JPMorgan Chase & Co. 2013 Q1 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm with businesses in consumer and community banking, investment banking, commercial banking, asset management and private equity. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012, and provides balance-sheet comparisons with December 31, 2012.
At March 31, 2013, the Firm reported approximately $2.4 trillion of assets, $207.1 billion of stockholders’ equity and 255,898 employees.
Financial performance and key metrics
| Metric | 1Q13 | 1Q12 | Change |
|---|---|---|---|
| Total net revenue | $25.1 billion | $26.1 billion | Down 4% |
| Net interest income | $10.9 billion | $11.7 billion | Down 6% |
| Noninterest revenue | $14.2 billion | $14.4 billion | Down 1% |
| Pre-provision profit | $9.7 billion | $7.7 billion | Up 26% |
| Provision for credit losses | $617 million | $726 million | Down 15% |
| Net income | $6.5 billion | $4.9 billion | Up 33% |
| Diluted EPS | $1.59 | $1.19 | Up 34% |
| Return on common equity | 13% | 11% | Improved |
| Overhead ratio | 61% | 70% | Improved |
Net income applicable to common stockholders was $6.1 billion. Book value per share was $52.02 and tangible book value per share was $39.54. The common dividend declared was $0.30 per share.
- Net cash provided by operating activities was $20.0 billion, compared with $4.3 billion in the prior-year quarter.
- Net cash used in investing activities was $55.5 billion, primarily reflecting increased deposits with banks and other balance-sheet deployment of excess funds.
- Net cash provided by financing activities was $28.2 billion, driven by long-term borrowing, secured financing, commercial paper and preferred-stock issuance, partly offset by common-stock repurchases and dividends.
- Cash and due from banks were $45.5 billion at March 31, 2013, down from $53.7 billion at December 31, 2012.
- Total assets were $2.389 trillion, up from $2.359 trillion at year-end 2012. Deposits were $1.203 trillion and long-term debt was $268.4 billion.
- Loans were $728.9 billion, down from $733.8 billion at December 31, 2012. The deposits-to-loans ratio was 165%.
- Allowance for credit losses was $21.5 billion, down from $22.6 billion at year-end. Nonperforming assets were $11.6 billion.
Business segment results
| Segment | 1Q13 net income | Year-over-year change | Key factors |
|---|---|---|---|
| Consumer & Community Banking | $2.6 billion | Down 12% | Lower mortgage revenue and net interest income, partly offset by lower expenses and credit costs |
| Corporate & Investment Bank | $2.6 billion | Up 28% | Higher revenue, favorable DVA comparison and lower expenses |
| Commercial Banking | $596 million | Up 1% | Loan growth and lower credit provision offset by higher expenses |
| Asset Management | $487 million | Up 26% | Client inflows, higher markets and performance fees |
| Corporate/Private Equity | $250 million | Compared with a $1.0 billion loss | Prior-year litigation and Washington Mutual settlement effects; current-quarter private-equity valuation losses |
Mortgage originations were $52.7 billion, up 37% from the prior year, but Mortgage Banking net income declined 31% to $673 million because of lower production margins, mortgage servicing revenue and MSR risk-management results. Asset Management reported record assets under supervision of $2.2 trillion and $31.0 billion of net long-term product flows.
Material changes versus the prior comparable period
- Revenue declined despite higher principal-transactions revenue. The prior-year period included a $1.1 billion Washington Mutual bankruptcy-settlement benefit, while 2013 benefited from the absence of $1.4 billion of CIO synthetic-credit losses and included a $126 million DVA gain versus a $907 million DVA loss in 2012.
- Net interest income declined because of low interest rates, lower loan yields, portfolio runoff, lower securities yields and limited reinvestment opportunities. The managed net interest yield fell to 2.37% from 2.61%.
- Noninterest expense fell $2.9 billion, primarily because the prior year included $2.7 billion of additional litigation reserves and approximately $200 million of foreclosure-related expense. Current-quarter litigation expense was $347 million.
- Credit trends improved. Net charge-offs declined to $1.7 billion from $2.4 billion, and the Firm’s reported net charge-off rate fell to 0.97% from 1.35%.
- Consumer credit drove a $1.2 billion reduction in the allowance for loan losses, reflecting improved delinquencies and home prices. The credit-card allowance reduction was approximately $500 million and the Real Estate Portfolios reduction was $650 million.
- Basel 2.5 implementation increased risk-weighted assets by approximately $150 billion and reduced the Firm’s Tier 1, total capital and Tier 1 common ratios by approximately 140, 160 and 120 basis points, respectively.
Guidance, outlook, risks and unusual items
- Management expected full-year 2013 net interest income to be approximately 1% below 2012 and total noninterest expense to be approximately $1 billion lower, excluding Corporate litigation and foreclosure-related expenses in both years.
- Management expected continued mortgage default, foreclosure and servicing costs, elevated mortgage repurchases and ongoing uncertainty around mortgage-related litigation. The Firm believed its $2.7 billion mortgage repurchase liability was sufficient for probable GSE-related losses, but estimated reasonably possible losses above the reserve at up to approximately $0.9 billion.
- Management indicated that the Card allowance could decline by approximately $1 billion during 2013, including the $500 million reduction recorded in the first quarter, if credit trends continued to improve.
- Management expected Treasury and CIO could generate a quarterly net loss of approximately $300 million during 2013, with significant variability based on the yield curve and securities-portfolio positioning.
- The Federal Reserve did not object to the 2013 capital plan but required an additional capital plan addressing identified weaknesses in capital-planning processes. The Federal Reserve could require modifications to capital distributions.
- The Board announced an intended increase in the quarterly common dividend to $0.38 per share beginning with the second-quarter 2013 dividend and authorized up to $6 billion of common-equity repurchases through the end of the first quarter of 2014.
- At March 31, 2013, Basel I Tier 1 common capital was $143.3 billion and the Tier 1 common ratio was 10.2%; management estimated the Basel III Tier 1 common ratio at approximately 8.9% and targeted approximately 9.5% by year-end 2013.
- The Firm reported strong liquidity, with estimated high-quality liquid assets of approximately $413 billion and a deposits-to-loans ratio of 165%. Liquidity and funding remain sensitive to market conditions and credit-rating changes.
- Regulatory and legal risks remained material. The Firm was subject to Consent Orders involving Bank Secrecy Act/anti-money-laundering controls and CIO risk management and governance. Aggregate reasonably possible legal losses in excess of established reserves were estimated at up to approximately $6.0 billion.
- Subsequent events included a $1.5 billion preferred-stock issuance on April 23, 2013, and redemption of approximately $5.0 billion of trust preferred securities on May 8, 2013.
Most important facts for investors to verify
- Whether credit improvement and allowance releases are sustainable or are providing a temporary earnings benefit.
- Mortgage repurchase, servicing, foreclosure and private-label securitization litigation exposures, including the stated potential excess loss range.
- Progress on the additional Federal Reserve capital plan and any effect on dividends or share repurchases.
- The effect of Basel III implementation, higher risk-weighted assets and the Firm’s targeted capital ratios.
- Underlying CIB performance excluding DVA and other market-sensitive valuation effects.
- Mortgage Banking profitability, MSR valuation sensitivity, prepayment assumptions and production-margin trends.
- Future litigation, regulatory, LIBOR, MBS, CIO, AML and mortgage-related developments.
- Liquidity resilience under credit-rating downgrades, market stress and potential funding requirements related to derivatives, VIEs and off-balance-sheet commitments.