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WASHINGTON, Nov 26 (Reuters) - Net income for U.S. banks declined 3.9 percent year-on-year in the third quarter, a top federal banking regulator said on Tuesday, weighed down by litigation costs and a sharp drop in mortgage demand.
A $4 billion increase in litigation expenses at one institution was the main cause for the drop, the Federal Deposit Insurance Corp said. The agency did not name the bank.
"Had it not been for that, the upward trend in earnings would have continued," FDIC Chairman Martin Gruenberg said in notes prepared for a news conference.
Total net profit at FDIC-insured banks was $36 billion in the quarter, $1.5 billion less than a year ago, constituting the first year-on-year decline in industry profits since the second quarter of 2009.
It was also off from a downwardly revised $38.1 billion total three months earlier, the FDIC said in a quarterly data report.
Rising interest rates lowered the value of fixed income assets and sapped demand for refinancing mortgages. Net interest margins benefited from the rise, but were still lower than in the third quarter of 2012.
Lower loan-loss provisions were a significant positive contribution as banks set aside $5.8 billion, the smallest reported by the industry since the third quarter of 1999.
Long-term positive trends also continued, Gruenberg said, as fewer institutions reported quarterly losses, credit quality continued to improve, lending grew at a modest pace, and fewer banks failed.
Equity capital increased by $13.9 billion, or almost 1 percent, after declining in the previous quarter, with retained earnings adding $13.1 billion to the rise. Dividends rose far stronger at a rate of 11.9 percent, however.
Six banks failed in the quarter, while 43 were absorbed in mergers and one new institution was added. The total number of banks whose deposits are guaranteed by the FDIC stands at 6,891, the agency said.