WASHINGTON While big banks dragged overall industry earnings down in the fourth quarter due to a boost in legal costs, community institutions had one of their most successful periods in recent memory.
Community bank earnings surged 28% to $4.8 billion during the fourth quarter, compared with a 7.3% decline for the industry as a whole, according to a report released Tuesday by the Federal Deposit Insurance Corp.
"The larger institutions recovered from the crisis earlier, but the community banks really are catching up and their performance over the past year on a number of indicators really surpassed the general industry results as a whole," FDIC Chairman Martin Gruenberg said during a press conference announcing the industry results.
Community bank performance was better across the board. Loans made by community banks increased 8.6% in the fourth quarter, compared with a 5.3% increase for the entire industry, while net interest margins for small banks were 3.63%, 51 basis points higher than the industry average and the largest spread in eight years. More than one quarter of the loans made by the industry in 2014 were originated by community banks.
Net operating revenue at community banks, meanwhile, rose $1.88 billion or 7.7% year over year in the fourth quarter.
For the industry overall, net operating revenue increased by $923 million in the fourth quarter from a year earlier, and net interest income was 1% higher at $1.1 billion from a year ago while noninterest income was down by $160 million, or 0.3% lower.
The lag on overall industry earnings was caused by itemized legal expenses at Bank of America, Citigroup and JPMorgan Chase. Legal expenses at those banks jumped by $4.4 billion, helping push quarterly earnings down by $2.9 billion to $36.9 billion overall.
For the full year bank earnings declined for the first time in five years, totaling $152.7 billion, a 1.1% decline from the $154.4 billion earned in 2013.
"The litigation expenses make the numbers look worse, but it is my experience that it is not unusual to have these kinds of adjustments in the fourth quarter," said James Chessen, chief economist at the American Bankers Association, after the FDIC press conference.
JPMorgan also had a litigation expense release in the fourth quarter of 2013, which distorted the litigation expenses higher in the latest quarter. While the industry saw earnings decline year over year, 61.2% of insured institutions reported an increase in earnings and the percentage of unprofitable institutions fell to 9.4% from 12.7%.
"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," Gruenberg said.
There was other good news for banks in the quarterly report.
The FDIC said that banks increased loss provisions for the second consecutive quarter, totaling $8.2 billion, which was 12% higher than the fourth quarter of 2013.
Net chargeoffs, meanwhile, fell to their lowest point in eight years. Chargeoffs during the fourth quarter were 18% lower than a year earlier, with the largest improvements in residential mortgage loans, credit cards and home equity lines of credit.
The amount of noncurrent loans also fell during the fourth quarter, dropping by 5.4% from a year earlier. The percentage of total loans and leases that were more than 90 days past due fell to 1.96%, the first time since 2008 that the noncurrent loan rate was below 2%.
The number of troubled institutions on the FDIC's "troubled bank" list fell to 291 from 329 during the fourth quarter, while total assets of such banks fell to $87 billion from $102 billion.
The Deposit Insurance Fund balance also increased as estimated losses for prior bank failures declined and estimated insured deposits rose, pushing the ratio of the fund to insured deposits up to 1.01%, its highest level in six years. The ratio is required by law to reach 1.35% by 2020.