A one-two combo of income from higher fees and fewer losses from lousy loans resulted in U.S. banks earning more from January through March than during any quarter on record.
The banking industry earned $40.3 billion in the first quarter, the Federal Deposit Insurance Corp. (FDIC) said Wednesday. That's the highest ever for a single quarter and up 15.8 percent from the first quarter of 2012, when the industry's profits were $34.8 billion.
"Today's report shows further progress in the recovery that has been underway in the banking industry for more than three years,” FDIC Chairman Martin J. Gruenberg said in a statement.
“We saw improvement in asset quality indicators over the quarter, a continued increase in the number of profitable institutions, and further declines in the number of problem banks and bank failures,” the statement added.
“However, tighter net interest margins and slow loan growth create an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention.”
Record profits show banks have come a long way from the 2008 financial crisis. But the report offered a reminder that the industry is still struggling to help the broader economy recover from the Great Recession.
Only about half of U.S. banks reported improved earnings from a year earlier, the lowest proportion since 2009. That shows the industry's growth is being driven by a narrower group of the nation's largest banks.
Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. Almost all of them received federal bailout money during the crisis.
Bank lending declined from the October-December quarter, although that followed several quarters of increases.
And bank profits from interest charged fell 2.2 percent to $104 billion. The industry's average interest income as a percentage of total loans on its books fell from 3.35 percent to 3.27 percent. That's the lowest portion of total loans in nearly seven years.
That has forced banks to see more revenue from fees, despite complaints from customers and consumer advocates.
Income earned from interest on loans is falling in part because interest rates have been near record lows. The Federal Reserve's aggressive stimulus programs since the crisis have exerted downward pressure on short- and long-term interest rates, making mortgages and other loans cheaper. The Fed's low interest-rate policies are intended to boost borrowing and spending to accelerate overall economic growth.
Still, many banks have adopted stricter lending standards since the financial crisis, requiring higher credit scores, larger down payments and proof of employment. So while loans are a bargain, they are only available to those who can qualify.
Another sign of the industry's health is that fewer banks are at risk of failure. The number of banks on the FDIC's "problem" list fell to 612 from 651 as of Dec. 31.
And so far this year, only 13 banks have failed. That follows 51 closures last year, 92 in 2011 and 157 in 2010. The 2010 closures were the most in one year since the height of the savings and loan crisis in 1992.
On Tuesday, Moody's Investors Service said it had raised its outlook for the U.S. banking industry from "Negative" to "Stable," the first increase in five years. The rating agency said sustained economic growth and a better jobs picture will help banks over the next 12 to 18 months.
The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.
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The Associated Press contributed to this story.