Banks reinvesting boost in profits from 2017 tax reform

  • Wells Fargo Pacific Northwest Business Banking Division Manager Joe Everhart and other banking leaders are optimistic about oil developments on the North Slope and a large influx of tourists expected this summer, but uncertainty still looms over the state economy with a $1.6 billion deficit and no certain way forward as the legislative session unfolds. (Photo/Michael Dinneen/For the Journal)

Though the fate of Gov. Michael J. Dunleavy’s budget looms over Alaska’s economy, federal tax reform and some positive trends are boosting bank leaders’ morale.

“The future looks a lot better than it has,” said Wells Fargo Pacific Northwest Business Banking Division Manager Joe Everhart.

Alaska’s financial institutions are reaping the benefits of a federal tax change put in place by President Donald Trump’s administration in 2018. Trump signed the the tax reform bill passed by Congress at the tail end of 2017. Among changes both to individual and corporate tax structures, the law lowered the corporate tax rate to 21 percent to more closely match the global average of 25 percent.

Nationally, the change brought about record bank profits. According to the Wall Street Journal, national banking profits spiked in 2018 after the new tax law took effect. According to the Federal Deposit Insurance Corp., banking profits jumped 44 percent from 2017 to 2018 for a record profit of $236.7 billion.

For the first time since 2006, no American bank failed during 2018.

Alaska’s banks proved no exception to the national trend. For the five Alaska-based banks, net income rose an average 43.8 percent between the fourth quarter of 2017 and the fourth quarter of 2018, or right on par with the national average.

Cumulatively, the five Alaska-based banks saw their net income increase from $60.9 million to $87.6 million.

Alaska-specific information income from the FDIC isn’t available for national banks Wells Fargo, which has just more than 50 percent of state deposits at nearly $6 billion, and KeyBank, which is fourth in Alaska deposit market share with $1.2 billion.

Banks welcome the chance to spread the good news. Wells Fargo is sinking the extra money back into the company and into philanthropy.

“We raised the minimum hourly base pay for team members in the U.S. to twice the federal minimum wage, and we increased philanthropic support for our communities by 55 percent in 2018 to $444 million,” said David Kennedy, Wells Fargo Alaska’s public information officer.

Everhart takes the tax change as a boost in what has been a gloomy few years for an Alaska economy beset with cash flow problems related to the 2014 crash in oil prices.

Everhart said the new tax law accompanies some notable oases on the state’s economic horizon. North Slope oil development has picked up, giving both the promise of revenue and jobs.

The Trump administration approved ConocoPhillips’ $1 billion drill site, at Greater Mooses Tooth-2, which began construction this winter, and its sister site Greater Mooses Tooth-1 began producing oil ahead of schedule this past September.

Tourism could produce a jump in cashflow for the state economy.

Cruise Lines International Association predicted cruise ship tourism will increase by 16 percent in 2019 with about 1.3 million cash-laden visitors.

Northrim Bank topped the list of the Alaska-only bank beneficiaries of the new tax law in net income growth.

Net income climbed 49 percent from 2017 to 2018 for Northrim, which has $1.22 billion in deposits, from $14 million to $20.9 million. First National Bank Alaska, second in deposit market share with $2.4 billion in deposits, had net income jump 48.5 percent from $36.4 million to $54.1 million in the same period.

Mt. McKinley Bank in Fairbanks saw net income grew from $3.8 million to $4.7 million.

The new tax law isn’t the only element pushing numbers up, either. Alaska banks also increased their loan portfolios across the board by an average 5.5 percent. McKinley Bank increased net loans and leases 9.5 percent from fourth quarter 2017 to fourth quarter 2018 — a good signal for an area still anticipating a financial boost from an incoming wing of F-35 fighter jets to Eielson Air Force Base.

Northrim Bank President and CEO Joe Schierhorn agreed with both with the cheerier-than-normal economic outlook and means to reinvest it. Schierhorn said he can’t remember a time since the late 1980s when a tax reform yielded this kind of fiscal boost, and like Wells Fargo Alaska, has spread the cash around.

“There are three ways of thinking about how to use extra income,” Schierhorn said. “You can return it to shareholders, invest back in infrastructure, or invest in employees. We did all three.”

Northrim gave wage and pension bumps and additional education opportunities to employees, aa record-breaking dividend increase to its shareholders, and opened a new branch in East Anchorage.

Like Everhart, Schierhorn points to increased production on the North Slope and to the cruise line forecast as hopeful elements in the 2019 outlook.

“The projected tourism increase will be big,” Schierhorn said. “When you think about the shore-based business that cater to that segment, it could be significant economic driver.”

Even though 2019 is beginning with good omens, bank leaders are still looking critically at Alaska’s political situation. Despite the profits and promise, Dunleavy’s cut-laden budget makes banking leaders uneasy.

“When Dunleavy’s budget came out, it created a sense of cost,” said Everhart. “It came with $1.6 billion of cuts. You think about that, and in reality every $100,000 of cuts is one job. That $1.6 billion is 1,600 jobs we could lose.”

Everhart’s tone and message adds to a widespread concern over Dunleavy’s budget from state employees and public unions in healthcare and education, but he clarified Wells Fargo isn’t making any moves till the Legislature hashes out the budget.

Clearly, however, he seems to believe in better solutions to the Permanent Fund dividend question than budgets slashes.

“We have a cash flow problem, not an economic crisis,” Everhart said. “The state still has levers to pull without the deep cuts currently proposed. The legislative process has still not taken place. It’s hard to ring the alarm bells until the legislative process completes.”

03/27/2019 - 11:51am