WASHINGTON -- Profits at the nation's banks fell 3.9% in the third quarter of 2013 compared with a year earlier, the first such decline since 2009, as the industry grappled with higher interest rates that led to a drop in mortgage activity, the Federal Deposit Insurance Corp. said Tuesday.
But FDIC Chairman Martin J. Gruenberg said the banking sector was continuing its gradual recovery from the financial crisis and Great Recession.
He noted that a $4-billion increase in litigation expenses at a large bank -- believed to be JPMorgan Chase & Co. -- pushed down industry profits, although rising interest rates also posed an ongoing challenge for the industry.
JPMorgan posted a $380-million loss in the third quarter as it set aside $23 billion to handle litigation costs. This month, the bank agreed to a record $13-billion settlement with the government to resolve allegations it sold shoddy mortgage investments.
Overall, the nation's nearly 7,000 federally insured banks earned $36 billion in the July-to-September quarter. That was down from a record $42.2 billion in profits in the second quarter.
The third-quarter profits also were $1.5 billion less than in the same period a year earlier, ending a streak of year-over-year increases that began when the Great Recession ended in mid-2009.
Profits were hurt by a jump in interest rates after Federal Reserve officials indicated they were preparing to reduce the central bank's bond-buying stimulus program.
The Fed's $85 billion in monthly bond purchases was designed to push down long-term interest rates and the increase over the summer led central bank policymakers to hold off on changes to the program. But the Fed is expected to start tapering those purchases in the coming months.
Mortgage originations were down 30% in the third quarter from the previous quarter, the FDIC said. And the end to a long period of historically low interest rates makes for "a tricky environment" for banks, Gruenberg said.
But he stressed the overall picture of the industry was not bad. If not for the $4-billion increase in litigation expenses in the quarter, the upward trend of year-over-year profit growth would have increased.
The number of banks at risk of failure -- so-called problem banks -- dropped to 515 from 553 the previous quarter. It was the 10th straight quarter the figure had declined. There have been 23 bank failures so far this year, down from 50 in the same period last year.
And higher interest rates have positives for banks as well, Gruenberg said.
"It’s a bit of a double-edged sword," he said.
"Rising interest rates will have benefits for institutions in terms of improving the margins on loans, and that can help generate revenue," Gruenberg said. "On the other hand, as is reflected in the mortgage market, it can depress activity."