5 Takeaways From JPMorgan Chase Earnings (Update 3)

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(JPMorgan earnings updated with information and management commentary throughout.)

NEW YORK (TheStreet) -- JPMorgan Chase said strong investment banking results and an improvement in mortgage banking revenues powered profit in the first quarter.

The nation's largest bank by assets and deposits reported net income on a managed basis of $5.38 billion, or $1.31 per share, down slightly from $5.55 billion, or $1.29 a share, in the year-ago quarter. In the fourth quarter, the bank posted a net income of $3.7 billion, or 90 cents a share.

Profits included several one-off items including a $1.8 billion pretax benefit from reduced loan-loss reserves, a $1.1 billion pretax benefit from WaMu's bankruptcy settlement, which was offset by a $2.5 billion pretax expense for additional litigation reserves and a debt valuation adjustment loss of $900 million, an accounting loss incurred from tightening spreads on the bank's own debt.

Excluding items, "core" earnings per share were $1.39.

Revenue came in at $27.4 billion, up 6% from the year-earlier quarter and 24% over the previous quarter.

Analysts were expecting earnings per share of $1.18 on revenue of $24.68 billion.

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"We are pleased that our results for the quarter reflected positive credit trends for our consumer real estate and credit card portfolios," CEO Jamie Dimon said in a statement. "However, with respect to our Mortgage Banking business, we expect to see elevated levels of costs and losses associated with mortgage-related issues for a while longer. Credit trends across our wholesale portfolios were stable and continued to be strong."

Here are five headline numbers from JPMorgan's earnings.

1. Trading Revenue Rebounds: As was widely expected, JPMorgan reported a solid rebound in fixed income trading from the fourth quarter, with debt market activity picking up in the early part of the year.

Revenue from the trading of fixed income, currency and commodities -- known as FICC -- came in at $4.66 billion, down 8% from the year-ago quarter, but up 87% from the dismal fourth quarter revenue of $2.49 billion.

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Ex-DVA, fixed income revenue was up 91% sequentially at $5 billion.

Fixed income trading accounted for about 60% of the bank's investment banking revenue in 2011.

Equity trading revenue came in at $1.29 billion, down 8% from the year-ago quarter but up 66% from the fourth quarter.

Excluding DVA, equity revenue was up 77% sequentially and 2% year on year.

However, lackluster M&A activity was a drag on advisory revenue, which declined 29% from the fourth quarter and 34% from the year-ago quarter to $281 million.

Equity and debt underwriting fees declined 27% and 16% respectively from the year-ago quarter but were up 63% and 48% respectively on a sequential basis.

CEO Jamie Dimon has said that investors should expect the trading and investment banking business to be volatile, but declared in an investor presentation earlier this year that the weakness in trading and investment banking is purely "cyclical" and not "secular."

Other bank execs have not been quite as quick to weigh in on the cyclical versus secular debate.

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2. Loan Growth Continues but at Slower Clip: The bank continues to see loan growth in commercial banking and business banking, but overall loan growth was flattish.

End of period loan balances at the commercial banking segment rose 16% from the prior year to $115.8 billion.

End-of-period business banking loans were $17.8 billion, up 5% from the year-ago quarter and 1% from the fourth quarter.

However, total loans were flat versus the fourth quarter, with credit card loans declining 5% and other consumer loans dipping 1%.

3. Mortgage Banking Revenue Booms: The bank reported mortgage fees and related services income of $2.01 billion in the first quarter, up 177% from $725 million in the previous quarter. In the year-ago quarter, the bank posted a mortgage banking loss of $487 million.

Mortgage loan originations were $38.4 billion, up 6% from the year-ago quarter and flat from the previous quarter; Retail originations (branch and direct to consumer) were $23.4 billion, up 11% from the prior year and flat from the previous quarter.

Mortgage banking was expected to be strong, as lower mortgage rates and changes to the government's HARP program has boosted refinancing activity. Mortgage loan volume applications up 33% from the prior year.

However, Dimon noted elevated costs and losses in its mortgage business. The bank also took a $2.5 billion reserve for additional mortgage-related matters.

Management said during a media conference call that it was "conservatively and comprehensively" reserved for mortgage litigation matters.

4. Expenses Spiral Higher: Total non-interest expense rose 15% to $18.345 billion from the year-ago quarter. The bank's overhead ratio- non interest expense as a percent of revenue- was 69%, compared to 63% in the year-ago quarter.

Net of the $2.5 billion litigation expense, expenses was $15.85 billion which was more or less flat.

Management said during the analyst conference call that it expects expenses to come down over time.

5. Capital Ratios Robust: JPMorgan ended the first quarter with Basel 1 Tier 1 Capital ratio of 10.4% and an estimated Basel III Tier 1 Capital ratio of 8.4%.

The bank passed the Federal Reserve's annual stress tests with flying colors, announcing a a quarterly dividend increase of 20% to 30 cents a share and a $15 billion share buyback program.

In his annual letter, Dimon said the bank might be less inclined to buy back shares when they trade at levels above $45.

"We will repurchase equity as deemed appropriate relative to our organic growth, investment opportunities, capital retention needs, and the stock price," the company said in its statement following the earnings release.

In the analyst conference call, Dimon said the management will wait until they know more about capital rules before they consider alternative capital deployment strategies such as a special dividend.

--Written by Shanthi Bharatwaj in New York

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