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JPMorgan Posts Fourth-Quarter Profit of $5.3 Billion (Update 2)

  • JPMorgan Chase reports fourth quarter earnings of $5.3 billion, or $1.30 a share, on revenue of $24.1 billion.
  • Adjusted for one-time items, earnings-per-share would have been $1.40.
  • Analysts polled by Thomson Reuters on average expected earnings per share of $1.35 on revenue of $23.685 billion.
  • For the full year, the bank earned a profit of $17.9 billion, or $4.35 a share, on revenue of $99.8 billion.

Updated from 7:30 a.m. ET with additional information throughout.

NEW YORK (TheStreet) - JPMorgan Chase (JPM) said fourth-quarter profit fell 7% from a year ago, hurt by a steep decline in mortgage banking production, weak investment banking performance and a surge in legal and other one-time expenses.

The country's largest bank kicked off bank earnings season Tuesday, reporting a fourth-quarter profit of $5.278 billion, or $1.30 a share. Revenue on a managed basis was $24.1 billion. During the fourth quarter of 2012, the bank reported earnings of $5.692 billion, or $1.40 per share, on revenue of $24.378 billion.

Shares of JPMorgan were up 0.5% in premarket trading, to $58.00.

The results included a number of one-off items, including $1.1 billion after-tax legal expenses. The bank had previously disclosed that it would take a $850 million charge in the fourth quarter related to a $2.6 billion settlement it entered into with the Department of Justice and regulators over its role in the Bernard Madoff Ponzi scheme and would add $400 million to its legal reserves.

The results were also affected by a $1.2 billion after-tax adjustment from "funding valuation adjustments" or "debit valuation adjustments." The latter is an accounting quirk that requires banks to record a profit when the market value of their own bonds drops and a loss when the value of their bonds rises.

The funding valuation adjustment appears to be a new accounting treatment that the bank said reflects an industry migration that incorporates the "cost or benefit of unsecured funding into valuations." That adjustment was a $1.5 billion loss this quarter, hurting investment banking results.

Excluding these and other one-off items, the bank would have reported earnings of $1.40 a share. Analysts polled by Thomson Reuters on average had expected fourth-quarter earnings to come in at $1.35 a share on revenue of $23.685 billion. The consensus excluded the $850 million charge, but included adjustments to bond valuations.

After posting record profits in 2012, the bank finished 2013 with a profit of $17.9230 billion a 16% decline from the previous year, while revenues at $96.6 billion was slightly lower than the 2012 revenue of $97.03 billion. Earnings-per-share for 2013 came in at $4.35, down from $5.20 in 2012. JPMorgan's 2013 performance was marred by a third-quarter loss as the bank built reserves to deal with a crescendo of legal challenges. These included $17.5 billion in residential mortgage-backed securities settlements with government authorities and investors during the fourth quarter.

"We are pleased to have made progress on our control, regulatory and litigation agendas and to have put some significant issues behind us this quarter," Chairman and CEO Jamie Dimon said. "We reached several important resolutions - Global RMBS, Gibbs & Bruns, and Madoff. It was in the best interests of our company and shareholders for us to accept responsibility, resolve these issues and move forward. This will allow us to focus on what we are here for: serving our clients and communities around the world."

Consumer and community banking revenues rose 2% from the third quarter but were down 8% from a year earlier. Net interest income was down 3% from the previous year, driven by narrowing spreads on credit card and lower deposit margins and lower loan balances on portfolio runoff.

Core net interest margins -- the difference between interest earned on loans and assets and interest paid on deposits and liabilities -- rose 4 basis points quarter-on-quarter. CFO Marianne Lake said in the conference call that the outlook for NIMs was relatively stable.

Fee revenue declined 17% from the year-ago quarter led by a drop in mortgage banking fees.

Fourth-quarter mortgage originations of $23.3 billion were down 54% from the prior year and 42% from the previous quarter, as higher interest rates ended the refinancing boom that buoyed mortgage banks over the last few years.

Purchase originations were up 6% year-over-year, but down 35% from the previous quarter, suggesting that higher rates may be hurting the demand for loans.

The bank reported a loss of $274 million from mortgage production, a decrease of $1.1 billion from the previous year, reflecting "lower volumes, lower margins and higher legal expense."

The steep decline in mortgage banking profitability over the last two quarters has led to layoffs. JPMorgan shed 11,000 jobs in the mortgage business during 2013.

On the legal front, the bank entered into a $1.1 billion settlement with Fannie Mae (FNMA) and Freddie Mac (FMCC) during the quarter over repurchase claims associated with loans sold to the GSEs from 2000 to 2008.

Revenue from the corporate and investment banking division dropped 21% year-over-year to $6 billion, while profits fell 57% to $858 million. Fixed income and equity trading revenue totaled $4.1 billion during the fourth quarter, flat year-over-year.

Excluding the $1.5 billion funding valuation adjustment and the debit valuation adjustment of $500 million, the division would have reported net income of $2.1 billion, down 11% from a year earlier. Revenues would have come in at $8 billion, about 2% lower.

Compensation as a percentage of revenues was 30% for the year, excluding valuation adjustments.

In its outlook, JPMorgan warned that the mortgage business would likely post a loss in the first quarter of 2014 as well. However, the company also said that if credit quality continues to improve at the current pace, it will continue to release loan loss reserves. The bank released $800 million (after-tax) from its loan loss reserves during the quarter.

JPM also said it would continue to focus on expense control and expects its adjusted expense base (excluding foreclosure and legal) to be below $60 billion for 2014.

The bank had an estimated Basel III Tier I Common ratio of 9.5%. The bank has a target ratio of 10 to 10.5%.

Adjusted for one-off items, its return on tangible common equity was 15% for the quarter and for the year.

-- Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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