Higher litigation expenses caused a drop in earnings at U.S. banks in the fourth quarter, according to new data from the Federal Deposit Insurance Corp. (FDIC).
The FDIC says that aggregate net income of US$36.9 billion was generated by the commercial banks and savings institutions it insures in the fourth quarter of 2014. This was down US$2.9 billion (7.3%) from the same quarter a year ago. The agency says that the decline in earnings was “mainly attributable to a US$4.4 billion increase in litigation expenses at a few large banks.”
Apart from that, more than half of banks had year-over-year growth in quarterly earnings, it says. And, the proportion of banks that were unprofitable during the fourth quarter fell to 9.4% from 12.7% a year earlier.
“The banking industry continued to improve at the end of the year,” said FDIC chairman Martin Gruenberg. “Although total industry earnings declined as a result of significant litigation expenses at a few large institutions and a continued decline in mortgage-related income, a majority of banks reported higher operating revenues and improved earnings from the previous year. In addition, banks made loans at a faster pace, asset quality improved, and the number of banks on the ‘problem list’ declined to the lowest level in six years.”
Loan and lease balances rose US$149.4 billion (1.8%) in the fourth quarter to US$8.3 trillion, the FDIC said. Also, commercial and industrial loans increased by US$42.2 billion (2.5%), and credit card balances grew by US$35.4 billion (5.2%). Over the past 12 months, loan and lease balances increased 5.3%, it reports, not in that this the highest 12-month growth rate for loans since mid-2008.
Net interest income was US$1.1 billion (1%) higher than a year ago, as the industry’s interest-bearing assets increased 6.2% in 2014. The average net interest margin was 3.12%, down from 3.27% in the fourth quarter of 2013, which is the lowest quarterly average margin recorded since the third quarter of 1989.
Non-interest income was down US$160 million (0.3%) from a year ago, as income from the sale, securitization, and servicing of residential mortgages declined US$1.6 billion (30.8%), it said. At the same time, non-interest expenses rose by US$4.9 billion (4.8%) from a year ago, as litigation expenses at a few of the largest banks were US$4.4 billion higher.
Banks set aside US$8.2 billion in provisions for loan losses, up 12% from a year earlier, the FDIC noted, adding that this is the second consecutive quarter that the industry has reported a year-over-year increase in loss provisions. Asset quality indicators continued to improve, the FDIC said, as insured banks and thrifts charged off US$9.9 billion in uncollectible loans during the quarter, down US$2.2 billion from a year earlier.
“The current operating environment remains challenging,” Gruenberg concluded. “Revenue growth continues to be held back by narrow interest margins and lower mortgage-related income. And, many institutions are reaching for yield given the low interest-rate environment, which is a matter of ongoing supervisory attention. Nevertheless, results from the fourth quarter generally were positive for the banking industry, and for community banks in particular.”
Full-year earnings totaled US$152.7 billion, the FDIC reported, down US$1.7 billion (1.1%) from 2013. This is the first decline in annual net income in five years.