Trump Trade, Consumer Spending, and a Conversation with Cheryl Pate of Angel Oak Capital Advisors

I am reasonably sure that this week marks the first time a sitting President has called members of the central bank boneheads.

In a Twitter tirade this week, Donald Trump said, “The USA should always be paying the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of Boneheads.”

I am sure many President have not been fans of the Fed, but they are usually a bit more discreet in expressing their feelings and desired curse of action.

It is doubtful that the boneheads will give him what he desires. Several regional Fed Presidents have expressed doubt that they would use this tactic as Europe and Japan have done to stimulate their economies. Negative rates would be a monster threat to the banking industry. It would almost have to cause a massive M&A wave as there is no way small banks that live and die on the spread could survive. While that sounds great at first until you think it through and come to the obvious conclusion that these deals would be done at bargain-basement prices.

The economy is not great, but it is growing. We saw jobless claims this morning, and the number of people filing for benefits was just 204,000, the third-lowest figure in the decade long recovery. That was below the consensus expectation of the all-knowing economist who estimates these numbers. Hurricane Irma may have affected the numbers, but the 4-week moving average was still just 212,000.

BAML Turns Pessimistic

One source of concern is that according to the folks at Bank of America Merrill lynch the consumer is getting a tad pessimistic. In a report, this week analysts said that “The consumer is beginning to worry. Since our last update in mid-August, the BofAML US consumer confidence indicator (USCCI) declined by 3.8 points to 50.1 based on data through September 9. It briefly dipped below the 50 breakeven level during the survey period indicating that the consumer is growing increasingly pessimistic.”

That’s potentially a huge problem as consumer spending has provided what little growth we have seen this year.

In a potential bright spot, the Mortgage Bankers Association put out a press release that said Mortgage applications increased 2.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 6, 2019. This week’s results include an adjustment for the Labor Day holiday.

Mortgage Levels Increase – Now What?

The Market Composite Index, a measure of mortgage loan application volume, increased 2.0 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 9 percent compared with the previous week. The Refinance Index increased 0.4 percent from the previous week and was 169 percent higher than the same week one year ago. The seasonally adjusted Purchase Index increased 5 percent from one week earlier.

The unadjusted Purchase Index decreased 8 percent compared with the previous week and was 9 percent higher than the same week one year ago.

“Mortgages rates continued to decline over the holiday-shortened week, with the 30-year fixed-rate decreasing five basis points and remaining near three-year lows,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Refinances were essentially unchanged, up just 0.4 percent, but August overall was the strongest month of activity so far in 2019. Purchase applications rose around 5 percent, with increases for both conventional and government applications. Purchase activity was 9 percent higher than last year, continuing the trend of solid year-over-year gains.”

A Conversation with Cheryl Pate

I had a pleasant conversation with Cheryl Pate, PM of Angel Oak Capital Advisors this week.

Her firm manages several funds that invest in bank credit. She was optimistic about M&A activity telling me: “It’s been moving up the size spectrum, from really what was mostly in large community banks and regional banks, up towards that upper end of the regional banks. I think a couple of reasons for that, I think the regulatory backdrop for larger deals has become more friendly, and secondly you have a sector in search of efficiencies and meaningful cost savings in the face of what I would characterize the tougher earnings and rate environment. You started to see some of these bigger banks come out with mergers of equals, which we think is a trend that does likely continue, more modest premiums on a MOE type transaction, sort of lessens the execution risk, all else equal. And I would say we do typically see is seasonally more active second half in the year. So we look for M&A to accelerate from current levels through 2020 as banks try to generate more operating leverage in their business model when net interest margins are likely continuing to compress.”

Focus Bank of the Week

The Focus bank this week is FSB Bancorp (FSBC) is the Bank holding Company of Fairport Savings Bank, a New York chartered savings bank headquartered in Fairport, New York. The Bank conducts business from its main office in Fairport, New York and four branches located in Penfield, New York, Irondequoit, New York, Webster, New York, and Perinton, New York. The Company also has three mortgage origination offices located in Pittsford, New York, Watertown, New York, and Buffalo, New York. The Bank first opened to the public all the back in 1888.

Fairport is a tiny little town in upstate New York that sits alongside the Erie Canal about 10 miles from Rochester New York. Average household incomes in Fairport are higher than they are in Rochester itself, which has a large immigrant population. The town basically functions as a suburb of Rochester itself.

Monroe County has been trying to redirect its economy toward high technology, with new, smaller companies providing the seed capital necessary for business foundation. The University of Rochester and Cornell University are in the region, and that does help attract tech talent to the region. Thanks to the presence of Eastman Kodak in Rochester, the area is often referred to as the world capital of imaging, and that is also helping attract tech business into the area.

FSB Bancorp Has Lots of Insider Buying

FSB Bancorp is a small-town bank with about $ 325 million in total assets.

The loan book is 77% single-family homes, and there is very little C&I or construction lending going on. They are trying to grow their commercial loan book and grew their commercial loan portfolio, which includes commercial real estate, multifamily, and commercial and industrial loans, $10.9 million, or 37.4% to $40.0 million at December 31, 2018, from $29.1 million at December 31, 2017.

That’s still about 12% of the total portfolio, and 30 of the $40 million is in commercial real estate or multifamily property loans. Non-performing assets are just .40% of all assets, and non-accrual loans are a minuscule .47% of total assets, less than half the national average.

Insiders own 9.2% of the Bank, so there is skin in the game here. They also have two of my favorite watchdogs, Michael Price, and Lawrence Seidman as substantial shareholders. The stock is trading right at book value, and the Equity to assets ratio is 9.23. The EQA is on the wrong side of my preferred ten levels.

However, given the nature of the loan portfolio, I am not going to panic about it.