The Federal Deposit Insurance Corp. said Tuesday that the banking industry earned $36 billion in the third quarter, down $1.5 billion or 3.9 percent from the third quarter of 2012.
The FDIC said the earnings decline came primarily from a $4 billion increase in litigation expenses at a single institution.
The FDIC did not name the institution, but the JPMorgan Chase & Co. reached a $4.5 billion settlement with investors earlier this month which was the latest in a series of legal settlements for the nation's largest bank over JPMorgan's sales of mortgage-backed securities in the year preceding the 2008 financial crisis.
As the housing market collapsed between 2006 and 2008, millions of homeowners defaulted on high-risk mortgages. That led to billions of dollars in losses for investors who bought securities created from bundles of mortgages. Those securities had been sold by JPMorgan and other big Wall Street banks.
The FDIC said that lower revenue from reduced mortgage activity and lower gains from asset sales also contributed to the reduction in earnings in the July-September quarter.
Half of the nation's 6,891 insured banking institutions had year-over-year growth in earnings while half reported declines, the FDIC said in its quarterly report on the health of the industry.
"While industry revenue was lower, due in large part to a reduction in mortgage originations caused by higher interest rates, today's report shows further progress in the gradual recovery of the banking industry," FDIC Chairman Martin Gruenberg told reporters at a news conference.
Gruenberg noted that banks' net operating revenue was $6.1 billion lower than the third quarter a year ago. He said that this decline was driven largely by a rise in mortgage interest rates which cut into the number of people trying to refinance their mortgages during the third quarter.
But he said higher long-term interest rates did have some positive impacts on bank earnings since banks generally borrow short-term and lend long-term.
The number of banks on the FDIC's problem watch list declined to 515, down from 553 in the second quarter. That is 10th consecutive quarter that this list of problem banks has declined. Banks on the watch list are now more than 40 percent below the recent peak of 888 in the first quarter of 2011.
Six FDIC insured institutions failed during the third quarter. So far this year, 23 banks have failed, compared to more than 50 during the first nine months of 2012.