FDIC: Community Bank Profits Rise, Sector Consolidation Likely

By Jeff Bater

Community bank profits surged during early 2017, but further consolidation in the industry could reinforce the Trump administration’s argument for regulatory relief.

Federal Deposit Insurance Corporation data May 24 showed earnings of small lenders increased 10.4 percent in the first quarter compared to the same three-month period in 2016.

“Today’s report clearly shows the banking industry is healthy, with strong capital and high asset quality,” American Bankers Association chief economist James Chessen said in a statement. “Nonetheless, regulatory burden continues to drive consolidation, with 54 community banks being pressured to merge or sell in the first quarter.”

President Donald Trump, who met with community bankers at the White House in March, has ordered a review of bank industry rules. His first budget plan, released May 23, proposes $35 billion in cuts by way of changes to financial regulations. Trump has called Dodd-Frank a “disaster” that has made it difficult for businesses to get loans.

Healthy Banks

Most of the 5,856 FDIC-insured institutions that reported first-quarter results are identified as community banks. Earnings for all lenders grew even faster, rising by 12.7 percent — or, in dollar terms, by $5 billion to $44 billion. Industry revenues were strong, driven by interest income fed by higher short-term rates.

While quarterly profits were solid, FDIC Chairman Martin Gruenberg said the pace of banking industry lending has slowed in the past two quarters.

“As the economy approaches the end of the eighth year of expansion, a slowdown in loan growth is not unusual at this stage of the credit cycle,” he said at a briefing on the earnings report May 24.

Businesses are waiting to see what headway the administration makes on an overhaul of tax laws, and banks are showing some caution amid uncertainty about the economy.

”While lending moderated a bit from its rapid pace last year, it remains on target to grow about 5 percent in 2017,” Chessen said. “The pace of borrowing for the rest of the year will largely depend upon whether the cloud of uncertainty lifts.”

The FDIC report said of all banks reporting profits, 57 percent reported year-over-year growth. The proportion of banks that were unprofitable in the first quarter fell to 4.1 percent from 5.1 percent in the same period a year earlier.

The number of banks on the FDIC’s so-called problem list fell to 112 from 123 during the first quarter, well off its post-crisis peak of 888 in the first quarter of 2011. Three banks failed in the first three months of 2017 and two new charters were added, the first since the third quarter of 2015.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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