CORP 10K 2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934 |
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For the fiscal year ended | | Commission file |
December 31, 2012 | | number 1-5805 |
JPMorgan Chase & Co.
(Exact name of registrant as specified in its charter) |
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Delaware | | 13-2624428 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
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270 Park Avenue, New York, New York | | 10017 |
(Address of principal executive offices) | | (Zip code) |
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Registrant’s telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Name of each exchange on which registered |
Common stock | | The New York Stock Exchange |
| | The London Stock Exchange |
| | The Tokyo Stock Exchange |
Warrants, each to purchase one share of Common Stock | | The New York Stock Exchange |
Depositary Shares, each representing a one-four hundredth interest in a share of 8.625% Non-Cumulative Preferred Stock, Series J | | The New York Stock Exchange |
Depositary Shares, each representing a one-four hundredth interest in a share of 5.50% Non-Cumulative Preferred Stock, Series O | | The New York Stock Exchange |
Guarantee of 7.00% Capital Securities, Series J, of J.P. Morgan Chase Capital X | | The New York Stock Exchange |
Guarantee of 5.875% Capital Securities, Series K, of J.P. Morgan Chase Capital XI | | The New York Stock Exchange |
Guarantee of 6.25% Capital Securities, Series L, of J.P. Morgan Chase Capital XII | | The New York Stock Exchange |
Guarantee of 6.20% Capital Securities, Series N, of JPMorgan Chase Capital XIV | | The New York Stock Exchange |
Guarantee of 6.35% Capital Securities, Series P, of JPMorgan Chase Capital XVI | | The New York Stock Exchange |
Guarantee of 6.625% Capital Securities, Series S, of JPMorgan Chase Capital XIX | | The New York Stock Exchange |
Guarantee of 6.875% Capital Securities, Series X, of JPMorgan Chase Capital XXIV | | The New York Stock Exchange |
Guarantee of 6.70% Capital Securities, Series CC, of JPMorgan Chase Capital XXIX | | The New York Stock Exchange |
Guarantee of 7.20% Preferred Securities of BANK ONE Capital VI | | The New York Stock Exchange |
KEYnotes Exchange Traded Notes Linked to the First Trust Enhanced 130/30 Large Cap Index | | The New York Stock Exchange |
Alerian MLP Index ETNs due May 24, 2024 | | NYSE Arca, Inc. |
JPMorgan Double Short US 10 Year Treasury Futures ETNs due September 30, 2025 | | NYSE Arca, Inc. |
JPMorgan Double Short US Long Bond Treasury Futures ETNs due September 30, 2025 | | NYSE Arca, Inc. |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
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. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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x Large accelerated filer | o Accelerated filer | o Non-accelerated filer (Do not check if a smaller reporting company) | o Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates as of June 30, 2012: $134,979,087,091
Number of shares of common stock outstanding as of January 31, 2013: 3,827,466,945
Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the annual meeting of stockholders to be held on May 21, 2013, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13 and 14 of Part III.
Form 10-K Index
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ITEM 1: BUSINESS
Overview
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), 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.” or “United States”), with operations worldwide; the Firm had $2.4 trillion in assets and $204.1 billion in stockholders’ equity as of December 31, 2012. 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 wholly-owned subsidiary of JPMorgan Chase Bank, N.A.
The Firm’s website is www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the U.S. Securities and Exchange Commission (the “SEC”). The Firm has adopted, and posted on its website, a Code of Ethics for its Chairman and Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and other senior financial officers.
Business segments
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 is provided in the “Business segment results” section of Management’s discussion and analysis of financial condition and results of operations (“MD&A”), beginning on page 64 and in Note 33 on pages 326–329.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. JPMorgan Chase’s businesses generally compete on the basis of the quality and range of their products and services, transaction execution, innovation and price. Competition also varies based on the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a regional basis. The Firm’s ability to compete also depends on its ability to attract and retain its professional and other personnel, and on its reputation.
The financial services industry has experienced consolidation and convergence in recent years, as financial institutions involved in a broad range of financial products and services have merged and, in some cases, failed. This convergence trend is expected to continue. Consolidation could result in competitors of JPMorgan Chase gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. It is likely that competition will become even more intense as companies continue to expand their operations globally and as the Firm’s businesses continue to compete with other financial institutions that are or may become larger or better capitalized, that may have a stronger local presence in certain geographies or that operate under different rules and regulatory regimes than the Firm.
Supervision and regulation
The Firm is subject to regulation under state and federal laws in the United States, as well as the applicable laws of each of the various jurisdictions outside the United States in which the Firm does business.
Regulatory reform: On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is intended to make significant structural reforms to the financial services industry. The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct approximately 285 rule-makings and 130 studies and reports. These regulatory agencies include the Commodity Futures Trading Commission (the “CFTC”); the
Securities and Exchange Commission (the “SEC”); the Board of Governors of the Federal Reserve System (the “Federal Reserve”); the Office of the Comptroller of the Currency (the “OCC”); the Federal Deposit Insurance Corporation (the “FDIC”); the Bureau of Consumer Financial Protection (the “CFPB”); and the Financial Stability Oversight Council (the “FSOC”). As a result of the Dodd-Frank Act rule-making and other regulatory reforms, the Firm is currently experiencing a period of unprecedented change in regulation and such changes could have a significant impact on how the Firm conducts business. 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. Given the current status of the regulatory developments, the Firm cannot currently quantify the possible effects on its business and operations of all of the significant changes that are currently underway. For more information, see “Risk Factors” on pages 8–21. Certain of these changes include the following:
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• | Comprehensive Capital Analysis and Review (“CCAR”) and stress testing. In December 2011, the Federal Reserve issued final rules regarding the submission of capital plans by bank holding companies with total assets of $50 billion or more. Pursuant to these rules, the Federal Reserve requires the Firm to submit a capital plan on an annual basis. In October 2012, the Federal Reserve and OCC issued rules requiring the Firm and certain of its bank subsidiaries to perform stress tests under one stress scenario created by the Firm as well as three scenarios (baseline, adverse and severely adverse) mandated by the Federal Reserve. If the Federal Reserve objects to the Firm’s capital plan, the Firm will be unable to make any capital distributions unless approved by the Federal Reserve. For more information, see “CCAR and stress testing” on pages 5–6. |
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• | Resolution plan. In September 2011, the FDIC and the Federal Reserve issued, pursuant to the Dodd-Frank Act, a final rule that requires bank holding companies with assets of $50 billion or more and companies designated as systemically important by the FSOC to submit periodically to the Federal Reserve and the FDIC a plan for resolution under the Bankruptcy Code in the event of material distress or failure (a “resolution plan”). In January 2012, the FDIC also issued a final rule that requires insured depository institutions with assets of $50 billion or more to submit periodically to the FDIC a plan for resolution under the Federal Deposit Insurance Act in the event of failure. The timing of initial, annual and interim resolution plan submissions under both rules is the same. The Firm’s initial resolution plan submissions were filed by July 1, 2012, and annual updates will be due by July 1 each year. |
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• | Derivatives. Under the Dodd-Frank Act, the Firm will be subject to comprehensive regulation of its derivatives business (including capital and margin requirements, central clearing of standardized over-the-counter derivatives and the requirement that they be traded on regulated trading platforms) and heightened supervision. Further, some of the rules for derivatives will apply extraterritorially to U.S. firms doing business with clients outside of the United States. The Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which derivatives activities are conducted. |
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• | Volcker Rule. The Firm will also be affected by the requirements of Section 619 of the Dodd-Frank Act, and specifically the provisions prohibiting proprietary trading and restricting the activities involving private equity and hedge funds (the “Volcker Rule”). On October 11, 2011, regulators proposed regulations to implement the Volcker Rule. These are currently expected to be finalized in 2013. Under the proposed rules, “proprietary trading” is defined as the trading of securities, derivatives, or futures (or options on any of the foregoing) as principal, where such trading is principally for the purpose of short-term resale, benefiting from actual or expected short-term price movements and realizing short-term arbitrage profits. The proposed rule’s definition of proprietary trading specifically excludes market-making-related activity, certain government issued securities trading and certain risk management activities. The Firm ceased some prohibited proprietary trading activities during 2010 and has since exited substantially all such activities. |
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• | Money Market Fund Reform. In November 2012, the FSOC and the Financial Stability Board (the “FSB”) issued separate proposals regarding money market fund reform. Pursuant to Section 120 of the Dodd-Frank Act, the FSOC published proposed recommendations that the SEC proceed with structural reforms of money market funds, including, among other possibilities, requiring that money market funds adopt a floating net asset value, mandating a capital buffer and requiring a hold-back on redemptions for certain shareholders. On January 15, 2013, the FSOC announced that it had extended the comment period for the proposed recommendations at the request of the Chairman of the SEC. It is expected that the SEC will issue its own rule proposal on money market fund reform in the near future. The FSB endorsed and published for public consultation 15 policy recommendations proposed by the International Organization of Securities Commissions (“IOSCO”), including requiring money market funds to adopt a floating net asset value. The FSB has stated that it expects to publish final recommendations in September 2013 and, thereafter, work on procedures for the |
consistent implementation of the policy recommendations.
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• | Capital. The treatment of trust preferred securities as Tier 1 capital for regulatory capital purposes will be phased out over a three year period, beginning in 2013. In addition, in June 2011, the Basel Committee and the FSB announced that certain global systemically important banks (“GSIBs”) would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bank’s systemic importance. In June 2012, the Federal Reserve, the OCC and FDIC issued final rules for implementing ratings alternatives for the computation of risk-based capital for market risk exposures, which will result in significantly higher capital requirements for many securitization exposures. For more information, see “Capital requirements” on pages 4–5. |
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• | FDIC Deposit Insurance Fund Assessments. In February 2011, the FDIC issued a final rule changing the assessment base and the method for calculating the deposit insurance assessment rate. These changes became effective on April 1, 2011, and resulted in a substantial increase in the assessments that the Firm’s bank subsidiaries pay annually to the FDIC. For example, in 2011, these changes resulted in an increase of approximately $600 million in assessments. For more information, see “Deposit insurance” on page 6. |
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• | Bureau of Consumer Financial Protection. The Dodd-Frank Act established the CFPB as a new regulatory agency. The CFPB has authority to regulate providers of credit, payment and other consumer financial products and services. The CFPB has examination authority over large banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., with respect to the banks’ consumer financial products and services. The CFPB issued final regulations regarding mortgages, which will become effective in January 2014. For more information, see “CFPB regulations regarding mortgages” on page 7 and “Other supervision and regulation” on pages 7–8. |
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• | Heightened prudential standards for systemically important financial institutions. The Dodd-Frank Act creates a structure to regulate systemically important financial companies, and subjects them to heightened prudential standards. For more information, see “Systemically important financial institutions” below. |
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• | Debit interchange. On October 1, 2011, the Federal Reserve adopted final rules implementing the “Durbin Amendment” provisions of the Dodd-Frank Act, which limit the amount the Firm can charge for each debit card transaction it processes. |
Other proposals have been made internationally, including additional capital and liquidity requirements that will apply to non-U.S. subsidiaries of JPMorgan Chase, such as J.P.
Morgan Securities plc. For further information, see “Risk Factors” on pages 8–21.
Systemically important financial institutions: The Dodd-Frank Act creates a structure to regulate systemically important financial institutions, and subjects them to heightened prudential standards, including heightened capital, leverage, liquidity, risk management, resolution plan, single-counterparty credit limits, and early remediation requirements. Systemically important financial institutions will be supervised by the Federal Reserve. Bank holding companies with over $50 billion in assets, including JPMorgan Chase, and certain nonbank financial companies that are designated by the FSOC, will be considered systemically important financial institutions subject to the heightened standards and supervision.
In addition, if the regulators determine that the size or scope of activities of the company pose a threat to the safety and soundness of the company or the financial stability of the United States, the regulators have the power to require such companies to sell or transfer assets and terminate activities.
On December 20, 2011, the Federal Reserve issued proposed rules to implement certain of these heightened prudential standards, including:
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• | Risk management standards. The proposal would require oversight of enterprise-wide risk management by a stand-alone risk committee of the board of directors and a chief risk officer. Among other things, the risk committee of the board of directors of a bank holding company would be required to review and approve the liquidity costs, benefits, and risk of each significant new line of business and product. |
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• | Liquidity stress testing. The proposal would require a company to conduct a liquidity stress test at least monthly. |
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• | Stress tests. Stress tests would be conducted annually by the Federal Reserve, and semi-annually by the company. |
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• | Single Counterparty Exposure Limits. The proposal would limit net credit exposure of a bank holding company to a single counterparty as a percentage of regulatory capital. There would be a two-tier counterparty credit limit: (1) a general limit that prohibits a bank holding company (including its subsidiaries) from having aggregate net credit exposure to any single unaffiliated counterparty (including its subsidiaries) in excess of 25% of the company’s capital stock and surplus; and (2) a more stringent limit between a bank holding company with over $500 billion in total assets, and all its subsidiaries, and any counterparty with over $500 billion in total assets, and all of its subsidiaries, of 10% of the company’s capital stock and surplus. |
For more information, see “Capital requirements” on pages 4–5 and “Prompt corrective action and early remediation” on page 6.
Permissible business activities: JPMorgan Chase elected to become a financial holding company as of March 13, 2000, pursuant to the provisions of the Gramm-Leach-Bliley Act. If a financial holding company or any depository institution controlled by a financial holding company ceases to meet certain capital or management standards, the Federal Reserve may impose corrective capital and/or managerial requirements on the financial holding company and place limitations on its ability to conduct the broader financial activities permissible for financial holding companies. In addition, the Federal Reserve may require divestiture of the holding company’s depository institutions if the deficiencies persist. Federal regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act, the Federal Reserve must prohibit the financial holding company and its subsidiaries from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.
The Federal Reserve has proposed rules under which the Federal Reserve could impose restrictions on systemically important financial institutions that are experiencing financial weakness, which restrictions could include limits on acquisitions, among other things. For more information on the restrictions, see “Prompt corrective action and early remediation” on page 6.
Financial holding companies and bank holding companies are required to obtain the approval of the Federal Reserve before they may acquire more than five percent of the voting shares of an unaffiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), the Federal Reserve may approve an application for such an acquisition without regard to whether the transaction is prohibited under the law of any state, provided that the acquiring bank holding company, before or after the acquisition, does not control more than 10% of the total amount of deposits of insured depository institutions in the United States or more than 30% (or such greater or lesser amounts as permitted under state law) of the total deposits of insured depository institutions in the state in which the acquired bank has its home office or a branch. In addition, the Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies. For non-U.S. financial companies, liabilities are calculated using only the risk-weighted assets of their U.S. operations. U.S. financial companies must include all of their risk-weighted assets (including assets held overseas). This could have the effect of allowing a non-U.S. financial company to grow to hold significantly more than 10% of the U.S. market without exceeding the concentration limit. Under the Dodd-Frank Act, the Firm must provide written notice to the Federal Reserve prior to acquiring direct or indirect ownership or control of any voting shares of any company with over $10 billion in assets that is engaged in “financial in nature” activities.
Dividend restrictions: Federal law imposes limitations on the payment of dividends by national banks. Dividends payable by JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., as national bank subsidiaries of JPMorgan Chase, are limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the national bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits.” See Note 27 on page 306 for the amount of dividends that the Firm’s principal bank subsidiaries could pay, at January 1, 2013, to their respective bank holding companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC, the Federal Reserve and the FDIC have authority to prohibit or limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its bank and bank holding company subsidiaries, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. Under proposed rules issued by the Federal Reserve, dividends are restricted once any one of three risk-based capital ratios (tier 1 common, tier 1 capital, or total capital) falls below their respective minimum capital ratio requirement (inclusive of the GSIB surcharge) plus 2.5%.
Moreover, the Federal Reserve has issued rules requiring bank holding companies, such as JPMorgan Chase, to submit to the Federal Reserve a capital plan on an annual basis and receive a notice of non-objection from the Federal Reserve before taking capital actions, such as paying dividends, implementing common equity repurchase programs or redeeming or repurchasing capital instruments. For more information, see “CCAR and stress testing” on pages 5–6.
Capital requirements: Federal banking regulators have adopted risk-based capital and leverage guidelines that require the Firm’s capital-to-assets ratios to meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into risk-weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers: Tier 1 capital and Tier 2 capital. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital. Total capital is the sum of Tier 1 capital and Tier 2 capital. Under the guidelines, banking organizations are required to maintain a total capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 capital ratio of 4%. For a further description of these guidelines, see Note 28 on pages 306–308.
The federal banking regulators also have established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by adjusted average total assets. The minimum leverage ratio is 4% for bank holding companies. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending upon their particular condition, risk profile and growth plans. The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision (“Basel I”). In 2004, the Basel Committee published a revision to the Accord (“Basel II”). The goal of the Basel II Framework is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking operations. In December 2010, the Basel Committee finalized further revisions to the Accord (“Basel III”) which narrowed the definition of capital, increased capital requirements for specific exposures, introduced short-term liquidity coverage and term funding standards, and established an international leverage ratio. In June 2011, the U.S. federal banking agencies issued rules to establish a permanent Basel I floor under Basel II/Basel III calculations. For further description of these capital requirements, see pages 4–5.
In connection with the U.S. Government’s Supervisory Capital Assessment Program in 2009, U.S. banking regulators developed an additional measure of capital, Tier 1 common, which is defined as Tier 1 capital less elements of Tier 1 capital not in the form of common equity - such as perpetual preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt securities. Tier 1 common, a non-GAAP financial measure, is used by banking regulators, investors and analysts to assess and compare the quality and composition of the Firm’s capital with the capital of other financial services companies. The Firm uses Tier 1 common along with the other capital measures to assess and monitor its capital position. In June 2012, the U.S. banking regulators revised, effective July 1, 2013, certain capital requirements for trading positions and securitizations (“Basel 2.5”). For more information, see Regulatory capital on pages 117–120.
In June 2011, the Basel Committee and the FSB announced that GSIBs would be required to maintain additional capital, above the Basel III Tier 1 common equity minimum, in amounts ranging from 1% to 2.5%, depending upon the bank’s systemic importance. In November 2012, the FSB announced that the Firm would be in the category subject to a 2.5% capital surcharge. Furthermore, in order to provide a disincentive for banks facing the highest required level of Tier 1 common equity to “increase materially their global systemic importance in the future,” an additional 1% charge could be applied. The Federal Reserve has issued a proposed rule-making that incorporates the concept of a capital surcharge for GSIBs.
The Basel III revisions governing the capital requirements are subject to prolonged observation and transition periods.
The transition period for banks to meet the revised Tier 1 common equity requirement were to begin in 2013, with implementation on January 1, 2019. The additional capital requirements for GSIBs will be phased-in starting January 1, 2016, with full implementation on January 1, 2019. The Firm will continue to monitor the ongoing rule-making process to assess both the timing and the impact of Basel III on its businesses and financial condition.
In addition to capital requirements, the Basel Committee has also proposed two new measures of liquidity risk: the “Liquidity Coverage Ratio” and the “Net Stable Funding Ratio,” which are intended to measure, over different time spans, the amount of liquid assets held by the Firm. The observation periods for both these standards began in 2011, with implementation commencing in 2015 and 2018, respectively.
The Dodd-Frank Act prohibits the use of external credit ratings in federal regulations. In June 2012, the Federal Reserve, OCC and FDIC issued final rules implementing ratings alternatives for the computation of risk-based capital for market risk exposures, which will result in significantly higher capital requirements for many securitization exposures.
For additional information regarding the Firm’s regulatory capital, see Regulatory capital on pages 117–120.
CCAR and stress testing: In December 2011, the Federal Reserve issued final rules regarding the submission of capital plans by bank holding companies with total assets of $50 billion or more. Pursuant to these rules, the Federal Reserve requires the Firm to submit a capital plan on an annual basis. In October 2012, the Federal Reserve issued rules requiring bank holding companies with over $50 billion in total assets to perform an annual stress test and report the results to the Federal Reserve in January. The results of the annual stress test will also be publicly disclosed, and will be used as a factor in determining whether the Federal Reserve will or will not object to the bank holding company’s capital plan. On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 CCAR process. The Firm’s plan relates to the last three quarters of 2013 and the first quarter of 2014 (that is, the 2013 CCAR capital plan relates to dividends to be declared commencing in June 2013 and payable in July 2013, and to common equity repurchases and other capital actions commencing April 1, 2013). The Firm expects to receive the Federal Reserve’s final response to its plan no later than March 14, 2013. In reviewing the capital plan, the Federal Reserve will consider both quantitative and qualitative factors. Quantitative assessments will include, among other things, the Firm’s ability to continue to meet supervisory expectation for minimum capital ratios and a Basel I Tier 1 common capital ratio of at least 5% throughout the planning horizon under severely adverse stress conditions of the stress test, even if the Firm did not reduce planned capital actions. Qualitative assessments will include, among other things, the comprehensiveness of the plan, the assumptions and
analyses underlying the Firm’s capital plan, and any relevant supervisory information. If the Federal Reserve objects to the Firm’s capital plan, the Firm will be unable to make any capital distributions unless approved by the Federal Reserve. Bank holding companies must perform an additional stress test in the middle of the year and publicly disclose those results as well. The OCC issued similar regulations that require national banks with over $10 billion in total assets to perform annual stress tests. Accordingly, the Firm will be required to submit separate stress tests to the OCC for its national bank subsidiaries that exceed that threshold.
Prompt corrective action and early remediation: The Federal Deposit Insurance Corporation Improvement Act of 1991 requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards. While these regulations apply only to banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., the Federal Reserve is authorized to take appropriate action against the parent bank holding company, such as JPMorgan Chase & Co., based on the undercapitalized status of any bank subsidiary. In certain instances, the bank holding company would be required to guarantee the performance of the capital restoration plan for its undercapitalized subsidiary.
In addition, in December 2011, the Federal Reserve issued proposed rules which provide for early remediation of systemically important financial companies that experience financial weakness. These proposed restrictions could include limits on capital distributions, acquisitions, and requirements to raise additional capital.
Deposit Insurance: The FDIC deposit insurance fund provides insurance coverage for certain deposits, which insurance is funded through assessments on banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. Higher levels of bank failures during the financial crisis have dramatically increased resolution costs of the FDIC. In addition, the amount of FDIC insurance coverage for insured deposits has been increased from $100,000 per depositor to $250,000 per depositor. In light of the increased stress on the deposit insurance fund caused by these developments, and in order to maintain a strong funding position and restore the reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of insured institutions generally. As required by the Dodd-Frank Act, the FDIC issued a final rule in February 2011 that changes the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changes the assessment rate calculation. These changes became effective on April 1, 2011, and resulted in a substantial increase in the assessments that the Firm’s bank subsidiaries pay annually to the FDIC. For example, in 2011, these changes resulted in an increase of approximately $600 million in assessments.
Powers of the FDIC upon insolvency of an insured depository institution or the Firm: Upon the insolvency of an insured depository institution, the FDIC will be appointed the conservator or receiver under the Federal Deposit Insurance Act. In such an insolvency, the FDIC has the power:
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• | to transfer any assets and liabilities to a new obligor without the approval of the institution’s creditors; |
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• | to enforce the institution’s contracts pursuant to their terms; or |
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• | to repudiate or disaffirm any contract or lease to which the institution is a party. |
The above provisions would be applicable to obligations and liabilities of JPMorgan Chase’s subsidiaries that are insured depository institutions, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as “public noteholders”) in the public markets.
Under federal law, the claims of a receiver of an insured depository institution for administrative expense and the claims of holders of U.S. deposit liabilities (including the FDIC) have priority over the claims of other unsecured creditors of the institution, including public noteholders and depositors in non-U.S. offices. As a result, whether or not the FDIC would ever seek to repudiate any obligations held by public noteholders or depositors in non-U.S. offices of any subsidiary of the Firm that is an insured depository institution, such as JPMorgan Chase Bank, N.A., such persons would be treated differently from, and could receive, if anything, substantially less than the depositors in U.S. offices of the depository institution. However, the U.K. Financial Services Authority (the “FSA”) has recently issued a proposal that may require the Firm to either obtain equal treatment for U.K. depositors or “subsidiarize” in the U.K.
An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being “in default” or “in danger of default” (commonly referred to as “cross-guarantee” liability). An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.
Under the Dodd-Frank Act, where a systemically important financial institution, such as JPMorgan Chase, is in default or danger of default, the FDIC may be appointed receiver in order to conduct an orderly liquidation of such systemically important financial institution. The FDIC has issued rules to implement its orderly liquidation authority, and is expected to propose additional rules. The FDIC has powers as receiver similar to those described above. However, the details of certain powers will be the subject of additional rule-makings and have not yet been fully delineated.
The Bank Secrecy Act: The Bank Secrecy Act (“BSA”) requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. The Firm has established a global anti-money laundering program in order to comply with BSA requirements. In January 2013, the Firm entered into Consent Orders with the OCC and the Federal Reserve relating to its BSA and Anti-Money Laundering policies, procedures and controls.
Regulation by Federal Reserve: The Federal Reserve acts as an “umbrella regulator” and certain of JPMorgan Chase’s subsidiaries are regulated directly by additional authorities based on the particular activities of those subsidiaries. For example, JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are regulated by the OCC. See “Other supervision and regulation” on pages 7–8 for a further description of the regulatory supervision to which the Firm’s subsidiaries are subject.
Holding company as source of strength for bank subsidiaries: Effective July 2011, provisions of the Dodd-Frank Act codified the Federal Reserve’s historical policy that requires a bank holding company to serve as a source of financial strength for any depository institution subsidiary and to commit resources to support these subsidiaries in circumstances where it might not do so absent such policy. However, because the Gramm-Leach-Bliley Act provides for functional regulation of financial holding company activities by various regulators, the Gramm-Leach-Bliley Act prohibits the Federal Reserve from requiring payment by a holding company or subsidiary to a depository institution if the functional regulator of the payor objects to such payment. In such a case, the Federal Reserve could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.
Restrictions on transactions with affiliates: The bank subsidiaries of JPMorgan Chase are subject to certain restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Firm and certain other affiliates, and on investments in stock or securities of JPMorgan Chase and those affiliates. These restrictions prevent JPMorgan Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts and are subject to certain other limits. For more information, see Note 27 on page 306. Effective in 2012, the Dodd-Frank Act extended such restrictions to derivatives and securities lending transactions. In addition, the Dodd-Frank Act’s Volcker Rule imposes similar restrictions on transactions between banking entities, such as JPMorgan Chase and its subsidiaries, and hedge funds or private equity funds for
which the banking entity serves as the investment manager, investment advisor or sponsor.
CFPB regulations regarding mortgages: The CFPB issued final regulations regarding mortgages, which will become effective in January 2014 and which will prohibit mortgage servicers from beginning foreclosure proceedings until a mortgage loan is 120 days delinquent. During this period, the borrower may apply for a loan modification or other option and the servicer cannot begin foreclosure until the application has been addressed. The CFPB issued another final regulation in December 2012 imposing an “ability to repay” requirement for residential mortgage loans. A creditor (or its assignee) will be liable to the borrower for damages if the creditor fails to make a “good faith and reasonable determination of a borrower’s reasonable ability to repay as of consummation.” Borrowers can sue the creditor or assignee for up to three years after closing, and can raise an ability to repay claim against the servicer as a set off at any point during the loan’s life if in foreclosure. A “Qualified Mortgage” as defined in the regulation is generally protected from such suits.
Other supervision and regulation: The Firm’s banks and certain of its nonbank subsidiaries are subject to direct supervision and regulation by various other federal and state authorities (some of which are considered “functional regulators” under the Gramm-Leach-Bliley Act). JPMorgan Chase’s national bank subsidiaries, such as JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A., are subject to supervision and regulation by the OCC and, in certain matters, by the Federal Reserve and the FDIC. Supervision and regulation by the responsible regulatory agency generally includes comprehensive annual reviews of all major aspects of the relevant bank’s business and condition, stress tests of banks and imposition of periodic reporting requirements and limitations on investments, among other powers.
The Firm conducts securities underwriting, dealing and brokerage activities in the United States through J.P. Morgan Securities LLC and other broker-dealer subsidiaries, all of which are subject to regulations of the SEC, the Financial Industry Regulatory Authority and the New York Stock Exchange, among others. The Firm conducts similar securities activities outside the United States subject to local regulatory requirements. In the United Kingdom, those activities are conducted by J.P. Morgan Securities plc, which is regulated by the FSA. It is expected that, during 2013, regulation of J.P. Morgan Securities plc will transition to the Prudential Regulation Authority (PRA), pursuant to the U.K. Government’s plan under the Financial Services Act 2012 to restructure regulatory competences as between the PRA (which will be a subsidiary of the Bank of England having responsibility for prudential regulation of banks and other systemically important institutions) and the Financial Conduct Authority (which will regulate prudential matters for other firms and conduct matters for all participants).
JPMorgan Chase mutual funds also are subject to regulation by the SEC, in addition to the supervision already described above with respect to money market mutual funds.
The Firm has subsidiaries that are members of futures exchanges in the United States and abroad and are registered accordingly.
In the United States, two subsidiaries are registered as futures commission merchants, and other subsidiaries are either registered with the CFTC as commodity pool operators and commodity trading advisors or exempt from such registration. These CFTC-registered subsidiaries are also members of the National Futures Association. The Firm’s U.S. energy business is subject to regulation by the Federal Energy Regulatory Commission. It is also subject to other extensive and evolving energy, commodities, environmental and other governmental regulation both in the United States and other jurisdictions globally.
Under the Dodd-Frank Act, the CFTC and SEC will be the regulators of the Firm’s derivatives businesses. JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Ventures Energy Corporation have registered with the CFTC as swap dealers. The Firm expects that JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC will also register with the SEC as security-based swap dealers.
The types of activities in which the non-U.S. branches of JPMorgan Chase Bank, N.A. and the international subsidiaries of JPMorgan Chase may engage are subject to various restrictions imposed by the Federal Reserve. Those non-U.S. branches and international subsidiaries also are subject to the laws and regulatory authorities of the countries in which they operate.
The activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. as consumer lenders also are subject to regulation under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practice, Electronic Funds Transfer and CARD acts, as well as various state laws. These statutes impose requirements on consumer loan origination and collection practices. Under the Dodd-Frank Act, the CFPB will be responsible for rule-making and enforcement pursuant to such statutes.
Under the requirements imposed by the Gramm-Leach-Bliley Act, JPMorgan Chase and its subsidiaries are required periodically to disclose to their retail customers the Firm’s policies and practices with respect to the sharing of nonpublic customer information with JPMorgan Chase affiliates and others, and the confidentiality and security of that information. Under the Gramm-Leach-Bliley Act, retail customers also must be given the opportunity to “opt out” of information-sharing arrangements with nonaffiliates, subject to certain exceptions set forth in the Gramm-Leach-Bliley Act.
Item 1A: RISK FACTORS
The following discussion sets forth the material risk factors that could affect JPMorgan Chase’s financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Firm.
Regulatory Risk
JPMorgan Chase operates within a highly regulated industry, and the Firm’s businesses and results are significantly affected by the laws and regulations to which it is subject.
As a global financial services firm, JPMorgan Chase is subject to extensive and comprehensive regulation under federal and state laws in the United States and the laws of the various jurisdictions outside the United States in which the Firm does business. These laws and regulations significantly affect the way that the Firm does business, and can restrict the scope of its existing businesses and limit its ability to expand its product offerings or to pursue acquisitions, or can make its products and services more expensive for clients and customers.
The U.S. Department of the Treasury, the FSOC, the SEC, the CFTC, the Federal Reserve, the OCC, the CFPB and the FDIC are all engaged in extensive rule-making mandated by the Dodd-Frank Act, and a substantial amount of the rule-making remains to be done. As a result, the complete impact of the Dodd-Frank Act on the Firm’s business, operations and earnings remains uncertain. Certain aspects of the Dodd-Frank Act and such rule-making are discussed in more detail below. For further information, see Supervision and regulation on pages 1–8.
Debit interchange. The Firm believes that, as a result of the “Durbin Amendment” provisions of the Dodd-Frank Act, which limit the amount that the Firm can charge for each debit card transaction, the Firm’s annualized net income has been reduced by approximately $600 million per year. Although the Firm continues to consider various actions to mitigate this reduction in net income, it is unlikely that any such actions will wholly offset such reduction.
Volcker Rule. Until the final regulations under the Volcker Rule are adopted, the precise definition of prohibited “proprietary trading”, the scope of any exceptions, including those related to market-making and hedging activities, and the scope of permitted hedge fund and private equity fund investments remain uncertain. It is unclear under the proposed rules whether some portion of the Firm’s market-making-related and risk mitigation activities, as currently conducted, will be required to be curtailed or will be otherwise adversely affected. In addition, the rules, if enacted as proposed, could prohibit the Firm’s participation and investment in certain securitization structures and could bar the Firm from sponsoring or investing in certain non-U.S. funds. Also, should regulators not exercise their authority to permit the Firm to hold certain investments, including those in illiquid private equity funds, beyond the minimum statutory
divestment period, the Firm could incur substantial losses when it disposes of such investments. The Firm may be forced to sell such investments at a substantial discount in the secondary market as a result of both the constrained timing of such sales and the possibility that other financial institutions are likewise liquidating investments at the same time.
Derivatives. In addition to imposing comprehensive regulation on the Firm’s derivatives businesses, the Dodd-Frank Act also requires banking entities, such as JPMorgan Chase, to significantly restructure their derivatives businesses, including changing the legal entities through which such businesses are conducted. Further, some of the rules for swaps will apply extraterritorially to U.S. firms doing business with clients outside of the United States. Clients of non-U.S. firms doing business outside the United States may not be required to comply with the same rules in similar transactions. This disparity in the application of the different rules could place JPMorgan Chase at a significant competitive disadvantage to its non-U.S. competitors, which could have a material adverse effect on the earnings and profitability of the Firm’s wholesale businesses.
Heightened prudential standards for systemically important financial institutions. Under the Dodd-Frank Act, JPMorgan Chase is considered to be a systemically important financial institution and is subject to heightened prudential standards and supervision. If the proposed rules issued by the Federal Reserve in December 2011 are adopted as currently proposed, they are likely to increase the Firm’s operational, compliance and risk management costs, and could have an adverse effect on the Firm’s business, results of operations or financial condition.
CFPB. The CFPB has issued final regulations regarding mortgages which will become effective in January 2014 and which will prohibit mortgage servicers from beginning foreclosure proceedings until a mortgage loan is 120 days delinquent, and will impose an “ability to repay” requirement for residential mortgage loans. Other new regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in JPMorgan Chase’s consumer businesses, result in increased compliance costs and impair the profitability of such businesses. In addition, as a result of the Dodd-Frank Act’s potential expansion of the authority of state attorneys general to bring actions to enforce federal consumer protection legislation, the Firm could potentially be subject to additional state lawsuits and enforcement actions, thereby further increasing its legal and compliance costs.
Resolution. The FDIC and the Federal Reserve have issued a final rule that requires the Firm to submit periodically to the Federal Reserve and the FDIC a resolution plan under the Bankruptcy Code in the event of material financial distress or failure (a “resolution plan”). The FDIC also issued a final rule that requires the Firm to submit periodic contingency plans to the FDIC under the Federal Deposit Insurance Act outlining its resolution plan in the event of its failure. The Firm’s initial resolution plan submissions were filed in July
2012, and updates are due annually. If the FDIC and the Federal Reserve determine that the Firm’s resolution plan is not credible or would not facilitate an orderly resolution under the Bankruptcy Code, the FDIC and the Federal Reserve may jointly impose more stringent capital, leverage or liquidity requirements on the Firm, or restrictions on the growth, activities or operations of the Firm, or require the Firm to restructure, reorganize or divest certain assets or operations in order to facilitate an orderly resolution. Any such measures, particularly those aimed at the disaggregation of the Firm, may reduce the Firm’s capital, adversely affect the Firm’s operations and profitability, increase the Firm’s systems, technology and managerial costs, lessen efficiencies and economies of scale and potentially impede the Firm’s business strategies.
In addition, holders of subordinated debt or preferred stock issued by the Firm may be fully subordinated to interests held by the U.S. government in the event that the Firm enters into a receivership, insolvency, liquidation or similar proceeding.
Concentration Limits. The Dodd-Frank Act restricts acquisitions by financial companies if, as a result of the acquisition, the total liabilities of the financial company would exceed 10% of the total liabilities of all financial companies in the United States. The Federal Reserve is expected to issue rules related to these provisions in 2013. This concentration limit could restrict the Firm’s ability to make acquisitions in the future, thereby adversely affecting its growth prospects.
The total impact of the Dodd-Frank Act cannot be fully assessed without taking into consideration how non-U.S. policymakers and regulators respond to the Dodd-Frank Act and the implementing regulations under the Act, and how the cumulative effects of both U.S. and non-U.S. laws and regulations will affect the businesses and operations of the Firm. Additional legislative or regulatory actions in the United States, as well as in the other countries in which the Firm operates, could result in a significant loss of revenue for the Firm, limit the Firm’s ability to pursue business opportunities in which it might otherwise consider engaging, affect the value of assets that the Firm holds, require the Firm to increase its prices and therefore reduce demand for its products, impose additional costs on the Firm, or otherwise adversely affect the Firm’s businesses. Accordingly, any such new or additional legislation or regulations could have an adverse effect on the Firm’s business, results of operations or financial condition.
Non-U.S. regulations and initiatives may be inconsistent or may conflict with current or proposed regulations in the United States, which could create increased compliance and other costs and adversely affect the Firm’s business, operations or profitability.
The EU has created a European Systemic Risk Board to monitor financial stability, and the Group of Twenty Finance Ministers and Central Bank Governors (“G-20”) broadened the membership and scope of the Financial Stability Forum in 2008 to form the FSB. These institutions, which are
charged with developing ways to promote cross-border financial stability, are considering various proposals to address risks associated with global financial institutions. Some of the initiatives adopted include increased capital requirements for certain trading instruments or exposures and compensation limits on certain employees located in affected countries. In the U.K., regulators have increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companies and branches of non-U.K. banks located in the U.K.; adopted a Bank Tax Levy that applies to balance sheets of branches and subsidiaries of non-U.K. banks; proposed that non-U.K. banks either obtain equal treatment for U.K. depositors or “subsidiarize” in the U.K.; and proposed the creation of resolution and recovery plans by U.K. regulated entities, among other initiatives.
In the EU, there is an extensive and complex program of proposed regulatory enhancement which reflects, in part, the EU’s commitments to policies of the G-20 together with other plans specific to the EU. This program includes the European Market Infrastructure Regulation (“EMIR”) which, among other things, would require central clearing of standardized derivatives and which is likely to be phased in starting in 2013. It also includes the revision of the existing Markets in Financial Instruments Directive (“MiFID II”) to deliver, among other things, the G20 commitment to on-venue trading of derivatives. Both EMIR and MiFID II include many other regulatory requirements that may have wide-ranging and material effects on the Firm’s business operations.
The EU is also currently considering significant revisions to laws covering: depositary activities; credit rating activities; resolution of banks, investment firms and market infrastructures; anti-money-laundering controls; data security and privacy; and corporate governance in financial firms, together with implementation in the EU of the Basel III capital standards. In addition, the Firm is monitoring any potential implications for its business of developments in relation to both bank structure (in respect of which both the EU itself and a variety of EU Member States unilaterally are considering new rules) and the EU’s plans for a single supervisory mechanism for systemic banks under the European Central Bank. For example, the U.K. Independent Commission on Banking (the “Vickers Commission”) proposed provisions, which are now set forth in draft legislation, that would mandate the separation (or “ring-fencing”) of deposit-taking activities from securities trading and other analogous activities within banks, subject to certain exemptions. The final legislation is expected to adopt and include the supplemental recommendation of the Parliamentary Commission on Banking Standards (the “Tyrie Commission”) that such ring-fences should be “electrified” by the imposition of mandatory forced separation on banking institutions that are deemed to test the limits of the safeguards. It is believed that the Firm will have the benefit of the above-referenced exemptions from the requirement to “ring-fence,” but this cannot be determined until the criteria are known with certainty.
Parallel but distinct draft provisions have been published by the French and German governments which could affect the Firm’s operations in those countries.
It is not possible to determine at the current time how these various proposals will affect the Firm’s businesses, or how each relate to the European Commission’s forthcoming legislative proposals on bank structure arising out of the Report of the High Level Expert Group on Reforming the Structure of the EU Banking Sector (the “Liikanen Group”). However, as regulatory requirements that are being proposed by these various regulators may be inconsistent or conflict with regulations to which the Firm is subject in the United States (as well as in other parts of the world), the Firm may, if these proposals are adopted, be subjected to higher compliance and legal costs, as well as the possibility of higher operational, capital and liquidity costs, all of which could have an adverse effect on the Firm’s business, results of operations and profitability in the future.
The Basel III capital standards will impose additional capital, liquidity and other requirements on the Firm that could decrease its competitiveness and profitability.
The Basel Committee on Banking Supervision (the “Basel Committee”) announced in December 2010 revisions to its Capital Accord; such revisions are commonly referred to as “Basel III”. Basel III will require higher capital ratio requirements for banks, narrow the definition of capital, expand the definition of risk-weighted assets, and introduce short-term liquidity and term funding standards, among other things. In June 2012, the U.S. federal banking agencies published proposed capital rules to implement Basel III.
Capital Surcharge. In June 2011, the Basel Committee and the FSB proposed that GSIBs be required to maintain additional capital above the Basel III Tier 1 common equity minimum. See page 5 in Item 1: Business, for further information on the proposed capital change. Based on the Firm’s current understanding of these new capital requirements, the Firm expects that it will be in compliance with all of the standards to which it will be subject as they become effective. However, compliance with these capital standards may reduce the Firm’s return on equity or cause the Firm to alter the types of products it offers to its customers and clients, thereby causing the Firm’s products to become less attractive or placing the Firm at a competitive disadvantage to financial institutions, both within and outside the United States, that are not subject to the same capital surcharge.
Liquidity Coverage and Net Stable Funding Ratios. The Basel Committee has also proposed two new measures of liquidity risk: the “liquidity coverage ratio” and the “net stable funding ratio,” which are intended to measure, during an acute stress, over different time spans, the amount of the liquid assets held by the Firm in relation to liquidity required. If the ratios are finalized as currently proposed, the Firm may need to incur additional costs to raise liquidity and to take certain mitigating actions, such as ceasing to
offer certain products to its customers and clients or charging higher fees for extending certain lines of credit, in order to be in compliance with such ratios. Accordingly, compliance with these liquidity coverage standards could adversely affect the Firm’s funding costs or reduce its profitability in the future.
Elimination of Use of External Credit Ratings. The Federal Reserve, the OCC and the FDIC have issued final rules for risk-based capital guidelines which eliminate the use of external credit ratings for the calculation of risk-weighted assets. This will result in a significant increase in the calculation of the Firm’s risk-weighted assets, which will require the Firm to hold more capital, increase its cost of doing business and place the Firm at a competitive disadvantage to non-U.S. competitors.
Expanded regulatory oversight of JPMorgan Chase’s consumer businesses will increase the Firm’s compliance costs and risks and may negatively affect the profitability of such businesses.
JPMorgan Chase’s consumer businesses are subject to increasing regulatory oversight and scrutiny with respect to its compliance with consumer laws and regulations, including changes implemented as part of the Dodd-Frank Act. The Firm has entered into Consent Orders with its banking regulators relating to its Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) policies, procedures and controls and with respect to its residential mortgage servicing, foreclosure and loss-mitigation activities. The Firm also agreed in 2012 to a global settlement with a number of federal and state government agencies relating to the servicing and origination of mortgages. The mortgage-related Consent Order and global settlement require the Firm to make cash payments and provide certain refinancing and other borrower relief, as well as to adhere to certain enhanced mortgage servicing standards, and the BSA/AML Consent Order will require the Firm to make enhancements to its procedures, make investments in its technology and hire additional personnel, all of which will increase the Firm’s operational and compliance costs.
New regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in the product offerings and practices of JPMorgan Chase’s consumer businesses and affect the profitability of such businesses.
Finally, as a result of increasing federal and state scrutiny of the Firm’s consumer practices, the Firm may face a greater number or wider scope of investigations, enforcement actions and litigation, thereby increasing its costs associated with responding to or defending such actions. In addition, increased regulatory inquiries and investigations, as well as any additional legislative or regulatory developments affecting the Firm’s consumer businesses, and any required changes to the Firm’s business operations resulting from these developments, could result in significant loss of revenue, limit the products or services the Firm offers, require the Firm to increase its prices and therefore reduce demand for its products, impose
additional compliance costs on the Firm, cause harm to the Firm’s reputation or otherwise adversely affect the Firm’s consumer businesses. If the Firm does not appropriately comply with current or future legislation and regulations that apply to its consumer operations, the Firm may be subject to fines, penalties or judgments, or material regulatory restrictions on its businesses, which could adversely affect the Firm’s operations and, in turn, its financial results.
Implementation of the Firm’s resolution plan under the U.S. resolution plan rules could materially impair the claims of JPMorgan Chase debt holders.
As noted above, in July 2012 JPMorgan Chase submitted to the Federal Reserve and the FDIC its initial plan for resolution of the Firm. The Firm’s resolution plan includes strategies to resolve the Firm under the Bankruptcy Code, and also recommends to the FDIC and the Federal Reserve the Firm’s proposed optimal strategy to resolve the Firm under the special resolution procedure provided in Title II of the Dodd-Frank Act (“Title II”).
The Firm’s recommendation for its optimal Title II strategy would involve a “single point of entry” recapitalization model in which the FDIC would use its power to create a “bridge entity” for JPMorgan Chase, transfer the systemically important and viable parts of the Firm’s business, principally the stock of JPMorgan Chase & Co.’s main operating subsidiaries and any intercompany claims against such subsidiaries, to the bridge entity, recapitalize those businesses by contributing some or all of such intercompany claims to the capital of such subsidiaries, and by exchanging debt claims against JPMorgan Chase & Co. for equity in the bridge entity. If the Firm were to be resolved under this strategy, no assurance can be given that the value of the stock of the bridge entity distributed to the holders of debt obligations of JPMorgan Chase & Co. would be sufficient to repay or satisfy all or part of the principal amount of, and interest on, the debt obligations for which such stock was exchanged.
Market Risk
JPMorgan Chase’s results of operations have been, and may continue to be, adversely affected by U.S. and international financial market and economic conditions.
JPMorgan Chase’s businesses are materially affected by economic and market conditions, including the liquidity of the global financial markets; the level and volatility of debt and equity prices, interest rates and currency and commodities prices; investor sentiment; events that reduce confidence in the financial markets; inflation and unemployment; the availability and cost of capital and credit; the occurrence of natural disasters, acts of war or terrorism; and the health of U.S. or international economies.
In the Firm’s wholesale businesses, the above-mentioned factors can affect transactions involving the Firm’s underwriting and advisory businesses; the realization of cash returns from its private equity business; the volume of transactions that the Firm executes for its customers and,
therefore, the revenue that the Firm receives from commissions and spreads; and the willingness of financial sponsors or other investors to participate in loan syndications or underwritings managed by the Firm.
The Firm generally maintains extensive positions in the fixed income, currency, commodities and equity markets to facilitate client demand and provide liquidity to clients. The Firm may have market-making positions that lack pricing transparency or liquidity. The revenue derived from these positions is affected by many factors, including the Firm’s success in effectively hedging its market and other risks, volatility in interest rates and equity, debt and commodities markets, credit spreads, and availability of liquidity in the capital markets, all of which are affected by economic and market conditions. The Firm anticipates that revenue relating to its market-making and private equity businesses will continue to experience volatility, which will affect pricing or the ability to realize returns from such activities, and that this could materially adversely affect the Firm’s earnings.
The fees that the Firm earns for managing third-party assets are also dependent upon general economic conditions. For example, a higher level of U.S. or non-U.S. interest rates or a downturn in securities markets could affect the valuations of the third-party assets that the Firm manages or holds in custody, which, in turn, could affect the Firm’s revenue. Macroeconomic or market concerns may also prompt outflows from the Firm’s funds or accounts.
Changes in interest rates will affect the level of assets and liabilities held on the Firm’s balance sheet and the revenue that the Firm earns from net interest income. A low interest rate environment or a flat or inverted yield curve may adversely affect certain of the Firm’s businesses by compressing net interest margins, reducing the amounts that the Firm earns on its investment securities portfolio, or reducing the value of its mortgage servicing rights (“MSR”) asset, thereby reducing the Firm’s net interest income and other revenues.
The Firm’s consumer businesses are particularly affected by domestic economic conditions, including U.S. interest rates; the rate of unemployment; housing prices; the level of consumer confidence; changes in consumer spending; and the number of personal bankruptcies. If the current positive trends in the U.S. economy are not sustained, this could diminish demand for the products and services of the Firm’s consumer businesses, or increase the cost to provide such products and services. In addition, adverse economic conditions, such as declines in home prices or persistent high levels of unemployment, could lead to an increase in mortgage, credit card and other loan delinquencies and higher net charge-offs, which can reduce the Firm’s earnings.
Widening of credit spreads makes it more expensive for the Firm to borrow on both a secured and unsecured basis. Credit spreads widen or narrow not only in response to Firm-specific events and circumstances, but also as a result of general economic and geopolitical events and conditions.
Changes in the Firm’s credit spreads will impact, positively or negatively, the Firm’s earnings on liabilities that are recorded at fair value.
Despite improved financial market conditions, many of the structural issues facing the Eurozone remain and problems could resurface which could have significant adverse effects on JPMorgan Chase’s business, results of operations, financial condition and liquidity.
Notwithstanding improved financial market conditions, many of the structural issues facing the Eurozone remain and problems could resurface which could have significant adverse effects on JPMorgan Chase’s business, results of operations, financial condition and liquidity, particularly if they lead to sovereign debt default, significant bank failures or defaults and/or the exit of one or more countries from the European Monetary Union (the “EMU”).
The ECB’s Outright Monetary Transaction program continues to underpin an improved risk environment, shifting the focus of the crisis from immediate financing strains to the more structural challenges of fiscal retrenchment and stimulation of GDP growth. However, financial market conditions could materially worsen if, for example, consecutive Eurozone countries were to default on their sovereign debt, significant bank failures or defaults in these countries were to occur, and/or one or more of the members of the Eurozone were to exit the EMU. Yields on government bonds of certain Eurozone countries, including Greece, Ireland, Italy, Portugal and Spain, have remained volatile, despite various stabilization packages and facilities that have been implemented to assist various distressed Eurozone countries. Concerns have been and continue to be raised as to the financial effectiveness of the assistance measures taken to date and such concerns could intensify. Concerns could also be triggered by political developments, with key elections in Italy and Germany during 2013, and ongoing uncertainty about the tolerance of austerity across the Eurozone.
Continued economic turmoil in the Eurozone could lead to a further deterioration of global economic conditions and thereby adversely affect the Firm’s business and results of operations in Europe and elsewhere. There can be no assurance that the various steps that JPMorgan Chase has taken to protect its businesses, results of operations and financial condition against the results of the Eurozone crisis will be sufficient.
Further, the effects of the Eurozone debt crisis could be even more significant if they lead to a partial or complete break-up of the EMU. The partial or full break-up of the EMU would be unprecedented and its impact highly uncertain. The exit of one or more countries from the EMU or the dissolution of the EMU could lead to redenomination of certain obligations of obligors in exiting countries. Any such exit and redenomination would cause significant uncertainty with respect to outstanding obligations of counterparties and debtors in any exiting country, whether sovereign or otherwise, and lead to complex and lengthy disputes and litigation. The resulting uncertainty and
market stress could also cause, among other things, severe disruption to equity markets, significant increases in bond yields generally, potential failure or default of financial institutions, including those of systemic importance, a significant decrease in global liquidity, a freeze-up of global credit markets and a potential worldwide recession. Any combination of such events could negatively impact JPMorgan Chase’s businesses, financial condition and results of operations. In addition, one or more EMU exits and currency redenominations could be accompanied by imposition of capital, exchange and similar controls, which could further negatively impact JPMorgan Chase’s cross-border risk and other aspects of its businesses and its earnings. See “Management’s Discussion and Analysis - Country Risk Management” on pages 170–173 for a discussion of the Firm’s European exposures.
Changes are being considered in the method for determining LIBOR and it is not apparent how any such changes could affect the value of LIBOR-linked obligations of JPMorgan Chase, or how such changes could affect the Firm’s financial condition or results of operations.
Beginning in 2008, concerns have been raised about the accuracy of the calculation of the daily London Inter-Bank Offered Rate (“LIBOR”), which is currently overseen by the British Bankers’ Association (the “BBA”). The BBA has taken steps to change the process for determining LIBOR by increasing the number of banks surveyed to set LIBOR and to strengthen the oversight of the process. The final report of the Wheatley Review of LIBOR, published in September 2012, set forth recommendations relating to the setting and administration of LIBOR, including the gradual phasing out of certain currencies and maturities. In December 2012 the U.K. government adopted legislation enacting one of those recommendations, making it a criminal offense to attempt to manipulate the setting of benchmark rates. The U.K. government also announced that the U.K. Financial Services Authority (“FSA”) intends to incorporate the rest of the Wheatley Review recommendations in new regulations relating to the LIBOR process.
At the present time it is uncertain the extent of changes, if any, may be required or made by the FSA or other governmental or regulatory authorities in the method for determining LIBOR. Accordingly, at the present time it is not apparent whether or to what extent any such changes would have an adverse impact on the value of any LIBOR-linked debt securities issued by the Firm or any loans, derivatives and other financial obligations or extensions of credit for which the Firm is an obligor, or whether or to what extent any such changes would have an adverse effect on the value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to the Firm, or on the Firm’s financial condition or results of operations.
Credit Risk
The financial condition of JPMorgan Chase’s customers, clients and counterparties, including other financial institutions, could adversely affect the Firm.
If the current positive economic trends globally are not sustained, more of JPMorgan Chase’s customers may become delinquent on their loans or other obligations to the Firm which, in turn, could result in a higher level of charge-offs and provisions for credit losses, or in requirements that the Firm purchase assets from or provide other funding to its clients and counterparties, any of which could adversely affect the Firm’s financial condition. Moreover, a significant deterioration in the credit quality of one of the Firm’s counterparties could lead to concerns in the market about the credit quality of other counterparties in the same industry, thereby exacerbating the Firm’s credit risk exposure, and increasing the losses (including mark-to-market losses) that the Firm could incur in its market-making and clearing businesses.
Financial services institutions are interrelated as a result of market-making, trading, clearing, counterparty, or other relationships. The Firm routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose the Firm to credit risk and, in some cases, disputes and litigation in the event of a default by the counterparty or client.
During periods of market stress or illiquidity, the Firm’s credit risk also may be further increased when the Firm cannot realize the fair value of the collateral held by it or when collateral is liquidated at prices that are not sufficient to recover the full amount of the loan, derivative or other exposure due to the Firm. Further, disputes with obligors as to the valuation of collateral significantly increase in times of market stress and illiquidity. Periods of illiquidity could produce losses if the Firm is unable to realize the fair value of collateral or manage declines in the value of collateral.
Concentration of credit and market risk could increase the potential for significant losses.
JPMorgan Chase has exposure to increased levels of risk when customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. As a result, the Firm regularly monitors various segments of its portfolio exposures to assess potential concentration risks. The Firm’s efforts to diversify or hedge its credit portfolio against concentration risks may not be successful.
In addition, disruptions in the liquidity or transparency of the financial markets may result in the Firm’s inability to sell, syndicate or realize the value of its positions, thereby leading to increased concentrations. The inability to reduce the Firm’s positions may not only increase the market and credit risks associated with such positions, but also increase
the level of risk-weighted assets on the Firm’s balance sheet, thereby increasing its capital requirements and funding costs, all of which could adversely affect the operations and profitability of the Firm’s businesses.
JPMorgan Chase’s role as a clearing and custody bank in the U.S. tri-party repurchase business exposes it to credit risks, including intra-day credit risk.
The Firm is a market leader in providing clearing, custodial and prime brokerage services for financial services companies. In addition, the Firm acts as a clearing and custody bank in the U.S. tri-party repurchase transaction market. Many of these transactions expose the Firm to credit risk in the event of a default by the counterparty or client and, in the case of its role in the U.S. tri-party repurchase business, can expose the Firm to intra-day credit risk of the cash borrowers, usually broker-dealers; however, this exposure is secured by collateral and typically extinguished through the settlement process by the end of the day. The Firm actively participated in the Tri-Party Repo Infrastructure Reform Task Force sponsored by the Federal Reserve Bank of New York, which issued recommendations to modify and improve the infrastructure of tri-party repurchase transactions in order to, among other things, mitigate intra-day credit exposure. The Firm has implemented many of the recommendations and intends to implement the intra-day credit recommendations by the end of 2013. As a result, the Firm expects its intra-day credit exposure after implementation of all the Task Force recommendations to be substantially reduced. Nevertheless, if a broker-dealer that is party to a repurchase transaction cleared by the Firm becomes bankrupt or insolvent, the Firm may become involved in disputes and litigation with the broker-dealer’s bankruptcy estate and other creditors, or involved in regulatory investigations, all of which can increase the Firm’s operational and litigation costs and may result in losses if the securities in the repurchase transaction decline in value.
Liquidity Risk
If JPMorgan Chase does not effectively manage its liquidity, its business could suffer.
JPMorgan Chase’s liquidity is critical to its ability to operate its businesses. Some potential conditions that could impair the Firm’s liquidity include markets that become illiquid or are otherwise experiencing disruption, unforeseen cash or capital requirements (including, among others, commitments that may be triggered to special purpose entities (“SPEs”) or other entities), difficulty in selling or inability to sell assets, unforeseen outflows of cash or collateral, and lack of market or customer confidence in the Firm or financial markets in general. These conditions may be caused by events over which the Firm has little or no control. The widespread crisis in investor confidence and resulting liquidity crisis experienced in 2008 and into early 2009 increased the Firm’s cost of funding and limited its access to some of its traditional sources of liquidity such as securitized debt offerings backed by mortgages, credit card
receivables and other assets, and there is no assurance that these conditions could not occur in the future.
If the Firm’s access to stable and low cost sources of funding, such as bank deposits, are reduced, the Firm may need to raise alternative funding which may be more expensive or of limited availability.
As a holding company, JPMorgan Chase & Co. relies on the earnings of its subsidiaries for its cash flow and, consequently, its ability to pay dividends and satisfy its debt and other obligations. These payments by subsidiaries may take the form of dividends, loans or other payments. Several of JPMorgan Chase & Co.’s principal subsidiaries are subject to dividend distribution or capital adequacy requirements or other regulatory restrictions on their ability to provide such payments. Limitations in the payments that JPMorgan Chase & Co. receives from its subsidiaries could reduce its liquidity position.
Some regulators have proposed legislation or regulations requiring large banks to incorporate a separate subsidiary in countries in which they operate, and to maintain independent capital and liquidity for such subsidiaries. If adopted, these requirements could hinder the Firm’s ability to efficiently manage its funding and liquidity in a centralized manner.
Reductions in the Firm’s credit ratings may adversely affect its liquidity and cost of funding, as well as the value of debt obligations issued by the Firm.
JPMorgan Chase & Co. and certain of its subsidiaries, including JPMorgan Chase Bank, N.A., are currently rated by credit rating agencies. In 2012, Moody’s and Fitch downgraded the ratings of JPMorgan Chase & Co. In addition, as of year-end 2012, Moody’s had JPMorgan Chase & Co., and S&P had JPMorgan Chase & Co., JPMorgan Chase Bank, N.A. and certain other subsidiaries, on “negative” outlook, indicating the possibility of a further downgrade in ratings. Although the Firm closely monitors and manages factors influencing its credit ratings, there is no assurance that such ratings will not be lowered in the future. For example, the rating agencies, have indicated that further control failures by the Firm (such as was evidenced in the Chief Investment Office (“CIO”) matter discussed below), deterioration in capital, liquidity and asset quality levels, or a significant increase in risk appetite could put downward pressure on the Firm’s ratings. Additionally, the rating agencies have indicated that they intend to re-evaluate the credit ratings of systemically important financial institutions in light of the provisions of the Dodd-Frank Act that seek to eliminate any implicit government support for such institutions.
Furthermore, the rating agencies continue to evaluate economic and geopolitical trends, including sovereign creditworthiness, elevated economic uncertainty and higher funding spreads, all of which could lead to downgrades in the credit ratings of global banks, including the Firm. There is no assurance that any such downgrades from rating agencies, if they affected the Firm’s credit ratings, would not occur at times of broader market instability when the
Firm’s options for responding to events may be more limited and general investor confidence is low.
Further, a reduction in the Firm’s credit ratings could reduce the Firm’s access to debt markets, materially increase the cost of issuing debt, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing or permitted, contractually or otherwise, to do business with or lend to the Firm, thereby curtailing the Firm’s business operations and reducing its profitability. In addition, any such reduction in credit ratings may increase the credit spreads charged by the market for taking credit risk on JPMorgan Chase & Co. and its subsidiaries and, as a result, could adversely affect the value of debt obligations that they have issued or may issue in the future.
Legal Risk
JPMorgan Chase faces significant legal risks, both from regulatory investigations and proceedings and from private actions brought against the Firm.
JPMorgan Chase is named as a defendant or is otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Actions currently pending against the Firm may result in judgments, settlements, fines, penalties or other results adverse to the Firm, which could materially adversely affect the Firm’s business, financial condition or results of operations, or cause serious reputational harm to the Firm. As a participant in the financial services industry, it is likely that the Firm will continue to experience a high level of litigation related to its businesses and operations.
The Firm’s businesses and operations are also subject to increasing regulatory oversight and scrutiny, which may lead to additional regulatory investigations or enforcement actions. In 2012, the Firm was the subject of Consent Orders from its banking regulators and entered into a global settlement with federal and state governmental agencies relating to its mortgage servicing and origination activities. In January 2013, the Firm also entered into Consent Orders with its banking regulators related to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm and with respect to the Firm’s and certain of its bank subsidiaries’ policies, procedures and controls relating to compliance with BSA and AML requirements. As the regulators continue to examine the operations of the Firm and its bank subsidiaries, there is no assurance that additional consent orders or other enforcement actions will not be issued by them in the future. These and other initiatives from federal and state officials may subject the Firm to further judgments, settlements, fines or penalties, or cause the Firm to be required to restructure its operations and activities, all of which could lead to reputational issues, or higher operational costs, thereby reducing the Firm’s revenue.
Business and Operational Risks
JPMorgan Chase’s operations are subject to risk of loss from unfavorable economic, monetary and political developments in the United States and around the world.
JPMorgan Chase’s businesses and earnings are affected by the fiscal and other policies that are adopted by various U.S. and non-U.S. regulatory authorities and agencies. The Federal Reserve regulates the supply of money and credit in the United States and its policies determine in large part the cost of funds for lending and investing in the United States and the return earned on those loans and investments. Changes in Federal Reserve policies (as well as the fiscal and monetary policies of non-U.S. central banks or regulatory authorities and agencies) are beyond the Firm’s control and, consequently, the impact of changes in these policies on the Firm’s activities and results of operations is difficult to predict.
The Firm’s businesses and revenue are also subject to risks inherent in investing and market-making in securities of companies worldwide. These risks include, among others, risk of loss from unfavorable political, legal or other developments, including social or political instability, in the countries in which such companies operate, as well as the other risks and considerations as described further below.
Several of the Firm’s businesses engage in transactions with, or trade in obligations of, U.S. and non-U.S. governmental entities, including national, state, provincial, municipal and local authorities. These activities can expose the Firm to enhanced sovereign, credit-related, operational and reputational risks, including the risks that a governmental entity may default on or restructure its obligations or may claim that actions taken by government officials were beyond the legal authority of those officials, which could adversely affect the Firm’s financial condition and results of operations.
Further, various countries in which the Firm operates or invests, or in which the Firm may do so in the future, have in the past experienced severe economic disruptions particular to those countries or regions. As noted above, concerns regarding the fiscal condition of certain countries within the Eurozone continue and there is no assurance such concerns will not lead to “market contagion” beyond those countries in the Eurozone or beyond the Eurozone. Accordingly, it is possible that economic disruptions in certain countries, even in countries in which the Firm does not conduct business or have operations, will adversely affect the Firm.
JPMorgan Chase’s international growth strategy may be hindered by local political, social and economic factors, and will be subject to additional compliance costs and risks.
JPMorgan Chase has expanded, and plans to continue to grow, its international wholesale businesses in Europe/Middle East/Africa (“EMEA”), Asia/Pacific and Latin America/Caribbean. As part of its international growth strategy, the Firm seeks to provide a wider range of
financial services to its clients that conduct business in those regions and to expand its international operations.
Many of the countries in which JPMorgan Chase intends to grow its wholesale businesses have economies or markets that are less developed and more volatile, and may have legal and regulatory regimes that are less established or predictable, than the United States and other developed markets in which the Firm currently operates. Some of these countries have in the past experienced severe economic disruptions, including extreme currency fluctuations, high inflation, or low or negative growth, among other negative conditions, or have imposed restrictive monetary policies such as currency exchange controls and other laws and restrictions that adversely affect the local and regional business environment. In addition, these countries have historically been more susceptible to unfavorable political, social or economic developments which have in the past resulted in, and may in the future lead to, social unrest, general strikes and demonstrations, outbreaks of hostilities, overthrow of incumbent governments, terrorist attacks or other forms of internal discord, all of which can adversely affect the Firm’s operations or investments in such countries. Political, social or economic disruption or dislocation in countries or regions in which the Firm seeks to expand its wholesale businesses can hinder the growth and profitability of those operations, and there can be no assurance that the Firm will be able to successfully execute its international growth initiatives.
Less developed legal and regulatory systems in certain countries can also have adverse consequences on the Firm’s operations in those countries, including, among others, the absence of a statutory or regulatory basis or guidance for engaging in specific types of business or transactions, or the inconsistent application or interpretation of existing laws and regulations; uncertainty as to the enforceability of contractual obligations; difficulty in competing in economies in which the government controls or protects all or a portion of the local economy or specific businesses, or where graft or corruption may be pervasive; and the threat of arbitrary regulatory investigations, civil litigations or criminal prosecutions.
Revenue from international operations and trading in non-U.S. securities and other obligations may be subject to negative fluctuations as a result of the above considerations, as well as due to governmental actions including expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, and changes in laws and regulations. The impact of these fluctuations could be accentuated as some trading markets are smaller, less liquid and more volatile than larger markets. Also, any of the above-mentioned events or circumstances in one country can, and has in the past, affected the Firm’s operations and investments in another country or countries, including the Firm’s operations in the United States. As a result, any such unfavorable conditions
or developments could have an adverse impact on the Firm’s business and results of operations.
Conducting business in countries with less developed legal and regulatory regimes often requires the Firm to devote significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as structuring its operations to comply with local laws and regulations and implementing and administering related internal policies and procedures. There can be no assurance that the Firm will always be successful in its efforts to conduct its business in compliance with laws and regulations in countries with less predictable legal and regulatory systems. In addition, the Firm can also incur higher costs, and face greater compliance risks, in structuring its operations outside the United States to comply with U.S. anti-corruption and anti-money laundering laws and regulations.
JPMorgan Chase’s results of operations may be adversely affected by loan repurchase and indemnity obligations.
In connection with the sale and securitization of loans (whether with or without recourse), the originator is generally required to make a variety of representations and warranties regarding both the originator and the loans being sold or securitized. JPMorgan Chase and some of its subsidiaries have made such representations and warranties in connection with the sale and securitization of loans, and the Firm will continue to do so when it securitizes loans it has originated. If a loan that does not comply with such representations or warranties is sold or securitized, the Firm may be obligated to repurchase the loan and incur any associated loss directly, or the Firm may be obligated to indemnify the purchaser against any such losses. Since 2010, the costs of repurchasing mortgage loans that had been sold to U.S. government-sponsored entities (“GSEs”), such as Fannie Mae and Freddie Mac, have been elevated, and there is no assurance that such costs will not continue to be elevated in the future. Accordingly, repurchase or indemnity obligations to the GSEs or to private third-party purchasers could materially and adversely affect the Firm’s results of operations and earnings in the future.
The repurchase liability that the Firm records with respect to its loan repurchase obligations to the GSEs is estimated based on several factors, including the level of current and estimated probable future repurchase demands made by purchasers, the Firm’s ability to cure the defects identified in the repurchases demands, the severity of loss upon repurchase or foreclosure, the Firm’s potential ability to recover certain losses from third-party originators, and the terms of agreements with certain mortgage insurers and other parties. While the Firm believes that its current repurchase liability reserves are adequate, the factors referred to above are subject to change based on the GSEs’ future behavior, the economic environment and other uncertainties. Accordingly, there is no assurance that such reserves will not be increased in the future.
The Firm also faces litigation related to securitizations, primarily related to securitizations not sold to the GSEs. The
Firm separately evaluates its exposure to such litigation in establishing its litigation reserves. While the Firm believes that its current reserves in respect of such litigation matters are adequate, there can be no assurance that such reserves will not need to be increased in the future.
JPMorgan Chase may incur additional costs and expenses in ensuring that it satisfies requirements relating to mortgage servicing and foreclosures.
The Firm has, as described above, entered into the Consent Orders with its banking regulators relating to its residential mortgage servicing, foreclosure and loss-mitigation activities, and agreed to the global settlement with federal and state government agencies relating to the servicing and origination of mortgages. The Firm expects to incur additional costs and expenses in connection with its efforts to enhance its mortgage origination, servicing and foreclosure procedures, including the enhancements required under the Consent Orders and the global settlement. In addition, the GSEs impose compensatory fees on their mortgage servicers, including the Firm, if such servicers are unable to comply with the foreclosure timetables mandated by the GSEs, and such fees may continue to be imposed on the Firm in the future.
JPMorgan Chase’s commodities activities are subject to extensive regulation, potential catastrophic events and environmental risks and regulation that may expose the Firm to significant cost and liability.
JPMorgan Chase engages in the storage, transportation, marketing or trading of several commodities, including metals, agricultural products, crude oil, oil products, natural gas, electric power, emission credits, coal, freight, and related products and indices. The Firm is also engaged in power generation and has invested in companies engaged in wind energy and in sourcing, developing and trading emission reduction credits. As a result of all of these activities, the Firm is subject to extensive and evolving energy, commodities, environmental, and other governmental laws and regulations. The Firm expects laws and regulations affecting its commodities activities to expand in scope and complexity, and to restrict some of the Firm’s activities, which could result in lower revenues from the Firm’s commodities activities. In addition, the Firm may incur substantial costs in complying with current or future laws and regulations, and the failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties. Furthermore, liability may be incurred without regard to fault under certain environmental laws and regulations for remediation of contaminations.
The Firm’s commodities activities also further expose the Firm to the risk of unforeseen and catastrophic events, including natural disasters, leaks, spills, explosions, release of toxic substances, fires, accidents on land and at sea, wars, and terrorist attacks that could result in personal injuries, loss of life, property damage, damage to the Firm’s reputation and suspension of operations. The Firm’s commodities activities are also subject to disruptions, many
of which are outside of the Firm’s control, from the breakdown or failure of power generation equipment, transmission lines or other equipment or processes, and the contractual failure of performance by third-party suppliers or service providers, including the failure to obtain and deliver raw materials necessary for the operation of power generation facilities. The Firm’s actions to mitigate its risks related to the above-mentioned considerations may not prove adequate to address every contingency. In addition, insurance covering some of these risks may not be available, and the proceeds, if any, from insurance recovery may not be adequate to cover liabilities with respect to particular incidents. As a result, the Firm’s financial condition and results of operations may be adversely affected by such events.
JPMorgan Chase relies on its systems, employees and certain counterparties, and certain failures could materially adversely affect the Firm’s operations.
JPMorgan Chase’s businesses are dependent on the Firm’s ability to process, record and monitor a large number of complex transactions. If the Firm’s financial, accounting, or other data processing systems fail or have other significant shortcomings, the Firm could be materially adversely affected. The Firm is similarly dependent on its employees. The Firm could be materially adversely affected if one or more of its employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates the Firm’s operations or systems. Third parties with which the Firm does business could also be sources of operational risk to the Firm, including with respect to breakdowns or failures of the systems or misconduct by the employees of such parties. In addition, as the Firm changes processes or introduces new products and services, the Firm may not fully appreciate or identify new operational risks that may arise from such changes. Any of these occurrences could diminish the Firm’s ability to operate one or more of its businesses, or result in potential liability to clients, increased operating expenses, higher litigation costs (including fines and sanctions), reputational damage, regulatory intervention or weaker competitive standing, any of which could materially adversely affect the Firm.
If personal, confidential or proprietary information of customers or clients in the Firm’s possession were to be mishandled or misused, the Firm could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of the Firm’s systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.
The Firm may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond the Firm’s control, which may include, for example, security breaches (as discussed further below); electrical or
telecommunications outages; failures of computer servers or other damage to the Firm’s property or assets; natural disasters; health emergencies or pandemics; or events arising from local or larger scale political events, including terrorist acts. JPMorgan Chase maintains a global resiliency and crisis management program that is intended to ensure that the Firm has the ability to recover its critical business functions and supporting assets, including staff, technology and facilities, in the event of a business interruption. While the Firm believes that its current resiliency plans are both sufficient and adequate, there can be no assurance that such plans will fully mitigate all potential business continuity risks to the Firm. Any failures or disruptions of the Firm’s systems or operations could give rise to losses in service to customers and clients, adversely affect the Firm’s business and results of operations by subjecting the Firm to losses or liability, or require the Firm to expend significant resources to correct the failure or disruption, as well as by exposing the Firm to litigation, regulatory fines or penalties or losses not covered by insurance.
A breach in the security of JPMorgan Chase’s systems could disrupt its businesses, result in the disclosure of confidential information, damage its reputation and create significant financial and legal exposure for the Firm.
Although JPMorgan Chase devotes significant resources to maintain and regularly upgrade its systems and processes that are designed to protect the security of the Firm’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to the Firm and its customers, there is no assurance that all of the Firm’s security measures will provide absolute security. JPMorgan Chase and other financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyberattacks and other means. The Firm and several other U.S. financial institutions have also experienced several significant distributed denial-of-service attacks from technically sophisticated and well-resourced third parties which were intended to disrupt consumer online banking services.
Despite the Firm’s efforts to ensure the integrity of its systems, it is possible that the Firm may not be able to anticipate or to implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because security attacks can originate from a wide variety of sources, including third parties outside the Firm such as persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. Those parties may also
attempt to fraudulently induce employees, customers or other users of the Firm’s systems to disclose sensitive information in order to gain access to the Firm’s data or that of its customers or clients. These risks may increase in the future as the Firm continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications.
A successful penetration or circumvention of the security of the Firm’s systems could cause serious negative consequences for the Firm, including significant disruption of the Firm’s operations, misappropriation of confidential information of the Firm or that of its customers, or damage to computers or systems of the Firm and those of its customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to the Firm or to its customers, loss of confidence in the Firm’s security measures, customer dissatisfaction, significant litigation exposure, and harm to the Firm’s reputation, all of which could have a material adverse effect on the Firm.
JPMorgan Chase’s acquisitions and the integration of acquired businesses may not result in all of the benefits anticipated.
JPMorgan Chase has in the past and may in the future seek to expand its business by acquiring other businesses. There can be no assurance that the Firm’s acquisitions will have the anticipated positive results, including results relating to: the total cost of integration; the time required to complete the integration; the amount of longer-term cost savings; the overall performance of the combined entity; or an improved price for JPMorgan Chase & Co.’s common stock. Integration efforts could divert management attention and resources, which could adversely affect the Firm’s operations or results. The Firm cannot provide assurance that any such integration efforts would not result in the occurrence of unanticipated costs or losses.
Acquisitions may also result in business disruptions that cause the Firm to lose customers or cause customers to move their business to competing financial institutions. It is possible that the integration process related to acquisitions could result in the disruption of the Firm’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that could adversely affect the Firm’s ability to maintain relationships with clients, customers, depositors and other business partners. The loss of key employees in connection with an acquisition could adversely affect the Firm’s ability to successfully conduct its business.
Risk Management
JPMorgan Chase’s framework for managing risks and its risk management procedures and practices may not be effective in mitigating risk and loss to the Firm.
JPMorgan Chase’s risk management framework seeks to mitigate risk and loss to the Firm. The Firm has established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which the Firm is subject, including liquidity risk, credit risk, market
risk, interest rate risk, country risk, principal risk, operational risk, legal and fiduciary risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to the Firm’s risk management strategies because there may exist, or develop in the future, risks that the Firm has not appropriately anticipated or identified. If the Firm’s risk management framework proves ineffective, the Firm could suffer unexpected losses and could be materially adversely affected. As the Firm’s businesses change and grow and the markets in which they operate continue to evolve, the Firm’s risk management framework may not always keep sufficient pace with those changes. As a result, there is the risk that the credit and market risks associated with new products or new business strategies may not be appropriately identified, monitored or managed. In addition, in a difficult or less liquid market environment, the Firm’s risk management strategies may not be effective because other market participants may be attempting to use the same or similar strategies to deal with the challenging market conditions. In such circumstances, it may be difficult for the Firm to reduce its risk positions due to the activity of such other market participants.
The Firm’s products, including loans, leases, lending commitments, derivatives, trading account assets and assets held-for-sale, as well as cash management and clearing activities, expose the Firm to credit risk. As one of the nation’s largest lenders, the Firm has exposures arising from its many different products and counterparties, and the credit quality of the Firm’s exposures can have a significant impact on its earnings. The Firm establishes allowances for probable credit losses that are inherent in its credit exposure, including unfunded lending commitments. The Firm also employs stress testing and other techniques to determine the capital and liquidity necessary to protect the Firm in the event of adverse economic or market events. These processes are critical to the Firm’s financial results and condition, and require difficult, subjective and complex judgments, including forecasts of how economic conditions might impair the ability of the Firm’s borrowers and counterparties to repay their loans or other obligations. As is the case with any such assessments, there is always the chance that the Firm will fail to identify the proper factors or that the Firm will fail to accurately estimate the impact of factors that it identifies.
JPMorgan Chase’s market-making businesses may expose the Firm to unexpected market, credit and operational risks that could cause the Firm to suffer unexpected losses. Severe declines in asset values, unanticipated credit events, or unforeseen circumstances that may cause previously uncorrelated factors to become correlated (and vice versa) may create losses resulting from risks not appropriately taken into account in the development, structuring or pricing of a financial instrument such as a derivative. Certain of the Firm’s derivative transactions require the physical settlement by delivery of securities, commodities or obligations that the Firm does not own; if the Firm is unable to obtain such securities, commodities or obligations
within the required timeframe for delivery, this could cause the Firm to forfeit payments otherwise due to it and could result in settlement delays, which could damage the Firm’s reputation and ability to transact future business. In addition, in situations where trades are not settled or confirmed on a timely basis, the Firm may be subject to heightened credit and operational risk, and in the event of a default, the Firm may be exposed to market and operational losses. In particular, disputes regarding the terms or the settlement procedures of derivative contracts could arise, which could force the Firm to incur unexpected costs, including transaction, legal and litigation costs, and impair the Firm’s ability to manage effectively its risk exposure from these products.
Many of the Firm’s risk management strategies or techniques have a basis in historical market behavior, and all such strategies and techniques are based to some degree on management’s subjective judgment. For example, many models used by the Firm are based on assumptions regarding correlations among prices of various asset classes or other market indicators. In times of market stress, or in the event of other unforeseen circumstances, previously uncorrelated indicators may become correlated, or conversely, previously correlated indicators may make unrelated movements. These sudden market movements or unanticipated or unidentified market or economic movements have in some circumstances limited the effectiveness of the Firm’s risk management strategies, causing the Firm to incur losses. The Firm cannot provide assurance that its risk management framework, including the Firm’s underlying assumptions or strategies, will at all times be accurate and effective.
In connection with the Firm’s internal review of the reported losses in the synthetic credit portfolio managed by CIO, management concluded that during the first quarter of 2012 CIO’s risk management had been ineffective in dealing with the growth in the size and complexity of the portfolio during the first quarter of 2012. Among other matters, the Firm’s internal review found that CIO lacked a robust risk committee structure; that CIO’s risk limits were insufficiently granular and should have been reassessed in light of the positions being added to the synthetic credit portfolio in the first quarter of 2012; that CIO risk management was insufficiently engaged in the approval and implementation during the first quarter of 2012 of a new CIO Value-at-Risk (“VaR”) model related to the portfolio (before that model was discontinued and the previous model was restored); and that there was inadequate escalation to the Firm’s management of certain risk issues relating to the portfolio. The Firm has taken steps to correct such lapses, including, among other things, appointing a new Chief Risk Officer for CIO/Treasury/Corporate (“CTC”); adding resources and talent in CIO risk management; instituting new CTC risk committees to improve governance and controls and ensure tighter linkages between CIO, Treasury and other activities in the Corporate sector; and introducing more granular risk limits for CIO.
In January 2013, JPMorgan Chase & Co. entered into a Consent Order with the Federal Reserve and JPMorgan Chase Bank, N.A. entered into a Consent Order with the OCC relating to the banking regulators’ reviews of the CIO matter. These Consent Orders relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. Many of the actions required by the Consent Orders have already been, or are in the process of being, implemented by the Firm.
While the Firm has taken, and is taking, steps to correct the lapses in the CIO risk management framework, there is no assurance that new or additional lapses in the Firm’s risk management framework and governance structure could not occur in the future. Any such lapses or other inadequacies in the design or implementation of the Firm’s risk management framework, governance, procedures or practices could, individually or in the aggregate, cause unexpected losses for the Firm, materially and adversely affect the Firm’s financial condition and results of operations, require significant resources to remediate any risk management deficiency, attract heightened regulatory scrutiny, expose the Firm to regulatory investigations or legal proceedings, subject the Firm to fines, penalties or judgments, harm the Firm’s reputation, or otherwise cause a decline in investor confidence.
Lapses in disclosure controls and procedures or internal control over financial reporting could materially and adversely affect the Firm’s operations, profitability or reputation.
The Firm is committed to maintaining high standards of internal control over financial reporting and disclosure controls and procedures. Nevertheless, in a firm as large and complex as JPMorgan Chase, lapses or deficiencies in disclosure controls and procedures or in the Firm’s internal control over financial reporting may occur from time to time. On July 13, 2012, the Firm reported that it had determined that a material weakness existed in its internal control over financial reporting at March 31, 2012. This determination related to the valuation control function for the synthetic credit portfolio managed by CIO during the first quarter of 2012. As a result of the material weakness, management also concluded that the Firm’s disclosure controls and procedures were not effective at March 31, 2012. Management has taken steps to remediate the internal control deficiency, including enhancing management supervision of valuation matters. The control deficiency was substantially remediated by June 30, 2012, and was closed-out by September 30, 2012.
There can be no assurance that the Firm’s disclosure controls and procedures will be effective in the future or that a material weakness or significant deficiency in internal control over financial reporting could not occur again. Any such lapses or deficiencies may materially and adversely affect the Firm’s business and results of operations or financial condition, restrict its ability to access the capital markets, require the Firm to expend significant resources to
correct the lapses or deficiencies, expose the Firm to regulatory or legal proceedings, subject it to fines, penalties or judgments, harm the Firm’s reputation, or otherwise cause a decline in investor confidence.
Other Risks
The financial services industry is highly competitive, and JPMorgan Chase’s inability to compete successfully may adversely affect its results of operations.
JPMorgan Chase operates in a highly competitive environment and the Firm expects competitive conditions to continue to intensify as the financial services industry produces better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices.
Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance companies, mutual fund companies, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, and a variety of other financial services and advisory companies. Technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions and other companies to provide electronic and Internet-based financial solutions, including electronic securities trading. The Firm’s businesses generally compete on the basis of the quality and variety of the Firm’s products and services, transaction execution, innovation, reputation and price. Ongoing or increased competition in any one or all of these areas may put downward pressure on prices for the Firm’s products and services or may cause the Firm to lose market share. Increased competition also may require the Firm to make additional capital investments in its businesses in order to remain competitive. These investments may increase expense or may require the Firm to extend more of its capital on behalf of clients in order to execute larger, more competitive transactions. The Firm cannot provide assurance that the significant competition in the financial services industry will not materially adversely affect its future results of operations.
Competitors of the Firm’s non-U.S. wholesale businesses are typically subject to different, and in some cases, less stringent, legislative and regulatory regimes. For example, the regulatory objectives underlying several provisions of the Dodd-Frank Act, including the prohibition on proprietary trading under the Volcker Rule and the derivatives “push-out” rules, have not been embraced by governments and regulatory agencies outside the United States and may not be implemented into law in most countries. The more restrictive laws and regulations applicable to U.S. financial services institutions, such as JPMorgan Chase, can put the Firm at a competitive disadvantage to its non-U.S. competitors, including
prohibiting the Firm from engaging in certain transactions, making the Firm’s pricing of certain transactions more expensive for clients or adversely affecting the Firm’s cost structure for providing certain products, all of which can reduce the revenue and profitability of the Firm’s wholesale businesses.
JPMorgan Chase’s ability to attract and retain qualified employees is critical to the success of its business, and failure to do so may materially adversely affect the Firm’s performance.
JPMorgan Chase’s employees are the Firm’s most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. The imposition on the Firm or its employees of restrictions on executive compensation may adversely affect the Firm’s ability to attract and retain qualified senior management and employees. If the Firm is unable to continue to retain and attract qualified employees, the Firm’s performance, including its competitive position, could be materially adversely affected.
JPMorgan Chase’s financial statements are based in part on assumptions and estimates which, if incorrect, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States, JPMorgan Chase is required to use certain assumptions and estimates in preparing its financial statements, including in determining allowances for credit losses, mortgage repurchase liability and reserves related to litigation, among other items. Certain of the Firm’s financial instruments, including trading assets and liabilities, available-for-sale securities, certain loans, MSRs, private equity investments, structured notes and certain repurchase and resale agreements, among other items, require a determination of their fair value in order to prepare the Firm’s financial statements. Where quoted market prices are not available, the Firm may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment. If assumptions or estimates underlying the Firm’s financial statements are incorrect, the Firm may experience material losses.
Damage to JPMorgan Chase’s reputation could damage its businesses.
Maintaining trust in JPMorgan Chase is critical to the Firm’s ability to attract and maintain customers, investors and employees. Damage to the Firm’s reputation can therefore cause significant harm to the Firm’s business and prospects. Harm to the Firm’s reputation can arise from numerous sources, including, among others, employee misconduct, compliance failures, litigation or regulatory outcomes or governmental investigations. In addition, a failure to deliver appropriate standards of service and quality, or a failure or
perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to the Firm’s reputation. Adverse publicity regarding the Firm, whether or not true, may result in harm to the Firm’s prospects. Actions by the financial services industry generally or by certain members of or individuals in the industry can also affect the Firm’s reputation. For example, the role played by financial services firms in the financial crisis, including concerns that consumers have been treated unfairly by financial institutions, has damaged the reputation of the industry as a whole. Should any of these or other events or factors that can undermine the Firm’s reputation occur, there is no assurance that the additional costs and expenses that the Firm may need to incur to address the issues giving rise to the reputational harm could not adversely affect the Firm’s earnings and results of operations.
Management of potential conflicts of interests has become increasingly complex as the Firm continues to expand its business activities through more numerous transactions, obligations and interests with and among the Firm’s clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with the Firm, or give rise to litigation or enforcement actions, as well as cause serious reputational harm to the Firm.
ITEM 1B: UNRESOLVED SEC STAFF COMMENTS
None.
ITEM 2: PROPERTIES
JPMorgan Chase’s headquarters is located in New York City at 270 Park Avenue, a 50-story office building owned by JPMorgan Chase. This location contains approximately 1.3 million square feet of space.
In total, JPMorgan Chase owned or leased approximately 12.0 million square feet of commercial office and retail space in New York City at December 31, 2012. JPMorgan Chase and its subsidiaries also own or lease significant administrative and operational facilities in Chicago, Illinois (3.7 million square feet); Houston and Dallas, Texas (3.7 million square feet); Columbus, Ohio (2.8 million square feet); Phoenix, Arizona (1.4 million square feet); Jersey City, New Jersey (1.0 million square feet); and 5,614 retail branches in 23 states. At December 31, 2012, the Firm occupied approximately 68.9 million total square feet of space in the United States.
At December 31, 2012, the Firm also owned or leased approximately 5.6 million square feet of space in Europe, the Middle East and Africa. In the United Kingdom, at December 31, 2012, JPMorgan Chase owned or leased approximately 4.3 million square feet of office space and owned a 378,000 square-foot operations center. JPMorgan Chase acquired a 999-year leasehold interest at 25 Bank Street in London’s Canary Wharf in 2010. 25 Bank Street, with 1.4 million square feet of space, became the new
European headquarters of the Corporate & Investment Bank in 2012.
In 2008, JPMorgan Chase had acquired a 999-year leasehold interest in land at London’s Canary Wharf and had entered into a building agreement to develop the site and construct a European headquarters building. However, with the acquisition of 25 Bank Street, JPMorgan Chase signed an amended building agreement in December 2010 for the continued development of the Canary Wharf site for future use. The amended terms extend the building agreement to October 30, 2016.
JPMorgan Chase and its subsidiaries also occupy offices and other administrative and operational facilities in the Asia/Pacific region, Latin America and North America under ownership and leasehold agreements aggregating approximately 5.4 million square feet of space at December 31, 2012. This includes leases for administrative and operational facilities in India (2.0 million square feet) and the Philippines (1.0 million square feet).
The properties occupied by JPMorgan Chase are used across all of the Firm’s business segments and for corporate purposes. JPMorgan Chase continues to evaluate its current and projected space requirements and may determine from time to time that certain of its premises and facilities are no longer necessary for its operations. There is no assurance that the Firm will be able to dispose of any such excess premises or that it will not incur charges in connection with such dispositions. Such disposition costs may be material to the Firm’s results of operations in a given period. For a discussion of occupancy expense, see the Consolidated Results of Operations on pages 72–75.
ITEM 3: LEGAL PROCEEDINGS
For a description of the Firm’s material legal proceedings, see Note 31 on pages 316–325.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
Part II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for registrant’s common equity
The outstanding shares of JPMorgan Chase common stock are listed and traded on the New York Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. For the quarterly high and low prices of JPMorgan Chase’s common stock for the last two years, see the section entitled “Supplementary information – Selected quarterly financial data (unaudited)” on pages 331–332. For a comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total return of the S&P 500 Index, the KBW Bank Index and the S&P Financial Index over the five-year period ended
December 31, 2012, see “Five-year stock performance,” on page 63.
JPMorgan Chase declared and paid quarterly cash dividends on its common stock in the amount of $0.30 per share for each quarter of 2012, $0.25 per share for each quarter of 2011 and $0.05 per share for each quarter of 2010.
The common dividend payout ratio, based on reported net income, was 23% for 2012, 22% for 2011 and 5% for 2010. For a discussion of restrictions on dividend payments, see Note 22 and Note 27 on page 300 and page 306, respectively. At January 31, 2013, there were 217,055 holders of record of JPMorgan Chase common stock. For information regarding securities authorized for issuance under the Firm’s employee stock-based compensation plans, see Item 12 on page 26.
Repurchases under the common equity repurchase program
On March 13, 2012, the Board of Directors authorized a $15.0 billion common equity (i.e., common stock and warrants) repurchase program (the “2012 program”), of which up to $12.0 billion was approved for repurchase in 2012 and up to an additional $3.0 billion is approved through the end of the first quarter of 2013. During 2012 and 2011, the Firm repurchased (on a trade-date basis) 31 million and 229 million shares of common stock, for $1.3 billion and $8.8 billion, respectively. During 2012 and 2011, the Firm repurchased 18 million and 10 million warrants, for $238 million and $122 million, respectively. The Firm did not make any repurchases after May 17, 2012. As of December 31, 2012, $13.4 billion of authorized repurchase capacity remained under the program.
The Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate repurchases in accordance with the repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its equity during periods when it would not otherwise be repurchasing common equity — for example, during internal trading “black-out periods.” All purchases under a Rule 10b5-1 plan must be made according to a predefined plan established when the Firm is not aware of material nonpublic information.
The authorization to repurchase common equity will be utilized at management’s discretion, and the timing of purchases and the exact amount of common equity that may be repurchased is subject to various factors, including market conditions; legal and regulatory considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into account goodwill and intangibles); internal capital generation; and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 programs; and may be suspended at any time.
Shares repurchased pursuant to the common equity repurchase program during 2012 were as follows.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Warrants | | | | | |
Year ended December 31, 2012 | | Total shares of common stock repurchased | | Average price paid per share of common stock(b) | | Total warrants repurchased | | Average price paid per warrant(b) | | Aggregate repurchases of common equity (in millions)(b) | | Dollar value of remaining authorized repurchase (in millions)(c) | |
Repurchases under the prior $15.0 billion program(a) | | 2,604,500 |
| | $ | 33.10 |
| | — |
| | $ | — |
| | $ | 86 |
| | $ | 6,050 |
| (d) |
Repurchases under the new $15.0 billion program | | 2,867,870 |
| | 45.29 |
| | — |
| | — |
| | 130 |
| | 14,870 |
| |
First quarter(a) | | 5,472,370 |
| | 39.49 |
| | — |
| | — |
| | 216 |
| | 14,870 |
| |
Second quarter | | 28,070,715 |
| | 42.72 |
| | 18,471,300 |
| | 12.90 |
| | 1,437 |
| | 13,433 |
| |
Third quarter | | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| |
October | | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| |
November | | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| |
December | | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| |
Fourth quarter | | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| |
Year-to-date(a) | | 33,543,085 |
| | $ | 42.19 |
| | 18,471,300 |
| | $ | 12.90 |
| | $ | 1,653 |
| | $ | 13,433 |
| |
| |
(a) | Includes $86 million of repurchases in December 2011, which settled in early January 2012. |
| |
(b) | Excludes commissions cost. |
| |
(c) | The amount authorized by the Board of Directors excludes commissions cost. |
| |
(d) | The unused portion of the prior $15.0 billion program was canceled when the $15.0 billion 2012 program was authorized. |
Repurchases under the stock-based incentive plans
Participants in the Firm’s stock-based incentive plans may have shares of common stock withheld to cover income taxes. Shares withheld to pay income taxes are repurchased pursuant to the terms of the applicable plan and not under the Firm’s repurchase program. Shares repurchased pursuant to these plans during 2012, were as follows.
|
| | | | | | |
Year ended December 31, 2012 | Total shares of common stock repurchased |
| | Average price paid per share of common stock |
|
First quarter | 406 |
| | $ | 45.81 |
|
Second quarter | 32 |
| | 39.72 |
|
Third quarter | 28 |
| | 35.98 |
|
October | — |
| | — |
|
November | 154,125 |
| | 41.10 |
|
December | — |
| | — |
|
Fourth quarter | 154,125 |
| | 41.10 |
|
Year-to-date | 154,591 |
| | $ | 41.11 |
|
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see “Five-year summary of consolidated financial highlights (unaudited)” on pages 62–63.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations, entitled “Management’s discussion and analysis,” appears on pages 64–184. Such information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, which appear on pages 188–330.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of Management’s discussion and analysis on pages 163–169.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, together with the Notes thereto and the report thereon dated February 28, 2013 of PricewaterhouseCoopers LLP, the Firm’s independent registered public accounting firm, appear on pages 187–330.
Supplementary financial data for each full quarter within the two years ended December 31, 2012, are included on pages 331–332 in the table entitled “Selected quarterly financial data (unaudited).” Also included is a “Glossary of terms’’ on pages 333–335.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the Certification statements issued by the Chairman and Chief Executive Officer and Chief Financial Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting. Nevertheless, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, in a firm as large and complex as JPMorgan Chase, lapses or deficiencies in internal controls may occur from time to time, and there can be no assurance that any such deficiencies will not result in significant deficiencies or material weaknesses in internal controls in the future. For further information, see “Management’s report on internal control over financial reporting” on page 186. There was no change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the three months ended December 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Firm’s internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
Carlson Wagonlit Travel (“CWT”), a business travel management firm in which JPMorgan Chase has invested through its merchant banking activities, may be deemed to be an affiliate of the Firm, as that term is defined in Exchange Act Rule 12b-2. CWT has informed the Firm that, during the year ended December 31, 2012, it booked approximately 30 flights (of the approximately 59 million transactions it booked in 2012) to Iran on Iran Air for passengers, including employees of foreign governments and non-governmental organizations. All of such flights originated outside of the United States from countries that permit travel to Iran, and none of such passengers were persons designated under Executive Orders 13224 or 13382 or were employees of foreign governments that are targets of U.S. sanctions. CWT and the Firm believe that this activity is permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. CWT had approximately $27,000 in gross revenues attributable to these transactions. CWT has informed the Firm that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive officers of the registrant
|
| | |
| Age | |
Name | (at December 31, 2012) | Positions and offices |
James Dimon | 56 | Chairman of the Board, Chief Executive Officer and President. |
Frank J. Bisignano | 53 | Co-Chief Operating Officer since July 2012. He had been Chief Executive Officer of Mortgage Banking from February 2011 until December 2012 and Chief Administrative Officer from 2005 until July 2012. |
Douglas L. Braunstein(a) | 51 | Vice Chairman since January 1, 2013. He had been Chief Financial Officer from June 2010 until December 31, 2012, and was head of Investment Banking for the Americas since 2008, prior to which he had served in a number of senior Investment Banking roles, including as head of Global Mergers and Acquisitions. |
Michael J. Cavanagh | 46 | Co-Chief Executive Officer of the Corporate & Investment Bank since July 2012. He had been Chief Executive Officer of Treasury & Securities Services (now part of Corporate & Investment Bank) from June 2010 until July 2012, prior to which he had been Chief Financial Officer. |
Stephen M. Cutler | 51 | General Counsel since February 2007. Prior to joining JPMorgan Chase, he was a partner and co-chair of the Securities Department at the law firm of WilmerHale. |
John L. Donnelly | 56 | Head of Human Resources since January 2009. Prior to joining JPMorgan Chase, he had been Global Head of Human Resources at Citigroup, Inc. since 2007 and Head of Human Resources and Corporate Affairs for Citi Markets and Banking business from 1998 until 2007. |
Mary Callahan Erdoes | 45 | Chief Executive Officer of Asset Management since September 2009, prior to which she had been Chief Executive Officer of Private Banking. |
John J. Hogan(b) | 46 | Chief Risk Officer since January 2012. He had been Chief Risk Officer of the Investment Bank (now part of Corporate & Investment Bank) since 2006. |
Marianne Lake(a) | 43 | Chief Financial Officer since January 1, 2013. She had been Chief Financial Officer of the Consumer & Community Banking business (“CCB”) and prior to the organization of CCB served since 2009 as Chief Financial Officer for the consumer business unit now part of CCB. She previously had served as Global Controller of the Investment Bank from 2007 to 2009, prior to which she had served in a number of senior financial officer roles. |
Douglas B. Petno | 47 | Chief Executive Officer of Commercial Banking since January 2012. He had been Chief Operating Officer of Commercial Banking since October 2010, prior to which he had been Global Head of Natural Resources in the Investment Bank. |
Daniel E. Pinto | 50 | Co-Chief Executive Officer of the Corporate & Investment Bank since July 2012 and Chief Executive Officer of Europe, the Middle East and Africa since June 2011. He had been head or co-head of the Investment Bank Global Fixed Income business (now part of Corporate & Investment Bank) from November 2009 until July 2012. He was Global Head of Emerging Markets from 2006 until 2009, and was also responsible for the Global Credit Trading & Syndicate business from 2008 until 2009. |
Gordon A. Smith | 54 | Chief Executive Officer of Consumer & Community Banking since December 2012 prior to which he had been Co-Chief Executive Officer since July 2012. He had been Chief Executive Officer of Card Services since 2007 and of the Auto Finance and Student Lending businesses since 2011. Prior to joining JPMorgan Chase, he was with American Express Company and was, from 2005 until 2007, president of American Express’ Global Commercial Card business. |
Matthew E. Zames | 42 | Co-Chief Operating Officer since July 2012 and head of Mortgage Banking Capital Markets since January 2012. He had been Chief Investment Officer from May until September 2012 and was co-head of the Investment Bank Global Fixed Income business (now part of Corporate & Investment Bank) from November 2009 until May 2012 and co-head of Mortgage Banking Capital Markets from July 2011 until January 2012, prior to which he had served in a number of senior Investment Banking Fixed Income management roles. |
| |
(a) | On January 1, 2013, Ms. Lake was named Chief Financial Officer and appointed to the Operating Committee. At that date, Mr. Braunstein became Vice Chairman of JPMorgan Chase and retired from the Operating Committee; he is no longer an executive officer of the registrant. |
| |
(b) | As of February 1, 2013, Mr. Hogan is on a leave of absence. |
Unless otherwise noted, during the five fiscal years ended December 31, 2012, all of JPMorgan Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan Chase. There are no family relationships among the foregoing executive officers. See also Item 13.
ITEM 11: EXECUTIVE COMPENSATION
See Item 13.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For security ownership of certain beneficial owners and management, see Item 13 below.
The following table details the total number of shares available for issuance under JPMorgan Chase’s employee stock-based incentive plans (including shares available for issuance to nonemployee directors). The Firm is not authorized to grant stock-based incentive awards to nonemployees, other than to nonemployee directors.
|
| | | | | | | | | | |
December 31, 2012 | Number of shares to be issued upon exercise of outstanding options/SARs | | Weighted-average exercise price of outstanding options/SARs | | Number of shares remaining available for future issuance under stock compensation plans |
Plan category | | | | | | |
Employee stock-based incentive plans approved by shareholders | 111,710,849 |
| | $ | 42.82 |
| | 283,322,413 |
| (a) |
Employee stock-based incentive plans not approved by shareholders | 4,194,767 |
| | 32.36 |
| | — |
| |
Total | 115,905,616 |
| | $ | 42.44 |
| | 283,322,413 |
| |
| |
(a) | Represents future shares available under the shareholder-approved Long-Term Incentive Plan, as amended and restated effective May 17, 2011. |
All future shares will be issued under the shareholder-approved Long-Term Incentive Plan, as amended and restated effective May 17, 2011. For further discussion, see Note 10 on pages 241–243.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information to be provided in Items 10, 11, 12, 13 and 14 of Form 10-K and not otherwise included herein is incorporated by reference to the Firm’s definitive proxy statement for its 2012 Annual Meeting of Stockholders to be held on May 21, 2013, which will be filed with the SEC within 120 days of the end of the Firm’s fiscal year ended December 31, 2012.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
See Item 13.
Part IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits, financial statement schedules
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1 | | Financial statements |
| | The Consolidated Financial Statements, the Notes thereto and the report of the Independent Registered Public Accounting Firm thereon listed in Item 8 are set forth commencing on page 187. |
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2 | | Financial statement schedules |
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3 | | Exhibits |
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3.1 | | Restated Certificate of Incorporation of JPMorgan Chase & Co., effective April 5, 2006 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2006). |
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3.2 | | Certificate of Designations of Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series I (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). |
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3.3 | | Certificate of Designations of 8.625% Non-Cumulative Preferred Stock, Series J (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K/A of JPMorgan Chase & Co. (File No. 1-5805) filed September 17, 2008). |
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3.4 | | Certificate of Designations of 5.50% Non-Cumulative Preferred Stock, Series O (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 27, 2012). |
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3.5 | | By-laws of JPMorgan Chase & Co., effective January 19, 2010 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed January 25, 2010). |
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4.1 | | Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010). |
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4.2 | | Indenture, dated as of October 21, 2010, between JPMorgan Chase & Co. and U.S. Bank Trust National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No.1-5805) filed October 21, 2010). |
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4.3 | | Indenture, dated as of May 25, 2001, between JPMorgan Chase & Co. and Bankers Trust Company (succeeded by Deutsche Bank Trust Company Americas), as Trustee (incorporated by reference to Exhibit 4(a)(1) to the Registration Statement on Form S-3 of JPMorgan Chase & Co. (File No. 333-52826) filed June 13, 2001). |
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4.4 | | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed April 24, 2008). |
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4.5 | | Form of Deposit Agreement (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 21, 2008). |
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4.6 | | Deposit Agreement, dated August 27, 2012, among JPMorgan Chase & Co., Computershare Shareowner Services LLC, as depositary, and the holders from time to time of Depositary Receipts relating to the 5.50% Non-Cumulative Preferred Stock, Series O (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of JPMorgan Chase & Co. (File No. 1-5805) filed August 27, 2012). |
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4.7 | | Form of Warrant to purchase common stock (incorporated by reference to Exhibit 4.2 to the Form 8-A of JPMorgan Chase & Co. (File No. 1-5805) filed December 11, 2009). |
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Other instruments defining the rights of holders of long-term debt securities of JPMorgan Chase & Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon request. |
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10.1 | | Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., as amended and restated July 2001 and as of December 31, 2004 (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a) |
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10.2 | | 2005 Deferred Compensation Plan for Non-Employee Directors of JPMorgan Chase & Co., effective as of January 1, 2005 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a) |
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10.3 | | Post-Retirement Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation, as amended and restated, effective May 21, 1996 (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.4 | | 2005 Deferred Compensation Program of JPMorgan Chase & Co., restated effective as of December 31, 2008 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.5 | | JPMorgan Chase & Co. Long-Term Incentive Plan as amended and restated effective May 17, 2011 (incorporated by reference to Appendix C of the Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed April 7, 2011).(a) |
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10.6 | | Key Executive Performance Plan of JPMorgan Chase & Co., as amended and restated effective January 1, 2009 (incorporated by reference to Appendix D of the Schedule 14A of JPMorgan Chase & Co. (File No. 1-5805) filed March 31, 2008).(a) |
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10.7 | | Excess Retirement Plan of JPMorgan Chase & Co., restated and amended as of December 31, 2008, as amended (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a) |
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10.8 | | 1995 Stock Incentive Plan of J.P. Morgan & Co. Incorporated and Affiliated Companies, as amended, dated December 11, 1996 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.9 | | Executive Retirement Plan of JPMorgan Chase & Co., as amended and restated December 31, 2008 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.10 | | Amendment to Bank One Corporation Director Stock Plan, as amended and restated effective February 1, 2003 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.11 | | Summary of Bank One Corporation Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2005).(a) |
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10.12 | | Bank One Corporation Stock Performance Plan, as amended and restated effective February 20, 2001 (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.13 | | Bank One Corporation Supplemental Savings and Investment Plan, as amended and restated effective December 31, 2008 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.14 | | Revised and Restated Banc One Corporation 1989 Stock Incentive Plan, effective January 18, 1989 (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.15 | | Banc One Corporation Revised and Restated 1995 Stock Incentive Plan, effective April 17, 1995 (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.16 | | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a) |
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10.17 | | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Award Agreement of January 22, 2008 stock appreciation rights for James Dimon (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2007).(a) |
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10.18 | | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.19 | | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of January 20, 2009 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2008).(a) |
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10.20 | | Form of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for Operating Committee member stock appreciation rights, dated as of February 3, 2010 (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a) |
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10.21 | | Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units, dated as of January 19, 2011 and February 16, 2011 (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2011).(a) |
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10.22 | | Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units, dated as of January 18, 2012 (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2011).(a) |
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10.23 | | Forms of JPMorgan Chase & Co. Long-Term Incentive Plan Terms and Conditions for stock appreciation rights and restricted stock units for Operating Committee members, dated as of January 17, 2013.(a)(b) |
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10.24 | | Form of JPMorgan Chase & Co. Performance-Based Incentive Compensation Plan, effective as of January 1, 2006, as amended (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of JPMorgan Chase & Co. (File No. 1-5805) for the year ended December 31, 2009).(a) |
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12.1 | | Computation of ratio of earnings to fixed charges.(b) |
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12.2 | | Computation of ratio of earnings to fixed charges and preferred stock dividend requirements.(b) |
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21 | | List of subsidiaries of JPMorgan Chase & Co.(b) |
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22.1 | | Annual Report on Form 11-K of The JPMorgan Chase 401(k) Savings Plan for the year ended December 31, 2012 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). |
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23 | | Consent of independent registered public accounting firm.(b) |
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31.1 | | Certification.(b) |
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31.2 | | Certification.(b) |
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32 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(c) |
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101.INS | | XBRL Instance Document.(b)(d) |
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101.SCH | | XBRL Taxonomy Extension Schema Document.(b) |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document.(b) |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document.(b) |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document.(b) |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document.(b) |
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(a) | This exhibit is a management contract or compensatory plan or arrangement. |
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(c) | Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
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(d) | Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated statements of income for the years ended December 31, 2012, 2011 and 2010, (ii) the Consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010, (iii) the Consolidated balance sheets as of December 31, 2012 and 2011, (iv) the Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2012, 2011 and 2010, (v) the Consolidated statements of cash flows for the years ended December 31, 2012, 2011 and 2010, and (vi) the Notes to consolidated financial statements. |
Pages 30–60 not used
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62 | | | | Audited financial statements: |
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63 | | | | 186 | | |
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| | 187 | | |
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64 | | | | 188 | | |
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66 | | | | 193 | | |
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72 | | | | |
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76 | | | | Supplementary information: |
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78 | | | | 331 | | |
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105 | | | | 333 | | |
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106 | | | | | | |
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109 | | | | | | |
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116 | | | | | | |
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123 | | | | | | |
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127 | | | | | | |
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134 | | | | | | |
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163 | | | | | | |
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170 | | | | | | |
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174 | | Principal Risk Management | | | | |
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175 | | | | | | |
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177 | | | | | | |
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178 | | | | | | |
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184 | | | | | | |
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185 | | | | | | |
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JPMorgan Chase & Co./2012 Annual Report | | 61 |
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTS
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(unaudited) As of or for the year ended December 31, | | | | | | |
(in millions, except per share, ratio and headcount data) | | 2012 | 2011 | 2010 | 2009 | 2008(b) |
Selected income statement data | | | | | | |
Total net revenue | | $ | 97,031 |
| $ | 97,234 |
| $ | 102,694 |
| $ | 100,434 |
| $ | 67,252 |
|
Total noninterest expense | | 64,729 |
| 62,911 |
| 61,196 |
| 52,352 |
| 43,500 |
|
Pre-provision profit | | 32,302 |
| 34,323 |
| 41,498 |
| 48,082 |
| 23,752 |
|
Provision for credit losses | | 3,385 |
| 7,574 |
| 16,639 |
| 32,015 |
| 19,445 |
|
Provision for credit losses - accounting conformity(a) | | — |
| — |
| — |
| — |
| 1,534 |
|
Income before income tax expense/(benefit) and extraordinary gain | | 28,917 |
| 26,749 |
| 24,859 |
| 16,067 |
| 2,773 |
|
Income tax expense/(benefit) | | 7,633 |
| 7,773 |
| 7,489 |
| 4,415 |
| (926 | ) |
Income before extraordinary gain | | 21,284 |
| 18,976 |
| 17,370 |
| 11,652 |
| 3,699 |
|
Extraordinary gain(b) | | — |
| — |
| — |
| 76 |
| 1,906 |
|
Net income | | $ | 21,284 |
| $ | 18,976 |
| $ | 17,370 |
| $ | 11,728 |
| $ | 5,605 |
|
Per common share data | | | | | | |
Basic earnings | | | | | | |
Income before extraordinary gain | | $ | 5.22 |
| $ | 4.50 |
| $ | 3.98 |
| $ | 2.25 |
| $ | 0.81 |
|
Net income | | 5.22 |
| 4.50 |
| 3.98 |
| 2.27 |
| 1.35 |
|
Diluted earnings(c) | | | | | | |
Income before extraordinary gain | | $ | 5.20 |
| $ | 4.48 |
| $ | 3.96 |
| $ | 2.24 |
| $ | 0.81 |
|
Net income | | 5.20 |
| 4.48 |
| 3.96 |
| 2.26 |
| 1.35 |
|
Cash dividends declared per share | | 1.20 |
| 1.00 |
| 0.20 |
| 0.20 |
| 1.52 |
|
Book value per share | | 51.27 |
| 46.59 |
| 43.04 |
| 39.88 |
| 36.15 |
|
Tangible book value per share(d) | | 38.75 |
| 33.69 |
| 30.18 |
| 27.09 |
| 22.52 |
|
Common shares outstanding | | | | | | |
Average: Basic | | 3,809.4 |
| 3,900.4 |
| 3,956.3 |
| 3,862.8 |
| 3,501.1 |
|
Diluted | | 3,822.2 |
| 3,920.3 |
| 3,976.9 |
| 3,879.7 |
| 3,521.8 |
|
Common shares at period-end | | 3,804.0 |
| 3,772.7 |
| 3,910.3 |
| 3,942.0 |
| 3,732.8 |
|
Share price(e) | | | | | | |
High | | $ | 46.49 |
| $ | 48.36 |
| $ | 48.20 |
| $ | 47.47 |
| $ | 50.63 |
|
Low | | 30.83 |
| 27.85 |
| 35.16 |
| 14.96 |
| 19.69 |
|
Close | | 43.97 |
| 33.25 |
| 42.42 |
| 41.67 |
| 31.53 |
|
Market capitalization | | 167,260 |
| 125,442 |
| 165,875 |
| 164,261 |
| 117,695 |
|
Selected ratios | | | | | | |
Return on common equity (“ROE”)(c) | | | | | | |
Income before extraordinary gain | | 11 | % | 11 | % | 10 | % | 6 | % | 2 | % |
Net income | | 11 |
| 11 |
| 10 |
| 6 |
| 4 |
|
Return on tangible common equity (“ROTCE”)(c)(d) | | | | | | |
Income before extraordinary gain | | 15 |
| 15 |
| 15 |
| 10 |
| 4 |
|
Net income | | 15 |
| 15 |
| 15 |
| 10 |
| 6 |
|
Return on assets (“ROA”) | | | | | | |
Income before extraordinary gain | | 0.94 |
| 0.86 |
| 0.85 |
| 0.58 |
| 0.21 |
|
Net income | | 0.94 |
| 0.86 |
| 0.85 |
| 0.58 |
| 0.31 |
|
Return on risk-weighted assets(f) | | | | | | |
Income before extraordinary gain | | 1.65 |
| 1.58 |
| 1.50 |
| 0.95 |
| 0.32 |
|
Net income | | 1.65 |
| 1.58 |
| 1.50 |
| 0.95 |
| 0.49 |
|
Overhead ratio | | 67 |
| 65 |
| 60 |
| 52 |
| 65 |
|
Deposits-to-loans ratio | | 163 |
| 156 |
| 134 |
| 148 |
| 135 |
|
Tier 1 capital ratio(g) | | 12.6 |
| 12.3 |
| 12.1 |
| 11.1 |
| 10.9 |
|
Total capital ratio | | 15.3 |
| 15.4 |
| 15.5 |
| 14.8 |
| 14.8 |
|
Tier 1 leverage ratio | | 7.1 |
| 6.8 |
| 7.0 |
| 6.9 |
| 6.9 |
|
Tier 1 common capital ratio(h) | | 11.0 |
| 10.1 |
| 9.8 |
| 8.8 |
| 7.0 |
|
Selected balance sheet data (period-end)(g) | | | | | | |
Trading assets | | $ | 450,028 |
| $ | 443,963 |
| $ | 489,892 |
| $ | 411,128 |
| $ | 509,983 |
|
Securities | | 371,152 |
| 364,793 |
| 316,336 |
| 360,390 |
| 205,943 |
|
Loans | | 733,796 |
| 723,720 |
| 692,927 |
| 633,458 |
| 744,898 |
|
Total assets | | 2,359,141 |
| 2,265,792 |
| 2,117,605 |
| 2,031,989 |
| 2,175,052 |
|
Deposits | | 1,193,593 |
| 1,127,806 |
| 930,369 |
| 938,367 |
| 1,009,277 |
|
Long-term debt | | 249,024 |
| 256,775 |
| 270,653 |
| 289,165 |
| 302,959 |
|
Common stockholders’ equity | | 195,011 |
| 175,773 |
| 168,306 |
| 157,213 |
| 134,945 |
|
Total stockholders’ equity | | 204,069 |
| 183,573 |
| 176,106 |
| 165,365 |
| 166,884 |
|
Headcount | | 258,965 |
| 260,157 |
| 239,831 |
| 222,316 |
| 224,961 |
|
Credit quality metrics | | | | | | |
Allowance for credit losses | | $ | 22,604 |
| $ | 28,282 |
| $ | 32,983 |
| $ | 32,541 |
| $ | 23,823 |
|
Allowance for loan losses to total retained loans | | 3.02 | % | 3.84 | % | 4.71 | % | 5.04 | % | 3.18 | % |
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(i) | | 2.43 |
| 3.35 |
| 4.46 |
| 5.51 |
| 3.62 |
|
Nonperforming assets | | $ | 11,734 |
| $ | 11,315 |
| $ | 16,682 |
| $ | 19,948 |
| $ | 12,780 |
|
Net charge-offs | | 9,063 |
| 12,237 |
| 23,673 |
| 22,965 |
| 9,835 |
|
Net charge-off rate | | 1.26 | % | 1.78 | % | 3.39 | % | 3.42 | % | 1.73 | % |
|
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62 | | JPMorgan Chase & Co./2012 Annual Report |
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(a) | Results for 2008 included a conforming loan loss provision related to the acquisition of Washington Mutual Bank’s (“Washington Mutual”) banking operations. |
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(b) | On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. The acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. |
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(c) | The calculation of 2009 earnings per share (“EPS”) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (“TARP”) preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted ROE and ROTCE were 7% and 11%, respectively, for 2009. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. |
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(d) | 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 76–77 of this Annual Report. |
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(e) | 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. |
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(f) | Return on Basel I risk-weighted assets is the annualized earnings of the Firm divided by its average risk-weighted assets. |
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(g) | Effective January 1, 2010, the Firm adopted accounting guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (“VIEs”). Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders’ equity and the Tier 1 capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders’ equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date. |
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(h) | 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 capital ratio, see Regulatory capital on pages 117–120 of this Annual Report. |
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(i) | Excludes the impact of residential real estate purchased credit-impaired (“PCI”) loans. For further discussion, see Allowance for credit losses on pages 159–162 of this Annual Report. |
FIVE-YEAR STOCK PERFORMANCE
The following table and graph compare the five-year cumulative total return for JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) common stock with the cumulative return of the S&P 500 Index, the KBW Bank Index and the S&P Financial Index. The S&P 500 Index is a commonly referenced U.S. equity benchmark consisting of leading companies from different economic sectors. The KBW Bank Index seeks to reflect the performance of banks and thrifts that are publicly-traded in the U.S. and is composed of 24 leading national money center and regional banks and thrifts. The S&P Financial Index is an index of 80 financial companies, all of which are components of the S&P 500. The Firm is a component of all three industry indices.
The following table and graph assume simultaneous investments of $100 on December 31, 2007, in JPMorgan Chase common stock and in each of the above indices. The comparison assumes that all dividends are reinvested.
|
| | | | | | | | | | | | | | | | | | |
December 31, (in dollars) | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
JPMorgan Chase | $ | 100.00 |
| $ | 74.87 |
| $ | 100.59 |
| $ | 102.91 |
| $ | 82.36 |
| $ | 112.15 |
|
KBW Bank Index | 100.00 |
| 52.45 |
| 51.53 |
| 63.56 |
| 48.83 |
| 64.97 |
|
S&P Financial Index | 100.00 |
| 44.73 |
| 52.44 |
| 58.82 |
| 48.81 |
| 62.92 |
|
S&P 500 Index | 100.00 |
| 63.00 |
| 79.68 |
| 91.68 |
| 93.61 |
| 108.59 |
|
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JPMorgan Chase & Co./2012 Annual Report | | 63 |
Management’s discussion and analysis
This section of JPMorgan Chase’s Annual Report for the year ended December 31, 2012 (“Annual Report”), provides Management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of Terms on pages 333–335 for definitions of terms used throughout this Annual Report. The MD&A included in this Annual Report contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such 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. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 185 of this Annual Report) and in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2012 (“2012 Form 10-K”), in Part I, Item 1A: Risk factors; reference is hereby made to both.
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 has $2.4 trillion in assets and $204.1 billion in stockholders’ equity as of December 31, 2012. 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 wholly-owned 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.
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64 | | JPMorgan Chase & Co./2012 Annual Report |
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 holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.
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 non-profit 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 $2.1 trillion, 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.
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JPMorgan Chase & Co./2012 Annual Report | | 65 |
Management’s discussion and analysis
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 Annual Report. For a complete description of events, trends and uncertainties, as well as the capital, liquidity, credit, market, and country risks, and the critical accounting estimates affecting the Firm and its various lines of business, this Annual Report should be read in its entirety.
Economic environment
The Eurozone crisis was center stage the beginning of the year, with social stresses and fears of breakup of the Euro. However, strong stands by Eurozone states and the European Central Bank (“ECB”) helped stabilize the Eurozone later in the year. The ECB’s Outright Monetary Transactions (“OMT”) program showed its commitment to provide a safety net for European nations. Eurozone member states also took crucial steps toward further fiscal integration by handing over power to the ECB to regulate the largest banks in the Euro area and by passing more budgetary authority to the European Union. Despite the easing of the crisis, the economies of many of the European Union member countries stalled in 2012.
Asia’s developing economies continued to expand in 2012, although growth was significantly slower than the previous year, reducing global inflationary pressures.
In the U.S., the economy grew at a modest pace and the unemployment rate declined to a four year low of 7.8% by the end of 2012 as U.S. labor market conditions continued to improve. The U.S. housing market turned the corner during 2012 as the sector continued to show signs of improvement: excess inventories were reduced, prices began to rise and home affordability improved in most areas of the country as household incomes stabilized and mortgage rates declined to historic lows. Homebuilder confidence improved to the highest level in six years and housing starts increased to the highest level in four years during 2012. At the same time, inflation 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 the interest rate forecasts to the evolution of the economy, in particular inflation and unemployment rates. Additionally, the Federal Reserve announced a new asset purchase program that would be open-ended and is intended to speed up the pace of the U.S. economic recovery and produce sustained improvement in the labor market.
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%. Spending and debt ceiling issues were postponed into 2013.
Going into 2013, the U.S. economy is likely to be affected by the continuing uncertainty about Europe’s financial crisis, the Federal Reserve’s monetary policy, and the ongoing fiscal debate over the U.S. debt limit, government spending and taxes.
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| | | | | | | | | | |
Financial performance of JPMorgan Chase | | |
Year ended December 31, | |
(in millions, except per share data and ratios) | 2012 | | 2011 | | Change |
Selected income statement data | | | | | |
Total net revenue | $ | 97,031 |
| | $ | 97,234 |
| | — | % |
Total noninterest expense | 64,729 |
| | 62,911 |
| | 3 |
|
Pre-provision profit | 32,302 |
| | 34,323 |
| | (6 | ) |
Provision for credit losses | 3,385 |
| | 7,574 |
| | (55 | ) |
Net income | 21,284 |
| | 18,976 |
| | 12 |
|
Diluted earnings per share | 5.20 |
| | 4.48 |
| | 16 |
|
Return on common equity | 11 | % | | 11 | % | | |
Capital ratios | | | | | |
Tier 1 capital | 12.6 |
| | 12.3 |
| | |
Tier 1 common | 11.0 |
| | 10.1 |
| | |
Business overview
JPMorgan Chase reported full-year 2012 record net income of $21.3 billion, or $5.20 per share, on net revenue of $97.0 billion. Net income increased by $2.3 billion, or 12%, compared with net income of $19.0 billion, or $4.48 per share, in 2011. ROE for both 2012 and 2011 was 11%.
The increase in net income in 2012 was driven by a lower provision for credit losses, partially offset by higher noninterest expense. Net revenue was flat compared with 2011 as lower principal transactions revenue and lower net interest income were offset by higher mortgage fees and related income, higher other income, and higher securities gains. Principal transactions revenue for 2012 included losses from the synthetic credit portfolio. The increase in noninterest expense was driven by higher compensation expense.
The decline in the provision for credit losses reflected a lower consumer provision as net charge-offs decreased and the related allowance for credit losses was reduced by $5.5 billion in 2012. The decline in the consumer allowance reflected improved delinquency trends and reduced estimated losses in the real estate and credit card loan portfolios. The wholesale credit environment remained favorable throughout 2012. Firmwide, net charge-offs were $9.1 billion for the year, down $3.2 billion, or 26%, from 2011, and nonperforming assets at year-end were $11.7 billion, up $419 million, or 4%. The current year included the effect of regulatory guidance implemented during 2012, which resulted in the Firm reporting an additional $3.0 billion of nonperforming loans at December 31, 2012 (see Consumer, excluding credit card on pages 140–148 of this Annual Report for further information). Before the
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66 | | JPMorgan Chase & Co./2012 Annual Report |
impact of these reporting changes, nonperforming assets would have been $8.7 billion at December 31, 2012. The total firmwide allowance for credit losses was $22.6 billion, resulting in a loan loss coverage ratio of 2.43% of total loans, excluding the purchased credit-impaired portfolio.
The Firm’s 2012 results reflected strong underlying performance across virtually all its businesses, with strong lending and deposit growth. Consumer & Business Banking within Consumer & Community Banking added 106 branches and increased deposits by 11% in 2012. Business Banking loans increased to a record $18.9 billion, up 7% compared with 2011. Mortgage Banking reported strong production revenue driven by strong originations growth. In Card, Merchant Services & Auto, credit card sales volume (excluding Commercial Card) was up 11% for the year. The Corporate & Investment Bank maintained its #1 ranking in Global Investment Banking Fees and reported record assets under custody of $18.8 trillion at December 31, 2012. Commercial Banking reported record net revenue of $6.8 billion and record net income of $2.6 billion in 2012. Commercial Banking loans increased to a record $128.2 billion, a 14% increase compared with the prior year. Asset Management reported record revenue in 2012 and achieved its fifteenth consecutive quarter of positive net long-term client flows into assets under management. Asset Management also increased loan balances to a record $80.2 billion at December 31, 2012.
JPMorgan Chase ended the year with a Basel I Tier 1 common ratio of 11.0%, compared with 10.1% at year-end 2011. The Firm estimated that its Basel III Tier 1 common ratio was approximately 8.7% at December 31, 2012, taking into account the impact of final Basel 2.5 rules and the proposals set forth in the Federal Reserve’s Notice of Proposed Rulemaking (“NPR”). Total deposits increased to $1.2 trillion, up 6% from the prior year. Total stockholders’ equity at December 31, 2012, was $204.1 billion. (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 117–120 of this Annual Report.)
During 2012, the Firm worked to help its customers, corporate clients and the communities in which it does business. The Firm provided credit and raised capital of more than $1.8 trillion for its clients during 2012; this included $20 billion lent to small businesses and $85 billion for nearly 1,500 non-profit and government entities, including states, municipalities, hospitals and universities. The Firm also originated more than 920,000 mortgages, and provided credit cards to approximately 6.7 million people. Since the beginning of 2009, the Firm has offered nearly 1.4 million mortgage modifications and of these approximately 610,000 have achieved permanent modifications.
In addition, despite the damage and disruption at many of its branches and facilities caused by Superstorm Sandy at
the end of October 2012, the Firm continued to assist customers, clients and borrowers in the affected areas. The Firm continued to dispense cash through ATMs, loan money, provide liquidity to customers, and settle trades, and it waived a number of checking account and loan fees, including late payment fees, for the benefit of its customers.
Consumer & Community Banking net income increased compared to the prior year, reflecting higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense. Net revenue increased, driven by higher noninterest revenue. Net interest income decreased, driven by lower deposit margins and lower loan balances due to net portfolio runoff, largely offset by the impact of higher deposit balances. Noninterest revenue increased, driven by higher mortgage fees and related income, partially offset by lower debit card revenue, reflecting the impact of the Durbin Amendment. The provision for credit losses in 2012 was $3.8 billion compared with $7.6 billion in the prior year. The current-year provision reflected a $5.5 billion reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses in the mortgage loan and credit card portfolios. The prior-year provision reflected a $4.2 billion reduction in the allowance for loan losses. Noninterest expense increased in 2012 compared with the prior year, driven by higher production expense reflecting higher volumes, investments in sales force and partially offset by lower marketing expense in Card. Return on equity for the year was 25% on $43.0 billion of average allocated capital.
Corporate & Investment Bank net income increased in 2012 compared with the prior year, reflecting slightly higher net revenue, lower noninterest expense and a larger benefit from the provision for credit losses. Net revenue for 2012 included a $930 million loss from debit valuation adjustments (“DVA”) on structured notes and derivative liabilities resulting from the tightening of the Firm’s credit spreads. The prior year net revenue included a $1.4 billion gain from DVA. The provision for credit losses was a larger benefit in 2012 compared with the prior year. The current-year benefit reflected recoveries and a net reduction in the allowance for credit losses both related to the restructuring of certain nonperforming loans, current credit trends and other portfolio activity. Noninterest expense was down slightly driven by lower compensation expense. Return on equity for the year was 18%, or 19% excluding DVA (a non-GAAP financial measure), on $47.5 billion of average allocated capital.
Commercial Banking reported record net income for 2012, reflecting an increase in net revenue and a decrease in the provision for credit losses, partially offset by higher noninterest expense. Net revenue was a record, driven by higher net interest income and higher noninterest revenue. Net interest income increased, driven by growth in loan and liability balances, partially offset by spread compression on loan and liability products. Noninterest revenue increased
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JPMorgan Chase & Co./2012 Annual Report | | 67 |
Management’s discussion and analysis
compared with the prior year, largely driven by increased investment banking revenue. Noninterest expense increased, primarily reflecting higher headcount-related expense. Return on equity for the year was 28% on $9.5 billion of average allocated capital.
Asset Management net income increased in 2012, driven by higher net revenue. Net revenue increased, driven by net inflows to products with higher margins and higher net interest income resulting from higher loan and deposit balances. Noninterest expense was flat compared with the prior year. Return on equity for the year was 24% on $7.0 billion of average allocated capital.
Corporate/Private Equity reported a net loss in 2012, compared with net income in the prior year driven by losses in Treasury and Chief Investment Office (“CIO”). Treasury and CIO net revenue included $5.8 billion of principal transactions losses from the synthetic credit portfolio in CIO during the first six months of 2012 and $449 million of losses during the third quarter of 2012 on the retained index credit derivative positions. During the third quarter, CIO effectively closed out the index credit derivative positions that were retained following the transfer of the remainder of the synthetic credit portfolio to CIB on July 2, 2012. Treasury and CIO net revenue also included securities gains of $2.0 billion for the year. The current-year net revenue also included $888 million of extinguishment gains related to the redemption of trust preferred securities. Net interest income was negative in 2012, and significantly lower than the prior year, primarily reflecting the impact of lower portfolio yields and higher deposit balances across the Firm.
Other Corporate reported a net loss in 2012. Noninterest revenue included a benefit of $1.1 billion as a result of the Washington Mutual bankruptcy settlement and a $665 million gain for the recovery on a Bear Stearns-related subordinated loan. Noninterest expense included an expense of $3.7 billion for additional litigation reserves, predominantly for mortgage-related matters. The prior year included expense of $3.2 billion for 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 185 of this Annual Report and the Risk Factors section on pages 8–21 of the 2012 Form 10-K.
JPMorgan Chase’s outlook for the full year 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.
In the Consumer & Business Banking business within CCB, the Firm estimates that, given the current low interest rate environment, continued deposit spread compression could negatively impact annual net income by approximately $400 million in 2013. This decline may be offset by the impact of deposit balance growth, although the exact extent of any such deposit growth cannot be determined at this time.
In the Mortgage Banking business 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. In addition, management believes that the high production margins experienced in recent quarters likely peaked in 2012 and will decline over time. Management also 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 may be approximately $550 million, subject to economic conditions. If the positive credit trends in the residential real estate portfolio continue or accelerate and economic uncertainty declines, the related allowance for loan losses may be reduced over time. Given management’s current estimate of portfolio runoff levels, the residential real estate portfolio is expected to decline by approximately 10% to 15% in 2013 from year-end 2012 levels. The run-off in the residential real estate portfolio can be expected to reduce annual net interest income by approximately $600 million in 2013. Over time, the reduction in net interest income should be offset by an improvement in credit costs and lower expenses.
In Card Services within CCB, the Firm expects that, if current positive credit trends continue, the card- related allowance for loan losses could be reduced by up to $1 billion over the course 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
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68 | | JPMorgan Chase & Co./2012 Annual Report |
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 expects a quarterly net loss of approximately $300 million with that amount likely to vary 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.
Management expects the Firm's net interest income to be generally flat during 2013, as modest pressure on the net yield on interest-earning assets is expected to be generally offset by anticipated growth in interest-earning assets.
The Firm continues to focus on expense discipline and is targeting expense for 2013 to be approximately $1 billion lower than in 2012 (not taking into account, for such purposes, any expenses in each year related to corporate litigation and foreclosure-related matters).
CIO synthetic credit portfolio
On August 9, 2012, the Firm restated its previously-filed interim financial statements for the quarterly period ended March 31, 2012. The restatement related to valuations of certain positions in the synthetic credit portfolio of the Firm’s CIO. The restatement had the effect of reducing the Firm’s reported net income for the three months ended March 31, 2012, by $459 million. The restatement had no impact on any of the Firm’s Consolidated Financial Statements as of June 30, 2012, and December 31, 2011, or for the three and six months ended June 30, 2012 and 2011. For more information about the restatement and the related valuation matter, see the Firm’s Form 10-Q for the quarter ended June 30, 2012, filed on August 9, 2012.
Management also determined that a material weakness existed in the Firm’s internal control over financial reporting at March 31, 2012. Management has taken steps to remediate the material weakness, including enhancing management supervision of valuation matters. These remedial steps were substantially implemented by June 30, 2012; however, in accordance with the Firm’s internal control compliance program, the material weakness designation could not be closed until the remedial processes were operational for a period of time and successfully tested. The testing was successfully completed during the third quarter of 2012 and the control deficiency was closed at September 30, 2012. For additional information concerning the remedial changes in, and related testing of, the Firm’s internal control over financial reporting, see Part I, Item 4: Controls and Procedures in the Firm’s Form 10-Q for the quarter ended September 30, 2012, filed on November 8, 2012.
On July 2, 2012, the majority of the synthetic credit portfolio was transferred from the CIO to the Firm’s CIB, which has the expertise, trading platforms and market franchise to manage these positions to maximize their economic value. An aggregate position of approximately $12 billion notional was retained in CIO. By the end of the third quarter of 2012, CIO effectively closed out the index credit derivative positions that had been retained by it following the transfer. CIO incurred losses of $5.8 billion from the synthetic credit portfolio for the six months ended June 30, 2012, and losses of $449 million from the retained index credit derivative positions for the three months ended September 30, 2012, which were recorded in the principal transactions revenue line item of the income statement. CIB continues to actively manage and reduce the risks in the remaining synthetic credit portfolio that had been transferred to it on July 2, 2012. This portion of the portfolio experienced modest losses in each of the two quarters of 2012 following the transfer; these losses were included in Fixed Income Markets Revenue for CIB (and also recorded in the principal transactions revenue).
On January 16, 2013, the Firm announced that the Firm’s Management Task Force and the independent Review Committee of the Firm’s Board of Directors (the “Board Review Committee”) had each concluded their reviews relating to the 2012 losses by the CIO and had released their respective reports. The Board Review Committee’s Report sets forth recommendations relating to the Board’s oversight of the Firm’s risk management processes, all of which have been approved by the full Board of Directors and have been, or are in the process of being, implemented.
The Management Task Force Report, in addition to summarizing the key events and setting forth its observations regarding the losses incurred in CIO’s synthetic credit portfolio, describes the broad range of remedial measures taken by the Firm to respond to the lessons it has learned from the CIO events, including:
| |
• | revamping the governance, mandate and reporting and control processes of CIO; |
| |
• | implementing numerous risk management changes, including improvements in model governance and market risk; and |
| |
• | effecting a series of changes to the Risk function’s governance, organizational structure and interaction with the Board. |
The Board of Directors formed the Board Review Committee in May 2012 to oversee the scope and work of the Management Task Force review, assess the Firm’s risk management processes related to the issues raised in the Management Task Force review, and to report to the Board of Directors on the Review Committee’s findings and recommendations. In performing these tasks, the Board Review Committee, with the assistance of its own counsel and expert advisor, conducted an independent review, including analyzing the voluminous documentary record and conducting interviews of Board members and
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JPMorgan Chase & Co./2012 Annual Report | | 69 |
Management’s discussion and analysis
numerous current and former employees of the Firm. Based on its review, the Board Review Committee concurred in the substance of the Management Task Force Report. The Management Task Force Report and the Board Review Committee Report set out facts that in their view were the most relevant for their respective purposes. Others (including regulators conducting their own investigations) may have a different view of the facts, or may focus on other facts, and may also draw different conclusions regarding the facts and issues.
The Board Review Committee Report recommends a number of enhancements to the Board’s own practices to strengthen its oversight of the Firm’s risk management processes. The Board Review Committee noted that some of its recommendations were already being followed by the Board or the Risk Policy Committee or have recently been put into effect.
The Board Review Committee’s recommendations include:
| |
• | better focused and clearer reporting of presentations to the Board’s Risk Policy Committee, with particular emphasis on the key risks for each line of business, identification of significant future changes to the business and its risk profile, and adequacy of staffing, technology and other resources; |
| |
• | clarifying to management the Board’s expectations regarding the capabilities, stature, and independence of the Firm’s risk management personnel; |
| |
• | more systematic reporting to the Risk Policy Committee on significant model risk, model approval and model governance, on setting of significant risk limits and responses to significant limit excessions, and with respect to regulatory matters requiring attention; |
| |
• | further clarification of the Risk Policy Committee’s role and responsibilities, and more coordination of matters presented to the Risk Policy Committee and the Audit Committee; |
| |
• | concurrence by the Risk Policy Committee in the hiring or firing of the Chief Risk Officer and that it be consulted with respect to the setting of such Chief Risk Officer’s compensation; and |
| |
• | staff with appropriate risk expertise be added to the Firm’s Internal Audit function and that Internal Audit more systematically include the risk management function in its audits. |
The Board of Directors will continue to oversee the Firm’s remediation efforts to ensure they are fully implemented.
Also, on January 14, 2013, the Firm and JPMorgan Chase Bank, N.A., entered into Consent Orders with, respectively, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency (“the OCC”) that relate to risk management, model governance and other control functions related to CIO and certain other trading activities at the Firm. Many of the actions required by the Consent Orders are consistent with those recommended by the Management Task Force and the Board Review Committee and, as such, a number of them have been, or are in the process of being, implemented. The
Firm is committed to the full remediation of all issues identified in the Consent Orders.
The CIO synthetic credit portfolio losses have resulted in litigation against the Firm, as well as heightened regulatory scrutiny and may lead to additional regulatory or legal proceedings, in addition to the consent orders noted above. Such regulatory and legal proceedings may expose the Firm to fines, penalties, judgments or losses, harm the Firm’s reputation or otherwise cause a decline in investor confidence. For a description of the regulatory and legal developments relating to the CIO matters described above, see Note 31 on pages 316–325 of this Annual Report.
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.
During 2012, for example, the Firm submitted to the Federal Reserve and the FDIC its “resolution plan” in the event of a material distress or failure, registered several of its subsidiaries with the CFTC as swap dealers, and continued its planning and implementation efforts with respect to new regulations affecting its derivatives, trading and money market mutual funds businesses. The Firm also faces regulatory initiatives relating to its structure, including push-out of certain derivatives activities from its subsidiary banks under Section 716 of the Dodd-Frank Act, a proposed requirement from the U.K. Financial Services Authority (the “FSA”) requiring the Firm to either obtain equal treatment for the U.K. depositors of its U.S. bank who makes deposits in the U.K., or “subsidiarize” in the U.K., and various other proposed U.K. and EU initiatives that could affect its ability to allocate capital and liquidity efficiently among its global operations. Additional efforts are underway to comply with the higher capital requirements of the new Basel Accords (both the “Basel 2.5” requirements effective January 1, 2013 as well as the additional capital requirements of “Basel III”). The Firm is also preparing to comply with Basel III’s new liquidity measures -- the “liquidity coverage ratio” (“LCR”) and the “net stable
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70 | | JPMorgan Chase & Co./2012 Annual Report |
funding ratio” (“NSFR”) - which require the Firm to hold specified types of “high quality” liquid assets to meet assumed levels of cash outflows following a stress event. Management’s current objective is for the Firm to reach, by the end of 2013, an estimated Basel III Tier I common ratio of 9.5% (including the impact of the Basel 2.5 rules and the estimated impact of the other applicable requirements set forth in the Federal Reserve’s Advanced NPR issued in June 2012). The Firm is currently targeting reaching a 100% LCR, based on its current understanding of these requirements, by the end of 2013.
Furthermore, 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 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.
On January 7, 2013, the Firm submitted its capital plan to the Federal Reserve under the Federal Reserve’s 2013 Comprehensive Capital Analysis and Review (“CCAR”) process. The Firm’s plan relates to the last three quarters of 2013 and the first quarter of 2014 (that is, the 2013 CCAR capital plan relates to dividends to be declared commencing in June 2013 and payable in July 2013, and to common equity repurchases and other capital actions commencing April 1, 2013). The Firm expects to receive the Federal Reserve’s final response to its plan no later than March 14, 2013. With respect to the Firm’s 2012 CCAR capital plan, the Firm expects that its Board of Directors will declare the regular quarterly common stock dividend of $0.30 per share for the 2013 first quarter at its Board meeting to be
held on March 19, 2013. In addition, pursuant to a non-objection received from the Federal Reserve on November 5, 2012 with respect to the 2012 capital plan it resubmitted in August 2012, the Firm is authorized to repurchase up to $3.0 billion of common equity in the first quarter of 2013. The timing and exact amount of any common equity to be repurchased under the program will depend on various factors, including market conditions; the Firm’s capital position; organic and other investment opportunities, and legal and regulatory considerations, among other factors. For more information, see Capital management on pages 116–122.
Business events
Superstorm Sandy
On October 29, 2012, the mid-Atlantic and Northeast regions of the U.S. were affected by Superstorm Sandy, which caused major flooding and wind damage and resulted in major disruptions to individuals and businesses and significant damage to homes and communities in the affected regions. Despite the damage and disruption to many of its branches and facilities, the Firm has been assisting its customers, clients and borrowers in the affected areas. The Firm has continued to dispense cash via ATMs and branches, loan money, provide liquidity to customers, and settle trades, and it waived a number of checking account and loan fees, including late payment fees. Superstorm Sandy did not have a material impact on the 2012 financial results of the Firm and the Firm does not anticipate total losses due to the storm will be material.
Subsequent events
Mortgage foreclosure settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System
On January 7, 2013, the Firm announced that it and a number of other financial institutions entered into a settlement agreement with the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System providing for the termination of the independent foreclosure review programs (the “Independent Foreclosure Review”). Under this settlement, the Firm will make a cash payment of $753 million into a settlement fund for distribution to qualified borrowers. The Firm has also committed an additional $1.2 billion to foreclosure prevention actions, which will be fulfilled through credits given to the Firm for modifications, short sales and other specified types of borrower relief. Foreclosure prevention actions that earn credit under the Independent Foreclosure Review settlement are in addition to actions taken by the Firm to earn credit under the global settlement entered into by the Firm with state and federal agencies. The estimated impact of the foreclosure prevention actions required under the Independent Foreclosure Review settlement have been considered in the Firm’s allowance for loan losses. The Firm recognized a pretax charge of approximately $700 million in the fourth quarter of 2012 related to the Independent Foreclosure Review settlement.
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JPMorgan Chase & Co./2012 Annual Report | | 71 |
Management’s discussion and analysis
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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-year period ended December 31, 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 178–182 of this Annual Report.
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Revenue | | | | | |
Year ended December 31, | | | | | |
(in millions) | 2012 |
| | 2011 |
| | 2010 |
|
Investment banking fees | $ | 5,808 |
| | $ | 5,911 |
| | $ | 6,190 |
|
Principal transactions | 5,536 |
| | 10,005 |
| | 10,894 |
|
Lending- and deposit-related fees | 6,196 |
| | 6,458 |
| | 6,340 |
|
Asset management, administration and commissions | 13,868 |
| | 14,094 |
| | 13,499 |
|
Securities gains | 2,110 |
| | 1,593 |
| | 2,965 |
|
Mortgage fees and related income | 8,687 |
| | 2,721 |
| | 3,870 |
|
Card income | 5,658 |
| | 6,158 |
| | 5,891 |
|
Other income(a) | 4,258 |
| | 2,605 |
| | 2,044 |
|
Noninterest revenue | 52,121 |
| | 49,545 |
| | 51,693 |
|
Net interest income | 44,910 |
| | 47,689 |
| | 51,001 |
|
Total net revenue | $ | 97,031 |
| | $ | 97,234 |
| | $ | 102,694 |
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(a) | Included operating lease income of $1.3 billion, $1.2 billion and $971 million for the years ended December 31, 2012, 2011 and 2010, respectively. |
2012 compared with 2011
Total net revenue for 2012 was $97.0 billion, down slightly from 2011. Results for 2012 were driven by lower principal transactions revenue from losses incurred by CIO, and lower net interest income. These items were predominantly offset by higher mortgage fees and related income in CCB and higher other income in Corporate/Private Equity.
Investment banking fees decreased slightly from 2011, reflecting lower advisory fees on lower industry-wide volumes, and to a lesser extent, slightly lower equity underwriting fees on industry-wide volumes that were flat from the prior year. These declines were predominantly offset by record debt underwriting fees, driven by favorable market conditions and the impact of continued low interest rates. For additional information on investment banking fees, which are primarily recorded in CIB, see CIB segment results pages 92–95 and Note 7 on pages 228–229 of this Annual Report.
Principal transactions revenue, which consists of revenue primarily from the Firm’s market-making and private equity investing activities, decreased compared with 2011, predominantly due to $5.8 billion of losses incurred by CIO from the synthetic credit portfolio for the six months ended June 30, 2012, and $449 million of losses incurred by CIO from the retained index credit derivative positions for the
three months ended September 30, 2012; and additional modest losses incurred by CIB from the synthetic credit portfolio in each of the third and fourth quarters of 2012.
Principal transaction revenue also included a $930 million loss in 2012, compared with a $1.4 billion gain in 2011, from DVA on structured notes and derivative liabilities, resulting from the tightening of the Firm’s credit spreads. These declines were partially offset by higher market-making revenue in CIB, driven by strong client revenue and higher revenue in rates-related products, as well as a $665 million gain recognized in Other Corporate associated with the recovery on a Bear Stearns-related subordinated loan. Private equity gains decreased in 2012, predominantly due to lower unrealized and realized gains on private investments, partially offset by higher unrealized gains on public securities. For additional information on principal transactions revenue, see CIB and Corporate/Private Equity segment results on pages 92–95 and 102–104, respectively, and Note 7 on pages 228–229 of this Annual Report.
Lending- and deposit-related fees decreased in 2012 compared with the prior year. The decrease predominantly reflected lower lending-related fees in CIB and lower deposit-related fees in CCB. 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 80–91, CIB on pages 92–95 and CB on pages 96–98 of this Annual Report.
Asset management, administration and commissions revenue decreased from 2011. The decrease was largely driven by lower brokerage commissions in CIB. This decrease was largely offset by higher asset management fees in AM driven by net client inflows, the effect of higher market levels, and higher performance fees; and higher investment service fees in CCB, as a result of growth in branch sales of investment products. For additional information on these fees and commissions, see the segment discussions for CIB on pages 92–95, CCB on pages 80–91, AM on pages 99–101, and Note 7 on pages 228–229 of this Annual Report.
Securities gains increased, compared with the 2011 level, reflecting the results of repositioning the CIO available-for-sale (“AFS”) securities portfolio. For additional information on securities gains, which are mostly recorded in the Firm’s Corporate/Private Equity segment, see the Corporate/Private Equity segment discussion on pages 102–104, and Note 12 on pages 244–248 of this Annual Report.
Mortgage fees and related income increased significantly in 2012 compared with 2011. The increase resulted from higher production revenue, reflecting wider margins driven by favorable market conditions; and higher volumes due to historically low interest rates and the Home Affordable Refinance Programs (“HARP”). The increase also resulted from a favorable swing in risk management results related
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72 | | JPMorgan Chase & Co./2012 Annual Report |
to mortgage servicing rights (“MSR”), which was a gain of $619 million in 2012, compared with a loss of $1.6 billion in 2011. 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 85–87, and Note 17 on pages 291–295 of this Annual Report.
Card income decreased during 2012, driven by lower debit card revenue, reflecting the impact of the Durbin Amendment; and to a lesser extent, higher amortization of loan origination costs. The decrease in credit card income was offset partially by higher net interchange income associated with growth in credit card sales volume, and higher merchant servicing revenue. For additional information on credit card income, see the CCB segment results on pages 80–91 of this Annual Report.
Other income increased in 2012 compared with the prior year, largely due to a $1.1 billion benefit from the Washington Mutual bankruptcy settlement, and $888 million of extinguishment gains in Corporate/Private Equity related to the redemption of trust preferred securities (“TruPS”). The extinguishment gains were related to adjustments applied to the cost basis of the TruPS during the period they were in a qualified hedge accounting relationship. These items were offset partially by the absence of a prior-year gain on the sale of an investment in AM.
Net interest income decreased in 2012 compared with the prior year, predominantly reflecting the impact of lower average trading asset balances, the runoff of higher-yielding loans, faster prepayment of mortgage-backed securities, limited reinvestment opportunities, as well as the impact of lower interest rates across the Firm’s interest-earning assets. The decrease in net interest income was partially offset by lower deposit and other borrowing costs. The Firm’s average interest-earning assets were $1.8 trillion for 2012, and the net yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.48%, a decrease of 26 basis points from 2011.
2011 compared with 2010
Total net revenue for 2011 was $97.2 billion, a decrease of $5.5 billion, or 5%, from 2010. Results for 2011 were driven by lower net interest income in several businesses, lower securities gains in Corporate/Private Equity, lower mortgage fees and related income in CCB, and lower principal transactions revenue in Corporate/Private Equity. These declines were partially offset by higher asset management fees, largely in AM.
Investment banking fees decreased from 2010, predominantly due to declines in equity and debt underwriting fees. The impact from lower industry-wide volumes in the second half of 2011 more than offset the Firm’s record level of debt underwriting fees in the first six months of the year. Advisory fees increased for the year, reflecting higher industry-wide completed M&A volumes relative to the 2010 level.
Principal transactions revenue decreased compared with 2010. This was driven by lower trading revenue and lower private equity gains. Trading revenue included a $1.4 billion gain from DVA on structured notes and derivative liabilities, resulting from the widening of the Firm’s credit spreads; this was partially offset by a $769 million loss, net of hedges, from CVA on derivative assets in CIB’s credit portfolio, due to the widening of credit spreads related to the Firm’s counterparties. The prior year included a $509 million gain from DVA, partially offset by a $403 million loss, net of hedges, from CVA. Excluding DVA and CVA, lower trading revenue reflected the impact of challenging market conditions on Corporate and CIB during the second half of 2011. Lower private equity gains were primarily due to net write-downs on privately-held investments and the absence of prior-year gains from sales in the Private Equity portfolio.
Lending- and deposit-related fees increased modestly in 2011 compared with the prior year. The increase was primarily driven by the introduction of a new checking account product offering by CCB in the first quarter of 2011, and the subsequent conversion of certain existing accounts into the new product. The increase was offset partly by the impact of regulatory and policy changes affecting nonsufficient fund/overdraft fees in CCB.
Asset management, administration and commissions revenue increased from 2010, reflecting higher asset management fees in AM and CCB, driven by net inflows to products with higher margins and the effect of higher market levels; and higher administration fees in CIB, reflecting net inflows of assets under custody.
Securities gains decreased, compared with the 2010 level, primarily due to the repositioning of the AFS portfolio in response to changes in the current market environment and to rebalancing exposures.
Mortgage fees and related income decreased in 2011 compared with 2010, reflecting a MSR risk management loss of $1.6 billion for 2011, compared with income of $1.1 billion for 2010, largely offset by lower repurchase losses in 2011. The $1.6 billion loss was driven by a $7.1 billion loss due to a decrease in the fair value of the mortgage servicing rights (“MSR”) asset, which was predominantly offset by a $5.6 billion gain on the derivatives used to hedge the MSR asset. For additional information on repurchase losses, see the Mortgage repurchase liability discussion on pages 111–115 and Note 29 on pages 308–315 of this Annual Report.
Card income increased during 2011, largely reflecting higher net interchange income associated with higher customer transaction volume on credit and debit cards, as well as lower partner revenue-sharing due to the impact of the Kohl’s portfolio sale. These increases were partially offset by lower revenue from fee-based products, as well as the impact of the Durbin Amendment.
Other income increased in 2011, driven by valuation adjustments on certain assets and incremental revenue from recent acquisitions in CIB, and higher auto operating lease income in CCB, resulting from growth in lease volume.
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JPMorgan Chase & Co./2012 Annual Report | | 73 |
Management’s discussion and analysis
Also contributing to the increase was a gain on the sale of an investment in AM.
Net interest income decreased in 2011 compared with the prior year, driven by lower average loan balances and yields in CCB, reflecting the expected runoff of credit card balances and residential real estate loans; lower fees on credit card receivables, reflecting the impact of legislative changes; higher average interest-bearing deposit balances and related yields; and lower yields on securities, reflecting portfolio repositioning in anticipation of an increasing interest rate environment. The decrease was offset partially by lower revenue reversals associated with lower credit card charge-offs, and higher trading asset balances. The Firm’s average interest-earning assets were $1.8 trillion for the 2011 full year, and the net yield on those assets, on a FTE basis, was 2.74%, a decrease of 32 basis points from 2010. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see CCB discussion on credit card legislation on page 89 of this Annual Report.
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Provision for credit losses | | | | |
Year ended December 31, | | | | | |
(in millions) | 2012 |
| | 2011 |
| | 2010 |
|
Consumer, excluding credit card | $ | 302 |
| | $ | 4,672 |
| | $ | 9,452 |
|
Credit card | 3,444 |
| | 2,925 |
| | 8,037 |
|
Total consumer | 3,746 |
| | 7,597 |
| | 17,489 |
|
Wholesale | (361 | ) | | (23 | ) | | (850 | ) |
Total provision for credit losses | $ | 3,385 |
| | $ | 7,574 |
| | $ | 16,639 |
|
2012 compared with 2011
The provision for credit losses decreased by $4.2 billion from 2011. The decrease was driven by a lower provision for consumer, excluding credit card loans, which reflected a reduction in the allowance for loan losses, due primarily to lower estimated losses in the non-PCI residential real estate portfolio as delinquency trends improved, partially offset by the impact of charge-offs of Chapter 7 loans. A higher level of recoveries and lower charge-offs in the wholesale provision also contributed to the decrease. These items were partially offset by a higher provision for credit card loans, largely due to a smaller reduction in the allowance for loan losses in 2012 compared with the prior year. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for CCB on pages 80–91, CIB on pages 92–95 and CB on pages 96–98, and Allowance For Credit Losses on pages 159–162 of this Annual Report.
2011 compared with 2010
The provision for credit losses declined by $9.1 billion from 2010. The consumer, excluding credit card, provision was down, reflecting improved delinquency and charge-off trends across most portfolios, partially offset by an increase of $770 million, reflecting additional impairment of the Washington Mutual PCI loans portfolio. The credit card provision was down, driven primarily by improved
delinquency trends and net credit losses. The benefit from the wholesale provision was lower in 2011 than in 2010, primarily reflecting loan growth and other portfolio activity.
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Noninterest expense | | | | |
Year ended December 31, | |
(in millions) | 2012 |
| | 2011 |
| | 2010 |
|
Compensation expense | $ | 30,585 |
| | $ | 29,037 |
| | $ | 28,124 |
|
Noncompensation expense: | | | | | |
Occupancy | 3,925 |
| | 3,895 |
| | 3,681 |
|
Technology, communications and equipment | 5,224 |
| | 4,947 |
| | 4,684 |
|
Professional and outside services | 7,429 |
| | 7,482 |
| | 6,767 |
|
Marketing | 2,577 |
| | 3,143 |
| | 2,446 |
|
Other(a)(b) | 14,032 |
| | 13,559 |
| | 14,558 |
|
Amortization of intangibles | 957 |
| | 848 |
| | 936 |
|
Total noncompensation expense | 34,144 |
| | 33,874 |
| | 33,072 |
|
Total noninterest expense | $ | 64,729 |
| | $ | 62,911 |
| | $ | 61,196 |
|
| |
(a) | Included litigation expense of $5.0 billion, $4.9 billion and $7.4 billion for the years ended December 31, 2012, 2011 and 2010, respectively. |
| |
(b) | Included FDIC-related expense of $1.7 billion, $1.5 billion and $899 million for the years ended December 31, 2012, 2011 and 2010, respectively. |
2012 compared with 2011
Total noninterest expense for 2012 was $64.7 billion, up by $1.8 billion, or 3%, from 2011. Compensation expense drove the increase from the prior year.
Compensation expense increased from the prior year, predominantly due to investments in the businesses, including the sales force in CCB and bankers in the other businesses, partially offset by lower compensation expense in CIB.
Noncompensation expense for 2012 increased from the prior year, reflecting continued investments in the businesses, including branch builds in CCB; higher expense related to growth in business volume in CIB and CCB; higher regulatory deposit insurance assessments; expenses related to exiting a non-core product and writing-off intangible assets in CCB; and higher litigation expense in Corporate/Private Equity. These increases were partially offset by lower litigation expense in AM and CCB (including the Independent Foreclosure Review settlement) and lower marketing expense in CCB. For a further discussion of litigation expense, see Note 31 on pages 316–325 of this Annual Report. For a discussion of amortization of intangibles, refer to Note 17 on pages 291–295 of this Annual Report.
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74 | | JPMorgan Chase & Co./2012 Annual Report |
2011 compared with 2010
Total noninterest expense for 2011 was $62.9 billion, up by $1.7 billion, or 3%, from 2010. Both compensation and noncompensation expense contributed to the increase.
Compensation expense increased from the prior year, due to investments in branch and mortgage production sales and support staff in CCB and increased headcount in AM, largely offset by lower performance-based compensation expense and the absence of the 2010 U.K. Bank Payroll Tax in CIB.
The increase in noncompensation expense in 2011 was due to elevated foreclosure- and default-related costs in CCB, including $1.7 billion of expense for fees and assessments, as well as other costs of foreclosure-related matters, higher marketing expense in CCB, higher FDIC assessments across businesses, non-client-rel