Two of the nation's largest banks published third quarter earnings today and both credited their respective mortgage businesses for part of their substantial increase in income.  JP Morgan Chase reported record net income of $5.7 billion and Wells Fargo said its income for the quarter was $4.9 billion.

Chase reported Net Revenue of $25.15 billion compared to $22.18 billion in the second quarter and $23.76 billion in the third quarter of 2011.  This represented a net increase in revenue of 13 percent quarter-over-quarter and 6 percent year over year.  Net income of $5.71 billion was 15 percent higher than the $4.96 billion reported in the previous quarter and 34 percent above the $4.26 billion reported a year earlier.  Earnings were $1.40 per share, up from $1.21 in Quarter Two and $1.02 a year earlier.

The banks said "the results showed continued momentum in all business; strong lending in Commercial Banking, Business Banking, Mortgage Banking, and Asset Management."

Mortgage production and servicing generated net income of $563 million, up $358 million compared with the prior year.  There was record pretax income of $1.1 billion from mortgage production, up $594 million from a year earlier.  Mortgage production-related income, excluding repurchase losses, was a record $1.8 billion, an increase of 36 percent from the prior year.  Chase said these results reflected wider margins due to favorable market conditions and higher volumes because of low interest rates and the Home Affordable Refinance Programs (HARP.) 

The financial report includes the following details:

  • Mortgage loan originations were $47.3 billion, up 29% from the prior year and 8% compared with the prior quarter; Retail channel originations (branch and direct-to-consumer) were $25.5 billion, up 14% from the prior year and down 2% compared with the prior quarter.
  • Mortgage loan application volumes were $73.2 billion, up 26% from the prior year and 9% from the prior quarter.
  • Total third-party mortgage loans serviced were $814.8 billion, down 12% from the prior year and 5% from the prior quarter.

Production expense was $678 million, an increase of 37 percent, reflecting higher volumes.  Repurchasing losses dropped from $314 million in 2011 to $13 million although this was an increase of $4 million from the second quarter.

Mortgage servicing had a pretax loss of $159 million compared to a loss of $153 million the previous year.  Servicing revenue was $754 million, up 8 percent from the previous year due to lower mortgage servicing rights asset amortization which was largely offset by lower servicing related revenue.  Servicing expenses increased by $197 million to 1.1 billion.  The current quarter's report includes about $100 million of incremental expense for foreclosure related matters.

Real estate portfolios reported net income of $60 million compared to a net loss of $67 million in 2011.  The increase was due to lower provisions for credit losses.  Net revenue was $1.0 billion, a decrease of 13 percent which was driven by a decline in net interest income from lower loan balances due to portfolio runoff.

Provision for credit losses dropped to $520 million from $899 million in the prior year reflecting a $900 million reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses, primarily in the Home Equity Portfolio. 

Jamie Dimon, Chairman and Chief Executive Officer, said of the companies third quarter results, "The Firm reported strong performance across all our businesses in the third quarter of 2012. Revenue for the quarter was $25.9 billion, up 6% compared with the prior year, or 16% before the impact of DVA. These results reflected continued momentum in all our businesses.

"Importantly, we believe the housing market has turned the corner, Dimon continued.  "In our Mortgage Banking business, we were encouraged that credit trends continued to modestly improve, and, as a result, the Firm reduced the related loan loss reserves by $900 million. Despite this improvement, the absolute level of charge-offs remains elevated. We also expect to see high default-related expense for a while longer. We are acting responsibly to help homeowners and prevent foreclosures, offering nearly 1.4 million mortgage modifications and completing 578,000 since 2009. Credit trends in our credit card portfolio continued to improve, and the wholesale credit environment remained stable."

Wells Fargo's net income of $4.9 billion increased from $4.62 billion in the second quarter, a 27 percent annualized increase.  Net income the previous year was $4.06 billion.   Revenues were $21.21 billion, down slightly from the previous quarter, $21.2 billion compared to $21.3 billion, but well above the $19.63 billion reported a year earlier.  Earnings were $.88 per share compared to $.82 and $.72 in the previous reporting periods.

Total loans were $782.6 billion at September 30, 2012, up $7.4 billion from $775.2 billion at June 30, 2012. Included in this growth was $9.8 billion of 1-4 family conforming first mortgage production retained on the balance sheet.

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

Net interest income was $10.7 billion in third quarter, down from $11.0 billion in second quarter 2012. The decline in net interest income was largely driven by lower income from variable sources, such as fee income and purchased credit-impaired (PCI) loan resolutions which were elevated in the second quarter. In addition, income from the available-for-sale (AFS) securities portfolio declined as the pace of mortgage-backed securities (MBS) pay-downs increased in response to lower interest rates, and we replaced a large portion of the run-off with lower yielding, but shorter duration securities. The income impact of lower levels of long-term securities purchases was partially offset by our retention of $9.8 billion of high-quality, conforming first real estate mortgages.

Wells Fargo Chairman and CEO John Stempf said, "Through the efforts of our more than 265,000 team members, we've now achieved six consecutive quarters of record net income and EPS. By focusing on earning all of our customers' business and providing outstanding service, we continued to generate growth across our diversified set of businesses. In the third quarter, core loans grew by $11.9 billion and we saw continued strength in our mortgage and deposit businesses. We remained diligent in managing costs and continued to have strong underlying credit performance as our loss mitigation efforts and the low interest rate environment helped improve affordability for our customers."