JPMorgan Chase & Co. 2009 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2009, with fourth-quarter information included in the annual report. The filing was dated February 24, 2010. JPMorgan Chase operated in more than 60 countries, with approximately $2.0 trillion of assets, $165.4 billion of stockholders’ equity and six principal business segments plus Corporate/Private Equity.
Financial performance and condition
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total net revenue | $100.4 billion | $67.3 billion | Up 49% |
| Pre-provision profit | $48.1 billion | $23.8 billion | Up 102% |
| Provision for credit losses | $32.0 billion | $21.0 billion | Up 53% |
| Income before extraordinary gain | $11.7 billion | $3.7 billion | Up 215% |
| Net income | $11.7 billion | $5.6 billion | Up 109% |
| Diluted EPS | $2.26 | $1.35 | Up 67% |
| Return on common equity | 6% | 4% | Improved |
| Overhead ratio | 52% | 65% | Improved |
| Net interest income | $51.2 billion | $38.8 billion | Up 32% |
| Cash flow from operating activities | $121.9 billion | $23.1 billion | Increased substantially |
Balance sheet and funding: Total assets declined to $2.032 trillion from $2.175 trillion. Loans declined to $633.5 billion from $744.9 billion, while securities increased to $360.4 billion from $205.9 billion. Deposits declined to $938.4 billion from $1.009 trillion. Long-term debt was $266.3 billion, compared with $270.7 billion in 2008. Total stockholders’ equity was $165.4 billion.
Credit quality: The total allowance for credit losses increased to $32.5 billion from $23.8 billion, and nonperforming assets increased to $19.7 billion from $12.7 billion. Firmwide managed net charge-offs were $29.4 billion, compared with $13.4 billion in 2008, producing a managed net charge-off rate of 3.88%, versus 2.08%.
Capital: The Tier 1 capital ratio was 11.1%, total capital was 14.8%, Tier 1 leverage was 6.9% and Tier 1 common capital was 8.8%, compared with 7.0% in 2008. The Firm redeemed the $25.0 billion of TARP preferred stock in June 2009 after issuing $5.8 billion of common stock.
Material changes versus 2008
- Revenue benefited from improved trading conditions, record Investment Bank results, higher net interest income and the full-year impact of the Washington Mutual transaction.
- Principal transactions revenue improved to a $9.8 billion gain from a $10.7 billion loss, reflecting improved fixed-income and equity markets and the absence of substantial 2008 markdowns on legacy mortgage and leveraged-lending positions.
- Investment Bank net income was $6.9 billion, compared with a $1.2 billion loss in 2008. Retail Financial Services earned $97 million, down from $880 million, while Card Services reported a $2.2 billion loss, compared with $780 million of income.
- Commercial Banking net income decreased to $1.3 billion from $1.4 billion, and Treasury & Securities Services net income declined to $1.2 billion from $1.8 billion. Asset Management income increased to $1.4 billion from $1.4 billion, while Corporate/Private Equity income rose to $3.0 billion from $557 million.
- Credit costs worsened materially, particularly in home equity, mortgage and credit card portfolios. Consumer-managed net charge-offs increased to $26.3 billion from $13.0 billion.
- Noninterest expense rose 20% to $52.4 billion, driven by Washington Mutual integration, performance-based compensation, FDIC costs, mortgage servicing and default-related expenses. The 2009 expense included a $675 million FDIC special assessment and $1.4 billion of foreclosed-property expense.
- Common dividends were reduced from $0.38 per quarter to $0.05 per quarter, producing $0.20 of dividends per share for 2009 versus $1.52 in 2008. No open-market common-stock repurchases occurred.
Outlook, risks and unusual items
Management described the 2010 outlook as uncertain. It expected continued pressure from unemployment, housing weakness, consumer credit deterioration, regulatory reform and potentially normalizing capital-markets revenue.
- Management projected 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 next several quarters.
- Managed Card Services charge-offs, excluding Washington Mutual, could approach 11% in the first quarter of 2010; the Washington Mutual card portfolio could approach 24% over the next several quarters. Management expected Card Services to report losses in each of the first two quarters of 2010.
- New credit-card legislation was expected to reduce Card Services annual net income by approximately $500 million to $750 million. Changes to overdraft and nonsufficient-funds policies were expected to reduce annualized net income by approximately $500 million beginning in the first quarter of 2010.
- The Home Lending portfolio was expected to decline approximately 10% to 15% in 2010, reducing 2010 portfolio net interest income by approximately $1 billion from 2009 levels.
- Mortgage repurchase obligations remained a significant contingency. The recorded repurchase liability increased to $1.7 billion from $1.1 billion, while management noted that additional government-agency and private-market claims could materially affect future results.
- The Firm faced extensive litigation and regulatory matters, including mortgage-backed securities, Bear Stearns and Washington Mutual matters, municipal derivatives, auction-rate securities, interchange fees and securities lending. Management believed current reserves were adequate but stated that individual matters could materially affect a particular period.
- On January 1, 2010, new VIE consolidation guidance added approximately $88 billion of assets and $92 billion of liabilities and reduced stockholders’ equity by approximately $4 billion. The adoption also reduced the Tier 1 capital ratio by approximately 30 basis points.
Important facts for investors to verify
- Reconcile reported results with managed-basis results, particularly for Card Services and credit card securitizations.
- Assess whether consumer credit losses, delinquencies and nonperforming assets peaked or continued to deteriorate after year-end 2009.
- Review the adequacy of the $32.5 billion credit-loss allowance, including the $1.6 billion allowance added for Washington Mutual purchased credit-impaired loans.
- Evaluate mortgage repurchase, indemnification and litigation exposures, including the $1.7 billion recorded repurchase liability and potentially unquantified claims.
- Consider the sustainability of 2009 trading gains and the extent to which Investment Bank revenue may normalize.
- Monitor the effects of 2010 VIE consolidation on capital, leverage, liquidity, securitization funding and reported earnings.
- Review debt maturities, rating outlooks and contingent collateral requirements. A one-notch downgrade could require approximately $1.2 billion of additional collateral, while a six-notch downgrade could require approximately $3.6 billion.
- Confirm the impact of regulatory reform, credit-card legislation, overdraft-policy changes and dividend restrictions on future earnings and capital returns.