JPMORGAN CHASE & CO annual report, FY2012

JPMorgan Chase & Co. — FY2012 Form 10-K Summary

Business context and reporting period

JPMorgan Chase & Co. is a global financial holding company operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management, and Corporate/Private Equity. The filing covers the year ended December 31, 2012; fourth-quarter results are included in the supplementary quarterly data. The Firm reported $2.4 trillion of assets and $204.1 billion of stockholders’ equity at year-end.

Beginning in the fourth quarter, Retail Financial Services and Card Services & Auto were combined into Consumer & Community Banking, while Investment Bank and Treasury & Securities Services were combined into Corporate & Investment Bank. Prior segment information was revised retrospectively.

Financial performance and key metrics

Metric	2012	2011	Change
Total net revenue	$97.0 billion	$97.2 billion	Flat
Noninterest expense	$64.7 billion	$62.9 billion	Up 3%
Pre-provision profit	$32.3 billion	$34.3 billion	Down 6%
Provision for credit losses	$3.4 billion	$7.6 billion	Down 55%
Net income	$21.3 billion	$19.0 billion	Up 12%
Diluted EPS	$5.20	$4.48	Up 16%
Return on common equity	11%	11%	Unchanged
Effective tax rate	26.4%	29.1%	Lower

Revenue was supported by mortgage fees and related income of $8.7 billion, securities gains of $2.1 billion, and other income of $4.3 billion. Net interest income declined to $44.9 billion from $47.7 billion, and the net yield on average interest-earning assets fell to 2.48% from 2.74%.

Noninterest expense increased primarily because of higher compensation and continued investments in the businesses. Reported litigation expense was $5.0 billion, compared with $4.9 billion in 2011, and FDIC-related expense was $1.7 billion, compared with $1.5 billion.

Balance sheet, credit, liquidity and capital

• Total assets increased 4% to $2.36 trillion.
• Loans increased to $733.8 billion from $723.7 billion, driven by wholesale growth, partially offset by consumer portfolio runoff.
• Deposits increased 6% to $1.19 trillion; the deposits-to-loans ratio improved to 163% from 156%.
• Long-term debt declined to $249.0 billion from $256.8 billion, primarily because of trust preferred securities redemptions.
• Common stockholders’ equity increased to $195.0 billion; book value per share was $51.27 and tangible book value per share was $38.75.
• Net charge-offs declined 26% to $9.1 billion, and the net charge-off rate declined to 1.26% from 1.78%.
• The allowance for credit losses declined to $22.6 billion from $28.3 billion. Nonperforming assets were $11.7 billion, up from $11.3 billion, although regulatory reporting changes added approximately $3.0 billion of nonperforming loans.
• Basel I Tier 1 capital was 12.6%, total capital was 15.3%, Tier 1 leverage was 7.1%, and Tier 1 common was 11.0%, compared with 10.1% at year-end 2011. Management estimated a Basel III Tier 1 common ratio of approximately 8.7%.
• Global Liquidity Reserve was estimated at approximately $491 billion, compared with $379 billion at year-end 2011. Management stated that liquidity and funding capacity were sufficient for on- and off-balance-sheet obligations.
• Net cash provided by operating activities was $25.1 billion. Investing activities used $119.8 billion, while financing activities provided $87.7 billion. Cash and due from banks declined $5.9 billion to $53.7 billion.

Material changes versus the prior comparable period

• Net income increased despite essentially flat revenue because credit costs fell substantially, reflecting improved consumer delinquency trends and lower estimated losses.
• Consumer & Community Banking net income rose 71% to $10.6 billion, helped by mortgage production and lower credit costs. Mortgage Banking returned to $3.3 billion of net income from a $2.1 billion loss.
• Corporate & Investment Bank net income increased 5% to $8.4 billion, while Commercial Banking net income increased 12% to $2.6 billion and Asset Management net income increased 7% to $1.7 billion.
• Corporate/Private Equity generated a $2.1 billion net loss versus $822 million of net income in 2011. Treasury and CIO results included $5.8 billion of synthetic credit portfolio losses in the first half and $449 million of losses on retained index credit derivatives in the third quarter.
• The Firm recognized a $1.1 billion pretax gain from the Washington Mutual bankruptcy settlement and $888 million of pretax gains from the extinguishment of trust preferred securities.
• Mortgage fees and related income increased sharply from $2.7 billion to $8.7 billion. MSR risk-management income was $619 million, compared with a $1.6 billion loss in 2011.
• The common dividend increased to $0.30 per share per quarter from $0.25. The Firm repurchased $1.3 billion of common stock and $238 million of warrants in 2012, but voluntarily ceased repurchases after May 17, 2012.

Guidance, outlook, risks and unusual items

• Management expected 2013 net interest income to be generally flat. Deposit spread compression was expected to reduce Consumer & Business Banking annual net income by approximately $400 million, partly offset by deposit growth.
• Management targeted 2013 expense approximately $1 billion below 2012, excluding corporate litigation and foreclosure-related expenses.
• Management expected residential real estate portfolio runoff of approximately 10% to 15% in 2013, reducing annual net interest income by approximately $600 million, while credit cost improvements and lower expenses were expected to offset the decline over time.
• Management expected a quarterly Treasury and CIO net loss of approximately $300 million, subject to yield-curve movements and investment portfolio positioning. Card-related allowance releases could reach up to $1 billion if positive credit trends continued.
• The Firm submitted its 2013 CCAR capital plan on January 7, 2013, and targeted an estimated Basel III Tier 1 common ratio of 9.5% by year-end 2013 and a 100% liquidity coverage ratio by year-end 2013. Capital distributions remained subject to Federal Reserve non-objection.
• The Firm restated first-quarter 2012 results, reducing reported net income by $459 million, because of valuation issues in the CIO synthetic credit portfolio. A material weakness in internal control existed at March 31, 2012, but management stated it was substantially remediated by June 30 and closed by September 30; year-end controls were assessed as effective.
• In January 2013, the Firm entered into Federal Reserve and OCC Consent Orders concerning CIO risk management, model governance, controls, and Bank Secrecy Act/anti-money-laundering processes.
• The January 2013 Independent Foreclosure Review settlement required a $753 million cash payment and $1.2 billion of additional foreclosure-prevention actions. The Firm recorded an approximately $700 million pretax charge in the fourth quarter of 2012.
• Mortgage servicing, foreclosure, mortgage repurchase and private-label securitization matters remain material contingencies. The mortgage repurchase liability was $2.8 billion, with reasonably possible additional losses estimated at up to approximately $0.9 billion.
• The estimated aggregate range of reasonably possible legal losses in excess of recorded reserves was $0 to approximately $6.1 billion at December 31, 2012. Key matters included CIO, mortgage-backed securities, LIBOR, Madoff, Lehman, mortgage servicing, interchange and other regulatory litigation.
• Principal risks include regulatory reform and capital requirements, market and credit volatility, liquidity and ratings downgrades, litigation, mortgage exposures, model and control failures, cyber and operational risks, Eurozone conditions, and competition.

Most important facts for an investor to verify

• Reconcile reported net income and EPS to the $459 million CIO restatement and assess the sustainability of earnings excluding unusual gains, litigation charges and CIO losses.
• Review the quality and persistence of the $5.7 billion reduction in the credit-loss allowance and the effect of regulatory changes on nonperforming loans and charge-offs.
• Assess remaining mortgage servicing, foreclosure, private-label securitization and repurchase exposures, including the $2.8 billion repurchase liability and possible additional losses.
• Evaluate the effect of Basel 2.5, Basel III, the 2.5% GSIB surcharge, liquidity rules and CCAR approval on capital distributions, returns and business mix.
• Monitor execution of the CIO and BSA/AML Consent Orders and whether further regulatory actions, fines or remediation costs arise.
• Examine funding and liquidity sensitivity to credit-rating downgrades, derivative collateral calls and contingent obligations, including $1.03 trillion of lending-related commitments.
• Determine whether mortgage production margins, deposit spreads, consumer credit trends and portfolio runoff develop as management projected for 2013.