U.S. banks saw their collective profits drop by about 7.6% in the first quarter, due to lower mortgage income and a drop in trading revenues, the Federal Deposit Insurance Corp. (FDIC) reports.

The FDIC said Wednesday that the commercial banks and savings institutions it insures reported aggregate net income of US$37.2 billion in the first quarter of 2014, down 7.6% from the same quarter last year. The decline in earnings was mainly due to a US$7.1 billion drop in non-interest income, it said, which it attributes to reduced mortgage activity and a drop in trading revenue .

According to its latest quarterly stats, non-interest income from the sale, securitization and servicing of mortgages was down 53.6% from a year ago. And, realized gains on available-for-sale securities were down by 60.1%, “as higher medium- and long-term interest rates reduced the market values of fixed-rate securities”.

Net operating revenue was down by 4.0% in the quarter, as the increase in net interest income was outweighed by the drop in non-interest income. As a result, the average return on assets fell to 1.01% in the first quarter from 1.12% a year earlier, and the average return on equity (ROE) fell to 8.99% from 9.96%.

However, the FDIC also reports that the number of “problem banks” fell for the 12th consecutive quarter, declining from 467 to 411 during the quarter. The number of “problem” banks now is now less than half the post-crisis high of 888 at the end of the first quarter of 2011, it says.

Overall, the U.S. banking industry is improving, said FDIC chairman Martin Gruenberg. “Asset quality continues to improve, loan balances are trending up, fewer institutions are unprofitable, and the number of problem banks continues to decline,” he said. “However, industry revenue has been affected by 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.”

Additionally, he suggested that the regulator is concerned about the demand for returns in the generally low-return environment. “The current interest rate environment has created an incentive for institutions to reach for yield, and this is a matter of ongoing supervisory attention,” he said.