Third-Quarter Earnings Kick-OffJPMorgan Chase ( JPM) and Wells Fargo ( WFC) traditionally begin earnings season for large-cap banks and did so on Friday. But before the party started, SunTrust ( STI) late on Thursday announced a serious of negative mortgage items expected to wipe out roughly half of its third-quarter net income. SunTrust of Atlanta announced over $1 billion in extraordinary third-quarter mortgage related items, a settlement of claims by the Federal Housing Administration, with the bank agreeing to pay $500 million in "consumer relief" and make a $468 million cash payment. SunTrust also announced loan repurchase claim settlements with Fannie Mae ( FNMA) and Freddie Mac ( FNMA), which resulted in cash payments of roughly $268 million after credits for previously repurchased loans were deducted. The bank also was required to pay a $160 million fine to the Federal Reserve under the national mortgage settlement. The bank said it would also take a $96 million charge related to the sale of mortgage servicing rights. The above items were partially offset by a tax benefit of $113 million, following a "taxable reorganization of certain subsidiaries during the third quarter." SunTrust said the multiple items would lower its third-quarter earnings after taxes by $179 million, or 33 cents a share. Prior to the announcement, the consensus among analysts polled by Thomson Reuters was for the bank's third-quarter earnings to come in at $372 million, or 68 cents a share.
JPMorgan Chase's SurpriseThe nation's largest bank by assets early on Friday reported a third-quarter net loss of $380 million, or 17 cents a share, declining from earnings of $6.5 billion, or $1.60 a share in the second quarter, and $5.7 billion, or $1.40 a share, during the third quarter of 2012. Investors knew JPMorgan Chase's earnings would decline, because of the bank's three major regulatory settlements during the third quarter, including an agreement to pay $410 million "in penalties and disgorgement to ratepayers," to settle Federal Energy Trading Commission charges of market manipulation, $920 million in fines to settle multiple probes of the 2012 "London Whale" trading fiasco and another $369 million in fines and customer refunds to settle regulatory charges of " illegal credit card practices." But investors have been waiting for "the big one," which is expected to be a global settlement of multiple criminal and civil investigations of JPMorgan's mortgage lending and sales activities by the Department of Justice, federal regulators and states' attorneys general. Various media reports have estimated the settlement -- possibly delayed by the partial shutdown of the federal government -- could reach as high as $11 billion. JPMorgan took a forward approach by setting aside $9.15 billion for litigation reserves during the third quarter, which lopped of $7.20 billion, or $1.85 a share, from after-tax earnings. The company increased its transparency by reporting its litigation reserves totaled roughly $23 billion as of Sept. 30, with a "range of reasonably possible losses" up to $5.7 billion beyond what is currently reserved. Those are huge figures, but the relatively strong market reaction to the announcement shows that investors are comfortable that further losses will have little effect on JPMorgan's financial performance in 2014. JPMorgan set earnings records over the past three years of $17.4 billion, or $3.96 a share in 2010; $19.0 billion, or $4.48 a share, in 2011; and $21.3 billion, or $5.20 a share, in 2012. JPMorgan's shares were down a penny to close at $52.51. The shares remain among the cheapest for bank stocks, valued at just 8.8 times the consensus 2014 EPS estimate of $5.99, among analysts polled by Thomson Reuters.
Wells Fargo Continues Record StreakWells Fargo is now the nation's most profitable bank, and on Friday posted record earnings of $5.578 billion, or 99 cents a share, for the third quarter. In comparison, the company earned $5.519 billion, or 98 cents a share, in the second quarter, and $4.937 billion, or 88 cents a share, during the third quarter of 2012.
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