JPMorgan Posts Red Ink on $9.2B in Legal Costs

JPMorgan Chase (NYSE:JPM) on Friday reported its first loss during chief executive Jamie Dimon’s tenure, as the nation’s largest bank suffered under the weight of $9.2 billion in third-quarter legal expenses.

The New York-based company hadn’t seen red ink since Dimon came on board after the 2004 merger of J.P. Morgan and Bank One.

That winning streak ended with a third-quarter loss of $380 million, after JPMorgan racked up massive legal costs in the face of regulatory scrutiny.

On a per-share basis, J.P. Morgan’s loss was 17 cents. That compared to a year-ago profit of $5.71 billion, or $1.40 a share. The third quarter included a net loss of $1.85 a share related to legal expenses. The same period last year saw a net gain of four cents tied to reduced mortgage loan reserves and other items.

Excluding litigation costs and other one-time items, the company’s adjusted profit was $5.82 billion, or $1.42 a share, in the latest quarter.

Net revenue fell 7.7% to $23.88 billion. Total non-interest expense jumped 54% to $23.63 billion.

The bank did beat Wall Street’s earnings estimate of $1.17 a share, although analysts anticipated slightly better revenue of $23.94 billion.

Shares were trading 1% higher at $53.08 in early morning trading Friday. The stock had already gained 19.5% on the year through Thursday’s close.

'Painful' Legal Expenses

JPMorgan said it currently has $23 billion reserved for settlements, fines and other legal expenses. That figure, which was previously undisclosed, includes the legal expenses incurred in the third quarter.

The third-quarter charge of $9.2 billion, or $7.2 billion after taxes, includes money set aside for future settlements.

The bank reported just $684 million in legal costs last year, and $600 million in the second period.

“We appreciate the litigation expense of $9.2 billion is much more significant than you’ve been expecting,” JPMorgan Chief Financial Officer Marianne Lake said during a conference call with analysts. “It’s much more significant that we expected until recently.”

JPMorgan is battling several regulatory fronts, including probes related to the sale of mortgage-backed securities.

The bank is currently in discussions with the U.S. Department of Justice about a potential settlement that would end several investigations on the federal and state level.

Dimon said the bank is not considering any management changes as a result of the litigation charge, adding the company is “a lot closer” to getting through its legal problems.

“I wish we could reduce the uncertainty for investors,” said Dimon, who called the legal charge “painful.”

More Clouds on the Horizon in Mortgage Origination 

Meanwhile, third-quarter revenue from fixed income markets slid 7.7% to $3.44 billion, and equity markets revenue surged 20% to $1.25 billion.

Mortgage loan originations were down 14% at $40.5 billion, a 17% decline sequentially.

JPMorgan has cautioned that it will likely lose money on its mortgage-origination business in the second half, with mortgage originations on pace to tumble 40% versus the first half.

But mortgage banking profit rose 14% to $705 million, partly due to lower non-interest expense.

The bank also saw positive signs from consumers and businesses. Average loan balances in the commercial banking unit increased 8% year-over-year to $131.6 billion, and commercial banking posted a $665 million profit, down 3.6% from last year but up 7.1% sequentially.

JPMorgan's consumer and community banking segment, a business that deals with customers who have checking accounts and credit cards, logged a profit of $2.7 billion, up 15% year-over-year but down 13% versus the prior quarter.