JPMorgan Chase & Co. Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. The global financial services firm reported approximately $2.0 trillion of assets, $162.3 billion of stockholders’ equity, and operations in more than 60 countries. Its principal businesses were Investment Banking, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset Management, and Corporate/Private Equity.
Results were significantly affected by the September 2008 acquisition of Washington Mutual’s banking operations and the May 2008 Bear Stearns merger.
Financial performance and key metrics
| Metric | 3Q09 | 3Q08 | 9M09 | 9M08 |
|---|---|---|---|---|
| Total net revenue | $26.6 billion | $14.7 billion | $77.3 billion | $50.0 billion |
| Net income | $3.6 billion | $527 million | $8.5 billion | $4.9 billion |
| Diluted EPS | $0.82 | $0.09 | $1.51 | $1.30 |
| Noninterest expense | $13.5 billion | $11.1 billion | $40.3 billion | $32.2 billion |
| Provision for credit losses | $8.1 billion | $5.8 billion | $24.7 billion | $13.7 billion |
| Pre-provision profit | $13.2 billion | $3.6 billion | $36.9 billion | $17.8 billion |
| Return on common equity | 9% | 1% | 6% | 5% |
- Revenue growth was driven by strong trading results, gains on legacy leveraged-lending and mortgage-related positions, higher net interest income, wider loan spreads, and the Washington Mutual transaction.
- Net interest income increased 42% in the quarter and 55% year to date. The net yield on interest-earning assets was 3.10% in the quarter and 3.15% year to date, compared with 2.73% and 2.68%, respectively, in the comparable 2008 periods.
- Noninterest expense increased 21% in the quarter and 25% year to date, reflecting Washington Mutual-related costs, higher performance-based compensation, mortgage servicing costs, FDIC insurance premiums, and a $675 million FDIC special assessment recorded in the second quarter.
- The effective tax rate was 30.6% in the quarter and 31.3% year to date. The 2008 comparison benefited from releases of deferred tax liabilities related to certain non-U.S. subsidiaries.
- Operating cash flow was $110.9 billion for the first nine months of 2009, compared with $32.4 billion in the prior-year period. Investing activities provided $37.6 billion, while financing activities used $154.6 billion.
Balance sheet, capital, debt and liquidity
- Total assets were $2.041 trillion at September 30, 2009, down from $2.175 trillion at December 31, 2008. Loans declined to $653.1 billion from $744.9 billion, while securities increased to $372.9 billion from $205.9 billion.
- Deposits were $868.0 billion, down from $1.009 trillion at year-end 2008, primarily because wholesale deposits normalized from elevated 2008 levels. Long-term debt was $254.4 billion, and total long-term debt plus trust preferred capital debt securities was $272.1 billion.
- Management stated that unsecured and secured funding capacity was sufficient for on- and off-balance-sheet obligations. Cash and due from banks totaled $21.1 billion at September 30, 2009.
- Regulatory capital remained strong: Tier 1 capital ratio was 10.2%, total capital ratio was 13.9%, Tier 1 leverage ratio was 6.5%, and Tier 1 common capital ratio was 8.2%. The Firm and its significant bank subsidiaries exceeded applicable well-capitalized thresholds.
- The Firm issued $5.8 billion of common stock in June 2009 and redeemed the $25.0 billion of Series K preferred stock issued to the U.S. Treasury under TARP. The redemption produced a one-time noncash reduction of approximately $1.1 billion, or $0.27 per share, in nine-month EPS.
- The quarterly common dividend was reduced to $0.05 per share from $0.38. Management indicated that any increase would depend on economic stabilization and business performance.
Credit quality and material changes
- Nonperforming assets increased to $20.4 billion from $12.7 billion at December 31, 2008, and were more than double the $9.5 billion reported at September 30, 2008.
- The allowance for credit losses increased to $31.5 billion from $23.8 billion at year-end 2008. Excluding purchased credit-impaired loans and Washington Mutual Master Trust loans, allowance coverage increased to 5.28% from 3.62% at year-end 2008.
- Nine-month net charge-offs were $16.8 billion, compared with $6.5 billion in 2008. The reported net charge-off rate was 3.28%, versus 1.70% in the prior-year period.
- Consumer credit remained the principal source of deterioration. The managed credit card net charge-off rate was 10.30% in the quarter and 9.32% year to date, compared with 5.00% and 4.79%, respectively, in 2008.
- Card Services reported a $700 million quarterly loss and a $1.9 billion nine-month loss. Consumer Lending reported a $1.0 billion quarterly loss and a $2.4 billion nine-month loss.
- Investment Bank net income increased to $1.9 billion in the quarter and $5.0 billion year to date, primarily because of strong fixed-income trading and the absence of prior-year markdowns.
- Asset Management had $1.7 trillion of assets under supervision at September 30, 2009, up 7% from the prior year, while Treasury & Securities Services net income declined 26% in the quarter and 20% year to date.
- The Firm recorded a $76 million extraordinary gain from final purchase-accounting refinements related to Washington Mutual, compared with a $581 million extraordinary gain in the third quarter of 2008.
Guidance, outlook, risks and contingencies
- Management remained cautious regarding consumer credit because of high unemployment, declining housing prices, and potential further deterioration in mortgage, home-equity, and credit-card portfolios.
- Management indicated that quarterly net charge-offs could reach approximately $1.4 billion for home equity, $600 million for prime mortgages, and $500 million for subprime mortgages over the following several quarters. Card Services’ managed net charge-off rate could approach 10.5% by the first half of 2010, while the Washington Mutual card portfolio could approach 24%.
- Management expected recent strong Investment Bank trading results to moderate. Corporate quarterly net income, excluding Private Equity, merger-related and significant nonrecurring items, was expected to decline to approximately $500 million and trend lower through 2010.
- Management expected the recently changed overdraft policies to reduce annualized 2010 Retail Banking net income by approximately $500 million. Credit card legislation was expected to reduce annual Card Services net income by approximately $500 million to $750 million; management expected Card Services to report a full-year 2010 net loss.
- Adoption of new consolidation guidance on January 1, 2010 could require consolidation of up to $110 billion of assets and liabilities and reduce the Tier 1 capital ratio by approximately 40 basis points. The ultimate effect could differ materially based on final rules and market conditions.
- Liquidity commitments to special-purpose entities could require approximately $37.6 billion of funding if JPMorgan Chase Bank, N.A. were downgraded below specified short-term ratings. A single-notch downgrade could require approximately $1.5 billion of additional collateral under derivative agreements; a six-notch downgrade could require approximately $4.4 billion.
- Off-balance-sheet lending-related commitments totaled $1.012 trillion, including $668.8 billion of consumer commitments and $343.1 billion of wholesale commitments. Litigation reserves were considered adequate by management, but the filing states that ultimate losses could materially exceed current reserves in individual periods.
Most important facts for investors to verify
- Whether the sharp increase in revenue and earnings is sustainable after separating recurring operating performance from trading gains, spread-related valuation effects, mortgage-servicing results, acquisitions, and other unusual items.
- Subsequent trends in consumer and wholesale net charge-offs, delinquencies, nonperforming assets, allowance coverage, and the performance of Washington Mutual purchased credit-impaired loans.
- The expected impact of January 2010 VIE and securitization consolidation on assets, risk-weighted assets, capital ratios, liquidity, and credit-card funding structures.
- Future capital requirements and shareholder distributions, including the timing of any common-dividend increase, potential warrant activity, and the use of remaining repurchase authorization.
- Exposure from litigation, mortgage repurchase and indemnification obligations, off-balance-sheet commitments, derivative collateral requirements, and credit-rating downgrades.
- The sensitivity of mortgage servicing rights, fair-value assets, trading revenue, and earnings to interest rates, prepayment speeds, market liquidity, credit spreads, unemployment, and housing prices.