FDIC-insured banks’ quarterly net income dropped by $3.1 billion to $37.2 billion, thanks to lower non-interest income from reduced mortgage-related activity, FDIC’s Quarterly Banking Profile revealed. The FDIC’s First Quarter 2014 Quarterly Banking Profile shows that despite a drop in earnings, a majority of banks reported an increase in quarterly net income compared to a year ago.

Drop in earnings

The quarterly review shows that FDIC-insured banks posted net income of $37.2 billion compared to the $40.3 billion clocked a year ago. The decline is attributed to narrow margins, modest loan growth, and a decline in non-interest income as higher interest rates have reduced mortgage-related activity and trading income fell. Moreover, non-interest income was higher one year back ago due to a one-time gain at one institution.

The following graph captures quarterly net income since 2009:

Quarterly Net Income FDIC-Insured Banks

However, as highlighted in the following graph, the banks’ net interest income increased slightly from a year ago, and more than two-thirds of all banks clocked higher net interest income from a year ago:

Net interest income

The quarterly review attributes the improvement to positive effects from the rise in longer-term rates witnessed in mid-2013. The review shows that the steeper yield curve has been favorable for margins at institutions that fund at the short end of the yield curve and invest over the medium- to long-term.

Drop in unprofitable Institutions – FDIC

As a departure from its traditional practice, the FDIC survey also included a new section on the performance of community banks. The survey indicates that community banks have benefited the most over the past year from the steeper yield curve, as their average net interest income was up 4 basis points from a year ago.

The FDIC review points out that though overall industry earnings declined, the number of unprofitable institutions declined. During the first quarter of 2014, the percentage of banks that reported a net loss was the lowest since the second quarter of 2006:

Decline in unprofitable institutions

Decline in problem banks

The review also points out that the significant contributor to earnings continues to be lower provisions for loan losses. However, as set forth in the following chart, the benefits to earnings from lower provisions are diminishing. Throughout much of the post-crisis recovery period, the reduction in loan-loss provisions has tracked the improvement in credit quality.

Loan-loss provisions

The FDIC review also shows continued improvement in the number of “problem” banks, as their numbers declined from 467 to 411 during the quarter. It is now less than half of the peak of 888 witnessed three years ago, though five insured institutions failed in the first quarter.

Change in number of problem banks