By Stephen Gandel
April 13, 2012

Sales were up at the nation’s largest bank in the first quarter of the year.

FORTUNE – Jamie Dimon pulled another rabbit out of his hat. The question is how much longer the CEO can continue to make magic at JPMorgan Chase.

JPMorgan (JPM) earned $5.4 billion in the first three months of the year, driven in part by lower interest rates that produced hundreds of millions of dollars of excess profits in its mortgage division. On a per share basis, JPMorgan’s bottom line came in at $1.31 in earnings. Analysts had been predicting the company would earn $1.15 per share.

Also on Friday morning, Wells Fargo (WFC) said its earnings in the first quarter of the year rose slightly from a year ago to $4.2 billion, also boosted by an uptick in its mortgage sales. The company also said 9% fewer loans went bad in the quarter. Like with JPMorgan, Well’s results were better than expected. JP Morgan and Wells Fargo are the first two of the large banks to report earnings to investors, signalling that at least for now, things seem to be improving in the banking sector.

Still, JPMorgan’s bottom line fell 3% from the $5.6 billion the company produced in profits in the same period a year ago. And there were some signs that problems might be ahead for the nation’s biggest bank. JPMorgan added $2.2 billion to the money it puts aside to pay for future litigation expenses. The company said much of the addition costs were related to its mortgage operations.

On the company’s conference call, one analyst said the company’s foreclosure expectations were too optimistic. Mike Mayo, an analyst at Credit Agricole Securities, questioned whether the company could continue to make money opening branches with interest rates so low. JPMorgan executives said the company’s excess mortgage profits were likely temporary. Dimon said he expects JPMorgan to have “elevated levels of costs and expenses” in its home loan division for “a while longer.” What’s more, at mid-day, JPMorgan’s shares had fallen nearly 3% to $43.58.

Nonetheless, there was a lot of good news at JPMorgan. Revenue in the first quarter was $27.4 billion, which was 24% higher than in the last three months of 2011, and 6% more than what it had in sales a year ago. The positive results were driven by its retail and banking division, where sales jumped 40%. JPMorgan said lower rates encouraged customers to refinancing their home loans, and that it benefited as well from the government’s Home Affordable Refinance Program. In credit cards, sales were up and the company wrote off fewer loans. The company also lowered its provision for card losses by $96 million, which also added to the division’s bottom line. Deposits for both consumers and businesses were up 8%.

The gains in that division were partly offset by a drop in earnings and revenue in the company’s investment banking division from a year ago, though trading profits were up significantly from the fourth quarter. A number of observers have said that profits appear to improving on Wall Street this year. The company said it ranked as the number one investment bank in the country by fees.

CEO Dimon said he was pleased with the results and that the company has continued to strengthen its “fortress balance sheet.” He said he believe housing bottomed, and that his firm’s expectation that foreclosures would drop over the course of the year reflected that. On the conference call, JPMorgan’s CFO Douglas Braunstein was asked about reports that the bank is making large risky bets in its chief investment office. Braunstein said that the trading was hedging purposes and he believed it would be allowed under the Volcker Rule, which was passed as part of the Dodd-Frank financial regulator reform, but has not been implemented. Said Dimon, “Credit trends across our wholesale portfolios were stable and continued to be strong.”

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