JPMorgan Chase & Co. — 2Q11 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm operating through Investment Banking, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, with comparisons to the corresponding 2010 periods. The filing was dated August 5, 2011.
Financial performance and condition
| Metric | 2Q11 | 2Q10 | 6M11 | 6M10 |
|---|---|---|---|---|
| Total net revenue | $26.8 billion | $25.1 billion | $52.0 billion | $52.8 billion |
| Net income | $5.4 billion | $4.8 billion | $11.0 billion | $8.1 billion |
| Diluted EPS | $1.27 | $1.09 | $2.55 | $1.83 |
| Provision for credit losses | $1.8 billion | $3.4 billion | $3.0 billion | $10.4 billion |
| Noninterest expense | $16.8 billion | $14.6 billion | $32.8 billion | $30.8 billion |
| Return on common equity | 12% | 12% | 13% | 10% |
- Second-quarter net income increased 13%, while first-half net income increased 35%. Results benefited substantially from lower credit costs, higher principal transactions revenue, investment banking fees and asset-management revenue.
- Net interest income declined 7% in the quarter and 10% year to date. The net yield on average interest-earning assets was 2.72% in 2Q11 versus 3.06% in 2Q10.
- The overhead ratio increased to 63% in 2Q11 from 58% in 2Q10, reflecting higher litigation, foreclosure-related and other operating costs.
- At June 30, 2011, total assets were $2.25 trillion, loans were $689.7 billion, deposits were $1.05 trillion, long-term debt was $279.2 billion and total stockholders’ equity was $182.9 billion.
- Net cash provided by operating activities for the first half was $58.7 billion, compared with $45.7 billion in the prior-year period. Investing activities used $145.8 billion, largely because of increased deposits with banks, while financing activities provided $89.3 billion, principally from deposit growth and borrowings.
- The estimated Global Liquidity Reserve was approximately $404 billion, compared with $262 billion at December 31, 2010. Management described liquidity and funding capacity as strong. The deposits-to-loans ratio was 152%.
- Capital remained strong: Basel I Tier 1 capital ratio was 12.4%, Tier 1 common ratio was 10.1%, total capital ratio was 15.7% and Tier 1 leverage ratio was 7.0%. Management estimated a Basel III Tier 1 common ratio of approximately 7.6%.
Material changes versus comparable periods
- Credit quality improved materially. Net charge-offs declined to $3.1 billion in 2Q11 from $5.7 billion in 2Q10, and the annualized net charge-off rate declined to 1.83% from 3.28%. Nonperforming assets declined to $13.2 billion from $18.2 billion at June 30, 2010.
- The allowance for credit losses declined to $29.1 billion from $36.7 billion a year earlier and $33.0 billion at December 31, 2010. The credit-card allowance was reduced by approximately $1.0 billion in the quarter and $3.0 billion in the first half.
- Investment Bank net income increased 49% in 2Q11 to $2.1 billion, supported by 37% higher investment banking fees and solid markets revenue.
- Retail Financial Services net income decreased 44% to $582 million in the quarter and 59% to $374 million for the first half, primarily because foreclosure, mortgage-servicing and litigation costs more than offset improved credit results.
- Card Services net income increased to $911 million from $343 million in 2Q10, despite a 7% decline in revenue, mainly because of lower credit losses. The portfolio reflected continued runoff and the April 1, 2011 sale of the $3.7 billion Kohl’s portfolio.
- Commercial Banking revenue reached a record $1.6 billion, but net income declined 12% because the prior-year period included a credit provision benefit; period-end loans increased 7% year over year.
- Mortgage servicing rights declined to $12.2 billion from $13.6 billion at year-end 2010. The first-half valuation decline included a $1.1 billion reduction resulting from higher estimated servicing costs and regulatory compliance requirements.
Guidance, outlook, risks and unusual items
- Management expected mortgage production and margins to weaken if mortgage rates remained at or rose above current levels. Realized mortgage repurchase losses were estimated at approximately $1.2 billion on an annualized basis for the remainder of 2011.
- Mortgage-related noninterest expense was expected to remain elevated because of servicing enhancements, foreclosure procedures and regulatory Consent Orders. Additional foreclosure-related fees, assessments and settlement costs remained possible.
- Management expected residential real-estate portfolio net charge-offs of approximately $1.2 billion per quarter and annual portfolio runoff of approximately 10% to 15% for the foreseeable future.
- Key 2Q11 unusual items included a $1.0 billion pretax Card Services reserve-release benefit, an $837 million pretax securities gain in Corporate, a $1.0 billion pretax foreclosure-related expense in Retail Financial Services and $1.3 billion of additional litigation reserves, predominantly mortgage-related.
- The recorded mortgage repurchase liability was $3.6 billion. Management estimated reasonably possible additional repurchase losses of up to approximately $2.2 billion beyond recorded reserves, although actual results could vary significantly.
- The Firm disclosed more than 10,000 legal proceedings and an aggregate range of reasonably possible legal losses, in excess of established reserves, of up to approximately $5.1 billion. Litigation expense was $1.9 billion in 2Q11 and $3.0 billion for the first half.
- Regulatory changes were expected to pressure revenue and costs. The Durbin Amendment was expected to reduce Retail Banking annualized gross revenue by approximately $1.0 billion beginning in the fourth quarter of 2011; the filing also discussed FDIC assessment increases, the Volcker Rule and Basel III implementation.
- Management authorized a $15.0 billion common-equity repurchase program, with up to $8.0 billion approved for 2011. The Firm repurchased $3.5 billion of common stock in the second quarter and raised the quarterly common dividend from $0.05 to $0.25 per share.
Important facts for investors to verify
- Whether reserve releases and improved charge-off trends are sustainable or primarily reflect a favorable point in the credit cycle.
- The ultimate cost and timing of mortgage foreclosure investigations, Consent Orders, servicing remediation, mortgage-backed securities litigation and mortgage repurchase claims.
- Residential real-estate performance under further home-price declines, higher unemployment and prolonged foreclosure timelines, including risks in the Washington Mutual PCI portfolio.
- The effect of the Durbin Amendment, FDIC assessments, Basel III, the Volcker Rule and other Dodd-Frank regulations on revenue, expenses, capital and liquidity.
- The quality and stability of reported earnings given the material contribution from reserve releases, securities gains, private-equity valuation gains and other unusual items.
- Exposure to off-balance-sheet commitments, securitization vehicles, derivatives, guarantees and potential collateral or funding requirements following a credit-rating downgrade.