Selected income statement data
Year ended December 31,
(in millions, except ratios) 2013 2012 2011
Revenue
Mortgage fees and related
income $ 5,195 $ 8,680 $ 2,714
All other income 283 475 490
Noninterest revenue 5,478 9,155 3,204
Net interest income 4,548 4,808 5,324
Total net revenue 10,026 13,963 8,528
Provision for credit losses (2,681) (490) 3,580
Noninterest expense 7,602 9,121 8,256
Income/(loss) before income
tax expense/(benefit) 5,105 5,332 (3,308) Net income/(loss) $ 3,082 $ 3,341 $ (2,138)
Return on equity 16% 19% (14)%
Overhead ratio 76 65 97
Equity (period-end and average) $ 19,500 $ 17,500 $15,500
2013 compared with 2012
Mortgage Banking net income was $3.1 billion, a decrease of $259 million, or 8%, compared with the prior year, driven by lower net revenue, predominantly offset by a higher benefit from the provision for credit losses and lower noninterest expense.
Net revenue was $10.0 billion, a decrease of $3.9 billion compared with the prior year. Net interest income was $4.5 billion, a decrease of $260 million, or 5%, driven by lower loan balances due to net portfolio runoff. Noninterest revenue was $5.5 billion, a decrease of $3.7 billion, driven by lower mortgage fees and related income.
The provision for credit losses was a benefit of $2.7 billion, compared with a benefit of $490 million in the prior year.
The current year reflected a $3.8 billion reduction in the allowance for loan losses due to continued improvement in home prices and delinquencies. The prior year included a
$3.9 billion reduction in the allowance for loan losses.
Noninterest expense was $7.6 billion, a decrease of $1.5 billion, or 17%, from the prior year, due to lower servicing expense, partially offset by higher non-MBS related legal expense in Mortgage Production.
2012 compared with 2011
Mortgage Banking net income was $3.3 billion, compared with a net loss of $2.1 billion in the prior year. The increase was driven by higher net revenue and lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $14.0 billion, up $5.4 billion, or 64%, compared with the prior year. Net interest income was $4.8 billion, down $516 million, or 10%, resulting from lower loan balances due to net portfolio runoff. Noninterest revenue was $9.2 billion, up $6.0 billion compared with the prior year, driven by higher mortgage fees and related income.
The provision for credit losses was a benefit of $490 million, compared with a provision expense of $3.6 billion in the prior year. The current year reflected a $3.85 billion reduction in the allowance for loan losses due to improved delinquency trends and lower estimated losses.
Noninterest expense was $9.1 billion, an increase of $865 million, or 10%, compared with the prior year, driven by higher production expense reflecting higher volumes, partially offset by lower costs related to mortgage-related matters.
Management’s discussion and analysis
90 JPMorgan Chase & Co./2013 Annual Report
Functional results
Year ended December 31,
(in millions, except ratios) 2013 2012 2011 Mortgage Production
Production revenue $ 2,673 $ 5,783 $ 3,395
Production-related net interest
& other income 909 787 840
Production-related revenue, excluding repurchase
(losses)/benefits 3,582 6,570 4,235
Production expense(a) 3,088 2,747 1,895
Income, excluding repurchase (losses)/
benefits 494 3,823 2,340
Repurchase (losses)/benefits 331 (272) (1,347) Income before income tax
expense 825 3,551 993
Mortgage Servicing
Loan servicing revenue 3,552 3,772 4,134
Servicing-related net interest &
other income 411 407 390
Servicing-related revenue 3,963 4,179 4,524 Changes in MSR asset fair value
due to collection/realization of
expected cash flows (1,094) (1,222) (1,904) Default servicing expense 2,069 3,707 3,814
Core servicing expense 904 1,033 1,031
Income/(loss), excluding MSR
risk management (104) (1,783) (2,225)
MSR risk management, including related net interest
income/(expense) (268) 616 (1,572)
Income/(loss) before income
tax expense/(benefit) (372) (1,167) (3,797) Real Estate Portfolios
Noninterest revenue (209) 43 38
Net interest income 3,721 4,049 4,554
Total net revenue 3,512 4,092 4,592
Provision for credit losses (2,693) (509) 3,575
Noninterest expense 1,553 1,653 1,521
Income/(loss) before income
tax expense/(benefit) 4,652 2,948 (504) Mortgage Banking income/(loss)
before income tax expense/
(benefit) $ 5,105 $ 5,332 $ (3,308)
Mortgage Banking net income/
(loss) $ 3,082 $ 3,341 $ (2,138)
Overhead ratios
Mortgage Production 79% 43% 65%
Mortgage Servicing 114 133 462
Real Estate Portfolios 44 40 33
(a) Includes provision for credit losses associated with Mortgage Production.
Selected income statement data
Year ended December 31,
(in millions) 2013 2012 2011
Supplemental mortgage fees and related income details Net production revenue:
Production revenue $ 2,673 $ 5,783 $ 3,395
Repurchase (losses)/benefits 331 (272) (1,347)
Net production revenue 3,004 5,511 2,048
Net mortgage servicing revenue:
Operating revenue:
Loan servicing revenue 3,552 3,772 4,134
Changes in MSR asset fair value due to collection/
realization of expected
cash flows (1,094) (1,222) (1,904)
Total operating revenue 2,458 2,550 2,230 Risk management:
Changes in MSR asset fair value due to market interest
rates and other(a) 2,119 (587) (5,390)
Other changes in MSR asset fair value due to other inputs and assumptions in
model(b) (511) (46) (1,727)
Changes in derivative fair
value and other (1,875) 1,252 5,553
Total risk management (267) 619 (1,564)
Total net mortgage servicing
revenue 2,191 3,169 666
Mortgage fees and related
income $ 5,195 $ 8,680 $ 2,714
(a) Represents both the impact of changes in estimated future prepayments due to changes in market interest rates, and the difference between actual and expected prepayments.
(b) Represents the aggregate impact of changes in model inputs and assumptions such as projected cash flows (e.g. cost to service), discount rates and changes in prepayments other than those attributable to changes in market interest rates (e.g. changes in prepayments due to changes in home prices).
JPMorgan Chase & Co./2013 Annual Report 91 Net production revenue includes net gains or losses on
originations and sales of mortgage loans, other production-related fees and losses production-related to the repurchase of previously-sold loans.
Net mortgage servicing revenue includes the following components:
(a) Operating revenue predominantly represents the return on Mortgage Servicing’s MSR asset and includes:
– Actual gross income earned from servicing third-party mortgage loans, such as contractually specified servicing fees and ancillary income; and
– The change in the fair value of the MSR asset due to the collection or realization of expected cash flows.
(b) Risk management represents the components of
Mortgage Servicing’s MSR asset that are subject to ongoing risk management activities, together with derivatives and other instruments used in those risk management activities Mortgage origination channels comprise the following:
Retail – Borrowers who buy or refinance a home through direct contact with a mortgage banker employed by the Firm using a branch office, the Internet or by phone. Borrowers are
frequently referred to a mortgage banker by a banker in a Chase branch, real estate brokers, home builders or other third parties.
Wholesale – Includes loans guaranteed by the U.S. Department of Agriculture under its Section 502 Guaranteed Loan program that serves low-and-moderate income families in small rural communities.
Correspondent – Banks, thrifts, other mortgage banks and other financial institutions that sell closed loans to the Firm.
2013 compared with 2012
Mortgage Production pretax income was $825 million, a decrease of $2.7 billion from the prior year, reflecting lower margins, lower volumes and higher legal expense, partially offset by a benefit in repurchase losses. Production-related revenue, excluding repurchase losses, was $3.6 billion, a decrease of $3.0 billion, or 45%, from the prior year, largely reflecting lower margins and lower volumes from rising rates. Production expense was $3.1 billion, an increase of $341 million from the prior year, due to higher non-MBS related legal expense and higher compensation-related expense. Repurchase losses for the current year reflected a benefit of $331 million, compared with repurchase losses of $272 million in the prior year. The current year reflected a reduction in repurchase liability largely as a result of the settlement with the GSEs. For further information, see Mortgage repurchase liability on pages 78–79 of this Annual Report.
Mortgage Servicing pretax loss was $372 million,
compared with a pretax loss of $1.2 billion in the prior year, driven by lower expense, partially offset by mortgage servicing rights (“MSR”) risk management loss. Mortgage net servicing-related revenue was $2.9 billion, a decrease of $88 million. MSR risk management was a loss of $268 million, compared with income of $616 million in the prior year, driven by the net impact of various changes in model inputs and assumptions. See Note 17 on pages 299–304 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges.
Servicing expense was $3.0 billion, a decrease of $1.8 billion from the prior year, reflecting lower costs associated with the Independent Foreclosure Review and lower servicing headcount.
Real Estate Portfolios pretax income was $4.7 billion, up
$1.7 billion from the prior year, due to a higher benefit from the provision for credit losses, partially offset by lower net revenue. Net revenue was $3.5 billion, a decrease of
$580 million, or 14%, from the prior year. This decrease was due to lower net interest income, resulting from lower loan balances due to net portfolio runoff, and lower noninterest revenue due to higher loan retention. The provision for credit losses was a benefit of $2.7 billion, compared with a benefit of $509 million in the prior year.
The current-year provision reflected a $3.8 billion reduction in the allowance for loan losses, $2.3 billion from the non credit-impaired allowance and $1.5 billion from the purchased credit-impaired allowance, reflecting continued improvement in home prices and delinquencies. The prior-year provision included a $3.9 billion reduction in the allowance for loan losses from the non credit-impaired allowance. Net charge-offs were $1.1 billion, compared with
$3.3 billion in the prior year. Prior-year total net charge-offs included $744 million of incremental charge-charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. See
Consumer Credit Portfolio on pages 120–129 of this Annual Report for the net charge-off amounts and rates.
Noninterest expense was $1.6 billion, a decrease of $100 million, or 6%, compared with the prior year, driven by lower foreclosed asset expense due to lower foreclosure inventory, largely offset by higher FDIC-related expense.
2012 compared with 2011
Mortgage Production pretax income was $3.6 billion, an increase of $2.6 billion compared with the prior year.
Mortgage production-related revenue, excluding repurchase losses, was $6.6 billion, an increase of $2.3 billion, or 55%, from the prior year. These results reflected wider margins, driven by favorable market conditions, and higher volumes due to historically low interest rates and the Home Affordable Refinance Programs (“HARP”). Production expense, including credit costs, was $2.7 billion, an
increase of $852 million, or 45%, reflecting higher volumes and additional litigation costs. Repurchase losses were
$272 million, compared with $1.3 billion in the prior year.
The current-year reflected a reduction in the repurchase liability of $683 million compared with a build of $213 million in the prior year, primarily driven by improved cure rates on Agency repurchase demands and lower
outstanding repurchase demand pipeline. For further information, see Mortgage repurchase liability on pages 78–
79 of this Annual Report.
Mortgage Servicing reported a pretax loss of $1.2 billion, compared with a pretax loss of $3.8 billion in the prior year.
Mortgage servicing revenue, including amortization, was
$3.0 billion, an increase of $337 million, or 13%, from the
Management’s discussion and analysis
92 JPMorgan Chase & Co./2013 Annual Report
prior year, driven by lower mortgage servicing rights (“MSR”) asset amortization expense as a result of lower MSR asset value, partially offset by lower loan servicing revenue due to the decline in the third-party loans serviced.
MSR risk management income was $616 million, compared with a loss of $1.6 billion in the prior year. The prior year MSR risk management loss was driven by refinements to the valuation model and related inputs. See Note 17 on pages 299–304 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges. Servicing expense was $4.7 billion, down 2% from the prior year, but elevated in both the current and prior year primarily due to higher default servicing costs.
Real Estate Portfolios pretax income was $2.9 billion, compared with a pretax loss of $504 million in the prior year. The improvement was driven by a benefit from the provision for credit losses, reflecting the continued improvement in credit trends, partially offset by lower net revenue. Net revenue was $4.1 billion, down $500 million, or 11%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances due to net portfolio runoff. The provision for credit losses reflected a benefit of $509 million, compared with a provision expense of $3.6 billion in the prior year. The current-year provision reflected a $3.9 billion reduction in the non credit-impaired allowance for loan losses due to improved delinquency trends and lower estimated losses.
Current-year net charge-offs totaled $3.3 billion, including
$744 million of incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy, compared with
$3.8 billion in the prior year. See Consumer Credit Portfolio on pages 120–129 of this Annual Report for the net charge-off amounts and rates. Nonaccrual loans were $7.9 billion, compared with $5.9 billion in the prior year. Excluding the impact of certain regulatory guidance, nonaccrual loans would have been $4.9 billion at December 31, 2012. For more information on the reporting of Chapter 7 loans and performing junior liens that are subordinate to senior liens that are 90 days or more past due as nonaccrual, see Consumer Credit Portfolio on pages 120–129 of this Annual Report. Noninterest expense was $1.7 billion, up $132 million, or 9%, compared with the prior year due to an increase in servicing costs.
PCI Loans
Included within Real Estate Portfolios are PCI loans that the Firm acquired in the Washington Mutual transaction. For PCI loans, the excess of the undiscounted gross cash flows expected to be collected over the carrying value of the loans (the “accretable yield”) is accreted into interest income at a level rate of return over the expected life of the loans.
The net spread between the PCI loans and the related liabilities are expected to be relatively constant over time, except for any basis risk or other residual interest rate risk that remains and for certain changes in the accretable yield percentage (e.g., from extended loan liquidation periods
and from prepayments). As of December 31, 2013, the remaining weighted-average life of the PCI loan portfolio is expected to be 8 years. The loan balances are expected to decline more rapidly over the next three years as the most troubled loans are liquidated, and more slowly thereafter as the remaining troubled borrowers have limited refinancing opportunities. Similarly, default and servicing expense are expected to be higher in the earlier years and decline over time as liquidations slow down.
For further information, see Note 14, PCI loans, on pages 274–276 of this Annual Report.