JPMorgan Chase - 10-Q quarterly report FY2013 Q3

The U.S. economy grew at a moderate pace in the third quarter of 2013. Employment continued to expand, and the U.S. unemployment rate fell to 7.2%, as labor market conditions continued to improve gradually. However, inflation remained below the Federal Reserve’s Open Market Committee’s long-run target of 2%.

The U.S. housing sector continued to recover despite a rise in mortgage rates earlier in the quarter, primarily driven by improving house price indexes. Existing home sales reached the highest level in six-and-a-half years, while the median home price carried its ninth consecutive month of double-digit year-over-year increases in August 2013.

In September 2013, the Federal Reserve’s Open Market Committee decided to delay the tapering of its bond buying

program, citing rising mortgage rates and uncertainty regarding the political debate on the federal budget and debt ceiling. A partial government shutdown began on October 1, 2013 which will likely exert a drag on GDP in the fourth quarter of 2013. On October 16, 2013, the U.S. government reached an agreement on the continuing resolution funding the government and suspending the debt ceiling until February 7, 2014, averting default.

Economic activity in the European Union gradually began to strengthen this quarter, but the pace of growth remained slow. Outside the Eurozone, the UK economy continued to recover at a modest pace.

In Asia, the Chinese economy returned to relative stability, as policy makers remain focused on balancing structural reforms, financial stability and growth. In Japan, the Bank of Japan left its economic easing policy unchanged this quarter, and Japanese real GDP grew at a 4% annualized rate in the first half of the year.

JPMorgan Chase reported a third-quarter 2013 net loss of $0.4 billion, or $(0.17) per share, on net revenue of $23.1 billion. Net income decreased by $6.1 billion, compared with net income of $5.7 billion, or $1.40 per share, in the third quarter of 2012. Return on equity for the quarter was (1)%, compared with 12% for the prior-year quarter. Results in the third quarter of 2013 included the following significant items: $9.15 billion pretax expense ($7.20 billion after-tax and $1.85 per share after-tax decrease in earnings) for legal expense in Corporate, including reserves for litigation and regulatory proceedings; and $1.60 billion pretax benefit ($992 million after-tax and $0.26 per share after-tax increase in earnings) from a reduction in the

administration and commissions revenue. The decrease in mortgage fees and related income reflected lower mortgage production-related revenue, reflecting lower volumes and lower margins, partially offset by lower repurchase losses; and by a decrease in net mortgage servicing-related revenue. Net interest income decreased compared with the prior year, reflecting the impact of lower loan yields due to competitive pressures and replacement of higher yielding loans with lower yielding loans, partially offset by higher investment securities yield and lower net interest expense on long-term debt.

Results in the third quarter of 2013 reflected lower estimated losses due to improved delinquency trends in the residential real estate and credit card portfolios, as well as the impact of improved home prices on the residential real estate portfolio. The provision for credit losses was a benefit of $543 million, compared with a provision for credit losses of $1.8 billion in the prior year. The total consumer provision for credit losses was a benefit of $273 million, compared with an expense of $1.9 billion in the prior year. The current-quarter consumer provision reflected a $1.6 billion reduction in the allowance for loan losses. Consumer net charge-offs were $1.3 billion, compared with $2.8 billion in the prior year, resulting in net charge-off rates of 1.47% and 3.10%, respectively, excluding in each year the PCI portfolio. The prior-year total net charge-offs included $880 million of incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. The wholesale provision for credit losses was a benefit of $270 million, compared with a benefit of $63 million in the prior year. Wholesale net charge-offs were $26 million, compared with net recoveries of $34 million in the prior year, resulting in a net charge-off rate of 0.03% and a net recovery rate of 0.05%, respectively. The Firm’s allowance for loan losses to period-end loans retained, excluding PCI loans, was 1.89%, compared with 2.61% in the prior year. The Firm’s nonperforming assets totaled $10.2 billion, down from the prior-quarter and prior-year levels of $10.9 billion and $12.5 billion, respectively.

Noninterest expense was $23.6 billion, up $8.3 billion, or 54%, compared with the prior year, driven by higher legal expense. The current quarter included approximately $9.3 billion of legal expense, including reserves for litigation and regulatory proceedings, compared with $790 million of expense for additional litigation reserves in the prior year.

The Firm’s results reflected strong underlying performance across its businesses. CCB average deposits were up 10%. Client investment assets were a record $179.0 billion, up 16%, and credit card sales volume was a record $107.0 billion, up 11% from the prior year. Corporate & Investment Banking reported strong performance across products and maintained its #1 ranking for Global Investment Banking fees. Corporate & Investment Banking assets under custody were a record $19.7 trillion, up 8% compared with the prior year, and average client deposits and other third-party

liabilities were up 10% compared with the prior year. Asset Management reported net long-term product flows of $19 billion, positive for the eighteenth consecutive quarter, total client assets of $2.2 trillion and record loan balances of $90.5 billion.

Net income during the nine months of 2013 was $12.6 billion, or $3.05 per share, compared with $15.6 billion, or $3.81 per share, in the first nine months of 2012. The decrease was driven by an increase in noninterest expense, partially offset by a decrease in provision for credit losses. Noninterest expense was $54.9 billion, up $6.2 billion, or 13%, compared with the prior year, driven by higher legal expense. The lower provision for credit losses reflected an improved credit environment.

JPMorgan Chase continued to support clients, consumers, companies and communities around the globe. The Firm provided credit and raised capital of $1.6 trillion for commercial and consumer clients during the nine months ended September 30, 2013. This included $14 billion of credit provided for U.S. small businesses and $442 billion of credit provided for corporations. This also included more than $829 billion of capital for clients and more than $59 billion of credit provided to, and capital raised for, nonprofit and government entities, including states, municipalities, hospitals and universities.

JPMorgan Chase is subject to regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside the U.S. in which the Firm does business. In addition, certain affiliates and subsidiaries of the Firm are banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, banking, commodities futures, consumer protection and other regulators. The Firm is currently experiencing an unprecedented increase in regulation and supervision, and such changes could have a significant impact on how the Firm conducts business.

result thereof and any changes in business practices the Firm may make in response thereto.

Rulemaking under the Dodd-Frank Act, as well as other federal banking laws, by the Federal Reserve, the OCC, and the FDIC, the Commodities Futures Trading Commission (the “CFTC”), the Securities Exchange Commission (the “SEC”), and the Bureau of Consumer Financial Protection (the “CFPB”) is continuing. In June, 2013, the CFTC published final rules enacting the Dodd-Frank requirement that swaps that are required to be cleared (“required swaps”), be executed on a “swap execution facility” (“SEF”); until the final rules were issued, the market assumed that only those platforms which offered required swaps would be required to register as a SEF. However, when the final rules were issued, included in a footnote was the requirement that all trading platforms that meet the definition of a SEF register with the CFTC — even if the trading platform does not execute required swaps — thereby mandating that all such platforms register with the CFTC by October 2, 2013. Because many non-U.S. platforms that do not execute required swaps have taken the position that they would not need to register with the CFTC unless they permit U.S. persons to transact on their platform, they have, as a result of the final rules, become unwilling to permit certain U.S. market participants, such as JPMorgan Chase Bank, N.A., access to their platforms. The Firm believes reduced participation by U.S. persons in certain non-U.S. swaps markets will adversely affect the liquidity of such markets. Finally, the responsible agencies have indicated that a final Volcker rule may be forthcoming by or near the end of 2013; depending on how the final rule deals with issues involving market-making, hedging and sponsored funds, it could adversely affect the Firm’s investment banking and investment management businesses, and other of the Firm’s activities. The Firm continues to work diligently to assess and understand the implications of all the regulatory changes it is facing, and is devoting substantial resources to implementing all the new regulations while, at the same time, endeavoring to meet the needs and expectations of its clients.

The effect of the changes in law and the heightened scrutiny of its regulators, the increase in threatened and pending litigation facing the Firm, and the escalating demands and penalties being imposed by various governmental agencies,

has resulted in additional legal expense for the Firm in recent periods.

As of September 30, 2013, the Firm had total reserves for litigation and regulatory proceedings of approximately $23 billion. These reserves, which reflect the Firm’s estimate of probable and estimable losses from litigation and regulatory proceedings as of September 30, 2013, relate to a broad range of matters, and involve significant management judgment, based upon information available as of the date of such estimate and taking into consideration management’s best estimate of such losses for those cases for which such estimates can be made. Accordingly, such reserves will change from time to time.

Lending- and deposit-related fees decreased only slightly compared with both the three and nine months ended September 30, 2012, predominantly due to lower deposit-related fees in CCB resulting from reductions in certain product and transaction fees. For additional information on lending- and deposit-related fees, which are mostly

10-Q.

Form 10-Q.

Card income increased compared with the three and nine months ended September 30, 2012. The increase was

Other income decreased compared with the three and nine months ended September 30, 2012, primarily reflecting the absence of 2012 items recorded in Corporate/Private Equity. The three months ended September 30, 2012 included $888 million of extinguishment gains related to the redemption of trust preferred securities. The nine months ended September 30, 2012 included the aforementioned gain on the trust preferred securities, as well as a $1.1 billion benefit from the Washington Mutual bankruptcy settlement. The 2013 decrease was offset partially by higher revenue from client-driven activity in CIB, as well as higher auto-related operating lease income, in both the three and nine month periods.

Noncompensation expense increased in the three months ended September 30, 2013, compared with the prior year, due to higher other expense, reflecting in particular $9.3