UPDATE 1-U.S. banks' quarterly profit jumps 27.5 percent on lower tax rate -FDIC

-FDIC@ (Adds details, Gruenberg comment)

WASHINGTON, May 22 (Reuters) - U.S. banks reported $56 billion in profits in the first quarter, up 27.5 percent from a year earlier, as institutions began to take advantage of a lower effective tax rate, the Federal Deposit Insurance Corporation (FDIC) reported Tuesday.

Over 70 percent of U.S. banks reported growth in year-over-year earnings, as the industry enjoyed higher net operating revenue amid a significantly lower corporate tax rate, according to the regulator. Net interest income was up 8.5 percent to $131.3 billion.

The jump in bank profits came after the industry reported a 40.9 percent drop in net income in the last quarter of 2017, due primarily to one-time accounting change from the tax law.

The report indicates that banks stand to gain significantly in the long run from the tax law, which cut the corporate tax rate from 35 to 21 percent.

FDIC Chairman Martin Gruenberg said the new report showed positive results for the banking industry, with loan balances growing and net interest margins improving.

However, he cautioned that a prolonged period of low interest rates and a competitive lending environment had encouraged some banks to reach for yield, heightening risks.

He warned that the industry must be ready for an "inevitable downturn" in the economic cycle after years of expansion.

"The industry must manage risks carefully to continue to grow on a long-run, sustainable path," he said in a statement.

Gruenberg also noted that community banks reported a 17.7 percent increase in net income in the first quarter from a year earlier. (Reporting by Pete Schroeder; Editing by Bernadette Baum)