J.P. Morgan Posts Loss

Updated from 8:15 a.m. EDT

J.P. Morgan Chase ( JPM) posted a second-quarter loss Wednesday after moving to boost its litigation reserve by $2.3 billion. The nation's second-largest bank is still wrestling with its role in the Enron and WorldCom debacles.

The bank, which recently completed its acquisition of Bank One, lost $548 million, or 27 cents a share in the quarter, compared with a profit of $1.83 billion, or 89 cents a share, a year ago.

J.P. Morgan's decision to bolster its litigation reserve wasn't previously signaled, although the move seemed inevitable after Citigroup ( C), the world's largest financial services firm, set aside even more money for future legal settlements in its second quarter.

But Citigroup managed to produce a $1 billion profit, even after taking a $4.95 billion litigation charge, which included a $2.65 billion payout to WorldCom investors, something J.P. Morgan has yet to do. Like J.P. Morgan, Citigroup also faces a potential mega-settlement to resolve issues over its role in providing funding for some of Enron's shady off balance sheet accounting games.

With today's announcement, J.P. Morgan now has a total of $4.7 billion in litigation reserves, compared to $6.7 billion for Citigroup.

"The regulatory and legal environment continues to be very challenging," said J.P. Morgan Chairman and Chief Executive William Harrison, in a conference call with analysts. "This reserve represents our best judgment."

Excluding the litigation charge, J.P. Morgan said it would have earned $1.81 billion in the quarter, or 85 cents a share. Analysts, according to Thomson First Call, had predicted the bank would earn 83 cents in the quarter.

Investors, focusing more on the bank's operating earnings and news that the merger with Bank One would result in additional cost savings, propelled shares of J.P. Morgan higher in early trading. The stock rose $1.05, or 2.9%, to $37.45.

Bank officials now say they expect to save $3 billion a year from the merger, up from an earlier estimate of $2.2 billion. The company also plans to eliminate an additional 2,000 jobs, bringing the total job losses in the merger to 12,000.

The merger will spell the end for the Bank One name. James Dimon, J.P. Morgan's president and the former Bank One boss, says the investment bank will be known simply as J.P. Morgan, while the retail and credit card operations will be called Chase.

Dimon, who is well regarded on Wall Street and will eventually succeed Harrison as the bank's top executive, said the merged bank won't disappoint investors.

"We will deliver and make this a great company for you,'' he said during the conference call.

In the short-term, however, J.P. Morgan, fell short in some important areas.

Total revenue in the quarter was $8.6 billion, down 4% from a year ago and short of analysts' estimates. First Call had the bank producing $8.9 billion in revenue.

Operating earnings also declined by 1% to $1.81 billion.

Earnings in the investment bank declined by 32% to $703 million, due to a 44% year-over-year decline in trading revenue. The slump in revenue from bond and stock trading was partially offset by a 15% rise in investment banking fees.

Earnings in J.P. Morgan's retail bank, which includes its big mortgage operation, fell 27% from a year ago to $620 million.

The bank's numbers were bolstered by a sharp 53% reduction in its quarterly provision for loan losses, as it continued to put the bad loans of the recession behind it. The provision fell from $405 million a year ago to $203 million.

The bank posted a big improvement in its venture capital division, J.P. Morgan Partners. The division generated $187 million in earnings, compared to a $96 million loss a year ago.

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