JPMorgan Chase & Co. — 2Q10 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The global financial services firm reported approximately $2.0 trillion of assets, $171.1 billion of stockholders’ equity, and operations in more than 60 countries. Its businesses comprise the Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity.
Key financial metrics
| Metric | 2Q10 | 2Q09 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total net revenue | $25.1 billion | $25.6 billion | $52.8 billion | $50.6 billion |
| Net income | $4.8 billion | $2.7 billion | $8.1 billion | $4.9 billion |
| Diluted EPS | $1.09 | $0.28 | $1.83 | $0.68 |
| Noninterest expense | $14.6 billion | $13.5 billion | $30.8 billion | $26.9 billion |
| Provision for credit losses | $3.4 billion | $8.0 billion | $10.4 billion | $16.6 billion |
| ROE | 12% | 3% | 10% | 4% |
Reported net revenue declined 2% year over year in the quarter, primarily because of lower principal transactions revenue and investment banking fees. Six-month revenue increased 4%, supported by higher markets revenue, securities gains and private equity results.
Pre-provision profit was $10.5 billion in the quarter and $22.0 billion for the first half, down 13% and 7%, respectively. The overhead ratio was 58% for both the quarter and first half. Net interest income was $12.7 billion in the quarter and $26.4 billion year to date; the second-quarter net yield on interest-earning assets was 3.06%.
Cash and due from banks totaled $32.8 billion at June 30, 2010. Six-month cash flow from operating activities was $47.6 billion, investing activities provided $73.7 billion, and financing activities used $114.2 billion. Total deposits were $887.8 billion, long-term debt was $248.6 billion, and the deposit-to-loan ratio was 127%.
Total assets were $2.014 trillion, compared with $2.032 trillion at December 31, 2009. Loans were $699.5 billion, securities were $312.0 billion, common stockholders’ equity was $163.0 billion, and total stockholders’ equity was $171.1 billion.
Material changes versus comparable periods
- Net income increased 76% in the quarter and 67% year to date, although the comparisons benefited from the $1.1 billion noncash TARP-related charge recorded in second-quarter and first-half 2009.
- The 2010 quarter included a $1.5 billion reduction in loan-loss reserves, or approximately $0.36 per share, and a $550 million U.K. Bank Payroll Tax charge, or approximately $0.14 per share.
- Credit costs improved materially: the quarterly provision declined 58% and the first-half provision declined 38%. Firmwide reserves were $36.7 billion, with reserves equal to approximately 5.3% of loans excluding purchased credit-impaired loans.
- Noninterest expense rose 8% in the quarter and 14% year to date. Litigation expense was $792 million in the quarter and $3.7 billion year to date; 2009 also included a $675 million FDIC special assessment and merger costs.
- Consumer credit remained stressed despite improving delinquencies. The firmwide net charge-off rate was 3.28% in the quarter and 3.88% year to date; the consumer net charge-off rate was 4.49% and 5.03%, respectively.
- Card Services returned to profitability, reporting $343 million of second-quarter net income versus a $672 million loss in the prior year, but its managed net charge-off rate remained high at 10.20%.
- Retail Financial Services net income increased to $1.0 billion from $15 million, largely because of lower credit provisions. Real Estate Portfolios still reported a $236 million quarterly loss and a $1.5 billion first-half loss.
- Investment Bank quarterly net income declined 6% to $1.4 billion as revenue fell 13%, while first-half net income increased 25% to $3.9 billion. Commercial Banking net income increased 88% to $693 million in the quarter, driven by lower credit costs.
Accounting, capital, liquidity and unusual items
Effective January 1, 2010, new accounting guidance required consolidation of certain credit-card securitization trusts, multi-seller conduits and other securitization entities. Adoption added $87.7 billion of assets and $92.2 billion of liabilities, reduced equity by $4.5 billion, and reduced the Tier 1 capital ratio by 34 basis points. Comparisons with 2009 are therefore affected by classification and balance-sheet changes.
At June 30, 2010, the firm’s Tier 1 capital ratio was 12.1%, total capital ratio was 15.8%, Tier 1 leverage ratio was 6.9%, and Tier 1 common ratio was 9.6%. The firm and its banking subsidiaries were reported as well capitalized. The firm resumed common-stock repurchases during the quarter, buying 3.0 million shares for $135 million.
Management estimated that the CARD Act could reduce annualized Card Services net income by approximately $750 million. Retail Banking overdraft and nonsufficient-funds changes were expected to reduce annualized net income by approximately $700 million by the fourth quarter of 2010. Management expected continued pressure on net interest margin.
Guidance, outlook and risks
- Management expected modest additional downward pressure on third-quarter net interest margin from securities-portfolio repositioning, runoff of higher-yielding loans and the CARD Act.
- Management projected quarterly net charge-offs of approximately $1.0 billion for home equity, $400 million for prime mortgage and $400 million for subprime mortgage over the next several quarters, assuming prevailing delinquency and loss-severity conditions.
- Residential real estate balances were expected to decline approximately 10% to 15% annually for the foreseeable future, potentially reducing 2010 net interest income by up to $1.0 billion versus 2009.
- Card Services average outstandings were expected to decline approximately 15% for 2010, potentially reaching approximately $140 billion by the fourth quarter. The third-quarter card net charge-off rate, excluding Washington Mutual, could be approximately 8.5% if delinquency trends continued to improve.
- Key risks include unemployment and housing-price deterioration, elevated consumer losses, mortgage repurchases and insurance rescissions, litigation, market volatility, credit-rating downgrades, liquidity and counterparty risk, and implementation of the Dodd-Frank Act and future Basel requirements.
- The firm recorded a $2.3 billion repurchase liability at June 30, 2010. Management stated that a hypothetical simultaneous 10% adverse change in key repurchase assumptions could increase the liability by approximately $1.2 billion.
- Litigation expense was significant, but management could not estimate an aggregate range of reasonably possible losses for asserted and probable unasserted claims. The filing states that ultimate losses could materially exceed current reserves and affect results in a particular period.
Investor verification priorities
- Reconcile reported versus managed results, particularly the effects of 2010 VIE consolidation on Card Services revenue, provisions, loans and credit metrics.
- Assess whether reserve releases and improving delinquencies are sustainable, especially in credit cards, home equity, subprime mortgages and Washington Mutual purchased credit-impaired portfolios.
- Monitor mortgage repurchase demands, unresolved mortgage-insurance rescissions, the $2.3 billion repurchase liability and related litigation exposure.
- Evaluate the recurring earnings base excluding reserve releases, securities gains, private equity gains, litigation charges and other unusual items.
- Track implementation of the Dodd-Frank Act, potential CARD Act and overdraft impacts, Basel changes, and their effects on revenue, capital and business structure.
- Review liquidity, funding maturities, rating outlooks and contingent collateral requirements, including $36.1 billion of liquidity commitments potentially affected by a bank downgrade.