Second Quarter 2016 Board/ALCO Background Review

Andy Neid idea5 Discoveries 0 Comments

Second Quarter 2016

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 1-11):

Folks who sold off their stock portfolios after temporarily losing a fortune in the “Brexit” fallout likely will be kicking themselves this week after America’s major stock indexes posted record performances. The late-June Brexit result initially sent international markets into a tailspin, but U.S. stocks have gained substantially since as domestic and international traders have flocked to American stocks and bonds as safe-haven investments. As economists continue to speculate how the recent U.K. vote will affect the global economy, here in the States the verdict is still out about the overall health of our own economy six years after economic expansion began.

Economic growth in the United States slowed in the first quarter of 2016 but not as sharply as previously estimated, with gains in exports and software investment partly offsetting weak consumer spending. GDP increased at a 1.1% annual rate versus 1.4% in the fourth quarter of 2015. There are signs the economy has regained momentum in the second quarter with retail sales and home sales rising in April and May, even though business spending continues to struggle. Early estimates have the economy to maintain roughly a 2% to 2.5% growth in the second quarter, but only time will tell.

The U.S. labor market rebounded in June as employers stepped up hiring adding 287,000 jobs for the month compared to only 11,000 jobs in May, increasing the 3 month average to 147,000 per month. While June’s data is much more positive than May’s, the massive swings only add to a level of uncertainty going forward. The official unemployment rate did rise to 4.9% from 4.7%, largely because 417,000 individuals entered the workforce. With a tightening labor market, employers are having to hike wages to attract skilled workers resulting in wage of 2.6% increase from a year ago which is good news for employees.

The Consumer Confidence Index, which decreased in May, improved to June. The index now stands at 98.0 up from 92.4 in May. “Consumers were less negative about current business and labor market conditions, but only moderately more positive, suggesting no deterioration in economic conditions, but no strengthening either”, said Lynn Franco, Director of Economic Indicators at The Conference Board.

A gauge of U.S. manufacturing activity rose for the second straight month in June to its highest level since February 2015, putting the sector on stable footing for the second half of the year. The Institute for Supply Management recently reported its index of manufacturing activity rose to 53.2 in June from 51.3 in May. A reading above 50 indicates that factory activity is expanding while a reading below 50 signals contraction.

As for the Fed, all signs are pointing that they will not increase rates when they meet later this month. “We feel like we can be patient to let the economy continue to heal before we start moving aggressively to raise rates,” Minneapolis Fed President Neel Kashkari said this week at a Town Hall in Marquette, Michigan. “We should take our time when we go ahead and start raising rates again. There’s not a huge urgency to raise rates because inflation is coming up low.” Kashkari, who is not a voting member on Fed policy this year but will rotate into a voting spot next year, continued by saying “The key driver for us is, how do we put as many people back to work as possible while preventing the economy from overheating.” Some still do think a rate hike is possible still this year, but many speculate that if it is going to happen that it will be after the election.

Financial Institutions (Slides 13-27):


For the first quarter of 2016, total assets for all financial institutions under $10 billion in assets have grown 1.8% since the end of 2015 and 4.9% since the first quarter of 2015.  Broken down by asset size, commercial banks between $1 billion to $10 billion in assets continue to lead the pack growing 2.7% so far this year and 8.2% over the last 4 quarters. Credit Unions under $10 billion followed with 3% growth for the quarter and 6.5% year over year. For both commercial banks under $1 billion in assets and savings institutions under $10 billion in assets the numbers are not as rosy. Commercial banks continue to grow at an annual rate of less than 1% while the savings institutions grew 2.2% over the last year. The good news for these institutions is that loan growth has been positive over the last 4 quarters. For commercial banks less than $1 billion, loan growth since the first quarter of 2015 was 3.9% while for savings institutions it was 4.8% compared to over 10% growth for all credit unions and commercial banks between $1 billion and $10 billion. Another difference between these institutions are how these loans are funded. While both credit unions and commercial banks between $1 billion and $10 billion have experienced deposit growth to fund their loans, commercial banks under $1 billion and savings institutions have relied on liquidating cash and investments during this time. Overall, things are trending positively and hopefully will continue for the remainder of the year.


Since the beginning of 2015, margins have remained relatively flat with the biggest improvement for commercial banks less than $1 billion in assets. Their current margin of 3.8% has improved 6 bps compared to 4 bps improvement for credit unions. As for overall profitability, net income for the first quarter of 2016 grew 5% compared to the first quarter of 2015, with most of the profits concentrated with banks. Banking quarterly net income grew 7% compared to -3.1% for credit unions. Though credit unions continue to experience a healthy increase in revenue (+7.2%), non-interest expenses including the provision for loan loss has increased 9.4% versus only 2.2% for banks. As mentioned last quarter, the main culprit for credit unions is a dramatic increase in their provision expense. Compared to the first quarter of 2015, 2016’s first quarter provision expense increased +39% compared to just +13.9% for banks. With CECL continuing to be delayed, idea5 will keep an eye on this trend to see if credit unions cut back or if truly this is a sign of deteriorating loan quality.


The Capital to Asset ratio for the industry continues to be strong with ratios above 11% for all institutions while the loan to deposit ratios remained relatively flat compared to 2015. Credit unions and commercial banks less than $1 billion in assets continue to experience a loan to deposit ratio less than 80% while commercial banks between $1 billion and $10 billion and all savings institutions have rates above 80%.  These rates have remained relatively constant since the end of 2014.


Looking beyond 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 Strategic 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.







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