CORP Q3 2013



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

For the quarterly period ended
Commission file
September 30, 2013
number 1-5805

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



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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes T No
 
Number of shares of common stock outstanding as of September 30, 2013: 3,759,189,280
 





FORM 10-Q
TABLE OF CONTENTS

Part I - Financial information
Page
Item 1
 
 
110
 
Consolidated statements of comprehensive income (unaudited) for the three and nine months ended September 30, 2013 and 2012
111
 
Consolidated balance sheets (unaudited) at September 30, 2013, and December 31, 2012
112
 
Consolidated statements of changes in stockholders’ equity (unaudited) for the nine months ended September 30, 2013 and 2012
113
 
Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2013 and 2012
114
 
115
 
Report of Independent Registered Public Accounting Firm
212
 
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and nine months ended September 30, 2013 and 2012
213
 
215
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
3
 
4
 
6
 
12
 
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
16
 
19
 
53
 
54
 
56
 
61
 
67
 
105
 
106
 
108
 
109
Item 3
220
Item 4
220
Part II - Other information
 
Item 1
221
Item 1A
221
Item 2
221
Item 3
222
Item 4
Mine Safety Disclosure
222
Item 5
222
Item 6
222


2



JPMorgan Chase & Co.
Consolidated financial highlights
(unaudited)
As of or for the period ended,
 
 
 
 
 
 
Nine months ended September 30,
(in millions, except per share, ratio, headcount data and where otherwise noted)
3Q13
2Q13
1Q13
4Q12
3Q12
 
2013
2012
Selected income statement data
 
 
 
 
 
 
 
 
Total net revenue
$
23,117

$
25,211

$
25,122

$
23,653

$
25,146

 
$
73,450

$
73,378

Total noninterest expense
23,626

15,866

15,423

16,047

15,371

 
54,915

48,682

Pre-provision profit/(loss)
(509
)
9,345

9,699

7,606

9,775

 
18,535

24,696

Provision for credit losses
(543
)
47

617

656

1,789

 
121

2,729

Income before income tax expense
34

9,298

9,082

6,950

7,986

 
18,414

21,967

Income tax expense
414

2,802

2,553

1,258

2,278

 
5,769

6,375

Net income/(loss)
$
(380
)
$
6,496

$
6,529

$
5,692

$
5,708

 
$
12,645

$
15,592

Per common share data
 
 
 
 
 
 
 
 
Net income/(loss) per share: Basic
$
(0.17
)
$
1.61

$
1.61

$
1.40

$
1.41

 
$
3.08

$
3.82

             Diluted
(0.17
)
1.60

1.59

1.39

1.40

 
3.05

3.81

Cash dividends declared per share(a)
0.38

0.38

0.30

0.30

0.30

 
1.06

0.90

Book value per share
52.01

52.48

52.02

51.27

50.17

 
52.01

50.17

Tangible book value per share (“TBVS”)(b)
39.51

39.97

39.54

38.75

37.53

 
39.51

37.53

Common shares outstanding
 
 
 
 
 
 
 
 
Average: Basic
3,767.0

3,782.4

3,818.2

3,806.7

3,803.3

 
3,789.2

3,810.4

Diluted
3,767.0

3,814.3

3,847.0

3,820.9

3,813.9

 
3,820.9

3,822.6

Common shares at period-end
3,759.2

3,769.0

3,789.8

3,804.0

3,799.6

 
3,759.2

3,799.6

Share price(c)
 
 
 
 
 
 
 
 
High
$
56.93

$
55.90

$
51.00

$
44.54

$
42.09

 
$
56.93

$
46.49

Low
50.06

46.05

44.20

38.83

33.10

 
44.20

30.83

Close
51.69

52.79

47.46

43.97

40.48

 
51.69

40.48

Market capitalization
194,312

198,966

179,863

167,260

153,806

 
194,312

153,806

Selected ratios and metrics
 
 
 
 
 
 
 
 
Return on common equity (“ROE”)
(1
)%
13
%
13
%
11
%
12
%
 
8
%
11
%
Return on tangible common equity (“ROTCE”)(b)
(2
)
17

17

15

16

 
11

15

Return on assets (“ROA”)
(0.06
)
1.09

1.14

0.98

1.01

 
0.71

0.92

Return on risk-weighted assets(d)(e)
(0.11
)
1.85

1.88

1.76

1.74

 
1.20

1.61

Overhead ratio
102

63

61

68

61

 
75

66

Loans-to-deposits ratio
57

60

61

61

63

 
57

63

High Quality Liquid Assets (“HQLA”) (in billions)(f)
$
538

$
454

$
413

$
341

NA

 
$
538

NA

Tier 1 capital ratio(e)
11.7
 %
11.6
%
11.6
%
12.6
%
11.9
%
 
11.7
%
11.9
%
Total capital ratio(e)
14.3

14.1

14.1

15.3

14.7

 
14.3

14.7

Tier 1 leverage ratio
6.9

7.0

7.3

7.1

7.1

 
6.9

7.1

Tier 1 common capital ratio(e)(g)
10.5

10.4

10.2

11.0

10.4

 
10.5

10.4

Selected balance sheet data (period-end)
 
 
 
 
 
 
 
 
Trading assets
$
383,348

$
401,470

$
430,991

$
450,028

$
447,053

 
$
383,348

$
447,053

Securities
356,556

354,725

365,744

371,152

365,901

 
356,556

365,901

Loans
728,679

725,586

728,886

733,796

721,947

 
728,679

721,947

Total assets
2,463,309

2,439,494

2,389,349

2,359,141

2,321,284

 
2,463,309

2,321,284

Deposits
1,281,102

1,202,950

1,202,507

1,193,593

1,139,611

 
1,281,102

1,139,611

Long-term debt(h)
263,372

266,212

268,361

249,024

241,140

 
263,372

241,140

Common stockholders’ equity
195,512

197,781

197,128

195,011

190,635

 
195,512

190,635

Total stockholders’ equity
206,670

209,239

207,086

204,069

199,693

 
206,670

199,693

Headcount(i)
255,041

254,063

255,898

258,753

259,144

 
255,041

259,547

Credit quality metrics
 
 
 
 
 
 
 
 
Allowance for credit losses
$
18,248

$
20,137

$
21,496

$
22,604

$
23,576

 
$
18,248

$
23,576

Allowance for loan losses to total retained loans
2.43
 %
2.69
%
2.88
%
3.02
%
3.18
%
 
2.43
%
3.18
%
Allowance for loan losses to retained loans excluding purchased credit-impaired loans(j)
1.89

2.06

2.27

2.43

2.61

 
1.89

2.61

Nonperforming assets
$
10,231

$
10,896

$
11,584

$
11,734

$
12,481

 
$
10,231

$
12,481

Net charge-offs
1,346

1,403

1,725

1,628

2,770

 
4,474

7,435

Net charge-off rate
0.74
 %
0.78
%
0.97
%
0.90
%
1.53
%
 
0.83
%
1.39
%
(a)
On May 21, 2013, the Board of Directors of JPMorgan Chase increased the Firm’s quarterly common stock dividend from $0.30 to $0.38 per share.
(b)
TBVS and ROTCE are non-GAAP financial measures. TBVS 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 16–18 of this Form 10-Q.
(c)
Share price shown for JPMorgan Chase’s common stock is 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.
(d)
Return on Basel I risk-weighted assets is the annualized earnings of the Firm divided by its average risk-weighted assets (“RWA”).
(e)
Basel 2.5 rules became effective for the Firm on January 1, 2013. The implementation of these rules in the first quarter of 2013 resulted in an increase of approximately $150 billion in RWA compared with the Basel I rules. The implementation of these rules also resulted in decreases of the Firm’s Tier 1 capital, Total capital and Tier 1 common capital ratios by 140 basis points, 160 basis points and 120 basis points, respectively, at March 31, 2013. For further discussion of Basel 2.5, see Regulatory capital on pages 61–65 of this Form 10-Q.
(f)
The Firm began estimating its total HQLA as of December 31, 2012, based on its current understanding of the Basel III LCR rules, see HQLA on page 71 of this Form 10-Q.
(g)
The Tier 1 common capital ratio (“Tier 1 common ratio”) under Basel I is Tier 1 common capital (“Tier 1 common”) divided by RWA. The Firm uses Tier 1 common capital along with the other capital measures to assess and monitor its capital position. For further discussion of the Tier 1 common ratio, see Regulatory capital on pages 61–65 of this Form 10-Q.
(h)
Included unsecured long-term debt of $199.2 billion, $199.1 billion, $206.1 billion, $200.6 billion, $207.3 billion, $199.2 billion and $207.3 billion, for the respective periods above.
(i)
Effective January 1, 2013, interns are excluded from the firmwide and business segment headcount metrics. Prior periods were revised to conform with this presentation.
(j)
Excludes the impact of residential real estate purchased credit-impaired (“PCI”) loans. For further discussion, see Allowance for credit losses on pages 94–96 of this Form 10-Q.

3

INTRODUCTION
This section of the Form 10-Q provides management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”). See the Glossary of terms on pages 215–218 for definitions of terms used throughout this Form 10-Q.
The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause JPMorgan Chase’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements on page 109 and Part II, Item 1A: Risk Factors, on page 221 of this Form 10-Q; and Part I, Item 1A, Risk Factors, on pages 8–21 of JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the U.S. Securities and Exchange Commission (“2012 Annual Report” or “2012 Form 10-K”), to which reference is hereby made.
JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with operations worldwide. The Firm had $2.5 trillion in assets and $206.7 billion in stockholders’ equity as of September 30, 2013. The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firm’s principal operating subsidiaries in the United Kingdom (“U.K.”) is J.P. Morgan Securities plc (formerly J.P. Morgan Securities Ltd.), a subsidiary of JPMorgan Chase Bank, N.A.
 
JPMorgan Chase’s activities are organized, for management reporting purposes, into four major reportable business segments, as well as a Corporate/Private Equity segment. The Firm’s consumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, Commercial Banking, and Asset Management segments comprise the Firm’s wholesale businesses. A description of the Firm’s business segments, and the products and services they provide to their respective client bases, follows.
Consumer & Community Banking
Consumer & Community Banking (“CCB”) serves consumers and businesses through personal service at bank branches and through ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking, Mortgage Banking (including Mortgage Production, Mortgage Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto (“Card”). Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Mortgage Banking includes mortgage origination and servicing activities, as well as portfolios comprised of residential mortgages and home equity loans, including the PCI portfolio acquired in the Washington Mutual transaction. Card issues credit cards to consumers and small businesses, provides payment services to corporate and public sector clients through its commercial card products, offers payment processing services to merchants, and provides auto and student loan services.
Corporate & Investment Bank
The Corporate & Investment Bank (“CIB”) comprised of Banking and Markets & Investor Services, offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Within Banking, the CIB offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Also included in Banking is Treasury Services, which includes transaction services, comprised primarily of cash management and liquidity solutions, and trade finance products. The Markets & Investor Services segment of the CIB is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes the Securities Services business, a leading global custodian which includes custody, fund accounting and administration, and securities lending products sold principally to asset managers, insurance companies and public and private investment funds.


4

Commercial Banking
Commercial Banking (“CB”) delivers extensive industry knowledge, local expertise and dedicated service to U.S. and U.S. multinational clients, including corporations, municipalities, financial institutions and nonprofit entities with annual revenue generally ranging from $20 million to $2 billion. CB provides financing to real estate investors and owners. Partnering with the Firm’s other businesses, CB provides comprehensive financial solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Asset Management
Asset Management (“AM”), with client assets of $2.2 trillion as of September 30, 2013, is a global leader in investment and wealth management. AM clients include institutions, high-net-worth individuals and retail investors in every major market throughout the world. AM offers investment management across all major asset classes including equities, fixed income, alternatives and money market funds. AM also offers multi-asset investment management, providing solutions to a broad range of clients’ investment needs. For individual investors, AM also provides retirement products and services, brokerage and banking services, including trust and estate, loans, mortgages and deposits. The majority of AM’s client assets are in actively managed portfolios.
 
In addition to the four major reportable business segments outlined above, the following is a description of the Corporate/Private Equity segment.
Corporate/Private Equity
The Corporate/Private Equity segment comprises Private Equity, Treasury and Chief Investment Office (“CIO”), and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding, capital and structural interest rate and foreign exchange risks. The major corporate staff units include Central Technology and Operations, Internal Audit, Executive, Finance, Human Resources, Legal, Compliance, Global Real Estate, Operational Control, Risk Management, and Corporate Responsibility & Public Policy. Other centrally managed expense includes the Firm’s occupancy and pension-related expense that are subject to allocation to the businesses.



5

EXECUTIVE OVERVIEW
This executive overview of the MD&A highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of trends and uncertainties, as well as the risks and critical accounting estimates affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.
Economic environment
The U.S. economy grew at a moderate pace in the third quarter of 2013. Employment continued to expand, and the U.S. unemployment rate fell to 7.2%, as labor market conditions continued to improve gradually. However, inflation remained below the Federal Reserve’s Open Market Committee’s long-run target of 2%.
The U.S. housing sector continued to recover despite a rise in mortgage rates earlier in the quarter, primarily driven by improving house price indexes. Existing home sales reached the highest level in six-and-a-half years, while the median home price carried its ninth consecutive month of double-digit year-over-year increases in August 2013.
In September 2013, the Federal Reserve’s Open Market Committee decided to delay the tapering of its bond buying
 
program, citing rising mortgage rates and uncertainty regarding the political debate on the federal budget and debt ceiling. A partial government shutdown began on October 1, 2013 which will likely exert a drag on GDP in the fourth quarter of 2013. On October 16, 2013, the U.S. government reached an agreement on the continuing resolution funding the government and suspending the debt ceiling until February 7, 2014, averting default.
Economic activity in the European Union gradually began to strengthen this quarter, but the pace of growth remained slow. Outside the Eurozone, the UK economy continued to recover at a modest pace.
In Asia, the Chinese economy returned to relative stability, as policy makers remain focused on balancing structural reforms, financial stability and growth. In Japan, the Bank of Japan left its economic easing policy unchanged this quarter, and Japanese real GDP grew at a 4% annualized rate in the first half of the year.
Economic growth in Latin America in the third quarter continued to be slow as reflected in the International Monetary Fund cutting the region’s growth forecast for 2013 to 2.7%.


Financial performance of JPMorgan Chase
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share data and ratios)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Selected income statement data
 
 
 
 
 
 
 
 
 
 
 
Total net revenue
$
23,117

 
$
25,146

 
(8
)%
 
$
73,450

 
$
73,378

 
—
 %
Total noninterest expense
23,626

 
15,371

 
54

 
54,915

 
48,682

 
13

Pre-provision profit/(loss)
(509
)
 
9,775

 
NM

 
18,535

 
24,696

 
(25
)
Provision for credit losses
(543
)
 
1,789

 
NM

 
121

 
2,729

 
(96
)
Net income/(loss)
(380
)
 
5,708

 
NM

 
12,645

 
15,592

 
(19
)
Diluted earnings per share
(0.17
)
 
1.40

 
NM

 
3.05

 
3.81

 
(20
)%
Return on common equity
(1
)%
 
12
%
 
 
 
8
%
 
11
%
 
 
Capital ratios
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital
11.7

 
11.9

 
 
 
 
 
 
 
 
Tier 1 common(a)
10.5

 
10.4

 
 
 
 
 
 
 
 
(a)
The Tier 1 common capital ratio (“Tier 1 common ratio”) under Basel I is Tier 1 common capital (“Tier 1 common”) divided by RWA. The Firm uses Tier 1 common capital along with the other capital measures to assess and monitor its capital position. For further discussion of the Tier 1 common ratio, see Regulatory capital on pages 61–65 of this Form 10-Q.

Business Overview
JPMorgan Chase reported a third-quarter 2013 net loss of $0.4 billion, or $(0.17) per share, on net revenue of $23.1 billion. Net income decreased by $6.1 billion, compared with net income of $5.7 billion, or $1.40 per share, in the third quarter of 2012. Return on equity for the quarter was (1)%, compared with 12% for the prior-year quarter. Results in the third quarter of 2013 included the following significant items: $9.15 billion pretax expense ($7.20 billion after-tax and $1.85 per share after-tax decrease in earnings) for legal expense in Corporate, including reserves for litigation and regulatory proceedings; and $1.60 billion pretax benefit ($992 million after-tax and $0.26 per share after-tax increase in earnings) from a reduction in the
 
allowance for loan losses in Consumer & Community Banking. Adjusting for these two items, the Firm would have earned $5.8 billion in net income, corresponding to $1.42 earnings per share. Each of these measures are non-GAAP financial measures, for further discussion, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 16–18 of this Form 10-Q.
The decrease in net income from the third quarter of 2012 was driven by higher noninterest expense and lower net revenue, partially offset by lower provision for credit losses. The decrease in net revenue compared with the prior year was mainly driven by lower mortgage fees and related income and lower securities gains, partially offset by higher principal transactions and higher asset management,


6

administration and commissions revenue. The decrease in mortgage fees and related income reflected lower mortgage production-related revenue, reflecting lower volumes and lower margins, partially offset by lower repurchase losses; and by a decrease in net mortgage servicing-related revenue. Net interest income decreased compared with the prior year, reflecting the impact of lower loan yields due to competitive pressures and replacement of higher yielding loans with lower yielding loans, partially offset by higher investment securities yield and lower net interest expense on long-term debt.
Results in the third quarter of 2013 reflected lower estimated losses due to improved delinquency trends in the residential real estate and credit card portfolios, as well as the impact of improved home prices on the residential real estate portfolio. The provision for credit losses was a benefit of $543 million, compared with a provision for credit losses of $1.8 billion in the prior year. The total consumer provision for credit losses was a benefit of $273 million, compared with an expense of $1.9 billion in the prior year. The current-quarter consumer provision reflected a $1.6 billion reduction in the allowance for loan losses. Consumer net charge-offs were $1.3 billion, compared with $2.8 billion in the prior year, resulting in net charge-off rates of 1.47% and 3.10%, respectively, excluding in each year the PCI portfolio. The prior-year total net charge-offs included $880 million of incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. The wholesale provision for credit losses was a benefit of $270 million, compared with a benefit of $63 million in the prior year. Wholesale net charge-offs were $26 million, compared with net recoveries of $34 million in the prior year, resulting in a net charge-off rate of 0.03% and a net recovery rate of 0.05%, respectively. The Firm’s allowance for loan losses to period-end loans retained, excluding PCI loans, was 1.89%, compared with 2.61% in the prior year. The Firm’s nonperforming assets totaled $10.2 billion, down from the prior-quarter and prior-year levels of $10.9 billion and $12.5 billion, respectively.
Noninterest expense was $23.6 billion, up $8.3 billion, or 54%, compared with the prior year, driven by higher legal expense. The current quarter included approximately $9.3 billion of legal expense, including reserves for litigation and regulatory proceedings, compared with $790 million of expense for additional litigation reserves in the prior year.
The Firm’s results reflected strong underlying performance across its businesses. CCB average deposits were up 10%. Client investment assets were a record $179.0 billion, up 16%, and credit card sales volume was a record $107.0 billion, up 11% from the prior year. Corporate & Investment Banking reported strong performance across products and maintained its #1 ranking for Global Investment Banking fees. Corporate & Investment Banking assets under custody were a record $19.7 trillion, up 8% compared with the prior year, and average client deposits and other third-party
 
liabilities were up 10% compared with the prior year. Asset Management reported net long-term product flows of $19 billion, positive for the eighteenth consecutive quarter, total client assets of $2.2 trillion and record loan balances of $90.5 billion.
Net income during the nine months of 2013 was $12.6 billion, or $3.05 per share, compared with $15.6 billion, or $3.81 per share, in the first nine months of 2012. The decrease was driven by an increase in noninterest expense, partially offset by a decrease in provision for credit losses. Noninterest expense was $54.9 billion, up $6.2 billion, or 13%, compared with the prior year, driven by higher legal expense. The lower provision for credit losses reflected an improved credit environment.
The Firm maintained its strong balance sheet, ending the third quarter with Basel I Tier 1 common capital of $145 billion and a Tier 1 common ratio of 10.5%, including the impact of Basel 2.5 rules that became effective at the beginning of this year. The Firm estimated that its Tier 1 common ratio under the Basel III Advanced approach on a fully phased-in basis was approximately 9.3% at September 30, 2013, including the estimated impact of final Basel III rules issued on July 2, 2013. (The Basel I and Basel 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 61–65 of this Form 10-Q.)
JPMorgan Chase continued to support clients, consumers, companies and communities around the globe. The Firm provided credit and raised capital of $1.6 trillion for commercial and consumer clients during the nine months ended September 30, 2013. This included $14 billion of credit provided for U.S. small businesses and $442 billion of credit provided for corporations. This also included more than $829 billion of capital for clients and more than $59 billion of credit provided to, and capital raised for, nonprofit and government entities, including states, municipalities, hospitals and universities.
Consumer & Community Banking net income increased, compared with the prior year, due to lower provision for credit losses and noninterest expense, predominantly offset by lower net revenue. The decrease in net revenue was driven by lower mortgage fees and related income. Net interest income decreased from the prior year, driven by lower deposit margins, spread compression in Credit Card and Auto and lower loan balances due to portfolio runoff, largely offset by higher deposit balances. The provision for credit losses was a benefit of $267 million, compared with a provision for credit losses of $1.9 billion in the prior year. The current-quarter provision reflected a $1.6 billion reduction in the allowance for loan losses and total net charge-offs of $1.3 billion. The prior-year provision reflected a $955 million reduction in the allowance for loan losses and total net charge-offs of $2.8 billion. Prior-year total net charge-offs included $880 million of incremental


7

charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. Noninterest expense decreased from the prior year, driven by lower mortgage servicing expense, partially offset by continued investments in Chase Private Client expansion, and costs related to the control agenda. Return on equity for the third quarter of 2013 was 23% on $46.0 billion of average allocated capital.
Corporate & Investment Bank net income increased compared with the prior year, reflecting lower noninterest expense and a higher benefit from the provision for credit losses, partially offset by lower net revenue. Net revenue included a $397 million loss from debit valuation adjustments (“DVA”; a non-GAAP financial measure) on structured notes and derivative liabilities; the prior year included a loss from DVA of $211 million, as well as a modest loss from the synthetic credit portfolio. Excluding the impact of DVA, revenue was flat, with higher Banking revenue predominantly offset by lower Markets and Investor Services revenue. Noninterest expense decreased from the prior year, primarily driven by lower compensation expense. Return on equity for the third quarter of 2013 was 16%, or 17% excluding DVA, on $56.5 billion of average allocated capital.
Commercial Banking net income decreased compared with the prior year, reflecting an increase in noninterest expense, partially offset by a lower provision for credit losses. Net revenue was flat compared with the prior year. Net interest income was flat compared with the prior year, reflecting spread compression on loan and liability products and lower purchase discounts recognized on loan repayments, predominantly offset by higher loan balances. Noninterest expense increased by 10% compared with the prior year reflecting higher product- and headcount-related expense. Return on equity for the third quarter of 2013 was 20% on $13.5 billion of average allocated capital.
Asset Management net income increased compared with the prior year, reflecting higher net revenue, predominantly offset by higher noninterest expense. Noninterest revenue increased due to net client inflows, the effect of higher market levels and higher placement fees. Net interest income increased due to higher loan and deposit balances, partially offset by narrower loan and deposit spreads. Noninterest expense increased from the prior year, primarily due to higher headcount-related expense, higher performance-based compensation and costs related to the control agenda. Return on equity was 21% on $9.0 billion of average allocated capital and pretax margin was 28% for the third quarter of 2013.
Corporate/Private Equity net income was a loss of $6.5 billion, compared with net income of $228 million in the prior year.
Private Equity reported net income of $242 million, compared with a net loss of $89 million in the prior year. Net revenue was $398 million, compared with a loss of
 
$135 million in the prior year, primarily due to net valuation gains on private investments.
Treasury and CIO reported a net loss of $193 million, compared with net income of $369 million in the prior year. Net revenue was a loss of $232 million, compared with net revenue of $713 million in the prior year. The prior-year revenue reflected $888 million extinguishment gains related to the redemption of trust preferred securities. Current-quarter net interest income was a loss of $261 million due to low interest rates and limited reinvestment opportunities.
Other Corporate reported a net loss of $6.5 billion, compared with a net loss of $52 million in the prior year. The current quarter included approximately $9.15 billion of legal expense, including reserves for litigation and regulatory proceedings, compared with $684 million of expense for additional litigation reserves in the prior year.
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 109 and Risk Factors on page 221 of this Form 10-Q.
JPMorgan Chase’s outlook for the remainder of 2013 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business.
The Firm expects that net interest income for the fourth quarter of 2013 will be relatively flat from third-quarter levels. Firmwide adjusted expense is expected to be $59.5–$60 billion for the full year 2013 (including approximately $1 billion of increase in spending related to the control agenda and approximately $0.5 billion of non-Corporate litigation, but excluding Corporate litigation expense and foreclosure-related matters).
In Mortgage Banking within CCB, management expects to continue to incur elevated default- and foreclosure-related


8

costs, including additional costs associated with the Firm’s mortgage servicing processes, particularly its loan modification and foreclosure procedures.
Primary mortgage interest rates increased in the second quarter of 2013 and remained at those higher levels in the third quarter of 2013. Management expects such a market environment to have a negative impact on refinancing volumes and margins, and, accordingly, the pretax income of Mortgage Production is anticipated to be slightly negative in the fourth quarter of 2013.
For Real Estate Portfolios within Mortgage Banking, total net charge-offs for the fourth quarter of 2013 are expected to be approximately $200 million, if current trends continue. If net charge-offs and delinquencies continue to trend down, the related allowance for loan losses could continue to be reduced over time.
In the Card Services business within Card, Merchant Services & Auto, the Firm expects that, if current credit trends in the credit card portfolio continue to improve, including improving delinquency rates and lower balances of restructured loans, it is possible that there could be a further release of approximately $150 million from the related allowance for loan losses in the fourth quarter of 2013.
The currently anticipated results for CCB described above could be adversely affected if economic conditions, including U.S. housing prices or the unemployment rate, do not continue to improve. Management continues to closely monitor the portfolios in these businesses.
In Private Equity, within the Corporate/Private Equity segment, earnings will likely continue to be volatile and influenced by capital markets activity, market levels, the performance of the broader economy and investment-specific factors.
For Treasury and CIO, as the Firm continues to reinvest its investment securities portfolio, net interest income is expected to improve over the next several quarters.
For Other Corporate, within the Corporate/Private Equity segment, management expects quarterly net income, excluding material legal expense and significant items, if any, to be approximately $100 million, but this amount is likely to vary each quarter.
 
Regulatory developments
JPMorgan Chase is subject to regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside the U.S. in which the Firm does business. In addition, certain affiliates and subsidiaries of the Firm are banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, banking, commodities futures, consumer protection and other regulators. The Firm is currently experiencing an unprecedented increase in regulation and supervision, and such changes could have a significant impact on how the Firm conducts business.
As previously disclosed, in July 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC”) approved the interim final rules for implementing Basel III in the U.S. The interim final rules narrowed the definition of capital, increased capital requirements for certain exposures, set higher capital ratio requirements and minimum floors with respect to the capital ratio requirements, and included a supplementary leverage ratio. U.S. banking regulators and the Basel Committee on Banking Supervision (“Basel Committee”) have, in addition, proposed changes to the leverage ratios applicable to the Firm and its bank subsidiaries. On October 24, 2013, the U.S. banking regulators released a proposal to implement a quantitative liquidity requirement consistent with, but more conservative than, the Basel III Liquidity Coverage Ratio (“LCR”) for large banks. It also provides for an accelerated transition period compared to what is currently required under the Basel III LCR rules. The Firm is currently assessing the impact of this new proposal to its current estimate of LCR. For further information regarding Basel III, including the supplementary leverage ratio, see Regulatory capital on pages 61–65, and for LCR, see Liquidity risk management on pages 68–73 of this Form 10-Q. Also in July 2013, as previously disclosed, the U.S. District Court for the District of Columbia ruled that the Federal Reserve exceeded its authority in the manner it set a cap on debit card transaction interchange fees and established network exclusivity prohibitions in its regulation implementing the Durbin Amendment provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Federal Reserve announced in August, 2013 that it was appealing the decision and the appellate court has set up an expedited briefing schedule; the Federal Reserve’s current regulations are expected to remain in effect until the appeal is decided. It is too early for the Firm to determine what effects the District Court decision could have on the Firm, as any such effects (and the timing thereof) will depend on numerous factors, including the outcome of the appeal, the substance of any new or revised regulations that may be promulgated as a


9

result thereof and any changes in business practices the Firm may make in response thereto.
Rulemaking under the Dodd-Frank Act, as well as other federal banking laws, by the Federal Reserve, the OCC, and the FDIC, the Commodities Futures Trading Commission (the “CFTC”), the Securities Exchange Commission (the “SEC”), and the Bureau of Consumer Financial Protection (the “CFPB”) is continuing. In June, 2013, the CFTC published final rules enacting the Dodd-Frank requirement that swaps that are required to be cleared (“required swaps”), be executed on a “swap execution facility” (“SEF”); until the final rules were issued, the market assumed that only those platforms which offered required swaps would be required to register as a SEF. However, when the final rules were issued, included in a footnote was the requirement that all trading platforms that meet the definition of a SEF register with the CFTC — even if the trading platform does not execute required swaps — thereby mandating that all such platforms register with the CFTC by October 2, 2013. Because many non-U.S. platforms that do not execute required swaps have taken the position that they would not need to register with the CFTC unless they permit U.S. persons to transact on their platform, they have, as a result of the final rules, become unwilling to permit certain U.S. market participants, such as JPMorgan Chase Bank, N.A., access to their platforms. The Firm believes reduced participation by U.S. persons in certain non-U.S. swaps markets will adversely affect the liquidity of such markets. Finally, the responsible agencies have indicated that a final Volcker rule may be forthcoming by or near the end of 2013; depending on how the final rule deals with issues involving market-making, hedging and sponsored funds, it could adversely affect the Firm’s investment banking and investment management businesses, and other of the Firm’s activities. The Firm continues to work diligently to assess and understand the implications of all the regulatory changes it is facing, and is devoting substantial resources to implementing all the new regulations while, at the same time, endeavoring to meet the needs and expectations of its clients.
The Firm is also experiencing heightened regulatory scrutiny of its compliance with applicable laws and rules, as well as its controls and operational processes. As previously disclosed, the Firm has entered into several Consent Orders and regulatory settlements (including, in certain instances, with multiple regulators proceeding in respect of the same underlying conduct), some of which have resulted in civil money penalties and payments of restitution or disgorgement. The Firm expects that such regulatory scrutiny will continue, and that regulators will increasingly use formal enforcement actions instead of informal supervisory actions or criticisms. For further discussion of the Consent Orders and other regulatory settlements, see Note 23 on pages 201–209 of this Form 10-Q.
The effect of the changes in law and the heightened scrutiny of its regulators, the increase in threatened and pending litigation facing the Firm, and the escalating demands and penalties being imposed by various governmental agencies,
 
has resulted in additional legal expense for the Firm in recent periods.
As of September 30, 2013, the Firm had total reserves for litigation and regulatory proceedings of approximately $23 billion. These reserves, which reflect the Firm’s estimate of probable and estimable losses from litigation and regulatory proceedings as of September 30, 2013, relate to a broad range of matters, and involve significant management judgment, based upon information available as of the date of such estimate and taking into consideration management’s best estimate of such losses for those cases for which such estimates can be made. Accordingly, such reserves will change from time to time.
The Firm cannot, in light of the various factors discussed above, quantify the possible effects on its business and operations or financial condition of all the significant changes that are currently underway. For further discussion of the Firm’s litigation matters, see Note 23 on pages 201–209 of this Form 10-Q, and for additional information regarding regulatory developments, see Supervision and Regulation on pages 1–8 and Risk factors on pages 8–21, of JPMorgan Chase’s 2012 Form 10-K.




10

Business events
Changes to preferred stock
On February 5, 2013, the Firm issued $900 million of noncumulative preferred stock. On April 23, 2013, the Firm issued $1.5 billion of noncumulative preferred stock. On July 29, 2013, the Firm issued $1.5 billion of noncumulative preferred stock.
The Firm redeemed all $1.8 billion of its outstanding 8.625% noncumulative preferred stock, Series J on September 1, 2013. For additional information on the Firm’s preferred stock, see Note 22 on page 300 of the Firm’s 2012 Annual Report.
Redemption of outstanding trust preferred securities
On May 8, 2013, the Firm redeemed approximately $5.0 billion, or 100% of the liquidation amount, of the following eight series of trust preferred securities: JPMorgan Chase Capital X, XI, XII, XIV, XVI, XIX, XXIV, and BANK ONE Capital VI. For a further discussion of trust preferred securities, see Note 21 on pages 297–299 of JPMorgan Chase’s 2012 Annual Report.
Increase in common stock dividend
On May 21, 2013, the Board of Directors increased the Firm’s quarterly common stock dividend from $0.30 per share to $0.38 per share, effective with the dividend paid on July 31, 2013, to shareholders of record on July 5, 2013.
One Equity Partners
As announced on June 14, 2013, One Equity Partners (“OEP”) will raise its next fund from an external group of limited partners and then become independent from JPMorgan Chase. Until it becomes independent from the Firm, OEP will continue to make direct investments for JPMorgan Chase, and thereafter continue to manage the then-existing group of portfolio companies for JPMorgan Chase to maximize value for the Firm.
 
Physical commodities businesses
On July 26, 2013, the Firm announced that it is pursuing strategic alternatives for its physical commodities businesses, including its remaining holdings of commodities assets and its physical trading operations. The Firm is exploring a full range of options, including but not limited to: a sale, spin off or strategic partnership. During this process, the Firm will continue to run its physical commodities business as a going concern. The Firm remains fully committed to its traditional banking activities in the commodities markets, including financial derivatives and the trading of precious metals, which are not part of these strategic alternatives.
Student loan business
The Firm has announced it intends to exit student loan originations.
Subsequent events
One Chase Manhattan Plaza
On October 17, 2013, the Firm entered into a $725 million agreement for the sale of One Chase Manhattan Plaza, an office building located in New York City. The transaction is anticipated to close in the fourth quarter of 2013.
Mortgage-backed securities settlements with the Federal Housing Finance Agency, Freddie Mac and Fannie Mae
On October 25, 2013, the Firm announced that it had reached an agreement to resolve all of its mortgage-backed securities (“MBS”) litigation with the Federal Housing Finance Agency (“FHFA”) as conservator for Freddie Mac and Fannie Mae for $4.0 billion. This settlement resolves the Firm’s largest MBS case and relates to approximately $33.8 billion of securities purchased by Fannie Mae and Freddie Mac from JPMorgan Chase, Bear Stearns and Washington Mutual. The Firm also simultaneously agreed to resolve, for $1.1 billion, GSE repurchase claims for breaches of representations and warranties on loans sold to the GSEs from 2000 to 2008, except for certain limited types of exposures. The settlement does not release the Firm’s liability with respect to its servicing obligations on the covered loans. For additional information see Note 23 on pages 201–209 of this Form 10-Q.




11

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 and nine months ended September 30, 2013 and 2012. Factors that relate primarily to a single business segment are discussed in more detail
 
within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 106–108 of this Form 10-Q and pages 178–182 of JPMorgan Chase’s 2012 Annual Report.

Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2013
 
2012
 
Change
 
2013

 
2012

 
Change

Investment banking fees
$
1,507

 
$
1,443

 
4
 %
 
$
4,669

 
$
4,081

 
14
 %
Principal transactions(a)
2,662

 
2,047

 
30

 
10,183

 
4,342

 
135

Lending- and deposit-related fees
1,519

 
1,562

 
(3
)
 
4,476

 
4,625

 
(3
)
Asset management, administration and commissions
3,667

 
3,336

 
10

 
11,131

 
10,189

 
9

Securities gains
26

 
458

 
(94
)
 
659

 
2,008

 
(67
)
Mortgage fees and related income
841

 
2,377

 
(65
)
 
4,116

 
6,652

 
(38
)
Card income
1,518

 
1,428

 
6

 
4,440

 
4,156

 
7

Other income(b)
602

 
1,519

 
(60
)
 
1,364

 
3,537

 
(61
)
Noninterest revenue
12,342

 
14,170

 
(13
)
 
41,038

 
39,590

 
4

Net interest income
10,775

 
10,976

 
(2
)
 
32,412

 
33,788

 
(4
)
Total net revenue
$
23,117

 
$
25,146

 
(8
)%
 
$
73,450

 
$
73,378

 
—
 %
(a)
Includes DVA on structured notes and derivative liabilities measured at fair value. DVA gains/(losses) were $(397) million and $(211) million for the three months ended September 30, 2013 and 2012, respectively, and $84 million and $(363) million for the nine months ended September 30, 2013 and 2012, respectively.
(b)
Included operating lease income of $376 million and $331 million for the three months ended September 30, 2013 and 2012, respectively, and $1.1 billion and $982 million for the nine months ended September 30, 2013 and 2012, respectively.
Total net revenue for the three months ended September 30, 2013, was $23.1 billion, a decrease of $2.0 billion, or 8%, compared with the three months ended September 30, 2012. For the nine months ended September 30, 2013, total net revenue was $73.5 billion, an increase of $72 million, from the same period of the prior year. For the three months ended September 30, 2013, lower mortgage fees and related income, as well as other income were offset partially by higher principal transactions revenue. For the nine months ended September 30, 2013, higher principal transactions revenue, asset management, administration and commissions revenue, and investment banking fees were offset partially by lower mortgage fees and related income, net interest income, securities gains and other income.
Investment banking fees for both the three and nine months ended September 30, 2013, increased compared with the prior year, due to higher debt and equity underwriting fees, partially offset by lower advisory fees. The increase in debt and equity underwriting fees for the nine months ended September 30, 2013, compared with the prior year was driven by overall industry wallet growth and an increase in the Firm’s wallet share. The decrease in advisory fees compared with the prior year was due to the industry-wide M&A wallet decline, partially offset by a higher share of completed transactions. For additional information on investment banking fees, which are primarily recorded in CIB, see CIB segment results pages 36–41 and Note 6 on pages 145–146 of this Form 10-Q.
 
Principal transactions revenue increased for both the three and nine months ended September 30, 2013, compared with the prior year. The increase for the three months ended September 30, 2013 was primarily due to net valuation gains, compared with net valuation losses in the prior year, in Corporate/Private Equity. In addition, the prior year included a $449 million loss on the index credit derivative positions retained by CIO and a modest loss from the synthetic credit portfolio in CIB. Principal transactions revenue for the nine months ended September 30, 2013 increased significantly compared with the prior year. The prior-year period included the aforementioned loss in CIO, in addition to the $5.8 billion loss on the synthetic credit portfolio incurred by CIO in the first six months of 2012. The current-year period reflected strong equity markets revenue in CIB and a gain related to DVA on structured notes and derivative liabilities, compared with a loss in the prior year; these were partially offset by the absence of a $663 million gain recognized in 2012 in Other Corporate, representing the recovery on a Bear Stearns-related subordinated loan. For additional information on principal transactions revenue, see CIB and Corporate/Private Equity segment results on pages 36–41 and 50–52, respectively, and Note 6 on pages 145–146 of this Form 10-Q.
Lending- and deposit-related fees decreased only slightly compared with both the three and nine months ended September 30, 2012, predominantly due to lower deposit-related fees in CCB resulting from reductions in certain product and transaction fees. For additional information on lending- and deposit-related fees, which are mostly


12

recorded in CCB, CIB and CB, see the segment results for CCB on pages 21–35, CIB on pages 36–41 and CB on pages 42–45 of this Form 10-Q.
Asset management, administration and commissions revenue increased compared with both the three and nine months ended September 30, 2012. The increase from the three months ended September 30, 2012, was driven by higher investment management fees in AM, due to net client inflows, the effect of higher market levels, and higher placement fees, as well as higher investment revenue in CCB. The increase from the nine months ended September 30, 2012, was driven by higher investment management fees in AM, due to net client inflows, the effect of higher market levels, and higher performance fees, as well as higher investment revenue in CCB. For additional information on these fees and commissions, see the segment discussions for CCB on pages 21–35, AM on pages 46–49, and Note 6 on pages 145–146 of this Form
10-Q.
Securities gains decreased compared with both prior-year periods, reflecting the results of repositioning the CIO available-for-sale (“AFS”) portfolio. For additional information on securities gains, which are predominantly recorded in the Firm’s Corporate/Private Equity segment, see the Corporate/Private Equity segment discussion on pages 50–52, and Note 11 on pages 149–152 of this
Form 10-Q.
Mortgage fees and related income decreased compared with prior-year periods. The decrease resulted from lower net mortgage production revenue and net mortgage servicing revenue. The decrease in net mortgage production revenue was due to lower revenue margins and rising rates. The decrease in net mortgage servicing revenue was predominantly due to lower mortgage servicing rights (“MSR”) risk management results. 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 27–30, and Note 16 on pages 186–189 of this Form 10-Q.
Card income increased compared with the three and nine months ended September 30, 2012. The increase was
 
driven by higher net interchange income on credit and debit cards and merchant servicing revenue, due to growth in business volume. For additional information on credit card income, see the CCB segment results on pages 21–35 of this Form 10-Q.
Other income decreased compared with the three and nine months ended September 30, 2012, primarily reflecting the absence of 2012 items recorded in Corporate/Private Equity. The three months ended September 30, 2012 included $888 million of extinguishment gains related to the redemption of trust preferred securities. The nine months ended September 30, 2012 included the aforementioned gain on the trust preferred securities, as well as a $1.1 billion benefit from the Washington Mutual bankruptcy settlement. The 2013 decrease was offset partially by higher revenue from client-driven activity in CIB, as well as higher auto-related operating lease income, in both the three and nine month periods.
Net interest income decreased compared with the three and nine months ended September 30, 2012. The decrease from the three months ended September 30, 2012, primarily reflected the impact of lower loan yields due to competitive pressures and replacement of higher yielding loans with lower yielding loans, partially offset by higher investment securities yield and lower interest expense on long-term debt. The decrease from the nine months ended September 30, 2012, reflected the impact of the aforementioned lower loan yields and the impact of low interest rates on investment securities yield and reinvestment opportunities, partially offset by lower long-term debt costs, primarily due to a change in funding mix, and lower deposit costs. The Firm’s average interest-earning assets were $2.0 trillion for the three months ended September 30, 2013, and the net interest yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.18%, a decrease of 25 basis points from the prior year. For the nine months ended September 30, 2013, the Firm’s average interest-earning assets were $2.0 trillion, and the net interest yield on those assets, on a FTE basis, was 2.25%, a decrease of 26 basis points from the prior year.

Provision for credit losses
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Consumer, excluding credit card
$
(815
)
 
$
736

 
NM
 
$
(1,345
)
 
$
313

 
NM
Credit card
542

 
1,116

 
(51)%
 
1,588

 
2,347

 
(32
)%
Total consumer
(273
)
 
1,852

 
NM
 
243

 
2,660

 
(91
)
Wholesale
(270
)
 
(63
)
 
(329)%
 
(122
)
 
69

 
NM
Total provision for credit losses
$
(543
)
 
$
1,789

 
NM
 
$
121

 
$
2,729

 
(96
)%
The provision for credit losses decreased from both the three and nine months ended 2012, largely due to a decline in the provision for total consumer credit losses, and to a lesser extent, the wholesale provision for credit losses, which reflected a higher benefit for the three months ended
 
September 30, 2013, and a benefit for the nine month period in 2013, compared with an expense in 2012. The decline in the consumer provision was attributable to lower net charge-offs, largely due to the prior-year incremental charge-offs of $880 million recorded in accordance with


13

regulatory guidance on certain loans discharged under Chapter 7 bankruptcy; continued reductions in the allowance for loan losses, reflecting lower estimated losses due to improved delinquency trends; and the impact of improved home prices. The wholesale provision in the current periods reflected a favorable credit environment
 
and stable credit quality trends. For a more detailed discussion of the credit portfolio and the allowance for credit losses, see the segment discussions for CCB on pages 21–35, CIB on pages 36–41 and CB on pages 42–45, and the Allowance for credit losses section on pages 94–96 of this Form 10-Q.

Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Compensation expense
$
7,325

 
$
7,503

 
(2
)%
 
$
23,758

 
$
23,543

 
1
 %
Noncompensation expense:
 
 
 
 
 
 
 
 
 
 
 
Occupancy
947

 
973

 
(3
)
 
2,752

 
3,014

 
(9
)
Technology, communications and equipment
1,356

 
1,312

 
3

 
4,049

 
3,865

 
5

Professional and outside services
1,897

 
1,759

 
8

 
5,532

 
5,411

 
2

Marketing
588

 
607

 
(3
)
 
1,755

 
1,929

 
(9
)
Other expense(a)(b)
11,373

 
3,035

 
275

 
16,625

 
10,354

 
61

Amortization of intangibles
140

 
182

 
(23
)
 
444

 
566

 
(22
)
Total noncompensation expense
16,301

 
7,868

 
107

 
31,157

 
25,139

 
24

Total noninterest expense
$
23,626

 
$
15,371

 
54
 %
 
$
54,915

 
$
48,682

 
13
 %
(a)
Included firmwide legal expense of $9.3 billion and $790 million for the three months ended September 30, 2013 and 2012, respectively, and $10.3 billion and $3.8 billion for the nine months ended September 30, 2013 and 2012, respectively.
(b)
Included FDIC-related expense of $362 million and $426 million for the three months ended September 30, 2013 and 2012, respectively, and $1.1 billion and $1.2 billion for the nine months ended September 30, 2013 and 2012, respectively.
Total noninterest expense for the three months ended September 30, 2013, was $23.6 billion, up by $8.3 billion, or 54%, compared with the prior year. For the nine months ended September 30, 2013, total noninterest expense was $54.9 billion, up by $6.2 billion, or 13%, compared with the prior year. The increase in both periods was predominantly due to higher legal expense in Corporate/Private Equity.
Compensation expense decreased compared with the three months ended September 30, 2012, driven predominantly by CIB, partially offset by the impact of investments across the businesses, including front office sales and support staff, as well as costs related to the Firm’s control agenda. Compensation expense increased compared with the nine months ended September 30, 2012, due to the impact of the aforementioned investments in the businesses and costs related to the Firm’s control agenda, partially offset by lower performance-based compensation expense in CIB and a decline in CCB’s mortgage business, which included the effect of lower servicing headcount.
Noncompensation expense increased in the three months ended September 30, 2013, compared with the prior year, due to higher other expense, reflecting in particular $9.3
 
billion of firmwide legal expense, predominantly in Corporate/Private Equity, representing reserves for litigation and regulatory proceedings, compared with $790 million of expense for additional litigation reserves in the prior year. Higher legal-related professional services expense and costs related to the Firm’s control agenda also contributed to the increase. For the nine months ended September 30, 2013, noncompensation expense increased reflecting in particular $10.3 billion of firmwide legal expense, predominantly in Corporate/Private Equity, representing reserves for litigation and regulatory proceedings, compared with $3.8 billion of expense for additional litigation reserves in the prior year. Investments in the businesses, higher legal-related professional services expense, and costs related to the Firm’s control agenda also contributed to the increase. The increase was offset partially by lower mortgage servicing and marketing expense in CCB, and lower occupancy expense for the Firm, which predominantly reflected the absence of charges recognized in 2012 related to vacating excess space. For a further discussion of legal expense, see Note 23 on pages 201–209 of this Form 10-Q.



14

Income tax expense
 
 
 
 
 
 
 
 
 
 
(in millions, except rate)
Three months ended September 30,
 
Nine months ended September 30,
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Income before income tax expense
$
34

 
$
7,986

 
(100
)%
 
$
18,414

 
$
21,967

 
(16
)%
Income tax expense
414

 
2,278

 
(82
)
 
5,769

 
6,375

 
(10
)
Effective tax rate
NM

 
28.5
%
 
 
 
31.3
%
 
29.0
%
 


The effective tax rate for the three months ended September 30, 2013, was impacted by the substantial effect of the increased legal expense, a portion of which is estimated to include nondeductible penalties, on pretax income and income tax expense. The increase in the effective tax rate during the nine months ended September 30, 2013, was largely attributable to the effect of the aforementioned nondeductible penalties, partially offset by lower reported pretax income in combination with changes
 
in the mix of income and expense subject to U.S. federal, state and local income taxes, the impact of tax-exempt income and business tax credits, prior period tax adjustments and audit resolutions. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 106–108, of this Form 10-Q.

















15

EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES
The Firm prepares its consolidated financial statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”); these financial statements appear on pages 110–114 of this Form 10-Q. That presentation, which is referred to as “reported” basis, provides the reader with an understanding of the Firm’s results that can be tracked consistently from year-to-year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in
 
the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.


The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
 
Three months ended September 30,
 
2013
 
2012
(in millions, except ratios)
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
 
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
Other income
$
602

 
$
582

 
$
1,184

 
$
1,519

 
$
517

 
$
2,036

Total noninterest revenue
12,342

 
582

 
12,924

 
14,170

 
517

 
14,687

Net interest income
10,775

 
181

 
10,956

 
10,976

 
200

 
11,176

Total net revenue
23,117

 
763

 
23,880

 
25,146

 
717

 
25,863

Pre-provision profit/(loss)
(509
)
 
763

 
254

 
9,775

 
717

 
10,492

Income before income tax expense
34

 
763

 
797

 
7,986

 
717

 
8,703

Income tax expense
$
414

 
$
763

 
$
1,177

 
$
2,278

 
$
717

 
$
2,995

Overhead ratio
102
%
 
NM

 
99
%
 
61
%
 
NM

 
59
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2013
 
2012
(in millions, except ratios)
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
 
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
Other income
$
1,364

 
$
1,728

 
$
3,092

 
$
3,537

 
$
1,568

 
$
5,105

Total noninterest revenue
41,038

 
1,728

 
42,766

 
39,590

 
1,568

 
41,158

Net interest income
32,412

 
508

 
32,920

 
33,788

 
566

 
34,354

Total net revenue
73,450

 
2,236

 
75,686

 
73,378

 
2,134

 
75,512

Pre-provision profit/(loss)
18,535

 
2,236

 
20,771

 
24,696

 
2,134

 
26,830

Income before income tax expense
18,414

 
2,236

 
20,650

 
21,967

 
2,134

 
24,101

Income tax expense
$
5,769

 
$
2,236

 
$
8,005

 
$
6,375

 
$
2,134

 
$
8,509

Overhead ratio
75
%
 
NM

 
73
%
 
66
%
 
NM

 
64
%
(a)
Predominantly recognized in CIB and CB business segments and Corporate/Private Equity.

16

Tangible common equity (“TCE”), ROTCE, TBVS, Tier 1 common under Basel I and III rules, and the supplementary leverage ratio (“SLR”) are each non-GAAP financial measures. TCE represents the Firm’s common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less goodwill and identifiable intangible assets (other than MSRs), net of related deferred tax liabilities. ROTCE measures the Firm’s earnings as a percentage of average TCE. TBVS represents the Firm’s tangible common equity divided by period-end common shares. Tier 1 common
 
under Basel I and III rules, and SLR are used by management, bank regulators, investors and analysts to assess and monitor the Firm’s capital position and liquidity. TCE, ROTCE, and TBVS are meaningful to the Firm, as well as analysts and investors, in assessing the Firm’s use of equity. For additional information on Tier 1 common under Basel I
and III, see Regulatory capital on pages 61–65 of this Form10-Q. All of the aforementioned measures are useful to the Firm, as well as analysts and investors, in facilitating comparisons of the Firm with competitors.

Average tangible common equity
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share and ratio data)
 
2013
 
2012
 
2013
 
2012
Common stockholders’ equity
 
$
197,232

 
$
186,590

 
$
196,425

 
$
181,791

Less: Goodwill
 
48,073

 
48,158

 
48,106

 
48,178

Less: Certain identifiable intangible assets
 
1,878

 
2,729

 
2,021

 
2,928

Add: Deferred tax liabilities(a)
 
2,904

 
2,765

 
2,867

 
2,741

Tangible common equity
 
$
150,185

 
$
138,468

 
$
149,165

 
$
133,426

 
 
 
 
 
 
 
 
 
Return on tangible common equity (“ROTCE”)
 
(2
)%
 
16
%
 
11
%
 
15
%
Tangible book value per share
 
$
39.51

 
$
37.53

 
$
39.51

 
$
37.53

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

Core net interest income data(a)
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except rates)
2013
2012
 
Change
 
2013
2012
 
Change
Net interest income – managed basis(b)(c)
$
10,956

$
11,176

 
(2
)%
 
$
32,920

$
34,354

 
(4
)%
Less: Market-based net interest income
1,109

1,386

 
(20
)
 
3,886

4,300

 
(10
)
Core net interest income(b)
$
9,847

$
9,790

 
1

 
$
29,034

$
30,054

 
(3
)
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
1,997,413

$
1,829,780

 
9

 
$
1,958,359

$
1,831,633

 
7

Less: Average market-based earning assets
493,780

497,469

 
(1
)
 
505,062

497,832

 
1

Core average interest-earning assets
$
1,503,633

$
1,332,311

 
13
%
 
$
1,453,297

$
1,333,801

 
9
%
Net interest yield on interest-earning assets – managed basis
2.18
%
2.43
%
 
 
 
2.25
%
2.51
%
 
 
Net interest yield on market-based activities
0.89

1.11

 
 
 
1.03

1.15

 
 
Core net interest yield on core average interest-earning assets
2.60
%
2.92
%
 
 
 
2.67
%
3.01
%
 
 
(a)
Includes core lending, investing and deposit-raising activities on a managed basis across the Firm’s business segments and Corporate/Private Equity; excludes the market-based activities within the CIB.
(b)
Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(c)
For a reconciliation of net interest income on a reported and managed basis, see reconciliation from the Firm’s reported U.S. GAAP results to managed basis on page 16 of this Form 10-Q.

17

Quarterly and year-to-date results
Core net interest income increased by $57 million to $9.8 billion and decreased by $1.0 billion to $29.0 billion for the three and nine months ended September 30, 2013, respectively, compared with the prior year periods. Core average interest-earning assets increased by $171.3 billion to $1,503.6 billion and by $119.5 billion to $1,453.3 billion for the three and nine months ended September 30, 2013, respectively, compared with the prior year periods. The slight increase in core net interest income from the third quarter of 2012 primarily reflected the impact of higher investment securities yield, lower interest expense on long-term debt and on other liabilities, largely offset by lower loan yields due to competitive pressures and replacement of higher yielding loans with lower yielding loans.
The decrease from the nine months ended September 30, 2012 reflected the impact of the aforementioned lower loan yields, the impact of low interest rates on investment securities yield and reinvestment opportunities, partially offset by lower long-term debt costs, primarily due to a change in funding mix, and lower deposit costs. The increase in average interest-earning assets in both periods was primarily driven by higher deposits with banks. The core net interest yield decreased by 32 basis points to 2.60% for the three months ended September 30, 2013, primarily driven by a significant increase in deposits with banks and lower loan yields, partially offset by higher investment securities yield and lower interest expense on long-term debt. For the nine months ended September 30, 2013, core net interest yield decreased by 34 basis points to 2.67%, primarily driven by a significant increase in deposits with banks and lower loan yields, partially offset by the impact of lower long-term debt costs and deposit rates.
 
Net income and earnings per share excluding certain items
Presented below are the Firm’s net income and earnings per share excluding the aftertax impact of reductions in the allowance for loan losses and litigation expense in Corporate. These measures should be viewed in addition to, and not as a substitute for, the Firm’s reported results. Management believes this information helps investors understand the effect of these items on reported results and provides an additional presentation of the Firm’s performance. The table below provides a reconciliation of reported results to these non-GAAP measures.
Three months ended
September 30, 2013
In millions

Per-share amounts

Reported: Net income
$
(380
)
$
(0.17
)
Adjustments:
 
 
Corporate litigation expense
7,200

1.85

Reduction in allowance for loan losses
(992
)
(0.26
)
As adjusted: Net income
$
5,828

$
1.42

Other financial measures
The Firm also discloses the allowance for loan losses to total retained loans, excluding residential real estate purchased credit-impaired loans. For a further discussion of this credit metric, see Allowance for credit losses on pages 94–96 of this Form 10-Q.



18

BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are four major reportable business segments – Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking and Asset Management. In addition, there is a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP financial measures, on pages 16–18 of this Form 10-Q.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies.
 
For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on pages 78–79 of JPMorgan Chase’s 2012 Annual Report. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Business segment capital allocation changes
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, regulatory capital requirements (as estimated under Basel III) and economic risk measures. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2013, the Firm further refined the capital allocation framework to align it with the line of business structure described above, which had become effective in the fourth quarter of 2012. The increase in equity levels for the lines of businesses is largely driven by regulatory guidance on Basel III requirements, principally for CIB and CIO, and by anticipated business growth. For further information about these capital changes, see Line of business equity on page 65 of this Form 10-Q.




19

Segment Results – Managed Basis
The following table summarizes the business segment results for the periods indicated.
Three months ended September 30,
Total net revenue(a)
 
Total Noninterest expense(a)
 
Pre-provision profit/(loss)(a)
(in millions)
2013
2012
Change

 
2013
2012
Change
 
2013
2012
Change
Consumer & Community Banking
$
11,082

$
12,720

(13
)%
 
$
6,867

$
6,956

(1
)%
 
$
4,215

$
5,764

(27
)%
Corporate & Investment Bank
8,189

8,360

(2
)
 
4,999

5,350

(7
)
 
3,190

3,010

6

Commercial Banking
1,725

1,732

—

 
661

601

10

 
1,064

1,131

(6
)
Asset Management
2,763

2,459

12

 
2,003

1,731

16

 
760

728

4

Corporate/Private Equity
121

592

(80
)
 
9,096

733

NM
 
(8,975
)
(141
)
NM
Total
$
23,880

$
25,863

(8
)%
 
$
23,626

$
15,371

54
 %
 
$
254

$
10,492

(98
)%
Three months ended September 30,
Provision for credit losses
 
Net income/(loss)(a)
 
Return on common equity
(in millions, except ratios)
2013
2012
Change
 
2013
2012
Change
 
2013
2012
Consumer & Community Banking
$
(267
)
$
1,862

NM
 
$
2,702

$
2,355

15
 %
 
23
 %
22
%
Corporate & Investment Bank
(218
)
(60
)
(263
)%
 
2,240

1,992

12

 
16

17

Commercial Banking
(41
)
(16
)
(156
)
 
665

690

(4
)
 
20

29

Asset Management
—

14

NM
 
476

443

7

 
21

25

Corporate/Private Equity 
(17
)
(11
)
(55
)%
 
(6,463
)
228

NM
 
NM
NM
Total
$
(543
)
$
1,789

NM
 
$
(380
)
$
5,708

NM
 
(1
)%
12
%

Nine months ended September 30,
Total net revenue(a)
 
Total Noninterest expense(a)
 
Pre-provision profit/(loss)(a)
(in millions)
2013
2012
Change

 
2013
2012
Change
 
2013
2012
Change
Consumer & Community Banking
$
34,712

$
37,522

(7
)%
 
$
20,521

$
20,838

(2
)%
 
$
14,191

$
16,684

(15
)%
Corporate & Investment Bank
28,205

26,684

6

 
16,852

16,854

—

 
11,353

9,830

15

Commercial Banking
5,126

5,080

1

 
1,957

1,790

9

 
3,169

3,290

(4
)
Asset Management
8,141

7,193

13

 
5,771

5,161

12

 
2,370

2,032

17

Corporate/Private Equity
(498
)
(967
)
49

 
9,814

4,039

143

 
(10,312
)
(5,006
)
(106
)
Total
$
75,686

$
75,512

—
 %
 
$
54,915

$
48,682

13
 %
 
$
20,771

$
26,830

(23
)%
Nine months ended September 30,
Provision for credit losses
 
Net income/(loss)(a)
 
Return on common equity
(in millions, except ratios)
2013
2012
Change
 
2013
2012
Change
 
2013
2012
Consumer & Community Banking
$
263

$
2,683

(90
)%
 
$
8,377

$
8,562

(2
)%
 
24
%
27
%
Corporate & Investment Bank
(213
)
(34
)
NM
 
7,688

6,401

20

 
18

18

Commercial Banking
42

44

(5
)
 
1,882

1,954

(4
)
 
19

27

Asset Management
44

67

(34
)
 
1,463

1,220

20

 
22

23

Corporate/Private Equity 
(15
)
(31
)
52

 
(6,765
)
(2,545
)
(166
)
 
NM
NM
Total
$
121

$
2,729

(96
)%
 
$
12,645

$
15,592

(19
)%
 
8
%
11
%
(a)
In the second quarter of 2013, the 2012 data for certain income statement line items were revised to reflect the transfer of certain functions and staff from Corporate/Private Equity to CCB, effective January 1, 2013.

20


CONSUMER & COMMUNITY BANKING
For a discussion of the business profile on CCB, see pages 80–91 of JPMorgan Chase’s 2012 Annual Report and the Introduction on page 4 of this Form 10-Q.
Selected income statement data(a)
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except ratios)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Revenue
 
 
 
 
 
 
 
 
 
 
 
Lending- and deposit-related fees
$
780

 
$
797

 
(2
)%
 
$
2,230

 
$
2,332

 
(4
)%
Asset management, administration and commissions
515

 
523

 
(2
)
 
1,609

 
1,598

 
1

Mortgage fees and related income
839

 
2,376

 
(65
)
 
4,108

 
6,649

 
(38
)
Card income
1,460

 
1,376

 
6

 
4,267

 
3,998

 
7

All other income
367

 
353

 
4

 
1,074

 
1,123

 
(4
)
Noninterest revenue
3,961

 
5,425

 
(27
)
 
13,288

 
15,700

 
(15
)
Net interest income
7,121

 
7,295

 
(2
)
 
21,424

 
21,822

 
(2
)
Total net revenue
11,082

 
12,720

 
(13
)
 
34,712

 
37,522

 
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
(267
)
 
1,862

 
NM
 
263

 
2,683

 
(90
)
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
Compensation expense
2,949

 
2,947

 
 —
 
8,921

 
8,780

 
2

Noncompensation expense
3,817

 
3,872

 
(1
)
 
11,282

 
11,630

 
(3
)
Amortization of intangibles
101

 
137

 
(26
)
 
318

 
428

 
(26
)
Total noninterest expense
6,867

 
6,956

 
(1
)
 
20,521

 
20,838

 
(2
)
Income before income tax expense
4,482

 
3,902

 
15

 
13,928

 
14,001

 
(1
)
Income tax expense
1,780

 
1,547

 
15

 
5,551

 
5,439

 
2

Net income
$
2,702

 
$
2,355

 
15
%
 
$
8,377

 
$
8,562

 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
Financial ratios
 
 
 
 
 
 
 
 
 
 
 
Return on common equity
23
%
 
22
%
 
 
 
24
%
 
27
%
 
 
Overhead ratio
62

 
55

 
 
 
59

 
56

 
 
(a)
In the second quarter of 2013, the 2012 data for certain income statement line items (predominantly net interest income, compensation and noncompensation expense) were revised to reflect the transfer of certain technology and operations, as well as real estate-related functions and staff, from Corporate/Private Equity to CCB, effective January 1, 2013.
Quarterly results
Consumer & Community Banking net income was $2.7 billion, an increase of $347 million, or 15%, compared with the prior year, due to lower provision for credit losses and noninterest expense, predominantly offset by lower net revenue.
Net revenue was $11.1 billion, a decrease of $1.6 billion, or 13%, compared with the prior year. Net interest income was $7.1 billion, down $174 million, or 2%, driven by lower deposit margins, spread compression in Credit Card and Auto and lower loan balances due to portfolio runoff in Mortgage Banking, largely offset by higher deposit balances. Noninterest revenue was $4.0 billion, a decrease of $1.5 billion, or 27%, driven by lower mortgage fees and related income.
The provision for credit losses was a benefit of $267 million, compared with a provision for credit losses of $1.9 billion in the prior year. The current-quarter provision reflected a $1.6 billion reduction in the allowance for loan losses and total net charge-offs of $1.3 billion. The prior-year provision reflected a $955 million reduction in the allowance for loan losses and total net charge-offs of $2.8
 
billion. Prior-year total net charge-offs included $880 million of incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. For more information, including net charge-off amounts and rates, see Consumer Credit Portfolio on pages 75–85 of this Form 10-Q.
Noninterest expense was $6.9 billion, a decrease of $89 million, or 1%, from the prior year, driven by lower mortgage servicing expense, partially offset by continued investments in Chase Private Client expansion, and costs related to the control agenda.
Year-to-date results
Consumer & Community Banking net income was $8.4 billion, a decrease of $185 million, or 2%, compared with the prior year, due to lower net revenue, offset by lower provision for credit losses and lower noninterest expense.
Net revenue was $34.7 billion, a decrease of $2.8 billion, or 7%, compared with the prior year. Net interest income was $21.4 billion, down $398 million, or 2%, driven by lower deposit margins, lower loan balances due to portfolio runoff in Mortgage Banking, spread compression in Credit Card and Auto and lower average credit card loan balances,


21


largely offset by higher deposit balances and the impact of lower revenue reversals associated with lower net charge-offs in Credit Card. Noninterest revenue was $13.3 billion, a decrease of $2.4 billion, or 15%, driven by lower mortgage fees and related income.
The provision for credit losses was $263 million, compared with $2.7 billion in the prior year. The current-year provision reflected a $4.2 billion reduction in the allowance for loan losses and total net charge-offs of $4.5 billion.
The prior-year provision reflected a $4.8 billion reduction in the allowance for loan losses and total net charge-offs of $7.5 billion. Prior-year total net charge-offs included
 
$880 million of incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy.
Noninterest expense was $20.5 billion, a decrease of $317 million, or 2%, from the prior year, driven by lower mortgage servicing expense and lower remediation expense, inclusive of a current-period charge, related to an exited non-core product, largely offset by continued investments in the business, and costs related to the control agenda.


Selected metrics
 
 
 
 
 
 
 
 
 
 
 
As of or for the three
months ended September 30,
 
As of or for the nine
months ended September 30,
(in millions, except headcount)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Selected balance sheet data (period-end)(a)
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
451,166

 
$
463,602

 
(3
)%
 
$
451,166

 
$
463,602

 
(3
)%
Loans:
 
 
 
 
 
 
 
 
 
 
 
Loans retained
390,345

 
402,431

 
(3
)
 
390,345

 
402,431

 
(3
)
Loans held-for-sale and loans at fair value(b)
10,758

 
15,356

 
(30
)
 
10,758

 
15,356

 
(30
)
Total loans
401,103

 
417,787

 
(4
)
 
401,103

 
417,787

 
(4
)
Deposits
458,867

 
422,101

 
9

 
458,867

 
422,101

 
9

Equity
46,000

 
43,000

 
7

 
46,000

 
43,000

 
7

Selected balance sheet data (average)(a)
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
453,881

 
$
463,812

 
(2
)
 
$
458,315

 
$
469,303

 
(2
)
Loans:
 
 
 
 
 
 
 
 
 
 
 
Loans retained
390,865

 
404,772

 
(3
)
 
393,616

 
411,165

 
(4
)
Loans held-for-sale and loans at fair value(b)
14,127

 
17,988

 
(21
)
 
17,810

 
17,637

 
1

Total loans
404,992

 
422,760

 
(4
)
 
411,426

 
428,802

 
(4
)
Deposits
456,940

 
416,686

 
10

 
450,677

 
409,889

 
10

Equity
46,000

 
43,000

 
7

 
46,000

 
43,000

 
7

 
 
 
 
 
 
 
 
 
 
 
 
Headcount(a)
156,064

 
165,179

 
(6
)%
 
156,064

 
165,179

 
(6
)%
(a)
In the second quarter of 2013, the 2012 data for certain balance sheet line items (predominantly total assets) as well as headcount were revised to reflect the transfer of certain technology and operations, as well as real estate-related functions and staff, from Corporate/Private Equity to CCB, effective January 1, 2013.
(b)
Predominantly consists of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets and Condensed Average Balance Sheets.

22


Selected metrics
 
 
 
 
 
 
 
 
 
 
 
As of or for the three months ended September 30,
 
As of or for the nine months ended September 30,
(in millions, except ratios and where otherwise noted)
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Credit data and quality statistics
 
 
 
 
 
 
 
 
 
 
 
Net charge-offs