germany in the 1930s. The state formally retained ownership of the means of production. But with commands, prohibitions, laws, taxes, and control, the state determines who is allowed to produce what, when, and under what conditions, and who is allowed to consume what, when, and how much. In such a command and control economy, it is quite conceivable that the form of money production will change—away from money creation through lending toward the issue of helicopter money. The central bank determines who gets how much new money and when. The amount of money in people’s bank accounts no longer reflects their economic success. From now on, it is the result of arbitrary political decisions by the central banks, i.e., the rulers. The prospect of being supplied with new money by the state and its central bank—that is, receiving an unconditional basic income—will presumably drive hosts of people into the arms of the state and bring any resistance to its machinations to a shrieking halt. 9. Will the people, the general public, really subscribe to all of this? Well, government-sponsored economists, in particular, will do their very best to inform us about the benefits of having a globally coordinated monetary policy; that stabilizing the exchange rates between national currencies is beneficial; that if a supranational controlled currency—with the name INTOR or GLOBAL—is created, we will achieve the best of all worlds. And as the issuance of digital central bank money has shut down the last remnants of a free capital market, the merging of different national currencies into one will be relatively easy. The single world currency creature that the political globalists want to create will be a fiat money, certainly not a commodity money. Such a single world fiat currency will not only suffer from all the economic and ethical defects which weigh on national fiat currencies. It will also exacerbate and exponentiate the damages a national fiat currency causes. The door to a high inflation policy would be pushed wide open—as nobody could escape the inflationary single world fiat currency. The states are the main beneficiaries: they can get money from the world central bank at any time, provided they adhere to the rules set out by the world central bank and the special interest groups that govern it. This creates the incentive for national states to relinquish sovereignty rights and to submit to supranational rules—for example, in taxation and financial market regulation. It is therefore the incentive resulting from a single world currency that paves the way toward a world government and a world state. In this context, please note what happened in the euro area: the starting point was not the creation of the EU superstate, which was to be followed by the introduction of the euro. It was exactly the opposite: the euro was introduced to overcome national sovereignty and ultimately establish the United Nations of Europe. One has good reason to fear that the idea of issuing a world fiat currency—which the master ring relentlessly pushes for—would bring totalitarianism—that would most likely dwarf the regimes established by Joseph Stalin, Adolf Hitler, Mao Zedong, Pol Pot, and other criminals. 10. In Tolkien’s Lord of the Rings, evil is eventually defeated. The story has a happy ending. Will it be that easy in our world? The ideas of having a state (as we know it today), of tolerating it, of cooperating with it, of giving the state total control over our money, of accepting fiat money, are deeply rooted in people’s minds as good ideas. Where are the forces supposed to come from that will enlighten people about the evil that the state (as we know it today) brings to humanity? Particularly when in kindergartens, schools, and universities—which are all in the hands of the state—the teachings of collectivism-socialism-Marxism are systematically drummed into people’s (especially impressionable children’s) heads, when the teachings of freedom, free market and free society, and capitalism are hardly or not at all imparted to the younger generation? Who will explain to people the uncomfortable truth that even a minimal state will become a maximal state? That states’ monopolies over money will lead to a single world currency and thus world tyranny? It does not take much to become bleak when it comes to the future of the free economic and social order. However, it would be rather shortsighted to get pessimistic. Those who believe in Jesus Christ can trust that God will not fail them. If we cannot think of a solution to the problems at hand, the believers can trust God. Because “[e]ven in the darkest night, there is a bright light shining somewhere.” Or: please remember the Enlightenment movement in the eighteenth century. At that time, the Prussian philosopher Immanuel Kant explained the “unheard of” to the people, namely that there is such a thing as “autonomy of reason.” It means that you and I have the indisputable right to lead our lives independently; that we should handle it according to self-imposed rules, rules that we determine ourselves based on good reason. People back then understood Kant’s message. Why should such an intellectual revolution—triggered by the writings and words of a free thinker—not be able to repeat itself in the future? Or: the fact that people have not yet learned from bad experience does not mean that they won’t eventually learn from it. When it comes to thinking about changes for the better, it is important to note that it is not the mass of people that matters, but the individual. Applied to the conditions in today’s world, among those thinkers who can defeat evil and help the good make a breakthrough are Ludwig von Mises, Murray Rothbard, and Hans-Hermann Hoppe—and all those following their teachings and fearlessly disseminating them—as scholars or as fans. They are—in terms of Tolkien’s Lord of the Rings—the companions. They give us the intellectual firepower and the courage to fight and defeat evil. I don’t know if Ludwig von Mises knew Tolkien’s Lord of the Rings. But he was certainly well aware of the struggle between good and evil that continues throughout human history. In fact, the knowledge of this struggle shaped Mises’s maxim of life, which he took from the verse of the Roman poet Virgil (70 to 19 BC): “Tu ne cede malis, sed contra audentior ito,” which means “Do not give in to evil but proceed ever more boldly against it.” I want to close my interpretation with a quote from Samwise Gamgee, the loyal friend and companion of Frodo Baggins. In a really hopeless situation, Sam says to Frodo: “There is something good in this world, Mr. Frodo. And it’s worth fighting for.” So if we want to fight for the good in this world, we know what we have to do: we have to fight for property and freedom and against the darkness that the state (as we know it today) wishes to bring upon us, especially with its fiat money. In fact, we must fight steadfastly for a society of property and freedom! Tyler Durden Sat, 10/09/2021 - 22:00.....»»

Category: dealsSource: nytOct 9th, 2021

First Northwest Bancorp Reports Fourth Quarter 2022 Earnings

PORT ANGELES, Wash., Jan. 26, 2023 (GLOBE NEWSWIRE) -- First Northwest Bancorp (NASDAQ:FNWB) Q4 2022 Net Income Q4 2022 Diluted Earnings Per Share YTD Loan Growth Q4 2022 Net Interest Margin Book Value per Share $6.1 million $0.66 13.1% 3.96% $16.31  $16.13*,excluding goodwill andintangibles           CEO Commentary "2022 was another good year for First Northwest with record performance by the Bank, including return on equity, earnings per share, and net interest margin expansion. We remain focused on banking, including deposits and loans, through strategic hires, partnerships such as Meriwether Group, and community investments," said Matthew P. Deines, President and CEO of First Northwest Bancorp. "The strategic repositioning we began in 2020 continues in the commercial bank while we invest and build technology solutions and partnerships which will produce long-term shareholder value." The Board of Directors of First Northwest Bancorp declared a quarterly cash dividend of $0.07 per common share. The dividend will be payable on February 24, 2023, to shareholders of record as of the close of business on February 10, 2023. Quarter Ended December 31, 2022 to September 30, 2022 Quarter Ended December 31, 2022 to December 31, 2021 Financial Highlights Net income of $6.1 million and diluted earnings per share of $0.66, compared to $4.3 million and $0.47, respectively Net income of $6.1 million and diluted earnings per share of $0.66, compared to $5.1 million and $0.55, respectively Total revenue (net interest income before provision plus noninterest income) of $22.3 million, an increase of 8.6%, or $1.8 million, compared to $20.5 million Total revenue of $22.3 million, an increase of 8.3%, or $1.7 million, compared to $20.6 million Effective tax rate of 14.7%, compared to 18.5% Effective tax rate of 14.7%, compared to 18.3% Financial Position   Total assets of $2.04 billion, down $49.4 million, or 2.4% Increase in total assets of $121.0 million, or 6.3% Total gross loans, excluding loans held for sale, of $1.53 billion, up $9.2 million, or 0.6% Increase in total gross loans, excluding loans held for sale, of $177.2 million, or 13.1% Total deposits of $1.56 billion, a decrease of $41.0 million, or 2.6% Decrease in total deposits of $16.3 million, or 1.0% Asset Quality and Capital   Nonperforming assets (nonaccrual loans and repossessed assets) to total assets of 0.09%, compared to 0.17% Nonperforming assets (nonaccrual loans and repossessed assets) to total assets of 0.09%, compared to 0.07% Tangible common equity ratio* and equity to total assets of 7.67% and 7.75%, compared to 7.40% and 7.49%, respectively Tangible common equity ratio* and equity to total assets of 7.67% and 7.75%, compared to 9.82% and 9.92%, respectively Key Performance Metrics   Net interest margin of 3.96%, compared to 3.88% Net interest margin of 3.96%, compared to 3.58% Efficiency ratio of 67.9%, compared to 74.9% Efficiency ratio of 67.9%, compared to 70.5% Annualized returns on average assets, tangible common equity* and equity of 1.18%, 15.45% and 15.26%, compared to 0.85%, 10.23%, and 10.12%, respectively Annualized returns on average assets, tangible common equity* and equity of 1.18%, 15.45%, and 15.26%, compared to 1.09%, 10.82% and 10.72%, respectively Tangible book value per share* of $16.13, an increase of 4.07% from $15.50Book value per common share of $16.31 compared to $15.69 Tangible book value per share* of $16.13, a decrease of 14.7% from $18.89Book value per common share of $16.31 compared to $19.10 * See reconciliation of Non-GAAP Financial Measures later in this release. Business Update In December 2022, Quin Ventures, Inc. ("Quin") sold certain assets, including intellectual property, to Quil Ventures, Inc. ("Quil"). Quil was created by the other 50% owners of Quin, in partnership with a third-party financing source, to pursue a new business model with another sponsor bank. As part of the transaction, First Northwest received a 5% ownership stake in Quil valued at $225,000. First Northwest retains a 50% ownership in Quin and will also receive a portion of Quil's monthly subscription fee income, the value of which is reflected as a commitment receivable under "Other Assets." The fair value of the Quil ownership stake and the commitment receivable were evaluated by a third party with extensive experience in valuing bank assets and liabilities. For the quarter ended December 31, 2022, Quin reported a loss of $396,000, 50% of which was recognized by the Company through non-controlling interest accounting. For the year ended December 31, 2022, Quin reported a loss of $4.3 million, 50% of which was recognized by the Company through non-controlling interest accounting. The Company anticipates future expenses related to Quin will be immaterial. Balance Sheet Review Total assets decreased $49.4 million, or 2.4%, to $2.04 billion at December 31, 2022, compared to $2.09 billion at September 30, 2022, and increased $121.0 million, or 6.3%, compared to $1.92 billion at December 31, 2021. Cash and cash equivalents decreased by $58.1 million, or 56.0%, to $45.6 million as of December 31, 2022, compared to $103.7 million as of September 30, 2022, and decreased $80.4 million, or 63.8%, compared to $126.0 million at December 31, 2021. Investment securities decreased $2.9 million, or 0.9%, to $326.6 million at December 31, 2022, compared to $329.4 million three months earlier, and decreased $17.6 million compared to $344.2 million at December 31, 2021. The market value of the portfolio increased $1.1 million during the fourth quarter of 2022, primarily driven by lower long-term interest rates. Principal and interest payments received of $6.9 million were primarily used to fund loan growth. At December 31, 2022, municipal bonds totaled $98.1 million and comprised the largest portion of the investment portfolio at 30.0%. Non-agency issued mortgage-backed securities were the second largest segment, totaling $93.3 million, or 28.6%, of the portfolio at quarter end. The estimated average life of the securities portfolio was approximately 8.2 years, compared to 8.4 years in the prior quarter and 5.7 years in the fourth quarter of 2021. The effective duration of the portfolio was approximately 5.1 years, compared to 5.1 years in the prior quarter and 5.2 years in the fourth quarter of 2021. Investment securities consisted of the following at the dates indicated:     December 31,2022     September 30,2022     December 31,2021     Three MonthChange     One YearChange       (In thousands)   Available for Sale at Fair Value                                         Municipal bonds   $ 98,050     $ 96,130     $ 113,364     $ 1,920     $ (15,314 ) U.S. Treasury notes     2,364       2,355       —       9       2,364   International agency issued bonds (Agency bonds)     1,702       1,683       1,920       19       (218 ) Corporate issued asset-backed securities (ABS corporate)     —       —       14,489       —       (14,489 ) Corporate issued debt securities (Corporate debt)     55,499       56,165       59,789       (666 )     (4,290 ) U.S. Small Business Administration securities (SBA)     —       —       14,680       —       (14,680 ) Mortgage-backed securities:                                         U.S. government agency issued mortgage-backed securities (MBS agency)     75,648       78,231       79,962       (2,583 )     (4,314 ) Non-agency issued mortgage-backed securities (MBS non-agency)     93,306       94,872       60,008       (1,566 )     33,298   Total securities available for sale   $ 326,569     $ 329,436     $ 344,212     $ (2,867 )   $ (17,643 )                                           Net loans, excluding loans held for sale, increased $10.3 million, or 0.7%, to $1.53 billion at December 31, 2022, from $1.52 billion at September 30, 2022, and increased $181.2 million, or 13.4%, from $1.35 billion one year ago. One- to four-family loans increased $8.8 million during the current quarter as a result of $8.9 million in new amortizing loan originations and $14.0 million of residential construction loans which converted to permanent amortizing loans, partially offset by sales and payments received. Multi-family loans increased $10.3 million during the current quarter. The increase was the result of new originations totaling $1.3 million and $5.5 million of construction loans converting into permanent amortizing loans. Construction loans decreased $22.5 million during the quarter, with $28.9 million converting into fully amortizing loans, partially offset by draws on new and existing loans. Commercial real estate, home equity, and commercial business loans all increased during the current quarter, compared to the previous quarter as originations and draws on existing commitments exceeded payoffs and scheduled payments. The Company originated $8.6 million in residential mortgages during the fourth quarter of 2022 and sold $3.3 million, with an average gross margin on sale of mortgage loans of approximately 2.19%. This production compares to residential mortgage originations of $19.4 million in the preceding quarter with sales of $6.2 million, with an average gross margin of 2.10%. Higher market rates on mortgage loans and a lack of single-family home inventory continued to hinder saleable mortgage loan production in the fourth quarter. New single-family residence construction loan commitments totaled $16.1 million in the fourth quarter, compared to $26.9 million in the preceding quarter. Loans receivable consisted of the following at the dates indicated:     December 31,2022     September 30,2022     December 31,2021     Three MonthChange     One YearChange       (In thousands)   Real Estate:                                         One- to four-family   $ 343,825     $ 335,067     $ 294,965     $ 8,758     $ 48,860   Multi-family     253,551       243,256       172,409       10,295       81,142   Commercial real estate     390,246       385,272       363,299       4,974       26,947   Construction and land     194,646       217,175       224,709       (22,529 )     (30,063 ) Total real estate loans     1,182,268       1,180,770       1,055,382       1,498       126,886                                             Consumer:                                         Home equity     52,322       50,066       39,172       2,256       13,150   Auto and other consumer     222,794       223,100       182,769       (306 )     40,025   Total consumer loans     275,116       273,166       221,941       1,950       53,175                                             Commercial business     76,996       71,269       79,838       5,727       (2,842 )                                           Total loans     1,534,380       1,525,205       1,357,161       9,175       177,219   Less:                                         Net deferred loan fees     2,786       3,519       4,772       (733 )     (1,986 ) Premium on purchased loans, net     (15,957 )     (15,705 )     (12,995 )     (252 )     (2,962 ) Allowance for loan losses     16,116       16,273       15,124       (157 )     992   Total loans receivable, net   $ 1,531,435     $ 1,521,118     $ 1,350,260     $ 10,317     $ 181,175                                             Equity and partnership investments increased $299,000 to $14.3 million at December 31, 2022, compared to $14.0 million at September 30, 2022, as we added an investment in Quil Ventures as a result of the Quin asset sale, and increased $10.7 million compared to $3.6 million one year ago, as we expanded partnership and equity relationships to include Meriwether Group, JAM FINTOP and Torpago. Prepaid expenses and other assets increased $3.9 million to $42.4 million at December 31, 2022, compared to $38.5 million at September 30, 2022, and increased $20.2 million compared to $22.2 million one year ago. The increase in the current quarter is mainly due to a commitment receivable from the Quin assets sale and a receivable for a bank-owned life insurance ("BOLI") death benefit payment related to the passing of a former employee. In addition to the changes recorded during the current quarter, the increase from a year ago also reflects an increase in other prepaid expenses of $3.9 million, which includes long-term sponsorship agreements with local not-for-profit organizations, and an increase in deferred tax assets of $11.2 million resulting from the fair market value decrease in the investment portfolio. Total deposits decreased $41.0 million, to $1.56 billion at December 31, 2022, compared to $1.61 billion at September 30, 2022, and decreased $16.3 million, or 1.0%, compared to $1.58 billion one year ago. Increases in consumer certificates of deposits ("CDs") of $22.2 million, business savings account balances of $12.2 million, and brokered CDs of $4.3 million, were offset by decreases in consumer money market account balances of $37.7 million, consumer demand account balances of $17.7 million, business demand account balances of $9.0 million, business money market account balances of $8.3 million, consumer savings account balances of $8.0 million, and public fund CDs of $647,000 during the fourth quarter. Decreases in deposits were largely driven by customers utilizing account balances as the cost of goods increased. The current rate environment has contributed to greater competition for deposits with more rate specials offered to attract new funds. Some public entities moved funding out of CDs into U.S. Treasury securities during the year. Demand deposits decreased 6.0% compared to a year ago to $508.6 million at December 31, 2022, and represented 32.5% of total deposits; money market accounts decreased 20.9% compared to a year ago to $473.0 million, and represented 30.2% of total deposits; savings accounts increased 3.2% compared to a year ago to $200.9 million at December 31, 2022, and represented 12.9% of total deposits; and certificates of deposit increased 54.4% compared to a year ago to $381.7 million at quarter-end, and represented 24.4% of total deposits. Brokered CDs increased $68.1 million to $133.8 million at December 31, 2022, from $65.7 million a year ago, accounting for 50.7% of the increase in CD balances. The total cost of deposits increased to 0.62% for the fourth quarter of 2022 compared to 0.32% for the third quarter of 2022, and 0.20% for the fourth quarter of 2021 as the Bank increased rates in light of the current rate environment and increased competition for deposits. Deposits consisted of the following at the dates indicated:     December31, 2022     September30, 2022     December31, 2021     Three MonthChange     One YearChange       (In thousands)   Noninterest-bearing demand deposits   $ 315,083     $ 342,808     $ 343,932     $ (27,725 )   $ (28,849 ) Interest-bearing demand deposits     193,558       192,504       196,970       1,054       (3,412 ) Money market accounts     473,009       519,018       597,815       (46,009 )     (124,806 ) Savings accounts     200,920       196,780       194,620       4,140       6,300   Certificates of deposit     381,685       354,125       247,243       27,560       134,442   Total deposits   $ 1,564,255     $ 1,605,235     $ 1,580,580     $ (40,980 )   $ (16,325 )                                           Total shareholders' equity increased to $158.3 million at December 31, 2022, compared to $156.6 million three months earlier, due to an increase in the fair market value of the investment securities portfolio, net of taxes, of $853,000, a $373,000 decrease in the fair market value of the defined benefit plan, net of taxes, and higher net income quarter-over-quarter, partially offset by the cost of repurchased shares. Total shareholders' equity decreased from $190.5 million a year earlier, due to a decline in the fair market value of the investment securities portfolio, net of taxes, of $40.8 million. Bond values decreased across the board as rates and credit spreads increased in response to efforts by the Federal Reserve to address sustained inflationary pressures. Tangible book value per common share* was $16.13 at December 31, 2022, compared to $15.50 at September 30, 2022, and $18.89 at December 31, 2021. Book value per common share was $16.31 at December 31, 2022, compared to $15.69 at September 30, 2022, and $19.10 at December 31, 2021. We repurchased 224,671 shares of common stock under the Company's October 2020 stock repurchase plan at an average price of $14.64 per share for a total of $3.3 million during the quarter ended December 31, 2022, leaving 302,027 shares remaining under the plan. Year-to-date, we repurchased 356,343 shares of common stock at an average price of $15.22 per share for a total of $5.4 million. Income Statement Results In the fourth quarter of 2022, the Company generated a return on average assets ("ROAA") of 1.18%, and a return on average equity ("ROAE") of 15.26%, compared to 0.85% and 10.12%, respectively, in the third quarter of 2022, and 1.09% and 10.72%, respectively, in the fourth quarter of 2021. Net income increased $1.8 million to $6.1 million over the prior quarter and $936,000 over the comparable quarter in 2021. Net interest income continues to increase with the growth in the loan portfolio as well as higher loan and investment yields despite higher funding costs. Noninterest income improved over the prior quarter as the Bank recorded a BOLI death benefit payment related to the passing of a former employee; however, noninterest income remains significantly down from the same quarter one year ago with declines in gain on sale of loans and gains on partnership investments. Noninterest expense decreased from the prior quarter but continues to be higher than the same quarter one year ago. As a result, the efficiency ratio improved to 67.9% for the fourth quarter of 2022, compared to 74.9% for the third quarter of 2022, and 70.5% the fourth quarter of 2021. The Company generated a ROAA of 0.79%, and an ROAE of 9.09%, for the year ended December 31, 2022, compared to 0.87% and 8.19%, respectively, for the year ended December 31, 2021. Net income increased $227,000, or 1.5%, compared to 2021. An increase in net interest income was offset by a decrease in noninterest income and increase in noninterest expense. Noninterest income was down due to significant declines in gain on sale of loans and gains on partnership investments. Noninterest expense was higher due to increased compensation, advertising, data processing, and occupancy expenses. The increases in expense were primarily related to Quin and expansion of the Bank's staffing levels and locations. Total interest income increased $2.8 million to $23.7 million for the fourth quarter of 2022, compared to $20.9 million in the previous quarter, and increased $6.5 million from $17.2 million in the fourth quarter of 2021. Interest and fees on loans increased during the quarter, in part, as the Bank grew the loan portfolio through single-family, multi-family and commercial real estate lending as well as purchased auto and manufactured home loans. Loan yields also increased due to higher rates on new originations as well as the repricing of variable rate loans tied to the Prime Rate or other indices. The Bank also recorded higher deferred fee income from loan payoffs during the fourth quarter of 2022. Total interest expense was $4.7 million for the fourth quarter of 2022, compared to $2.7 million in the third quarter of 2022 and $1.4 million in the fourth quarter a year ago. The increase was the result of a higher volume of short-term FHLB advances that are more sensitive to Federal Reserve Bank and other market rate increases along with a 30 basis point increase in the cost of deposits to 0.62% at December 31, 2022, from 0.32% at the prior quarter end and 42 basis point increase from 0.20% one year prior. Total interest income for the year ended December 31, 2022, increased $16.7 million to $80.4 million, compared to $63.7 million for the year ended December 31, 2021. Total interest expense increased $5.1 million for the year ended December 31, 2022, to $10.5 million, compared to $5.4 million for the year ended December 31, 2021. Both categories were impacted by higher interest rates. Net interest income, before provision for loan losses, for the fourth quarter of 2022 increased 4.0% to $18.9 million, compared to $18.2 million for the preceding quarter, and increased 19.7% from the fourth quarter one year ago. Net interest income, before provision for loan losses, for the year ended December 31, 2022, increased $11.6 million to $69.9 million, compared to $58.3 million for the year ended December 31, 2021. The Company recorded a $285,000 provision for loan loss during the fourth quarter of 2022. This compares to a loan loss provision of $750,000 for the preceding quarter and a recovery of $150,000 for the fourth quarter of 2021. The current provision reflects lower loan growth, stable credit quality metrics and improvement in nonperforming assets. The loan loss provision for the year ended December 31, 2022, was $1.5 million, compared to $1.4 million for the year ended December 31, 2021. * See reconciliation of Non-GAAP Financial Measures later in this release. The net interest margin increased 8 basis points to 3.96% for the fourth quarter of 2022, from 3.88% the prior quarter, and increased 38 basis points over the fourth quarter of 2021 of 3.58%. Increases over both the prior quarter and the prior year are primarily due to an improvement in our earning asset mix, as well as higher coupon rates for both fixed and variable rate assets and an increase in loan prepayment fee income. The net interest margin increased 28 basis points to 3.79% for the year ended December 31, 2022, and from 3.51% for the year ended December 31, 2021.  The yield on average earning assets increased 50 basis points to 4.95% for the fourth quarter of 2022, compared to 4.45% for the third quarter of 2022, and increased 105 basis points from 3.90% for the fourth quarter of 2021. The increase over the prior quarter was due to higher yields on the investment portfolio along with higher average loan balances and an increase in the loan portfolio yield to 5.22% for the fourth quarter of 2022, compared to 4.75% for the third quarter of 2022, reflective of the rising rate environment. The year-over-year increase was primarily due to higher average loan balances augmented by increases in yields, which were positively impacted by the rising rate environment and overall improvements in the mix of interest-earning assets. The yield on average earning assets increased 53 basis points to 4.36% for the year ended December 31, 2022, from 3.83% for the year ended December 31, 2021. The cost of average interest-bearing liabilities increased 51 basis points to 1.24% for the fourth quarter of 2022, compared to 0.73% for the third quarter of 2022, and increased 82 basis points from 0.42% for the fourth quarter of 2021. Total cost of funds increased 43 basis points to 1.02% for the fourth quarter of 2022 from 0.59% in the prior quarter and increased 68 basis points from 0.34% for the fourth quarter of 2021. Current quarter increases were due to higher costs on interest-bearing deposits and advances in addition to an increase in average FHLB advance balances. The increase over the same quarter last year was driven by the same factors. The cost of average interest-bearing liabilities increased 30 basis points to 0.73% for the year ended December 31, 2022, from 0.43% for the year ended December 31, 2021. The total cost of funds increased 25 basis points to 0.60% for the year ended December 31, 2022, from 0.35% for the year ended December 31, 2021. Noninterest income increased 44.3% to $3.4 million for the fourth quarter of 2022 from $2.3 million for the third quarter of 2022 and decreased 29.5% compared to $4.8 million for the fourth quarter a year ago. The Bank recorded a $1.5 million BOLI death benefit payment related to the passing of a former employee which was partially offset by decreases during the fourth quarter of 2022 in service fee income and gain on sale of loans. Decreases compared to the fourth quarter of 2021 were primarily due to lower market gains on sale of loans and lower gains on the value of our limited partnership fintech investments. Noninterest income decreased 34.0% to $10.3 million for the year ended December 31, 2022, from $15.6 million for the year ended December 31, 2021. Decreases compared to the prior year were primarily due to lower gain on sale of mortgage loans, lower gains on investment security sales, a decrease in the value of our limited partnership fintech investments, and a decline in the value of the loan servicing rights asset, partially offset by additional service fee income and the BOLI death benefit payment. Noninterest expense totaled $15.1 million for the fourth quarter of 2022, compared to $15.4 million for the preceding quarter and $14.7 million for the fourth quarter a year ago. The decrease from the prior quarter is mainly related to reduced Quin compensation. The increase over the fourth quarter of 2021 reflects increases in data processing and occupancy expenses associated with expanding our footprint with additional branch locations as well as higher professional fees, including legal and technology consulting fees. Noninterest expense increased 14.5% to $62.3 million for the year ended December 31, 2022, from $54.4 million for the year ended December 31, 2021. Additional Quin expenses resulted in significant increases to advertising, compensation, depreciation and data processing expenses during the year ended December 31, 2022, totaling approximately $3.5 million. As of December 31, 2022, future additional expenses related to Quin are expected to be immaterial. The provision for income tax increased to $1.0 million for the fourth quarter of 2022, compared to $818,000 for the third quarter of 2022 and $1.1 million for the fourth quarter of 2021, reflecting differences in pre-tax income. The provision for income tax decreased to $2.9 million for the year ended December 31, 2022, compared to $3.2 million for the year ended December 31, 2021. The effective tax rate decreased over prior periods as a result of the permanent tax exclusion of BOLI noninterest income, including the BOLI death benefit. Capital Ratios and Credit Quality Capital levels for both the Company and its operating bank, First Fed, remain in excess of applicable regulatory requirements and the Bank was categorized as "well-capitalized" at December 31, 2022. Common Equity Tier 1 and Total Risk-Based Capital Ratios at December 31, 2022, were 13.4% and 14.4%, respectively. Nonperforming loans were $1.8 million at December 31, 2022, a decrease of $1.7 million from September 30, 2022, which was related to the payoff of one speculative single-family home construction project. A small improvement in mortgage loans was offset by increases in nonperforming consumer loans. The percentage of the allowance for loan losses to nonperforming loans increased to 900% at December 31, 2022, from 463% at September 30, 2022, and decreased from 1095% at December 31, 2021. Classified loans increased $5.2 million to $16.9 million at December 31, 2022, as one $14.0 million commercial multifamily construction loan was downgraded during the fourth quarter due to additional liens being placed on the property. The allowance for loan losses as a percentage of total loans was 1.05% at December 31, 2022, decreasing from 1.07% at the prior quarter end and decreasing from 1.11% reported one year earlier. Awards/Recognition The Company has received several accolades as a leader in the community. In April 2022, First Fed was recognized as a Top Corporate Citizen by the Puget Sound Business Journal. The Corporate Citizenship Awards honors local corporate philanthropists and companies making significant contributions in the region. The top 25 small, medium and large-sized companies were recognized in addition to nine other honorees last year. First Fed was ranked #3 in the medium-sized company category in 2022 and was ranked #4 in the same category in 2021. In June 2022, First Fed was named to the Middle Market Fast 50 List by the Puget Sound Business Journal. First Fed also made the Fast 50 list for 2020 and 2021, which recognizes the region's fastest-growing middle market companies. Additionally, in June 2022 First Fed was named on the Puget Sound Business Journal's Best Workplaces list. First Fed has been recognized as one the top 100 workplaces in Washington, as voted for two years in row by each company's own employees. In September 2022, the First Fed team was honored to bring home the Gold for Best Bank in the Best of the Northwest survey hosted by Bellingham Alive. In October 2022, First Fed was also recognized in the Best of the Peninsula surveys, winning Best Bank for both Clallam and Jefferson counties. The Bank was a finalist for Best Bank on Bainbridge Island and Central Kitsap. Also, First Fed received Best Financial Advisor in Jefferson. About the Company First Northwest Bancorp (NASDAQ:FNWB) is a financial holding company engaged in investment activities including the business activity of its subsidiary, First Fed Bank, along with other fintech partnerships. First Fed is a small business-focused financial institution which has served its customers and communities since 1923. Currently First Fed has 16 locations in Washington state including 12 full-service branches. First Fed's business and operating strategy is focused on building sustainable earnings by delivering a full array of financial products and services for individuals, small business, and commercial customers. Additionally, First Fed focuses on strategic partnerships with financial technology ("fintech") companies to develop and deploy digitally focused financial solutions to meet customers' needs on a broader scale. FNWB also invests in fintech companies directly as well as through select venture capital partners. In 2022, the Company made a minority investment in Meriwether Group, a boutique investment banking and accelerator firm. In 2021, the Company entered a joint venture to found Quin Ventures, Inc., a fintech focused on financial wellness and lifestyle protection for consumers nationwide. Other fintech partnership initiatives include banking-as-a-service, digital payments and marketplace lending. First Northwest Bancorp was incorporated in 2012. The Company completed its initial public offering in 2015 under the ticker symbol FNWB and is headquartered in Port Angeles, Washington. Forward-Looking Statements Certain matters discussed in this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, expectations of the business environment in which we operate, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risks and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety of factors including, but not limited to: increased competitive pressures; changes in the interest rate environment; the credit risks of lending activities; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and other factors described in the Company's latest Annual Report on Form 10-K and other filings with the Securities and Exchange Commission ("SEC")-which are available on our website at www.ourfirstfed.com and on the SEC's website at www.sec.gov. Any of the forward-looking statements that we make in this Press Release and in the other public statements we make may turn out to be incorrect because of the inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed or implied in any forward-looking statements made by or on our behalf and the Company's operating and stock price performance may be negatively affected. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2023 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us and could negatively affect the Company's operations and stock price performance. FIRST NORTHWEST BANCORP AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except share data) (Unaudited)     December 31,2022     September 30 2022     December 31,2021     Three MonthChange     One YearChange   Assets                                                                                   Cash and due from banks   $ 17,104     $ 22,784     $ 13,868       -24.9 %     23.3 % Interest-earning deposits in banks     28,492       80,879       112,148       -64.8       -74.6   Investment securities available for sale, at fair value     326,569       329,436       344,212       -0.9       -5.1   Loans held for sale     597       263       760       127.0       -21.4   Loans receivable (net of allowance for loan losses of $16,116, $16,273, and $15,124)     1,531,435       1,521,118       1,350,260       0.7       13.4   Federal Home Loan Bank (FHLB) stock, at cost     11,681       11,961       5,196       -2.3       124.8   Accrued interest receivable     6,743       6,655       5,289       1.3       27.5   Premises and equipment, net     18,089       20,841       19,830       -13.2       -8.8   Servicing rights on sold loans, net     —       —       3,282       n/a       -100.0   Servicing rights on sold loans, at fair value     3,887       3,872       —       0.4       100.0   Bank-owned life insurance, net     39,665       40,003       39,318       -0.8       0.9   Equity and partnership investments     14,289       13,990       3,571       2.1       300.1   Goodwill and other intangible assets, net     1,089       1,173       1,183       -7.2       -7.9   Prepaid expenses and other assets  .....»»

Category: earningsSource: benzingaJan 26th, 2023

Summit Financial Group Reports Record Q4 2022 EPS of $1.16 on Continued Strong Loan Growth Resulting in 19.5 Percent Annualized Increase in TBVPS

MOOREFIELD, W.V., Jan. 26, 2023 (GLOBE NEWSWIRE) -- Summit Financial Group, Inc. ("Company" or "Summit") (NASDAQ:SMMF) today reported financial results for the fourth quarter of 2022, including continued strong earnings on growth in loans and total revenue. The Company, which serves commercial and individual clients across West Virginia, the Washington D.C. metropolitan area, Virginia and Kentucky through Summit Community Bank, Inc., reported net income applicable to common shares of $14.9 million, or $1.16 per diluted share, for the fourth quarter of 2022, as compared to $14.2 million, or $1.11 per diluted share, for the third quarter of 2022 and $12.4 million, or $0.95 per diluted share, for the fourth quarter of 2021. "In the fourth quarter and full year of 2022, our team continued expanding existing customer relationships and cultivating new relationships from our strong commercial pipelines to continue to deliver annualized double-digit loan growth, strong deposit growth, increased revenue and earnings," said H. Charles Maddy, III, President and Chief Executive Officer. "Our disciplined underwriting standards consistently provide stable asset quality metrics and improved in the fourth quarter and for year-end. Given the challenging interest rate environment, the sequential increase in our tangible book value per common share differentiates us from our peers. Our tremendous operating results in 2022, pending merger with PSB Holding Corp. and the strength of our balance sheet well-positions us for continued growth in 2023." Highlights for Q4 2022 Total loans, excluding mortgage warehouse lines of credit and Paycheck Protection Program ("PPP") lending, increased 2.6 percent (10.3 percent annualized) during the quarter and 17.1 percent since December 31, 2021. Deposits increased 2.0 percent (8.0 percent annualized) during the fourth quarter and 7.7 percent for full year 2022. Tangible book value per common share ("TBVPS") increased $1.01 (4.9 percent or 19.5 percent annualized) to $21.70 during the quarter, which included unrealized net gains on debt securities available for sale ("AFS") of $0.09 per common share (net of deferred income taxes) recorded in Other Comprehensive Income ("OCI"), partially offset by decreases in the fair values of derivative financial instruments hedging against higher interest rates totaling $0.08 per common share (net of deferred income taxes) also recorded in OCI. For full year 2022, Summit's TBVPS increased 11.1 percent, while for the vast majority of our peers' TBVPS declined, and in some cases significantly so, during the same period. Net interest margin ("NIM") decreased 4 basis points to 3.80 percent from the linked quarter and increased 31 basis points from the year-ago quarter, as increased yields on interest earning assets were offset by increased cost of deposits and other funding. Total noninterest expense decreased 1.9 percent to $18.8 million in the quarter, primarily due to deferred director compensation income of $316,000 in Q4 compared to $830,000 deferred director compensation expense in the linked quarter and up 5.1 percent from the year-ago quarter primarily due to higher salary and benefits expenses. Annualized non-interest expense decreased to 1.92 percent of average assets compared to 2.01 percent of average assets for the linked quarter and 2.02 for the year-ago period. Achieved an efficiency ratio of 46.40 percent compared to 47.95 percent in Q3 2022 and 48.85 percent in the year-ago quarter. Incurred $1.50 million provision for credit losses in the quarter increasing period-end allowance for loan credit losses to $38.9 million, or 1.26 percent of total loans and 497.2 percent of nonperforming loans. Foreclosed property held for sale declined by 2.4 percent during the quarter and 48.6 percent from the year-ago quarter to $5.07 million or 0.13 percent of assets at period end. Nonperforming assets ("NPAs") improved to 0.33 percent of total assets at period end, excluding restructured assets, down 4 basis points during the quarter and 30 basis points from December 31, 2021. Announced expansion of our footprint into Eastern Shore of Maryland and Delaware by entering into a definitive merger agreement to acquire PSB Holding Corp. and its bank subsidiary, Provident State Bank, Inc. headquartered in Preston, Maryland. Results from Operations Net interest income grew to $34.4 million in the fourth quarter of 2022, an increase of 0.7 percent from the linked quarter and 19.1 percent from the prior-year fourth quarter. NIM for fourth quarter 2022 was 3.80 percent compared to 3.84 percent for the linked quarter and 3.49 percent for the year-ago quarter. Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments, Summit's net interest margin would have been 3.78 percent for the fourth quarter of 2022, 3.81 percent for the linked quarter and 3.45 percent for the year-ago period. Noninterest income, consisting primarily of service fee income from community banking activities and trust and wealth management fees, for fourth quarter 2022 was $4.87 million compared to $4.89 million for the linked quarter and $5.95 million for the comparable period of 2021. The Company recorded realized securities losses on debt securities of $24,000 in the fourth quarter of 2022 and $242,000 in the linked quarter. In addition, the Company recognized net gains on equity investments of $280,000 in fourth quarter 2022 compared to $283,000 in the linked quarter. Mortgage origination revenue decreased to $286,000 in the fourth quarter of 2022 compared to $538,000 in the linked quarter and $1.36 million for the year-ago period reflecting continuing negative impact of higher interest rates on demand for new mortgage loans. Mortgage origination revenue includes an increase in the fair value of mortgage servicing rights of $140,000 for fourth quarter 2022, $318,000 during the linked quarter and $879,000 for the year-ago period. Excluding gains and losses on debt securities and equity investments, noninterest income was $4.61 million for fourth quarter 2022 compared to $4.85 million for Q3 2022 and $5.86 million in the year-ago quarter, down primarily as result of lower mortgage origination revenue. Revenue from net interest income and noninterest income, excluding gains and losses on debt securities and equity investments, remained unchanged compared to the linked quarter at $39.0 million, and up 12.3 percent from $34.7 million in the year-ago quarter, while for the year 2022, it grew to $147.6 million, up 14.0 percent from 2021, outpacing the 6.0 percent noninterest expense increase recorded. Total noninterest expense decreased to $18.8 million in the fourth quarter of 2022, down 1.9 percent from $19.2 million in the linked quarter and was up 5.1 percent from $17.9 million for the prior-year fourth quarter. The sequential-quarter decrease in total noninterest expense, primarily on higher salary and benefits expenses offset by deferred director compensation income, reflected modest fluctuations in most other categories of operating costs. Salary and benefit expenses of $10.5 million in the fourth quarter of 2022 increased from $10.2 million for the linked quarter and $9.0 million during the year-ago period. Higher group health insurance premiums and increased accruals for anticipated 2022 performance bonuses account for the primary reasons for the increases. Net losses and expenses on foreclosed properties were $159,000 during fourth quarter 2022 compared to $26,000 in the linked quarter and $403,000 in the year-ago period. Other expenses were $2.93 million for Q4 2022 compared to $3.83 million for the linked quarter and $3.25 million in the year-ago period. The decrease in other expenses was primarily from an increase in deferred director compensation plan-related income to $316,000 during the fourth quarter of 2022 compared to $850,000 plan-related expense during the third quarter of 2022 and $227,000 in the year-ago quarter. For full-year 2022, deferred director compensation plan-related income totaled $612,000 compared to plan related expense of $725,000 for full-year 2021. During Q3 2022, we purchased investments to hedge the changes in the Plan participants' phantom investments which should serve to significantly reduce the period-to-period volatility of the Plan's impact on the Company's statements of income. Summit's efficiency ratio was 46.40 percent in the fourth quarter of 2022 compared to 47.95 percent in the linked quarter and 48.85 percent for the year-ago period. Non-interest expense to average assets was 1.92 percent in fourth quarter of 2022 compared to 2.01 percent in the linked quarter and 2.02 percent in the year-ago quarter. Balance Sheet As of December 31, 2022, total assets were $3.9 billion, an increase of $340.0 million, or 9.5 percent since December 31, 2021. Total loans net of unearned fees grew to $3.1 billion on December 31, 2022, up 0.3 percent (or 1.0 percent annualized) during the quarter, and up 11.6 percent from December 31, 2021. Excluding PPP and mortgage warehouse lending, total loans grew to $3.0 billion on December 31, 2022, up 2.6 percent (or 10.3 percent annualized) during the fourth quarter and up 17.1 percent year-to-date. Total commercial loans, including commercial and industrial (C&I) and commercial real estate (CRE) but excluding PPP lending, grew to $2.0 billion on December 31, 2022, up 1.5 percent (5.9 percent annualized) during the fourth quarter and 15.9 percent year-to-date. Residential real estate and consumer lending totaled $586.3 million on December 31, 2022, up 1.5 percent (6.1 percent annualized) during the fourth quarter and 3.2 percent year-to-date. As of December 31, 2022, PPP balances were paid down to $8,000 and mortgage warehouse lines of credit, sourced solely from a participation arrangement with a large regional bank, totaled $130.4 million compared to $194.7 million at September 30, 2022 and $227.9 million at the year-ago period end. Deposits totaled $3.2 billion on December 31, 2022, a 2.0 percent (or 8.0 percent annualized) increase during the fourth quarter and a 7.7 percent increase year-to-date. Core deposits increased 2.4 percent (9.5 percent annualized) during fourth quarter 2022 to $3.1 billion and increased 8.5 percent in 2022. Changes in core deposits by category are as follows: Non-interest bearing deposit accounts decreased $65.5 million or 10.6 percent in the fourth quarter of 2022 and $15.4 million or 2.7 percent since December 31, 2021. Interest bearing checking accounts grew $267.7 million or 18.1 percent in the fourth quarter of 2022 and $616.0 million or 54.6 percent since December 31, 2021. Savings accounts declined $86.2 million or 14.8 percent in the fourth quarter of 2022 and $201.4 million or 28.8 percent since December 31, 2021. Core time deposits declined $44.0 million or 13.0 percent in the fourth quarter of 2022 and $157.1 million or 34.8 percent since December 31, 2021. Total shareholders' equity was $354.5 million as of December 31, 2022 compared to $327.5 million at December 31, 2021. Summit paid a quarterly common dividend of $0.20 per share in Q4 2022. For the year 2022, TBVPS increased $2.16 to $21.70. TBVPS was negatively impacted during 2022 by unrealized net losses on AFS debt securities of $3.11 per common share (net of deferred income taxes) recorded in OCI. However, these losses were partially offset by increased fair values of interest rate caps and swaps (also recorded in OCI) held as hedges against higher interest rates totaling $1.78 per common share (net of deferred income taxes), in the same period. Summit had 12,783,646 outstanding common shares at the end of 2022 compared to 12,743,125 at year-end 2021. As announced in the first quarter of 2020, the Board of Directors authorized the open market repurchase of up to 750,000 shares of the issued and outstanding shares of Summit's common stock, of which 323,577 shares have been repurchased to date. The timing and quantity of stock purchases under this repurchase plan are at the discretion of management. During the fourth quarter of 2022, no shares of Summit's common stock were repurchased under the Plan. Asset Quality Net loan charge-offs ("NCOs") declined to $1,000 in the fourth quarter of 2022. NCOs of $193,000 represented 0.03 percent of average loans annualized in the year-ago period. Summit recorded a $1.50 million provision for credit losses in the fourth quarter of 2022, reflecting reserve build to support the Company's significant loan growth and increasing forecasted economic uncertainty. The provision for credit losses was $1.50 million for the linked quarter and the year-ago quarter. Summit's allowance for loan credit losses was $38.9 million on December 31, 2022, $36.8 million at the end of the linked quarter, and $32.3 million on December 31, 2021. The allowance for loan credit losses stood at 1.26 percent of total loans at December 31, 2022 compared to 1.19 percent at the end of the linked quarter, and 1.17 percent at December 31, 2021. The allowance was 497.2 percent of nonperforming loans at December 31, 2022, compared to 254.4 percent at year-end 2021. Summit's allowance for credit losses on unfunded loan commitments was $6.95 million on December 31, 2022, $7.60 million at the end of the linked quarter and $7.28 million on December 31, 2021. The allowance for credit losses on unfunded loan commitments decreased $650,000 during the most recent quarter, principally as result of a change in mix of unfunded commitments. Construction loan commitments, which on average have a higher historical loss ratio than do other loans, decreased, while commercial unfunded lines of credit, which carry a lower loss factor and lower utilization rates, increased. As of December 31, 2022, nonperforming assets ("NPAs"), consisting of nonperforming loans, foreclosed properties and repossessed assets, totaled $12.9 million, or 0.33 percent of assets, compared to NPAs of $14.4 million, or 0.37 percent of assets at the linked quarter-end and $22.6 million or 0.63 percent of assets at year-end 2021. About the Company Summit Financial Group, Inc. is the $3.9 billion financial holding company for Summit Community Bank, Inc. Its talented bankers serve commercial and individual clients throughout West Virginia, the Washington, D.C. metropolitan area, Virginia, and Kentucky. Summit's focus on in-market commercial lending and providing other business banking services in dynamic markets is designed to leverage its highly efficient operations and core deposits in strong legacy locations. Residential and consumer lending, trust and wealth management, and other retail financial services are offered through convenient digital and mobile banking platforms, including MySummitBank.com and 44 full-service branch locations. More information on Summit Financial Group, Inc. (NASDAQ:SMMF), headquartered in West Virginia's Eastern Panhandle in Moorefield, is available at SummitFGI.com. FORWARD-LOOKING STATEMENTS This press release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Words such as "expects", "anticipates", "believes", "estimates" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could" are intended to identify such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially. Factors that might cause such a difference include: the effect of the COVID-19 pandemic, including the negative impacts and disruptions on the communities we serve, and the domestic and global economy, which may have an adverse effect on our business; current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates, U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; fiscal and monetary policies of the Federal Reserve; future provisions for credit losses on loans and debt securities; changes in nonperforming assets; changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; the successful integration of operations of our acquisitions; changes in banking laws and regulations; changes in tax laws; the impact of technological advances; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; and changes in the national and local economies. We undertake no obligation to revise these statements following the date of this press release. SUMMIT FINANCIAL GROUP, INC. (NASDAQ:SMMF)     Quarterly Performance Summary (unaudited)       Q4 2022 vs Q4 2021                   For the Quarter Ended Percent Dollars in thousands 12/31/2022 12/31/2021 Change Statements of Income         Interest income         Loans, including fees $ 43,589   $ 28,979   50.4%     Securities   4,181     2,763   51.3%     Other   70     75   -6.7%     Total interest income   47,840     31,817   50.4%     Interest expense         Deposits   10,194     1,718   493.4%     Borrowings   3,293     1,267   159.9%     Total interest expense   13,487     2,985   351.8%     Net interest income   34,353     28,832   19.1%     Provision for credit losses   1,500     1,500   0.0%     Net interest income after provision         for credit losses   32,853     27,332   20.2%               Noninterest income         Trust and wealth management fees   750     847   -11.5%     Mortgage origination revenue   286     1,361   -79.0%     Service charges on deposit accounts   1,526     1,501   1.7%     Bank card revenue   1,513     1,528   -1.0%     Net gains on equity investments   280     202   38.6%     Net realized losses on debt securities   (24 )   (109 ) -78.0%     Bank owned life insurance and annuity income   367     293   25.3%     Other income   167     330   -49.4%     Total noninterest income   4,865     5,953   -18.3%     Noninterest expense         Salaries and employee benefits   10,532     8,977   17.3%     Net occupancy expense   1,328     1,265   5.0%     Equipment expense   1,769     1,902   -7.0%     Professional fees   386     438   -11.9%     Advertising and public relations   280     216   29.6%     Amortization of intangibles   351     387   -9.3%     FDIC premiums   352     330   6.7%     Bank card expense   679     703   -3.4%     Foreclosed properties expense, net of (gains)/losses   159     403   -60.5%     Acquisition-related expense   81     57   42.1%     Other expenses   2,932     3,250   -9.8%     Total noninterest expense   18,849     17,928   5.1%     Income before income taxes   18,869     15,357   22.9%     Income taxes   3,783     2,777   36.2%     Net income   15,086     12,580   19.9%     Preferred stock dividends   225     225   n/a               Net income applicable to common shares $ 14,861   $ 12,355   20.3%   SUMMIT FINANCIAL GROUP, INC. (NASDAQ:SMMF)     Quarterly Performance Summary (unaudited)       Q4 2022 vs Q4 2021                   For the Quarter Ended Percent     12/31/2022 12/31/2021 Change Per Share Data         Earnings per common share         Basic $ 1.16   $ 0.96   20.8%     Diluted $ 1.16   $ 0.95   22.1%               Cash dividends per common share $ 0.20   $ 0.18   11.1%     Common stock dividend payout ratio   16.9%     18.3%   -7.7%               Average common shares outstanding         Basic   12,775,703     12,916,555   -1.1%     Diluted   12,837,637     12,976,181   -1.1%               Common shares outstanding at period end   12,783,646     12,743,125   0.3%             Performance Ratios         Return on average equity   17.50%     15.48%   13.0%     Return on average tangible equity (C)   21.75%     19.72%   10.3%     Return on average tangible common equity (D)   22.96%     20.91%   9.8%     Return on average assets   1.54%     1.42%   8.5%     Net interest margin (A)   3.80%     3.49%   8.9%     Efficiency ratio (B)   46.40%     48.85%   -5.0%             NOTES (A) – Presented on a tax-equivalent basis assuming a federal tax rate of 21%. (B) – Computed on a tax equivalent basis excluding acquisition-related expenses, gains/losses on sales of assets, write-downs of OREO properties to fair value and amortization of intangibles. (C) – Return on average tangible equity = (Net income + Amortization of intangibles [after-tax]) / (Average shareholders' equity – Average intangible assets). (D) – Return on average tangible common equity = (Net income + Amortization of intangibles [after-tax]) / (Average common shareholders' equity – Average intangible assets). SUMMIT FINANCIAL GROUP, INC. (NASDAQ:SMMF)       Annual Performance Summary (unaudited)       2022 vs 2021                     For the Year Ended Percent Dollars in thousands 12/31/2022 12/31/2021 Change Statements of Income         Interest income         Loans, including fees $ 145,364   $ 112,630 29.1%     Securities   13,052     9,470 37.8%     Other   331     316 4.7%     Total interest income   158,747     122,416 29.7%     Interest expense         Deposits   20,683     8,182 152.8%     Borrowings   9,078     4,302 111.0%     Total interest expense   29,761     12,484 138.4%     Net interest income   128,986     109,932 17.3%     Provision for credit losses   6,950     4,000 73.8%     Net interest income after provision         for credit losses   122,036     105,932 15.2%               Noninterest income         Trust and wealth management fees   2,978     2,886 3.2%     Mortgage origination revenue   1,480     3,999 -63.0%     Service charges on deposit accounts   6,150     5,032 22.2%     Bank card revenue   6,261     5,896 6.2%     Net gains on equity investments   265     202 31.2%     Net realized (losses)/gains on debt securities   (708 )   425 -266.6%     Bank owned life insurance and annuity income   1,211     1,026 18.0%     Other income   516     742 -30.5%     Total noninterest income   18,153     20,208 -10.2%     Noninterest expense         Salaries and employee benefits   40,452     34,386 17.6%     Net occupancy expense   5,128     4,824 6.3%     Equipment expense   7,253     6,990 3.8%     Professional fees   1,628     1,578 3.2%     Advertising and public relations   893     697 28.1%     Amortization of intangibles   1,440     1,563 -7.9%     FDIC premiums   1,224     1,449 -15.5%     Bank card expense   2,928     2,668 9.7%     Foreclosed properties expense, net of (gains)/losses   236     1,745 -86.5%     Acquisition-related expense   114     1,224 -90.7%     Other expenses   11,583     11,615 -0.3%     Total noninterest expense   72,879     68,739 6.0%     Income before income taxes   67,310     57,401 17.3%     Income taxes   14,094     11,663 20.8%     Net income   53,216     45,738 16.3%     Preferred stock dividends   900     589 52.8%               Net income applicable to common shares $ 52,316   $ 45,149 15.9%        SUMMIT FINANCIAL GROUP, INC. (NASDAQ:SMMF)     Annual Performance Summary (unaudited)       2022 vs 2021                   For the Year Ended Percent     12/31/2022 12/31/2021 Change Per Share Data         Earnings per common share         Basic $ 4.10   $ 3.49   17.5%     Diluted $ 4.08   $ 3.47   17.6%               Cash dividends per common share $ 0.76   $ 0.70   8.6%     Common stock dividend payout ratio   18.2%     19.9%   -8.5%               Average common shares outstanding         Basic   12,760,649     12,943,883   -1.4%     Diluted   12,821,533     13,003,428   -1.4%               Common shares outstanding at period end   12,783,646     12,743,125   0.3%             Performance Ratios         Return on average equity   15.83%     14.76%   7.2%     Return on average tangible equity (C)   19.88%     18.71%   6.3%     Return on average tangible common equity (D)   21.03%     19.51%   7.8%     Return on average assets   1.42%     1.36%   4.4%     Net interest margin (A)   3.73%     3.54%   5.4%     Efficiency ratio (B)   47.76%     49.22%   -3.0%             NOTES (A) – Presented on a tax-equivalent basis assuming a federal tax rate of 21%. (B) – Computed on a tax equivalent basis excluding acquisition-related expenses, gains/losses on sales of assets, write-downs of OREO properties to fair value and amortization of intangibles. (C) – Return on average tangible equity = (Net income + Amortization of intangibles [after-tax]) / (Average shareholders' equity – Average intangible assets). (D) – Return on average tangible common equity = (Net income + Amortization of intangibles [after-tax]) / (Average common shareholders' equity – Average intangible assets). SUMMIT FINANCIAL GROUP, INC. (NASDAQ:SMMF)         Five Quarter Performance Summary (unaudited)                           For the Quarter Ended Dollars in thousands 12/31/2022 9/30/2022 6/30/2022 3/31/2022 12/31/2021 Statements of Income             Interest income             Loans, including fees $ 43,589   $ 38,784   $ 32,766   $ 30,224   $ 28,979     Securities   4,181     3,497     2,752     2,623     2,763     Other   70     170     45     46     75     Total interest income   47,840     42,451     35,563     32,893     31,817     Interest expense             Deposits   10,194     6,140     2,622     1,727     1,718     Borrowings   3,293     2,198     1,976     1,612     1,267     Total interest expense   13,487     8,338     4,598     3,339     2,985     Net interest income   34,353     34,113     30,965     29,554     28,832     Provision for credit losses   1,500     1,500     2,000     1,950     1,500     Net interest income after provision             for credit losses   32,853     32,613     28,965     27,604     27,332     Noninterest income             Trust and wealth management fees   750     725     745     757     847     Mortgage origination revenue   286     538     317     339     1,361     Service charges on deposit accounts   1,526     1,550     1,674     1,401     1,501     Bank card revenue   1,513     1,639     1,618     1,491     1,528     Net gains/(losses) on equity investments   280     283     (669 )   372     202     Net realized losses on debt securities   (24 )   (242 )   (289 )   (152.....»»

Category: earningsSource: benzingaJan 26th, 2023

Southern States Bancshares, Inc. Announces Fourth Quarter 2022 Financial Results

Fourth Quarter 2022 Performance and Operational Highlights Net income of $10.6 million, or $1.18 per diluted share Core net income(1) of $8.1 million, or $0.90 per diluted share(1) Net interest income of $20.9 million, an increase of $1.4 million from the prior quarter Net interest margin ("NIM") of 4.38%, up 23 basis points from the prior quarter NIM of 4.39% on a fully-taxable equivalent basis ("NIM - FTE")(1) Return on average assets ("ROAA") of 2.11%; return on average stockholders' equity ("ROAE") of 23.77%; and return on average tangible common equity ("ROATCE")(1) of 26.49% Core ROAA(1) of 1.61%; and core ROATCE(1) of 20.21% Efficiency ratio of 40.81%, an improvement from 48.94% for the prior quarter Linked-quarter loan growth was 18.1% annualized(2) Linked-quarter deposit growth was 4.6% annualized(2) Completed the sale of two branches resulting in a $2.4 million net gain (1) See "Reconciliation of Non-GAAP Financial Measures" below for reconciliation of non-GAAP financial measures to their most closely comparable GAAP financial measures.(2) The sale of two branches on October 1, 2022 resulted in a $7.3 million reduction in loans and a $66.0 million reduction in deposits. The growth percentages are net of the accounts sold. ANNISTON, Ala., Jan. 23, 2023 (GLOBE NEWSWIRE) -- Southern States Bancshares, Inc. (NASDAQ:SSBK) ("Southern States" or the "Company"), the holding company for Southern States Bank, an Alabama state-chartered commercial bank (the "Bank"), today reported net income of $10.6 million, or $1.18 diluted earnings per share, for the fourth quarter of 2022. This compares to net income of $6.7 million, or $0.75 diluted earnings per share, for the third quarter of 2022, and net income of $4.1 million, or $0.44 diluted earnings per share, for the fourth quarter of 2021. The Company reported core net income of $8.1 million, or $0.90 diluted core earnings per share, for the fourth quarter of 2022. This compares to core net income of $6.8 million, or $0.77 diluted core earnings per share, for the third quarter of 2022, and core net income of $4.3 million, or $0.47 diluted core earnings per share, for the fourth quarter of 2021 (see "Reconciliation of Non-GAAP Financial Measures"). CEO Commentary   Stephen Whatley, Chairman and Chief Executive Officer of Southern States, said, "We are very pleased with our fourth-quarter and full-year results. Our talented bankers identified compelling opportunities throughout 2022, driving strong new business development. At the same time, we maintained underwriting discipline and excellent credit quality.""We grew loans by 18.1% annualized in the fourth quarter and 27.7% for the full year, culminating a year of robust production across our economically dynamic markets. This growth, combined with an increased net interest margin, fueled the expansion of our fourth-quarter net interest income, which increased by 7.5% from the prior quarter and by 48.2% from the fourth quarter of 2021."Mr. Whatley continued. "While our markets are healthy and our clients are cautiously optimistic, we are mindful of the slowing economic environment heading into 2023 and the lagging impact of rising interest rates on deposit costs. Our long-term commitment to prudent, selective lending and proactive expense management give us confidence in our ability to navigate the changing landscape and continue to drive strong risk-adjusted returns for our shareholders."  "To that end, during the fourth quarter, we completed the sale of two branches as part of an ongoing effort to optimize our physical footprint. The branch sales resulted in a net gain of $2.4 million." Net Interest Income and Net Interest Margin   Three Months Ended   % Change December 31, 2022 vs. December 31,2022   September 30,2022   December 31,2021   September 30,2022   December 31,2021   (Dollars in thousands)                             Average interest-earning assets $ 1,893,069     $ 1,859,104     $ 1,519,490     1.8 %   24.6 % Net interest income $ 20,884     $ 19,435     $ 14,096     7.5 %   48.2 % Net interest margin   4.38 %     4.15 %     3.68 %   23 bps   70 bps                     Net interest income for the fourth quarter of 2022 was $20.9 million, an increase of 7.5% from $19.4 million for the third quarter of 2022. The increase was primarily attributable to growth, accompanied by an increase in net interest margin. Relative to the fourth quarter of 2021, net interest income increased $6.8 million, or 48.2%. The increase was substantially the result of growth, accompanied by an increase in net interest margin. Net interest margin for the fourth quarter of 2022 was 4.38%, compared to 4.15% for the third quarter of 2022. The increase was primarily due to the Company's asset sensitive balance sheet as rates increased. Relative to the fourth quarter of 2021, net interest margin increased from 3.68%. The increase was primarily due to the Company's asset sensitive balance sheet as rates increased, coupled with the deployment of excess liquidity. Noninterest Income   Three Months Ended   % Change December 31, 2022 vs. December 31,2022   September 30,2022   December 31,2021   September 30,2022   December 31,2021   (Dollars in thousands)                             Service charges on deposit accounts $ 431     $ 508     $ 428     (15.2 )%   0.7 % Swap fees   2       11       (6 )   (81.8 )%   (133.3 )% SBA/USDA fees   70       95       533     (26.3 )%   (86.9 )% Mortgage origination fees   98       218       269     (55.0 )%   (63.6 )% Net gain (loss) on securities   (86 )     (143 )     (40 )   (39.9 )%   115.0 % Other operating income   4,088       650       567     528.9 %   621.0 % Total noninterest income $ 4,603     $ 1,339     $ 1,751     243.8 %   162.9 %                     Noninterest income for the fourth quarter of 2022 was $4.6 million, an increase of 243.8% from $1.3 million for the third quarter of 2022. The fourth quarter 2022 results included a $2.6 million gain on the sale of two branches and a bank owned life insurance ("BOLI") benefit claim of $774,000. This decrease was partially offset by a decrease in mortgage fees. Relative to the fourth quarter of 2021, noninterest income increased 162.9% from $1.8 million. The fourth quarter 2022 results included a $2.6 million gain on the sale of two branches and a BOLI benefit claim of $774,000. This increase was partially offset by a decrease in SBA/USDA fees and mortgage fees during the fourth quarter of 2022. Noninterest Expense   Three Months Ended   % Change December 31, 2022 vs. December 31,2022   September 30,2022   December 31,2021   September 30,2022   December 31,2021   (Dollars in thousands)                             Salaries and employee benefits $ 6,738     $ 6,152     $ 5,563     9.5 %   21.1 % Equipment and occupancy expenses   730       764       943     (4.5 )%   (22.6 )% Data processing fees   711       599       563     18.7 %   26.3 % Regulatory assessments   165       235       263     (29.8 )%   (37.3 )% Other operating expenses   2,092       2,487       2,280     (15.9 )%   (8.2 )% Total noninterest expenses $ 10,436     $ 10,237     $ 9,612     1.9 %   8.6 %                     Noninterest expense for the fourth quarter of 2022 was $10.4 million, an increase of 1.9% from $10.2 million for the third quarter of 2022. The increase was primarily attributable to an increase in salaries and benefits as a result of expense related to the issuance of restricted stock units in a deferred compensation plan. Also included in the fourth quarter of 2022 was $200,000 in expenses associated with the sale of the branches. The increase was partially offset by a decrease in fraud losses as a portion was recovered in the fourth quarter of 2022. Relative to the fourth quarter of 2021, noninterest expense increased 8.6% from $9.6 million. The increase was primarily attributable to an increase in salaries and benefits as a result of additional incentive accruals based on operating results along with expense related to the issuance of restricted stock units in a deferred compensation plan. Loans and Credit Quality   Three Months Ended   % Change December 31, 2022 vs. December 31,2022   September 30,2022   December 31,2021   September 30,2022   December 31,2021 (Dollars in thousands)                             Core loans $ 1,592,707     $ 1,530,129     $ 1,244,914     4.1 %   27.9 % PPP loans   —       —       9,203     — %   NM  Gross loans   1,592,707       1,530,129       1,254,117     4.1 %   27.0 % Unearned income   (5,543 )     (5,139 )     (3,817 )   7.9 %   45.2 % Loans, net of unearned income ("Loans") $ 1,587,164     $ 1,524,990     $ 1,250,300     4.1 %   26.9 % Average loans, net of unearned ("Average loans") $ 1,563,255     $ 1,480,735     $ 1,191,688     5.6 %   31.2 %                     Nonperforming loans ("NPL") $ 2,245     $ 3,950     $ 1,972     (43.2 )%   13.8 % Provision for loan losses $ 1,938     $ 1,663     $ 732     16.5 %   164.8 % Allowance for loan losses ("ALLL") $ 20,156     $ 18,423     $ 14,844     9.4 %   35.8 % Net charge-offs (recoveries) $ 205     $ 47     $ (15 )   336.2 %   (1466.7 )% NPL to gross loans   0.14 %     0.26 %     0.16 %         Net charge-offs (recoveries) to average loans(1)   0.05 %     — %     — %         ALLL to loans   1.27 %     1.21 %     1.19 %                             (1) Ratio is annualized.                   NM = Not meaningful                                       Loans, net of unearned income were $1.6 billion at December 31, 2022, up $62.2 million from September 30, 2022 and up $336.9 million from December 31, 2021. The linked-quarter increase in loans was primarily attributable to growth across our footprint. Nonperforming loans totaled $2.2 million, or 0.14% of gross loans, at December 31, 2022, compared with $4.0 million, or 0.26% of gross loans, at September 30, 2022, and $2.0 million, or 0.16% of gross loans, at December 31, 2021. The $1.7 million net decrease in nonperforming loans in the fourth quarter was primarily attributable to one commercial real estate loan that was moved back to accruing status. The $273,000 net increase in nonperforming loans from December 31, 2021 was primarily attributable to loans being added and removed from nonaccrual status, none of which were significant. The Company recorded a provision for loan losses of $1.9 million for the fourth quarter of 2022, compared to $1.7 million for the third quarter of 2022. The provision was primarily due to changes in our qualitative economic factors. Net charge-offs for the fourth quarter of 2022 were $205,000, or 0.05% of average loans, compared to net charge-offs of $47,000, or 0.00% of average loans, for the third quarter of 2022, and net recoveries of $15,000, or 0.00% of average loans, for the fourth quarter of 2021. The Company's allowance for loan losses was 1.27% of total loans and 897.82% of nonperforming loans at December 31, 2022, compared with 1.21% of total loans and 466.41% of nonperforming loans at September 30, 2022. Deposits     Three Months Ended   % Change December 31, 2022 vs.   December 31,2022   September 30,2022   December 31,2021   September 30,2022     December 31,2021   (Dollars in thousands)                                 Noninterest-bearing deposits $ 460,977     $ 499,613     $ 541,546     (7.7 )%   (14.9 )% Interest-bearing deposits   1,259,766       1,267,479       1,014,905     (0.6 )%   24.1 % Total deposits $ 1,720,743     $ 1,767,092     $ 1,556,451     (2.6 )%   10.6 %                       Total deposits were $1.7 billion at December 31, 2022, compared with $1.8 billion at September 30, 2022 and $1.6 billion at December 31, 2021. The $46.3 million decrease in total deposits in the fourth quarter was substantially due to the sale of two branches in October, which resulted in a $66.0 million reduction in total deposits. Excluding the sale, total deposits had a net increase of $19.7 million due to a $43.7 million increase in interest-bearing account balances that more than offset a decrease of $24.0 million in noninterest-bearing deposits. Capital   December 31,2022   September 30,2022   December 31,2021 Company   Bank   Company   Bank   Company   Bank                       Tier 1 capital ratio to average assets 8.82 %   12.17 %   8.44 %   11.49 %   9.74 %   10.44 % Risk-based capital ratios:                       Common equity tier 1 ("CET1") capital ratio 8.82 %   12.17 %   8.73 %   11.89 %   10.35 %   11.09 % Tier 1 capital ratio 8.82 %   12.17 %   8.73 %   11.89 %   10.35 %   11.09 % Total capital ratio 14.29 %   13.18 %   12.26 %   12.87 %   11.33 %   12.07 %                         As of December 31, 2022, total stockholders' equity was $181.7 million, compared with $170.3 million at September 30, 2022. The increase of $11.4 million was substantially due to strong earnings growth. About Southern States Bancshares, Inc. Headquartered in Anniston, Alabama, Southern States Bancshares, Inc. is a bank holding company that operates primarily through its wholly-owned subsidiary, Southern States Bank. The Bank is a full service community banking institution, which offers an array of deposit, loan and other banking-related products and services to businesses and individuals in its communities. The Bank operates 13 branches in Alabama and Georgia and two loan production offices in Atlanta. Forward-Looking Statements This press release contains forward-looking statements within the meaning of the federal securities laws, which reflect our current expectations and beliefs with respect to, among other things, future events and our financial performance. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. This may be especially true given the inflationary environment, the COVID-19 pandemic and governmental responses. Although we believe that the expectations reflected in such forward-looking statements are reasonable as of the dates made, we cannot give any assurance that such expectations will prove correct and actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 and in other SEC filings under the section entitled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors". Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. These statements are often, but not always, made through the use of words or phrases such as "may," "can," "should," "could," "to be," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "likely," "anticipate," "seek," "estimate," "intend," "plan," "target," "project," "would" and "outlook," or the negative version of those words or other similar words or phrases of a future or forward-looking nature. Forward-looking statements appear in a number of places in this press release and may include statements about business strategy and prospects for growth, operations, ability to pay dividends, competition, regulation and general economic conditions. Contact Information       Lynn Joyce Kevin Dobbs (205) 820-8065 (310) 622-8245 ljoyce@ssbank.bank ssbankir@finprofiles.com SELECT FINANCIAL DATA (In thousands, except share and per share amounts)                       Three Months Ended   Year Ended December 31, December 31,2022   September 30,2022   December 31,2021     2022       2021                     Results of Operations                   Interest income $ 26,706     $ 22,520     $ 15,171     $ 82,850     $ 57,777   Interest expense   5,822       3,085       1,075       11,512       4,864   Net interest income   20,884       19,435       14,096       71,338       52,913   Provision for loan losses   1,938       1,663       732       5,605       2,982   Net interest income after provision   18,946       17,772       13,364       65,733       49,931   Noninterest income   4,603       1,339       1,751       8,677       10,803   Noninterest expense   10,436       10,237       9,612       39,614       36,435   Income tax expense(1)   2,521       2,174       1,445       7,725       5,732   Net income $ 10,592     $ 6,700     $ 4,058     $ 27,071     $ 18,567   Core net income(2) $ 8,081     $ 6,806     $ 4,256     $ 24,975     $ 15,956                       Share and Per Share Data                   Shares issued and outstanding   8,706,920       8,705,920       9,012,857       8,706,920       9,012,857   Weighted average shares outstanding:                   Basic   8,707,026       8,693,745       9,012,857       8,774,860       8,198,188   Diluted   8,932,585       8,871,116       9,125,872       8,949,669       8,316,536   Earnings per share:                   Basic $ 1.22     $ 0.77     $ 0.45     $ 3.08     $ 2.26   Diluted $ 1.18     $ 0.75     $ 0.44     $ 3.02     $ 2.23   Core - diluted(2) $ 0.90     $ 0.77     $ 0.47     $ 2.79     $ 1.92   Book value per share $ 20.87     $ 19.56     $ 19.66     $ 20.87     $ 19.66   Tangible book value per share(2) $ 18.79     $ 17.48     $ 17.62     $ 18.79     $ 17.62   Cash dividends declared $ 0.09     $ 0.09     $ 0.09     $ 0.36     $ 0.36                       Performance and Financial Ratios                   ROAA   2.11 %     1.35 %     0.99 %     1.43 %     1.23 % ROAE   23.77 %     15.42 %     9.15 %     15.55 %     11.80 % Core ROAA(2)   1.61 %     1.37 %     1.04 %     1.32 %     1.06 % ROATCE(2)   26.49 %     17.24 %     10.22 %     17.37 %     13.38 % Core ROATCE(2)   20.21 %     17.51 %     10.72 %     16.02 %     11.50 % NIM   4.38 %     4.15 %     3.68 %     3.99 %     3.78 % NIM - FTE(2)   4.39 %     4.17 %     3.70 %     4.01 %     3.80 % Net interest spread   3.84 %     3.86 %     3.54 %     3.68 %     3.63 % Yield on loans   6.05 %     5.37 %     4.75 %     5.27 %     4.89 % Yield on interest-bearing assets   5.60 %     4.81 %     3.96 %     4.64 %     4.13 % Cost of interest-bearing liabilities   1.76 %     0.95 %     0.42 %     0.96 %     0.50 % Cost of funds(3)   1.29 %     0.69 %     0.30 %     0.68 %     0.36 % Cost of interest-bearing deposits   1.52 %     0.82 %     0.39 %     0.79 %     0.47 % Cost of total deposits   1.09 %     0.58 %     0.27 %     0.55 %     0.33 % Noninterest deposits to total deposits   26.79 %     28.27 %     34.79 %     26.79 %     34.79 % Total loans to total deposits   92.24 %     86.30 %     80.33 %     92.24 %     80.33 % Efficiency ratio   40.81 %     48.94 %     60.50 %     49.12 %     57.13 % Core efficiency ratio(2)   45.98 %     48.94 %     59.07 %     50.97 %     60.13 %                     (1) Three months ended and year ended December 31, 2022 include a $540,000 investment tax credit.(2) See "Reconciliation of Non-GAAP Financial Measures" below for reconciliation of non-GAAP financial measures to their most closely comparable GAAP financial measures.(3) Includes total interest-bearing liabilities and noninterest deposits. SELECT FINANCIAL DATA (In thousands)                       Three Months Ended   Year Ended December 31, December 31,2022   September 30,2022   December 31,2021     2022       2021                     Financial Condition (ending)                   Total loans $ 1,587,164     $ 1,524,990     $ 1,250,300     $ 1,587,164     $ 1,250,300   Total securities   175,196       170,375       151,844       175,196       151,844   Total assets   2,044,866       2,052,725       1,782,592       2,044,866       1,782,592   Total noninterest bearing deposits   460,977       499,613       541,546       460,977       541,546   Total deposits   1,720,743       1,767,092       1,556,451       1,720,743       1,556,451   Total borrowings   117,295       93,020       38,448       117,295       38,448   Total liabilities   1,863,147       1,882,400       1,605,394       1,863,147       1,605,394   Total shareholders' equity $ 181,719     $ 170,325     $ 177,198     $ 181,719     $ 177,198                       Financial Condition (average)                   Total loans $ 1,563,255     $ 1,480,735     $ 1,191,688     $ 1,421,376     $ 1,118,386   Total securities   188,765       185,670       140,201       178,755       122,425   Other interest-earning assets   141,049       192,699       187,601       187,263       158,243   Total interest-bearing assets   1,893,069       1,859,104       1,519,490       1,787,394       1,399,054   Total assets   1,994,087       1,966,556       1,628,804       1,893,044       1,510,114   Noninterest-bearing deposits   477,301       491,917       439,142       496,486       378,868   Interest-bearing deposits   1,216,492       1,207,797       965,457       1,127,637       922,870   Total deposits   1,693,793       1,699,714       1,404,599       1,624,123       1,301,738   Total borrowings   99,111       75,039       38,448       76,379       41,733   Total interest-bearing liabilities   1,315,603       1,282,836       1,003,905       1,204,016       964,603   Total shareholders' equity $ 176,769     $ 172,402     $ 175,913     $ 174,107     $ 157,277                       Asset Quality                   Nonperforming loans $ 2,245     $ 3,950     $ 1,972     $ 2,245     $ 1,972   Other real estate owned ("OREO") $ 2,930     $ 2,930     $ 2,930     $ 2,930     $ 2,930   Nonperforming assets ("NPA") $ 5,175     $ 6,880     $ 4,902     $ 5,175     $ 4,902   Net charge-offs (recovery) to average loans(1)   0.05 %     — %     — %     0.02 %     — % Provision for loan losses to average loans(1)   0.49 %     0.45 %     0.24 %     0.39 %     0.27 % ALLL to loans   1.27 %     1.21 %     1.19 %     1.27 %     1.19 %.....»»

Category: earningsSource: benzingaJan 23rd, 2023

CapStar Reports Year End 2022 Results and SBA Expansion

NASHVILLE, Tenn., Jan. 19, 2023 (GLOBE NEWSWIRE) -- CapStar Financial Holdings, Inc. ("CapStar") (NASDAQ:CSTR) today reported net income of $10.3 million or $0.47 per diluted share, for the quarter ended December 31, 2022, compared with net income of $8.0 million or $0.37 per diluted share, for the quarter ended September 30, 2022, and net income of $12.5 million or $0.56 per diluted share, for the quarter ended December 31, 2021. Annualized return on average assets and return on average equity for the quarter ended December 31, 2022 were 1.31% and 11.78%, respectively. Fourth quarter results include a $0.7 million recovery related to an operational loss that occurred in third quarter 2022. For the twelve months ended December 31, 2022, the Company reported net income of $39.0 million or $1.77 per diluted share, compared with $48.7 million or $2.19 per diluted share, for the same period of 2021. Year to date 2022 return on average assets and return on average equity were 1.24% and 10.74%, respectively. Four Key Drivers   Targets   2022   4Q22   3Q22   4Q21 Annualized revenue growth   > 5%   -9.89%   33.30%   -19.51%   -5.61% Net interest margin   ≥ 3.60%   3.33%   3.44%   3.50%   3.14% Efficiency ratio   ≤ 55%   57.51%   53.23%   62.21%   54.74% Annualized net charge-offs to average loans   ≤ 0.25%   0.02%   0.03%   0.02%   0.04% Concurrently, the Company announced the hiring of a team of experienced SBA professionals from top 10 SBA originators to expand our SBA division and its fee contribution to the bank. Led by newly appointed director Marc Gilson, an SBA lending professional with over 25 years experience, the division now includes three business development officers along with additions to our existing team totaling 14 dedicated and experienced professionals in processing, underwriting, approval, loan closing and servicing. "CapStar's 2022 performance and results were outstanding," said Timothy K. Schools, President and Chief Executive Officer of CapStar. "Our Company delivered excellent service to our valued customers across each of our markets, investments in Chattanooga and Knoxville approached $450 million in loans helping us remix our earning assets into higher yielding balances through the addition of numerous new customers, net interest margin expanded due to a rise in rates as well as an emphasis on disciplined pricing, our focus on productivity and operating efficiency continues, and our net charge-offs remain limited. Further, we added a new office in Asheville and key hires in our existing markets. With the year's strong performance and our focus on capital management, we were pleased to return a record $17.9 million to shareholders in the form of share repurchases and dividends." "It is an exciting time at CapStar and our employees' hard work was recognized in 2022 by being named the fourteenth highest performing bank among the nation's top 300 publicly traded banks by Bank Director. As we look to 2023, we will continue to deliver exemplary service and seek to expand existing and new relationships while remaining actively focused on the challenging deposit environment and uncertain economic environment. While the outlook for this year remains clouded with an array of possible outcomes, we are very excited about our progress and the prospects of our markets and company." Revenue Total revenue, defined as net interest income plus noninterest income, was $31.2 million in the fourth quarter of 2022 compared to the third quarter of 2022 revenue of $28.8 million. As previously communicated, loans produced in our Tri-Net division since the spring have proved challenging to achieve a gain on sale. Additional production was ceased in early July. Third quarter 2022 revenue was negatively impacted by $2.1 million related to realized and unrealized losses associated with selling or transferring to held for investment the remaining Tri-Net loans in held for sale. Fourth quarter net interest income declined $0.6 million to $25.0 million as a result of increased deposit pricing pressure and a shift into higher cost deposit categories. Noninterest income for the fourth quarter of 2022 was $6.3 million, an increase of $3.0 million from the previous quarter, or when adjusting for the Tri-Net impact, an increase of $1.0 million largely due to improved SBA revenues. Fourth quarter 2022 average earning assets remained relatively flat at $2.89 billion compared to the third quarter 2022 as fourth quarter growth in loans held for investment was principally funded by a decline in loans held for sale. Average loans held for investment, excluding Tri-Net loan transfers from held for sale to held for investments during the third quarter, increased $59.5 million, or 11% linked-quarter annualized. The current commercial loan pipeline remains strong, exceeding $450 million. The Company remains conservative maintaining pricing discipline and limiting commercial real estate lending as a result of an uncertain economic outlook and in an effort to balance loan demand with funding in a challenging deposit environment. For the fourth quarter of 2022, the net interest margin decreased 6 basis points from the prior quarter to 3.44% primarily resulting from increased deposit pricing pressure and a shift into higher cost deposit categories. The Company's average deposits totaled $2.66 billion in the fourth quarter of 2022, flat compared to the third quarter of 2022. During the quarter, the Company experienced a $155.4 million increase in higher cost average time deposits, primarily a result of brokered deposit issuances. These increases were partially offset by a $80.2 million decrease in interest-bearing transaction accounts, creating an overall net increase of $83.6 million in average interest-bearing deposits when compared to the third quarter of 2022. During the quarter, the Company's noninterest-bearing deposits decreased 12% from the linked quarter to 22% of total average deposits as of December 31, 2022. Total deposit costs increased 58 basis points to 1.20% compared to 0.62% for the prior quarter. Noninterest income for the fourth quarter of 2022 was $6.3 million compared to the third quarter of 2022 noninterest income of $3.3 million, or $5.3 million when adjusted for the previously discussed Tri-Net losses. The $1.0 million increase versus adjusted third quarter was largely attributable to a $0.9 million improvement in the Company's SBA division driven by the expansion of the SBA division in the fourth quarter. The Company's mortgage and Tri-Net divisions provided little contribution in the fourth quarter. Noninterest Expense and Operating Efficiency Noninterest expense was $16.6 million for the fourth quarter of 2022, compared to $17.9 million in the third quarter of 2022. Third quarter expenses included a $1.5 million wire fraud and a $0.7 million operational loss, offset by an $0.8 million voluntary executive incentive reversal. Fourth quarter expenses included a $0.7 million recovery of the third quarter operational loss. Excluding the third quarter wire fraud, operational loss and incentive reversal, and the fourth quarter operation loss recovery, adjusted noninterest expense was $17.4 million in the fourth quarter and $16.5 million for the third quarter. Commissions and incentives for the SBA division contributed $0.4 million to the quarter's $0.9 million increase. The efficiency ratio was 53.23% for the quarter ended December 31, 2022 and 62.21% for the quarter ended September 30, 2022. The fourth quarter efficiency ratio adjusted for the operational loss recovery was 55.57%. The third quarter ratio adjusted for the wire fraud, operational loss, executive incentive reversal, and Tri-Net losses was 53.44%. Annualized noninterest expense, adjusted for the wire fraud, operational loss and recovery and executive incentive reversal, as a percentage of average assets increased 14 basis points to 2.20% for the quarter ended December 31, 2022 compared to 2.08% for the quarter ended September 30, 2022. Assets per employee declined to $7.9 million as of December 31, 2022 compared to $8.2 million in the previous quarter. Asset Quality The provision for credit losses for fourth quarter totaled $1.5 million, an increase from $0.9 million in third quarter 2022, as a result of continued strong loan growth and $0.7 million in specific reserves related to two impaired loans. Net loan charge-offs in fourth quarter were $172 thousand, or 0.03% of average loans held for investment, compared with $120 thousand, or 0.02% in third quarter 2022. For the year 2022, net loan charge-offs totaled $366 thousand or 0.02% of average loans held for investment. Past due loans improved to $11.6 million or 0.50% of total loans held for investment at December 31, 2022 compared to $14.4 million or 0.63% of total loans held for investment at September 30, 2022. The decrease was primarily related to the renewal of loans that had matured. Past dues are largely comprised of three relationships totaling $8.9 million for which the Company believes at this time there is nominal risk of loss beyond the impairment-related specific reserve of $0.7 million recorded in the fourth quarter. Non-performing assets to total loans and OREO increased to 0.46% at December 31, 2022 compared to 0.30% at September 30, 2022. The increase in non-performing assets is principally related to one of the three previously noted past due relationships that totals $3.4 million but which has a 90% SBA guaranty of $3.0 million. The allowance for loan losses plus the fair value mark on acquired loans to total loans increased to 1.13% as of December 31, 2022 compared to 1.09% as of September 30, 2022.   Asset Quality Data:   12/31/22   9/30/22   6/30/22   3/31/22   12/31/21 Annualized net charge-offs to average loans   0.03%   0.02%   0.00%   0.01%   0.04% Criticized and classified loans to total loans   1.31%   1.79%   2.12%   2.49%   2.64% Loans- past due to total end of period loans   0.50%   0.63%   0.12%   0.17%   0.25% Loans- over 90 days past due to total end of period loans   0.44%   0.27%   0.02%   0.05%   0.11% Non-performing assets to total loans held for investment and OREO   0.46%   0.30%   0.11%   0.18%   0.18% Allowance for loan losses plus fair value marks / Non-PPP Loans   1.13%   1.09%   1.09%   1.16%   1.27% Allowance for loan losses to non-performing loans   222%   333%   974%   596%   666% Income Tax Expense The Company's fourth quarter effective income tax rate increased slightly to 21% when compared to 20% in the prior quarter ended September 30, 2022. The Company's effective tax rate for 2022 was approximately 20%. Capital The Company continues to be well capitalized with tangible equity of $308.1 million at December 31, 2022. Tangible book value per share of common stock for the quarter ended December 31, 2022 was $14.19 compared to $13.72 and $14.99 for the quarters ended September 30, 2022 and December 31, 2021, respectively, with the changes being attributable to a decline in the value of the investment portfolio related to an increase in market interest rates, partially offset by ongoing earnings. Excluding the impact of after-tax gain or loss within the available for sale investment portfolio, tangible book value per share of common stock for the quarter ended December 31, 2022 was $16.57 compared to $16.16 and $15.13 for the quarters ended September 30, 2022 and December 31, 2021, respectively. Capital ratios:   12/31/22   9/30/22   6/30/22   3/31/22   12/31/21 Total risk based capital   14.51%   14.59%   14.79%   15.60%   16.29% Common equity tier 1 capital   12.61%   12.70%   12.87%   13.58%   14.11% Leverage   11.40%   11.22%   11.10%   10.99%   10.69% As a component of the Company's capital allocation strategy, $17.9 million was returned to shareholders in 2022 in the form of share repurchases and dividends. In total, 523,663 shares were repurchased at an average price of $19.12 of which 198,610 shares were repurchased in fourth quarter 2022 for an average price of $17.39. The Board of Directors of the Company renewed a common stock share repurchase of up to $10 million on January 18, 2023. The Plan will terminate on the earlier of the date on which the maximum authorized dollar amount of shares of common stock has been repurchased or January 31, 2024. Dividend On January 18, 2023, the Board of Directors of the Company approved a quarterly dividend of $0.10 per common share payable on February 22, 2023 to shareholders of record of CapStar's common stock as of the close of business on February 8, 2023. Conference Call and Webcast Information CapStar will host a conference call and webcast at 10:30 a.m. Central Time on Friday, January 20, 2023. During the call, management will review the fourth quarter results and operational highlights. Interested parties may listen to the call by registering here to access the live call, including for participants who plan to ask a question during the call. A simultaneous webcast may be accessed on CapStar's website at ir.capstarbank.com by clicking on "News & Events." An archived version of the webcast will be available in the same location shortly after the live call has ended. About CapStar Financial Holdings, Inc. CapStar Financial Holdings, Inc. is a bank holding company headquartered in Nashville, Tennessee and operates primarily through its wholly owned subsidiary, CapStar Bank, a Tennessee-chartered state bank. CapStar Bank is a commercial bank that seeks to establish and maintain comprehensive relationships with its clients by delivering customized and creative banking solutions and superior client service. As of December 31, 2022, on a consolidated basis, CapStar had total assets of $3.1 billion, total loans of $2.3 billion, total deposits of $2.7 billion, and shareholders' equity of $354.2 million. Visit www.capstarbank.com for more information. NON-GAAP MEASURES Certain releases may include financial information determined by methods other than in accordance with generally accepted accounting principles ("GAAP"). This financial information may include certain operating performance measures, which exclude merger-related and other charges that are not considered part of recurring operations. Such measures may include: "Efficiency ratio – operating," "Expenses – operating," "Earnings per share – operating," "Diluted earnings per share – operating," "Tangible book value per share," "Return on common equity – operating," "Return on tangible common equity – operating," "Return on assets – operating", "Tangible common equity to tangible assets" or other measures. Management may include these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating CapStar's underlying performance trends. Further, management uses these measures in managing and evaluating CapStar's business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the ‘Non-GAAP Reconciliation Tables' included in the exhibits to this presentation. CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARYConsolidated Statements of Income (unaudited) (dollars in thousands, except share data)Fourth quarter 2022 Earnings Release     Three Months Ended     Year Ended       December 31,     December 31,       2022     2021     2022     2021   Interest income:                         Loans, including fees   $ 30,024     $ 22,284     $ 101,501     $ 89,219   Securities:                         Taxable     2,000       1,682       7,642       6,573   Tax-exempt     310       335       1,268       1,408   Federal funds sold     45       9       76       21   Restricted equity securities     240       157       784       640   Interest-bearing deposits in financial institutions     1,187       192       2,262       598   Total interest income     33,806       24,659       113,533       98,459   Interest expense:                         Interest-bearing deposits     2,200       410       4,479       1,626   Savings and money market accounts     2,701       307       5,102       1,203   Time deposits     3,151       556       5,421       2,873   Federal funds purchased     —       —       2       —   Federal Home Loan Bank advances     401       —       862       12   Subordinated notes     394       394       1,575       1,575   Total interest expense     8,847       1,667       17,441       7,289   Net interest income     24,959       22,992       96,092       91,170   Provision for loan losses     1,548       (651 )     2,474       (1,066 ) Net interest income after provision for loan losses     23,411       23,643       93,618       92,236   Noninterest income:                         Deposit service charges     1,206       1,117       4,781       4,515   Interchange and debit card transaction fees     1,250       1,261       5,053       4,816   Mortgage banking income     637       2,740       5,073       16,058   Tri-Net     39       3,996       78       8,613   Wealth management     403       438       1,687       1,850   SBA lending     1,446       279       2,501       2,060   Net gain on sale of securities     1       8       8       28   Other noninterest income     1,303       1,295       5,341       4,741   Total noninterest income     6,285       11,134       24,522       42,681   Noninterest expense:                         Salaries and employee benefits     9,875       10,549       38,065       41,758   Data processing and software     2,797       2,719       11,152       11,248   Occupancy     1,032       1,012       4,299       4,205   Equipment     753       867       2,988       3,507   Professional services     522       521       2,175       2,155   Regulatory fees     266       284       1,080       1,031   Acquisition related expenses     —       —       —       323   Amortization of intangibles     399       461       1,690       1,939   Other noninterest expense     984       2,269       7,921       7,375   Total noninterest expense     16,628       18,682       69,370       73,541   Income before income taxes     13,068       16,095       48,770       61,376   Income tax expense     2,735       3,625       9,753       12,699   Net income   $ 10,333     $ 12,470     $ 39,017     $ 48,677   Per share information:                         Basic net income per share of common stock   $ 0.47     $ 0.56     $ 1.77     $ 2.20   Diluted net income per share of common stock   $ 0.47     $ 0.56     $ 1.77     $ 2.19   Weighted average shares outstanding:                         Basic     21,887,351       22,166,410       22,010,462       22,127,919   Diluted     21,926,821       22,221,989       22,059,855       22,179,461   This information is preliminary and based on CapStar data available at the time of this earnings release. CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARYSelected Quarterly Financial Data (unaudited) (dollars in thousands, except share data)Fourth quarter 2022 Earnings Release     Five Quarter Comparison       12/31/2022     9/30/2022     6/30/2022     3/31/2022     12/31/2021   Income Statement Data:                               Net interest income   $ 24,959     $ 25,553     $ 24,440     $ 21,140     $ 22,992   Provision for loan losses     1,548       867       843       (784 )     (651 ) Net interest income after provision for loan losses     23,411       24,686       23,597       21,924       23,643   Deposit service charges     1,206       1,251       1,182       1,142       1,117   Interchange and debit card transaction fees     1,250       1,245       1,336       1,222       1,261   Mortgage banking     637       765       1,705       1,966       2,740   Tri-Net     39       (2,059 )     (73 )     2,171       3,996   Wealth management     403       385       459       440       438   SBA lending     1,446       560       273       222       279   Net gain (loss) on sale of securities     1       7       —       —       8   Other noninterest income     1,303       1,118       994       1,926       1,295   Total noninterest income     6,285       3,272       5,876       9,089       11,134   Salaries and employee benefits     9,875       8,712       9,209       10,269       10,549   Data processing and software     2,797       2,861       2,847       2,647       2,719   Occupancy     1,032       1,092       1,076       1,099       1,012   Equipment     753       743       783       709       867   Professional services     522       468       506       679       521   Regulatory fees     266       269       265       280       284   Acquisition related expenses     —       —       —       —       —   Amortization of intangibles     399       415       430       446       461   Other noninterest expense     984       3,371       1,959       1,607       2,269   Total noninterest expense     16,628       17,931       17,075       17,736       18,682   Net income before income tax expense     13,068       10,027       12,398       13,277       16,095   Income tax expense     2,735       1,988       2,426       2,604       3,625   Net income   $ 10,333     $ 8,039     $ 9,972     $ 10,673     $ 12,470   Weighted average shares - basic     21,887,351       21,938,259       22,022,109    .....»»

Category: earningsSource: benzingaJan 20th, 2023

Banner Corporation Reports Net Income of $54.4 Million, or $1.58 Per Diluted Share, for Fourth Quarter 2022; Earns $195.4 Million in Net Income, or $5.67 Per Diluted Share, for 2022; Declares Increased Quarterly Cash Dividend of $0.48 Per Share

WALLA WALLA, Wash., Jan. 19, 2023 (GLOBE NEWSWIRE) -- Banner Corporation (NASDAQ GSM: BANR) ("Banner"), the parent company of Banner Bank, today reported net income of $54.4 million, or $1.58 per diluted share, for the fourth quarter of 2022, an 11% increase compared to $49.1 million, or $1.43 per diluted share, for the preceding quarter and a 9% increase compared to $49.9 million, or $1.44 per diluted share, for the fourth quarter of 2021. Banner's fourth quarter 2022 results include $6.7 million of provision for credit losses, compared to $6.1 million of provision for credit losses in the preceding quarter and $5.2 million in recapture of provision for credit losses in the fourth quarter of 2021. In addition, the current quarter included an accrual of $3.5 million of legal expense in relation to a potential settlement of a pending litigation matter. For the year ended December 31, 2022, net income decreased 3% to $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted share for the prior year. Full year 2022 results include $10.4 million in provision for credit losses, compared to $33.4 million in recapture of provision for credit losses in 2021. In addition, Banner recognized a $7.8 million gain related to the branch sale completed during the second quarter of 2022. Banner announced that its Board of Directors increased its regular quarterly cash dividend by 9% to $0.48 per share. The dividend will be payable February 13, 2023, to common shareholders of record on February 02, 2023. "Banner's 2022 operating results reflect the continued successful execution of our super community bank strategy, and the benefits of implementing Banner Forward initiatives," said Mark Grescovich, President and CEO. "Our performance for the fourth quarter of 2022 benefited from solid loan growth and higher yields on interest-earning assets that led to net interest margin expansion. Our continued focus on fostering new client relationships contributed to our 13% growth in loans, excluding PPP loans, compared to 2021. Our asset sensitive balance sheet contributed to the expansion of our net interest margin. As we continue to grow, we remain true to our values and guiding principle: Do the right thing for our clients, communities, employees, and shareholders through all economic cycles." "During the fourth quarter of 2022, we published our inaugural Environmental, Social and Governance Highlights Report," said Grescovich. "This report identifies ongoing practices and recent accomplishments in the areas of environmental risk and impact management, social responsibility (including diversity, equity and inclusion) and governance. While we've been engaged in ESG activities and practices for a very long time, creating this report makes it easier to share more examples and greater detail with interested stakeholders in a single, dedicated document." The report can be found on our website, bannerbank.com/esg. "Banner Forward, our bank-wide initiative to enhance revenue growth and reduce operating expense, is having a meaningful impact on earnings," said Grescovich. "Beginning during the third quarter of 2021, Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. The implementation of the revenue initiatives benefited the second half of 2022 and are expected to continue ramping up in 2023. The efficiency-related initiatives associated with Banner Forward have largely been completed. During the fourth quarter of 2022, we incurred expenses of $838,000 related to Banner Forward." At December 31, 2022, Banner Corporation had $15.83 billion in assets, $10.01 billion in net loans and $13.62 billion in deposits. Banner operates 137 full service branch offices, including branches located in eight of the top 20 largest western Metropolitan Statistical Areas by population. Fourth Quarter 2022 Highlights Revenues increased 6% to $172.1 million, compared to $162.0 million in the preceding quarter, and increased 18% compared to $146.0 million in the fourth quarter a year ago. Net interest income increased 9% to $159.1 million in the fourth quarter of 2022, compared to $146.4 million in the preceding quarter and increased 31%, compared to $121.5 million in the fourth quarter a year ago. Net interest margin, on a tax equivalent basis, was 4.23%, compared to 3.85% in the preceding quarter and 3.17% in the fourth quarter a year ago. Mortgage banking revenues increased to $2.3 million, compared to $105,000 in the preceding quarter, and decreased 59% compared to $5.6 million in the fourth quarter a year ago. Return on average assets was 1.34%, compared to 1.18% in both the preceding quarter and fourth quarter a year ago. Net loans receivable increased 3% to $10.01 billion at December 31, 2022, compared to $9.69 billion at September 30, 2022, and increased 12% compared to $8.95 billion at December 31, 2021. Non-performing assets increased to $23.4 million, or 0.15% of total assets, at December 31, 2022, compared to $15.6 million, or 0.10% of total assets at September 30, 2022, and decreased slightly compared to $23.7 million, or 0.14% of total assets, at December 31, 2021. The allowance for credit losses - loans was $141.5 million, or 1.39% of total loans receivable, as of December 31, 2022, compared to $135.9 million, or 1.38% of total loans receivable as of September 30, 2022 and $132.1 million, or 1.45% of total loans receivable as of December 31, 2021. Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) decreased to $12.90 billion at December 31, 2022, compared to $13.51 billion at September 30, 2022, and $13.49 billion a year ago. Core deposits represented 95% of total deposits at December 31, 2022. Dividends paid to shareholders were $0.44 per share in the quarter ended December 31, 2022. Common shareholders' equity per share increased 3% to $42.59 at December 31, 2022, compared to $41.20 at the preceding quarter end, and decreased 14% from $49.35 a year ago. Tangible common shareholders' equity per share* increased 5% to $31.41 at December 31, 2022, compared to $29.97 at the preceding quarter end, and decreased 17% from $38.02 a year ago. *Non-GAAP (Generally Accepted Accounting Principles) measure; see the discussion and reconciliation of Non-GAAP Financial Measures beginning on page 16. Income Statement Review Net interest income was $159.1 million in the fourth quarter of 2022, compared to $146.4 million in the preceding quarter and $121.5 million in the fourth quarter a year ago. Banner's net interest margin on a tax equivalent basis was 4.23% for the fourth quarter of 2022, a 38 basis-point increase compared to 3.85% in the preceding quarter and a 106 basis-point increase compared to 3.17% in the fourth quarter a year ago. "Rising market interest rates during the quarter produced higher yields on loans and investment securities which improved our net interest margin. Our net interest margin was also enhanced by increases in average loan balances during the quarter," said Grescovich. Average yields on interest-earning assets increased 43 basis points to 4.40% for the fourth quarter of 2022, compared to 3.97% for the preceding quarter and increased 111 basis points compared to 3.29% in the fourth quarter a year ago. Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve System has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a range of 4.25% to 4.50%. The increase in average yields on interest-earning assets during the current quarter reflects the benefit of variable rate interest-earning assets repricing higher, as well as new loans being originated at higher interest rates. Average loan yields increased 32 basis points to 5.14% compared to 4.82% in the preceding quarter and increased 57 basis points compared to 4.57% in the fourth quarter a year ago. The increase in average loan yields during the current quarter compared to the preceding and prior year quarters was primarily the result of rising interest rates. The year-over-year increase in average loan yields was partially offset by a decline in the recognition of deferred loan fee income due to loan repayments from U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loan forgiveness compared to the prior year quarter. Total deposit costs were 0.10% in the fourth quarter of 2022, which was a three basis-point increase compared to both the preceding quarter and fourth quarter a year ago. The total cost of funding liabilities was 0.18% during the fourth quarter of 2022, a five basis-point increase compared to 0.13% in both the preceding quarter and fourth quarter a year ago. Banner recorded a $6.7 million provision for credit losses in the current quarter (comprised of a $6.0 million provision for credit losses - loans, a $680,000 provision for credit losses - unfunded loan commitments and a $19,000 recapture of provision for credit losses - held-to-maturity debt securities). This compares to a $6.1 million provision for credit losses in the prior quarter (comprised of a $6.3 million provision for credit losses - loans, a $205,000 recapture of provision for credit losses - unfunded loan commitments and a $55,000 recapture of provision for credit losses - held-to-maturity debt securities) and a $5.2 million recapture of provision for credit losses in the fourth quarter a year ago (comprised of an $8.1 million recapture of provision for credit losses - loans, a $2.3 million provision for credit losses - unfunded loan commitments and a $579,000 provision for credit losses - held-to-maturity debt securities). The provision for credit losses for the current and preceding quarter primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic indicators utilized to estimate credit losses. Total non-interest income was $13.1 million in the fourth quarter of 2022, compared to $15.6 million in the preceding quarter and $24.5 million in the fourth quarter a year ago. The decrease in non-interest income during the current quarter, compared to the prior quarter was primarily due to a $628,000 decrease in deposit fees and other service charges and a $3.7 million net loss on the sale of securities recorded during the current quarter, partially offset by a $2.2 million increase in mortgage banking revenues. The decrease in non-interest income during the current quarter, compared to the prior year quarter was primarily due to a $3.3 million decrease in mortgage banking revenues, a $3.3 million decrease in miscellaneous non-interest income primarily due to a valuation adjustment recognized on the SBA servicing asset and higher gains related to SBA loans sold during the fourth quarter a year ago, and the previously mentioned net loss recognized on the sale of securities during the current quarter, partially offset by a $917,000 increase in bank-owned life insurance income. Deposit fees and other service charges were $10.8 million in the fourth quarter of 2022, compared to $11.4 million in the preceding quarter and $10.3 million in the fourth quarter a year ago. Mortgage banking revenues, including gains on one- to four-family and multifamily loan sales and loan servicing fees, were $2.3 million in the fourth quarter, compared to $105,000 in the preceding quarter and $5.6 million in the fourth quarter a year ago. The increase from the preceding quarter primarily reflects a negative fair value adjustment recognized in the previous quarter on multifamily held for sale loans. The decrease from the fourth quarter of 2021 primarily reflects a reduction in the volume and a decrease in the gain on sale margin for one- to four-family loans sold. The reduction in the volume of one-to four family loans sold primarily reflects reduced refinancing activity, as well as decreased purchase activity as interest rates increased during the current year. Home purchase activity accounted for 90% of one- to four-family mortgage loan originations in the fourth quarter of 2022, compared to 88% in the preceding quarter and was 64% in the fourth quarter of 2021. Mortgage banking revenue included a $723,000 lower of cost or market upward adjustment for the current quarter due to the transfer of multifamily held for sale loans to held for investment portfolio loans, partially offset by a negative fair value adjustment on multifamily held for sale loans. This compares to a $2.2 million lower of cost or market downward adjustment recorded during the preceding quarter on multifamily held for sale loans due to increases in market interest rates this year. Fourth quarter 2022 non-interest income also included a $157,000 net gain for fair value adjustments as a result of changes in the valuation of financial instruments carried at fair value, principally comprised of certain investment securities held for trading and limited partnership investments, and a $3.7 million net loss on the sale of securities. In the preceding quarter, results included a $532,000 net gain for fair value adjustments and a $6,000 net gain on the sale of securities. In the fourth quarter a year ago, results included a $2.7 million net gain for fair value adjustments and a $136,000 net loss on the sale of securities. Total revenue increased 6% to $172.1 million for the fourth quarter of 2022, compared to $162.0 million in the preceding quarter, and increased 18% compared to $146.0 million in the fourth quarter of 2021. Adjusted revenue* (the total of net interest income and total non-interest income excluding the net gain or loss on the sale of securities, the net change in valuation of financial instruments, and the gain on sale of branches) was $175.7 million in the fourth quarter of 2022, compared to $161.5 million in the preceding quarter and $143.4 million in the fourth quarter a year ago. For the year ended December 31, 2022, total revenue was $628.4 million compared to $593.3 million during 2021, with adjusted revenue* totaling $623.1 million for the year ended December 31, 2022, compared to $588.2 million in 2021. Total non-interest expense was $99.0 million in the fourth quarter of 2022, compared to $95.0 million in the preceding quarter and $91.8 million in the fourth quarter of 2021. The increase in non-interest expense for the current quarter compared to the prior quarter primarily reflects a $1.1 million decrease in capitalized loan origination costs, primarily due to decreases in production for construction and land loans, a $1.5 million increase in occupancy and equipment expenses, primarily reflecting increased building rent expense due to lease buyouts during the quarter as well as weather related increases in building maintenance expense, and a $3.7 million increase in professional and legal expenses, primarily due to a $3.5 million accrual during the current quarter in relation to a potential settlement of a pending litigation matter, partially offset by a $1.3 million decrease in salary and employee benefits expense, primarily due to a decrease in commission expense. The increase in non-interest expense for the current quarter compared to the same quarter a year ago primarily reflects an increase in salary and employee benefits expense, a decrease in capitalized loan origination costs and an increase in professional and legal expenses, partially offset by a $2.3 million loss on extinguishment of debt as a result of the redemption of $8.2 million of junior subordinated debentures during fourth quarter of 2021. For the year ended December 31, 2022, total non-interest expense was $377.3 million, compared to $380.1 million in the prior year. Banner's efficiency ratio was 57.52% for the fourth quarter, compared to 58.65% in the preceding quarter and 62.88% in same quarter a year ago. Banner's adjusted efficiency ratio* was 54.43% for the fourth quarter, compared to 57.04% in the preceding quarter and 59.71% in the year ago quarter. Federal and state income tax expense totaled $12.0 million for the fourth quarter of 2022 resulting in an effective tax rate of 18.1%, reflecting the benefits from tax exempt income as well as some adjustments related to filing its annual tax returns. Banner's statutory income tax rate is 23.5%, representing a blend of the statutory federal income tax rate of 21.0% and apportioned effects of the state income tax rates. * Non-GAAP measure; see the discussion and reconciliation of Non-GAAP Financial Measures beginning on page 16. Balance Sheet Review Total assets decreased 3% to $15.83 billion at December 31, 2022, compared to $16.36 billion at September 30, 2022, and decreased 6% when compared to $16.80 billion at December 31, 2021. The total of securities and interest-bearing deposits held at other banks was $4.28 billion at December 31, 2022, compared to $5.01 billion at September 30, 2022 and $6.26 billion at December 31, 2021. The decreases compared to the prior quarter and the prior year quarter were primarily due to a decrease in interest-bearing deposits. The average effective duration of Banner's securities portfolio was approximately 6.5 years at December 31, 2022, compared to 4.6 years at December 31, 2021. Total loans receivable increased to $10.15 billion at December 31, 2022, compared to $9.83 billion at September 30, 2022, and $9.08 billion at December 31, 2021. Excluding SBA PPP loans, total loans receivable increased $325.1 million from the preceding quarter and increased $1.19 billion from the fourth quarter a year ago. SBA PPP loans decreased 41% to $7.9 million at December 31, 2022, compared to $13.4 million at September 30, 2022, and decreased 94% to $133.9 million at December 31, 2021. One- to four-family residential loans increased to $1.17 billion at December 31, 2022, compared to $1.03 billion at September 30, 2022, and $657.5 million a year ago. The increase in one- to four-family residential loans from the preceding quarter was primarily the result of one- to four-family construction loans converting to one- to four-family portfolio loans as construction was completed and new production during the fourth quarter of 2022. Multifamily real estate loans increased 9% to $645.1 million at December 31, 2022, compared to $592.8 million at September 30, 2022, and increased 22% compared to $530.9 million a year ago. The current quarter increase in multifamily loans was due to transferring $54.0 million of multifamily held for sale loans to held for investment portfolio loans. Commercial real estate loans decreased slightly to $3.64 billion at December 31, 2022, compared to $3.66 billion at September 30, 2022 and decreased 4% when compared to $3.79 billion at December 31, 2021. Commercial business loans increased 4% to $2.23 billion at December 31, 2022, compared to $2.15 billion at September 30, 2022, and increased 14% compared to $1.96 billion a year ago. Excluding SBA PPP loans, commercial business loans increased 4% to $2.22 billion at December 31, 2022, compared to $2.14 billion at September 30, 2022, and increased 21% compared to $1.83 billion a year ago. Agricultural business loans decreased to $295.1 million at December 31, 2022, compared to $299.4 million at September 30, 2022, and increased from $280.6 million a year ago. Total construction, land and land development loans were $1.49 billion at December 31, 2022, a 3% increase from $1.44 billion at September 30, 2022, and a 14% increase from $1.31 billion at December 31, 2021, primarily due to an increase in multifamily construction loans. Consumer loans increased to $680.9 million at December 31, 2022, compared to $662.2 million at September 30, 2022, and increased from $555.9 million a year ago. The year-over-year increase in consumer loans was partially due to the purchase of a $25.6 million pool of consumer marine loans during the prior quarter. Loans held for sale were $56.9 million at December 31, 2022, compared to $84.4 million at September 30, 2022, and $96.5 million at December 31, 2021. The volume of one- to four- family residential mortgage loans sold was $39.3 million in the current quarter, compared to $49.7 million in the preceding quarter and $245.9 million in the fourth quarter a year ago. No multifamily loans were sold during the fourth quarter of 2022, compared to $10.5 million sold in the preceding quarter and none sold in the fourth quarter a year ago. Total deposits decreased to $13.62 billion at December 31, 2022, compared to $14.23 billion at September 30, 2022, and $14.33 billion a year ago. Non-interest-bearing account balances decreased 5% to $6.18 billion at December 31, 2022, compared to $6.51 billion at September 30, 2022, and 3% compared to $6.39 billion a year ago. Core deposits were 95% of total deposits at both December 31, 2022 and September 30, 2022 and 94% of total deposits at December 31, 2021. Certificates of deposit increased to $723.5 million at December 31, 2022, compared to $721.9 million at September 30, 2022, and decreased 14% compared to $838.6 million a year earlier. Banner had $50.0 million of FHLB borrowings at December 31, 2022, compared to none at September 30, 2022 and $50.0 million a year ago. At December 31, 2022, total common shareholders' equity was $1.46 billion, or 9.20% of assets, compared to $1.41 billion or 8.61% of assets at September 30, 2022, and $1.69 billion or 10.06% of assets a year ago. The increase in total common shareholders' equity at December 31, 2022 compared to September 30, 2022 was primarily due to a $39.1 million increase in retained earnings as a result of $54.4 million in net income, partially offset by the payment of cash dividends during the quarter. The decrease in total common shareholders' equity from December 31, 2021 reflects a $363.0 million decrease in accumulated other comprehensive income, primarily due to an increase in the unrealized loss on the security portfolio as a result of an increase in interest rates, the repurchase of 200,000 shares of common stock in the second quarter of 2022 at an average cost of $54.80 per share, and the payment of cash dividends, partially offset by a $134.5 million increase in retained earnings. At December 31, 2022, tangible common shareholders' equity*, which excludes goodwill and other intangible assets, net, was $1.07 billion, or 6.95% of tangible assets*, compared to $1.02 billion, or 6.41% of tangible assets, at September 30, 2022, and $1.30 billion, or 7.93% of tangible assets, a year ago. Banner and Banner Bank continue to maintain capital levels in excess of the requirements to be categorized as "well-capitalized." At December 31, 2022, Banner's estimated common equity Tier 1 capital ratio was 11.44%, its estimated Tier 1 leverage capital to average assets ratio was 9.45%, and its estimated total capital to risk-weighted assets ratio was 14.04%. These regulatory capital ratios are estimates, pending completion and filing of Banner's regulatory reports. * Non-GAAP measure; see the discussion and reconciliation of Non-GAAP Financial Measures beginning on page 16. Credit Quality The allowance for credit losses - loans was $141.5 million, or 1.39% of total loans receivable and 615% of non-performing loans, at December 31, 2022, compared to $135.9 million, or 1.38% of total loans receivable and 895% of non-performing loans, at September 30, 2022, and $132.1 million, or 1.45% of total loans receivable and 578% of non-performing loans, at December 31, 2021. In addition to the allowance for credit losses - loans, Banner maintains an allowance for credit losses - unfunded loan commitments, which was $14.7 million at December 31, 2022, compared to $14.0 million at September 30, 2022 and $12.4 million at December 31, 2021. Net loan charge-offs totaled $496,000 in the fourth quarter of 2022, compared to net loan recoveries of $869,000 in the preceding quarter and $311,000 in the fourth quarter a year ago. Non-performing loans were $23.0 million at December 31, 2022, compared to $15.2 million at September 30, 2022, and $22.8 million a year ago. Banner's total substandard loans were $137.2 million at December 31, 2022, compared to $136.4 million at September 30, 2022, and $198.4 million a year ago. The year over year decrease primarily reflects the payoff of substandard loans as well as risk rating upgrades during the current year. Banner's total non-performing assets were $23.4 million, or 0.15% of total assets, at December 31, 2022, compared to $15.6 million, or 0.10% of total assets, at September 30, 2022, and $23.7 million, or 0.14% of total assets, a year ago. Conference Call Banner will host a conference call on Friday January 20, 2023, at 8:00 a.m. PST, to discuss its fourth quarter results. Interested investors may listen to the call live at www.bannerbank.com. Investment professionals are invited to dial (844) 200-6205 using access code 188909 to participate in the call. A replay will be available for one week at (866) 813-9403 using access code 733055 or at www.bannerbank.com. About the Company Banner Corporation is a $15.83 billion bank holding company operating one commercial bank in four Western states through a network of branches offering a full range of deposit services and business, commercial real estate, construction, residential, agricultural and consumer loans. Visit Banner Bank on the Web at www.bannerbank.com. Forward-Looking Statements When used in this press release and in other documents filed with or furnished to the Securities and Exchange Commission (the "SEC"), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "may," "believe," "will," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "plans," "potential," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date such statements are made and based only on information then actually known to Banner. Banner does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These statements may relate to future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial information. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements and could negatively affect Banner's operating and stock price performance. Factors that could cause Banner's actual results to differ materially from those described in the forward-looking statements, include but are not limited to, the following: (1) potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia's invasion of Ukraine, as well as increasing oil prices and supply chain disruptions, and any governmental or societal responses to the COVID-19 pandemic, including the possibility of new COVID-19 variants; (2) the credit risks of lending activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, which could necessitate additional provisions for credit losses, resulting both from loans originated and loans acquired from other financial institutions; (3) results of examinations by regulatory authorities, including the possibility that any such regulatory authority may, among other things, require increases in the allowance for credit losses or writing down of assets or impose restrictions or penalties with respect to Banner's activities; (4) competitive pressures among depository institutions; (5) the effect of inflation on interest rate movements and their impact on client behavior and net interest margin; (6) the transition away from the London Interbank Offered Rate (LIBOR) toward new interest rate benchmarks; (7) the impact of repricing and competitors' pricing initiatives on loan and deposit products; (8) fluctuations in real estate values; (9) the ability to adapt successfully to technological changes to meet clients' needs and developments in the market place; (10) the ability to access cost-effective funding; (11) disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information technology systems or on the third-party vendors who perform critical processing functions; (12) changes in financial markets; (13) changes in economic conditions in general and in Washington, Idaho, Oregon and California in particular, including the risk of inflation; (14) the costs, effects and outcomes of litigation; (15) legislation or regulatory changes, including but not limited to changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (16) changes in accounting principles, policies or guidelines; (17) future acquisitions by Banner of other depository institutions or lines of business; (18) future goodwill impairment due to changes in Banner's business or changes in market conditions; (19) the costs associated with Banner Forward; (20) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and (21) other risks detailed from time to time in Banner's filings with the Securities and Exchange Commission including Banner's Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. RESULTS OF OPERATIONS Quarters Ended   Years Ended (in thousands except shares and per share data) Dec 31, 2022   Sep 30, 2022   Dec 31, 2021   Dec 31, 2022   Dec 31, 2021 INTEREST INCOME:                   Loans receivable $ 129,450     $ 116,610     $ 104,929     $ 450,916     $ 445,731   Mortgage-backed securities   19,099       17,558       13,220       67,585       45,723   Securities and cash equivalents   17,009       16,951       8,397       54,068       29,046       165,558       151,119       126,546       572,569       520,500   INTEREST EXPENSE:                   Deposits   3,623       2,407       2,384       10,124       11,770   Federal Home Loan Bank advances   198       —       348       489       2,592   Other borrowings   132       81       109       377       467   Subordinated debt   2,534       2,188       2,175       8,400       8,780       6,487       4,676       5,016       19,390       23,609   Net interest income   159,071       146,443       121,530       553,179       496,891   PROVISION (RECAPTURE) FOR CREDIT LOSSES   6,704       6,087       (5,243 )     10,364       (33,388 ) Net interest income after provision (recapture) for credit losses   152,367       140,356       126,773       542,815       530,279   NON-INTEREST INCOME:                   Deposit fees and other service charges   10,821       11,449       10,341       44,459       39,495   Mortgage banking operations   2,311       105       5,643       10,834       33,948   Bank-owned life insurance   2,120       1,804       1,203       7,794       5,000   Miscellaneous   1,382       1,689       4,702       6,805       12,875       16,634       15,047       21,889       69,892       91,318   Net (loss) gain on sale of securities   (3,721 )     6       (136 )     (3,248 )     482   Net change in valuation of financial instruments carried at fair value   157       532       2,721       807       4,616   Gain on sale of branches, including related deposits   —       —       —       7,804       —   Total non-interest income   13,070       15,585       24,474       75,255       96,416   NON-INTEREST EXPENSE:                   Salary and employee benefits   60,309       61,639       57,798       242,266       244,351   Less capitalized loan origination costs   (4,877 )     (5,984 )     (7,647 )     (24,313 )     (34,401 ) Occupancy and equipment   13,506       12,008       13,885       52,018       52,850   Information and computer data services   6,535       6,803       6,441       25,986       24,356   Payment and card processing services   5,109       5,508       5,062       21,195       20,544   Professional and legal expenses   6,328       2,619       2,251       14,005       22,274   Advertising and marketing   1,350       1,326       2,071       3,959       6,036   Deposit insurance   1,739       1,946       1,340       6,649       5,583   State and municipal business and use taxes   1,304       1,223       976       4,693       4,343   Real estate operations, net   28       68       49       (104 )     (22 ) Amortization of core deposit intangibles   1,215       1,215       1,574       5,279       6,571   Loss on extinguishment of debt   —       —       2,284       793       2,284   Miscellaneous   6,467       6,663       5,594       24,869       24,236       99,013       95,034       91,678       377,295       379,005   COVID-19 expenses   —       —       127       —       436   Merger and acquisition-related expenses   —       —       —       —       660   Total non-interest expense   99,013       95,034       91,805       377,295       380,101   Income before provision for income taxes   66,424       60,907       59,442       240,775       246,594   PROVISION FOR INCOME TAXES   12,044       11,837       9,515       45,397       45,546   NET INCOME $ 54,380     $ 49,070     $ 49,927     $ 195,378     $ 201,048   Earnings per common share:                   Basic $ 1.59     $ 1.43     $ 1.46     $ 5.70     $ 5.81   Diluted $ 1.58     $ 1.43     $ 1.44     $ 5.67     $ 5.76   Cumulative dividends declared per common share $ 0.44     $ 0.44     $ 0.41     $ 1.76     $ 1.64   Weighted average number of common shares outstanding:                   Basic   34,226,162       34,224,640       34,292,967       34,264,322       34,610,056   Diluted   34,437,151       34,416,017       34,575,607       34,459,922       34,919,188   Increase (decrease) in common shares outstanding   2,259       429       641       (58,614 )     (906,568 ) FINANCIAL CONDITION             Percentage Change (in thousands except shares and per share data) Dec 31, 2022   Sep 30, 2022   Dec 31, 2021   Prior Qtr   Prior Yr Qtr                     ASSETS                   Cash and due from banks $ 198,154     $ 273,052     $ 358,461     (27.4 )%   (44.7 )% Interest-bearing deposits   44,908       548,869       1,775,839     (91.8 )%   (97.5 )% Total cash and cash equivalents   243,062       821,921       2,134,300     (70.4 )%   (88.6 )% Securities - trading   28,694       28,383       26,981     1.1 %   6.3 % Securities - available for sale   2,789,031       2,996,173       3,638,993     (6.9 )%   (23.4 )% Securities - held to maturity   1,117,588       1,132,852       520,922     (1.3 )%   114.5 % Total securities   3,935,313       4,157,408       4,186,896     (5.3 )%   (6.0 )% Federal Home Loan Bank (FHLB) stock   12,000       10,000       12,000     20.0 %   — % Securities purchased under agreements to resell   300,000       300,000       300,000     — %   — % Loans held for sale   56,857       84,358       96,487     (32.6 )%   (41.1 )% Loans receivable   10,146,724       9,827,096       9,084,763     3.3 %   11.7 % Allowance for credit losses – loans   (141,465 )     (135,918 )     (132,099 )   4.1 %   7.1 % Net loans receivable   10,005,259       9,691,178       8,952,664     3.2 %   11.8 % Accrued interest receivable   57,284       50,689       42,916     13.0 %   33.5 % Real estate owned (REO) held for sale, net   340       340       852     — %   (60.1 )% Property and equipment, net   138,754       141,280       148,759     (1.8 )%   (6.7 )% Goodwill   373,121       373,121       373,121     — %   — % Other intangibles, net   9,440       10,655       14,855     (11.4 )%   (36.5 )% Bank-owned life insurance   297,565       295,443       244,156     0.7 %   21.9 % Operating lease right-of-use assets   49,283       51,908       55,257     (5.1 )%   (10.8 )% Other assets   355,153       372,508       242,609     (4.7 )%   46.4 % Total assets $ 15,833,431     $ 16,360,809     $ 16,804,872     (3.2 )%   (5.8 )% LIABILITIES                   Deposits:                   Non-interest-bearing $ 6,176,998     $ 6,507,523     $ 6,385,177     (5.1 )%   (3.3 )% Interest-bearing transaction and savings accounts   6,719,531       7,004,799       7,103,125     (4.1 )%   (5.4 )% Interest-bearing certificates   723,530       721,944       838,631     0.2 %   (13.7 )% Total deposits   13,620,059       14,234,266       14,326,933     (4.3 )%   (4.9 )% Advances from FHLB   50,000       —       50,000     — %   — % Other borrowings   232,799       234,006       264,490     (0.5 )%   (12.0 )% Subordinated notes, net   98,947       98,849       98,564     0.1 %   0.4 % Junior subordinated debentures at fair value   74,857       73,841       119,815     1.4 %   (37.5 )% Operating lease liabilities   55,205       58,031       59,756     (4.9 )%   (7.6 )% Accrued expenses and other liabilities   200,839       209,226       148,303     (4.0 )%   35.4 % Deferred compensation   44,293       43,931       46,684     0.8 %   (5.1 )% Total liabilities   14,376,999       14,952,150       15,114,545     (3.8 )%   (4.9 )% SHAREHOLDERS' EQUITY                   Common stock   1,293,959       1,291,741       1,299,381     0.2 %   (0.4 )% Retained earnings   525,242       486,108       390,762     8.1 %   34.4 % Accumulated other comprehensive (loss) income   (362,769 )     (369,190 )     184     (1.7 )%   nm Total shareholders' equity   1,456,432       1,408,659       1,690,327     3.4 %   (13.8 )% Total liabilities and shareholders' equity $ 15,833,431     $ 16,360,809     $ 16,804,872     (3.2 )%   (5.8 )% Common Shares Issued:                   Shares outstanding at end of period   34,194,018       34,191,759       34,252,632           Common shareholders' equity per share (1) $ 42.59     $ 41.20     $ 49.35           Common shareholders' tangible equity per share (1) (2) $ 31.41     $ 29.97     $ 38.02           Common shareholders' tangible equity to tangible assets (2)   6.95 %     6.41 %     7.93 %         Consolidated Tier 1 leverage capital ratio   9.45 %     9.06 %     8.76 %         (1 ) Calculation is based on number of common shares outstanding at the end of the period rather than weighted average shares outstanding. (2 ) Common shareholders' tangible equity excludes goodwill and other intangible assets. Tangible assets exclude goodwill and other intangible assets. These ratios represent non-GAAP financial measures. See also Non-GAAP Financial Measures reconciliation tables on the final two pages of the press release tables. ADDITIONAL FINANCIAL INFORMATION                   (dollars in thousands)                                 Percentage Change LOANS (1) Dec 31, 2022   Sep 30, 2022   Dec 31, 2021   Prior Qtr   Prior Yr Qtr                     Commercial real estate (CRE):                   Owner-occupied $ 845,320     $ 862,792     $ 831,623     (2.0 )%  .....»»

Category: earningsSource: benzingaJan 19th, 2023

OceanFirst Financial Corp. Announces Record Quarterly and Annual Earnings and Financial Results

RED BANK, N.J., Jan. 19, 2023 (GLOBE NEWSWIRE) -- OceanFirst Financial Corp. (NASDAQ:"OCFC") (the "Company"), the holding company for OceanFirst Bank N.A. (the "Bank"), announced net income available to common stockholders of $52.3 million, or $0.89 per diluted share, for the quarter ended December 31, 2022, as compared to $37.6 million, or $0.64 per diluted share, for the prior linked quarter, and $21.7 million, or $0.37 per diluted share, for the corresponding prior year period. For the year ended December 31, 2022, the Company reported net income available to common stockholders of $142.6 million, or $2.42 per diluted share, as compared to $106.1 million, or $1.78 per diluted share, for the prior year. Selected performance metrics are as follows (refer to "Selected Quarterly Financial Data" for additional information):   For the Three Months Ended,   For the Year Ended, Performance Ratios (Quarterly Ratios Annualized): December 31,   September 30,   December 31,   December 31,   December 31, 2022   2022   2021   2022   2021 Return on average assets 1.62 %   1.19 %   0.72 %   1.15 %   0.91 % Return on average stockholders' equity 13.25     9.68     5.65     9.24     7.02   Return on average tangible stockholders' equity (a) 19.85     14.62     8.59     13.96     10.73   Return on average tangible common equity (a) 20.97     15.47     9.09     14.76     11.37   Efficiency ratio 44.56     53.10     72.04     53.80     63.50   Net interest margin 3.64     3.36     2.99     3.37     2.93   (a) Return on average tangible stockholders' equity and return on average tangible common equity ("ROTCE"), which are non-GAAP ("generally accepted accounting principles") financial measures, exclude the impact of intangible assets and goodwill from both assets and stockholders' equity. ROTCE also excludes preferred stock from stockholders' equity. Refer to "Explanation of Non-GAAP Financial Measures" and the "Non-GAAP Reconciliation" tables for additional information regarding non-GAAP financial measures. Core earnings1 for the quarter and year ended December 31, 2022 amounted to $39.5 million and $138.0 million, respectively, or $0.67 and $2.34 per diluted share, an increase from core earnings of $28.5 million and $111.2 million, or $0.48 and $1.86 per diluted share, for the corresponding prior year periods. Non-core operations, net of tax, had a favorable impact of $12.7 million and $4.6 million for the quarter and year ended December 31, 2022, respectively. Non-core operations, net of tax, had an adverse impact of $6.8 million and $5.1 million for the quarter and year ended December 31, 2021, respectively. Core earnings for the quarter ended December 31, 2022 increased $4.5 million from $35.0 million, or $0.60 per diluted share, for the prior linked quarter. Non-core operations, net of tax, had a favorable impact of $2.6 million for the prior linked quarter. Core earnings PTPP for the quarter and year ended December 31, 2022 were $56.5 million and $190.7 million, respectively, or $0.96 and $3.24 per diluted share, as compared to $33.1 million and $133.1 million, or $0.56 and $2.23 per diluted share for the corresponding prior year periods. Selected performance metrics are as follows:   For the Three Months Ended,   For the Year Ended,   December 31,   September 30,   December 31,   December 31,   December 31, Core Ratios1 (Quarterly Ratios Annualized): 2022   2022   2021   2022   2021 Return on average assets   1.22 %     1.11 %     0.95 %     1.11 %     0.95 % Return on average tangible stockholders' equity   15.01       13.62       11.30       13.50       11.25   Return on average tangible common equity   15.86       14.40       11.96       14.28       11.92   Efficiency ratio   50.78       54.80       62.57       54.21       60.84   Core diluted earnings per share $ 0.67     $ 0.60     $ 0.48     $ 2.34     $ 1.86   Core PTPP diluted earnings per share   0.96       0.81       0.56       3.24       2.23   Key developments for the recent quarter are described below: Net Interest Income and Margin Expansion: Net interest income increased by $10.5 million to $106.5 million, from $96.0 million in the prior linked quarter. Net interest margin increased to 3.64%, from 3.36% in the prior linked quarter, largely driven by the impact of the rising rate environment on interest earning assets and loan growth, partly offset by an increased cost of funds. Loan Growth: Loan growth for the quarter was $199.3 million, reflecting loan originations of $684.1 million, while loan growth for the year was $1.30 billion, reflecting record loan originations of $3.09 billion for the year ended December 31, 2022. Stockholders' Equity per Common Share Growth: Stockholders' equity per common share increased to $26.81, from $26.04 in the prior linked quarter. Tangible common equity per common share increased to $17.08, from $16.30 in the prior linked quarter, reflecting capital accretion from earnings growth and stable other comprehensive income. 1 Core earnings and core earnings before income taxes and credit loss provision ("PTPP or Pre-Tax-Pre-Provision"), and ratios derived therefrom, are non-GAAP financial measures. For the periods presented, core earnings exclude merger related expenses, net branch consolidation (benefit) expense, net loss (gain) on equity investments, and the income tax effect of these items, (collectively referred to as "non-core" operations). PTPP excludes the aforementioned pre-tax "non-core" items along with income tax expense (benefit) and credit loss provision (benefit). Refer to "Explanation of Non-GAAP Financial Measures" and the "Non-GAAP Reconciliation" tables for additional information regarding non-GAAP financial measures. Chairman and Chief Executive Officer, Christopher D. Maher, commented on the Company's results, "We are pleased to report exceptional financial performance for the fourth quarter and for the year driven by record net income and net interest income, net interest margin expansion, and continued loan growth. Throughout the challenging economic environment in 2022, OceanFirst has produced some of the strongest results in the history of our Company." Mr. Maher added, "I am very proud of the entire team who worked tirelessly to serve our customers, to drive these results, and position OceanFirst to continue to deliver for our stockholders in 2023." As previously announced, in November 2022, the Company made an additional minority, non-controlling equity investment in Auxilior Capital Partners, Inc. ("Auxilior"), of $2.8 million as part of a new round of financing by the Company and other investors, in addition to the original $10.0 million investment the Company made in 2021. The new round of financing resulted in an unrealized gain of $17.5 million on the prior investments, which is included in other income for the quarter and year ended December 31, 2022. The Company's Board of Directors declared its 104th consecutive quarterly cash dividend on common stock. The quarterly cash dividend on common stock of $0.20 per share will be paid on February 17, 2023 to common stockholders of record on February 6, 2023. The Board declared a quarterly cash dividend on preferred stock of $0.4375 per depositary share, representing 1/40th interest in the Series A Preferred Stock. This dividend will be paid on February 15, 2023 to preferred stockholders of record on January 31, 2023. Results of OperationsOn April 1, 2022, the Company completed its acquisition of a majority interest in Trident Abstract Title Agency, LLC ("Trident") and its results of operations are included in the consolidated results for the quarter and year ended December 31, 2022, but do not impact the results of operations for the period from January 1, 2021 to March 31, 2022. Refer to "Supplemental Information on Trident" for the impact of Trident on the Company's consolidated results. Net Interest Income and MarginNet interest income for the quarter and year ended December 31, 2022 increased to $106.5 million and $377.5 million, respectively, as compared to $80.6 million and $305.3 million for the corresponding prior year periods, reflecting an increase in average interest-earning assets and net interest margin. Net interest margin for the quarter and year ended December 31, 2022 increased to 3.64% and 3.37%, respectively, from 2.99% and 2.93% for the same prior year periods. Excluding the impact of purchase accounting accretion and prepayment fees of 0.10% and 0.18% for the quarter ended December 31, 2022 and 2021, respectively, net interest margin increased to 3.54% from 2.81%. Excluding the impact of purchase accounting accretion and prepayment fees of 0.11% and 0.17% for the year ended December 31, 2022 and 2021, respectively, net interest margin increased to 3.26% from 2.76%. Net interest margin for both the quarter and year ended December 31, 2022 were enhanced by the impact of the rising rate environment on interest earning assets and the redeployment of excess cash into loans, partly offset by an increased cost of funds and the growth of interest-bearing liabilities. Average interest-earning assets increased by $899.7 million and $779.9 million for the quarter and year ended December 31, 2022, respectively, as compared to the corresponding prior year periods, primarily due to loan growth and, to a lesser extent securities growth, funded by the redeployment of excess cash and increased Federal Home Loan Bank ("FHLB") advances. Average loans receivable, net of allowance for loan credit losses, increased by $1.47 billion and $1.40 billion, primarily in commercial loans, for the quarter and year ended December 31, 2022, respectively, as compared to the same prior year periods. For the quarter and year ended December 31, 2022, the cost of average interest-bearing liabilities increased to 1.09% and 0.65%, respectively, from 0.40% and 0.49% for the corresponding prior year periods, as a result of higher costs associated with FHLB advances and interest-bearing deposits, including time deposits issued in an elevated rate environment in 2022. The total cost of deposits (including non-interest bearing deposits) was 0.53% and 0.31% for the quarter and year ended December 31, 2022, respectively, as compared to 0.20% and 0.26% for the same prior year periods. While costs of deposits have increased, deposit betas remain under 10% and are a fraction of the Company's historical experience in the last rising interest rate cycle. Net interest income for the quarter ended December 31, 2022 increased by $10.5 million, as compared to the prior linked quarter, reflecting an increase in net interest margin to 3.64%, as compared to 3.36% for the prior linked quarter. Excluding the impact of purchase accounting accretion and prepayment fees of 0.10% and 0.08% for the quarter ended December 31, 2022 and September 30, 2022, respectively, net interest margin increased to 3.54% from 3.28%. The expansion in net interest margin was primarily attributable to the impact of the rising rate environment on interest earning assets, loan growth and, to a lesser extent, loan payoffs impacting interest income. This was partly offset by an increased cost of funds and the expansion in FHLB advances to fund loan growth. Average interest-earning assets increased by $279.1 million for the quarter ended December 31, 2022, as compared to the prior linked quarter, primarily due to loan growth. The yield on average interest-earning assets increased to 4.46% for the quarter ended December 31, 2022, from 3.88% in the prior linked quarter, primarily due to the impact of the rising rate environment on interest earning assets. The total cost of average interest-bearing liabilities increased to 1.09% for the quarter ended December 31, 2022, as compared to 0.69% in the prior linked quarter, primarily due to higher costs associated with interest-bearing deposits and higher costs and balances of FHLB advances. Credit Loss Expense (Benefit)Credit loss expense for the quarter and year ended December 31, 2022, was $3.6 million and $7.8 million, respectively, as compared to credit loss benefit of $1.6 million and $11.8 million for the corresponding prior year periods, and a credit loss expense of $1.0 million in the prior linked quarter. The credit loss expense for the quarter and year ended December 31, 2022 was primarily influenced by loan growth, slowing prepayment assumptions, and increasingly uncertain macro-economic forecasts due to persistent inflation, interest rate increases, and global economic headwinds, partly offset by positive trends in the Company's criticized and classified assets. The Company's credit loss expense for the quarter ended December 31, 2022 increased from the prior linked quarter due to the heightened levels of uncertainty in macro-environment projections, despite the strength in the Company's borrower performance and overall asset quality. Net loan recoveries were $5,000 and $340,000 for the quarter and year ended December 31, 2022, respectively. Net loan recoveries were $19,000 and $461,000 for the quarter and year ended December 31, 2021, respectively. Net loan recoveries were $252,000 in the prior linked quarter. Refer to "Asset Quality" section for further discussion. Non-interest IncomeFor the quarter and year ended December 31, 2022, other income increased to $27.6 million and $59.1 million, respectively, as compared to $9.4 million and $51.9 million for the corresponding prior year periods. Other income for the quarter and year ended December 31, 2022 was impacted by non-core operations of $17.2 million and $9.7 million, respectively, related to net gains on equity investments, which included a $17.5 million unrealized gain on the Auxilior investment. The year ended December 31, 2022 included $8.9 million of net unrealized losses, mostly on preferred stock equity investments, primarily due to the impact of the rising interest rate environment. The preferred stock equity investments carried a weighted average yield of 5.1% and an amortized cost of $73.0 million at December 31, 2022. Other income for the quarter and year ended December 31, 2021 included net losses on equity investments of $1.3 million and net gains on equity investments of $7.1 million, respectively, which are considered non-core operations. Excluding non-core operations noted above, other income decreased $298,000 for the quarter ended December 31, 2022, as compared to the corresponding prior year period. This decrease was primarily due to decreases in bankcard services of $1.9 million, primarily as a result of the Durbin amendment, which became effective for the Company on July 1, 2022, and commercial loan swap income of $804,000. These decreases were partly offset by the acquisition of a majority interest in Trident, which added $2.6 million primarily due to title-related fees and service charges. Excluding non-core operations noted above, other income increased by $4.6 million for the year ended December 31, 2022, as compared to the prior year. The increase was primarily due to the impact of Trident, which added $10.4 million, mostly due to title-related fees and services charges, and an increase in commercial loan swap income of $3.0 million. These increases were partly offset by decreases in bankcard services of $4.1 million, primarily as a result of the Durbin amendment, net gain on sale of loans of $2.8 million, fees and service charges (excluding Trident) of $814,000, and Paycheck Protection Program loan origination referral fees of $800,000 recognized in the prior year. Excluding non-core operations of $3.4 million related to net gain on equity investments in the prior linked quarter, other income for the quarter ended December 31, 2022 decreased by $1.4 million, primarily due to a decrease in commercial loan swap income of $952,000. Non-interest ExpenseOperating expenses decreased to $59.7 million and increased to $234.9 million for the quarter and year ended December 31, 2022, respectively, as compared to $64.8 million and $226.9 million, for the same prior year periods. Operating expenses for the quarter and year ended December 31, 2022 were adversely impacted by $387,000 and $3.4 million of non-core operations, respectively. Operating expenses for the quarter and year ended December 31, 2021 were adversely impacted by non-core operations of $7.7 million and $13.8 million, respectively. Excluding non-core operations, operating expenses increased by $2.2 million for the quarter ended December 31, 2022, as compared to the corresponding prior year period. This increase was partly due to the acquisition of a majority interest in Trident, which added $2.5 million of expenses for the quarter ended December 31, 2022. Other increases, excluding Trident, included professional fees of $2.0 million and compensation and benefits of $1.3 million, partly offset by a decrease in data processing expense of $3.2 million. Excluding non-core operations, operating expenses increased by $18.4 million for the year ended December 31, 2022, as compared to the prior year. This increase was partly due to the impact of Trident, which added $8.5 million of expenses. Other increases, excluding Trident, included compensation and benefits expense of $6.6 million, primarily related to higher compensation and incentive costs, professional fees of $1.9 million, data processing expense of $1.5 million, and federal deposit insurance and regulatory assessments of $1.2 million, partly offset by a decrease in amortization of core deposit intangible of $734,000. Excluding non-core operations of $48,000, which favorably impacted operating expenses in the prior linked quarter, operating expenses for the quarter ended December 31, 2022 increased by $296,000 primarily due to an increase in professional fees of $2.2 million, partly offset by a decrease in data processing expense of $1.9 million. Income Tax ExpenseThe provision for income taxes was $17.4 million and $46.6 million for the quarter and year ended December 31, 2022, respectively, as compared to $4.1 million and $32.2 million, for the same prior year periods, and $12.3 million for the prior linked quarter. The effective tax rate was 24.6% and 24.0% for the quarter and year ended December 31, 2022, respectively, as compared to 15.3% and 22.6% for the same prior year periods, and 24.1% for the prior linked quarter. The lower effective tax rate for the quarter ended December 31, 2021, as compared to the current year periods and prior linked quarter, was primarily due to allocation of taxable income to jurisdictions other than New Jersey, which was tied to our commercial banking strategy, and other tax optimization efforts. Financial ConditionTotal assets increased by $1.36 billion to $13.10 billion at December 31, 2022, from $11.74 billion at December 31, 2021. Total loans increased by $1.30 billion to $9.92 billion at December 31, 2022, from $8.62 billion at December 31, 2021, due to strong loan originations and to a lesser extent, residential loan pool purchases. Total debt securities decreased by $28.7 million at December 31, 2022, as compared to December 31, 2021, primarily due to principal repayments and maturities, and to a lesser extent, an increase in unrealized losses driven by the rising rate environment. This was partly offset by purchases in the second half of the year, which included approximately $227 million of fixed rate bonds at amortized cost, with a weighted average life of 8.5 years and a weighted average yield of 5.1%, to provide stability to the Company's net interest income position. Other assets increased by $74.1 million to $221.1 million at December 31, 2022 from $147.0 million at December 31, 2021, primarily due to an increase in market values associated with customer interest rate swap programs. Total liabilities increased by $1.30 billion to $11.52 billion at December 31, 2022, from $10.22 billion at December 31, 2021. FHLB advances increased to $1.21 billion at December 31, 2022 from $0 at December 31, 2021 to fund liquidity needs, as deposits decreased by $57.6 million during this period from $9.73 billion to $9.68 billion. Total deposits, excluding time deposits, decreased by $824.6 million to $8.13 billion at December 31, 2022, from $8.96 billion at December 31, 2021, due to the net runoff of non-interest-bearing and interest-bearing checking balances. Time deposits increased to $1.54 billion, or 15.9% of total deposits, at December 31, 2022, from $775.0 million, or 8.0% of total deposits, at December 31, 2021, primarily due to an increase in brokered time deposits. The loans-to-deposit ratio at December 31, 2022 was 102.5%, as compared to 88.6% at December 31, 2021. Other borrowings also decreased by $33.7 million to $195.4 million at December 31, 2022, from $229.1 million at December 31, 2021, primarily due to the extinguishment of $35.0 million of subordinated debt in March 2022. Other liabilities increased by $224.1 million to $346.2 million at December 31, 2022, from $122.0 million at December 31, 2021, primarily due to an increase in the market values associated with customer interest rate swap programs and related collateral received from counterparties. Stockholders' equity increased to $1.59 billion at December 31, 2022, as compared to $1.52 billion at December 31, 2021. Accumulated other comprehensive loss increased by $33.2 million to $36.0 million at December 31, 2022 from $2.8 million at December 31, 2021, primarily due to unrealized losses on debt securities available-for-sale, which were adversely impacted by the rising interest rate environment. For the year ended December 31, 2022, the Company repurchased 373,223 shares totaling $7.4 million under its stock repurchase program at a weighted average cost of $19.82. There were 2,934,438 shares available for repurchase at December 31, 2022 under the existing repurchase program. Stockholders' equity per common share increased to $26.81 at December 31, 2022, as compared to $25.63 at December 31, 2021. Tangible common equity per common share2 increased to $17.08 at December 31, 2022, as compared to $15.93 at December 31, 2021. 2 Tangible common equity per common share, a non-GAAP financial measure, excludes the impact of intangible assets, goodwill, and preferred equity from stockholders' equity. Refer to "Explanation of Non-GAAP Financial Measures" and the "Non-GAAP Reconciliation" tables for additional information regarding non-GAAP financial measures. Asset QualityThe Company's non-performing loans decreased to $23.3 million at December 31, 2022, as compared to $25.5 million at December 31, 2021. The Company's non-performing loans, excluding $3.9 million and $6.5 million of non-performing purchased with credit deterioration ("PCD") loans from prior bank acquisitions at December 31, 2022 and 2021, respectively, increased to $19.3 million at December 31, 2022, as compared to $18.9 million at December 31, 2021. The allowance for loan credit losses as a percentage of total non-performing loans was 244.25% at December 31, 2022, as compared to 191.61% at December 31, 2021. The allowance for loan credit losses as a percentage of total non-performing loans, excluding PCD loans, was 294.10% at December 31, 2022, as compared to 257.81% at December 31, 2021. The level of 30 to 89 days delinquent loans improved to $14.1 million at December 31, 2022, from $14.5 million at December 31, 2021. The level of 30 to 89 days delinquent loans, excluding non-performing and PCD loans, improved to $10.5 million at December 31, 2022, from $13.5 million at December 31, 2021. The Company's allowance for loan credit losses was 0.57% of total loans at both December 31, 2022 and 2021. The allowance for loan credit losses plus the unamortized credit and PCD marks amounted to $68.2 million, or 0.69% of total loans, at December 31, 2022, as compared to $67.8 million, or 0.79% of total loans at December 31, 2021. Explanation of Non-GAAP Financial MeasuresReported amounts are presented in accordance with GAAP. The Company's management believes that the supplemental non-GAAP information, which consists of reported net income excluding non-core operations and in some instances excluding income taxes and credit loss provision, and reporting equity and asset amounts excluding intangible assets, goodwill or preferred stock, which can vary from period to period, provides a better comparison of period-to-period operating performance. In addition, a non-GAAP table has been presented excluding the results associated with the acquisition of a majority interest in Trident for better comparison period over period. Additionally, the Company believes this information is utilized by regulators and market analysts to evaluate a company's financial condition and, therefore, such information is useful to investors. These disclosures should not be viewed as a substitute for financial results in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies. Refer to the Non-GAAP Reconciliation table at the end of this document for details on the earnings impact of these items. Annual MeetingThe Company also announced today that its Annual Meeting of Stockholders will be held on Tuesday, May 23, 2023 at 8:00 a.m. Eastern Time. The record date for stockholders to vote at the Annual Meeting is Tuesday, April 4, 2023. Additional information regarding virtual access to the meeting will be distributed prior to the meeting. Conference CallAs previously announced, the Company will host an earnings conference call on Friday, January 20, 2023 at 11:00 a.m. Eastern Time. The direct dial number for the call is 1-844-200-6205, toll free, using the access code 433036. For those unable to participate in the conference call, a replay will be available. To access the replay, dial 1-866-813-9403, access code 427414, from one hour after the end of the call until April 20, 2023. The conference call, as well as the replay, are also available (listen-only) by internet webcast at www.oceanfirst.com - in the Investor Relations section. OceanFirst Financial Corp.'s subsidiary, OceanFirst Bank N.A., founded in 1902, is a $13.1 billion regional bank providing financial services throughout New Jersey and in the major metropolitan markets of Philadelphia, New York, Baltimore, and Boston. OceanFirst Bank delivers commercial and residential financing, treasury management, trust and asset management, and deposit services and is one of the largest and oldest community-based financial institutions headquartered in New Jersey. To learn more about OceanFirst, go to www.oceanfirst.com. Forward-Looking Statements In addition to historical information, this news release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "will," "should," "may," "view," "opportunity," "potential," or similar expressions or expressions of confidence. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to: implications arising from the termination of the proposed merger with Partners Bancorp, including reputational risks and potential adverse effects on the ability to attract other merger partners; the impact of the COVID-19 pandemic or any other pandemic on our operations and financial results and those of our customers, changes in interest rates, inflation, general economic conditions, potential recessionary conditions, levels of unemployment in the Bank's lending area, real estate market values in the Bank's lending area, future natural disasters, potential increases to flood insurance premiums, the current or anticipated impact of military conflict, terrorism or other geopolitical events, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, changes in consumer spending, borrowing and savings habits, changes in accounting principles, a failure in or breach of the Company's operational or security systems or infrastructure, including cyberattacks, the failure to maintain current technologies, failure to retain or attract employees and the Bank's ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, under Item 1A - Risk Factors and elsewhere, and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. OceanFirst Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(dollars in thousands)   December 31, 2022   September 30, 2022   December 31, 2021   (Unaudited)   (Unaudited)     Assets           Cash and due from banks $ 167,946   $ 170,668   $ 204,949 Debt securities available-for-sale, at estimated fair value   457,648     470,300     568,255 Debt securities held-to-maturity, net of allowance for securities credit losses of $1,128 at December 31, 2022, $1,234 at September 30, 2022, and $1,467 at December 31, 2021 (estimated fair value of $1,110,041 at December 31, 2022, $905,426 at September 30, 2022, and $1,152,744 at December 31, 2021)   1,221,138     1,027,712     1,139,193 Equity investments   102,037     81,722     101,155 Restricted equity investments, at cost   109,278     77,556     53,195 Loans receivable, net of allowance for loan credit losses of $56,824 at December 31, 2022, $53,521 at September 30, 2022, and $48,850 at December 31, 2021   9,868,718     9,672,488     8,583,352 Loans held-for-sale   690     3,549     — Interest and dividends receivable   44,704     38,388     32,606 Other real estate owned   —     —     106 Premises and equipment, net   126,705     127,868     125,828 Bank owned life insurance   261,603     261,118     259,207 Assets held for sale   2,719     3,216     6,229 Goodwill   506,146     506,146     500,319 Core deposit intangible   13,497     14,656     18,215 Other assets   221,067     228,066     147,007 Total assets $ 13,103,896   $ 12,683,453   $ 11,739,616 Liabilities and Stockholders' Equity           Deposits $ 9,675,206   $ 9,959,469   $ 9,732,816 Federal Home Loan Bank advances   1,211,166     514,200     — Securities sold under agreements to repurchase with customers   69,097     96,289     118,769 Other borrowings   195,403     194,914     229,141 Advances by borrowers for taxes and insurance   21,405     25,457     20,305 Other liabilities   346,155     352,908     122,032 Total liabilities   11,518,432     11,143,237     10,223,063 Stockholders' equity:           OceanFirst Financial Corp. stockholders' equity   1,584,662     1,539,253     1,516,553 Non-controlling interest   802     963     — Total stockholders' equity   1,585,464     1,540,216     1,516,553 Total liabilities and stockholders' equity $ 13,103,896   $ 12,683,453   $ 11,739,616      OceanFirst Financial Corp.CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)   For the Three Months Ended   For the Year Ended   December 31,   September 30,   December 31,   December 31,   2022   2022   2021   2022   2021   |--------------------- (Unaudited) ---------------------|   (Unaudited)     Interest income:                   Loans $ 117,046   $ 100,141     $ 81,392     $ 390,386   $ 315,237   Debt securities   10,951     8,479       5,654       34,407     22,033   Equity investments and other   2,280     1,879       1,411       6,382     4,822   Total interest income   130,277     110,499       88,457       431,175     342,092   Interest expense:                   Deposits   13,425     9,238       5,010       31,021     25,210   Borrowed funds   10,364     5,296       2,861       22,677     11,544   Total interest expense   23,789     14,534       7,871       53,698     36,754   Net interest income   106,488     95,965       80,586       377,477     305,338   Credit loss expense (benefit)   3,647     1,016       (1,573 )     7,768     (11,832 ) Net interest income after credit loss expense (benefit)   102,841     94,949       82,159       369,709     317,170   Other income:                   Bankcard services revenue   1,437     1,509       3,308       9,219     13,360   Trust and asset management revenue   551     568       562       2,386     2,336   Fees and service charges   5,776     6,320       3,314       22,802     13,833   Net gain on sales of loans   10     168       6       358     3,186   Net gain (loss) on equity investments   17,187     3,362       (1,252 )     9,685     7,145   Net (loss) gain from other real estate operations   —     —       (3 )     48     (15 ) Income from bank owned life insurance   1,697     1,356       2,061       6,578     6,832   Commercial loan swap income   519     1,471       1,323       7,065     4,095   Other   374     396       91       953     1,159   Total other income   27,551     15,150       9,410       59,094     51,931   Operating expenses:                   Compensation and employee benefits   33,943     34,124       31,006       131,915     120,014   Occupancy   5,027     5,288       5,101       20,817     20,481   Equipment   1,131     1,150       1,435       4,987     5,443   Marketing   705     655       614       2,947     2,169   Federal deposit insurance and regulatory assessments   1,924     1,757       1,733       7,359     6,155   Data processing   4,629     6,560       7,774       23,095     21,570   Check card processing   1,243     1,231       1,170       4,971     5,182   Professional fees   4,697     2,502       2,726       12,993     11,043   Amortization of core deposit intangible   1,159     1,171       1,343       4,718     5,453   Branch consolidation expense (benefit), net   111     (346 )     7,286       713     12,337   Merger related expenses   276     298       451       2,735     1,503   Other operating expense   4,883     4,607       4,195       17,631     15,510   Total operating expenses   59,728     58,997       64,834       234,881     226,860   Income before provision for income taxes   70,664     51,102       26,735       193,922     142,241   Provision for income taxes   17,353     12,298       4,078       46,565     32,165   Net income   53,311     38,804       22,657       147,357     110,076   Net income attributable to non-controlling interest   39     193       —       754     —   Net income attributable to OceanFirst Financial Corp.   53,272     38,611       22,657       146,603     110,076   Dividends on preferred shares   1,004     1,004       1,004       4,016     4,016   Net income available to common stockholders $ 52,268   $ 37,607     $ 21,653     $ 142,587   $ 106,060   Basic earnings per share $ 0.89   $ 0.64     $ 0.37     $ 2.43   $ 1.79   Diluted earnings per share $ 0.89   $ 0.64     $ 0.37     $ 2.42   $ 1.78   Average basic shares outstanding   58,584     58,681       58,801       58,730     59,406   Average diluted shares outstanding   58,751     58,801       59,044       58,878     59,649   OceanFirst Financial Corp.SELECTED LOAN AND DEPOSIT DATA(dollars in thousands) LOANS RECEIVABLE     At       December 31,2022   September 30,2022   June 30,2022   March 31,2022   December 31,2021 Commercial:                       Commercial real estate - investor   $ 5,171,952     $ 5,007,637     $ 4,808,965     $ 4,607,880     $ 4,378,061   Commercial real estate - owner-occupied     997,367       983,784       1,020,873       1,057,246       1,055,065   Commercial and industrial       622,372       652,620       584,464       502,739       449,224   Total commercial       6,791,691       6,644,041       6,414,302       6,167,865       5,882,350   Consumer:                       Residential real estate       2,861,991       2,813,209       2,758,269       2,687,927       2,479,701   Home equity loans and lines and other consumer ("other consumer")     264,372       261,510       252,314       253,184       260,819   Total consumer       3,126,363       3,074,719       3,010,583       2,941,111       2,740,520   Total loans       9,918,054       9,718,760       9,424,885       9,108,976       8,622,870   Deferred origination costs (fees), net     7,488       7,249       7,864       7,301       9,332   Allowance for loan credit losses       (56,824 )     (53,521 )     (52,061 )     (50,598 )     (48,850 ) Loans receivable, net     $ 9,868,718     $ 9,672,488     $ 9,380,688     $ 9,065,679     $ 8,583,352   Mortgage loans serviced for others   $ 51,736     $ 53,869     $ 56,045     $ 58,089     $ 60,447     At December 31, 2022Average Yield                     Loan pipeline (1):                       Commercial 6.53 %   $ 114,232     $ 339,487     $ 273,843     $ 385,986     $ 539,426   Residential real estate 6.10       36,958       80,591       104,920       116,554       123,211   Other consumer 5.95       14,890       19,395       6,278       12,814       8,381   Total 6.38 %   $ 166,080     $ 439,473     $ 385,041     $ 515,354     $ 671,018     For the Three Months Ended     December 31,   September 30,   June 30,   March 31,   December 31,     2022   2022   2022   2022.....»»

Category: earningsSource: benzingaJan 19th, 2023

CNB Financial Corporation Reports Full-Year 2022 Earnings Per Share of $3.26 Compared to $3.16 For Full-Year 2021

CLEARFIELD, Pa., Jan. 19, 2023 (GLOBE NEWSWIRE) -- CNB Financial Corporation ("CNB" or the "Corporation") (NASDAQ:CCNE), the parent company of CNB Bank, today announced its earnings for the twelve and three months ended December 31, 2022. Executive Summary Net income available to common shareholders ("earnings") was $58.9 million, or $3.26 per diluted share, for the twelve months ended December 31, 2022, compared to $53.4 million, or $3.16 per diluted share, for the twelve months ended December 31, 2021, reflecting increases of $5.5 million, or 10.3%, and $0.10 per diluted share, or 3.2%. The 2022 full-year earnings per share was partially impacted as a result of the dilutive effect of the Corporation's common stock offering completed in September of 2022, resulting in the issuance of 4,257,446 shares of common stock at $23.50 per share and net proceeds of $94.1 million after deducting the underwriting discount and customary offering expenses. Earnings for the three months ended December 31, 2022 were $14.8 million, or $0.70 per diluted share, compared to $13.6 million, or $0.80 per diluted share, for the three months ended December 31, 2021. The increase in earnings of $1.3 million, or 9.2%, for the three months ended December 31, 2022 compared to the same period in the prior year resulted primarily from growth in commercial loans and year-over-year increases in the balance of investment securities, stable credit quality, and an asset-sensitive balance sheet supporting increased net interest income in the current rising rate environment. The decrease in diluted earnings per share of $0.10, or 12.5%, for the three months ended December 31, 2022 compared to the same period in the prior year is due to the additional shares issued in the common equity capital raise in the third quarter 2022, as discussed above, which had a significant impact on the weighted average number of shares outstanding for the Corporation, in the fourth quarter of 2022. Processing fees on Paycheck Protection Program ("PPP") loans ("PPP-related fees") totaled approximately $1.9 million for the twelve months ended December 31, 2022, compared to $8.7 million for the twelve months ended December 31, 2021. PPP-related fees totaled approximately $19 thousand for the three months ended December 31, 2022, compared to $1.9 million for the three months ended December 31, 2021. At December 31, 2022, remaining deferred PPP-related fees totaled approximately $3 thousand. At December 31, 2022, loans, excluding the impact of (i) syndicated loans, and (ii) PPP loans, net of PPP-related fees (such loans being referred to as the "PPP-related loans"), totaled $4.1 billion, representing an increase of $654.5 million, or 18.9%, from December 31, 2021. This favorable loan growth, which was experienced across the Corporation's footprint, continued to reflect the Corporation's ongoing expansion in the Cleveland and Southwest Virginia regions, as well as new opportunities from its new loan production office in Rochester, New York, combined with growth in the portfolio related to its Private Banking division. For the twelve months ended December 31, 2022, the Corporation's balance sheet reflected an increase in syndicated lending balances of $30.9 million compared to December 31, 2021. The syndicated loan portfolio totaled $156.6 million, or 3.7% of total loans, excluding PPP-related loans, at December 31, 2022, compared to $125.8 million, or 3.5% of total loans, excluding PPP-related loans, at December 31, 2021. At December 31, 2022, total deposits were $4.6 billion, reflecting a decrease of $93.2 million, or 2.0%, from December 31, 2021. The decrease in deposit balances was primarily the result of increased utilization of liquidity by our customers as well as some reductions in excess balances from certain customers with a higher level of interest rate sensitivity. While deposit balances decreased, the total number of deposit households increased by 2.2% from December 31, 2021 to December 31, 2022. At December 31, 2022, short-term borrowings from the Federal Home Bank of Pittsburgh ("FHLB") totaled approximately $132.4 million, compared to no borrowings at December 31, 2021. The increase in short-term borrowings resulted primarily from the fourth quarter growth in loans outpacing the growth in deposit balances for the same period. Total nonperforming assets were approximately $23.5 million, or 0.43% of total assets, as of December 31, 2022, compared to $20.3 million, or 0.38% of total assets, as of December 31, 2021. For the three months ended December 31, 2022, net loan charge-offs were $821 thousand, or 0.08% (annualized) of average total loans and loans held for sale, compared to $456 thousand, or 0.05% (annualized) of average total loans and loans held for sale, during the three months ended December 31, 2021. Pre-provision net revenue ("PPNR"), a non-GAAP measure, was $86.8 million for the twelve months ended December 31, 2022, compared to $76.8 million for the twelve months ended December 31, 2021, reflecting an increase of $10.0 million, or 13.1%.1 PPNR was $22.8 million for the three months ended December 31, 2022, compared to $18.5 million for the three months ended December 31, 2021, reflecting an increase of $4.3 million, or 23.2%.1 The increase in PPNR for the twelve and three months ended December 31, 2022 was primarily driven by growth in loans and expansion of the Corporation's net interest margin. 1 This release contains references to certain financial measures that are not defined under U.S. Generally Accepted Accounting Principles ("GAAP"). Management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented. A reconciliation of these non-GAAP financial measures is provided in the "Non-GAAP Reconciliations" section. Michael D. Peduzzi, President and CEO, stated, "I am pleased to report that our results for 2022 represent record full-year earnings for the Corporation. Our performance reflects the dedicated, collective efforts of our commercial business development officers, retail office and client service personnel, wealth management and treasury services professionals, and corporate support teams. Our strategy of operating multiple relevant banking brands and divisions across four states efficiently under one bank charter greatly supported our double-digit percentage loan growth and increases in fee-based revenues. Importantly, we maintained our underwriting and pricing discipline reflected by sound asset quality measures and a strong net interest margin. With our business development professionals being strongly connected in the markets across our footprint, and the addition in 2023 of our new women's banking division, Impressia Bank, we believe we remain well-positioned for continued qualitative growth." Other Balance Sheet Highlights As of December 31, 2022, the total balance of investments classified as held-to-maturity was $404.8 million. There were no securities classified as held-to-maturity at December 31, 2021. During 2022, as a result of the Corporation's asset/liability and capital management strategies, securities with a combined amortized cost of $220.8 million and a fair value of $213.7 million were transferred from available-for-sale to held-to-maturity. These held-to-maturity portfolio bonds continue to support liquidity through pledging and can be utilized as collateral against borrowings. In addition to these internal portfolio transfers, some of the investment purchases made by the Corporation during 2022 were also classified as held-to-maturity securities. Book value per common share was $22.39 at December 31, 2022, representing a decrease of 2.0% from $22.85 at December 31, 2021. Tangible book value per common share, a non-GAAP measure, was $20.30 as of December 31, 2022, reflecting an increase of 0.4% from a tangible book value per common share of $20.22 as of December 31, 2021.1 The changes in book value per common share and tangible book value per common share compared to the prior year were mostly due to a $52.1 million increase in accumulated other comprehensive loss primarily from the temporary unrealized valuation changes in the available-for-sale investment portfolio. The after-tax impact of these unrealized losses was substantially, but not completely, offset by a $46.3 million increase in retained earnings. Book value and tangible book value also benefited from the issuance price of the shares added from the previously discussed common equity capital raise completed in September of 2022. In addition, tangible book value per common share benefited from a lower core deposit intangible balance at December 31, 2022. Performance Ratios Annualized return on average equity was 13.86% and 12.45% for the twelve and three months ended December 31, 2022, respectively, compared to 13.39% and 13.17% for the twelve and three months ended December 31, 2021, respectively. Annualized return on average tangible common equity, a non-GAAP measure, was 16.64% and 14.54% for the twelve and three months ended December 31, 2022, respectively, compared to 16.23% and 15.87% for the comparable periods in 2021, respectively.1 While the previously discussed common equity capital raise completed in the third quarter of 2022 significantly enhanced the Corporation's capital position, it also impacted the performance ratios for the twelve and three months ended December 31, 2022 and the related comparison to prior periods. The Corporation's efficiency ratio was 61.32% and 61.87% for the twelve and three months ended December 31, 2022, respectively, compared to 60.26% and 63.68% for the twelve and three months ended December 31, 2021, respectively. The efficiency ratio on a fully tax-equivalent basis, a non-GAAP ratio, was 60.87% and 61.40% for the twelve and three months ended December 31, 2022, respectively, compared to 59.76% and 63.19% for the twelve and three months ended December 31, 2021, respectively.1 The increase for the twelve months ended December 31, 2022 was primarily a result of expected increasing costs associated with the Corporation's expanding franchise investments into the Cleveland and Southwest Virginia markets, coupled with its continued strategic investments in technologies focused on customer sales management and connectivity capabilities. In addition, the fourth quarter of 2021 included approximately $2.3 million in additional personnel costs primarily from higher incentive compensation accruals and certain retirement benefit expenses. Revenue Net interest income combined with non-interest income ("total revenue") was $224.4 million for the twelve months ended December 31, 2022, representing an increase of $31.2 million, or 16.2%, from the twelve months ended December 31, 2021, primarily due to the following: Net interest income of $189.7 million for the twelve months ended December 31, 2022 increased $29.9 million, or 18.7%, from the twelve months ended December 31, 2021, primarily as a result of loan growth throughout 2022 and the benefits of the impact of rising interest rates in 2022 resulting in greater income on variable-rate loans, coupled with net growth in the Corporation's investment portfolio. Included in net interest income were PPP-related fees, which totaled approximately $1.9 million for the twelve months ended December 31, 2022, compared to $8.7 million for the twelve months ended December 31, 2021. Net interest margin was 3.83% and 3.35% for the twelve months ended December 31, 2022 and 2021, respectively. Net interest margin on a fully tax-equivalent basis, a non-GAAP measure, was 3.82% and 3.38% for the twelve months ended December 31, 2022 and 2021, respectively.1 The yield on earning assets of 4.30% for the twelve months ended December 31, 2022 increased 51 basis points from 3.79% for the twelve months ended December 31, 2021, primarily as a result of loan growth, the repricing of variable rate loans, and the Corporation's redeployment of excess cash at the Federal Reserve to investment securities, partially offset by lower PPP-related fees in 2022 compared to 2021. The cost of interest-bearing liabilities increased 10 basis points from 0.52% for the twelve months ended December 31, 2021 to 0.62% for the twelve months ended December 31, 2022, primarily as a result of the Corporation's targeted interest-bearing deposit rate increases. Total revenue was $59.8 million for the three months ended December 31, 2022, representing an increase of $8.9 million, or 17.4%, compared to the three months ended December 31, 2021, primarily due to the following: Net interest income of $50.8 million for the three months ended December 31, 2022 increased $8.8 million, or 20.9%, from the three months ended December 31, 2021, primarily as a result of loan growth and the net benefit of higher interest rates on both variable-rate loans and new loan production. Included in net interest income were PPP-related fees, which totaled approximately $19 thousand for the three months ended December 31, 2022, compared to $1.9 million for the three months ended December 31, 2021. Net interest margin was 4.07% and 3.38% for the three months ended December 31, 2022 and 2021, respectively. Net interest margin on a fully tax-equivalent basis, a non-GAAP measure, was 4.03% and 3.41% for the three months ended December 31, 2022 and 2021, respectively.1 The yield on earning assets of 4.95% for the three months ended December 31, 2022 increased 120 basis points from 3.75% for the three months ended December 31, 2021, primarily as a result of loan growth and the Corporation redeploying excess cash at the Federal Reserve to investment securities. Net interest income also reflected the net benefit of higher interest rates, partially offset by lower PPP-related fees in 2022 compared to 2021. The cost of interest-bearing liabilities increased 77 basis points from 0.43% for the three months ended December 31, 2021 to 1.20% for the three months ended December 31, 2022, primarily as a result of the Corporation's targeted interest-bearing deposit rate increases and short-term borrowings through the FHLB. Total non-interest income was $34.8 million for the twelve months ended December 31, 2022, representing an increase of $1.3 million, or 4.0%, from the same period in 2021. Included in non-interest income for the twelve months ended December 31, 2022 and 2021 was $651 thousand and $783 thousand, respectively, in net realized gains on available-for-sale securities. Non-interest income excluding realized gains on available-for-sale securities, a non-GAAP measure, for the twelve months ended December 31, 2022, increased $1.5 million, or 4.5%, from the same period in 2021.1 During the twelve months ended December 31, 2022, Wealth and Asset Management fees increased $432 thousand, or 6.4%, compared to the twelve months ended December 31, 2021, as the Corporation benefited from an increased number of wealth management relationships. Other notable increases during the twelve months ended December 31, 2022 included increased income from service charges on deposits, other service charges and fees, pass-through income from small business investment companies ("SBICs") and bank owned life insurance mostly due to an $883 thousand gain resulting from death benefit proceeds. These were partially offset by unrealized losses on equity securities and decreased mortgage banking activity. Total non-interest income was $9.0 million for the three months ended December 31, 2022, representing an increase of $83 thousand, or 0.9%, from the same period in 2021. The increase was primarily the result of income from service charges and fees and pass-through income from SBICs, partially offset by decreased mortgage banking activity. Non-Interest Expense For the twelve months ended December 31, 2022, total non-interest expense was $137.6 million, reflecting an increase of $21.2 million, or 18.2%, from the twelve months ended December 31, 2021, primarily as a result of (i) expansion of the Corporation's workforce in its growth regions of Cleveland, Southwest Virginia, and Rochester, (ii) increased investments in technology aimed at enhancing both customer experience and expanding service delivery channels, and (iii) the Corporation's sales management and increased legal and professional expenses. For the three months ended December 31, 2022, total non-interest expense was $37.0 million, reflecting an increase of $4.6 million, or 14.0%, from the three months ended December 31, 2021, primarily as a result of the same expense drivers as discussed above. Income Taxes Income tax expense was $15.0 million, representing a 19.2% effective tax rate, and $13.1 million, representing a 18.5% effective tax rate, for the twelve months ended December 31, 2022 and 2021, respectively. Asset Quality Total nonperforming assets were $23.5 million, or 0.43% of total assets, as of December 31, 2022, compared to $20.3 million, or 0.38% of total assets, as of December 31, 2021. The allowance for credit losses measured as a percentage of total loans was 1.02% as of December 31, 2022, compared to 1.03% as of December 31, 2021. In addition, the allowance for credit losses as a percentage of nonaccrual loans was 207.0% as of December 31, 2022, compared to 193.6% as of December 31, 2021. Provision for credit losses was $8.6 million and $3.0 million for the twelve and three months ended December 31, 2022, respectively, compared to $6.0 million and $814 thousand for the twelve and three months ended December 31, 2021, respectively. Included in the provision for credit losses for the twelve and three months ended December 31, 2022 was $603 thousand expense and a $38 thousand benefit, respectively, related to the allowance for unfunded commitments compared to no accrual towards the allowance for unfunded commitments for the twelve and three months ended December 31, 2021. For the twelve months ended December 31, 2022, net loan charge-offs were $2.1 million, or 0.05% of average total loans including loans held for sale, compared to $2.8 million, or 0.08%, during the twelve months ended December 31, 2021. For the three months ended December 31, 2022, net loan charge-offs were $821 thousand, or 0.08% (annualized) of average total loans including loans held for sale, compared to $456 thousand, or 0.05% (annualized), during the three months ended December 31, 2021. Capital As of December 31, 2022, the Corporation's total shareholders' equity was $530.8 million, representing an increase of $87.9 million, or 19.9%, from December 31, 2021, primarily due to the $94.1 million increase in additional paid in capital as a result of the Corporation's common stock offering and the increase from the Corporation's earnings, partially offset by both common and preferred dividends paid during the year, and a significant increase in accumulated other comprehensive loss during the year resulting primarily from the temporary unrealized reduction in the value of the available-for-sale investment portfolio during the twelve months ended December 31, 2022. Regulatory capital ratios for the Corporation continue to exceed regulatory "well-capitalized" levels as of December 31, 2022. As of December 31, 2022, the Corporation's ratio of common shareholders' equity to total assets was 8.64% compared to 7.23% at December 31, 2021. As of December 31, 2022, the Corporation's ratio of tangible common equity to tangible assets, a non-GAAP measure, was 7.90% compared to 6.45% at December 31, 2021. This increase was the result of the above-noted impacts of the Corporation's common stock offering and an increase in retained earnings, partially offset by an increase in accumulated other comprehensive loss during the twelve months ended December 31, 2022.1 About CNB Financial Corporation CNB Financial Corporation is a financial holding company with consolidated assets of approximately $5.5 billion. CNB Financial Corporation conducts business primarily through its principal subsidiary, CNB Bank. CNB Bank is a full-service bank engaging in a full range of banking activities and services, including trust and wealth management services, for individual, business, governmental, and institutional customers. CNB Bank operations include a private banking division, three loan production offices, one drive-up office, one mobile office and 47 full-service offices in Pennsylvania, Ohio, New York and Virginia. CNB Bank's divisions include ERIEBANK, based in Erie, Pennsylvania, with offices in Northwest Pennsylvania and Northeast Ohio; FCBank, based in Worthington, Ohio, with offices in Central Ohio; BankOnBuffalo, based in Buffalo, New York, with offices in Western New York; Ridge View Bank, with loan production offices in the Southwest Virginia region; and Impressia Bank which will operate in CNB Bank's primary market areas. CNB Bank is headquartered in Clearfield, Pennsylvania, with offices in Central and North Central Pennsylvania. Additional information about CNB Financial Corporation may be found at www.CNBBank.bank.  Forward-Looking Statements This press release includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to CNB's financial condition, liquidity, results of operations, future performance and business. These forward-looking statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that are not historical facts. Forward-looking statements include statements with respect to beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond CNB's control). Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future conditional verbs such as "may," "will," "should," "would" and "could." CNB's actual results may differ materially from those contemplated by the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Such known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, include, but are not limited to, (i) adverse changes or conditions in capital and financial markets; (ii) changes in interest rates; (iii) the duration and scope of a pandemic, including the ongoing COVID-19 pandemic, and the local, national and global impact of a pandemic;; (iv) changes in general business, industry or economic conditions or competition; (v) changes in any applicable law, rule, regulation, policy, guideline or practice governing or affecting financial holding companies and their subsidiaries or with respect to tax or accounting principles or otherwise; (vi) higher than expected costs or other difficulties related to integration of combined or merged businesses; (vii) the effects of business combinations and other acquisition transactions, including the inability to realize our loan and investment portfolios; (viii) changes in the quality or composition of our loan and investment portfolios; (ix) adequacy of loan loss reserves; (x) increased competition; (xi) loss of certain key officers; (xii) deposit attrition; (xiii) rapidly changing technology; (xiv) unanticipated regulatory or judicial proceedings and liabilities and other costs; (xv) changes in the cost of funds, demand for loan products or demand for financial services; and (xvi) other economic, competitive, governmental or technological factors affecting our operations, markets, products, services and prices. Such developments could have an adverse impact on CNB's financial position and results of operations. For more information about factors that could cause actual results to differ from those discussed in the forward-looking statements, please refer to the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of and the forward-looking statement disclaimers in CNB's annual and quarterly reports filed with the Securities and Exchange Commission. The forward-looking statements are based upon management's beliefs and assumptions and are made as of the date of this press release. CNB undertakes no obligation to publicly update or revise any forward-looking statements included in this press release or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this press release might not occur and you should not put undue reliance on any forward-looking statements. Financial Tables The following tables supplement the financial highlights described previously for CNB. All dollars are stated in thousands, except share and per share data.     (unaudited)         Three Months Ended   Twelve Months Ended     December 31,   December 31,       2022       2021     % change     (unaudited)2022       2021     % change Income Statement                         Interest and fees on loans   $ 57,781     $ 40,923     41.2 %   $ 194,149     $ 157,799     23.0 % Processing fees on PPP loans     19       1,920     (99.0)%     1,889       8,737     (78.4)% Interest and dividends on securities and cash and cash equivalents     4,645       3,486     33.2 %     17,700       13,064     35.5 % Interest expense     (11,612 )     (4,270 )   171.9 %     (24,079 )     (19,820 )   21.5 % Net interest income     50,833       42,059     20.9 %     189,659       159,780     18.7 % Provision for credit losses     2,950       814     262.4 %     8,589       6,003     43.1 % Net interest income after provision for credit losses     47,883       41,245     16.1 %     181,070       153,777     17.7 %                           Non-interest income                         Service charges on deposit accounts     1,806       1,806     0.0 %     7,206       6,195     16.3 % Other service charges and fees     943       731     29.0 %     3,196       2,436     31.2 % Wealth and asset management fees     1,716       1,719     (0.2)%     7,172       6,740     6.4 % Net realized gains on available-for-sale securities     0       783     NM     651       783     (16.9)% Net realized and unrealized gains (losses) on equity securities     284       313     (9.3)%     (1,149 )     790     (245.4)% Mortgage banking     172       532     (67.7)%     1,237       3,147     (60.7)% Bank owned life insurance     655       636     3.0 %     3,433       2,638     30.1 % Card processing and interchange income     2,021       1,925     5.0 %     7,797       7,796     0.0 % Other non-interest income     1,410       479     194.4 %     5,223       2,909     79.5 % Total non-interest income     9,007       8,924     0.9 %     34,766       33,434     4.0 % Non-interest expenses                         Salaries and benefits     18,800       17,733     6.0 %     71,460       61,175     16.8 % Net occupancy expense of premises     3,358       3,227     4.1 %     13,298       12,381     7.4 % Technology expense     5,093       3,271     55.7 %     17,041       11,723     45.4 % Advertising expense     1,021       763     33.8 %     2,887       2,081     38.7 % State and local taxes     957       961     (0.4)%     4,078       4,057     0.5 % Legal, professional, and examination fees     1,141       732     55.9 %     4,173       3,517     18.7 % FDIC insurance premiums     654       689     (5.1)%     2,796       2,509     11.4 % Card processing and interchange expenses     1,315       1,020     28.9 %     4,801       3,836     25.2 % Other non-interest expense     4,682       4,069     15.1 %     17,088       15,154     12.8 % Total non-interest expenses     37,021       32,465     14.0 %     137,622       116,433     18.2 %                           Income before income taxes     19,869       17,704     12.2 %     78,214       70,778     10.5 % Income tax expense     3,989       3,075     29.7 %     15,026       13,071     15.0 % Net income     15,880       14,629     8.6 %     63,188       57,707     9.5 % Preferred stock dividends     1,076       1,076     0.0 %     4,302       4,302     0.0 % Net income available to common shareholders   $ 14,804     $ 13,553     9.2 %   $ 58,886     $ 53,405     10.3 %                           Average diluted common shares outstanding     21,092,770       16,823,060           18,019,604       16,820,054                                 Diluted earnings per common share   $ 0.70     $ 0.80     (12.5)%   $ 3.26     $ 3.16     3.2 % Cash dividends per common share   $ 0.175     $ 0.175     0.0 %   $ 0.700     $ 0.685     2.2 % Dividend payout ratio     25 %     22 %         21 %     22 %                                   (unaudited)                 Three Months Ended       Twelve Months Ended         December 31,       December 31,           2022       2021           (unaudited)2022       2021       Average Balances                         Total loans and loans held for sale   $ 4,123,857     $ 3,560,753         $ 3,897,722     $ 3,465,919       Investment securities     787,259       735,926           813,172       675,124       Total earning assets     4,959,490       4,931,292           4,954,547       4,768,040       Total assets     5,311,790       5,240,449           5,284,213       5,058,900       Noninterest-bearing deposits     874,131       787,865           847,793       724,839       Interest-bearing deposits     3,714,040       3,835,434           3,796,642       3,733,327       Shareholders' equity     505,992       440,808           455,748       431,062       Tangible common shareholders' equity (non-GAAP) (1)     404,079       338,798           353,800       329,012                                 Average Yields (annualized)                         Total loans and loans held for sale     5.58 %     4.80 %         5.06 %     4.83 %     Investment securities     1.90 %     1.77 %         1.85 %     1.83 %     Total earning assets     4.95 %     3.75 %         4.30 %     3.79 %     Interest-bearing deposits     1.09 %     0.34 %         0.52 %     0.40 %     Interest-bearing liabilities     1.20 %     0.43 %         0.62 %     0.52 %                               Performance Ratios (annualized)                         Return on average assets     1.19 %     1.11 %         1.20 %     1.14 %     Return on average equity     12.45 %     13.17 %         13.86 %     13.39 %     Return on average tangible common equity (non-GAAP) (1)     14.54 %     15.87 %      .....»»

Category: earningsSource: benzingaJan 19th, 2023

Preferred Bank Reports Record Quarterly Earnings Again

LOS ANGELES, Jan. 18, 2023 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), one of the larger independent California banks, today reported results for the quarter ended December 31, 2022. Preferred Bank ("the Bank") reported net income of $39.6 million or $2.71 per diluted share for the fourth quarter of 2022. This represents an increase of $13.1 million or 49.7% over the same quarter last year and also an impressive $4.4 million or 12.4% increase over the third quarter of 2022. The primary driver of the increase over both comparable periods was net interest income which increased by 50.0% over the same period last year and increased by 11.0% over the third quarter of 2022. Net income for the year ended December 31, 2022 was $128.8 million or $8.70 per diluted share compared to $95.2 million or $6.41 per diluted share for the year ended December 31, 2021. This represents an increase in net income of $33.6 million or 35.3% and an increase in diluted earnings per share of 35.7%. The extraordinary interest rate hikes undertaken by the Federal Open Market Committee ("FOMC") to fend off inflation during the course of 2022 has led to a significant increase in interest income as most of the Bank's loans are tied to the Prime rate. Fourth quarter 2022 highlights: Return on average assets ("ROA") of 2.48% Return on beginning equity ("ROBE") of 26.58% Pre-provision, pre-tax ("PPPT") ROBE of 38.26% 1. Net interest margin increased to 4.75% Efficiency ratio of 25.97% Linked quarter deposit growth of 1.9% Linked quarter loan growth of 1.3% ______________________________1 This is a non-GAAP measure and links to the reconciliation on page 4. Full Year 2022 highlights: Return on average assets ("ROA") of 2.08% Return on beginning equity ("ROBE") of 21.96% Efficiency ratio of 27.48% Total loan growth of $650 million or 14.7% Total deposit growth of $331 million or 6.3% Li Yu, Chairman and CEO, commented, "I am pleased to report another record quarter of earnings. Net income for the fourth quarter of 2022 was $39.6 million or $2.71 per diluted share with return on beginning equity reaching 26.6%. "Growth in interest income continues to outpace the rise in deposit interest costs. The Bank's net interest margin was 4.75% for the fourth quarter, up from 4.37% recorded in the previous quarter. The cost of deposits accelerated during the quarter, as deposit rates catch up to market rates. We expect this trend to continue as financial institutions are increasing their deposit rates frequently. Another reason for the increase in overall deposit costs is the shifting of funds from noninterest bearing accounts to interest bearing products as companies and individuals become more savvy with their cash balances. "Sequentially, total loans increased by $64 million, or 1.3% for the quarter while total deposits grew by $101 million or 1.9%. Loan demand has moderated since mid-2022 and this trend is expected to continue as investors and operators become more cautious in the higher interest rate environment. "Deposit growth has also slowed significantly. We expect that deposit growth will be a challenge, especially at reasonable costs, throughout 2023. "The Bank's liquidity position continues to be very strong as deposit growth outpaced loan growth for the year. Also, capital levels remain high. The Bank's tangible book value per share increased by 6.1% for 2022, which was rare for any bank this year because higher interest rates lead to higher negative accumulated other comprehensive income ("AOCI") marks on investment portfolios within bank's capital. Preferred Bank's earning power was more than enough to offset this headwind, even after dividends. "Benefitted by the increase in net interest income, the efficiency ratio continues to be one of the best in the industry, coming in at 26.0% for the quarter. In 2023, total expenses are expected to increase at a rate above the historical pace due to wage inflation as well as the upcoming increase in FDIC premium assessments. Regardless, we expect our efficiency ratio will remain among the best in the Country. "Our attention is always focused on credit quality, which appears stable. Nonperforming assets and nonperforming loans were $27.5 million and $5.5 million respectively, as compared to $32.3 million and $6.2 million as of September 30, 2022. More importantly, loans 30-89 days past due, a leading indicator of credit quality trends was practically nil as of December 31, 2022. Over the past few quarters, the Bank's total allowance for credit loss ("ACL") coverage has increased and now stands at 1.35% of total loans. Preferred Bank was 2nd among all California publicly traded banks over $2 billion in assets with a return on tangible common shareholders' equity ("ROTCE") of 23.6% for the third quarter of 2022. Our ROTCE actually expanded in the fourth quarter to 25.8%. We are very pleased with our earnings capacity as it is often overlooked as one of the best defenses for a recessionary economy. All of our operating metrics remain stable heading into 2023 as we approach the new year with prudence." Results of Operations Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $74.1 million for the fourth quarter of 2022. This was a significant increase from the $49.4 million recorded in the same quarter last year and also up sharply over the $66.8 million posted in the third quarter of 2022. The FOMC rate hikes throughout 2022 drove the Bank's loan portfolio yield higher, as most of the Bank's loans are tied to the Prime rate. Interest expense on deposits also rose but the increase in deposit interest costs was well behind that of interest income, leading to continued margin expansion. The taxable equivalent net interest margin rose 38 basis points on a linked quarter basis to 4.75% from 4.37% last quarter. Comparing to the same quarter last year, the margin was up by an astounding 147 basis points over the 3.28% posted this quarter last year. Noninterest Income. For the fourth quarter of 2022, noninterest income was $2.8 million compared with $2.0 million for the same quarter last year and compared to $2.2 million for the third quarter of 2022. The increase compared to the prior quarter was due to an increase in letter of credit ("LC") fees of $289,000 and an increase in other income of $105,000 partially offset by gain on the sale of investment securities of $297,000 in the fourth quarter of 2022. In comparison to the same quarter last year, LC fees are up by $526,000 partially offset by the gain on the sales of investment securities of $297,000. Noninterest Expense. Total noninterest expense was $20.0 million for the fourth quarter of 2022 compared to $17.4 million for the third quarter of 2022 and compared to the $14.8 million recorded in the same period last year. Comparing this quarter to the fourth quarter of last year; personnel expense increased by $2.7 million or 26.0%, other real estate owned ("OREO") expense was $2.1 million this quarter compared to $0 last year and other expense increased by $1.8 million this quarter. The personnel expense increase was mainly due to new hires, merit increases and an increase in incentive compensation. In comparing to the prior quarter; personnel expense was up by $627,000 or 5.1% from the third quarter of 2022, other expense was up by $191,000 and OREO expense increased by $1.4 million and incurred a loss on sale of OREO of $426,000. During the fourth quarter of 2022, the Bank wrote down the value of its OREO by $1.4 million. For the quarter ended December 31, 2022, the Bank's efficiency ratio was 26.0%, slightly higher than the 25.2% posted last quarter but easily surpassing the 28.8% posted this quarter last year. Income Taxes. The Bank recorded a provision for income taxes of $15.4 million for the fourth quarter of 2022. This represents an effective tax rate ("ETR") of 28.0% and equal to the ETR for the third quarter of 2022 but down slightly from the 29.5% ETR posted in the fourth quarter of 2021. The Bank's ETR will fluctuate slightly from quarter to quarter within a fairly small range due to the timing of taxable events throughout the year. Balance Sheet Summary Total gross loans at December 31, 2022 were $5.07 billion, an increase of $650 million or 14.7% over the total of $4.42 billion as of December 31, 2021. Total deposits increased to $5.56 billion, an increase of $331 million or 6.3% over the $5.23 billion as of December 31, 2021. Total assets ended the year at $6.42 billion, an increase of $376 million or 6.2% over the total of $6.05 billion as of December 31, 2021. Asset Quality As of December 31, 2022, nonaccrual loans totaled $5.5 million, down from the $6.2 million reported as of September 30, 2022 and down from the $14.8 million as of the end of 2021. In addition, OREO and repossessed assets totaled $22.0 million as of December 31, 2022, compared to $26.1 million as of September 30, 2022 and zero as of the end of 2021. Total net charge-offs were $0 for the fourth quarter of 2022 as compared to net recoveries of $2.4 million last quarter and compared to net charge-offs of $267,000 in the same quarter of 2021. Allowance for Credit Losses The provision for credit losses for the fourth quarter of 2022 was $2.0 million as compared to $2.7 million recorded last quarter and compared to a reversal of $900,000 recorded in the fourth quarter of last year.   The Bank's allowance coverage ratio now stands at 1.35% of total loans (excluding PPP loans). Capitalization As of December 31, 2022, the Bank's leverage ratio was 10.27%, the common equity tier 1 capital ratio was 10.78% and the total capital ratio stood at 14.36%. As of December 31, 2021, the Bank's leverage ratio was 9.54%, the common equity tier 1 ratio was 11.26% and the total risk-based capital ratio was 15.37%. GAAP – Non-GAAP Reconciliation -Fourth Quarter 2022 PPPT ROBE Net Income $ 39,560   Add: Provision for credit losses   2,000   Add: Income tax expense   15,384   Pre-provision and pre-tax income $ 56,944       Total equity – 9/30/22 $ 590,553   Pre-provision and pre-tax ROBE   38.26 %     Conference Call and Webcast A conference call with simultaneous webcast to discuss Preferred Bank's fourth quarter 2022 financial results will be held tomorrow, January 19, 2023 at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 844-826-3037 (domestic) or 412-317-5182 (international) and referencing "Preferred Bank." There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's website at www.preferredbank.com. Web participants are encouraged to go to the website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software. Preferred Bank's Chairman and Chief Executive Officer Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward J. Czajka, Chief Credit Officer Nick Pi and Deputy Chief Operating Officer Johnny Hsu will be present to discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will remain available in the Investor Relations section of Preferred Bank's website. A replay of the call will also be available at 877-344-7529 (domestic) or 412-317-0088 (international) through February 2, 2023; the passcode is 5526852. About Preferred Bank Preferred Bank is one of the larger independent commercial banks headquartered in California. The Bank is chartered by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent permitted by law. The Bank conducts its banking business from its main office in Los Angeles, California, and through eleven full-service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)) and one branch in Flushing, New York. In addition, the Bank operates a Loan Production Office in the Houston, Texas suburb of Sugar Land. Preferred Bank offers a broad range of deposit and loan products and services to both commercial and consumer customers. The Bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals. Although originally founded as a Chinese-American Bank, Preferred Bank now derives most of its customers from the diversified mainstream market but does continue to benefit from the significant migration to California of ethnic Chinese from China and other areas of East Asia. Forward-Looking Statements This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Bank's future financial and operating results, the Bank's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the Bank's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: changes in economic conditions; changes in the California real estate market; the loss of senior management and other employees; natural disasters or recurring energy shortage; changes in interest rates; competition from other financial services companies; ineffective underwriting practices; inadequate allowance for loan and lease losses to cover actual losses; risks inherent in construction lending; adverse economic conditions in Asia; downturn in international trade; inability to attract deposits; inability to raise additional capital when needed or on favorable terms; inability to manage growth; inadequate communications, information, operating and financial control systems, technology from fourth party service providers; the U.S. government's monetary policies; government regulation; environmental liability with respect to properties to which the bank takes title; and the threat of terrorism. Additional factors that could cause the Bank's results to differ materially from those described in the forward-looking statements can be found in the Bank's 2021 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can be found on Preferred Bank's website. The forward-looking statements in this press release speak only as of the date of the press release, and the Bank assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements. For additional information about Preferred Bank, please visit the Bank's website at www.preferredbank.com. Financial Tables to Follow PREFERRED BANK Condensed Consolidated Statements of Operations (unaudited) (in thousands, except for net income per share and shares)                                             For the Quarter Ended         December 31,   September 30,   December 31,           2022     2022     2021   Interest income:             Loans, including fees $ 87,159   $ 71,192   $ 51,906     Investment securities   11,028     7,111     2,867     Fed funds sold   192     117     18       Total interest income   98,379     78,420     54,791                     Interest expense:             Interest-bearing demand   13,906     6,436     1,511     Savings   32     19     17     Time certificates   9,004     3,850     2,521     Subordinated debt   1,325     1,325     1,325       Total interest expense   24,267     11,630     5,374       Net interest income   74,112     66,790     49,417   Provision for (reversal of) credit losses   2,000     2,700     (900 )     Net interest income after provision for (reversal of)                 credit losses   72,112     64,090     50,317                     Noninterest income:             Fees & service charges on deposit accounts   631     703     581     Letters of credit fee income   1,245     956     719     BOLI income   102     100     99     Net gain on called and sale of investment securities   297     -     -     Other income   533     428     567       Total noninterest income   2,808     2,187     1,966                     Noninterest expense:             Salary and employee benefits   12,953     12,326     10,278     Net occupancy expense   1,444     1,452     1,396     Business development and promotion expense   320     214     280     Professional services   1,028     1,161     1,075     Office supplies and equipment expense   460     456     498     Loss on sale of OREO, valuation allowance and related expense   2,103     314     -     Other     1,668     1,477     1,279       Total noninterest expense   19,976     17,400     14,806       Income before provision for income taxes   54,944     48,877     37,477   Income tax expense   15,384     13,688     11,056       Net income $ 39,560   $ 35,189   $ 26,421                     Dividend and earnings allocated to participating securities   -     -     (3 ) Net income available to common shareholders $ 39,560   $ 35,189   $ 26,418                     Income per share available to common shareholders               Basic $ 2.76   $ 2.44   $ 1.80       Diluted $ 2.71   $ 2.40   $ 1.80                     Weighted-average common shares outstanding               Basic   14,357,326     14,408,235     14,677,515       Diluted   14,617,377     14,644,452     14,677,515                     Cash dividends per common share $ 0.55   $ 0.43   $ 0.43                     PREFERRED BANK Condensed Consolidated Statements of Operations (unaudited) (in thousands, except for net income per share and shares)                                       For the Year Ended           December 31,   December 31,   Change         2022       2021     % Interest income:             Loans, including fees $ 269,011     $ 200,537     34.1 %   Investment securities   24,997       10,417     140.0 %   Fed funds sold   374       81     361.5 %     Total interest income   294,382       211,035     39.5 %                 Interest expense:             Interest-bearing demand   24,221       5,964     306.1 %   Savings   91       57     58.9 %   Time certificates   17,412       12,811     35.9 %   Subordinated debt   5,300       6,325     -16.2 %     Total interest expense   47,024       25,158     86.9 %     Net interest income   247,358       185,877     33.1 % Provision for (reversal of) credit losses   7,350       (1,000 )   -835.0 %     Net interest income after provision for (reversal of) credit losses   240,008       186,877     28.4 %                 Noninterest income:             Fees & service charges on deposit accounts   2,728       2,113     29.1 %   Letters of credit fee income   4,463       3,914     14.0 %   BOLI income   401       392     2.3 %   Net gain on called and sale of investment securities   297       41     623.6 %   Net loss on sale of loans   -       (640 )   -100.0 %   Other income   1,973       1,924     2.6 %     Total noninterest income   9,862       7,743     27.4 %                 Noninterest expense:             Salary and employee benefits   48,607       42,606     14.1 %   Net occupancy expense   5,759       5,656     1.8 %   Business development and promotion expense   811       568     42.8 %   Professional services   4,892       4,127     18.5 %   Office supplies and equipment expense   1,864       1,879     -0.8 %   Loss on sale of OREO, valuation allowance and related expense   2,818       -     100.0 %   Other   5,922       5,956     -0.6 %     Total noninterest expense   70,673       60,792     16.3 %     Income before provision for income taxes   179,197       133,828     33.9 % Income tax expense   50,352       38,588     30.5 %     Net income $ 128,845     $ 95,240     35.3 %                 Dividend and earnings allocated to participating securities $ (2 )   $ (11 )   -77.4 % Net income available to common shareholders $ 128,843     $ 95,229     35.3 %                 Income per share available to common shareholders               Basic $ 8.84     $ 6.41     37.9 %     Diluted $ 8.70     $ 6.41     35.7 %                 Weighted-average common shares outstanding               Basic   14,579,132       14,866,000     -1.9 %     Diluted   14,809,416       14,866,000     -0.4 %                 Dividends per share $ 1.84     $ 1.57     17.2 %                 PREFERRED BANK Condensed Consolidated Statements of Financial Condition (unaudited) (in thousands)                               December 31,   December 31,         2022       2021         (Unaudited)   (Audited) Assets       Cash and due from banks $ 747,526     $ 1,030,610   Fed funds sold   20,000       20,000     Cash and cash equivalents   767,526       1,050,610               Securities held to maturity, at amortized cost   22,459       13,962   Securities available-for-sale, at fair value   428,295       451,911   Loans   5,074,793       4,424,992     Less allowance for credit losses   (68,472 )     (59,969 )   Less amortized deferred loan fees, net   (9,939 )     (6,316 )   Loans, net   4,996,382       4,358,707               Other real estate owned and repossessed assets   21,990       -   Customers' liability on acceptances   1,731       10,188   Bank furniture and fixtures, net   8,999       10,533   Bank-owned life insurance   10,357       10,088   Accrued interest receivable   23,593       14,646   Investment in affordable housing partnerships   61,173       59,018   Federal Home Loan Bank stock, at cost   15,000       15,000   Deferred tax assets   39,746       26,674   Operating lease right-of-use assets   21,718       21,969   Other assets   2,917       2,997     Total assets $ 6,421,886     $ 6,046,303               Liabilities and Shareholders' Equity       Deposits:         Non-interest bearing demand deposits $ 1,192,091     $ 1,305,692     Interest-bearing deposits:   2,295,212       2,032,819       Savings   39,527       37,839       Time certificates of $250,000 or more   1,138,727       934,444       Other time certificates   891,440       914,717       Total deposits   5,556,997       5,225,511               Acceptances outstanding   1,731       10,188   Subordinated debt issuance, net   147,995       147,758   Commitments to fund investment in affordable housing partnerships   27,490       22,606   Operating lease liabilities   20,949       22,861   Accrued interest payable   2,608      .....»»

Category: earningsSource: benzingaJan 19th, 2023

PNC REPORTS FULL YEAR 2022 NET INCOME OF $6.1 BILLION, $13.85 DILUTED EPS OR $13.96 AS ADJUSTED

Fourth quarter net income was $1.5 billion, $3.47 diluted EPS or $3.49 as adjusted 3% avg. loan growth; 4% revenue increase; 10 basis point NIM expansion PITTSBURGH, Jan. 18, 2023 /PRNewswire/ -- The PNC Financial Services Group, Inc. (NYSE:PNC) today reported: For the quarter For the year In millions, except per share data and as noted 4Q22 3Q22 2022 2021 Fourth Quarter Highlights Financial Results Comparisons reflect 4Q22 vs. 3Q22 Revenue $  5,763 $  5,549 $ 21,120 $ 19,211 ▪  Net interest income grew 6% –  NIM increased 10 basis points   ▪  Noninterest income increased $5 million –  Fee income grew 4%   ▪  Revenue increased 4%   ▪  Expenses increased 6%   ▪  PPNR increased 1%   ▪  Average loans grew 3%, driven by commercial and consumer loan growth   ▪  Deposits were relatively stable –  Average deposits declined 1% –  Spot deposits decreased 0.4%   ▪  Provision for credit losses of $408 million –  ACL build of $172 million   ▪  Net loan charge-offs were $224 million or 0.28% annualized to average loans   ▪  Tangible book value increased 3%   ▪  PNC returned $1.2 billion of capital to shareholders Noninterest expense 3,474 3,280 13,170 13,002 Pretax, pre-provision earnings (PPNR) (non-GAAP) 2,289 2,269 7,950 6,209 Integration costs 9 1 55 798 PPNR excluding integration costs (non-GAAP) 2,298 2,270 8,005 7,007 Provision for (recapture of) credit losses 408 241 477 (779) Net income 1,548 1,640 6,113 5,725 Per Common Share Diluted earnings - as reported $    3.47 $    3.78 $13.85 $  12.70 Impact from integration costs (non-GAAP) 0.02 — 0.11 1.48 Diluted earnings - as adjusted (non-GAAP) 3.49 3.78 13.96 14.18 Average diluted common shares outstanding 404 410 412 426 Book value 99.93 97.59 99.93 120.61 Tangible book value (non-GAAP) 72.12 69.98 72.12 94.11 Balance Sheet & Credit Quality Average loans    In billions $  321.9 $  313.0 $   307.7 $  268.7 Average deposits    In billions 434.9 439.2 443.4 418.9 Accumulated other comprehensive income (loss) (AOCI)    In billions (10.2) (10.5) (10.2) 0.4 Net loan charge-offs 224 119 563 657 Allowance for credit losses (ACL) to total loans 1.67 % 1.67 % 1.67 % 1.92 % Selected Ratios Return on average common shareholders' equity 14.19 % 14.97 % 13.52 % 10.78 % Return on average assets 1.10 1.19 1.11 1.09 Net interest margin (NIM) (non-GAAP) 2.92 2.82 2.65 2.29 Noninterest income to total revenue 36 37 38 45 Efficiency 60 59 62 68 Efficiency excluding integration costs (non-GAAP) 60 59 62 64 Common equity Tier 1 capital ratio 9.1 9.3 9.1 10.3 Diluted earnings as adjusted is a non-GAAP measure calculated by excluding post-tax integration costs for BBVA USA. See this and other non-GAAP financial measures in the Consolidated Financial Highlights accompanying this release.   From Bill Demchak, PNC Chairman, President and Chief Executive Officer: "By focusing on serving customers and communities, PNC delivered strong results in 2022. Capitalizing on opportunities across our coast to coast franchise, we grew loans and generated record revenue during a rapidly rising rate environment. At the same time, we controlled expenses and delivered substantial positive operating leverage. Our credit quality metrics remained strong and our solid capital position allowed us to return $6 billion of capital to shareholders throughout the year. As we enter 2023, we are well positioned to continue generating value for our stakeholders." Income Statement Highlights Fourth quarter 2022 compared with third quarter 2022 Net income of $1.5 billion decreased $92 million, or 6%, and included a higher provision for credit losses. Total revenue of $5.8 billion increased $214 million, or 4%, primarily due to higher net interest income. Net interest income of $3.7 billion increased $209 million, or 6%, driven by higher interest-earning asset yields and balances, partially offset by higher funding costs. Net interest margin of 2.92% increased 10 basis points due to higher interest-earning asset yields, partially offset by higher funding costs. Noninterest income of $2.1 billion increased $5 million. Fee income of $1.8 billion increased $75 million, or 4%, and included higher capital markets and advisory revenue. Other noninterest income of $247 million decreased $70 million driven by negative Visa Class B derivative fair value adjustments of $41 million related to litigation escrow funding and other valuation changes. The third quarter of 2022 included positive Visa Class B derivative fair value adjustments of $13 million. Noninterest expense of $3.5 billion increased $194 million, or 6%, primarily due to increased personnel costs, reflecting higher variable compensation related to increased business activity and market impacts on long-term incentive compensation as well as seasonally elevated medical benefits expense. Provision for credit losses of $408 million in the fourth quarter included the impact of a weaker economic outlook and continued loan growth. The third quarter of 2022 included a provision for credit losses of $241 million. The effective tax rate was 17.7% for the fourth quarter and 19.1% for the third quarter. Balance Sheet Highlights Fourth quarter 2022 compared with third quarter 2022 or December 31, 2022 compared with September 30, 2022 Average loans of $321.9 billion increased $8.9 billion, or 3%. Average commercial loans of $221.6 billion increased $7.5 billion driven by growth in PNC's corporate banking, real estate and business credit businesses. Average consumer loans of $100.3 billion grew $1.4 billion due to higher residential mortgage, home equity and credit card loans, partially offset by lower auto loans. Credit quality performance: Delinquencies of $1.5 billion decreased $136 million, or 8%, as a result of lower commercial delinquencies. Total nonperforming loans of $2.0 billion decreased $83 million, or 4%, driven by lower commercial and consumer nonperforming loans. Net loan charge-offs of $224 million increased $105 million and included the impact of one large commercial loan credit. The allowance for credit losses of $5.4 billion increased $172 million. The allowance for credit losses to total loans was 1.67% at both December 31, 2022 and September 30, 2022. Average deposits of $434.9 billion were relatively stable. Average investment securities of $142.9 billion grew $5.9 billion, or 4%, reflecting net purchases. Average Federal Reserve Bank balances of $30.0 billion decreased $1.5 billion. Federal Reserve Bank balances at December 31, 2022 of $26.9 billion decreased $12.9 billion, driven by higher loans outstanding. PNC maintained strong capital and liquidity positions. On January 4, 2023, the PNC board of directors declared a quarterly cash dividend on common stock of $1.50 per share. The dividend, with a payment date of February 5, 2023, will be payable the next business day. PNC returned $1.2 billion of capital to shareholders, reflecting $0.6 billion of common share repurchases, representing 3.8 million shares, and $0.6 billion of dividends on common shares. The Basel III common equity Tier 1 capital ratio was an estimated 9.1% at December 31, 2022 and 9.3% at September 30, 2022. The Liquidity Coverage Ratio at December 31, 2022 for PNC exceeded the regulatory minimum requirement.   Earnings Summary In millions, except per share data 4Q22 3Q22 4Q21 Net income $  1,548 $  1,640 $  1,306 Net income attributable to diluted common shares - as reported $  1,400 $  1,550 $  1,214 Net income attributable to diluted common shares - as adjusted (non-GAAP) $  1,408 $  1,551 $  1,560 Diluted earnings per common share - as reported $    3.47 $    3.78 $    2.86 Diluted earnings per common share - as adjusted (non-GAAP) $    3.49 $    3.78 $    3.68 Average diluted common shares outstanding 404 410 424 Cash dividends declared per common share $    1.50 $    1.50 $    1.25 See non-GAAP financial measures included in the Consolidated Financial Highlights accompanying this news release The Consolidated Financial Highlights accompanying this news release include additional information regarding reconciliations of non-GAAP financial measures to reported (GAAP) amounts. This information supplements results as reported in accordance with GAAP and should not be viewed in isolation from, or as a substitute for, GAAP results. Effective for the first quarter of 2022, the presentation of noninterest income has been recategorized. Fee income, a non-GAAP financial measure, refers to noninterest income in the following categories: asset management and brokerage, capital markets and advisory, card and cash management, lending and deposit services and residential and commercial mortgage. See a description of each noninterest income revenue category in PNC's third quarter 2022 Form 10-Q. In the fourth quarter of 2022, PNC updated the name of the fee income line item "capital markets related" to "capital markets and advisory." This update did not impact the components of the category. All periods presented herein reflect these changes. Information in this news release, including the financial tables, is unaudited. CONSOLIDATED REVENUE REVIEW Revenue Change Change 4Q22 vs 4Q22 vs In millions 4Q22 3Q22 4Q21 3Q22 4Q21 Net interest income $     3,684 $     3,475 $     2,862 6 % 29 % Noninterest income 2,079 2,074 2,265 — (8) % Total revenue $     5,763 $     5,549 $     5,127 4 % 12 % Total revenue for the fourth quarter of 2022 increased $214 million and $636 million compared with the third quarter of 2022 and the fourth quarter of 2021, respectively, driven by higher net interest income. Net interest income of $3.7 billion for the fourth quarter of 2022 increased $209 million and $822 million compared to the third quarter of 2022 and fourth quarter of 2021, respectively. In both comparisons, the increase was driven by higher interest-earning asset yields and balances, partially offset by higher funding costs. The net interest margin was 2.92% in the fourth quarter of 2022, increasing 10 basis points and 65 basis points compared with the third quarter of 2022 and the fourth quarter of 2021, respectively. In both comparisons, the increase was due to higher interest-earning asset yields, partially offset by higher funding costs. Noninterest Income Change Change 4Q22 vs 4Q22 vs In millions 4Q22 3Q22 4Q21 3Q22 4Q21 Asset management and brokerage $      345 $      357 $      385 (3) % (10) % Capital markets and advisory 336 299 460 12 % (27) % Card and cash management 671 671 646 — 4 % Lending and deposit services 296 287 273 3 % 8 % Residential and commercial mortgage 184 143 209 29 % (12) % Other 247 317 292 (22) % (15) % Total noninterest income $   2,079 $   2,074 $   2,265 — (8) % Note: Integration costs related to noninterest income were $5 million for the fourth quarter of 2022, $1 million for the third quarter of 2022 and $47 million for the fourth quarter of 2021. Noninterest income for the fourth quarter of 2022 increased $5 million compared with the third quarter of 2022. Asset management and brokerage fees decreased $12 million, reflecting the impact of lower average equity markets. Capital markets and advisory revenue increased $37 million driven by higher merger and acquisition advisory fees, partially offset by lower loan syndication revenue. Lending and deposit services increased $9 million driven by higher loan commitment fees. Residential and commercial mortgage revenue increased $41 million due to higher results from residential mortgage servicing rights valuation, net of economic hedge, partially offset by lower commercial mortgage banking activities. Other noninterest income decreased $70 million driven by negative Visa Class B derivative fair value adjustments of $41 million related to litigation escrow funding and other valuation changes. The third quarter of 2022 included positive Visa Class B derivative fair value adjustments of $13 million. Noninterest income for the fourth quarter of 2022 decreased $186 million compared with the fourth quarter of 2021, as lower results from market sensitive fee businesses and negative Visa Class B derivative fair value adjustments more than offset the benefit of business growth and lower integration costs. The fourth quarter of 2021 included positive Visa Class B derivative fair value adjustments of $1 million. CONSOLIDATED EXPENSE REVIEW Noninterest Expense Change Change 4Q22 vs 4Q22 vs In millions 4Q22 3Q22 4Q21 3Q22 4Q21 Personnel $        1,943 $        1,805 $        2,038 8 % (5) % Occupancy 247 241 260 2 % (5) % Equipment 369 344 437 7 % (16) % Marketing 106 93 97 14 % 9 % Other 809 797 959 2 % (16) % Total noninterest expense $        3,474 $        3,280 $        3,791 6 % (8) % Note: Integration expenses were $4 million for the fourth quarter of 2022, $0 for the third quarter of 2022 and $391 million for the fourth quarter of 2021. Noninterest expense for the fourth quarter of 2022 increased $194 million compared with the third quarter of 2022. Personnel costs increased $138 million, reflecting higher variable compensation related to increased business activity and market impacts on long-term incentive compensation as well as seasonally elevated medical benefits expense. Equipment and occupancy expense increased $25 million and $6 million, respectively, and included the impact of impairments. Marketing expense increased $13 million reflecting the timing of annual spend. Noninterest expense decreased $317 million in comparison with the fourth quarter of 2021,  due to lower integration expenses and a decline in variable compensation related to lower business activity, partially offset by continued investments to support business growth. The effective tax rate was 17.7% for the fourth quarter of 2022, 19.1% for the third quarter of 2022 and 21.5% for the fourth quarter of 2021. CONSOLIDATED BALANCE SHEET REVIEW Average total assets were $557.2 billion in the fourth quarter of 2022 compared with $547.1 billion in the third quarter of 2022 and $559.4 billion in the fourth quarter of 2021. Compared to the third quarter of 2022, the increase was primarily attributable to higher loan balances. Loans Change Change December 31, 2022 September 30, 2022 December 31, 2021 12/31/22 vs 12/31/22 vs In billions 09/30/22 12/31/21 Average Commercial $           221.6 $            214.1 $           193.8 4 % 14 % Consumer 100.3 98.9 95.1 1 % 5 % Average loans $           321.9 $            313.0 $           288.9 3 % 11 % Quarter end Commercial $           225.0 $            215.6 $           193.1 4 % 17 % Consumer 101.0 99.8 95.3 1 % 6 % Total loans $           326.0 $            315.4 $           288.4 3 % 13 % Average loans for the fourth quarter of 2022 were $321.9 billion, increasing $8.9 billion compared to the third quarter of 2022. Average commercial loans increased $7.5 billion driven by growth in PNC's corporate banking, real estate and business credit businesses. Average consumer loans grew $1.4 billion due to higher residential mortgage, home equity and credit card loans, partially offset by lower auto loans. Average loans for the fourth quarter of 2022 increased $33.0 billion compared to the fourth quarter of 2021. Average commercial loans increased $27.8 billion driven by growth in PNC's corporate banking and business credit businesses. Average consumer loans increased $5.2 billion primarily due to growth in residential mortgage loans. Investment Securities December 31, 2022 September 30, 2022 December 31, 2021 In billions Balance Portfolio Mix Balance Portfolio Mix Balance Portfolio Mix Average Available for sale $        49.7 $        52.1 $      126.4 Held to maturity 93.2 84.9 1.4 Average investment securities $      142.9 $      137.0 $      127.8 Quarter end Available for sale $        44.1 32 % $        45.8 34 % $      131.5 99 % Held to maturity 95.2 68 % 90.7 66 % 1.5 1 % Total investment securities $      139.3 $      136.5 $      133.0 Average investment securities for the fourth quarter of 2022 were $142.9 billion, increasing $5.9 billion and $15.1 billion from the third quarter of 2022 and fourth quarter of 2021, respectively, reflecting net purchases, primarily of agency residential mortgage-backed securities within the held to maturity portfolio. Net unrealized losses on available for sale securities were $4.4 billion at December 31, 2022 and $4.8 billion at September 30, 2022, compared with net unrealized gains of $0.7 billion at December 31, 2021. Average Federal Reserve Bank balances for the fourth quarter of 2022 were $30.0 billion, decreasing $1.5 billion from the third quarter of 2022. Average Federal Reserve Bank balances decreased $45.1 billion from the fourth quarter of 2021, primarily due to the redeployment of liquidity into higher interest-earning assets. Federal Reserve Bank balances at December 31, 2022 were $26.9 billion, decreasing $12.9 billion from September 30, 2022, driven by higher loans outstanding. Deposits Change Change December 31, 2022 September 30, 2022 December 31, 2021 12/31/22 vs 12/31/22 vs In billions 09/30/22 12/31/21 Average Commercial $           215.8 $           215.8 $           231.0 — (7) % Consumer 219.1 223.4 221.8 (2) % (1) % Average deposits $           434.9 $           439.2 $           452.8 (1) % (4) % Quarter end Commercial $           207.7 $           216.0 $           227.6 (4) % (9) % Consumer 228.6 222.2 229.7 3 % — Total deposits $           436.3 $           438.2 $           457.3 — (5) % Average deposits for the fourth quarter of 2022 were $434.9 billion, decreasing $4.3 billion compared with the third quarter of 2022 due to lower consumer deposits. The decrease in consumer deposits reflected the impact of inflationary pressures and competitive pricing dynamics. Compared with the fourth quarter of 2021, average deposits decreased $17.9 billion driven by lower commercial deposits, which were impacted by competitive pricing dynamics. In both comparisons, noninterest-bearing balances decreased due to deposit outflows and the shift of commercial deposits to interest-bearing as deposit rates have risen. Deposits at December 31, 2022 of $436.3 billion, decreased $1.9 billion from September 30, 2022 due to a decline in commercial deposits at year end, partially offset by an increase in consumer deposits reflecting higher time deposits. Borrowed Funds.....»»

Category: earningsSource: benzingaJan 18th, 2023

Macleod: The Evolution Of Credit & Debt In 2023

Macleod: The Evolution Of Credit & Debt In 2023 Authored by Alasdair Macleod via GoldMoney.com, The evidence strongly suggests that a combined interest rate, economic and currency crisis for the US and its western alliance will continue in 2023. This article focuses on credit, its constraints, and why quantitative easing has already crowded out private sector activity. Adjusting M2 money supply for accumulating QE indicates the degree to which this has driven the US tax base into deep recession. And the wider effects on credit in the economy should not be ignored.  After a brief partial recovery from the covid crisis in US government finances, they are likely to start deteriorating again due to a deepening recession of private sector activity. Funding these deficits depends on foreign inward investment flows, which are faltering. Rising interest rates and an ongoing bear market make funding from this source hard to envisage. Meanwhile, from his public statements President Putin is fully aware of these difficulties, and a consequence of the western alliance increasing their support and involvement in Ukraine makes it almost certain that Putin will take the opportunity to push the dollar over the edge. Credit is much more than bank deposits Economics is about credit, and its balance sheet twin, debt. Debt is either productive, in which case it can extinguish credit in due course, or it is not, and credit must be extended or written off. Money almost never comes into it. Money is distinguished from credit by having no counterparty risk, which credit always has. The role of money is to stabilise the purchasing power of credit. And the only legal form of money is metallic; gold, silver, or copper usually rendered into coin for enhanced fungibility. Credit is created between consenting parties. It facilitates commerce, created to circulate existing commodities, and to transform them into consumer goods. The chain of production requires credit, from miner, grower, or importer, to manufacturer, wholesaler, retailer and customer or consumer. Credit in the production chain is only extinguished when the customer or consumer pays for the end product. Until then, the entire production chain must either have money or arrange for credit to pay for their inputs.  Providers of this credit include the widest range of economic actors in an economy as well as the banks. When we talk of the misnamed money supply as the measure of credit in an economy, we are looking at the tip of an iceberg, leading us to think that debt in the form of bank notes and deposit accounts owed to individuals and businesses is the extent of it. Changes in the banking sector’s risk appetite drive a larger change in unrecorded credit conditions. We must accept that changes in the level of officially recognised debt are merely symptomatic of larger changes in payment obligations in the economy.  The role of credit is not adequately understood by economists. Keynes’s General Theory has only one indexed reference to credit in the entire book, the vade mecum for all macroeconomists. Even the title includes “money” when it is actually all about credit. Von Mises expounds on credit to a considerable degree in his Human Action, but this is an exception. And even his followers today are often unclear about the distinction between money and credit. Economists and commentators have begun to understand that credit is not limited to banks, by admitting to the existence of shadow banking, a loose definition for financial institutions which do not have a banking licence but circulate credit. The Bank for International Settlements which monitors shadow banking appears to suspect shadow banks of creating credit without the requirement of a banking licence. There appears to be a confusion here: the BIS’s starting point is that credit is the preserve of a licenced bank. The mistake is to not understand the wider role of non-bank credit in economic activity. But these institutions, ranging from insurance companies and pension funds to various forms of financial intermediaries and agents, unconsciously create credit by allowing time to elapse between a commitment giving rise to an obligation, and its settlement. Even next day settlement is a debt obligation for a buyer, or credit extended by a seller. Delivery against settlement is a credit obligation for both parties in a transaction. Futures, forwards, and options are credit obligations in favour of a buyer, which can be traded. And when a broker insists a client must have a credit in his account before investing, or to deliver securities before selling, credits and obligations are also created. Therefore, credit has the same effect as money (which is very rarely used) in every transaction, financial or non-financial. All the debts in the accounts of businesses are part of the circulating medium in an economy, including bills of exchange and other tradable obligations. And at each transfer a new credit, debt, or right of action is created, while others are extinguished. A banking system provides a base for further credit expansion because all credit transactions are ultimately settled in bank notes, which are an obligation of the note issuer (in practice today, a central bank) or through the novation of a bank deposit, being an obligation of a commercial bank. Banks are simply dealers in credit. As such, they facilitate not just their own dealings, but all credit creation and expunction.  The reason for making the point about the true extent of credit is that it is a mistake to think that the statistical expansion, or contraction of it, conventionally measured by the misnamed money supply, is the true extent of a change in outstanding credit. Central banks in particular act as if they believe that by influencing the height of the visible tip of the credit iceberg, they can simply ignore the consequences for the rest.  It is also worth making this point so that we can assess how the economies of the western alliance will fare in the year ahead — the American-led NATO and other nations adhering to its sphere of influence. With signs of bank credit no longer expanding and, in some cases, contracting, and with price inflation continuing at destructive levels and a recession threatened, it is rarely so important to understand credit and its role in an economy.  We also need to have a true understanding of credit to assess the prospects for China’s economy, which appears to be set on a different course. Emerging from lockdown and in the light of favourable geopolitical developments while the western alliance is tipping into recession, the prospects for China’s economy are rapidly improving. Interest rates in 2023 That the long-term trend of declining interest rates for the major fiat currencies over the last four decades came to an end in 2021 is now beyond question. That this trend fostered a continuing appreciation of asset values is fundamental to an understanding of the consequences. And that the expansion of bank credit supporting a widening plethora of financial credit has stopped, is now only beginning to be register. If we look at the quarterly rate of change in US M2 money supply, this is now evident. Since the Bretton Woods agreement was abandoned in 1971, there has not been as severe a contraction of US dollar bank credit as witnessed today. It follows a massive covid-related spike when the US Government’s budget deficit soared. And its rise and fall is contemporaneous with a collapse in government revenues and soaring welfare costs. In fiscal 2020 (to end-September), the Federal Government’s deficit was $3.312 trillion, compared with revenue of $3.42 trillion. It meant that spending was nearly twice tax income. Some of that excess expenditure was helicoptered directly into citizens’ bank accounts. The rest was reflected in bank balances as it was spent into public circulation by the government. Furthermore, from March 2020 the Fed commenced QE at the rate of $120bn per month, adding a total of $2.6 trillion in bank deposits by the end of fiscal 2021.  Deflating M2 by QE to get a feel for changes in the aggregate level of bank deposits strictly related to private sector origination tells us that private sector related credit was already contracting substantially in fiscal 2020—2021. This finding is consistent with an economy which suffered a suspension of much activity. This is illustrated in our next chart, taken from January 2020. In this chart, accumulating QE is subtracted from official M2 to derive the red line. In practice, one cannot make such a clear distinction, because QE credit goes directly into the financial sector, which is broadly excluded from the GDP calculation. Nevertheless, QE inflates not just commercial bank reserves at the Fed, but their deposit liabilities to the insurance companies, pension funds, and other members of the shadow banking group. A minor portion of QE might relate to the commercial banks themselves, which for practical purposes can be ignored. Through QE, state-origination of credit effectively crowds out private sector-origination of credit. A Keynesian critic might dismiss this on the basis that he believes QE stimulates the wider economy. That may be true when a monetary stimulus is first applied, since it takes time for market prices to adjust to the extra quantity of credit. Furthermore, QE stimulates financial market values and not the GDP economy, only affecting it later in a roundabout way. But when QE eventually leaks out into the wider economy, it leads to higher prices for consumer goods, confirmed by the dramatic re-emergence of consumer price inflation. Furthermore, regulated banks are limited in their ability to create credit by balance sheet constraints, so to accommodate QE they are necessarily restricted in their credit creation for private sector borrowers. Given the far larger quantities of non-bank credit which depend for its facilitation on bank credit, the negative impact on the economy of banks becoming risk averse is poorly understood. It is ignored on the assumption that state-origination of credit through budget deficits stimulates economic activity. What is less appreciated is that QE has already driven the non-government portion of the US economy into a deepening recession, yet to be reflected in government statistics. Furthermore, that the extra credit burden on the commercial banking system has exceeded their collective balance sheet capacity is confirmed by the Fed’s reverse repo facility, which offers deposit facilities additional to the commercial banking system. Currently standing at $2.2 trillion, it represents the bulk of excess credit created by QE since March 2020. Adjusted for QE, the falling level of private sector deposits in the M2 statistic is consistent with an economic slump, only concealed statistically by the expansion of state spending and the loss of the dollar’s purchasing power. The economic distortions arising from QE are not restricted to America but are repeated in the other advanced economies as well. The only offset to the problem is an increase in private sector savings at the expense of immediate consumption and the extent to which they absorb increasing government borrowing. That way, the consequences for price inflation would have been lessened. But in America, much of the EU, and the UK, savings have not increased as a proportion of GDP, so there has been little or no savings offset to soaring budget deficits. A funding crisis is in the making Returning to the US as our primary example, we can see that national monetary statistics are concealing a slump in economic activity in the “real economy”. This real economy represents the state’s revenue base. On its own, this is going to lead to higher government borrowing than expected by forecasters as tax revenues fall and welfare commitments rise. And interest expense, already estimated by the Congressional Budget Office to cost $442bn in the current fiscal year and $525bn in fiscal 2024, are bound to be significantly higher due to unbudgeted extra borrowing. Officialdom still assumes that a recession will be mild and brief. Consequently, the CBO’s calculations are unrealistic in what is clearly an unfolding economic slump given the evidence from bank credit. Even without considering additional negative factors, such as bankruptcies and bank failures which always attend a deep recession, borrowing cost estimates are almost certainly going to be far higher than currently expected. In addition to domestic spending, the western alliance appears to be stepping up its war in Ukraine against Russia. US Defence spending is already running at nearly $800bn, and that can be expected to escalate significantly as the conflict in Ukraine worsens. The CBO’s estimate for 2024 is an increase to $814bn; but in the face of a more realistic assessment of an escalation of the Ukraine conflict since the CBO forecast was made last May, the outturn could easily be over $1,000bn.  To the volume of debt issuance must also be added variations in interest cost. Bond investors currently tolerate negative yields in the apparent belief that falling consumer demand in a recession will reduce the tendency for consumer prices to rise. This is certainly the official line in all western central banks. But as we have seen, this “transient inflation” argument has had its timescale pushed further into the future as reality intervenes.  This line of thinking, which is based on interpretations of supply and demand curves, ignores the plain fact that a general fall in consumption is tied irrevocably to a general fall in production. It also ignores the most important variable, which is the purchasing power of a fiat currency. It is the loss of purchasing power, which is primarily reflected in the consumer price index following the dilution of the currency by its debasement. In the absence of a sheet anchor tying credit values to legal money there is the thorny question of its users’ confidence being maintained in it as the exchange medium. Should that deteriorate, not only have we yet to see the consequences of earlier QE work their way through to undermining the dollar’s purchasing power, but the cost of government borrowing is likely to remain higher and for longer than official forecasts assume.  Funding difficulties are ahead We can now identify sources of ongoing credit inflation, which at the least will serve to continue to undermine the dollar’s purchasing power and ensure that a rising trend for interest rates will continue. This conclusion is markedly different from expectations that the current catalogue of problems facing the US authorities amounts to a series of one-off factors that will diminish and disappear in time. We can see that in common with the Eurozone, Japan, and the UK, the US financial system will be required to come up with rising levels of credit to fund government debt, the consequence of continuing high levels of budget deficits. Furthermore, after a brief respite from the exceptional levels of deficits over covid, there is every likelihood that these deficits will increase again, particularly in the US, UK, and the PIGS grouping in the Eurozone. Not only do these nations have a problem with budget deficits, but they have trade deficits as well. This is bad news particularly for the dollar and sterling, because both currencies are overly dependent on inward capital flows to balance their governments’ books. It is becoming apparent that with respect to credit policies, the authorities in America (and the UK) are faced with mounting funding difficulties to resolve. We can briefly summarise them as follows: Though they have yet to admit it, despite all the QE to date the evidence of a gathering recession is mounting. It has only served to conceal a deteriorating economic condition. The Fed is prioritising tackling rising consumer prices for now, claiming that that is the immediate problem. Along with the US Treasury, the Fed still claims that inflation is transient. This claim must continue to have credibility if negative real yields in bond markets are to endure, a situation which cannot last for very long. Monetary stimulus is confined by a lack of commercial banking balance sheet space. Further stimulation through QE will come up against this lack of headroom.  With early evidence of a declining foreign appetite for US Treasuries, it could become increasingly difficult to fund the government’s deficits, as was the case in the UK in the 1970s. This author has vivid recollections of a similar situation faced by the UK’s monetary authorities between 1972—1975. In those days, the Bank of England was instructed in its monetary policy by the Treasury, and often its market related advice was overridden by Treasury mandarins lacking knowledge of financial markets. During the Barbour boom of 1971—1972, the Bank suppressed interest rates and encouraged the inflation of credit. Subsequently, price inflation started to rise and interest rates belatedly followed, always reluctantly conceded by the authorities. This rapidly became a funding crisis for the government. The Treasury always tried to issue gilt-edged stock at less than the market was prepared to pay. Consequently, sterling’s exchange rate would come under pressure, and with a trend of rising consumer prices continuing, interest rates would have to be raised to get the gilt issue of the day subscribed. Having reflected a deteriorating situation, bond yields then fell when it was momentarily resolved. The crunch came in Autumn 1973, when the Bank of England’s minimum lending rate was increased from 9% on 26 July in steps to 13% on 13 November. A banking crisis suddenly ensued among lenders exposed to commercial property, and a number of banks failed. This episode became known as the secondary banking crisis. As bond yields rose, stock markets crashed, with the FT30 Share Index falling from 530 in May 1972, to 140 in January 1975. The listed commercial property sector was virtually wiped out. In an air of crisis, inept Treasury policies continued to contribute to a growing fear of runaway inflation. Long maturity gilt issues bore coupons such as 15 ¼% and 15 ½%. And finally, in November 1976, the IMF bailed Britain out with a $3.9bn loan.  Today, these lessons for the Fed and holders of dollar denominated financial assets are instructive. Future increases in interest rates were always underestimated, and as the error became apparent bond yields rose and equities fell. While the Fed is notionally independent from the US Treasury, the Federal Open Market Committee’s approach to markets is one of control, which was not so much shared by the Bank of England in the 1970s but reflected the anti-market Keynesian view of the controlling UK Treasury.  In common with all other western central banks today, official policy at the Fed is to deny that price inflation is related to the quantity of credit. It is rare that money or credit in the context of a circulating medium is even mentioned in FOMC policy statements. Instead, interest rate setting is the dominant theme. And there is no acknowledgement that interest rates are primarily compensation to depositors for loss of purchasing power — a dangerous error when national finances are dependent on foreigners buying your treasury bonds.  Foreign ownership of dollars and dollar assets In the 1970s, sterling’s troubles were compounded by a combination of trade deficits and Britain’s dependence on inward (foreign) investment. In short, the nation was, and still is savings deficient. Consequently, at the first sign of rising interest rates foreign holders recognised that the UK government would drag its heels at accepting reality. They would turn sellers leading to perennial sterling crises. Today, the dollar has been protected from this fate because of its status as the world’s reserve currency. Otherwise, it shares the same characteristics as sterling in the 1970s — twin deficits, reliance upon foreign investment, and rising yields on government bonds.  According to the US Treasury’s TIC statistics, in the 12 months to September last, foreign holders purchased $846bn long-term securities. Breaking these figures down, private sector foreigners were net buyers, while foreign governments were net sellers. This reflects the difference between the trade deficit and the balance of payments: in other words, importers were retaining and investing most of their dollar payments on a net basis. Table 1 shows the most recent position. Over the last year, the total value of foreign long-term and short-term investments in dollars (including bank deposits) fell by $3.531 trillion to $30.270 trillion. $2.532 trillion of this decline was in equity valuations, and with the recent rally in equity and bond markets, there will be some recovery in these numbers. But they are an indication of market and currency risks assumed by foreign holders of these assets if US bond yields start to rise again. And here we must also consider relative currency attractions. The decline of the petrodollar and rise of the petroyuan It is in this context that we must view Saudi Arabia’s move to replace petrodollars with petroyuan. Through its climate change policies, the western alliance against the Asian hegemons has effectively told its oil and natural gas supliers in the Gulf Cooperation Council that their carbon fuel products will no longer be welcome in a decade’s time. It is therefore hardly surprising that the Middle East sees its future trade being with China, along with her associates in the Shanghai Cooperation Organisation, the Eurasian economic Union, and the BRICS. Saudi Arabia has indicated her desire to join BRICS. Along with Egypt, Qatar, Emirates, Kuwait, and Bahrain, Saudi Arabia are also on the list to become dialog partners of the SCO.  Binding the membership of the SCO together is China’s plans to accelerate a communications and industrial revolution throughout Asia, and with a savings rate of 45% she has the capital available to invest in the necessary projects without undermining her currency. While America stagnates, China’s economy will be powering ahead. There are further advantages to China’s plans with respect to the security and availability of cheap energy. While the Asians pay lip service to the western alliance’s insistence that fossil fuels must be reduced and then eliminated, in practice SCO members are still building coal-fired power stations and increasing their demand for all forms of fossil fuel. Members, associates, and dialog partners of the SCO, representing over 40% of the world’s population now include all the major oil and gas exporters in Asia. The economic consequences are certain to impart significant advantages to China and her industrialisation plans, compared with the western alliance’s determination to starve itself of energy. While it will take some time for the Saudis to fully declare the petrodollar dead, the signal that she is prepared to accept petroyuan is an important one with more immediate consequences. We can be sure that besides geopolitical imperatives, the Saudis will have analysed the relative prospects between the two petro-currencies. They appear to have concluded that the risk of loss of the yuan’s purchasing power is at least no greater than that of the dollar. And if the Saudis are arriving at this conclusion, we can assume that other Asian governments holding dollars in their reserves will as well. Russia is likely to stir the currency pot With the western alliance increasing its support and involvement in the Ukraine proxy war, the military pressure on Russia is mounting. If President Putin has learned anything, it should be that military attempts to secure Eastern Ukraine carry a high risk of failure. Furthermore, with the alliance bringing more lethal weaponry to bear on his army, his prospects of military success are declining. Compounding his military problems is the recent decline in oil and gas prices, particularly of the latter which has taken the energy squeeze off the EU. There can be little doubt that the greater these negative factors become, the greater the pressure on Putin to resort to a financial solution. Putin’s strategy is likely to be simple and has already been telegraphed in his speech to the delegates at the St Petersburg Economic Forum last June. In short, he understands the weakness for the dollar’s position and by extension those of the other alliance currencies. Ideally, a cold snap in Middle and Eastern Europe will help lift oil and gas prices, increasing the prospects for price inflation, thereby bringing renewed pressure for interest rates in the alliance currencies to rise. This will lead to renewed losses on US and EU bonds, further falls in equities, and therefore dollar liquidation by foreigners. The eventual outcome of Triffin’s dilemma, a final crisis for the reserve currency, is certainly in the wings. With the situation in Ukraine likely to escalate, Putin can ill afford to delay. On another front, he has authorised Russia’s National Wealth Fund to invest up to 60% in Chinese yuan and 40% in physical gold. This is probably a move to protect the fund from Putin’s view of future currency trends and from their declining value in gold. It is consistent with what the Saudis are doing with respect to getting out of dollars into yuan, and probably some gold bullion through the Shanghai International Gold Exchange. If this demand for gold extends beyond both Russia and Saudi Arabia, then the mechanism for dollar destruction could be accelerating demand for gold from multiple governments and entities in the Russian Chinese axis. Tyler Durden Sat, 01/14/2023 - 17:30.....»»

Category: dealsSource: nytJan 14th, 2023

2 Consumer Loan Stocks to Gain Despite Grim Industry Prospects

Muted consumer sentiments, recessionary fears and worsening asset quality hurt the Zacks Consumer Loans industry players. Efforts to digitize operations and the easing lending standards will aid companies like Capital One (COF) and Navient (NAVI). The Zacks Consumer Loans industry continues to bear the brunt of muted consumer sentiments, mainly attributable to sky-high inflation, geopolitical matters and recessionary fears. This will, therefore, gradually dampen the demand for consumer loans and hamper top-line growth. Weakening asset quality as economic growth continues to slow down is a major headwind.Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and digitization of operations will keep benefiting industry players. Hence, companies like Capital One Financial Corporation COF and Navient Corporation NAVI are worth considering despite industry challenges.About the IndustryThe Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.3 Themes Shaping Consumer Loan Industry's ProspectsSubdued Consumer Sentiments: The ongoing Russia-Ukraine conflict, supply-chain disruptions and inflation (though now somewhat moderating) continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in December. But this seems to be largely supported by “jobs, wages, and declining gas prices.”Lynn Franco, senior director of economic indicators at The Conference Board, said, “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”Consumer spending will face headwinds from inflation and higher interest rates in the coming months. This will thereby result in lower demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be hampered.Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a “mild” recession in the near term.Also, going by the central bank’s latest Summary of Economic Projections, the U.S. economy will grow 0.5% in 2023 and 1.6% in 2024, lower than the prior projection of 1.2% for this year and 1.7% for the next. These factors may severely curtail the consumers’ ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players’ asset quality.Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.Zacks Industry Rank Reflects Gloomy PictureThe Zacks Consumer Loans industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #198, which places it at the bottom 28% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2022 have moved 7.6% lower.Before we present a few stocks that you may want to keep on your radar despite industry headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.Industry vs. Broader MarketThe Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year.The stocks in this industry have collectively lost 32.5% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 17.3% and 14.7%, respectively.One-Year Price PerformanceIndustry's Current ValuationOn the basis of price-to-tangible book (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 1.06. The highest level of 1.54X and a median of 1.18X are recorded over the past five years.This compares with the S&P 500’s trailing 12-month P/TBV of 9.99X, as the chart below shows.Price-to-Tangible Book Ratio (TTM) As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 4.70X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.Price-to-Tangible Book Ratio (TTM) 2 Consumer Loan Stocks to Keep an Eye onCapital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending as well as deposit origination. Strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic inorganic expansion initiatives will keep supporting Capital One’s financials.With the Federal Reserve raising interest rates to control inflation, this Zacks Rank #3 (Hold) company’s NII and NIM are expected to witness improvements. Also, its Credit Card segment is likely to continue showing strength. Strong growth opportunities in card loans and purchase volumes are expected despite an intensely competitive environment.The Zacks Consensus Estimate for earnings has moved marginally higher for 2022 over the past 30 days. Also, COF’s shares have lost 3.5% over the past six months.Price and Consensus: COF Navient: This Zacks Rank #3 stock is a leading provider of education loan management and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Focus on introducing new products leveraged with technology, cost control efforts and inorganic expansion strategy will continue supporting Navient in the quarters ahead. Further, the improving economy and declining unemployment rate should provide support to the company.Strengthening its asset recovery and business process outsourcing capabilities, NAVI has entered into several acquisition deals since 2015. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.Its shares have rallied 17.1% over the past six months. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for both 2022 and 2023.Price and Consensus: NAVI  Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time. This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.Free: See Our Top Stock and 4 Runners Up >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Capital One Financial Corporation (COF): Free Stock Analysis Report Navient Corporation (NAVI): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»

Category: topSource: zacksJan 12th, 2023

Higher Rates, Trading to Aid BofA (BAC) Q4 Earnings, IB to Hurt

Higher interest rates, decent loan demand and solid trading are expected to have aided BofA's (BAC) Q4 earnings amid weakness in IB and higher provisions. Bank of America BAC is scheduled to announce fourth-quarter and full-year 2022 earnings on Jan 13, before the market opens. The higher interest rate regime is likely to have considerably bolstered the company’s net interest income (NII) as it is the most interest rate sensitive among its peers.Supported by a decent lending backdrop, BAC is also expected to have witnessed a solid expansion of its net interest margin (NIM) during the fourth quarter. Per the Fed’s latest data, demand for commercial and industrial loans, real estate loans and consumer loans (specifically credit cards) accelerated solidly in October and November.The Zacks Consensus Estimate for BAC’s average interest earnings assets is pegged at $2.74 trillion, suggesting a marginal decline on a year-over-year basis. Our estimate for the metric is $2.94 trillion, indicating a 6.9% rise.Continuing with its ultra-hawkish monetary policy stance, the Federal Reserve raised the interest rates by another 125 basis points during the quarter. The policy rate has thus reached a 15-year high of 4.25-4.50%. While this is likely to have had a favorable impact on BofA’s NIM and NII, the inversion of the yield curve in the December-ended quarter is expected to have weighed to some extent.Management expects NII in the fourth quarter to be at least $1.25 billion higher than the third-quarter level.The Zacks Consensus Estimate for NII on FTE basis of $15.17 billion suggests a 31.7% jump. Our estimate for NII on FTE basis implies a rise of 33.6% to $15.38 billion.Other Major Factors to Impact Q4 ResultsTrading Income: Like the first three quarters of 2022, market volatility and client activity remained robust during the fourth quarter. The developments, including Russia’s invasion of Ukraine and continued supply chain disruptions, led to ambiguity among investors. Also, the ultra-aggressive stance of the central banks across the globe to control inflation and ensuing fears of an economic slowdown/recession drove client activity and trading volume.These factors led to heightened volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. Hence, BofA is likely to have witnessed growth in trading revenues this time.The Zacks Consensus Estimate for trading revenues of $3.72 billion suggests a surge of 26.8% from the prior-year quarter’s reported number. Our estimate for the metric is the same as the consensus number.At an investor conference in December 2022, BofA CEO Brian Moynihan stated that trading revenues will grow 10-15% (with major support from fixed-income trading) year over year.Investment Banking (IB) Fees: After a stellar 2021 performance, global deal-making hit a record low for the fourth consecutive quarter. Raging inflation, geopolitical tensions, equity markets rout, higher interest rates and fears of recession dealt a blow to the business sentiments and plans for expansion through acquisitions. Thus, both deal volume and total value crashed during the fourth quarter. So, BofA’s advisory fees are likely to have been adversely impacted.Given similar reasons, both IPOs and follow-up equity issuances dried up. Also, bond issuances are likely to have been muted. Hence, BAC’s underwriting fees (accounting for almost 40% of total IB fees) are expected to have been hurt during the to-be-reported quarter.Moynihan, at the conference, provided a grim outlook for the IB business. The company expects IB fees to decline 55-60% year over year.The Zacks Consensus Estimate for IB income of $1.07 billion indicates a plunge of 54.6% from the prior-year quarter level.Expenses: Though the bank continues to digitize operations, upgrade technology and expand into newer markets by opening branches leading to higher related costs, its prior efforts to improve operating efficiency are likely to have resulted in manageable expense levels in the to-be-reported quarter.Our estimate for non-interest expenses stands at $15.87 billion, reflecting an increase of 7.8% on a year-over-year basis.For 2022, management anticipates expenses to be $61 billion. This includes the cost related to the resolution of regulatory and litigation matters. Without that, expenses are expected to be a little more than $60 billion. Our estimate for the same is pegged at $61.8 billion, suggesting a 3.4% rise.Asset Quality: With an increase in loan balance and expectations of a global recession due to geopolitical and macroeconomic headwinds, BAC is expected to have built reserves in the third quarter. Our estimate for provision for credit losses is pegged at $476.7 million against a provision benefit of $489 million a year ago.The Zacks Consensus Estimate for non-performing loans of $4.54 billion implies a slight decrease year over year. Our estimate for the metric is pegged at $4.62 billion, marking a 1.2% increase.What the Zacks Model ShowsOur proven model does not predict an earnings beat for BofA this time around. This is because it doesn’t have the right combination of the two key ingredients — positive Earnings ESP and  Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.Earnings ESP: The Earnings ESP for BofA is -4.65%.Zacks Rank: BAC currently carries a Zacks Rank #3. Bank of America Corporation Price and Consensus Bank of America Corporation price-consensus-chart | Bank of America Corporation QuoteThe Zacks Consensus Estimate for fourth-quarter earnings is pegged at 80 cents, which has moved 2.4% lower over the past seven days. Further, the estimated figure suggests a fall of 2.4% from the year-ago reported number. Our estimate for earnings is same as the consensus number.The consensus estimate for sales of $24.3 billion indicates 10.2% growth. Our estimate for sales is $24.19 billion, reflecting a rise of 9.7%.Banks to ConsiderHere are a couple of bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:The Earnings ESP for The Bank of New York Mellon Corporation BK is +6.31% and it carries a Zacks Rank #3, at present. The company is slated to report fourth-quarter and full-year 2022 results on Jan 13.Over the past seven days, BK’s Zacks Consensus Estimate for quarterly earnings has moved 3.5% north.First Republic Bank FRC is scheduled to release fourth-quarter and full-year 2022 earnings on Jan 13. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.25%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.FRC’s quarterly earnings estimates have moved marginally lower over the past week.Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar. Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time. This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.Free: See Our Top Stock and 4 Runners Up >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Bank of America Corporation (BAC): Free Stock Analysis Report The Bank of New York Mellon Corporation (BK): Free Stock Analysis Report First Republic Bank (FRC): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»

Category: topSource: zacksJan 10th, 2023