Business Context and Reporting Period
This Form 8-K, dated July 13, 2012, reports that JPMorgan Chase & Co. has determined to restate its interim financial statements for the first quarter of 2012 (ended March 31, 2012). The decision followed a management review with the Audit Committee regarding valuation irregularities in the Chief Investment Office's (CIO) synthetic credit portfolio.
Key Financial Metrics and Restatement Impact
The restatement reduces reported net income for the first quarter of 2012 by $459 million. The adjustments are detailed below (in millions, except per share data):
| Metric | Previously Reported | Adjustment | Restated |
|---|---|---|---|
| Corporate/Private Equity Sector | |||
| Principal transactions revenue | $113 | $(660) | $(547) |
| Total net revenue | $1,689 | $(660) | $1,029 |
| Net income | $(563) | $(459) | $(1,022) |
| Consolidated Financial Information | |||
| Basic Net income per share | $1.31 | $(0.11) | $1.20 |
| Diluted Net income per share | $1.31 | $(0.12) | $1.19 |
| Return on Common Equity | 12% | - | 11% |
| Return on Tangible Common Equity | 16% | - | 15% |
| Principal transactions revenue | $3,382 | $(660) | $2,722 |
| Total net revenue | $26,712 | $(660) | $26,052 |
| Net income | $5,383 | $(459) | $4,924 |
Capital ratios at March 31, 2012, are adjusted as follows: Basel I Tier I common ratio reduced by 4 basis points to 10.3%; Estimated Basel III Tier I common ratio reduced by 3 basis points to 8.1%. The filing states that year-to-date revenue and net income for the CIO and the Firm remain unchanged as the restatement shifts losses from Q1 to Q2.
Material Changes and Causes
The restatement stems from a lack of confidence in the integrity of trader marks used for the synthetic credit portfolio. Internal reviews suggest certain individuals may have sought to avoid showing the full amount of losses incurred in Q1. Consequently, the Firm concluded that previously reported marks did not reflect good faith estimates of fair value. The Firm will restate valuations based on external "mid-market" benchmarks adjusted for liquidity. The valuation errors had an immaterial effect on the balance sheet and risk-weighted assets.
Outlook, Risks, and Management Commentary
- Internal Controls: Management identified a material weakness in internal control over financial reporting as of March 31, 2012, due to changes in the size and characteristics of the synthetic credit portfolio. Deficiencies were substantially remediated by June 30, 2012, through enhanced management oversight.
- Risk Metrics: The Firm believes the valuation irregularities had an immaterial impact on Value at Risk (VaR). Average CIO VaR was $177 million for the quarter ended June 30, 2012.
- Future Filings: An amended Form 10-Q for the first quarter will be filed no later than the filing of the Form 10-Q for the quarter ended June 30, 2012.
- Ongoing Review: Management's internal review is ongoing, and a Special Committee of the Board of Directors is reviewing the matter. The Audit Committee has discussed the issues with PricewaterhouseCoopers LLP.
Key Facts for Investor Verification
- Verify the specific methodology used to adjust valuations to external "mid-market" benchmarks in the upcoming amended 10-Q.
- Monitor the progress of the Special Committee's review and any additional disclosures regarding the synthetic credit portfolio.
- Confirm the timeline for the filing of the amended Form 10-Q for the first quarter of 2012.
- Assess the impact of the $459 million net income reduction on the Firm's overall capital adequacy and regulatory compliance.