WASHINGTON -- U.S. banks' earnings fell 7.7 percent in the January-March quarter from a year earlier, as higher interest rates dampened demand for mortgage refinancing and reduced banks' revenue from the mortgage business.
The data issued Wednesday by the Federal Deposit Insurance Corp. highlighted the effect of the increase in interest rates that occurred in the spring of 2013.
"Industry revenue has been affected by narrow margins, modest loan growth and a decline in noninterest income as higher interest rates have reduced mortgage-related activity and trading income fell," FDIC Chairman Martin Gruenberg said at a briefing on the report. On the positive side, he said, loan balances are trending up and more firms are profitable.
It was only the second time in the past 19 quarters that the banking industry, which has been recovering from the financial crisis, posted a decline in net income from the year-earlier quarter.
The FDIC reported that the banking industry earned $37.2 billion in the first quarter of this year, down from $40.3 billion in the same period in 2013.
It was the first time since the third quarter of 2013 that banks marked a year-over-year profit decline -- and that was the first decline since the spring of 2009, when the country was still mired in a recession.
The latest report also showed the number of banks on the FDIC's problem list fell to 411 in the first quarter from 467 in the fourth quarter of last year.
Arkansas banks earned about $186 million in the first quarter, down 2.6 percent from $190 million in the first quarter last year, the FDIC reported.
The banks' total assets rose 1.2 percent to $62.2 billion in the first quarter and deposits were up 1.5 percent to $52.1 billion.
Total loans climbed 4 percent to $38.1 billion in the quarter.
There were 118 banks in Arkansas in the first three months this year, down from 126 in the same period last year. Six of the banks were unprofitable in the quarter, compared with 14 that lost money in the first quarter last year.
Despite recent declines, long-term mortgage rates still are nearly a full percentage point above record lows reached about a year ago. The increase over the year was driven in part by speculation that the Federal Reserve would reduce its bond purchases, which have helped keep long-term interest rates low. The Fed has announced four declines in its monthly bond purchases since December because the economy appears to be gaining strength. But the Fed has no plans to raise its benchmark short-term rate from record lows.
Reduced income from trading also contributed to the first-quarter decline in banks' profit, the FDIC said. But the comparison was being drawn with banks' highest-earning quarter on record in January-March of last year, which the FDIC said was pumped up by some unusual profit gains.
The health of the banking industry continued to improve in the first quarter, with sour loans on the books declining, lending getting more robust and fewer banks unprofitable, FDIC officials said.
"The first-quarter results show a continuation of the recovery in the banking industry," Gruenberg said in a statement.
The pace of banks' lending picked up in the first quarter. Total loan balances rose by $37.8 billion, or 0.5 percent, from the final quarter of 2013 even as mortgage lending declined and credit-card loans marked a seasonal decrease.
"It's not as strong as anybody would like, but trends are upward," said James Chessen, chief economist at the American Bankers Association, citing record capital levels and strong improvements in asset quality. "The hope now is that business loan demand starts to pick up."
Some experts have predicted strong growth in lending this year, with demand for loans growing as new jobs are created, incomes rise and business confidence strengthens.
Community banks earned $4.4 billion in the first quarter, the FDIC said, adding a new data category to its quarterly report.
Banks with assets exceeding $10 billion continued to drive the bulk of the earnings growth in the January-March period. While they make up just 1.6 percent of U.S. banks, they accounted for about 82 percent of industry earnings.
Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most of them have recovered with help from federal bailout money during the financial crisis and record-low borrowing rates.
Most big banks saw declines in trading income in the three-month period that ended March 31, while revenue from originating, selling and servicing mortgages fell $4 billion from a year earlier, the FDIC said in the Quarterly Banking Profile released Wednesday in Washington.
Last year, the number of bank failures slowed to 24. That is still more than normal. In a strong economy, an average of four or five banks close annually. But failures were down sharply from 51 in 2012, 92 in 2011 and 157 in 2010 -- the most in one year since the height of the savings and loan crisis in 1992.
So far this year, eight banks have failed. Thirteen had been shuttered by this time last year.
The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $48.9 billion balance at the end of March, according to the FDIC. That compares with $47.2 billion as of Dec. 31.
The FDIC, created during the Great Depression to insure bank deposits, monitors and examines the financial condition of U.S. banks.
The agency guarantees bank deposits up to $250,000 per account. Apart from its deposit insurance fund, the FDIC also has tens of billions of dollars in reserves.
Information for this article was contributed by Marcy Gordon of The Associated Press, by Jesse Hamilton of Bloomberg News and by David Smith of the Arkansas Democrat-Gazette.
Business on 05/29/2014