CORP Q1 2013



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the quarterly period ended
Commission file
March 31, 2013
number 1-5805

JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter)
Delaware
13-2624428
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification no.)
 
 
270 Park Avenue, New York, New York
10017
(Address of principal executive offices)
(Zip Code)
 
 
Registrant’s telephone number, including area code: (212) 270-6000



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
T Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
T Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer T                 Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes T No
 
Number of shares of common stock outstanding as of April 30, 2013: 3,779,676,026
 





FORM 10-Q
TABLE OF CONTENTS

Part I - Financial information
Page
Item 1
 
 
90
 
91
 
Consolidated balance sheets (unaudited) at March 31, 2013, and December 31, 2012
92
 
Consolidated statements of changes in stockholders’ equity (unaudited) for the three months ended March 31, 2013 and 2012
93
 
Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2013 and 2012
94
 
95
 
Report of Independent Registered Public Accounting Firm
182
 
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three months ended March 31, 2013 and 2012
183
 
184
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
3
 
4
 
6
 
11
 
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
13
 
15
 
35
 
36
 
38
 
42
 
48
 
84
 
85
 
88
 
89
Item 3
189
Item 4
189
Part II - Other information
 
Item 1
190
Item 1A
190
Item 2
190
Item 3
191
Item 4
Mine Safety Disclosure
191
Item 5
191
Item 6
191


2




JPMorgan Chase & Co.
Consolidated financial highlights
(unaudited)
As of or for the period ended,
 
 
 
 
 
(in millions, except per share, ratio and headcount data)
1Q13
4Q12
3Q12
2Q12
1Q12
Selected income statement data
 
 
 
 
 
Total net revenue
$
25,122

$
23,653

$
25,146

$
22,180

$
26,052

Total noninterest expense
15,423

16,047

15,371

14,966

18,345

Pre-provision profit
9,699

7,606

9,775

7,214

7,707

Provision for credit losses
617

656

1,789

214

726

Income before income tax expense
9,082

6,950

7,986

7,000

6,981

Income tax expense
2,553

1,258

2,278

2,040

2,057

Net income
$
6,529

$
5,692

$
5,708

$
4,960

$
4,924

Per common share data
 
 
 
 
 
Net income per share: Basic
$
1.61

$
1.40

$
1.41

$
1.22

$
1.20

  Diluted
1.59

1.39

1.40

1.21

1.19

Cash dividends declared per share
0.30

0.30

0.30

0.30

0.30

Book value per share
52.02

51.27

50.17

48.40

47.48

Tangible book value per share(a)
39.54

38.75

37.53

35.71

34.79

Common shares outstanding
 
 
 
 
 
Average: Basic
3,818.2

3,806.7

3,803.3

3,808.9

3,818.8

Diluted
3,847.0

3,820.9

3,813.9

3,820.5

3,833.4

Common shares at period-end
3,789.8

3,804.0

3,799.6

3,796.8

3,822.0

Share price(b)
 
 
 
 
 
High
$
51.00

$
44.54

$
42.09

$
46.35

$
46.49

Low
44.20

38.83

33.10

30.83

34.01

Close
47.46

43.97

40.48

35.73

45.98

Market capitalization
179,863

167,260

153,806

135,661

175,737

Selected ratios
 
 
 
 
 
Return on common equity (“ROE”)
13
%
11
%
12
%
11
%
11
%
Return on tangible common equity (“ROTCE”)(a)
17

15

16

15

15

Return on assets (“ROA”)
1.14

0.98

1.01

0.88

0.88

Return on risk-weighted assets(c)(d)
1.88

1.76

1.74

1.52

1.57

Overhead ratio
61

68

61

67

70

Deposits-to-loans ratio
165

163

158

153

157

Tier 1 capital ratio(d)
11.6

12.6

11.9

11.3

11.9

Total capital ratio(d)
14.1

15.3

14.7

14.0

14.9

Tier 1 leverage ratio
7.3

7.1

7.1

6.7

7.1

Tier 1 common capital ratio(d)(e)
10.2

11.0

10.4

9.9

9.8

Selected balance sheet data (period-end)
 
 
 
 
 
Trading assets
$
430,991

$
450,028

$
447,053

$
417,324

$
455,633

Securities
365,744

371,152

365,901

354,595

381,742

Loans
728,886

733,796

721,947

727,571

720,967

Total assets
2,389,349

2,359,141

2,321,284

2,290,146

2,320,164

Deposits
1,202,507

1,193,593

1,139,611

1,115,886

1,128,512

Long-term debt
268,361

249,024

241,140

239,539

255,831

Common stockholders’ equity
197,128

195,011

190,635

183,772

181,469

Total stockholders’ equity
207,086

204,069

199,693

191,572

189,269

Headcount(f)
255,898

258,753

259,144

260,398

261,169

Credit quality metrics
 
 
 
 
 
Allowance for credit losses
$
21,496

$
22,604

$
23,576

$
24,555

$
26,621

Allowance for loan losses to total retained loans
2.88
%
3.02
%
3.18
%
3.29
%
3.63
%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(g)
2.27

2.43

2.61

2.74

3.11

Nonperforming assets
$
11,584

$
11,734

$
12,481

$
11,397

$
11,953

Net charge-offs
1,725

1,628

2,770

2,278

2,387

Net charge-off rate
0.97
%
0.90
%
1.53
%
1.27
%
1.35
%
(a)
Tangible book value per share and ROTCE are non-GAAP financial measures. Tangible book value per share represents the Firm’s tangible common equity divided by period-end common shares. ROTCE measures the Firm’s annualized earnings as a percentage of tangible common equity. For further discussion of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 13–14 of this Form 10-Q.
(b)
Share prices shown for JPMorgan Chase’s common stock are from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(c)
Return on Basel I risk-weighted assets is the annualized earnings of the Firm divided by its average risk-weighted assets.
(d)
In the first quarter of 2013, the Firm implemented rules that provide for additional capital requirements for trading positions and securitizations (“Basel 2.5”). This implementation resulted in an increase to risk-weighted assets of approximately $150 billion and decreases to the Firm’s Tier 1 capital, Total capital and Tier 1 common capital ratios of 140 basis points, 160 basis points and 120 basis points, respectively. For further discussion of Basel 2.5, see Regulatory capital on pages 42–45 of this Form 10-Q.
(e)
Basel I Tier 1 common capital ratio (“Tier 1 common ratio”) is Tier 1 common capital (“Tier 1 common”) divided by risk-weighted assets. The Firm uses Tier 1 common capital along with the other capital measures to assess and monitor its capital position. For further discussion of the Tier 1 common ratio, see Regulatory capital on pages 42–45 of this Form 10-Q.
(f)
Effective January 1, 2013, interns are excluded from the firmwide and business segment headcount metrics. Prior periods were revised to conform with this presentation.
(g)
Excludes the impact of residential real estate purchased credit-impaired (“PCI”) loans. For further discussion, see Allowance for credit losses on pages 74–76 of this Form 10-Q.


3


INTRODUCTION
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”). See the Glossary of terms on pages 184–186 for definitions of terms used throughout this Form 10-Q.
The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause JPMorgan Chase’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements on page 89 and Part II, Item 1A: Risk Factors, on page 190 of this Form 10-Q; and Part I, Item 1A, Risk Factors, on pages 8–21 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (“2012 Annual Report” or “2012 Form 10-K”), to which reference is hereby made.
JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with operations worldwide. The Firm had $2.4 trillion in assets and $207.1 billion in stockholders’ equity as of March 31, 2013. The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firm’s principal operating subsidiaries in the United Kingdom (“U.K.”) is J.P. Morgan Securities plc (formerly J.P. Morgan Securities Ltd.), a subsidiary of JPMorgan Chase Bank, N.A.
 
JPMorgan Chase’s activities are organized, for management reporting purposes, into four major reportable business segments, as well as a Corporate/Private Equity segment. The Firm’s consumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, Commercial Banking, and Asset Management segments comprise the Firm’s wholesale businesses. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Consumer & Community Banking
Consumer & Community Banking (“CCB”) serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking, Mortgage Banking (including Mortgage Production, Mortgage Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto (“Card”). Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Mortgage Banking includes mortgage origination and servicing activities, as well as portfolios comprised of residential mortgages and home equity loans, including the purchased credit impaired (“PCI”) portfolio acquired in the Washington Mutual transaction. Card issues credit cards to consumers and small businesses, provides payment services to corporate and public sector clients through its commercial card products, offers payment processing services to merchants, and provides auto and student loan services.
Corporate & Investment Bank
The Corporate & Investment Bank (“CIB”) offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Within Banking, the CIB offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Also included in Banking is Treasury Services, which includes transaction services, comprised primarily of cash management and liquidity solutions, and trade finance products. The Markets & Investor Services segment of the CIB is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes the Securities Services business, a leading global custodian which includes custody, fund accounting and administration, and securities lending products sold principally to asset managers, insurance companies and public and private investment funds.


4


Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to U.S. and U.S. multinational clients, including corporations, municipalities, financial institutions and nonprofit entities with annual revenue generally ranging from $20 million to $2 billion. CB provides financing to real estate investors and owners. Partnering with the Firm’s other businesses, CB provides comprehensive financial solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Asset Management
Asset Management (“AM”), with client assets of $2.2 trillion as of March 31, 2013, is a global leader in investment and wealth management. AM clients include institutions, high-net-worth individuals and retail investors in every major market throughout the world. AM offers investment management across all major asset classes including equities, fixed income, alternatives and money market funds. AM also offers multi-asset investment management, providing solutions to a broad range of clients’ investment needs. For individual investors, AM also provides retirement products and services, brokerage and banking services, including trust and estate, loans, mortgages and deposits. The majority of AM’s client assets are in actively managed portfolios.
 
In addition to the four major reportable business segments outlined above, the following is a description of the Corporate/Private Equity segment.
Corporate/Private Equity
The Corporate/Private Equity segment comprises Private Equity, Treasury and Chief Investment Office (“CIO”), and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital and structural interest rate and foreign exchange risks. The major corporate staff units include Central Technology and Operations, Internal Audit, Executive, Finance, Human Resources, Legal, Compliance, Global Real Estate, Operational Control, Risk Management, and Corporate Responsibility & Public Policy. Other centrally managed expense includes the Firm’s occupancy and pension-related expense that are subject to allocation to the businesses.



5


EXECUTIVE OVERVIEW
This executive overview of the MD&A highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of trends and uncertainties, as well as the risks and critical accounting estimates affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.
Economic environment
During the first quarter of 2013, the U.S. economy continued to grow at a modest pace. The U.S. unemployment rate declined to 7.6% as U.S. labor market conditions continued to improve, although hiring may have slowed in March. After turning the corner in 2012, the U.S. housing market continued to improve during the first quarter, with rising prices, existing home sales hitting their highest level in three years and homebuilding permits rising at the fastest pace since mid-2008.
The economies of many of the European Union member countries continued to struggle during the first quarter of 2013. In the first quarter, the Eurozone was tested again by the banking crisis in Cyprus. By the end of the first quarter, that nation had turned to the Eurozone and the International Monetary Fund (“IMF”) to recapitalize its banking system.
Asia’s developing economies continued to expand at a modest pace in the first quarter, keeping global inflationary pressures in check. In Latin America, attention continued to be focused on Argentina where the local currency has declined toward historic lows as the economic situation in that country has worsened. Both Argentina and Brazil were dealing with inflation issues.
U.S. inflation estimates remained below the Board of Governors of the Federal Reserve System’s (the “Federal Reserve”) 2% long-run goal. The Federal Reserve maintained the target range for the federal funds rate at zero to one quarter percent and tied its interest rate forecasts to the evolution of the economy, in particular, inflation and unemployment rates.
At the beginning of the quarter, financial markets reacted favorably when the U.S. Congress reached an agreement to resolve the so-called “fiscal cliff” by passing the American Taxpayer Relief Act of 2012. This Act made permanent most of the tax cuts initiated in 2001 and 2003 and allowed the tax rate on the top income bracket, which was increased to $450,000 annually for joint tax filers, to revert to 39.6% from 35.0%.
For the remainder of 2013, the U.S. economy is likely to be affected by the continuing uncertainty about Europe’s financial crisis, geopolitical developments, the Federal Reserve’s monetary policy, and the ongoing fiscal debate over the U.S. debt limit, government spending and taxes. Spending and debt ceiling issues are likely to return to the spotlight during the second quarter when the U.S. is projected to reach its debt limit again.
 
Financial performance of JPMorgan Chase
 
 
 
Three months ended March 31,
(in millions, except per share data and ratios)
2013
 
2012
 
Change
Selected income statement data
 
 
 
 
 
Total net revenue
$
25,122

 
$
26,052

 
(4
)%
Total noninterest expense
15,423

 
18,345

 
(16
)
Pre-provision profit
9,699

 
7,707

 
26

Provision for credit losses
617

 
726

 
(15
)
Net income
6,529

 
4,924

 
33

Diluted earnings per share
1.59

 
1.19

 
34

Return on common equity
13
%
 
11
%
 
 
Capital ratios
 
 
 
 
 
Tier 1 capital(a)
11.6

 
11.9

 
 
Tier 1 common(a)
10.2

 
9.8

 
 
(a)
In the first quarter of 2013, regulatory rules requiring additional capital for certain trading positions and securitizations became effective (“Basel 2.5”). This resulted in an increase to risk-weighted assets of approximately $150 billion, resulting in a decrease to the Firm’s Tier 1 capital and Tier 1 common capital ratios by 140 basis points and 120 basis points, respectively. For further discussion of Basel 2.5, see Regulatory capital on pages 42–45 of this Form 10-Q.
Business Overview
JPMorgan Chase reported record first-quarter 2013 net income of $6.5 billion, or a record $1.59 per share, on net revenue of $25.1 billion. Net income increased by $1.6 billion, or 33%, compared with net income of $4.9 billion, or $1.19 per share, in the first quarter of 2012. ROE for the quarter was 13%, compared with 11% for the prior-year quarter. Results in the first quarter of 2013 included the following significant items: $650 million pretax benefit ($0.10 per share after-tax increase in earnings) from a reduction in the allowance for loan losses in Real Estate Portfolios; and $500 million pretax benefit ($0.08 per share after-tax increase in earnings) from a reduction in the allowance for loan losses in the credit card portfolio. The tax rate used for each of the above significant items is 38%; for additional information, see the discussion at the end of this section on page 8.
The increase in net income from the first quarter of 2012 was driven by lower noninterest expense and lower provision for credit losses, partially offset by lower net revenue. The decrease in net revenue compared with the prior year was due to a $1.1 billion benefit from the WaMu bankruptcy settlement in the prior year, lower mortgage fees and related income and lower lending- and deposit-related fees, largely offset by higher principal transactions revenue. The increase in principal transactions revenue reflected: the absence of $1.4 billion of losses on CIO’s synthetic credit portfolio, which was recorded in the first quarter of the prior year; and, this year, a DVA gain on structured notes and derivative liabilities of $126 million resulting from the widening of the Firm’s credit spreads,


6


compared with a DVA loss of $907 million in the prior year. Net interest income decreased compared with the prior year, reflecting the impact of low interest rates, as well as lower loan yields due to competitive pressures and loan portfolio run-off, lower investment securities yield, and limited reinvestment opportunities, partially offset by lower long-term debt costs, primarily due to a change in funding mix, and lower deposit costs.
Results in the first quarter of 2013 reflected positive credit trends for the residential real estate and credit card portfolios. The provision for credit losses was $617 million, down $109 million, or 15%, from the prior year. The total consumer provision for credit losses was $545 million, down $92 million from the prior year. The current-quarter consumer provision included a $1.2 billion reduction in the allowance for loan losses due to lower estimated losses reflecting improved delinquency trends in the residential real estate and credit card portfolios, and also the impact of improved home prices in the residential real estate portfolio. Consumer net charge-offs were $1.7 billion, compared with $2.4 billion in the prior year, resulting in net charge-off rates of 1.92% and 2.60%, respectively, excluding in each year the purchased credit impaired (“PCI”) portfolio. The decrease in consumer net charge-offs was primarily due to improved delinquency trends. A favorable credit environment and stable credit trends also prevailed across the Firm’s wholesale loan portfolios as the Firm continued to experience low levels of criticized exposure, nonaccrual loans and charge-offs. The wholesale provision for credit losses was $72 million, compared with $89 million in the prior year. Wholesale net charge-offs were $35 million, compared with $5 million in the prior year, resulting in net charge-off rates of 0.05% and 0.01%, respectively. The Firm’s allowance for loan losses to end-of-period loans retained was 2.27%, compared with 3.11% in the prior year, excluding in each year the PCI portfolio. The Firm’s nonperforming assets totaled $11.6 billion at March 31, 2013, down from $11.7 billion in the prior quarter and down from $12.0 billion in the prior year.
Noninterest expense was $15.4 billion, down $2.9 billion, or 16%, compared with the prior year. The prior year included pretax expense of $2.7 billion for additional litigation reserves.
The Firm’s results reflected strong performance in all of its businesses. Consumer & Community Banking average deposits were up 10%. Mortgage Banking originations were $52.7 billion, up 37% compared with the prior year. Credit Card sales volume, excluding Commercial Card, was up 9% compared with the prior year. The Corporate & Investment Bank reported strong performance across products and maintained its #1 ranking for Global Investment Banking fees. The Corporate & Investment Bank’s assets under custody rose to $19.3 trillion, up 8% compared with the prior year. Asset Management reported positive net long-term product flows for the sixteenth consecutive quarter to a record of $31.0 billion for the first quarter and reported
 
record loan balances of $81.4 billion and record assets under supervision of $2.2 trillion.
The Firm strengthened its balance sheet, ending the first quarter with Basel I Tier 1 common capital of $143 billion and a Tier 1 common ratio of 10.2%, including the impact of Basel 2.5 rules that became effective at the beginning of this year. The Firm estimated that its Basel III Tier 1 common ratio was approximately 8.9% at March 31, 2013, including the impact of the Basel 2.5 rules and the requirements included in the Federal Reserve’s Notice of Proposed Rulemaking issued in June 2012 (“NPR”). (The Basel I and III Tier 1 common ratios are non- GAAP financial measures, which the Firm uses along with the other capital measures to assess and monitor its capital position. For further discussion of the Tier 1 common capital ratios, see Regulatory capital on pages 42–45 of this Form 10-Q.)
JPMorgan Chase continued to support clients, consumers, companies, and communities around the globe. The Firm provided credit and raised capital of $480 billion for commercial and consumer clients during the first three months of 2013. This included nearly $4 billion of credit provided for U.S. small businesses and $123 billion of credit provided for corporations. This also included more than $255 billion of capital for clients and more than $17 billion of credit provided to, and capital raised for, nonprofit and government entities, including states, municipalities, hospitals and universities.
Consumer & Community Banking net income decreased compared to the prior year, reflecting lower net revenue, partially offset by lower noninterest expense and lower provision for credit losses. Net revenue decreased, driven by lower noninterest revenue and net interest income. Noninterest revenue decreased, driven by lower mortgage fees and related income. Net interest income decreased, driven by lower deposit margins and lower loan balances due to portfolio runoff, largely offset by higher deposit balances. The provision for credit losses in the first quarter of 2013 was $549 million compared with $642 million in the prior year. The current-quarter provision reflected a $1.2 billion reduction in the allowance for loan losses due to lower estimated losses reflecting improved delinquency trends in the residential real estate and credit card portfolios. The provision for the first quarter of 2012 reflected a $1.8 billion reduction in the allowance for loan losses. Noninterest expense decreased in the first quarter of 2013 compared with the prior year. The prior year included approximately $200 million for foreclosure-related matters, including adjustments for the global settlement with federal and state agencies. Return on equity for the first quarter of 2013 was 23% on $46.0 billion of average allocated capital.
Corporate & Investment Bank net income increased compared with the prior year, reflecting higher net revenue and lower noninterest expense. Net revenue for the first quarter of 2013 included a $126 million gain from debit


7


valuation adjustments (“DVA”) on structured notes and derivative liabilities resulting from the widening of the Firm’s credit spreads; the prior-year included a $907 million loss from DVA. The increase in net revenue also reflected higher Banking revenue. Noninterest expense was down slightly from the prior year, driven by lower compensation expense and lower noncompensation expense related to efficiency initiatives, largely offset by higher litigation expense. Return on equity for the first quarter of 2013 was 19%, or 18% excluding DVA (a non-GAAP financial measure), on $56.5 billion of average allocated capital.
Commercial Banking net income increased slightly compared with the prior year, reflecting lower provision for credit losses and an increase in net revenue, predominantly offset by higher noninterest expense. Net revenue was slightly higher compared with the prior year, driven by growth in loan balances, partially offset by lower purchase discounts recognized on loan repayments, lower community development investment-related revenue, and spread compression on loan products. Noninterest expense increased compared with the prior year, reflecting higher headcount-related expense and increased operating expense for Commercial Card. Return on equity for the first quarter of 2013 was 18% on $13.5 billion of average allocated capital.
Asset Management net income increased compared with the prior year, reflecting higher net revenue, largely offset by higher noninterest expense. Noninterest revenue increased due to net client inflows, higher performance fees and the effect of higher market levels. Net interest income increased due to higher loan and deposit balances. Noninterest expense increased from the prior year, primarily due to higher headcount-related expense and performance-based compensation. Return on equity for the first quarter of 2013 was 22% on $9.0 billion of average allocated capital.
Corporate/Private Equity net income was $250 million, compared with a net loss of $1.0 billion in the prior year.
Private Equity reported a net loss of $182 million, compared with net income of $134 million in the prior year. Net revenue was a loss compared with positive net revenue in the prior year, due to net valuation losses on private investments.
Treasury and CIO reported net income of $24 million, compared with a net loss of $227 million in the prior year. Net revenue was $113 million, compared with a loss of $233 million in the prior year. Net revenue for the first quarter of 2012 included $1.4 billion of losses on CIO’s synthetic credit portfolio. Net interest income for the current quarter was a loss of $472 million due to low interest rates and limited reinvestment opportunities.
Other Corporate reported net income of $408 million in the first quarter, compared with a net loss of $929 million in the prior year. The current quarter included a benefit for tax adjustments. The prior-year included a $1.1 billion benefit
 
from the Washington Mutual bankruptcy settlement offset by $2.5 billion of additional litigation reserves.
Note: The Firm uses a single U.S.-based, blended marginal tax rate of 38% (“the marginal rate”) to report the estimated after-tax effects of each significant item affecting net income. This rate represents the weighted-average marginal tax rate for the U.S. consolidated tax group. The Firm uses this single marginal rate to reflect the tax effects of all significant items because (a) it simplifies the presentation and analysis for management and investors; (b) it has proved to be a reasonable estimate of the marginal tax effects; and (c) often there is uncertainty at the time a significant item is disclosed regarding its ultimate tax outcome.
2013 Business outlook
The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on page 89 and Risk Factors on page 190 of this Form 10-Q.
JPMorgan Chase’s outlook for the remainder of 2013 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business.
The Firm expects that net interest income for full-year 2013 will be approximately 1% lower than in 2012 as modest spread compression is expected to be offset by balance growth. In the Consumer & Business Banking business within CCB, the Firm estimates that net interest income could decline by approximately $200 million as continued deposit spread compression is expected to be largely offset by deposit balance growth. For Real Estate Portfolios within CCB, net interest income is expected to decline by approximately $400 million given management’s current estimate of net portfolio runoff levels. However, over time, the reduction in net interest income should be offset by an improvement in credit costs and lower expense. Net interest income for Treasury and CIO within Corporate/Private Equity is expected to decline as a result of limited reinvestment opportunities (this is reflected in the net income guidance for this business as described below), but this decline in net interest income is expected to be largely offset by growth in interest earning assets across the wholesale businesses.
The Firm continues to focus on expense discipline and expects total noninterest expense for the full year 2013 to be approximately $1 billion lower than in 2012 (not taking


8


into account any expense in each year related to Corporate litigation and foreclosure-related matters).
In Mortgage Banking within CCB, management expects to continue to incur elevated default- and foreclosure-related costs, including additional costs associated with the Firm’s mortgage servicing processes, particularly its loan modification and foreclosure procedures. The Firm expects there will be continued elevated levels of repurchases of mortgages previously sold, predominantly to U.S. government-sponsored entities (“GSEs”). However, based on current trends and estimates, management believes that the existing mortgage repurchase liability is sufficient to cover such losses.
For Real Estate Portfolios within Mortgage Banking, management believes that total quarterly net charge-offs are likely to be at or below $400 million. If net charge-offs and delinquencies continue to trend down, the related allowance for loan losses could be reduced over time.
In the Card Services business within Card, Merchant Services & Auto, the Firm expects that, in light of current credit trends in the credit card portfolio, the related allowance for loan losses could be reduced by approximately $1 billion for full-year 2013 (which includes the $500 million reduction in the first quarter of 2013).
The currently anticipated results for CCB described above could be adversely affected if economic conditions, including U.S. housing prices or the unemployment rate, do not continue to improve. Management continues to closely monitor the portfolios in these businesses.
In Private Equity, within the Corporate/Private Equity segment, earnings will likely continue to be volatile and influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific issues.
For Treasury and CIO, within the Corporate/Private Equity segment, management currently believes that during 2013 it may generate a quarterly net loss of approximately $300 million, with that amount likely to vary each quarter driven by the implied yield curve and management decisions related to the positioning of the investment securities portfolio.
For Other Corporate, within the Corporate/Private Equity segment, management expects quarterly net income, excluding material litigation expense and significant items, if any, to be approximately $100 million, but this amount is also likely to vary each quarter.
Regulatory developments
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. 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. For example, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), U.S. federal banking and other regulatory agencies are instructed to conduct approximately 285 rulemakings and 130 studies and reports. These agencies include the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission (the “SEC”) and the Bureau of Consumer Financial Protection (the “CFPB”). The Firm continues to work diligently in assessing and understanding the implications of the regulatory changes it is facing, and is devoting substantial resources to implementing all the new regulations while, at the same time, best meeting the needs and expectations of its clients.
The Firm is experiencing heightened scrutiny by its regulators of its compliance with new and existing regulations, including those issued under the Bank Secrecy Act, the Unfair and Deceptive Acts or Practices laws, the Real Estate Settlement Procedures Act (“RESPA”), the Truth in Lending Act, laws governing the Firm’s consumer collections practices and the laws administered by the Office of Foreign Control, among others. The Firm is also under scrutiny by its supervisors with respect to its controls and operational processes, such as those relating to model development, review, governance and approvals. On January 14, 2013, the Firm and three of its subsidiary banks, including JPMorgan Chase Bank, N.A. entered into Consent Orders with the Federal Reserve and the OCC relating principally to the Firm’s and such banks’ BSA/AML policies and procedures. Also on January 14, 2013, the Firm and JPMorgan Chase Bank, N.A. entered into Consent Orders arising out of their reviews of the Firm’s Chief Investment Office. These latter Consent Orders relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. The Firm expects that its banking supervisors will in the future continue to take more formal enforcement actions against the Firm, (including Consent Orders related to certain non-mortgage consumer collections practices and certain sales of an ancillary identity theft protection product) rather than issuing informal supervisory actions or criticisms.
While the effect of the changes in law and the heightened scrutiny of its regulators is likely to result in additional costs, the Firm cannot, given the current status of regulatory and supervisory developments, quantify the possible effects on its business and operations of all the significant changes that are currently underway. For further discussion of regulatory developments, see Supervision and regulation on pages 1–8 and Risk factors on pages 8–21 of JPMorgan Chase’s 2012 Form 10-K.
On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 CCAR process. On March 14, 2013, the Federal Reserve informed the Firm that it did not object to the Firm’s 2013


9


capital plan, but asked the Firm to submit an additional capital plan, as discussed further below. Following this notification, the Firm announced that its Board of Directors intends to increase the second-quarter common stock dividend to $0.38 per share from the current $0.30 per share, returning the dividend to its highest level. The Board of Directors has also authorized the Firm to repurchase up to $6 billion of common equity commencing with the second quarter of this year through the end of the first quarter of 2014.
The Federal Reserve has asked the Firm to submit by the end of the third quarter of 2013 an additional capital plan addressing the weaknesses it identified in the Firm’s CCAR capital planning processes. The Firm intends to fully address the Federal Reserve’s requirements. Following its review, the Federal Reserve may require the Firm to modify its capital distributions. For more information, see Capital management on pages 42–47.

 
Subsequent events
Redemption of outstanding trust preferred securities
On May 8, 2013, the Firm redeemed approximately $5.0 billion of trust preferred securities pursuant to the optional redemption provisions set forth in the documents governing those trust preferred securities.
Issuance of preferred stock
On April 23, 2013, the Firm issued $1.5 billion of noncumulative preferred stock.



10


CONSOLIDATED RESULTS OF OPERATIONS
The following section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis for the three months ended March 31, 2013 and 2012. Factors that relate primarily to a single business segment are discussed in more detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 85–87 of this Form 10-Q and pages 178–182 of JPMorgan Chase’s 2012 Annual Report.
Revenue
 
 
 
 
 
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Investment banking fees
$
1,445

 
$
1,381

 
5
 %
Principal transactions
3,761

 
2,722

 
38

Lending- and deposit-related fees
1,468

 
1,517

 
(3
)
Asset management, administration and commissions
3,599

 
3,392

 
6

Securities gains
509

 
536

 
(5
)
Mortgage fees and related income
1,452

 
2,010

 
(28
)
Card income
1,419

 
1,316

 
8

Other income(a)
536

 
1,512

 
(65
)
Noninterest revenue
14,189

 
14,386

 
(1
)
Net interest income
10,933

 
11,666

 
(6
)
Total net revenue
$
25,122

 
$
26,052

 
(4
)%
(a)
Included operating lease income of $349 million and $323 million for the three months ended March 31, 2013 and 2012, respectively.
Total net revenue for the three months ended March 31, 2013, was $25.1 billion, a decrease of $930 million, or 4%, from the three months ended March 31, 2013. The decrease was due to lower net interest income, mortgage fees and related income, and other income. The decrease was partially offset by higher principal transactions revenue.
Investment banking fees for the three months ended March 31, 2013, increased slightly from the prior year, due to higher debt underwriting fees, which included record bond underwriting fees on record levels of industry-wide high-yield bond issuance. The increase was partially offset by lower advisory fees. For additional information on investment banking fees, which are primarily recorded in CIB, see CIB segment results pages 25–28 and Note 6 on page 120 of this Form 10-Q.
Principal transactions revenue increased significantly in the three months ended March 31, 2013, compared with the prior year. The increase reflected the absence of $1.4 billion of losses on CIO’s synthetic credit portfolio, which was recorded in the prior year; and a DVA gain on structured notes and derivative liabilities of $126 million, resulting from the widening of the Firm’s credit spreads, compared with a DVA loss of $907 million in the prior year. The three months ended March 31, 2013, also reflected solid client revenue in fixed income and equity markets. The increase was partially offset by net valuation losses on
 
private investments in Corporate/Private Equity during the three months ended March 31, 2013. For additional information on principal transactions revenue, see CIB and Corporate/Private Equity segment results on pages 25–28 and 33–34, respectively, and Note 6 on page 120 of this Form 10-Q.
Lending- and deposit-related fees decreased modestly compared with the prior year. The decrease was largely due to lower deposit fees in CCB, resulting from reductions in certain product and transaction fees. For additional information on lending- and deposit-related fees, which are mostly recorded in CCB, CIB and CB, see the segment results for CCB on pages 16–24, CIB on pages 25–28 and CB on pages 29–30 of this Form 10-Q.
Asset management, administration and commissions revenue increased compared with the prior year. The increase was driven by higher investment management fees in AM due to net client inflows, higher performance fees and the effect of higher market levels. The increase was partially offset by lower brokerage commissions. For additional information on these fees and commissions, see the segment discussions for CCB on pages 16–24, AM on pages 31–32, and Note 6 on page 120 of this Form 10-Q.
Securities gains decreased slightly compared with the prior year, reflecting the absence of a gain recognized in 2012 on an investment security in CCB, offset partially by the results of repositioning the CIO available-for-sale (“AFS”) portfolio. For additional information on securities gains, which are predominantly recorded in the Firm’s Corporate/Private Equity segment, see the Corporate/Private Equity segment discussion on pages 33–34, and Note 11 on pages 123–126 of this Form 10-Q.
Mortgage fees and related income decreased compared with the prior year. The decrease resulted from lower mortgage servicing revenue and mortgage production revenue. The decrease in mortgage servicing revenue was predominantly due to lower mortgage servicing rights (“MSR”) risk management results due to prepayment model assumption updates, primarily driven by an improvement in housing price appreciation assumptions. The decrease in mortgage production revenue reflected lower margins due to tightening of primary/secondary spreads, as well as pricing pressure due to increased capacity in the market, partially offset by higher volumes. For additional information on mortgage fees and related income, which is recorded predominantly in CCB, see CCB’s Mortgage Production and Mortgage Servicing discussion on pages 19–21, and Note 16 on pages 158–161 of this Form 10-Q.
Card income increased compared with the three months ended March 31, 2012. The increase was driven by higher net interchange income on credit and debit cards, and higher merchant servicing revenue, both due to increases in business volume. For additional information on credit card


11


income, see the CCB segment results on pages 16–24 of this Form 10-Q.
Other income decreased compared with the three months ended March 31, 2012, driven by the absence of a $1.1 billion benefit from the Washington Mutual bankruptcy settlement in Corporate/Private Equity.
Net interest income decreased in the first quarter of 2013 compared with the prior year. The decline reflected the impact of low interest rates, as well as lower loan yields due to competitive pressures and loan portfolio run-off, lower investment securities yield, and limited reinvestment opportunities; these items were partially offset by lower long-term debt costs, primarily due to a change in funding mix, and lower deposit costs. The Firm’s average interest-earning assets were $1.9 trillion for the three months ended March 31, 2013, and the net interest yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.37%, a decrease of 24 basis points from the prior year.
Provision for credit losses
 
 
 
 
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Consumer, excluding credit card
$
(37
)
 
$
1

 
NM

Credit card
582

 
636

 
(8
)%
Total consumer
545

 
637

 
(14
)
Wholesale
72

 
89

 
(19
)
Total provision for credit losses
$
617

 
$
726

 
(15
)%
The provision for credit losses decreased by $109 million compared with the prior year. The decrease was driven by a lower provision for total consumer credit losses, due to lower net charge-offs, partially offset by a lower benefit from the reduction in the allowance for loan losses ($1.2 billion in 2013 compared with $1.8 billion in 2012). The level of the wholesale provision in 2013 reflected a favorable credit environment and stable credit trends. For a more detailed discussion of the credit portfolio and the allowance for credit losses, see the segment discussions for CCB on pages 16–24, CIB on pages 25–28 and CB on pages 29–30, and the Allowance For Credit Losses section on pages 74–76 of this Form 10-Q.
Noninterest expense
 
 
 
 
 
Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Compensation expense
$
8,414

 
$
8,613

 
(2
)%
Noncompensation expense:
 
 
 
 
 
Occupancy
901

 
961

 
(6
)
Technology, communications and equipment
1,332

 
1,271

 
5

Professional and outside services
1,734

 
1,795

 
(3
)
Marketing
589

 
680

 
(13
)
Other(a)(b)
2,301

 
4,832

 
(52
)
Amortization of intangibles
152

 
193

 
(21
)
Total noncompensation expense
7,009

 
9,732

 
(28
)
Total noninterest expense
$
15,423

 
$
18,345

 
(16
)%
 
(a)
Included litigation expense of $347 million and $2.7 billion for the three months ended March 31, 2013 and 2012, respectively.
(b)
Included FDIC-related expense of $379 million and $401 million for the three months ended March 31, 2013 and 2012, respectively.
Total noninterest expense for the three months ended March 31, 2013, was $15.4 billion, down by $2.9 billion, or 16%, compared with the prior year. The decrease was due to significantly lower other expense, in particular, litigation expense in Corporate/Private Equity.
Compensation expense decreased from the three months ended March 31, 2012, predominantly due to lower expense in CIB; the decrease was partially offset by the impact of investments in the businesses, including front office sales and support staff in AM and CB.
Noncompensation expense decreased in the three months ended March 31, 2013, due to significantly lower other expense, in particular, litigation expense in Corporate/Private Equity and CCB, offset partially by an increase in litigation expense in CIB. Litigation expense in 2012 included $2.5 billion predominantly for mortgage-related matters in Corporate/Private Equity, and approximately $200 million for foreclosure-related matters in CCB. Other factors contributing to the decrease in noncompensation expense were the following: in CCB, the absence of an expense that was recorded in 2012, related to a non-core product, lower marketing expense, lower servicing and foreclosure-related expense; and the impact of efficiency initiatives across the Firm. The decrease in noncompensation expense was offset partially by the impact of investments in the businesses, including branch builds in CCB. For a further discussion of litigation expense, see Note 23 on pages 170–179 of this Form 10-Q. For a discussion of amortization of intangibles, refer to Note 16 on pages 158–161 of this Form 10-Q.
Income tax expense
 
 
(in millions, except rate)
Three months ended March 31,
2013
 
2012
Income before income tax expense
$
9,082

 
$
6,981

Income tax expense
2,553

 
2,057

Effective tax rate
28.1
%
 
29.5
%
The decrease in the effective tax rate compared with 2012 was largely attributable to tax benefits associated with prior year tax adjustments and the settlement of tax audits. This was partially offset by the impact of higher reported pretax income in combination with changes in the mix of income and expense subject to U.S. federal and state and local taxes. The prior year included deferred tax benefits associated with state and local income taxes. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 85–87 of this Form 10-Q.


12


EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 9094 of this Form 10-Q. That presentation, which is referred to as “reported” basis, provides the reader with an understanding of the Firm’s results that can be tracked consistently from year to year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable
 
investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.


The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
 
Three months ended March 31,
 
2013
 
2012
(in millions, except ratios)
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
 
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
Other income
$
536

 
$
564

 
$
1,100

 
$
1,512

 
$
534

 
$
2,046

Total noninterest revenue
14,189

 
564

 
14,753

 
14,386

 
534

 
14,920

Net interest income
10,933

 
162

 
11,095

 
11,666

 
171

 
11,837

Total net revenue
25,122

 
726

 
25,848

 
26,052

 
705

 
26,757

Pre-provision profit
9,699

 
726

 
10,425

 
7,707

 
705

 
8,412

Income before income tax expense
9,082

 
726

 
9,808

 
6,981

 
705

 
7,686

Income tax expense
$
2,553

 
$
726

 
$
3,279

 
$
2,057

 
$
705

 
$
2,762

Overhead ratio
61
%
 
NM

 
60
%
 
70
%
 
NM

 
69
%
(a)
Predominantly recognized in CIB and CB business segments and Corporate/Private Equity.
Tangible common equity (“TCE”), ROTCE, tangible book value per share (“TBVS”), and Tier 1 common under Basel I and III rules are each non-GAAP financial measures. TCE represents the Firm’s common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less goodwill and identifiable intangible assets (other than MSRs), net of related deferred tax liabilities. ROTCE measures the Firm’s earnings as a percentage of average TCE. TBVS represents the Firm’s tangible common equity divided by period-end common shares. Tier 1 common under Basel I and III rules are used by management, along with other capital
 
measures, to assess and monitor the Firm’s capital position. TCE, ROTCE, and TBVS are meaningful to the Firm, as well as analysts and investors, in assessing the Firm’s use of equity. For additional information on Tier 1 common under Basel I and III, see Regulatory capital on pages 42–45 of this Form
10-Q. All of the aforementioned measures are useful to the Firm, as well as analysts and investors, in facilitating comparisons of the Firm with competitors.



13


Average tangible common equity
 
 
Three months ended March 31,
(in millions, except per share and ratio data)
 
2013
 
2012
Common stockholders’ equity
 
$
194,733

 
$
177,711

Less: Goodwill
 
48,168

 
48,218

Less: Certain identifiable intangible assets
 
2,162

 
3,137

Add: Deferred tax liabilities(a)
 
2,828

 
2,724

Tangible common equity
 
$
147,231

 
$
129,080

 
 
 
 
 
Return on tangible common equity (“ROTCE”)
 
17
%
 
15
%
Tangible book value per share
 
$
39.54

 
$
34.79

(a)
Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in nontaxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Core net interest income
In addition to reviewing JPMorgan Chase’s net interest income on a managed basis, management also reviews core net interest income to assess the performance of its core lending, investing (including asset-liability management) and deposit-raising activities (which excludes the impact of CIB’s market-based activities). The core data presented below are non-GAAP financial measures due to the
 
exclusion of CIB’s market-based net interest income and the related assets. Management believes this exclusion provides investors and analysts a more meaningful measure by which to analyze the non-market-related business trends of the Firm and provides a comparable measure to other financial institutions that are primarily focused on core lending, investing and deposit-raising activities.

Core net interest income data(a)
 
Three months ended March 31,
(in millions, except rates)
2013
2012
 
Change
Net interest income – managed basis(b)(c)
$
11,095

$
11,837

 
(6
)%
Less: Market-based net interest income
1,432

1,569

 
(9
)
Core net interest income(b)
$
9,663

$
10,268

 
(6
)
 
 
 
 
 
Average interest-earning assets
$
1,896,084

$
1,821,513

 
4

Less: Average market-based earning assets
508,941

490,750

 
4

Core average interest-earning assets
$
1,387,143

$
1,330,763

 
4
 %
Net interest yield on interest-earning assets – managed basis
2.37
%
2.61
%
 
 
Net interest yield on market-based activity
1.14

1.29

 
 
Core net interest yield on core average interest-earning assets
2.83
%
3.10
%
 
 
(a)
Includes core lending, investing and deposit-raising activities on a managed basis across CCB, CIB, CB, AM, Corporate/Private Equity; excludes the market-based activities within the CIB.
(b)
Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(c)
For a reconciliation of net interest income on a reported and managed basis, see reconciliation from the Firm’s reported U.S. GAAP results to managed basis on page 13 of this Form 10-Q .
Quarterly results
Core net interest income decreased by $605 million to $9.7 billion and core average interest-earning assets increased by $56.4 billion to $1,387.1 billion during the three months ended March 31, 2013. The decline in net interest income reflected the impact of low interest rates, as well as lower loan yields due to competitive pressures and portfolio run-off, and lower investment securities yield. The decline was partially offset by lower long-term debt costs, primarily due to a change in funding mix, and lower deposit costs. The increase in average interest-earning assets was driven by higher deposits with banks and loan growth. The core net interest yield decreased by 27 basis points to 2.83% in the first quarter of 2013, primarily driven by lower loan yields due to competitive pressures and run-off, lower investment securities yield, limited reinvestment opportunities, and was partially offset by lower long-term debt costs, primarily
 
due to a change in funding mix and lower customer deposit rates.
Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding residential real estate purchased credit-impaired loans. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 74–76 of this Form 10-Q.


14


BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are four major reportable business segments – Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking and Asset Management. In addition, there is a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP financial measures, on pages 13–14 of this Form 10-Q.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies.
 
For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on pages 78–79 of JPMorgan Chase’s 2012 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment capital allocation changes
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, regulatory capital requirements (as estimated under Basel III) and economic risk measures. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2013, the Firm further refined the capital allocation framework to align it with the revised line of business structure that became effective in the fourth quarter of 2012. The increase in equity levels for the lines of businesses is largely driven by the most current regulatory guidance on Basel III requirements (including the NPR), principally for CIB and CIO, and by anticipated business growth. For further information about these capital changes, see Line of business equity on page 46 of this Form 10-Q.



Segment Results – Managed Basis
The following table summarizes the business segment results for the periods indicated.
Three months ended March 31,
Total net revenue
 
Noninterest expense
 
Pre-provision profit/(loss)
(in millions)
2013
2012
Change

 
2013
2012
Change
 
2013
2012
Change
Consumer & Community Banking
$
11,615

$
12,363

(6
)%
 
$
6,790

$
7,038

(4
)%
 
$
4,825

$
5,325

(9
)%
Corporate & Investment Bank
10,140

9,338

9

 
6,111

6,211

(2
)
 
4,029

3,127

29

Commercial Banking
1,673

1,657

1

 
644

598

8

 
1,029

1,059

(3
)
Asset Management
2,653

2,370

12

 
1,876

1,729

9

 
777

641

21

Corporate/Private Equity
(233
)
1,029

NM

 
2

2,769

(100
)
 
(235
)
(1,740
)
86

Total
$
25,848

$
26,757

(3
)%
 
$
15,423

$
18,345

(16
)%
 
$
10,425

$
8,412

24
 %
Three months ended March 31,
Provision for credit losses
 
Net income/(loss)
 
Return on common equity
(in millions, except ratios)
2013
2012
Change
 
2013
2012
Change
 
2013
2012
Consumer & Community Banking
$
549

$
642

(14
)%
 
$
2,586

$
2,936

(12
)%
 
23
%
27
%
Corporate & Investment Bank
11

(3
)
NM

 
2,610

2,033

28

 
19

17

Commercial Banking
39

77

(49
)
 
596

591

1

 
18

25

Asset Management
21

19

11

 
487

386

26

 
22

22

Corporate/Private Equity 
(3
)
(9
)
67

 
250

(1,022
)
NM

 
NM

NM

Total
$
617

$
726

(15
)%
 
$
6,529

$
4,924

33
 %
 
13
%
11
%


15



CONSUMER & COMMUNITY BANKING
For a discussion of the business profile on CCB, see pages 80–91 of JPMorgan Chase’s 2012 Annual Report and the Introduction on page 4 of this Form 10-Q.
Selected income statement data
 
 
 
 

Three months ended March 31,
(in millions, except ratios)
2013
 
2012
 
Change
Revenue
 
 
 
 
 
Lending- and deposit-related fees
$
723

 
$
753

 
(4
)%
Asset management, administration and commissions
533

 
535

 

Mortgage fees and related income
1,450

 
2,008

 
(28
)
Card income
1,362

 
1,263

 
8

All other income
338

 
416

 
(19
)
Noninterest revenue
4,406

 
4,975

 
(11
)
Net interest income
7,209

 
7,388

 
(2
)
Total net revenue
11,615

 
12,363

 
(6
)
 
 
 
 
 
 
Provision for credit losses
549

 
642

 
(14
)
 
 
 
 
 
 
Noninterest expense
 
 
 
 
 
Compensation expense
3,006

 
2,819

 
7

Noncompensation expense
3,676

 
4,072

 
(10
)
Amortization of intangibles
108

 
147

 
(27
)
Total noninterest expense
6,790

 
7,038

 
(4
)
Income before income tax expense
4,276

 
4,683

 
(9
)
Income tax expense
1,690

 
1,747

 
(3
)
Net income
$
2,586

 
$
2,936

 
(12
)%
 
 
 
 
 
 
Financial ratios
 
 
 
 
 
Return on common equity
23
%
 
27
%
 
 
Overhead ratio
58

 
57

 
 
Quarterly results
Consumer & Community Banking net income was $2.6 billion, compared with $2.9 billion in the prior year. The decrease was driven by lower net revenue, partially offset by lower noninterest expense and lower provision for credit losses.
Net revenue was $11.6 billion, a decrease of $748 million, or 6%, compared with the prior year. Net interest income was $7.2 billion, down $179 million, or 2%, driven by lower deposit margins and lower loan balances due to portfolio runoff, largely offset by higher deposit balances. Noninterest revenue was $4.4 billion, a decrease of $569 million, or 11%, driven by lower mortgage fees and related income.
The provision for credit losses was $549 million, compared with $642 million in the prior year. The current-quarter provision reflected a $1.2 billion reduction in the allowance for loan losses and total net charge-offs of $1.7 billion. The prior-year provision reflected a $1.8 billion reduction in the allowance for loan losses and total net charge-offs of $2.4 billion. For more information, including net charge-off amounts and rates, see Consumer Credit Portfolio on pages 56–65 of this Form 10-Q.
 
Noninterest expense was $6.8 billion, a decrease of $248 million from the prior year. The prior year included approximately $200 million for foreclosure-related matters, including adjustments for the global settlement with federal and state agencies.
Selected metrics
 
 
 
 
 
As of or for the three months ended
March 31,
(in millions, except headcount)
2013
 
2012
 
Change
Selected balance sheet data (period-end)
 
 
 
 
 
Total assets
$
458,902

 
$
469,084

 
(2
)%
Loans:
 
 
 
 
 
Loans retained
393,575

 
413,373

 
(5
)
Loans held-for-sale and loans at fair value(a)
16,277

 
13,352

 
22

Total loans
409,852

 
426,725

 
(4
)
Deposits
457,176

 
415,942

 
10

Equity
46,000

 
43,000

 
7

Selected balance sheet data (average)
 
 
 
 
 
Total assets
$
463,527

 
$
471,476

 
(2
)
Loans:
 
 
 
 
 
Loans retained
397,118

 
418,017

 
(5
)
Loans held-for-sale and loans at fair value(a)
21,181

 
16,442

 
29

Total loans
418,299

 
434,459

 
(4
)
Deposits
441,335

 
401,580

 
10

Equity
46,000

 
43,000

 
7

 
 
 
 
 
 
Headcount
161,123

 
162,970

 
(1
)%
(a)
Predominantly consists of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets.


16



Selected metrics
 
 
 
 
 
As of or for the three months ended March 31,
(in millions, except ratios and where otherwise noted)
2013
 
2012
 
Change
Credit data and quality statistics
 
 
 
 
 
Net charge-offs
$
1,699

 
$
2,392

 
(29
)%
Nonaccrual loans:
 
 
 
 
 
Nonaccrual loans retained
8,996

 
8,395

 
7

Nonaccrual loans held-for-sale and loans at fair value
42

 
101

 
(58
)
Total nonaccrual loans(a)(b)(c)(d)
9,038

 
8,496

 
6

Nonperforming assets(a)(b)(c)(d)
9,708

 
9,351

 
4

Allowance for loan losses
16,599

 
21,508

 
(23
)
Net charge-off rate(e)
1.74
%
 
2.30
%
 
 
Net charge-off rate, excluding PCI loans(e)
2.04

 
2.72

 
 
Allowance for loan losses to period-end loans retained
4.22

 
5.20

 
 
Allowance for loan losses to period-end loans retained, excluding PCI loans(f)
3.25

 
4.52

 
 
Allowance for loan losses to nonaccrual loans retained, excluding credit card(a)(d)(f)
65

 
114

 
 
Nonaccrual loans to total period-end loans, excluding credit card(d)
3.14

 
2.82

 
 
Nonaccrual loans to total period-end loans, excluding credit card and PCI loans(a)(d)
3.94

 
3.58

 
 
Business metrics
 
 
 
 
 
Number of:
 
 
 
 
 
Branches
5,632

 
5,541

 
2

ATMs
18,830

 
17,654

 
7

Active online customers (in thousands)
32,281

 
30,680

 
5

Active mobile customers (in thousands)
13,263

 
10,016

 
32
 %
(a)
Excludes PCI loans. Because the Firm is recognizing interest income on each pool of PCI loans, they are all considered to be performing.
(b)
Certain mortgages originated with the intent to sell are classified as trading assets on the Consolidated Balance Sheets.
(c)
At March 31, 2013 and 2012 nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.9 billion and $11.8 billion, respectively, that are 90 or more days past due; (2) real estate owned insured by U.S. government agencies of $1.7 billion and $1.2 billion, respectively; and (3) student loans insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”) of $523 million and $586 million, respectively, that are 90 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally.
(d)
Nonaccrual loans included $1.9 billion of Chapter 7 loans at March 31, 2013.
(e)
Loans held-for-sale and loans accounted for at fair value were excluded when calculating the net charge-off rate.
(f)
The allowance for loan losses for PCI loans was $5.7 billion at both March 31, 2013 and 2012; this amount was also excluded from the applicable ratios.
 
Consumer & Business Banking
Selected financial statement data
 
 
 
 

Three months ended March 31,
(in millions, except ratios)
2013
 
2012
 
Change
Revenue
 
 
 
 
 
Lending- and deposit-related fees
$
711

 
$
742

 
(4
)%
Asset management, administration and commissions
426

 
412

 
3

Card income
349

 
315

 
11

All other income
119

 
116

 
3

Noninterest revenue
1,605

 
1,585

 
1

Net interest income
2,572

 
2,675

 
(4
)
Total net revenue
4,177

 
4,260

 
(2
)
 
 
 
 
 
 
Provision for credit losses
61

 
96

 
(36
)
 
 
 
 
 
 
Noninterest expense
3,041

 
2,866

 
6

Income before income tax expense
1,075

 
1,298

 
(17
)
Net income
$
641

 
$
774

 
(17
)
 
 
 
 
 
 
Return on common equity
24
%
 
35
%
 
 
Overhead ratio
73

 
67

 
 
Overhead ratio, excluding core deposit intangibles(a)
72

 
66

 
 
Equity (period-end and average)
$
11,000

 
$
9,000

 
22
 %
(a)
Consumer & Business Banking (“CBB”) uses the overhead ratio (excluding the amortization of core deposit intangibles (“CDI”)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded CBB’s CDI amortization expense related to prior business combination transactions of $41 million and $51 million for the three months ended March 31, 2013 and 2012, respectively.
Quarterly results
Consumer & Business Banking net income was $641 million, a decrease of $133 million, or 17%, compared with the prior year. The decrease was driven by lower noninterest expense and lower net revenue, partially offset by lower provision for credit losses.
Net revenue was $4.2 billion, down 2% compared with the prior year. Net interest income was $2.6 billion, down 4% compared with the prior year, driven by the impact of lower deposit margins and fewer days in the period, largely offset by the impact of higher deposit balances. Noninterest revenue was $1.6 billion, an increase of 1%, driven by higher debit card revenue and investment sales revenue, largely offset by lower deposit-related fees.
The provision for credit losses was $61 million, compared with $96 million in the prior year. Net charge-offs were $61 million compared with $96 million in the prior year.
Noninterest expense was $3.0 billion, up 6% from the prior year, primarily driven by investments, including new branch builds, and a one-time cost related to a contract renegotiation.


17



Selected metrics
 
 
 
 

As of or for the three months ended
March 31,
(in millions, except ratios and where otherwise noted)
2013
 
2012
 
Change
Business metrics
 
 
 
 
 
Business banking origination volume
$
1,234

 
$
1,540

 
(20
)%
Period-end loans
18,739

 
17,822

 
5

Period-end deposits:
 
 
 
 
 
Checking
180,326

 
159,075

 
13

Savings
227,162

 
200,662

 
13

Time and other
30,431

 
35,643

 
(15
)
Total period-end deposits
437,919

 
395,380

 
11

Average loans
18,711

 
17,667

 
6

Average deposits:
 
 
 
 
 
Checking
168,697

 
147,455

 
14

Savings
221,394

 
197,199

 
12

Time and other
31,029

 
36,123

 
(14
)
Total average deposits
421,120

 
380,777

 
11

Deposit margin
2.36
%
 
2.68
%
 
 
Average assets
$
36,302

 
$
30,911

 
17

Credit data and quality statistics
 
 
 
 
Net charge-offs
$
61

 
$
96

 
(36
)
Net charge-off rate
1.32
%
 
2.19
%
 
 
Allowance for loan losses
$
698

 
$
798

 
(13
)
Nonperforming assets
465

 
663

 
(30
)
Retail branch business metrics
 
 
 
 
Investment sales volume
$
9,220

 
$
6,598

 
40

Client investment assets
168,527

 
147,083

 
15

% managed accounts
31
%
 
26
%
 
 
Number of:
 
 
 
 
 
Chase Private Client branch locations
1,392

 
366

 
280

Personal bankers
23,130

 
24,198

 
(4
)
Sales specialists
6,102

 
6,110

 

Client advisors
2,998

 
3,131

 
(4
)
Chase Private Clients
134,206

 
32,857

 
308

Accounts (in thousands)(a)
28,530

 
27,034

 
6
 %
(a) Includes checking accounts and Chase LiquidSM cards (launched in the second quarter of 2012).


 
Mortgage Banking
Selected financial statement data
 
Three months ended March 31,
(in millions, except ratios)
2013
 
2012
 
Change
Revenue
 
 
 
 
 
Mortgage fees and related income
$
1,450

 
$
2,008

 
(28
)%
All other income
93

 
131

 
(29
)
Noninterest revenue
1,543

 
2,139

 
(28
)
Net interest income
1,175

 
1,250

 
(6
)
Total net revenue
2,718

 
3,389

 
(20
)
 
 
 
 
 
 
Provision for credit losses
(198
)
 
(192
)
 
(3
)
 
 
 
 
 
 
Noninterest expense
1,806

 
2,143

 
(16
)
Income before income tax expense
1,110

 
1,438

 
(23
)
Net income
$
673

 
$
979

 
(31
)
 
 
 
 
 
 
Return on common equity
14
%
 
23
%
 
 
Overhead ratio
66

 
63

 
 
Equity (period-end and average)
$
19,500

 
$
17,500

 
11
 %

Quarterly results
Mortgage Banking net income was $673 million, a decrease of $306 million, or 31%, compared with prior year. The decrease was driven by lower net revenue, largely offset by lower noninterest expense and lower provision for credit losses.
Net revenue was $2.7 billion, a decrease of $671 million compared with the prior year. Net interest income was $1.2 billion, a decrease of $75 million. Noninterest revenue was $1.5 billion, a decrease of $596 million, driven by lower mortgage fees and related income.
The provision for credit losses was a benefit of $198 million, compared with a benefit of $192 million in the prior year. The current quarter reflected a $650 million reduction in the allowance for loan losses.
Noninterest expense was $1.8 billion, a decrease of $337 million from with the prior year, due to lower servicing expense.


18



Functional results

Three months ended March 31,
(in millions, except ratios)
2013
 
2012
 
Change
Mortgage Production
 
 
 
 
 
Production revenue
$
995

 
$
1,432

 
(31
)%
Production-related net interest & other income
223

 
187

 
19

Production-related revenue, excluding repurchase losses
1,218

 
1,619

 
(25
)
Production expense(a)
710

 
573

 
24

Income, excluding repurchase losses
508

 
1,046

 
(51
)
Repurchase losses
(81
)
 
(302
)
 
73

Income before income tax expense
427

 
744

 
(43
)
 
 
 
 
 
 
Mortgage Servicing
 
 
 
 
 
Loan servicing revenue
936

 
1,039

 
(10
)
Servicing-related net interest & other income
100

 
112

 
(11
)
Servicing-related revenue
1,036

 
1,151

 
(10
)
MSR asset modeled amortization
(258
)
 
(351
)
 
26

Default servicing expense
497

 
890

 
(44
)
Core servicing expense
240

 
261

 
(8
)
Income/(loss), excluding MSR risk management
41

 
(351
)
 
NM

MSR risk management, including related net interest income/(expense)
(142
)
 
191

 
NM

Income/(loss) before income tax expense/(benefit)
(101
)
 
(160
)
 
37

Real Estate Portfolios
 
 
 
 
 
Noninterest revenue
(17
)
 
8

 
NM

Net interest income
962

 
1,073

 
(10
)
Total net revenue
945

 
1,081

 
(13
)
 
 
 
 
 
 
Provision for credit losses
(202
)
 
(192
)
 
(5
)
 
 
 
 
 
 
Noninterest expense
363

 
419

 
(13
)
Income before income tax expense
784

 
854

 
(8
)
Mortgage Banking income before income tax expense
$
1,110

 
$
1,438

 
(23
)
Mortgage Banking net income
$
673

 
$
979

 
(31
)%
 
 
 
 
 
 
Overhead ratios
 
 
 
 
 
Mortgage Production
62
%
 
44
%
 
 
Mortgage Servicing
116

 
116

 
 
Real Estate Portfolios
38

 
39

 
 
(a)
Includes provision for credit losses associated with Mortgage Production.
 
Selected income statement data

Three months ended March 31,
(in millions)
2013
 
2012
 
Change
Supplemental mortgage fees and related income details
 
 
 
 
 
Net production revenue:
 
 
 
 
 
Production revenue
$
995

 
$
1,432

 
(31
)%
Repurchase losses
(81
)
 
(302
)
 
73

Net production revenue
914

 
1,130

 
(19
)
Net mortgage servicing revenue:
 

 
 
 
 
Operating revenue:
 

 
 
 
 
Loan servicing revenue
936

 
1,039

 
(10
)
Changes in MSR asset fair value due to modeled amortization
(258
)
 
(351
)
 
26

Total operating revenue
678

 
688

 
(1
)
Risk management:
 
 
 
 
 
Changes in MSR asset fair value due to market interest rates
546

 
644

 
(15
)
Other changes in MSR asset fair value due to inputs or assumptions in model(a)
(237
)
 
(48
)
 
(394
)
Changes in derivative fair value and other
(451
)
 
(406
)
 
(11
)
Total risk management
(142
)
 
190

 
NM

Total net mortgage servicing revenue
536

 
878

 
(39
)
Mortgage fees and related income
$
1,450

 
$
2,008

 
(28
)%
(a)
Represents the aggregate impact of changes in model inputs and assumptions such as prepayment speeds (which are in turn affected by other assumptions such as home prices), costs to service, ancillary income and discount rates, as well as changes to the valuation models themselves.
Quarterly results
Mortgage Production pretax income was $427 million, a decrease of $317 million from the prior year. Mortgage production-related revenue, excluding repurchase losses, was $1.2 billion, a decrease of $401 million, or 25%, from the prior year. These results reflected lower margins on tightening in primary/secondary spreads, as well as pricing pressure due to increased capacity in the market, partially offset by higher volumes. Production expense was $710 million, an increase of $137 million from the prior year, primarily reflecting higher volumes. Repurchase losses were $81 million, compared with $302 million in the prior year. The current quarter reflected a $100 million reduction in the repurchase liability and lower realized repurchase losses compared with prior year, primarily driven by a decline in outstanding repurchase demands. For further information, see Mortgage repurchase liability on pages 38–41 of this Form 10-Q.
Mortgage Servicing pretax loss was $101 million, compared with a pretax loss of $160 million in the prior year. Mortgage servicing revenue, including amortization, was $778 million, a decrease of $22 million, or 3%, from the prior year reflecting lower loan servicing revenue due to lower average third-party mortgage loans serviced.


19



Mortgage servicing rights (“MSR”) risk management was a loss of $142 million, compared with MSR risk management income of $191 million in the prior year, largely due to prepayment model assumption updates, primarily driven by an improvement in housing price appreciation assumptions. See Note 16 on pages 158–161 of this Form 10-Q for further information regarding changes in value of the MSR asset and related hedges. Servicing expense was $737 million, a decrease of $414 million from the prior year, which reflected the impact of approximately $200 million for foreclosure-related matters in the prior year and lower servicing headcount.
Real Estate Portfolios pretax income was $784 million, compared with $854 million in the prior year. Net revenue was $945 million, a decrease of $136 million, or 13%, from the prior year. The decrease was driven by a decline in net interest income, resulting from lower loan balances due to portfolio runoff. The provision for credit losses reflected a benefit of $202 million, compared with a benefit of $192 million in the prior year. The current-quarter provision reflected a $650 million reduction in the allowance for loan losses due to lower estimated losses reflecting improved delinquency trends, primarily in the home equity portfolio, including the impact of improved home prices. Current-quarter net charge-offs totaled $448 million, compared with $808 million in the prior year. See Consumer Credit Portfolio on pages 56–65 of this Form 10-Q for the net charge-off amounts and rates. Nonaccrual loans were $7.8 billion, compared with $7.0 billion in the prior year. Excluding the impact of certain regulatory guidance, nonaccrual loans would have been $6.0 billion at March 31, 2013. Noninterest expense was $363 million, a decrease of $56 million compared with the prior year, primarily driven by lower foreclosed asset expense due to lower foreclosure inventory.
PCI Loans
Included within Real Estate Portfolios are PCI loans that the Firm acquired in the Washington Mutual transaction. For PCI loans, the excess of the undiscounted gross cash flows expected to be collected over the carrying value of the loans (the “accretable yield”) is accreted into interest income at a level rate of return over the expected life of the loans.
The net spread between the PCI loans and the related liabilities are expected to be relatively constant over time, except for any basis risk or other residual interest rate risk that remains and for certain changes in the accretable yield percentage (e.g., from extended loan liquidation periods and from prepayments). As of March 31, 2013, the remaining weighted-average life of the PCI loan portfolio is expected to be 8 years. The loan balances are expected to decline more rapidly over the next three to four years as the most troubled loans are liquidated, and more slowly thereafter as the remaining troubled borrowers have limited refinancing opportunities. Similarly, default and servicing expense are expected to be higher in the earlier years and decline over time as liquidations slow down.
 
To date the impact of the PCI loans on Real Estate Portfolios’ net income has been negative. This is largely due to the provision for loan losses recognized subsequent to their acquisition, and the higher level of default and servicing expense associated with the portfolio. Over time, the Firm expects that this portfolio will contribute positively to net income.
For further information, see Note 14, PCI loans, on pages 142–143 of this Form 10-Q.
Mortgage Production and Mortgage Servicing
Selected metrics
 

As of or for the three months
ended March 31,
(in millions, except ratios)
2013
 
2012
 
Change
Selected balance sheet data
 
 
 
 
 
Period-end loans:
 
 
 
 
 
Prime mortgage, including option ARMs(a)
$
17,257

 
$
17,268

 
 %
Loans held-for-sale and loans at fair value(b)
16,277

 
12,496

 
30

Average loans:
 
 
 
 
 
Prime mortgage, including option ARMs(a)
17,554

 
17,238

 
2

Loans held-for-sale and loans at fair value(b)
21,181

 
15,621

 
36

Average assets
64,218

 
58,862

 
9

Repurchase liability (period-end)
2,430

 
3,213

 
(24
)
Credit data and quality statistics
 
 
 
 
 
Net charge-offs:
 
 
 
 
 
Prime mortgage, including option ARMs
4

 

 
NM

Net charge-off rate:
 
 
 
 
 
Prime mortgage, including option ARMs
0.09
%
 
%
 
 
30+ day delinquency rate(c)
3.04

 
3.01

 
 
Nonperforming assets(d)
$
643

 
$
708

 
(9
)%
(a)
Predominantly represents prime loans repurchased from Government National Mortgage Association (“Ginnie Mae”) pools, which are insured by U.S. government agencies. See further discussion of loans repurchased from Ginnie Mae pools in Mortgage repurchase liability on pages 38–41and Note 21 on pages 166–170 of this Form 10-Q.
(b)
Predominantly consists of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets.
(c)
At March 31, 2013 and 2012, excluded mortgage loans insured by U.S. government agencies of $11.9 billion and $12.7 billion, respectively, that are 30 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on pages 129–149 of this Form 10-Q which summarizes loan delinquency information.
(d)
At March 31, 2013 and 2012, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $10.9 billion and $11.8 billion, respectively, that are 90 or more days past due; and (2) real estate owned insured by U.S. government agencies of $1.7 billion and $1.2 billion, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on pages 129–149 of this Form 10-Q which summarizes loan delinquency information.


20



Selected metrics
 
 
 
 
 

As of or for the three months ended March 31,
(in billions, except ratios)
2013
 
2012
 
Change
Business metrics (in billions)
 
 
 
 
 
Mortgage origination volume by channel
 
 
 
 
 
Retail
$
26.2

 
$
23.4

 
12
 %
Wholesale(a)
0.1

 

 
NM

Correspondent(a)
24.0

 
14.2

 
69

CNT (negotiated transactions)
2.4

 
0.8

 
200

Total mortgage origination volume(b)
$
52.7

 
$
38.4

 
37

Mortgage application volume by channel
 
 
 
 
 
Retail
$
34.7

 
$
40.0

 
(13
)
Wholesale(a)
0.2

 
0.2

 

Correspondent(a)
25.6

 
19.7

 
30

Total mortgage application volume
$
60.5

 
$
59.9

 
1

Third-party mortgage loans serviced (period-end)
$
849.2

 
$
884.2

 
(4
)
Third-party mortgage loans serviced (average)
854.3

 
892.6

 
(4
)
MSR net carrying value (period-end)
7.9

 
8.0

 
(1
)%
Ratio of MSR net carrying value (period-end) to third-party mortgage loans serviced (period-end)
0.93
%
 
0.90
%
 
 
Ratio of annualized loan servicing-related revenue to third-party mortgage loans serviced (average)
0.42

 
0.47

 
 
MSR revenue multiple(c)
2.21x

 
1.91x

 
 
(a)
Includes rural housing loans sourced through brokers and correspondents, which are underwritten and closed with pre-funding loan approval from the U.S. Department of Agriculture Rural Development, which acts as the guarantor in the transaction.
(b)
Firmwide mortgage origination volume was $55.1 billion and $40.5 billion for the three months ended March 31, 2013 and 2012, respectively.
(c)
Represents the ratio of MSR net carrying value (period-end) to third-party mortgage loans serviced (period-end) divided by the ratio of annualized loan servicing-related revenue to third-party mortgage loans serviced (average).
 
Real Estate Portfolios
 
 
Selected metrics
 
 
 
 
 

As of or for the three months ended March 31,
(in millions)
2013
 
2012
 
Change
Loans, excluding PCI
 
 
 
 
 
Period-end loans owned:
 
 
 
 
 
Home equity
$
64,798

 
$
75,207

 
(14
)%
Prime mortgage, including option ARMs
41,997

 
43,152

 
(3
)
Subprime mortgage
8,003

 
9,289

 
(14
)
Other
604

 
692

 
(13
)
Total period-end loans owned
$
115,402

 
$
128,340

 
(10
)
Average loans owned:
 
 
 
 
 
Home equity
$
66,133

 
$
76,600

 
(14
)
Prime mortgage, including option ARMs
41,808

 
43,701

 
(4
)
Subprime mortgage
8,140

 
9,485

 
(14
)
Other
619

 
707

 
(12
)
Total average loans owned
$
116,700

 
$
130,493

 
(11
)