JP Morgan Chase 2012 Annual Report Download - page 66

Management’s discussion and analysis
76 JPMorgan Chase & Co./2012 Annual Report
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
188–192 of this Annual Report. 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.
2012 2011 2010
Year ended
December 31,
(in millions, except ratios)
Reported
Results
Fully tax-
equivalent
adjustments(a)
Managed
basis
Reported
Results
Fully tax-
equivalent
adjustments(a)
Managed
basis
Reported
Results
Fully tax-
equivalent
adjustments(a)
Managed
basis
Other income $ 4,258 $ 2,116 $ 6,374 $ 2,605 $ 2,003 $ 4,608 $ 2,044 $ 1,745 $ 3,789
Total noninterest revenue 52,121 2,116 54,237 49,545 2,003 51,548 51,693 1,745 53,438
Net interest income 44,910 743 45,653 47,689 530 48,219 51,001 403 51,404
Total net revenue 97,031 2,859 99,890 97,234 2,533 99,767 102,694 2,148 104,842
Pre-provision profit 32,302 2,859 35,161 34,323 2,533 36,856 41,498 2,148 43,646
Income before income tax expense 28,917 2,859 31,776 26,749 2,533 29,282 24,859 2,148 27,007
Income tax expense 7,633 2,859 10,492 7,773 2,533 10,306 7,489 2,148 9,637
Overhead ratio 67% NM 65% 65% NM 63% 60% NM 58%
(a) Predominantly recognized in CIB and CB business segments and Corporate/Private Equity.
Tangible common equity (“TCE”), ROTCE, tangible book
value per share (“TBVS”), and Tier 1 common under Basel I
and III rules are each non-GAAP financial measures. TCE
represents the Firm’s common stockholders’ equity (i.e.,
total stockholders’ equity less preferred stock) less goodwill
and identifiable intangible assets (other than MSRs), net of
related deferred tax liabilities. ROTCE measures the Firm’s
earnings as a percentage of TCE. TBVS represents the Firm’s
tangible common equity divided by period-end common
shares. Tier 1 common under Basel I and III rules are used
by management, along with other capital measures, to
assess and monitor the Firm’s capital position. TCE, ROTCE,
and TBVS are meaningful to the Firm, as well as analysts
and investors, in assessing the Firm’s use of equity. For
additional information on Tier 1 common under Basel I and
III, see Regulatory capital on pages 117–120 of this Annual
Report. All of the aforementioned measures are useful to
the Firm, as well as analysts and investors, in facilitating
comparison of the Firm with competitors.
Calculation of certain U.S. GAAP and non-GAAP metrics
The table below reflects the formulas used to calculate both the
following U.S. GAAP and non-GAAP measures.
Return on common equity
Net income* / Average common stockholders’ equity
Return on tangible common equity(a)
Net income* / Average tangible common equity
Return on assets
Reported net income / Total average assets
Return on risk-weighted assets
Annualized earnings / Average risk-weighted assets
Overhead ratio
Total noninterest expense / Total net revenue
* Represents net income applicable to common equity
(a) The Firm uses ROTCE, a non-GAAP financial measure, to evaluate its
use of equity and to facilitate comparisons with competitors.
Refer to the following table for the calculation of average tangible
common equity.