The bad news about banks in the third quarter is that their net income declined 3.9% from the same quarter last year, according to the latest Quarterly Banking Profile released today from the Federal Deposit Insurance Corporation (FDIC).

The good news is that although this is the first decline in year-over-year earnings in 17 quarters, most of that, according to the FDIC, is attributable to a $4 billion increase in litigation expenses at one institution.

"Most of the positive trends we have been seeing in industry performance continued in the third quarter," said FDIC Chairman Martin J. Gruenberg. "Fewer institutions reported quarterly losses, lending grew at a modest pace, credit quality continued to improve, more banks came off the ‘Problem List,’ and fewer banks failed."

The number of failed banks in 2013 is about half the number of last year, with 23 so far, compared to 50 in 2012. The number of those "problem banks" declined from 553 to 515 in the third quarter.

The downward trend in bank failures has been steady all year, but picked up noticeably in the last half of the year. There were only two failures in September, one failure in October and none reported so far this month. 

Some of the states that saw the biggest volume in bank failures in the past are still showing up on the 2013 list — Florida, Arizona and Nevada, for example — but in much smaller numbers. The type of bank has also changed.

"It tends to be the smaller banks that are failing at this point," said David Barr, FDIC spokesman. 

According to the FDIC, that decline in bank failures was partly responsible for the increase in the Deposit Insurance Fund (DIF) balance to $40.8 billion as of Sept. 30, as estimated insured deposits were essentially unchanged from the previous quarter.

Total bank loan balances rose in the third quarter by 0.9% to $69.7 billion, as all major loan categories except 1-to-4 family residential real estate loans grew in that quarter. The biggest gain was seen in loans to states and municipalities, which rose 7.3% to $7.5 billion.

Mortgage activity declined in the third quarter as higher interest rates in the second quarter drove down demand for refis. Originations of 1-to-4 family residential real estate loans were 30.1% lower than in the second quarter.