JPMORGAN CHASE & CO annual report, FY2014

JPMorgan Chase & Co. — 2014 Form 10-K Summary

Business context and reporting period

JPMorgan Chase & Co. is a global financial-services firm organized into Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, Asset Management and Corporate. The filing covers the fiscal year ended December 31, 2014; fourth-quarter 2014 information is presented in unaudited supplementary quarterly data.

At year-end, the Firm reported $2.6 trillion of assets, $232.1 billion of stockholders’ equity, 5,602 U.S. branches and 241,359 employees. Management reported under U.S. GAAP, with segment results also presented on a non-GAAP fully taxable-equivalent managed basis.

Key financial metrics

Metric	2014	2013	Change
Total net revenue	$94.2 billion	$96.6 billion	Down 2%
Net income	$21.8 billion	$17.9 billion	Up 21%
Diluted EPS	$5.29	$4.35	Up 22%
Noninterest expense	$61.3 billion	$70.5 billion	Down 13%
Provision for credit losses	$3.1 billion	$225 million	Increased materially
Return on common equity	10%	9%	Improved
Common dividends declared per share	$1.58	$1.44	Increased

Fourth-quarter 2014 net income was $4.9 billion, or $1.19 diluted EPS, compared with $5.3 billion, or $1.30 diluted EPS, in fourth-quarter 2013. Fourth-quarter net revenue was $22.5 billion and noninterest expense was $15.4 billion.

Net interest income was $43.6 billion, slightly above 2013, while the net interest yield on average interest-earning assets declined to 2.18% from 2.23%. Noninterest revenue declined to $50.6 billion, primarily because of lower mortgage fees and related income, securities gains and other income.

Cash flow from operating activities was $36.6 billion, compared with $108.0 billion in 2013. Investing activities used $165.6 billion, primarily reflecting increased deposits with banks and loan growth. Financing activities provided $118.2 billion, primarily from deposit growth, borrowings and preferred-stock issuance. Cash and due from banks declined by $11.9 billion during the year.

At December 31, 2014, loans were $757.3 billion, deposits were $1.363 trillion, long-term debt was $276.8 billion, total assets were $2.573 trillion and total stockholders’ equity was $232.1 billion. The loans-to-deposits ratio was 56%. High-quality liquid assets were estimated at $600 billion, and the Firm reported more than 18 months of parent-company pre-funding assuming no access to wholesale funding markets.

Material changes versus the prior comparable period

• Net income increased despite lower revenue, mainly because noninterest expense fell by $9.2 billion. The reduction was driven primarily by lower legal expense, compensation expense and mortgage-related costs.
• Legal expense declined to $2.9 billion from $11.1 billion in 2013, but remained material. The aggregate range of reasonably possible legal losses in excess of reserves was estimated at $0 to approximately $5.8 billion.
• The provision for credit losses increased to $3.1 billion from $225 million because 2014 included a substantially smaller benefit from consumer allowance releases.
• Net charge-offs declined 18% to $4.8 billion, nonperforming assets declined 18% to $8.0 billion, and the allowance for credit losses declined to $14.8 billion from $17.0 billion.
• Consumer & Community Banking net income fell 17% to $9.2 billion, primarily because of lower mortgage revenue and the higher credit-loss provision. Mortgage origination volume fell to $78.0 billion from $165.5 billion.
• Corporate & Investment Bank net income fell 22% to $6.9 billion. Fixed Income Markets revenue declined, while investment banking fees increased 4% to $6.6 billion.
• Commercial Banking net income was essentially flat at $2.6 billion, while loans increased 8% to $149 billion and gross investment-banking revenue increased 18% to $2.0 billion.
• Asset Management net income increased 3% to $2.2 billion. Client assets increased to $2.4 trillion and assets under management rose 9% to $1.7 trillion.
• The Firm issued $8.9 billion of noncumulative preferred stock, repurchased 83.4 million common shares for $4.8 billion and ended the year with $3.8 billion of remaining authorization under its broader common-equity repurchase program.
• Basel III Advanced Transitional CET1 capital was 10.2%, Tier 1 capital was 11.6% and total capital was 13.1%. Estimated fully phased-in Advanced CET1 was also 10.2%, with an estimated supplementary leverage ratio of 5.6%.

Guidance, outlook and management commentary

• Management expected 2015 core loan growth of approximately 10%.
• Management expected 2015 net charge-offs to remain modestly above $4 billion if favorable credit trends continued, with a further reduction in the consumer allowance for loan losses over the following two years.
• Adjusted 2015 expense was expected to be approximately $57 billion, excluding firmwide legal expense and foreclosure-related matters.
• Management targeted fully phased-in Basel III CET1 ratios of approximately 11% by the end of 2015 and approximately 12% by the end of 2018, assuming a 4.5% G-SIB surcharge.
• The Firm anticipated that business-simplification actions would reduce 2015 revenue and expense by approximately $1.6 billion each, with no meaningful expected effect on net income.
• Management expected a managed overhead ratio of approximately 55% over the next several years, dependent on revenue growth and operating efficiencies.
• Management emphasized continued investment in controls, technology, regulatory compliance, balance-sheet optimization and business simplification. The Firm exited or reduced several non-core activities, including portions of prepaid cards, co-branded cards, mortgage products, physical commodities and private equity.

Risks, contingencies and unusual items

• The Firm remains exposed to extensive and changing U.S. and international regulation, including Basel III, the Volcker Rule, enhanced prudential standards, liquidity requirements, resolution planning and potential TLAC requirements.
• Regulatory and legal matters remain significant. The filing identifies ongoing investigations and litigation involving foreign exchange, benchmark rates, mortgage-backed securities, mortgage servicing, consumer debt collection, hiring practices, credit default swaps and other activities.
• A 2014 cyberattack compromised certain customer contact information and internal user-related data. The Firm stated that account numbers, passwords, user IDs, dates of birth and Social Security numbers were not evidenced as compromised and that the incident had not materially disrupted operations as of the filing date.
• Market risks include interest-rate, foreign-exchange, equity, commodity, credit-spread and liquidity volatility. The Firm reported five market-risk VaR band breaks in 2014 and average total VaR of $43 million.
• Credit risks remain concentrated in residential real estate, commercial real estate, financial institutions and oil and gas. Wholesale oil-and-gas exposure was $48.3 billion at year-end and was being monitored in light of falling oil prices.
• Residential real-estate exposure remains sensitive to home prices, unemployment, foreclosure timelines, payment recasts and borrower behavior. Approximately $47 billion of non-PCI HELOC principal was scheduled or expected to recast from interest-only to fully amortizing payments.
• Management identified mortgage-banking goodwill of approximately $2 billion as having an elevated impairment risk because estimated fair value exceeded carrying value by less than 5%.
• The Firm’s 2014 results included unusual or nonrecurring items, including lower legal expense, a $276 million private-equity goodwill impairment, gains and losses from business exits, mortgage-servicing-rights valuation changes and the 2013 FVA implementation loss that affected the comparison period.
• The filing states that management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective and that no material weaknesses existed as of December 31, 2014.

Most important facts an investor should verify

• Reconcile reported GAAP revenue, net income and EPS with the Firm’s fully taxable-equivalent managed-basis segment measures.
• Assess how much of the 2014 earnings improvement resulted from lower legal and mortgage-related expense versus recurring operating performance.
• Review the sustainability of credit-loss benefits, allowance releases and declining charge-offs, particularly in residential real estate, credit cards and PCI loans.
• Evaluate the effects of proposed G-SIB capital surcharges, Basel III standardized requirements, TLAC and incremental debt issuance on capital returns and funding costs.
• Review the estimated $0 to $5.8 billion range of reasonably possible legal losses in excess of reserves and the status of major investigations and settlements.
• Monitor mortgage-servicing-rights valuation sensitivity, foreclosure-related obligations, HELOC payment recasts and the elevated mortgage-banking goodwill impairment risk.
• Verify liquidity and contingent-funding exposure, including $1.056 trillion of lending-related commitments, downgrade-triggered derivative collateral requirements and commitments to securitization vehicles.
• Compare management’s 2015 targets for loan growth, charge-offs, expenses, capital ratios and overhead with subsequent filings and actual results.