JPMORGAN CHASE & CO quarterly report, Q3 FY2014

JPMorgan Chase & Co. — Form 10-Q Summary

Business context and reporting period

JPMorgan Chase & Co. is a global financial services firm operating through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management, and Corporate/Private Equity. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared primarily with the same periods in 2013. The Firm reported approximately $2.5 trillion of assets and $231.3 billion of stockholders’ equity at quarter-end.

Financial performance and key metrics

Metric	3Q14	3Q13	9M14	9M13
Total net revenue	$24.2 billion	$23.1 billion	$71.7 billion	$73.5 billion
Net income	$5.6 billion	$(0.4) billion	$16.8 billion	$12.6 billion
Diluted EPS	$1.36	$(0.17)	$4.10	$3.05
Pre-provision profit	$8.4 billion	$(0.5) billion	$25.8 billion	$18.5 billion
Provision for credit losses	$0.8 billion	$(0.5) billion	$2.3 billion	$0.1 billion
Noninterest expense	$15.8 billion	$23.6 billion	$45.9 billion	$54.9 billion
ROE	10%	(1)%	10%	8%

Third-quarter net revenue increased 5%, driven by higher net interest income, asset-management fees and principal transactions revenue. Net interest income rose 3% to $11.1 billion; noninterest revenue rose 6% to $13.1 billion.
Nine-month net revenue declined 2%, primarily because of lower mortgage revenue, principal transactions revenue and securities gains. Net interest income was essentially flat.
Third-quarter noninterest expense fell 33%, principally because legal expense declined to $1.1 billion from $9.3 billion in the prior-year quarter. Nine-month expense declined 16%, with legal expense of $1.8 billion versus $10.3 billion.
Consumer credit quality improved overall. Net charge-offs were $1.1 billion in the quarter and $3.5 billion year to date; the firmwide net charge-off rate was 0.60% in the quarter and 0.65% year to date. Nonperforming assets declined to $8.4 billion from $10.4 billion a year earlier.
The allowance for credit losses was $15.5 billion at September 30, 2014, down from $18.2 billion a year earlier. The allowance-to-retained-loans ratio declined to 2.02% from 2.43%.
Period-end loans were $743.3 billion, deposits were $1.3345 trillion, and long-term debt was $268.7 billion. The loans-to-deposits ratio was 56%.
Total assets increased 5% from December 31, 2013, while stockholders’ equity increased 10%. Mortgage servicing rights declined 14% to $8.2 billion.
Nine-month cash flows were $7.8 billion provided by operating activities, $95.6 billion used in investing activities and $74.1 billion provided by financing activities, resulting in a $14.4 billion decrease in cash and due from banks.
Liquidity remained strong, with approximately $572 billion of high-quality liquid assets and an estimated supplementary leverage ratio of 5.5%.

Material changes versus the prior comparable period

The Firm moved from a $380 million third-quarter 2013 net loss to $5.6 billion of net income. The principal driver was the $7.8 billion reduction in noninterest expense, especially legal costs.
Consumer & Community Banking third-quarter net income declined 9% to $2.5 billion because the prior-year quarter included a substantially larger allowance release. Its nine-month net income declined 18% to $6.8 billion.
Corporate & Investment Bank third-quarter net income declined 34% to $1.5 billion, despite 7% higher revenue, because expense rose 21%, including higher legal and control-related costs. Nine-month net income declined 29%.
Asset Management third-quarter net income increased 20% to $572 million, supported by client inflows and higher market levels. Assets under management increased 11% to $1.7 trillion.
Mortgage Banking remained pressured by lower origination volumes. Nine-month mortgage origination volume fell 61% to $55.0 billion, and Mortgage Banking net income declined 50% to $1.3 billion.
Corporate/Private Equity generated $398 million of third-quarter net income versus a $6.5 billion loss in the prior-year quarter, largely reflecting the absence of the prior-year legal expense. The Firm also recognized a $68 million impairment of Private Equity goodwill.
The Firm adopted Basel III during 2014 and began using the Basel III Advanced Approach. The September 30, 2014 Basel III Advanced Transitional CET1 ratio was 10.2%, compared with the prior-year Basel I comparison of 10.5%; the fully phased-in estimated CET1 ratio was 10.1%.

Guidance, outlook, commentary, risks and unusual items

Management expected full-year 2014 adjusted expense to exceed $58 billion and firmwide net charge-offs to be below $5 billion.
Management expected fourth-quarter Mortgage Production pretax income to be slightly negative and Mortgage Servicing revenue to be at or slightly below $600 million, with servicing revenue expected to continue declining in 2015.
Management expected CCB’s consumer allowance for loan losses could decline by $1 billion or more over the following several years if positive credit trends continued.
Business simplification initiatives were expected to reduce fourth-quarter Markets revenue by approximately $300 million, or 8%, and expense by approximately $200 million versus the prior-year quarter.
The Firm was exiting or selling noncore activities, including physical commodities, certain correspondent banking activities, the Global Special Opportunities Group portfolio, and the Asset Management Retirement Plan Services business.
Legal proceedings remained a material contingency. The estimated aggregate range of reasonably possible legal losses in excess of established reserves was $0 to approximately $5.9 billion. Management stated that actual losses could vary materially and that litigation outcomes could affect results in particular periods.
The Firm disclosed a cybersecurity incident affecting approximately 76 million households and 7 million small businesses. It stated that account numbers, passwords, user IDs, dates of birth and Social Security numbers were not known to have been compromised as of the filing date, and that no material operational or financial impact had occurred.
Key credit risks include residential real estate delinquencies, HELOC payment recasts, payment shock on modified and PCI loans, credit-card losses, and economic or housing-price deterioration. Management estimated that specified adverse assumptions could increase modeled losses by approximately $1.0 billion for PCI loans, $100 million for residential real estate excluding PCI loans, $600 million for credit cards, and $1.9 billion for wholesale loans.
Other risks include regulatory and legislative changes, capital and liquidity requirements, ratings downgrades, market volatility, operational and technology failures, cybersecurity threats, geopolitical developments, valuation uncertainty, and the effectiveness of control and simplification initiatives.

Most important facts for investors to verify

Whether the sharp improvement in quarterly earnings is sustainable after normalizing for the prior-year $9.3 billion legal expense and other unusual items.
The progress and ultimate cost of legal, regulatory, mortgage-servicing, RMBS and foreign-exchange matters, including the $5.9 billion estimated range of reasonably possible losses above reserves.
The trajectory of mortgage originations, Mortgage Servicing revenue, MSR valuations and potential Mortgage Banking goodwill impairment.
Whether consumer credit improvements continue and whether allowance releases, HELOC recasts, student-loan modifications and PCI payment recasts create future volatility.
The effect of Basel III, GSIB and TLAC-related requirements on capital distributions, leverage and business mix.
The financial and regulatory consequences of the disclosed cybersecurity incident and the adequacy of related controls.
Actual versus projected expense, net charge-offs, Markets revenue and business-simplification benefits for the remainder of 2014.
The comparability of managed-basis and fully taxable-equivalent metrics with U.S. GAAP results and other financial institutions’ measures.