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):
As we turn the calendars to the New Year, there is enough conflicting data about the state of the economy to discount any market prognosticator. Late last week, the U.S. Census Bureau reported that GDP increased a sluggish .7 % in the fourth quarter of 2015 raising questions about whether U.S. growth is losing momentum. For the year, the economy expanded at a 2.4% clip, the same rate as in 2014. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth quarter slowdown.
On the jobs front, 2015 closed out with a huge round of job creation. Nonfarm payrolls grew by 292,000 during December lowering the overall unemployment rate to 5%. A separate, more encompassing measure that accounts for those who did not look for work in the past month or were working part time for economic reasons — the underemployed — head steady as well, at 9.9%. A strong labor market and a well-financed consumer are why many economists remain optimistic
Steady job growth that cut the unemployment rate has given many home buyers increased confidence and relatively low mortgage rates improved affordability. As a result, Americans rushed to buy new homes in December at the strongest pace in 10 months, a sign of the positive momentum carrying the housing market in 2016. The Commerce Department says new-home sales surged 10.8% to a seasonally adjusted annual rate of 544,000. It was the third consecutive monthly gain since sales collapsed in September.
The U.S. economy’s manufacturing sector contracted further to end the year, with the Institute of Supply Management (ISM) reporting an activity level of 48.2 in December. Any reading below 50 indicates a contraction in the manufacturing sector and this reading was the worst level since June 2009. The strong U.S. dollar coupled with a slowing global economy continues to hurt the power of U.S. exports and increases the likelihood of further deterioration in the manufacturing sector.
Offsetting the headwinds of manufacturing and energy market challenges is the U.S. consumer. According to the American Automobile Association, the drop in oil prices to their lowest level in more than a decade translated into $115 billion of savings for consumers last year – or $550 per driver. As page 11 of the attached Board\ALCO Background Review indicates, consumers have opted to pocket those savings to the tune of 15% increase in personal savings from Q3 2014 to Q4 2015 as retail sales growth continues to trend below what was widely expected.
Now that the Fed finally raised interest rates in December for the first time since 2006, all eyes will be on the future trajectory of additional increases. After December’s inflationary indicators showed little signs of progress, the domestic manufacturing sectors sobering results, and the worst start for a calendar year for the stock market, analysts are not holding their breath for another rate hike in the near term. As we reach the halfway point in the first quarter, the big question is which view of the economy is right.
Financial Institutions (Slides 13-28):
With every passing quarter since the Great Recession, the financial industry continues to improve right along with the slowly improving economy. Since the end of 2014, banks and thrifts under $10 billion have grown a healthy 7.5% in assets while credit unions have grown 5%. Though it is not consistent throughout the country, loan demand for both industries has been strong especially for credit unions. Over the last 4 quarters, credit unions have experienced 11% growth in loans and 6% growth in deposits while banks under $10 billion have grown 7% and 4% respectively. What is concerning is that much of this growth appears to be concentrated within credit unions and larger banks while banks under $1 billion continue to experience negative growth.
After trending downward the later part of last year, margins continue to improve for both banks and credit unions which in turn has helped the bottom line. For the third quarter of 2015, banks under $10 billion reported a net income of $7.3 billion, up $200 million (up 3%) from third quarter of 2014. Year to date, net income is up 9% which is mainly driven by banks between $1 billion and $10 billion in assets. For these institutions, year to date income is up 13% while compared to just 3% for banks under $1 billion. For credit unions, the results are a bit different. For the quarter, credit unions reported a quarterly profit of $2.3 billion, down $97 million (down 4%) from the third quarter of 2014, but up 2% for the year. Looking into the numbers even deeper, the reason for the small increase in profits compared to banks is due to the increase in expenses. Even though net interest income has grown 6% and non-interest income is up 9% compared to 2014, non-interest expenses are also up 9%. Compared to banks, non-interest expenses increased just 2% while net interest income and non-interest income grew 2% and 8% respectively. What is interesting is the trends in provision expense. For banks, their provision expense has grown 11% since 2014 while credit unions have increased their provision 28% compared to last year. While loan demand has increased over the last few years, is this a sign of deteriorating loan quality or are institutions preparing for pending CECL regulations? Something that at idea5 we will continue keep an eye on.
Along with the increase in profitability, the capital to assets ratio for the industry continues to improve with both banks and credit unions reporting above 11%. Even though parts of the country still struggle with loan demand compared to deposit growth, for the industry loan to deposit ratios continue to increase. For both credit unions and banks under $1 billion in assets, the third quarter ratio of 77% is 200 basis points higher than the end of 2014. For banks between $1 billion and $10 billion, the ratio of 84% is 100 basis points higher than the end of 2014.