JPMorgan Chase & Co. — 1Q14 Form 10-Q Summary
Business context and reporting period
JPMorgan Chase & Co. is a global financial services firm with operations in consumer banking, investment banking, commercial banking, asset management, payments and private equity. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparisons primarily to the three months ended March 31, 2013 and, for balance-sheet items, December 31, 2013. Total assets were $2.477 trillion and total stockholders’ equity was $219.7 billion at March 31, 2014.
Key financial metrics
| Metric | 1Q14 | 1Q13 | Change |
|---|---|---|---|
| Total net revenue | $23.0 billion | $25.1 billion | Down 8% |
| Net interest income | $10.7 billion | $10.9 billion | Down 2% |
| Noninterest revenue | $12.3 billion | $14.2 billion | Down 13% |
| Noninterest expense | $14.6 billion | $15.4 billion | Down 5% |
| Pre-provision profit | $8.4 billion | $9.7 billion | Down 14% |
| Provision for credit losses | $850 million | $617 million | Up 38% |
| Net income | $5.3 billion | $6.5 billion | Down 19% |
| Diluted EPS | $1.28 | $1.59 | Down 19% |
| Return on common equity | 10% | 13% | Down 3 points |
| Overhead ratio | 64% | 61% | Up 3 points |
Net income applicable to common stockholders was $4.9 billion. Common dividends declared were $0.38 per share, compared with $0.30 in the prior-year quarter. Tangible book value per share was $41.73, compared with $39.54 a year earlier.
- Loans were $731.0 billion, down 1% from year-end 2013; deposits were $1.283 trillion, down slightly from year-end. The loans-to-deposits ratio was 57%.
- Long-term debt was $274.5 billion, up from $267.9 billion at December 31, 2013.
- The allowance for credit losses was $16.5 billion, down from $17.0 billion at year-end and $21.5 billion a year earlier.
- Nonperforming assets were $9.5 billion, down from $9.7 billion at year-end and $11.7 billion a year earlier.
- Net charge-offs were $1.3 billion, with a 0.71% rate, compared with $1.7 billion and 0.97% in 1Q13.
- Operating cash flow was $14.7 billion; investing activities used $68.4 billion and financing activities provided $40.3 billion. Cash and due from banks declined $13.5 billion during the quarter.
- Reported Basel III Transitional ratios were 10.9% Tier 1 common, 12.1% Tier 1 capital, 14.5% total capital and 7.4% Tier 1 leverage. Estimated fully phased-in Basel III Advanced Tier 1 common ratio was 9.6%.
- High-quality liquid assets were approximately $538 billion, including $328 billion of eligible cash and $210 billion of eligible securities.
Material changes versus the prior comparable period
- Revenue declined primarily because mortgage fees and related income fell 65% to $514 million, securities gains fell 94% to $30 million, and principal transactions revenue fell 12% to $3.3 billion.
- Net interest income decreased as lower loan yields and lower average trading-asset balances more than offset higher investment-securities yields and lower funding costs. Core net interest income increased 2% to $9.8 billion, while core net interest yield declined to 2.66% from 2.83%.
- Expense reduction was driven by lower performance-based compensation, lower mortgage production and servicing expense, lower legal-related expense and lower FDIC assessments. These benefits were partly offset by higher technology, control-agenda and headcount-related costs.
- The higher credit provision reflected a $449 million consumer allowance release, versus a $1.1 billion release in 1Q13, despite lower charge-offs.
- Consumer & Community Banking net income fell 25% to $1.9 billion, largely because of weaker Mortgage Banking results. Mortgage Banking net income fell 83% to $114 million, and mortgage origination volume fell 68% to $17.0 billion.
- Corporate & Investment Bank net income fell 24% to $2.0 billion as revenue declined 15%, including a 21% decline in Fixed Income Markets revenue. Investment banking fees were broadly stable, with higher advisory and equity underwriting fees offsetting lower debt underwriting fees.
- Commercial Banking net income fell 3% to $578 million as higher expenses and lower net interest income offset lower credit costs. Period-end loans increased 7%.
- Asset Management net income fell 9% to $441 million despite a 5% increase in revenue, because expenses increased 11%. Client assets rose 10% to $2.394 trillion.
- Corporate/Private Equity net income increased 36% to $340 million, primarily because Private Equity generated gains versus a prior-year loss. Other Corporate included an approximately $90 million after-tax charge from the write-down of deferred tax assets following New York State tax-law changes.
Guidance, outlook, commentary and unusual items
- Management expected core net interest margin to remain relatively stable during 2014 and adjusted firmwide expense to be below $59 billion, excluding firmwide legal expense and foreclosure-related matters.
- Management expected Mortgage Banking production-related pretax losses of approximately $100 million to $150 million in 2Q14 and negative pretax margins in the second half of 2014. Mortgage servicing revenue was expected to decline through the remainder of the year.
- Management expected 2Q14 Markets revenue to decline approximately 20%, plus or minus, from 2Q13 because of challenging markets and lower client activity. Securities Services revenue was expected to increase by approximately $100 million from 1Q14 because of seasonality.
- The Federal Reserve did not object to the Firm’s 2014 capital plan. The Board intended to increase the common dividend to $0.40 per share beginning in 2Q14 and authorized up to $6.5 billion of common-equity repurchases from April 1, 2014 through March 31, 2015.
- The Firm agreed to sell certain physical commodities operations to Mercuria for approximately $3.5 billion. Closing was expected in 3Q14, subject to regulatory approvals; management did not expect a material after-tax impact.
- The Firm transferred $19.3 billion of securities from available-for-sale to held-to-maturity, primarily to reduce the effect of price volatility on accumulated other comprehensive income and certain Basel III capital measures.
- Management identified continued exposure to mortgage-market conditions, housing prices, unemployment, interest rates, market volatility, regulatory developments, litigation, operational and cybersecurity events, credit deterioration, ratings downgrades and geopolitical developments, including Russia-related uncertainty.
- Legal proceedings remained significant. Management estimated reasonably possible losses in excess of established reserves from zero to approximately $4.5 billion at March 31, 2014. The filing states that actual losses could differ materially and that particular matters could materially affect results for an individual period.
- The filing reported a deferred prosecution agreement and related settlements concerning Madoff matters, including a $1.7 billion forfeiture to the United States, as well as other penalties and civil settlements. The filing also described ongoing investigations and litigation involving foreign exchange, LIBOR and other benchmark rates, credit-default swaps, mortgage-backed securities and other matters.
Most important facts for an investor to verify
- Whether the expected deterioration in Mortgage Banking and Markets revenue occurred and how it affected full-year revenue and earnings.
- The sustainability of allowance releases and whether consumer credit improvements, especially in residential real estate and credit cards, continued.
- Progress toward the targeted fully phased-in Basel III Advanced ratios of at least 10% Tier 1 common and 11% Tier 1 capital by year-end 2014, including the effect of capital distributions.
- Actual common-dividend increases and share repurchases compared with the authorized $6.5 billion program.
- The closing and financial impact of the physical commodities business sale.
- Changes in mortgage servicing-rights valuation, prepayment assumptions, servicing costs and the risk of future Mortgage Banking goodwill impairment.
- Developments in legal proceedings, including the estimated $0 to $4.5 billion range of reasonably possible losses above reserves and the status of mortgage-backed-securities, benchmark-rate, foreign-exchange and Madoff-related matters.
- The effect of ratings changes, collateral requirements and contingent funding obligations. A one-notch or two-notch downgrade could require approximately $1.0 billion or $3.0 billion, respectively, of additional collateral for certain derivatives, plus potential termination payments.