Strong Mortgage Production Leads to Record Profits at JP Morgan and Wells

by devteam October 12th, 2012 | Share

Two of the nation’s largest banksrnpublished third quarter earnings today and both credited their respectivernmortgage businesses for part of their substantial increase in income.  JP Morgan Chase reported record net income ofrn$5.7 billion and Wells Fargo said its income for the quarter was $4.9 billion.</p

Chase reported Net Revenue of $25.15rnbillion compared to $22.18 billion in the second quarter and $23.76 billion inrnthe third quarter of 2011.  Thisrnrepresented a net increase in revenue of 13 percent quarter-over-quarter and 6rnpercent year over year.  Net income ofrn$5.71 billion was 15 percent higher than the $4.96 billion reported in thernprevious quarter and 34 percent above the $4.26 billion reported a yearrnearlier.  Earnings were $1.40 per share,rnup from $1.21 in Quarter Two and $1.02 a year earlier.</p

The banks said “the results showedrncontinued momentum in all business; strong lending in Commercial Banking,rnBusiness Banking, Mortgage Banking, and Asset Management.” </p

Mortgage production and servicingrngenerated net income of $563 million, up $358 million compared with the priorrnyear.  There was record pretax income ofrn$1.1 billion from mortgage production, up $594 million from a yearrnearlier.  Mortgage production-related income,rnexcluding repurchase losses, was a record $1.8 billion, an increase of 36rnpercent from the prior year.  Chase saidrnthese results reflected wider margins due to favorable market conditions andrnhigher volumes because of low interest rates and the Home Affordable RefinancernPrograms (HARP.)  </p

The financial report includes thernfollowing details:</p<ul class="unIndentedList"<liMortgagernloan originations were $47.3 billion, up 29% from the prior year and 8%rncompared with the prior quarter; Retail channel originations (branch andrndirect-to-consumer) were $25.5 billion, up 14% from the prior year and down 2%rncompared with the prior quarter.</li<liMortgagernloan application volumes were $73.2 billion, up 26% from the prior year and 9%rnfrom the prior quarter.</li<liTotalrnthird-party mortgage loans serviced were $814.8 billion, down 12% from thernprior year and 5% from the prior quarter.</li</ul

Production expense was $678 million, anrnincrease of 37 percent, reflecting higher volumes.  Repurchasing losses dropped from $314 millionrnin 2011 to $13 million although this was an increase of $4 million from thernsecond quarter.</p

Mortgage servicing had a pretax loss ofrn$159 million compared to a loss of $153 million the previous year.  Servicing revenue was $754 million, up 8rnpercent from the previous year due to lower mortgage servicing rights asset amortizationrnwhich was largely offset by lower servicing related revenue.  Servicing expenses increased by $197 millionrnto 1.1 billion.  The current quarter’srnreport includes about $100 million of incremental expense for foreclosurernrelated matters.</p

Real estate portfolios reported netrnincome of $60 million compared to a net loss of $67 million in 2011.  The increase was due to lower provisions forrncredit losses.  Net revenue was $1.0rnbillion, a decrease of 13 percent which was driven by a decline in net interestrnincome from lower loan balances due to portfolio runoff. </p

Provision for credit losses dropped torn$520 million from $899 million in the prior year reflecting a $900 millionrnreduction in the allowance for loan losses due to improved delinquency trends andrnlower estimated losses, primarily in the Home Equity Portfolio.  </p

Jamie Dimon, Chairman and Chief Executive Officer, said of the companiesrnthird quarter results, “The Firm reported strong performance across allrnour businesses in the third quarter of 2012. Revenue for the quarter was $25.9rnbillion, up 6% compared with the prior year, or 16% before the impact of DVA.rnThese results reflected continued momentum in all our businesses. </p

“Importantly, we believe the housing market has turned the corner,rnDimon continued.  “In our MortgagernBanking business, we were encouraged that credit trends continued to modestlyrnimprove, and, as a result, the Firm reduced the related loan loss reserves byrn$900 million. Despite this improvement, the absolute level of charge-offsrnremains elevated. We also expect to see high default-related expense for arnwhile longer. We are acting responsibly to help homeowners and prevent foreclosures,rnoffering nearly 1.4 million mortgage modifications and completing 578,000 sincern2009. Credit trends in our credit card portfolio continued to improve, and thernwholesale credit environment remained stable.”</p

Wells Fargo’s net income of $4.9 billion increased from $4.62 billion in thernsecond quarter, a 27 percent annualized increase.  Net income the previous year was $4.06rnbillion.   Revenues were $21.21 billion, downrnslightly from the previous quarter, $21.2 billion compared to $21.3 billion,rnbut well above the $19.63 billion reported a year earlier.  Earnings were $.88 per share compared to $.82rnand $.72 in the previous reporting periods. </p

Total loans were $782.6 billion at September 30, 2012, up $7.4 billion fromrn$775.2 billion at June 30, 2012. Included in this growth was $9.8 billion ofrn1-4 family conforming first mortgage production retained on the balance sheet. </p

Mortgage banking noninterest income was $2.8 billion, down $86 million fromrnsecond quarter 2012, on $139 billion of originations, compared with $131rnbillion of originations in second quarter. During the third quarter, thernCompany retained on balance sheet 1-4 family conforming first mortgage loans,rnforgoing approximately $200 million of fee revenue that could have beenrngenerated had the loans been originated for sale during the quarter along withrnother agency conforming loan production. The Company provided $462 million forrnmortgage loan repurchase losses, compared with $669 million in second quarterrn(included in net gains from mortgage loan origination/sales activities). Net MSRsrnresults were $142 million, compared with $377 million in second quarter due tornMSR valuation adjustments made in the third quarter for increased servicing andrnforeclosure costs. The ratio of MSRs to related loans serviced for others wasrnat a historical low of 63 basis points and the average note rate on thernservicing portfolio was 4.87 percent. The unclosed pipeline at September 30,rn2012 was $97 billion, compared with $102 billion at June 30, 2012.</p

Net interest income was $10.7 billion in third quarter, down from $11.0rnbillion in second quarter 2012. The decline in net interest income was largelyrndriven by lower income from variable sources, such as fee income and purchasedrncredit-impaired (PCI) loan resolutions which were elevated in the secondrnquarter. In addition, income from the available-for-sale (AFS) securitiesrnportfolio declined as the pace of mortgage-backed securities (MBS) pay-downsrnincreased in response to lower interest rates, and we replaced a large portionrnof the run-off with lower yielding, but shorter duration securities. The incomernimpact of lower levels of long-term securities purchases was partially offsetrnby our retention of $9.8 billion of high-quality, conforming first real estaternmortgages.</p

Wells Fargo Chairman and CEO John Stempf said, “Through the efforts of ourrnmore than 265,000 team members, we’ve now achieved six consecutive quarters ofrnrecord net income and EPS. By focusing on earning all of our customers’rnbusiness and providing outstanding service, we continued to generate growthrnacross our diversified set of businesses. In the third quarter, core loans grewrnby $11.9 billion and we saw continued strength in our mortgage and depositrnbusinesses. We remained diligent in managing costs and continued to have strongrnunderlying credit performance as our loss mitigation efforts and the lowrninterest rate environment helped improve affordability for our customers.”

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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