JPMorgan Chase & Co. 2010 Form 10-K Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial holding company with operations in more than 60 countries, $2.1 trillion of assets and $176.1 billion of stockholders’ equity at December 31, 2010. Its businesses comprise Investment Banking, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity. This Form 10-K covers the fiscal year ended December 31, 2010; fourth-quarter figures are included where reported.
Financial performance and condition
| Metric | Q4 2010 | FY 2010 | FY 2009 |
|---|---|---|---|
| Total net revenue | $26.1 billion | $102.7 billion | $100.4 billion |
| Noninterest expense | $16.0 billion | $61.2 billion | $52.4 billion |
| Provision for credit losses | $3.0 billion | $16.6 billion | $32.0 billion |
| Net income | $4.8 billion | $17.4 billion | $11.7 billion |
| Diluted EPS | $1.12 | $3.96 | $2.26 |
| Return on common equity | 11% | 10% | 6% |
| Overhead ratio | 61% | 60% | 52% |
Annual net income increased 48%, while revenue increased 2%. The improvement was driven primarily by a 48% decline in the provision for credit losses and higher securities gains, principal transactions revenue and asset-management fees. These benefits were partly offset by a 17% increase in noninterest expense, including substantial mortgage-related litigation costs.
- Annual net interest income was $51.0 billion, essentially flat with 2009. The reported amount benefited by approximately $5.8 billion from consolidating credit-card securitization trusts; excluding that accounting effect, net interest income declined.
- Provision for credit losses was $16.6 billion, compared with $32.0 billion in 2009. Firmwide credit reserves were approximately $33.0 billion, and the loan-loss coverage ratio was 4.5% of total loans.
- Total assets were $2.118 trillion, compared with $2.032 trillion at year-end 2009. Loans were $692.9 billion, deposits were $930.4 billion and long-term debt was $247.7 billion.
- Operating cash flow was negative $3.8 billion, compared with positive $122.8 billion in 2009. Investing activities provided $54.0 billion, while financing activities used $49.2 billion. Cash and due from banks increased by $1.4 billion to $27.6 billion.
- Liquidity was supported by a diversified deposit base, access to secured and unsecured funding markets and a reported Global Liquidity Reserve of approximately $262 billion. The deposits-to-loans ratio was 134%, versus 148% in 2009.
- Regulatory capital strengthened: Tier 1 capital was 12.1%, total capital was 15.5%, Tier 1 leverage was 7.0% and Tier 1 common capital was 9.8%, compared with 8.8% in 2009.
Material changes versus the prior comparable period
- Credit conditions improved, with lower delinquencies, charge-offs and wholesale nonperforming assets. However, mortgage losses and consumer credit stress remained elevated.
- Corporate/Private Equity securities gains rose to $2.9 billion from $1.1 billion, while private-equity gains increased materially. These gains contributed to revenue but may be volatile and nonrecurring.
- Litigation expense increased to $7.4 billion from $161 million in 2009, contributing substantially to the higher expense base and lower pre-provision profit.
- Card Services returned to profitability, reporting $2.1 billion of net income versus a $2.2 billion loss in 2009, primarily because of lower credit-loss provisions. Card loans declined 16% year over year, and the full-year net charge-off rate remained high at 9.73%.
- Retail Financial Services net income increased to $2.5 billion from $97 million, while its real-estate portfolio still generated a $2.5 billion loss.
- Commercial Banking reported record net income of $2.1 billion, up 64%, and Asset Management net income rose 20% to $1.7 billion. Investment Bank net income declined 4% to $6.6 billion.
- Effective January 1, 2010, new VIE accounting rules consolidated credit-card trusts, multi-seller conduits and other securitization entities. The adoption added $87.7 billion of assets and $92.2 billion of liabilities and reduced equity by $4.5 billion. Comparisons with 2009 are therefore affected by classification changes.
- The common dividend remained $0.05 per share per quarter. JPMorgan repurchased 78 million common shares for $3.0 billion during 2010, primarily to offset employee equity awards.
Guidance, outlook, risks and unusual items
Management did not provide consolidated earnings guidance, but gave business-level expectations for 2011. Mortgage fees and related income were expected to be $1 billion or less in the first quarter. Management estimated approximately $1.2 billion of 2011 realized mortgage repurchase losses, expected residential real-estate portfolios to decline 10% to 15% annually, and projected approximately $700 million of 2011 net-interest-income pressure from portfolio runoff. Card Services net interest income was expected to decline approximately $1.4 billion due to lower balances. Management also indicated that private-equity earnings would remain volatile and that Corporate net income, excluding material litigation and other unusual items, could trend toward approximately $300 million per quarter.
- Mortgage repurchase liability increased to $3.3 billion from $1.7 billion. Management disclosed a reasonably possible additional loss range of up to approximately $2 billion.
- The Firm faced more than 10,000 legal proceedings. Reasonably possible losses in excess of recorded reserves were estimated at $0 to approximately $4.5 billion, excluding matters for which no estimate could be made.
- Foreclosure-documentation issues led to temporary foreclosure suspensions, governmental investigations and expected remediation costs. Potential outcomes include fines, penalties, process changes and additional litigation.
- Dodd-Frank, the Volcker Rule, derivatives reforms, debit-interchange restrictions, CFPB regulation and Basel III could increase costs, constrain activities and require changes to the business model.
- Key ongoing risks include unemployment and housing weakness, mortgage and credit-card losses, market and counterparty exposures, liquidity and credit-rating downgrades, model and valuation risk, operational failures, reputational damage and regulatory or private litigation.
- The Company reported effective disclosure controls and internal control over financial reporting, with no material weaknesses identified by management or its independent auditor.
Most important facts an investor should verify
- Whether mortgage repurchase demands, foreclosure investigations and related litigation ultimately exceed the recorded reserves.
- The sustainability of lower credit-loss provisions as consumer unemployment, housing prices and delinquency trends evolve.
- The effect of VIE consolidation on reported revenue, net interest income, loans, reserves and capital ratios when comparing 2010 with 2009.
- Whether card-loan runoff and CARD Act effects produce the projected 2011 reduction in net interest income.
- The impact of Dodd-Frank and Basel III implementation on capital, liquidity, derivatives, proprietary trading and private-equity activities.
- The quality and recurring nature of securities gains, private-equity gains and other unusual revenue items included in 2010 results.
- Funding, liquidity and rating sensitivity, including the $262 billion liquidity reserve, $247.7 billion of long-term debt and potential collateral requirements after a ratings downgrade.