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Performance among US banks, credit unions diverges in Q4'17

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Performance among US banks, credit unions diverges in Q4'17

While tax reform muddied fairly strong results by U.S. banks in the fourth quarter of 2017, performance by credit unions, which are not subject to corporate income taxes, was marked by a notable slippage in credit quality.

Short-term interest rates rose throughout 2017 and long-term rates rebounded from recent lows in the latter half of the year. This helped drive loan yields higher at banks and credit unions while deposit costs rose modestly from recent lows, allowing net interest margins to expand — reaching a five-year high in the fourth quarter.

But the margin growth was overshadowed by noise created by the passage of tax reform. The legislation led to billions in write-downs of many banks' deferred tax assets.

Still, those expenses will be one-time items, and there is some hope that tax reform will lead to greater loan demand. Loan growth already bounced off multiyear lows in the fourth quarter. The nation's smallest banks reported strong growth in commercial-and-industrial and commercial real estate loans, while mortgage lending fueled growth among the 10 largest banks.

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As loan growth rebounded and interest rates moved higher, banks' deposit costs continued to increase. Rising funding pressures encouraged many to maintain their deposit balances, and fees and service charges on consumer accounts fell to the lowest amount since the second quarter of 2016.

Credit quality, meanwhile, was mixed at banks. Loan delinquencies dropped 23 basis points year over year to 1.89% of total loans, but net charge-offs climbed to the highest amount since the second quarter of 2013. Multifamily loan delinquency rose for the first time since 2010 and auto loan credit quality continued to deteriorate.

Only a handful of institutions' balance sheets are under significant duress. While 490 institutions reported elevated commercial real estate concentrations based on regulatory guidelines, very few banks seemed in great need for capital. Twenty-nine banks and thrifts reported an adjusted Texas ratio above 100% and only 12 reported capital ratios below minimum requirements.

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Asset quality remained stronger at U.S. community banks, which saw their net charge-offs fall 4.4% from a year ago, but the same was not true for their credit union counterparts. Those institutions reported that net charge-offs jumped by 27.0% to $1.67 billion, while the ratio of net charge-offs to average loans climbed 9 basis points to 0.70%. The largest dollar-value increase in net charge-offs at credit unions was in "other consumer" loans, which jumped by $281.1 million, or about 65%, from year-ago levels.

Net charge-offs also increased at a majority of the largest credit unions year over year. Thirteen of the country's 20 largest credit unions by loans and leases reported an increase in the ratio of net charge-offs to average loans compared to the final quarter of 2016.

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The 2018 US Bank Market Report covers banking performance over the last decade and offers an outlook for results over the next five years, including the impact of the new reserve methodology, known as the Current Expected Credit Loss model, or CECL.

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Click here to see the top 50 U.S. banks and thrifts by assets.

To find other fourth-quarter 2017 articles on the U.S. banking and credit union sectors, click on the "Related Articles" tab.