Pub. 7 2018 Issue 6

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 24 S&P Global Market Intelligence anticipates that community bank margins and earnings will improve, buoyed by the passage of tax reform and continued increases in interest rates. Assuming interest rates increase as expected, community bank earnings are projected to jump 19% in 2018. Earnings should dip modestly in 2019 as funding costs rise and impede margin expansion. S&P Global Market Intelligence sees earnings falling again in 2020 as credit quality begins deteriorating. The projections also assume that in 2020, GDP growth will slow and the unemployment rate will move modestly higher. The benefits of higher interest rates should also wane as funding costs catch up with the expansion in earning - asset yields. Tax ReformOffers a Large Boost to Earnings Tax reform resulted in a sizable hit to community bank earnings in 2017 but will boost results in 2018. The federal tax overhaul lowered the corporate statutory tax rate to 21%, below the roughly 25% effective rate regularly recorded by community banks since the credit crisis. The legislation prompted banks to revalue their deferred tax assets, resulting in substantial write-downs that negatively impacted earnings. The lower tax rate in 2018 will more than make up for that one- time hit in 2017, pushing community bank earnings $1.7 billion, or 5.4%, higher than results would have been without tax reform. The lower tax rate and the benefit of being compared to a lower earnings base in 2017 should allow earnings to grow by 19% in 2018. U.S. banks plan to share some of the windfall created by tax reform with their employees and customers but community banks stand to retain nearly 40% of the savings. A number of banks have announced plans to use some of the windfall to increase their hourly minimum wage to $15. Some of those institutions and others are paying one-time bonuses to certain employees and have unveiled plans to make sizable charitable donations. S&P Global Market Intelligence estimates that the total cost of such plans will amount to just 1.75% of community banks’ expenses in 2018. We believe expenses could remain elevated in the years after that as banks reinvest in their franchises. Banks have struggled for years to lever their existing capital by making loans. Unless the economy grows at a significantly COMMUNITY BANKS WINNING THE BATTLE FOR DEPOSIT COSTS Tax reform to offer a boost to community bank earnings