mortgage lending

What JPMorgan actually earned in 2013

January 15, 2014: 2:59 PM ET

Jamie Dimon's bank is richer than it looks.

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FORTUNE -- If you caught only a headline or two about JPMorgan Chase in the past year, you probably came away thinking the nation's largest bank had hit a rough patch.

Not so much. On Tuesday, JPMorgan (JPM) said it earned nearly $18 billion in 2013. That's about $3 billion more than the GDP of Jamaica. So yeah, (Jamie Di) Mon.

Nice year, but down from the $21 billion it made the year before. Still, 2013's financials include all the money that JPMorgan had to spend to settle its legal battles, much of which are related to events that took place more than five years ago. The implication is that if you exclude that, the bank's bottom line is actually much, much better.

The problem is legal fees are not the only one-time expense or benefit in JPMorgan's financial statements.

MORE: By one key measure, JPMorgan is lending a lot less than it used to

So what did JPMorgan really make in 2013? Attempting to find that answer shows just how convoluted and opaque bank financial statements can be. That's something all of us should be worried about. How can we know a crisis is coming if we can't tell, without some serious detective work, what a bank made or if it is in trouble? There are simply too many obstacles. But my best attempt at looking behind the curtain tells me that the nation's largest bank had a good year, better than its reported number lets on, though still not much better than 2012.

I did a similar analysis a little over a year ago to show how JPMorgan's $6 billion trading loss seemingly disappeared behind a number of accounting moves. Given the bank's huge legal fees and massive profits, I thought it was worthwhile to repeat the exercise. This time, though, I came to the opposite conclusion.

Start with the $18 billion annual profit. The simplest way to get to the bank's actual earnings should be to add back JPMorgan's $22 billion in legal fines. But you can't do that. Not all of those were paid this year, at least in terms of the bank's accounting. Banks build up legal reserves over time and expense them as they go along. So, some of this year's legal fines were already paid for on the bank's profit and loss statement before 2013 even began.

Of the $22 billion, about half was paid for in 2013. But we're not there yet. Legal fees lower profits, so typically JPMorgan would get a tax benefit from paying them, offsetting some of the cost. Normally, to exclude legal costs, and factor in taxes, we would add back $8 billion, given that JPMorgan's average tax rate is around 28%.

But as part of the punishment, JPMorgan agreed not to take a tax deduction on about $9 billion of the penalties and settlements it paid last year. But before paying out any of this money, JPMorgan had already expensed that cost on its financial statements. And when it did, it assumed that it would be able to get a tax benefit. That lowers the tax write-off that JPMorgan can take on its $11 billion in legal expenses in 2013 by $500 million, making 2013's post-tax legal costs about $8.5 billion. Add that to the $18 billion JPMorgan reported and you get $26.5 billion in profits for 2013.

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On top of that, JPMorgan had other one-time gains and charges: $1.1 billion in gains from selling Visa shares and a building in lower Manhattan, and $1.2 billion in losses from accounting adjustments. Net those out, and its income goes up by $100 million to $26.6 billion.

But some of the profits that JPMorgan did include in its reported number weren't money it actually made in 2013, in the sense that it sold someone a product like a loan and collected a payment for that. JPMorgan, like all banks, has to put away reserves for future potential losses it could have. Sometimes it puts too much away. And it appears that's what happened in the heart of the financial crisis. Now it's taking money out of that account, and when it does, that money goes right to the bottom line. But like the legal costs, that's really a one-time gain. The bank got $5.7 billion from reserve releases in 2013. Take it out, and profits fall to $20.9 billion.

Almost there. JPMorgan lowered the value of its mortgage servicing rights -- the obligation that a bank takes on to collect payments and pass those along on the loans it sells to investors -- by $1.1 billion in 2013. That reflects that the bank expects to get less revenue from that business in the future. It is, after all, issuing fewer mortgages than it did a few years ago. Still, that's not a real expense. So, let's back that out, too.

Our final tally: $22 billion, or 22% more than what the bank said it made.

That's up slightly from last year's reported profits, which, when adjusted in the same way, would have been around $21.8 billion. And it's more than the $21.9 billion that Wells Fargo (WFC), JPMorgan's closest profit rival, said it earned in 2013, though I haven't adjusted that.

The one caveat to all this is that JPMorgan's revenue in 2013 fell for the third year in a row. But it was only down slightly.

In the past year, JPMorgan shelled out tens of billions of dollars in legal fees, and some have questioned why the company's stock price has continued to rise, by over 30% in 2013. One answer: JPMorgan actually had a pretty good year.

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