Net income for the nation’s community banks dropped 14.2 percent in the fourth quarter of 2017, to $4.1 billion, down $681 million from fourth quarter 2016. A reduction in corporate tax rates under the new tax law prompted one-time write-downs on deferred tax assets, which contributed to a $1.8 billion increase in income tax expense compared with the same period last year, according to the FDIC.
Excluding one-time income tax effects, estimated quarterly net income would have been $5.6 billion at community banks, up 17 percent from fourth quarter 2016. Higher net interest income lifted the pretax return on assets 13 basis points to 1.31 percent, compared with the same quarter last year. This improvement narrowed the gap between community and non-community bank pretax ROAs from 33 basis points at fourth quarter 2016 to 9 basis points at fourth quarter 2017.
One de novo opened and two community banks failed during the fourth quarter.
Meanwhile, the FDIC reported community bank annual net income of $20.6 billion, up $757 million, or 4 percent, from a year earlier. Changes from the new tax law contributed to a $2.3 billion, or 39 percent, increase in income tax expenses in 2017. Excluding these tax effects, estimated annual net income would have been $22.3 billion, up from $19.8 billion from 2016.
Higher net interest income, up $1.6 billion, or 9.4 percent, lifted net operating revenue 7.2 percent year-over-year to $23.4 billion. Growth in other real estate loan income (up $1 billion, or 13.3 percent) drove most of the increase in net interest income. The average net interest margin at community banks widened 8 basis points year-over-year to 3.66 percent, but increased less than 1 basis point during the quarter. Higher earning asset yields, which increased at a faster rate than average funding costs, is behind this shift.
Higher payroll expenses, up 3.4 percent, led the increase in noninterest expenses. Community banks added 7,547 full-time employees in 2017, a 1.8 percent increase from a year ago. Average total assets per employee increased 4.8 percent to $5.2 million during the same period. More than two out of three community banks reported higher noninterest expense, while noninterest expense as a percentage of average assets declined by 7 basis points to 2.83 percent from fourth quarter 2016.
Community banks made an additional $9.2 billion in small loans to businesses compared with fourth quarter 2016, increasing the total to $294.8 billion. Most of the growth in this category was in nonfarm nonresidential loans (up 3.1 percent) and C&I loans (up 4.1 percent).
Data is compiled from 5,227 FDIC insured community banks across the nation.