Second Quarter 2015 Board/ALCO Background Review

Andy Neid idea5 Discoveries 0 Comments

second-qtr-2015-board-reviewThis analysis refers to information and graphs provided separately as a pdf. Click the thumbnail or click here to access the pdf.

National Trends (Slides 1-8):
Short version: Slow growth in the economy overall. Some good growth in the housing and commercial sectors depending on where you are in the country.

Longer version: GDP retracted a bit in the first quarter, which the White House blamed on the “weather.” In reality, the country is mixed, with parts of the country (the Midwest, Hawaii and parts of the Northeast) showing very good growth, and others just holding water (e.g. Illinois and parts of the Deep South.)

As for unemployment, the national U3 rate fell slightly to 5.3 percent in June, but the spread between the U3 and U6 unemployment still shows a wide gap. This is evidenced by the Employment Population Ratio and the Employment Trends in Slides 5 and 6 which indicate many workers are either part time or have “given up” looking for employment. We think this will change slightly in the coming quarters as some of these workers will find full time employment. Reason? Job openings in certain industries and sectors in the country are very high – especially tech jobs.

Consumer sentiment remains stable for the last two quarters, and the June index settled on 101.4 – almost the same as March 2015. The good news is the index has remained at or near 100 now for nearly seven months, which is more “normal” than it has been since the Great Recession.

The Purchasing Managers Index – an early indicator of the future economy, grew slightly to 53.5 in June. It has been above 50 now in almost every period since late 2009. If this number was consistently above 55 – this would be an early indicator of very good growth in the economy.

Another quarter passed without an increase in interest rates by the Fed while the overall spread between the 10 year T-Note and the 91 T-Bill now shrinking to 195 basis points. Though Fed Chair Janet Yellen talks about the need to raise rates before inflation picks up, she is clearly sympathetic to the go-slow approach as she does see slack in the labor market as mentioned above. We think there is a 50-50 chance of the Fed raising rates later in 2015 versus the first half of 2016. If rates do go up, the first step will be small. Again, only time will tell.

Financial Institutions (Slides 9-22):
Short version: Margins slightly declined, and financial institutions are concentrating on efforts to grow their loan portfolios – with mixed success. Commercial RE loans and first mortgages are having some good growth.

Longer version: Financial institution performance tends to lag many economic indicators. That being said, the strength of the financial industry continues to improve in many metrics. Based on first quarter 2015 results, margins have mostly stabilized for both banks and credit unions – with a slight drop in the first quarter. For banks under $1 billion, a full 100 basis points of their ROA can be attributed to fee income compared to 120 basis points for banks between $1 and 10 billion in assets. For credit unions, the number is 130 which is evidenced on slide 18. Conclusion? Credit unions rely more on fee and other income for their operations than community banks.

Growth is another matter. Banks less than $1 billion – especially much smaller banks – continue to have negative growth. Although this negative pace has slowed in the first quarter of 2015, the contraction of this part of the industry continues to be disturbing. Credit unions have enjoyed good growth in all years since 2002, although the “pace” has slowed in the first quarter of 2015.

The Capital to Assets ratio for the industry held mostly steady in the first quarter. For credit unions, the overall rate dropped slightly closer to 10.81 percent. For commercial banks, the first quarter inched higher to 11.11 and 11.79 for banks below $1 billion in assets and $1 to $10 billion respectively. We know of some institutions purposely increasing their capital for acquisition opportunities in the future. Loan demand has improved as some banks and credit unions are reporting over 95% loan to share ratios. Other financial institutions are finding it very hard to lend in any loan category.

For the industry as a whole, loan to deposit ratios dropped slightly in the first quarter of 2015. But as mentioned above, the results are mixed by region and institution. As a case in point, we have seen one metro area having individual institutions decrease their loan to deposit ratios in the last 5 quarters, and other increase during the same period. Sounds like strategy in play.

As for liquidity, it is still very mixed within the industry as some institutions have excess liquidity while others are scrambling for new liquidity sources. The biggest challenge for many of institutions continues to be on the regulatory side. Regulatory change continues to take more time which is limiting the industry in their ability to focus on their core business activities and invest in growth opportunities.

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