The data issued Tuesday by the Federal Deposit Insurance Corp. showed a reversal of the trend of rising earnings as the industry has recovered from the financial crisis.
The FDIC reported that U.S. banks earned $36.9 billion in the October-December period, down from $39.8 billion a year ago.
Overall, growth in lending helped boost revenue at most banks. Sixty-one per cent of banks reported an increase in profit in the fourth quarter from a year earlier, and only 9.4 per cent of banks were unprofitable. But the gains were outweighed by the big banks' costs for settling cases related to sales of risky mortgage securities before the crisis and the mortgage income declines, the FDIC said.
Three of the biggest U.S. banks — JPMorgan Chase, Bank of America and Citigroup — together posted $4.4 billion in legal costs during the quarter.
"The banking industry continued to show further improvement in the fourth quarter, notwithstanding the impact on earnings of significant litigation expenses at a few large institutions," FDIC Chairman Martin Gruenberg said at a news conference.
He noted that revenue and income increased from a year earlier at a majority of banks, fewer risky loans were on banks' books, lending expanded and there were fewer banks on the FDIC's "problem list."
The number of banks on the confidential list fell to 291 from 329 in the third quarter. That's the lowest level since the end of 2008, when the financial crisis struck.
Community banks scored strong earnings growth in the fourth quarter, increasing 28 per cent from the same period in 2013.
The biggest banks have driven the bulk of the industry's earnings growth in recent years, as they have recovered with help from federal bailout money during the crisis and record-low borrowing rates. But the latest snapshot of the industry showed big banks dragging down earnings and smaller institutions posting advances.
The big banks "recovered from the crisis earlier," Gruenberg said, and now smaller institutions like community banks are catching up.