JPMorgan's Earnings: 3 Important Takeaways

On Friday, the nation's largest bank by assets, JPMorgan Chase (JPM 0.65%), became the second component of the Dow Jones Industrial Average (^DJI 0.06%) to report third-quarter earnings. Unlike Alcoa (AA), which unofficially kicked off earnings season Tuesday with mixed results, JPMorgan pounded the consensus estimates on both the top and bottom lines.

Source: The Wall Street Journal.

In no particular order, here are the three most important takeaways from JPMorgan's earnings release.

1. Housing is recovering
As my colleague Matt Koppenheffer observed: "When JPMorgan's CEO Jamie Dimon speaks, people tend to listen." It's for this reason that virtually every major financial publication perked up when Dimon asserted that "the housing market has turned the corner."

Even though this assertion shouldn't come as a surprise, as macroeconomic data has suggested a turnaround has been under way for months now, what made it particularly notable were the numbers to back it up at both JPMorgan and Wells Fargo (WFC 2.73%), the nation's third largest bank by assets and the largest mortgage originator, which also reported on Friday.

In JPMorgan's case, mortgage banking originations were $47 billion in the third quarter, a 29% increase over the same quarter last year. In Wells Fargo's case, the figure came in at an astounding $139 billion, a shocking 56% year-over-year improvement.

2. Credit quality is improving
If there's one thing that would jump-start a more robust economic recovery, it's a dramatic improvement in credit quality. Since the financial crisis, many of the nation's largest banks have been suffocating under the crushing weight of toxic loan portfolios and massive repurchase claims from past purchasers of defectively originated loans.

While this problem remains far from resolved, both JPMorgan and Wells Fargo's results demonstrate that banks are moving in the right direction. According to Dimon: "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."And as I noted yesterday with respect to Wells Fargo, excluding the impact of new regulatory guidance from the Office of the Comptroller of the Currency, net charge-offs at the California-based lender decreased sequentially by 19% and nonaccrual loans fell by 5%.

3. Investment options are dwindling
The final notable takeaway is that, as the Federal Reserve has fought to drive down interest rates, attractively yielding investment alternatives are in increasingly short supply.

Again, as fellow Fool Matt Koppenheffer pointed out, JPMorgan's press release highlighted this by referring to "limited investment opportunities." Throughout the quarter, moreover, Wells Fargo chose to keep a significant portion of residential mortgages on its books rather than securitize them for the same reason, as the latter yield significantly less than the former thanks to the Fed's third round of quantitative easing.

As a result, banks are seeing their net interest margin -- the difference between their yield on interest-earning assets and cost of funds -- contracting. JPMorgan's NIM decreased by 4 basis points in the quarter, while Wells Fargo's plummeted by 25.

In addition, nonbank financial institutions are beginning to feel the reverberations. In its third-quarter market commentary, for example, the mREIT Annaly Capital Management (NLY 0.61%) discussed the demand pressure in the residential mortgage-backed securities market caused by the Fed's intervention. This will only be heightened by supply pressures as mortgage originators like Wells Fargo choose to retain home loans on their books as opposed to feeding the supply chain.