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JPMorgan Chase's CEO Discusses Q1 2013 Results - Earnings Call Transcript

Executives

Marianne Lake – Chief Financial Officer

James Dimon – Chairman and Chief Executive Officer

Analysts

John McDonald – Sanford C. Bernstein & Co.

Glenn Schorr – Nomura Securities (US)

Betsy Graseck – Morgan Stanley

Brennan Hawken – UBS

L. Erika Penala – Bank of America Merrill Lynch

Mike Mayo – Credit Agricole Securities

Matthew Burnell – Wells Fargo Securities, LLC

Moshe Orenbuch – Credit Suisse - North America

Matt O’Connor – Deutsche Bank Research

Guy Moszkowski – Autonomous Research LLP

Gerard Cassidy – RBC Capital Markets

Paul Miller – FBR Capital Markets

Nancy Bush – NAB Research, LLC

Draft version. An edited version will be posted soon.

Operator

Good morning, ladies and gentlemen. Welcome to JPMorgan Chase’s First Quarter 2013 Earnings Call. This call is being recorded. (Operator Instructions) We will now go live to the presentation. Please stand by. At this time, I would like to turn the call over to JPMorgan Chase’s Chairman and CEO, Jamie Dimon; and Chief Financial Officer, Marianne Lake. Ms. Lake, please go ahead.

Marianne Lake

Thank you. Good morning everyone. I’m going to take you through with the presentation, which is available on our website. Please refer to the disclaimer regarding forward-looking statements at the back of the presentation.

So if you turn to Page 1, a very strong start to the year with record net income of $6.5 billion for the first quarter and record EPS of $1.59 a share, and revenue of $25.8 billion and a return on tangible common equity of 17% for the quarter. You can see on Page 1, we’ve highlighted upfront two significant items; a $650 million reserve release in mortgage and $500 million reserve release in card.

And as I go through the presentation, I’ll also be highlighting for you a number of smaller items some positive and some negatives. We continue to maintain the leadership positions we’ve highlighted at Investor Day; number one, ATM Network, number two Bronze Network, number two mortgage originator, number one credit card issuer in the U.S., and number one ranking in global IDCs.

And we’re on track to deliver against our expense target for the year. On a reported basis, total loans for the company were at 1% with core loan growth excluding one-off up 5%. Favorable credit performance continued in our wholesale and core consumer portfolios with low levels of delinquencies and charge-offs.

As the housing market recovers, losses in the real estate portfolio continue to improve and this quarter we saw 30+ delinquency declined by 14%, and severities improve. So if you turn to Page 3 for a brief capital update, we ended the quarter with Basel I and Basel III Tier I common of $143 billion and $146 billion respectively, both up from last quarter.

Our Basel I ratio is 10.2%, which reflects the impact of new market risk builds that went into effect in January and the 10.2% compares to a ratio of 9.9%; the last quarter is measured on the same basis.

Our Basel III ratio of 8.9% is up from 8.7% last quarter and reflects the full impact of the rules, we understand them. And as you know we don’t put forward the impact of passive run-off or model-enhancements, which we expect to deliver around 100 basis points of benefit this year and next.

And we still expect to reach our Basel III Tier 1 common target of 9.5% by the end of this year, including the capacities continued share repurchases. And we’ve also made progress this quarter and are on track for full LCR compliance this year. So in the bullet to the bottom of the Page, the board intends to increase the quarterly dividend to $0.38 a share effective in the second quarter and we repurchased $2.6 billion of common equity in the first quarter with authorization to repurchase an additional $6 billion over the next four quarters.

Returning to the businesses, on Page 4, we have consumer and community banking. The combined consumer businesses generated $2.6 billion of net income for the quarter and $11.6 billion of revenue with an ROE of 23% on new allocated capital. And as we go through the presentation, all of the current quarter ROEs are calculated based upon the new allocated capital numbers that we showed you at Investor Day.

Overall, revenue was down year-on-year and quarter-on-quarter driven by mortgage banking, quarter-on-quarter the reduction reflects the continuation of production margin compression. Credit costs reflect the releases in both mortgage banking and card that we referred to on Page 1.

And core expenses were flattish both year-on-year and quarter-over-quarter normalizing prior period. We remain on track to deliver on our expense guidance and head count in the consumer bank and mortgage business was down over 3,000 heads this quarter, a function of the evolution in the branch operating model and the completion of the IFR work.

We ended the quarter with over 5,600 branches and closed 19,000 ATMs and as of today, we have over 1,400 Chase Private Client locations.

On Page 5, Consumer & Business Banking, net income was $641 million and an ROE of 24%. Our net revenue of $4.2 billion is down 2% year-on-year and quarter-on-quarter. The sequential decline is due to fewer days in the quarter for net interest income and seasonality in non-interest revenue.

We continue to see pressure on deposit margins, eight basis points down in the quarter and 32 basis points year-over-year, but this continue to be largely offset by the project growth of 11% year-over-year, which we believe is significantly faster than the industry. And this quarter we had the lowest customer attritional record, which reflects the great progress that we are making on the customer experience.

And we were just named winner of four TNS Choice Award recognizing superior performance in customer acquisition, retention, satisfaction and market share with consumer and affluent banking customers, which is more than any financial institution has earned in any year.

Average Business Banking loan balances of $18.7 billion are flattish quarter-over-quarter and in the drivers you can see loan production decreased this quarter, due to softer demand and higher competitive intensity. However, the pipeline in the second quarter is looking stronger. We had record investment sales of over $9 billion up 40% year-on-year and client investment assets are up 15%, which shows that we are penetrating our customer more deeply with 70% of those sales up from 50% last year being managed money driving strong recurring revenues.

Finally on this page expenses are up year-over-year reflecting the investments that we are making in the business, including new branch builds, and a one-time cost related to a contract renegotiation.

Turning to Page 6 on mortgage banking, overall net income was $673 million and an ROE of 14%. If you look at the top of the table in the first blue highlighted items, production pretax income was $427 million, down year-over-year and sequentially driven by continued margin compression.

As we expected and as we talked about last quarter, gain on sale margins continue to come down this quarter and reached levels of around 100 basis points on a pretax basis, which compares to a normalized pretax margin in the fourth quarter of last year of around 180 basis points and was driven by a significant tightening in primary and secondary spreads as well as pricing pressure, reflecting increased capacity in the market.

Strong originations of $53 billion were up 37% year-on-year and 3% sequentially. While applications were actually down 8% from last quarter, but we continue to expect high levels of refinancing and close loan volumes in the next quarter to remain solid.

Production expense increased year-on-year on higher volumes, a net repurchase of this of $81 million in the quarter reflects a reduction in realized losses, partially offset by reserve releases. We continue to believe or adequately reserve and we do expect our releases to broadly offset losses over time.

Moving down to servicing, revenue of $778 million increased sequentially, primarily due to one time gains associated with buying, sharing and reselling certain delinquent loans out for securities. Servicing expenses of $737 million increased a small amount of final IFR cost as we round down in every quarter and also from severance; and if you back those cost out, servicing expenses were slightly lower from the $725 million normalized run rate we talked about last quarter. IFR cost now out of our run rate and we continue to expect servicing costs to reduce to $600 million by the fourth quarter of this year.

MSR risk management was a modest loss, a $142 million. The driver of the net loss is an increase in our expectations for home price appreciation this year, which is a great thing, but drove an approximate negative $400 million within the model update line in the supplement given higher prepayments.

And although there is an upfront negative in the mark of servicing assets, improvements in home prices would drive lower credit losses over time that will more than outlay this mark.

Finally on this page, Real Estate Portfolios show pretax income of $784 million, which includes net charge-off of around $450 million this quarter, and compares to a normalized fourth-quarter number of $520 million. This reflects lower delinquencies as well as lower severities as home prices improve and lead us to a release reserve of $650 million this quarter.

As you’ve seen charge-off has been steadily declining and we do expect that to continue, but at a more moderated pace. We’ve updated our guidance for you to expect quarterly net charge-offs to be at or below $400 million.

If you turn to Page 7; Card, Merchant Services & Auto; net income of $1.3 billion, up 8% year-on-year or up 33%, if you exclude the change in loan loss (inaudible) with and ROE of 33%. Revenue of $4.7 million was flat year-on-year, but down quarter-on-quarter with quarter one having seasonally lower loan balances, sales volume and merchant processing volume. Expenses were down by year-over-year and quarter-on-quarter, primarily driven by non-core expense items in the comparable period.

Net charge-offs continue to be low and we released $500 million of loan loss reserve this quarter, reflecting the continued improvement in early stage rollouts. The net charge-off rate is 3.55%, well down over 80 basis points year-over-year was up slightly quarter-on-quarter on lower loan balances. And consistent within best today, you should expect up to $1 billion of card reserve releases in the full year of 2013, including the $500 million reflected this quarter.

Year-on-year growth in sales volume was strong at 9%, and the revenue rates at 12.83% reflects strong interchange revenue and merchant processing fees, with merchant processing volumes up 15% year-on-year

And moving onto Auto, originations were up 12% year-on-year and 18% quarter-on-quarter. And why the first quarter is seasonally stronger, this growth outpaced the normal seasonal pattern. We gained share in the quarter through increased competitive positioning in prime and auto saw a strong growth with our private label manufacturing partners.

Moving onto slide 8 and 9 on the Corporate & Investment Bank. Very strong first quarter results and the results this quarter included a small DVA gain of $126 million that is a loss in the same quarter of last year of $900 million. Both of which you’ll see in the credit adjustment line item in the table.

So if you focus on the numbers excluding DVA, $2.5 billion of net income on $10 billion of revenue, down 2% year-on-year, but up 22% quarter-on-quarter, and with an ROE of 18%.

Total Banking revenue was $3 billion, up 12% year-on-year driven by higher IB fees of $1.4 billion in the quarter, up 4% year-on-year with record bond underwriting. And lending related revenue were $500 million, primarily core NII and fees on retained lending commitments, and to a lesser extent gains on positions received in loan restructuring.

Total Markets & Investor Services revenue of $7 billion, down 7% year-on-year driven by fixed income market of $4.8 billion, down 5% year-on-year, coming off of a very strong third quarter last year, and up 50% quarter-on-quarter on seasonality with continued strength in the prior franchise. The P&L impact from the remaining synthetic credit portfolio included (inaudible) with insignificant this quarter but positive.

Equity markets of $1.3 billion, down 6% year-on-year, but up 50% quarter-on-quarter. And the sequential change reflects seasonally strong equity derivatives results. With regards to Securities Services revenue of $974 million was flat year-on-year, and down slightly quarter-on-quarter.

And while a portion of this reflects the depository receipts business, which is seasonally down, the portion that reflect our custody business has grown in line with assets under custody, which were $19.3 trillion, up 8% year-on-year.

And we’re seeing positive expense trends. Year-on-year a net reduction of 2% driven by lower compensation and efficiency initiatives essentially offset this quarter by litigation expenses. If you take the DVA and the restructuring gains I mentioned as well as the litigation expense by (inaudible).

The comp/revenue ratio at DVA of 34% is in line with our guidance, and at the bottom of the drivers section you can see that our average CIB VaR continued to decline this quarter to $62 million, reflecting lower levels of risk including the continued de-risking of the synthetic credit portfolio, but also reflecting very lower levels of volatility across multiple asset classes.

So on Page 9, before I step over the page, you can see that we continue to make progress, growing our international loans and deposits. Our international loan balances were up 9% since the end of 2012 with particular strength across Asia and EMEA.

Moving on to Page 10, in the Commercial Bank; we posted our net income of nearly $600 million on $1.7 billion of revenue flat year-over-year with a return on equity of 18%. Underlying loan growth of $0.11 year-on-year includes our C&I portfolio, which grew 12% in line with the industry and our commercial real estate book, which grew 10% year-over-year significantly above the industry, driven by commercial term lending.

Quarter-over-quarter loan balances were generally flat consistent with the industry partly reflecting the fact that some demand (inaudible) pull forward into the fourth quarter, but also reflecting lower level of demand and increased competition. Loan spreads held up, while this quarter remained stable to last quarter and credit quality continues to be very strong.

Lastly here, expenses up 8% year-on-year on the continued investment in the business and increased operating expenses to commercial card.

Turning to Page 11, our Asset Management business have record net income for first quarter of $487 million up 26% year-on-year and 1% quarter-on-quarter with an ROE of 22%. 12% year-on-year revenue growth reflects an increase in management fees driven by strong long term net inflows including a record $31 billion this quarter marking the 16 th consecutive quarter of long-term net inflows.

We also had higher equity and fixed-income market, up 9% based on our business mix, and still higher performance fees driven by strong fund returns in 2012. We have record loan balances up over $20 billion driven by increases in U.S. mortgage and international loan growth.

Total AUM was close to $1.5 trillion with over $1 trillion in long-term AUM. And lastly higher head count expenses and performance related fund contributed to a 9% year-over-year expense growth, but the pretax margin of 29% also increased from 26% last year reflecting an improvement in operating leverage.

Moving on to Page 12, Corporate/Private Equity. Total net income of $260 million for the quarter and reflected a private equity net loss of $182 million including nearly $300 million of unrealized losses related to specific positions.

Treasury and CIO net income were $24 million, an included about $500 million of net securities gains offset by about $470 million of Negative NII due to low rates and limited reinvestment opportunities.

Both the private equity losses and the securities gains were more significant this quarter than usual unless it’s a positive $200 million pretax.

Finally, other corporate net income of just over $400 million increased $230 million of prior period tax adjustments. And finishing on guidance in CIO and Treasury, our guidance remains a net loss of $300 million plus or minus, and in other corporate, our guidance remains $100 million plus or minus of net income with both numbers able to vary quarter-on-quarter.

Turning to Page 13 on net interest margin, Firmwide NIM declined 3 basis points and Core NIM 2 basis points quarter-on-quarter. A number of items affected our NIM first were negative. The low rates environment continues to affect our reinvestment opportunities, and also competitive pressures continued to impact loan yields.

On the positive side, investment securities yield increased from higher mortgage backed securities income driven by slower prepayments and reduced secured financing. And lower long term debt cost reflected a change in mix.

Lastly our outlook on Page 14, we’ve covered most of these items already, but you’ll see that we’ve changed our NIM and NII guidance to put it altogether on one place, and on a consistent basis.

All numbers shown are pretax and our estimates of net NII reflecting both rate compression and volume growth. So you should expect modest NIM compression during the year with absolute levels of NII very strongly supported by growth in interesting earning assets, but overall NII expected to be down about 1% this year.

Lastly, you may have seen, we will redeem about $5 billion of outstanding trust preferred in the second quarter, and as it heads with modest one-time loss in the second quarter, but also a lower cost of debt over time.

Backing up, we had a record quarter with high quality earnings and strong underlying business performance seeing positive momentum across our businesses.

So thank you for joining us. Operator, you can open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

James Dimon

Operator?

Operator

Our first question comes from John McDonald of Sanford Bernstein.

Marianne Lake

Hi, John.

John McDonald – Sanford C. Bernstein & Co.

Good morning, Marianne. On the last point about NII outlook, what are the drivers of the strong growth in earning…

Marianne Lake

Sorry, John, we can’t hear you. Apologies John, we didn’t hear the question.

John McDonald – Sanford C. Bernstein & Co.

Can you hear me?

Marianne Lake

Yes, we can.

James Dimon

Yes.

John McDonald – Sanford C. Bernstein & Co.

Sorry about that. Can you tell me on the NII outlook, what are the drivers of the strong growth in earning assets you expect that you just mentioned on the NII page?

Marianne Lake

Yes. So we are feeling – as you’ve probably seen in the trading Investor Day and rather it’s a little bit of lower growth this quarter, we do expect to grow loans in our commercial bank loans and asset management, wholesale loans, mortgage banking. So (inaudible) [21:06] very strongly. So it’s really just the underlying business driver growth that we’ve been seeing and expect to continue.

John McDonald – Sanford C. Bernstein & Co.

Okay. On the expense outlook, you mentioned so the kind of adjusted expenses to be down about a $1 billion, what’s the base that we should look at for you to be down from, do you have that?

Marianne Lake

Yeah. So John, if I refer you back and some recollection I’ll do for you, if I refer you back to Investor Day, it’s based upon our adjusted expenses, which are defined as our expenses excluding corporate litigation and foreclosure-related matters, which in 2012 was $60 billion plus or minus, I think $60.1 billion and we’re expecting to be $59 billion this year and that’s what we’re on track to deliver.

John McDonald – Sanford C. Bernstein & Co.

And what was in the first quarter?

James Dimon

A little higher than that.

Marianne Lake

A little higher than that in the first quarter. The first quarter is seasonally high.

John McDonald – Sanford C. Bernstein & Co.

Yeah. Okay, got it. And then can you just repeat your outlook on the default servicing expense line that came down a lot this quarter nicely and you mentioned the target for the end of the year?

Marianne Lake

Yes. So the fourth quarter normalized run rate was $725 million and this quarter it’s down a little of that as you would expect given the IFR completion. We said that we expected the fourth quarter to be running at $600 million we said that at our Investor Day and we’ve been on track to do that. And we’ve also said that the long-term run rate for that part of the business would be about $325 million a quarter and that will be over the next couple of years.

John McDonald – Sanford C. Bernstein & Co.

Okay. And then the litigation dropped significantly this quarter, you said I think you said it was kind of immaterial this quarter on the litigation revision, is that right?

Marianne Lake

The litigation dropped quarter-over-quarter, clearly we had a large number last quarter on the back of IFR and we did have a litigation expenses this quarter, you will see in the supplement that was just over $300 million.

John McDonald – Sanford C. Bernstein & Co.

Okay. And the last thing is on the buybacks, you did a healthy buyback this quarter, but the share count didn’t shrink that much. Is the first quarter heavier than usual in terms of your issuance? And the question is getting at, would $2.6 billion of buybacks in other quarters be expected to shrink the share count in quarters when (inaudible) [23:08] the first quarter?

Marianne Lake

Yes, that’s right John.

John McDonald – Sanford C. Bernstein & Co.

Okay. So your issuance is more weighted towards the first, is that right?

Marianne Lake

Yes, but also remember we didn’t buyback shares in the fourth quarter or the third quarter. So there was a overall, overall net $2.6 billion to close $2.6 billion net of (inaudible) [23:26] provision.

John McDonald – Sanford C. Bernstein & Co.

Actually you can have that translates to reduction in the share count. It’s kind of offset by what you do on issuance throughout each quarter?

Marianne Lake

Yes.

John McDonald – Sanford C. Bernstein & Co.

And it was just a normal quarter of issuance, so $2.6 billion buyback would keep the share count flat. Is that the kind of ratio we might expect?

James Dimon

I think the issuance number is fairly level and consistent quarter-by-quarter. It is really based upon amortization of restricted stock and all that.

John McDonald – Sanford C. Bernstein & Co.

Okay. Okay.

James Dimon

And the buyback, the $2.6 billion, that was over the course of the quarter. So it averaged up to half of that through the quarter. So we can give you more detail on that for you early on.

John McDonald – Sanford C. Bernstein & Co.

Okay, but its steady throughout the year, that’s what I’m getting at.

James Dimon

The $6 billion will offset how much average amortization over the same 12 month period like $2 billion…

Marianne Lake

$2 billion.

James Dimon

$2 billion, okay.

Marianne Lake

(inaudible) [24:18] looking at it. We’re just being authorized to repurchase relates to employee issuance at the same point of just a little bit over $2 billion.

James Dimon

For accounting purposes.

John McDonald – Sanford C. Bernstein & Co.

$2 billion for the year and $6 billion for the year. Okay, great. Thank you.

Operator

Our next question comes from Glenn Schorr of Nomura.

Glenn Schorr – Nomura Securities (US)

Hi guys, thanks.

Marianne Lake

Hi, Glenn.

Glenn Schorr – Nomura Securities (US)

Hello there. First of all, the first deadline for compliance with central clearing came and went and it clearly didn’t have much of an impact on your first quarter FIC results. So I am curious I hear commentary in the market that a lot of clients might not be ready for either the second or the third deadlines later this year. Curious what you are expecting and if you do think it could produce any hiccup on activity levels.

James Dimon

The second one is the big one. Last June…

Marianne Lake

(inaudible).

Unidentified Company Representative

Something likes that and that’s where you have a lot of asset manager, a lot of client stuff like that. People (inaudible) use to it, so we think – I think we’ve got 30% or 40% lined up to do it.

Marianne Lake

Yes.

Unidentified Company Representative

They are still beating documents, they design you documents and so hopefully they will go smoothly. Some like to go smooth in the first round. First round is really, really large participating in swap fields et cetera. So we’ll often just wait and see.

Glenn Schorr – Nomura Securities (US)

And even on the latency if some are ready. Do you think of that as a temporary and just literally a function of processing not maybe we don’t need insurance anymore because it’s too expensive.

Unidentified Company Representative

Look I don’t, we’ve really don’t know, I would say temporary, but probably still down a little bit, because the reason you get. Some fields just say we don’t need to do this anymore, and we also know all the final rules by the way, and how the (inaudible) are going to work in bidding.

Glenn Schorr – Nomura Securities (US)

Right. Okay. [Marianne] on the RWA front, bunch of little things in here, but Basel I RWAs were up a 11% quarter-on-quarter, but Basel III were pretty much flat. I know that it some of that do with 2.5% being starting in the first quarter, but if you can help us.

Unidentified Company Representative

Yeah, since so if you take our Basel I RWA written-off about couple of hundred million dollars that’s all about the implementation the new market, which goes above the 2.5%, which is also why you still ratio go down from the 4% to 11% last quarter. So it’s really all explained by that, and our Basel III RWA reflected quarter-over-quarter with some positives and some minuses.

Unidentified Company Representative

And that was already in there potentially.

Unidentified Company Representative

Yeah, of course.

Glenn Schorr – Nomura Securities (US)

So I guess that leads into the comment you made towards the beginning on any past of runoff and model enhancements are not pulled forward in your results and I think you said it could be a better 100 basis points. Is there a dollar amount of RWA natural runoff that we should be thinking about, because obviously capital building?

Unidentified Company Representative

Yes (inaudible) and again Glenn, (inaudible) against wrong in that is bid on the slides and the firm overview in Investor Day that I think that a 100 basis points it makes to about $180 billion of RWA over the next two years, but remember the asset runoff will take place over time not will linearly by over time and the model enhancements in handy elephant lanphier and a little bit more back ended. So we’ll just have to see how that pays out. But, yes, we’re still expecting for those things to happen to off to get 100 basis points of benefit from that and that’s without the active litigation, that’s going to happen over the course of time.

Glenn Schorr – Nomura Securities (US)

Okay, last one…

Unidentified Company Representative

Just check that slides again, when you get on.

Glenn Schorr – Nomura Securities (US)

We’ll do. Last one (inaudible) I know you addressed some of this in your shareholder letter but between everything related to Basel III stress test that frank in place already and then OLA and Living wills coming online. It feels like we’re going down to past on containing to big sale. But yes, there is a steady drum beat including ground letter to change things. Just curious on where we’re headed in this and what will stop the drum beat? When it’s enough...

Unidentified Company Representative

Well I actually think you are on the line should be doing this a little bit because the reason you have companies (inaudible) there is a reason our numbers are good because we have requested Alan and clients come to us and the reason for global banks just like the reasons for community banks. I think that the real issue again, you guys do the numbers is the banking system is going so much stronger in the United States and it’s not just capital but it’s capital liquidity over side (inaudible) that people didn’t like longer been done, derivatives are going to clearing house. And the initial wave of OLA and Living Wills et cetera, those things should all work. And I have a one point to declare victory to stop (inaudible) young at this thing.

Glenn Schorr – Nomura Securities (US)

All right, thanks.

Operator

Our next question comes from Betsy Graseck of Morgan Stanley.

Betsy Graseck – Morgan Stanley

Hi, good morning.

Unidentified Company Representative

Good morning.

Betsy Graseck – Morgan Stanley

A couple of follow ups on RWA. How much of the passes mitigation was embedded within the RWA results for Basel III this quarter?

Unidentified Company Representative

So that gives us a little bit of mitigation and limited runoff and there is also some declines as we (inaudible) manufactured (inaudible) and those are offset by some other things, so it wasn’t a very big number because as I say that will leading overtime and the model enhancement which are about a half of the 100 base point benefit will be a bit back ended.

Betsy Graseck – Morgan Stanley

Okay, so really that’s going to come later this year this is what you are saying.

Unidentified Company Representative

Yeah, some of it late this year some of it next.

Betsy Graseck – Morgan Stanley

And then on the NIM and LCR there is obviously an interplay there and could you just give us an update on where you are with the LCR this quarter because your NIM declined, this quarter actually was a lot lighter than what we were expecting?

Unidentified Company Representative

Yes, so we are – we (inaudible) invested either we had a gap to be fully comply, but then we comply it by the end of the year, we did close that gap this quarter not completely buy back (inaudible) and obviously we also disclosed on the side of the HQLA our high quality liquid assets which it has a relationship based on – that’s a numerator and the denominator changes to, so think about this and we made good progress, we placed the gap (inaudible) and we are on the way to compliance.

Unidentified Company Representative

I think it’s in when she talked when [Mary] gave you the forecast going forward for NIM.

Unidentified Company Representative

Yes.

Unidentified Company Representative

That includes changing how we create more LCR.

Betsy Graseck – Morgan Stanley

Right, okay and then lastly just on the – to seek our conditional approval, can you just give us a sense because I think people were a lit bit surprised to see that you had the conditional approvals results and yet you are able to do the buyback and the dividend hike that you ask for, so I guess genuine question is what can you speak to with regard to what’s being asked and what kind of timeframe do you think you have for satisfying the regulatory requirements here?

Unidentified Company Representative

Let me just add, on the quantitative stuff we passed and that’s why we got the capital plan, their criticism were on qualitative and from what we know now and we are still doing work and we will give you more is around they want more granular type of forecasting, the one more interesting credit type of forecasting and so, what we’re having conversation with them, (inaudible) is going to be the C car department, which is going to be come back in (inaudible).

Unidentified Company Representative

And that’s the, in terms of the timeline, we’re resubmitting at requested in the third quarter. We’re doing everything between now and then to remediate and improved our processes following that feedback. So, with committed to being successful.

Betsy Graseck – Morgan Stanley

Okay. Thanks.

Operator

Our next question comes from Brennan Hawken of UBS.

Brennan Hawken – UBS

Good morning.

Jamie Dimon

Good morning.

Brennan Hawken – UBS

So, just to follow-up on the question on litigation, so backdrop to that $0.3 billion. Is that potentially - are we now adjusting to a lower level or was that just like no ways in what it is extremely volatile number bouncing around the world.

Jamie Dimon

Yeah. It’s Brennan, I think it’s very hard to predict and you’re right that it bounces around and then it can be noisy. We have high level of litigation reserves in the third quarter of last year and we hope that the numbers will remain low but we can’t predict them for your innovate.

Brennan Hawken – UBS

Sure. Okay. But, I guess certain of the way, you guys don’t see anything changing in the environment that would lead you to believe or be comfortable with a lower level of assumption of litigation expenses. What we think about…

Unidentified Company Representative

I think that all could be lumpy because yet the deal is finish in two course. I think in the prior year as we put away a lot in the same predominantly mortgage, marketing mortgage, et cetera and obviously the fact that we’re not doing more means we think we’ve got them. We did a lot of work in that. It could always change, but we would following those as you (inaudible) by the way so, we did it at the trench level almost in the - so, it could be permanently low yet. It could be permanently low. It have to be higher and obviously lot of things coming up (inaudible) have to reserve for properties as they come in.

Brennan Hawken – UBS

Yes, let’s hope so. Okay and then the spread in mortgage compression was kind of meaningful here at this quarter. What inning do you think were in their (inaudible) I know its kind of talk to predict as well?

Unidentified Company Representative

Yes, I mean it’s hard to predict but maybe the thing is – look at it, if you take up pre tax spread right now of a 100 basis points that compared to a longer term average rate of 65 basis points before the prices. So we’ve been taking down from a very, very high level at the beginning of 2012, but we’re back to a level where frankly we’re not that far away from the longer run rate and it’s driven by the primary, secondary spread which came in about 20 basis points in the quarter back to level again, feel more normal. So I don’t know I could say what (inaudible) but it doesn’t feel like we have another big step change to go.

Unidentified Company Representative

So we expect it might be up a little bit, not down for a variety of reasons.

Unidentified Company Representative

Having the volatility portion closer but for this year we think we are in and around this range.

Brennan Hawken – UBS

Okay so this is the right way to think about it that helps. And then last one for me, when you think about your cap markets business and depending change, you guys chatted a little bit about a plan on swap clearing that June seems like bigger data, (inaudible) and all of the subsequent changes to the competitive environment, competitive adjustment side of the business what have you – how do you feel about your business, particularly on the fixed side more capital intensive businesses do you think that there is this presents an opportunity to maybe go through review and right size may be increase the efficiency measures there or do you feel comfortable keeping your business where it is roughly.

Unidentified Company Representative

Lot of that businesses.

Brennan Hawken – UBS

Yeah.

Jamie Dimon

So little bit credit and merging markets rates affects the clients now we deal with the clients who are around the world, they need those services and you’re obviously always trying to become more efficient. So you locate [FX] unless that 80% is electronic. It is the rates which is going to – the electronic number is going to go up and so which is going to drive efficiency, but we still pay price when they need it, although these [grows] to pay for (inaudible), and obviously (inaudible) will be adjusted to Basel III. But as you pointed out, some people are leaving the business, some are in the business, we think it has a good future, we don’t think it’s going to go away.

Brennan Hawken – UBS

Okay, thanks a lot.

Operator

Our next question comes from Erika Penala of Bank of America.

L. Erika Penala – Bank of America Merrill Lynch

Good morning. I just had one follow-up question to Betsy’s inquiry on capital return. So clearly we now have two years as this Stress Test behind us, and you were initially approved in 2012 for a $15 billion buy-back and $6 billion this year, I guess what do you – does the Fed mean to see, and you’re building capital clearly. What do you think that Fed needs to see from you and from this the quality as issues, to get back to the kind of capital return that they cleared away in 2012; they thought you had plenty of capacity to pay out.

Jamie Dimon

I think you are confusing two different things. I (inaudible) quality they’re giving us more feedback and where they so we started showing quality, so I think I’ve [merged] them in a syncretic more level detail, more enterprise why type of that forecast, and et cetera, that’s one issue. The second is, the actual [borrow] on them, the Fed has made it very clear, they what people to get to their Basel III targets, ours is at least 9.5. They then (inaudible) said they, on a speech he gave that the banks are into the Stress Test 1 of more capital after extreme Stress, then they started with the capital decrease in the crises. So the Fed, I think, is doing more and more possible as much as individual banks, but the system is all. And we’ve reduced the 15 down to 6, because we wanted to get to our 9.5 target faster, that’s why we did it.

L. Erika Penala – Bank of America Merrill Lynch

Okay.

James Dimon

We just changed our mind, we want to get to 9.5 this year, we want to get LCR this year, and obviously they made changes to (inaudible) us next year, and I assume that we’re going to have a conservation buffer coming in, and we don’t know how the interplay of those two things will work.

L. Erika Penala – Bank of America Merrill Lynch

Okay. And, given what you just mentioned, is it too optimistic to assume for next year a buyback in the $12 to $15 billion range?

Marianne Lake

It’s too early to…

James Dimon

It’s too early to perhaps tell that.

Marianne Lake

Okay. Thank you.

James Dimon

And remember I would have to relate to how fast you grow, and other request from regulators, so now lets’ take some when we get there.

Marianne Lake

Yeah, but we do, yes, we do expect that we will be considering to [surpass to] just through this 100 basis points of (inaudible) mitigation, so it certainly (inaudible) level will be strong and we wouldn’t have to see how things play out.

L. Erika Penala – Bank of America Merrill Lynch

Okay.

Operator

Our next question comes from Mike Mayo of CLSA.

Mike Mayo – Credit Agricole Securities

Good morning.

Marianne Lake

Good morning.

James Dimon

Good morning.

Mike Mayo – Credit Agricole Securities

Loan growth, it’s a little bit softer, and I think you mentioned there was some push forward to the fourth quarter, but you also mentioned more competition and lower levels of demand, if I heard you correctly.

Marianne Lake

Yes.

Mike Mayo – Credit Agricole Securities

So, my question is how much of the softer loan growth is due to JPMorgan perhaps pulling back, and how much it’s due to the economy.

Marianne Lake

So, it’s like a little difficult to say that for you, but we did see a lot of stealthy pull forward in the fourth quarter, it is given the year-end issues that people were concerned about, and so that has had an impact. I think it’s slightly less of an impact and in terms of the competitive landscape and there are [building] done with terms and conditions and pricing that we’re not (inaudible) at the moment, and we’re just remaining very disciplined, so that has had an impact for us.

Mike Mayo – Credit Agricole Securities

So, really on the lower level demand, I mean what was your loan utilization in the first quarter versus the fourth quarter?

Unidentified Company Representative

That before we talk, put it on 32%

Mike Mayo – Credit Agricole Securities

(inaudible) I’m sorry.

Unidentified Company Representative

Moving flat to that around 32%

Mike Mayo – Credit Agricole Securities

32%

Unidentified Company Representative

Right

Mike Mayo – Credit Agricole Securities

And so with the kind of flatter down a little bit.

Unidentified Company Representative

Will be flat – flat

Mike Mayo – Credit Agricole Securities

A flat and is that just (inaudible) on people borrowing more

Unidentified Company Representative

The unit that we have the so declines in the progress so their using that cost, and then waiting out

Mike Mayo – Credit Agricole Securities

Okay and then a separate question looking at the annual report, page four of the Chairman (inaudible) said we first to regulation, and some of the issues that you tasted into that we will see more of these I’m sorry.

So what when you can we will see more or these gain in what you talking about because, peoples imagination people go in a lot of different direction are we talking to the partner just as SEC, FBI where you think if anything particular or general or a time frame, and really what I’m asking to address is the regulatory (inaudible) risk of if we don’t know what we don’t know in terms of the potential government moves as relates to JPMorgan.

Unidentified Company Representative

So we make it clear, and so (inaudible) our regulators, and so we know the reason we expecting from more concerns orders, but to clarify for you is they relate to issues, but we’ve been working on over the cost of the last several years that even know. The new breaking issues that will, surprise you in any material way.

Mike Mayo – Credit Agricole Securities

Okay and was there anything new as part of the ‘11 hearing that would changed the way you will think (inaudible) these one in while and ceratin, and because there is some free damming information some I known at least two those was in power the company, but for your perspective it is rating and I was thinking you need to do as (inaudible) the information in this hearings.

Unidentified Company Representative

So it like we taught when we going to the detail of the report same specifics, but we obviously respect to working (inaudible) we expect to findings they had and we’re working very hard to take that issues and as it relates to the proposal on the recommendation to the prior documentation associated with portfolio hedging, identifying the specific risk fact the hedge is designed to mitigate and then monitoring overtime we tend to (inaudible) in the context of what we [said].

Mike Mayo – Credit Agricole Securities

And then lastly, when you talk about some additional changes that need to take place. And I think some of these are organizational, is there anything made your move that you did not cover at the Investors’ Day recently?

Marianne Lake

No, I think there is a couple of things I would say, first step, we are organizing our calls around the control and regulatory agenda, because it’s a high priority task, I’m just getting [our thoughts] organizing the same way we would around module and acquisition. And in doing that we are prioritizing, but we’re not changing our overall strategy, we are not going to change the way, we see our customers how we think that going our businesses, but at the margin with our (inaudible) energies are making sure that we execute on the commitments to improve the control and regulatory environment.

Mike Mayo – Credit Agricole Securities

All right. Thank you.

Marianne Lake

Okay.

Operator

Our next question comes from Matt Burnell of Wells Fargo Securities.

Marianne Lake

Hi, Matt

Operator

Mr. Burnell your line is open. Please go ahead.

Matthew Burnell – Wells Fargo Securities, LLC

Sorry, can you hear me now.

Marianne Lake

Yes.

Matthew Burnell – Wells Fargo Securities, LLC

Thank you. Good morning. Wanted to drill down a little bit on the mortgage side of things, mortgage originations were a little bit stronger than we expected up about 3% and applications were down about 8%, you suggested that you thought that gain on sale margins might be relatively flattish going through the next couple of quarters, guess I’m just curious what’s your thoughts are in terms of the mortgage origination market away from the gain on sale issues that you have been facing?

Jamie Dimon

Yeah. So, you have to take conductive, you come back on rates have come down in the second quarter and it’s often ridiculous talking that, we’re expecting, [B5] volumes to say high, we did see a little bit of an increase in purchase volumes in the applications in the third quarter a bit from a smaller base and also we did the MetLife transaction.

So, we have the opportunity to be working in that portfolio. So, have you on volumes for the year is that they’re going to remain solid and adult, some possibility really on the back of continued strength in refinancing and you see the (inaudible) for the market, I think resize include half, we’ll a level of support for volumes this year.

Matthew Burnell – Wells Fargo Securities, LLC

And then, (inaudible) on the question on Nim, clearly your moves on the LCR had some of back done on Nim over the last quarter or two. Can you separate what you think that that net interest margin movements will be for JP Morgan next year, excluding your moves for the LCR or is it just of intertwined that you really can’t do that?

Jamie Dimon

Yeah. I mean, it’s really, all of is really old part of how we think about positioning the organization and they’ve been with LCR as far of our new reality. So, this is the part of even better into this, how we thinking about the overall positioning the phone, so it’s not separating of with.

Matthew Burnell – Wells Fargo Securities, LLC

Okay. And then, just finally, we saw fierly sizable decline in value or risk both in the CID and overall. Can you give us a little more color is to as to what’s going on there. What we might be able to expect in the second quarter.

Unidentified Company Representative

Yeah. I mean, it’s hardly in the second quarter, it is a real reduction in risk across the portfolio including and not driven by the including the credit portfolio if we continue to do that stuff, it is important to know if you look across the FX process, that’s gonna very significant decline in levels of volatility the effect, the time series for that and necessarily bad days rolled off and best days rolled off and better rolled on, and so when we can choose (inaudible) it’s pushing the drawdown lower. So as long as volatility remains low and we continue to see risk, there is reasons to believe they will be at or around this level, but it is going to be subject to changes and volatility as and when they happen.

Matthew Burnell – Wells Fargo Securities, LLC

Okay. Thank you very much.

Marianne Lake

Thank you.

Operator

Our next question comes from Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch – Credit Suisse - North America

Great. Thanks. Couple of cleanup things and when you are looking at the getting to the 9.5%, did you factor in that 100 basis points or is that something that would be on top of that (inaudible).

Unidentified Company Representative

It’s factored in.

Marianne Lake

It’s all (inaudible) number for us. So to the degree that we expect that to happen by the year end, its all part of the number including some (inaudible).

Moshe Orenbuch – Credit Suisse - North America

Got it. Okay. And talking qualitatively about the (inaudible) process, also there was a pretty large impact on PPNR which seem to be like the Fed’s looking at pretty harsh look at trading losses. I mean do have – have you had any kind of clarity from them about how they – whether they are looking at that revenue stream differently than other banking revenue streams?

Marianne Lake

Yeah, I’ll take the two things separately (inaudible) trading losses. So on the trading losses obviously there is a number of different practice that we do and while our number was different, I don’t think we felt like that there is anything about our process is that (inaudible) but as it relates to PPNR, we did get feedback that we need to look at certain of our revenue models and we need to look at them more centrally and as Jamie said with a slightly more negative view (inaudible) practically and we are going to do that.

Moshe Orenbuch – Credit Suisse - North America

Okay. And then lastly, on the mortgage business, you look like and in the core production, the expense reduction was about half of the revenue decline. How do you think about the – has that business continue to normalize? As you said, it’s probably most normalized from a gain on sale perspective although you probably have some volumes issues as we go through the rest of the year. I mean, how do you think about the cost structure in that business as you go forward?

Unidentified Company Representative

So there are a couple of things. One is we are expecting to and hoping to we said (inaudible) to gain share. We do expect volumes to be supported by refinancing this year. So that is our expectation that could change of course. And then as it relates to the cost structure, obviously that comes down a little bit more fairly over time but we’re making progress. And we talked about the fact that we expect that to be down $600 million run rate for the fourth quarter and down to $325 million some time over the next couple of years. And what actually we’re working on optimizing our servicing business both the core performing servicing and so that obviously the light sale, but also it would make sense that we would be open to doing sales on sub-servicing of delinquent loans and we’re working two of things to try and get to cost structure as the best as it can be.

Moshe Orenbuch – Credit Suisse - North America

Thank you.

Operator

Our next question comes from Matt O’Connor of Deutsche Bank.

Matt O’Connor – Deutsche Bank Research

Good morning.

Unidentified Company Representative

Good morning, Matt.

Unidentified Company Representative

Good morning.

Matt O’Connor – Deutsche Bank Research

I thought this was one of the clean out quarters in a while, so I just had one follow up here. In the private equity you took some losses on the private portfolio just wondering what drove that. And then also the outlook for this business under Basel III and Volcker even though we don’t exactly know what Volcker is at?

Unidentified Company Representative

You know private equity, we’ve always told you there’s won’t be and it’s just mark downs and write downs of existing position, and we don’t go through this specific names, but obviously we hope it will earn a profit. So (inaudible) of private equity and the private equity legally can survive Volcker and all those things. So we would like to business, we would like to [feed] both and just have to do it in different bases that’s all.

Matt O’Connor – Deutsche Bank Research

Is there any seasonality in terms of getting on a year end or mid year statements on the private portfolios?

Unidentified Company Representative

No, there is no seasonality in private equity. This cost has been reviewed.

Matt O’Connor – Deutsche Bank Research

Okay, all right. Thank you.

Marianne Lake

But it’s lumpy.

Matt O’Connor – Deutsche Bank Research

Yeah.

Operator

Our next question comes from Guy Moszkowski of Autonomous Research.

Guy Moszkowski – Autonomous Research LLP

Good morning. First thing I wanted to ask was if you could dig in a little bit on the repurchase losses within more of the servicing, such a big swing versus the fourth quarter and $81 million sounds like a reserve build because I think, I heard you say that your actual realized losses were not significant and yet the guidance remains that it should be kind of net zero. So it did seem like there were a lot of moving parts here something maybe you could give us a little sense of why you have the $81 million hit?

Marianne Lake

Yeah, through the extent, no Guy it’s a big change in fourth quarter of this small number. So not diminish the sizable numbers that (inaudible) in sort of plus or minus around zero level. And what (inaudible) Guy is that the reserve release is based upon our model and realize losses is based upon agency activity and they have do some of the timing exactly perfect.

And so realize (inaudible) came down from about $200 million to $180 million and we didn’t build – reserve to be release then just not at the same order of magnitude and it’s really to do a timing like which is why we say that we do expect over time the net zero last quarter with the small (inaudible) of this quarter, small (inaudible) nothing to read into it.

Guy Moszkowski – Autonomous Research LLP

Okay. Thanks for that. With regard to the (inaudible) process and some of the changes that – does that is asking you to make first of all just quantitatively, can you give us a sense for the amount of dialogue that you have with the Fed 1 as you work to works satisfying their request, so that you really know exactly where they thought the deficiency were, or if there are a lot of guess work for you on that?

Marianne Lake

No we are in closer dialogue with regulators, we obviously can’t comment on the specifics of our conversation this time. We have some structured conversations as we came out 2013 [SEACOR] process and on the basis of those we are actively working to make the improvements but also make, we are also expecting to continue to get more and more detailed feedback and actually hope to get some industry best practice information too. So we are going to (inaudible) sit with them in closer dialogue all the way through this year, so that we can be clear on what set aside.

Guy Moszkowski – Autonomous Research LLP

And just if I can follow-up on, I think it was Moses question about the PPNR, it sounded like you were saying that many of the deficiencies that they were focusing on were in the inputs to the calculation of the stressed PPNR specifically is going to stay that right?

Unidentified Company Representative

Guys they got a feedback yes. So there will be more to come. But we are willing to do that, we want to be best in class with SEACOR, the answer is absolute policy in PPNR, I mentioned just one (inaudible) exposure in risk of PPNR, so when you go through a stress test, you could assume your company is just doing with all those macroeconomic factors with the forecast, you’re going to see new companies going through macroeconomic forecast plus you understand other kind of stress you can lose market shares.

Obviously that would change your PP&R. So what we have more dialogue and trying to figure out make sure we do the right thing here.

Guy Moszkowski – Autonomous Research LLP

Okay. That’s very helpful. Thanks. I hope it doesn’t sound too crazy but just to think about it the other way, is there any chance that after the resubmission or as part of the resubmission how close you are to your Basel III targets and with some of that 100 basis points coming in. Is there any chance that you would ask for and could get an increase for this year?

Unidentified Company Representative

No, this is just a resubmission of the progress program and then like to see qualitative improvements. This is not a change request at all, this is the one regarding (inaudible) that will be the third quarter, we obviously…

Guy Moszkowski – Autonomous Research LLP

Yes, yes that’s right

Unidentified Company Representative

We obviously (inaudible) in January.

Guy Moszkowski – Autonomous Research LLP

Got it and then final question, you mentioned Jamie and the shareholder letter that just because you don’t have big (inaudible) named cost-cutting programs doesn’t mean you are not very focused on cost reduction, is that what we are seeing in the fact that if you look at the CIB your comp was down 7% versus your revenue being plus or is it that you did something different in the way you think about through the year across.

James Dimon

Through the year across is almost exactly the same as based upon, it is a lot of stuff that goes in that number but that really hasn’t changed that much.

Unidentified Company Representative

And actually you got to (inaudible) the DVA which is an (inaudible) or should we normalize or our revenues are down. So it’s not up down on that number.

Guy Moszkowski – Autonomous Research LLP

Yes it’s here, that’s here.

Unidentified Company Representative

(inaudible) that we’re constantly putting in new operational new systems to reduce overhead (inaudible) and we mentioned a bunch of things we’re doing in mortgage, we are seeing similar efforts in consumer, that’s (inaudible) we do have name for some of them by the way it’s not inclusive here.

Guy Moszkowski – Autonomous Research LLP

Okay but there’s nothing different like you said in terms of the way you approve for bonuses within the investment bank.

Unidentified Company Representative

No.

Guy Moszkowski – Autonomous Research LLP

Okay thank you.

Operator

Our next question comes from Gerard Cassidy, of RBC.

Gerard Cassidy – RBC Capital Markets

Thank you, good morning. I had some questions on the commercial banking line of business, you had a nice increase in the real estate lending area in the first-quarter and it looked like it was about $9 billion after four quarters of essentially flatted down real estate loans. Can you give us some color on where the growth was?

Unidentified Company Representative

Well, I think you’re referring to the CTL the Commercial Term Lending, which is you where lending against multi-family, and we have seen growth in that. Remember that was like 65% LTV and it is growing through this last downturn so we’re very comfortable with that kind of lending. And if that were you see.

Gerard Cassidy – RBC Capital Markets

Are you guys funding greater demand or are you just more comfortable with that now than you were maybe a year ago?

Unidentified Company Representative

I would say a little bit above.

Gerard Cassidy – RBC Capital Markets

Following up on your guidance, the answer about corporate deposits dropping in the quarter, which obviously is a good sign if companies are using this for capital improvements. What’s your – do you expect that to continue, should we see that as a continued positive trend?

Unidentified Company Representative

Are you talking about the commercial bank or the total company?

Gerard Cassidy – RBC Capital Markets

Commercial bank.

Unidentified Company Representative

Well, we would expect to be kind of flatter down a light bit as companies used there. I mean we did have a lot of deposits. So I think on Investor Day and early told people they were kind of really high and we expected to come down particularly the four people start using the revolvers, so they do relate to each other.

Gerard Cassidy – RBC Capital Markets

I agree. And are your guys in the front line hearing that from your customers that they expect to use more than for the reminder of the year, do you think?

Unidentified Company Representative

I don’t know (Inaudible)

Gerard Cassidy – RBC Capital Markets

Okay. Coming back to loan loss reserves, obviously you’ve got a great capital position you’ve pointed out that (inaudible) as indicated that the banking system is super strong going through the stress test. With the current level of loans of about $729 billion, what would be a normal reverse level in normal times compared to where you are today?

Unidentified Company Representative

We did a whole page for you on where we thought the three of the cycle with that level should be by business. Now some businesses [not moving] most obviously they still have a ways to go and there are other businesses in the wholesale base and the commercial banks of the low and through the cycle. So I would tell you back to that page, if you do the numbers from recollection on us, annualized basis our target would be more like $7 billion or $8 billion which is mostly similar the target we’ve seen for different regions. So I would take (inaudible) that page.

Unidentified Company Representative

It’s mostly mortgage that will come down.

Marianne Lake

Yeah.

Unidentified Company Representative

Think if everything else is close to normal, mortgage which in total is $9 billion, the (inaudible) should be a lot lower than that but it would take a couple of years.

Gerard Cassidy – RBC Capital Markets

Thank you.

Operator

Our next question comes from Paul Miller of FBR.

Paul Miller – FBR Capital Markets

Yeah. Thank you very much. I know lot of my questions have been answered, but we saw yesterday that they extended to HARP out another two years and there is also some discussion coming out, out of the White House really that they could put some type of PR plan behind HARP to try to get more people to HARP. Do you think this will have any impact at all in getting more people of the sidelines and refine to the HARP programs?

Marianne Lake

Yeah. I mean let’s talk for us specifically as you probably know we’ve been very successful and proactive as it’s relating to harping our own (inaudible). By the end of this year we fully expect it to have – they’ve been successful as far as possible they will (inaudible) on. That’s not the case in the industry, so its great news that HARP was extended out at the end of 2015 and it will allow for other services to get there, that’s going to vary and potentially to have full service to HARP, which in turn should be good in terms of volumes although I don’t think it will be change. And for us, we are not expecting it to be a significant difference in our production or in our MSR values.

Paul Miller – FBR Capital Markets

How much, I mean, I don’t know if you can disclose this and how much do you think that you have HARP eligible and how many of those HARP eligible loans that you do on a percentage basis? Do you think you have touched most of them already?

Marianne Lake

Yeah. We talked about repeat below a half volumes in about second quarter of last year I think overall to first half of last year (inaudible) down slightly overall 15% last year. We talked at inventor day that we thought that would go down to a high single digit this year and it is in terms of percentage of our production. And, we are very, very active and has been very proactive in mailing our heart population and expected to have completed the program by the end of the year, so we were on track and this doesn’t (inaudible) our expectations.

James Dimon

This total, if you take all mortgages, I don’t think numbers like $4 million will be comparable today if they went to in, and I wouldn’t – some of the (inaudible) that [Moorefield] don’t do, to tell you the truth.

Marianne Lake

Yes.

James Dimon

But, anything that government could do, either PR or I think the cross services for a bigger one will make us probably better. And, such thing is a (inaudible) better, it’s not going to dramatically change mortgage.

Paul Miller – FBR Capital Markets

Okay. Yeah, I think a lot of company that pulled us back they think that they got through most of the low hanging fruit with [harp], and that the people that [un-harping] they doubt they will ever harp. And so I’m just wondering if there is a big DR portion, some of those guys will wake up and say, oh, maybe this isn’t, maybe I need to look at this program.

James Dimon

Yeah, we hope so.

Marianne Lake

And I…

James Dimon

Even we don’t know any better than you. I mean…

Paul Miller – FBR Capital Markets

Okay. Yeah.

James Dimon

Yeah.

Paul Miller – FBR Capital Markets

Okay. Thanks a lot guys. Thanks.

Operator

Our next question comes from Nancy Bush of NAB Research.

Nancy Bush – NAB Research, LLC

Good morning.

James Dimon

Good morning.

Marianne Lake

Good morning.

Nancy Bush – NAB Research, LLC

A quick question sort of back to the brown that are stuff that’s kind of hanging around out there, I mean, I’m reading what everybody else is that they are looking at sort of a 10% capital ratio with the possibility of another 5% topper on top of that and basically touring away to concept in risk weighted assets and more or less of this rating Basel III as far as I can see. I mean, do you guys have any sense where this sort of 10%, 5% number comes from. Is there is some sort of empirical evidence, or is it just sort of a backdoor way to try to get the biggest banks to break up?

James Dimon

You really have to ask them and we’ll leave this to them and the regulators, okay.

Nancy Bush – NAB Research, LLC

Well, is there, I mean, do you have a sense where the numbers are coming from? What that 10%, half of ratio, where it comes from?

Unidentified Company Representative

You’ve got to ask them.

Nancy Bush – NAB Research, LLC

Okay. Thanks.

Unidentified Company Representative

Okay.

Operator

We have no further questions at this time.

Jamie Dimon

Thank you.

Marianne Lake

Thanks for spending time with us.

Operator

This concludes today’s conference call. You may now disconnect.

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