In 2017 the price of admission to the advantages of the Tax Cuts and Jobs Act going forward was a drop in year to year earnings for the entire banking industry and a giveback of about two-thirds of the net income increase that the community bank sector would have seen.
“Both fourth quarter and full-year net income declined, reflecting a one-time increase in income taxes from a revaluation of deferred tax assets and repatriation of income from foreign subsidiaries,” said FDIC Chairman Martin Gruenberg of the entire industry, in unveiling the final FDIC Quarterly Banking Profile report for 2017 on Feb. 27.
“Community banks also were affected by the new tax law in the fourth quarter, primarily from the one-time revaluation of deferred tax assets,” Gruenberg added. For community banks the tax impact in the fourth quarter represented a $1.8 billion increase in income tax expense over the fourth quarter of 2016. For the industry as a whole, the increase in tax costs came to $21.6 billion.
Net income for all banks and community banks
FDIC’s quarterly report breaks out results both for community banks only and for the industry as a whole.
For community banks, net income for 2017 came to $20.6 billion, up 4% from 2016. (Net income for the fourth quarter for community banks was down 14.2%.) Had the one-time tax adjustments not been made, community banks would have seen an increase in net income of 12.6%. The one-time impact contributed to an increase in tax expenses of 39%.
For the industry as a whole, net income for the full year came to $164.8 billion, down 3.5%. (Net income for the final quarter was down 40.9%.) The one-time tax effects contributed to a 28.4% rise in tax expenses. Other factors cited for the industry’s lower earnings included higher noninterest expenses and higher loan-loss provisions.
FDIC’s report stated that without the tax charges, it’s estimated that the industry’s 2017 net income would have increased 7.2%.
More findings from FDIC report
• Community bank noninterest expense rose 3.4% in 2017, mostly due to higher payroll expenses. Payroll rose 5% for community banks in 2017, in part reflecting an increase in full-time equivalent staff overall.
• Community banks increased their small loans to businesses by 3.2% in 2017—$9.2 billion more in such credit. This was more than twice the rate of increase seen among non-community banks. Most of the increase reflected additional commercial real estate lending.
• Community banks’ net interest margin for the year rose 3.66%, an 8 basis point increase over 2016. FDIC said that while quarterly net interest margin for community banks continue to be higher than that for the industry as a whole, the difference has been narrowing.
“Large institutions have benefitted more than community banks from rising short-term interest rates,” Gruenberg said, “as large institutions have a greater share of assets that reprice quickly.”
• One yellow light from Gruenberg: “The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded by ‘reaching for yield’ through investing in higher-risk and longer-term assets. So far, interest rates on deposits have not increased at the same pace as loan rates. Higher interest rates on deposits could result in narrower net interest margins.”