Bank earnings more than double thanks to tax cut

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WASHINGTON — Bank profits remained near historic highs in the fourth quarter — at $59.1 billion, they more than doubled from a year earlier, the Federal Deposit Insurance Corp. said Thursday.

That 133% increase, however, was mostly attributable to the 2017 tax law, both because banks had to take a one-time charge in the fourth quarter of that year as a result of a decrease in value for deferred tax assets, and because the lower effective tax rate helped boost profits throughout 2018. Without the tax law, profits would have been up 18.5% in the fourth quarter, reaching $50.3 billion, the FDIC said.

“Once again, the banking industry reported a strong quarter. Net income improved on higher net operating revenue and a lower effective tax rate,” FDIC Chairman Jelena McWilliams said in prepared remarks. “The current economic expansion is the second-largest on record, and the nation’s banks are stronger as a result.”

For all of 2018, banks reported a 44% jump in net income to $236.7 billion, which included the benefits of a lower tax rate. Community banks reported a 29.4% increase in net income, to $26.1 billion, for 2018. Without the tax cut, community banks would have had an estimated 10.7% increase in earnings and banks overall would have had a 13.6% increase.

Net interest margins also continued to expand with banks reporting an average fourth quarter margin of 3.48%, up from 3.31% a year earlier. However, FDIC staff continued to caution banks about “reaching for yield” as interest rates have remained fairly low and banks have locked in to more longer-term assets while the interest on deposits is starting to increase.

“While results this quarter were positive, the extended period of low interest rates and an increasingly competitive lending environment continue to lead some institutions to ‘reach for yield,’ ” McWilliams said. “With the recent flattening of the yield curve, new challenges for institutions in lending and funding may emerge.”

Overall, loan growth continues to be a positive story for banks. Banks reported a 4.4% rise in loan balances to $213 billion in the fourth quarter from a year earlier. Most of that increase was in commercial and industrial loans, consumer loans and credit cards, the FDIC said.

Credit quality also continued to improve with the noncurrent loan balance rate, which are loans 90 days or more past due, falling to 0.99%. This was the first time the noncurrent loan rate fell below 1% since the second quarter of 2007, the FDIC noted.

Charge-offs also declined, falling 4.6% from a year earlier to $12.6 billion. It was the first time in more than three years that net charge-offs registered a year-over-year decline, the FDIC said. The biggest increase in charge-offs came from credit cards, which increased by $347.7 million during the quarter while C&I loans had the largest decline, falling by $522.6 million. The average net charge-off rate declined from 0.55% in the fourth quarter 2017 to 0.50%, the FDIC said.

Still, banks appear to be preparing for higher losses. Banks set aside $14 billion in loan-loss provisions during the fourth quarter, an increase of nearly 3% from a year earlier and a six-year high, the FDIC said.

Total loan-loss reserves were $124.7 billion at the end of the fourth quarter, a $1 billion increase, with more than half of all banks reporting a quarterly increase. Banks reported higher reserves for credit card losses, up 2.5% and lower reserves for residential real estate losses, which fell by 4.4%, according to banks with more than $1 billion of assets. After declining for the past nine consecutive quarters, itemized reserves for losses on commercial loans grew by 1.3%, the FDIC said.

Notably, there was a drop of 264 banks reporting to the FDIC last year while only 15 new banks were approved by the FDIC for deposit insurance in 2018.

FDIC staff attributed most of the decline to an increase in merger activity as bank consolidation has continued to grow for decades. This does not include one of the largest banking mergers in recent history: BB&T’s acquisition of SunTrust, announced earlier this month.

McWilliams declined to comment about the BB&T-SunTrust deal when asked, but said that her objective is to make sure a community does not lose access to financial services as a result of any merger.

“As the primary regulator for the majority of the banks in the country, we take a look at those trends and ask: what does it mean for the communities that they serve,” McWilliams said. “We are cognizant . . . of some of the communities losing banking presence, especially in rural communities. And that’s something that we focus on in every merger.”

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