JPMORGAN CHASE & CO annual report, FY2013

JPMorgan Chase & Co. 2013 Form 10-K Summary

Business context and reporting period

JPMorgan Chase & Co. filed its Form 10-K for the fiscal year ended December 31, 2013, with audited consolidated financial statements for 2013, 2012 and 2011. The Firm is a global financial services company with four primary reportable segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking and Asset Management, plus Corporate/Private Equity. At year-end, the Firm reported $2.4 trillion of assets and $211.2 billion of stockholders’ equity.

The fourth quarter of 2013 included net income of $5.3 billion, or $1.30 diluted earnings per share, on net revenue of $23.2 billion. Quarterly results included significant legal expenses and a one-time funding valuation adjustment.

Financial performance and key metrics

Metric	2013	2012	Change
Total net revenue	$96.6 billion	$97.0 billion	Down less than 1%
Net income	$17.9 billion	$21.3 billion	Down 16%
Diluted EPS	$4.35	$5.20	Down 16%
Noninterest expense	$70.5 billion	$64.7 billion	Up 9%
Provision for credit losses	$225 million	$3.4 billion	Down 93%
Return on common equity	9%	11%	Down 2 percentage points
Net charge-offs	$5.8 billion	$9.1 billion	Down 36%
Nonperforming assets	$9.7 billion	$11.9 billion	Down 18%

• Net interest income was $43.3 billion, down from $44.9 billion. The fully taxable-equivalent net interest yield declined to 2.23% from 2.48%, reflecting lower loan yields, runoff of higher-yielding loans and increased deposits with banks.
• Noninterest revenue was $53.3 billion, compared with $52.1 billion. Investment banking fees and asset-management revenue increased, while mortgage fees, securities gains and lending- and deposit-related fees declined.
• Legal expense was $11.1 billion, compared with $5.0 billion in 2012, and was the principal driver of higher noninterest expense.
• The allowance for credit losses declined to $17.0 billion from $22.6 billion. The allowance for loan losses was $16.3 billion, or 2.25% of retained loans; excluding purchased credit-impaired loans, coverage was 1.80%.
• Total loans were $738.4 billion, deposits were $1.288 trillion and long-term debt was $267.9 billion at year-end. The loans-to-deposits ratio was 57%.
• Operating cash flow was $108.0 billion. Investing activities used $150.5 billion, primarily reflecting increased deposits with banks and wholesale loan growth. Financing activities provided $28.3 billion.
• Estimated high-quality liquid assets were $522 billion, compared with $341 billion at year-end 2012. Management stated that liquidity and secured and unsecured funding capacity were sufficient to meet obligations.
• Basel I Tier 1 capital was 11.9%, total capital was 14.4%, Tier 1 leverage was 7.1% and Tier 1 common capital was 10.7%. Management estimated a fully phased-in Basel III Advanced Approach Tier 1 common ratio of 9.5%.

Material changes versus the prior comparable period

• Net income declined despite broadly stable revenue because legal and regulatory costs increased substantially.
• Credit performance improved materially: net charge-offs, nonperforming assets, consumer delinquencies and the allowance for credit losses all declined.
• Deposits increased 8% to $1.3 trillion, while loans increased approximately 1%. Wholesale lending growth offset consumer portfolio runoff.
• Consumer & Community Banking net income increased 2% to $10.7 billion despite an 8% revenue decline, primarily because credit-loss provision and expenses were lower.
• Corporate & Investment Bank net income increased 2% to $8.5 billion. Excluding FVA and DVA, management reported higher underlying revenue and net income.
• Commercial Banking net income declined 3% to $2.6 billion as higher revenue was more than offset by increased expenses and provision expense.
• Asset Management net income increased 19% to $2.0 billion, supported by client inflows and higher market levels.
• Corporate/Private Equity reported a $6.0 billion net loss, compared with a $2.0 billion net loss in 2012, primarily due to $10.2 billion of legal expense.

Guidance, outlook, risks and unusual items

• Management expected relatively stable near-term net interest margin and 2014 adjusted firmwide expense below $59 billion, excluding legal expenses and foreclosure-related matters.
• Management expected incremental control and compliance spending of slightly more than $1 billion in 2014, following approximately $1 billion of additional spending in 2013.
• Higher mortgage rates were expected to reduce refinancing volumes and margins; Mortgage Production was expected to be modestly pretax negative in the first quarter of 2014.
• Management expected continued spread compression in Card Services, possible further allowance reductions if credit trends remained favorable, and declining charge-offs in Real Estate Portfolios if housing and macroeconomic conditions remained stable.
• The fourth quarter included a one-time $1.5 billion pretax loss from implementing an FVA framework for over-the-counter derivatives and structured notes. DVA losses were $452 million for 2013.
• Other unusual 2013 items included a $1.3 billion pretax gain from selling Visa Class B shares and a $493 million pretax gain from selling One Chase Manhattan Plaza.
• The Firm entered into or accrued for major mortgage-related settlements, including a $9.0 billion cash RMBS settlement and $4.0 billion of borrower relief, a $4.0 billion FHFA MBS settlement, and a $1.1 billion GSE mortgage repurchase settlement.
• Subsequent events included a $614 million FHA, HUD and VA settlement and Madoff-related agreements, including a $1.7 billion forfeiture payment, a $350 million OCC penalty and a $461 million FinCEN penalty.
• Material risks include regulatory reform and supervision, litigation, market and credit conditions, liquidity and ratings downgrades, operational and cybersecurity events, model and valuation risk, mortgage servicing and repurchase exposure, and execution of Basel III, the Volcker Rule and derivatives reforms.
• The Firm estimated reasonably possible legal losses in excess of established reserves from $0 to approximately $5.0 billion at December 31, 2013. Management stated that the estimate was subject to significant uncertainty.

Important facts investors should verify

• Reconcile reported net income with the $11.1 billion legal expense and assess the sustainability of earnings excluding legal and other unusual items.
• Review the effect of the $1.5 billion FVA implementation loss and the treatment of future FVA and DVA volatility.
• Evaluate capital under fully phased-in Basel III, including the estimated 9.5% Tier 1 common ratio and the estimated 4.7% supplementary leverage ratio at year-end.
• Assess credit-quality assumptions underlying the $5.6 billion allowance reduction, particularly housing prices, unemployment, HELOC payment recasts, modified-loan redefaults and PCI loans.
• Review remaining mortgage repurchase, RMBS, servicing, foreclosure and government-insured mortgage exposures, including the $681 million mortgage repurchase liability.
• Monitor regulatory remediation, consent orders, the 2014 CCAR response, Volcker Rule compliance and expected control and compliance spending.
• Assess liquidity sensitivity to credit-rating downgrades, derivative collateral calls, contingent funding obligations and off-balance-sheet commitments exceeding $1.0 trillion.
• Confirm the status and potential financial impact of pending litigation and investigations not resolved by the filing date.