This analysis refers to information and graphs provided separately as a pdf. Click the thumbnail or click here to access the pdf.
National Trends (Slides 1-12):
The U.S. economy is again off to a “sideways” start to the year, clouding the outlook and validating the Federal Reserve’s wait and see posture on raising interest rates. This is nothing new for the first quarter of a new year since during the last few years, the U.S. economy has been marked by barren first quarters followed by blossoming growth in the spring. Hopefully this year is no different, but only time will tell.
As for the overall economy, the U.S. Census Bureau’s latest estimate for the fourth quarter of 2015 reported GDP growth of 1.4%, an increase over the earlier estimates of 1.0 %. The increase in GDP reflected positive contributions from personal consumption, residential fixed investment, and federal government spending that were partly offset by negative effects of nonresidential fixed investment, exports, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.
On the jobs front, based on the latest report from the Bureau of Labor Statistics, U.S. employers added 215,000 jobs in March while the unemployment rate increased slightly to 5%, up from 4.9% in both January and February. Economists had been anticipating 203,000 jobs would be added in March and for the unemployment rate to remain steady. Though at first blush, the bump in the unemployment rate may appear negative, the increase is due to more people entering the job market looking for work than there are dropping out of the workforce all together. In other words, the rate increased for what most economists consider the “right reasons.” As evidence, the labor force participation rate was 63% in March, up slightly from 62.9% in February and 62.7% in January. Since September, this measure has increased by 0.6%, as has the employment-population ratio, which now stands at 59.9%. The U-6 rate, which measures under-employment, came in at 9.8% in March, up from 9.7% in February but down from 11% a year ago.
Consumers were feeling more optimistic in March as stock market stability eased investor worries. Consumer confidence, which decreased in February, improved in March. The index now stands at 96.2, up from 94.0 in February. As noted by Lynn Franco, Director of Economic Indicators at The Conference Board, “Expectations regarding the short-term turned more favorable as last month’s turmoil in the financial markets appears to have abated. On balance, consumers do not foresee the economy gaining any significant momentum in the near future, nor do they see it worsening.”
Economic activity in the manufacturing sector expanded in March for the first time in six months with the Institute of Supply Management (ISM) reporting an activity level of 51.8%, an increase of 230 basis points from the February reading of 49.5 %. A reading below 50 indicates a contraction in the manufacturing sector; therefore, the improvement in March was a positive, short-term, sign for manufacturing momentum.
As for interest rates, based on the latest comments from Federal Reserve Board Chair, Janet Yellen, the message was straight and to the point: “The Fed should proceed cautiously”. While the Fed, raised its benchmark rate in December for the first time since the financial crisis, debate continues with regard to the timing of a second increase. The Fed’s policy-making committee indicated after its most recent meeting that it now expected to raise rates by about half a percentage point sometime in 2016. That was half as much as the Fed had predicted at the beginning of the year.
Financial Institutions (Slides 13-28):
In 2015, combined assets for banks and credit unions grew at a rate of 3%, down from 5.6% in 2014, but still higher than the 2.1% growth in 2013. If you compare by industry, banks only grew in 2015 at a rate of 2.5% compared to 7.3% for credit unions. Broken down by asset size, banks between $1 billion to $10 billion in assets had an impressive 2015, growing 6.8% compared to just 2.4% for the larger banks (i.e., those over $10 billion in assets). Banks with less than $1 billion in assets continued to struggle as they have since the Great Recession ending 2015 with a 3% drop in total assets. The good news is that within the asset growth, the mix of loans as a percentage of total assets has increased. Though not consistent throughout the country, overall loan growth for depository institutions was a healthy 6.7% in 2015 compared to 5.7% in 2014 and 2.9% in 2013. Again, credit unions experienced the highest growth, growing 10.5% for the year- the second year in a row that it has been above 10%. For banks, institutions between $1 billion to $10 billion grew at 9.5% compared to 6.3% growth for banks above $10 billion, and 2.9% growth for banks under $1 billion. Funding the asset growth for both industries has primarily been deposits, with a total growth of 4% in 2015. Overall, positive growth trends will hopefully continue in 2016.
After trending downward the later part of last year, margins remained relatively flat in 2015 for both banks and credit unions. As for profitability, overall income for the industry grew 7.4%, with most of the profits concentrated in banks. For the first three months of 2016, banks realized an increase in profits of 8.6% compared to (0.3%) for credit unions. The good news for banks is that growth was fairly consistent across all asset sizes. For commercial banks with total assets under $1 billion, year to date income increased 7.5% compared to 9.5% for commercial banks between $1 billion to $10 billion. As for credit unions, even though revenues increased over 7%, non-interest expenses (excluding provision for loan losses) increased 6.7% versus only 2% for banks. Credit unions also have experienced a dramatic increase in provision for loan losses, which has increased a whopping 31% in 2015 as compared to 2014. For banks, provision for loan losses increased 16% in 2015 as compared to 2014. As we discussed in last quarter’s newsletter, while loan demand has increased over the last few years, is this a sign of deteriorating loan quality or are institutions preparing for CECL? Again, something idea5 will keep an eye on.
Along with the healthy bottom lines, the capital to asset ratios remained strong at the end of 2015, at approximately 11% across the industry. With the increase in loan demand over deposit growth, both banks and credit unions have seen a slight increase in the loan to deposit ratio. For both commercial banks with assets less than $1 billion and all credit unions, the fourth quarter ratio of 77% is 200 basis points higher than at the end of 2014. For commercial banks with total assets between $1 billion and $10 billion, the ratio of 85% was also 200 basis points higher than the end 2014 while savings institutions experienced a decline of 300 basis points from 81% at December 31, 2014 to 78% at December 31, 2015.
Looking further into 2016, despite all of the headlines regarding banking profitability, banks and credit unions continue to face challenges in several areas beyond low interest rates and regulatory pressures. As we mentioned in our Top 10 discussion topics, community financial institutions face pressures to grow, in a market where advances in technology has changed consumer expectations, has brought new competitors to the market (e.g., FinTech companies such as Apple with Apple Pay) and has heightened security concerns. The current times are as challenging as ever.