Updated from 9:46 a.m. EDT

J.P. Morgan Chase

(JPM) - Get Report

, coming off an awful 2002, appears to be turning over a new leaf: It's making lots of money again.

The nation's second-largest bank said Wednesday that it earned $1.4 billion, or 69 cents a share, in the first quarter, up more than 40% from $982 million, or 48 cents a share, in the year-ago period. The Thomson Financial/First Call consensus estimate called for J.P. Morgan to earn 51 cents a share, so the bank beat Wall Street's expectations by a wide margin.

The earnings were fueled by a combination of gains in net interest income, fees from bond and Treasury trading and securities gains. The bank posted $485 million in securities gains, a 325% increase over the year-ago period. It also posted a big 206% gain in unspecified "other revenue," which is listed at $481 million.

"They did everything right, but probably 20 cents

in earnings of unsustainable revenues," said Reilly Tierney, an analyst with Fox-Pitt Kelton. "They've got a lot of unsustainable revenues in securities gains and other income." (Tierney owns J.P. Morgan shares.)

Much of J.P. Morgan's securities gains and other income can be attributed to the solid performance of its mortgage-backed investment portfolio. The bank profited from some of the hedges it took out to safeguard the portfolio from a surge in early prepayment of mortgages -- something that's been spurred by low interest rates.

Total net revenue was $7.6 billion, up 12%. Net interest income was $3.21 billion, a gain of 10% over the year-ago period. The bank's retail operation posted operating revenue of $3.74 billion, up 21% from a year ago. The increase was driven by consumer demand for mortgages and auto loans.

In a conference call with analysts, the company trumpeted the first-quarter results as vindication for J.P. Morgan's two-year-old merger with Chase Manhattan, which many on Wall Street had begun to question following last year's dismal performance.

"This is a model that will work and produce superior results," said Marc Shapiro, the bank's vice chairman, in the conference call.

On Wall Street, however, the reaction to J.P. Morgan's earnings was somewhat muted. At midday, the stock was up 13 cents, less than 1%, to $27 a share. The small gains may be due the fact that the bank's stock already is up 17% this year, after falling 44% last year.

But investors also may be holding back because there continue to be some worrisome signs for the bank. On the bad-loan front, a problem that weighed heavily on the bank's earnings last year, J.P. Morgan showed some modest improvement but is by no means out of the woods.

Total nonperforming assets -- loans overdue by 90 days or more -- were $4.39 billion, down 8% from the end of last year, but up 2% from a year ago. Charge-offs for bad commercial loans in the first quarter were $292 million, compared with $320 million a year ago. The bank set aside roughly the same amount of money for bad loans in the latest quarter as it did a year ago. It set aside $743 million for bad loans, down 1% from the year-earlier period.

"We remain cautious about credit," said J.P. Morgan Chief Financial Officer Dina Dublon.

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Shapiro, meanwhile, said the bank is learning from its past mistakes and is moving to diversify its commercial lending portfolio. Many of the bad loans in J.P. Morgan's commercial portfolio have been concentrated in the troubled telecom and energy sectors.

Its venture capital operation, J.P. Morgan Partners, continues to bleed red ink. It posted an operating loss of $224 million in the quarter, continuing a pattern it established all of last year. And bank officials say they don't expect those private equity losses to abate anytime soon.

The bank also continues to deal with the ghost of

Enron

. This week, J.P. Morgan confirmed what many had suspected when it said the

Securities and Exchange Commission

is getting close to taking regulatory action against the bank over its business dealings with Enron.

The bank's Tier 1 Capital Ratio, a measure of a bank's fiscal health and its ability to absorb losses, remains below year-ago levels. At the end of the first quarter it was 8.4%, compared with 8.6% a year earlier. However, it is up from the 8.2% mark set at the end of last year. Bank analysts don't like to see Tier 1 Capital ratios fall much below 8%.

Overall, Wall Street's sentmient about the bank's quarter seems to be that the worst is over for the bank, but hurdles remain. "You can say it's incremental gains. But are happy days here again? No," said David Hendler, an analyst with CreditSights, an independent research firm.

In other bank news,

Wachovia

(WB) - Get Report

earned $1.02 billion, or 76 cents a share, in the first quarter, up from $907 million, or 66 cents a share, a year earlier.

Bank of New York

(WB) - Get Report

, meanwhile, saw its profit fall in the quarter, as it reported that net income fell to $295 million, or 41 cents a share, from $362 million, or 50 cents a share, a year earlier.