JPMorgan Chase & Co. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2009. JPMorgan Chase is a global financial services firm with approximately $2.0 trillion of assets, $154.8 billion of stockholders’ equity, and operations in more than 60 countries. Its principal businesses include investment banking, consumer and commercial banking, transaction processing, and asset management. Results include the effects of the September 2008 Washington Mutual banking acquisition and the May 2008 Bear Stearns merger.
Key financial metrics
| Metric | 2Q09 | 2Q08 | Change | 6M09 | 6M08 |
|---|---|---|---|---|---|
| Total net revenue | $25.6 billion | $18.4 billion | +39% | $50.6 billion | $35.3 billion |
| Noninterest expense | $13.5 billion | $12.2 billion | +11% | $26.9 billion | $21.1 billion |
| Pre-provision profit | $12.1 billion | $6.2 billion | +95% | $23.8 billion | $14.2 billion |
| Provision for credit losses | $8.0 billion | $3.5 billion | +132% | $16.6 billion | $7.9 billion |
| Net income | $2.7 billion | $2.0 billion | +36% | $4.9 billion | $4.4 billion |
| Diluted EPS | $0.28 | $0.53 | -47% | $0.68 | $1.20 |
| ROE | 3% | 6% | Down | 4% | 7% |
Reported results are presented under U.S. GAAP. Segment results generally use management’s non-GAAP “managed basis,” which treats securitized credit-card receivables as if they remained on balance sheet and presents revenue on a fully taxable-equivalent basis.
- Net interest income increased 53% in the quarter and 63% year to date, to $12.7 billion and $26.0 billion, respectively. The second-quarter net interest yield on interest-earning assets was 3.07%, up 36 basis points year over year.
- Principal transactions revenue was $3.1 billion in the quarter, driven by record trading results, although tightening of JPMorgan Chase credit spreads produced a $1.9 billion loss on certain structured liabilities and derivatives.
- Investment banking fees reached a record $2.1 billion in the quarter, including $1.1 billion of equity underwriting fees.
- Noninterest expense included a $675 million FDIC special assessment and higher FDIC insurance premiums, mortgage servicing expense, and expenses associated with Washington Mutual.
- Cash flow from operating activities was $103.3 billion for the first six months, compared with $24.0 billion in the prior-year period. Investing activities provided $34.4 billion, while financing activities used $139.4 billion, principally because of lower deposits and repayment of TARP preferred stock.
- At June 30, total assets were $2.03 trillion, loans were $680.6 billion, deposits were $866.5 billion, long-term debt was $254.2 billion, and total stockholders’ equity was $154.8 billion.
- Management stated that unsecured and secured funding capacity was sufficient for on- and off-balance-sheet obligations. Long-dated funding and core liabilities exceeded illiquid assets.
- Regulatory capital remained above well-capitalized thresholds: Tier 1 common ratio 7.7%, Tier 1 capital ratio 9.7%, total capital ratio 13.3%, and Tier 1 leverage ratio 6.2%.
Material changes versus comparable periods
- Revenue growth was driven by Washington Mutual, record fixed-income trading, stronger equity underwriting, higher net interest income, and mortgage servicing results.
- Credit deterioration was substantial. The provision for credit losses more than doubled year over year in the second quarter. The allowance for credit losses rose to $29.8 billion from $13.9 billion a year earlier, and nonperforming assets rose to $17.5 billion from $6.2 billion.
- Firmwide reported net charge-offs were $6.0 billion in the quarter and $10.4 billion for the first half, compared with $2.1 billion and $4.0 billion, respectively, in the prior-year periods. The reported net charge-off rate was 3.52% for the quarter and 3.01% year to date.
- Consumer credit was the principal pressure point. Managed Card Services net charge-offs reached 10.03% in the quarter versus 4.98% in 2Q08; excluding Washington Mutual, the rate was 8.97%. Consumer Lending reported a $955 million quarterly loss, compared with a $171 million loss in the prior year.
- Investment Bank net income increased to $1.5 billion from $394 million, while Card Services reported a $672 million loss versus $250 million of income. Retail Financial Services earned $15 million versus $503 million, and Commercial Banking earned $368 million versus $355 million.
- Treasury & Securities Services net income declined 11% to $379 million, and Asset Management net income declined 11% to $352 million, reflecting lower market levels and related fee revenue.
- Total deposits declined from $1.01 trillion at December 31, 2008, to $866.5 billion at June 30, 2009, primarily as wholesale deposits normalized. Loans declined from $744.9 billion to $680.6 billion.
- The common dividend was reduced from $0.38 to $0.05 per share, retaining approximately $5 billion of common equity annually. The firm issued $5.8 billion of common stock in June 2009.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued pressure from unemployment, housing prices, consumer spending, and wholesale credit conditions. It stated that credit costs, nonperforming assets, and charge-offs could increase during the remainder of 2009.
- Management projected that quarterly net charge-offs could reach approximately $1.4 billion for home equity, $600 million for prime mortgage, and $500 million for subprime mortgage over the next several quarters.
- Managed Card Services net charge-offs, excluding Washington Mutual, could approach 10% in the third quarter. The Washington Mutual card portfolio was expected to approach 24% by year-end 2009.
- Trading results were expected to remain volatile and the unusually high second-quarter trading gains were not expected to repeat. Private Equity could experience modest near-term write-downs.
- JPMorgan Chase redeemed all $25.0 billion of Series K TARP preferred stock on June 17, 2009. The redemption generated a one-time, noncash reduction of approximately $1.1 billion, or $0.27 per diluted share. Excluding that item, second-quarter ROE was 6% rather than the reported 3%.
- The firm consolidated the Washington Mutual Master Trust during the quarter, adding approximately $6.0 billion of assets and $6.1 billion of liabilities and recording a pretax loss of approximately $64 million. Credit-card securitization actions also added approximately $40 billion of risk-weighted assets and reduced the Tier 1 capital ratio by about 40 basis points.
- Adoption of SFAS 166 and SFAS 167 on January 1, 2010, was expected to require consolidation of up to $130 billion of assets and liabilities and could reduce the Tier 1 capital ratio by approximately 40 basis points. The ultimate impact could differ materially.
- Liquidity commitments to special-purpose entities could require approximately $44.0 billion of funding if JPMorgan Chase Bank, N.A. were downgraded below specified short-term ratings.
- Off-balance-sheet lending-related commitments totaled $1.04 trillion, including $699.3 billion of consumer commitments and $344.0 billion of wholesale commitments. Securities lending guarantees totaled $153.9 billion.
- Pending litigation includes municipal derivatives, mortgage-backed securities, auction-rate securities, Washington Mutual-related matters, and other proceedings. Management considered reserves adequate but noted that ultimate losses could materially exceed reserves and affect a particular reporting period.
- Proposed U.S. and international financial-regulatory reforms could increase compliance costs, restrict activities, require additional capital or margin, and alter securitization, consumer-finance, and derivatives businesses.
Most important facts for investors to verify
- Whether consumer and wholesale credit losses stabilized or exceeded management’s stated 2009 expectations.
- The sustainability of record Investment Bank trading and underwriting revenue after excluding spread-related and other unusual valuation effects.
- The performance of the Washington Mutual mortgage, option ARM, and credit-card portfolios, including purchased credit-impaired loan assumptions.
- The effect of SFAS 166 and SFAS 167 consolidation on assets, liabilities, risk-weighted assets, reserves, capital ratios, and funding needs.
- Changes in deposits, wholesale funding, long-term debt maturities, secured financing, and liquidity commitments following the TARP repayment.
- Whether the $29.8 billion allowance for credit losses remains adequate as unemployment and housing conditions evolve.
- Developments in Washington Mutual-related litigation, repurchase claims, mortgage representations and warranties, and other legal contingencies.
- The sensitivity of mortgage servicing rights, fair-value Level 3 assets, securitization interests, and trading results to interest rates, prepayments, credit spreads, and market liquidity.