JPMORGAN CHASE & CO quarterly report, Q3 FY2011

JPMorgan Chase & Co. 2011 Q3 Form 10-Q Summary

Business context and reporting period

JPMorgan Chase & Co. filed an unaudited Form 10-Q for the three and nine months ended September 30, 2011. The global financial-services firm operated across investment banking, consumer and small-business banking, commercial banking, transaction processing, asset management and private equity, with approximately $2.3 trillion of assets, $182.3 billion of stockholders’ equity and operations in more than 60 countries at quarter-end.

Reportable businesses were the Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking, Treasury & Securities Services, Asset Management and Corporate/Private Equity. Effective July 1, 2011, Auto and Student Lending moved from Retail Financial Services to Card Services & Auto; prior periods were revised for segment comparability.

Financial performance and key metrics

Metric	3Q11	3Q10	9M11	9M10
Total net revenue	$23.8 billion	$23.8 billion	$75.8 billion	$76.6 billion
Net income	$4.3 billion	$4.4 billion	$15.2 billion	$12.5 billion
Diluted EPS	$1.02	$1.01	$3.57	$2.84
Noninterest expense	$15.5 billion	$14.4 billion	$48.4 billion	$45.2 billion
Provision for credit losses	$2.4 billion	$3.2 billion	$5.4 billion	$13.6 billion
Return on common equity	9%	10%	11%	10%
Overhead ratio	65%	60%	64%	59%

Third-quarter net revenue was essentially flat year over year. Lower principal transactions revenue, investment banking fees and net interest income were offset by higher mortgage fees, securities gains, credit card income and other revenue.
Nine-month net income increased 22%, primarily because the provision for credit losses declined by $8.2 billion, partly offset by a 7% increase in noninterest expense and a 1% decline in revenue.
Net interest income declined 5% in the third quarter and 9% year to date. Management attributed the decline to loan runoff, spread compression, lower yields on securities and legislative changes affecting card fees.
Net cash provided by operating activities was $66.5 billion for the first nine months of 2011, compared with $4.9 billion of cash used in the comparable 2010 period. Investing activities used $169.7 billion, while financing activities provided $132.4 billion, primarily from deposit growth.
At September 30, 2011, total assets were $2.289 trillion, loans were $696.9 billion, deposits were $1.093 trillion and long-term debt was $273.7 billion. Deposits increased 21% from September 30, 2010, and the deposits-to-loans ratio was 157%.
Estimated Global Liquidity Reserve was approximately $404 billion, compared with approximately $262 billion at December 31, 2010. Management described liquidity and funding capacity as strong.
Firmwide credit reserves were $29.0 billion, down from $33.0 billion at December 31, 2010. Nonperforming assets were $12.2 billion, down from $17.7 billion a year earlier. The net charge-off rate improved to 1.44% in the quarter and 1.83% for the nine-month period.
Basel I Tier 1 common ratio was 9.9%, Tier 1 capital ratio was 12.1% and total capital ratio was 15.3%. Management estimated the Basel III Tier 1 common ratio at approximately 7.7%.

Material changes versus prior comparable periods

Investment Bank net income increased 27% in the quarter and 18% year to date, but results included a $1.9 billion pretax debit valuation adjustment gain and a $691 million credit valuation adjustment loss.
Retail Financial Services quarterly net income increased 62%, helped by higher mortgage-related revenue and lower credit costs. Nine-month net income declined 10% because of elevated foreclosure and default-related expenses, including $1.7 billion of estimated litigation and other foreclosure-related costs.
Card Services & Auto quarterly net income declined 8% as lower net interest income and higher expenses more than offset lower credit losses. Nine-month net income increased 164%, largely reflecting the sharp reduction in credit-card provisions.
Commercial Banking, Treasury & Securities Services and nine-month Asset Management net income increased, supported by loan, liability, deposit and custody growth. Asset Management quarterly net income declined 8% because of higher compensation, litigation and other expenses.
Corporate/Private Equity reported a $645 million quarterly net loss versus $348 million of income in the prior year. The result included private-equity valuation losses and $1.0 billion of additional mortgage-related litigation expense.
Mortgage servicing rights declined to $7.8 billion from $13.6 billion at December 31, 2010. The decline reflected lower interest rates, modeled runoff and a $1.1 billion reduction in value from higher estimated servicing costs.
The common dividend was increased from $0.05 to $0.25 per quarter in March 2011. The firm repurchased $4.4 billion of common stock and warrants during the quarter and $8.0 billion during the first nine months.

Guidance, outlook, risks and unusual items

Management estimated that the Durbin Amendment would reduce fourth-quarter 2011 revenue by approximately $300 million and reduce annualized Consumer & Business Banking revenue by approximately $1.0 billion once fully reflected. Low rates and spread compression were expected to reduce 2012 annualized net income for that business by approximately $400 million.
Fourth-quarter realized mortgage repurchase losses were estimated at approximately $350 million or slightly higher. Mortgage servicing was expected to incur elevated default-management, foreclosure, Consent Order compliance and potential settlement costs.
Management estimated quarterly mortgage-banking net charge-offs of approximately $1.2 billion and expected the residential real-estate portfolio to decline approximately 10% to 15% annually for the foreseeable future.
Management expected Card credit-card outstandings, excluding Washington Mutual and Commercial Card portfolios, to be $115 billion to $120 billion at year-end 2011. The related charge-off rate was expected to improve modestly.
Key risks included weak employment, depressed housing prices, elevated mortgage delinquencies, foreclosure delays, potential additional repurchase demands, mortgage-related litigation, euro-zone sovereign stress, market volatility, low interest rates, regulatory changes and implementation of the Dodd-Frank, Volcker Rule and Basel III requirements.
The recorded mortgage repurchase liability was $3.6 billion. Management disclosed a reasonably possible additional loss range of $0 to approximately $2.0 billion, excluding amounts already accrued.
The firm was involved in more than 10,000 legal proceedings and estimated reasonably possible litigation losses in excess of reserves at $0 to approximately $5.0 billion. The filing states that actual losses could exceed this range and that litigation outcomes remain uncertain.
Total off-balance-sheet lending-related commitments were $973.1 billion, including $528.8 billion of credit-card commitments and $379.7 billion of wholesale commitments. A downgrade of JPMorgan Chase Bank, N.A. could affect approximately $35.3 billion of liquidity commitments to special-purpose entities and require additional collateral or funding.

Most important facts for an investor to verify

Whether credit-cost improvement, particularly in credit cards, is sustainable or primarily reflects reserve releases and portfolio runoff.
The ultimate cost and timing of mortgage repurchase claims, foreclosure-related remediation, Consent Order compliance and mortgage-backed-securities litigation.
Actual implementation effects of the Durbin Amendment, Dodd-Frank derivatives and Volcker Rule requirements, and Basel III capital and liquidity standards.
The quality and stability of the large deposit base, the $404 billion liquidity reserve and access to wholesale funding during market stress.
The sensitivity of mortgage servicing rights, private-equity valuations, trading revenue, DVA/CVA gains and securities gains to interest rates, credit spreads and market volatility.
The performance of residential real-estate and purchased credit-impaired portfolios, including home prices, unemployment, loan-to-value ratios, delinquency trends and modification redefault rates.
The status and adequacy of litigation reserves relative to the disclosed possible loss range, including MBS, foreclosure, LIBOR, Madoff, Lehman and Washington Mutual matters.
That segment results and certain management metrics use managed, fully tax-equivalent or other non-GAAP presentations; comparisons should be reconciled to reported U.S. GAAP results.