updated 10/15/2008 4:16:25 PM ET 2008-10-15T20:16:25

JPMorgan Chase & Co.'s third-quarter profit tumbled 84 percent and Wells Fargo's fell 25 percent, the banks reported on Wednesday.

JPMorgan took big hits from souring mortgage investments, leveraged loans and home loans. Considered one of the stronger players in the current financial meltdown, the New York-based bank came in better than Wall Street anticipated. The company earned $527 million, or 11 cents per share, compared with $3.4 billion, or 97 cents per share, a year earlier. Analysts polled by Thomson Reuters had predicted a loss of 21 cents per share.

Wells Fargo took hits on investments in troubled finance companies and increased its credit reserves, but results were better than analysts had expected. For the July-to-September period, the San Francisco-based bank earned $1.64 billion, or 49 cents per share, compared with $2.17 billion, or 64 cents per share, in the prior-year quarter.

Wells Fargo, whose pending purchase of Wachovia Corp. puts it squarely in the top ranks of U.S. banking, along with Bank of America, JPMorgan Chase and Citigroup, said total revenue rose 5 percent to $10.38 billion. Analysts had expected a profit of 41 cents per share on revenue of $10.96 billion, according to a poll by Thomson Reuters.

JPMorgan's revenue disappoints
JPMorgan's revenue fell below expectations, dropping nearly 20 percent to $14.74 billion from $18.40 billion in the third quarter of 2007. Analysts predicted revenue of $16.01 billion.

JPMorgan's investment bank wrote down $3.6 billion from its mortgage investments and leveraged lending exposures, and boosted loan loss reserves by $1.3 billion to $15.3 billion.

The bank's results also included a charge of $1.2 billion to conform loan loss reserves after buying Washington Mutual Inc.'s banking operations, and a gain of $581 million related to the acquisition.

WaMu — the largest bank to fail in U.S. history — was sold by the Federal Deposit Insurance Corp. to JPMorgan for $1.9 billion late last month. It was JPMorgan's second major acquisition during the credit crisis that has escalated over the past year; in March, JPMorgan bought the ailing investment bank Bear Stearns Cos. in another deal brokered by the government.

JPMorgan saw an after-tax loss of $642 million during the third quarter due to its exposure to Fannie Mae and Freddie Mac, and an after-tax charge of $248 million related to auction-rate securities.

The bank's markdowns and losses were partially offset by double-digit net income growth in the bank's commercial banking and Treasury and securities services businesses. The company also raised $11.5 billion through stock sales during the quarter, and benefited by $927 million, after-tax, from reduced deferred tax liabilities.

"Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expect reduced earnings for our firm over the next few quarters," said Chief Executive Jamie Dimon in a statement. He added, though, that "we feel well-positioned to handle the turbulent environment and, most importantly, to continue to invest in our businesses and serve our clients well."

Write-downs hurt Wells Fargo
As previously announced, Wells Fargo's earnings were hurt by a 13 cents-per-share write-down on investments in Fannie Mae, Freddie Mac and Lehman Brothers. The bank also increased its credit reserves by $500 million, lowering earnings by 10 cents per share, in anticipation of higher losses in several of its consumer credit businesses. Overall, the bank took a $2.5 billion provision against potential bad loans.

The total allowance for credit losses now stands at $8 billion, Wells Fargo said.

Net interest income, or income from loans and deposits, rose 21 percent to $1.1 billion.

During the quarter, the company saw a huge influx of deposits, especially at the end of September, Wells Fargo said. Core deposits increased $23.7 billion, or 30 percent, from June 30. Average loans increased $53.5 billion, or 15 percent, from a year ago, due mostly to growth in commercial loans.

While the bank has decreased indirect lending activity and pared down loans in higher risk categories, Wells Fargo is one of the few continuing to supply credit to existing and new customers in the face of one of the nation's worst credit crises.

"One of the main reasons that other banks have been paring back their lending is lack of liquidity and lack of capital, not necessarily (because of) judgments that the risk is too great," said Chief Financial Officer Howard Atkins in an interview with The Associated Press. "That, in fact, has been why we have been able to grow our loans and increase our market share during this past year, because we have had the financial capacity to do that. We are not going to compromise our underwriting standards."

Wells Fargo's tier-1 capital ratio — a measure of a company's cash versus debt — increased 34 basis points from the second quarter to 8.58 percent. Wells Fargo expects its capital ratio to benefit from the government's planned investment of $25 billion in preferred stock.

Government to invest in Wells Fargo
On Tuesday, the Bush administration announced it will invest $250 billion into the nation's leading banks, including Wells Fargo, in return for a stake in those institutions. The move is designed to stabilize the system and induce banks to lend again. The plan is part of the $750 billion financial rescue package passed by Congress earlier this month.

"This new capital from the government will simply help us do what we've been doing all along — provide credit to consumers and businesses that are creditworthy," Atkins said.

Noninterest income, or income generated from fees and other charges, declined by $575 million from the year-ago quarter, primarily due to fewer net investment gains.

Net charge offs, or loans written off as unpaid, were $2 billion, or 1.96 percent of average loans annualized. Total nonperforming assets were $6.3 billion, or 1.53 percent of loans in the third quarter, up from $5.2 billion, or 1.31 percent, in the second quarter.

Considering the environment, the results were pretty solid overall, said David George, an analyst at Robert W. Baird & Co. "Credit costs were high but I don't think that should surprise people," he said.

Wells Fargo also plans to raise an additional $20 billion from a stock offering. This, combined with the capital investment from the government, will help the bank finance its acquisition of Wachovia.

Wells Fargo-Wachovia deal nears
Wells Fargo expects to close the Wachovia deal — which it won after a hostile battle with Citigroup — by the end of the fourth quarter. Wells' original offer for the Charlotte, N.C.-based bank totaled about $15.1 billion, but it is now valued at about $14.4 billion due to the decline in Wells' stock price since the deal was announced on Oct. 3.

Citigroup had made an earlier bid to aquire Wachovia's banking operations for $2.1 billion with the assistance of the Federal Deposit Insurance Corp. Citigroup later backed out of negotiations with Wells Fargo and regulators after the parties failed to reach an agreement over how to split up Wachovia.

Wells Fargo has said it expects to take a $74 billion hit on Wachovia's $498 billion loan portfolio, but will likely minimize the blow by taking advantage of recently approved tax deductions. The bank expects the deal to add to earnings in the first year, excluding integration costs and other charges.

By combining with Wachovia, Wells Fargo will have total deposits of $787 billion and more than 10,500 locations — more than any of its rivals.

Wells Fargo has been weathering the current credit crisis much better than most of its peers, in spite of its prominence in California, one of the areas hardest hit by the housing bust. This is due in part to its minimal exposure to subprime mortgages. Defaults on those riskier loans skyrocketed in the past year and a half as the housing market crumbled, forcing banks to write down billions in losses.

The Wachovia acquisition could wind up costing Wells Fargo if Citigroup prevails in a lawsuit seeking $60 billion in damages for alleged interference in its agreement with Wachovia.

Wells Fargo shares rose 58 percent during the quarter. They are up 11 percent in 2008, a stark contrast to most bank stocks, which have seen significant double-digit declines this year.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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