CORP Q3 2014


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

For the quarterly period ended
Commission file
September 30, 2014
number 1-5805

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



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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x  Yes
o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
 
 
Non-accelerated filer (Do not check if a smaller reporting company)  o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨  Yes
x  No
 
Number of shares of common stock outstanding as of September 30, 2014: 3,738,188,746
 



FORM 10-Q
TABLE OF CONTENTS
Part I - Financial information
Page
Item 1
Consolidated Financial Statements – JPMorgan Chase & Co.:
 
 
Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2014 and 2013
90
 
Consolidated statements of comprehensive income (unaudited) for the three and nine months ended September 30, 2014 and 2013
91
 
Consolidated balance sheets (unaudited) at September 30, 2014, and December 31, 2013
92
 
Consolidated statements of changes in stockholders’ equity (unaudited) for the nine months ended September 30, 2014 and 2013
93
 
Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2014 and 2013
94
 
Notes to Consolidated Financial Statements (unaudited)
95
 
Report of Independent Registered Public Accounting Firm
179
 
Consolidated Average Balance Sheets, Interest and Rates (unaudited) for the three and nine months ended September 30, 2014 and 2013
180
 
Glossary of Terms and Line of Business Metrics
182
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
Consolidated Financial Highlights
3
 
Introduction
4
 
Executive Overview
5
 
Consolidated Results of Operations
8
 
Consolidated Balance Sheets Analysis
11
 
Off-Balance Sheet Arrangements
13
 
Consolidated Cash Flows Analysis
14
 
Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures
15
 
Business Segment Results
17
 
Enterprise-Wide Risk Management
48
 
Credit Risk Management
49
 
Market Risk Management
67
 
Country Risk Management
70
 
Operational Risk Management
71
 
Capital Management
73
 
Liquidity Risk Management
80
 
Supervision and Regulation
84
 
Critical Accounting Estimates Used by the Firm
85
 
Accounting and Reporting Developments
88
 
Forward-Looking Statements
89
Item 3
Quantitative and Qualitative Disclosures About Market Risk
187
Item 4
Controls and Procedures
187
Part II - Other information
 
Item 1
Legal Proceedings
188
Item 1A
Risk Factors
188
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
188
Item 3
Defaults Upon Senior Securities
190
Item 4
Mine Safety Disclosure
190
Item 5
Other Information
190
Item 6
Exhibits
190

2


JPMorgan Chase & Co.
Consolidated financial highlights
(unaudited)
As of or for the period ended,
 
 
 
 
 
Nine months ended
September 30,
(in millions, except per share, ratio, headcount data and where
 otherwise noted)
3Q14
2Q14
1Q14
4Q13
3Q13
2014
2013
Selected income statement data
 
 
 
 
 
 
 
Total net revenue
$
24,246

$
24,454

$
22,993

$
23,156

$
23,117

$
71,693

$
73,450

Total noninterest expense
15,798

15,431

14,636

15,552

23,626

45,865

54,915

Pre-provision profit/(loss)
8,448

9,023

8,357

7,604

(509
)
25,828

18,535

Provision for credit losses
757

692

850

104

(543
)
2,299

121

Income before income tax expense
7,691

8,331

7,507

7,500

34

23,529

18,414

Income tax expense
2,119

2,346

2,233

2,222

414

6,698

5,769

Net income/(loss)
$
5,572

$
5,985

$
5,274

$
5,278

$
(380
)
$
16,831

$
12,645

Earnings per share data
 
 
 
 
 
 
 
Net income/(loss):
Basic
$
1.37

$
1.47

$
1.29

$
1.31

$
(0.17
)
$
4.13

$
3.08

 
Diluted
1.36

1.46

1.28

1.30

(0.17
)
4.10

3.05

Average shares:
Basic
3,755.4

3,780.6

3,787.2

3,762.1

3,767.0

3,774.4

3,789.2

 
Diluted
3,788.7

3,812.5

3,823.6

3,797.1

3,767.0

3,808.3

3,820.9

Market and per common share data
 
 
 
 
 
 
 
Market capitalization
225,188

216,725

229,700

219,657

194,312

225,188

194,312

Common shares at period-end
3,738.2

3,761.3

3,784.7

3,756.1

3,759.2

3,738.2

3,759.2

Share price(a):
 
 
 
 
 
 
 
High
$
61.85

$
61.29

$
61.48

$
58.55

$
56.93

$
61.85

$
56.93

Low
54.96

52.97

54.20

50.25

50.06

52.97

44.20

Close
60.24

57.62

60.71

58.48

51.69

60.24

51.69

Book value per share
56.50

55.53

54.05

53.25

52.01

56.50

52.01

Tangible book value per share (“TBVPS”)(b)
44.13

43.17

41.73

40.81

39.51

44.13

39.51

Cash dividends declared per share
0.40

0.40

0.38

0.38

0.38

1.18

1.06

Selected ratios and metrics
 
 
 
 
 
 
 
Return on common equity (“ROE”)
10
%
11
%
10
%
10
%
(1
)%
10
%
8
%
Return on tangible common equity (“ROTCE”)(b)
13

14

13

14

(2
)
13

11

Return on assets (“ROA”)
0.90

0.99

0.89

0.87

(0.06
)
0.93

0.71

Overhead ratio
65

63

64

67

102

64

75

Loans-to-deposits ratio
56

57

57

57

57

56

57

High quality liquid assets (“HQLA”) (in billions)(c)
$
572

$
576

$
538

$
522

$
538

$
572

$
538

Common equity tier 1 (“CET1”) capital ratio(d)
10.2
%
9.8
%
10.9%

10.7
%
10.5
 %
10.2
%
10.5
%
Tier 1 capital ratio(d)
11.5

11.1

12.1

11.9

11.7

11.5

11.7

Total capital ratio(d)
12.8

12.5

14.5

14.4

14.3

12.8

14.3

Tier 1 leverage ratio(d)
7.6

7.6

7.4

7.1

6.9

7.6

6.9

Selected balance sheet data (period-end)
 
 
 
 
 
 
 
Trading assets
$
410,657

$
392,543

$
375,204

$
374,664

$
383,348

$
410,657

$
383,348

Securities(e)
366,358

361,918

351,850

354,003

356,556

366,358

356,556

Loans
743,257

746,983

730,971

738,418

728,679

743,257

728,679

Total assets
2,527,005

2,520,336

2,476,986

2,415,689

2,463,309

2,527,005

2,463,309

Deposits
1,334,534

1,319,751

1,282,705

1,287,765

1,281,102

1,334,534

1,281,102

Long-term debt(f)
268,721

269,929

274,512

267,889

263,372

268,721

263,372

Common stockholders’ equity
211,214

208,851

204,572

200,020

195,512

211,214

195,512

Total stockholders’ equity
231,277

227,314

219,655

211,178

206,670

231,277

206,670

Headcount
242,388

245,192

246,994

251,196

255,041

242,388

255,041

Credit quality metrics
 
 
 
 
 
 
 
Allowance for credit losses
$
15,526

$
15,974

$
16,485

$
16,969

$
18,248

$
15,526

$
18,248

Allowance for loan losses to total retained loans
2.02%

2.08%

2.20%

2.25%

2.43%

2.02%

2.43%

Allowance for loan losses to retained loans excluding purchased credit-impaired loans(g)
1.63

1.69

1.75

1.80

1.89

1.63

1.89

Nonperforming assets
$
8,390

$
9,017

$
9,473

$
9,706

$
10,380

$
8,390

$
10,380

Net charge-offs
1,114

1,158

1,269

1,328

1,346

3,541

4,474

Net charge-off rate
0.60%

0.64%

0.71%

0.73%

0.74%

0.65%

0.83%

(a)
Share price shown for JPMorgan Chase’s common stock is from the New York Stock Exchange. JPMorgan Chase’s common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange.
(b)
TBVPS and ROTCE are non-GAAP financial measures. TBVPS represents the Firm’s tangible common equity divided by common shares at period-end. ROTCE measures the Firm’s annualized earnings as a percentage of tangible common equity. For further discussion of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15–16.
(c)
HQLA is the estimated amount of assets that qualify for inclusion in the final U.S. Liquidity Coverage Ratio (“U.S. LCR”) for 3Q14 and in the Basel III Liquidity Coverage Ratio (“Basel III LCR”) for prior periods; for additional information, see HQLA on page 83.
(d)
Basel III Transitional rules became effective on January 1, 2014; prior period data is based on Basel I rules. As of September 30, 2014, and June 30, 2014, the ratios presented are calculated under the Basel III Advanced Transitional Approach. As of March 31, 2014, the ratios presented are calculated under the Basel III Standardized Transitional Approach. CET1 capital under Basel III replaced Tier 1 common capital under Basel I. Prior to Basel III becoming effective on January 1, 2014, Tier 1 common capital under Basel I was a non-GAAP financial measure. See Regulatory capital on pages 73–77 for additional information on Basel III and non-GAAP financial measures of regulatory capital.
(e)
Included held-to-maturity (“HTM”) securities of $48.8 billion, $47.8 billion, $47.3 billion, $24.0 billion and $4.5 billion at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013 and September 30, 2013, respectively.
(f)
Included unsecured long-term debt of $204.7 billion, $205.6 billion, $206.1 billion, $199.4 billion and $199.2 billion at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013 and September 30, 2013, respectively.
(g)
Excludes the impact of residential real estate purchased credit-impaired (“PCI”) loans. For further discussion, see Allowance for credit losses on pages 64–66.


3

INTRODUCTION
The following is management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) in this Form 10-Q.
This Form 10-Q should be read in conjunction with JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the U.S. Securities and Exchange Commission (“2013 Annual Report” or “2013 Form 10-K”), to which reference is hereby made. See the Glossary of terms on pages 182–185 for definitions of terms used throughout this Form 10-Q.
The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause JPMorgan Chase’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements on page 89 of this Form 10-Q and Part I, Item 1A, Risk Factors, on pages 9–18 of JPMorgan Chase’s 2013 Annual Report.
JPMorgan Chase & Co., a financial holding company incorporated under Delaware law in 1968, is a leading global financial services firm and one of the largest banking institutions in the United States of America (“U.S.”), with operations worldwide; the Firm had $2.5 trillion in assets and $231.3 billion in stockholders’ equity as of September 30, 2014. The Firm is a leader in investment banking, financial services for consumers and small
 
businesses, commercial banking, financial transaction processing and asset management. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the world’s most prominent corporate, institutional and government clients.
JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national bank that is the Firm’s credit card–issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), the Firm’s U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firm’s principal operating subsidiaries in the United Kingdom (“U.K.”) is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.
JPMorgan Chase’s activities are organized, for management reporting purposes, into four major reportable business segments, as well as a Corporate/Private Equity segment. The Firm’s consumer business is the Consumer & Community Banking (“CCB”) segment. The Corporate & Investment Bank (“CIB”), Commercial Banking (“CB”), and Asset Management (“AM”) segments comprise the Firm’s wholesale businesses. For a description of the Firm’s business segments, and the products and services they provide to their respective client bases refer to Note 33 of JPMorgan Chase’s 2013 Annual Report.





4

EXECUTIVE OVERVIEW
This executive overview of the MD&A highlights selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of the trends and uncertainties, as well as the
 
risks and critical accounting estimates affecting the Firm and its various lines of business, this Form 10-Q should be read in its entirety.

Financial performance of JPMorgan Chase
 
 
 
 
 
 
 
 
(unaudited)
As of or for the period ended,
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share data and ratios)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Selected income statement data
 
 
 
 
 
 
 
 
 
 
 
Total net revenue
$
24,246

 
$
23,117

 
5
%
 
$
71,693

 
$
73,450

 
(2
)%
Total noninterest expense
15,798

 
23,626

 
(33
)
 
45,865

 
54,915

 
(16
)
Pre-provision profit
8,448

 
(509
)
 
NM

 
25,828

 
18,535

 
39

Provision for credit losses
757

 
(543
)
 
NM

 
2,299

 
121

 
NM 
Net income/(loss)
5,572

 
(380
)
 
NM

 
16,831

 
12,645

 
33

Diluted earnings per share
$
1.36

 
$
(0.17
)
 
NM

 
$
4.10

 
$
3.05

 
34
%
Return on common equity
10
%
 
(1
)%
 
 
 
10
%
 
8
%
 
 
Capital ratios(a)
 
 
 
 
 
 
 
 
 
 
 
CET1
10.2

 
10.5

 
 
 
10.2

 
10.5

 
 
Tier 1 capital
11.5

 
11.7

 
 
 
11.5

 
11.7

 
 
(a)
Basel III Transitional rules became effective on January 1, 2014; prior period data is based on Basel I rules. As of September 30, 2014, the ratios presented are calculated under the Basel III Advanced Transitional Approach. CET1 capital under Basel III replaced Tier 1 common capital under Basel I. Prior to Basel III becoming effective on January 1, 2014, Tier 1 common capital under Basel I was a non-GAAP financial measure. See Regulatory capital on pages 73–77 for additional information on Basel III and non-GAAP financial measures of regulatory capital.
Business Overview
JPMorgan Chase reported third-quarter 2014 net income of $5.6 billion, or $1.36 per share, on net revenue of $24.2 billion. Net income increased by $6.0 billion, to $5.6 billion, in the third quarter of 2014. Return on equity for the quarter was 10%, compared with (1)% for the prior-year quarter.
The Firm delivered strong underlying performance for the quarter. The increase in net income from the third quarter of 2013 was driven by lower noninterest expense and higher net revenue, partially offset by higher provision for credit losses.
Net revenue was $24.2 billion up $1.1 billion, or 5%, compared with the prior year. Noninterest revenue was $13.1 billion, up $797 million, or 6%, compared with the prior year. Net interest income was $11.1 billion, up $332 million, or 3%, compared with the prior year, reflecting lower interest expense, higher investment securities yields and higher loan balances, partially offset by lower loan yields.
The provision for credit losses for the three months ended September 30, 2014 increased from the prior year, reflecting an increase in the consumer provision for credit losses. The increase in the consumer provision for credit losses was the result of a lower benefit from reductions in the consumer allowance for loan losses, partially offset by lower net charge-offs. The current-quarter consumer provision reflected a $200 million reduction in the allowance for loan losses, compared to a $1.6 billion reduction in the prior year. The current-quarter consumer allowance release primarily reflects the continued improvement in home prices and delinquencies in the
 
residential real estate portfolio, the run-off of the student loan portfolio and lower estimated losses in auto loans.
Consumer net charge-offs were $1.1 billion, compared with $1.3 billion in the prior year, resulting in net charge-off rates, excluding PCI loans, of 1.19% and 1.47%, respectively.
The wholesale provision for credit losses reflected a generally favorable credit environment and stable credit quality trends. The wholesale provision for credit losses was a benefit of $140 million, compared with a benefit of $270 million in the prior year. Wholesale net charge-offs were $17 million, compared with $26 million in the prior year, resulting in net charge-rates of 0.02% and 0.03%, respectively.
The Firm’s allowance for loan losses to period-end loans retained, excluding PCI loans, was 1.63%, compared with 1.89% in the prior year. The Firm’s allowance for loan losses to retained nonaccrual loans, excluding PCI loans, was 155%, compared with 140% in the prior year. The Firm’s nonperforming assets totaled $8.4 billion, down from the prior quarter and prior year levels of $9.0 billion and $10.4 billion, respectively.
Noninterest expense was $15.8 billion, down $7.8 billion, or 33%, compared with the prior year, driven by lower legal expense. The current quarter noninterest expense included $1.1 billion of legal expense, compared with $9.3 billion of legal expense in the prior year.
Consumer & Business Banking (“CBB”) average deposits were up 9% and Business Banking loan originations were up 27%. Client investment assets were a record $207.8 billion, up 16%, and credit card sales volume was $119.5 billion, up 12% from the prior year. CIB maintained its #1


5

ranking for Global Investment Banking fees, and assets under custody were up 8% compared with the prior year. CB period-end loan balances were up 6%, and gross investment banking revenue from CB clients was up 12%. AM reported positive net long-term product flows for the twenty-second consecutive quarter, assets under management up 11% and record average loan balances of $101.4 billion.
Net income during the nine months ended September 30, 2014, was $16.8 billion, or $4.10 per share, compared with $12.6 billion, or $3.05 per share, during the nine months ended September 30, 2013. The increase was primarily driven by a decrease in noninterest expense, partially offset by an increase in provision for credit losses and lower revenue. Net revenue during the nine months of 2014 was $71.7 billion, down $1.8 billion, or 2%, compared with the prior year. Noninterest revenue was $39.1 billion, down $1.9 billion, or 5%, compared with the prior year. Net interest income was $32.6 billion, flat compared with the prior year, reflecting lower interest expense, higher investment securities yields and higher loan balances, partially offset by lower loan yields and lower average interest-earning trading asset balances. The higher provision for credit losses reflected a lower benefit from reductions in the consumer allowance for loan losses, partially offset by lower net charge-offs. The decrease in noninterest expense was driven by lower legal expense.
The Firm maintained its fortress balance sheet, ending the third quarter with estimated Basel III Advanced Fully Phased-in CET1 capital of $163.2 billion and a CET1 capital ratio of 10.1%. The Firm’s supplementary leverage ratio (“SLR”) was 5.5% and the Firm had $572 billion of high quality liquid assets (“HQLA”) as of September 30, 2014. Basel III Advanced Fully Phased-In measures and the SLR under the U.S. final SLR rule are non-GAAP financial measures. These measures are used by management, bank regulators, investors and analysts to assess and monitor the Firm’s capital position. For further discussion of Basel III Advanced Fully Phased-In measures and the SLR under the U.S. final SLR rule, see Regulatory capital on pages 73–77.
JPMorgan Chase continued to support consumers, businesses and communities around the globe. The Firm provided credit and raised capital of $1.6 trillion for commercial and consumer clients during the nine months ended September 30, 2014. This included $15 billion of credit provided to U.S. small businesses and $464 billion of credit provided to corporations. The Firm raised more than $881 billion of capital for clients. In addition, more than $55 billion of credit was provided to, and capital was raised for, nonprofit and government entities, including states, municipalities, hospitals and universities.
For a detailed discussion of results by Line of Business
refer to the Business Segment Results section beginning on page 17.

 
2014 Business outlook
These current expectations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on the current beliefs and expectations of JPMorgan Chase’s management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firm’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on page 89 of this Form 10-Q and Risk Factors on pages 9-18 of JPMorgan Chase’s 2013 Annual Report. There is no assurance that actual results for the fourth quarter or full year of 2014 will be in line with the outlook set forth below, and the Firm does not undertake to update any of these forward-looking statements to reflect the impact of circumstances or events that arise after the date hereof.
JPMorgan Chase’s outlook for the remainder of 2014 should be viewed against the backdrop of the global and U.S. economies, including the strength of consumers and businesses, U.S. housing prices, the unemployment rate, implied market interest rates, financial market levels and activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business, although each of these factors will affect each of the lines of business to a different degree.
The Firm expects full year 2014 adjusted expense to be above $58 billion; the amount of actual firmwide expense will be affected by performance-related compensation for 2014, driven by higher markets-related revenue. Management also expects firmwide net charge-offs for the full year 2014 to be less than $5 billion, below previous guidance.
In the Mortgage Banking (“MB”) business within CCB, pretax income in Mortgage Production is expected to be a small negative in the fourth quarter of 2014; the actual results will be market dependent. In Mortgage Servicing within Mortgage Banking, management expects servicing revenue to be at or slightly below $600 million in the fourth quarter of 2014, and to continue to decrease in 2015.
If current positive consumer credit trends continue, management expects CCB to have a reduction in the consumer allowance for loan losses by $1 billion or more over the next couple of years.
In CIB, Markets revenue in the fourth quarter of 2014 will be impacted by the Firm’s business simplification initiatives. These business simplification initiatives are expected to result in a decline of approximately $300 million, or 8%, in Markets revenue and a decline of approximately $200 million in expense, for the fourth quarter of 2014 compared to the prior-year quarter.
In AM, pretax margin and return on equity for the full year 2014 are expected to be below through-the-cycle targets.


6

Business events
Business simplification
The Firm has made substantial progress in completing its business simplification agenda to exit certain noncore businesses and activities. Recent examples include exiting the CIB’s business of providing transaction services for certain correspondent banking clients, the sale or substantial liquidation of all of the CIB’s physical commodities business and Global Special Opportunities Group investment portfolio, and the sale of AM’s Retirement Plan Services business.  The Firm expects the sale of a portion of the One Equity Partners (“OEP”) investment portfolio, and the formation by the OEP investment professionals of a new, independent management company, to occur by year-end. These actions will enable the Firm to focus on core activities for its core clients with an enhanced focus on its operational, regulatory, and litigation risks.
Regulatory developments
On September 2, 2014, the Office of the Comptroller of the Currency (“OCC”) released final regulations and guidelines establishing heightened standards for large banks. The guidelines establish minimum standards for the design and implementation of a risk governance framework for banks. JPMorgan Chase has three national bank subsidiaries that will be required to comply with the guidelines: JPMorgan Chase Bank, N.A., Chase Bank USA, N.A., and JPMorgan Bank & Trust Company, NA.
On September 3, 2014, the Federal Reserve and the OCC issued final rules for the Supplementary Leverage Ratio (“SLR”) and Liquidity Coverage Ratio (“LCR”).  For additional details on these ratios, see Regulatory capital and Liquidity risk management on pages 73–77 and pages 80–84, respectively. The Firm also anticipates that bank regulatory authorities will issue proposals with respect to the potential recalibration of the global systemically important bank (“GSIB”) framework and Total Loss Absorbing Capital (“TLAC”) in late 2014 or early 2015.
 
On October 11, 2014, the Firm, along with 17 other financial institutions, agreed in principle to adhere to the Resolution Stay Protocol developed by the International Swaps and Derivatives Association, Inc. in response to regulator concerns that the closeout of derivatives transactions during the resolution of a large cross-border financial institution could impede resolution efforts and potentially destabilize markets. The Resolution Stay Protocol provides for the contractual recognition of cross-border stays under various statutory resolution regimes and a contractual stay on certain cross-default rights. It is expected that the Firm and the other 17 financial institutions will formally adhere to the Resolution Stay Protocol once the text of the protocol is finalized in early November.
For additional Business events during the nine months ended September 30, 2014, and Subsequent events, see Note 2.




7

CONSOLIDATED RESULTS OF OPERATIONS
The following section of the MD&A provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis for the three and nine months ended September 30, 2014 and 2013. Factors that relate primarily to a single business segment are discussed in more
 
detail within that business segment. For a discussion of the Critical Accounting Estimates Used by the Firm that affect the Consolidated Results of Operations, see pages 85–87 of this Form 10-Q and pages 174–178 of JPMorgan Chase’s 2013 Annual Report.

Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change

Investment banking fees
$
1,538

 
$
1,507

 
2
%
 
$
4,709

 
$
4,669

 
1
%
Principal transactions
2,966

 
2,662

 
11

 
9,196

 
10,183

 
(10
)
Lending- and deposit-related fees
1,479

 
1,519

 
(3
)
 
4,347

 
4,476

 
(3
)
Asset management, administration and commissions
3,978

 
3,667

 
8

 
11,821

 
11,131

 
6

Securities gains
6

 
26

 
(77
)
 
48

 
659

 
(93
)
Mortgage fees and related income
903

 
841

 
7

 
2,708

 
4,116

 
(34
)
Card income
1,537

 
1,518

 
1

 
4,494

 
4,440

 
1

Other income(a)
732

 
602

 
22

 
1,798

 
1,364

 
32

Noninterest revenue
13,139

 
12,342

 
6

 
39,121

 
41,038

 
(5
)
Net interest income
11,107

 
10,775

 
3

 
32,572

 
32,412

 
—

Total net revenue
$
24,246

 
$
23,117

 
5
%
 
$
71,693

 
$
73,450

 
(2
)%
(a)
Included operating lease income of $433 million and $376 million for the three months ended September 30, 2014 and 2013, respectively, and $1.3 billion and $1.1 billion for the nine months ended September 30, 2014 and 2013, respectively.
Total net revenue for the three months ended September 30, 2014, increased by $1.1 billion compared with the three months ended September 30, 2013. The increase was predominantly due to higher net interest income; higher asset management, administration and commissions revenue; and higher principal transactions revenue. For the nine months ended September 30, 2014, total net revenue decreased by $1.8 billion from the same period of the prior year. The decrease was predominantly due to lower mortgage fees and related income; lower principal transactions revenue; and lower securities gains; partially offset by higher asset management, administration and commissions revenue; and higher other income.
Investment banking fees for the three and nine months ended September 30, 2014, increased slightly compared with the prior year, due to higher advisory and equity underwriting fees, largely offset by lower debt underwriting fees. The increase in advisory and equity underwriting fees was driven by higher industry-wide fee levels, while the decrease in debt underwriting fees was primarily related to lower industry-wide loan fee levels. For additional information on investment banking fees, see CIB segment results on pages 32–37, CB segment results on pages 38–40, and Note 6.
Principal transactions revenue in the three months ended September 30, 2014, increased compared with the prior period due to higher market-making revenue in CIB on particularly strong performance in currencies and emerging markets. The increase in market-making revenue was partly offset by lower private equity gains due to lower net valuation gains on investments. For the nine months ended September 30, 2014, principal transactions revenue decreased from the prior year reflecting, in CIB, lower fixed income markets revenue on lower client activity across most products, as well as lower equity markets revenue on
 
lower derivatives revenue compared with a strong prior year. The decrease was partially offset by higher private equity gains as a result of higher net gains on sales. For additional information on principal transactions revenue, see CIB and Corporate/Private Equity segment results on pages 32–37 and pages 45–47, respectively, and Note 6.
Lending- and deposit-related fees decreased compared with the three and nine months ended September 30, 2013, reflecting the impact of business simplification initiatives and lower trade finance revenue in CIB.
Asset management, administration and commissions revenue increased compared with the three and nine months ended September 30, 2013, reflecting net client inflows and the effect of higher market levels in AM and CCB. The increase in the nine months ended September 30, 2014 was offset partially by lower revenue in CCB related to the exit of a non-core product in the second half of 2013. For additional information on these fees and commissions, see the segment discussions for CCB on pages 18–31, AM on pages 41–44, and Note 6.
Securities gains in the nine months ended September 30, 2014, decreased compared with the prior period, reflecting lower repositioning activity of the investment securities portfolio in the current period. For additional information, see the Corporate/Private Equity segment discussion on pages 45–47, and Note 11.
Mortgage fees and related income in the nine months ended September 30, 2014, decreased compared with the prior period. The decrease was predominantly related to lower net production revenue, driven by lower volumes. The lower net production revenue was partially offset by higher mortgage servicing rights (“MSR”) risk management results. For additional information, see pages 26–28, and Note 16.


8

Other income increased from the three months ended September 30, 2013, reflecting a nonrecurring gain in MB and higher auto lease income resulting from growth in auto lease volume. The increase in the nine months ended September 30, 2014 compared with the prior period was due to the aforementioned items, as well as a benefit from a franchise tax settlement recorded in the second quarter of 2014 and the absence of a modest loss on the redemption of trust preferred securities recorded in the second quarter of 2013. The increase was partially offset by lower all other revenue in CIB and lower valuations of seed capital investments in AM.
Net interest income increased in the three and nine months ended September 30, 2014, compared with the prior year. The increase from both 2013 periods predominantly reflected the impact of lower interest expense, higher yields
 
on investment securities, and higher average loan balances, partially offset by lower yields on loans due to the run-off of higher-yielding loans and new originations of lower-yielding loans. The increase from the nine months ended September 30, 2013, was also partially offset by lower average interest-earning trading asset balances. The Firm’s average interest-earning assets were $2.1 trillion for the three months ended September 30, 2014, and the net interest yield on those assets, on a fully taxable-equivalent (“FTE”) basis, was 2.19%, an increase of 1 basis point from the prior year. For the nine months ended September 30, 2014, the Firm’s average interest-earning assets were $2.0 trillion, and the net interest yield on those assets, on a FTE basis, was 2.19%, a decrease of 6 basis points from the prior year.

Provision for credit losses
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Consumer, excluding credit card
$
99

 
$
(815
)
 
NM 
 
$
181

 
$
(1,345
)
 
NM 
Credit card
798

 
542

 
47
%
 
2,371

 
1,588

 
49
%
Total consumer
897

 
(273
)
 
NM 
 
2,552

 
243

 
NM 
Wholesale
(140
)
 
(270
)
 
48

 
(253
)
 
(122
)
 
(107
)
Total provision for credit losses
$
757

 
$
(543
)
 
NM 
 
$
2,299

 
$
121

 
NM 
The provision for credit losses for the three and nine months ended September 30, 2014 increased from the prior year, reflecting an increase in the consumer provision for credit losses. The increase in the consumer provision for credit losses was the result of a lower benefit from reductions in the consumer allowance for loan losses, partially offset by lower net charge-offs. The consumer allowance release was primarily related to the continued improvement in home prices and delinquencies in the
 
residential real estate portfolio, and the run-off of the student loan portfolio. The wholesale provision reflected a generally favorable credit environment and stable credit quality trends. For a more detailed discussion of the credit portfolio and the allowance for credit losses, see the segment discussions for CCB on pages 18–31, CIB on pages 32–37 and CB on pages 38–40, and the Allowance for credit losses section on pages 64–66.

Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Compensation expense
$
7,831

 
$
7,325

 
7
%
 
$
23,300

 
$
23,758

 
(2
)%
Noncompensation expense:
 
 
 
 
 
 
 
 
 
 
 
Occupancy
978

 
947

 
3

 
2,903

 
2,752

 
5

Technology, communications and equipment
1,465

 
1,356

 
8

 
4,309

 
4,049

 
6

Professional and outside services
1,907

 
1,897

 
1

 
5,625

 
5,532

 
2

Marketing
610

 
588

 
4

 
1,824

 
1,755

 
4

Other expense(a)(b)
2,956

 
11,373

 
(74
)
 
7,590

 
16,625

 
(54
)
Amortization of intangibles
51

 
140

 
(64
)
 
314

 
444

 
(29
)
Total noncompensation expense
7,967

 
16,301

 
(51
)
 
22,565

 
31,157

 
(28
)
Total noninterest expense
$
15,798

 
$
23,626

 
(33
)%
 
$
45,865

 
$
54,915

 
(16
)%
(a)
Included Firmwide legal expense of $1.1 billion and $9.3 billion for the three months ended September 30, 2014 and 2013, respectively, and $1.8 billion and $10.3 billion for the nine months ended September 30, 2014 and 2013, respectively.
(b)
Included Federal Deposit Insurance Corporation-related (“FDIC”) expense of $250 million and $362 million for the three months ended September 30, 2014 and 2013, respectively, and $809 million and $1.1 billion for the nine months ended September 30, 2014 and 2013, respectively.

9

Total noninterest expense for the three months ended September 30, 2014, decreased by $7.8 billion compared with the prior year. The decrease was driven by lower other expense, in particular, legal expense, partially offset by higher compensation expense. For the nine months ended September 30, 2014, total noninterest expense decreased by $9.1 billion from the prior year. The decrease was driven by the aforementioned decline in other expense, as well as lower compensation expense.
Compensation expense increased compared with the three months ended September 30, 2013, predominantly driven by the Firm’s investments in the businesses, including headcount for controls, and higher compensation expense in CIB. The increase was partially offset by lower headcount-related expense in MB, and lower postretirement benefit costs. For the nine months ended September 30, 2014, compensation expense decreased predominantly driven by lower headcount-related expense in MB, lower
 
performance-based compensation expense in CIB, and lower postretirement benefit costs. The decrease in compensation expense was partially offset by the Firm’s investments, including headcount for controls.
Noncompensation expense in the three and nine months ended September 30, 2014, decreased compared with the prior year. The decrease for both periods was due to lower other expense, predominantly as a result of lower legal expense (as the prior year third quarter included a $9.3 billion expense). Lower expense for foreclosure-related matters and lower production and servicing-related expense in Mortgage Banking, and lower FDIC-related assessments, also contributed to the decline for both periods. The decrease was offset partially by the Firm’s investments in the businesses, including for controls, and costs related to business simplification initiatives in CIB. For a further discussion of legal expense, see Note 23.


Income tax expense
 
 
 
 
 
 
 
(in millions, except rate)
Three months ended September 30,
 
Nine months ended September 30,
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Income before income tax expense
$
7,691

 
$
34

 
NM 
 
$
23,529

 
$
18,414

 
28
%
Income tax expense
2,119

 
414

 
412
%
 
6,698

 
5,769

 
16

Effective tax rate
27.6
%
 
NM

 
 
 
28.5
%
 
31.3
%
 


The effective tax rate for the three months ended September 30, 2014, reflected benefits from tax adjustments and the settlement of tax audits; these benefits were partially offset by the impact of legal expense, which included nondeductible penalties. The effective tax rate for the three months ended September 30, 2013, was impacted by the substantial effect of that period’s legal expense, a portion of which included nondeductible penalties. The decrease in the effective tax rate from the nine months ended September 30, 2013, was largely attributable to the effect of the aforementioned nondeductible penalties, partially offset by higher reported pretax income in combination with changes in the mix of income and expense subject to U.S. federal, state and local income taxes, the write-down of deferred tax assets as a result of tax law changes enacted in New York State, comparably lower tax benefits associated with tax adjustments and the settlement of tax audits. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 85–87.


10

CONSOLIDATED BALANCE SHEETS ANALYSIS
Selected Consolidated Balance Sheets data
 
(in millions)
Sep 30,
2014
 
Dec 31,
2013
Change
Assets
 
 
 
 
Cash and due from banks
$
25,372

 
$
39,771

(36
)%
Deposits with banks
414,312

 
316,051

31

Federal funds sold and securities purchased under resale agreements
214,336

 
248,116

(14
)
Securities borrowed
118,873

 
111,465

7

Trading assets:
 
 
 
 
Debt and equity instruments
338,204

 
308,905

9

Derivative receivables
72,453

 
65,759

10

Securities
366,358

 
354,003

3

Loans
743,257

 
738,418

1

Allowance for loan losses
14,889

 
16,264

(8
)
Loans, net of allowance for loan losses
728,368

 
722,154

1

Accrued interest and accounts receivable
75,504

 
65,160

16

Premises and equipment
15,177

 
14,891

2

Goodwill
47,970

 
48,081

—

Mortgage servicing rights
8,236

 
9,614

(14
)
Other intangible assets
1,274

 
1,618

(21
)
Other assets
100,568

 
110,101

(9
)
Total assets
$
2,527,005

 
$
2,415,689

5

Liabilities
 
 
 
 
Deposits
$
1,334,534

 
$
1,287,765

4

Federal funds purchased and securities loaned or sold under repurchase agreements
198,746

 
181,163

10

Commercial paper
59,960

 
57,848

4

Other borrowed funds
31,892

 
27,994

14

Trading liabilities:
 
 
 


Debt and equity instruments
84,305

 
80,430

5

Derivative payables
58,951

 
57,314

3

Accounts payable and other liabilities
211,055

 
194,491

9

Beneficial interests issued by consolidated VIEs
47,564

 
49,617

(4
)
Long-term debt
268,721

 
267,889

—

Total liabilities
2,295,728

 
2,204,511

4

Stockholders’ equity
231,277

 
211,178

10

Total liabilities and stockholders’ equity
$
2,527,005

 
$
2,415,689

5
 %
Consolidated Balance Sheets overview
JPMorgan Chase’s total assets increased by $111.3 billion, and total liabilities increased by $91.2 billion from December 31, 2013.
The following is a discussion of the significant changes in the specific line item captions on the Consolidated Balance Sheets from December 31, 2013.
 
Cash and due from banks and deposits with banks
The net increase was attributable to higher levels of excess funds, which the Firm placed with various central banks, predominantly Federal Reserve Banks.
Federal funds sold and securities purchased under resale agreements; and securities borrowed
The decrease in federal funds sold and securities purchased under resale agreements was related to lower securities purchased under resale agreements, which was predominantly attributable to a shift in the deployment of the Firm’s excess cash by Treasury, and client activity in CIB. Securities borrowed increased due to a higher requirement for collateral to cover client-driven activities in CIB.
Trading assets and liabilities–debt and equity instruments
The increase in trading assets was predominantly related to client-driven market-making activities in CIB, which resulted in higher levels of debt and equity securities, and trading loans.
The increase in trading liabilities was predominantly related to client-driven market-making activities in CIB, which resulted in a higher level of short positions in debt securities. For additional information, refer to Note 3.
Trading assets and liabilities–derivative receivables and payables
The increase in both receivables and payables was predominantly due to client-driven market-making activities in CIB, specifically in foreign exchange derivatives, as a result of the appreciation of the U.S. dollar against certain currencies, and interest rate derivatives. The increase was partially offset by a decline in equity derivatives. For additional information, refer to Derivative contracts on pages 62–63, and Notes 3 and 5.
Securities
The increase was largely due to higher levels of obligations of U.S. states and municipalities, U.S. mortgage-backed securities and U.S. Treasuries, partially offset by a lower level of non-U.S. residential mortgage-backed securities. For additional information related to securities, refer to the discussion in the Corporate/Private Equity segment on pages 45–47, and Notes 3 and 11.
Loans and allowance for loan losses
The increase in loans was attributable to higher wholesale loans, partly offset by lower consumer loans. The increase in wholesale loans was driven by net new originations of commercial real estate loans in CB, and AM loans both in the U.S. and internationally, partially offset by lower balances in CIB. The decrease in consumer loans reflected paydowns and charge-off or liquidation of delinquent loans offset primarily by originations of prime mortgage loans.
The decrease in allowance for loan losses was driven by a reduction in the consumer allowance, predominantly as a result of continued improvement in home prices and delinquencies in the residential real estate portfolio, a reduction in the credit card allowance due to a decrease in


11

the asset-specific allowance resulting from increased granularity of the impairment estimates and lower balances related to credit card loans modified in troubled debt restructurings (“TDRs”), and the run-off of the student loan portfolio. The wholesale allowance was relatively unchanged, reflecting a generally favorable credit environment and stable credit quality trends. For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to Credit Risk Management on pages 49–66, and Notes 3, 4, 13 and 14.
Accrued interest and accounts receivable
The increase was due to higher receivables from security sales that did not settle, and higher client receivables, related to client-driven market-making activities in CIB.
Mortgage servicing rights
The decrease was predominantly due to the impact of total changes in valuation due to inputs and assumptions. For additional information on MSRs, see Note 16.
Other assets
The decrease was driven by several categories, including lower collateral pledged; lower deferred tax assets; and lower private equity investments due to sales.
Deposits
The increase was attributable to higher consumer and wholesale deposits. The increase in consumer deposits reflected a continuing positive growth trend, which was the result of strong customer retention, maturing of recent branch builds, and net new business. The increase in wholesale deposits was related to strong client deposit inflows toward the end of September 2014. For more information on consumer deposits, refer to the CCB segment discussion on pages 18–31; the Liquidity Risk Management discussion on pages 80–84; and Notes 3 and 17. For more information on wholesale client deposits, refer to the AM, CB and CIB segment discussions on pages 41–44, pages 38–40 and pages 32–37, respectively.
 
Federal funds purchased and securities loaned or sold under repurchase agreements
The increase in federal funds purchased and securities loaned or sold under repurchase agreements was related to higher securities sold under repurchase agreements, which was predominantly attributable to higher financing of the Firm’s trading assets-debt and equity instruments, and a change in the mix of the Firm’s funding sources. The increase was partially offset by client activity in CIB. For additional information on the Firm’s Liquidity Risk Management, see pages 80–84.
Accounts payable and other liabilities
The increase was attributable to higher client short positions and higher payables from security purchases that did not settle, both in CIB. Higher taxes payable was offset by lower legal-related reserve, largely reflecting the settlement of previously disclosed legal and regulatory matters.
Stockholders’ equity
The increase was due to net income, preferred stock issuances, and higher accumulated other comprehensive income (“AOCI”). The increase was partially offset by the declaration of cash dividends on common and preferred stock, and repurchases of common stock. For additional information on AOCI, see Note 19; for the Firm’s capital actions, see Capital actions on pages 78-79.


12

OFF-BALANCE SHEET ARRANGEMENTS
JPMorgan Chase is involved with several types of off–balance sheet arrangements, including through nonconsolidated special-purpose entities (“SPEs”), which are a type of variable interest entity (“VIE”), and through lending-related financial instruments (e.g., commitments and guarantees). For further discussion, see Note 21 of this Form 10-Q and Off–Balance Sheet Arrangements and Contractual Cash Obligations on pages 77–79 and Note 29 of JPMorgan Chase’s 2013 Annual Report.
Special-purpose entities
The most common type of VIE is an SPE. SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. SPEs are an important part of the financial markets, including the mortgage- and asset-backed securities and commercial paper markets, as they provide market liquidity by facilitating investors’ access to specific portfolios of assets and risks. The Firm holds capital, as deemed appropriate, against all SPE-related transactions and related exposures, such as derivative transactions and lending-related commitments and guarantees. For further information on the types of SPEs, see Note 15 of this Form 10-Q, and Note 1 and Note 16 of JPMorgan Chase’s 2013 Annual Report.
Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A.
For certain liquidity commitments to SPEs, JPMorgan Chase Bank, N.A., could be required to provide funding if its short-term credit rating were downgraded below specific levels, primarily “P-1,” “A-1” and “F1” for Moody’s, Standard & Poor’s and Fitch, respectively. These liquidity commitments support the issuance of asset-backed commercial paper by Firm-administered consolidated SPEs. In the event of a short-term credit rating downgrade, JPMorgan Chase Bank, N.A., absent other solutions, would be required to provide funding to the SPE, if the commercial paper could not be reissued as it matured. The aggregate amounts of commercial paper outstanding held by third parties as of September 30, 2014, and December 31, 2013, was $8.4 billion and $15.5 billion, respectively. The aggregate amounts of commercial paper outstanding could increase in future periods should clients of the Firm-administered consolidated SPEs draw down on certain unfunded lending-related commitments. These unfunded lending-related commitments were $8.6 billion and $9.2 billion at September 30, 2014, and December 31, 2013, respectively. The Firm could facilitate the refinancing of some of the clients’ assets in order to reduce the funding obligation.

 


Off–balance sheet lending-related financial instruments, guarantees, and other commitments
JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk to the Firm should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and should the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without being drawn or a default occurring. As a result, the total contractual amount of these instruments is not, in the Firm’s view, representative of its actual future credit exposure or funding requirements. For further discussion of lending-related financial instruments, guarantees and other commitments, and the Firm’s accounting for them, see Lending-related commitments on page 62 and Note 21 (including the table that presents the related amounts by contractual maturity as of September 30, 2014). For a discussion of liabilities associated with loan sales- and securitization-related indemnifications, see Note 21.


13

CONSOLIDATED CASH FLOWS ANALYSIS
For a discussion of the activities affecting the Firm’s cash flows, see pages 80–81 of JPMorgan Chase’s 2013 Annual Report and Balance Sheet Analysis of this Form 10-Q.
(in millions)
 
Nine months ended September 30,
 
2014
 
2013
Net cash provided by/(used in)
 
 
 
 
Operating activities
 
$
7,847

 
$
114,867

Investing activities
 
(95,630
)
 
(189,101
)
Financing activities
 
74,061

 
51,243

Effect of exchange rate changes on cash
 
(677
)
 
(68
)
Net decrease in cash and due from banks
 
$
(14,399
)
 
$
(23,059
)
Operating activities
Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by client-driven and risk management activities, and market conditions. The Firm believes cash flows from operations, available cash balances and its ability to generate cash through short- and long-term borrowings are sufficient to fund the Firm’s operating liquidity needs.
Cash provided by operating activities in 2014 predominantly resulted from net income after noncash operating adjustments; and higher net proceeds from loan securitizations and sales activities, reflecting lower levels of activity over the prior year; partially offset by net cash outflows from higher trading assets, predominantly debt and equity instruments related to client-driven market-making activities in CIB. Cash provided during 2013 predominantly resulted from lower trading assets, largely debt and equity instruments, driven by client-driven market-making activities in CIB; and an increase in accounts payable and other liabilities predominantly due to higher CIB brokerage payables. Cash proceeds from sales and paydowns of loans were slightly higher than the cash used to acquire loans.
 
Investing activities
Cash used in investing activities during 2014 and 2013, predominantly resulted from increases in deposits with banks, attributable to higher levels of excess funds, which the Firm placed with various central banks, predominantly Federal Reserve banks; and increases in wholesale loans due to net originations. Partially offsetting these cash outflows in both periods was a net decline in securities purchased under resale agreements due to a shift in the deployment of the Firm’s excess cash by Treasury. Cash outflows in 2014 also reflected net purchases of investment securities, while 2013 reflected cash proceeds from net maturities and sales of investment securities.
Financing activities
Cash provided by financing activities in 2014 predominantly resulted from higher consumer and wholesale deposits. The increase in consumer deposits reflected a continuing positive growth trend resulting from strong customer retention, maturing of recent branch builds, and net new business; the increase in wholesale deposits reflected strong client deposit inflows. Cash provided also resulted from an increase in securities loaned or sold under repurchase agreements due to higher financing of the Firm’s trading assets–debt and equity instruments; and proceeds from preferred stock issuances. Further, issuances of long-term borrowings were predominantly offset by maturities and redemptions. Cash provided in 2013 was driven by growth in both wholesale and consumer deposits, net proceeds from long-term borrowings, and issuance of preferred stock; partially offset by a decrease in securities loaned or sold under repurchase agreements, predominantly due to changes in the mix of the Firm’s funding sources. In both periods these cash inflows were partially offset by repurchases of common stock and payments of dividends on common and preferred stock.



14

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 90–94. That presentation, which is referred to as “reported” basis, provides the reader with an understanding of the Firm’s results that can be tracked consistently from year-to-year and enables a comparison of the Firm’s performance with other companies’ U.S. GAAP financial statements.
In addition to analyzing the Firm’s results on a reported basis, management reviews the Firm’s results and the results of the lines of business on a “managed” basis, which is a non-GAAP financial measure. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in
 
the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business.
Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. Non-GAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.


The following summary table provides a reconciliation from the Firm’s reported U.S. GAAP results to managed basis.
 
Three months ended September 30,
 
2014
 
2013
(in millions, except ratios)
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
 
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
Other income
$
732

 
$
660

 
$
1,392

 
$
602

 
$
582

 
$
1,184

Total noninterest revenue
13,139

 
660

 
13,799

 
12,342

 
582

 
12,924

Net interest income
11,107

 
253

 
11,360

 
10,775

 
181

 
10,956

Total net revenue
24,246

 
913

 
25,159

 
23,117

 
763

 
23,880

Pre-provision profit/(loss)
8,448

 
913

 
9,361

 
(509
)
 
763

 
254

Income before income tax expense
7,691

 
913

 
8,604

 
34

 
763

 
797

Income tax expense
$
2,119

 
$
913

 
$
3,032

 
$
414

 
$
763

 
$
1,177

Overhead ratio
65
%
 
NM

 
63
%
 
102
%
 
NM

 
99
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
2014
 
2013
(in millions, except ratios)
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
 
Reported
results
 
Fully taxable-equivalent adjustments(a)
 
Managed
basis
Other income
$
1,798

 
$
1,955

 
$
3,753

 
$
1,364

 
$
1,728

 
$
3,092

Total noninterest revenue
39,121

 
1,955

 
41,076

 
41,038

 
1,728

 
42,766

Net interest income
32,572

 
723

 
33,295

 
32,412

 
508

 
32,920

Total net revenue
71,693

 
2,678

 
74,371

 
73,450

 
2,236

 
75,686

Pre-provision profit
25,828

 
2,678

 
28,506

 
18,535

 
2,236

 
20,771

Income before income tax expense
23,529

 
2,678

 
26,207

 
18,414

 
2,236

 
20,650

Income tax expense
$
6,698

 
$
2,678

 
$
9,376

 
$
5,769

 
$
2,236

 
$
8,005

Overhead ratio
64
%
 
NM

 
62
%
 
75
%
 
NM

 
73
%
(a)
Predominantly recognized in CIB and CB business segments and Corporate/Private Equity.
Tangible common equity (“TCE”), ROTCE and TBVPS are each non-GAAP financial measures. TCE represents the Firm’s common stockholders’ equity (i.e., total stockholders’ equity less preferred stock) less goodwill and identifiable intangible assets (other than MSRs), net of related deferred tax liabilities. ROTCE measures the Firm’s earnings as a
 
percentage of average TCE. TBVPS represents the Firm’s tangible common equity divided by common shares at period-end. TCE, ROTCE, and TBVPS are meaningful to the Firm, as well as investors and analysts, in assessing the Firm’s use of equity.



15

Tangible common equity
 
Period-end
 
Average
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
(in millions, except per share and ratio data)
Sep 30,
2014
 
Dec 31,
2013
 
 
 
 
2014
 
2013
 
2014
 
2013
Common stockholders’ equity
$
211,214

 
$
200,020

 
$
209,621

 
$
197,232

 
$
205,888

 
$
196,425

Less: Goodwill
47,970

 
48,081

 
48,081

 
48,073

 
48,073

 
48,106

Less: Certain identifiable intangible assets
1,274

 
1,618

 
1,308

 
1,878

 
1,423

 
2,021

Add: Deferred tax liabilities(a)
2,991

 
2,953

 
2,980

 
2,904

 
2,959

 
2,867

Tangible common equity
$
164,961

 
$
153,274

 
$
163,212

 
$
150,185

 
$
159,351

 
$
149,165

 
 
 
 
 
 
 
 
 
 
 
 
Return on tangible common equity
NM

 
NM

 
13
%
 
(2
)%
 
13
%
 
11
%
Tangible book value per share
$
44.13

 
$
40.81

 
NM

 
NM

 
NM

 
NM

(a)
Represents deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in non-taxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
Additionally, certain capital ratios disclosed by the Firm
are non-GAAP measures. For additional information on these non-GAAP measures, see Regulatory capital on
pages 73–77.
Core net interest income
In addition to reviewing net interest income on a managed basis, management also reviews core net interest income to assess the performance of its core lending, investing (including asset-liability management) and deposit-raising activities. Core net interest income excludes the impact of
 
CIB’s market-based activities. Because of the exclusion of CIB’s market-based net interest income and the related assets, the core data presented below are non-GAAP financial measures. Management believes this exclusion provides investors and analysts another measure by which to analyze the non-market-related business trends of the Firm and provides a comparable measure to other financial institutions that are primarily focused on core lending, investing and deposit-raising activities.



Core net interest income data(a)
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except rates)
2014
2013
 
Change
 
2014
2013
 
Change
Net interest income – managed basis(b)(c)
$
11,360

$
10,956

 
4
%
 
$
33,295

$
32,920

 
1
%
Less: Market-based net interest income
1,239

1,109

 
12

 
3,325

3,886

 
(14
)
Core net interest income(b)
$
10,121

$
9,847

 
3

 
$
29,970

$
29,034

 
3

 
 
 
 
 
 
 
 
 
 
Average interest-earning assets
$
2,061,785

$
1,997,413

 
3

 
$
2,030,665

$
1,958,359

 
4

Less: Average market-based earning assets
513,051

493,780

 
4

 
507,675

505,062

 
1

Core average interest-earning assets
$
1,548,734

$
1,503,633

 
3
%
 
$
1,522,990

$
1,453,297

 
5
%
Net interest yield on interest-earning assets – managed basis
2.19
%
2.18
%
 
 
 
2.19
%
2.25
%
 
 
Net interest yield on market-based activities
0.96

0.89

 
 
 
0.88

1.03

 
 
Core net interest yield on core average interest-earning assets
2.59
%
2.60
%
 
 
 
2.63
%
2.67
%
 
 
(a)
Includes core lending, investing and deposit-raising activities on a managed basis across each of the business segments and Corporate/Private Equity; excludes the market-based activities within the CIB.
(b)
Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(c)
For a reconciliation of net interest income on a reported and managed basis, see reconciliation from the Firm’s reported U.S. GAAP results to managed basis on
page 15.
Quarterly and year-to-date results
Core net interest income increased by $274 million to $10.1 billion and by $936 million to $30.0 billion for the three and nine months ended September 30, 2014, respectively, compared with the prior year periods. Core average interest-earning assets increased by $45.1 billion to $1.5 trillion, and by $69.7 billion to $1.5 trillion for the three and nine months ended September 30, 2014, respectively, compared with the prior year periods. The increase in net interest income predominantly reflected the impact of higher yields on investment securities, lower
 
interest expense, and higher average loan balances, partially offset by lower yields on loans due to run-off of higher yielding loans and new originations of lower yielding loans. The increase in average interest-earning assets largely reflected the impact of higher average balance of deposits with banks. These changes in net interest income and interest-earning assets resulted in the core net interest yield decreasing by 1 basis point to 2.59% for the three months ended September 30, 2014, and 4 basis points to 2.63% for the nine months ended September 30, 2014.



16

BUSINESS SEGMENT RESULTS
The Firm is managed on a line of business basis. There are four major reportable business segments – Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking and Asset Management. In addition, there is a Corporate/Private Equity segment.
The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and Reconciliation of the Firm’s use of non-GAAP financial measures, on pages 15–16.
Description of business segment reporting methodology
Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense
 
using market-based methodologies. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
For a further discussion of those methodologies, see Business Segment Results – Description of business segment reporting methodology on pages 84–85 of JPMorgan Chase’s 2013 Annual Report.
Business segment capital allocation changes
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons, regulatory capital requirements (as estimated under Basel III Advanced Fully Phased-In) and economic risk measures. The amount of capital assigned to each business is referred to as equity. Effective January 1, 2014, the Firm revised the capital allocated to certain businesses. For further information about these capital changes, see Line of business equity on pages 77–78.


Segment Results – Managed Basis
The following table summarizes the business segment results for the periods indicated.
Three months ended September 30,
Total net revenue
 
Total Noninterest expense
 
Pre-provision profit/(loss)
(in millions)
2014
2013
Change

 
2014
2013
Change
 
2014
2013
Change
Consumer & Community Banking
$
11,267

$
11,082

2
%
 
$
6,305

$
6,867

(8
)%
 
$
4,962

$
4,215

18
%
Corporate & Investment Bank
8,787

8,189

7

 
6,035

4,999

21

 
2,752

3,190

(14
)
Commercial Banking
1,667

1,725

(3
)
 
668

661

1

 
999

1,064

(6
)
Asset Management
3,016

2,763

9

 
2,081

2,003

4

 
935

760

23

Corporate/Private Equity
422

121

249

 
709

9,096

(92
)
 
(287
)
(8,975
)
97

Total
$
25,159

$
23,880

5
%
 
$
15,798

$
23,626

(33
)%
 
$
9,361

$
254

NM
Three months ended September 30,
Provision for credit losses
 
Net income/(loss)
 
Return on common equity
(in millions, except ratios)
2014
2013
Change
 
2014
2013
Change
 
2014
2013
Consumer & Community Banking
$
902

$
(267
)
NM
 
$
2,468

$
2,702

(9
)%
 
19
%
23
%
Corporate & Investment Bank
(67
)
(218
)
(69
)%
 
1,485

2,240

(34
)
 
10

16

Commercial Banking
(79
)
(41
)
93

 
649

665

(2
)
 
18

20

Asset Management
9

—

NM
 
572

476

20
%
 
25

21

Corporate/Private Equity 
(8
)
(17
)
53
%
 
398

(6,463
)
NM
 
NM
NM
Total
$
757

$
(543
)
NM
 
$
5,572

$
(380
)
NM
 
10
%
(1
)%
Nine months ended September 30,
Total net revenue
 
Total Noninterest expense
 
Pre-provision profit/(loss)
(in millions)
2014
2013
Change

 
2014
2013
Change
 
2014
2013
Change
Consumer & Community Banking
$
33,158

$
34,712

(4
)%
 
$
19,198

$
20,521

(6
)%
 
$
13,960

$
14,191

(2
)%
Corporate & Investment Bank
26,384

28,205

(6
)
 
17,697

16,852

5

 
8,687

11,353

(23
)
Commercial Banking
5,019

5,126

(2
)
 
2,029

1,957

4

 
2,990

3,169

(6
)
Asset Management
8,750

8,141

7

 
6,218

5,771

8

 
2,532

2,370

7

Corporate/Private Equity
1,060

(498
)
NM 
 
723

9,814

(93
)
 
337

(10,312
)
NM 
Total
$
74,371

$
75,686

(2
)%
 
$
45,865

$
54,915

(16
)%
 
$
28,506

$
20,771

37
%
Nine months ended September 30,
Provision for credit losses
 
Net income/(loss)
 
Return on common equity
(in millions, except ratios)
2014
2013
Change
 
2014
2013
Change
 
2014
2013
Consumer & Community Banking
$
2,570

$
263

NM 
 
$
6,847

$
8,377

(18
)%
 
18
%
24
%
Corporate & Investment Bank
(102
)
(213
)
(52
)%
 
5,427

7,688

(29
)
 
12

18

Commercial Banking
(141
)
42

NM 
 
1,885

1,882

—

 
18

19

Asset Management
1

44

(98
)
 
1,565

1,463

7

 
23

22

Corporate/Private Equity
(29
)
(15
)
(93
)%
 
1,107

(6,765
)
NM 
 
NM
NM
Total
$
2,299

$
121

NM 
 
$
16,831

$
12,645

33
%
 
10
%
8
%

17


CONSUMER & COMMUNITY BANKING
For a discussion of the business profile of CCB, see pages 86–97 of JPMorgan Chase’s 2013 Annual Report.
Selected income statement data
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except ratios)
2014
 
2013
 
Change
 
2014
 
2013
 
 
Change
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
Lending- and deposit-related fees
$
804

 
$
780

 
3
%
 
$
2,257

 
$
2,230

 
 
1
%
Asset management, administration and commissions
534

 
515

 
4

 
1,558

 
1,609

 
 
(3
)
Mortgage fees and related income
902

 
839

 
8

 
2,706

 
4,108

 
 
(34
)
Card income
1,478

 
1,460

 
1

 
4,312

 
4,267

 
 
1

All other income
496

 
367

 
35

 
1,283

 
1,074

 
 
19

Noninterest revenue
4,214

 
3,961

 
6

 
12,116

 
13,288

 
 
(9
)
Net interest income
7,053

 
7,121

 
(1
)
 
21,042

 
21,424

 
 
(2
)
Total net revenue
11,267

 
11,082

 
2

 
33,158

 
34,712

 
 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for credit losses
902

 
(267
)
 
NM

 
2,570

 
263

 
 
NM 

 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest expense
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense
2,627

 
2,949

 
(11
)
 
8,003

 
8,921

 
 
(10
)
Noncompensation expense
3,656

 
3,817

 
(4
)
 
10,985

 
11,282

 
 
(3
)
Amortization of intangibles
22

 
101

 
(78
)
 
210

 
318

 
 
(34
)
Total noninterest expense
6,305

 
6,867

 
(8
)
 
19,198

 
20,521

 
 
(6
)
Income before income tax expense
4,060

 
4,482

 
(9
)
 
11,390

 
13,928

 
 
(18
)
Income tax expense
1,592

 
1,780

 
(11
)
 
4,543

 
5,551

 
 
(18
)
Net income
$
2,468

 
$
2,702

 
(9
)%
 
$
6,847

 
$
8,377

 
 
(18
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial ratios
 
 
 
 
 
 
 
 
 
 
 
 
Return on common equity
19
%
 
23
%
 
 
 
18
%
 
24
%
 
 
 
Overhead ratio
56

 
62

 
 
 
58

 
59

 
 
 
Note: In the discussion and the tables which follow, CCB presents certain financial measures which exclude the impact of PCI loans; these are non-GAAP financial measures.For additional information, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures on pages 15–16
Quarterly results
Consumer & Community Banking net income was $2.5 billion, a decrease of $234 million, or 9%, compared with the prior year, due to higher provision for credit losses, largely offset by lower noninterest expense and higher net revenue.
Net revenue was $11.3 billion, an increase of $185 million, or 2%, compared with the prior year. Net interest income was $7.1 billion, down $68 million, or 1%, driven by spread compression and lower mortgage warehouse balances, predominantly offset by higher deposit balances. Noninterest revenue was $4.2 billion, an increase of $253 million, or 6%, driven by a non-recurring gain in Mortgage Banking, higher mortgage fees and related income and higher investment revenue in Consumer & Business Banking.
The provision for credit losses was $902 million, compared with a benefit of $267 million in the prior year. The current-quarter provision reflected a $200 million reduction in the allowance for loan losses and total net charge-offs of $1.1 billion. The prior-year provision reflected a $1.6 billion reduction in the allowance for loan losses and total net charge-offs of $1.3 billion. For more information, including net charge-off amounts and rates, see Consumer Credit Portfolio on pages 50–57.
Noninterest expense was $6.3 billion, a decrease of $562 million, or 8%, from the prior year, driven by lower Mortgage Banking expense, partially offset by an accrual
 
related to Home Depot fraud and higher Auto lease depreciation expense.
Year-to-date results
Consumer & Community Banking net income was $6.8 billion, a decrease of $1.5 billion, or 18%, compared with the prior year, due to higher provision for credit losses and lower net revenue, partially offset by lower noninterest expense.
Net revenue was $33.2 billion, a decrease of $1.6 billion, or 4%, compared with the prior year. Net interest income was $21.0 billion, down $382 million, or 2%, driven by spread compression and lower mortgage warehouse balances, largely offset by higher deposit balances. Noninterest revenue was $12.1 billion, a decrease of $1.2 billion, or 9%, driven by lower mortgage fees and related income.
The provision for credit losses was $2.6 billion, compared with $263 million in the prior year. The current-year provision reflected a $1.0 billion reduction in the allowance for loan losses and total net charge-offs of $3.6 billion. The prior-year provision reflected a $4.2 billion reduction in the allowance for loan losses and total net charge-offs of $4.5 billion. For more information, including net charge-off amounts and rates, see Consumer Credit Portfolio on pages 50–57.
Noninterest expense was $19.2 billion, a decrease of $1.3 billion, or 6%, from the prior year, driven by lower Mortgage Banking expense, partially offset by higher Auto and Credit Card expense.


18


Selected metrics
 
 
 
 
 
 
 
 
 
 
 
As of or for the three months
ended September 30,
 
As of or for the nine months
ended September 30,
(in millions, except headcount)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Selected balance sheet data (period-end)
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
448,033

 
$
451,166

 
(1
)%
 
$
448,033

 
$
451,166

 
(1
)%
Trading assets - loans(a)
10,750

 
10,309

 
4

 
10,750

 
10,309

 
4

Loans:
 
 
 
 
 
 
 
 
 
 
 
Loans retained
390,709

 
390,345

 
—

 
390,709

 
390,345

 
—

Loans held-for-sale
876

 
449

 
95

 
876

 
449

 
95

Total loans
391,585

 
390,794

 
—

 
391,585

 
390,794

 
—

Deposits
493,249

 
458,867

 
7

 
493,249

 
458,867

 
7

Equity(b)
51,000

 
46,000

 
11

 
51,000

 
46,000