The data issued Wednesday by the Federal Deposit Insurance Corp. highlighted the impact of the increase in interest rates that occurred in the spring of 2013.
It was only the second time in the last 19 quarters that the banking industry, which has been recovering from the financial crisis, posted a decline in net income from the year-earlier quarter.
The FDIC reported that the banking industry earned $37.2 billion in the first quarter of this year, down from $40.3 billion in the same period in 2013.
It was the first time since the third quarter of 2013 that banks marked a year-over-year profit decline and that was the first decline since the spring of 2009, when the country was still mired in the Great Recession.
The latest report also showed the number of banks on the FDIC's problem list fell to 411 in the first quarter from 467 in the fourth quarter of last year.
Despite recent declines, long-term mortgage rates still are nearly a full percentage point above record lows reached about a year ago. The increase over the year was driven in part by speculation that the Federal Reserve would reduce its bond purchases, which have helped keep long-term interest rates low. Indeed, the Fed has announced four declines in its monthly bond purchases since December because the economy appears to be healing. But the Fed has no plans to raise its benchmark short-term rate from record lows.
Reduced income from trading also contributed to the first-quarter decline in banks' profit, the FDIC said. But the comparison was being drawn with banks' highest-earning quarter on record in January-March of last year, which the FDIC said was pumped up by some unusual profit gains.
The health of the banking industry continued to improve in the first quarter, with sour loans on the books declining, lending getting more robust and fewer banks unprofitable, FDIC officials said.
"The first-quarter results show a continuation of the recovery in the banking industry," FDIC Chairman Martin Gruenberg said in a statement.
The pace of banks' lending picked up in the first quarter. Total loan balances rose by $37.8 billion, or 0.5 percent, from the final quarter of 2013 even as mortgage lending declined and credit card loans marked a seasonal decrease.
Some experts have predicted strong growth in lending this year, with demand for loans growing as new jobs are created, incomes rise and business confidence strengthens.
Community banks earned $4.4 billion in the first quarter, the FDIC said, adding a new data category to its quarterly report.
Banks with assets exceeding $10 billion continued to drive the bulk of the earnings growth in the January-March period. While they make up just 1.6 percent of U.S. banks, they accounted for about 82 percent of industry earnings.
Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most of them have recovered with help from federal bailout money during the financial crisis and record-low borrowing rates.
Last year, the number of bank failures slowed to 24. That is still more than normal. In a strong economy, an average of four or five banks close annually. But failures were down sharply from 51 in 2012, 92 in 2011 and 157 in 2010 the most in one year since the height of the savings and loan crisis in 1992.
So far this year, eight banks have failed. Thirteen had been shuttered by this time last year.
The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $48.9 billion balance at the end of March, according to the FDIC. That compares with $47.2 billion as of Dec. 31.
The FDIC, created during the Great Depression to ensure bank deposits, monitors and examines the financial condition of U.S. banks.
The agency guarantees bank deposits up to $250,000 per account. Apart from its deposit insurance fund, the FDIC also has tens of billions of dollars in reserves.