NEW YORK (

TheStreet

) - The Federal Deposit Insurance Corp on Tuesday reported that the nation's banks and thrifts saw profits continue to climb during the third quarter, as the number of "problem banks" declined.

The FDIC reported that combined U.S. banks and thrifts earned $35.3 billion during the third quarter, increasing from $28.8 billion during the second quarter, and $23.8 billion during the third quarter of 2010. This was the ninth straight quarter for year-over-year earnings increases for the industry.

As in prior quarters, the industry improvement was driven by a release of loan loss reserves, as overall credit quality improved. Loan loss reserves for the industry declined by an aggregate of $10.45 billion during the third quarter.

A quick look at the "big four" U.S. banks underlines the importance of the reserve releases:

At the holding company level, based on regulatory data from

Federal Reserve

filings provided by SNL Financial,

Citigroup

(C) - Get Report

reported third-quarter net income of $3.8 billion, driven by a $2.3 billion release of loan loss reserves.

For

Bank of America

(BAC) - Get Report

, a $6.2 billion third-quarter profit was fed in part by a $2.2 billion decline in loan loss reserves.

Wells Fargo's

(WFC) - Get Report

third-quarter net income of $4.1 billion reflected an $854 million reserve release,

JPMorgan Chase

(JPM) - Get Report

released only $170 million in loan loss reserves, while earning $4.3 billion.

The FDIC said the industry's loan-loss provisions -- additions to reserves to cover expected loan losses -- totaled $18.6 billion during the third quarter, down slightly from $19 billion the previous quarter but down 47% from a year earlier.

The banking industry's return on assets for the third quarter was 1.03%, improving from 0.85% in the second quarter and 0.72% in the third quarter of 2010.

The industry's noninterest income increased 5.8% year-over-year to $59.5 billion in the third quarter, with a portion of the improvement coming from "accounting gains booked by a few large banks, triggered by declines in the market values of some of their liabilities." Absent the accounting adjustments, the FDIC said that "net operating revenue would have posted a year-over-year decline for a third consecutive quarter."

Third-quarter industry trading revenue doubled year-over-year to $8.8 billion. The combined industry lost $1.7 billion on loan servicing operations during the third quarter, compared to servicing revenue of $3.0 billion a year earlier. .

The industry's aggregate net interest margin -- the difference between a bank's yield on loans and investments and its average cost for deposits and wholesale borrowings -- continued to decline in the prolonged low interest rate environment, to 3.56% in the third quarter, from 3.61% during the second quarter, and 3.75% in the third quarter of 2010.

Another bright spot for the industry was continued growth of non-real estate commercial and industrial loans, which grew by $44.8 billion during the third quarter, or 3.6%, to $1.28 trillion. C&I loan balances were up over 10% year-over-year.

Loan quality continued to improve, with the FDIC reporting noncurrent assets of 2.62% as of Sept. 30, compared to 2.75% the previous quarter and 3.24% a year earlier.

The regulator said that there were no new bank or thrift charters granted during the third quarter, while mergers absorbed 49 institutions and

26 banks and thrifts failed

, leaving 7,436 insured depository institutions as of Sept. 30.

The FDIC said the number of institutions on its "problem list" declined for the second straight quarter, to 865 from 844, however, the decline in problem banks was less than the number that failed.

TheStreet

published a smaller list of

153 banks and thrifts that were undercapitalized

per ordinary regulatory guidelines, as of Sept. 30.

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--

Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.