JPMorgan Chase & Co. — 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, transaction processing, private equity and related activities. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, with comparisons primarily to the corresponding 2012 periods. The filing was signed November 1, 2013.
Key financial metrics
| Metric | 3Q13 | 3Q12 | 9M13 | 9M12 |
|---|---|---|---|---|
| Total net revenue | $23.1 billion | $25.1 billion | $73.5 billion | $73.4 billion |
| Net income/(loss) | $(0.4) billion | $5.7 billion | $12.6 billion | $15.6 billion |
| Diluted EPS | $(0.17) | $1.40 | $3.05 | $3.81 |
| Noninterest expense | $23.6 billion | $15.4 billion | $54.9 billion | $48.7 billion |
| Provision for credit losses | $(0.5) billion benefit | $1.8 billion expense | $0.1 billion expense | $2.7 billion expense |
| Return on common equity | (1)% | 12% | 8% | 11% |
| Overhead ratio | 102% | 61% | 75% | 66% |
Reported third-quarter results included approximately $9.3 billion of legal expense, including litigation and regulatory reserves, and a $1.6 billion reduction in the allowance for loan losses. Management stated that, excluding these items, adjusted third-quarter net income would have been approximately $5.8 billion, or $1.42 per share; these are non-GAAP measures.
- Net interest income was $10.8 billion in the quarter and $32.4 billion year to date, down 2% and 4%, respectively. The third-quarter net interest yield on interest-earning assets was 2.18%, down from 2.43% in the prior-year quarter.
- Net cash provided by operating activities was $115.1 billion for the first nine months, compared with $29.6 billion in 2012. Investing activities used $189.1 billion and financing activities provided $51.0 billion. Cash and due from banks ended at $30.7 billion.
- At September 30, total assets were $2.46 trillion, deposits were $1.28 trillion, loans were $728.7 billion, long-term debt was $263.4 billion and total stockholders’ equity was $206.7 billion.
- Estimated high-quality liquid assets were $538 billion, including $344 billion of eligible cash and $194 billion of eligible securities. The loans-to-deposits ratio was 57%.
- Basel I/2.5 Tier 1 capital and total capital ratios were 11.7% and 14.3%, respectively; the Tier 1 common ratio was 10.5%. Management estimated a fully phased-in Basel III Tier 1 common ratio of approximately 9.3%.
- The allowance for credit losses declined to $18.2 billion from $22.6 billion at December 31, 2012. Nonperforming assets were $10.2 billion, compared with $11.7 billion at year-end 2012. Nine-month net charge-offs were $4.5 billion, versus $7.4 billion in the prior-year period.
Material changes versus comparable periods
- Third-quarter net revenue declined 8%, primarily because of lower mortgage fees and related income, lower securities gains and lower other income. These declines were partly offset by higher principal transactions and asset-management revenue.
- Noninterest expense increased 54% in the quarter and 13% year to date, principally because legal expense rose to $9.3 billion in the quarter and $10.3 billion year to date.
- Consumer & Community Banking third-quarter net income increased 15% to $2.7 billion despite a 13% revenue decline, mainly because of lower credit-loss provisions and lower expenses. Mortgage fees and related income fell 65%.
- Corporate & Investment Bank net income increased 12% to $2.2 billion in the quarter and 20% to $7.7 billion year to date. Investment banking fees rose 6% in the quarter and 15% year to date; third-quarter results included a $397 million DVA loss.
- Commercial Banking net income declined 4% to $665 million in the quarter, reflecting a 10% increase in expenses, while revenue was essentially flat.
- Asset Management net income increased 7% to $476 million in the quarter. Client assets reached $2.2 trillion, up 11%, and assets under management reached $1.5 trillion, up 12%.
- Corporate/Private Equity reported a $6.5 billion loss in the quarter, compared with $228 million of income in the prior-year period, primarily because of approximately $9.15 billion of legal expense in Other Corporate.
Guidance, outlook, risks and unusual items
- Management expected fourth-quarter net interest income to be relatively flat with the third quarter. Full-year 2013 adjusted expense guidance was $59.5 billion to $60.0 billion, excluding Corporate litigation expense and foreclosure-related matters, but including approximately $1.0 billion of control-agenda spending and $0.5 billion of non-Corporate litigation.
- Mortgage Production pretax income was expected to be slightly negative in the fourth quarter because higher mortgage rates were expected to reduce refinancing volumes and margins. Elevated default, foreclosure and mortgage-servicing costs were expected to continue.
- Management indicated that further allowance releases were possible if credit trends continued to improve, including approximately $150 million potentially available in Card Services during the fourth quarter. Such releases are dependent on future delinquency and loss trends.
- Total reserves for litigation and regulatory proceedings were approximately $23 billion at September 30, 2013. Management estimated reasonably possible losses in excess of established reserves at $0 to approximately $5.7 billion, although some matters could not be estimated.
- Subsequent to quarter-end, the Firm announced a $4.0 billion settlement resolving FHFA litigation relating to mortgage-backed securities purchased by Fannie Mae and Freddie Mac, together with a $1.1 billion settlement of certain GSE repurchase claims. The settlements do not release certain servicing-related liabilities.
- Other strategic actions included pursuing alternatives for the physical commodities businesses and exiting student-loan originations. The Firm also issued preferred stock during 2013, redeemed $5.0 billion of trust preferred securities and increased the quarterly common dividend to $0.38 per share.
- Key continuing risks include legal and regulatory proceedings, mortgage servicing and repurchase exposure, changing capital and liquidity rules, credit deterioration, market volatility, interest-rate movements, credit-rating downgrades, operational and cybersecurity risks, and the potential effect of regulatory changes such as Basel III, the Volcker rule and liquidity requirements.
Most important facts for an investor to verify
- Reconcile reported net loss with the $9.3 billion legal expense and the $1.6 billion loan-loss allowance reduction, and assess the sustainability of adjusted earnings.
- Review Note 23 litigation disclosures, including the approximately $23 billion reserve, the estimated excess-loss range, and post-quarter-end mortgage settlements.
- Assess whether mortgage production weakness, servicing costs, repurchase demands and foreclosure-related obligations could continue to pressure revenue and capital.
- Evaluate the sustainability of allowance releases given remaining residential real-estate, PCI, HELOC recast and credit-card risks.
- Confirm liquidity and capital under final Basel III rules, including the estimated 9.3% fully phased-in Basel III Tier 1 common ratio and estimated 4.7% supplementary leverage ratio.
- Distinguish GAAP results from management’s non-GAAP managed-basis, adjusted earnings, DVA, ROTCE and tangible-book-value measures.
- Review off-balance-sheet commitments, guarantees, securitization exposures and the potential liquidity effects of credit-rating downgrades.