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JPMorgan Torpedoes Bank Industry Earnings

NEW YORK (TheStreet) -- U.S. banks finally stopped their long streak of year-over-year earnings growth, with combined third-quarter earnings coming in at $36.0 billion, according to the Federal Deposit Insurance Corp.

Industry earnings were down from $42.2 billion in the second quarter and $37.5 billion during the third quarter of 2013.

This was the first year-over-year aggregate earnings decline for FDIC-insured U.S. banks and thrifts in 17 quarters.

Without naming names, the FDIC placed the blame squarely on JPMorgan Chase Bank NA, the main subsidiary of JPMorgan Chase (JPM - Get Report): "The earnings decline was mainly attributable to a $4 billion increase in litigation expenses at one institution," the regulator said.

JPMorgan Chase Bank, NA earned $401 million during the third quarter, declining from $4.9 billion in the second quarter and $4.0 billion during the third quarter of 2013.

On the holding company level, JPMorgan reported a third-quarter net loss of $380 million, springing from $9.15 billion in provisions for litigation expenses, before taxes. Those provisions brought the company's litigation reserves to $23 billion as of Sept. 30. The company's total fourth-quarter residential mortgage-backed securities (RMBS) litigation tab has come to $17.5 billion so far, including JPMorgan's landmark $13 billion settlement with the Department of Justice and other government authorities, and a $4.5 billion RMBS settlement with institutional investors.

A Hostile Rate Environment

Getting back to the industry results, U.S. banks saw their net interest income for the third quarter decline 1.3% year-over-year to $104.3 billion, as the combined net interest margin narrowed to 3.26% in the third quarter from 3.43% a year earlier. There was some benefit from a widening of interest rates spreads as long-term rates rose during the third quarter, with the margin remaining unchanged in the second quarter.

But what most banks need in order to significantly improve their margins is a parallel rise in interest rates. Investors can expect long-term rates to rise when the Federal Reserve begins tapering its "QE3" purchases of long-term bonds, which have been running at a net rate of $85 billion a month since September 2009. But short-term rates won't budge as long as the central bank keeps the federal funds rate in a target range of zero to 0.25%, as it has done since late 2008.

The Fed has indicated that it is unlikely to consider raising the federal funds target rate until the U.S. unemployment rate drops below 6.5%. The October unemployment rate was 7.3%, increasing from 7.2% in September. Federal Reserve Chairman Ben Bernanke has indicated that the central bank may keep the federal funds rate in its current range for some time after the unemployment rate falls below 6.5%.

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