Third Quarter 2015 Board/ALCO Background Review

Andy Neid idea5 Discoveries 0 Comments

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)

Just as the recent swings in your stock portfolio suggest, the latest economic news continues to send mixed messages on the overall health of the economy. On a positive note, real GDP increased 3.9% in the second quarter, after increasing only 0.6% in the first. The acceleration in real GDP reflected an upturn in exports, an acceleration in personal consumption, a deceleration in imports, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in private inventory investment and in federal government spending.

The disappointing news came from the most recent jobs report. Earlier this month, the labor department reported that the U.S. economy added just 142,000 jobs in September, and the new hires were revised down to 136,000 in August. The unemployment rate stayed unchanged at 5.1% but the participation rate fell to 62.4%, the lowest since October 1977. Another problem the economy is facing is wage growth. If you take a look at Slide 7 in the packet, for the majority of the country average weekly wages have only increased around 2% with the West being the only region to experience growth of over 3%. Much lower than the gains realized the previous year. While the latest report is only a snapshot of the economy and the weaknesses may ultimately prove fleeting, it does suggest that ordinary workers are still failing to take home the kind of monetary rewards normally expected from a recovery that has been ongoing for more than 6 years.

Consumer sentiment continues to improve with its fourth straight reading above 100.  September’s reading of 103 was the highest since January this year and well above the average since the recession.

Some concerning news might be the recent drop in the Purchasing Managers index.  With a decrease of 3.3 points from the prior quarter, the September reading of 50.2 is its lowest since May 2013. The good news is the reading is still above 50 which suggests the economic activity in the manufacturing sector is still expanding. One reason for the recent decline could be what is happening in the energy sector. We will keep an eye on this reading looking ahead.

Based on all this news, the Federal Reserve decided that the economy’s advance remained too fragile to risk lifting interest rates from their near-zero level. Only time will tell, but for now the interest rate hike is on hold and may depend more on what is happening oversees rather than here at home. Some economists still believe that we are in line for an increase this year while others believe now it will not happen until next year.

Financial Institutions (Slides 12-24)

As the economy slowly improves, the financial industry continues to improve right along with it as the recent gains in loan demand has led to stable margins and healthier bottom lines. Though it is not consistent within the industry, loan demand has increased in the areas of commercial real estate, first mortgages and auto loans. 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 and the first quarter of this year, margins stabilized in the second quarter ending slightly above what they did versus the first quarter for both banks and credit unions. ROA’s remained constant for both banks under $1 billion and for all credit unions while they improved 10 basis points for banks above $1 billion going from 114 bps to 124 bps. Both industries continue to rely on fee income with the edge going to bigger banks and credit unions. Over 129 basis points of ROA can be attributed to fee income for credit unions and larger banks, while this number is around 104 basis points for banks less than $1 billion. Both these spreads have been constant since 2008.

Though it was not as strong as it was in 2014, asset growth has been decent this year. To date, credit unions have experienced 4% growth while banks $1 billion to $10 billion grew at 3%. Not great numbers, but ok, since we are starting to see growth in loans rather than just deposits and investments. As for banks under a $1 billion, their growth rate remains negative as it has since the Great Recession.

The capital to asset ratio for the industry held steady for the second quarter with the biggest improvement going to credit unions. The ratio of 10.92 was a 9-basis point improvement compared to the first quarter. Since the beginning of the year, loan demand has improved, as seen in the loan to deposit ratios. For credit unions, the rate of 75.4 is 60 basis points higher than the end of 2014. For commercial banks, the second quarter results of 76% and 84.9 for banks below $1 billion in assets and $1 to $10 billion respectively was over a 100-basis point improvement since the beginning of the year. Although loan demand has improved for the industry, there are some financial institutions that are still finding it tough to find loans of any category.

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