Document/ExhibitDescriptionPagesSize 1: 10-K Annual Report HTML 5.94M
2: EX-10.19 Material Contract HTML 399K
5: EX-21 Subsidiaries List HTML 65K
6: EX-23 Consent of Experts or Counsel HTML 60K
3: EX-12.1 Statement re: Computation of Ratios HTML 76K
4: EX-12.2 Statement re: Computation of Ratios HTML 78K
7: EX-31.1 Certification -- §302 - SOA'02 HTML 64K
8: EX-31.2 Certification -- §302 - SOA'02 HTML 64K
9: EX-32 Certification -- §906 - SOA'02 HTML 63K
16: R1 Document and Entity Information HTML 85K
17: R2 Consolidated Statements of Income HTML 143K
18: R3 Consolidated Statements of Comprehensive Income HTML 84K
19: R4 Consolidated Balance Sheets HTML 158K
20: R5 Consolidated Balance Sheets (Parenthetical) HTML 116K
21: R6 Consolidated Statements of Changes in HTML 119K
Stockholders' Equity
22: R7 Consolidated Statements of Changes in HTML 59K
Stockholders' Equity (Parenthetical)
23: R8 Consolidated Statements of Cash Flows HTML 178K
24: R9 Basis of Presentation HTML 98K
25: R10 Fair Value Measurement HTML 1.52M
26: R11 Fair Value Option HTML 264K
27: R12 Credit Risk Concentrations HTML 199K
28: R13 Derivative Instruments HTML 777K
29: R14 Noninterest Revenue and Noninterest Expense HTML 164K
30: R15 Interest Income and Interest Expense HTML 102K
31: R16 Pension and Other Postretirement Employee Benefit HTML 444K
Plans
32: R17 Employee Share-Based Incentives HTML 129K
33: R18 Securities HTML 538K
34: R19 Securities Financing Activities HTML 166K
35: R20 Loans HTML 1.25M
36: R21 Allowance for Credit Losses HTML 426K
37: R22 Variable Interest Entities HTML 368K
38: R23 Goodwill and Mortgage Servicing Rights HTML 213K
39: R24 Premises and Equipment HTML 61K
40: R25 Deposits HTML 109K
41: R26 Accounts Payable and Other Liabilities HTML 70K
42: R27 Long-term Debt HTML 189K
43: R28 Preferred Stock HTML 146K
44: R29 Common Stock HTML 94K
45: R30 Earnings Per Share HTML 92K
46: R31 Accumulated Other Comprehensive Income/(Loss) HTML 261K
47: R32 Income Taxes HTML 216K
48: R33 Restrictions on Cash and Intercompany Funds HTML 73K
Transfers
49: R34 Regulatory Capital HTML 195K
50: R35 Off-balance Sheet Lending-related Financial HTML 273K
Instruments, Guarantees, and Other Commitments
51: R36 Commitments, Pledged Assets and Collateral HTML 110K
52: R37 Litigation HTML 94K
53: R38 International Operations HTML 147K
54: R39 Business Segments HTML 237K
55: R40 Parent Company HTML 230K
56: R41 Basis of Presentation (Policies) HTML 268K
57: R42 Basis of Presentation Basis of Presentation HTML 76K
(Tables)
58: R43 Fair Value Measurement (Tables) HTML 1.47M
59: R44 Fair Value Option (Tables) HTML 257K
60: R45 Credit Risk Concentrations (Tables) HTML 195K
61: R46 Derivative Instruments (Tables) HTML 764K
62: R47 Noninterest Revenue and Noninterest Expense HTML 160K
(Tables)
63: R48 Interest Income and Interest Expense (Tables) HTML 100K
64: R49 Pension and Other Postretirement Employee Benefit HTML 445K
Plans (Tables)
65: R50 Employee Share-Based Incentives (Tables) HTML 118K
66: R51 Securities (Tables) HTML 531K
67: R52 Securities Financing Activities (Tables) HTML 160K
68: R53 Loans (Tables) HTML 1.20M
69: R54 Allowance for Credit Losses (Tables) HTML 405K
70: R55 Variable Interest Entities (Tables) HTML 331K
71: R56 Goodwill and Mortgage Servicing Rights (Tables) HTML 204K
72: R57 Deposits (Tables) HTML 112K
73: R58 Accounts Payable and Other Liabilities (Tables) HTML 69K
74: R59 Long-term Debt (Tables) HTML 308K
75: R60 Preferred Stock (Tables) HTML 166K
76: R61 Common Stock (Tables) HTML 179K
77: R62 Earnings Per Share (Tables) HTML 91K
78: R63 Accumulated Other Comprehensive Income/(Loss) HTML 263K
(Tables)
79: R64 Income Taxes (Tables) HTML 204K
80: R65 Regulatory Capital (Tables) HTML 189K
81: R66 Off-balance Sheet Lending-related Financial HTML 224K
Instruments, Guarantees, and Other Commitments
(Tables)
82: R67 Commitments, Pledged Assets and Collateral HTML 112K
(Tables)
83: R68 International Operations (Tables) HTML 147K
84: R69 Business Segments (Tables) HTML 230K
85: R70 Parent Company (Tables) HTML 228K
86: R71 Fair Value Measurement - Recurring Basis (Details) HTML 383K
87: R72 Fair Value Measurement - Transfers (Details) HTML 89K
88: R73 Fair Value Measurement - Level 3 Inputs (Details) HTML 266K
89: R74 Fair Value Measurement - Changes in Level 3 HTML 335K
Recurring Measurements (Details)
90: R75 Fair Value Measurement - Level 3 Analysis HTML 81K
(Details)
91: R76 Fair Value Measurement - Impact of Credit HTML 61K
Adjustments (Details)
92: R77 Fair Value Measurement - Nonrecurring Basis HTML 99K
(Details)
93: R78 Fair Value Measurement - Carrying Value and HTML 134K
Estimated Fair Value (Details)
94: R79 Fair Value Option - Changes in fair value under HTML 130K
the fair value option (Details)
95: R80 Fair Value Option - Aggregate differences HTML 109K
(Details)
96: R81 Fair Value Option - Structured note products by HTML 94K
balance sheet classification and risk component
(Details)
97: R82 Credit Risk Concentrations (Details) HTML 187K
98: R83 Derivative Instruments - Notional Amount of HTML 102K
Derivative Contracts (Details)
99: R84 Derivative Instruments - Impact on Balance Sheet HTML 114K
(Details)
100: R85 Derivative Instruments - Derivatives Netting HTML 187K
(Details)
101: R86 Derivative Instruments - Liquidity Risk and HTML 73K
Credit-Related Contingent Features (Details)
102: R87 Derivative Instruments - Designated as Hedges HTML 59K
(Details)
103: R88 Derivative Instruments - Impact on Statements of HTML 83K
Income, Fair Value Hedges (Details)
104: R89 Derivative Instruments - Impact on Statements of HTML 91K
Income, Cash Flow Hedges (Details)
105: R90 Derivative Instruments - Impact on Statements of HTML 65K
Income, Net Investment Hedges (Details)
106: R91 Derivative Instruments - Impact on Statements of HTML 72K
Income, Risk Management Derivatives (Details)
107: R92 Derivative Instruments - Credit Derivatives HTML 84K
(Details)
108: R93 Derivative Instruments - Credit Derivatives, HTML 82K
Protection Sold, Notional and Fair Value (Details)
109: R94 Noninterest Revenue and Noninterest Expense - HTML 69K
Investment Banking Fees (Details)
110: R95 Noninterest Revenue and Noninterest Expense - HTML 77K
Principal Transactions (Details)
111: R96 Noninterest Revenue and Noninterest Expense - HTML 66K
Lending and Deposit-Related Fees (Details)
112: R97 Noninterest Revenue and Noninterest Expense - HTML 78K
Asset Management, Administration and Commissions
(Details)
113: R98 Noninterest Revenue and Noninterest Expense - Card HTML 66K
Income (Details)
114: R99 Noninterest Revenue and Noninterest Expense - HTML 60K
Other Income (Details)
115: R100 Noninterest Revenue and Noninterest Expense - HTML 62K
Components of Noninterest Expense (Details)
116: R101 Interest Income and Interest Expense (Details) HTML 105K
117: R102 Pension and Other Postretirement Employee Benefit HTML 191K
Plans - Defined Benefit Pension Plans (Details)
118: R103 Pension and Other Postretirement Employee Benefit HTML 71K
Plans - Gains and Losses (Details)
119: R104 Pension and Other Postretirement Employee Benefit HTML 150K
Plans - Net Periodic Benefit Costs (Details)
120: R105 Pension and Other Postretirement Employee Benefit HTML 65K
Plans - Pretax Amortization from AOCI (Details)
121: R106 Pension and Other Postretirement Employee Benefit HTML 68K
Plans - Plan Assumptions (Details)
122: R107 Pension and Other Postretirement Employee Benefit HTML 70K
Plans - Twenty-Five Basis Point Decrease Effects
(Details)
123: R108 Pension and Other Postretirement Employee Benefit HTML 98K
Plans - Investment Strategy and Weighted Average
Asset Allocation (Details)
124: R109 Pension and Other Postretirement Employee Benefit HTML 166K
Plans - Plan Assets and Liabilities Measured At
Fair Value (Details)
125: R110 Pension and Other Postretirement Employee Benefit HTML 80K
Plans - Changes In Level 3 Fair Value Measurements
(Details)
126: R111 Pension and Other Postretirement Employee Benefit HTML 92K
Plans - Estimated Future Benefit Payments
(Details)
127: R112 Employee Share-Based Incentives - Employee HTML 94K
Share-Based Awards (Details)
128: R113 Employee Share-Based Incentives - RSUs, Employee HTML 140K
Stock Options and SARS Activities (Details)
129: R114 Employee Share-Based Incentives - Compensation HTML 69K
Expense (Details)
130: R115 Employee Share-Based Incentives - Cash Flows and HTML 69K
Tax Benefits (Details)
131: R116 Securities - Amortized Costs, Fair Value (Details) HTML 164K
132: R117 Securities - Continuous Unrealized Loss Position HTML 175K
(Details)
133: R118 Securities - Realized Gain (Loss) (Details) HTML 74K
134: R119 Securities - Amortized Cost, Fair Value, by HTML 298K
Contract Maturity (Details)
135: R120 Securities Financing Activities - Schedule of HTML 140K
securities purchased under resale agreements,
netting & securities borrowed (Details)
136: R121 Securities Financing Activities - Schedule of HTML 103K
secured financing transactions by assets pledged &
remaining maturity (Details)
137: R122 Securities Financing Activities - Schedule of HTML 59K
transfers not qualifying for sale accounting
(Details)
138: R123 Loans - Narrative and Balances By Portfolio HTML 96K
Segment (Details)
139: R124 Loans - By Portfolio Segment (Details) HTML 77K
140: R125 Loans - Purchased, Sold and Reclassified to HTML 76K
Held-for-Sale (Details)
141: R126 Loans - Net Gains and Losses on Sale (Details) HTML 68K
142: R127 Loans - Consumer, Excluding Credit Card Loan HTML 87K
Portfolio (Details)
143: R128 Loans - Consumer, Excluding Credit Card Loans, HTML 208K
Residential Real Estate, Excluding PCI Loans
(Details)
144: R129 Loans - Consumer, Excluding Credit Card Loans, HTML 85K
Delinquency Statistics Junior Lien Home Equity
Loans (Details)
145: R130 Loans - Consumer, Excluding Credit Card Loans, HTML 104K
Impaired Loans (Details)
146: R131 Loans - Consumer, Excluding Credit Card Loans, HTML 68K
Loan Modifications, New TDRs (Details)
147: R132 Loans - Consumer, Excluding Credit Card Loans, HTML 102K
Loan Modifications, Nature and Extent of
Modifications (Details)
148: R133 Loans - Consumer, Excluding Credit Card Loans, HTML 113K
Financial Effects of Modifications and Redefaults
(Details)
149: R134 Loans - Consumer, Excluding Credit Card Loans, HTML 136K
Other Consumer Loans (Details)
150: R135 Loans - Consumer, Excluding Credit Card Loans, HTML 84K
Other Consumer Impaired Loans and Loan
Modifications (Details)
151: R136 Loans - Consumer, Excluding Credit Card Loans, PCI HTML 321K
Loans (Details)
152: R137 Loans - Consumer, Excluding Credit Card Loans, PCI HTML 91K
Delinquency Statistics (Details)
153: R138 Loans - Consumer, Excluding Credit Card Loans, PCI HTML 88K
Accretable Yield Activity (Details)
154: R139 Loans - Credit Card Loan Portfolio (Details) HTML 108K
155: R140 Loans - Credit Card Portfolio - Impaired Loans HTML 78K
(Details)
156: R141 Loans - Credit Card Portfolio - Loan Modifications HTML 73K
(Details)
157: R142 Loans - Wholesale Loan Portfolio - By Class of HTML 174K
Receivable (Details)
158: R143 Loans - Wholesale Loan Portfolio - Real Estate HTML 89K
Class of Loans (Details)
159: R144 Loans - Wholesale Loan Portfolio - Impaired Loans HTML 96K
(Details)
160: R145 Allowance for Credit Losses (Details) HTML 193K
161: R146 Variable Interest Entities - Credit Card HTML 70K
Securitizations (Details)
162: R147 Variable Interest Entities - Firm Sponsored HTML 125K
Variable Interest Entities (Details)
163: R148 Variable Interest Entities - Re-securitizations HTML 74K
(Details)
164: R149 Variable Interest Entities - Multi-seller Conduits HTML 70K
(Details)
165: R150 Variable Interest Entities - Consolidated VIE HTML 130K
Assets and Liabilities (Details)
166: R151 Variable Interest Entities - VIEs Sponsored by HTML 69K
Third Parties (Details)
167: R152 Variable Interest Entities - Securitization HTML 86K
Activity (Details)
168: R153 Variable Interest Entities - Loans Sold to HTML 70K
Third-Party Sponsored Securitization Entities
(Details)
169: R154 Variable Interest Entities - Schedule of Loans HTML 66K
Repurchased and Option to Repurchase Delinquent
Loans (Details)
170: R155 Variable Interest Entities - Loan Delinquencies HTML 81K
and Net Charge-offs (Details)
171: R156 Goodwill and Mortgage Servicing Rights - by HTML 70K
Business Segment (Details)
172: R157 Goodwill and Mortgage Servicing Rights - Changes HTML 72K
During Period (Details)
173: R158 Goodwill and Mortgage Servicing Rights - HTML 61K
Impairment Testing Narrative (Details)
174: R159 Goodwill and Mortgage Servicing Rights - Mortgage HTML 98K
Servicing Rights (Details)
175: R160 Goodwill and Mortgage Servicing Rights - Mortgage HTML 86K
Fees and Related Income (Details)
176: R161 Goodwill and Mortgage Servicing Rights - Key HTML 71K
Economic Assumptions (Details)
177: R162 Deposits - Noninterest and Interest-bearing HTML 82K
(Details)
178: R163 Deposits - Time Deposits (Details) HTML 63K
179: R164 Deposits - Maturities of Interest-Bearing Time HTML 80K
Deposits (Details)
180: R165 Accounts Payable and Other Liabilities (Details) HTML 66K
181: R166 Long-term Debt - Summary of Long-Term Debt HTML 231K
(Details)
182: R167 Long-term Debt - Junior Subordinated Debt HTML 74K
(Details)
183: R168 Preferred Stock (Details) HTML 190K
184: R169 Common Stock - Narrative (Details) HTML 85K
185: R170 Common Stock - Shares Issued (Details) HTML 84K
186: R171 Common Stock - Repurchases (Details) HTML 68K
187: R172 Earnings Per Share (Details) HTML 89K
188: R173 Accumulated Other Comprehensive Income/(Loss) - HTML 90K
Rollforward (Details)
189: R174 Accumulated Other Comprehensive Income/(Loss) - HTML 121K
Components of Other Comprehensive Income/(Loss)
(Details)
190: R175 Income Taxes - Reconciliation of Effective Income HTML 98K
Tax Rate (Details)
191: R176 Income Taxes - Components of Income Tax HTML 94K
Expense/(Benefit) (Details)
192: R177 Income Taxes - Results from Non-U.S. Earnings HTML 66K
(Details)
193: R178 Income Taxes - Affordable Housing Tax Credits HTML 66K
(Details)
194: R179 Income Taxes - Deferred Tax Assets and Liabilities HTML 108K
(Details)
195: R180 Income Taxes - Unrecognized Tax Benefits (Details) HTML 85K
196: R181 Restrictions on Cash and Intercompany Funds HTML 84K
Transfers (Details)
197: R182 Regulatory Capital (Details) HTML 148K
198: R183 Off-balance Sheet Lending-related Financial HTML 196K
Instruments, Guarantees, and Other Commitments
(Details)
199: R184 Off-balance Sheet Lending-related Financial HTML 69K
Instruments, Guarantees, and Other Commitments -
Other Unfunded Commitments and Standby Letters of
Credit (Details)
200: R185 Off-balance Sheet Lending-related Financial HTML 82K
Instruments, Guarantees, and Other Commitments -
Standby Letters of Credit, Other Financial
Guarantees and Other Letters of Credit (Details)
201: R186 Off-balance Sheet Lending-related Financial HTML 61K
Instruments, Guarantees, and Other Commitments -
Securities Lending Indemnifications (Details)
202: R187 Off-balance Sheet Lending-related Financial HTML 80K
Instruments, Guarantees, and Other Commitments -
Derivatives Qualifying as Guarantees (Details)
203: R188 Off-balance Sheet Lending-related Financial HTML 62K
Instruments, Guarantees, and Other Commitments -
Loan Sales- and Securitization-Related
Indemnifications (Details)
204: R189 Off-balance Sheet Lending-related Financial HTML 73K
Instruments, Guarantees, and Other Commitments -
Other Off-Balance Sheet Arrangements (Details)
205: R190 Commitments, Pledged Assets and Collateral - Lease HTML 91K
Commitments (Details)
206: R191 Commitments, Pledged Assets and Collateral - HTML 81K
Pledged Assets and Collateral (Details)
207: R192 Litigation (Details) HTML 156K
208: R193 International Operations (Details) HTML 97K
209: R194 Business Segments - Narrative (Details) HTML 69K
210: R195 Business Segments (Details) HTML 136K
211: R196 Parent Company - Statements of Income (Details) HTML 105K
212: R197 Parent Company - Balance Sheets (Details) HTML 117K
213: R198 Parent Company - Statements of Cash Flows HTML 135K
(Details)
214: R199 Parent Company - Footnote Information (Details) HTML 87K
216: XML IDEA XML File -- Filing Summary XML 422K
215: EXCEL IDEA Workbook of Financial Reports XLSX 445K
10: EX-101.INS XBRL Instance -- jpm-20171231 XML 29.64M
12: EX-101.CAL XBRL Calculations -- jpm-20171231_cal XML 831K
13: EX-101.DEF XBRL Definitions -- jpm-20171231_def XML 3.78M
14: EX-101.LAB XBRL Labels -- jpm-20171231_lab XML 6.76M
15: EX-101.PRE XBRL Presentations -- jpm-20171231_pre XML 4.49M
11: EX-101.SCH XBRL Schema -- jpm-20171231 XSD 778K
217: ZIP XBRL Zipped Folder -- 0000019617-18-000057-xbrl Zip 1.56M
Guarantee
of Callable Step-Up Fixed Rate Notes due April 26, 2028 of JPMorgan Chase Financial Company LLC
The New York Stock Exchange
Guarantee of Cushing 30 MLP Index ETNs due June 15, 2037 of JPMorgan Chase Financial Company LLC
NYSE Arca, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No
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 Website,
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
x Large
accelerated filer
o Accelerated filer
o Non-accelerated filer
(Do not check if a smaller reporting company)
o Smaller reporting company
o Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
The aggregate market value of JPMorgan Chase & Co. common stock held by non-affiliates as of June 30, 2017: $319,702,076,316
Number of shares of common stock outstanding as of January 31,
2018: 3,431,958,491
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), 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 $255.7
billion in stockholders’ equity as of December 31, 2017. 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 banking association with U.S. branches in 23 states, and Chase Bank USA, National
Association (“Chase Bank USA, N.A.”), a national banking association that is the Firm’s principal credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), a U.S. broker-dealer. The bank and non-bank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. The Firm’s principal operating subsidiary in the U.K. is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.
The Firm’s website is
www.jpmorganchase.com. JPMorgan Chase makes available free of charge, through its website, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the U.S. Securities and Exchange Commission (the “SEC”) at www.sec.gov. The Firm has adopted, and posted on its website, a Code of Conduct for all employees of the Firm and a Code of Ethics for its Chairman and Chief Executive Officer,
Chief Financial Officer, Principal Accounting Officer and all other professionals of the Firm worldwide serving in a finance, accounting, tax or investor relations role.
Business segments
JPMorgan Chase’s activities are organized, for management reporting purposes, into four major reportable business segments, as well as a Corporate segment. The Firm’s consumer business is the Consumer & Community Banking (“CCB”) segment. The Firm’s wholesale business segments are Corporate & Investment Bank (“CIB”), Commercial Banking (“CB”), and Asset & Wealth Management (“AWM”).
A description of the Firm’s business segments and the products
and services they provide to their respective client bases is provided in the “Business segment results” section
of Management’s discussion and analysis of financial condition and results of operations (“MD&A”), beginning on page 40 and in Note 31.
Competition
JPMorgan Chase and its subsidiaries and affiliates operate in a highly competitive environment. Competitors include other banks, brokerage firms, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity firms, insurance
companies, mutual fund companies, investment managers, credit card companies, mortgage banking companies, trust companies, securities processing companies, automobile financing companies, leasing companies, e-commerce and other Internet-based companies, financial technology companies, and other companies engaged in providing similar products and services. The Firm’s businesses generally compete on the basis of the quality and variety of the Firm’s products and services, transaction execution, innovation, reputation and price. Competition also varies based on the types of clients, customers, industries and geographies served. With respect to some of its geographies and products, JPMorgan Chase competes globally; with respect to others, the Firm competes on a national or regional basis. The Firm’s ability to compete also depends on its ability to attract and retain professional and other personnel, and on its reputation.
It
is likely that competition in the financial services industry will continue to be intense as the Firm’s businesses compete with other financial institutions that may have a stronger local presence in certain geographies or that operate under different rules and regulatory regimes than the Firm, or with companies that provide new or innovative products or services that the Firm does not provide.
Supervision and regulation
The Firm is subject to extensive and comprehensive regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various jurisdictions outside the U.S. in which the Firm does business.
The Firm has experienced an
extended period of significant change in regulation which has had and could continue to have significant consequences for how the Firm conducts business in the U.S. and abroad. The Firm devotes substantial resources to complying with existing and new laws, rules and regulations, while, at the same time, endeavoring to best meet the needs and expectations of its customers, clients and shareholders. As a result of legislative and regulatory changes and expanded supervision, the Firm has implemented and refined policies, procedures and controls, and made adjustments to its business and operations, legal entity structure, and capital and liquidity management. The combined effect of numerous rule-makings by multiple governmental agencies and regulators, and the potential conflicts or inconsistencies among such rules, continue to present challenges and risks to the Firm’s business and operations.
1
Part
I
Because regulatory changes are ongoing, the Firm cannot currently quantify all of the possible effects on its business and operations of the significant changes that are underway. For more information, see Risk Factors on pages 8–26.
Financial holding company:
Consolidated supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company (“BHC”) and a financial holding company, JPMorgan Chase is subject to comprehensive consolidated supervision, regulation and examination by the Federal Reserve. The Federal Reserve acts as an “umbrella regulator” and certain of JPMorgan Chase’s subsidiaries
are regulated directly by additional regulatory authorities based on the particular activities of those subsidiaries. For example, JPMorgan Chase’s national bank subsidiaries, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., are subject to supervision and regulation by the Office of the Comptroller of the Currency (“OCC”) and, with respect to certain matters, by the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”). Certain non-bank subsidiaries, such as the Firm’s U.S. broker-dealers, are subject to supervision and regulation
by the SEC, and subsidiaries of the Firm that engage in certain futures-related and swaps-related activities are subject to supervision and regulation by the Commodity Futures Trading Commission (“CFTC”). J.P. Morgan Securities plc, is a U.K. bank licensed within the European Economic Area (the “EEA”) to undertake all banking activity and is regulated by the U.K. Prudential Regulation Authority (the “PRA”), a subsidiary of the Bank of England which has responsibility for prudential regulation of banks and other systemically important institutions, and by the U.K. Financial Conduct Authority (“FCA”), which regulates conduct matters for all market participants. The Firm’s other non-U.S. subsidiaries
are regulated by the banking and securities regulatory authorities in the countries in which they operate. See Securities and broker-dealer regulation, Investment management regulation and Derivatives regulation below. In addition, the Firm’s consumer activities are subject to supervision and regulation by the Consumer Financial Protection Bureau (“CFPB”) and to regulation under various state statutes which are enforced by the respective state’s Attorney General.
Scope of permissible business activities. The Bank Holding Company Act generally restricts BHCs from engaging in business activities other than the business of banking and certain closely-related activities. Financial holding companies generally can engage in a broader range of financial activities than are otherwise
permissible for BHCs, including underwriting, dealing and making markets in securities, and making merchant banking investments in non-financial companies. The Federal Reserve has the authority to limit a financial holding company’s ability to conduct otherwise permissible activities if the financial holding company or any of its depository institution subsidiaries ceases to meet the applicable eligibility
requirements (including requirements that the financial holding company and each of its U.S. depository institution subsidiaries maintain their status as “well-capitalized”
and “well-managed”). The Federal Reserve may also impose corrective capital and/or managerial requirements on the financial holding company and may, for example, require divestiture of the holding company’s depository institutions if the deficiencies persist. Federal regulations also provide that if any depository institution controlled by a financial holding company fails to maintain a satisfactory rating under the Community Reinvestment Act, the Federal Reserve must prohibit the financial holding company and its subsidiaries from engaging in any activities other than those permissible for bank holding companies. In addition, a financial holding company must obtain Federal Reserve approval before engaging in certain banking and other financial activities both in the U.S. and internationally, as further described under Regulation
of acquisitions below.
Activities restrictions under the Volcker Rule. Section 619 (the “Volcker Rule”) of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) prohibits banking entities, including the Firm, from engaging in certain “proprietary trading” activities, subject to exceptions for underwriting, market-making, risk-mitigating hedging and certain other activities. In addition, the Volcker Rule limits the sponsorship of, and investment in, “covered funds” (as defined by the Volcker Rule) and imposes limits on certain transactions between the Firm and its sponsored funds (see JPMorgan Chase’s subsidiary banks — Restrictions on transactions with affiliates below). The period during which banking entities were required to bring
covered funds into conformance with the Volcker Rule ended on July 21, 2017. The Volcker Rule requires banking entities to establish comprehensive compliance programs reasonably designed to help ensure and monitor compliance with the restrictions under the Volcker Rule, including, in order to distinguish permissible from impermissible risk-taking activities, the measurement, monitoring and reporting of certain key metrics.
Capital and liquidity requirements. The Federal Reserve establishes capital and leverage requirements for the Firm and evaluates its compliance with such requirements. The OCC establishes similar capital and leverage requirements for the Firm’s national banking subsidiaries.
For more information about the applicable requirements relating to risk-based capital and leverage, see Capital Risk Management on pages 82–91 and Note 26. Under Basel III, bank holding companies and banks are required to measure their liquidity against two specific liquidity tests: the liquidity coverage ratio (“LCR”) and the net stable funding ratio (“NSFR”). In the U.S., the final LCR rule (“U.S. LCR”) became effective on January 1, 2015. In April 2016, the U.S. banking regulators issued a proposed rule for NSFR, but no final rule has been issued. For additional information on LCR, see Liquidity Risk Management on pages 92–97. On December
19, 2016, the Federal Reserve published final U.S. LCR public disclosure requirements. Beginning in the second quarter of 2017, the Firm began disclosing its
2
consolidated LCR pursuant to the U.S. LCR rule. On September 8, 2016, the Federal Reserve published the framework that will apply to
the setting of the countercyclical capital buffer. The Federal Reserve reviews the amount of this buffer at least annually, and on December 1, 2017, the Federal Reserve reaffirmed setting this buffer at 0%. Banking supervisors globally continue to consider refinements and enhancements to the Basel III capital framework for financial institutions. On December 7, 2017, the Basel Committee issued Basel III: Finalizing post-crisis reforms (“Basel III Reforms”), which seeks to reduce excessive variability in RWA and converge capital requirements between Standardized and Advanced approaches. The Basel III Reforms include revisions to both the standardized and internal ratings-based approach for credit risk, streamlining of the available approaches under the credit valuation adjustment (“CVA”) framework, a revised
approach for operational risk, revisions to the measurement and calibration of the leverage ratio, and a capital floor based on 72.5% of the revised Standardized approaches. The Basel Committee expects national regulatory authorities to implement the Basel III Reforms in the laws of their respective jurisdictions and to require banking organizations subject to such laws to meet most of the revised requirements by January 1, 2022, with certain elements being phased in through January 1, 2027. U.S. banking regulators will now propose requirements applicable to U.S. financial institutions.
Stress tests. The Federal Reserve has adopted supervisory stress tests for large bank holding companies, including JPMorgan Chase, which form part
of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (“CCAR”) framework. Under the framework, the Firm must conduct semi-annual company-run stress tests and, in addition, must submit an annual capital plan to the Federal Reserve, taking into account the results of separate stress tests designed by the Firm and the Federal Reserve. In reviewing the Firm’s capital plan, the Federal Reserve considers both quantitative and qualitative factors. Qualitative assessments include, among other things, the comprehensiveness of the plan, the assumptions and analysis underlying the plan, and the extent to which the Firm has satisfied certain supervisory matters related to the Firm’s processes and analyses, including
the design and operational effectiveness of the controls governing such processes. Moreover, the Firm is required to receive a notice of non-objection from the Federal Reserve before taking capital actions, such as paying dividends, implementing common equity repurchase programs or redeeming or repurchasing capital instruments. The OCC requires JPMorgan Chase Bank, N.A. to perform separate, similar annual stress tests. The Firm publishes each year the results of its mid-cycle stress tests under the Firm’s internally-developed “severely adverse” scenario and the results of its (and its two primary subsidiary banks’) annual stress tests under the supervisory “severely adverse” scenarios provided by the Federal Reserve and the OCC. The Firm is required to file its 2018
annual CCAR submission on April 5,
2018. Results will be published by the Federal Reserve by June 30, 2018, with disclosures of results by BHCs, including the Firm, to follow within 15 days. The mid-cycle capital stress test submissions are due on October 5, 2018 and BHCs, including the Firm, will publish results by November 4, 2018. For additional information on the Firm’s CCAR, see Capital Risk Management on pages 82–91. In December 2017, the Federal Reserve released a
set of proposals intended to provide more detailed disclosure and transparency concerning the Federal Reserve’s approach, design and governance of the supervisory stress testing process. The proposals were open for public comment through January 22, 2018.
Enhanced prudential standards. The Financial Stability Oversight Council (“FSOC”), among other things, recommends prudential standards and reporting and disclosure requirements to the Federal Reserve for systemically important financial institutions (“SIFIs”), such as JPMorgan Chase. The Federal Reserve has adopted several rules to implement the heightened prudential standards, including final rules relating to risk management and corporate governance of subject BHCs. BHCs with $50 billion or more in total consolidated assets are required to comply with enhanced
liquidity and overall risk management standards, and their boards of directors are required to conduct appropriate oversight of their risk management activities. For information on liquidity measures, see Liquidity Risk Management on pages 92–97.
Orderly liquidation authority and resolution and recovery. As a BHC with assets of $50 billion or more, the Firm is required to submit periodically to the Federal Reserve and the FDIC a plan for resolution under the Bankruptcy Code in the event of material distress or failure (a “resolution plan”). On December 19, 2017, the Federal Reserve and the FDIC announced joint determinations on the 2017 resolution plans of
eight systemically important domestic banking institutions, including that of JPMorgan Chase, and extended the filing deadline for the next resolution plan for each of these entities until July 1, 2019. The agencies determined that JPMorgan Chase’s 2017 resolution plan did not have any “deficiencies,” which are weaknesses severe enough to trigger a resubmission process that could result in more stringent requirements, or any “shortcomings,” which are less-severe weaknesses that would need to be addressed in the next resolution plan. For more information about the Firm’s resolution plan, see Risk Factors on pages 8–26.
Certain financial companies, including JPMorgan Chase and certain of its subsidiaries,
can also be subjected to resolution under an “orderly liquidation authority.” The U.S. Treasury Secretary, in consultation with the President of the United States, must first make certain extraordinary financial distress and systemic risk determinations, and action must be recommended by the FDIC and the Federal Reserve. Absent such actions, the Firm, as a BHC, would remain subject to resolution under the Bankruptcy Code. In December 2013, the FDIC issued a draft policy statement
3
Part
I
describing its “single point of entry” strategy for resolution of systemically important financial institutions under the orderly liquidation authority. This strategy seeks to keep operating subsidiaries of the BHC open and impose losses on shareholders and creditors of the holding company in receivership according to their statutory order of priority. For further information see Risk Factors on pages 8–26.
The FDIC also requires each insured depository institution (“IDI”) with $50 billion or more in assets, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., to provide an IDI resolution plan.
The Firm
has a comprehensive recovery plan detailing the actions it would take to avoid failure by remaining well-capitalized and well-funded in the case of an adverse event. JPMorgan Chase has provided the Federal Reserve with comprehensive confidential supervisory information and analyses about the Firm’s businesses, legal entities and corporate governance and about its crisis management governance, capabilities and available alternatives to generate liquidity and capital in severe market circumstances. The OCC has published guidelines establishing standards for recovery planning by insured national banks, and JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. have submitted their recovery plans to the OCC. In addition, certain of the Firm’s non-U.S. subsidiaries are subject
to resolution and recovery planning requirements in the jurisdictions in which they operate.
Regulators in the U.S. and abroad have proposed and implemented measures designed to address the possibility or perception that large financial institutions, including the Firm, may be “too big to fail,” and to provide safeguards so that, if a large financial institution does fail, it can be resolved without the use of public funds. Higher capital surcharges on global systemically important banks (“GSIBs”), requirements for certain large bank holding companies to maintain a minimum amount of long-term debt to facilitate orderly resolution of those firms (referred to as Total Loss Absorbing Capacity (“TLAC”)), and the International Swaps and Derivatives Association (“ISDA”) protocol relating
to the “close-out” of derivatives transactions during the resolution of a large cross-border financial institution, are examples of initiatives to address “too big to fail.” For further information on the GSIB framework and TLAC, see Capital Risk Management on pages 82–91 and Risk Factors on pages 8–26, and on the ISDA close-out protocol, see Derivatives regulation below.
Holding company as source of strength for bank subsidiaries. JPMorgan Chase & Co. is required to serve as a source of financial strength for its depository institution subsidiaries
and to commit resources to support those subsidiaries. This support may be required by the Federal Reserve at times when the Firm might otherwise determine not to provide it.
Regulation of acquisitions. Acquisitions by bank holding companies and their banks are subject to multiple requirements by the Federal Reserve and the OCC. For example, financial holding companies and bank holding companies are required to obtain the approval of the
Federal Reserve before they may acquire more than 5% of the voting shares of an unaffiliated bank. In addition, acquisitions by financial companies are prohibited if, as a result of the acquisition, the total liabilities
of the financial company would exceed 10% of the total liabilities of all financial companies. In addition, for certain acquisitions, the Firm must provide written notice to the Federal Reserve prior to acquiring direct or indirect ownership or control of any voting shares of any company with over $10 billion in assets that is engaged in activities that are “financial in nature.”
JPMorgan Chase’s subsidiary banks:
The Firm’s two principal subsidiary banks, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., are FDIC-insured national banks regulated by the OCC. As national banks, the activities of JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are limited to those specifically authorized under the National Bank Act and related interpretations by the OCC.
FDIC
deposit insurance. The FDIC deposit insurance fund provides insurance coverage for certain deposits and is funded through assessments on banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. Changes in the methodology used to calculate such assessments, resulting from the enactment of the Dodd-Frank Act, significantly increased the assessments that the Firm’s bank subsidiaries pay annually to the FDIC. The FDIC instituted a new assessment surcharge on insured depository institutions with total consolidated assets greater than $10 billion in order to raise the reserve ratio for the FDIC deposit insurance fund.
FDIC powers upon a bank insolvency. Upon the insolvency of an insured depository institution, such as JPMorgan Chase Bank,
N.A., the FDIC could be appointed as the conservator or receiver under the Federal Deposit Insurance Act (“FDIA”). The FDIC has broad powers to transfer any assets and liabilities without the approval of the institution’s creditors.
Cross-guarantee. An FDIC-insured depository institution can be held liable for any loss incurred or expected to be incurred by the FDIC if another FDIC-insured institution that is under common control with such institution is in default or is deemed to be “in danger of default” (commonly referred to as “cross-guarantee” liability). An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution.
Prompt
corrective action and early remediation. The Federal Deposit Insurance Corporation Improvement Act of 1991 requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards. While these regulations apply only to banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., the Federal Reserve is authorized to take appropriate action against the parent BHC, such as
4
JPMorgan
Chase & Co., based on the undercapitalized status of any bank subsidiary. In certain instances, the BHC would be required to guarantee the performance of the capital restoration plan for its undercapitalized subsidiary.
OCC Heightened Standards. The OCC has established guidelines setting forth heightened standards for large banks. The guidelines establish minimum standards for the design and implementation of a risk governance framework for banks. While the bank can use certain components of the parent company’s risk governance framework, the framework must ensure that the bank’s risk profile is easily distinguished and separate from the parent for risk management purposes. The bank’s board or risk committee is responsible for approving the bank’s risk governance framework, providing active oversight of the bank’s risk-taking activities, and holding management accountable
for adhering to the risk governance framework.
Restrictions on transactions with affiliates. The bank subsidiaries of JPMorgan Chase (including subsidiaries of those banks) are subject to certain restrictions imposed by federal law on extensions of credit to, investments in stock or securities of, and derivatives, securities lending and certain other transactions with, JPMorgan Chase & Co. and certain other affiliates. These restrictions prevent JPMorgan Chase & Co. and other affiliates from borrowing from such subsidiaries
unless the loans are secured in specified amounts and comply with certain other requirements. For more information, see Note 25. In addition, the Volcker Rule imposes a prohibition on such transactions between any JPMorgan Chase entity and covered funds for which a JPMorgan Chase entity serves as the investment manager, investment advisor, commodity trading advisor or sponsor, as well as, subject to a limited exception, any covered fund controlled by such funds.
Dividend restrictions. Federal law imposes limitations on the payment of dividends by national banks, such as JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. See Note 25 for the amount of dividends that
the Firm’s principal bank subsidiaries could pay, at January 1, 2018, to their respective bank holding companies without the approval of their banking regulators.
In addition to the dividend restrictions described above, the OCC and the Federal Reserve have authority to prohibit or limit the payment of dividends of the bank subsidiaries they supervise, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the
bank.
Depositor preference. Under federal law, the claims of a receiver of an insured depository institution for administrative expense and the claims of holders of U.S. deposit liabilities (including the FDIC and deposits in non-U.S. branches that are dually payable in the U.S. and in a non-U.S. branch) have priority over the claims of other unsecured creditors of the institution, including public noteholders and depositors in non-U.S. branches. As a result, such persons could receive substantially less than the depositors in U.S. offices of the depository institution.
CFPB regulation and supervision, and other consumer regulations. JPMorgan Chase and its national bank subsidiaries, including JPMorgan
Chase Bank, N.A. and Chase Bank USA, N.A., are subject to supervision and regulation by the CFPB with respect to federal consumer protection laws, including laws relating to fair lending and the prohibition of unfair, deceptive or abusive acts or practices in connection with the offer, sale or provision of consumer financial products and services. These laws include the Truth-in-Lending, Equal Credit Opportunity Act (“ECOA”), Fair Credit Reporting, Fair Debt Collection Practice, Electronic Funds Transfer, Credit Card Accountability, Responsibility and Disclosure (“CARD”) and Home Mortgage Disclosure Acts. The CFPB has authority to impose new disclosure requirements for certain consumer financial products and services. The CFPB’s rule-making efforts have addressed mortgage-related topics, including ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home
Mortgage Disclosure Act requirements, appraisal and escrow standards and requirements for higher-priced mortgages. The CFPB continues to issue informal guidance on a variety of topics (such as the collection of consumer debts and credit card marketing practices). Other areas of focus include sales incentives, pre-authorized electronic funds transfers, “add-on” products, matters involving consumer populations considered vulnerable by the CFPB, credit reporting, and the furnishing of credit scores to individuals. As part of its regulatory oversight, the CFPB has authority to take enforcement actions against firms that offer certain products and services to consumers, including JPMorgan Chase.
Securities and broker-dealer regulation:
The Firm conducts securities underwriting, dealing and brokerage activities in the U.S. through
J.P. Morgan Securities LLC and other non-bank broker-dealer subsidiaries, all of which are subject to regulations of the SEC, the Financial Industry Regulatory Authority and the New York Stock Exchange, among others. The Firm conducts similar securities activities outside the U.S. subject to local regulatory requirements. In the U.K., those activities are conducted by J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A., and are regulated by the PRA and the FCA. Broker-dealers are subject to laws and regulations covering all aspects of the securities business, including sales and trading practices, securities offerings, publication of research reports, use of customers’ funds, the financing of clients’ purchases, capital structure, record-keeping and retention, and the conduct of their directors, officers and employees.
For information on the net capital of J.P. Morgan Securities LLC, and the applicable requirements relating to risk-based capital for J.P. Morgan Securities plc, see Broker-dealer regulatory capital on page 91. In addition, rules adopted by the U.S. Department of Labor (“DOL”) have imposed (among other things) a new standard of care applicable to broker-dealers when dealing
5
Part I
with
customers. For more information see Investment management regulation below.
Investment management regulation:
The Firm’s asset and wealth management businesses are subject to significant regulation in numerous jurisdictions around the world relating to, among other things, the safeguarding and management of client assets, offerings of funds and marketing activities. Certain of the Firm’s subsidiaries are registered with, and subject to oversight by, the SEC as investment advisers. As such, the Firm’s registered investment advisers are subject to the fiduciary and other obligations imposed under the Investment Advisers Act of 1940 and the rules and
regulations promulgated thereunder, as well as various state securities laws. For information regarding investigations and litigation in connection with disclosures to clients related to proprietary products, see Note 29.
The Firm’s asset and wealth management businesses continue to be affected by ongoing rule-making and implementation of new regulations. The DOL’s fiduciary rule, which became effective June 9, 2017, has significantly expanded the universe of persons viewed as investment advice fiduciaries to retirement plans and individual retirement accounts (“IRAs”) under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The prohibited transaction exemptions issued in
connection with the rule require adherence to “impartial conduct standards” (including a requirement to act in the “best interest” of retirement clients), although compliance with requirements relating to conditions requiring new client contracts, implementation of policies and procedures, websites and other disclosures to both investors and the DOL have been delayed until July 1, 2019. Furthermore, the DOL is performing a review of the rule and the related exemptions in accordance with a February 2017 memorandum from the President. Subject to the outcome of the DOL’s review, it is expected that the rule and related prohibited transaction exemptions will have a significant impact on the fee and compensation
practices at financial institutions that offer investment advice to retail retirement clients. In addition to the impact of the DOL’s fiduciary rule, the Firm’s asset and wealth management businesses may be affected by ongoing rule-making and implementation of new regulations by the SEC and certain U.S. states relating to enhanced standards of conduct for broker-dealers and certain other market participants.
In the European Union (“EU”), substantial revisions to the Markets in Financial Instruments Directive (“MiFID II”) became effective across EU member states beginning January 3, 2018. These revisions introduced expanded requirements for a broad range of investment management activities, including product governance, transparency on costs
and charges, independent investment advice, inducements, record keeping and client reporting. In addition, final regulations on European Money Market Fund Reform were published in July 2017 and, following an 18-month transition period for existing funds, will implement
new requirements to enhance the liquidity and stability of money market funds in the EU.
Derivatives regulation:
The Firm is subject to comprehensive regulation of its derivatives businesses. The regulations impose capital and margin requirements (including the collecting and posting of variation margin and initial margin in respect of non-centrally cleared derivatives), require central clearing of standardized over-the-counter (“OTC”) derivatives, require that certain
standardized over-the-counter swaps be traded on regulated trading venues, and provide for reporting of certain mandated information. In addition, the Dodd-Frank Act requires the registration of “swap dealers” and “major swap participants” with the CFTC and of “security-based swap dealers” and “major security-based swap participants” with the SEC. JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, J.P. Morgan Securities plc and J.P. Morgan Ventures Energy Corporation have registered with the CFTC as swap dealers, and JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Securities plc may be required to register with the SEC as security-based swap dealers. As a result of their registration as swap dealers or security-based swap dealers, these entities will be subject to a comprehensive regulatory framework applicable to their swap or security-based swap activities, which includes capital requirements, rules regulating their
swap activities, rules requiring the collateralization of uncleared swaps, rules regarding segregation of counterparty collateral, business conduct and documentation standards, record-keeping and reporting obligations, and anti-fraud and anti-manipulation requirements. Further, some of the rules for derivatives apply extraterritorially to U.S. firms doing business with clients outside of the U.S., as well as to the overseas activities of non-U.S. subsidiaries of the Firm that either deal with U.S. persons or that are guaranteed by U.S. subsidiaries of the Firm; however, the full scope of the extra-territorial impact of the U.S. swaps regulation has not been finalized and therefore remains unclear.
The effect of these rules may require banking entities, such as the Firm, to modify the structure of their derivatives businesses and face increased operational and regulatory costs. In the EU, the implementation of the European Market Infrastructure Regulation (“EMIR”) and MiFID II will result in comparable, but not identical, changes to the European regulatory regime for derivatives. The combined effect of the U.S. and EU requirements, and the potential conflicts and inconsistencies between them, present challenges and risks to the structure and operating model of the Firm’s derivatives businesses.
The Firm and other financial institutions have agreed to adhere to the 2015 Universal Resolution Stay Protocol (the “Protocol”) developed by ISDA in response to regulator
concerns that the close-out of derivatives and other financial transactions during the resolution of a large cross-border financial institution could impede resolution efforts and potentially destabilize markets. The Protocol provides for the contractual recognition of cross-border stays under
6
various statutory resolution regimes and a contractual stay on certain cross-default rights.
In
the U.S., one subsidiary of the Firm, J.P. Morgan Securities LLC, is registered as a futures commission merchant, and other subsidiaries are either registered with the CFTC as commodity pool operators and commodity trading advisors or are exempt from such registration. These CFTC-registered subsidiaries are also members of the National Futures Association.
Data regulation:
The Firm and its subsidiaries are subject to federal, state and international laws and regulations concerning the use and protection of certain customer,
employee and other personal and confidential information, including those imposed by the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act, as well as the EU Data Protection Directive. In addition, various U.S. regulators, including the Federal Reserve, the OCC and the SEC, have increased their focus on cybersecurity and data privacy through guidance, examinations and regulations.
In May 2018, the General Data Protection Regulation (“GDPR”) will replace the EU Data Protection Directive, and it will have a significant impact on how businesses can collect and process the personal data of EU individuals. In addition, numerous proposals regarding privacy and data protection are pending before U.S. and non-U.S. legislative and regulatory bodies.
The Bank Secrecy Act and Economic Sanctions:
The Bank Secrecy Act (“BSA”)
requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as cash transaction and suspicious activity reporting), as well as due diligence/know your customer documentation requirements. In January 2013, the Firm entered into Consent Orders with its banking regulators relating to the Firm’s Bank Secrecy Act/Anti-Money Laundering policies, procedures and controls; the Firm has taken significant steps to modify and enhance its processes and controls with respect to its Anti-Money Laundering procedures and to remediate the issues identified in the Consent Order.
The Firm is also subject to the regulations and economic sanctions programs administered by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”).
Anti-Corruption:
The Firm is subject to laws and regulations relating to corrupt and illegal payments to government officials and others in the jurisdictions in which it operates, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. In November 2016, the Firm entered into a Consent Order with the Federal Reserve to resolve its investigation relating to a former hiring program for candidates referred by clients, potential clients and government officials in the Asia Pacific region. The Firm has taken significant steps to modify and
enhance its processes and controls with respect
to the hiring of referred candidates and to remediate the issues identified in the Consent Order.
Compensation practices:
The Firm’s compensation practices are subject to oversight by the Federal Reserve, as well as other agencies. The Federal Reserve has issued guidance jointly with the FDIC and the OCC that is designed to ensure that incentive compensation paid by banking organizations does not encourage imprudent risk-taking that threatens the organizations’ safety and soundness. In addition, under the Dodd-Frank Act, federal regulators, including the Federal Reserve, must issue regulations or guidelines requiring covered financial institutions, including
the Firm, to report the structure of all incentive-based compensation arrangements and prohibit incentive-based payment arrangements that encourage inappropriate risks by providing compensation that is excessive or that could lead to material financial loss to the institution. The Federal Reserve has conducted a review of the incentive compensation policies and practices of a number of large banking institutions, including the Firm. The Financial Stability Board has established standards covering compensation principles for banks. In addition, the SEC has issued regulations that will require public companies to start disclosing, beginning with annual shareholder meetings in 2018, the pay ratio between the company’s median employee and the
company’s chief executive officer or other principal executive officer in the proxy statement as of December 31, 2017. The Firm’s compensation practices are also subject to regulation and oversight by local regulators in other jurisdictions. In Europe, the Fourth Capital Requirements Directive (“CRD IV”) includes compensation provisions and the European Banking Authority has instituted guidelines on compensation policies which in certain countries, such as the U.K., are implemented or supplemented by further local regulations or guidelines. The implementation of the Federal Reserve’s and other banking regulators’ guidelines regarding compensation are expected to evolve over the next several years, and may affect the manner in which the Firm structures its compensation programs and practices.
Significant
international regulatory initiatives:
In the EU, there is an extensive and complex program of final and proposed regulatory enhancement that reflects, in part, the EU’s commitments to policies of the Group of Twenty Finance Ministers and Central Bank Governors (“G20”) together with other plans specific to the EU. The EU operates a European Systemic Risk Board that monitors financial stability, together with European Supervisory Authorities (“ESA”) that set detailed regulatory rules and encourage supervisory convergence across the EU’s Member States. The EU is currently reviewing the ESA framework. The EU has also created a Single Supervisory Mechanism for the euro-zone, under which the regulation of all banks in that zone will be under the auspices of the European Central Bank, together with a Single Resolution Mechanism and Single Resolution Board, having jurisdiction over bank resolution in the zone. At both
the G20 and EU
7
Part I
levels, various proposals are under consideration to address risks associated with global financial institutions.
In the EU, this includes EMIR, which requires, among other things, the central clearing of certain standardized derivatives and risk mitigation for uncleared
OTC derivatives, and MiFID II, which gives effect to the G20 commitment to move trading of standardized OTC derivatives to exchanges or electronic trading platforms. MiFID II significantly enhances requirements for pre- and post-trade transparency, transaction reporting and investor protection. MiFID II also introduces a commodities position limits and reporting regime. EMIR became effective in 2012, although some requirements apply on a phased basis and certain aspects of the regulation are currently being reviewed. MiFID II became effective across EU Member States on January 3, 2018, after a one-year delay.
The EU is also currently considering or implementing significant revisions to laws covering securities settlement; mutual funds and pensions; payments; anti-money laundering controls; data security and privacy; transparency and disclosure of securities financing transactions;
benchmarks; resolution of banks, investment firms and market infrastructures; and capital and liquidity requirements for banks and investment firms. The capital and liquidity legislation for banks and investment firms will implement in the EU many of the finalized Basel III capital and liquidity standards, including in relation to the leverage ratio, market risk capital, and a net stable funding ratio. The legislation also proposes an intermediate parent undertaking (“IPU”) requirement for foreign banks, which will require non-EU banks operating in Europe (with total EU assets greater than EUR30 billion or which are part of a GSIB) to establish a single EU-located IPU. The full impact of the proposal on JPM’s EU operations and legal entities will be heavily influenced by the outcome of the EU legislative process, including whether any flexibility is introduced to the requirement.
Consistent
with the G20 and EU policy frameworks, U.K. regulators have adopted a range of policy measures that have significantly changed the markets and prudential regulatory environment in the U.K. In addition, U.K. regulators have introduced measures to enhance accountability of individuals, and promote forward-looking conduct risk identification and mitigation, including by introducing the Senior Managers and Certification Regimes.
On June 23, 2016, the U.K. voted by referendum to leave the European Union. The U.K. government invoked Article 50 of the Lisbon Treaty on March 29, 2017, starting a two-year period for the formal exit negotiations. This means that the U.K. will leave the EU on March 29, 2019 unless the timeline is unanimously extended by the remaining 27 EU Member States
(“EU27”) and the U.K. In December 2017, the EU27 agreed that “sufficient progress” had been made on the terms of the U.K.’s withdrawal to allow parallel talks on the future relationship, which are expected to begin in March 2018. The U.K.’s priorities in negotiating the future relationship are to seek a bilateral free trade agreement
with the EU27 that facilitates the “greatest possible access” to the Single Market. However, the U.K. will not seek to continue its membership in the Single Market. The current EU27 position is that a free trade agreement should be balanced, ambitious and wide-ranging, that the U.K.’s participation in the Single Market or parts thereof must end, and that there will not be any sector-specific carve-outs, such as for financial services. Both the EU27 and the U.K. are open to the idea of a “transitional arrangement.”
The U.K.’s departure from the EU will have a significant impact across the Firm’s European businesses, including business and legal entity reorganization, and may lead to direct and indirect changes to EU27 and U.K. regulatory approaches. The situation remains highly uncertain, particularly in relation to whether a transition period is implemented and whether financial services will be included in any future free trade agreement.
Item 1A. Risk Factors.
The following discussion sets forth the material risk factors that could affect JPMorgan Chase’s financial condition and operations. Readers should not consider any descriptions of these factors to be a complete set
of all potential risks that could affect the Firm.
Regulatory
JPMorgan Chase’s businesses are highly regulated, and the laws and regulations that apply to JPMorgan Chase have a significant impact on its operations.
JPMorgan Chase is a financial services firm with operations worldwide. JPMorgan Chase must comply with the laws and regulations that apply to its operations in all of the jurisdictions around the world in which it does business. The regulation of financial services activities is typically extensive and comprehensive.
In recent years, legislators and regulators adopted a wide range of new laws and regulations affecting the financial services industry, both within and outside the U.S. The supervision of financial services firms also expanded significantly during this period. The wave
of increased regulation and supervision of JPMorgan Chase has affected the way that it conducts and structures its operations. Existing and new laws and regulations and expanded supervision could require JPMorgan Chase to make further changes to its operations. These changes could result in JPMorgan Chase incurring additional costs for complying with laws and regulations or losing a significant amount of revenue, and could reduce JPMorgan Chase’s profitability. More specifically, existing and new laws and regulations could require JPMorgan Chase to:
•
limit the products and services that it offers
•
reduce
the liquidity that it can provide through its market-making activities
•
stop or discourage it from engaging in business opportunities that it might otherwise pursue
•
recognize losses in the value of assets that it holds
8
•
pay
higher assessments, levies or other governmental charges
•
dispose of certain assets, and do so at times or prices that are disadvantageous
•
impose restrictions on certain business activities, or
•
increase the prices that it charges for products and services, which could reduce the demand
for them.
Differences in financial services regulation can be disadvantageous for JPMorgan Chase’s business.
The content and application of laws and regulations affecting financial services firms sometimes vary according to factors such as the size of the firm, the jurisdiction in which it is organized or operates, or other criteria. For example:
•
larger firms are often subject to more stringent supervision and regulation
•
financial
technology companies and other competitors may not be subject to banking regulation, or may be supervised by a national or state regulatory agency that does not have the same resources or regulatory priorities as the regulatory agencies which supervise more diversified financial services firms, or
•
the financial services regulatory framework in a particular jurisdiction may favor financial institutions that are based in that country.
There can also be significant differences in the ways that similar regulatory initiatives affecting the financial services industry are implemented in the U.S. and in different countries and regions in which JPMorgan Chase does business. For example,
legislative and regulatory initiatives within the EU could require JPMorgan Chase to make significant modifications to its operations and legal entity structure in that region in order to comply with those requirements. These include laws and regulations that have been adopted or proposed relating to:
•
the resolution of financial institutions
•
the establishment by non-EU financial institutions of intermediate holding companies in the EU
•
the
separation of trading activities from core banking services
•
mandatory on-exchange trading
•
position limits and reporting rules for derivatives
•
governance and accountability regimes
•
conduct
of business requirements, and
•
restrictions on compensation.
These types of differences in financial services regulation, or inconsistencies or conflicts between laws and regulations between different jurisdictions, could require JPMorgan Chase to, among other things:
•
divest assets or restructure its operations
•
absorb
increased operational, capital and liquidity costs
•
change the prices that it charges for its products and services
•
curtail the products and services that it offers to its customers and clients, or
•
incur higher costs for complying with different legal and regulatory frameworks.
Any
or all of these factors could harm JPMorgan Chase’s ability to compete against other firms that are not subject to the same laws and regulations or supervisory oversight, or harm JPMorgan Chase’s businesses, results of operations and profitability.
Governments in some countries in which JPMorgan Chase does business have adopted laws or regulations which require that JPMorgan Chase subsidiaries which operate in those countries maintain minimum amounts of capital or liquidity on a stand-alone basis. Some regulators outside the U.S. have also proposed that large banks which conduct certain businesses in their jurisdictions operate through separate subsidiaries located in those countries. These requirements, and any future laws or regulations that impose
restrictions on the way JPMorgan Chase organizes its businesses or increase the capital or liquidity requirements that would apply to JPMorgan Chase subsidiaries, could hinder JPMorgan Chase’s ability to efficiently manage its operations, increase its funding and liquidity costs, and result in lower profitability.
Heightened regulatory scrutiny of JPMorgan Chase’s businesses has increased its compliance costs and could result in restrictions on its operations.
JPMorgan Chase’s operations are subject to heightened oversight and scrutiny from regulatory authorities in many jurisdictions where JPMorgan Chase does business. JPMorgan Chase has paid significant fines or provided other monetary relief in connection with resolving several investigations and enforcement actions by governmental agencies.
JPMorgan Chase could become subject to similar regulatory settlements or other actions in the future, and addressing the requirements of any such settlement could result in JPMorgan Chase incurring higher operational and compliance costs.
In connection with resolving specific regulatory investigations or enforcement actions, certain regulators have required JPMorgan Chase and other financial institutions to admit wrongdoing with respect to the activities that gave rise to the settlement. These types of admissions can lead to:
•
greater exposure in civil litigation
•
damage
to reputation
•
disqualification from doing business with certain clients or customers, or in specific jurisdictions, or
9
Part I
•
other
direct and indirect adverse effects.
Furthermore, U.S. government officials have demonstrated a willingness to bring criminal actions against financial institutions and have increasingly demanded that institutions plead guilty to criminal offenses or admit other wrongdoing in connection with resolving regulatory investigations or enforcement actions. In the case of JPMorgan Chase, these resolutions have included:
•
JPMorgan Chase’s agreement in May 2015 to plead guilty to a single violation of federal antitrust law in connection with its settlements with certain government authorities relating to its foreign exchange sales and trading activities and controls related to those activities, and
•
the
non-prosecution agreement entered into by a subsidiary of JPMorgan Chase with the U.S. Department of Justice in November 2016 in connection with settlements to resolve various governmental investigations relating to a former hiring program for candidates referred by clients, potential clients and government officials in the Asia Pacific region.
Resolutions of this type can have significant collateral consequences for the subject financial institution, including loss of clients, customers and business, the inability to offer certain products or services, or losing permission to operate certain businesses, either temporarily or permanently.
JPMorgan Chase expects that it and other financial services firms will continue to be subject to expanded regulatory scrutiny and governmental investigations and enforcement actions. JPMorgan Chase also expects that regulators
will continue to insist that financial institutions be penalized for actual or deemed violations of law with formal and punitive enforcement actions, including the imposition of significant monetary and other sanctions, rather than resolving these matters through informal supervisory actions. Furthermore, if JPMorgan Chase fails to meet the requirements of any governmental settlements and other actions to which it is subject, or to maintain risk and control processes that meet the heightened standards established by its regulators, it could be required to, among other things:
•
enter into further orders and settlements
•
pay
additional regulatory fines, penalties or judgments, or
•
accept material regulatory restrictions on, or changes in the management of, its businesses.
The extent of JPMorgan Chase’s exposure to legal and regulatory matters can be unpredictable and could, in some cases, exceed the amount of reserves that JPMorgan Chase has established for those matters.
Requirements for the orderly resolution of JPMorgan Chase could result in JPMorgan Chase having to restructure or reorganize its businesses.
JPMorgan Chase is required under the Dodd-Frank Act and Federal Reserve and FDIC rules to prepare and
submit
periodically to those agencies a detailed plan for rapid and orderly resolution in bankruptcy without extraordinary government support, in the event of material financial distress or failure. The agencies’ evaluation of the Firm’s resolution plan may change, and the requirements for resolution plans may be modified from time to time. Any such determinations or modifications could result in JPMorgan Chase making changes to its legal entity structure or to certain internal or external activities that could increase funding or operational costs.
If the Federal Reserve and the FDIC were to determine that a future resolution plan submitted by JPMorgan Chase has deficiencies, they could jointly impose more stringent capital, leverage or liquidity requirements or restrictions on JPMorgan Chase’s growth, activities
or operations. After two years, if the deficiencies are not cured, the agencies could also require that JPMorgan Chase restructure, reorganize or divest assets or businesses in ways that could materially and adversely affect JPMorgan Chase’s operations and strategy.
Holders of JPMorgan Chase & Co.’s debt and equity securities will absorb losses if it were to enter into a resolution.
Federal Reserve rules require that JPMorgan Chase & Co. (the “holding company”) maintain minimum levels of unsecured external long-term debt and other loss-absorbing capacity with specific terms (“eligible LTD”) for purposes of recapitalizing JPMorgan Chase’s operating subsidiaries if the holding company were to enter into a resolution either:
•
in
a bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code, or
•
in a receivership administered by the FDIC under Title II of the Dodd-Frank Act (“Title II”).
If the holding company were to enter into a resolution, holders of eligible LTD and other debt and equity securities of the holding company will absorb the losses of the holding company and its affiliates.
The preferred “single point of entry” strategy under JPMorgan Chase’s resolution plan contemplates that only the holding company would enter bankruptcy proceedings. JPMorgan Chase’s subsidiaries
would be recapitalized as needed so that they could continue normal operations or subsequently be divested or wound down in an orderly manner. As a result, the holding company’s losses and any losses incurred by its subsidiaries would be imposed first on holders of the holding company’s equity securities and thereafter on its unsecured creditors, including holders of eligible LTD and other debt securities. Claims of holders of those securities would have a junior position to the claims of creditors of JPMorgan Chase’s subsidiaries and to the claims of priority (as determined by statute) and secured creditors of the holding company.
Accordingly, in a resolution of the holding company in bankruptcy, holders of eligible LTD and other debt securities
of the holding company would realize value only to the
10
extent available to the holding company as a shareholder of JPMorgan Chase Bank, N.A. and its other subsidiaries, and only after any claims of priority and secured creditors of the holding company have been fully repaid.
The FDIC has similarly indicated
that a single point of entry recapitalization model could be a desirable strategy to resolve a systemically important financial institution, such as the holding company, under Title II. However, the FDIC has not, to date, formally adopted a single point of entry resolution strategy.
If the holding company were to enter into a resolution, none of the holding company, the Federal Reserve or the FDIC is obligated to follow JPMorgan Chase’s preferred strategy, and losses to holders of eligible LTD and other debt and equity securities of the holding company, under whatever strategy is ultimately followed, could be greater.
Political
Political developments can cause uncertainty concerning the regulatory environment in which JPMorgan Chase operates its businesses.
Recent elections and referendums
in the U.S. and abroad have introduced uncertainty regarding the regulatory environment in which JPMorgan Chase and other financial services firms will operate in the future. For example, the U.K.’s planned departure from the EU has engendered significant uncertainty concerning the regulatory framework under which global financial services institutions, including JPMorgan Chase, will need to conduct their business in the U.K. and the EU. Depending on the nature of the arrangements agreed between the U.K. and the EU, including with respect to the ability of financial services companies to engage in business in the EU from legal entities organized in or operating from the U.K., JPMorgan Chase may need to make significant changes to its legal entity structure and operations and the locations in which it operates. These types of structural and operational changes could result in JPMorgan Chase needing to implement an operating model across its European legal entities that
is less efficient or cost-effective.
The result of an election may suggest that the new administration will ease the regulatory requirements that apply to financial services firms. However, it is equally possible that the potential for reduced regulation does not occur or is reversed by another regulator or by a subsequent administration, or that deregulation measures that are ultimately enacted deliver significant competitive advantages to financial services firms that are structured differently or serve different markets than JPMorgan Chase. JPMorgan Chase cannot predict political developments of this nature, or whether they will have favorable or unfavorable long-term effects on its businesses.
Economic uncertainty caused by political developments can hurt JPMorgan Chase’s businesses.
The economic environment and market conditions
in which JPMorgan Chase operates continue to be uncertain due to
recent political developments in the U.S. and abroad. Certain policy proposals, including isolationist foreign policies, protectionist trade policies or the possible withdrawal or reduction of government support for GSEs, could cause a contraction in U.S. and global economic growth and higher volatility in the financial markets. These types of political developments could, among other things:
•
erode investor confidence in the U.S. economy and financial markets
•
heighten
concerns about whether the U.S. government will be funded, and its outstanding debt serviced, at any particular time, and
•
undermine the status of the U.S. dollar as a safe haven currency.
These factors could lead to greater market volatility, large-scale sales of U.S. government debt and other U.S. debt and equity securities, the widening of credit spreads and other market dislocations. Any of these potential outcomes could cause JPMorgan Chase to suffer losses in its investment securities portfolio, reduce its capital levels, hamper its ability to deliver products and services to its clients and customers, and weaken its results of operations.
Political
developments in other parts of the world have also led to uncertainty in global economic conditions, including:
•
concerns about the capabilities and intentions of the government of North Korea, and
•
regional hostilities, and political or social upheavals, in other parts of the world.
JPMorgan Chase’s results of operations can be adversely affected by the uncertainty arising from significant political developments and any market volatility or disruption that results from
that uncertainty.
The positive impact of U.S. tax reform legislation on JPMorgan Chase may diminish over time.
The long-term impact of the tax reform legislation recently enacted in the U.S. on JPMorgan Chase and the U.S. economy is not yet known. While the tax reform will have a positive impact on JPMorgan Chase’s net income, the competitive environment and other factors will influence the extent to which these benefits are retained by JPMorgan Chase over the longer term. In addition, the specific impact on JPMorgan Chase’s businesses, products and geographies may vary.
Market
JPMorgan Chase’s businesses are materially affected by economic and market conditions.
JPMorgan Chase’s results of operations can be negatively affected by adverse changes
in any of the following:
•
the liquidity in the U.S. and global financial markets
•
the level and volatility of market prices and rates, including those for debt and equity instruments,
11
Part
I
currencies, commodities, interest rates and other market indices
•
investor, consumer and business sentiment
•
events that reduce confidence in the financial markets
•
inflation and unemployment
•
the
availability and cost of capital and credit
•
the economic effects of natural disasters, severe weather conditions, health emergencies or pandemics, cyberattacks, outbreaks of hostilities, terrorism or other geopolitical instabilities
•
monetary and fiscal policies and actions taken by governmental authorities, including the Federal Reserve and other central banks, and
•
the
health of the U.S. and global economies.
JPMorgan Chase’s consumer businesses are particularly affected by U.S. domestic economic conditions, including:
•
U.S. interest rates
•
the rate of unemployment
•
housing prices
•
the
level of consumer confidence
•
changes in consumer spending, and
•
the number of personal bankruptcies.
Sustained low growth in the U.S. economy could diminish customer demand for the products and services offered by JPMorgan Chase’s consumer businesses. It could also increase the cost to provide those products and services. Adverse economic conditions could also lead to an increase in delinquencies in mortgage, credit card, auto and other loans and higher
net charge-offs, which can reduce JPMorgan Chase’s earnings. These consequences could be significantly worse in certain geographies where high levels of unemployment have resulted from declining industrial or manufacturing activity.
JPMorgan Chase’s earnings from its consumer businesses could also be adversely affected by changes in government policies that affect consumers, including those relating to medical insurance, immigration and employment status, as well as governmental policies aimed at the economy more broadly, such as infrastructure spending and global trade, which could result in, among other things, higher inflation or reductions in consumer disposable income.
In JPMorgan Chase’s wholesale businesses, market and economic factors can affect the volume of transactions that JPMorgan Chase executes for its clients and, therefore, the revenue that JPMorgan Chase receives
from those transactions. These factors can also influence the willingness of other financial institutions and investors to participate in capital markets transactions that JPMorgan Chase manages, such as loan syndications or securities underwritings. Furthermore, if a significant and sustained
deterioration in market conditions were to occur, the profitability of JPMorgan Chase’s capital markets businesses could be reduced to the extent that those businesses:
•
earn less fee revenue due to lower transaction volumes, including when clients are unwilling or unable to refinance their outstanding debt obligations in unfavorable market conditions
•
dispose
of portions of credit commitments, such as loan syndications or securities underwritings, at a loss, or
•
hold larger residual positions in credit commitments that cannot be sold at favorable prices.
JPMorgan Chase’s investment securities portfolio and market-making positions can suffer losses due to adverse economic, market and political events and conditions.
JPMorgan Chase generally maintains positions in various fixed income instruments in its investment securities portfolio, and positions in various fixed income, currency, commodity, credit and equity instruments as part of its market-making activities. Market-making positions are
intended to facilitate demand from JPMorgan Chase’s clients for these instruments and to provide liquidity for clients. The value of the positions that JPMorgan Chase holds can be significantly affected by factors such as:
•
JPMorgan Chase’s ability to effectively hedge market and other risks on its positions
•
volatility in interest rates and debt, equity and commodities markets
•
changes
in interest rates and credit spreads, and
•
the availability of liquidity in the capital markets.
All of these are affected by global economic, market and political events and conditions, as well as regulatory restrictions on market-making activities.
JPMorgan Chase’s investment securities portfolio and market-making businesses can also suffer losses due to unanticipated market events, including:
•
severe declines in asset values
•
unexpected
credit events
•
unforeseen events or conditions that may cause previously uncorrelated factors to become correlated (and vice versa), or
•
other market risks that may not have been appropriately taken into account in the development, structuring or pricing of a financial instrument.
If JPMorgan Chase experiences significant losses in its investment securities portfolio or from market-making activities, this could reduce JPMorgan Chase’s profitability and
its capital levels, and thereby constrain the growth of its businesses.
12
JPMorgan Chase’s asset and wealth management and custody businesses may earn lower fee revenue during adverse macroeconomic conditions.
The fees that JPMorgan Chase earns from managing third-party assets or holding assets in custody for clients could be diminished by declining asset values or other adverse macroeconomic conditions.
For example, higher interest rates or a downturn in financial markets could affect the valuations of the client assets that JPMorgan Chase manages or holds in custody, which, in turn, could affect JPMorgan Chase’s revenue from fees that are based on the amount of assets under management or custody. Similarly, adverse macroeconomic or market conditions could prompt outflows from JPMorgan Chase funds or accounts, or cause clients to invest in products that generate lower revenue. Substantial and unexpected withdrawals from a JPMorgan Chase fund can also hamper the investment performance of the fund, particularly if the outflows create the need for the fund to dispose of fund assets at disadvantageous times or prices, and could lead to further withdrawals based on the weaker investment performance.
Changes in interest rates and credit spreads can adversely affect certain of JPMorgan Chase’s revenue and income streams.
JPMorgan
Chase can generally be expected to earn higher net interest income when interest rates are high or increasing. However, higher interest rates can also lead to:
•
fewer originations of commercial and residential loans
•
lower returns on JPMorgan Chase’s investment securities portfolio, and
•
the loss of deposits
to the extent that JPMorgan Chase makes incorrect assumptions about depositor behavior.
All of these outcomes could adversely affect JPMorgan Chase’s revenues and capital levels. Higher interest rates can also negatively affect the payment performance on loans within JPMorgan Chase’s consumer and wholesale loan portfolios that are linked to variable interest rates. If borrowers of variable rate loans are unable to afford higher interest payments, those borrowers may reduce or stop making payments, thereby causing JPMorgan Chase to incur losses and increased operational costs related to servicing a higher volume of delinquent loans.
On the other hand, a low interest rate environment may cause JPMorgan Chase’s net interest margins to be compressed, which could reduce:
•
the
amounts that JPMorgan Chase earns on its investment securities portfolio to the extent that it is unable to reinvest contemporaneously in higher-yielding instruments, and
•
the value of JPMorgan Chase’s mortgage servicing rights (“MSRs”) asset, thereby reducing its net interest income and other revenues.
When credit spreads widen, it becomes more expensive for JPMorgan Chase to borrow. JPMorgan Chase’s credit spreads
may widen or narrow not only in response to events and circumstances that are specific to JPMorgan Chase but also as a result of general economic and geopolitical events
and conditions. Changes in JPMorgan Chase’s credit spreads will affect, positively or negatively, JPMorgan Chase’s earnings on certain liabilities, such as derivatives, that are recorded at fair value.
High market volatility can impact JPMorgan Chase’s markets businesses.
While JPMorgan Chase’s markets businesses may earn higher flow revenue during periods of elevated market volatility, sudden and significant volatility in the prices of securities, loans, derivatives and other instruments can:
•
curtail the trading markets for those instruments
•
make
it difficult to sell or hedge those instruments
•
increase JPMorgan Chase’s funding costs, or
•
adversely affect JPMorgan Chase’s profitability, capital or liquidity.
The Federal Reserve has observed that market volatility may be exacerbated by regulatory restrictions. It noted that market participants that are subject to the Volcker Rule are likely to decrease their market-making activities, and thereby constrain market liquidity, during periods of market
stress. Furthermore, market participants that are not required to hold substantial amounts of capital may retreat more quickly from volatile markets, which could further reduce market liquidity.
In a difficult or less liquid market environment, JPMorgan Chase’s risk management strategies may not be effective because other market participants may be attempting to use the same or similar strategies. In these circumstances, it may be difficult for JPMorgan Chase to reduce its risk positions due to the activity of other market participants or widespread market dislocations.
Sustained volatility in the financial markets may also negatively affect consumer or investor confidence, which could lead to lower client activity and reduce JPMorgan Chase’s revenues.
Credit
JPMorgan Chase can be adversely
affected by the financial condition of its clients, customers and counterparties.
JPMorgan Chase routinely executes transactions with brokers and dealers, commercial and investment banks, mutual and hedge funds, investment managers and other types of financial institutions. Many of these transactions expose JPMorgan Chase to the credit risk of its clients and counterparties, and can involve JPMorgan Chase in disputes and litigation in the event that a client or counterparty defaults. JPMorgan Chase can also be subject to losses or liability where a financial institution that it has appointed to
13
Part
I
provide custody services for assets of JPMorgan Chase’s clients becomes insolvent.
Disputes may arise with counterparties to derivatives contracts with regard to the terms, the settlement procedures or the value of underlying collateral. The disposition of those disputes could cause JPMorgan Chase to incur unexpected transaction, operational and legal costs, or result in credit losses. These consequences can also impair JPMorgan Chase’s ability to effectively manage its credit risk exposure from its market activities.
JPMorgan Chase’s markets businesses can be harmed by the insolvency of a significant market participant.
The failure of a significant
market participant, or concerns about the creditworthiness of such a firm, can have a cascading effect within the financial markets. JPMorgan Chase’s markets businesses could be significantly disrupted by such an event, particularly if it leads to other market participants incurring significant losses, experiencing liquidity issues or defaulting.
JPMorgan Chase’s clearing services business is exposed to the risk of client or counterparty default.
As part of its clearing services activities, JPMorgan Chase is a member of various central counterparty clearinghouses (“CCPs”). In the event that another member of such an organization defaults on its obligations to the CCP, JPMorgan Chase may be required to pay a portion of any losses incurred by the CCP as a result of that default. As a clearing member, JPMorgan Chase is also exposed to the risk of non-performance by its clients,
which it seeks to mitigate by requiring clients to provide adequate collateral. JPMorgan Chase is exposed to intra-day credit risk of its clients in connection with providing cash management, clearing, custodial and other transaction services to those clients. If a client for which JPMorgan Chase provides these services becomes bankrupt or insolvent, JPMorgan Chase may incur losses, become involved in disputes and litigation with one or more CCPs, the client’s bankruptcy estate and other creditors, or be subject to regulatory investigations. All of the foregoing events can increase JPMorgan Chase’s operational and litigation costs, and JPMorgan Chase may suffer losses to the extent that any collateral that it has received is insufficient to cover those losses.
JPMorgan Chase may suffer losses if the value of collateral declines in stressed market conditions.
During periods of market
stress or illiquidity, JPMorgan Chase’s credit risk may be further increased when JPMorgan Chase cannot realize the fair value of the collateral held by it or when collateral is liquidated at prices that are not sufficient to recover the full amount of the loan, derivative or other exposure due to it. Furthermore, disputes with counterparties concerning the valuation of collateral may increase in times of significant market stress, volatility or illiquidity, and JPMorgan Chase could suffer losses during these periods if it is unable to realize the fair value of collateral or to manage declines in the value of collateral.
JPMorgan Chase could incur significant losses arising from concentrations of credit and market risk.
JPMorgan Chase is exposed to greater credit and market risk to the extent that groupings of its clients or counterparties:
•
engage
in similar businesses
•
do business in the same geographic region, or
•
have business profiles, models or strategies that could cause their ability to meet their obligations to be similarly affected by changes in economic conditions.
For example, a significant deterioration in the credit quality of one of JPMorgan Chase’s borrowers or counterparties could lead to concerns about the creditworthiness of other borrowers or counterparties in similar, related
or dependent industries. This type of interrelationship could exacerbate JPMorgan Chase’s credit and market risk exposure and potentially cause it to incur losses, including fair value losses in its trading businesses.
Similarly, challenging economic conditions that affect a particular industry or geographic area could lead to concerns about the credit quality of JPMorgan Chase’s borrowers or counterparties not only in that particular industry or geography but in related or dependent industries, wherever located. These conditions could also heighten concerns about the ability of customers of JPMorgan Chase’s consumer businesses who live in those areas or work in those affected industries or related or dependent industries to meet their obligations to JPMorgan Chase. JPMorgan Chase regularly monitors various segments of its credit and market risk exposures to assess the potential risks of concentration or contagion, but its
efforts to diversify or hedge its exposures against those risks may not be successful.
JPMorgan Chase’s consumer businesses can also be harmed by an excessive, industry-wide expansion of consumer credit. For example, heightened competition among financial institutions for certain types of consumer loans, including credit card, mortgage, auto or other loans, could prompt significant reductions in the pricing of those loans and thereby decrease their profitability, or result in loans being extended to less-creditworthy borrowers. If large numbers of consumers subsequently default on their loans, whether due to weak credit profiles, an economic downturn or other factors, this could impair their ability to repay obligations owed to JPMorgan Chase and result in higher charge-offs and other credit-related losses. More broadly, widespread defaults on consumer debt could lead to recessionary conditions in the U.S. economy, and JPMorgan
Chase’s consumer businesses may earn lower revenues in such an environment.
Disruptions in the liquidity or transparency of the financial markets could cause JPMorgan Chase to be unable to sell, syndicate or realize the value of its positions in various debt instruments, loans, derivatives and other obligations, and thereby lead to increased risk concentrations. If JPMorgan
14
Chase is unable to
reduce positions effectively during a market dislocation, this can increase both the market and credit risks associated with those positions and the level of risk-weighted assets (“RWA”) that JPMorgan Chase holds on its balance sheet. These factors could increase JPMorgan Chase’s capital requirements and funding costs and adversely affect the profitability of JPMorgan Chase’s businesses.
Liquidity
Liquidity is critical to JPMorgan Chase’s ability to fund and operate its businesses.
JPMorgan Chase’s liquidity could be impaired at any given time by factors such as:
•
market-wide illiquidity or disruption
•
unforeseen
cash or capital requirements
•
inability to sell assets, or to sell assets at favorable times or prices
•
default by a CCP or other significant market participant
•
unanticipated outflows of cash or collateral, and
•
lack
of market or customer confidence in JPMorgan Chase or financial institutions in general.
A diminution of JPMorgan Chase’s liquidity may be caused by events over which it has little or no control. For example, during the 2008-2009 financial crisis, periods of low investor confidence and significant market illiquidity resulted in higher funding costs for JPMorgan Chase and limited its access to some of its traditional sources of liquidity, including securitized debt issuances. There is no assurance that severe conditions of this type will not occur in the future.
JPMorgan Chase may need to raise funding from alternative sources if its access to stable and lower-cost sources of funding, such as bank deposits and borrowings from Federal Home Loan Banks, is reduced. Alternative sources of funding could be more expensive or limited in availability. JPMorgan Chase’s
funding costs could also be negatively affected by actions that JPMorgan Chase may take in order to:
•
satisfy applicable liquidity coverage ratio and net stable funding ratio requirements
•
continue to satisfy requirements under the TLAC rules concerning the amount of eligible LTD that JPMorgan Chase must have outstanding
•
address
obligations under its resolution plan, or
•
satisfy regulatory requirements in countries outside the U.S. relating to the pre-positioning of liquidity in subsidiaries that are material legal entities.
More generally, if JPMorgan Chase fails to effectively manage its liquidity, this could constrain its ability to fund or invest in its businesses, and thereby adversely affect its results of operations.
JPMorgan Chase & Co. is a holding company and depends on the cash flows of its subsidiaries
to make payments on its outstanding securities.
JPMorgan Chase & Co. is a holding company that holds the stock of JPMorgan Chase Bank, N.A. and an intermediate holding company, JPMorgan Chase Holdings LLC (the “IHC”). The IHC in turn holds the stock of substantially all of JPMorgan Chase’s subsidiaries other than JPMorgan Chase Bank, N.A. and its subsidiaries. The IHC also owns other assets and intercompany indebtedness owing to the holding company.
The holding company is obligated to contribute to the IHC substantially all the net proceeds received from securities issuances (including issuances of senior and subordinated debt securities and of preferred and common stock).
The
ability of JPMorgan Chase Bank, N.A. and the IHC to make payments to the holding company is also limited. JPMorgan Chase Bank, N.A. is subject to restrictions on its dividend distributions, as well as capital adequacy and liquidity requirements and other regulatory restrictions on its ability to make payments to the holding company. The IHC is prohibited from paying dividends or extending credit to the holding company if certain capital or liquidity “thresholds” are breached or if limits are otherwise imposed by JPMorgan Chase’s management or Board of Directors.
As a result of these arrangements, the ability of the holding company to make various payments is dependent on its receiving dividends from JPMorgan Chase Bank, N.A. and dividends and extensions of credit from the IHC. These limitations could affect the holding company’s ability to:
•
pay
interest on its debt securities
•
pay dividends on its equity securities
•
redeem or repurchase outstanding securities, and
•
fulfill its other payment obligations.
Collectively, these regulatory restrictions and limitations
could significantly limit the holding company’s ability to pay dividends and satisfy its debt and other obligations. They could also result in the holding company seeking protection under bankruptcy laws at a time earlier than would have been the case absent the existence of those thresholds.
Reductions in JPMorgan Chase’s credit ratings may adversely affect its liquidity and cost of funding.
JPMorgan Chase & Co. and certain of its principal subsidiaries are rated by credit rating agencies. Rating agencies evaluate both general and firm- and industry-specific factors when determining their credit ratings for a particular financial institution, including:
•
economic
and geopolitical trends
•
regulatory developments
•
expected future profitability
15
Part
I
•
risk management practices
•
legal expenses
•
assumptions about government support, and
•
ratings
differentials between bank holding companies and their bank and non-bank subsidiaries.
JPMorgan Chase closely monitors and manages, to the extent that it is able, factors that could influence its credit ratings. However, there is no assurance that JPMorgan Chase’s credit ratings will not be lowered in the future. Furthermore, any such downgrade could occur at times of broader market instability when JPMorgan Chase’s options for responding to events may be more limited and general investor confidence is low.
A reduction in JPMorgan Chase’s credit ratings could curtail JPMorgan Chase’s business activities and reduce its profitability in a number of ways, including by:
•
reducing
access to capital markets
•
materially increasing the cost of issuing and servicing securities
•
triggering additional collateral or funding requirements, and
•
decreasing the number of investors and counterparties that are willing or permitted to do business with or lend to JPMorgan
Chase.
Any rating reduction could also increase the credit spreads charged by the market for taking credit risk on JPMorgan Chase & Co. and its subsidiaries. This could, in turn, adversely affect the value of debt and other obligations of JPMorgan Chase & Co. and its subsidiaries.
Regulation and reform of benchmarks could have adverse consequences on securities and other instruments that are linked to those benchmarks.
Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of recent international, national and other regulatory guidance and proposals for reform.
Some of these reforms are already effective while others are still to be implemented. These reforms may cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences which cannot be fully anticipated.
Any of the international, national or other proposals for reform or the general increased regulatory scrutiny of benchmarks could also increase the costs and risks of administering or otherwise participating in the setting of benchmarks and complying with any such regulations or requirements. Such factors may have the effect of discouraging market participants from continuing to administer or contribute to certain benchmarks, trigger changes in the rules or methodologies used in certain benchmarks or lead to the disappearance of certain benchmarks.
On July
27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021.
Any of the these developments, and any future initiatives to regulate, reform or change the manner of administration of benchmarks, could result in adverse consequences to the return on, value of and market for securities and other instruments whose returns are linked to any such benchmark, including those issued by JPMorgan Chase or its subsidiaries.
Operational
JPMorgan
Chase’s businesses are highly dependent on the effectiveness of its operational systems and those of other market participants.
JPMorgan Chase’s businesses rely comprehensively on the ability of JPMorgan Chase’s financial, accounting, trading, data processing and other operational systems to process, record, monitor and report a large number of transactions on a continuous basis, and to do so accurately and quickly. In addition to proper design, installation, maintenance and training, the effective functioning of JPMorgan Chase’s operational systems depends on, among other things:
•
the quality of the information contained in those systems, as inaccurate, outdated or corrupted data can significantly compromise the
functionality of a particular operational system and other systems to which it transmits information, and
•
JPMorgan Chase’s ability to appropriately maintain and upgrade its systems on a regular basis, and to ensure that any changes introduced to its systems are managed carefully to ensure operational continuity.
JPMorgan Chase also depends on its ability to access and use the operational systems of its vendors, custodians and other market participants, including clearing and payment systems, CCPs, securities exchanges and data processing, security and technology companies.
The ineffectiveness, failure or other disruption of the operational
systems of JPMorgan Chase or another significant market participant, including due to a cyberbreach, could result in unfavorable ripple effects in the financial markets and for JPMorgan Chase and its clients and customers, including:
•
delays or other disruptions in providing information, services and liquidity to clients and customers
•
the inability to settle transactions or obtain access to funds and other assets
16
•
the
possibility that transactions such as funds transfers or capital markets trades are executed erroneously, illegally or with unintended consequences
•
financial losses, including possible restitution to clients and customers
•
higher operational costs associated with replacing services provided by a system that is unavailable
•
customer
dissatisfaction and loss of confidence in JPMorgan Chase’s products and services, and
•
harm to reputation.
Furthermore, the interconnectivity of multiple financial institutions with central agents, CCPs, payment processors, securities exchanges, clearing houses and other financial market infrastructures, and the increased importance of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially affect JPMorgan Chase’s ability to conduct business.
As the speed, frequency, volume and complexity of transactions increases, it becomes more
challenging to effectively maintain JPMorgan Chase’s operational systems and infrastructure, especially due to the heightened risks that:
•
errors, whether inadvertent or malicious, cause widespread system disruption
•
isolated or seemingly insignificant errors in operational systems compound, or migrate to other systems over time, to become larger issues
•
failures
in synchronization or encryption software, or degraded performance of microprocessors due to design flaws, causes disruptions in operational systems, or the inability of systems to communicate with each other, and
•
third parties attempt to block the use of key technology solutions by claiming that the use infringes on their intellectual property rights.
If JPMorgan Chase’s operational systems, or those of third parties on which JPMorgan Chase’s businesses depend, are unable to meet the demanding standards of JPMorgan Chase’s businesses and operations, or if they fail or have other significant shortcomings, JPMorgan Chase could be materially and adversely affected.
JPMorgan
Chase relies on the skill and integrity of its employees and those of third parties in running its operational systems.
The effective functioning of JPMorgan Chase’s operational systems also depends on the competence and reliability of its employees, as well as the employees of third parties on whom JPMorgan Chase depends for technological support, security or other services. JPMorgan Chase could be materially and adversely affected by a significant operational breakdown or failure caused by human error or
misconduct by an employee of JPMorgan Chase or a third party.
JPMorgan Chase can be negatively affected if it fails to identify and address operational risks associated with new products or processes.
When JPMorgan Chase changes processes or
introduces new products and services or new connectivity solutions, JPMorgan Chase may not fully appreciate or identify new operational risks that may arise from those changes, or may fail to implement adequate controls to mitigate the risks associated with new business activities. Any of these occurrences could diminish JPMorgan Chase’s ability to operate one or more of its businesses or result in:
•
potential liability to clients and customers
•
increased operating expenses
•
higher
litigation costs, including regulatory fines, penalties and other sanctions
•
damage to JPMorgan Chase’s reputation
•
impairment of JPMorgan Chase’s liquidity
•
regulatory intervention, or
•
weaker
competitive standing.
Any of the foregoing consequences could materially and adversely affect JPMorgan Chase’s businesses and results of operations.
JPMorgan Chase’s connections to third-party operational systems expose it to greater operational risks.
Third parties with which JPMorgan Chase does business, as well as retailers, data aggregators and other third parties with which JPMorgan Chase’s customers do business, can also be sources of operational risk to JPMorgan Chase. This is particularly the case where activities of customers or those third parties are beyond JPMorgan Chase’s security and control systems, including through the use of the internet, personal smart phones and other mobile devices or services.
If a third party obtains access to customer account data
on JPMorgan Chase’s systems, and that third party experiences a cyberbreach of its own systems or misappropriates that data, this could result in a variety of negative outcomes for JPMorgan Chase and its customers, including:
•
heightened risk that third parties will be able to execute fraudulent transactions using JPMorgan Chase’s systems
•
losses from fraudulent transactions, as well as potential liability for losses that exceed thresholds established in consumer protection laws and regulations
•
increased
operational costs to remediate the consequences of the third party’s security breach, and
•
harm to reputation arising from the perception that JPMorgan Chase’s systems may not be secure.
17
Part I
As
JPMorgan Chase’s interconnectivity with customers and other third parties expands, JPMorgan Chase increasingly faces the risk of operational failure with respect to their systems. Security breaches affecting JPMorgan Chase’s customers, or systems breakdowns or failures, security breaches or human error or misconduct affecting those other third parties, may require JPMorgan Chase to take steps to protect the integrity of its own operational systems or to safeguard confidential information. These actions can increase JPMorgan Chase’s operational costs and potentially diminish customer satisfaction.
JPMorgan Chase faces substantial legal and operational risks in safeguarding personal information.
JPMorgan Chase’s businesses are subject to complex and evolving laws and regulations, both within and outside the U.S., governing the privacy and protection of personal information of individuals.
The protected parties can include:
•
JPMorgan Chase’s clients and customers
•
clients and customers of JPMorgan Chase’s clients and customers
•
JPMorgan Chase’s employees, and
•
employees
of JPMorgan Chase’s suppliers, counterparties and other third parties.
Ensuring that JPMorgan Chase’s collection, use, transfer and storage of personal information comply with all applicable laws and regulations in all relevant jurisdictions, including where the laws of different jurisdictions are in conflict, can:
•
increase JPMorgan Chase’s operating costs
•
affect the development of new products or services
•
demand
significant oversight by JPMorgan Chase’s management, and
•
require JPMorgan Chase to structure its businesses, operations and systems in less efficient ways.
Furthermore, JPMorgan Chase cannot ensure that all of its clients and customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information exchanged between them and JPMorgan Chase, particularly where information is transmitted by electronic means. JPMorgan Chase could be exposed to litigation or regulatory fines, penalties or other sanctions if personal, confidential or proprietary information of clients, customers, employees or others were to
be mishandled or misused, such as situations where such information is:
•
erroneously provided to parties who are not permitted to have the information, or
•
intercepted or otherwise compromised by third parties.
Concerns regarding the effectiveness of JPMorgan Chase’s measures to safeguard personal information, or even the perception that those measures are inadequate, could cause
JPMorgan
Chase to lose existing or potential clients and customers, and thereby reduce JPMorgan Chase’s revenues. Furthermore, any failure or perceived failure by JPMorgan Chase to comply with applicable privacy or data protection laws and regulations may subject it to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices, significant liabilities or regulatory fines, penalties or other sanctions. Any of these could damage JPMorgan Chase’s reputation and otherwise adversely affect its businesses.
JPMorgan Chase’s operations and results could be vulnerable to catastrophes or other events that disrupt its business.
JPMorgan Chase’s business and operational systems could be seriously disrupted by events that are wholly or partially beyond its control, including:
•
cyberbreaches
or breaches of physical premises
•
electrical or telecommunications outages
•
failures of, or loss of access to, operational systems, including computer systems, servers, networks and other technology assets
•
damage to or loss of property or assets
•
natural
disasters or severe weather conditions
•
health emergencies or pandemics, or
•
events arising from local or larger-scale political events, including outbreaks of hostilities or terrorist acts.
JPMorgan Chase maintains a global resiliency and crisis management program that is intended to ensure the ability to recover critical business functions and supporting assets, including staff, technology and facilities, in the event of a business interruption.
There can be no assurance that JPMorgan Chase’s resiliency plans will fully mitigate all potential business continuity risks to JPMorgan Chase or its clients and customers. Any significant failure or disruption of JPMorgan Chase’s operations or operational systems could, among other things:
•
hinder its ability to provide services to its clients and customers
•
require it to expend significant resources to correct the failure or disruption
•
cause
it to incur financial losses, both from loss of revenue and damage to or loss of property, and
•
expose it to litigation or regulatory fines, penalties or other sanctions.
A successful cyberattack against JPMorgan Chase could cause significant harm to JPMorgan Chase or its clients and customers.
JPMorgan Chase experiences numerous cyberattacks on its computer systems, software, networks and other technology assets on a daily basis. These cyberattacks can
18
take
many forms, but a common objective of many of these attacks is to introduce computer viruses or malware into JPMorgan Chase’s systems. These viruses or malicious code are typically designed to, among other things:
•
obtain unauthorized access to confidential information belonging to JPMorgan Chase or its clients and customers
•
manipulate or destroy data
•
disrupt,
sabotage or degrade service on JPMorgan Chase’s systems, or
•
steal money.
JPMorgan Chase has also been the target of significant distributed denial-of-service attacks which are intended to disrupt online banking services.
JPMorgan Chase devotes significant resources to maintain and regularly upgrade its systems to protect them against cyberattacks. However, JPMorgan Chase has experienced security breaches due to cyberattacks in the past, and it is inevitable that additional breaches will occur in the future. Any such breach could result in serious and harmful consequences for JPMorgan Chase or its clients and customers.
A
principal reason that JPMorgan Chase cannot provide absolute security against cyberattacks is that it may not always be possible to anticipate, detect or recognize threats to JPMorgan Chase’s systems, or to implement effective preventive measures against all breaches. This is because, among other things:
•
the techniques used in cyberattacks change frequently and may not be recognized until launched
•
cyberattacks can originate from a wide variety of sources, including third parties who are or may be involved in organized crime or
linked to terrorist organizations or hostile foreign governments, and
•
third parties may seek to gain access to JPMorgan Chase’s systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of JPMorgan Chase’s systems.
The risk of a security breach due to a cyberattack could increase in the future as JPMorgan Chase continues to expand its mobile-payment and other internet-based product offerings and its internal use of web-based products and applications.
A successful penetration or circumvention of the security of JPMorgan Chase’s systems or the systems
of a supplier, governmental body or another market participant could cause serious negative consequences, including:
•
significant disruption of JPMorgan Chase’s operations and those of its clients, customers and counterparties, including losing access to operational systems
•
misappropriation of confidential information of JPMorgan Chase or that of its clients, customers, counterparties or employees
•
damage
to computers or systems of JPMorgan Chase and those of its clients, customers and counterparties
•
inability to fully recover and restore data that has been stolen, manipulated or destroyed, or to prevent systems from processing fraudulent transactions
•
violations by JPMorgan Chase of applicable privacy and other laws
•
financial
loss to JPMorgan Chase or to its clients and customers
•
loss of confidence in JPMorgan Chase’s cybersecurity measures
•
client and customer dissatisfaction
•
significant exposure to litigation and regulatory fines, penalties or other sanctions, or
•
harm
to JPMorgan Chase’s reputation.
JPMorgan Chase could also suffer some of the above consequences if a third party were to misappropriate confidential information obtained by intercepting signals or communications from mobile devices used by JPMorgan Chase’s employees.
JPMorgan Chase may not be able to immediately address the consequences of a security breach due to a cyberattack.
A successful breach of JPMorgan Chase’s computer systems, software, networks or other technology assets due to a cyberattack could occur and persist for an extended period of time before being detected due to, among other things:
•
the
breadth of JPMorgan Chase’s operations and the high volume of transactions that it processes
•
the large number of customers, counterparties and third-party service providers with which JPMorgan Chase does business
•
the proliferation and increasing sophistication of cyberattacks, and
•
the
possibility that a third party, after establishing a foothold on an internal network without being detected, might obtain access to other networks and systems.
The extent of a particular cyberattack and the steps that JPMorgan Chase may need to take to investigate the attack may not be immediately clear, and it may take a significant amount of time before such an investigation can be completed and full and reliable information about the attack is known. While such an investigation is ongoing, JPMorgan Chase may not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could
19
Part
I
further increase the costs and consequences of a cyberattack.
JPMorgan Chase’s risk management framework and procedures may not be effective in identifying and mitigating every risk to JPMorgan Chase.
JPMorgan Chase’s risk management framework is intended to mitigate risk and loss. JPMorgan Chase has established processes and procedures to identify, measure, monitor, report and analyze the types of risk to which JPMorgan Chase is subject. However, there are inherent limitations to risk management strategies because there may be existing or future risks that JPMorgan Chase has not appropriately anticipated or identified.
JPMorgan Chase could be exposed to unexpected losses, and JPMorgan Chase’s financial condition or results of operations
could be materially and adversely affected, by any inadequacy or lapse in its risk management framework, governance structure, procedures and practices, models or reporting systems. An inadequacy or lapse could:
•
require significant resources to remediate
•
attract heightened regulatory scrutiny
•
expose
JPMorgan Chase to regulatory investigations or legal proceedings
•
subject it to litigation or regulatory fines, penalties or other sanctions
•
harm its reputation, or
•
diminish confidence in JPMorgan Chase.
JPMorgan Chase
relies on data to assess its various risk exposures. Any deficiencies in the quality or effectiveness of JPMorgan Chase’s data gathering and validation processes could result in ineffective risk management practices. These deficiencies could also result in inaccurate risk reporting.
JPMorgan Chase establishes allowances for probable credit losses that are inherent in its credit exposures. It then employs stress testing and other techniques to determine the capital and liquidity necessary in the event of adverse economic or market events. These processes are critical to JPMorgan Chase’s results of operations and financial condition. They require difficult, subjective and complex judgments, including forecasts of how economic conditions might impair the ability of JPMorgan Chase’s borrowers and counterparties to repay their loans or other obligations. It is possible that JPMorgan Chase will fail to identify the proper factors
or that it will fail to accurately estimate the impact of factors that it identifies.
Many of JPMorgan Chase’s risk management strategies and techniques consider historical market behavior. These strategies and techniques are based to some degree on management’s subjective judgment. For example, many models used by JPMorgan Chase are based on assumptions regarding correlations among prices of various asset classes or other market indicators. In times of market stress, including difficult or less liquid market environments, or in
the event of other unforeseen circumstances, previously uncorrelated indicators may become correlated. Conversely, previously-correlated indicators may make unrelated movements at those times. Sudden market movements and unanticipated or unidentified market or economic movements have, in some circumstances,
limited the effectiveness of JPMorgan Chase’s risk management strategies, causing it to incur losses.
JPMorgan Chase could incur significant losses and face greater regulatory scrutiny if its models or estimations are inadequate.
JPMorgan Chase has developed and uses a variety of models and other analytical and judgment-based estimations to assess and implement mitigating controls over its market, credit, operational and other risks. These models and estimations are based on a variety of assumptions and historical trends, and are periodically reviewed and modified as necessary. The models and estimations that JPMorgan Chase uses may not be effective in all cases to observe and mitigate risk due to a variety of factors, such as:
•
reliance
on historical trends that may not accurately predict future events, including assumptions underlying the models and estimations which predict correlation among certain market indicators or asset prices
•
inherent limitations associated with forecasting uncertain economic and financial outcomes
•
historical trend information may be incomplete, or may not anticipate severely negative market conditions such as extreme volatility, dislocation or lack of liquidity
•
technology
that is introduced to run models or estimations may not perform as expected, or may not be well understood by the personnel using the technology
•
models and estimations may contain erroneous data, valuations, formulas or algorithms, and
•
review processes may fail to detect flaws in models and estimations.
JPMorgan Chase could incur substantial losses, its capital levels could be reduced and it could face greater regulatory scrutiny if its models or estimations
prove to be inadequate.
Some of the models and other analytical and judgment-based estimations used by JPMorgan Chase in managing risks are subject to review by, and require the approval of, JPMorgan Chase’s regulators. These reviews are required before JPMorgan Chase may use those models and estimations in connection with calculating market risk RWA, credit risk RWA and operational risk RWA under Basel III. If JPMorgan Chase’s models or estimations are not approved by its regulators, it may be subject to higher capital charges, which could adversely affect its financial results or limit the ability to expand its businesses. JPMorgan Chase’s capital actions could also be constrained if a CCAR submission is not approved by its banking regulators due to the perceived inadequacy of its models or estimations.
20
Enhanced
standards for vendor risk management can result in higher costs and other potential exposures.
JPMorgan Chase must comply with enhanced standards for the assessment and management of risks associated with doing business with vendors and other third-party service providers. These requirements are contained both in bank regulatory regulations and guidance and in certain consent orders to which JPMorgan Chase has been subject. JPMorgan Chase incurs significant costs and expenses in connection with its initiatives to address the risks associated with oversight of its third party relationships. JPMorgan Chase’s failure to appropriately assess and manage third-party relationships, especially those involving significant banking functions, shared services or other critical activities, could materially adversely affect JPMorgan Chase. Specifically, any such failure could subject JPMorgan Chase to:
•
potential
liability to clients and customers
•
regulatory fines, penalties or other sanctions
•
increased operational costs, or
•
harm to its reputation.
Requirements for physical settlement and delivery in trading agreements could expose
JPMorgan Chase to operational and other risks.
Certain of JPMorgan Chase’s markets transactions require the physical settlement by delivery of securities or other obligations that JPMorgan Chase does not own. If JPMorgan Chase is unable to obtain the obligations within the required timeframe, JPMorgan Chase could forfeit payments otherwise due. Failures could also result in settlement delays, which could damage JPMorgan Chase’s reputation and ability to transact business. Failure to timely settle and confirm transactions could also subject JPMorgan Chase to heightened credit and operational risk, and in the event of a default, market and operational losses.
JPMorgan Chase could incur unexpected losses if estimates and judgments underlying its financial statements are incorrect.
Under U.S. generally accepted accounting principles (“U.S.
GAAP”), JPMorgan Chase is required to use estimates and apply judgments in preparing its financial statements, including in determining allowances for credit losses and reserves related to litigation, among other items. Certain financial instruments require a determination of their fair value in order to prepare JPMorgan Chase’s financial statements, including:
•
trading assets and liabilities
•
instruments in the investment securities portfolio
•
certain
loans
•
MSRs
•
structured notes, and
•
certain repurchase and resale agreements.
Where quoted market prices are not available for these types of instruments, JPMorgan Chase may make
fair value determinations based on internally developed models or other means which ultimately rely to some degree on management estimates and judgment. Sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which could lead to valuations being subsequently changed or adjusted. If estimates or judgments underlying JPMorgan Chase’s financial statements prove to have been incorrect, JPMorgan Chase may experience material losses.
Lapses in controls over disclosure or financial reporting could materially affect JPMorgan Chase’s profitability or reputation.
There can be no assurance that JPMorgan Chase’s disclosure controls and procedures will be effective in every circumstance, or that a material weakness or significant deficiency in internal control over financial reporting will not occur.
Any such lapses or deficiencies could:
•
materially and adversely affect JPMorgan Chase’s business and results of operations or financial condition
•
restrict its ability to access the capital markets
•
require it to expend significant resources to correct the lapses or deficiencies
•
expose
it to litigation or regulatory fines, penalties or other sanctions
•
harm its reputation, or
•
otherwise diminish investor confidence in JPMorgan Chase.
Strategic
If JPMorgan Chase’s management fails to develop and execute effective business strategies, JPMorgan Chase’s competitive standing and results could suffer.
JPMorgan Chase’s business
strategies significantly affect its competitive standing and results of operations. These strategies relate to:
•
the products and services that JPMorgan Chase offers
•
the geographies in which it operates
•
the types of clients and customers that it serves
•
the
counterparties with which it does business, and
•
the methods and distribution channels by which it offers products and services.
The franchise values and growth prospects of JPMorgan Chase’s businesses, and its earnings and results of operations, may suffer and revenues could decline if management makes choices about these strategies and goals that:
•
prove to be incorrect
21
Part
I
•
do not accurately assess the competitive landscape and industry trends, or
•
fail to address changing regulatory and market environments in the U.S. and abroad.
JPMorgan Chase’s growth and prospects also depend on management’s ability to develop and execute effective business plans to address these strategic priorities, both in the near term and over longer time horizons. Management’s effectiveness in this regard
will affect JPMorgan Chase’s ability to develop and enhance its resources, control expenses and return capital to shareholders. Each of these objectives could be adversely affected by management’s failure to:
•
devise effective business plans and strategies
•
effectively implement business decisions, including by minimizing bureaucratic processes
•
institute
controls that appropriately address the risks associated with business activities and any changes in those activities
•
offer products and services that meet the expectations of clients and customers, and in ways that enhance their satisfaction with those products and services
•
allocate capital to JPMorgan Chase’s businesses in a manner that promotes their long-term profitability
•
adequately
respond to regulatory requirements
•
appropriately address shareholder concerns
•
react quickly to changes in market conditions or market structures, or
•
develop and enhance the operational, technology, risk, financial and managerial resources necessary to grow and manage JPMorgan Chase’s
businesses.
Additionally, JPMorgan Chase’s Board of Directors plays an important role in exercising appropriate oversight of management’s strategic decisions, and a failure by the Board to perform this function could also impair JPMorgan Chase’s results of operations.
Conduct
Misconduct by JPMorgan Chase employees can harm its clients and customers, damage its reputation and trigger litigation and regulatory action.
JPMorgan Chase’s employees interact with clients, customers and counterparties, and with each other, every day. All employees are expected to demonstrate values and exhibit the culture and behaviors that are an integral part of JPMorgan Chase’s How We Do Business Principles, including JPMorgan Chase’s commitment to “do first class business in a first class
way.” JPMorgan Chase endeavors to embed culture and conduct risk management throughout an employee’s life cycle, including recruiting, onboarding, training and development, and performance management. Culture and conduct risk management are
also important to JPMorgan Chase’s promotion and compensation processes.
Notwithstanding these expectations, policies and practices, certain employees have in the past engaged in improper or illegal conduct resulting in litigation as well as settlements involving consent orders, deferred prosecution agreements and non-prosecution agreements, as well as other civil and criminal settlements with regulators and other governmental entities. There is no assurance that further inappropriate actions by employees will not occur or that any such actions will always be deterred or quickly prevented.
JPMorgan
Chase’s reputation could be harmed, and collateral consequences could result, from a failure by one or more employees to act consistently with JPMorgan Chase’s expectations, including by acting in ways that harm clients, customers, other market participants or other employees. Some examples of this include:
•
improperly selling and marketing JPMorgan Chase’s products or services
•
engaging in insider trading, market manipulation or unauthorized trading
•
facilitating
illegal or aggressive tax-motivated transactions, or transactions designed to circumvent economic sanction programs
•
failing to fulfill fiduciary obligations or other duties owed to clients or customers
•
violating anti-trust or anti-competition laws by colluding with other market participants to manipulate markets, prices or indices
•
making
risk decisions in ways that subordinate JPMorgan Chase’s risk appetite to employee compensation objectives, and
•
misappropriating property or confidential or proprietary information or technology belonging to JPMorgan Chase, its clients and customers or third parties.
The consequences of any failure by employees to act consistently with JPMorgan Chase’s expectations could include litigation, or regulatory or other governmental investigations or enforcement actions. Any of these proceedings or actions could result in judgments, settlements, fines, penalties or other sanctions, or lead to:
•
financial
losses
•
increased operational and compliance costs
•
greater regulatory scrutiny
•
requirements that JPMorgan Chase restructure, curtail or cease certain of its activities
•
the
need for significant oversight by JPMorgan Chase’s management
•
the undermining of JPMorgan Chase’s culture
22
•
loss
of clients or customers, and
•
harm to JPMorgan Chase’s reputation.
Reputation
Damage to JPMorgan Chase’s reputation could harm its businesses.
Maintaining trust in JPMorgan Chase is critical to its ability to attract and retain clients, customers, investors and employees. Damage to JPMorgan Chase’s reputation can therefore cause significant harm to JPMorgan Chase’s business and prospects. Harm to JPMorgan Chase’s reputation can arise from numerous sources, including:
•
employee
misconduct
•
security breaches
•
compliance failures
•
litigation or regulatory fines, penalties or other sanctions, or
•
regulatory
investigations, enforcement actions or settlements.
JPMorgan Chase’s reputation could also be harmed by the failure or perceived failure of certain third parties to comply with laws or regulations, including companies in which JPMorgan Chase has made principal investments, parties to joint ventures with JPMorgan Chase, and vendors and other third parties with which JPMorgan Chase does business.
JPMorgan Chase’s reputation or prospects may be significantly damaged by adverse publicity or negative information regarding JPMorgan Chase, whether or not true, that may be posted on social media, non-mainstream news services or other parts of the internet, and this risk can be magnified by the speed and pervasiveness with which information is disseminated through those channels.
Actions by the financial services industry generally
or by certain members of or individuals in the industry can also affect JPMorgan Chase’s reputation. For example, concerns that consumers have been treated unfairly by a financial institution, or that a financial institution has acted inappropriately with respect to the methods used to offer products to customers, can damage the reputation of the industry as a whole. If JPMorgan Chase is perceived to have engaged in these types of behaviors, the measures needed to address the associated reputational issues could increase JPMorgan Chase’s operational and compliance costs and negatively affect its earnings. Furthermore, events that undermine JPMorgan Chase’s reputation can hinder its ability to attract and retain clients, customers, investors and employees.
Failure to effectively manage potential conflicts of interest can result in litigation and enforcement actions, as well as damage JPMorgan Chase’s reputation.
JPMorgan
Chase’s ability to manage potential conflicts of interest has become increasingly complex as its business activities encompass more transactions, obligations and
interests with and among JPMorgan Chase’s clients and customers. JPMorgan Chase can become subject to litigation and enforcement actions, and its reputation can be damaged, by the failure or perceived failure to, among other things:
•
adequately address or appropriately disclose conflicts of interest
•
deliver
appropriate standards of service and quality
•
treat clients and customers fairly
•
use client and customer data responsibly and in a manner that meets legal requirements and regulatory expectations
•
provide fiduciary products or services in accordance with the applicable legal and regulatory
standards, or
•
handle or use confidential information of customers or clients appropriately or in compliance with applicable data protection and privacy laws and regulations.
In the future, a failure or perceived failure to appropriately address conflicts or fiduciary obligations could result in customer dissatisfaction, litigation and regulatory fines, penalties or other sanctions, and heightened regulatory scrutiny and enforcement actions, all of which can lead to lost revenue and higher operating costs and cause serious harm to JPMorgan Chase’s reputation.
Country
JPMorgan Chase can incur
losses due to unfavorable economic developments around the world.
JPMorgan Chase’s businesses and earnings are affected by the monetary, fiscal and other policies adopted by various U.S. and non-U.S. regulatory authorities and agencies. For example, the Federal Reserve regulates the supply of money and credit in the U.S. and its policies determine in large part the cost of funds for lending and investing in the U.S. and the return earned on those loans and investments. Changes in fiscal policies by central banks or regulatory authorities, and the manner in which those policies are executed, are beyond JPMorgan Chase’s control and may be difficult to predict. Consequently, unanticipated changes in these policies or the ways in which they are implemented could have a negative impact on JPMorgan Chase’s businesses and results of operations.
JPMorgan Chase’s businesses and revenues
are also subject to the risks inherent in investing and market-making in securities, loans and other obligations of companies worldwide. These risks include, among others:
•
negative effects from slowing growth rates or recessionary economic conditions
•
the risk of loss from unfavorable political, legal or other developments, including social or political instability, in the countries or regions in which those companies operate, and
•
the
other risks and considerations discussed below.
23
Part I
Adverse economic and political developments in a country or region can have a wider negative impact on JPMorgan Chase’s businesses.
Some countries or regions in which JPMorgan Chase operates or invests, or in which JPMorgan Chase may do business in the future, have in
the past experienced severe economic disruptions particular to those countries or regions. In some cases, concerns regarding the fiscal condition of one or more countries can cause a contraction of available credit and reduced commercial activity among trading partners within the affected countries or region. These developments can also create market volatility which can lead to a contagion affecting other countries in the same region or beyond. Furthermore, governments in particular countries or regions in which JPMorgan Chase or its clients do business may choose to adopt protectionist economic or trade policies in response to concerns about domestic economic conditions. Any or all of these developments could lead to diminished cross-border trade and financing activity within that country or region, all of which could negatively affect JPMorgan Chase’s business and earnings in those jurisdictions. If JPMorgan Chase takes steps to reduce its market and credit risk exposure
within a particular country or region that is experiencing economic or political disruption, it may incur losses that are higher than expected because it will be disposing of assets when market conditions are likely to be highly unfavorable.
JPMorgan Chase’s business activities with governmental entities pose a greater risk of loss.
Several of JPMorgan Chase’s businesses engage in transactions with, or trade in obligations of, governmental entities, including national, state, provincial, municipal and local authorities, both within and outside the U.S. These activities can expose JPMorgan Chase to enhanced sovereign, credit-related, operational and reputation risks, including the risks that a governmental entity may:
•
default
on or restructure its obligations
•
claim that actions taken by government officials were beyond the legal authority of those officials, or
•
repudiate transactions authorized by a previous incumbent government.
Any or all of these actions could adversely affect JPMorgan Chase’s financial condition and results of operations and could hurt its reputation, particularly if JPMorgan Chase pursues claims against a government obligor in a jurisdiction in which
it has significant business relationships with clients or customers.
JPMorgan Chase’s business and revenues in emerging markets can be hampered by local political, social and economic factors.
Some of the countries in which JPMorgan Chase conducts business have economies or markets that are less developed and more volatile, and may have legal and regulatory regimes that are less established or predictable,
than the U.S. and other developed markets in which JPMorgan Chase operates. Some of these countries have in the past experienced severe economic disruptions, including:
•
extreme
currency fluctuations
•
high inflation
•
low or negative growth, or
•
defaults or potential defaults on sovereign debt.
The governments in these countries have sometimes reacted to these developments by imposing restrictive
monetary policies such as currency exchange controls and other laws and restrictions that adversely affect the local and regional business environment. In addition, these countries, as well as certain more developed countries, have been susceptible to unfavorable social developments arising from poor economic conditions and related governmental actions, including:
•
social unrest
•
general strikes and demonstrations
•
crime
and corruption
•
security and personal safety issues
•
outbreaks of hostilities
•
overthrow of incumbent governments
•
terrorist
attacks, or
•
other forms of internal discord.
These economic, political and social developments have in the past resulted in, and in the future could lead to, conditions that can adversely affect JPMorgan Chase’s operations in those countries and impair the revenues, growth and profitability of those operations.
If the legal and regulatory system in a particular country is less established or predictable, this can create a more difficult environment in which to conduct business. For example, any of the following could hamper JPMorgan Chase’s operations and reduce its earnings in countries with less established or predictable legal
and regulatory regimes:
•
the absence of a statutory or regulatory basis or guidance for engaging in specific types of business or transactions
•
the adoption of conflicting or ambiguous laws and regulations, or the inconsistent application or interpretation of existing laws and regulations
•
uncertainty
concerning the enforceability of contractual obligations
•
difficulty in competing in economies in which the government controls or protects all or a portion of the local economy or specific businesses, or where graft or corruption may be pervasive, and
24
•
the
threat of arbitrary regulatory investigations, civil litigations or criminal prosecutions, the termination of licenses required to operate in the local market or the suspension of business relationships with governmental bodies.
JPMorgan Chase’s operations in or involving emerging markets countries can also be affected by governmental actions such as:
•
monetary policies
•
expropriation, nationalization or confiscation of assets
•
price,
capital or exchange controls, and
•
changes in laws and regulations.
The impact of these actions could be accentuated in trading markets that are smaller, less liquid and more volatile than more-developed markets. These types of government actions can negatively affect JPMorgan Chase’s operations in the relevant country, either directly or by suppressing the business activities of local clients or multi-national clients that conduct business in the jurisdiction. For example, some or all of these governmental actions can result in funds belonging to JPMorgan Chase, or that it places with a local custodian on behalf of a client, being effectively trapped in a country. In addition
to the ultimate risk of losing the funds entirely, JPMorgan Chase could be exposed for an extended period of time to the credit risk of a local custodian that is now operating in a deteriorating domestic economy.
JPMorgan Chase’s revenues from international operations and trading in non-U.S. securities and other obligations can be negatively affected by the foregoing economic, political and social conditions in a particular country in which it does business. In addition, any of the above-mentioned events or circumstances in one country can affect JPMorgan Chase’s operations and investments in another country or countries, including in the U.S.
JPMorgan Chase’s operations in the emerging markets can subject it to higher operational and compliance costs.
Conducting business in countries with less-developed legal and regulatory regimes
often requires JPMorgan Chase to devote significant additional resources to understanding, and monitoring changes in, local laws and regulations, as well as structuring its operations to comply with local laws and regulations and implementing and administering related internal policies and procedures. There can be no assurance that JPMorgan Chase will always be successful in its efforts to conduct its business in compliance with laws and regulations in countries with less predictable legal and regulatory systems or that JPMorgan Chase will be able to develop effective working relationships with local regulators.
Complying with economic sanctions and anti-corruption and anti-money laundering laws and regulations can increase JPMorgan Chase’s operational and compliance costs and risks.
JPMorgan Chase must comply with economic sanctions
and embargo programs administered by OFAC and similar national and multi-national bodies and governmental agencies outside the U.S., as well as anti-corruption and anti-money laundering laws and regulations throughout the world. JPMorgan Chase can incur higher costs and face greater compliance risks in structuring and operating its businesses to comply with these requirements. Furthermore, a violation of a sanction or embargo program or anti-corruption or anti-money laundering laws and regulations could subject JPMorgan Chase, and individual employees, to regulatory enforcement actions as well as significant civil and criminal penalties.
Competition
The financial services industry is highly competitive, and JPMorgan Chase’s results of operations will suffer if it is not a strong and effective competitor.
JPMorgan Chase operates in a highly
competitive environment, and expects that competition in the U.S. and global financial services industry will continue to be intense. Competitors include:
•
other banks and financial institutions
•
trading, advisory and investment management firms
•
finance companies and technology companies, and
•
other
firms that are engaged in providing similar products and services.
JPMorgan Chase cannot provide assurance that the significant competition in the financial services industry will not materially and adversely affect its future results of operations.
New competitors have emerged. For example, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products. These advances have also allowed financial institutions and other companies to provide electronic and internet-based financial solutions, including electronic securities trading, payment processing and online automated algorithmic-based investment advice. Furthermore, both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted
by technologies, such as cryptocurrencies, that require no intermediation. New technologies have required and could require JPMorgan Chase to spend more to modify or adapt its products to attract and retain clients and customers or to match products and services offered by its competitors, including technology companies.
Ongoing or increased competition may put downward pressure on prices and fees for JPMorgan Chase’s products and services or may cause JPMorgan Chase to lose market share. This competition may be on the basis of, among other factors, quality and variety of products and services offered, transaction execution, innovation, reputation and price. The failure of any of JPMorgan Chase’s businesses to
25
Part
I
meet the expectations of clients and customers, whether due to general market conditions or underperformance, could affect JPMorgan Chase’s ability to attract or retain clients and customers. Any such impact could, in turn, reduce JPMorgan Chase’s revenues. Increased competition also may require JPMorgan Chase to make additional capital investments in its businesses, or to extend more of its capital on behalf of its clients in order to remain competitive.
Non-U.S. competitors of JPMorgan Chase’s wholesale businesses outside the U.S. are typically subject to different, and in some cases, less stringent, legislative and regulatory regimes. The more restrictive laws and regulations applicable to JPMorgan Chase and other U.S. financial services institutions can put JPMorgan Chase and those firms at a competitive disadvantage to
non-U.S. competitors. This could reduce the revenue and profitability of JPMorgan Chase’s wholesale businesses, resulting from:
•
prohibitions on engaging in certain transactions
•
higher capital and liquidity requirements
•
making JPMorgan Chase’s pricing of certain transactions more expensive for clients,
and
•
adversely affecting JPMorgan Chase’s cost structure for providing certain products.
People
JPMorgan Chase’s ability to attract and retain qualified employees is critical to its success.
JPMorgan Chase’s employees are its most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense. JPMorgan Chase endeavors to attract talented and diverse new employees and retain and motivate its existing employees. If JPMorgan Chase were unable to continue to attract or retain qualified employees, including successors to the Chief Executive
Officer or members of the Operating Committee, JPMorgan Chase’s performance, including its competitive position, could be materially and adversely affected.
Changes in immigration policies could adversely affect JPMorgan Chase.
There is the potential for changes in immigration policies in multiple jurisdictions around the world, including in the U.S. If immigration policies were to unduly restrict or otherwise make it more difficult for qualified employees to work in, or transfer among, jurisdictions in which JPMorgan Chase has operations or conducts its business, JPMorgan Chase could be adversely affected.
Legal
JPMorgan Chase faces significant legal risks from private actions and formal and informal regulatory investigations.
JPMorgan
Chase is named as a defendant or is otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. Actions currently pending against JPMorgan Chase may result in judgments, settlements, fines, penalties or other results adverse to JPMorgan Chase. Any of these matters could materially and adversely affect JPMorgan Chase’s business, financial condition or results of operations, or cause serious reputational harm. As a participant in the financial services industry, it is likely that JPMorgan Chase will continue to experience a high level of litigation related to its businesses and operations.
Regulators and other government agencies conduct examinations of JPMorgan Chase and its subsidiaries both on a routine basis and in targeted exams, and JPMorgan Chase’s businesses and operations
are subject to heightened regulatory oversight. This heightened regulatory scrutiny, or the results of such an investigation or examination, may lead to additional regulatory investigations or enforcement actions. There is no assurance that those actions will not result in regulatory settlements or other enforcement actions against JPMorgan Chase. Furthermore, a single event involving a potential violation of law or regulation may give rise to numerous and overlapping investigations and proceedings, either by multiple federal and state agencies and officials in the U.S. or, in some instances, regulators and other governmental officials in non-U.S. jurisdictions.
If another financial institution violates a law or regulation relating to a particular business activity or practice, this will often give rise to an investigation by regulators and other governmental agencies of the same or similar activity or practice by JPMorgan
Chase.
These and other initiatives by U.S. and non-U.S. governmental authorities may subject JPMorgan Chase to judgments, settlements, fines or penalties, or require JPMorgan Chase to restructure its operations and activities or to cease offering certain products or services. All of these potential outcomes could harm JPMorgan Chase’s reputation or lead to higher operational costs, thereby reducing JPMorgan Chase’s profitability, or result in collateral consequences.
Item 1B. Unresolved Staff Comments.
None.
26
Item
2. Properties.
JPMorgan Chase’s headquarters is located in New York City at 270 Park Avenue, a 50-story office building that it owns.
The Firm owned or leased facilities in the following locations at December 31, 2017.
At
December 31, 2017, the Firm owned or leased 5,130 retail branches in 23 states.
The premises and facilities occupied by JPMorgan Chase are used across all of the Firm’s business segments and for corporate purposes. JPMorgan Chase continues to evaluate its current and projected space requirements and may determine from time to time that certain of its properties (including the premises and facilities noted above) are no longer necessary for its operations. There is no assurance that the Firm will be able to dispose of any such excess properties, premises, and facilities or that it will not incur costs in connection with such dispositions. Such disposition costs may be material to the Firm’s results of operations in a given period. For information on occupancy expense, see the Consolidated Results of Operations on pages 44–46.
Item
3. Legal Proceedings.
For a description of the Firm’s material legal proceedings, see Note 29.
Item 4. Mine Safety Disclosures.
Not applicable.
27
Part II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for registrant’s common equity
The outstanding shares of JPMorgan Chase common stock are listed and traded on the New York Stock Exchange. For the quarterly high and low prices of JPMorgan Chase’s common stock and cash dividends declared on JPMorgan Chase’s common stock for the last two years, see the section entitled “Supplementary information – Selected quarterly financial data (unaudited)” on page 277. For a comparison of the cumulative total return for JPMorgan Chase common stock with the comparable total return of the S&P 500 Index, the KBW Bank Index and the S&P Financial Index over the five-year period ended December 31, 2017,
see “Five-year stock performance,” on page 39.
For information on the common dividend payout ratio, see Capital actions in the Capital Risk Management section of Management’s discussion and analysis on pages 89-90. For a discussion of restrictions on dividend payments, see Note 20 and Note 25. On January 31, 2018, there were 192,658 holders of record of JPMorgan Chase common stock. For information regarding securities authorized for issuance under the Firm’s employee share-based compensation
plans, see Part III, Item 12 on page 31.
Repurchases under the common equity repurchase program
For information regarding repurchases under the Firm’s common equity repurchase program, see Capital actions in the Capital Risk Management section of Management’s discussion and analysis on pages 89-90.
Shares repurchased, on a settlement-date basis, pursuant to the common equity repurchase program during 2017 were as follows.
Aggregate repurchases of common equity (in millions)(a)
Dollar value
of remaining
authorized
repurchase
(in
millions)(a)
First quarter
32,132,964
$
88.14
$
2,832
$
3,221
Second
quarter
34,940,127
86.05
3,007
214
(b)
Third
quarter
51,756,892
92.02
4,763
14,637
October
14,248,307
98.04
1,397
13,241
November
19,472,405
98.92
1,926
11,314
December
14,006,503
106.02
1,485
9,830
Fourth
quarter
47,727,215
100.74
4,808
9,830
Year-to-date
166,557,198
$
92.52
$
15,410
$
9,830
(c)
(a)
Excludes
commissions cost.
(b)
The $214 million unused portion under the prior Board authorization was canceled when the $19.4 billion repurchase program was authorized by the Board of Directors on June 28, 2017.
(c)
Represents the amount remaining under the $19.4 billion repurchase program.
Item
6. Selected Financial Data.
For five-year selected financial data, see “Five-year summary of consolidated financial highlights (unaudited)” on page 38.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations, entitled “Management’s discussion and analysis,” appears on pages 40–145. Such information should be read in conjunction with the Consolidated Financial Statements and Notes thereto, which appear on pages 148–276.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
For a discussion of the quantitative and qualitative disclosures about market risk, see the Market Risk Management section of Management’s discussion and analysis on pages 121-128.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, together with the Notes thereto and the report thereon dated February 27, 2018, of PricewaterhouseCoopers LLP, the Firm’s independent registered public accounting firm, appear on pages 146–276.
Supplementary
financial data for each full quarter within the two years ended December 31, 2017, are included on page 277 in the table entitled “Selected quarterly financial
28
data (unaudited).” Also included is a “Glossary of Terms and Acronyms’’ on pages 283-289.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The internal control framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), “Internal Control — Integrated Framework” (“COSO 2013”) provides guidance for designing, implementing and conducting internal control and assessing its effectiveness. The Firm used the COSO 2013 framework to assess the effectiveness of the Firm’s internal control over financial reporting as of December 31, 2017. See “Management’s report on internal
control over financial reporting” on page 146.
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were effective. See Exhibits 31.1 and 31.2 for the Certifications issued by the Chairman and Chief Executive Officer and Chief Financial Officer.
The Firm is committed to maintaining high standards of internal control over financial reporting. Nevertheless, because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, in a firm as large and complex as JPMorgan Chase, lapses or deficiencies in internal controls may occur from time to time, and there can be no assurance that any such deficiencies will not result in significant deficiencies or material weaknesses in internal control in the future. For further information, see “Management’s report on internal control over financial reporting” on page 146. There was no change in the Firm’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the three months ended December 31, 2017, that has materially affected, or is reasonably likely
to materially affect, the Firm’s internal control over financial reporting.
Item 9B. Other Information.
Iran threat reduction disclosure
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure may be required even where the activities, transactions or dealings were conducted in compliance
with applicable law. Except as set forth below, as of the date of this report, the Firm is not aware of any other activity, transaction or dealing by any of its affiliates during the calendar year 2017 that requires disclosure under Section 219.
As previously disclosed, during the first quarter of 2017, a non-U.S. subsidiary of JPMorgan Chase processed a payment in the amount of EUR 1,466 for its client, a non-U.S. international organization, where the payment originated from entities owned or controlled by the Government of Iran. JPMorgan Chase charged a fee of EUR 2.50 for this transaction. In addition to the previously disclosed transaction, the Firm identified four other payments made in 2017 in the amounts of $68,567, $66,280, $98,143, and $110,831, that were processed by JPMorgan Chase Bank N.A. and a non-U.S. subsidiary of JPMorgan Chase for a client, a U.S.-based international publishing business, where the payments
originated from educational institutions owned or controlled by the Government of Iran. JPMorgan Chase charged total fees of $3,930 for these transactions.
Each of the above payments received into both clients’ accounts, were for the purchase of informational materials, and they were therefore exempt transactions pursuant to 31. C.F.R. 560.210(c), and were all processed in compliance with the Iran-related sanctions regulations.
JPMorgan Chase may in the future engage in similar transactions for its clients to the extent permitted by U.S. law.
29
Part
III
Item 10. Directors, Executive Officers and Corporate Governance.
Chairman of the Board and Chief Executive Officer; he had been President from July 2004 until January 2018.
Ashley Bacon
48
Chief Risk Officer since June 2013. He had been Deputy Chief Risk Officer since June 2012, prior to which he had been Global Head of Market Risk for the Investment Bank (now part of Corporate & Investment
Bank).
Lori A. Beer(a)
50
Chief Information Officer since September 2017, prior to which she had been Chief Information Officer of the Corporate & Investment Bank since June 2016. She was Global Head of Banking Technology from January 2014 until May 2016. Prior to joining JPMorgan Chase in 2014, she was Executive Vice President of Specialty Businesses and Information Technology for Anthem, Inc.
Mary Callahan Erdoes
50
Chief Executive Officer of Asset & Wealth Management
since September 2009, prior to which she had been Chief Executive Officer of Wealth Management.
Stacey Friedman
49
General Counsel since January 2016, prior to which she was Deputy General Counsel since July 2015 and General Counsel for the Corporate & Investment Bank since August 2012. Prior to joining JPMorgan Chase in 2012, she was a partner at the law firm of Sullivan & Cromwell LLP.
Chief Financial Officer since January 2013, prior to which she had been Chief Financial
Officer of Consumer & Community Banking since 2009.
Robin Leopold(b)
53
Head of Human Resources since January 2018, prior to which she had been Head of Human Resources for the Corporate & Investment Bank since 2012. She was a Human Resources Executive serving the Firm’s Corporate functions from February 2010 until August 2012.
Douglas B. Petno
52
Chief Executive Officer of Commercial Banking since January 2012, prior to which he had been Chief Operating Officer of Commercial
Banking.
Daniel E. Pinto(c)
55
Co-President and Co-Chief Operating Officer since January 30, 2018, Chief Executive Officer of the Corporate & Investment Bank since March 2014, and Chief Executive Officer of Europe, the Middle East and Africa since June 2011. He had been Co-Chief Executive Officer of the Corporate & Investment Bank from July 2012 until March 2014, prior to which he had been head or Co-head of the Global Fixed Income business from November 2009 until July 2012.
Peter Scher(a)
56
Head
of Corporate Responsibility since 2011 and Chairman of the Mid-Atlantic Region since 2015.
Gordon A. Smith(c)
59
Co-President and Co-Chief Operating Officer since January 30, 2018, and Chief Executive Officer of Consumer & Community Banking since December 2012. He had been Co-Chief Executive Officer from July 2012 until December 2012, prior to which he had been Chief Executive Officer of Card Services from 2007 until 2012 and of the Auto Finance and Student Lending businesses from 2011 until 2012.
Unless otherwise noted, during the five fiscal years
ended December 31, 2017, all of JPMorgan Chase’s above-named executive officers have continuously held senior-level positions with JPMorgan Chase. There are no family relationships among the foregoing executive officers. Information to be provided in Items 10, 11, 12, 13 and 14 of the Form 10-K and not otherwise included herein is incorporated by reference to the Firm’s Definitive Proxy Statement for its 2018 Annual Meeting of Stockholders to be held on May 15, 2018, which will be filed with the SEC within 120 days of the end of the Firm’s fiscal year ended December 31, 2017.
(a)
The
Chief Information Officer and Head of Corporate Responsibility were both named as executive officers in 2017.
(b)
On January 1, 2018, Ms. Leopold was named Head of Human Resources. At that date, Mr. John L. Donnelly, formerly Head of Human Resources, became a Vice Chairman of JPMorgan Chase; he is no longer an executive officer of the Firm.
(c)
On January 30, 2018, Mr. Pinto and Mr. Smith were named Co-Presidents and
Co-Chief Operating Officers of the Firm.
30
Item 11. Executive Compensation.
See Item 10.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
For security ownership of certain beneficial owners and management, see Item 10.
The following table sets forth the total number of shares available for issuance under JPMorgan Chase’s employee share-based incentive plans (including shares available for issuance to non-employee directors). The Firm is not authorized to grant share-based incentive awards to non-employees, other than to non-employee directors.
Number of shares to be issued upon exercise of outstanding options/stock appreciation rights
Weighted-average
exercise price of
outstanding
options/stock appreciation rights
Number of shares remaining available for future issuance under stock compensation plans
Plan category
Employee
share-based incentive plans approved by shareholders
17,492,607
(a)
$
40.76
66,828,172
(b)
Total
17,492,607
$
40.76
66,828,172
(a)
Does
not include restricted stock units or performance stock units granted under the shareholder-approved Long-Term Incentive Plan (“LTIP”), as amended and restated effective May 19, 2015. For further discussion, see Note 9.
(b)
Represents shares available for future issuance under the shareholder-approved LTIP.
All shares available for future issuance will be issued under the shareholder-approved LTIP. For further discussion, see Note 9.
Item
13. Certain Relationships and Related Transactions, and Director Independence.
See Item 10.
Item 14. Principal Accounting Fees and Services.
See Item 10.
31
Part IV
Item
15. Exhibits, Financial Statement Schedules.
1
Financial statements
The Consolidated Financial Statements, the Notes thereto and the report of the Independent Registered Public Accounting Firm thereon listed in Item 8 are set forth commencing on page 147.
Other
instruments defining the rights of holders of long-term debt securities of JPMorgan Chase & Co. and its subsidiaries are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. JPMorgan Chase & Co. agrees to furnish copies of these instruments to the SEC upon request.
Annual Report on Form 11-K of The JPMorgan Chase 401(k) Savings Plan for the year ended December 31, 2017 (to be filed pursuant to Rule 15d-21 under the Securities Exchange Act of 1934).
Furnished herewith. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934.
(d)
Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated statements of income for the years ended December 31, 2017, 2016 and 2015, (ii) the Consolidated statements of comprehensive income for the
years ended December 31, 2017, 2016 and 2015, (iii) the Consolidated balance sheets as of December 31, 2017 and 2016, (iv) the Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2017, 2016 and 2015, (v) the Consolidated statements of cash flows for the years ended December 31, 2017,
2016 and 2015, and (vi) the Notes to Consolidated Financial Statements.
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
As of or for the year ended December 31,
(in millions, except per share, ratio, headcount data and where otherwise noted)
2017
2016
2015
2014
2013
Selected
income statement data
Total net revenue
$
99,624
$
95,668
$
93,543
$
95,112
$
97,367
Total
noninterest expense
58,434
55,771
59,014
61,274
70,467
Pre-provision
profit
41,190
39,897
34,529
33,838
26,900
Provision for credit losses
5,290
5,361
3,827
3,139
225
Income
before income tax expense
35,900
34,536
30,702
30,699
26,675
Income
tax expense
11,459
9,803
6,260
8,954
8,789
Net income(a)
$
24,441
$
24,733
$
24,442
$
21,745
$
17,886
Earnings
per share data
Net income: Basic
$
6.35
$
6.24
$
6.05
$
5.33
$
4.38
Diluted
6.31
6.19
6.00
5.29
4.34
Average
shares: Basic
3,551.6
3,658.8
3,741.2
3,808.3
3,832.4
Diluted
3,576.8
3,690.0
3,773.6
3,842.3
3,864.9
Market
and per common share data
Market capitalization
$
366,301
$
307,295
$
241,899
$
232,472
$
219,657
Common
shares at period-end
3,425.3
3,561.2
3,663.5
3,714.8
3,756.1
Share
price:(b)
High
$
108.46
$
87.39
$
70.61
$
63.49
$
58.55
Low
81.64
52.50
50.07
52.97
44.20
Close
106.94
86.29
66.03
62.58
58.48
Book
value per share
67.04
64.06
60.46
56.98
53.17
Tangible book value
per share (“TBVPS”)(c)
53.56
51.44
48.13
44.60
40.72
Cash
dividends declared per share
2.12
1.88
1.72
1.58
1.44
Selected ratios
and metrics
Return on common equity (“ROE”)
10
%
10
%
11
%
10
%
9
%
Return
on tangible common equity (“ROTCE”)(c)
12
13
13
13
11
Return
on assets (“ROA”)
0.96
1.00
0.99
0.89
0.75
Overhead ratio
59
58
63
64
72
Loans-to-deposits
ratio
64
65
65
56
57
High quality liquid assets (“HQLA”) (in
billions)(d)
$
556
$
524
$
496
$
600
$
522
Common
equity tier 1 (“CET1”) capital ratio(e)
12.2
%
12.3
%
(i)
11.8
%
10.2
%
10.7
%
Tier
1 capital ratio(e)
13.9
14.0
(i)
13.5
11.6
11.9
Total
capital ratio(e)
15.9
15.5
15.1
13.1
14.3
Tier
1 leverage ratio(e)
8.3
8.4
8.5
7.6
7.1
Selected
balance sheet data (period-end)
Trading assets
$
381,844
$
372,130
$
343,839
$
398,988
$
374,664
Securities
249,958
289,059
290,827
348,004
354,003
Loans
930,697
894,765
837,299
757,336
738,418
Core
Loans
863,683
806,152
732,093
628,785
583,751
Average core loans
829,558
769,385
670,757
596,823
563,809
Total
assets
2,533,600
2,490,972
2,351,698
2,572,274
2,414,879
Deposits
1,443,982
1,375,179
1,279,715
1,363,427
1,287,765
Long-term
debt(f)
284,080
295,245
288,651
276,379
267,446
Common
stockholders’ equity
229,625
228,122
221,505
211,664
199,699
Total
stockholders’ equity
255,693
254,190
247,573
231,727
210,857
Headcount
252,539
243,355
234,598
241,359
251,196
Credit
quality metrics
Allowance for credit losses
$
14,672
$
14,854
$
14,341
$
14,807
$
16,969
Allowance
for loan losses to total retained loans
1.47
%
1.55
%
1.63
%
1.90
%
2.25
%
Allowance for loan losses
to retained loans excluding purchased credit-impaired loans(g)
1.27
1.34
1.37
1.55
1.80
Nonperforming
assets
$
6,426
$
7,535
$
7,034
$
7,967
$
9,706
Net
charge-offs(h)
5,387
4,692
4,086
4,759
5,802
Net
charge-off rate(h)
0.60
%
0.54
%
0.52
%
0.65
%
0.81
%
(a)
On
December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. The Firm’s results included a $2.4 billion decrease to net income as a result of the enactment of the TCJA. For additional information related to the impact of the TCJA, see Note 24.
(b)
Based on daily prices reported by the New York Stock Exchange.
(c)
TBVPS and ROTCE are non-GAAP financial measures. For further discussion of these measures,
see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Financial Performance Measures on pages 52–54.
(d)
HQLA represents the amount of assets that qualify for inclusion in the liquidity coverage ratio. For December 31, 2017, the balance represents the average of quarterly reported results per the U.S. LCR public disclosure requirements effective April 1, 2017. Prior periods represent period-end balances under the final U.S. rule (“U.S. LCR”) for December 31, 2016 and 2015,
and the Firm’s estimated amount for December 31, 2014 prior to the effective date of the final rule, and under the Basel III liquidity coverage ratio (“Basel III LCR”) for December 31, 2013. For additional information, see LCR and HQLA on page 93.
(e)
Ratios presented are calculated under the Basel III Transitional rules, which became effective on January 1, 2014, and for the capital ratios, represent the Collins Floor. Prior to 2014, the ratios were calculated under the Basel I rules. See Capital Risk Management on pages
82–91 for additional information on Basel III.
(f)
Included unsecured long-term debt of $218.8 billion, $212.6 billion, $211.8 billion, $207.0 billion and $198.9 billion respectively, as of December 31, of each year presented.
(g)
Excluded the impact of residential real estate purchased credit-impaired (“PCI”) loans, a non-GAAP financial measure. For further discussion of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Performance
Measures on pages 52–54, and the Allowance for credit losses on pages 117–119.
(h)
Excluding net charge-offs of $467 million related to the student loan portfolio sale, the net charge-off rate for the year ended December 31, 2017 would have been 0.55%.
(i)
The prior period ratios have been revised to conform with the current period presentation.
38
JPMorgan
Chase & Co./2017 Annual Report
FIVE-YEAR STOCK PERFORMANCE
The following table and graph compare the five-year cumulative total return for JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) common stock with the cumulative return of the S&P 500 Index, the KBW Bank Index and the S&P Financial Index. The S&P 500 Index is a commonly referenced equity benchmark in the United States of America (“U.S.”), consisting of leading companies from different economic sectors. The KBW Bank Index seeks to reflect the performance of banks and thrifts that are publicly traded in the U.S. and is composed of leading national money center and regional banks and
thrifts. The S&P Financial Index is an index of financial companies, all of which are components of the S&P 500. The Firm is a component of all three industry indices.
The following table and graph assume simultaneous investments of $100 on December 31, 2012, in JPMorgan Chase common stock and in each of the above indices. The comparison assumes that all dividends are reinvested.
December
31,
(in dollars)
2012
2013
2014
2015
2016
2017
JPMorgan
Chase
$
100.00
$
136.71
$
150.22
$
162.79
$
219.06
$
277.62
KBW
Bank Index
100.00
137.76
150.66
151.39
194.55
230.72
S&P
Financial Index
100.00
135.59
156.17
153.72
188.69
230.47
S&P
500 Index
100.00
132.37
150.48
152.55
170.78
208.05
December
31,
(in dollars)
JPMorgan Chase & Co./2017 Annual Report
39
Management’s
discussion and analysis
This section of JPMorgan Chase’s Annual Report for the year ended December 31, 2017 (“Annual Report”), provides Management’s discussion and analysis of financial condition and results of operations (“MD&A”) of JPMorgan Chase. See the Glossary of Terms and Acronyms on pages 283-289 for definitions of terms used throughout this Annual Report. The MD&A included in this Annual Report contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such 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. Certain of such risks and uncertainties are described herein (see Forward-looking Statements on page 145) and in JPMorgan Chase’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”), in Part I, Item 1A: Risk factors; reference is hereby made to both.
INTRODUCTION
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 $255.7 billion in stockholders’ equity as of December 31, 2017. 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 banking association with U.S. branches in 23 states, and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national banking association that is the Firm’s principal credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (“JPMorgan Securities”), a U.S. broker-dealer. The bank and non-bank subsidiaries of JPMorgan
Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. The Firm’s principal operating subsidiary in the U.K. is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.
For management reporting purposes, the Firm’s activities are organized into four major reportable business segments, as well as a Corporate segment. The Firm’s consumer business is the Consumer & Community Banking (“CCB”) segment. The Firm’s wholesale business segments are Corporate & Investment Bank (“CIB”), Commercial Banking (“CB”), and Asset & Wealth Management (“AWM”). For a description of the Firm’s
business segments, and the products and services they provide to their respective client bases, refer to Business Segment Results on pages 55–74, and Note 31.
40
JPMorgan Chase & Co./2017 Annual Report
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 Annual Report. 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 Annual Report should be read in its entirety.
Financial performance of JPMorgan Chase
Year
ended December 31,
(in millions, except per share data and ratios)
2017
2016
Change
Selected income statement data
Total net revenue
$
99,624
$
95,668
4
%
Total
noninterest expense
58,434
55,771
5
Pre-provision profit
41,190
39,897
3
Provision
for credit losses
5,290
5,361
(1
)
Net income
24,441
24,733
(1
)
Diluted
earnings per share
6.31
6.19
2
Selected ratios and metrics
Return
on common equity
10
%
10
%
Return on tangible common equity
12
13
Book
value per share
$
67.04
$
64.06
5
Tangible book value per share
53.56
51.44
4
Capital
ratios(a)
CET1
12.2
%
12.3
%
(b)
Tier 1 capital
13.9
14.0
(b)
Total
capital
15.9
15.5
(a)
Ratios presented are calculated under the Basel III Transitional rules and represent the Collins Floor. See Capital Risk Management on pages 82–91 for additional information on Basel III.
(b)
The
prior period ratios have been revised to conform with the current period presentation.
Comparisons noted in the sections below are calculated for the full year of 2017 versus the full year of 2016, unless otherwise specified.
Summary of 2017 results
JPMorgan Chase reported strong results for full year 2017 with net income of $24.4 billion, or $6.31 per share, on net revenue of $99.6 billion. The Firm reported ROE of 10% and ROTCE of 12%. The Firm’s results included a $2.4 billion decrease to net income as a result of the enactment of the Tax Cuts and Jobs Act (“TCJA”), driven by a deemed repatriation charge and adjustments to the value of the Firm’s tax-oriented investments, partially offset
by a benefit from the revaluation of the Firm’s net deferred tax liability. For additional information related to the impact of the TCJA, refer to Note 24.
•
Net income decreased 1% driven by higher noninterest expense and income tax expense, predominantly offset by higher net interest income.
•
Total net revenue increased by 4% driven by higher net interest income and investment banking fees, partially
offset
by lower Fixed Income Markets and Home Lending noninterest revenue.
•
Noninterest expense was $58.4 billion, up 5%, driven by higher compensation expense, auto lease depreciation expense and continued investments across the businesses.
•
The provision for credit losses was $5.3 billion, relatively flat compared with the prior year, reflecting a decrease in the wholesale provision driven by credit quality improvements in the Oil & Gas, Natural Gas Pipelines and Metals & Mining portfolios, offset by an increase in the consumer
provision. The increase in the consumer provision was driven by higher net charge-offs and a higher addition to the allowance for loan losses in the credit card portfolio, and the impact of the sale of the student loan portfolio.
•
The total allowance for credit losses was $14.7 billion at December 31, 2017, and the Firm had a loan loss coverage ratio, excluding the PCI portfolio, of 1.27%, compared with 1.34% in the prior year. The Firm’s nonperforming assets totaled $6.4 billion, a decrease from the prior-year level of $7.5 billion.
•
Firmwide
average core loans increased 8%.
Selected capital-related metrics
•
The Firm’s Basel III Fully Phased-In CET1 capital was $183 billion, and the Standardized and Advanced CET1 ratios were 12.1% and 12.7%, respectively.
•
The Firm’s Fully Phased-In supplementary leverage ratio (“SLR”) was 6.5%.
•
The
Firm continued to grow tangible book value per share (“TBVPS”), ending 2017 at $53.56, up 4%.
ROTCE and TBVPS are non-GAAP financial measures. Core loans and each of the Fully Phased-In capital and leverage measures are considered key performance measures. For a further discussion of each of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Performance Measures on pages 52–54, and Capital Risk Management on pages 82–91.
JPMorgan Chase & Co./2017 Annual Report
41
Management’s
discussion and analysis
Lines of business highlights
Selected business metrics for each of the Firm’s four lines of business are presented below for the full year of 2017.
CCB
ROE 17%
•
Average core loans up 9%; average deposits of $640 billion, up 9%
•
Client investment assets of $273 billion,
up 17%
•
Credit card sales volume up 14% and merchant processing volume up 12%
CIB
ROE 14%
•
Maintained #1 ranking for Global Investment Banking fees with 8.1% wallet share
•
Investment Banking revenue up 12%; Treasury Services revenue up 15%; and Securities Services revenue up 9%
CB
ROE 17%
•
Record
revenue of $8.6 billion, up 15%; record net income of $3.5 billion, up 33%
•
Average loan balances of $198 billion, up 10%
AWM
ROE 25%
•
Record revenue of $12.9 billion, up 7%; record net income of $2.3 billion, up 4%
•
Average loan balances of $123 billion, up 9%
•
Record assets under management (“AUM”) of $2.0 trillion, up 15%
For
a detailed discussion of results by line of business, refer to the Business Segment Results on pages 55–56.
Credit provided and capital raised
JPMorgan Chase continues to support consumers, businesses and communities around the globe. The Firm provided credit and raised capital of $2.3 trillion for wholesale and consumer clients during 2017:
•
$258 billion of credit for consumers
•
$22 billion of
credit for U.S. small businesses
•
$817 billion of credit for corporations
•
$1.1 trillion of capital raised for corporate clients and non-U.S. government entities
•
$92 billion of credit and capital raised for U.S. government and nonprofit entities, including states, municipalities, hospitals
and universities.
Recent events
•
On February 21, 2018, the Firm announced its intent to pursue building a new 2.5 million square foot headquarters at its 270 Park Avenue location in New York City. The project will be subject to various approvals, and the Firm will work closely with the New York City Council and State officials to complete the project in a manner that benefits all constituencies. Once the project’s approvals are granted, redevelopment and construction are expected to begin in 2019 and take approximately five years to complete. The project is not expected to have a material impact on the
company’s financial results.
•
On January 30, 2018, Amazon, Berkshire Hathaway, and JPMorgan Chase announced that they are partnering on ways to address healthcare for their U.S. employees, with the aim of improving employee satisfaction and reducing costs. Through a new independent company, the initial focus will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.
•
On
January 29, 2018, JPMorgan Chase announced that Daniel Pinto, Chief Executive Officer (“CEO”) of CIB, and Gordon Smith, CEO of CCB, have been appointed Co-Presidents and Co-Chief Operating Officers (“COO”) of the Firm, effective January 30, 2018, and will continue to report to Jamie Dimon, Chairman and CEO. In addition to their current roles, Mr. Pinto and Mr. Smith will work closely with Mr. Dimon to help drive critical Firmwide opportunities. Responsibilities for the rest of the Firm’s Operating Committee will remain unchanged, with its members continuing to report to Mr. Dimon.
•
On January
23, 2018, the Firm announced a $20 billion, five-year comprehensive investment to help its employees and support job and economic growth in the U.S. Through these new investments, the Firm plans to develop hundreds of new branches in several new U.S. markets, increase wages and benefits for hourly U.S. employees, make increased small business and mortgage lending commitments, add approximately 4,000 jobs throughout the country, and increase philanthropic investments.
•
On December 22, 2017, the TCJA was signed into law. The Firm’s results included a $2.4 billion decrease to net income as a result of the enactment of the TCJA. For additional information related to the impact of the TCJA,
see Note 24.
•
During the second half of 2017, natural disasters caused significant disruptions to individuals and businesses, and damage to homes and communities in several regions where the Firm conducts business. The Firm continues to provide assistance to customers, clients, communities and employees who have been affected by these disasters. These events did not have a material impact on the Firm’s 2017 financial results.
42
JPMorgan
Chase & Co./2017 Annual Report
2018 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 145 and the Risk Factors section on pages 8–26.
There is no assurance that actual results for the full year of 2018 will be in line with the outlook set forth below, and the Firm does not undertake to update any forward-looking statements.
JPMorgan Chase’s outlook for 2018 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client and customer activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these interrelated factors will affect the performance of the Firm and its lines of business. The Firm expects that it will continue to make appropriate adjustments to its businesses and operations in response to ongoing developments in the legal, regulatory, business and economic environments in which it operates.
Firmwide
•
As
a result of the change in tax rate due to the TCJA, management expects a reduction in tax-equivalent adjustments, decreasing both revenue and income tax expense, on a managed basis, by approximately $1.2 billion on an annual run-rate basis.
•
Management expects the new revenue recognition accounting standard to increase both noninterest revenue and expense for full-year 2018 by approximately $1.2 billion, with most of the impact in the AWM business. For additional information on the new accounting standard, see Accounting and Reporting Developments on page 141.
•
Management
expects first-quarter 2018 net interest income, on a managed basis, to be down modestly compared with the fourth quarter of 2017, driven by the impact of the TCJA and a lower day count. For full-year 2018, management expects net interest income, on a managed basis, to be in the $54 to $55 billion range, market dependent, and assuming expected core loan growth. Management expects Firmwide average core loan growth to be in the 6% to 7% range in 2018, excluding CIB loans.
•
Excluding the impact of the new revenue recognition accounting standard, management expects Firmwide noninterest revenue for full-year 2018, on a managed basis, to be up approximately 7%, depending on market conditions.
•
The
Firm continues to take a disciplined approach to managing its expenses, while investing for growth and innovation. As a result, management expects Firmwide adjusted expense for full-year 2018 to be less than $62 billion, excluding the impact of the new revenue recognition accounting standard.
•
Management estimates the full-year 2018 effective income tax rate to be in the 19% to 20% range, depending upon several factors, including the geographic mix of taxable income and refinements to estimates of the impacts of the TCJA.
•
Management
expects net charge-off rates to remain relatively flat across the wholesale and consumer portfolios, with the exception of Card.
CCB
•
Management expects the full-year 2018 Card Services net revenue rate to be approximately 11.25%.
•
In Card, management expects the net charge-off rate to increase to approximately 3.25% in 2018.
CIB
•
Markets
revenue in the first-quarter 2018 is expected to be up by mid to high single digit percentage points when compared with the prior-year quarter; actual Markets revenue results will continue to be affected by market conditions, which can be volatile.
JPMorgan Chase & Co./2017 Annual Report
43
Management’s discussion and analysis
CONSOLIDATED
RESULTS OF OPERATIONS
This section provides a comparative discussion of JPMorgan Chase’s Consolidated Results of Operations on a reported basis for the three-year period ended December 31, 2017, unless otherwise specified. 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 138–140.
Revenue
Year
ended December 31,
(in millions)
2017
2016
2015
Investment
banking fees
$
7,248
$
6,448
$
6,751
Principal transactions
11,347
11,566
10,408
Lending-
and deposit-related fees
5,933
5,774
5,694
Asset management, administration and commissions
15,377
14,591
15,509
Securities
gains/(losses)
(66
)
141
202
Mortgage fees and related income
1,616
2,491
2,513
Card
income
4,433
4,779
5,924
Other income(a)
3,639
3,795
3,032
Noninterest
revenue
49,527
49,585
50,033
Net interest income
50,097
46,083
43,510
Total
net revenue
$
99,624
$
95,668
$
93,543
(a)
Included
operating lease income of $3.6 billion, $2.7 billion and $2.1 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
2017 compared with 2016
Investment banking fees increased reflecting higher debt and equity underwriting fees in CIB. The increase in debt underwriting fees was driven by a higher share of fees and an overall increase in industry-wide fees; and the increase in equity underwriting fees was driven by growth in industry-wide issuance, including a strong initial public offering
(“IPO”) market. For additional information, see CIB segment results on pages 62–66 and Note 6.
Principal transactions revenue decreased compared with a strong prior year in CIB, primarily reflecting:
•
lower Fixed Income-related revenue driven by sustained low volatility and tighter credit spreads
partially offset by
•
higher
Equity-related revenue primarily in Prime Services, and
•
higher Lending-related revenue reflecting lower fair value losses on hedges of accrual loans.
For additional information, see CIB and Corporate segment results on pages 62–66 and pages 73–74, respectively, and Note 6.
Asset management, administration and commissions revenue increased as a result of higher asset management
fees in AWM and CCB, and higher asset-based fees in CIB, both driven by higher market levels. For additional information, see AWM, CCB and CIB segment results on pages 70–72, pages 57-61 and pages 62–66, respectively, and Note 6.
For information on lending- and deposit-related fees, see the segment results for CCB on pages 57-61, CIB on pages 62–66, and CB on pages 67–69 and Note 6; on securities gains, see the Corporate segment discussion on pages 73–74.
Mortgage
fees and related income decreased driven by lower MSR risk management results, lower net production revenue on lower margins and volumes, and lower servicing revenue on lower average third-party loans serviced. For further information, see CCB segment results on pages 57-61, Note 6 and 15.
Card income decreased predominantly driven by higher credit card new account origination costs, largely offset
by higher card-related fees, primarily annual fees. For further information, see CCB segment results on pages 57-61 .
Other income decreased primarily due to:
•
lower
other income in CIB largely driven by a $520 million impact related to the enactment of the TCJA, which reduced the value of certain of CIB’s tax-oriented investments, and
•
the absence in the current year of gains from
–
the sale of Visa Europe interests in CCB,
–
the redemption of guaranteed
capital debt securities (“trust preferred securities”), and
–
the disposal of an asset in AWM
partially offset by
•
higher operating lease income reflecting growth in auto operating lease volume in CCB, and
•
a legal benefit of $645 million
recorded in the second quarter of 2017 in Corporate related to a settlement with the FDIC receivership for Washington Mutual and with Deutsche Bank as trustee of certain Washington Mutual trusts.
For further information, see Note 6.
Net interest income increased primarily driven by the net impact of higher rates and loan growth across the businesses, partially offset by declines in Markets net interest income in CIB. The Firm’s average interest-earning assets were $2.2 trillion, up $79 billion from the prior year, and the net interest yield on these assets, on a fully taxable equivalent (“FTE”) basis, was 2.36%, an increase of 11 basis points from the prior year.
44
JPMorgan
Chase & Co./2017 Annual Report
2016 compared with 2015
Investment banking fees decreased predominantly due to lower equity underwriting fees driven by declines in industry-wide fee levels.
Principal transactions revenue increased reflecting broad-based strength across products in CIB’s Fixed Income Markets business. Rates performance was strong, with increased client activity driven by high issuance-based flows, global political developments, and central bank actions. Credit revenue improved driven by higher market- making revenue from the secondary market as clients’ appetite for risk recovered.
Asset
management, administration and commissions revenue decreased reflecting lower asset management fees in AWM driven by a reduction in revenue related to the disposal of assets at the beginning of 2016, the impact of lower average equity market levels and lower performance fees, as well as due to lower brokerage commissions and other fees in CIB and AWM.
Mortgage fees and related income were relatively flat, as lower mortgage servicing revenue related to lower average third-party loans serviced was predominantly offset by higher MSR risk management results.
Card income decreased predominantly driven by higher new account origination costs and the impact of renegotiated co-brand partnership agreements, partially offset by higher card sales volume and other card-related fees.
Other
income increased primarily reflecting:
▪
higher operating lease income from growth in auto operating lease assets in CCB
▪
a gain on the sale of Visa Europe interests in CCB
▪
a gain related to the redemption of guaranteed capital debt securities
▪
the
absence of losses recognized in 2015 related to the accelerated amortization of cash flow hedges associated with the exit of certain non-operating deposits
▪
a gain on disposal of an asset in AWM
partially offset by
▪
a $514 million benefit recorded in the prior year from a legal settlement in Corporate.
Net interest income increased primarily driven by loan growth across
the businesses and the net impact of higher rates, partially offset by lower investment securities balances and higher interest expense on long-term debt. The Firm’s average interest-earning assets were $2.1 trillion in 2016, up $13 billion from the prior year, and the net interest yield on these assets, on a FTE basis, was 2.25%, an increase of 11 basis points from the prior year.
Provision for credit losses
Year
ended December 31,
(in millions)
2017
2016
2015
Consumer,
excluding credit card
$
620
$
467
$
(81
)
Credit card
4,973
4,042
3,122
Total
consumer
5,593
4,509
3,041
Wholesale
(303
)
852
786
Total
provision for credit losses
$
5,290
$
5,361
$
3,827
2017 compared with 2016
The provision for credit losses
decreased as a result of:
•
a net $422 million reduction in the wholesale allowance for credit losses, reflecting credit quality improvements in the Oil & Gas, Natural Gas Pipelines, and Metals & Mining portfolios, compared with an addition of $511 million in the prior year driven by downgrades in the same portfolios
predominantly offset by
•
a higher consumer provision driven by
–
$450
million of higher net charge-offs, primarily in the credit card portfolio due to growth in newer vintages which, as anticipated, have higher loss rates than the more seasoned portion of the portfolio, partially offset by a decrease in net charge-offs in the residential real estate portfolio reflecting continued improvement in home prices and delinquencies,
–
a $416 million higher addition to the allowance for credit losses related to the credit card portfolio driven by higher loss rates and loan growth, and a lower reduction in the allowance for the residential real estate portfolio predominantly driven by continued improvement in home prices and delinquencies, and
–
a
$218 million impact in connection with the sale of the student loan portfolio.
For a more detailed discussion of the credit portfolio, the student loan sale and the allowance for credit losses, see the segment discussions of CCB on pages 57-61, CIB on pages 62–66, CB on pages 67–69, the Allowance for Credit Losses on pages 117–119 and Note 13.
2016 compared with 2015
The provision for credit losses reflected an increase in the consumer provision and, to a lesser extent, the wholesale provision. The increase in the consumer provision
was predominantly driven by:
▪
a $920 million increase related to the credit card portfolio, due to a $600 million addition in the allowance for loan losses, as well as $320 million of higher net charge-offs, driven by loan growth (including growth in newer vintages which, as anticipated, have higher loss rates compared to the overall portfolio), and
JPMorgan Chase & Co./2017 Annual Report
45
Management’s
discussion and analysis
▪
a $470 million lower benefit related to the residential real estate portfolio, as the reduction in the allowance for loan losses in 2016 was lower than the prior year. The reduction in both periods reflected continued improvements in home prices and lower delinquencies.
The increase in the wholesale provision was largely driven by the impact of downgrades in the Oil & Gas and Natural Gas Pipelines portfolios.
Noninterest
expense
Year ended December 31,
(in millions)
2017
2016
2015
Compensation
expense
$
31,009
$
29,979
$
29,750
Noncompensation expense:
Occupancy
3,723
3,638
3,768
Technology,
communications and equipment
7,706
6,846
6,193
Professional and outside services
6,840
6,655
7,002
Marketing
2,900
2,897
2,708
Other(a)(b)
6,256
5,756
9,593
Total
noncompensation expense
27,425
25,792
29,264
Total noninterest expense
$
58,434
$
55,771
$
59,014
(a)
Included
Firmwide legal expense/(benefit) of $(35) million, $(317) million and $3.0 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
(b)
Included FDIC-related expense of $1.5 billion, $1.3 billion and $1.2 billion for the years ended December
31, 2017, 2016 and 2015, respectively.
2017 compared with 2016
Compensation expense increased predominantly driven by investments in headcount in most businesses, including bankers and business-related support staff, and higher performance-based compensation expense, predominantly in AWM.
Noncompensation expense increased as a result of:
•
higher depreciation expense from growth in auto operating lease volume in CCB
•
contributions
to the Firm’s Foundation
•
a lower legal net benefit compared to the prior year
•
higher FDIC-related expense, and
•
an impairment in CB on certain leased equipment, the majority of which was sold subsequent to year-end
partially
offset by
•
the absence in the current year of two items totaling $175 million in CCB related to liabilities from a merchant in bankruptcy and mortgage servicing reserves.
For a discussion of legal expense, see Note 29.
2016 compared with 2015
Compensation expense was relatively flat predominantly driven by higher performance-based compensation expense and investments in several businesses, offset by the impact of continued expense reduction initiatives, including lower headcount in certain businesses.
Noncompensation
expense decreased as a result of lower legal expense (including lower legal professional services expense), the impact of efficiencies, and reduced non-U.S. tax surcharges. These factors were partially offset by higher depreciation expense from growth in auto operating lease assets and higher investments in marketing.
Income tax expense
Year
ended December 31,
(in millions, except rate)
2017
2016
2015
Income before income tax expense
$
35,900
$
34,536
$
30,702
Income
tax expense
11,459
9,803
6,260
Effective tax rate
31.9
%
28.4
%
20.4
%
2017
compared with 2016
The effective tax rate increased in 2017 driven by:
•
a $1.9 billion increase to income tax expense representing the impact of the enactment of the TCJA. The increase was driven by the deemed repatriation of the Firm’s unremitted non-U.S. earnings and adjustments to the value of certain tax-oriented investments, partially offset by a benefit from the revaluation of the Firm’s net deferred tax liability. The incremental expense resulted in a 5.4 percentage point increase to the Firm’s effective tax rate
partially offset by
•
benefits
resulting from the vesting of employee share-based awards related to the appreciation of the Firm’s stock price upon vesting above their original grant price, and the release of a valuation allowance.
For further information, see Note 24.
2016 compared with 2015
The effective tax rate in 2016 was affected by changes in the mix of income and expense subject to U.S. federal and state and local taxes, tax benefits related to the utilization of certain deferred tax assets, as well as the adoption of new accounting guidance related to employee share-based incentive payments. These tax benefits were partially offset by higher income tax expense from tax audits. The lower effective tax rate in 2015 was predominantly driven by $2.9
billion of tax benefits, which reduced the Firm’s effective tax rate by 9.4 percentage points. The recognition of tax benefits in 2015 resulted from the resolution of various tax audits, as well as the release of U.S. deferred taxes associated with the restructuring of certain non-U.S. entities.
46
JPMorgan Chase & Co./2017 Annual Report
CONSOLIDATED
BALANCE SHEETS AND CASH FLOWS ANALYSIS
Consolidated Balance Sheets Analysis
The following is a discussion of the significant changes between December 31, 2017 and 2016.
Selected Consolidated balance sheets data
December
31, (in millions)
2017
2016
Change
Assets
Cash and due from banks
$
25,827
$
23,873
8
%
Deposits
with banks
404,294
365,762
11
Federal funds sold and securities purchased under resale agreements
198,422
229,967
(14
)
Securities
borrowed
105,112
96,409
9
Trading assets:
Debt and equity instruments
325,321
308,052
6
Derivative
receivables
56,523
64,078
(12
)
Securities
249,958
289,059
(14
)
Loans
930,697
894,765
4
Allowance
for loan losses
(13,604
)
(13,776
)
(1
)
Loans, net of allowance for loan losses
917,093
880,989
4
Accrued
interest and accounts receivable
67,729
52,330
29
Premises and equipment
14,159
14,131
—
Goodwill,
MSRs and other intangible assets
54,392
54,246
—
Other assets
114,770
112,076
2
Total
assets
$
2,533,600
$
2,490,972
2
%
Cash and due from banks and deposits with banks increased primarily driven by deposit growth and a shift in the deployment of excess cash from securities purchased under resale agreements and investment securities into deposits
with banks. The Firm’s excess cash is placed with various central banks, predominantly Federal Reserve Banks.
Federal funds sold and securities purchased under resale agreements decreased primarily due to the shift in the deployment of excess cash to deposits with banks and lower client activity in CIB. For additional information on the Firm’s Liquidity Risk Management, see pages 92–97.
Securities borrowed increased driven by higher demand for securities to cover short positions related to client-driven market-making activities in CIB.
Trading assets–debt and equity instruments increased predominantly as a result of client-driven market-making activities in CIB, primarily
in Fixed Income Markets and Prime Services, partially offset by lower equity instruments in Equity Markets. For additional information, refer to
Note 2.
Trading assets and trading liabilities–derivative receivables and payables decreased predominantly as a result of client-driven market-making activities in CIB Markets, which reduced foreign exchange and interest rate derivative receivables and payables, and increased equity derivative receivables, driven by market movements. For additional information, refer to Derivative contracts on pages 114–115, and Notes 2
and 5.
Securities decreased primarily reflecting net sales, maturities and paydowns of U.S. Treasuries, non-U.S. government securities and collateralized loan obligations. For additional information, see Notes 2 and 10.
Loans increased reflecting:
•
higher wholesale loans driven by new originations in CB and higher loans to Private Banking clients in AWM
•
higher
consumer loans driven by higher retention of originated high-quality prime mortgages in CCB and AWM, and higher credit card loans, largely offset by the sale of the student loan portfolio, lower home equity loans and the run-off of PCI loans.
The allowance for loan losses decreased driven by:
•
a net reduction in the wholesale allowance, reflecting credit quality improvements in the Oil & Gas, Natural Gas Pipelines and Metals & Mining portfolios (compared with additions to the allowance in the prior year driven by downgrades in the same portfolios)
largely
offset by
•
a net increase in the consumer allowance, reflecting additions to the allowance for the credit card and business banking portfolios, driven by loan growth in both of these portfolios and higher loss rates in the credit card portfolio, largely offset by a reduction in the allowance for the residential real estate portfolio, predominantly driven by continued improvement in home prices and delinquencies, and the utilization of the allowance in connection with the sale of the student loan portfolio.
For a more detailed discussion of loans and the allowance for loan losses, refer to Credit and Investment Risk Management on pages 99–120, and
Notes 2, 3, 12 and 13.
JPMorgan Chase & Co./2017 Annual Report
47
Management’s discussion and analysis
Accrued interest and accounts receivable
increased
primarily reflecting higher held-for-investment margin loans related to client-driven financing activities in Prime Services.
Other assets increased slightly as a result of higher auto operating lease assets from growth in business volume in CCB.
For information on Goodwill and MSRs, see Note 15.
Selected Consolidated balance sheets data
December
31, (in millions)
2017
2016
Change
Liabilities
Deposits
$
1,443,982
$
1,375,179
5
Federal
funds purchased and securities loaned or sold under repurchase agreements
158,916
165,666
(4
)
Short-term borrowings
51,802
34,443
50
Trading
liabilities:
Debt and equity instruments
85,886
87,428
(2
)
Derivative
payables
37,777
49,231
(23
)
Accounts payable and other liabilities
189,383
190,543
(1
)
Beneficial
interests issued by consolidated variable interest entities (“VIEs”)
26,081
39,047
(33
)
Long-term debt
284,080
295,245
(4
)
Total
liabilities
2,277,907
2,236,782
2
Stockholders’ equity
255,693
254,190
1
Total
liabilities and stockholders’ equity
$
2,533,600
$
2,490,972
2
%
Deposits increased due to:
•
higher
consumer deposits reflecting the continuation of strong growth from new and existing customers, and low attrition rates
•
higher wholesale deposits largely driven by growth in client cash management activity in CIB’s Securities Services business, partially offset by lower balances in AWM reflecting balance migration predominantly into the Firm’s investment-related products.
For more information, refer to the Liquidity Risk Management discussion on pages 92–97; and Notes 2
and 17.
Short-term borrowings increased primarily due to higher issuance of commercial paper reflecting in part a change in the mix of funding from securities sold under repurchase agreements for CIB Markets activities. For additional information, see Liquidity Risk Management on pages 92–97.
Beneficial interests issued by consolidated VIEs
decreased due to net maturities of credit card securitizations and the deconsolidation of the student loan securitization entities in connection with the portfolio’s sale. For further information on Firm-sponsored VIEs and loan securitization trusts,
see Off-Balance Sheet Arrangements on pages 50–51 and Note 14 and 27; and for the sale of the student loan portfolio, see CCB segment results on pages 57-61.
Long-term debt decreased reflecting lower Federal Home Loan Bank (“FHLB”) advances, partially offset by the net issuance of senior debt and the net issuance of structured notes in CIB driven by client demand. For additional information on the Firm’s long-term debt activities, see Liquidity Risk Management on pages 92–97 and Note 19.
For information on changes in stockholders’ equity, see page
151, and on the Firm’s capital actions, see Capital actions on pages 89-90.
Net
increase/(decrease) in cash and due from banks
$
1,954
$
3,383
$
(7,341
)
Operating activities
JPMorgan
Chase’s operating assets and liabilities support the Firm’s lending and capital markets activities. These 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 and other liquidity sources, and its capacity to generate cash through secured and unsecured sources are sufficient to meet operating liquidity needs.
•
In 2017, cash used reflected an increase in held-for-investment margin loans in accrued interest and accounts receivable and a decrease in trading liabilities.
•
In
2016, cash provided reflected increases in accounts payable and trading liabilities, partially offset by cash used reflecting an increase in trading assets, an increase in accounts receivable from merchants and higher client receivables.
•
In 2015, cash provided reflected decreases in trading assets and in accounts receivable, partially offset by cash used due to a decrease in accounts payable and other liabilities.
Investing activities
The Firm’s investing activities predominantly include originating held-for-investment loans and investing in the securities portfolio and other short-term
interest-earning assets.
•
In 2017, cash used primarily reflected net originations of loans and a net increase in short-term interest-earning assets, partially offset by net proceeds from paydowns, maturities, sales and purchases of investment securities.
•
In 2016, cash used reflected net originations of loans, an increase in short-term interest-earning assets, an increase in securities purchased under resale agreements, and the deployment of excess cash.
•
In
2015, cash provided predominantly reflected lower short-term interest-earning assets, and net proceeds from lower investment securities, partially offset by cash used for net originations of loans.
Financing activities
The Firm’s financing activities include acquiring customer deposits and issuing long-term debt, as well as preferred and common stock.
•
In 2017, cash provided reflected higher deposits and short-term borrowings, partially offset by a decrease in long-term borrowings.
•
In
2016, cash provided reflected higher deposits, and an increase in securities loaned or sold under repurchase agreements, and net proceeds from long term borrowings.
•
In 2015, cash used reflected lower deposits and short-term borrowings, partially offset by net proceeds from long-term borrowings. Additionally, in 2015 cash outflows reflected a decrease in securities loaned or sold under repurchase agreements.
•
For all periods, cash was used for repurchases of common stock and cash dividends on common and preferred
stock.
* * *
For a further discussion of the activities affecting the Firm’s cash flows, see Consolidated Balance Sheets Analysis on pages 47-48 , Capital Risk Management on pages 82–91, and Liquidity Risk Management on pages 92–97.
JPMorgan Chase & Co./2017 Annual Report
49
Management’s
discussion and analysis
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
In the normal course of business, the Firm enters into various contractual obligations that may require future cash payments. Certain obligations are recognized on-balance sheet, while others are off-balance sheet under accounting principles generally accepted in the U.S. (“U.S. GAAP”).
The Firm is involved with several types of off–balance sheet
arrangements, including through nonconsolidated SPEs, which are a type of VIE, and through lending-related financial instruments (e.g., commitments and guarantees).
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.
The Firm has no commitments to issue its own stock to support any SPE transaction, and its policies require that transactions with SPEs be conducted at arm’s length and reflect market pricing. Consistent with this policy, no JPMorgan Chase employee is permitted to invest in SPEs with which the Firm is involved where such investment would violate the Firm’s Code of Conduct.
The
table below provides an index of where in this Annual Report a discussion of the Firm’s various off-balance sheet arrangements can be found. In addition, see Note 1 for information about the Firm’s consolidation policies.
Type of off-balance sheet arrangement
Location of disclosure
Page references
Special-purpose entities: variable interests and other obligations, including contingent obligations, arising from variable interests in nonconsolidated VIEs
See Note 14
236–243
Off-balance
sheet lending-related financial instruments, guarantees, and other commitments
See Note 27
261–266
50
JPMorgan Chase & Co./2017 Annual Report
Contractual
cash obligations
The accompanying table summarizes, by remaining maturity, JPMorgan Chase’s significant contractual cash obligations at December 31, 2017. The contractual cash obligations included in the table below reflect the minimum contractual obligation under legally enforceable contracts with terms that are both fixed and determinable. Excluded from the below table are certain liabilities with variable cash flows and/or no obligation to return a stated amount of principal at maturity.
The carrying amount of on-balance sheet obligations on the Consolidated balance sheets
may differ from the minimum contractual amount of the obligations reported below. For a discussion of mortgage repurchase liabilities and other obligations, see Note 27.
Contractual cash obligations
By
remaining maturity at December 31, (in millions)
2017
2016
2018
2019-2020
2021-2022
After 2022
Total
Total
On-balance sheet obligations
Deposits(a)
$
1,421,174
$
5,276
$
4,810
$
6,204
$
1,437,464
$
1,368,866
Federal
funds purchased and securities loaned or sold under repurchase agreements
133,779
4,198
4,958
15,981
158,916
165,666
Short-term
borrowings(a)
42,664
—
—
—
42,664
26,497
Beneficial
interests issued by consolidated VIEs
13,636
9,542
2,544
314
26,036
38,927
Long-term
debt(a)
37,211
63,685
43,180
116,819
260,895
288,315
Other(b)
4,726
2,146
2,080
4,573
13,525
8,980
Total
on-balance sheet obligations
1,653,190
84,847
57,572
143,891
1,939,500
1,897,251
Off-balance
sheet obligations
Unsettled reverse repurchase and securities borrowing agreements(c)
76,859
—
—
—
76,859
50,722
Contractual
interest payments(d)
9,248
11,046
7,471
26,338
54,103
48,862
Operating
leases(e)
1,526
2,750
1,844
3,757
9,877
10,115
Equity
investment commitments(f)
174
46
19
515
754
1,068
Contractual
purchases and capital expenditures
1,923
937
439
204
3,503
2,566
Obligations
under co-brand programs
249
500
478
207
1,434
868
Total
off-balance sheet obligations
89,979
15,279
10,251
31,021
146,530
114,201
Total
contractual cash obligations
$
1,743,169
$
100,126
$
67,823
$
174,912
$
2,086,030
$
2,011,452
(a)
Excludes
structured notes on which the Firm is not obligated to return a stated amount of principal at the maturity of the notes, but is obligated to return an amount based on the performance of the structured notes.
(b)
Primarily includes dividends declared on preferred and common stock, deferred annuity contracts, pension and other postretirement employee benefit obligations, insurance liabilities and income taxes payable associated with the deemed repatriation under the TCJA.
(c)
For
further information, refer to unsettled reverse repurchase and securities borrowing agreements in Note 27.
(d)
Includes accrued interest and future contractual interest obligations. Excludes interest related to structured notes for which the Firm’s payment obligation is based on the performance of certain benchmarks.
(e)
Includes noncancelable operating leases for premises and equipment used primarily for banking purposes. Excludes the benefit of noncancelable sublease
rentals of $1.0 billion and $1.4 billion at December 31, 2017 and 2016, respectively. See Note 28 for more information on lease commitments.
(f)
At December 31, 2017 and 2016, included unfunded commitments of $40
million and $48 million, respectively, to third-party private equity funds, and $714 million and $1.0 billion of unfunded commitments, respectively, to other equity investments.
JPMorgan Chase & Co./2017 Annual Report
51
Management’s
discussion and analysis
EXPLANATION AND RECONCILIATION OF THE FIRM’S USE OF NON-GAAP FINANCIAL MEASURES AND KEY PERFORMANCE MEASURES
Non-GAAP financial measures
The Firm prepares its Consolidated Financial Statements using U.S. GAAP; these financial statements appear on pages 148–152. 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 Firmwide results, including the overhead ratio, on a “managed” basis; these Firmwide managed basis results are non-GAAP financial measures. The Firm also reviews the results of the lines of business on a managed basis. The Firm’s definition of managed basis starts, in each case, with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the reportable 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. These financial measures allow management to assess the comparability of revenue from year-to-year 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 Firm and business-segment level, because these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Firm or of the particular business segment, as the case may be, and, therefore, facilitate a comparison of the Firm or the business segment with the performance of its relevant competitors. For additional information on these non-GAAP measures, see Business Segment Results on pages 55–74.
Additionally, certain credit metrics and ratios disclosed by the Firm exclude PCI loans, and are therefore non-GAAP measures.
For additional information on these non-GAAP measures, see Credit and Investment Risk Management on pages 99–120.
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.
2017
2016
2015
Year
ended
December 31,
(in millions, except ratios)
Reported
Results
Fully taxable-equivalent adjustments(a)
Managed
basis
Reported
Results
Fully
taxable-equivalent adjustments(a)
Managed
basis
Reported
Results
Fully taxable-equivalent adjustments(a)
Managed
basis
Other income
$
3,639
$
2,704
(b)
$
6,343
$
3,795
$
2,265
$
6,060
$
3,032
$
1,980
$
5,012
Total
noninterest revenue
49,527
2,704
52,231
49,585
2,265
51,850
50,033
1,980
52,013
Net
interest income
50,097
1,313
51,410
46,083
1,209
47,292
43,510
1,110
44,620
Total
net revenue
99,624
4,017
103,641
95,668
3,474
99,142
93,543
3,090
96,633
Pre-provision
profit
41,190
4,017
45,207
39,897
3,474
43,371
34,529
3,090
37,619
Income
before income tax expense
35,900
4,017
39,917
34,536
3,474
38,010
30,702
3,090
33,792
Income
tax expense
11,459
4,017
(b)
15,476
9,803
3,474
13,277
6,260
3,090
9,350
Overhead
ratio
59
%
NM
56
%
58
%
NM
56
%
63
%
NM
61
%
(a)
Predominantly recognized in CIB and CB business segments and Corporate.
(b) Included $375 million related to tax-oriented investments as a result of the enactment of the TCJA.
52
JPMorgan Chase & Co./2017 Annual Report
Net interest income excluding CIB’s Markets businesses
In addition to reviewing net interest
income on a managed basis, management also reviews net interest income excluding net interest income arising from CIB’s Markets businesses to assess the performance of the Firm’s lending, investing (including asset-liability management) and deposit-raising activities. This net interest income is referred to as non-markets related net interest income. CIB’s Markets businesses are Fixed Income Markets and Equity Markets. Management believes that disclosure of non-markets related net interest income provides investors and analysts with another measure by which to analyze the non-markets-related business trends of the Firm and provides a comparable measure to other financial institutions that are primarily focused on lending, investing and deposit-raising activities.
The data presented below are non-GAAP financial measures
due to the exclusion of markets related net interest income
arising
from CIB.
Year ended December 31,
(in millions, except rates)
2017
2016
2015
Net interest income – managed basis(a)(b)
$
51,410
$
47,292
$
44,620
Less:
CIB Markets net interest income(c)
4,630
6,334
5,298
Net interest income excluding CIB Markets(a)
$
46,780
$
40,958
$
39,322
Average
interest-earning assets
$
2,180,592
$
2,101,604
$
2,088,242
Less: Average CIB Markets interest-earning assets(c)
540,835
520,307
510,292
Average
interest-earning assets excluding CIB Markets
$
1,639,757
$
1,581,297
$
1,577,950
Net interest yield on average interest-earning assets – managed basis
2.36
%
2.25
%
2.14
%
Net
interest yield on average CIB Markets interest-earning assets(c)
0.86
1.22
1.04
Net interest yield on average interest-earning assets excluding CIB Markets
2.85
%
2.59
%
2.49
%
(a)
Interest
includes the effect of related hedges. Taxable-equivalent amounts are used where applicable.
(b)
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 52.
(c)
The amounts in this table differ from the prior-period presentation to align with CIB’s Markets businesses. For further information on CIB’s Markets businesses, see page 65.
Calculation
of certain U.S. GAAP and non-GAAP financial measures
Certain U.S. GAAP and non-GAAP financial measures are calculated as follows:
Book value per share (“BVPS”)
Common stockholders’ equity at period-end /
Common shares at period-end
Overhead ratio
Total noninterest expense / Total net revenue
Return on assets (“ROA”)
Reported net income / Total average assets
Return on
common equity (“ROE”)
Net income* / Average common stockholders’ equity
Return on tangible common equity (“ROTCE”)
Net income* / Average tangible common equity
Tangible book value per share (“TBVPS”)
Tangible common equity at period-end / Common shares at period-end
* Represents net income applicable to common equity
JPMorgan
Chase & Co./2017 Annual Report
53
Management’s discussion and analysis
Tangible common equity, ROTCE and TBVPS
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 net income applicable to common equity as a percentage of average TCE. TBVPS represents the Firm’s TCE at period-end divided by common shares at period-end. TCE, ROTCE and TBVPS are utilized
by the Firm, as well as investors and analysts, in assessing the Firm’s use of equity.
The following summary table provides a reconciliation from the Firm’s common stockholders’ equity to TCE.
Period-end
Average
Dec 31,
2017
Dec 31, 2016
Year ended December 31,
(in millions, except per share and ratio data)
2017
2016
2015
Common stockholders’ equity
$
229,625
$
228,122
$
230,350
$
224,631
$
215,690
Less:
Goodwill
47,507
47,288
47,317
47,310
47,445
Less: Other intangible assets
855
862
832
922
1,092
Add:
Certain Deferred tax liabilities(a)(b)
2,204
3,230
3,116
3,212
2,964
Tangible common
equity
$
183,467
$
183,202
$
185,317
$
179,611
$
170,117
Return
on tangible common equity
NA
NA
12
%
13
%
13
%
Tangible book value per share
$
53.56
$
51.44
NA
NA
NA
(a)
Represents
deferred tax liabilities related to tax-deductible goodwill and to identifiable intangibles created in nontaxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
(b)
Includes the effect from the revaluation of the Firm’s net deferred tax liability as a result of the enactment of the TCJA.
Key performance measures
The Firm considers the following to be key regulatory capital measures:
•
Capital,
risk-weighted assets (“RWA”), and capital and leverage ratios presented under Basel III Standardized and Advanced Fully Phased-In rules, and
•
SLR calculated under Basel III Advanced Fully Phased-In rules.
The Firm, as well as banking regulators, investors and analysts, use these measures to assess the Firm’s regulatory capital position and to compare the Firm’s regulatory capital to that of other financial services companies.
For additional information on these measures, see Capital Risk Management on pages 82–91.
Core
loans are also considered a key performance measure. Core loans represent loans considered central to the Firm’s ongoing businesses; and exclude loans classified as trading assets, runoff portfolios, discontinued portfolios and portfolios the Firm has an intent to exit. Core loans is a measure utilized by the Firm and its investors and analysts in assessing actual growth in the loan portfolio.
54
JPMorgan Chase & Co./2017 Annual Report
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 & Wealth Management. In addition, there is a Corporate 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 52–54.
JPMorgan
Chase
Consumer Businesses
Wholesale Businesses
Consumer & Community Banking
Corporate & Investment Bank
Commercial Banking
Asset
& Wealth Management
Consumer
&
Business Banking
Home Lending(a)
Card, Merchant Services & Auto(b)
Banking
Markets &
Investor Services
• Middle
Market Banking
• Asset Management
• Consumer Banking/Chase Wealth Management
• Business Banking
• Home Lending Production
• Home Lending Servicing
• Real Estate Portfolios
• Card Services
– Credit Card
– Merchant Services
•
Auto
• Investment Banking
• Treasury Services
• Lending
• Fixed
Income
Markets
• Corporate Client Banking
• Wealth Management
• Equity Markets
• Securities Services
• Credit Adjustments & Other
• Commercial
Term Lending
• Real Estate Banking
(a)
Formerly Mortgage Banking
(b)
Formerly Card, Commerce Solutions & Auto
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 includes the allocation of certain income and expense items described in more detail below. The Firm also assesses the level of capital required for each line of business on at least an annual basis.
The Firm periodically assesses the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods.
Revenue sharing
When business segments join efforts to sell products and services to the Firm’s clients, the participating business segments agree to share revenue from those transactions. The segment results reflect these revenue-sharing agreements.
Funds
transfer pricing
Funds transfer pricing is used to assign interest income and expense to each business segment and to transfer the primary interest rate risk and liquidity risk exposures to Treasury and CIO within Corporate. The funds transfer pricing process considers the interest rate risk, liquidity risk and regulatory requirements of a business segment as if it were operating independently. This process is overseen by senior management and reviewed by the Firm’s Asset-Liability Committee (“ALCO”).
JPMorgan Chase & Co./2017 Annual Report
55
Management’s
discussion and analysis
Debt expense and preferred stock dividend allocation
As part of the funds transfer pricing process, almost all of the cost of the credit spread component of outstanding unsecured long-term debt and preferred stock dividends is allocated to the reportable business segments, while the balance of the cost is retained in Corporate. The methodology to allocate the cost of unsecured long-term debt and preferred stock dividends to the business segments is aligned with the Firm’s process to allocate capital. The allocated cost of unsecured long-term debt is included in a business segment’s net interest income, and net income is reduced by preferred stock dividends to arrive at a business segment’s net income applicable to common equity.
Business segment capital allocation
The amount of capital assigned to each business is referred to as equity. On at least an annual basis, the Firm assesses the level of capital required for each line of business as well as the assumptions and methodologies used to allocate
capital. For additional information on business segment capital allocation, see Line of business equity on page 89.
Expense allocation
Where business segments use services provided by corporate support units, or another business segment, the costs of those services are allocated to the respective business segments. The expense is generally allocated based on the actual cost and use of services provided. In contrast,
certain other costs related to corporate support units, or to certain technology and operations, are not allocated to the business segments and are retained in Corporate. Expense retained in Corporate generally includes parent company costs that would not be incurred if the segments were stand-alone businesses; adjustments to align corporate support units; and other items not aligned with a particular business segment.
Segment Results – Managed Basis
The following tables summarize the business segment results for the periods indicated.
Year
ended December 31,
Total net revenue
Total noninterest expense
Pre-provision profit/(loss)
(in millions)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Consumer
& Community Banking
$
46,485
$
44,915
$
43,820
$
26,062
$
24,905
$
24,909
$
20,423
$
20,010
$
18,911
Corporate
& Investment Bank
34,493
35,216
33,542
19,243
18,992
21,361
15,250
16,224
12,181
Commercial
Banking
8,605
7,453
6,885
3,327
2,934
2,881
5,278
4,519
4,004
Asset
& Wealth Management
12,918
12,045
12,119
9,301
8,478
8,886
3,617
3,567
3,233
Corporate
1,140
(487
)
267
501
462
977
639
(949
)
(710
)
Total
$
103,641
$
99,142
$
96,633
$
58,434
$
55,771
$
59,014
$
45,207
$
43,371
$
37,619
Year
ended December 31,
Provision for credit losses
Net income/(loss)
Return on equity
(in millions, except ratios)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Consumer
& Community Banking
$
5,572
$
4,494
$
3,059
$
9,395
$
9,714
$
9,789
17
%
18
%
18
%
Corporate
& Investment Bank
(45
)
563
332
10,813
10,815
8,090
14
16
12
Commercial
Banking
(276
)
282
442
3,539
2,657
2,191
17
16
15
Asset
& Wealth Management
39
26
4
2,337
2,251
1,935
25
24
21
Corporate
—
(4
)
(10
)
(1,643
)
(704
)
2,437
NM
NM
NM
Total
$
5,290
$
5,361
$
3,827
$
24,441
$
24,733
$
24,442
10
%
10
%
11
%
The
following sections provide a comparative discussion of business segment results as of or for the years ended December 31, 2017, 2016 and 2015.
56
JPMorgan Chase & Co./2017 Annual Report
CONSUMER
& COMMUNITY BANKING
Consumer & Community Banking offers services to consumers and businesses through bank branches, ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking (including Consumer Banking/Chase Wealth Management and Business Banking), Home Lending (including Home Lending Production, Home Lending Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto. Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Home Lending includes mortgage origination and servicing activities, as well as portfolios consisting of residential
mortgages and home equity loans. Card, Merchant Services & Auto issues credit cards to consumers and small businesses, offers payment processing services to merchants, and originates and services auto loans and leases.
Selected income statement data
Year
ended December 31,
(in millions, except ratios)
2017
2016
2015
Revenue
Lending-
and deposit-related fees
$
3,431
$
3,231
$
3,137
Asset management, administration and commissions
2,212
2,093
2,172
Mortgage
fees and related income
1,613
2,490
2,511
Card income
4,024
4,364
5,491
All
other income
3,430
3,077
2,281
Noninterest revenue
14,710
15,255
15,592
Net
interest income
31,775
29,660
28,228
Total net revenue
46,485
44,915
43,820
Provision
for credit losses
5,572
4,494
3,059
Noninterest
expense
Compensation expense
10,159
9,723
9,770
Noncompensation
expense(a)
15,903
15,182
15,139
Total noninterest expense
26,062
24,905
24,909
Income
before income tax expense
14,851
15,516
15,852
Income tax expense
5,456
5,802
6,063
Net
income
$
9,395
$
9,714
$
9,789
Revenue
by line of business
Consumer & Business Banking
$
21,104
$
18,659
$
17,983
Home
Lending
5,955
7,361
6,817
Card, Merchant Services & Auto
19,426
18,895
19,020
Mortgage
fees and related income details:
Net production revenue
636
853
769
Net
mortgage servicing
revenue(b)
977
1,637
1,742
Mortgage fees and related income
$
1,613
$
2,490
$
2,511
Financial
ratios
Return on equity
17
%
18
%
18
%
Overhead
ratio
56
55
57
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.
(a)
Included
operating lease depreciation expense of $2.7 billion, $1.9 billion and $1.4 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
(b)
Included MSR risk management results of $(242) million, $217 million and $(117) million for the years ended December 31, 2017, 2016 and 2015, respectively.
JPMorgan
Chase & Co./2017 Annual Report
57
Management’s discussion and analysis
2017 compared with 2016
Net income was $9.4 billion, a decrease of 3%, driven by higher noninterest expense and provision for credit losses, largely offset by higher net revenue.
Net revenue was $46.5 billion, an increase of 3%.
Net interest income was $31.8 billion, up 7%, driven by higher deposit balances, deposit margin expansion, and higher loan balances in Card, partially offset by loan spread compression from higher rates, including the
impact of higher funding costs in Home Lending and Auto and the impact of the sale of the student loan portfolio.
Noninterest revenue was $14.7 billion, down 4%, driven by:
•
higher new account origination costs in Card,
•
lower MSR risk management results,
•
the
absence in the current year of a gain on the sale of Visa Europe interests,
•
lower net production revenue reflecting lower mortgage production margins and volumes, and
•
lower mortgage servicing revenue as a result of a lower level of third-party loans serviced
largely offset by
•
higher
auto lease volume and
•
higher card- and deposit-related fees.
See Note 15 for further information regarding changes in value of the MSR asset and related hedges, and mortgage fees and related income.
Noninterest expense was $26.1 billion, an increase of 5%, driven by:
•
higher auto lease depreciation, and
•
continued
business growth
partially offset by
•
two items totaling $175 million included in the prior year related to liabilities from a merchant bankruptcy and mortgage servicing reserves.
The provision for credit losses was $5.6 billion, an increase of 24%, reflecting:
•
$445 million of higher net charge-offs, primarily in the credit card portfolio due to growth in newer vintages which, as anticipated, have higher loss rates than the
more seasoned portion of the portfolio, partially offset by a decrease in net charge-offs in the residential real estate portfolio reflecting continued improvement in home prices and delinquencies,
•
a $415 million higher addition to the allowance for credit losses related to the credit card portfolio driven by higher loss rates and loan growth, and a lower reduction in the allowance for the residential real estate portfolio predominantly driven by continued improvement in home prices and delinquencies, and
•
a $218
million impact in connection with the sale of the student loan portfolio.
The sale of the student loan portfolio during 2017 did not have a material impact on the Firm’s Consolidated Financial Statements.
2016 compared with 2015
Net income was $9.7 billion, a decrease of 1%, driven by higher provision for credit losses, predominantly offset by higher net revenue.
Net revenue was $44.9 billion, an increase of 2%.
Net interest income was $29.7 billion, up 5%, driven by higher deposit balances and higher loan balances, partially offset by deposit spread compression and an increase in the reserve for uncollectible interest and fees in Card.
Noninterest
revenue was $15.3 billion, down 2%, driven by higher new account origination costs and the impact of renegotiated co-brand partnership agreements in Card and lower mortgage servicing revenue predominantly as a result of a lower level of third-party loans serviced; these factors were predominantly offset by higher auto lease and card sales volume, higher card- and deposit-related fees, higher MSR risk management results and a gain on the sale of Visa Europe interests. See Note 15 for further information regarding changes in value of the MSR asset and related hedges, and mortgage fees and related income.
Noninterest expense of $24.9 billion was flat, driven by:
•
lower
legal expense and branch efficiencies
offset by
•
higher auto lease depreciation, and
•
higher investment in marketing.
The provision for credit losses was $4.5 billion, an increase of 47%, reflecting:
•
a
$920 million increase related to the credit card portfolio, due to a $600 million addition in the allowance for loan losses, as well as $320 million of higher net charge-offs, driven by loan growth, including growth in newer vintages which, as anticipated, have higher loss rates compared to the overall portfolio,
•
a $450 million lower benefit related to the residential real estate portfolio, as the current year reduction in the allowance for loan losses was lower than the prior year. The reduction in both periods reflected continued improvements in home prices and lower delinquencies, and
•
a
$150 million increase related to the auto and business banking portfolio, due to additions to the allowance for loan losses and higher net charge-offs, reflecting loan growth in the portfolios.
58
JPMorgan Chase & Co./2017 Annual Report
Selected
metrics
As of or for the year ended December 31,
(in millions, except headcount)
2017
2016
2015
Selected
balance sheet data (period-end)
Total assets
$
552,601
$
535,310
$
502,652
Loans:
Consumer
& Business Banking
25,789
24,307
22,730
Home equity
42,751
50,296
58,734
Residential
mortgage
197,339
181,196
164,500
Home Lending
240,090
231,492
223,234
Card
149,511
141,816
131,463
Auto
66,242
65,814
60,255
Student
—
7,057
8,176
Total
loans
481,632
470,486
445,858
Core loans
415,167
382,608
341,881
Deposits
659,885
618,337
557,645
Equity
51,000
51,000
51,000
Selected
balance sheet data (average)
Total assets
$
532,756
$
516,354
$
472,972
Loans:
Consumer
& Business Banking
24,875
23,431
21,894
Home equity
46,398
54,545
63,261
Residential
mortgage
190,242
177,010
140,294
Home Lending
236,640
231,555
203,555
Card
140,024
131,165
125,881
Auto
65,395
63,573
56,487
Student
2,880
7,623
8,763
Total
loans
469,814
457,347
416,580
Core loans
393,598
361,316
301,700
Deposits
640,219
586,637
530,938
Equity
51,000
51,000
51,000
Headcount
134,117
132,802
127,094
Selected
metrics
As of or for the year ended December 31,
(in millions, except ratio data)
2017
2016
2015
Credit data and quality statistics
Nonaccrual
loans(a)(b)
$
4,084
$
4,708
$
5,313
Net charge-offs/(recoveries)(c)
Consumer
& Business Banking
257
257
253
Home equity
63
184
283
Residential
mortgage
(16
)
14
2
Home Lending
47
198
285
Card
4,123
3,442
3,122
Auto
331
285
214
Student
498
162
210
Total
net charge-offs/(recoveries)
$
5,256
$
4,344
$
4,084
Net
charge-off/(recovery) rate(c)
Consumer & Business Banking
1.03
%
1.10
%
1.16
%
Home equity(d)
0.18
0.45
0.60
Residential
mortgage(d)
(0.01
)
0.01
—
Home Lending(d)
0.02
0.10
0.18
Card
2.95
2.63
2.51
Auto
0.51
0.45
0.38
Student
NM
2.13
2.40
Total
net charge-offs/(recovery) rate(d)
1.21
1.04
1.10
30+ day delinquency rate
Home Lending(e)(f)
1.19
%
1.23
%
1.57
%
Card
1.80
1.61
1.43
Auto
0.89
1.19
1.35
Student(g)
—
1.60
1.81
90+
day delinquency rate - Card
0.92
0.81
0.72
Allowance for loan losses
Consumer
& Business Banking
$
796
$
753
$
703
Home Lending, excluding PCI loans
1,003
1,328
1,588
Home
Lending — PCI loans(c)
2,225
2,311
2,742
Card
4,884
4,034
3,434
Auto
464
474
399
Student
—
249
299
Total
allowance for loan losses(c)
$
9,372
$
9,149
$
9,165
(a)
Excludes PCI loans. The Firm is recognizing
interest income on each pool of PCI loans as each of the pools is performing.
(b)
At December 31, 2017, 2016 and 2015, nonaccrual loans excluded loans 90 or more days past due as follows: (1) mortgage loans insured by U.S. government agencies of $4.3 billion, $5.0 billion and $6.3 billion, respectively; and (2) student loans insured by U.S. government agencies under the Federal Family Education Loan Program (“FFELP”) of zero, $263 million and $290 million, respectively. These amounts have been excluded based upon the government guarantee.
(c)
Net
charge-offs and the net charge-off rates for the years ended December 31, 2017, 2016 and 2015, excluded $86 million, $156 million and $208 million, respectively, of write-offs in the PCI portfolio. These write-offs decreased the allowance for loan losses for PCI loans. For further information on PCI write-offs, see summary of changes in the allowance on page 118.
(d)
Excludes the impact of PCI loans. For the years ended December 31,
2017, 2016 and 2015, the net charge-off rates including the impact of PCI loans were as follows: (1) home equity of 0.14%, 0.34% and 0.45%, respectively; (2) residential mortgage of (0.01)%, 0.01% and –%, respectively; (3) Home Lending of 0.02%, 0.09% and 0.14%, respectively; and (4) total CCB of 1.12%, 0.95% and 0.99%, respectively.
JPMorgan Chase & Co./2017 Annual Report
59
Management’s
discussion and analysis
(e)
At December 31, 2017, 2016 and 2015, excluded mortgage loans insured by U.S. government agencies of $6.2 billion, $7.0 billion and $8.4 billion, respectively, that are 30 or more days past due. These amounts have been excluded based upon the government guarantee.
(f)
Excludes
PCI loans. The 30+ day delinquency rate for PCI loans was 10.13%, 9.82% and 11.21% at December 31, 2017, 2016 and 2015, respectively.
(g)
Excluded student loans insured by U.S. government agencies under FFELP of $468 million and $526 million at December 31, 2016 and 2015, respectively, that are 30 or more days past due. These amounts have been excluded based upon the government
guarantee.
Selected metrics
As of or for the year ended December 31,
(in
billions, except ratios and where otherwise noted)
2017
2016
2015
Business Metrics
CCB households (in millions)(a)
61.0
60.4
58.1
Number
of branches
5,130
5,258
5,413
Active digital customers
(in thousands)(b)
46,694
43,836
39,242
Active
mobile customers
(in thousands)(c)
30,056
26,536
22,810
Debit and credit card sales volume(a)
$
916.9
$
821.6
$
754.1
Consumer
& Business Banking
Average deposits
$
625.6
$
570.8
$
515.2
Deposit
margin
1.98
%
1.81
%
1.90
%
Business banking origination volume
$
7.3
$
7.3
$
6.8
Client
investment assets
273.3
234.5
218.6
Home
Lending
Mortgage origination volume by channel
Retail
$
40.3
$
44.3
$
36.1
Correspondent
57.3
59.3
70.3
Total mortgage origination volume(d)
$
97.6
$
103.6
$
106.4
Total
loans serviced
(period-end)
$
816.1
$
846.6
$
910.1
Third-party mortgage loans serviced (period-end)
553.5
591.5
674.0
MSR
carrying value
(period-end)
6.0
6.1
6.6
Ratio of MSR carrying value (period-end) to third-party mortgage loans serviced (period-end)
1.08
%
1.03
%
0.98
%
MSR
revenue multiple(e)
3.09
x
2.94
x
2.80
x
Card,
excluding Commercial Card
Credit card sales volume
$
622.2
$
545.4
$
495.9
New
accounts opened
(in millions)
8.4
10.4
8.7
Card
Services
Net revenue rate
10.57
%
11.29
%
12.33
%
Merchant
Services
Merchant processing volume
$
1,191.7
$
1,063.4
$
949.3
Auto
Loan
and lease origination volume
$
33.3
$
35.4
$
32.4
Average Auto operating lease assets
15.2
11.0
7.8
(a)
The
prior period amounts have been revised to conform with the current period presentation.
(b)
Users of all web and/or mobile platforms who have logged in within the past 90 days.
(c)
Users of all mobile platforms who have logged in within the past 90 days.
(d)
Firmwide mortgage origination volume
was $107.6 billion, $117.4 billion and $115.2 billion for the years ended December 31, 2017, 2016 and 2015, respectively.
(e)
Represents the ratio of MSR carrying value (period-end) to third-party mortgage loans serviced (period-end) divided by the ratio of loan servicing-related revenue to third-party mortgage loans serviced (average).
60
JPMorgan
Chase & Co./2017 Annual Report
Mortgage servicing-related matters
The Firm has resolved the majority of the consent orders and settlements into which it entered with federal and state governmental agencies and private parties related to mortgage servicing, origination, and residential mortgage-backed securities activities. On January 12, 2018, the Board of Governors of the Federal Reserve System terminated its mortgage servicing-related Consent Order with the Firm, which had been outstanding since April 2011.
Some of the remaining obligations are overseen by an independent reviewer, who publishes periodic reports
detailing the Firm’s compliance with the obligations.
JPMorgan Chase & Co./2017 Annual Report
61
Management’s discussion and analysis
CORPORATE
& INVESTMENT BANK
The Corporate & Investment Bank, which consists of Banking and Markets & Investor Services, offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Banking offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Banking also includes Treasury Services, which provides transaction services,
consisting of cash management and liquidity solutions. Markets & Investor Services is a global market-maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes Securities Services, a leading global custodian which provides custody, fund accounting and administration, and securities lending products principally for asset managers, insurance companies and public and private investment funds.
Selected
income statement data
Year ended December 31,
(in millions)
2017
2016
2015
Revenue
Investment
banking fees
$
7,192
$
6,424
$
6,736
Principal transactions
10,873
11,089
9,905
Lending-
and deposit-related fees
1,531
1,581
1,573
Asset management, administration and commissions
4,207
4,062
4,467
All
other income
572
1,169
1,012
Noninterest revenue
24,375
24,325
23,693
Net
interest income
10,118
10,891
9,849
Total net revenue(a)(b)
34,493
35,216
33,542
Provision
for credit losses
(45
)
563
332
Noninterest
expense
Compensation expense
9,535
9,546
9,973
Noncompensation
expense
9,708
9,446
11,388
Total noninterest expense
19,243
18,992
21,361
Income
before income tax expense
15,295
15,661
11,849
Income tax expense
4,482
4,846
3,759
Net
income(a)
$
10,813
$
10,815
$
8,090
(a)
The
full year 2017 results reflect the impact of the enactment of the TCJA including a decrease to net revenue of $259 million and a benefit to net income of $141 million. For additional information related to the impact of the TCJA, see Note 24.
(b)
Included tax-equivalent adjustments, predominantly due to income tax credits related to alternative energy investments; income tax credits and amortization of the cost of investments in affordable housing projects; and tax-exempt income from municipal bonds of $2.4 billion, $2.0 billion and $1.7 billion for the years ended December 31, 2017, 2016
and 2015, respectively.
Selected income statement data
Year ended December 31,
(in
millions, except ratios)
2017
2016
2015
Financial ratios
Return on equity
14
%
16
%
12
%
Overhead
ratio
56
54
64
Compensation expense as
percentage of total net
revenue
28
27
30
Revenue
by business
Investment Banking
$
6,688
$
5,950
$
6,376
Treasury
Services
4,172
3,643
3,631
Lending
1,429
1,208
1,461
Total
Banking
12,289
10,801
11,468
Fixed Income Markets
12,812
15,259
12,592
Equity
Markets
5,703
5,740
5,694
Securities Services
3,917
3,591
3,777
Credit
Adjustments & Other(a)
(228
)
(175
)
11
Total Markets & Investor
Services
22,204
24,415
22,074
Total
net revenue
$
34,493
$
35,216
$
33,542
(a)
Consists
primarily of credit valuation adjustments (“CVA”) managed centrally within CIB, funding valuation adjustments (“FVA”) and debit valuation adjustments (“DVA”) on derivatives. Results are primarily reported in principal transactions revenue. Results are presented net of associated hedging activities and net of CVA and FVA amounts allocated to Fixed Income Markets and Equity Markets. For additional information, see Accounting and Reporting Developments on pages 141–144 and Notes 2, 3 and 23.
2017 compared with 2016
Net income was $10.8 billion, flat compared with the prior year, reflecting lower net revenue and higher noninterest expense,
offset by a lower provision for credit losses, and a tax benefit resulting from the vesting of employee share-based awards. The current year included a $141 million benefit to net income as a result of the enactment of the TCJA.
Net revenue was $34.5 billion, down 2%.
Banking revenue was $12.3 billion, up 14% compared with the prior year. Investment banking revenue was $6.7 billion, up 12% from the prior year, driven by higher debt and equity underwriting fees. The Firm maintained its #1 ranking for Global Investment Banking fees, according to Dealogic. Debt underwriting fees were $3.6 billion, up 16% driven by a higher share of fees and an overall increase in industry-wide fees; the Firm maintained its #1 ranking globally in fees across high-grade, high-yield, and loan products. Equity underwriting fees were $1.4 billion, up 20% driven by growth in industry-wide issuance including
a strong IPO market; the Firm ranked #2 in equity underwriting fees globally. Advisory fees were $2.2 billion, up 2%; the Firm maintained its #2 ranking for M&A. Treasury Services revenue was $4.2 billion, up 15%, driven by the impact of higher interest rates and growth in operating deposits. Lending revenue was $1.4 billion, up
62
JPMorgan Chase & Co./2017 Annual Report
18%
from the prior year, reflecting lower fair value losses on hedges of accrual loans.
Markets & Investor Services revenue was $22.2 billion, down 9% from the prior year. Fixed Income Markets revenue was $12.8 billion, down 16%, as lower revenue across products was driven by sustained low volatility, tighter credit spreads, and the impact from the TCJA on tax-oriented investments of $259 million, against a strong prior year. Equity Markets revenue was $5.7 billion, down 1% from the prior year, and included a fair value loss of $143 million on a margin loan to a single client. Excluding the fair value loss, Equity Markets revenue was higher driven by higher revenue in Prime Services and Cash Equities, partially offset by lower revenue in derivatives. Securities Services revenue was $3.9 billion, up 9%, driven by the impact of higher interest rates and deposit growth, as well as higher asset-based fees driven by higher market
levels. Credit Adjustments & Other was a loss of $228 million, driven by valuation adjustments.
The provision for credit losses was a benefit of $45 million, which included a net reduction in the allowance for credit losses driven by the Oil & Gas and Metals & Mining portfolios partially offset by a net increase in the allowance for credit losses for a single client. The prior year was an expense of $563 million, which included an addition to the allowance for credit losses driven by the Oil & Gas and Metals & Mining portfolios.
Noninterest expense was $19.2 billion, up 1% compared with the prior year.
2016 compared with 2015
Net income was $10.8 billion, up 34% compared with the prior year, driven by lower noninterest expense and higher net revenue, partially offset by
a higher provision for credit losses.
Banking revenue was $10.8 billion, down 6% compared with the prior year. Investment banking revenue was $6.0 billion, down 7% from the prior year, largely driven by lower equity underwriting fees. The Firm maintained its #1 ranking for Global Investment Banking fees, according to
Dealogic. Equity underwriting fees were $1.2 billion, down 19% driven by lower industry-wide fee levels; however, the Firm improved its market share and maintained its #1 ranking in equity underwriting fees globally as well as in both North America and Europe and its #1 ranking by volumes across all products, according to Dealogic. Advisory fees were $2.1 billion, down 1%; the Firm maintained its #2 ranking for M&A, according to Dealogic. Debt underwriting fees were $3.2 billion; the Firm maintained its #1 ranking globally
in fees across high grade, high yield, and loan products, according to Dealogic. Treasury Services revenue was $3.6 billion. Lending revenue was $1.2 billion, down 17% from the prior year, reflecting fair value losses on hedges of accrual loans.
Markets & Investor Services revenue was $24.4 billion, up 11% from the prior year. Fixed Income Markets revenue was $15.3 billion, up 21% from the prior year, driven by broad strength across products. Rates performance was strong, with increased client activity driven by high issuance-based flows, global political developments, and central bank actions. Credit and Securitized Products revenue improved driven by higher market-making revenue from the secondary market as clients’ risk appetite recovered, and due to increased financing activity. Equity Markets revenue was $5.7 billion, up 1%, compared to a strong prior-year. Securities Services revenue was $3.6 billion, down 5% from
the prior year, largely driven by lower fees and commissions. Credit Adjustments and Other was a loss of $175 million driven by valuation adjustments, compared with an $11 million gain in the prior-year, which included funding spread gains on fair value option elected liabilities.
The provision for credit losses was $563 million, compared to $332 million in the prior year, reflecting a higher allowance for credit losses, including the impact of select downgrades within the Oil & Gas portfolio.
Noninterest expense was $19.0 billion, down 11% compared with the prior year, driven by lower legal and compensation expenses.
JPMorgan
Chase & Co./2017 Annual Report
63
Management’s discussion and analysis
Selected metrics
As
of or for the year ended
December 31,
(in millions, except headcount)
2017
2016
2015
Selected balance sheet data (period-end)
Assets
$
826,384
$
803,511
$
748,691
Loans:
Loans
retained(a)
108,765
111,872
106,908
Loans held-for-sale and loans at fair value
4,321
3,781
3,698
Total
loans
113,086
115,653
110,606
Core loans
112,754
115,243
110,084
Equity
70,000
64,000
62,000
Selected
balance sheet data (average)
Assets
$
857,060
$
815,321
$
824,208
Trading
assets-debt and equity instruments
342,124
300,606
302,514
Trading assets-derivative receivables
56,466
63,387
67,263
Loans:
Loans
retained(a)
108,368
111,082
98,331
Loans held-for-sale and loans at fair value
4,995
3,812
4,572
Total
loans
113,363
114,894
102,903
Core loans
113,006
114,455
102,142
Equity
70,000
64,000
62,000
Headcount
51,181
48,748
49,067
(a)
Loans
retained includes credit portfolio loans, loans held by consolidated Firm-administered multi-seller conduits, trade finance loans, other held-for-investment loans and overdrafts.
Selected metrics
As
of or for the year ended
December 31,
(in millions, except ratios)
2017
2016
2015
Credit data and quality statistics
Net
charge-offs/(recoveries)
$
71
$
168
$
(19
)
Nonperforming assets:
Nonaccrual
loans:
Nonaccrual loans retained(a)
812
467
428
Nonaccrual
loansheld-for-sale and loans at fair value
—
109
10
Total nonaccrual loans
812
576
438
Derivative
receivables
130
223
204
Assets acquired in loan satisfactions
85
79
62
Total
nonperforming assets
1,027
878
704
Allowance for credit losses:
Allowance
for loan losses
1,379
1,420
1,258
Allowance for lending-related commitments
727
801
569
Total
allowance for credit losses
2,106
2,221
1,827
Net charge-off/(recovery) rate(b)
0.07
%
0.15
%
(0.02
)%
Allowance
for loan losses to period-end loans
retained
1.27
1.27
1.18
Allowance for loan losses to period-end loans retained, excluding trade finance and conduits(c)
1.92
1.86
1.88
Allowance
for loan losses to nonaccrual loans
retained(a)
170
304
294
Nonaccrual loans to total period-end loans
0.72
0.50
0.40
(a)
Allowance
for loan losses of $316 million, $113 million and $177 million were held against these nonaccrual loans at December 31, 2017, 2016 and 2015, respectively.
(b)
Loans held-for-sale and loans at fair value were excluded when calculating the net charge-off/(recovery) rate.
(c)
Management uses allowance for loan losses to period-end
loans retained, excluding trade finance and conduits, a non-GAAP financial measure, to provide a more meaningful assessment of CIB’s allowance coverage ratio.
Investment banking fees
Year
ended December 31,
(in millions)
2017
2016
2015
Advisory
$
2,150
$
2,110
$
2,133
Equity
underwriting
1,396
1,159
1,434
Debt underwriting(a)
3,646
3,155
3,169
Total
investment banking fees
$
7,192
$
6,424
$
6,736
(a)
Includes
loans syndication.
64
JPMorgan Chase & Co./2017 Annual Report
League
table results – wallet share
2017
2016
2015
Year ended December 31,
Rank
Share
Rank
Share
Rank
Share
Based
on fees(a)
Debt, equity and equity-related
Global
#1
7.4
%
#1
7.0
%
#1
7.6
%
U.S.
1
11.2
1
11.9
1
11.5
Long-term
debt(b)
Global
1
7.6
1
6.7
1
8.1
U.S.
2
10.9
2
11.1
1
11.7
Equity
and equity-related
Global(c)
2
7.1
1
7.4
2
6.9
U.S.
1
11.7
1
13.3
1
11.3
M&A(d)
Global
2
8.6
2
8.3
2
8.4
U.S.
2
9.2
2
9.8
2
9.9
Loan
syndications
Global
1
9.5
1
9.3
1
7.5
U.S.
1
11.3
2
11.9
2
10.8
Global
investment banking fees (e)
#1
8.1
%
#1
7.9
%
#1
7.8
%
(a)
Source:
Dealogic as of January 1, 2018. Reflects the ranking of revenue wallet and market share.
(b)
Long-term debt rankings include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities (“ABS”) and mortgage-backed securities (“MBS”); and exclude money market, short-term debt, and U.S. municipal securities.
(c)
Global equity and equity-related ranking includes rights offerings and Chinese A-Shares.
(d)
Global
M&A reflect the removal of any withdrawn transactions. U.S. M&A revenue wallet represents wallet from client parents based in the U.S.
(e)
Global investment banking fees exclude money market, short-term debt and shelf deals.
Markets revenue
The following table summarizes select income statement data for the Markets businesses. Markets includes both Fixed Income Markets and Equity Markets. Markets revenue consists of principal transactions, fees, commissions and other income, as well as net interest income. The Firm assesses its Markets business performance on a total revenue basis, as offsets may
occur across revenue line items. For example, securities that generate net interest income may be risk-managed by derivatives that are recorded in principal transactions. For a description of the composition of these income statement line items, see Notes 6 and 7.
Principal transactions reflects revenue on financial instruments and commodities transactions that arise from client-driven market making activity. Principal transactions revenue includes amounts recognized upon executing new transactions with market participants, as well as “inventory-related revenue”, which is revenue recognized from gains and losses on derivatives and other instruments that the
Firm has been holding in anticipation of, or in response to, client demand, and
changes in the fair value of instruments used by the Firm to actively manage the risk exposure arising from such inventory. Principal transactions revenue recognized upon executing new transactions with market participants is driven by many factors including the level of client activity, the bid-offer spread (which is the difference between the price at which a market participant is willing to sell an instrument to the Firm and the price at which another market participant is willing to buy it from the Firm, and vice versa), market liquidity and volatility. These factors are interrelated and sensitive to the same factors that drive inventory-related revenue, which include general market conditions, such as interest rates, foreign exchange rates, credit spreads, and equity and commodity prices, as well as other macroeconomic conditions.
For the periods presented below, the predominant source of principal transactions revenue
was the amount recognized upon executing new transactions.
2017
2016
2015
Year
ended December 31,
(in millions, except where otherwise noted)
Fixed Income Markets
Equity Markets
Total Markets
Fixed Income Markets
Equity Markets
Total Markets
Fixed Income Markets
Equity Markets
Total
Markets
Principal transactions
$
7,393
$
3,855
$
11,248
$
8,347
$
3,130
$
11,477
$
6,899
$
3,038
$
9,937
Lending-
and deposit-related fees
191
6
197
220
2
222
194
—
194
Asset
management, administration and commissions
390
1,635
2,025
388
1,551
1,939
383
1,704
2,087
All
other income
436
(21
)
415
1,014
13
1,027
854
(84
)
770
Noninterest
revenue
8,410
5,475
13,885
9,969
4,696
14,665
8,330
4,658
12,988
Net
interest income(a)
4,402
228
4,630
5,290
1,044
6,334
4,262
1,036
5,298
Total
net revenue
$
12,812
$
5,703
$
18,515
$
15,259
$
5,740
$
20,999
$
12,592
$
5,694
$
18,286
Loss
days(b)
4
0
2
(a)
Declines in Markets net interest income in 2017 were driven by higher funding costs.
(b)
Loss
days represent the number of days for which Markets posted losses. The loss days determined under this measure differ from the disclosure of daily market risk-related gains and losses for the Firm in the value-at-risk (“VaR”) back-testing discussion on pages 123–125.
JPMorgan Chase & Co./2017 Annual Report
65
Management’s discussion and analysis
Selected
metrics
As of or for the year ended
December 31,
(in millions, except where otherwise noted)
2017
2016
2015
Assets
under custody (“AUC”) by asset class (period-end) (in billions):
Fixed Income
$
13,043
$
12,166
$
12,042
Equity
7,863
6,428
6,194
Other(a)
2,563
1,926
1,707
Total
AUC
$
23,469
$
20,520
$
19,943
Client deposits and other third party liabilities (average)(b)
$
408,911
$
376,287
$
395,297
Trade
finance loans (period-end)
17,947
15,923
19,255
(a)
Consists of mutual funds, unit investment trusts, currencies, annuities, insurance contracts,
options and other contracts.
(b)
Client deposits and other third party liabilities pertain to the Treasury Services and Securities Services businesses.
International metrics
Year
ended December 31,
(in millions, except where otherwise noted)
2017
2016
2015
Total net revenue(a)
Europe/Middle
East/Africa
$
11,328
$
10,786
$
10,894
Asia/Pacific
4,525
4,915
4,901
Latin
America/Caribbean
1,125
1,225
1,096
Total international net revenue
16,978
16,926
16,891
North
America
17,515
18,290
16,651
Total net revenue
$
34,493
$
35,216
$
33,542
Loans
retained (period-end)(a)
Europe/Middle East/Africa
$
25,931
$
26,696
$
24,622
Asia/Pacific
15,248
14,508
17,108
Latin
America/Caribbean
6,546
7,607
8,609
Total international loans
47,725
48,811
50,339
North
America
61,040
63,061
56,569
Total loans retained
$
108,765
$
111,872
$
106,908
Client
deposits and other third-party liabilities (average)(a)(b)
Europe/Middle East/Africa
$
154,582
$
135,979
$
141,062
Asia/Pacific
76,744
68,110
67,111
Latin
America/Caribbean
25,419
22,914
23,070
Total international
$
256,745
$
227,003
$
231,243
North
America
152,166
149,284
164,054
Total client deposits and other third-party liabilities
$
408,911
$
376,287
$
395,297
AUC
(period-end) (in billions)(a)
North America
$
13,971
$
12,290
$
12,034
All
other regions
9,498
8,230
7,909
Total AUC
$
23,469
$
20,520
$
19,943
(a)
Total
net revenue is based predominantly on the domicile of the client or location of the trading desk, as applicable. Loans outstanding (excluding loans held-for-sale and loans at fair value), client deposits and other third-party liabilities, and AUC are based predominantly on the domicile of the client.
(b)
Client deposits and other third party liabilities pertain to the Treasury Services and Securities Services businesses.
66
JPMorgan
Chase & Co./2017 Annual Report
COMMERCIAL BANKING
Commercial Banking delivers extensive industry knowledge, local expertise and dedicated service to U.S. and U.S. multinational clients, including
corporations, municipalities, financial institutions and nonprofit entities with annual revenue generally ranging from $20 million to $2 billion. In addition, CB provides financing to real estate investors and owners. Partnering with the Firm’s other businesses, CB provides comprehensive financial solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Selected income statement data
Year
ended December 31,
(in millions)
2017
2016
2015
Revenue
Lending- and deposit-related fees
$
919
$
917
$
944
Asset
management, administration and commissions
68
69
88
All other income(a)
1,535
1,334
1,333
Noninterest
revenue
2,522
2,320
2,365
Net interest income
6,083
5,133
4,520
Total
net revenue(b)
8,605
7,453
6,885
Provision
for credit losses
(276
)
282
442
Noninterest
expense
Compensation expense
1,470
1,332
1,238
Noncompensation
expense
1,857
1,602
1,643
Total noninterest expense
3,327
2,934
2,881
Income
before income tax expense
5,554
4,237
3,562
Income tax expense
2,015
1,580
1,371
Net
income
$
3,539
$
2,657
$
2,191
(a)
Includes
revenue from investment banking products and commercial card transactions.
(b)
Total net revenue included tax-equivalent adjustments from income tax credits related to equity investments in designated community development entities that provide loans to qualified businesses in low-income communities, as well as tax-exempt income related to municipal financing activities of $699 million, $505 million and $493 million for the years ended December 31, 2017, 2016
and 2015, respectively. The 2017 results reflect the impact of the enactment of the TCJA including a benefit to all other income of $115 million on certain investments in the Community Development Banking business. For additional information related to the impact of the TCJA, see Note 24.
2017 compared with 2016
Net income was $3.5 billion, an increase of 33% compared with the prior year, driven by higher net revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $8.6 billion, an increase of 15% compared with the prior year. Net interest income was
$6.1 billion, an increase of 19% compared with the prior year, driven by higher deposit spreads and loan growth. Noninterest revenue was $2.5 billion, an increase of 9% compared with the prior year, predominantly driven by higher Community Development Banking revenue, including a $115 million benefit for the impact of the TCJA on certain investments, and higher investment banking revenue.
Noninterest expense was $3.3 billion, an increase of 13% driven by hiring of bankers and business-related support staff, investments in technology, and an impairment of approximately $130 million on certain leased equipment, the majority of which was sold subsequent to year-end.
The provision for credit losses was a benefit of $276 million, driven by net reductions in the allowance for credit
losses,
including in the Oil & Gas, Natural Gas Pipelines and Metals & Mining portfolios. The prior year provision for credit losses was $282 million driven by downgrades in the Oil & Gas portfolio and select client downgrades in other industries.
2016 compared with 2015
Net income was $2.7 billion, an increase of 21% compared with the prior year, driven by higher net revenue and a lower provision for credit losses, partially offset by higher noninterest expense.
Net revenue was $7.5 billion, an increase of 8% compared with the prior year. Net interest income was $5.1 billion, an increase of 14% compared with the prior year, driven by higher loan balances and deposit spreads. Noninterest revenue was $2.3 billion, a decrease of 2% compared with the prior year, largely driven by lower
lending-and-deposit-related fees and other revenue, partially offset by higher investment banking revenue.
Noninterest expense was $2.9 billion, an increase of 2% compared with the prior year, reflecting increased hiring of bankers and business-related support staff and investments in technology.
The provision for credit losses was $282 million and $442 million for 2016 and 2015, respectively, with both periods driven by downgrades in the Oil & Gas portfolio and select client downgrades in other industries.
JPMorgan Chase & Co./2017 Annual Report
67
Management’s
discussion and analysis
CB product revenue consists of the following:
Lending includes a variety of financing alternatives, which are primarily provided on a secured basis; collateral includes receivables, inventory, equipment, real estate or other assets. Products include term loans, revolving lines of credit, bridge financing, asset-based structures, leases, and standby letters of credit.
Treasury services includes revenue
from a broad range of products and services that enable CB clients to manage payments and receipts, as well as invest and manage funds.
Investment banking includes revenue from a range of products providing CB clients with sophisticated capital-raising alternatives, as well as balance sheet and risk management tools through advisory, equity underwriting, and loan syndications. Revenue from Fixed Income and Equity Markets products used by CB clients is also included.
Other product revenue primarily includes tax-equivalent adjustments generated from Community Development Banking activities and certain income derived from principal transactions.
CB
is divided into four primary client segments: Middle Market Banking, Corporate Client Banking, Commercial Term Lending, and Real Estate Banking.
Middle Market Banking covers corporate, municipal and nonprofit clients, with annual revenue generally ranging between $20 million and $500 million.
Corporate Client Banking covers clients with annual revenue generally ranging between $500 million and $2 billion and focuses on clients that have broader investment banking needs.
Commercial Term Lending primarily provides term financing to real estate investors/owners for multifamily properties as well as office, retail and industrial properties.
Real
Estate Banking provides full-service banking to investors and developers of institutional-grade real estate investment properties.
Other primarily includes lending and investment-related activities within the Community Development Banking business.
Selected income statement data (continued)
Year
ended December 31,
(in millions, except ratios)
2017
2016
2015
Revenue by product
Lending
$
4,094
$
3,795
$
3,429
Treasury
services
3,444
2,797
2,581
Investment banking(a)
805
785
730
Other(b)
262
76
145
Total
Commercial Banking net revenue
$
8,605
$
7,453
$
6,885
Investment
banking revenue, gross(c)
$
2,327
$
2,286
$
2,179
Revenue
by client segment
Middle Market Banking(d)
$
3,341
$
2,848
$
2,685
Corporate
Client Banking(d)
2,727
2,429
2,205
Commercial Term Lending
1,454
1,408
1,275
Real
Estate Banking
604
456
358
Other(b)
479
312
362
Total
Commercial Banking net revenue
$
8,605
$
7,453
$
6,885
Financial
ratios
Return on equity
17
%
16
%
15
%
Overhead
ratio
39
39
42
(a)
Includes total Firm revenue from investment banking products sold to CB clients, net of revenue sharing with the CIB.
(b)
The
2017 results reflect the impact of the enactment of the TCJA including a benefit of $115 million on certain investments in the Community Development Banking business. For additional information related to the impact of the TCJA, see Note 24.
(c)
Represents total Firm revenue from investment banking products sold to CB clients.
(d)
Certain clients were transferred from Middle Market Banking to Corporate Client Banking in the second quarter of 2017. The prior period
amounts have been revised to conform with the current period presentation.
68
JPMorgan Chase & Co./2017 Annual Report
Selected
metrics
As of or for the year ended December 31, (in millions, except headcount)
2017
2016
2015
Selected balance sheet data (period-end)
Total
assets
$
221,228
$
214,341
$
200,700
Loans:
Loans
retained
202,400
188,261
167,374
Loans held-for-sale and loans at fair value
1,286
734
267
Total
loans
$
203,686
$
188,995
$
167,641
Core loans
203,469
188,673
166,939
Equity
20,000
16,000
14,000
Period-end
loans by client segment
Middle Market Banking(a)
$
56,965
$
53,929
$
50,501
Corporate
Client Banking(a)
46,963
43,027
37,709
Commercial Term Lending
74,901
71,249
62,860
Real
Estate Banking
17,796
14,722
11,234
Other
7,061
6,068
5,337
Total
Commercial Banking loans
$
203,686
$
188,995
$
167,641
Selected
balance sheet data (average)
Total assets
$
217,047
$
207,532
$
198,076
Loans:
Loans
retained
197,203
178,670
157,389
Loans held-for-sale and loans at fair value
909
723
492
Total
loans
$
198,112
$
179,393
$
157,881
Core loans
197,846
178,875
156,975
Client
deposits and other third-party liabilities
177,018
174,396
191,529
Equity
20,000
16,000
14,000
Average
loans by client segment
Middle Market Banking(a)
$
55,474
$
52,242
$
50,334
Corporate
Client Banking(a)
46,037
41,756
34,497
Commercial Term Lending
73,428
66,700
58,138
Real
Estate Banking
16,525
13,063
9,917
Other
6,648
5,632
4,995
Total
Commercial Banking loans
$
198,112
$
179,393
$
157,881
Headcount
9,005
8,365
7,845
(a)
Certain
clients were transferred from Middle Market Banking to Corporate Client Banking in the second quarter of 2017. The prior period amounts have been revised to conform with the current period presentation.
Selected metrics
As
of or for the year ended December 31, (in millions, except ratios)
2017
2016
2015
Credit data and quality statistics
Net charge-offs/(recoveries)
$
39
$
163
$
21
Nonperforming
assets
Nonaccrual loans:
Nonaccrual loans retained(a)
617
1,149
375
Nonaccrual
loans held-for-sale and loans at fair value
—
—
18
Total nonaccrual loans
617
1,149
393
Assets
acquired in loan satisfactions
3
1
8
Total nonperforming assets
620
1,150
401
Allowance
for credit losses:
Allowance for loan losses
2,558
2,925
2,855
Allowance
for lending-related commitments
300
248
198
Total allowance for credit losses
2,858
3,173
3,053
Net
charge-off/(recovery) rate(b)
0.02
%
0.09
%
0.01
%
Allowance for loan losses to period-end loansretained
1.26
1.55
1.71
Allowance
for loan losses to nonaccrual loans retained(a)
415
255
761
Nonaccrual loans to period-end total loans
0.30
0.61
0.23
(a)
Allowance
for loan losses of $92 million, $155 million and $64 million was held against nonaccrual loans retained at December 31, 2017, 2016 and 2015, respectively.
(b)
Loans held-for-sale and loans at fair value were excluded when calculating the net charge-off/(recovery) rate.
JPMorgan
Chase & Co./2017 Annual Report
69
Management’s discussion and analysis
ASSET & WEALTH MANAGEMENT
Asset & Wealth
Management, with client assets of $2.8 trillion, is a global leader in investment and wealth management. AWM clients include institutions, high-net-worth individuals and retail investors in many major markets throughout the world. AWM offers investment management across most major asset classes including equities, fixed income, alternatives and money market funds. AWM also offers multi-asset investment management, providing solutions for a broad range of clients’ investment needs. For Wealth Management clients, AWM also provides retirement products and services, brokerage and banking services including trusts and estates, loans, mortgages and deposits. The majority of AWM’s client assets are in actively managed portfolios.
Selected
income statement data
Year ended December 31,
(in millions, except ratios
and headcount)
2017
2016
2015
Revenue
Asset
management, administration and commissions
$
8,946
$
8,414
$
9,175
All other income
593
598
388
Noninterest
revenue
9,539
9,012
9,563
Net interest income
3,379
3,033
2,556
Total
net revenue
12,918
12,045
12,119
Provision for credit losses
39
26
4
Noninterest
expense
Compensation expense
5,318
5,065
5,113
Noncompensation expense
3,983
3,413
3,773
Total
noninterest expense
9,301
8,478
8,886
Income before income tax expense
3,578
3,541
3,229
Income
tax expense
1,241
1,290
1,294
Net income
$
2,337
$
2,251
$
1,935
Revenue
by line of business
Asset Management
$
6,340
$
5,970
$
6,301
Wealth
Management
6,578
6,075
5,818
Total net revenue
$
12,918
$
12,045
$
12,119
Financial
ratios
Return on common equity
25
%
24
%
21
%
Overhead ratio
72
70
73
Pre-tax
margin ratio:
Asset Management
25
31
31
Wealth Management
30
28
22
Asset
& Wealth Management
28
29
27
Headcount
22,975
21,082
20,975
Number
of Wealth Management client advisors
2,605
2,504
2,778
2017 compared with 2016
Net income was $2.3 billion, an increase of 4% compared with the prior year, reflecting higher revenue and a tax benefit resulting from the vesting of employee share-based awards, offset
by higher noninterest expense.
Net revenue was $12.9 billion, an increase of 7%. Net interest income was $3.4 billion, up 11%, driven by higher deposit spreads. Noninterest revenue was $9.5 billion, up 6%, driven by higher market levels, partially offset by the absence of a gain in the prior year on the disposal of an asset.
Revenue from Asset Management was $6.3 billion, up 6% from the prior year, driven by higher market levels, partially offset by the absence of a gain in prior year on the disposal of an asset. Revenue from Wealth Management was $6.6 billion, up 8% from the prior year, reflecting higher net interest income from higher deposit
spreads.
Noninterest expense was $9.3 billion, an increase of 10%, predominantly driven by higher legal expense and compensation expense on higher revenue and headcount.
2016 compared with 2015
Net income was $2.3 billion, a decrease of 16% compared with the prior year, reflecting lower noninterest expense, predominantly offset by lower net revenue.
Net revenue was $12.0 billion, a decrease of 1%. Net interest income was $3.0 billion, up 19%, driven by higher loan balances and spreads. Noninterest revenue was $9.0 billion, a decrease of 6%, reflecting the impact of lower average equity market levels, a
reduction in revenue related to the disposal of assets at the beginning of 2016, and lower performance fees and placement fees.
Revenue from Asset Management was $6.0 billion, down 5% from the prior year, driven by a reduction in revenue related to the disposal of assets at the beginning of 2016, the impact of lower average equity market levels and lower performance fees. Revenue from Wealth Management was $6.1 billion, up 4% from the prior year, reflecting higher net interest income from higher deposit and loan spreads and continued loan growth, partially offset by the impact of lower average equity market levels and lower placement fees.
Noninterest expense was $8.5 billion, a decrease of 5%, predominantly due to a reduction in expense related to the disposal of assets at the beginning of 2016 and lower legal expense.
70
JPMorgan
Chase & Co./2017 Annual Report
AWM’s lines of business consist of the following:
Asset Management provides comprehensive global investment services, including asset management, pension analytics, asset-liability management and active risk-budgeting strategies.
Wealth Management offers investment advice and wealth management,
including investment management, capital markets and risk management, tax and estate planning, banking, lending and specialty-wealth advisory services.
AWM’s client segments consist of the following:
Private Banking clients include high- and ultra-high-net-worth individuals, families, money managers, business owners and small corporations worldwide.
Institutional clients include both corporate and public institutions, endowments, foundations, nonprofit
organizations and governments worldwide.
Retail clients include financial intermediaries and individual investors.
Asset Management has two high-level measures of its overall fund performance.
• Percentage of mutual fund assets under management in funds rated 4- or 5-star: Mutual fund rating services rank funds based on their risk-adjusted performance over various periods. A 5-star rating is the best rating and represents
the top 10% of industry-wide ranked funds. A 4-star rating represents the next 22.5% of industry-wide ranked funds. A 3-star rating represents the next 35% of industry-wide ranked funds. A 2-star rating represents the next 22.5% of industry-wide ranked funds. A 1-star rating is the worst rating and represents the bottom 10% of industry-wide ranked funds. The “overall Morningstar rating” is derived from a weighted average of the performance associated with a fund’s three-, five- and ten-year (if applicable) Morningstar Rating metrics. For U.S. domiciled funds, separate star ratings are given at the individual share class level. The Nomura “star rating” is based on three-year risk-adjusted performance only. Funds with fewer than three years of history are not rated and hence excluded
from this analysis. All ratings, the assigned peer categories and the asset values used to derive this analysis are sourced from these fund rating providers mentioned in footnote (a). The data providers re-denominate the asset values into U.S. dollars. This % of AUM is based on star ratings at the share class level for U.S. domiciled funds, and at a “primary share class” level to represent the star rating of all other funds except for Japan where Nomura provides ratings at the fund level. The “primary share class”, as defined by Morningstar, denotes the share class recommended as being the best proxy for the portfolio and in most cases will be the most retail version (based upon annual management charge, minimum investment, currency and other factors). The performance data could have been different if all funds/accounts would have been included. Past performance is
not indicative of future results.
• Percentage of mutual fund assets under management in funds ranked in the 1st or 2nd quartile (one, three and five years): All quartile rankings, the assigned peer categories and the asset values used to derive this analysis are sourced from the fund ranking providers mentioned in footnote (c). Quartile rankings are done on the net-of-fee absolute return of each fund. The data providers re-denominate the asset values into U.S. dollars. This % of AUM is based on fund performance and associated peer rankings at the share class level for U.S. domiciled funds, at a “primary share class” level to represent the quartile ranking of the U.K., Luxembourg and Hong Kong funds and at the fund level for all other funds.
The “primary share class”, as defined by Morningstar, denotes the share class recommended as being the best proxy for the portfolio and in most cases will be the most retail version (based upon annual management charge, minimum investment, currency and other factors). Where peer group rankings given for a fund are in more than one “primary share class” territory both rankings are included to reflect local market competitiveness (applies to “Offshore Territories” and “HK SFC Authorized” funds only). The performance data could have been different if all funds/accounts would have been included. Past performance is not indicative of future results.
Selected
metrics
As of or for the year ended December 31,
(in millions, except ranking data and ratios)
2017
2016
2015
% of JPM mutual fund assets rated as 4- or 5-star(a)(b)
60
%
63
%
52
%
%
of JPM mutual fund assets ranked in 1st or 2nd
quartile:(c)
1 year
64
54
62
3
years
75
72
78
5 years(b)
83
79
79
Selected
balance sheet data (period-end)
Total assets
$
151,909
$
138,384
$
131,451
Loans
130,640
118,039
111,007
Core
loans
130,640
118,039
111,007
Deposits
146,407
161,577
146,766
Equity
9,000
9,000
9,000
Selected
balance sheet data (average)
Total assets
$
144,206
$
132,875
$
129,743
Loans
123,464
112,876
107,418
Core
loans
123,464
112,876
107,418
Deposits
148,982
153,334
149,525
Equity
9,000
9,000
9,000
Credit
data and quality statistics
Net charge-offs
$
14
$
16
$
12
Nonaccrual
loans
375
390
218
Allowance for credit losses:
Allowance for loan losses
290
274
266
Allowance
for lending-related commitments
10
4
5
Total allowance for credit losses
300
278
271
Net
charge-off rate
0.01
%
0.01
%
0.01
%
Allowance for loan losses to period-end loans
0.22
0.23
0.24
Allowance
for loan losses to nonaccrual loans
77
70
122
Nonaccrual loans to period-end loans
0.29
0.33
0.20
(a)
Represents
the “overall star rating” derived from Morningstar for the U.S., the U.K., Luxembourg, Hong Kong and Taiwan domiciled funds; and Nomura “star rating” for Japan domiciled funds. Includes only Asset Management retail open-ended mutual funds that have a rating. Excludes money market funds, Undiscovered Managers Fund, and Brazil domiciled funds.
(b)
The prior period amounts have been revised to conform with the current period presentation.
(c)
Quartile ranking sourced from: Lipper for the U.S. and Taiwan
domiciled funds; Morningstar for the U.K., Luxembourg and Hong Kong domiciled funds; Nomura for Japan domiciled funds and Fund Doctor for South Korea domiciled funds. Includes only Asset Management retail open-ended mutual funds that are ranked by the aforementioned sources. Excludes money market funds, Undiscovered Managers Fund, and Brazil domiciled funds.
JPMorgan Chase & Co./2017 Annual Report
71
Management’s discussion and analysis
Client
assets
2017 compared with 2016
Client assets were $2.8 trillion, an increase of 14% compared with the prior year. Assets under management were $2.0 trillion, an increase of 15% from the prior year reflecting higher market levels, and net inflows into long-term and liquidity products.
2016 compared with 2015
Client assets were $2.5 trillion, an increase of 4% compared with the prior year. Assets under management were $1.8 trillion, an increase of 3% from the prior year reflecting inflows into both liquidity and long-term products and the effect of higher market levels, partially offset by asset sales at
the beginning of 2016.
Client assets
December 31,
(in billions)
2017
2016
2015
Assets
by asset class
Liquidity(a)
$
459
$
436
$
430
Fixed
income(a)
474
420
376
Equity
428
351
353
Multi-asset
and alternatives
673
564
564
Total assets under management
2,034
1,771
1,723
Custody/brokerage/
administration/deposits
755
682
627
Total
client assets
$
2,789
$
2,453
$
2,350
Memo:
Alternatives
client assets(b)
$
166
$
154
$
172
Assets
by client segment
Private Banking
$
526
$
435
$
437
Institutional
968
869
816
Retail
540
467
470
Total
assets under management
$
2,034
$
1,771
$
1,723
Private
Banking
$
1,256
$
1,098
$
1,050
Institutional
990
886
824
Retail
543
469
476
Total
client assets
$
2,789
$
2,453
$
2,350
(a)
The prior period amounts have been revised to conform with the current period presentation.
(b)
Represents
assets under management, as well as client balances in brokerage accounts.
Client assets (continued)
Year ended December 31,
(in billions)
2017
2016
2015
Assets
under management rollforward
Beginning balance
$
1,771
$
1,723
$
1,744
Net
asset flows:
Liquidity
9
24
—
Fixed income
36
30
(8
)
Equity
(11
)
(29
)
1
Multi-asset
and alternatives
43
22
22
Market/performance/other impacts
186
1
(36
)
Ending
balance, December 31
$
2,034
$
1,771
$
1,723
Client
assets rollforward
Beginning balance
$
2,453
$
2,350
$
2,387
Net
asset flows
93
63
27
Market/performance/other impacts
243
40
(64
)
Ending
balance, December 31
$
2,789
$
2,453
$
2,350
International
metrics
Year ended December 31,
(in billions, except where otherwise noted)
2017
2016
2015
Total net revenue (in millions)(a)
Europe/Middle East/Africa
$
2,021
$
1,849
$
1,946
Asia/Pacific
1,162
1,077
1,130
Latin
America/Caribbean
844
726
795
Total international net revenue
4,027
3,652
3,871
North
America
8,891
8,393
8,248
Total net revenue
$
12,918
$
12,045
$
12,119
Assets
under management
Europe/Middle East/Africa
$
384
$
309
$
302
Asia/Pacific
160
123
123
Latin
America/Caribbean
61
45
45
Total international assets under management
605
477
470
North
America
1,429
1,294
1,253
Total assets under management
$
2,034
$
1,771
$
1,723
Client
assets
Europe/Middle East/Africa
$
441
$
359
$
351
Asia/Pacific
225
177
173
Latin
America/Caribbean
154
114
110
Total international client assets
820
650
634
North
America
1,969
1,803
1,716
Total client assets
$
2,789
$
2,453
$
2,350
(a)
Regional revenue is based on the domicile of the client.
72
JPMorgan Chase & Co./2017 Annual Report
CORPORATE
The Corporate segment consists of Treasury and Chief Investment Office and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO is predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding and structural interest rate and foreign exchange risks, as well as executing the Firm’s capital plan. The major Other Corporate units include Real Estate, Enterprise Technology, Legal, Finance, Human Resources, Internal Audit, Risk Management, Compliance, Oversight & Controls, Corporate Responsibility and various Other Corporate groups.
Selected
income statement data
Year ended December 31,
(in millions, except headcount)
2017
2016
2015
Revenue
Principal
transactions
$
284
$
210
$
41
Securities gains/(losses)
(66
)
140
190
All
other income/(loss)(a)
867
588
569
Noninterest revenue
1,085
938
800
Net
interest income
55
(1,425
)
(533
)
Total net revenue(b)
1,140
(487
)
267
Provision
for credit losses
—
(4
)
(10
)
Noninterest
expense(c)
501
462
977
Income/(loss) before income tax benefit
639
(945
)
(700
)
Income
tax expense/(benefit)
2,282
(241
)
(3,137
)
Net income/(loss)
$
(1,643
)
$
(704
)
$
2,437
Total
net revenue
Treasury and CIO
566
(787
)
(493
)
Other
Corporate
574
300
760
Total net revenue
$
1,140
$
(487
)
$
267
Net
income/(loss)
Treasury and CIO
60
(715
)
(235
)
Other
Corporate
(1,703
)
11
2,672
Total net income/(loss)
$
(1,643
)
$
(704
)
$
2,437
Total
assets (period-end)
$
781,478
$
799,426
$
768,204
Loans (period-end)
1,653
1,592
2,187
Core
loans(d)
1,653
1,589
2,182
Headcount
35,261
32,358
29,617
(a)
Included
revenue related to a legal settlement of $645 million for the year ended December 31, 2017.
(b)
Included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $905 million, $885 million and $839 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(c)
Included
legal expense/(benefit) of $(593) million, $(385) million and $832 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(d)
Average core loans were $1.6 billion, $1.9 billion and $2.5 billion for the years ended December 31, 2017, 2016 and 2015,
respectively.
2017 compared with 2016
Net loss was $1.6 billion, compared with a net loss of $704 million in the prior year. The current year net loss included a $2.7 billion increase to income tax expense related to the impact of the TCJA.
Net revenue was $1.1 billion, compared with a loss of $487 million in the prior year. The increase in current year net revenue was driven by a $645 million benefit from a legal settlement with the FDIC receivership for Washington Mutual and with Deutsche Bank as trustee of certain Washington Mutual trusts and by the net impact of higher interest rates.
Net interest income
was $55 million, compared with a loss of $1.4 billion in the prior year. The gain in the current year was primarily driven by higher interest income on deposits with banks due to higher interest rates and balances, partially offset by higher interest expense on long-term debt primarily driven by higher interest rates.
2016 compared with 2015
Net loss was $704 million, compared with net income of $2.4 billion in the prior year.
Net revenue was a loss of $487 million, compared with a gain of $267 million in the prior year. The prior year included a $514 million benefit from a legal settlement.
Net interest income was a loss of $1.4 billion, compared with a loss of $533 million in the prior year. The loss in the current year was primarily driven
by higher interest expense on long-term debt and lower investment securities balances during the year, partially offset by higher interest income on deposits with banks and securities purchased under resale agreements as a result of higher interest rates.
Noninterest expense was $462 million, a decrease of $515 million from the prior year driven by lower legal expense, partially offset by higher compensation expense.
The prior year reflected tax benefits of $2.6 billion predominantly from the resolution of various tax audits.
JPMorgan Chase & Co./2017 Annual Report
73
Management’s
discussion and analysis
Treasury and CIO overview
Treasury and CIO is predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding and structural interest rate and foreign exchange risks, as well as executing the Firm’s capital plan. The risks managed by Treasury and CIO arise from the activities undertaken by the Firm’s four major reportable business segments to serve their respective client bases, which generate both on- and off-balance sheet assets and liabilities.
Treasury and CIO seek to achieve the Firm’s asset-liability
management objectives generally by investing in high-quality securities that are managed for the longer-term as part of the Firm’s investment securities portfolio. Treasury and CIO also use derivatives to meet the Firm’s asset-liability management objectives. For further information on derivatives, see Note 5. The investment securities portfolio primarily consists of agency and nonagency mortgage-backed securities, U.S. and non-U.S. government securities, obligations of U.S. states and municipalities, other ABS and corporate debt securities. At December 31, 2017, the investment securities portfolio was $248.0 billion, and the average credit rating of the securities comprising the portfolio was AA+
(based upon external ratings where available and where not available, based primarily upon internal ratings that correspond to ratings as defined by S&P and Moody’s). See Note 10 for further information on the details of the Firm’s investment securities portfolio.
For further information on liquidity and funding risk, see Liquidity Risk Management on pages 92–97. For information on interest rate, foreign exchange and other risks, see Market Risk Management on pages 121-128.
Selected
income statement and balance sheet data
As of or for the year ended December 31, (in millions)
2017
2016
2015
Securities gains/(losses)
$
(78
)
$
132
$
190
AFS
investment securities (average)
219,345
226,892
264,758
HTM investment securities (average)
47,927
51,358
50,044
Investment
securities portfolio (average)
267,272
278,250
314,802
AFS investment securities (period-end)
200,247
236,670
238,704
HTM
investment securities (period-end)
47,733
50,168
49,073
Investment securities portfolio (period–end)
247,980
286,838
287,777
74
JPMorgan
Chase & Co./2017 Annual Report
ENTERPRISE-WIDE RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chase’s business activities. When the Firm extends a consumer or wholesale loan, advises customers on their investment decisions, makes markets in securities, or offers other products or services, the Firm takes on some degree of risk. The Firm’s overall objective is to manage its businesses,
and the associated risks, in a manner that balances serving the interests of its clients, customers and investors and protects the safety and soundness of the Firm.
The Firm believes that effective risk management requires:
•
Acceptance of responsibility, including identification and escalation of risk issues, by all individuals within the Firm;
•
Ownership of risk identification, assessment, data and management
within each of the lines of business and corporate functions; and
•
Firmwide structures for risk governance.
The Firm strives for continual improvement through efforts to enhance controls, ongoing employee training and development, talent retention, and other measures. The Firm follows a disciplined and balanced compensation framework with strong internal governance and independent Board oversight. The impact of risk and control issues are carefully considered in the Firm’s performance evaluation and incentive compensation processes.
Firmwide
Risk Management is overseen and managed on an enterprise-wide basis. The Firm’s approach to risk management involves understanding drivers of risks, risk types, and impacts of risks.
Drivers of risk include, but are not limited to, the economic environment, regulatory or government policy, competitor or market evolution, business decisions, process or judgment error, deliberate wrongdoing, dysfunctional markets, and natural disasters.
The Firm’s risks are generally categorized in the following four risk types:
•
Strategic risk is the risk associated with the Firm’s current and future business plans and objectives, including capital risk, liquidity risk, and the impact
to the Firm’s reputation.
•
Credit and investment risk is the risk associated with the default or change in credit profile of a client, counterparty or customer; or loss of principal or a reduction in expected returns on investments, including consumer credit risk, wholesale credit risk, and investment portfolio risk.
•
Market risk is the risk associated with the effect of changes in market factors, such as interest and foreign exchange rates, equity and commodity prices, credit spreads or implied volatilities, on
the value of assets and liabilities held for both the short and long term.
•
Operational risk is the risk associated with inadequate or failed internal processes, people and systems, or from external events and includes compliance risk, conduct risk, legal risk, and estimations and model risk.
There may be many consequences of risks manifesting, including quantitative impacts such as reduction in earnings and capital, liquidity outflows, and fines or penalties, or qualitative impacts, such as reputation damage, loss of clients, and regulatory and enforcement actions.
JPMorgan
Chase & Co./2017 Annual Report
75
Management’s discussion and analysis
The Firm has established Firmwide risk management functions to manage different risk types. The scope of a particular risk management function may include multiple risk types. For example, the Firm’s Country Risk Management function oversees country risk which may be a driver of risk or an aggregation of exposures that could give rise to multiple risk types such as credit or market risk. The following sections discuss how the Firm manages the key risks that are inherent in its business activities.
Risk
Oversight
Definition
Page
references
Strategic risk
The risk associated with the Firm’s current and future business plans and objectives.
81
Capital risk
The risk that the Firm has an insufficient level and composition of capital to support the Firm’s business activities and associated risks during normal economic
environments and under stressed conditions.
82–91
Liquidity risk
The risk that the Firm will be unable to meet its contractual and contingent financial obligations as they arise or that it does not have the appropriate amount, composition and tenor of funding and liquidity to support its assets and liabilities.
92–97
Reputation risk
The potential that an action, inaction, transaction, investment or event will reduce trust in the Firm’s integrity or competence by its
various constituents, including clients, counterparties, investors, regulators, employees and the broader public.
98
Consumer credit risk
The risk associated with the default or change in credit profile of a customer.
102–107
Wholesale credit risk
The risk associated with the default or change in credit profile of a client or counterparty.
108–116
Investment
portfolio risk
The risk associated with the loss of principal or a reduction in expected returns on investments arising from the investment securities portfolio held by Treasury and CIO in connection with the Firm’s balance sheet or asset-liability management objectives or from principal investments managed in various lines of business in predominantly privately-held financial assets and instruments.
120
Market risk
The risk associated with the effect of changes in market factors, such as interest and foreign exchange rates, equity and commodity prices, credit spreads or implied volatilities, on the value
of assets and liabilities held for both the short and long term.
121–128
Country risk
The framework for monitoring and assessing how financial, economic, political or other significant developments adversely affect the value of the Firm’s exposures related to a particular country or set of countries.
129–130
Operational risk
The risk associated with inadequate or failed internal processes, people and systems, or from external events.
131–133
Compliance
risk
The risk of failure to comply with applicable laws, rules, and regulations.
134
Conduct risk
The risk that any action or inaction by an employee of the Firm could lead to unfair client/customer outcomes, compromise the Firm’s reputation, impact the integrity of the markets in which the Firm operates, or reflect poorly on the Firm’s culture.
135
Legal risk
The
risk of loss primarily caused by the actual or alleged failure to meet legal obligations that arise from the rule of law in jurisdictions in which the Firm operates, agreements with clients and customers, and products and services offered by the Firm.
136
Estimations and Model risk
The risk of the potential for adverse consequences from decisions based on incorrect or misused estimation outputs.
137
76
JPMorgan
Chase & Co./2017 Annual Report
Governance and oversight
The Firm’s overall appetite for risk is governed by a “Risk Appetite” framework. The framework and the Firm’s risk appetite are set and approved by the Firm’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Risk Officer (“CRO”). LOB-level risk appetite is set by the respective LOB CEO, CFO and CRO and is approved by the Firm’s CEO, CFO and CRO. Quantitative parameters and qualitative factors are used to monitor and measure the Firm’s capacity to take risk consistent with its stated risk appetite. Quantitative parameters have been established to assess select strategic risks, credit risks and market risks. Qualitative factors have been established for select operational
risks, and for reputation risks. Risk Appetite results are reported quarterly to the Board of Directors’ Risk Policy Committee (“DRPC”).
The Firm has an Independent Risk Management (“IRM”) function, which consists of the Risk Management and Compliance organizations. The CEO appoints, subject to DRPC approval, the Firm’s CRO to lead the IRM organization and manage the risk governance framework of the Firm. The framework is subject to approval by the DRPC in the form of the primary risk management policies. The Chief Compliance Officer (“CCO”), who reports to the CRO, is also responsible for reporting to the Audit Committee for the Global Compliance Program. The Firm’s Global Compliance Program focuses on overseeing compliance with laws, rules and regulations applicable to the Firm’s products and services to clients and counterparties.
The
Firm places reliance on each of its LOBs and other functional areas giving rise to risk. Each LOB and other functional area giving rise to risk is expected to operate within the parameters identified by the IRM function, and within its own management-identified risk and control standards. The LOBs, inclusive of LOB aligned Operations, Technology and Oversight & Controls, are the “first line of defense” in identifying and managing the risk in their activities, including but not limited to applicable laws, rules and regulations.
The IRM function is independent of the businesses and forms “the second line of defense”. The IRM function sets and oversees various standards for the risk governance framework, including risk policy, identification, measurement, assessment, testing, limit setting, monitoring and reporting, and conducts independent challenge of adherence to such standards.
The Internal Audit function operates independently from other parts of the Firm and performs independent testing and evaluation of firmwide processes and controls across the entire enterprise as the Firm’s “third line of defense” in managing risk. The Internal Audit Function is headed by the General Auditor, who reports to the Audit Committee.
In addition, there are other functions that contribute to the firmwide control environment including Finance, Human Resources, Legal, and Corporate Oversight & Control.
JPMorgan Chase & Co./2017
Annual Report
77
Management’s discussion and analysis
The independent status of the IRM function is supported by a governance structure that provides for escalation of risk issues to senior management, the Firmwide Risk Committee, and the Board of Directors, as appropriate.
The chart below illustrates the Board of Directors and key senior management level committees in the Firm’s risk governance structure. In addition, there are other committees, forums and paths of escalation that support the oversight of risk, not shown in the chart below.
The
Firm’s Operating Committee, which consists of the Firm’s CEO, CRO, CFO and other senior executives, is the ultimate management escalation point in the Firm and may refer matters to the Firm’s Board of Directors. The Operating Committee is accountable to the Firm’s Board of Directors.
The Board of Directors provides oversight of risk principally through the DRPC, the Audit Committee and, with respect to compensation and other management-related matters, the Compensation & Management Development Committee. Each committee of the Board oversees reputation risk and conduct risk issues within its scope of responsibility.
The Directors’ Risk Policy Committee of the Board oversees the Firm’s global risk management framework and approves the primary risk management policies of the Firm. The
Committee’s responsibilities include oversight of management’s exercise of its responsibility to assess and manage the Firm’s risks, and its capital and liquidity planning and analysis. Breaches in risk appetite, liquidity issues that may have a material adverse impact on the Firm and other significant risk-related matters are escalated to the DRPC.
78
JPMorgan Chase & Co./2017 Annual Report
The Audit Committee of the Board assists
the Board in its oversight of management’s responsibilities to assure that there is an effective system of controls reasonably designed to safeguard the assets and income of the Firm, assure the integrity of the Firm’s financial statements and maintain compliance with the Firm’s ethical standards, policies, plans and procedures, and with laws and regulations. In addition, the Audit Committee assists the Board in its oversight of the Firm’s independent registered public accounting firm’s qualifications, independence and performance, and of the performance of the Firm’s Internal Audit function.
The Compensation & Management Development Committee (“CMDC”) assists the Board in its oversight of the Firm’s compensation programs and reviews and approves the Firm’s overall compensation philosophy, incentive compensation pools, and compensation practices
consistent with key business objectives and safety and soundness. The CMDC reviews Operating Committee members’ performance against their goals, and approves their compensation awards. The CMDC also periodically reviews the Firm’s diversity programs and management development and succession planning, and provides oversight of the Firm’s culture and conduct programs.
Among the Firm’s senior management-level committees that are primarily responsible for key risk-related functions are:
The Firmwide Risk Committee (“FRC”) is the Firm’s highest management-level risk committee. It provides oversight of the risks inherent in the Firm’s businesses. The FRC is co-chaired by the Firm’s CEO and CRO. The FRC serves as an escalation point for risk topics and issues raised by its members, the Line of Business Risk Committees, Firmwide Control Committee, Firmwide
Fiduciary Risk Governance Committee, Firmwide Estimations Risk Committee, Culture and Conduct Risk Committee and regional Risk Committees, as appropriate. The FRC escalates significant issues to the DRPC, as appropriate.
The Firmwide Control Committee (“FCC”) provides a forum for senior management to review and discuss firmwide operational risks, including existing and emerging issues and operational risk metrics, and to review operational risk management execution in the context of the Operational Risk Management Framework (“ORMF”). The ORMF provides the framework for the governance, risk identification and assessment, measurement, monitoring and reporting of operational risk. The FCC is co-chaired by the Chief Control Officer and the Firmwide Risk Executive for Operational Risk Governance.
The FCC relies on the prompt escalation of operational risk and control issues from businesses and functions as the primary owners of the operational risk. Operational risk and control issues may be escalated by business or function control committees to the FCC, which in turn, may escalate to the FRC, as appropriate.
The Firmwide Fiduciary Risk Governance Committee (“FFRGC”) is a forum for risk matters related to the Firm’s fiduciary activities. The FFRGC oversees the firmwide fiduciary risk governance framework, which supports the consistent identification and escalation of fiduciary risk issues by the relevant lines of business; approves risk or compliance policy exceptions requiring FFRGC approval; approves the scope and/or expansion of the Firm’s fiduciary framework; and reviews metrics to track fiduciary activity and issue resolution Firmwide.
The FFRGC is co-chaired by the Asset Management CEO and the Asset & Wealth Management CRO. The FFRGC escalates significant fiduciary issues to the FRC, the DRPC and the Audit Committee, as appropriate.
The Firmwide Estimations Risk Committee (“FERC”) reviews and oversees governance and execution activities related to models and certain analytical and judgment based estimations, such as those used in risk management, budget forecasting and capital planning and analysis. The FERC is chaired by the Firmwide Risk Executive for Model Risk Governance and Review. The FERC serves as an escalation channel for relevant topics and issues raised by its members and the Line of Business Estimation Risk Committees. The FERC escalates significant issues to the FRC, as appropriate.
The
Culture and Conduct Risk Committee (“CCRC”) provides oversight of culture and conduct initiatives to develop a more holistic view of conduct risks and to connect key programs across the Firm to identify opportunities and emerging areas for focus. The CCRC is co-chaired by the Chief Culture & Conduct Officer and the Conduct Risk Compliance Executive. The CCRC escalates significant issues to the FRC, as appropriate.
Line of Business and Regional Risk Committees review the ways in which the particular line of business or the business operating in a particular region could be exposed to adverse outcomes with a focus on identifying, accepting, escalating and/or requiring remediation of matters brought to these committees. These committees may escalate to the FRC, as appropriate. LOB risk committees are co-chaired by the LOB CEO and the LOB CRO. Each
LOB risk committee may create sub-committees with requirements for escalation. The regional committees are established similarly, as appropriate, for the region.
In addition, each line of business and function is required to have a Control Committee. These control committees oversee the control environment of their respective business or function. As part of that mandate, they are responsible for reviewing data which indicates the quality and stability of the processes in a business or function, reviewing key operational risk issues and focusing on processes with shortcomings and overseeing process remediation. These committees escalate issues to the FCC, as appropriate.
JPMorgan
Chase & Co./2017 Annual Report
79
Management’s discussion and analysis
The Firmwide Asset Liability Committee (“ALCO”), chaired by the Firm’s Treasurer and Chief Investment Officer under the direction of the CFO, monitors the Firm’s balance sheet, liquidity risk and structural interest rate risk. ALCO reviews the Firm’s overall structural interest rate risk position, and the Firm’s funding requirements and strategy. ALCO is responsible for reviewing and approving the Firm’s Funds Transfer Pricing Policy (through which lines of business “transfer” interest rate risk and liquidity risk to Treasury and CIO),
the Firm’s Intercompany Funding and Liquidity Policy and the Firm’s Contingency Funding Plan.
The Firmwide Capital Governance Committee, chaired by the Head of the Regulatory Capital Management Office, is responsible for reviewing the Firm’s Capital Management Policy and the principles underlying capital issuance and distribution alternatives and decisions. The Committee oversees the capital adequacy assessment process, including the overall design, scenario development and macro assumptions, and ensures that capital stress test programs are designed to adequately capture the risks specific to the Firm’s businesses.
The Firmwide Valuation Governance Forum (“VGF”) is composed of senior finance and risk executives and is responsible
for overseeing the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the Firmwide head of the Valuation Control Group (“VCG”) under the direction of the Firm’s Controller, and includes sub-forums covering the Corporate & Investment Bank, Consumer & Community Banking, Commercial Banking, Asset & Wealth Management and certain corporate functions, including Treasury and CIO.
In addition, the JPMorgan Chase Bank, N.A. Board of Directors is responsible for the oversight of management of the Bank. The JPMorgan Chase Bank, N.A. Board accomplishes this function acting directly and through the principal standing committees of the Firm’s Board of Directors. Risk and control oversight on behalf of JPMorgan Chase Bank N.A. is primarily the responsibility of the DRPC and the Audit Committee of the Firm’s Board of Directors, respectively, and, with respect to compensation
and other management-related matters, the Compensation & Management Development Committee of the Firm’s Board of Directors.
Risk Identification
The Firm has a Risk Identification process in which the first line of defense identifies material risks inherent to the Firm, catalogs them in a central repository and reviews the most material risks on a regular basis. The second line of defense, at a firmwide level, establishes the risk identification framework, coordinates the process, maintains the central repository and reviews and challenges the first line’s identification of risks.
80
JPMorgan
Chase & Co./2017 Annual Report
STRATEGIC RISK MANAGEMENT
Strategic risk is the risk associated with the Firm’s current and future business plans and objectives. Strategic risk includes the risk to current or anticipated earnings, capital, liquidity, enterprise value, or the Firm’s reputation arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the industry or external
environment.
Overview
The Operating Committee and the senior leadership of each LOB are responsible for managing the Firm’s most significant strategic risks. Strategic risks are overseen by IRM through participation in business reviews, LOB senior management committees, ongoing management of the Firm’s risk appetite and limit framework, and other relevant governance forums. The Board of Directors oversees management’s strategic decisions, and the DRPC oversees IRM and the Firm’s risk management framework.
The Firm’s strategic planning process, which includes the development and execution of strategic priorities and initiatives by the Operating Committee and the management teams of the lines of business, is an important process for managing the Firm’s strategic risk. Guided by the Firm’s How We Do Business (“HWDB”) principles,
the strategic priorities and initiatives are updated annually and include evaluating performance against prior year initiatives, assessment of the operating environment, refinement of existing strategies and development of new strategies.
These strategic priorities and initiatives are then incorporated in the Firm’s budget, and are reviewed by the Board of Directors.
In the process of developing the strategic initiatives, line of business leadership identify the strategic risks associated with their strategic initiatives and those risks are incorporated into the Firmwide Risk Identification process and monitored and assessed as part of the Firmwide Risk Appetite framework. For further information on Risk Identification, see Enterprise-Wide Risk Management on page 75. For further information on the Risk Appetite framework see, Enterprise-Wide
Risk Management on
page 77.
The Firm’s balance sheet strategy, which focuses on risk-adjusted returns, strong capital and robust liquidity, is key to management of strategic risk. For further information on capital risk, see Capital Risk Management on pages 82–91. For further information on liquidity risk see, Liquidity Risk Management on pages 92–97
For further information on reputation risk, see Reputation Risk Management on page 98.
Governance and oversight
The Firm’s Operating Committee
defines the most significant strategic priorities and initiatives, including those of the Firm, the LOBs and the Corporate functions, for the coming year and evaluates performance against the prior year. As part of the strategic planning process, IRM conducts a qualitative assessment of those significant initiatives to determine the impact on the risk profile of the Firm. The Firm’s priorities, initiatives and IRM’s assessment are provided to the Board for its review.
As part of its ongoing oversight and management of risk across the Firm, IRM is regularly engaged in significant discussions and decision-making across the Firm, including decisions to pursue new business opportunities or modify or exit existing businesses.
JPMorgan
Chase & Co./2017 Annual Report
81
Management’s discussion and analysis
CAPITAL RISK MANAGEMENT
Capital risk is the risk the Firm has an insufficient level and composition of capital to support the Firm’s business activities and associated risks during normal
economic environments and under stressed conditions.
A strong capital position is essential to the Firm’s business strategy and competitive position. Maintaining a strong balance sheet to manage through economic volatility is considered a strategic imperative of the Firm’s Board of Directors, CEO and Operating Committee. The Firm’s fortress balance sheet philosophy focuses on risk-adjusted returns, strong capital and robust liquidity. The Firm’s capital risk management strategy focuses on maintaining long-term stability to enable it to build and invest in market-leading businesses, even in a highly stressed environment. Senior management considers the implications on the Firm’s capital prior to making decisions that could impact future business activities. In addition to considering the Firm’s earnings outlook,
senior management evaluates all sources and uses of capital with a view to preserving the Firm’s capital strength.
The Firm’s capital risk management objectives are to hold capital sufficient to:
•
Maintain “well-capitalized” status for the Firm and its insured depository institution (“IDI”) subsidiaries;
•
Support risks underlying business activities;
•
Maintain
sufficient capital in order to continue to build and invest in its businesses through the cycle and in stressed environments;
•
Retain flexibility to take advantage of future investment opportunities;
•
Serve as a source of strength to its subsidiaries;
•
Meet
capital distribution objectives; and
•
Maintain sufficient capital resources to operate throughout a resolution period in accordance with the Firm’s preferred resolution strategy.
These objectives are achieved through the establishment of minimum capital targets and a strong capital governance framework. Capital risk management is intended to be flexible in order to react to a range of potential events. The Firm’s minimum capital targets are based on the most binding of three pillars: an internal assessment of the Firm’s capital needs; an estimate of required capital under the CCAR and Dodd-Frank Act stress testing requirements; and Basel
III Fully Phased-In regulatory minimums. Where necessary, each pillar may include a management-established buffer. The capital governance framework requires regular monitoring of the Firm’s capital positions, stress testing and defining escalation protocols, both at the Firm and material legal entity levels.
82
JPMorgan Chase & Co./2017 Annual Report
The following
tables present the Firm’s Transitional and Fully Phased-In risk-based and leverage-based capital metrics under both the Basel III Standardized and Advanced Approaches. The Firm’s Basel III ratios exceed both the Transitional and Fully Phased-In regulatory minimums as of December 31, 2017 and 2016. For further discussion of these capital metrics, including regulatory minimums, and the Standardized and Advanced Approaches, refer to Strategy and Governance on pages 84–88.
Note:
As of December 31, 2017 and 2016, the lower of the Standardized or Advanced capital ratios under each of the Transitional and Fully Phased-In Approaches in the table above represents the Firm’s Collins Floor, as discussed in Risk-based capital regulatory minimums on page 85.
(a)
Adjusted average assets, for purposes of calculating the Tier 1 leverage ratio, includes total quarterly average assets adjusted for unrealized gains/(losses) on available-for-sale (“AFS”) securities, less deductions for goodwill and other
intangible assets, defined benefit pension plan assets, and deferred tax assets related to tax attributes, including net operating losses (“NOLs”).
(b)
The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted total average assets.
(c)
The SLR leverage ratio is calculated by dividing Tier 1 capital by total leverage exposure. For additional information on total leverage exposure, see SLR on page 88.
(d)
The
prior period amounts have been revised to conform with the current period presentation.
(e)
In the case of the SLR, the Fully Phased-In minimum ratio is effective January 1, 2018.
JPMorgan Chase & Co./2017 Annual Report
83
Management’s
discussion and analysis
Strategy and governance
The Firm’s CEO, together with the Board of Directors and the Operating Committee, establishes principles and guidelines for capital planning, issuance, usage and distributions, and minimum capital targets for the level and composition of capital in business-as-usual and highly stressed environments. The DRPC reviews and approves the capital management and governance policy of the Firm. The Firm’s Audit Committee is responsible for reviewing and approving the capital stress testing control framework.
The Capital Governance Committee and the Regulatory Capital Management Office (“RCMO”) support the Firm’s strategic capital decision-making. The Capital Governance Committee oversees the
capital adequacy assessment process, including the overall design, scenario development and macro assumptions, and ensures that capital stress test programs are designed to adequately capture the risks specific to the Firm’s businesses. RCMO, which reports to the Firm’s CFO, is responsible for designing and monitoring the Firm’s execution of its capital policies and strategies once approved by the Board, as well as reviewing and monitoring the execution of its capital adequacy assessment process. The Basel Independent Review function (“BIR”), which reports to the RCMO, conducts independent assessments of the Firm’s regulatory capital framework to ensure compliance with the applicable U.S. Basel rules in support of senior management’s responsibility for assessing and managing capital and for the DRPC’s oversight of management in executing that responsibility. For additional discussion on the DRPC, see Enterprise-wide Risk Management on pages
75–137.
Monitoring and management of capital
In its monitoring and management of capital, the Firm takes into consideration an assessment of economic risk and all regulatory capital requirements to determine the level of capital needed to meet and maintain the objectives discussed above, as well as to support the framework for allocating capital to its business segments. While economic risk is considered prior to making decisions on future business activities, in most cases the Firm considers risk-based regulatory capital to be a proxy for economic risk capital.
Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards, for the consolidated financial holding company. The OCC establishes similar minimum capital requirements
for the Firm’s national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. The U.S. capital requirements generally follow the Capital Accord of the Basel Committee, as amended from time to time.
Basel III overview
Capital rules under Basel III establish minimum capital ratios and overall capital adequacy standards for large and internationally active U.S. bank holding companies (“BHC”) and banks, including the Firm and its IDI subsidiaries. Basel III sets forth two comprehensive approaches for calculating RWA: a standardized approach
(“Basel III Standardized”), and an advanced approach (“Basel III Advanced”). Certain of the requirements of Basel III are subject to phase-in periods that began on January 1, 2014 and continue through the end of 2018 (“transitional period”).
Basel III establishes capital requirements for calculating credit risk RWA and market risk RWA, and in the case of Basel III Advanced, operational risk RWA. Key differences in the calculation of credit risk RWA between the Standardized and Advanced approaches are that for Basel III Advanced, credit risk RWA is based on risk-sensitive approaches which largely rely on the use of internal credit models and parameters, whereas for Basel III Standardized, credit risk RWA is generally based on supervisory risk-weightings which vary primarily by counterparty type and asset class. Market risk RWA is
calculated on a generally consistent basis between Basel III Standardized and Basel III Advanced. In addition to the RWA calculated under these methodologies, the Firm may supplement such amounts to incorporate management judgment and feedback from its regulators.
Basel III also includes a requirement for Advanced Approach banking organizations, including the Firm, to calculate the SLR. For additional information on the SLR, see page 88.
On December 7, 2017, the Basel Committee issued the Basel III Reforms. Potential changes to the requirements for U.S. financial institutions are being considered by the U.S. banking regulators.
For additional information on Basel III reforms, refer to Supervision & Regulation on pages 1–8.
Basel III Fully Phased-In
The Basel III transitional period will end on December 31, 2018, at which point the Firm will calculate its capital ratios under both the Basel III Standardized and Advanced Approaches on a Fully Phased–In basis. In the case of the SLR, the Fully Phased-In well-capitalized ratio is effective January 1, 2018. The Firm manages each of its lines of business, as well as the corporate functions, primarily on a Basel III Fully Phased-In basis.
For additional information on the Firm, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.’s capital, RWA and capital ratios under
Basel III Standardized and Advanced Fully Phased-In rules and the SLR calculated under the Basel III Advanced Fully Phased-In rules, all of which are considered key regulatory capital measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Performance Measures on pages 52–54.
84
JPMorgan Chase & Co./2017 Annual Report
The
Basel III Standardized and Advanced Fully Phased-In capital, RWA and capital ratios, and SLRs for the Firm, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. are based on the current published U.S. Basel III rules.
Risk-based capital regulatory minimums
The following chart presents the Basel III minimum CET1 capital ratio during the transitional periods and on a fully phased-in basis under the Basel III rules currently in effect.
The Basel III rules include minimum capital ratio requirements that are subject to phase-in periods through the end of 2018. The capital adequacy of the Firm and its IDI subsidiaries,
both during the transitional period and upon full phase-in, is evaluated against the Basel III approach (Standardized or Advanced) which, for each quarter, results in the lower ratio as required by the Collins Amendment of the Dodd-Frank Act (the “Collins Floor”). The Basel III Standardized Fully Phased-In CET1 ratio is the Firm’s current binding constraint, and the Firm expects that this will remain its binding constraint for the foreseeable future.
Additional information regarding the Firm’s capital ratios, as well as the U.S. federal regulatory capital standards to which the Firm is subject, is presented in Note 26. For further information on the Firm’s Basel III measures, see the Firm’s Pillar 3 Regulatory Capital Disclosures reports, which are available on the Firm’s website
(http://investor.shareholder.com/jpmorganchase/basel.cfm).
All banking institutions are currently required to have a minimum capital ratio of 4.5% of risk weighted assets. Certain banking organizations, including the Firm, are required to hold additional amounts of capital to serve as a “capital conservation buffer”. The capital conservation buffer is intended to be used to absorb potential losses in times of financial or economic stress. If not maintained, the Firm could be limited in the amount of capital that may be distributed, including dividends and common equity repurchases. The capital conservation buffer is subject to a
phase-in
period that began January 1, 2016 and continues through the end of 2018.
As an expansion of the capital conservation buffer, the Firm is also required to hold additional levels of capital in the form of a GSIB surcharge and a countercyclical capital buffer.
Under the Federal Reserve’s final rule, the Firm is required to calculate its GSIB surcharge on an annual basis under two separately prescribed methods, and is subject to the higher of the two. The first (“Method 1”), reflects the GSIB surcharge as prescribed by the Basel Committee’s assessment methodology, and is calculated across five criteria: size, cross-jurisdictional activity, interconnectedness, complexity and substitutability. The second (“Method 2”), modifies the Method 1 requirements to include a measure of short-term wholesale
funding in place of substitutability, and introduces a GSIB score “multiplication factor”. The following table represents the Firm’s GSIB surcharge.
2017
2016
Fully Phased-In:
Method
1
2.50
%
2.50
%
Method 2
3.50
%
4.50
%
Transitional(a)
1.75
%
1.125
%
(a)
The
GSIB surcharge is subject to transition provisions (in 25% increments) through the end of 2018.
JPMorgan Chase & Co./2017 Annual Report
85
Management’s discussion and analysis
The Firm’s effective GSIB surcharge for 2018 is anticipated to be 3.5%.
The countercyclical capital
buffer takes into account the macro financial environment in which large, internationally active banks function. On September 8, 2016 the Federal Reserve published the framework that will apply to the setting of the countercyclical capital buffer. As of December 1, 2017, the Federal Reserve reaffirmed setting the U.S. countercyclical capital buffer at 0%, and stated that it will review the amount at least annually. The countercyclical capital buffer can be increased if the Federal Reserve, FDIC and OCC determine that credit growth in the economy has become excessive and can be set at up to an additional 2.5% of RWA subject to a 12-month implementation period.
The Firm believes that it will operate with a Basel III CET1 capital ratio between 11% and 12% over the medium term. It is the Firm’s intention
that its capital ratios will continue to meet regulatory minimums as they are fully phased in 2019 and thereafter.
In addition to meeting the capital ratio requirements of Basel III, the Firm also must maintain minimum capital and leverage ratios in order to be “well-capitalized.” The following table represents the ratios that the Firm and its IDI subsidiaries must maintain in order to meet the definition of “well-capitalized” under the regulations issued by the Federal Reserve and the Prompt Corrective Action (“PCA”) requirements of the FDIC Improvement Act (“FDICIA”), respectively.
Well-capitalized
ratios
BHC
IDI
Capital ratios
CET1
—
%
6.5
%
Tier
1 capital
6.0
8.0
Total capital
10.0
10.0
Tier
1 leverage
—
5.0
SLR(a)
5.0
6.0
(a)
In
the case of the SLR, the Fully Phased-In well-capitalized ratio is effective January 1, 2018.
Capital
The following table presents reconciliations of total stockholders’ equity to Basel III Fully Phased-In CET1 capital, Tier 1 capital and Basel III Advanced and Standardized Fully Phased-In Total capital as of December 31, 2017 and 2016. For additional information on the components of regulatory capital, see Note 26.
Standardized/Advanced Fully Phased-In CET1 capital
183,244
181,734
Preferred stock
26,068
26,068
Less:
Other
Tier 1 adjustments(c)
748
328
Standardized/Advanced Fully Phased-In Tier 1 capital
$
208,564
$
207,474
Long-term
debt and other instruments qualifying as Tier 2 capital
$
14,827
$
15,253
Qualifying allowance for credit losses
14,672
14,854
Other
(103
)
(94
)
Standardized
Fully Phased-In Tier 2 capital
$
29,396
$
30,013
Standardized Fully Phased-in Total capital
$
237,960
$
237,487
Adjustment
in qualifying allowance for credit losses for Advanced Tier 2 capital
(10,462
)
(10,961
)
Advanced Fully Phased-In Tier 2 capital
$
18,934
$
19,052
Advanced Fully
Phased-In Total capital
$
227,498
$
226,526
(a)
Represents deferred tax liabilities related to tax-deductible goodwill and identifiable intangibles created in nontaxable transactions, which are netted against goodwill and other intangibles when calculating TCE.
(b)
Includes
the effect from the revaluation of the Firm’s net deferred tax liability as a result of the enactment of the TCJA.
(c)
Includes the deduction associated with the permissible holdings of covered funds (as defined by the Volcker Rule). The deduction was not material as of December 31, 2017 and 2016.
86
JPMorgan
Chase & Co./2017 Annual Report
The following table presents reconciliations of the Firm’s Basel III Transitional CET1 capital to the Firm’s Basel III Fully Phased-In CET1 capital as of December 31, 2017 and 2016.
Includes the remaining balance of accumulated other comprehensive income (“AOCI”) related to AFS debt securities and defined benefit pension and other postretirement employee benefit (“OPEB”) plans that will qualify as Basel III CET1 capital upon full phase-in.
(b)
Predominantly
includes regulatory adjustments related to changes in DVA, as well as CET1 deductions for defined benefit pension plan assets and deferred tax assets related to tax attributes, including NOLs.
(c)
Relates to intangible assets, other than goodwill and MSRs, that are required to be deducted from CET1 capital upon full phase-in.
(d)
Includes minority interest and the Firm’s investments in its own CET1 capital instruments.
Capital
rollforward
The following table presents the changes in Basel III Fully Phased-In CET1 capital, Tier 1 capital and Tier 2 capital for the year ended December 31, 2017.
Includes a $2.4 billion decrease to net income as a result of the enactment
of the TCJA. For additional information related to the impact of the TCJA, see Note 24.
(b)
Includes DVA related to structured notes recorded in AOCI.
(c)
Includes the effect from the revaluation of the Firm’s net deferred tax liability as a result of the enactment of the TCJA.
JPMorgan Chase & Co./2017 Annual Report
87
Management’s discussion and analysis
RWA rollforward
The following table presents changes in the components of RWA under Basel III Standardized and Advanced Fully Phased-In for the year ended December 31, 2017. The amounts in the rollforward categories are estimates,
based on the predominant driver of the change.
Model & data changes refer to material movements in levels of RWA as a result of revised methodologies and/or treatment per regulatory guidance (exclusive of rule changes).
(b)
Portfolio runoff for credit risk RWA primarily reflects (under both the Standardized and Advanced approaches) reduced risk from position rolloffs in legacy portfolios in Home Lending, the sale of the student loan portfolio during the second quarter of 2017, and the sale of reverse mortgages in CIB during the third quarter of 2017.
(c)
Movement in portfolio levels for credit risk RWA refers to changes primarily in book size, composition, credit quality, and market movements; and for market risk RWA refers to changes in position and market movements.
(d)
The prior period amounts have been revised to conform with the current period presentation.
Supplementary leverage ratio
The SLR is defined as Tier 1 capital under Basel III divided by the Firm’s total leverage exposure. Total
leverage exposure is calculated by taking the Firm’s total average on-balance sheet assets, less amounts permitted to be deducted for Tier 1 capital, and adding certain off-balance sheet exposures, such as undrawn commitments and derivatives potential future exposure.
The following table presents the components of the Firm’s Fully Phased-In SLR as of December 31, 2017 and 2016.
Less:
Adjustments for deductions from Tier 1 capital
47,333
46,977
Total adjusted average assets(a)
2,514,822
2,485,480
Off-balance sheet exposures(b)
690,193
707,359
Total
leverage exposure
$
3,205,015
$
3,192,839
SLR
6.5
%
6.5
%
(a)
Adjusted
average assets, for purposes of calculating the SLR, includes total quarterly average assets adjusted for on-balance sheet assets that are subject to deduction from Tier 1 capital, predominantly goodwill and other intangible assets.
(b)
Off-balance sheet exposures are calculated as the average of the three month-end spot balances during the reporting quarter.
As of December 31, 2017, JPMorgan Chase Bank, N.A.’s and Chase Bank USA, N.A.’s Fully Phased-In SLRs are approximately 6.7% and 11.8%,
respectively.
Line of business equity
Each business segment is allocated capital by taking into consideration stand-alone peer comparisons and regulatory capital requirements. For 2016, capital was allocated to each business segment for, among other things, goodwill and other intangibles associated with acquisitions effected by the line of business. ROE is measured and internal targets for expected returns are established as key measures of a business segment’s performance.
On at least an annual basis, the Firm assesses the level of capital required for each line of business as well as the assumptions and methodologies used to allocate capital.
Through the end of 2016, capital was allocated to the lines of business based on a single measure, Basel III Advanced Fully Phased-In RWA. Effective January 1, 2017, the Firm’s methodology used to allocate capital to the Firm’s business segments was updated. The new methodology incorporates Basel III Standardized Fully Phased-In RWA (as well as Basel III Advanced Fully Phased-In RWA), leverage, the GSIB surcharge, and a simulation of capital in a severe stress environment. The methodology will continue to be weighted towards Basel III Advanced Fully Phased-In RWA because the Firm believes it to be the best proxy for economic risk. The Firm will consider further changes to its capital allocation methodology as the regulatory framework evolves. In addition, under the new methodology, capital is no longer allocated to each line of business for goodwill and other intangibles
associated with acquisitions effected by the line of business. The Firm will continue to establish internal ROE targets for its business segments, against which they will be measured, as a key performance indicator.
88
JPMorgan Chase & Co./2017 Annual Report
The table below reflects the Firm’s assessed level of capital allocated to each line of business as of the dates indicated.
The Federal Reserve requires large
bank holding companies, including the Firm, to submit a capital plan on an annual basis. The Federal Reserve uses the CCAR and Dodd-Frank Act stress test processes to ensure that large BHCs have sufficient capital during periods of economic and financial stress, and have robust, forward-looking capital assessment and planning processes in place that address each BHC’s unique risks to enable it to absorb losses under certain stress scenarios. Through the CCAR, the Federal Reserve evaluates each BHC’s capital adequacy and internal capital adequacy assessment processes (“ICAAP”), as well as its plans to make capital distributions, such as dividend payments or stock repurchases.
On June 28, 2017, the Federal Reserve informed the Firm that it did not object, on either a quantitative or qualitative basis,
to the Firm’s 2017 capital plan. For information on actions taken by the Firm’s Board of Directors following the 2017 CCAR results, see Capital actions on pages 89-90.
The Firm’s CCAR process is integrated into and employs the same methodologies utilized in the Firm’s ICAAP process, as discussed below.
Internal Capital Adequacy Assessment Process
Semiannually, the Firm completes the ICAAP, which provides management with a view of the impact of severe and unexpected events on earnings, balance sheet positions, reserves and capital. The Firm’s ICAAP integrates stress testing protocols with capital planning.
The process assesses the potential impact of
alternative economic and business scenarios on the Firm’s earnings and capital. Economic scenarios, and the parameters underlying those scenarios, are defined centrally and applied uniformly across the businesses. These scenarios are articulated in terms of macroeconomic factors, which are key drivers of business results; global market shocks, which generate short-term but severe trading losses; and idiosyncratic operational risk events. The scenarios are intended to capture and stress key vulnerabilities and idiosyncratic risks facing the Firm. However, when defining a broad range of scenarios, actual events can always be worse. Accordingly, management considers additional stresses outside these scenarios, as necessary. ICAAP results are reviewed by management and the Audit Committee.
Capital actions
Preferred
stock
Preferred stock dividends declared were $1.7 billion for the year ended December 31, 2017.
On October 20, 2017, the Firm issued $1.3 billion of fixed-to-floating rate non-cumulative preferred stock, Series CC, with an initial dividend rate of 4.625%. On December 1, 2017, the Firm redeemed all $1.3 billion of its outstanding 5.50% non-cumulative preferred stock, Series O.
For additional information on the Firm’s preferred stock, see Note 20.
Trust preferred securities
On December
18, 2017, the Delaware trusts that issued seven series of outstanding trust preferred securities were liquidated, $1.6 billion of trust preferred and $56 million of common securities originally issued by those trusts were cancelled, and the junior subordinated debentures previously held by each trust issuer were distributed pro rata to the holders of the corresponding series of trust preferred and common securities.
The Firm redeemed $1.6 billion of trust preferred securities in the year ended December 31, 2016.
Common stock dividends
The Firm’s common stock dividend policy reflects JPMorgan Chase’s earnings outlook, desired dividend payout ratio, capital objectives, and alternative investment opportunities.
On
September 19, 2017, the Firm announced that its Board of Directors increased the quarterly common stock dividend to $0.56 per share, effective with the dividend paid on October 31, 2017. The Firm’s dividends are subject to the Board of Directors’ approval on a quarterly basis.
For information regarding dividend restrictions, see Note 20 and Note 25.
JPMorgan Chase & Co./2017 Annual Report
89
Management’s
discussion and analysis
The following table shows the common dividend payout ratio based on net income applicable to common equity.
During the year ended December 31, 2017, warrant holders exercised their right to purchase 9.9 million shares of the Firm’s common stock. The Firm issued from treasury stock 5.4 million shares of its common stock as a result of these exercises.
As of December 31, 2017, 15.0 million warrants remained outstanding, compared with 24.9 million outstanding as of December 31, 2016.
Effective June 28, 2017, the Firm’s Board of Directors authorized the repurchase of up to $19.4 billion of common equity (common stock and warrants) between July 1, 2017 and June 30, 2018, as part of its annual capital plan.
As of December 31, 2017, $9.8 billion of authorized repurchase capacity remained under the common equity repurchase program.
The
following table sets forth the Firm’s repurchases of common equity for the years ended December 31, 2017, 2016 and 2015. There were no repurchases of warrants during the years ended December 31, 2017, 2016 and 2015.
Year ended December 31, (in millions)
2017
2016
2015
Total
number of shares of common stock repurchased
166.6
140.4
89.8
Aggregate purchase price of common stock repurchases
$
15,410
$
9,082
$
5,616
The
Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate repurchases in accordance with the common equity repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its equity during periods when it would not otherwise be repurchasing common equity — for example, during internal trading blackout periods. All purchases under Rule 10b5-1 plans must be made according to predefined schedules established when the Firm is not aware of material nonpublic information.
The authorization to repurchase common equity will be utilized at management’s discretion, and the timing of purchases and the exact amount of common equity that may be repurchased is subject to various factors, including market conditions; legal and regulatory considerations affecting the amount and timing of repurchase activity; the Firm’s capital position (taking into
account goodwill and intangibles); internal capital generation; and alternative investment opportunities. The repurchase program does not include specific price targets or timetables; may be executed through open market purchases or privately negotiated transactions, or utilizing Rule 10b5-1 plans; and may be suspended by management at any time.
For additional information regarding repurchases of the Firm’s equity securities, see Part II, Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities on page 28.
Other capital requirements
TLAC
On December
15, 2016, the Federal Reserve issued its final TLAC rule which requires the top-tier holding companies of eight U.S. GSIB holding companies, including the Firm, to maintain minimum levels of external TLAC and external long-term debt that satisfies certain eligibility criteria (“eligible LTD”), effective January 1, 2019.
The minimum external TLAC and the minimum level of eligible long-term debt requirements are shown below:
(a) RWA is the greater of Standardized and Advanced.
The final TLAC rule permanently grandfathered all long-term debt issued before December 31, 2016, to the
extent these securities would be ineligible because they contained impermissible acceleration rights or were governed by non-U.S. law. As of December 31, 2017, the Firm was compliant with the requirements under the current rule to which it will be subject on January 1, 2019.
90
JPMorgan Chase & Co./2017 Annual Report
Broker-dealer
regulatory capital
JPMorgan Securities
JPMorgan Chase’s principal U.S. broker-dealer subsidiary is JPMorgan Securities. JPMorgan Securities is subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the “Net Capital Rule”). JPMorgan Securities is also registered as a futures commission merchant and subject to Rule 1.17 of the CFTC.
JPMorgan Securities has elected to compute its minimum net capital requirements in accordance with the “Alternative Net Capital Requirements” of the Net Capital Rule.
In accordance with the market and credit risk standards of Appendix E of the Net Capital Rule, JPMorgan Securities is eligible to use the alternative method of computing net capital if, in addition to
meeting its minimum net capital requirements, it maintains tentative net capital of at least $1.0 billion and is also required to notify the SEC in the event that tentative net capital is less than $5.0 billion. As of December 31, 2017, JPMorgan Securities had tentative net capital in excess of the minimum and notification requirements. The following table presents JPMorgan Securities’ net capital information:
J.P. Morgan
Securities plc is a wholly owned subsidiary of JPMorgan Chase Bank, N.A. and is the Firm’s principal operating subsidiary in the U.K. It has authority to engage in banking, investment banking and broker-dealer activities. J.P. Morgan Securities plc is jointly regulated by the U.K. PRA and the FCA. J.P. Morgan Securities plc is subject to the European Union Capital Requirements Regulation and the U.K. PRA capital rules, each of which implemented Basel III and thereby subject J.P. Morgan Securities plc to its requirements.
The following table presents J.P. Morgan Securities plc’s capital information:
Liquidity risk is the risk that the Firm will be unable to meet its contractual and contingent financial obligations as they arise or that it does not have the
appropriate amount, composition and tenor of funding and liquidity to support its assets and liabilities.
Liquidity risk oversight
The Firm has a liquidity risk oversight function whose primary objective is to provide assessment, measurement, monitoring, and control of liquidity risk across the Firm. Liquidity risk oversight is managed through a dedicated firmwide Liquidity Risk Oversight group. The CIO, Treasury and Corporate (“CTC”) CRO, who reports to the Firm’s CRO, as part of the IRM function, is responsible for firmwide Liquidity Risk Oversight. Liquidity Risk Oversight’s responsibilities include:
•
Establishing
and monitoring limits, indicators, and thresholds, including liquidity risk appetite tolerances;
•
Monitoring internal firmwide and material legal entity liquidity stress tests, and monitoring and reporting regulatory defined liquidity stress testing;
•
Approving or escalating for review liquidity stress assumptions;
•
Monitoring
liquidity positions, balance sheet variances and funding activities, and
•
Conducting ad hoc analysis to identify potential emerging liquidity risks.
Liquidity management
Treasury and CIO is responsible for liquidity management. The primary objectives of effective liquidity management are to:
•
Ensure that the Firm’s core businesses and material legal entities are able to operate
in support of client needs and meet contractual and contingent financial obligations through normal economic cycles as well as during stress events, and
•
Manage an optimal funding mix and availability of liquidity sources.
The Firm manages liquidity and funding using a centralized, global approach across its entities, taking into consideration both their current liquidity profile and any potential changes over time, in order to optimize liquidity sources and uses.
In the context of the Firm’s liquidity management, Treasury and CIO is responsible for:
•
Analyzing
and understanding the liquidity characteristics of the assets and liabilities of the Firm, lines of business and legal entities, taking into account legal, regulatory, and operational restrictions;
Defining and monitoring firmwide and legal entity-specific liquidity strategies, policies, guidelines, reporting and contingency funding plans;
•
Managing
liquidity within the Firm’s approved liquidity risk appetite tolerances and limits;
•
Managing compliance with regulatory requirements related to funding and liquidity risk, and
•
Setting transfer pricing in accordance with underlying liquidity characteristics of balance sheet assets and liabilities as well as certain off-balance sheet items.
Risk governance and measurement
Specific
committees responsible for liquidity governance include the firmwide ALCO as well as line of business and regional ALCOs, and the CTC Risk Committee. In addition, the DRPC reviews and recommends to the Board of Directors, for formal approval, the Firm’s liquidity risk tolerances, liquidity strategy, and liquidity policy at least annually. For further discussion of ALCO and other risk-related committees, see Enterprise-wide Risk Management on pages 75–137.
Internal stress testing
Liquidity stress tests are intended to ensure that the Firm has sufficient liquidity under a variety of adverse scenarios, including scenarios analyzed as part of the Firm’s resolution and recovery planning. Stress scenarios are produced for
JPMorgan Chase & Co. (“Parent Company”) and the Firm’s material legal entities on a regular basis, and ad hoc stress tests are performed, as needed, in response to specific market events or concerns. Liquidity stress tests assume all of the Firm’s contractual financial obligations are met and take into consideration:
•
Varying levels of access to unsecured and secured funding markets,
•
Estimated non-contractual and contingent cash outflows, and
•
Potential
impediments to the availability and transferability of liquidity between jurisdictions and material legal entities such as regulatory, legal or other restrictions.
Liquidity outflow assumptions are modeled across a range of time horizons and currency dimensions and contemplate both market and idiosyncratic stresses.
Results of stress tests are considered in the formulation of the Firm’s funding plan and assessment of its liquidity position. The Parent Company acts as a source of funding for the Firm through equity and long-term debt issuances, and the IHC provides funding support to the ongoing operations of the Parent Company and its subsidiaries, as necessary. The Firm maintains liquidity at the Parent Company and the IHC, in addition to liquidity held at the operating
subsidiaries, at levels sufficient to comply with liquidity risk tolerances and minimum liquidity requirements, and to manage through periods of stress where access to normal funding sources is disrupted.
92
JPMorgan Chase & Co./2017 Annual Report
Contingency funding plan
The
Firm’s contingency funding plan (“CFP”), which is approved by the firmwide ALCO and the DRPC, is a compilation of procedures and action plans for managing liquidity through stress events. The CFP incorporates the limits and indicators set by the Liquidity Risk Oversight group. These limits and indicators are reviewed regularly to identify the emergence of risks or vulnerabilities in the Firm’s liquidity position. The CFP identifies the alternative contingent funding and liquidity resources available to the Firm and its legal entities in a period of stress.
LCR and HQLA
The LCR rule requires the Firm to maintain an amount of unencumbered HQLA that is sufficient to meet its estimated total net cash outflows over a prospective 30 calendar-day period of significant stress. HQLA is the amount of liquid assets that qualify for inclusion
in the LCR. HQLA primarily consist of unencumbered cash and certain high quality liquid securities as defined in the LCR rule.
Under the LCR rule, the amount of HQLA held by JPMorgan Chase Bank N.A. and Chase Bank USA, N.A that are in excess of each entity’s standalone 100% minimum LCR requirement, and that are not transferable to non-bank affiliates, must be excluded from the Firm’s reported HQLA. Effective January 1, 2017, the LCR is required to be a minimum of 100%.
On December 19, 2016, the Federal Reserve published final LCR public disclosure requirements for certain BHCs and non-bank financial companies. Beginning with the second quarter of 2017, the Firm disclosed its average LCR for the quarter and the
key quantitative components of the average LCR, along with a qualitative discussion of material drivers of the ratio, changes over time, and causes of such changes. The Firm will continue to make available its U.S. LCR Disclosure report on a quarterly basis on the Firm’s website at: (https://investor.shareholder.com/jpmorganchase/basel.cfm)
The following table summarizes the Firm’s average LCR for the three months ended December 31, 2017 based on the Firm’s current interpretation of the finalized LCR framework.
Represents
cash on deposit at central banks, primarily Federal Reserve Banks.
(b)
Predominantly U.S. Agency MBS, U.S. Treasuries, and sovereign bonds net of applicable haircuts under the LCR rules
(c)
HQLA eligible securities may be reported in securities borrowed or purchased under resale agreements, trading assets, or securities on the Firm’s Consolidated balance sheets.
(d)
Excludes
average excess HQLA at JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. that are not transferable to non-bank affiliates.
For the three months ended December 31, 2017, the Firm’s average LCR was 119%, compared with an average of 120% for the three months ended September 30, 2017. The decrease in the ratio was largely attributable to a decrease in average HQLA, driven primarily by long-term debt maturities. The Firm’s average LCR may fluctuate from period to period, due to changes in its HQLA and estimated net cash outflows under the LCR as a result of ongoing business activity. The Firm’s HQLA are expected to be available to meet its liquidity needs in a time of stress.
Other
liquidity sources
As of December 31, 2017, in addition to assets reported in the Firm’s HQLA under the LCR rule, the Firm had approximately $208 billion of unencumbered marketable securities, such as equity securities and fixed income debt securities, available to raise liquidity, if required. This includes HQLA-eligible securities included as part of the excess liquidity at JPMorgan Chase Bank, N.A. that are not transferable to non-bank affiliates.
As of December 31, 2017, the Firm also had approximately $277 billion of
available borrowing capacity at various Federal Home Loan Banks (“FHLBs”), discount windows at Federal Reserve Banks and various other central banks as a result of collateral pledged by the Firm to such banks. This borrowing capacity excludes the benefit of securities reported in the Firm’s HQLA or other unencumbered securities that are currently pledged at Federal Reserve Bank discount windows. Although available, the Firm does not view the borrowing capacity at Federal Reserve Bank discount windows and the various other central banks as a primary source of liquidity.
NSFR
The net stable funding ratio (“NSFR”) is intended to measure the adequacy of “available” and “required” amounts of stable funding over a one-year horizon. On April 26, 2016, the U.S. NSFR proposal was released
for large banks and BHCs and was largely consistent with the Basel Committee’s final standard.
While the final U.S. NSFR rule has yet to be released, as of December 31, 2017 the Firm estimates that it was compliant with the proposed 100% minimum NSFR based on its current understanding of the proposed rule.
JPMorgan Chase & Co./2017 Annual Report
93
Management’s
discussion and analysis
Funding
Sources of funds
Management believes that the Firm’s unsecured and secured funding capacity is sufficient to meet its on- and off-balance sheet obligations.
The Firm funds its global balance sheet through diverse sources of funding including a stable deposit franchise as well as secured and unsecured funding in the capital markets. The Firm’s loan portfolio is funded with a portion of the Firm’s deposits, through securitizations and, with respect to a portion of the Firm’s real estate-related loans, with secured borrowings from the FHLBs. Deposits in excess of the amount utilized to fund loans are primarily invested in the Firm’s investment securities portfolio or deployed in cash or other short-term liquid
investments based on their interest rate and liquidity risk characteristics. Securities
borrowed or purchased under resale agreements and trading assets-debt and equity instruments are primarily funded by the Firm’s securities loaned or sold under agreements to repurchase, trading liabilities–debt and equity instruments, and a portion of the Firm’s long-term debt and stockholders’ equity. In addition to funding securities borrowed or purchased under resale agreements and trading assets-debt and equity instruments, proceeds from the Firm’s debt and equity issuances are used to fund certain loans and other financial and non-financial assets, or may be invested in the Firm’s investment securities portfolio. See the discussion below for additional information relating
to Deposits, Short-term funding, and Long-term funding and issuance.
Deposits
The table below summarizes, by line of business, the period-end and average deposit balances as of and for the years ended December 31, 2017 and 2016.
Deposits
Year
ended December 31,
As of or for the year ended December 31,
Average
(in millions)
2017
2016
2017
2016
Consumer &
Community Banking
$
659,885
$
618,337
$
640,219
$
586,637
Corporate
& Investment Bank
455,883
412,434
447,697
409,680
Commercial Banking
181,512
179,532
176,884
172,835
Asset
& Wealth Management
146,407
161,577
148,982
153,334
Corporate
295
3,299
3,604
5,482
Total
Firm
$
1,443,982
$
1,375,179
$
1,417,386
$
1,327,968
A
key strength of the Firm is its diversified deposit franchise, through each of its lines of business, which provides a stable source of funding and limits reliance on the wholesale funding markets. A significant portion of the Firm’s deposits are consumer and wholesale operating deposits, which are both considered to be stable sources of liquidity. Wholesale operating deposits are considered to be stable sources of liquidity because they are generated from customers that maintain operating service relationships with the Firm.
The table below shows the loan and deposit balances, the loans-to-deposits ratios, and deposits as a percentage of total liabilities, as of December 31, 2017 and 2016.
As
of December 31,
(in billions except ratios)
2017
2016
Deposits
$
1,444.0
$
1,375.2
Deposits
as a % of total liabilities
63
%
61
%
Loans
930.7
894.8
Loans-to-deposits ratio
64
%
65
%
Deposits
increased due to both higher consumer and wholesale deposits. The higher consumer deposits reflect the continuation of strong growth from new and existing customers, and low attrition rates. The higher wholesale deposits largely were driven by growth in client cash management activity in CIB’s Securities Services business, partially offset by lower balances in AWM reflecting balance migration predominantly into the Firm’s investment-related products.
The Firm believes average deposit balances are generally more representative of deposit trends than period-end deposit balances. The increase in average deposits for the year ended December 31, 2017
compared with the year ended December 31, 2016, was driven by an increase in both consumer and wholesale deposits. For further discussions of deposit and liability balance trends, see the discussion of the Firm’s business segments results and the Consolidated Balance Sheet Analysis on pages 55–74 and pages 47-48, respectively.
94
JPMorgan Chase & Co./2017 Annual Report
The
following table summarizes short-term and long-term funding, excluding deposits, as of December 31, 2017 and 2016, and average balances for the years ended December 31, 2017 and 2016. For additional information, see the Consolidated Balance Sheets Analysis on pages 47-48 and Note 19.
Sources
of funds (excluding deposits)
As of or for the year ended December 31,
Average
(in millions)
2017
2016
2017
2016
Commercial
paper
$
24,186
$
11,738
$
19,920
$
15,001
Other borrowed
funds
27,616
22,705
26,612
21,139
Total short-term borrowings
$
51,802
$
34,443
$
46,532
$
36,140
Obligations
of Firm-administered multi-seller conduits(a)
$
3,045
$
2,719
$
3,206
$
5,153
Securities
loaned or sold under agreements to repurchase:
Securities sold under agreements to repurchase(b)
$
146,432
$
149,826
$
171,973
$
160,458
Securities
loaned(c)
7,910
12,137
11,526
13,195
Total securities loaned or sold under agreements to repurchase(d)
$
154,342
$
161,963
$
183,499
$
173,653
Senior
notes
$
155,852
$
151,042
$
154,352
$
153,768
Trust
preferred securities(e)
690
2,345
2,276
3,724
Subordinated debt(e)
16,553
21,940
18,832
24,224
Structured
notes
45,727
37,292
42,918
35,978
Total long-term unsecured funding
$
218,822
$
212,619
$
218,378
$
217,694
Credit
card securitization(a)
$
21,278
$
31,181
$
25,933
$
29,428
Other
securitizations(a)(f)
—
1,527
626
1,669
FHLB advances
60,617
79,519
69,916
73,260
Other
long-term secured funding(g)
4,641
3,107
3,195
4,619
Total long-term secured funding
$
86,536
$
115,334
$
99,670
$
108,976
Preferred
stock(h)
$
26,068
$
26,068
26,212
$
26,068
Common stockholders’
equity(h)
$
229,625
$
228,122
230,350
$
224,631
(a)
Included
in beneficial interest issued by consolidated variable interest entities on the Firm’s Consolidated balance sheets.
(b)
Excludes long-term structured repurchase agreements of $1.3 billion and $1.8 billion as of December 31, 2017 and 2016, respectively, and average balances of $1.5 billion and $2.9 billion for the years ended December 31,
2017 and 2016, respectively.
(c)
Excludes long-term securities loaned of $1.3 billion and $1.2 billion as of December 31, 2017 and 2016, respectively, and average balances of $1.3 billion for both the years ended December 31, 2017
and 2016.
(d)
Excludes federal funds purchased.
(e)
Subordinated debt includes $1.6 billion of junior subordinated debentures distributed pro rata to the holders of the $1.6 billion of trust preferred securities which were cancelled on December 18, 2017. For further information see Note 19 .
(f)
Other
securitizations includes securitizations of student loans. The Firm deconsolidated the student loan securitization entities in the second quarter of 2017 as it no longer had a controlling financial interest in these entities as a result of the sale of the student loan portfolio. The Firm’s wholesale businesses also securitize loans for client-driven transactions, which are not considered to be a source of funding for the Firm and are not included in the table.
(g)
Includes long-term structured notes which are secured.
(h)
For
additional information on preferred stock and common stockholders’ equity see Capital Risk Management on pages 82–91, Consolidated statements of changes in stockholders’ equity, Note 20 and Note 21.
Short-term funding
The Firm’s sources of short-term secured funding primarily consist of securities loaned or sold under agreements to repurchase. These instruments are secured predominantly by high-quality securities collateral, including government-issued debt and agency MBS, and constitute a significant portion of the federal funds purchased and securities loaned or sold under repurchase agreements on the
Consolidated balance sheets. The increase in the average balance of securities loaned or sold under agreements to repurchase for the year ended December 31, 2017, compared to December 31, 2016, was largely due to client activities in CIB. The balances associated with securities loaned or sold under agreements to repurchase fluctuate over time due to customers’ investment and financing activities; the Firm’s demand for financing; the ongoing management of the mix of the Firm’s liabilities, including its secured and unsecured financing (for both the investment
securities and market-making portfolios); and other market and portfolio factors.
The
Firm’s sources of short-term unsecured funding primarily consist of issuances of wholesale commercial paper. The increase in short-term unsecured funding was primarily due to higher issuance of commercial paper reflecting in part a change in the mix of funding from securities sold under repurchase agreements for CIB Markets activities.
Long-term funding and issuance
Long-term funding provides additional sources of stable funding and liquidity for the Firm. The Firm’s long-term funding plan is driven primarily by expected client activity, liquidity considerations, and regulatory requirements, including TLAC. Long-term funding objectives include maintaining diversification, maximizing market access and
JPMorgan
Chase & Co./2017 Annual Report
95
Management’s discussion and analysis
optimizing funding costs. The Firm evaluates various funding markets, tenors and currencies in creating its optimal long-term funding plan.
The significant majority of the Firm’s long-term unsecured funding is issued by the Parent Company to provide maximum flexibility in support of both bank and non-bank subsidiary funding needs. The Parent Company advances substantially all net funding proceeds to its subsidiary, the IHC. The IHC does not issue debt to external
counterparties. The following table summarizes long-term unsecured issuance and maturities or redemptions for the years ended December 31, 2017 and 2016. For additional information, see Note 19.
Long-term unsecured funding
Year ended December 31, (in
millions)
2017
2016
Issuance
Senior notes issued in the U.S. market
$
21,192
$
25,639
Senior
notes issued in non-U.S. markets
2,210
7,063
Total senior notes
23,402
32,702
Subordinated debt
—
1,093
Structured
notes
29,040
22,865
Total long-term unsecured funding – issuance
$
52,442
$
56,660
Maturities/redemptions
Senior
notes
$
22,337
$
29,989
Trust preferred securities
—
1,630
Subordinated debt
6,901
3,596
Structured
notes
22,581
15,925
Total long-term unsecured funding – maturities/redemptions
$
51,819
$
51,140
The Firm raises secured long-term
funding through securitization of consumer credit card loans and advances from the FHLBs.
The following table summarizes the securitization issuance and FHLB advances and their respective maturities or redemption for the years ended December 31, 2017 and 2016.
Long-term
secured funding
Year ended
December 31,
Issuance
Maturities/Redemptions
(in millions)
2017
2016
2017
2016
Credit
card securitization
$
1,545
$
8,277
$
11,470
$
5,025
Other
securitizations(a)
—
55
233
FHLB advances
—
17,150
18,900
9,209
Other
long-term secured funding(b)
2,354
455
731
2,645
Total long-term secured funding
$
3,899
$
25,882
$
31,156
$
17,112
(a)
Other
securitizations includes securitizations of student loans. The Firm deconsolidated the student loan securitization entities in the second quarter of 2017 as it no longer had a controlling financial interest in these entities as a result of the sale of the student loan portfolio.
(b)
Includes long-term structured notes which are secured.
The Firm’s wholesale businesses also securitize loans for client-driven transactions; those client-driven loan securitizations are not considered to be a source of funding for the Firm and are not included in the table above. For further description of the client-driven loan securitizations, see Note 14.
96
JPMorgan
Chase & Co./2017 Annual Report
Credit ratings
The cost and availability of financing are influenced by credit ratings. Reductions in these ratings could have an adverse effect on the Firm’s access to liquidity sources, increase the cost of funds, trigger additional collateral or funding requirements and decrease the number of investors and counterparties willing to lend to the Firm. Additionally, the Firm’s funding requirements for VIEs and other third-
party commitments may be adversely affected by a decline in credit ratings. For additional information on
the impact of a credit ratings downgrade on the funding requirements for VIEs, and on derivatives and collateral agreements, see SPEs on page 50, and credit risk, liquidity risk and credit-related contingent features in Note 5 on page 186.
The credit ratings of the Parent Company and the Firm’s principal bank and non-bank subsidiaries as of December 31, 2017, were as follows.
On
February 22, 2017, Moody’s published its updated rating methodologies for securities firms. As a result of this methodology change, J.P. Morgan Securities LLC’s long-term issuer rating was downgraded by one notch from Aa3 to A1; the short-term issuer rating was unchanged and the outlook remained stable.
On June 1, 2017, JPMorgan Chase Bank, N.A. terminated its guarantee of the payment of all obligations of J.P. Morgan Securities plc arising after such termination. J.P. Morgan Securities plc, whose credit ratings previously reflected the benefit of this guarantee, is now rated on a stand-alone, non-guaranteed basis.
Downgrades of the Firm’s long-term ratings by one or two notches could result in an increase in its cost of funds, and access to certain funding markets could be reduced
as noted above. The nature and magnitude of the impact of ratings downgrades depends on numerous contractual and behavioral factors which the Firm believes are incorporated in its liquidity risk and stress testing metrics. The Firm believes that it maintains sufficient liquidity to withstand a
potential decrease in funding capacity due to ratings downgrades.
JPMorgan Chase’s unsecured debt does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings, or stock price.
Critical factors in maintaining high credit
ratings include a stable and diverse earnings stream, strong capital ratios, strong credit quality and risk management controls, diverse funding sources, and disciplined liquidity monitoring procedures. Rating agencies continue to evaluate economic and geopolitical trends, regulatory developments, future profitability, risk management practices, and litigation matters, as well as their broader ratings methodologies. Changes in any of these factors could lead to changes in the Firm’s credit ratings.
JPMorgan
Chase & Co./2017 Annual Report
97
REPUTATION RISK MANAGEMENT
Reputation risk is the potential that an action, inaction, transaction, investment or event will reduce trust in the Firm’s integrity or competence by its various constituents, including clients, counterparties, investors, regulators, employees and the broader public.
Maintaining the Firm’s reputation is the responsibility of each individual employee of the Firm. The Firm’s Reputation Risk Governance policy explicitly vests each employee with the responsibility to consider the reputation of the Firm when engaging in any activity. Because the types of events that could harm the Firm’s reputation are so varied across the Firm’s lines of business, each line of business has a separate reputation risk governance infrastructure in place, which consists of
three key elements: clear, documented escalation criteria appropriate to the business; a designated primary discussion forum — in most cases, one or more dedicated reputation risk committees; and a list of designated contacts to whom questions relating to reputation risk should be referred. Any matter giving rise to reputation risk that originates in
a corporate function is required to be escalated directly to Firmwide Reputation Risk Governance (“FRRG”) or to the relevant Risk Committee. Reputation risk governance is overseen by FRRG, which provides oversight of the governance infrastructure and process to support the consistent identification, escalation, management and monitoring of reputation risk issues firmwide.
98
JPMorgan Chase & Co./2017 Annual Report
CREDIT
AND INVESTMENT RISK MANAGEMENT
Credit and investment risk is the risk associated with the default or change in credit profile of a client, counterparty or customer; or loss of principal or a reduction in expected returns on investments.
Credit risk management
Credit risk is the risk associated with the default or change in credit profile of a client, counterparty or customer. The Firm provides credit to a variety of customers, ranging from large corporate and institutional clients to individual consumers and small businesses. In its consumer businesses, the Firm is exposed to credit risk primarily through its home lending, credit card, auto, and business banking businesses. In its wholesale businesses, the Firm is exposed to credit risk through its underwriting,
lending, market-making, and hedging activities with and for clients and counterparties, as well as through its operating services activities (such as cash management and clearing activities), securities financing activities, investment securities portfolio, and cash placed with banks.
Credit risk management is an independent risk management function that monitors, measures and manages credit risk throughout the Firm and defines credit risk policies and procedures. The credit risk function reports to the Firm’s CRO. The Firm’s credit risk management governance includes the following activities:
•
Establishing a comprehensive credit risk policy framework
•
Monitoring,
measuring and managing credit risk across all portfolio segments, including transaction and exposure approval
•
Setting industry concentration limits and establishing underwriting guidelines
•
Assigning and managing credit authorities in connection with the approval of all credit exposure
•
Managing
criticized exposures and delinquent loans
•
Estimating credit losses and ensuring appropriate credit risk-based capital management
Risk identification and measurement
The Credit Risk Management function monitors, measures, manages and limits credit risk across the Firm’s businesses. To measure credit risk, the Firm employs several methodologies for estimating the likelihood of obligor or counterparty default. Methodologies for measuring credit risk vary depending on several factors, including type of asset (e.g., consumer versus wholesale), risk measurement parameters (e.g., delinquency status and borrower’s credit score versus wholesale
risk-rating) and risk management and collection processes (e.g., retail collection center versus centrally managed workout groups). Credit risk measurement is based on the probability of default of an obligor or counterparty, the loss severity given a default event and the exposure at default.
Based on these factors and related market-based inputs, the Firm estimates credit losses for its exposures. Probable credit losses inherent in the consumer and wholesale held-for-investment loan portfolios are reflected in the allowance for loan losses, and probable credit losses inherent in lending-related commitments are reflected in the allowance for lending-related commitments. These losses are estimated using statistical analyses and other factors as described in Note 13. In addition, potential and unexpected credit losses are reflected
in the allocation of credit risk capital and represent the potential volatility of actual losses relative to the established allowances for loan losses and lending-related commitments. The analyses for these losses include stress testing that considers alternative economic scenarios as described in the Stress testing section below. For further information, see Critical Accounting Estimates used by the Firm on pages 138–140.
The methodologies used to estimate credit losses depend on the characteristics of the credit exposure, as described below.
Scored exposure
The scored portfolio is generally held in CCB and predominantly includes residential real estate loans, credit card loans, and certain auto and business banking loans. For the scored portfolio, credit loss estimates
are based on statistical analysis of credit losses over discrete periods of time. The statistical analysis uses portfolio modeling, credit scoring, and decision-support tools, which consider loan-level factors such as delinquency status, credit scores, collateral values, and other risk factors. Credit loss analyses also consider, as appropriate, uncertainties and other factors, including those related to current macroeconomic and political conditions, the quality of underwriting standards, and other internal and external factors. The factors and analysis are updated on a quarterly basis or more frequently as market conditions dictate.
Risk-rated exposure
Risk-rated portfolios are generally held in CIB, CB and AWM, but also include certain business banking and auto dealer loans held in CCB that are risk-rated because they have characteristics similar to commercial
loans. For the risk-rated portfolio, credit loss estimates are based on estimates of the probability of default (“PD”) and loss severity given a default. The probability of default is the likelihood that a borrower will default on its obligation; the loss given default (“LGD”) is the estimated loss on the loan that would be realized upon the default and takes into consideration collateral and structural support for each credit facility. The estimation process includes assigning risk ratings to each borrower and credit facility to differentiate risk within the portfolio. These risk ratings are reviewed regularly by Credit Risk Management and revised as needed to reflect the borrower’s current financial position, risk profile and related collateral. The calculations and assumptions are
JPMorgan
Chase & Co./2017 Annual Report
99
Management’s discussion and analysis
based on both internal and external historical experience and management judgment and are reviewed regularly.
Stress testing
Stress testing is important in measuring and managing credit risk in the Firm’s credit portfolio. The process assesses the potential impact of alternative economic and business scenarios on estimated credit losses for the Firm. Economic scenarios and the underlying parameters are defined centrally, articulated in terms of macroeconomic factors and applied across
the businesses. The stress test results may indicate credit migration, changes in delinquency trends and potential losses in the credit portfolio. In addition to the periodic stress testing processes, management also considers additional stresses outside these scenarios, including industry and country- specific stress scenarios, as necessary. The Firm uses stress testing to inform decisions on setting risk appetite both at a Firm and LOB level, as well as to assess the impact of stress on individual counterparties.
Risk monitoring and management
The Firm has developed policies and practices that are designed to preserve the independence and integrity of the approval and decision-making process of extending credit to ensure credit risks are assessed accurately, approved properly, monitored regularly and managed actively at both the transaction and portfolio levels. The policy framework
establishes credit approval authorities, concentration limits, risk-rating methodologies, portfolio review parameters and guidelines for management of distressed exposures. In addition, certain models, assumptions and inputs used in evaluating and monitoring credit risk are independently validated by groups that are separate from the line of businesses.
Consumer credit risk is monitored for delinquency and other trends, including any concentrations at the portfolio level, as certain of these trends can be modified through changes in underwriting policies and portfolio guidelines. Consumer Risk Management evaluates delinquency and other trends against business expectations, current and forecasted economic conditions, and industry benchmarks. Historical and forecasted economic performance and trends are incorporated into the modeling of estimated consumer credit losses and are part of the monitoring of the credit risk profile
of the portfolio.
Wholesale credit risk is monitored regularly at an aggregate portfolio, industry, and individual client and counterparty level with established concentration limits that are reviewed and revised as deemed appropriate by management, typically on an annual basis. Industry and counterparty limits, as measured in terms of exposure and economic risk appetite, are subject to stress-based loss constraints. In addition, wrong-way risk — the risk that exposure to a counterparty is positively correlated with the impact of a default by the same counterparty, which could cause exposure to increase at the same time as the counterparty’s capacity to meet its obligations is decreasing — is actively
monitored as this risk could result in greater exposure at default compared with a transaction with another counterparty that does not
have this risk.
Management of the Firm’s wholesale credit risk exposure is accomplished through a number of means, including:
•
Loan underwriting and credit approval process
•
Loan syndications and participations
•
Loan sales and securitizations
•
Credit
derivatives
•
Master netting agreements
•
Collateral and other risk-reduction techniques
In addition to Credit Risk Management, an independent Credit Review function is responsible for:
•
Independently
validating or changing the risk grades assigned to exposures in the Firm’s wholesale and commercial-oriented retail credit portfolios, and assessing the timeliness of risk grade changes initiated by responsible business units; and
•
Evaluating the effectiveness of business units’ credit management processes, including the adequacy of credit analyses and risk grading/LGD rationales, proper monitoring and management of credit exposures, and compliance with applicable grading policies and underwriting guidelines.
For further discussion of consumer and wholesale
loans, see Note 12.
Risk reporting
To enable monitoring of credit risk and effective decision-making, aggregate credit exposure, credit quality forecasts, concentration levels and risk profile changes are reported regularly to senior members of Credit Risk Management. Detailed portfolio reporting of industry; clients, counterparties and customers; product and geographic concentrations occurs monthly, and the appropriateness of the allowance for credit losses is reviewed by senior management at least on a quarterly basis. Through the risk reporting and governance structure, credit risk trends and limit exceptions are provided regularly to, and discussed with, risk committees, senior management and the Board of Directors as appropriate.
100
JPMorgan
Chase & Co./2017 Annual Report
CREDIT PORTFOLIO
In the following tables, reported loans include loans retained (i.e., held-for-investment); loans held-for-sale; and certain loans accounted for at fair value. The following tables do not include certain loans the Firm accounts for at fair value and classifies as trading assets. For further information regarding these loans, see Note
2 and Note 3. For additional information on the Firm’s loans, lending-related commitments, and derivative receivables, including the Firm’s accounting policies, see Note 12, Note 27, and Note 5, respectively.
For further information regarding the credit risk inherent in the Firm’s cash placed with banks, investment securities portfolio, and securities financing portfolio, see Note 4, Note 10, and Note 11, respectively.
For discussion of the consumer credit environment and consumer loans, see Consumer
Credit Portfolio on pages 102-107 and Note 12. For discussion of the wholesale credit environment and wholesale loans, see Wholesale Credit Portfolio on pages 108–116 and Note 12.
Total credit portfolio
December
31,
(in millions)
Credit exposure
Nonperforming(e)(f)
2017
2016
2017
2016
Loans retained
$
924,838
$
889,907
$
5,943
$
6,721
Loans
held-for-sale
3,351
2,628
—
162
Loans at fair value
2,508
2,230
—
—
Total
loans – reported
930,697
894,765
5,943
6,883
Derivative receivables
56,523
64,078
130
223
Receivables
from customers and other (a)
26,272
17,560
—
—
Total credit-related assets
1,013,492
976,403
6,073
7,106
Assets
acquired in loan satisfactions
Real estate owned
NA
NA
311
370
Other
NA
NA
42
59
Total assets
acquired in loan satisfactions
NA
NA
353
429
Lending-related commitments
991,482
975,152
(d)
731
506
Total
credit portfolio
$
2,004,974
$
1,951,555
(d)
$
7,157
$
8,041
Credit
derivatives used in credit portfolio management activities(b)
$
(17,609
)
$
(22,114
)
$
—
$
—
Liquid
securities and other cash collateral held against derivatives(c)
(16,108
)
(22,705
)
NA
NA
Year
ended December 31,
(in millions, except ratios)
2017
2016
Net charge-offs(g)
$
5,387
$
4,692
Average
retained loans
Loans
898,979
861,345
Loans – reported, excluding
residential real estate PCI loans
865,887
822,973
Net
charge-off rates(g)
Loans
0.60
%
0.54
%
Loans – excluding PCI
0.62
0.57
(a)
Receivables
from customers and other primarily represents held-for-investment margin loans to brokerage customers.
(b)
Represents the net notional amount of protection purchased and sold through credit derivatives used to manage both performing and nonperforming wholesale credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 115–116 and Note 5.
(c)
Includes
collateral related to derivative instruments where an appropriate legal opinion has not been either sought or obtained.
(d)
The prior period amounts have been revised to conform with the current period presentation.
(e)
Excludes PCI loans. The Firm is recognizing interest income on each pool of PCI loans as each of the pools is performing.
(f)
At
December 31, 2017 and 2016, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $4.3 billion and $5.0 billion, respectively, that are 90 or more days past due; (2) student loans insured by U.S. government agencies under the FFELP of zero and $263 million, respectively, that are 90 or more days past due; and (3) Real estate owned (“REO”) insured by U.S. government agencies of $95 million and $142 million, respectively. These amounts have been excluded based upon the government guarantee. In addition, the Firm’s
policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”).
(g)
For the year ended December 31, 2017, excluding net charge-offs of $467 million related to the student loan portfolio sale, the net charge-off rate for loans would have been 0.55% and for loans - excluding PCI would have been 0.57%.
JPMorgan
Chase & Co./2017 Annual Report
101
Management’s discussion and analysis
CONSUMER CREDIT PORTFOLIO
The Firm’s retained consumer portfolio consists primarily of residential real estate loans, credit card loans, auto loans, and business
banking loans, as well as associated lending-related commitments. The Firm’s focus is on serving primarily the prime segment of the consumer credit market. Originated mortgage loans are retained in the mortgage portfolio, securitized or sold to U.S. government agencies and U.S. government-sponsored enterprises; other types of consumer loans are typically retained on the balance sheet. The credit performance of the consumer portfolio continues to benefit from discipline in credit underwriting as well as improvement in the economy driven by increasing home prices and low unemployment. The total amount of residential real estate loans delinquent 30+ days, excluding government guaranteed and purchased credit impaired loans, increased from December 31, 2016 due to the impact of recent hurricanes; however, the 30+ day delinquency rate decreased due to growth
in the portfolio. The Credit Card 30+ day delinquency rate and the net charge-off rate increased from the prior year, in line with expectations. For further information on consumer loans, see Note 12. For further information on lending-related commitments, see Note 27.
102
JPMorgan Chase & Co./2017 Annual Report
The
following table presents consumer credit-related information with respect to the credit portfolio held by CCB, prime mortgage and home equity loans held by AWM, and prime mortgage loans held by Corporate. For further information about the Firm’s nonaccrual and charge-off accounting policies, see Note 12.
Consumer
credit portfolio
As of or for the year ended December 31,
(in millions, except ratios)
Credit exposure
Nonaccrual loans(k)(l)
Net charge-offs/(recoveries)(e)(m)(n)
Average annual net charge-off rate(e)(m)(n)
2017
2016
2017
2016
2017
2016
2017
2016
Consumer,
excluding credit card
Loans, excluding PCI loans and
loans held-for-sale
Residential mortgage(a)
$
216,496
$
192,486
$
2,175
$
2,256
$
(10
)
$
16
—
%
0.01
%
Home
equity
33,450
39,063
1,610
1,845
69
189
0.19
0.45
Auto(b)(c)
66,242
65,814
141
214
331
285
0.51
0.45
Consumer
& Business Banking(a)(c)(d)
25,789
24,307
283
287
257
257
1.03
1.10
Student(a)(e)
—
7,057
—
165
498
162
NM
2.13
Total
loans, excluding PCI loans and loans held-for-sale
341,977
328,727
4,209
4,767
1,145
909
0.34
0.28
Loans
– PCI
Home equity
10,799
12,902
NA
NA
NA
NA
NA
NA
Prime
mortgage
6,479
7,602
NA
NA
NA
NA
NA
NA
Subprime
mortgage
2,609
2,941
NA
NA
NA
NA
NA
NA
Option
ARMs(f)
10,689
12,234
NA
NA
NA
NA
NA
NA
Total
loans – PCI
30,576
35,679
NA
NA
NA
NA
NA
NA
Total
loans – retained
372,553
364,406
4,209
4,767
1,145
909
0.31
0.25
Loans
held-for-sale
128
238
—
53
—
—
—
—
Total
consumer, excluding credit card loans
372,681
364,644
4,209
4,820
1,145
909
0.31
0.25
Lending-related
commitments(g)
48,553
53,247
(j)
Receivables
from customers(h)
133
120
Total
consumer exposure, excluding credit card
421,367
418,011
(j)
Credit
Card
Loans retained(i)
149,387
141,711
—
—
4,123
3,442
2.95
2.63
Loans
held-for-sale
124
105
—
—
—
—
—
—
Total
credit card loans
149,511
141,816
—
—
4,123
3,442
2.95
2.63
Lending-related
commitments(g)
572,831
553,891
Total
credit card exposure
722,342
695,707
Total
consumer credit portfolio
$
1,143,709
$
1,113,718
(j)
$
4,209
$
4,820
$
5,268
$
4,351
1.04
%
0.89
%
Memo:
Total consumer credit portfolio, excluding PCI
$
1,113,133
$
1,078,039
(j)
$
4,209
$
4,820
$
5,268
$
4,351
1.11
%
0.96
%
(a)
Certain
loan portfolios have been reclassified. The prior period amounts have been revised to conform with the current period presentation.
(b)
At December 31, 2017 and 2016, excluded operating lease assets of $17.1 billion and $13.2 billion, respectively. These operating lease assets are included in other assets on the Firm’s Consolidated balance sheets. The risk of loss on these assets relates to the residual value of the leased vehicles, which is managed through projection
of the lease residual value at lease origination, periodic review of residual values, and through arrangements with certain auto manufacturers that mitigates this risk.
(c)
Includes certain business banking and auto dealer risk-rated loans that apply the wholesale methodology for determining the allowance for loan losses; these loans are managed by CCB, and therefore, for consistency in presentation, are included within the consumer portfolio.
(d)
Predominantly includes Business Banking loans.
(e)
For
the year ended December 31, 2017, excluding net charge-offs of $467 million related to the student loan portfolio sale, the net charge-off rate for Total consumer, excluding credit card and PCI loans and loans held-for-sale would have been 0.20%; Total consumer - retained excluding credit card loans would have been 0.18%; Total consumer credit portfolio would have been 0.95%; and Total consumer credit portfolio, excluding PCI loans would have been 1.01%.
(f)
At December 31, 2017 and 2016,
approximately 68% and 66%, respectively, of the PCI option adjustable rate mortgages (“ARMs”) portfolio has been modified into fixed-rate, fully amortizing loans.
(g)
Credit card and home equity lending-related commitments represent the total available lines of credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit would be used at the same time. For credit card and home equity commitments (if certain conditions are met), the Firm can reduce or cancel these lines of credit by providing the borrower notice or, in some cases as permitted by law, without notice. For further information,
see Note 27.
(h)
Receivables from customers represent held-for-investment margin loans to brokerage customers that are collateralized through assets maintained in the clients’ brokerage accounts. These receivables are reported within accrued interest and accounts receivable on the Firm’s Consolidated balance sheets.
(i)
Includes billed interest and fees net of an allowance for uncollectible interest and fees.
(j)
The
prior period amounts have been revised to conform with the current period presentation.
(k)
At December 31, 2017 and 2016, nonaccrual loans excluded loans 90 or more days past due as follows: (1) mortgage loans insured by U.S. government agencies of $4.3 billion and $5.0 billion, respectively; and (2) student loans insured by U.S. government agencies under the FFELP of zero and $263 million, respectively. These amounts
have been excluded from nonaccrual loans based upon the government guarantee. In addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status, as permitted by regulatory guidance issued by the FFIEC.
(l)
Excludes PCI loans. The Firm is recognizing interest income on each pool of PCI loans as each of the pools is performing.
(m)
Net charge-offs and net charge-off rates excluded write-offs in the PCI portfolio of $86 million and
$156 million for the years ended December 31, 2017 and 2016. These write-offs decreased the allowance for loan losses for PCI loans. See Allowance for Credit Losses on pages 117–119 for further details.
(n)
Average consumer loans held-for-sale were $1.5 billion and $496 million for the years ended December 31,
2017 and 2016, respectively. These amounts were excluded when calculating net charge-off rates.
JPMorgan Chase & Co./2017 Annual Report
103
Management’s discussion and analysis
Consumer,
excluding credit card
Portfolio analysis
Consumer loan balances increased from December 31, 2016 predominantly due to originations of high-quality prime mortgage loans that have been retained on the balance sheet, partially offset by the sale of the student loan portfolio as well as paydowns and the charge-off or liquidation of delinquent loans.
PCI loans are excluded from the following discussions of individual loan products and are addressed separately below. For further information about the Firm’s consumer portfolio, including information about delinquencies, loan modifications and other credit quality indicators, see
Note 12.
Residential
mortgage: The residential mortgage portfolio predominantly consists of high-quality prime mortgage loans with a small component (approximately 1%) of subprime mortgage loans. These subprime mortgage loans continue to run-off and are performing in line with expectations. The residential mortgage portfolio, including loans held-for-sale, increased from December 31, 2016 due to retained originations of primarily high-quality fixed rate prime mortgage loans partially offset by paydowns. Residential mortgage 30+ day delinquencies increased from December 31, 2016 due to the impact of recent hurricanes. Nonaccrual loans decreased from the prior year primarily as a result of loss mitigation activities. There was a net recovery for the year ended December 31,
2017 compared to a net charge-off for the year ended December 31, 2016, reflecting continued improvement in home prices and delinquencies.
At December 31, 2017 and 2016, the Firm’s residential mortgage portfolio, including loans held-for-sale, included $8.6 billion and $9.5 billion, respectively, of mortgage loans insured and/or guaranteed by U.S. government agencies, of which $6.2 billion and $7.0 billion, respectively,
were 30 days or more past due (of these past due loans, $4.3 billion and $5.0 billion, respectively, were 90 days or more past due). The Firm monitors its exposure to certain potential unrecoverable claim payments related to government insured loans and considers this exposure in estimating the allowance for loan losses.
At December 31, 2017 and 2016, the Firm’s residential mortgage portfolio included $20.2 billion and $19.1 billion, respectively, of interest-only loans. These loans have an interest-only
payment period generally followed by an adjustable-rate or fixed-rate fully amortizing payment period to maturity and are typically originated as higher-balance loans to higher-income borrowers. To date, losses on this portfolio generally have been consistent with the broader residential mortgage portfolio. The Firm continues to monitor the risks associated with these loans.
Home equity: The home equity portfolio declined from December 31, 2016 primarily reflecting loan paydowns. The amount of 30+ day delinquencies decreased from December 31, 2016 but was impacted by recent hurricanes. Nonaccrual loans decreased from December 31, 2016
primarily as a result of loss mitigation activities. Net charge-offs for the year ended December 31, 2017 declined when compared with the prior year, partially as a result of lower loan balances.
At December 31, 2017, approximately 90% of the Firm’s home equity portfolio consists of home equity lines of credit (“HELOCs”) and the remainder consists of home equity loans (“HELOANs”). HELOANs are generally fixed-rate, closed-end, amortizing loans, with terms ranging from 3–30 years. In general, HELOCs originated by the Firm are revolving loans for a 10-year period, after which time the HELOC recasts into a loan with a 20-year amortization period.
The
carrying value of HELOCs outstanding was $30 billion at December 31, 2017. Of such amounts, $14 billion have recast from interest-only to fully amortizing payments or have been modified and $5 billion are interest-only balloon HELOCs, which primarily mature after 2030. The Firm manages the risk of HELOCs during their revolving period by closing or reducing the undrawn line to the extent permitted by law when borrowers are exhibiting a material deterioration in their credit risk profile.
104
JPMorgan
Chase & Co./2017 Annual Report
The Firm monitors risks associated with junior lien loans where the borrower has a senior lien loan that is more than 90 days delinquent or has been modified. These loans are considered “high-risk seconds” and are classified as nonaccrual as they are considered to pose a higher risk of default than other junior lien loans. At December 31, 2017, the Firm estimated that the carrying value of its home equity portfolio contained approximately $725 million of current junior lien loans that were considered high-risk seconds, compared with $1.1 billion
at December 31, 2016. For further information, see Note 12.
Auto: The auto loan portfolio, which predominantly consists of prime-quality loans, was relatively flat compared with December 31, 2016, as new originations were largely offset by paydowns and the charge-off or liquidation of delinquent loans. Nonaccrual loans decreased compared with December 31, 2016. Net charge-offs for the year ended December 31, 2017 increased compared with the prior year, primarily as a
result of an incremental adjustment recorded in accordance with regulatory guidance regarding the timing of loss recognition for certain loans in bankruptcy and loans where assets were acquired in loan satisfaction.
Consumer & Business banking: Consumer & Business Banking loans increased compared with December 31, 2016 as growth due to loan originations was partially offset by paydowns and the charge-off or liquidation of delinquent loans. Nonaccrual loans and net charge-offs were relatively flat compared with prior year.
Student: The Firm wrote down and subsequently sold the student loan portfolio during 2017. Net charge-offs for the year ended December 31,
2017 increased as a result of the write-down.
Purchased credit-impaired loans: PCI loans decreased as the portfolio continues to run off. As of December 31, 2017, approximately 11% of the option ARM PCI loans were delinquent and approximately 68% of the portfolio had been modified into fixed-rate, fully amortizing loans. The borrowers for substantially all of the remaining loans are making amortizing payments, although such payments are not necessarily fully amortizing. This latter group of loans is subject to the risk of payment shock due to future payment recast. Default rates generally increase on option ARM loans when payment recast results in a payment increase. The expected increase
in default rates is considered in the Firm’s quarterly impairment assessment.
The following table provides a summary of lifetime principal loss estimates included in either the nonaccretable difference or the allowance for loan losses.
Summary of PCI loans lifetime principal loss estimates
Lifetime
loss estimates(a)
Life-to-date liquidation losses(b)
December 31, (in billions)
2017
2016
2017
2016
Home equity
$
14.2
$
14.4
$
12.9
$
12.8
Prime
mortgage
4.0
4.0
3.8
3.7
Subprime mortgage
3.3
3.2
3.1
3.1
Option
ARMs
10.0
10.0
9.7
9.7
Total
$
31.5
$
31.6
$
29.5
$
29.3
(a)
Includes
the original nonaccretable difference established in purchase accounting of $30.5 billion for principal losses plus additional principal losses recognized subsequent to acquisition through the provision and allowance for loan losses. The remaining nonaccretable difference for principal losses was $842 million and $1.1 billion at December 31, 2017 and 2016, respectively.
(b)
Represents both realization of loss upon loan
resolution and any principal forgiven upon modification.
For further information on the Firm’s PCI loans, including write-offs, see Note 12.
Geographic composition of residential real estate loans
At December 31, 2017, $152.8 billion, or 63% of the total retained residential real estate loan portfolio, excluding mortgage loans insured by U.S. government agencies and PCI loans, were concentrated in California, New York, Illinois, Texas and Florida, compared with $139.9 billion, or 63%,
at December 31, 2016. For additional information on the geographic composition of the Firm’s residential real estate loans, see Note 12.
Current estimated loan-to-values of residential real estate loans
Average current estimated loan-to-value (“LTV”) ratios have declined consistent with improvements in home prices, customer pay downs, and charge-offs or liquidations of higher LTV loans. For further information on current estimated LTVs of residential real estate loans, see Note 12.
Loan modification activities for residential real estate loans
The
performance of modified loans generally differs by product type due to differences in both the credit quality and the types of modifications provided. Performance metrics for modifications to the residential real estate portfolio, excluding PCI loans, that have been seasoned more than six months show weighted-average redefault rates of 24% for residential mortgages and 21% for home equity. The cumulative performance metrics for modifications to the PCI residential real estate portfolio that have been seasoned more than six months show weighted average redefault rates of 20% for home equity, 19% for prime mortgages, 16% for option ARMs and 34% for subprime mortgages. The cumulative redefault
rates reflect the performance of modifications completed under both the U.S. Government’s Home Affordable Modification Program (“HAMP”) and the Firm’s proprietary modification programs
Certain loans that were modified under HAMP and the Firm’s proprietary modification programs have interest rate reset provisions (“step-rate modifications”). Interest rates on these loans generally began to increase commencing in 2014 by 1% per year, and will continue to do so until the rate reaches a specified cap. The cap on these loans is typically at a prevailing market interest rate for a fixed-rate mortgage loan as of the modification date. At December 31, 2017, the carrying value of non-PCI loans and the unpaid principal balance of PCI loans modified in step-rate modifications, which have not yet met their specified caps, were $3 billion
and $7 billion, respectively. The Firm continues to monitor this risk exposure and the impact of these potential interest rate increases is considered in the Firm’s allowance for loan losses.
The following table presents information as of December 31, 2017 and 2016, relating to modified retained residential real estate loans for which concessions have been granted to borrowers experiencing financial difficulty. For further information on modifications for the years ended December 31, 2017 and 2016,
see Note 12.
Modified residential real estate loans
2017
2016
December 31,
(in millions)
Retained
loans
Nonaccrual retained
loans(d)
Retained loans
Nonaccrual retained
loans(d)
Modified residential real estate loans, excluding PCI loans(a)(b)
Residential
mortgage
5,620
1,743
6,032
1,755
Home equity
$
2,118
$
1,032
$
2,264
$
1,116
Total
modified residential real estate loans, excluding PCI loans
$
7,738
$
2,775
$
8,296
$
2,871
Modified PCI loans(c)
Home
equity
$
2,277
NA
$
2,447
NA
Prime mortgage
4,490
NA
5,052
NA
Subprime
mortgage
2,678
NA
2,951
NA
Option ARMs
8,276
NA
9,295
NA
Total
modified PCI loans
$
17,721
NA
$
19,745
NA
(a)
Amounts represent
the carrying value of modified residential real estate loans.
(b)
At December 31, 2017 and 2016, $3.8 billion and $3.4 billion, respectively, of loans modified subsequent to repurchase from Ginnie Mae in accordance with the standards of the appropriate government agency (i.e., Federal Housing Administration (“FHA”), U.S. Department of Veterans Affairs (“VA”), Rural Housing Service of the U.S. Department of Agriculture (“RHS”)) are not included
in the table above. When such loans perform subsequent to modification in accordance with Ginnie Mae guidelines, they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure. For additional information about sales of loans in securitization transactions with Ginnie Mae, see Note 14.
(c)
Amounts represent the unpaid principal balance of modified PCI loans.
(d)
As of December 31,
2017 and 2016, nonaccrual loans included $2.2 billion and $2.3 billion, respectively, of troubled debt restructuring (“TDRs”) for which the borrowers were less than 90 days past due. For additional information about loans modified in a TDR that are on nonaccrual status, see Note 12.
Nonperforming assets
The following table presents information as of December 31, 2017 and 2016,
about consumer, excluding credit card, nonperforming assets.
Nonperforming assets(a)
December 31, (in millions)
2017
2016
Nonaccrual
loans(b)
Residential real estate(c)
$
3,785
$
4,154
Other consumer(c)
424
666
Total
nonaccrual loans
4,209
4,820
Assets acquired in loan satisfactions
Real estate owned
225
292
Other
40
57
Total
assets acquired in loan satisfactions
265
349
Total nonperforming assets
$
4,474
$
5,169
(a)
At
December 31, 2017 and 2016, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $4.3 billion and $5.0 billion, respectively, that are 90 or more days past due; (2) student loans insured by U.S. government agencies under the FFELP of zero and $263 million, respectively, that are 90 or more days past due; and (3) real estate owned insured by U.S. government agencies of $95 million and $142 million, respectively. These amounts have been excluded based upon the government guarantee.
(b)
Excludes
PCI loans which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of individual loans within the pools, is not meaningful. The Firm is recognizing interest income on each pool of loans as each of the pools is performing.
(c)
Certain loan portfolios have been reclassified. The prior period amounts have been revised to conform with the current period presentation.
Nonaccrual loans in the residential real estate portfolio at December 31,
2017 decreased to $3.8 billion from $4.2 billion at December 31, 2016, of which 26% and 29% were greater than 150 days past due, respectively. In the aggregate, the unpaid principal balance of residential real estate loans greater than 150 days past due was charged down by approximately 40% and 43% to
the estimated net realizable value of the collateral at December 31, 2017 and 2016, respectively.
Active and suspended foreclosure: For information on loans that were in the process of active or suspended foreclosure, see Note 12.
Nonaccrual loans: The following table presents changes in the consumer, excluding credit card, nonaccrual loans for the years ended December 31, 2017 and 2016.
Nonaccrual
loan activity
Year ended December 31,
(in millions)
2017
2016
Beginning
balance
$
4,820
$
5,413
Additions
3,525
3,858
Reductions:
Principal
payments and other(a)
1,577
1,437
Charge-offs
699
843
Returned to performing status
1,509
1,589
Foreclosures
and other liquidations
351
582
Total reductions
4,136
4,451
Net changes
(611
)
(593
)
Ending
balance
$
4,209
$
4,820
(a)
Other reductions includes loan sales.
106
JPMorgan
Chase & Co./2017 Annual Report
Credit card
Total credit card loans increased from December 31, 2016 due to strong new account growth and higher sales volume. The December 31, 2017 30+ day delinquency rate increased to 1.80% from 1.61% at December 31, 2016, while the December 31, 2017 90+ day delinquency rate increased to 0.92% from 0.81% at December 31, 2016, in line with expectations. Net charge-offs increased for the year ended December 31, 2017
primarily due to growth in newer vintages which, as anticipated, have higher loss rates than the more seasoned portion of the portfolio. The credit card portfolio continues to reflect a largely well-seasoned portfolio that has strong U.S. geographic diversification.
Loans outstanding in the top five states of California, Texas, New York, Florida and Illinois consisted of $67.2 billion in receivables, or 45% of the retained loan portfolio, at December 31, 2017, compared with $62.8 billion, or 44%, at December 31, 2016. For more information on
the geographic and FICO composition of the Firm’s credit card loans, see Note 12.
Modifications of credit card loans
At both December 31, 2017 and 2016, the Firm had $1.2 billion of credit card loans outstanding that have been modified in TDRs. These balances included both credit card loans with modified payment terms and credit card loans that reverted back to their pre-modification payment terms because the cardholder did not comply with the modified payment terms.
Consistent with the Firm’s policy, all credit card loans typically remain on accrual
status until charged off. However, the Firm establishes an allowance, which is offset against loans and charged to interest income, for the estimated uncollectible portion of accrued and billed interest and fee income.
For additional information about loan modification programs to borrowers, see Note 12.
JPMorgan Chase & Co./2017 Annual Report
107
Management’s
discussion and analysis
WHOLESALE CREDIT PORTFOLIO
In its wholesale businesses, the Firm is exposed to credit risk through its underwriting, lending, market-making, and hedging activities with and for clients and counterparties, as well as through its operating services activities (such as cash management and clearing activities), securities financing activities, investment securities portfolio, and cash placed with banks. A portion of the loans originated or acquired by the Firm’s wholesale businesses is generally retained on the balance sheet. The Firm distributes
a significant percentage of the loans it originates into the market as part of its syndicated loan business and to manage portfolio concentrations and credit risk.
The wholesale credit portfolio was stable for the year ended December 31, 2017, characterized by low levels of criticized exposure, nonaccrual loans and charge-offs. See industry discussion on pages 109–112 for further information. The increase in retained loans was driven by new originations in CB and higher loans to Private Banking clients in AWM, which was partially offset by paydowns in CIB. Discipline in underwriting across all areas of lending continues to be a key point of focus. The wholesale portfolio is actively managed, in part by conducting ongoing, in-depth
reviews of client credit quality and transaction structure inclusive of collateral where applicable, and of industry, product and client concentrations.
In the following tables, the Firm’s wholesale credit portfolio includes exposure held in CIB, CB, AWM and Corporate, and excludes all exposure managed by CCB.
Wholesale credit portfolio
December
31,
(in millions)
Credit exposure
Nonperforming(c)
2017
2016
2017
2016
Loans retained
$
402,898
$
383,790
$
1,734
$
1,954
Loans
held-for-sale
3,099
2,285
—
109
Loans at fair value
2,508
2,230
—
—
Loans
– reported
408,505
388,305
1,734
2,063
Derivative receivables
56,523
64,078
130
223
Receivables
from customers and other(a)
26,139
17,440
—
—
Total wholesale credit-related assets
491,167
469,823
1,864
2,286
Lending-related
commitments
370,098
368,014
731
506
Total wholesale credit exposure
$
861,265
$
837,837
$
2,595
$
2,792
Credit
derivatives used
in credit portfolio management activities(b)
$
(17,609
)
$
(22,114
)
$
—
$
—
Liquid
securities and other cash collateral held against derivatives
(16,108
)
(22,705
)
NA
NA
(a)
Receivables from
customers and other include $26.0 billion and $17.3 billion of held-for-investment margin loans at December 31, 2017 and 2016, respectively, to brokerage customers in CIB Prime Services and in AWM; these are classified in accrued interest and accounts receivable on the Consolidated balance sheets.
(b)
Represents the net notional amount of protection purchased and sold through credit derivatives used to manage both performing and nonperforming wholesale credit
exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 115–116, and Note 5.
(c)
Excludes assets acquired in loan satisfactions.
108
JPMorgan Chase & Co./2017
Annual Report
The following tables present the maturity and ratings profiles of the wholesale credit portfolio as of December 31, 2017 and 2016. The ratings scale is based on the Firm’s internal risk ratings, which generally correspond to the ratings assigned by S&P and Moody’s. For additional information on wholesale loan portfolio risk ratings, see Note 12.
Wholesale
credit exposure – maturity and ratings profile
Less: Liquid
securities and other cash collateral held against derivatives
(22,705
)
(22,705
)
Total
derivative receivables, net of all collateral
14,019
8,510
18,844
41,373
33,081
8,292
41,373
80
Lending-related
commitments
88,399
271,825
7,790
368,014
269,820
98,194
368,014
73
Subtotal
219,656
447,570
125,951
793,177
592,824
200,353
793,177
75
Loans
held-for-sale and loans at fair value(a)
4,515
4,515
Receivables
from customers and other
17,440
17,440
Total
exposure – net of liquid securities and other cash collateral held against derivatives
$
815,132
$
815,132
Credit
derivatives used in credit portfolio management activities (b)(c)
$
(1,354
)
$
(16,537
)
$
(4,223
)
$
(22,114
)
$
(18,710
)
$
(3,404
)
$
(22,114
)
85
%
(a)
Represents
loans held-for-sale, primarily related to syndicated loans and loans transferred from the retained portfolio, and loans at fair value.
(b)
These derivatives do not qualify for hedge accounting under U.S. GAAP.
(c)
The notional amounts are presented on a net basis by underlying reference entity and the ratings profile shown is based on the ratings of the reference entity on which protection has been purchased. Predominantly all of the credit derivatives entered into by the Firm where it has purchased protection used in
credit portfolio management activities, are executed with investment-grade counterparties.
(d)
The maturity profile of retained loans, lending-related commitments and derivative receivables is based on remaining contractual maturity. Derivative contracts that are in a receivable position at December 31, 2017, may become payable prior to maturity based on their cash flow profile or changes in market conditions.
Wholesale
credit exposure – industry exposures
The Firm focuses on the management and diversification of its industry exposures, and pays particular attention to industries with actual or potential credit concerns. Exposures deemed criticized align with the U.S. banking regulators’ definition of criticized exposures, which consist
of the special mention, substandard and doubtful categories. The total criticized component of the portfolio, excluding loans held-for-sale and loans at fair value, was $15.6 billion at December 31, 2017, compared with $19.8 billion at December 31, 2016,
driven by a 47% decrease in the Oil & Gas portfolio.
JPMorgan Chase & Co./2017 Annual Report
109
Management’s discussion and analysis
In 2017, the Firm revised its methodology for the assignment of industry classifications, to better monitor and manage concentrations. This largely resulted in the re-assignment of holding companies from All other to the industry
of risk category based on the primary business activity of the holding company’s underlying entities. In the tables and industry discussions below, the prior period amounts have been revised to conform with the current period presentation.
Below are summaries of the Firm’s exposures as of December 31, 2017 and 2016. For additional information on industry concentrations, see Note 4.
Wholesale
credit exposure – industries(a)
Selected metrics
30
days or more past due and accruing loans
Net charge-offs/
(recoveries)
Credit derivative hedges(f)
Liquid securities
and other cash collateral held against derivative receivables
The
industry rankings presented in the table as of December 31, 2016, are based on the industry rankings of the corresponding exposures at December 31, 2017, not actual rankings of such exposures at December 31, 2016.
(b)
In addition to the credit risk exposure to states and municipal governments (both U.S. and non-U.S.) at December 31, 2017 and 2016,
noted above, the Firm held: $9.8 billion and $9.1 billion, respectively, of trading securities; $32.3 billion and $31.6 billion, respectively, of AFS securities; and $14.4 billion and $14.5 billion, respectively, of HTM securities, issued by U.S. state and municipal governments. For further information, see Note 2 and Note 10.
(c)
All other
includes: individuals; SPEs; and private education and civic organizations, representing approximately 59%, 37% and 4%, respectively, at both December 31, 2017 and December 31, 2016.
(d)
Excludes cash placed with banks of $421.0 billion and $380.2 billion, at December 31, 2017 and 2016,
respectively, which is predominantly placed with various central banks, primarily Federal Reserve Banks.
(e)
Credit exposure is net of risk participations and excludes the benefit of credit derivatives used in credit portfolio management activities held against derivative receivables or loans and liquid securities and other cash collateral held against derivative receivables.
(f)
Represents the net notional amounts of protection purchased and sold through credit derivatives used to manage the credit exposures; these
derivatives do not qualify for hedge accounting under U.S. GAAP. The All other category includes purchased credit protection on certain credit indices.
(g)
Prior period amounts have been revised to conform with the current period presentation.
JPMorgan Chase & Co./2017 Annual Report
111
Management’s
discussion and analysis
Presented below is additional detail on certain industries to which the Firm has exposure.
Real Estate
Exposure to the Real Estate industry increased $5.1 billion during the year ended December 31, 2017, to $139.4 billion predominantly driven by multifamily lending within CB. For the year ended December 31, 2017, the investment-grade percentage of the portfolio was 83%, up from 78% for the year ended December 31, 2016. For further information on Real Estate loans, see Note 12.
Real Estate exposure is predominantly secured; unsecured exposure is largely investment-grade.
(c)
Represents drawn exposure as a percentage of credit exposure.
Oil & Gas and Natural Gas Pipelines
Exposure to the Oil & Gas and Natural Gas Pipeline portfolios increased by $1.1 billion during the year ended December 31,
2017 to $45.9 billion. During the year ended December 31, 2017, the credit quality of this exposure continued to improve, with the investment-grade percentage increasing from 48% to 53% and criticized exposure decreasing by $4.5 billion.
(a)
Other Oil & Gas includes Integrated Oil & Gas companies, Midstream/Oil Pipeline companies and refineries.
(b) Natural Gas Pipelines is reported within the Utilities Industry.
(c) Secured lending is $14.0 billion and $14.3 billion at December 31, 2017 and December 31, 2016, respectively, approximately half of which is reserve-based lending to the Exploration & Production sub-sector; unsecured exposure is largely investment-grade.
(d) Represents drawn exposure as a percentage of credit exposure.
112
JPMorgan
Chase & Co./2017 Annual Report
Loans
In the normal course of its wholesale business, the Firm provides loans to a variety of clients, ranging from large corporate and institutional clients to high-net-worth individuals. For further discussion on loans, including information on credit quality indicators and sales of loans, see Note 12.
The following table presents the change in the nonaccrual loan portfolio for the years ended December 31, 2017 and 2016.
Wholesale nonaccrual loan activity(a)
Year ended December 31, (in millions)
2017
2016
Beginning
balance
$
2,063
$
1,016
Additions
1,482
2,981
Reductions:
Paydowns
and other
1,137
1,148
Gross charge-offs
200
385
Returned to performing status
189
242
Sales
285
159
Total
reductions
1,811
1,934
Net changes
(329
)
1,047
Ending balance
$
1,734
$
2,063
(a) Loans
are placed on nonaccrual status when management believes full payment of principal or interest is not expected, regardless of delinquency status, or when principal or interest have been in default for a period of 90 days or more unless the loan is both well-secured and in the process of collection.
The following table presents net charge-offs/recoveries, which are defined as gross charge-offs less recoveries, for the years ended December 31, 2017 and 2016. The amounts in the table below do not include gains or losses from sales of nonaccrual loans.
Wholesale
net charge-offs/(recoveries)
Year ended December 31,
(in millions, except ratios)
2017
2016
Loans – reported
Average loans retained
$
392,263
$
371,778
Gross
charge-offs
212
398
Gross recoveries
(93
)
(57
)
Net charge-offs
119
341
Net
charge-off rate
0.03
%
0.09
%
Lending-related commitments
The Firm uses lending-related financial instruments, such as commitments (including revolving credit facilities) and guarantees, to meet the financing needs of its clients. The contractual amounts of these financial instruments represent the maximum possible credit risk should the counterparties draw down on these commitments or the Firm fulfill its obligations under these guarantees, and the counterparties subsequently fail to perform according to the terms of these contracts.
Most of these commitments and guarantees are refinanced, extended, cancelled, or expire without being drawn upon or a default occurring. In the Firm’s view, the total contractual amount of these wholesale lending-related commitments is not representative of the Firm’s expected future credit exposure or funding requirements. For further information on wholesale lending-related commitments, see Note 27.
Clearing services
The Firm provides clearing services for clients entering into securities and derivative transactions. Through the provision of these services the Firm is exposed to the risk of non-performance by its clients and may be required to share in losses incurred by central counterparties. Where possible, the Firm seeks to mitigate its credit risk to its clients through the collection of adequate margin at inception and throughout
the life of the transactions and can also cease provision of clearing services if clients do not adhere to their obligations under the clearing agreement. For further discussion of clearing services, see Note 27.
In
the normal course of business, the Firm uses derivative instruments predominantly for market-making activities. Derivatives enable counterparties to manage exposures to fluctuations in interest rates, currencies and other markets. The Firm also uses derivative instruments to manage its own credit and other market risk exposure. The nature of the counterparty and the settlement mechanism of the derivative affect the credit risk to which the Firm is exposed. For OTC derivatives the Firm is exposed to the credit risk of the derivative counterparty. For exchange-traded derivatives (“ETD”), such as futures and options, and “cleared” over-the-counter (“OTC-cleared”) derivatives, the Firm is generally exposed to the credit risk of the relevant CCP. Where possible, the Firm seeks to mitigate its credit risk exposures arising from derivative transactions through the use of legally enforceable master netting arrangements and collateral agreements. For further
discussion of derivative contracts, counterparties and settlement types, see Note 5.
The following table summarizes the net derivative receivables for the periods presented.
Derivative receivables
December 31, (in millions)
2017
2016
Interest
rate
$
24,673
$
28,302
Credit derivatives
869
1,294
Foreign exchange
16,151
23,271
Equity
7,882
4,939
Commodity
6,948
6,272
Total,
net of cash collateral
56,523
64,078
Liquid securities and other cash collateral held against derivative receivables(a)
(16,108
)
(22,705
)
Total, net of all collateral
$
40,415
$
41,373
(a)
Includes
collateral related to derivative instruments where an appropriate legal opinion has not been either sought or obtained.
Derivative receivables reported on the Consolidated balance sheets were $56.5 billion and $64.1 billion at December 31, 2017 and 2016, respectively. Derivative receivables decreased predominantly as a result of client-driven market-making activities in CIB Markets, which reduced foreign exchange and interest rate derivative receivables, and increased equity derivative receivables, driven by market movements.
Derivative receivables amounts represent the fair
value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by the Firm. However, in management’s view, the appropriate measure of current credit risk should also take into consideration additional liquid securities (primarily U.S. government and agency securities and other group of seven nations (“G7”) government bonds) and other cash collateral held by the Firm aggregating $16.1 billion and $22.7 billion at December 31, 2017 and 2016, respectively, that may be used as security when the fair value of the client’s exposure
is in the Firm’s favor.
In addition to the collateral described in the preceding paragraph, the Firm also holds additional collateral (primarily cash, G7 government securities, other liquid government-agency and guaranteed securities, and corporate debt and equity securities) delivered by clients at the initiation of transactions, as well as collateral related to contracts that have a non-daily call frequency and collateral that the Firm has agreed to return but has not yet settled as of the reporting date. Although this collateral does not reduce the balances and is not included in the table above, it is available as security against potential exposure that could arise should the fair value of the client’s derivative transactions move in the Firm’s favor. The derivative receivables fair value,
net of all collateral, also does not include other credit enhancements, such as letters of credit. For additional information on the Firm’s use of collateral agreements, see Note 5.
While useful as a current view of credit exposure, the net fair value of the derivative receivables does not capture the potential future variability of that credit exposure. To capture the potential future variability of credit exposure, the Firm calculates, on a client-by-client basis, three measures of potential derivatives-related credit loss: Peak, Derivative Risk Equivalent (“DRE”), and Average exposure (“AVG”). These measures all incorporate netting and collateral benefits, where applicable.
Peak represents a conservative measure of potential exposure to a counterparty calculated in a manner that is broadly equivalent to a 97.5% confidence
level over the life of the transaction. Peak is the primary measure used by the Firm for setting of credit limits for derivative transactions, senior management reporting and derivatives exposure management. DRE exposure is a measure that expresses the risk of derivative exposure on a basis intended to be equivalent to the risk of loan exposures. DRE is a less extreme measure of potential credit loss than Peak and is used for aggregating derivative credit risk exposures with loans and other credit risk.
Finally, AVG is a measure of the expected fair value of the Firm’s derivative receivables at future time periods, including the benefit of collateral. AVG exposure over the total life of the derivative contract is used as the primary metric for pricing purposes and is used to calculate credit risk capital and the CVA, as further described
below. The three year AVG exposure was $29.0 billion and $31.1 billion at December 31, 2017 and 2016, respectively, compared with derivative receivables, net of all collateral, of $40.4 billion and $41.4 billion at December 31, 2017 and 2016, respectively.
The fair value of the Firm’s derivative receivables incorporates CVA to reflect the credit quality
of counterparties. CVA is based on the Firm’s AVG to a counterparty and the counterparty’s credit spread in the credit derivatives market. The Firm believes that active risk management is essential to controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firm’s risk management process takes into consideration the potential
114
JPMorgan Chase & Co./2017 Annual Report
impact
of wrong-way risk, which is broadly defined as the potential for increased correlation between the Firm’s exposure to a counterparty (AVG) and the counterparty’s credit quality. Many factors may influence the nature and magnitude of these correlations over time. To the extent that these correlations are identified, the Firm may adjust the CVA associated with that counterparty’s AVG. The Firm risk manages exposure to changes in CVA by entering into credit derivative transactions, as well as interest rate, foreign exchange, equity and commodity derivative transactions.
The accompanying graph shows exposure profiles to the Firm’s current derivatives portfolio over the next 10 years as calculated by the Peak, DRE and AVG metrics. The three measures generally show that exposure will decline after the first year, if no new trades are added to the portfolio.
The following table summarizes the ratings profile by derivative counterparty of the Firm’s derivative receivables, including credit derivatives, net of all collateral, at the dates indicated. The ratings scale is based on the Firm’s internal ratings, which generally correspond to the ratings as assigned by S&P and Moody’s.
Ratings
profile of derivative receivables
Rating equivalent
2017
2016
December 31,
(in millions, except ratios)
Exposure net of all collateral
%
of exposure net
of all collateral
Exposure net of all collateral
% of exposure net
of all collateral
AAA/Aaa to AA-/Aa3
$
11,529
29
%
$
11,449
28
%
A+/A1
to A-/A3
6,919
17
8,505
20
BBB+/Baa1 to BBB-/Baa3
13,925
34
13,127
32
BB+/Ba1
to B-/B3
7,397
18
7,308
18
CCC+/Caa1 and below
645
2
984
2
Total
$
40,415
100
%
$
41,373
100
%
As
previously noted, the Firm uses collateral agreements to mitigate counterparty credit risk. The percentage of the Firm’s over-the-counter derivatives transactions subject to collateral agreements — excluding foreign exchange spot trades, which are not typically covered by collateral agreements due to their short maturity and centrally cleared trades that are settled daily — was approximately 90% as of December 31, 2017, largely unchanged compared with December 31, 2016.
Credit derivatives
The Firm uses credit derivatives for two primary purposes: first, in its capacity as a market-maker, and second, as an end-user to manage the Firm’s own credit risk associated with various exposures. For
a detailed description of credit derivatives, see Credit derivatives in Note 5.
Credit portfolio management activities
Included in the Firm’s end-user activities are credit derivatives used to mitigate the credit risk associated with traditional lending activities (loans and unfunded commitments) and derivatives counterparty exposure in the Firm’s wholesale businesses (collectively, “credit portfolio management” activities). Information on credit portfolio management activities is provided in the table below. For further information on derivatives used in credit portfolio management activities, see Credit derivatives in Note 5.
The Firm also uses credit derivatives as an end-user to manage
other exposures, including credit risk arising from certain securities held in the Firm’s market-making businesses. These credit derivatives are not included in credit portfolio management activities; for further information on these credit derivatives as well as credit derivatives used in the Firm’s capacity as a market-maker in credit derivatives, see Credit derivatives in Note 5.
JPMorgan Chase & Co./2017 Annual Report
115
Management’s
discussion and analysis
Credit derivatives used in credit portfolio management activities
Notional amount of protection
purchased (a)
December 31, (in millions)
2017
2016
Credit
derivatives used to manage:
Loans and lending-related commitments
$
1,867
$
2,430
Derivative receivables
15,742
19,684
Credit
derivatives used in credit portfolio management activities
$
17,609
$
22,114
(a)
Amounts are presented net, considering the Firm’s net protection purchased or sold with respect to each underlying reference entity or index.
The
credit derivatives used in credit portfolio management activities do not qualify for hedge accounting under U.S. GAAP; these derivatives are reported at fair value, with gains and losses recognized in principal transactions revenue. In contrast, the loans and lending-related commitments being risk-managed are accounted for on an accrual basis. This asymmetry in accounting treatment,
between loans and lending-related commitments and the credit derivatives used in credit portfolio management activities, causes earnings volatility that is not representative, in the Firm’s view, of the true changes in value of the Firm’s overall credit exposure.
The effectiveness of credit default swaps (“CDS”) as a hedge against the Firm’s exposures may vary depending on a number of factors, including the named reference entity (i.e., the Firm may
experience losses on specific exposures that are different than the named reference entities in the purchased CDS); the contractual terms of the CDS (which may have a defined credit event that does not align with an actual loss realized by the Firm); and the maturity of the Firm’s CDS protection (which in some cases may be shorter than the Firm’s exposures). However, the Firm generally seeks to purchase credit protection with a maturity date that is the same or similar to the maturity date of the exposure for which the protection was purchased, and remaining differences in maturity are actively monitored and managed by the Firm.
116
JPMorgan
Chase & Co./2017 Annual Report
ALLOWANCE FOR CREDIT LOSSES
JPMorgan Chase’s allowance for credit losses covers the retained consumer and wholesale loan portfolios, as well as the Firm’s wholesale and certain consumer lending-related commitments.
For a further discussion of the components of the allowance for credit losses and related
management judgments, see Critical Accounting Estimates Used by the Firm on pages 138–140 and Note 13.
At least quarterly, the allowance for credit losses is reviewed by the CRO, the CFO and the Controller of the Firm, and discussed with the Board of Directors’ Risk Policy Committee (“DRPC”) and the Audit Committee. As of December 31, 2017, JPMorgan Chase deemed the allowance for credit losses to be appropriate and sufficient to absorb probable credit losses inherent in the portfolio.
The allowance for credit losses decreased as of December 31,
2017, driven by:
•
a net reduction in the wholesale allowance, reflecting credit quality improvements in the Oil & Gas, Natural Gas Pipelines, and Metals & Mining portfolios (compared with additions to the allowance in the prior year driven by downgrades in the same portfolios)
largely offset by
•
a net increase in the consumer allowance, reflecting
–
additions
to the allowance for the credit card and business banking portfolios, driven by loan growth in both of these portfolios and higher loss rates in the credit card portfolio,
largely offset by
–
a reduction in the allowance for the residential real estate portfolio, predominantly driven by continued improvement in home prices and delinquencies, and
–
the utilization of the allowance in connection with the sale of the student loan portfolio.
For
additional information on the consumer and wholesale credit portfolios, see Consumer Credit Portfolio on pages 102-107, Wholesale Credit Portfolio on pages 108–116 and
Note 12.
JPMorgan Chase & Co./2017 Annual Report
117
Management’s discussion and analysis
Summary
of changes in the allowance for credit losses
2017
2016
Year ended December 31,
Consumer, excluding
credit card
Credit
card
Wholesale
Total
Consumer, excluding
credit card
Credit card
Wholesale
Total
(in millions, except ratios)
Allowance for loan losses
Beginning
balance at January 1,
$
5,198
$
4,034
$
4,544
$
13,776
$
5,806
$
3,434
$
4,315
$
13,555
Gross
charge-offs
1,779
4,521
212
6,512
1,500
3,799
398
5,697
Gross
recoveries
(634
)
(398
)
(93
)
(1,125
)
(591
)
(357
)
(57
)
(1,005
)
Net
charge-offs(a)
1,145
4,123
119
5,387
909
3,442
341
4,692
Write-offs
of PCI loans(b)
86
—
—
86
156
—
—
156
Provision
for loan losses
613
4,973
(286
)
5,300
467
4,042
571
5,080
Other
(1
)
—
2
1
(10
)
—
(1
)
(11
)
Ending
balance at December 31,
$
4,579
$
4,884
$
4,141
$
13,604
$
5,198
$
4,034
$
4,544
$
13,776
Impairment
methodology
Asset-specific(c)
$
246
$
383
$
461
$
1,090
$
308
$
358
$
342
$
1,008
Formula-based
2,108
4,501
3,680
10,289
2,579
3,676
4,202
10,457
PCI
2,225
—
—
2,225
2,311
—
—
2,311
Total
allowance for loan losses
$
4,579
$
4,884
$
4,141
$
13,604
$
5,198
$
4,034
$
4,544
$
13,776
Allowance
for lending-related commitments
Beginning balance at January 1,
$
26
$
—
$
1,052
$
1,078
$
14
$
—
$
772
$
786
Provision
for lending-related commitments
7
—
(17
)
(10
)
—
—
281
281
Other
—
—
—
—
12
—
(1
)
11
Ending
balance at December 31,
$
33
$
—
$
1,035
$
1,068
$
26
$
—
$
1,052
$
1,078
Impairment
methodology
Asset-specific
$
—
$
—
$
187
$
187
$
—
$
—
$
169
$
169
Formula-based
33
—
848
881
26
—
883
909
Total
allowance for lending-related commitments(d)
$
33
$
—
$
1,035
$
1,068
$
26
$
—
$
1,052
$
1,078
Total
allowance for credit losses
$
4,612
$
4,884
$
5,176
$
14,672
$
5,224
$
4,034
$
5,596
$
14,854
Memo:
Retained
loans, end of period
$
372,553
$
149,387
$
402,898
$
924,838
$
364,406
$
141,711
$
383,790
$
889,907
Retained
loans, average
366,798
139,918
392,263
898,979
358,486
131,081
371,778
861,345
PCI
loans, end of period
30,576
—
3
30,579
35,679
—
3
35,682
Credit
ratios
Allowance for loan losses to retained loans
1.23
%
3.27
%
1.03
%
1.47
%
1.43
%
2.85
%
1.18
%
1.55
%
Allowance
for loan losses to retained nonaccrual loans(e)
109
NM
239
229
109
NM
233
205
Allowance
for loan losses to retained nonaccrual loans excluding credit card
109
NM
239
147
109
NM
233
145
Net
charge-off rate(a)
0.31
2.95
0.03
0.60
0.25
2.63
0.09
0.54
Credit
ratios, excluding residential real estate PCI loans
Allowance for loan losses to retained loans
0.69
3.27
1.03
1.27
0.88
2.85
1.18
1.34
Allowance
for loan losses to retained
nonaccrual loans(e)
56
NM
239
191
61
NM
233
171
Allowance
for loan losses to retained nonaccrual
loans excluding credit card
56
NM
239
109
61
NM
233
111
Net
charge-off rate(a)
0.34
%
2.95
%
0.03
%
0.62
%
0.28
%
2.63
%
0.09
%
0.57
%
Note:
In
the table above, the financial measures which exclude the impact of PCI loans are non-GAAP financial measures.
(a)
For the year ended December 31, 2017, excluding net charge-offs of $467 million related to the student loan portfolio sale, the net charge-off rate for Consumer, excluding credit card would have been 0.18%; total Firm would have been 0.55%; Consumer, excluding credit card and PCI loans would have been 0.20%; and total Firm, excluding PCI would have been 0.57%.
(b)
Write-offs
of PCI loans are recorded against the allowance for loan losses when actual losses for a pool exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. A write-off of a PCI loan is recognized when the underlying loan is removed from a pool (e.g., upon liquidation).
(c)
Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR. The asset-specific credit card allowance for loan losses modified in a TDR is calculated based on the loans’ original contractual interest rates and does not consider any incremental penalty rates.
(d)
The
allowance for lending-related commitments is reported in accounts payable and other liabilities on the Consolidated balance sheets.
(e)
The Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.
118
JPMorgan Chase & Co./2017
Annual Report
Provision for credit losses
The following table presents the components of the Firm’s provision for credit losses:
Year
ended December 31,
(in millions)
Provision for loan losses
Provision for
lending-related commitments
Total provision for credit losses
2017
2016
2015
2017
2016
2015
2017
2016
2015
Consumer,
excluding credit card
$
613
$
467
$
(82
)
$
7
$
—
$
1
$
620
$
467
$
(81
)
Credit
card
4,973
4,042
3,122
—
—
—
4,973
4,042
3,122
Total
consumer
5,586
4,509
3,040
7
—
1
5,593
4,509
3,041
Wholesale
(286
)
571
623
(17
)
281
163
(303
)
852
786
Total
$
5,300
$
5,080
$
3,663
$
(10
)
$
281
$
164
$
5,290
$
5,361
$
3,827
Provision
for credit losses
The provision for credit losses decreased as of December 31, 2017 as a result of:
•
a net $422 million reduction in the wholesale allowance for credit losses, reflecting credit quality improvements in the Oil & Gas, Natural Gas Pipelines, and Metals & Mining portfolios, compared with an addition of $511 million in the prior year driven by downgrades in the same portfolios.
The decrease was predominantly offset by
•
a
higher consumer provision driven by
–
$450 million of higher net charge-offs, primarily in the credit card portfolio due to growth in newer vintages which, as anticipated, have higher loss rates than the more seasoned portion of the portfolio, partially offset by a decrease in net charge-offs in the residential real estate portfolio reflecting continued improvement in home prices and delinquencies,
–
a $218 million impact in connection with the sale of the student loan portfolio, and
–
a
$416 million higher addition to the allowance for credit losses.
Current year additions to the consumer allowance included:
◦
an $850 million addition to the allowance for credit losses in the credit card portfolio, compared to a $600 million addition in the prior year, due to higher loss rates and loan growth in both years, and
◦
a $50 million addition to the allowance for credit losses in the business banking portfolio, driven by loan growth
the
additions were partially offset by
◦
a $316 million net reduction in the allowance for credit losses in the residential real estate portfolio, compared to a $517 million net reduction in the prior year, reflecting continued improvement in home prices and delinquencies in both years.
JPMorgan Chase & Co./2017 Annual Report
119
Management’s
discussion and analysis
INVESTMENT PORTFOLIO RISK MANAGEMENT
Investment portfolio risk is the risk associated with the loss of principal or a reduction in expected returns on investments arising from the investment securities portfolio held by Treasury and CIO in connection with the Firm’s balance sheet or asset-liability management objectives or from principal investments managed in various LOBs in predominantly privately-held financial assets and instruments. Investments are typically intended to be held over extended periods and, accordingly, the Firm has no
expectation for short-term realized gains with respect to these investments.
Investment securities risk
Investment securities risk includes the exposure associated with the default of principal plus coupon payments. This risk is minimized given that Treasury and CIO generally invest in high-quality securities. At December 31, 2017, the investment securities portfolio was $248.0 billion, and the average credit rating of the securities comprising the portfolio was AA+ (based upon external ratings where available and where not available, based primarily upon internal ratings that correspond to ratings as defined by S&P and Moody’s). For further information on the investment securities portfolio, see Note 10 on pages 203-208. For further information on the market risk inherent in the
portfolio, see Market Risk Management on pages 121-128. For further information on related liquidity risk, see Liquidity Risk on pages 92–97.
Governance and oversight
Investment securities risks are governed by the Firm’s Risk Appetite framework, and discussed at the CIO, Treasury and Corporate (CTC) Risk Committee with regular updates to the DRPC.
The Firm’s independent control functions are responsible for reviewing the appropriateness of the carrying value of investment securities in accordance with relevant policies. Approved levels for investment securities are established for each risk category, including capital and credit risks.
Principal investment
risk
Principal investments are typically private non-traded financial instruments representing ownership or other forms of junior capital. Principal investments cover multiple asset classes and are made either in stand-alone investing businesses or as part of a broader business platform. As of December 31, 2017, the carrying value of the principal investment portfolios included tax-oriented investments (e.g., affordable housing and alternative energy investments) of $14.0 billion and private equity and various debt and equity instruments of $5.5 billion. Increasingly, new principal investment activity seeks to enhance or accelerate LOB strategic business initiatives. The Firm’s principal investments are managed
under various LOBs and are reflected within the respective LOB financial results.
Governance and oversight
The Firm’s approach to managing principal risk is consistent with the Firm’s general risk governance structure. A Firmwide risk policy framework exists for all principal investing activities. All investments are approved by investment committees that include executives who are independent from the investing businesses.
The Firm’s independent control functions are responsible for reviewing the appropriateness of the carrying value of investments in accordance with relevant policies. Approved levels for investments are established for each relevant business in order to manage the overall size of the portfolios.
Industry, geographic and position
level concentration limits have been set and are intended to ensure diversification of the portfolios. The Firm also conducts stress testing on these portfolios using specific scenarios that estimate losses based on significant market moves and/or other risk events.
120
JPMorgan Chase & Co./2017 Annual Report
MARKET
RISK MANAGEMENT
Market risk is the risk associated with the effect of changes in market factors, such as interest and foreign exchange rates, equity and commodity prices, credit spreads or implied volatilities, on the value of assets and liabilities held for both the short and long term.
Market Risk Management
Market Risk Management monitors market risks throughout the Firm and defines market risk policies and procedures. The Market Risk Management function reports to the Firm’s CRO.
Market Risk Management seeks to manage risk, facilitate efficient risk/return decisions, reduce volatility in operating performance and provide transparency into the Firm’s market
risk profile for senior management, the Board of Directors and regulators. Market Risk Management is responsible for the following functions:
•
Establishment of a market risk policy framework
•
Independent measurement, monitoring and control of line of business and firmwide market risk
•
Definition, approval
and monitoring of limits
•
Performance of stress testing and qualitative risk assessments
Risk measurement
Tools used to measure risk
There is no single measure to capture market risk and therefore the Firm uses various metrics, both statistical and nonstatistical, to assess risk including:
•
VaR
•
Economic-value
stress testing
•
Nonstatistical risk measures
•
Loss advisories
•
Profit and loss drawdowns
•
Earnings-at-risk
•
Other sensitivities
Risk monitoring and control
Market risk exposure is managed primarily through a series of limits set in the context of the market environment and business strategy. In setting limits, the Firm takes into consideration factors such as market volatility, product liquidity and accommodation of client business, and management experience. The Firm maintains different levels of limits. Corporate level limits include VaR and stress limits. Similarly, line of business limits include VaR and stress limits and may be supplemented by loss advisories, nonstatistical measurements
and profit and loss drawdowns. Limits may also be set within the lines of business, as well at the portfolio or legal entity level.
Market Risk Management sets limits and regularly reviews and updates them as appropriate, with any changes approved by line of business management and Market Risk Management. Senior management, including the Firm’s CEO and CRO, are responsible for reviewing and approving certain of these risk limits on an ongoing basis. All limits that have not been reviewed within specified time periods by Market Risk Management are escalated to senior management. The lines of business are responsible for adhering to established limits against which exposures are monitored and reported.
Limit breaches are required to be reported in a timely manner to limit approvers, Market Risk Management and senior management. In the event of a breach, Market Risk Management consults
with senior management of the Firm and the line of business senior management to determine the appropriate course of action required to return the applicable positions to compliance, which may include a reduction in risk in order to remedy the breach. Certain Firm or line of business-level limits that have been breached for three business days or longer, or by more than 30%, are escalated to senior management and the Firmwide Risk Committee.
JPMorgan Chase & Co./2017 Annual Report
121
Management’s
discussion and analysis
The following table summarizes by line of business the predominant business activities that give rise to market risk, and certain market risk tools used to measure those risks.
Risk identification and classification by line of business
Line of Business
Predominant business activities and related market risks
Positions included in Risk Management VaR
Positions
included in earnings-at-risk
Positions included in other sensitivity-based measures
CCB
• Services mortgage loans which give rise to complex, non-linear interest rate and basis risk
• Non-linear risk arises primarily from prepayment options embedded in mortgages and changes in the probability of newly originated mortgage commitments actually closing
• Basis risk results from differences in the relative movements of the rate indices underlying mortgage exposure and other interest rates
•
Originates loans and takes deposits
• Mortgage
pipeline loans, classified as derivatives
• Warehouse loans, classified as trading assets – debt instruments
• MSRs
• Hedges of pipeline loans,
warehouse loans and MSRs, classified as derivatives
• Interest-only securities, classified as trading assets - debt instruments, and related hedges, classified as derivatives
•
Retained loan portfolio
•
Deposits
CIB
•
Makes
markets and services clients across fixed income, foreign exchange, equities and commodities
•
Market risk arises from changes in market prices (e.g., rates and credit spreads) resulting in a potential decline in net income
•
Originates loans and takes deposits
• Trading assets/liabilities – debt and marketable equity instruments, and derivatives, including hedges of the retained loan portfolio
• Certain securities purchased, loaned or sold under resale agreements and securities borrowed
• Fair value option elected liabilities
•
Derivative CVA
and associated hedges
•
Retained loan portfolio
•
Deposits
• Private equity investments measured at fair value
• Derivatives FVA and fair value option elected liabilities DVA
CB
•
Engages in traditional wholesale banking activities which include extensions of loans and credit facilities and taking deposits
•
Risk arises from changes in interest rates and prepayment risk with potential
for adverse impact on net interest income and interest-rate sensitive fees
•
Retained loan portfolio
•
Deposits
AWM
• Provides initial capital investments in products such as mutual funds, which give rise to market risk arising from changes in market prices in such products
• Originates loans and takes deposits
• Debt securities held in
advance of distribution to clients, classified as trading assets - debt instruments
•
Retained loan portfolio
•
Deposits
•
Initial seed capital investments and related hedges, classified as derivatives
•
Capital invested alongside third-party investors, typically in privately distributed collective vehicles managed by AWM (i.e., co-investments)
Corporate
• Manages the Firm’s liquidity, funding, structural interest rate and foreign
exchange risks arising from activities undertaken by the Firm’s four major reportable business segments
•
Derivative positions measured at fair value through noninterest revenue in earnings
•
Marketable equity investments measured at fair value through noninterest revenue in earnings
•
Deposits with banks
•
Investment securities portfolio and related interest rate hedges
•
Long-term debt and related interest rate hedges
• Private
equity investments measured at fair value
• Foreign exchange exposure related to Firm-issued non-USD long-term debt (“LTD”) and related hedges
122
JPMorgan Chase & Co./2017 Annual Report
Value-at-risk
JPMorgan
Chase utilizes VaR, a statistical risk measure, to estimate the potential loss from adverse market moves in a normal market environment. The Firm has a single VaR framework used as a basis for calculating Risk Management VaR and Regulatory VaR.
The framework is employed across the Firm using historical simulation based on data for the previous 12 months. The framework’s approach assumes that historical changes in market values are representative of the distribution of potential outcomes in the immediate future. The Firm believes the use of Risk Management VaR provides a stable measure of VaR that is closely aligned to the day-to-day risk management decisions made
by the lines of business, and provides the appropriate information needed to respond to risk events on a daily basis.
The Firm’s Risk Management VaR is calculated assuming a one-day holding period and an expected tail-loss methodology which approximates a 95% confidence level. Risk Management VaR provides a consistent framework to measure risk profiles and levels of diversification across product types and is used for aggregating risks and monitoring limits across businesses. VaR results are reported to senior management, the Board of Directors and regulators.
Under the Firm’s Risk Management VaR methodology, assuming current changes in market values are consistent with the historical changes used in the simulation, the Firm would expect to incur VaR “back-testing
exceptions,” defined as losses greater than that predicted by VaR estimates, an average of five times every 100 trading days. The number of VaR back-testing exceptions observed can differ from the statistically expected number of back-testing exceptions if the current level of market volatility is materially different from the level of market volatility during the 12 months of historical data used in the VaR calculation.
Underlying the overall VaR model framework are individual VaR models that simulate historical market returns for individual products and/or risk factors. To capture material market risks as part of the Firm’s risk management framework, comprehensive VaR model calculations are performed daily for businesses whose activities give rise to market risk. These VaR models are granular and incorporate numerous risk factors and inputs to simulate
daily changes in market values over the historical period; inputs are selected based on the risk profile of each portfolio, as sensitivities and historical time series used to generate daily market values may be different across product types or risk management systems. The VaR model results across all portfolios are aggregated at the Firm level.
As VaR is based on historical data, it is an imperfect measure of market risk exposure and potential losses, and it is not used to estimate the impact of stressed market conditions or to manage any impact from potential stress events. In addition, based on their reliance on available historical data, limited time horizons, and other factors, VaR measures are inherently limited in their ability to measure certain risks and to predict losses, particularly those associated
with market illiquidity and sudden or severe shifts in market conditions.
For certain products, specific risk parameters are not captured in VaR due to the lack of inherent liquidity and availability of appropriate historical data. The Firm uses proxies to estimate the VaR for these and other products when daily time series are not available. It is likely that using an actual price-based time series for these products, if available, would affect the VaR results presented. The Firm therefore considers other measures such as stress testing and nonstatistical measures, in addition to VaR, to capture and manage its market risk positions.
The daily market data used in VaR models may be different than the independent third-party data collected for VCG price testing in its monthly valuation process. For example,
in cases where market prices are not observable, or where proxies are used in VaR historical time series, the data sources may differ (see Valuation process in Note 2 for further information on the Firm’s valuation process). Because VaR model calculations require daily data and a consistent source for valuation, it may not be practical to use the data collected in the VCG monthly valuation process for VaR model calculations.
The Firm’s VaR model calculations are periodically evaluated and enhanced in response to changes in the composition of the Firm’s portfolios, changes in market conditions, improvements in the Firm’s modeling techniques and measurements, and other factors. Such changes may affect historical comparisons of VaR results. For information regarding model reviews and approvals, see Model Risk Management on page 137.
The
Firm calculates separately a daily aggregated VaR in accordance with regulatory rules (“Regulatory VaR”), which is used to derive the Firm’s regulatory VaR-based capital requirements under Basel III. This Regulatory VaR model framework currently assumes a ten business-day holding period and an expected tail loss methodology which approximates a 99% confidence level. Regulatory VaR is applied to “covered” positions as defined by Basel III, which may be different than the positions included in the Firm’s Risk Management VaR. For example, credit derivative hedges of accrual loans are included in the Firm’s Risk Management VaR, while Regulatory VaR excludes these credit derivative hedges. In addition, in contrast to the Firm’s Risk Management VaR, Regulatory VaR currently excludes the diversification benefit for certain VaR models.
JPMorgan
Chase & Co./2017 Annual Report
123
Management’s discussion and analysis
For additional information on Regulatory VaR and the other components of market risk regulatory capital for the Firm (e.g., VaR-based measure, stressed VaR-based measure and the respective backtesting), see JPMorgan Chase’s Basel III
Average
portfolio VaR is less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect reflects that the risks are not perfectly correlated.
(b)
Diversification benefit represents the difference between the total VaR and each reported level and the sum of its individual components. Diversification benefit reflects the non-additive nature of VaR due to imperfect correlation across lines of business and risk types. The maximum and minimum VaR for each portfolio may have occurred on different trading days than the components and consequently diversification benefit is not meaningful.
(c)
Maximum
Corporate VaR was higher than the prior year, due to a Private Equity position that became publicly traded in the fourth quarter of 2017. Previously, this position was included in other sensitivity-based measures.
Average Total VaR decreased $16 million for the year-ended December 31, 2017 as compared with the prior year. The reduction is a result of refinements made to VaR models for certain asset-backed products, changes made to the scope of positions included in VaR in the third quarter of 2016, and lower volatility in the one-year historical look-back period.
In addition, Credit Portfolio VaR declined by $5 million reflecting the sale of select positions and lower volatility in the one-year historical look-back period.
In
the first quarter of 2017, the Firm refined the historical proxy time series inputs to certain VaR models. These refinements are intended to more appropriately reflect the risk exposure from certain asset-backed products. In the absence of this refinement, the average Total VaR, CIB fixed income VaR, CIB trading VaR and CIB VaR would have each been higher by $4 million for the year ended December 31, 2017.
VaR can vary significantly as positions change, market volatility fluctuates, and diversification benefits change.
VaR back-testing
The Firm evaluates the effectiveness of its VaR methodology by back-testing, which compares the daily Risk Management VaR results with the daily gains and losses
actually recognized on market-risk related revenue.
The Firm’s definition of market risk-related gains and losses is consistent with the definition used by the banking regulators under Basel III. Under this definition market risk-related gains and losses are defined as: gains and losses on the positions included in the Firm’s Risk Management VaR, excluding fees, commissions, certain valuation adjustments (e.g., liquidity and FVA), net interest income, and gains and losses arising from intraday trading.
124
JPMorgan Chase & Co./2017
Annual Report
The following chart compares actual daily market risk-related gains and losses with the Firm’s Risk Management VaR for the year ended December 31, 2017. As the chart presents market risk-related gains and losses related to those positions included in the Firm’s Risk Management VaR, the results in the table below differ from the results of back-testing disclosed in the Market Risk section of the Firm’s Basel III Pillar 3 Regulatory Capital Disclosures reports, which are based on Regulatory VaR applied to covered positions. The chart shows that for the year ended December 31, 2017 the Firm observed 15 VaR back-testing exceptions and posted gains
on 145 of the 258 days.
Daily Market Risk-Related Gains and Losses
vs. Risk Management VaR (1-day, 95% Confidence level)
Along with VaR, stress testing is an important tool in measuring and controlling risk. While VaR reflects the risk of loss due to adverse changes in markets using recent historical market behavior as an indicator of losses, stress testing is intended to capture the Firm’s exposure to unlikely but plausible events in abnormal markets. The Firm runs weekly stress
tests on market-related risks across the lines of business using multiple scenarios that assume significant changes in risk factors such as credit spreads, equity prices, interest rates, currency rates and commodity prices.
The Firm uses a number of standard scenarios that capture different risk factors across asset classes including geographical factors, specific idiosyncratic factors and extreme tail events. The stress framework calculates multiple magnitudes of potential stress for both market rallies and market sell-offs for each risk factor and combines them in multiple ways to capture different market scenarios. For example, certain scenarios assess the potential loss arising from current exposures held by the Firm due to a broad sell-off in bond markets or an extreme widening in corporate credit spreads. The flexibility of the stress testing framework allows risk managers to construct new, specific
scenarios that can be used to form decisions about future possible stress events.
Stress testing complements VaR by allowing risk managers
to shock current market prices to more extreme levels relative to those historically realized, and to stress test the relationships between market prices under extreme scenarios. Stress scenarios are defined and reviewed by Market Risk Management, and significant changes are reviewed by the relevant LOB Risk Committees and may be redefined on a periodic basis to reflect current market conditions.
Stress-test results, trends and qualitative explanations based on current market risk positions are reported to the respective LOBs and the Firm’s senior management to allow them to better
understand the sensitivity of positions to certain defined events and to enable them to manage their risks with more transparency. Results are also reported to the Board of Directors.
The Firm’s stress testing framework is utilized in calculating results for the Firm’s CCAR and ICAAP processes. In addition, the results are incorporated into the quarterly assessment of the Firm’s Risk Appetite Framework and are also presented to the DRPC.
Nonstatistical risk measures
Nonstatistical risk measures include sensitivities to variables used to value positions, such as credit spread sensitivities, interest rate basis point values and market values. These measures provide granular information on the Firm’s market risk exposure.
They are aggregated by line of business and by risk type, and are also used for monitoring internal market risk limits.
Loss advisories and profit and loss drawdowns
Loss advisories and profit and loss drawdowns are tools used to highlight trading losses above certain levels of risk tolerance. Profit and loss drawdowns are defined as the decline in net profit and loss since the year-to-date peak revenue level.
Earnings-at-risk
The VaR and sensitivity measures illustrate the economic sensitivity of the Firm’s Consolidated balance sheets to changes in market variables.
The effect of interest rate exposure on the Firm’s reported net income is also important as interest rate risk represents one of the Firm’s significant market risks. Interest rate
risk arises not only from trading activities but also from the Firm’s traditional banking activities, which include extension of loans and credit facilities, taking deposits and issuing debt. The Firm evaluates its structural interest rate risk exposure through earnings-at-risk, which measures the extent to which changes in interest rates will affect the Firm’s net interest income and interest rate-sensitive fees. For a summary by line of business, identifying positions included in earnings-at-risk, see the table on page 122.
The CTC Risk Committee establishes the Firm’s structural interest rate risk policies and market risk limits, which are subject to approval by the DRPC. Treasury and CIO, working in partnership with the lines of business, calculates the Firm’s structural interest rate risk profile and reviews it with senior management including the CTC Risk Committee and the Firm’s
ALCO. In addition, oversight of structural interest rate risk is managed through a dedicated risk function reporting to the CTC CRO. This risk function is responsible for providing independent oversight and governance around assumptions and establishing and monitoring limits for structural interest rate risk. The Firm manages structural interest rate risk generally through its investment securities portfolio and interest rate derivatives.
126
JPMorgan Chase & Co./2017 Annual Report
Structural
interest rate risk can occur due to a variety of factors, including:
•
Differences in the timing among the maturity or repricing of assets, liabilities and off-balance sheet instruments
•
Differences in the amounts of assets, liabilities and off-balance sheet instruments that are repricing at the same time
•
Differences
in the amounts by which short-term and long-term market interest rates change (for example, changes in the slope of the yield curve)
•
The impact of changes in the maturity of various assets, liabilities or off-balance sheet instruments as interest rates change
The Firm manages interest rate exposure related to its assets and liabilities on a consolidated, firmwide basis. Business units transfer their interest rate risk to Treasury and CIO through funds transfer pricing, which takes into account the elements of interest rate exposure that can be risk-managed in financial markets. These elements include asset and liability balances and contractual rates of interest, contractual principal
payment schedules, expected prepayment experience, interest rate reset dates and maturities, rate indices used for repricing, and any interest rate ceilings or floors for adjustable rate products. All transfer-pricing assumptions are dynamically reviewed.
The Firm generates a baseline for net interest income and certain interest rate-sensitive fees, and then conducts simulations of changes for interest rate-sensitive assets and liabilities denominated in U.S. dollars and other currencies (“non-U.S. dollar” currencies). This simulation primarily includes, retained loans, deposits, deposits with banks, investment securities, long term debt and any related interest rate hedges, and excludes other positions in risk management VaR and other sensitivity-based measures as described on page 122.
Earnings-at-risk scenarios estimate the potential change in this baseline, over the
following 12 months utilizing multiple assumptions. These scenarios consider the impact on exposures as a result of changes in interest rates from baseline rates, as well as pricing sensitivities of deposits, optionality and changes in product mix. The scenarios include forecasted balance sheet changes, as well as modeled prepayment and reinvestment behavior, but do not include assumptions about actions that could be taken by the Firm in response to any such instantaneous rate changes. Mortgage prepayment assumptions are based on scenario interest rates compared with underlying contractual rates, the time since origination, and other factors which are updated periodically based on historical experience. The pricing sensitivity of deposits in the baseline and scenarios use assumed rates paid which may differ from actual rates paid due to timing lags and other factors. The Firm’s earnings-at-risk scenarios are periodically evaluated and enhanced in response to changes
in the composition of the Firm’s balance sheet, changes in market conditions, improvements in the Firm’s simulation and other factors.
The Firm’s U.S. dollar sensitivities are presented in the table below.
As
a result of the 2017 increase in the Fed Funds target rate to between 1.25% and 1.50%, the -100 bps sensitivity has been included.
(b)
Given the level of market interest rates, these downward parallel earnings-at-risk scenarios are not considered to be meaningful.
The non-U.S. dollar sensitivities for an instantaneous increase in rates by 200 and 100 basis points results in a 12-month benefit to net interest income of approximately $800 million and $500 million, respectively, at December 31, 2017 and were not material at December
31, 2016. The non-U.S. dollar sensitivities for an instantaneous decrease in rates by 200 and 100 basis points were not material to the Firm’s earnings-at-risk at December 31, 2017 and 2016.
The Firm’s sensitivity to rates is largely a result of assets repricing at a faster pace than deposits.
The Firm’s net U.S. dollar sensitivities for an instantaneous increase in rates by 200 and 100 basis points decreased by approximately $1.6 billion and $700 million, respectively, when compared to December 31, 2016. The primary driver of that decrease was the updating of the Firm’s baseline to reflect higher interest rates. As higher interest rates are reflected in the Firm’s baselines, the
magnitude of the sensitivity to further increases in rates would be expected to be less significant.
Separately, another U.S. dollar interest rate scenario used by the Firm — involving a steeper yield curve with long-term rates rising by 100 basis points and short-term rates staying at current levels — results in a 12-month benefit to net interest income of approximately $700 million and $800 million at December 31, 2017 and 2016, respectively. The increase in net interest income under this scenario reflects the Firm reinvesting at the higher long-term rates, with funding costs remaining unchanged. The results of the comparable non-U.S. dollar scenarios
were not material to the Firm at December 31, 2017 and 2016.
JPMorgan Chase & Co./2017 Annual Report
127
Non-U.S. dollar foreign exchange risk
Non-U.S.
dollar FX risk is the risk that changes in foreign exchange rates affect the value of the Firm’s assets or liabilities or future results. The Firm has structural non-U.S. dollar FX exposures arising from capital investments, forecasted expense and revenue, the investment securities
portfolio and non-U.S. dollar-denominated debt issuance. Treasury and CIO, working in partnership with the lines of business, primarily manage these risks on behalf of the Firm. Treasury and CIO may hedge certain of these risks using derivatives within risk limits governed by the CTC Risk Committee.
Other sensitivity-based measures
The Firm quantifies the market risk of certain investment and funding
activities by assessing the potential impact on net revenue and OCI due to changes in relevant market variables. For additional information on the positions captured in other sensitivity-based measures, please refer to the Risk identification and classification table on page 122.
The table below represents the potential impact to net revenue or OCI for market risk sensitive instruments that are not included in VaR or earnings-at-risk. Where appropriate, instruments used for hedging purposes are reported along with the positions being hedged. The sensitivities disclosed in the table below may not be representative of the actual gain or loss that would have been realized at December 31, 2017, as the movement in market parameters across maturities may vary and are not intended to imply management’s expectation of future deterioration
in these sensitivities.
Primarily represents the foreign exchange revaluation on the fair value of the derivative hedges
10% depreciation of currency
(13
)
(23
)
Derivatives
– funding spread risk
Impact of changes in the spread related to derivatives FVA
1 basis point parallel increase in spread
(6
)
(4
)
Fair value option elected liabilities –
funding spread risk
Impact
of changes in the spread related to fair value option elected liabilities DVA(a)
1 basis point parallel increase in spread
22
17
Fair value option elected liabilities –interest rate sensitivity
Interest rate sensitivity on fair value option liabilities
resulting from a change in the Firm’s own credit spread(a)
1 basis point parallel increase in spread
(1
)
NA
(a)
Impact recognized through OCI.
JPMorgan
Chase & Co./2017 Annual Report
128
COUNTRY RISK MANAGEMENT
The Firm has a country risk management framework for monitoring and assessing how financial, economic, political or other significant developments adversely affect the value of the Firm’s exposures
related to a particular country or set of countries. The Country Risk Management group actively monitors the various portfolios which may be impacted by these developments to ensure the Firm’s exposures are diversified and that exposure levels are appropriate given the Firm’s strategy and risk tolerance relative to a country.
Organization and management
Country Risk Management is an independent risk management function that assesses, manages and monitors country risk originated across the Firm. The Firmwide Risk Executive for Country Risk reports to the Firm’s CRO.
The Firm’s country risk management function includes the following activities:
•
Establishing
policies, procedures and standards consistent with a comprehensive country risk framework
•
Assigning sovereign ratings, and assessing country risks and establishing risk tolerance relative to a country
•
Measuring and monitoring country risk exposure and stress across the Firm
•
Managing and
approving country limits and reporting trends and limit breaches to senior management
•
Developing surveillance tools, such as signaling models and ratings indicators, for early identification of potential country risk concerns
•
Providing country risk scenario analysis
Sources and measurement
The Firm is exposed to country risk through its lending and deposits, investing, and market-making activities, whether
cross-border or locally funded. Country exposure includes activity with both government and private-sector entities in a country. Under the Firm’s internal country risk management approach, country exposure is reported based on the country where the majority of the assets of the obligor, counterparty, issuer or guarantor are located or where the majority of its revenue is derived, which may be different than the domicile (legal residence) or country of incorporation of the obligor, counterparty, issuer or guarantor. Country exposures are generally measured by considering the Firm’s risk to an immediate default of the counterparty or obligor, with zero recovery. Assumptions are sometimes required in determining the measurement and allocation of country exposure, particularly in the case of certain non-linear or index exposures. The use of different measurement approaches or assumptions could affect the amount of reported country exposure.
Under
the Firm’s internal country risk measurement framework:
•
Lending exposures are measured at the total committed amount (funded and unfunded), net of the allowance for credit losses and cash and marketable securities collateral received
•
Deposits are measured as the cash balances placed with central and commercial banks
•
Securities
financing exposures are measured at their receivable balance, net of collateral received
•
Debt and equity securities are measured at the fair value of all positions, including both long and short positions
•
Counterparty exposure on derivative receivables is measured at the derivative’s fair value, net of the fair value of the related collateral. Counterparty exposure on derivatives can change significantly because of market movements
•
Credit
derivatives protection purchased and sold is reported based on the underlying reference entity and is measured at the notional amount of protection purchased or sold, net of the fair value of the recognized derivative receivable or payable. Credit derivatives protection purchased and sold in the Firm’s market-making activities is measured on a net basis, as such activities often result in selling and purchasing protection related to the same underlying reference entity; this reflects the manner in which the Firm manages these exposures
Some activities may create contingent or indirect exposure related to a country (for example, providing clearing services or secondary exposure to collateral on securities financing receivables). These exposures are managed in the normal course of business through the Firm’s credit, market, and operational risk governance, rather than through Country Risk Management.
The
Firm’s internal country risk reporting differs from the reporting provided under the FFIEC bank regulatory requirements. For further information on the FFIEC’s reporting methodology, see Cross-border outstandings on page 296 of the 2017 Form 10-K.
Stress testing
Stress testing is an important component of the Firm’s country risk management framework, which aims to estimate and limit losses arising from a country crisis by measuring the impact of adverse asset price movements to a country based on market shocks combined with counterparty specific assumptions. Country Risk Management periodically designs and runs tailored stress scenarios to test vulnerabilities to individual countries, or groups of countries, in response to specific or potential market events, sector performance concerns and geopolitical risks. These tailored stress
results are used to assess potential risk reduction across the Firm, as necessary.
JPMorgan Chase & Co./2017 Annual Report
129
Management’s discussion and analysis
Risk Reporting
To enable effective risk management of country risk to the Firm, country nominal exposure and stress are measured and reported weekly, and used by Country Risk Management
to identify trends, and monitor high usages and breaches against limits.
The following table presents the Firm’s top 20 exposures by country (excluding the U.S.) as of December 31, 2017. The selection of countries represents the Firm’s largest total exposures by country, based on the Firm’s internal country risk management approach, and does not represent the Firm’s view of any actual or potentially adverse credit conditions. Country exposures may fluctuate from period to period due to client activity and market flows.
Country
exposures above reflect 86% of total firmwide non U.S. exposure.
(b)
Lending and deposits includes loans and accrued interest receivable (net of collateral and the allowance for loan losses), deposits with banks (including central banks), acceptances, other monetary assets, issued letters of credit net of participations, and unused commitments to extend credit. Excludes intra-day and operating exposures, such as from settlement and clearing activities.
(c)
Includes market-making inventory, AFS securities, counterparty
exposure on derivative and securities financings net of collateral and hedging.
(d)
Includes single reference entity (“single-name”), index and other multiple reference entity transactions for which one or more of the underlying reference entities is in a country listed in the above table.
(e)
Includes capital invested in local entities and physical commodity inventory.
130
JPMorgan
Chase & Co./2017 Annual Report
OPERATIONAL RISK MANAGEMENT
Operational risk is the risk associated with inadequate or failed internal processes, people and systems, or from external events; operational risk includes cybersecurity risk, business and technology resiliency risk, payment fraud risk, and third-party outsourcing risk. Operational risk is inherent
in the Firm’s activities and can manifest itself in various ways, including fraudulent acts, business interruptions, inappropriate employee behavior, failure to comply with applicable laws and regulations or failure of vendors to perform in accordance with their arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damages to the Firm. The goal is to keep operational risk at appropriate levels in light of the Firm’s financial position, the characteristics of its businesses, and the markets and regulatory environments in which it operates.
Operational Risk Management Framework
To monitor and control operational risk, the Firm has an Operational Risk Management Framework (“ORMF”) which is designed to enable the Firm to maintain a sound and well-controlled operational environment.
The ORMF has four main components: Governance, Risk Identification and Assessment, Measurement, and Monitoring and Reporting.
Governance
The lines of business and corporate functions are responsible for owning and managing their operational risks. The Firmwide Oversight and Control Group, which consists of control officers within each line of business and corporate function, is responsible for the day-to-day execution of the ORMF.
Line of business and corporate function control committees oversee the operational risk and control environments of their respective businesses and functions. These committees escalate operational risk issues to the FCC, as appropriate. For additional information on the FCC, see Enterprise-wide Risk Management on pages 75–137.
The
Firmwide Risk Executive for Operational Risk Governance (“ORG”), a direct report to the CRO, is responsible for defining the ORMF and establishing minimum standards for its execution. Operational Risk Officers report to both the line of business CROs and to the Firmwide Risk Executive for ORG, and are independent of the respective businesses or corporate functions they oversee.
The Firm’s Operational Risk Governance Policy is approved by the DRPC. This policy establishes the Operational Risk Management Framework for the Firm.
Risk identification and assessment
The Firm utilizes several tools to identify, assess, mitigate and manage its operational risk. One such tool is the Risk and Control Self-Assessment (“RCSA”) program which
is executed by LOBs and corporate functions in accordance with the minimum standards established by ORG. As part of the RCSA program, lines of business and corporate functions identify key operational risks inherent in their activities, evaluate the effectiveness of relevant controls in place to mitigate identified risks, and define actions to reduce residual risk. Action plans are developed for identified control issues and businesses and corporate functions are held accountable for tracking and resolving issues in a timely manner. Operational Risk Officers independently challenge the execution of the RCSA program and evaluate the appropriateness of the residual risk results.
In addition to the RCSA program, the Firm tracks and monitors events that have led to or could lead to actual operational risk losses, including litigation-related events. Responsible businesses and corporate functions analyze their losses to evaluate
the effectiveness of their control environment to assess where controls have failed, and to determine where targeted remediation efforts may be required. ORG provides oversight of these activities and may also perform independent assessments of significant operational risk events and areas of concentrated or emerging risk.
Measurement
In addition to the level of actual operational risk losses, operational risk measurement includes operational risk-based capital and operational risk loss projections under both baseline and stressed conditions.
The primary component of the operational risk capital estimate is the Loss Distribution Approach (“LDA”) statistical model, which simulates the frequency and severity of future operational risk loss projections based on historical data. The LDA model is used to estimate an aggregate operational
risk loss over a one-year time horizon, at a 99.9% confidence level. The LDA model incorporates actual internal operational risk losses in the quarter following the period in which those losses were realized, and the calculation generally continues to reflect such losses even after the issues or business activities giving rise to the losses have been remediated or reduced.
As required under the Basel III capital framework, the Firm’s operational risk-based capital methodology, which uses the Advanced Measurement Approach, incorporates internal and external losses as well as management’s view of tail risk captured through operational risk scenario analysis, and evaluation of key business environment and internal control metrics.
JPMorgan
Chase & Co./2017 Annual Report
131
Management’s discussion and analysis
The Firm considers the impact of stressed economic conditions on operational risk losses and develops a forward looking view of material operational risk events that may occur in a stressed environment. The Firm’s operational risk stress testing framework is utilized in calculating results for the Firm’s CCAR and ICAAP processes.
For information related to operational risk RWA, CCAR or ICAAP, see Capital Risk Management section, pages 82–91.
Monitoring
and reporting
ORG has established standards for consistent operational risk monitoring and reporting. The standards also reinforce escalation protocols to senior management and to the Board of Directors. Operational risk reports are produced on a firmwide basis as well as by line of business and corporate function.
Subcategories and examples of operational risks
As mentioned previously, operational risk can manifest itself in various ways. Operational risk subcategories such as Compliance risk, Conduct risk, Legal risk and Estimations and Model risk, as well as other operational risks, can lead to losses which are captured through the Firm’s operational risk measurement processes. More information on Compliance risk, Conduct risk, Legal risk and Estimations and Model risk subcategories are discussed on pages 134,
135, 136 and 137, respectively. Details on other select examples of operational risks are provided below.
Cybersecurity risk
Cybersecurity risk is an important, continuous and evolving focus for the Firm. The Firm devotes significant resources to protecting and continuing to improve the security of the Firm’s computer systems, software, networks and other technology assets. The Firm’s security efforts are intended to protect against, among other things, cybersecurity attacks by unauthorized parties to obtain access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. The Firm continues to make significant investments in enhancing its cyberdefense capabilities and to strengthen its
partnerships with the appropriate government and law enforcement agencies and other businesses in order to understand the full spectrum of cybersecurity risks in the operating environment, enhance defenses and improve resiliency against cybersecurity threats. The Firm actively participates in discussions of cybersecurity risks with law enforcement, government officials, peer and industry groups, and has significantly increased efforts to educate employees and certain clients on the topic. Third parties with which the Firm does business or that facilitate the Firm’s business activities (e.g., vendors, exchanges, clearing houses, central depositories, and financial intermediaries) could also be sources of cybersecurity risk to the Firm. Third party cybersecurity incidents such as system breakdowns or failures, misconduct by the employees of such parties, or cyberattacks could affect their ability to deliver a product or service to the Firm or result in lost or compromised
information of the Firm or its clients. Clients can also be
sources of cybersecurity risk to the Firm, particularly when their activities and systems are beyond the Firm’s own security and control systems. As a result, the Firm engages in regular and ongoing discussions with certain vendors and clients regarding cybersecurity risks and opportunities to improve security. However, where cybersecurity incidents are due to client failure to maintain the security of their own systems and processes, clients will generally be responsible for losses incurred.
To protect the confidentiality, integrity and availability of the Firm’s infrastructure, resources and information, the Firm leverages the ORMF to ensure risks are identified and managed within defined corporate tolerances. The Firm’s Board of Directors and the Audit Committee are regularly
briefed on the Firm’s cybersecurity policies and practices and ongoing efforts to improve security, as well as its efforts regarding significant cybersecurity events.
Business and technology resiliency risk
Business disruptions can occur due to forces beyond the Firm’s control such as severe weather, power or telecommunications loss, flooding, transit strikes, terrorist threats or infectious disease. The safety of the Firm’s employees and customers is of the highest priority. The Firm’s global resiliency program is intended to enable the Firm to recover its critical business functions and supporting assets (i.e., staff, technology and facilities) in the event of a business interruption. The program includes corporate governance, awareness and training, as well as strategic and tactical initiatives to identify, assess, and manage business interruption and public safety risks.
The
strength and proficiency of the Firm’s global resiliency program has played an integral role in maintaining the Firm’s business operations during and after various events.
Payment fraud risk
Payment fraud risk is the risk of external and internal parties unlawfully obtaining personal monetary benefit through misdirected or otherwise improper payment, and exposing the Firm to financial or reputational harm. Over the past year, the risk of payment fraud remained at a heightened level across the industry. The complexities of these attacks along with perpetrators’ strategies continue to evolve. A Payments Control Program has been established that includes Cybersecurity, Operations, Technology, Risk and the lines of business to manage the risk, implement controls and provide employee and client education and awareness training. In addition, a new wholesale fraud detection solution has
been introduced which monitors high value payments for certain anomalies. The Firm’s monitoring of customer behavior is periodically evaluated and enhanced, and attempts to detect and mitigate new strategies implemented by fraud perpetrators. The Firm’s consumer and wholesale businesses collaborate closely to deploy risk mitigation controls across their businesses.
132
JPMorgan Chase & Co./2017 Annual Report
Third-party
outsourcing risk
To identify and manage the operational risk inherent in its outsourcing activities, the Firm has a Third-Party Oversight (“TPO”) framework to assist lines of business and corporate functions in selecting, documenting, onboarding, monitoring and managing their supplier relationships. The objective of the TPO framework is to hold third parties to the same high level of operational performance as is expected of the Firm’s internal operations. The Corporate Third-Party Oversight group is responsible for Firmwide TPO training, monitoring, reporting and standards.
Insurance
One of the ways in which operational risk may be mitigated is through insurance maintained by the Firm. The Firm purchases insurance from commercial insurers and utilizes a wholly-owned captive insurer, Park Assurance Company, to ensure compliance
with local laws and regulations (e.g., workers compensation), as well as to serve other needs (e.g., property loss and public liability). Insurance may also be required by third parties with whom the Firm does business. The insurance purchased is reviewed and approved by senior management.
JPMorgan Chase & Co./2017 Annual Report
133
COMPLIANCE
RISK MANAGEMENT
Compliance risk, a subcategory of operational risk, is the risk of failure to comply with applicable laws, rules and regulations.
Overview
Each line of business and function is accountable for managing its compliance risk. The Firm’s Compliance Organization (“Compliance”), which is independent of the lines of business, works closely with senior management to provide independent review, monitoring and oversight of business operations with a focus on compliance with the legal and regulatory obligations applicable to the delivery of the Firm’s products and services to clients and customers.
These compliance risks relate to a wide variety of legal and regulatory obligations, depending on the line of business and
the jurisdiction, and include those related to financial products and services, relationships and interactions with clients and customers, and employee activities. For example, compliance risks include those associated with anti-money laundering compliance, trading activities, market conduct, and complying with the rules and regulations related to the offering of products and services across jurisdictional borders, among others. Compliance risk is also inherent in the Firm’s fiduciary activities, including the failure to exercise the applicable high standard of care (such as the duties of loyalty or care), to act in the best interest of clients and customers or to treat clients and customers fairly.
Other Functions provide oversight of significant regulatory obligations that are specific to their respective areas of responsibility.
Compliance implements various practices designed
to identify and mitigate compliance risk by establishing policies, testing, monitoring, training and providing guidance.
Governance and oversight
Compliance is led by the Firms’ CCO who reports to the Firm’s CRO.
The Firm maintains oversight and coordination of its Compliance Risk Management practices through the Firm’s CCO, lines of business CCOs and regional CCOs to implement the Compliance program globally across the lines of business and regions. The Firm’s CCO is a member of the FCC and the FRC. The Firm’s CCO also provides regular updates to the Audit Committee and DRPC. In addition, certain Special Purpose Committees of the Board have been established to oversee the Firm’s compliance with regulatory Consent Orders.
The
Firm has a Code of Conduct (the “Code”). Each employee is given annual training on the Code and is required annually to affirm his or her compliance with the Code. All new hires must complete Code training shortly after their start date with the Firm. The Code sets forth the Firm’s expectation that employees will conduct themselves with integrity at all times and provides the principles that govern employee conduct with clients, customers, shareholders and one another, as well as with the markets and communities in which the Firm does business. The Code requires employees to promptly report any known or suspected violation of the Code, any internal Firm policy, or any law or regulation applicable to the Firm’s business. It also requires employees to report any illegal conduct, or conduct that violates the underlying principles of the Code, by any of the Firm’s employees, customers, suppliers, contract
workers, business partners, or agents. The Code prohibits retaliation against anyone who raises an issue or concern in good faith. Specified compliance officers are specially trained and designated as “code specialists” who act as a resource to employees on questions related to the Code. Employees can report any known or suspected violations of the Code through the Code Reporting Hotline by phone or the internet. The Hotline is anonymous, except in certain non-U.S. jurisdictions where laws prohibit anonymous reporting, and is available 24/7 globally, with translation services. It is maintained by an outside service provider. Annually, the Chief Compliance Office and Human Resources report to the Audit Committee on the Code of Conduct program and provide an update on the employee completion rate for Code of Conduct training and affirmation.
JPMorgan
Chase & Co./2017 Annual Report
134
CONDUCT RISK MANAGEMENT
Conduct risk, a subcategory of operational risk, is the risk that any action or inaction by an employee of the Firm could lead to unfair client/customer outcomes, compromise the Firm’s reputation,
impact the integrity of the markets in which the Firm operates, or reflect poorly on the Firm’s culture.
Overview
Each line of business or function is accountable for identifying and managing its conduct risk to provide appropriate engagement, ownership and sustainability of a culture consistent with the Firm’s How We Do Business Principles (“Principles”). The Principles serve as a guide for how employees are expected to conduct themselves. With the Principles serving as a guide, the Firm’s Code sets out the Firm’s expectations for each employee and provides information and resources to help employees conduct business ethically and in compliance with the law everywhere the Firm operates. For further discussion of the Code, see Compliance Risk Management on page 134.
Governance and
oversight
The CMDC is the Board-level Committee with primary oversight of the firm’s Culture and Conduct Program. The Audit Committee is responsible for reviewing the program established by management to monitor compliance with the Code. Additionally, the DRPC reviews, at least annually, the Firm’s qualitative factors included in the Risk Appetite Framework, including conduct risk. The DRPC also meets annually with the CMDC to review and discuss aspects of the
Firm’s compensation practices. Finally, the Culture & Conduct Risk Committee provides oversight of certain culture and conduct risk initiatives at the Firm.
Conduct risk management is incorporated into various aspects of people management
practices throughout the employee life cycle, including recruiting, onboarding, training and development, performance management, promotion and compensation processes. Businesses undertake annual RCSA assessments, and, as part of these reviews, identify their respective key inherent operational risks (including conduct risks), evaluate the design and effectiveness of their controls, identify control gaps and develop associated action plans. Each LOB and designated corporate function completes an assessment of conduct risk quarterly, reviews metrics and issues which may involve conduct risk, and provides business conduct training as appropriate.
The Firm’s Know Your Employee framework generally addresses how the Firm manages, oversees and responds to workforce conduct related matters that may otherwise expose the Firm to financial, reputational, compliance and other operating
risks. The Firm also has a HR Control Forum, the primary purpose of which is to discuss conduct and accountability for more significant risk and control issues and review, when appropriate, employee actions including but not limited to promotion and compensation actions.
JPMorgan Chase & Co./2017 Annual Report
135
Management’s discussion and analysis
LEGAL
RISK MANAGEMENT
Legal risk, a subcategory of operational risk, is the risk of loss primarily caused by the actual or alleged failure to meet legal obligations that arise from the rule of law in jurisdictions in which the Firm operates, agreements with clients and customers, and products and services offered by the Firm.
Overview
The global Legal function (“Legal”) provides legal services and advice to the Firm. Legal is responsible for managing the Firm’s exposure to Legal risk by:
•
managing actual and potential litigation and enforcement matters, including
internal reviews and investigations related to such matters
•
advising on products and services, including contract negotiation and documentation
•
advising on offering and marketing documents and new business initiatives
•
managing
dispute resolution
•
interpreting existing laws, rules and regulations, and advising on changes thereto
•
advising on advocacy in connection with contemplated and proposed laws, rules and regulations, and
•
providing legal advice to the LOBs and corporate functions, in alignment with the
lines of defense described under Enterprise-wide Risk Management.
Legal selects, engages and manages outside counsel for the Firm on all matters in which outside counsel is engaged. In addition, Legal advises the Firm’s Conflicts Office which reviews the Firm’s wholesale transactions that may have the potential to create conflicts of interest for the Firm.
Governance and oversight
The Firm’s General Counsel reports to the CEO and is a member of the Operating Committee, the Firmwide Risk Committee and the Firmwide Control Committee. The General Counsel’s leadership team includes a General Counsel for each line of business, the heads of the Litigation and Corporate & Regulatory practices, as well as the Firm’s Corporate Secretary. Each region (e.g., Latin America, Asia
Pacific) has a General Counsel who is responsible for managing legal risk across all lines of business and functions in the region.
The Firm’s General Counsel and other members of Legal report on significant legal matters at each meeting of the Firm’s Board of Directors, at least quarterly to the Audit Committee, and periodically to the DRPC.
Legal serves on and advises various committees (including new business initiative and reputation risk committees) and advises the Firm’s businesses to protect the Firm’s reputation beyond any particular legal requirements.
136
JPMorgan
Chase & Co./2017 Annual Report
ESTIMATIONS AND MODEL RISK MANAGEMENT
Estimations and Model risk, a subcategory of operational risk, is the potential for adverse consequences from decisions based on incorrect or misused estimation outputs.
The Firm uses models and other analytical and judgment-based estimations
across various businesses and functions. The estimation methods are of varying levels of sophistication and are used for many purposes, such as the valuation of positions and measurement of risk, assessing regulatory capital requirements, conducting stress testing, and making business decisions. A dedicated independent function, Model Risk Governance and Review (“MRGR”), defines and governs the Firm’s model risk management policies and certain analytical and judgment-based estimations, such as those used in risk management, budget forecasting and capital planning and analysis. MRGR reports to the Firm’s CRO.
Model risks are owned by the users of the models within the various businesses and functions in the Firm based on the specific purposes of such models. Users and developers of models are responsible for developing, implementing and testing their models, as well as referring models to the Model Risk function for
review and approval. Once models have been approved, model users and developers are responsible for maintaining a robust operating environment, and must monitor and evaluate the performance of the models on an ongoing basis. Model users and developers may seek to enhance models in response to changes in the portfolios and in product and market developments, as well as to capture improvements in available modeling techniques and systems capabilities.
Models are tiered based on an internal standard according to their complexity, the exposure associated with the model and the Firm’s reliance on the model. This tiering is subject to the approval of the Model Risk function. A model review conducted by the Model Risk function considers the model’s suitability for the specific uses to which it will be put. The factors considered in reviewing a model include whether
the model accurately reflects the characteristics of the product and its significant risks, the selection and reliability of model inputs, consistency with models for similar products, the appropriateness of any model-related adjustments, and sensitivity to input parameters and assumptions that cannot be observed from the market. When reviewing a model, the Model Risk function analyzes and challenges the model methodology and the reasonableness of model assumptions and may perform or require additional testing, including back-testing of model outcomes. Model reviews are approved by the appropriate level of management within the Model Risk function based on the relevant model tier.
Under the Firm’s Estimations and Model Risk Management Policy, the Model Risk function reviews and approves new models, as well as material changes to existing models, prior to implementation in the operating environment. In certain circumstances,
the head of the Model Risk function may grant exceptions to the Firm’s policy to allow a model to be used prior to review or approval. The Model Risk function may also require the user to take appropriate actions to mitigate the model risk if it is to be used in the interim. These actions will depend on the model and may include, for example, limitation of trading activity.
The governance of analytical and judgment-based estimations, such as those used in risk management, budget forecasting, and capital planning and analysis, within MRGR’s scope, follows a consistent approach to the governance of models.
For a summary of valuations based on valuation models and other valuation techniques, see Critical Accounting Estimates Used by the Firm on pages 138–140 and Note 2.
JPMorgan
Chase & Co./2017 Annual Report
137
Management’s discussion and analysis
CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM
JPMorgan Chase’s accounting policies and use of estimates are integral to understanding its reported results. The Firm’s
most complex accounting estimates require management’s judgment to ascertain the appropriate carrying value of assets and liabilities. The Firm has established policies and control procedures intended to ensure that estimation methods, including any judgments made as part of such methods, are well-controlled, independently reviewed and applied consistently from period to period. The methods used and judgments made reflect, among other factors, the nature of the assets or liabilities and the related business and risk management strategies, which may vary across the Firm’s businesses and portfolios. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The Firm believes its estimates for determining the carrying value of its assets and liabilities are appropriate. The following is a brief description of the Firm’s critical accounting estimates involving significant judgments.
Allowance
for credit losses
JPMorgan Chase’s allowance for credit losses covers the retained consumer and wholesale loan portfolios, as well as the Firm’s wholesale and certain consumer lending-related commitments. The allowance for loan losses is intended to adjust the carrying value of the Firm’s loan assets to reflect probable credit losses inherent in the loan portfolio as of the balance sheet date. Similarly, the allowance for lending-related commitments is established to cover probable credit losses inherent in the lending-related commitments portfolio as of the balance sheet date.
The allowance for credit losses includes a formula-based component, an asset-specific component, and a component related to PCI loans. The determination of each of these components involves significant judgment on a number of matters. For further discussion of these components, areas
of judgment and methodologies used in establishing the Firm’s allowance for credit losses, see Note 13.
Allowance for credit losses sensitivity
The Firm’s allowance for credit losses is sensitive to numerous factors, which may differ depending on the portfolio. Changes in economic conditions or in the Firm’s assumptions and estimates could affect its estimate of probable credit losses inherent in the portfolio at the balance sheet date. The Firm uses its best judgment to assess these economic conditions and loss data in estimating the allowance for credit losses and these estimates are subject to periodic refinement based on changes to underlying external or Firm-specific historical data. The use of alternate estimates, data sources, adjustments to modeled loss estimates for model imprecision and other factors would result in a different
estimated allowance for credit losses, as well as impact any related sensitivities described below. During the second quarter of 2017, the Firm refined its loss estimates relating to the wholesale credit portfolio. See Note 13 for further discussion.
To illustrate the potential magnitude of certain alternate judgments, the Firm estimates that changes in the following inputs would have the following effects on the Firm’s modeled credit loss estimates as of December 31, 2017, without consideration of any offsetting or correlated effects of other inputs in the Firm’s allowance for loan losses:
•
A
combined 5% decline in housing prices and a 100 basis point increase in unemployment rates from current levels could imply:
◦
an increase to modeled credit loss estimates of approximately $525 million for PCI loans.
◦
an increase to modeled annual credit loss estimates of approximately $100 million for residential
real estate, excluding PCI loans.
•
For credit card loans, a 100 basis point increase in unemployment rates from current levels could imply an increase to modeled annual loss estimates of approximately $1.0 billion.
•
An increase in PD factors consistent with a one-notch downgrade in the Firm’s internal risk ratings for its entire wholesale loan portfolio could imply an increase in the Firm’s modeled credit loss estimates of approximately $1.4
billion.
•
A 100 basis point increase in estimated loss given default (“LGD”) for the Firm’s entire wholesale loan portfolio could imply an increase in the Firm’s modeled credit loss estimates of approximately $175 million.
The purpose of these sensitivity analyses is to provide an indication of the isolated impacts of hypothetical alternative assumptions on modeled loss estimates. The changes in the inputs presented above are not intended to imply management’s expectation of future deterioration of those risk factors. In addition, these analyses are not intended to estimate changes in the overall allowance
for loan losses, which would also be influenced by the judgment management applies to the modeled loss estimates to reflect the uncertainty and imprecision of these modeled loss estimates based on then-current circumstances and conditions.
It is difficult to estimate how potential changes in specific factors might affect the overall allowance for credit losses because management considers a variety of factors and inputs in estimating the allowance for credit losses. Changes in these factors and inputs may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors may be directionally inconsistent, such that improvement in one factor may offset deterioration in other factors. In addition, it is difficult to predict how changes in specific economic conditions or assumptions could affect borrower behavior or other factors considered by management in estimating the allowance
for credit losses. Given the process the Firm follows and the judgments made in evaluating the risk factors related to its loss estimates, management believes that its current estimate of the allowance for credit losses is appropriate.
138
JPMorgan Chase & Co./2017 Annual Report
Fair value of financial instruments,
MSRs and commodities inventory
JPMorgan Chase carries a portion of its assets and liabilities at fair value. The majority of such assets and liabilities are measured at fair value on a recurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis, including certain mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral.
Assets measured at fair value
The following table includes the Firm’s assets measured at fair value and the portion of such assets that are classified within level 3 of the valuation hierarchy. For further information, see Note 2.
Total
assets measured at fair value on a recurring basis
625.7
19.2
Total assets measured at fair value on a nonrecurring basis
1.3
0.8
Total
assets measured at fair value
$
627.0
$
20.0
Total Firm assets
$
2,533.6
Level
3 assets as a percentage of total Firm assets(a)
0.8
%
Level 3 assets as a percentage of total Firm assets at fair value(a)
3.2
%
(a)
For
purposes of the table above, the derivative receivables total reflects the impact of netting adjustments; however, the $6.0 billion of derivative receivables classified as level 3 does not reflect the netting adjustment as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset. The level 3 balances would be reduced if netting were applied, including the netting benefit associated with cash collateral.
Valuation
Details of the Firm’s processes for determining fair value are set out in Note 2. Estimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available to the Firm. For instruments valued using internally
developed valuation models and other valuation techniques that use significant unobservable inputs and are therefore classified within level 3 of the valuation hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.
In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate valuation technique to use. Second, the lack of observability of certain significant inputs requires management to assess all relevant empirical data in deriving valuation inputs including, for example, transaction details, yield curves, interest rates, prepayment rates, default rates, volatilities, correlations, equity or debt prices,
valuations of comparable instruments, foreign exchange
rates and credit curves. For further discussion of the valuation of level 3 instruments, including unobservable inputs used, see Note 2.
For instruments classified in levels 2 and 3, management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the Firm’s creditworthiness, market funding rates, liquidity considerations, unobservable parameters, and for portfolios that meet specified criteria, the size of the net open risk position. The judgments made are typically affected by the type of product and its specific contractual terms, and the level of liquidity for the product or within the market as a whole. For further discussion of valuation adjustments applied by the Firm see Note 2.
Imprecision in estimating unobservable
market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Firm’s businesses and portfolios.
The Firm uses various methodologies and assumptions in the determination of fair value. The use of methodologies or assumptions different than those used by the Firm could result in a different estimate of fair value at the reporting date. For a detailed discussion of the Firm’s valuation process and hierarchy, and its determination of fair value for individual financial instruments, see Note 2.
Goodwill impairment
Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least annually. The Firm’s process and methodology used to conduct goodwill impairment testing is described in Note 15.
Management applies significant judgment when estimating the fair value of its reporting units. Estimates of fair value are dependent upon estimates of the future earnings potential of the Firm’s reporting units, long-term growth rates and the estimated market cost of equity. Imprecision in estimating these factors can affect the estimated fair value of the reporting units.
Based upon the updated valuations for all of its reporting units, the Firm concluded that the goodwill allocated to its reporting units was not impaired at December 31,
2017. The fair values of these reporting units exceeded their carrying values by approximately 15% or higher and did not indicate a significant risk of goodwill impairment based on current projections and valuations. Such valuations do not reflect the impact of the TCJA that was enacted in December 2017 as such impact would not alter the conclusion that goodwill is not impaired.
The projections for all of the Firm’s reporting units are consistent with management’s current short-term business outlook assumptions, and in the longer term, incorporate a set of macroeconomic assumptions and the Firm’s best estimates of long-term growth and returns on equity of its
JPMorgan
Chase & Co./2017 Annual Report
139
Management’s discussion and analysis
businesses. Where possible, the Firm uses third-party and peer data to benchmark its assumptions and estimates.
Declines in business performance, increases in credit losses, increases in capital requirements, as well as deterioration in economic or market conditions, adverse estimates of regulatory or legislative changes or increases in the estimated market cost of equity, could cause the estimated fair values of the Firm’s reporting units or their associated goodwill to decline in the future, which could result in a material impairment
charge to earnings in a future period related to some portion of the associated goodwill.
For additional information on goodwill, see Note 15.
Credit card rewards liability
JPMorgan Chase offers credit cards with various reward programs which allow cardholders to earn reward points based on their account activity and the terms and conditions of the rewards program. Generally, there are no limits on the points that an eligible cardholder can earn, nor do they expire, and these points can be redeemed for a variety of rewards, including cash (predominantly in the form of account credits), gift cards and travel.
The Firm maintains a rewards liability which represents the estimated
cost of reward points earned and expected to be redeemed by cardholders. The rewards liability is sensitive to various assumptions, including cost per point and redemption rates for each of the various reward programs, which are evaluated periodically. The liability is accrued as the cardholder earns the benefit and is reduced when the cardholder redeems points. This liability was $4.9 billion and $3.8 billion at December 31, 2017 and 2016, respectively, and is recorded in accounts payable and other liabilities on the Consolidated balance sheets.
Income taxes
JPMorgan Chase is subject to the income tax laws of
the various jurisdictions in which it operates, including U.S. federal, state and local, and non-U.S. jurisdictions. These laws are often complex and may be subject to different interpretations. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, JPMorgan Chase must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgments regarding the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.
JPMorgan Chase’s interpretations of tax laws around the world are subject to review and examination by the various taxing authorities in the jurisdictions where the Firm operates, and disputes may occur regarding its view on a tax position. These disputes over interpretations with the various taxing
authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which the Firm operates. JPMorgan Chase regularly reviews whether it may be assessed additional income taxes as a result of the resolution of these matters, and the Firm records additional reserves as appropriate. In addition, the Firm may revise its estimate of income taxes due to changes in income tax
laws, legal interpretations, and business strategies. It is possible that revisions in the Firm’s estimate of income taxes may materially affect the Firm’s results of operations in any reporting period.
The Firm’s provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes.
Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. The Firm has also recognized deferred tax assets in connection with certain tax attributes, including NOLs. The Firm performs regular reviews to ascertain whether its deferred tax assets are realizable. These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporates various tax planning strategies, including strategies that may be available to utilize NOLs before they expire. In connection with these reviews, if it is determined that a deferred tax asset is not realizable, a valuation allowance is established. The valuation allowance may be reversed in a subsequent reporting period if the Firm determines that, based on revised estimates of future taxable income or changes in tax planning strategies, it is more likely than not that all or part of the deferred tax asset will become realizable.
As of December 31, 2017, management has determined it is more likely than not that the Firm will realize its deferred tax assets, net of the existing valuation allowance.
Prior to December 31, 2017, U.S. federal income taxes had not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings had been reinvested abroad for an indefinite period of time. The Firm will no longer maintain the indefinite reinvestment assertion on the undistributed earnings of those non-U.S. subsidiaries in light of the enactment
of the TCJA. The U.S. federal and state and local income taxes associated with the undistributed and previously untaxed earnings of those non-U.S. subsidiaries was included in the deemed repatriation charge recorded as of December 31, 2017.
The Firm adjusts its unrecognized tax benefits as necessary when additional information becomes available. Uncertain tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the largest amount of benefit that management believes is more likely than not to be realized upon settlement. It is possible that the reassessment of JPMorgan Chase’s unrecognized tax benefits may have a material impact on its effective income
tax rate in the period in which the reassessment occurs.
The income tax expense for the current year includes a reasonable estimate recorded under SEC Staff Accounting Bulletin No. 118 resulting from the enactment of the TCJA.
For additional information on income taxes, see Note 24.
Litigation reserves
For a description of the significant estimates and judgments associated with establishing litigation reserves, see
Note 29.
140
JPMorgan
Chase & Co./2017 Annual Report
ACCOUNTING AND REPORTING DEVELOPMENTS
SEC Staff Accounting Bulletin adopted during 2017
Bulletin
Summary
of guidance
Effects on financial statements
Application of U.S. GAAP related to the Tax Cuts and Jobs Act (“TCJA”) (SEC Staff Accounting Bulletin No. 118)
Issued December 2017
• Provides guidance on the accounting for income taxes in the context of the TCJA.
• For impacts of the tax law changes that are reasonably estimable, requires the recognition of provisional amounts in year-end 2017 financial statements.
• Provides a 1-year measurement period
in which to refine previously recorded provisional amounts based on new information or interpretations.
• The TCJA resulted in a $2.4 billion decrease in net income driven by a deemed repatriation charge and adjustments to the value of the Firm’s tax oriented investments, partially offset by a benefit from the revaluation of the Firm’s net deferred tax liability. Certain of these amounts may be refined in accordance with SEC Staff Accounting Bulletin No. 118.
• Refer to Note 24 for additional information related to the impacts of the TCJA.
Revenue recognition – revenue from contracts
with customers
Issued May 2014
• Requires that revenue from contracts with customers be recognized upon transfer of control of a good or service in the amount of consideration expected to be received.
• Changes the accounting for certain contract costs, including whether they may be offset against revenue in the Consolidated statements of income, and requires additional disclosures about revenue and contract costs.
• May
be adopted using a full retrospective approach or a modified, cumulative effect approach wherein the guidance is applied only to existing contracts as of the date of initial application, and to new contracts transacted after that date.
• The Firm adopted the revenue recognition guidance using the full retrospective method of adoption.
• The adoption of the guidance did not result in any material changes in the timing of the Firm’s revenue recognition, but will require gross presentation of certain
costs currently offset against revenue. This change in presentation will be reflected in the first quarter of 2018 and will increase both noninterest revenue and noninterest expense for the Firm by $1.1 billion and $900 million for the years ended December 31, 2017 and 2016, respectively. The increase is predominantly associated with certain distribution costs in AWM (currently offset against Asset management, administration and commissions), with the remainder of the increase associated with certain underwriting costs in CIB (currently offset against Investment banking fees).
• The Firm’s Note 6 qualitative disclosures are consistent with the guidance.
Recognition
and
measurement of financial assets and financial liabilities
Issued January 2016
• Requires that certain equity instruments be measured at fair value, with changes in fair value recognized in earnings.
• Provides a measurement alternative for equity securities without readily determinable fair values to be measured at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer. Any such price changes will be reflected in earnings beginning in the period of adoption.
• Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption,
except for those equity securities that are eligible for the measurement alternative.
• The Firm early adopted the provisions of this guidance related to presenting DVA in OCI for financial liabilities where the fair value option has been elected, effective January 1, 2016. The Firm adopted the portions of the guidance that were not eligible for early adoption on January 1, 2018.
• Upon adoption, the Firm elected the measurement alternative for its equity securities that do not have readily determinable fair values, and the Firm did not record a cumulative-effect adjustment related to the adoption of this guidance.
JPMorgan
Chase & Co./2017 Annual Report
141
Management’s discussion and analysis
FASB Standards issued but not adopted as of December 31, 2017 (continued)
Standard
Summary
of guidance
Effects on financial statements
Classification of certain cash receipts and cash payments in the statement of cash flows
Issued August 2016
• Provides targeted amendments to the classification of certain cash flows, including treatment of cash payments for settlement of zero-coupon debt instruments and distributions received from equity method investments.
• Requires retrospective application to all periods presented.
• The adoption of the guidance will result in reclassification of restricted cash balances into Cash and restricted cash on the Consolidated statements of cash flows in the first quarter of 2018. The Firm will include Cash and due from banks and Deposits with banks in Cash and restricted cash in the Consolidated statements of cash flows, resulting in Deposits with banks no longer being reflected in Investing activities.
• In addition, to align with the presentation of Cash and restricted cash on the Consolidated statements of cash flows, the Firm will reclassify restricted cash balances to Cash and due from banks and to Deposits with banks from Other assets and disclose the total for Cash and restricted cash on the Firm’s Consolidated balance sheets in the first quarter of 2018.
Definition
of a business
Issued January 2017
• Narrows the definition of a business and clarifies that, to be considered a business, the fair value of the gross assets acquired (or disposed of) may not be substantially all concentrated in a single identifiable asset or a group of similar assets.
• In addition, in order to be considered a business, a set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.
• No
impact upon adoption because the guidance is to be applied prospectively. Subsequent to adoption, fewer transactions will be treated as acquisitions or dispositions of a business.
Presentation of net periodic pension cost and net periodic postretirement benefit cost
Issued March 2017
• Requires the service cost component of net periodic pension and postretirement benefit cost to be reported separately in the consolidated results of operations from the other components (e.g., expected return on assets, interest costs, amortization of gains/losses and prior service costs).
• Requires retrospective application and presentation
in the consolidated results of operations of the service cost component in the same line item as other employee compensation costs and presentation of the other components in a different line item from the service cost component.
• The adoption of the guidance in the first quarter of 2018 will result in an increase in compensation expense and a reduction in other expense of $223 million and $250 million for the years ended December 31, 2017 and 2016, respectively.
Premium
amortization on purchased callable debt securities
Issued March 2017
• Requires amortization of premiums to the earliest call date on debt securities with call features that are explicit, noncontingent and callable at fixed prices and on preset dates.
• Does not impact securities held at a discount; the discount continues to be amortized to the contractual maturity.
• Requires adoption on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
• The
Firm early adopted the new guidance on January 1, 2018.
• The new guidance primarily impacts obligations of U.S. states and municipalities
held in the Firm’s investment securities portfolio.
• The adoption of this guidance resulted in a cumulative-effect adjustment that
reduced retained earnings by approximately $505 million as of January 1, 2018, with a corresponding increase of $261 million (after tax) in AOCI and related adjustments to securities and tax liabilities.
• Subsequent to adoption, although the guidance will reduce the interest income
recognized prior to the earliest call date for
callable debt securities held at a premium, the effect of this guidance on the Firm’s net interest income is not expected to be material.
142
JPMorgan Chase & Co./2017 Annual Report
FASB
Standards issued but not adopted as of December 31, 2017 (continued)
Standard
Summary of guidance
Effects on financial statements
Hedge
accounting
Issued August 2017
• Reduces earnings volatility by better aligning the accounting with the economics of the risk management activities.
• Expands the ability for certain hedges of interest rate risk to qualify for hedge accounting.
• Allows recognition of ineffectiveness in cash flow hedges and net investment hedges in OCI.
• Allows a one-time election at adoption to transfer certain securities classified as held-to-maturity to available-for-sale.
• Simplifies hedge documentation requirements.
• The
Firm early adopted the new guidance on January 1, 2018.
• The adoption of the guidance resulted in a cumulative-effect adjustment that increased retained earnings in the amount of $34 million, with related adjustments to debt carrying values and AOCI.
• The Firm will also amend its qualitative and quantitative disclosures within its derivative instruments note to the Consolidated Financial Statements in the first quarter of 2018.
• In accordance with the new guidance, the Firm elected to transfer certain securities from HTM to AFS. The amendments provide the Firm with additional hedge accounting alternatives for its AFS securities (including those transferred under the election) to be considered as the Firm manages it structural interest rate risk and regulatory capital. The Firm
is currently evaluating those risk management alternatives and intends to manage the transferred securities in a manner consistent with its existing AFS securities. This transfer is a non-cash transaction at fair value.
Reclassification of Certain Tax Effects from AOCI
Issued February 2018
•
Provides an election to reclassify from AOCI to retained earnings stranded tax effects due to the revaluation of deferred tax assets and liabilities as a result of changes in
applicable tax rates under the TCJA.
•
Requires additional disclosures related to the Firm’s election to reclassify amounts from AOCI to retained earnings and the Firm’s policy for releasing income tax effects from AOCI.
• The guidance may be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The adoption
of the guidance resulted in a cumulative-effect adjustment that increased retained earnings in the amount of $288 million in the first quarter of 2018. This amount is an estimate that may be refined in accordance with SEC Staff Accounting Bulletin No. 118, and represents the removal of the stranded tax effects from AOCI, thereby allowing the tax effects within AOCI to reflect the new respective corporate income tax rates.
• Refer to Note 24 for additional information related to the impacts of the TCJA.
Leases
Issued February 2016
• Requires lessees to recognize all leases longer than twelve months on the Consolidated
balance sheets as lease liabilities with corresponding right-of-use assets.
• Requires lessees and lessors to classify most leases using principles similar to existing lease accounting, but eliminates the “bright line” classification tests.
• Permits the Firm to generally account for its existing leases consistent with current guidance, except for the incremental balance sheet recognition.
• Expands qualitative and quantitative disclosures regarding leasing arrangements.
• May be adopted using a modified cumulative effect approach wherein the guidance is applied only to existing contracts as of the date of initial application, and to new contracts
transacted after that date.
• The Firm is in the process of its implementation which has included an initial evaluation of its leasing contracts and activities. As a lessee, the Firm is developing its methodology to estimate the right-of-use assets and lease liabilities, which is based on the present value of lease payments. The Firm expects to recognize lease liabilities and corresponding right-of-use assets (at their present value) related to predominantly all of the $10 billion of future minimum payments required under operating leases as disclosed in Note 28.
However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation. The Firm does not expect material changes to the recognition of operating lease expense in its Consolidated statements of income.
• The Firm plans to adopt the new guidance in the first quarter of 2019.
JPMorgan
Chase & Co./2017 Annual Report
143
Management’s discussion and analysis
FASB Standards issued but not adopted as of December 31, 2017 (continued)
Standard
Summary
of guidance
Effects on financial statements
Financial instruments – credit losses
Issued June 2016
• Replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost (including HTM securities), which will reflect management’s estimate of credit losses over the full remaining expected life of the financial assets.
• Eliminates existing guidance for PCI loans, and requires recognition of an allowance for expected credit losses on financial assets purchased with more than
insignificant credit deterioration since origination.
• Amends existing impairment guidance for AFS securities to incorporate an allowance, which will allow for reversals of impairment losses in the event that the credit of an issuer improves.
• Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.
• The Firm has begun its implementation efforts by establishing a Firmwide, cross-discipline governance structure. The Firm is currently identifying key interpretive issues,
and is assessing existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required.
• The Firm expects that the new guidance will result in an increase in its allowance for credit losses due to several factors, including:
1.
The allowance related to the Firm’s loans and commitments will increase to cover credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions
2.
The nonaccretable difference on PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans
3.
An allowance
will be established for estimated credit losses on HTM securities
• The extent of the increase is under evaluation, but will depend upon the nature and characteristics of the Firm’s portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date.
Goodwill
Issued January 2017
• Requires an impairment loss to be recognized when the estimated fair value of a reporting unit falls below its carrying value.
• Eliminates the second condition in the current guidance that requires an impairment loss to be recognized only if the estimated implied fair value of the goodwill is below its carrying value.
• Based on current impairment test results, the Firm does not expect a material effect on the Consolidated Financial Statements.
• After adoption, the guidance may result in more frequent goodwill impairment losses due to the removal of the second condition.
• The Firm is evaluating the timing of adoption.
(a)
Early adoption is permitted.
144
JPMorgan
Chase & Co./2017 Annual Report
FORWARD-LOOKING STATEMENTS
From time to time, the Firm has made and will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “anticipate,”“target,”“expect,”“estimate,”“intend,”“plan,”“goal,”“believe,” or other words of similar meaning. Forward-looking statements provide JPMorgan Chase’s current expectations or forecasts of future events, circumstances, results or aspirations. JPMorgan Chase’s disclosures in this Annual Report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Firm also may make forward-looking statements in its other documents filed or furnished with the SEC. In addition, the Firm’s senior management may make forward-looking statements orally to investors, analysts, representatives of the media and others.
All forward-looking statements are, by their nature, subject to risks and uncertainties, many of which are beyond the Firm’s control. JPMorgan Chase’s actual future results may differ materially from those set forth in its forward-looking statements. While there is no assurance that any list
of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ from those in the forward-looking statements:
•
Local, regional and global business, economic and political conditions and geopolitical events;
•
Changes in laws and regulatory requirements, including capital and liquidity requirements affecting the Firm’s businesses, and the ability of the Firm to address those requirements;
•
Heightened
regulatory and governmental oversight and scrutiny of JPMorgan Chase’s business practices, including dealings with retail customers;
•
Changes in trade, monetary and fiscal policies and laws;
•
Changes in income tax laws and regulations;
•
Securities and capital markets behavior, including
changes in market liquidity and volatility;
•
Changes in investor sentiment or consumer spending or savings behavior;
•
Ability of the Firm to manage effectively its capital and liquidity, including approval of its capital plans by banking regulators;
•
Changes in credit ratings assigned to
the Firm or its subsidiaries;
•
Damage to the Firm’s reputation;
•
Ability of the Firm to deal effectively with an economic slowdown or other economic or market disruption;
•
Technology changes instituted
by the Firm, its counterparties or competitors;
•
The success of the Firm’s business simplification initiatives and the effectiveness of its control agenda;
•
Ability of the Firm to develop new products and services, and the extent to which products or services previously sold by the Firm (including but not limited to mortgages and asset-backed securities) require the Firm to incur liabilities or absorb losses not contemplated at their initiation or origination;
•
Acceptance
of the Firm’s new and existing products and services by the marketplace and the ability of the Firm to innovate and to increase market share;
•
Ability of the Firm to attract and retain qualified employees;
•
Ability of the Firm to control expenses;
•
Competitive pressures;
•
Changes
in the credit quality of the Firm’s customers and counterparties;
•
Adequacy of the Firm’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
•
Adverse judicial or regulatory proceedings;
•
Changes in applicable accounting policies,
including the introduction of new accounting standards;
•
Ability of the Firm to determine accurate values of certain assets and liabilities;
•
Occurrence of natural or man-made disasters or calamities or conflicts and the Firm’s ability to deal effectively with disruptions caused by the foregoing;
•
Ability
of the Firm to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;
•
Ability of the Firm to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;
•
Ability of the Firm to effectively defend itself against cyberattacks and other attempts by unauthorized parties to access information of the Firm or its customers or to disrupt the Firm’s systems; and
•
The
other risks and uncertainties detailed in Part I, Item 1A: Risk Factors in the Firm’s Annual Report on Form 10-K for the year ended December 31, 2017.
Any forward-looking statements made by or on behalf of the Firm speak only as of the date they are made, and JPMorgan Chase does not undertake to update forward-looking statements. The reader should, however, consult any further disclosures of a forward-looking nature the Firm may make in any subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, or Current Reports on Form 8-K.
JPMorgan
Chase & Co./2017 Annual Report
145
Management’s report on internal control over financial reporting
Management of JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Firm’s principal executive
and principal financial officers, or persons performing similar functions, and effected by JPMorgan Chase’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
JPMorgan Chase’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Firm’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Firm are being made only in accordance with authorizations of JPMorgan Chase’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Firm’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has completed an assessment of the effectiveness of the Firm’s internal control over financial reporting as of December 31,
2017. In making the assessment, management used the “Internal Control — Integrated Framework” (“COSO 2013”) promulgated by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based upon the assessment performed, management concluded that as of December 31, 2017, JPMorgan Chase’s internal control over financial reporting was effective based upon the COSO 2013 framework. Additionally, based upon management’s assessment, the Firm determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2017.
The
effectiveness of the Firm’s internal control over financial reporting as of December 31, 2017, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Report of independent
registered public accounting firm
To the Board of Directors and Stockholders of JPMorgan Chase & Co.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of JPMorgan Chase & Co. and its subsidiaries (the “Firm”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Firm’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Firm as of December 31, 2017 and 2016,
and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Firm maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Firm’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting. Our responsibility is to express opinions on the Firm’s consolidated financial statements and on the Firm’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Firm in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP ź 300
Madison Avenue ź New York, NY10017
JPMorgan Chase & Co./2017 Annual Report
147
Consolidated
statements of income
Year ended December 31, (in millions, except per share data)
2017
2016
2015
Revenue
Investment
banking fees
$
7,248
$
6,448
$
6,751
Principal transactions
11,347
11,566
10,408
Lending-
and deposit-related fees
5,933
5,774
5,694
Asset management, administration and commissions
15,377
14,591
15,509
Securities
gains/(losses)
(66
)
141
202
Mortgage fees and related income
1,616
2,491
2,513
Card
income
4,433
4,779
5,924
Other income
3,639
3,795
3,032
Noninterest
revenue
49,527
49,585
50,033
Interest income
64,372
55,901
50,973
Interest
expense
14,275
9,818
7,463
Net interest income
50,097
46,083
43,510
Total
net revenue
99,624
95,668
93,543
Provision
for credit losses
5,290
5,361
3,827
Noninterest
expense
Compensation expense
31,009
29,979
29,750
Occupancy
expense
3,723
3,638
3,768
Technology, communications and equipment expense
7,706
6,846
6,193
Professional
and outside services
6,840
6,655
7,002
Marketing
2,900
2,897
2,708
Other
expense
6,256
5,756
9,593
Total noninterest expense
58,434
55,771
59,014
Income
before income tax expense
35,900
34,536
30,702
Income tax expense
11,459
9,803
6,260
Net
income
$
24,441
$
24,733
$
24,442
Net income applicable to common stockholders(a)
$
22,567
$
22,834
$
22,651
Net
income per common share data
Basic earnings per share
$
6.35
$
6.24
$
6.05
Diluted
earnings per share
6.31
6.19
6.00
Weighted-average
basic shares(a)
3,551.6
3,658.8
3,741.2
Weighted-average diluted shares(a)
3,576.8
3,690.0
3,773.6
Cash
dividends declared per common share
$
2.12
$
1.88
$
1.72
(a)
The
prior period amounts have been revised to conform with the current period presentation. The revision had no impact on the Firm’s reported earnings per share.
The Notes to Consolidated Financial Statements are an integral part of these statements.
148
JPMorgan Chase & Co./2017 Annual Report
Consolidated statements
of comprehensive income
Year ended December 31, (in millions)
2017
2016
2015
Net
income
$
24,441
$
24,733
$
24,442
Other comprehensive income/(loss), after–tax
Unrealized
gains/(losses) on investment securities
640
(1,105
)
(2,144
)
Translation adjustments, net of hedges
(306
)
(2
)
(15
)
Cash
flow hedges
176
(56
)
51
Defined benefit pension and OPEB plans
738
(28
)
111
DVA
on fair value option elected liabilities
(192
)
(330
)
—
Total other comprehensive income/(loss), after–tax
1,056
(1,521
)
(1,997
)
Comprehensive
income
$
25,497
$
23,212
$
22,445
The Notes to Consolidated Financial Statements are an integral part of these statements.
JPMorgan
Chase & Co./2017 Annual Report
149
Consolidated balance sheets
December 31, (in millions, except share data)
2017
2016
Assets
Cash
and due from banks
$
25,827
$
23,873
Deposits with banks
404,294
365,762
Federal
funds sold and securities purchased under resale agreements (included $14,732 and $21,506 at fair value)
198,422
229,967
Securities borrowed (included $3,049 and $0 at fair value)
105,112
96,409
Trading
assets (included assets pledged of $110,061 and $115,847)
381,844
372,130
Securities (included $202,225 and $238,891 at fair value and assets pledged of $17,969 and $16,115)
249,958
289,059
Loans
(included $2,508 and $2,230 at fair value)
930,697
894,765
Allowance for loan losses
(13,604
)
(13,776
)
Loans,
net of allowance for loan losses
917,093
880,989
Accrued interest and accounts receivable
67,729
52,330
Premises and equipment
14,159
14,131
Goodwill,
MSRs and other intangible assets
54,392
54,246
Other assets (included $16,128 and $7,557 at fair value and assets pledged of $1,526 and $1,603)
114,770
112,076
Total
assets(a)
$
2,533,600
$
2,490,972
Liabilities
Deposits (included $21,321 and
$13,912 at fair value)
$
1,443,982
$
1,375,179
Federal funds purchased and securities loaned or sold under repurchase agreements (included $697 and $687 at fair value)
158,916
165,666
Short-term
borrowings (included $9,191 and $9,105 at fair value)
51,802
34,443
Trading liabilities
123,663
136,659
Accounts
payable and other liabilities (included $9,208 and $9,120 at fair value)
189,383
190,543
Beneficial interests issued by consolidated VIEs (included $45 and $120 at fair value)
26,081
39,047
Long-term
debt (included $47,519 and $37,686 at fair value)
284,080
295,245
Total liabilities(a)
2,277,907
2,236,782
Commitments
and contingencies (see Notes 27, 28 and 29)
Common
stock ($1 par value; authorized 9,000,000,000 shares; issued 4,104,933,895 shares)
4,105
4,105
Additional paid-in capital
90,579
91,627
Retained
earnings
177,676
162,440
Accumulated other comprehensive income
(119
)
(1,175
)
Shares held in restricted stock units (“RSU”) trust, at
cost (472,953 shares)
(21
)
(21
)
Treasury stock, at cost (679,635,064 and 543,744,003 shares)
(42,595
)
(28,854
)
Total
stockholders’ equity
255,693
254,190
Total liabilities and stockholders’ equity
$
2,533,600
$
2,490,972
(a)
The
following table presents information on assets and liabilities related to VIEs that are consolidated by the Firm at December 31, 2017 and 2016. The difference between total VIE assets and liabilities represents the Firm’s interests in those entities, which were eliminated in consolidation.
December 31, (in millions)
2017
2016
Assets
Trading
assets
$
1,449
$
3,185
Loans
68,995
75,614
All
other assets
2,674
3,321
Total assets
$
73,118
$
82,120
Liabilities
Beneficial
interests issued by consolidated VIEs
$
26,081
$
39,047
All other liabilities
349
490
Total
liabilities
$
26,430
$
39,537
The assets of the consolidated VIEs are used to settle the liabilities of those entities. The holders of the beneficial interests do not have recourse to the general credit of JPMorgan Chase. At December 31, 2017 and 2016, the Firm
provided limited program-wide credit enhancement of $2.7 billion and $2.4 billion, respectively, related to its Firm-administered multi-seller conduits, which are eliminated in consolidation. For further discussion, see Note 14.
The Notes to Consolidated Financial Statements are an integral part of these statements.
150
JPMorgan Chase & Co./2017 Annual Report
Consolidated
statements of changes in stockholders’ equity
Year ended December 31, (in millions, except per share data)
2017
2016
2015
Preferred
stock
Balance at January 1
$
26,068
$
26,068
$
20,063
Issuance
1,258
—
6,005
Redemption
(1,258
)
—
—
Balance
at December 31
26,068
26,068
26,068
Common stock
Balance
at January 1 and December 31
4,105
4,105
4,105
Additional paid-in capital
Balance
at January 1
91,627
92,500
93,270
Shares issued and commitments to issue common stock for employee share-based compensation awards
(734
)
(334
)
(436
)
Other
(314
)
(539
)
(334
)
Balance
at December 31
90,579
91,627
92,500
Retained earnings
Balance
at January 1
162,440
146,420
129,977
Cumulative effect of change in accounting principle
—
(154
)
—
Net
income
24,441
24,733
24,442
Dividends declared:
Preferred
stock
(1,663
)
(1,647
)
(1,515
)
Common stock ($2.12, $1.88 and $1.72 per share for 2017, 2016 and 2015, respectively)
(7,542
)
(6,912
)
(6,484
)
Balance
at December 31
177,676
162,440
146,420
Accumulated other comprehensive income
Balance
at January 1
(1,175
)
192
2,189
Cumulative effect of change in accounting principle
—
154
—
Other
comprehensive income/(loss)
1,056
(1,521
)
(1,997
)
Balance at December 31
(119
)
(1,175
)
192
Shares
held in RSU Trust, at cost
Balance at January 1 and December 31
(21
)
(21
)
(21
)
Treasury
stock, at cost
Balance at January 1
(28,854
)
(21,691
)
(17,856
)
Repurchase
(15,410
)
(9,082
)
(5,616
)
Reissuance
1,669
1,919
1,781
Balance
at December 31
(42,595
)
(28,854
)
(21,691
)
Total stockholders’ equity
$
255,693
$
254,190
$
247,573
The
Notes to Consolidated Financial Statements are an integral part of these statements.
JPMorgan Chase & Co./2017 Annual Report
151
Consolidated statements of cash flows
Year
ended December 31, (in millions)
2017
2016
2015
Operating activities
Net income
$
24,441
$
24,733
$
24,442
Adjustments
to reconcile net income to net cash provided by/(used in) operating activities:
Provision for credit losses
5,290
5,361
3,827
Depreciation
and amortization
6,179
5,478
4,940
Deferred tax expense
2,312
4,651
1,333
Other
2,136
1,799
1,785
Originations
and purchases of loans held-for-sale
(94,628
)
(61,107
)
(48,109
)
Proceeds from sales, securitizations and paydowns of loans held-for-sale
93,270
60,196
49,363
Net
change in:
Trading assets
5,673
(20,007
)
62,212
Securities
borrowed
(8,653
)
2,313
12,165
Accrued interest and accounts receivable
(15,868
)
(5,815
)
22,664
Other
assets
4,318
(4,517
)
(3,701
)
Trading liabilities
(26,256
)
5,198
(28,972
)
Accounts
payable and other liabilities
(8,518
)
3,740
(23,361
)
Other operating adjustments
7,803
(1,827
)
(5,122
)
Net
cash provided by/(used in) operating activities
(2,501
)
20,196
73,466
Investing activities
Net
change in:
Deposits with banks
(38,532
)
(25,747
)
144,462
Federal
funds sold and securities purchased under resale agreements
31,448
(17,468
)
3,190
Held-to-maturity securities:
Proceeds
from paydowns and maturities
4,563
6,218
6,099
Purchases
(2,349
)
(143
)
(6,204
)
Available-for-sale
securities:
Proceeds from paydowns and maturities
56,117
65,950
76,448
Proceeds
from sales
90,201
48,592
40,444
Purchases
(105,309
)
(123,959
)
(70,804
)
Proceeds
from sales and securitizations of loans held-for-investment
15,791
15,429
18,604
Other changes in loans, net
(61,650
)
(80,996
)
(108,962
)
All
other investing activities, net
(563
)
(2,825
)
3,703
Net cash provided by/(used in) investing activities
(10,283
)
(114,949
)
106,980
Financing
activities
Net change in:
Deposits
57,022
97,336
(88,678
)
Federal
funds purchased and securities loaned or sold under repurchase agreements
(6,739
)
13,007
(39,415
)
Short-term borrowings
16,540
(2,461
)
(57,828
)
Beneficial
interests issued by consolidated VIEs
(1,377
)
(5,707
)
(5,632
)
Proceeds from long-term borrowings
56,271
83,070
79,611
Payments
of long-term borrowings
(83,079
)
(68,949
)
(67,247
)
Proceeds from issuance of preferred stock
1,258
—
5,893
Redemption
of preferred stock
(1,258
)
—
—
Treasury stock repurchased
(15,410
)
(9,082
)
(5,616
)
Dividends
paid
(8,993
)
(8,476
)
(7,873
)
All other financing activities, net
407
(467
)
(726
)
Net
cash provided by/(used in) financing activities
14,642
98,271
(187,511
)
Effect of exchange rate changes on cash and due from banks
96
(135
)
(276
)
Net
increase/(decrease) in cash and due from banks
1,954
3,383
(7,341
)
Cash and due from banks at the beginning of the period
23,873
20,490
27,831
Cash
and due from banks at the end of the period
$
25,827
$
23,873
$
20,490
Cash interest paid
$
14,153
$
9,508
$
7,220
Cash
income taxes paid, net
4,325
2,405
9,423
The Notes to Consolidated Financial Statements are an integral part of these statements.
152
JPMorgan
Chase & Co./2017 Annual Report
Note 1 – Basis of presentation
JPMorgan Chase & Co. (“JPMorgan Chase” or the “Firm”), 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 U.S., with operations worldwide. The Firm is a leader in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing and asset management. For a discussion of the Firm’s business segments, see Note 31.
The
accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to U.S. GAAP. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by regulatory authorities.
Certain amounts reported in prior periods have been reclassified to conform with the current presentation.
Consolidation
The Consolidated Financial Statements include the accounts of JPMorgan Chase and other entities in which
the Firm has a controlling financial interest. All material intercompany balances and transactions have been eliminated.
Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan Chase and are not included on the Consolidated balance sheets.
The Firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity.
Voting Interest Entities
Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant
decisions relating to the entity’s operations. For these types of entities, the Firm’s determination of whether it has a controlling interest is primarily based on the amount of voting equity interests held. Entities in which the Firm has a controlling financial interest, through ownership of the majority of the entities’ voting equity interests, or through other contractual rights that give the Firm control, are consolidated by the Firm.
Investments in companies in which the Firm has significant influence over operating and financing decisions (but does not own a majority of the voting equity interests) are accounted for (i) in accordance with the equity method of accounting (which requires
the Firm to recognize its proportionate share of the entity’s net earnings), or (ii) at fair value if the fair value option was elected. These investments are generally included in other assets, with income or loss included in other income.
Certain Firm-sponsored asset management funds are structured as limited partnerships or certain limited liability companies. For many of these entities, the Firm is the general partner or managing member, but the non-affiliated partners or members have the ability to remove the Firm as the general partner or managing member without cause
(i.e., kick-out rights), based on a simple majority vote, or the non-affiliated partners or members
have rights to participate in important decisions. Accordingly, the Firm does not consolidate these voting interest entities. However, in the limited cases where the non-managing partners or members do not have substantive kick-out or participating rights, the Firm evaluates the funds as VIEs and consolidates if it is the general partner or managing member and has a potentially significant interest.
The Firm’s investment companies have investments in both publicly-held and privately-held entities, including investments in buyouts, growth equity and venture opportunities. These investments are accounted for under investment company guidelines and accordingly, irrespective of the percentage of equity ownership interests held, are carried
on the Consolidated balance sheets at fair value, and are recorded in other assets, with income or loss included in noninterest revenue.
Variable Interest Entities
VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.
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. The basic SPE structure involves a company selling assets to the SPE; the SPE funds the purchase of those assets by issuing securities to investors. The legal documents that govern the transaction specify how the cash earned on the assets must be allocated to the SPE’s investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPE’s assets by creditors of other entities, including the creditors of the seller of the assets.
The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and (2) through its interests in the
VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
To assess whether the Firm has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Firm considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and
JPMorgan Chase & Co./2017 Annual
Report
153
Notes to consolidated financial statements
second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE (such as asset managers, collateral managers, servicers, or owners of call options or liquidation rights over the VIE’s assets) or have the right to unilaterally remove those decision-makers are deemed to have the power to direct the activities of a VIE.
To assess whether the Firm has the obligation to absorb losses of the VIE or the right to receive
benefits from the VIE that could potentially be significant to the VIE, the Firm considers all of its economic interests, including debt and equity investments, servicing fees, and derivatives or other arrangements deemed to be variable interests in the VIE. This assessment requires that the Firm apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Firm.
The Firm performs on-going reassessments of: (1) whether entities
previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and are therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Firm’s involvement with a VIE cause the Firm’s consolidation conclusion to change.
Use of estimates in the preparation of consolidated financial statements
The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense, and disclosures of contingent assets and liabilities. Actual results could be different from these estimates.
Foreign currency translation
JPMorgan
Chase revalues assets, liabilities, revenue and expense denominated in non-U.S. currencies into U.S. dollars using applicable exchange rates.
Gains and losses relating to translating functional currency financial statements for U.S. reporting are included in OCI within stockholders’ equity. Gains and losses relating to nonfunctional currency transactions, including non-U.S. operations where the functional currency is the U.S. dollar, are reported in the Consolidated statements of income.
Offsetting assets and liabilities
U.S. GAAP permits entities to present derivative receivables and derivative payables with the same counterparty and the related cash collateral receivables and payables on a net basis on the Consolidated balance sheets when a legally enforceable master
netting agreement exists. U.S. GAAP also permits securities sold and purchased under repurchase agreements and securities borrowed or loaned
under securities loan agreements to be presented net when specified conditions are met, including the existence of a legally enforceable master netting agreement. The Firm has elected to net such balances when the specified conditions are met.
The Firm uses master netting agreements to mitigate counterparty credit risk in certain transactions, including derivative, securities repurchase and reverse repurchase, and securities loaned and borrow transactions. A master netting agreement is a single agreement with a counterparty that permits multiple transactions governed by that agreement
to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or securities transfer or deliver collateral or margin when due). Upon the exercise of derivatives termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and the positive values of “in the money” transactions are netted against the negative values of “out of the money” transactions and (iii) the only remaining payment obligation is of one of the parties to pay the netted termination amount. Upon exercise of default rights under repurchase agreements and securities loan agreements in general (i) all transactions are terminated and accelerated, (ii) all values of securities or cash held or to be delivered are calculated, and all such sums are netted against each other and (iii) the only remaining payment obligation is of one of
the parties to pay the netted termination amount.
Typical master netting agreements for these types of transactions also often contain a collateral/margin agreement that provides for a security interest in, or title transfer of, securities or cash collateral/margin to the party that has the right to demand margin (the “demanding party”). The collateral/margin agreement typically requires a party to transfer collateral/margin to the demanding party with a value equal to the amount of the margin deficit on a net basis across all transactions governed by the master netting agreement, less any threshold. The collateral/margin agreement grants to the demanding party, upon default by the counterparty, the right to set-off any amounts payable by the counterparty against any posted collateral or the cash equivalent of any posted collateral/margin. It also grants to the demanding party the right to liquidate collateral/margin
and to apply the proceeds to an amount payable by the counterparty.
For further discussion of the Firm’s derivative instruments, see Note 5. For further discussion of the Firm’s repurchase and reverse repurchase agreements, and securities borrowing and lending agreements, see Note 11.
Statements of cash flows
For JPMorgan Chase’s Consolidated statements of cash flows, cash is defined as those amounts included in cash and due from banks.
154
JPMorgan
Chase & Co./2017 Annual Report
Significant accounting policies
The following table identifies JPMorgan Chase’s other significant accounting policies and the Note and page where a detailed description of each policy can be found.
Fair value measurement
Note 2
Page
155
Fair value option
Note 3
Page 174
Derivative instruments
Note 5
Page 179
Noninterest revenue
Note 6
Page 192
Interest
income and interest expense
Note 7
Page 195
Pension and other postretirement employee benefit plans
Note 8
Page 195
Employee share-based incentives
Note 9
Page 201
Securities
Note
10
Page 203
Securities financing activities
Note 11
Page 208
Loans
Note 12
Page 211
Allowance for credit losses
Note 13
Page
231
Variable interest entities
Note 14
Page 236
Goodwill and Mortgage servicing rights
Note 15
page 244
Premises and equipment
Note 16
page 248
Long-term
debt
Note 19
page 249
Income taxes
Note 24
page 255
Off–balance sheet lending-related financial instruments, guarantees and other commitments
Note 27
page 261
Litigation
Note
29
page 268
Note 2 – Fair value measurement
JPMorgan Chase carries a portion of its assets and liabilities at fair value. These assets and liabilities are predominantly carried at fair value on a recurring basis (i.e., assets and liabilities that are measured and reported at fair value on the Firm’s Consolidated balance sheets). Certain assets (e.g., held-for-sale loans), liabilities and unfunded lending-related commitments are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments
only in certain circumstances (for example, when there is evidence of impairment).
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices or inputs, where available. If prices or quotes are not available, fair value is based on valuation models and other valuation techniques that consider relevant transaction characteristics (such as maturity) and use as inputs observable or unobservable market parameters, including yield curves, interest rates, volatilities, equity or debt prices, foreign exchange rates and credit curves. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value, as described below.
The level of precision in estimating unobservable
market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while the Firm believes its valuation methods are appropriate and
consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Firm’s businesses and portfolios.
The Firm uses various methodologies and assumptions in the determination of fair value. The use of different methodologies or assumptions by other market participants compared with those used by the Firm could result in the Firm deriving a different
estimate of fair value at the reporting date.
Valuation process
Risk-taking functions are responsible for providing fair value estimates for assets and liabilities carried on the Consolidated balance sheets at fair value. The Firm’s VCG, which is part of the Firm’s Finance function and independent of the risk-taking functions, is responsible for verifying these estimates and determining any fair value adjustments that may be required to ensure that the Firm’s positions are recorded at fair value. The VGF
is composed of senior finance and risk executives and is responsible for overseeing the management of risks arising from valuation activities conducted across the Firm. The VGF is chaired by the Firmwide head of the VCG (under the direction of the Firm’s Controller), and includes sub-forums covering the CIB, CCB, CB, AWM and certain corporate functions including Treasury and CIO.
JPMorgan Chase & Co./2017 Annual Report
155
Notes
to consolidated financial statements
Price verification process
The VCG verifies fair value estimates provided by the risk-taking functions by leveraging independently derived prices, valuation inputs and other market data, where available. Where independent prices or inputs are not available, the VCG performs additional review to ensure the reasonableness of the estimates. The additional review may include evaluating the limited market activity including client unwinds, benchmarking valuation inputs to those used for similar instruments, decomposing the valuation of structured instruments into individual components, comparing expected to actual cash flows, reviewing profit and loss trends, and reviewing trends in collateral valuation. There are also additional levels of management review for more significant
or complex positions.
The VCG determines any valuation adjustments that may be required to the estimates provided by the risk-taking functions. No adjustments to quoted prices are applied for instruments classified within level 1 of the fair value hierarchy (see below for further information on the fair value hierarchy). For other positions, judgment is required to assess the need for valuation adjustments to appropriately reflect liquidity considerations, unobservable parameters, and, for certain portfolios that meet specified criteria, the size of the net open risk position. The determination of such adjustments follows a consistent framework across the Firm:
•
Liquidity valuation adjustments
are considered where an observable external price or valuation parameter exists but is of lower reliability, potentially due to lower market activity. Liquidity valuation adjustments are applied and determined based on current market conditions. Factors that may be considered in determining the liquidity adjustment include analysis of: (1) the estimated bid-offer spread for the instrument being traded; (2) alternative pricing points for similar instruments in active markets; and (3) the range of reasonable values that the price or parameter could take.
•
The Firm manages certain portfolios of financial instruments on the basis of net open risk exposure and, as permitted
by U.S. GAAP, has elected to estimate the fair value of such portfolios on the basis of a transfer of the entire net open risk position in an orderly transaction. Where this is the case, valuation adjustments may be necessary to reflect the cost of exiting a larger-than-normal market-size net open risk position. Where applied, such adjustments are based on factors that a relevant market participant would consider in the transfer of the net open risk position, including the size of the adverse market move that is likely to occur during the period required to reduce the net open risk position to a normal market-size.
•
Unobservable parameter valuation adjustments may be made when positions are valued using prices or input parameters to valuation
models that are unobservable due to a lack of market activity or because they cannot be implied from observable market data. Such prices or parameters must be estimated and are, therefore, subject to management judgment. Unobservable
parameter valuation adjustments are applied to reflect the uncertainty inherent in the resulting valuation estimate.
•
Where appropriate, the Firm also applies adjustments to its estimates of fair value in order to appropriately reflect counterparty credit quality (CVA),
the Firm’s own creditworthiness (DVA) and the impact of funding (FVA), using a consistent framework across the Firm. For more information on such adjustments see Credit and funding adjustments on page 171 of this Note.
Valuation model review and approval
If prices or quotes are not available for an instrument or a similar instrument, fair value is generally determined using valuation models that consider relevant transaction data such as maturity and use as inputs market-based or independently
sourced parameters. Where this is the case the price verification process described above is applied to the inputs to those models.
Under the Firm’s Estimations and Model Risk Management Policy, the Model Risk function reviews and approves new models, as well as material changes to existing models, prior to implementation in the operating environment. In certain circumstances, the head of the Model Risk function may grant exceptions to the Firm’s policy to allow a model to be used prior to review or approval. The Model Risk function may also require the user to take appropriate actions to mitigate the model risk if it is to be used in the interim. These actions will depend on the model and may include, for example,
limitation of trading activity.
Valuation hierarchy
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows.
•
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level
2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 – one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
156
JPMorgan
Chase & Co./2017 Annual Report
The following table describes the valuation methodologies generally used by the Firm to measure its significant products/instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Product/instrument
Valuation methodology
Classifications in the valuation
hierarchy
Securities financing agreements
Valuations are based on discounted cash flows, which consider:
Predominantly level 2
• Derivative features: for further information refer to the discussion of derivatives below.
• Market rates for the respective maturity
• Collateral characteristics
Loans and lending-related commitments — wholesale
Loans
carried at fair value (e.g., trading loans and non-trading loans) and associated lending-related commitments
Where observable market data is available, valuations are based on:
Level 2 or 3
• Observed market prices (circumstances are infrequent)
• Relevant broker quotes
• Observed market prices for similar instruments
Where
observable market data is unavailable or limited, valuations are based on discounted cash flows, which consider the following:
• Credit spreads derived from the cost of CDS; or benchmark credit curves developed by the Firm, by industry and credit rating
• Prepayment speed
• Collateral characteristics
Loans
held-for-investment and associated lending-related commitments
Valuations are based on discounted cash flows, which consider:
Predominantly level 3
• Credit spreads, derived from the cost of CDS; or benchmark credit curves developed by the Firm, by industry and credit rating
• Prepayment speed
Lending-related
commitments are valued similarly to loans and reflect the portion of an unused commitment expected, based on the Firm’s average portfolio historical experience, to become funded prior to an obligor default.
For information regarding the valuation of loans measured at collateral value, see Note 12.
Valuations are based on discounted cash flows, which consider:
Predominantly level 2
• Credit losses – which consider expected and current default rates, and loss severity
•
Prepayment
speed
•
Discount rates
•
Servicing costs
For information regarding the valuation of loans measured at collateral value, see Note 12.
Held-for-investment
credit card receivables
Valuations are based on discounted cash flows, which consider:
Level 3
• Credit costs - the allowance for loan losses is considered a reasonable proxy for the credit cost
• Projected interest income, late-fee revenue and loan repayment rates
• Discount rates
• Servicing
costs
Trading loans — conforming residential mortgage loans expected to be sold (CCB, CIB)
Fair value is based on observable prices for mortgage-backed securities with similar collateral and incorporates adjustments to these prices to account for differences between the securities and the value of the underlying loans, which include credit characteristics, portfolio composition, and liquidity.
Predominantly level 2
JPMorgan
Chase & Co./2017 Annual Report
157
Notes to consolidated financial statements
Product/instrument
Valuation methodology, inputs and assumptions
Classifications in the valuation hierarchy
Investment and trading securities
Quoted
market prices are used where available.
Level 1
In the absence of quoted market prices, securities are valued based on:
Level 2 or 3
• Observable market prices for similar securities
•
Relevant broker quotes
•
Discounted
cash flows
In addition, the following inputs to discounted cash flows are used for the following products:
Mortgage- and asset-backed securities specific inputs:
•
Collateral characteristics
• Deal-specific
payment and loss allocations
• Current market assumptions related to yield, prepayment speed, conditional default rates and loss severity
Collateralized loan obligations (“CLOs”) specific inputs:
•
Collateral characteristics
•
Deal-specific
payment and loss allocations
•
Expected prepayment speed, conditional default rates, loss severity
•
Credit spreads
• Credit rating data
Physical
commodities
Valued using observable market prices or data.
Predominantly level 1 and 2
Derivatives
Exchange-traded derivatives that are actively traded and valued using the exchange price.
Level 1
Derivatives that are valued using models such as the Black-Scholes option pricing model, simulation models, or a combination of models that may use observable or unobservable valuation inputs as well as considering the contractual terms.
The key valuation inputs used will
depend on the type of derivative and the nature of the underlying instruments and may include equity prices, commodity prices, interest rate yield curves, foreign exchange rates, volatilities, correlations, CDS spreads and recovery rates. Additionally, the credit quality of the counterparty and of the Firm as well as market funding levels may also be considered.
Level 2 or 3
In addition, specific inputs used for derivatives that are valued based on models with significant unobservable inputs are as follows:
Structured credit
derivatives specific inputs include:
•
CDS spreads and recovery rates
•
Credit correlation between the underlying debt instruments
Equity option specific inputs include:
•
Equity
volatilities
•
Equity correlation
•
Equity-FX correlation
•
Equity-IR correlation
Interest
rate and FX exotic options specific inputs include:
•
Interest rate spread volatility
•
Interest rate correlation
•
Foreign exchange correlation
•
Interest
rate-FX correlation
Commodity derivatives specific inputs include:
•
Commodity volatility
•
Forward commodity price
Additionally,
adjustments are made to reflect counterparty credit quality (CVA) and the impact of funding (FVA). See page 171 of this Note.
158
JPMorgan
Chase & Co./2017 Annual Report
Product/instrument
Valuation methodology, inputs and assumptions
Classification in the valuation hierarchy
Mortgage servicing rights
See Mortgage servicing rights in Note 15.
Level
3
Private equity direct investments
Fair value is estimated using all available information; the range of potential inputs include:
Level 2 or 3
• Transaction prices
• Trading multiples of comparable public companies
• Operating
performance of the underlying portfolio company
• Adjustments as required, since comparable public companies are not identical to the company being valued, and for company-specific issues and lack of liquidity.
• Additional available inputs relevant to the investment.
Fund investments
(e.g., mutual/collective investment funds, private equity funds, hedge funds, and real estate funds)
Net asset value
• NAV is supported by the ability to redeem and purchase at the NAV level.
Level 1
• Adjustments to the NAV as required, for restrictions on redemption (e.g., lock-up periods or withdrawal limitations) or where observable activity is limited.
Level 2 or 3(a)
Beneficial
interests issued by consolidated VIEs
Valued using observable market information, where available.
Level 2 or 3
In the absence of observable market information, valuations are based on the fair value of the underlying assets held by the VIE.
Long-term debt, not carried at fair value
Valuations are based on discounted cash flows, which consider:
Predominantly level 2
•
Market
rates for respective maturity
Structured notes (included in deposits, short-term borrowings and long-term debt)
• Valuations are based on discounted cash flow analyses that consider the embedded derivative and the terms and payment structure of the note.
• The embedded derivative features are considered using models such as the Black-Scholes option pricing model, simulation models, or a combination of models that may use observable or unobservable valuation inputs, depending on the embedded derivative. The specific inputs used vary according to the nature of the embedded derivative features, as described in the discussion above regarding derivatives valuation. Adjustments are then made to this base valuation to reflect the Firm’s own credit
risk (DVA). See page 171 of this Note.
Level 2 or 3
(a)
Excludes certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient.
JPMorgan Chase &
Co./2017 Annual Report
159
Notes to consolidated financial statements
The following table presents the assets and liabilities reported at fair value as of December 31, 2017 and 2016, by major product category and fair value hierarchy.
Assets
and liabilities measured at fair value on a recurring basis
Federal funds sold and securities purchased under resale agreements
$
—
$
21,506
$
—
$
—
$
21,506
Securities
borrowed
—
—
—
—
—
Trading
assets:
Debt instruments:
Mortgage-backed
securities:
U.S. government agencies(a)
13
40,586
392
—
40,991
Residential
– nonagency
—
1,552
83
—
1,635
Commercial
– nonagency
—
1,321
17
—
1,338
Total
mortgage-backed securities
13
43,459
492
—
43,964
U.S.
Treasury and government agencies(a)
19,554
5,201
—
—
24,755
Obligations
of U.S. states and municipalities
—
8,403
649
—
9,052
Certificates
of deposit, bankers’ acceptances and commercial paper
—
1,649
—
—
1,649
Non-U.S.
government debt securities
28,443
23,076
46
—
51,565
Corporate
debt securities
—
22,751
576
—
23,327
Loans(b)
—
28,965
4,837
—
33,802
Asset-backed
securities
—
5,250
302
—
5,552
Total
debt instruments
48,010
138,754
6,902
—
193,666
Equity
securities
96,759
281
231
—
97,271
Physical
commodities(c)
5,341
1,620
—
—
6,961
Other
—
9,341
761
—
10,102
Total
debt and equity instruments(d)
150,110
149,996
7,894
—
308,000
Derivative
receivables:
Interest rate
715
602,747
2,501
(577,661
)
28,302
Credit
—
28,256
1,389
(28,351
)
1,294
Foreign
exchange
812
231,743
870
(210,154
)
23,271
Equity
—
34,032
908
(30,001
)
4,939
Commodity
158
18,360
125
(12,371
)
6,272
Total
derivative receivables(e)
1,685
915,138
5,793
(858,538
)
64,078
Total
trading assets(g)
151,795
1,065,134
13,687
(858,538
)
372,078
Available-for-sale
securities:
Mortgage-backed securities:
U.S.
government agencies(a)
—
64,005
—
—
64,005
Residential
– nonagency
—
14,442
1
—
14,443
Commercial
– nonagency
—
9,104
—
—
9,104
Total
mortgage-backed securities
—
87,551
1
—
87,552
U.S.
Treasury and government agencies(a)
44,072
29
—
—
44,101
Obligations
of U.S. states and municipalities
—
31,592
—
—
31,592
Certificates
of deposit
—
106
—
—
106
Non-U.S.
government debt securities
22,793
12,495
—
—
35,288
Corporate
debt securities
—
4,958
—
—
4,958
Asset-backed
securities:
Collateralized loan obligations
—
26,738
663
—
27,401
Other
—
6,967
—
—
6,967
Equity
securities
926
—
—
—
926
Total
available-for-sale securities
67,791
170,436
664
—
238,891
Loans
—
1,660
570
—
2,230
Mortgage
servicing rights
—
—
6,096
—
6,096
Other
assets(g)
4,357
—
2,223
—
6,580
Total
assets measured at fair value on a recurring basis
$
223,943
$
1,258,736
$
23,240
$
(858,538
)
$
647,381
Deposits
$
—
$
11,795
$
2,117
$
—
$
13,912
Federal
funds purchased and securities loaned or sold under repurchase agreements
—
687
—
—
687
Short-term
borrowings
—
7,971
1,134
—
9,105
Trading
liabilities:
Debt and equity instruments(d)
68,304
19,081
43
—
87,428
Derivative
payables:
Interest rate
539
569,001
1,238
(559,963
)
10,815
Credit
—
27,375
1,291
(27,255
)
1,411
Foreign
exchange
902
231,815
2,254
(214,463
)
20,508
Equity
—
35,202
3,160
(30,222
)
8,140
Commodity
173
20,079
210
(12,105
)
8,357
Total
derivative payables(e)
1,614
883,472
8,153
(844,008
)
49,231
Total
trading liabilities
69,918
902,553
8,196
(844,008
)
136,659
Accounts
payable and other liabilities
9,107
—
13
—
9,120
Beneficial
interests issued by consolidated VIEs
—
72
48
—
120
Long-term
debt
—
24,836
(h)
12,850
(h)
—
37,686
Total
liabilities measured at fair value on a recurring basis
$
79,025
$
947,914
(h)
$
24,358
(h)
$
(844,008
)
$
207,289
(a)
At
December 31, 2017 and 2016, included total U.S. government-sponsored enterprise obligations of $78.0 billion and $80.6 billion, respectively, which were predominantly mortgage-related.
(b)
At December 31, 2017 and 2016, included within trading loans were $11.4
billion and $16.5 billion, respectively, of residential first-lien mortgages, and $4.2 billion and $3.3 billion, respectively, of commercial first-lien mortgages. Residential mortgage loans include conforming mortgage loans originated with the intent to sell to U.S. government agencies of $5.7 billion and $11.0 billion, respectively, and reverse mortgages of $836 million and $2.0 billion, respectively.
(c)
Physical
commodities inventories are generally accounted for at the lower of cost or net realizable value. “Net realizable value” is a term defined in U.S. GAAP as not exceeding fair value less costs to sell (“transaction costs”). Transaction costs for the Firm’s physical commodities inventories are either not applicable or immaterial to the value of the inventory. Therefore, net realizable value approximates fair value for the Firm’s physical commodities inventories. When fair value hedging has been applied (or when net
JPMorgan Chase & Co./2017 Annual Report
161
Notes
to consolidated financial statements
realizable value is below cost), the carrying value of physical commodities approximates fair value, because under fair value hedge accounting, the cost basis is adjusted for changes in fair value. For a further discussion of the Firm’s hedge accounting relationships, see Note 5. To provide consistent fair value disclosure information, all physical commodities inventories have been included in each period presented.
(d)
Balances reflect the reduction of securities owned (long positions) by the amount of identical securities sold but not yet purchased (short positions).
(e)
As
permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. For purposes of the tables above, the Firm does not reduce derivative receivables and derivative payables balances for this netting adjustment, either within or across the levels of the fair value hierarchy, as such netting is not relevant to a presentation based on the transparency of inputs to the valuation of an asset or liability. The level 3 balances would be reduced if netting were applied, including the netting benefit associated with cash collateral.
(f)
Reflects the Firm’s adoption of rulebook changes made by two CCPs that require
or allow the Firm to treat certain OTC-cleared derivative transactions as daily settled. For further information, see Note 5.
(g)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient are not required to be classified in the fair value hierarchy. At December 31, 2017 and 2016, the fair values of these investments, which include certain hedge funds, private equity funds, real estate and other funds, were $779
million and $1.0 billion, respectively. Included in these balances at December 31, 2017 and 2016, were trading assets of $54 million and $52 million, respectively, and other assets of $725 million and $977 million, respectively.
(h)
The prior period amounts have been revised to conform with the current period
presentation.
Transfers between levels for instruments carried at
fair value on a recurring basis
For the years ended December 31, 2017 and 2016, there were no significant transfers between levels 1 and 2.
During the year ended December 31, 2017, transfers from level 3 to level 2 included the following:
•
$1.5
billion of trading loans driven by an increase in observability.
•
$1.2 billion of gross equity derivative payables as a result of an increase in observability and a decrease in the significance of unobservable inputs.
During the year ended December 31, 2017, transfers from level 2 to level 3 included the following:
•
$1.0
billion of gross equity derivative receivables and $2.5 billion of gross equity derivative payables as a result of a decrease in observability and an increase in the significance of unobservable inputs.
•
$1.7 billion of long-term debt driven by a decrease in observability and an increase in the significance of unobservable inputs for certain structured notes.
During the year ended December 31, 2016, transfers from level 3 to level 2 included the following:
•
$1.4
billion of long-term debt driven by an increase in observability and a reduction in the significance of unobservable inputs for certain structured notes.
During the year ended December 31, 2016, transfers from level 2 to level 3 included the following:
•
$1.1 billion of gross equity derivative receivables and $1.0 billion of gross equity derivative payables as a result of an decrease in observability and an increase in the significance of unobservable inputs.
•
$1.0
billion of trading loans driven by a decrease in observability.
During the year ended December 31, 2015, transfers from level 3 to level 2 included the following:
•
$3.1 billion of long-term debt and $1.0 billion of deposits driven by an increase in observability on certain structured notes with embedded interest rate and FX derivatives and a reduction in the significance of unobservable inputs for certain structured notes with embedded equity derivatives.
•
$2.1
billion of gross equity derivatives for both receivables and payables as a result of an increase in observability and a decrease in the significance of unobservable inputs; partially offset by transfers into level 3 resulting in net transfers of approximately $1.2 billion for both receivables and payables.
•
$2.8 billion of trading loans driven by an increase in observability of certain collateralized financing transactions.
•
$2.4
billion of corporate debt driven by a decrease in the significance of unobservable inputs and an increase in observability for certain structured products.
During the year ended December 31, 2015, there were no significant transfers from level 2 to level 3.
All transfers are assumed to occur at the beginning of the quarterly reporting period in which they occur.
162
JPMorgan
Chase & Co./2017 Annual Report
Level 3 valuations
The Firm has established well-structured processes for determining fair value, including for instruments where fair value is estimated using significant unobservable inputs (level 3). For further information on the Firm’s valuation process and a detailed discussion of the determination of fair value for individual financial instruments, see pages 155–159 of this Note.
Estimating fair value requires the application
of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available to the Firm. For instruments valued using internally developed valuation models and other valuation techniques that use significant unobservable inputs and are therefore classified within level 3 of the fair value hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2.
In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate valuation model or other valuation technique to use. Second, due to the lack of observability of significant inputs, management must assess all relevant empirical data in deriving valuation inputs including transaction details,
yield curves, interest rates, prepayment speed, default rates, volatilities, correlations, equity or debt prices, valuations of comparable instruments, foreign exchange rates and credit curves.
The following table presents the Firm’s primary level 3 financial instruments, the valuation techniques used to measure the fair value of those financial instruments, the significant unobservable inputs, the range of values for those inputs and, for certain instruments, the weighted averages of such inputs. While the determination to classify an instrument within level 3 is based on the significance of the unobservable inputs to the overall fair value measurement, level 3 financial instruments typically include observable components (that is, components that are actively quoted and can be validated to external sources) in addition to the unobservable components.
The level 1 and/or level 2 inputs are not included in the table. In addition, the Firm manages the risk of the observable components of level 3 financial instruments using securities and derivative positions that are classified within levels 1 or 2 of the fair value hierarchy.
The range of values presented in the table is representative of the highest and lowest level input used to value the significant groups of instruments within a product/instrument classification. Where provided, the weighted averages of the input values presented in the table are calculated based on the fair value of the instruments that the input is being used to value.
In the Firm’s view, the input range and the weighted
average value do not reflect the degree of input uncertainty or an assessment of the reasonableness of the Firm’s estimates and assumptions. Rather, they reflect the characteristics of the various instruments held by the Firm and the relative distribution of instruments within the range of characteristics. For example, two option contracts may have similar levels of market risk exposure and valuation uncertainty, but may have significantly different implied volatility levels because the option contracts have different underlyings, tenors, or strike prices. The input range and weighted average values will therefore vary from period-to-period and parameter-to-parameter based on the characteristics
of the instruments held by the Firm at each balance sheet date.
For the Firm’s derivatives and structured notes positions classified within level 3 at December 31, 2017, interest rate correlation inputs used in estimating fair value were concentrated towards the upper end of the range; equity correlation, equity-FX and equity-IR correlation inputs were concentrated in the middle of the range; commodity correlation inputs were concentrated in the middle of the range; credit correlation inputs were concentrated towards the lower end of the range; and the interest rate-foreign exchange (“IR-FX”) correlation inputs were concentrated towards the lower end of
the range. In addition, the interest rate spread volatility inputs used in estimating fair value were distributed across the range; equity volatilities and commodity volatilities were concentrated towards the lower end of the range; and forward commodity prices used in estimating the fair value of commodity derivatives were concentrated towards the lower end of the range. Recovery rate, yield, prepayment speed, conditional default rate, loss severity and price inputs used in estimating the fair value of credit derivatives were distributed across the range; and credit spreads were concentrated towards the lower end of the range.
Residential mortgage-backed securities and loans(b)
$
1,418
Discounted
cash flows
Yield
3
%
–
16%
6%
Prepayment speed
0
%
–
13%
9%
Conditional
default rate
0
%
–
5%
1%
Loss severity
0
%
–
84%
3%
Commercial
mortgage-backed securities and loans(c)
714
Market comparables
Price
$
0
–
$100
$94
Obligations of U.S. states and municipalities
744
Market
comparables
Price
$
59
–
$100
$98
Corporate debt securities
312
Market comparables
Price
$
3
–
$111
$82
Loans(d)
1,242
Market
comparables
Price
$
4
–
$103
$84
Asset-backed securities
276
Discounted cash flows
Credit spread
204
bps
–
205bps
205bps
Prepayment
speed
20%
20%
Conditional default rate
2%
2%
Loss
severity
30%
30%
153
Market comparables
Price
$
2
–
$160
$79
Net
interest rate derivatives
28
Option pricing
Interest rate spread volatility
27
bps
–
38bps
Interest
rate correlation
(50
)%
–
98%
IR-FX correlation
60
%
–
70%
236
Discounted
cash flows
Prepayment speed
0
%
–
30%
Net credit derivatives
(37
)
Discounted cash flows
Credit correlation
40
%
–
75%
Credit
spread
6
bps
–
1,489bps
Recovery rate
20
%
–
70%
Yield
1
%
–
20%
Prepayment
speed
4
%
–
21%
Conditional default rate
0
%
–
100%
Loss
severity
4
%
–
100%
2
Market comparables
Price
$
10
$98
Net
foreign exchange derivatives
(200
)
Option pricing
IR-FX correlation
(50
)%
–
70%
(196
)
Discounted
cash flows
Prepayment speed
7%
Net equity derivatives
(3,409
)
Option pricing
Equity volatility
20
%
–
55%
Equity
correlation
0
%
–
85%
Equity-FX correlation
(50
)%
–
30%
Equity-IR
correlation
10
%
–
40%
Net commodity derivatives
(674
)
Option pricing
Forward commodity price
$
54
–
$68
per barrel
Commodity volatility
5
%
46%
Commodity
correlation
(40
)%
–
70%
MSRs
6,030
Discounted cash flows
Refer to Note 15
Other
assets
984
Discounted cash flows
Credit spread
40bps
–
70bps
55bps
Yield
8%
–
60%
47%
971
Market
comparables
EBITDA multiple
4.7x
–
10.6x
8.9x
Long-term debt, short-term borrowings, and deposits(e)
21,932
Option pricing
Interest rate spread volatility
27
bps
–
38bps
Interest
rate correlation
(50
)%
–
98%
IR-FX correlation
(50
)%
–
70%
Equity
correlation
0
%
–
85%
Equity-FX correlation
(50
)%
–
30%
Equity-IR
correlation
10
%
–
40%
Other level 3 assets and liabilities, net(f)
283
(a)
The
categories presented in the table have been aggregated based upon the product type, which may differ from their classification on the Consolidated balance sheets. Furthermore, the inputs presented for each valuation technique in the table are, in some cases, not applicable to every instrument valued using the technique as the characteristics of the instruments can differ.
164
JPMorgan Chase & Co./2017 Annual Report
(b)
Includes
U.S. government agency securities of $297 million, nonagency securities of $61 million and trading loans of $1.1 billion.
(c)
Includes U.S. government agency securities of $10 million, nonagency securities of $11 million, trading loans of $417 million and non-trading loans of $276 million.
(d)
Includes
trading loans of $1.2 billion.
(e)
Long-term debt, short-term borrowings and deposits include structured notes issued by the Firm that are predominantly financial instruments containing embedded derivatives. The estimation of the fair value of structured notes includes the derivative features embedded within the instrument. The significant unobservable inputs are broadly consistent with those presented for derivative receivables.
(f)
Includes level 3 assets and liabilities
that are insignificant both individually and in aggregate.
(g)
Price is a significant unobservable input for certain instruments. When quoted market prices are not readily available, reliance is generally placed on price-based internal valuation techniques. The price input is expressed assuming a par value of $100.
Changes in and ranges of unobservable inputs
The following discussion provides a description of the impact on a fair value measurement of a change in each unobservable input in isolation, and the interrelationship between
unobservable inputs, where relevant and significant. The impact of changes in inputs may not be independent, as a change in one unobservable input may give rise to a change in another unobservable input. Where relationships do exist between two unobservable inputs, those relationships are discussed below. Relationships may also exist between observable and unobservable inputs (for example, as observable interest rates rise, unobservable prepayment rates decline); such relationships have not been included in the discussion below. In addition, for each of the individual relationships described below, the inverse relationship would also generally apply.
The following discussion also provides a description of attributes of the underlying instruments and external market factors that affect the range of inputs used in the valuation of the Firm’s positions.
Yield – The yield of an asset is the interest rate used to discount future cash flows in a discounted cash flow calculation. An increase in the yield, in isolation, would result in a decrease in a fair value measurement.
Credit spread – The credit spread is the amount of additional annualized return over the market interest rate that a market participant would demand for taking exposure to the credit risk of an instrument. The credit spread for an instrument forms part of the discount rate used in a discounted cash flow calculation. Generally, an increase in the credit spread would result in a decrease in a fair value measurement.
The yield and the credit spread of a particular mortgage-backed security primarily reflect the risk inherent in the instrument. The yield is also impacted by
the absolute level of the coupon paid by the instrument (which may not correspond directly to the level of inherent risk). Therefore, the range of yield and credit spreads reflects the range of risk inherent in various instruments owned by the Firm. The risk inherent in mortgage-backed securities is driven by the subordination of the security being valued and the characteristics of the underlying mortgages within the collateralized pool, including borrower FICO scores, LTV ratios for residential mortgages and the nature of the property and/or any tenants for commercial mortgages. For corporate debt securities, obligations of U.S. states and municipalities and other similar instruments, credit spreads reflect the credit quality of the obligor and the tenor of the obligation.
Prepayment
speed – The prepayment speed is a measure of the voluntary unscheduled principal repayments of a prepayable obligation in a collateralized pool. Prepayment speeds generally decline as borrower delinquencies rise. An increase in prepayment speeds, in isolation, would result in a decrease in a fair value measurement of assets valued at a premium to par and an increase in a fair value measurement of assets valued at a discount to par.
Prepayment speeds may vary from collateral pool to collateral pool, and are driven by the type and location of the underlying borrower, and the remaining tenor of the obligation as well as the level and type (e.g., fixed or floating) of interest rate being paid by the borrower. Typically collateral pools with higher borrower credit quality have a higher prepayment rate than those with lower borrower credit quality, all other factors being equal.
Conditional
default rate – The conditional default rate is a measure of the reduction in the outstanding collateral balance underlying a collateralized obligation as a result of defaults. While there is typically no direct relationship between conditional default rates and prepayment speeds, collateralized obligations for which the underlying collateral has high prepayment speeds will tend to have lower conditional default rates. An increase in conditional default rates would generally be accompanied by an increase in loss severity and an increase in credit spreads. An increase in the conditional default rate, in isolation, would result in a decrease in a fair value measurement. Conditional default rates reflect the quality of the collateral underlying a securitization and the structure of the securitization itself. Based on the types of securities owned in the Firm’s market-making portfolios, conditional default rates are most typically
at the lower end of the range presented.
Loss severity – The loss severity (the inverse concept is the recovery rate) is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance. An increase in loss severity is generally accompanied by an increase in conditional default rates. An increase in the loss severity, in isolation, would result in a decrease in a fair value measurement.
The loss severity applied in valuing a mortgage-backed security investment depends on factors relating to the underlying mortgages, including the LTV ratio, the nature of the lender’s lien on the property and other instrument-specific factors.
JPMorgan
Chase & Co./2017 Annual Report
165
Notes to consolidated financial statements
Correlation – Correlation is a measure of the relationship between the movements of two variables (e.g., how the change in one variable influences the change in the other). Correlation is a pricing input for a derivative product where the payoff is driven by one or more underlying risks. Correlation inputs are related to the type of derivative (e.g., interest rate, credit, equity and foreign exchange) due to the nature of the underlying risks. When parameters are positively correlated, an increase in one parameter will
result in an increase in the other parameter. When parameters are negatively correlated, an increase in one parameter will result in a decrease in the other parameter. An increase in correlation can result in an increase or a decrease in a fair value measurement. Given a short correlation position, an increase in correlation, in isolation, would generally result in a decrease in a fair value measurement. The range of correlation inputs between risks within the same asset class are generally narrower than those between underlying risks across asset classes. In addition, the ranges of credit correlation inputs tend to be narrower than those affecting other asset classes.
The level of correlation used in the valuation of derivatives with multiple underlying risks depends on a number of factors including the nature of those risks. For example, the correlation between two credit risk exposures would be different than that between
two interest rate risk exposures. Similarly, the tenor of the transaction may also impact the correlation input, as the relationship between the underlying risks may be different over different time periods. Furthermore, correlation levels are very much dependent on market conditions and could have a relatively wide range of levels within or across asset classes over time, particularly in volatile market conditions.
Volatility – Volatility is a measure of the variability in possible returns for an instrument, parameter or market index given how much the particular instrument, parameter or index changes in value over time. Volatility is a pricing input for options, including equity options, commodity options, and interest rate options. Generally, the higher the volatility of the underlying, the riskier the instrument. Given a long position in an option, an increase in volatility, in isolation, would
generally result in an increase in a fair value measurement.
The level of volatility used in the valuation of a particular option-based derivative depends on a number of factors, including the nature of the risk underlying the option (e.g., the volatility of a particular equity security may be significantly different from that of a particular commodity index), the tenor of the derivative as well as the strike price of the option.
EBITDA multiple – EBITDA multiples refer to the input (often derived from the value of a comparable company) that is multiplied by the historic and/or expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) of a company in order to estimate the company’s
value. An increase in the EBITDA multiple, in isolation, net of adjustments, would result in an increase in a fair value measurement.
Changes in level 3 recurring fair value measurements
The following tables include a rollforward of the Consolidated balance sheets amounts (including changes in fair value) for financial instruments classified by the Firm within level 3 of the fair value hierarchy for the years ended December 31, 2017, 2016 and 2015. When a determination is made to classify a financial instrument within level 3, the determination is based on the significance
of the unobservable parameters to the overall fair value measurement. However, level 3 financial instruments typically include, in addition to the unobservable or level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources); accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are part of the valuation methodology. Also, the Firm risk-manages the observable components of level 3 financial instruments using securities and derivative positions that are classified within level 1 or 2 of the fair value hierarchy; as these level 1 and level 2 risk management instruments are not included below, the gains or losses in the following tables do not reflect the effect of the Firm’s risk management activities related to such level 3 instruments.
166
JPMorgan
Chase & Co./2017 Annual Report
Fair
value measurements using significant unobservable inputs
Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2015
Purchases
Sales
Issuances
Settlements(g)
Liabilities:(b)
Deposits
$
2,859
$
(39
)
(c)
$
—
$
—
$
1,993
$
(850
)
$
—
$
(1,013
)
$
2,950
$
(29
)
(c)
Short-term
borrowings
1,453
(697
)
(c)
—
—
3,334
(2,963
)
243
(731
)
639
(57
)
(c)
Trading
liabilities – debt and equity instruments
72
15
(c)
(163
)
160
—
(17
)
12
(16
)
63
(4
)
(c)
Accounts
payable and other liabilities
26
—
(c)
—
—
—
(7
)
—
—
19
—
Beneficial
interests issued by consolidated VIEs
1,146
(82
)
(c)
—
—
286
(574
)
—
(227
)
549
(63
)
(c)
Long-term
debt
11,877
(480
)
(c)
(58
)
—
9,359
(6,465
)
(j)
315
(3,101
)
11,447
(j)
385
(c)(j)
(a)
All
level 3 derivatives are presented on a net basis, irrespective of underlying counterparty.
JPMorgan Chase & Co./2017 Annual Report
169
Notes to consolidated financial statements
(b)
Level 3 liabilities as a percentage of total Firm liabilities
accounted for at fair value (including liabilities measured at fair value on a nonrecurring basis) were 15%, 12% and 13% at December 31, 2017, 2016 and 2015, respectively.
(c)
Predominantly reported in principal transactions revenue, except for changes in fair value for CCB mortgage loans, and lending-related commitments originated with the intent to sell, and mortgage loan purchase commitments, which are reported
in mortgage fees and related income.
(d)
Realized gains/(losses) on AFS securities, as well as other-than-temporary impairment (“OTTI”) losses that are recorded in earnings, are reported in securities gains. Unrealized gains/(losses) are reported in OCI. Realized gains/(losses) and foreign exchange hedge accounting adjustments recorded in income on AFS securities were zero, zero, and $(7) million for the years ended December 31, 2017, 2016
and 2015, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $15 million, $1 million and $(25) million for the years ended December 31, 2017, 2016 and 2015, respectively.
(e)
Changes in fair value for CCB MSRs are reported in mortgage fees and related income.
(f)
Loan
originations are included in purchases
(g)
Includes financial assets and liabilities that have matured, been partially or fully repaid, impacts of modifications, and deconsolidation associated with beneficial interests in VIEs and other items.
(h)
All transfers into and/or out of level 3 are based on changes in the observability of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting period in which they occur.
(i)
Realized
(gains)/losses due to DVA for fair value option elected liabilities are reported in principal transactions revenue. Unrealized (gains)/losses are reported in OCI. Unrealized gains were $48 million for the year ended December 31, 2017. There were no realized gains for the year ended December 31, 2017.
(j)
The prior period amounts have been revised to conform with the current period presentation.
Level 3 analysis
Consolidated
balance sheets changes
Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 0.8% of total Firm assets at December 31, 2017. The following describes significant changes to level 3 assets since December 31, 2016, for those items measured at fair value on a recurring basis. For further information on changes impacting items measured at fair value on a nonrecurring basis, see Assets and liabilities measured at fair value on a nonrecurring basis on page 172.
Level 3 assets were $19.2 billion at December 31, 2017, reflecting a decrease of $4.0 billion from December 31, 2016, largely due to the following:
•
$2.5 billion decrease in trading assets — debt and equity instruments was predominantly driven by a decrease of $2.1 billion in trading loans largely due to settlements,
and a $1.0 billion decrease in other assets due to settlements and transfers from level 3 to level 2 as a result of increased observability in certain valuation inputs
Gains and losses
The following describes significant components of total realized/unrealized gains/(losses) for instruments measured at fair value on a recurring basis for the years ended December 31, 2017, 2016 and 2015. For further information on these instruments, see Changes in level 3 recurring fair value measurements rollforward tables on
pages 166–170.
2017
•
$1.3 billion of net losses on liabilities largely driven by market movements in long-term debt
2016
•
There were no individually significant movements for the year ended December 31, 2016.
2015
•
$1.6
billion of net gains in interest rate, foreign exchange and equity derivative receivables largely due to market movements; partially offset by losses on commodity derivatives due to market movements
•
$1.3 billion of net gains in liabilities due to market movements
170
JPMorgan Chase &
Co./2017 Annual Report
Credit and funding adjustments – derivatives
Derivatives are generally valued using models that use as their basis observable market parameters. These market parameters generally do not consider factors such as counterparty nonperformance risk, the Firm’s own credit quality, and funding costs. Therefore, it is generally necessary to make adjustments to the base estimate of fair value to reflect these factors.
CVA represents the adjustment, relative to the relevant benchmark interest rate, necessary to reflect counterparty nonperformance risk. The Firm estimates CVA using a scenario analysis
to estimate the expected positive credit exposure across all of the Firm’s existing positions with each counterparty, and then estimates losses based on the probability of default and estimated recovery rate as a result of a counterparty credit event considering contractual factors designed to mitigate the Firm’s credit exposure, such as collateral and legal rights of offset. The key inputs to this methodology are (i) the probability of a default event occurring for each counterparty, as derived from observed or estimated CDS spreads; and (ii) estimated recovery rates implied by CDS spreads, adjusted to consider the differences in recovery rates as a derivative creditor relative to those reflected in CDS spreads, which generally reflect senior unsecured creditor risk.
FVA represents the adjustment to reflect the impact of funding and is recognized where there is evidence that a market participant in the principal market would
incorporate it in a transfer of the instrument. The Firm’s FVA framework, applied to uncollateralized (including partially collateralized) over-the-counter (“OTC”) derivatives incorporates key inputs such as: (i) the expected funding requirements arising from the Firm’s positions with each counterparty and collateral arrangements; and (ii) the estimated market funding cost in the principal market which, for derivative liabilities, considers the Firm’s credit risk (DVA). For collateralized derivatives, the fair value is estimated by discounting expected future cash flows at the relevant overnight indexed swap rate given the underlying collateral agreement with the counterparty, and therefore a separate FVA is not necessary.
The following table provides the impact of credit and funding adjustments on principal transactions revenue in the respective periods, excluding the effect
of any associated hedging activities. The FVA reported below include the impact of the Firm’s own credit quality on the inception value of liabilities as well as the impact of changes in the Firm’s own credit quality over time.
Year ended December 31, (in millions)
2017
2016
2015
Credit
and funding adjustments:
Derivatives CVA
$
802
$
(84
)
$
620
Derivatives
FVA
(295
)
7
73
Valuation adjustments on fair value option elected liabilities
The valuation of the Firm’s liabilities for which the fair value option has been elected requires consideration of the Firm’s own credit risk. DVA on fair value option elected liabilities reflects changes (subsequent to the issuance
of the liability) in the Firm’s probability of default and LGD, which are estimated based on changes in the Firm’s credit spread observed in the bond market. Effective January 1, 2016, the effect of DVA on fair value option elected liabilities is recognized in OCI. See Note 23 for further information.
JPMorgan Chase & Co./2017 Annual Report
171
Notes to consolidated financial statements
Assets
and liabilities measured at fair value on a nonrecurring basis
The following tables present the assets reported on a nonrecurring basis at fair value as of December 31, 2017 and 2016, by major product category and fair value hierarchy.
Total assets measured at fair value on a nonrecurring basis
$
—
$
735
$
822
$
1,557
(a) Of
the $779 million in level 3 assets measured at fair value on a nonrecurring basis as of December 31, 2017, $442 million related to residential real estate loans carried at the net realizable value of the underlying collateral (e.g., collateral-dependent loans and other loans charged off in accordance with regulatory guidance). These amounts are classified as level 3 as they are valued using a broker’s price opinion and discounted based upon the Firm’s experience with actual liquidation values. These discounts to the broker price opinions ranged from 13% to 48% with a weighted average of 27%.
There were no material liabilities measured at fair value
on a nonrecurring basis at December 31, 2017 and 2016.
Nonrecurring fair value changes
The following table presents the total change in value of assets and liabilities for which a fair value adjustment has been recognized for the years ended December 31, 2017 2016 and 2015, related to financial instruments held at those dates.
December
31, (in millions)
2017
2016
2015
Loans
$
(159
)
$
(209
)
$
(226
)
Other
Assets
(148
)
37
(60
)
Accounts payable and other liabilities
(1
)
—
(8
)
Total
nonrecurring fair value gains/(losses)
$
(308
)
$
(172
)
$
(294
)
For further information about the measurement of impaired collateral-dependent loans, and other loans where the carrying value is
based on the fair value of the underlying collateral (e.g., residential mortgage loans charged off in accordance with regulatory guidance), see Note 12.
Additional disclosures about the fair value of financial instruments that are not carried on the Consolidated balance sheets at fair value
U.S. GAAP requires disclosure of the estimated fair value of certain financial instruments, and the methods and significant assumptions used to estimate their fair value. Financial instruments within the scope of these disclosure requirements are included in the following table. However, certain financial instruments and all nonfinancial instruments are excluded from the scope of these disclosure requirements. Accordingly,
the fair value disclosures provided in the following table include only a partial estimate of the fair value of JPMorgan Chase’s assets and liabilities. For example, the Firm has developed long-term relationships with its customers through its deposit base and credit card accounts, commonly referred to as core
deposit intangibles and credit card relationships. In the opinion of management, these items, in the aggregate, add significant value to JPMorgan Chase, but their fair value is not disclosed in this Note.
Financial instruments for which carrying value approximates fair value
Certain financial instruments that are not
carried at fair value on the Consolidated balance sheets are carried at amounts that approximate fair value, due to their short-term nature and generally negligible credit risk. These instruments include cash and due from banks, deposits with banks, federal funds sold, securities purchased under resale agreements and securities borrowed, short-term receivables and accrued interest receivable, short-term borrowings, federal funds purchased, securities loaned and sold under repurchase agreements, accounts payable, and accrued liabilities. In addition, U.S. GAAP requires that the fair value of deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to their carrying value; recognition of the inherent funding value of these instruments is not permitted.
172
JPMorgan
Chase & Co./2017 Annual Report
The following table presents by fair value hierarchy classification the carrying values and estimated fair values at December 31, 2017 and 2016, of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and their classification within the fair value hierarchy. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see
pages 156–159 of this Note.
Federal
funds sold and securities purchased under resale agreements
183.7
—
183.7
—
183.7
208.5
—
208.3
0.2
208.5
Securities
borrowed
102.1
—
102.1
—
102.1
96.4
—
96.4
—
96.4
Securities,
held-to-maturity
47.7
—
48.7
—
48.7
50.2
—
50.9
—
50.9
Loans,
net of allowance for loan losses(a)(b)
914.6
—
213.2
707.1
920.3
878.8
—
24.1
851.0
875.1
Other
62.9
—
52.9
16.5
69.4
71.4
0.1
60.8
14.3
75.2
Financial
liabilities
Deposits
$
1,422.7
$
—
$
1,422.7
$
—
$
1,422.7
$
1,361.3
$
—
$
1,361.3
$
—
$
1,361.3
Federal
funds purchased and securities loaned or sold under repurchase agreements
158.2
—
158.2
—
158.2
165.0
—
165.0
—
165.0
Short-term
borrowings
42.6
—
42.4
0.2
42.6
25.3
—
25.3
—
25.3
Accounts
payable and other liabilities
152.0
—
148.9
2.9
151.8
148.0
—
144.8
3.4
148.2
Beneficial
interests issued by consolidated VIEs
26.0
—
26.0
—
26.0
38.9
—
38.9
—
38.9
Long-term
debt and junior subordinated deferrable interest debentures
236.6
—
240.3
3.2
243.5
257.5
—
260.0
2.0
262.0
(a)
Fair
value is typically estimated using a discounted cash flow model that incorporates the characteristics of the underlying loans (including principal, contractual interest rate and contractual fees) and other key inputs, including expected lifetime credit losses, interest rates, prepayment rates, and primary origination or secondary market spreads. For certain loans, the fair value is measured based on the value of the underlying collateral. The difference between the estimated fair value and carrying value of a financial asset or liability is the result of the different methodologies used to determine fair value as compared with carrying value. For example, credit losses are estimated for a financial asset’s remaining life in a fair value calculation but are estimated for a loss emergence period in the allowance for loan loss calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in the allowance
for loan losses. For a further discussion of the Firm’s methodologies for estimating the fair value of loans and lending-related commitments, see Valuation hierarchy on pages 156–159.
(b)
For the year ended December 31, 2017, the Firm transferred certain residential mortgage loans from Level 3 to Level 2 as a result of an increase in observability.
The majority of the Firm’s lending-related commitments are not carried at fair value on a recurring basis on the Consolidated balance sheets. The carrying value of the wholesale allowance for
lending-related commitments and the estimated fair value of these wholesale lending-related commitments were as follows for the periods indicated.
Excludes
the current carrying values of the guarantee liability and the offsetting asset, each of which is recognized at fair value at the inception of the guarantees.
The Firm does not estimate the fair value of consumer lending-related commitments. In many cases, the Firm can reduce or cancel these commitments by providing the borrower notice or, in some cases as permitted by law, without notice. For a further discussion of the valuation of lending-related commitments, see page 157 of this Note.
JPMorgan
Chase & Co./2017 Annual Report
173
Notes to consolidated financial statements
Note 3 – Fair value option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments.
The Firm has elected to measure certain instruments at fair value for several reasons including to mitigate income statement volatility caused by the
differences between the measurement basis of elected instruments (e.g., certain instruments elected were previously accounted for on an accrual basis) and the associated risk management arrangements that are accounted for on a fair value basis, as well as to better reflect those instruments that are managed on a fair value basis.
The Firm’s election of fair value includes the following instruments:
•
Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis, including
lending-related commitments
•
Certain securities financing arrangements with an embedded derivative and/or a maturity of greater than one year
•
Owned beneficial interests in securitized financial assets that contain embedded credit derivatives, which would otherwise be required to be separately accounted for as a derivative instrument
•
Structured
notes, which are predominantly financial instruments that contain embedded derivatives, that are issued as part of CIB’s client-driven activities
•
Certain long-term beneficial interests issued by CIB’s consolidated securitization trusts where the underlying assets are carried at fair value
174
JPMorgan
Chase & Co./2017 Annual Report
Changes in fair value under the fair value option election
The following table presents the changes in fair value included in the Consolidated statements of income for the years ended December 31, 2017, 2016 and 2015, for items for which the fair value option was elected. The profit and loss information presented below only includes the financial instruments that were elected to be measured at fair value; related risk management instruments, which are required
to be measured at fair value, are not included in the table.
2017
2016
2015
December
31, (in millions)
Principal transactions
All other income
Total changes in fair value recorded
Principal transactions
All other income
Total changes in fair value recorded
Principal transactions
All other income
Total
changes in fair value recorded
Federal funds sold and securities purchased under resale agreements
$
(97
)
$
—
$
(97
)
$
(76
)
$
—
$
(76
)
$
(38
)
$
—
$
(38
)
Securities
borrowed
50
—
50
1
—
1
(6
)
—
(6
)
Trading
assets:
Debt
and equity instruments, excluding loans
1,943
2
(c)
1,945
120
(1
)
(c)
119
756
(10
)
(c)
746
Loans
reported as trading
assets:
Changes
in instrument-specific credit risk
330
14
(c)
344
461
43
(c)
504
138
41
(c)
179
Other
changes in fair value
217
747
(c)
964
79
684
(c)
763
232
818
(c)
1,050
Loans:
Changes
in instrument-specific credit risk
(1
)
—
(1
)
13
—
13
35
—
35
Other
changes in fair value
(12
)
3
(c)
(9
)
(7
)
—
(7
)
4
—
4
Other
assets
11
(55
)
(d)
(44
)
20
62
(d)
82
79
(1
)
(d)
78
Deposits(a)
(533
)
—
(533
)
(134
)
—
(134
)
93
—
93
Federal
funds purchased and securities loaned or sold under repurchase agreements
11
—
11
19
—
19
8
—
8
Short-term
borrowings(a)
(747
)
—
(747
)
(236
)
—
(236
)
1,996
—
1,996
Trading
liabilities
(1
)
—
(1
)
6
—
6
(20
)
—
(20
)
Beneficial
interests issued by consolidated VIEs
—
—
—
23
—
23
49
—
49
Long-term
debt(a)(b)
(2,022
)
—
(2,022
)
(773
)
—
(773
)
1,388
—
1,388
(a)
Unrealized
gains/(losses) due to instrument-specific credit risk (DVA) for liabilities for which the fair value option has been elected is recorded in OCI, while realized gains/(losses) are recorded in principal transactions revenue. DVA for 2015 was included in principal transactions revenue, and includes the impact of the Firm’s own credit quality on the inception value of liabilities as well as the impact of changes in the Firm’s own credit quality subsequent to issuance. See Notes 2 and 23 for further information. Realized gains/(losses) due to instrument-specific credit risk recorded in principal transaction revenue were not material for the years ended December 31, 2017 and 2016.
(b)
Long-term
debt measured at fair value predominantly relates to structured notes. Although the risk associated with the structured notes is actively managed, the gains/(losses) reported in this table do not include the income statement impact of the risk management instruments used to manage such risk.
(c)
Reported in mortgage fees and related income.
(d)
Reported in other income.
Determination
of instrument-specific credit risk for items for which a fair value election was made
The following describes how the gains and losses that are attributable to changes in instrument-specific credit risk, were determined.
•
Loans and lending-related commitments: For floating-rate instruments, all changes in value are attributed to instrument-specific credit risk. For fixed-rate instruments, an allocation of the changes in value for the period is made between those changes in value that are interest rate-related and changes in value that are credit-related. Allocations are generally based on an analysis of borrower-specific credit spread and recovery information, where
available, or benchmarking to similar entities or industries.
•
Long-term debt: Changes in value attributable to instrument-specific credit risk were derived principally from observable changes in the Firm’s credit spread.
•
Resale and repurchase agreements, securities borrowed agreements and securities lending agreements: Generally, for these types of agreements, there is
a requirement that collateral be maintained with a market value equal to or in excess of the principal amount loaned; as a result, there would be no adjustment or an immaterial adjustment for instrument-specific credit risk related to these agreements.
JPMorgan Chase & Co./2017 Annual Report
175
Notes to consolidated financial statements
Difference between aggregate fair
value and aggregate remaining contractual principal balance outstanding
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of December 31, 2017 and 2016, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.
2017
2016
December
31, (in millions)
Contractual principal outstanding
Fair value
Fair value over/(under) contractual principal outstanding
Contractual principal outstanding
Fair value
Fair value over/(under) contractual principal outstanding
Loans(a)
Nonaccrual
loans
Loans reported as trading assets
$
4,219
$
1,371
$
(2,848
)
$
3,338
$
748
$
(2,590
)
Loans
39
—
(39
)
—
—
—
Subtotal
4,258
1,371
(2,887
)
3,338
748
(2,590
)
All
other performing loans
Loans reported as trading assets
38,157
36,590
(1,567
)
35,477
33,054
(2,423
)
Loans
2,539
2,508
(31
)
2,259
2,228
(31
)
Total
loans
$
44,954
$
40,469
$
(4,485
)
$
41,074
$
36,030
$
(5,044
)
Long-term
debt
Principal-protected debt
$
26,297
(c)
$
23,848
$
(2,449
)
$
21,602
(c)
$
19,195
$
(2,407
)
Nonprincipal-protected
debt(b)
NA
23,671
NA
NA
18,491
NA
Total
long-term debt
NA
$
47,519
NA
NA
$
37,686
NA
Long-term
beneficial interests
Nonprincipal-protected debt
NA
$
45
NA
NA
$
120
NA
Total
long-term beneficial interests
NA
$
45
NA
NA
$
120
NA
(a)
There
were no performing loans that were ninety days or more past due as of December 31, 2017 and 2016.
(b)
Remaining contractual principal is not applicable to nonprincipal-protected notes. Unlike principal-protected structured notes, for which the Firm is obligated to return a stated amount of principal at the maturity of the note, nonprincipal-protected structured notes do not obligate the Firm to return a stated amount of principal at maturity, but to return an amount based on the performance of an underlying
variable or derivative feature embedded in the note. However, investors are exposed to the credit risk of the Firm as issuer for both nonprincipal-protected and principal protected notes.
(c)
Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflects the contractual principal payment at maturity or, if applicable, the contractual principal payment at the Firm’s next call date.
At December 31, 2017 and 2016,
the contractual amount of lending-related commitments for which the fair value option was elected was $7.4 billion and $4.6 billion respectively, with a corresponding fair value of $(76) million and $(118) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 27.
176
JPMorgan
Chase & Co./2017 Annual Report
Structured note products by balance sheet classification and risk component
The following table presents the fair value of the structured notes issued by the Firm, by balance sheet classification and the primary risk type.
Concentrations of credit risk arise when a number of clients, counterparties or customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.
JPMorgan Chase regularly monitors various segments of its credit portfolios to assess potential credit risk concentrations and to obtain additional collateral when deemed necessary and permitted under the Firm’s agreements. Senior management is significantly involved in the credit approval and review process, and risk levels are adjusted
as needed to reflect the Firm’s risk appetite.
In the Firm’s consumer portfolio, concentrations are evaluated primarily by product and by U.S. geographic region, with a key focus on trends and concentrations at the portfolio level, where potential credit risk concentrations can be remedied through changes in underwriting policies and portfolio guidelines. In the wholesale portfolio, credit risk concentrations are evaluated primarily by industry and monitored regularly on both an aggregate portfolio level and on an individual client or counterparty basis. The Firm’s wholesale exposure is managed through loan syndications and participations, loan
sales, securitizations, credit derivatives, master netting agreements, collateral and other risk-reduction techniques. For additional information on loans, see Note 12.
The Firm does not believe that its exposure to any particular loan product (e.g., option ARMs), or industry segment (e.g., real estate), or its exposure to residential real estate loans with high LTV ratios, results in a significant concentration of credit risk.
Terms of loan products and collateral coverage are included in the Firm’s assessment when extending credit and establishing its allowance for loan losses.
JPMorgan
Chase & Co./2017 Annual Report
177
Notes to consolidated financial statements
The table below presents both on–balance sheet and off–balance sheet consumer and wholesale-related credit exposure by the Firm’s three credit portfolio segments as of December 31, 2017 and 2016.
In 2017 the Firm revised its methodology for the
assignment of industry classifications, to better monitor and manage concentrations. This largely resulted in the re-assignment of holding companies from Other to the industry of risk category based on the primary business activity of the holding company's underlying entities. In the tables and industry discussions below, the prior period amounts have been revised to conform with the current period presentation.
2017
2016
Credit
exposure(f)
On-balance sheet
Off-balance sheet(g)
Credit exposure
On-balance sheet
Off-balance sheet(g)
December 31, (in millions)
Loans
Derivatives
Loans
Derivatives
Consumer,
excluding credit card
$
421,234
$
372,681
$
—
$
48,553
$
417,891
$
364,644
$
—
$
53,247
(h)
Receivables
from customers(a)
133
—
—
—
120
—
—
—
Total
Consumer, excluding credit card
421,367
372,681
—
48,553
418,011
364,644
—
53,247
(h)
Credit
Card
722,342
149,511
—
572,831
695,707
141,816
—
553,891
Total
consumer-related
1,143,709
522,192
—
621,384
1,113,718
506,460
—
607,138
(h)
Wholesale-related(b)
Real
Estate
139,409
113,648
153
25,608
134,287
105,802
207
28,278
Consumer
& Retail
87,679
31,044
1,114
55,521
84,804
29,929
1,082
53,793
Technology,
Media & Telecommunications
59,274
13,665
2,265
43,344
63,324
14,063
1,293
47,968
Healthcare
55,997
16,273
2,191
37,533
49,445
15,545
2,280
31,620
Industrials
55,272
18,161
1,163
35,948
55,733
17,295
1,658
36,780
Banks
& Finance Cos
49,037
25,879
6,816
16,342
48,393
22,714
12,257
13,422
Oil
& Gas
41,317
12,621
1,727
26,969
40,367
13,253
1,878
25,236
Asset
Managers
32,531
11,480
7,998
13,053
33,201
10,339
10,820
12,042
Utilities
29,317
6,187
2,084
21,046
29,672
7,208
888
21,576
State
& Municipal Govt(c)
28,633
12,134
2,888
13,611
28,263
12,416
2,096
13,751
Central
Govt
19,182
3,375
13,937
1,870
20,408
3,964
14,235
2,209
Chemicals
& Plastics
15,945
5,654
208
10,083
15,043
5,292
271
9,480
Transportation
15,797
6,733
977
8,087
19,096
8,996
751
9,349
Automotive
14,820
4,903
342
9,575
16,736
4,964
1,196
10,576
Metals
& Mining
14,171
4,728
702
8,741
13,419
4,350
439
8,630
Insurance
14,089
1,411
2,804
9,874
13,510
1,119
3,382
9,009
Financial
Markets Infrastructure
5,036
351
3,499
1,186
8,732
347
3,884
4,501
Securities
Firms
4,113
952
1,692
1,469
4,211
1,059
1,913
1,239
All
other(d)
147,900
113,699
3,963
30,238
137,238
105,135
3,548
28,555
Subtotal
829,519
402,898
56,523
370,098
815,882
383,790
64,078
368,014
Loans
held-for-sale and loans at fair value
5,607
5,607
—
—
4,515
4,515
—
—
Receivables
from customers and other(a)
26,139
—
—
—
17,440
—
—
—
Total
wholesale-related
861,265
408,505
56,523
370,098
837,837
388,305
64,078
368,014
Total
exposure(e)(f)
$
2,004,974
$
930,697
$
56,523
$
991,482
$
1,951,555
$
894,765
$
64,078
$
975,152
(h)
(a)
Receivables
from customers primarily represent held-for-investment margin loans to brokerage customers (Prime Services in CIB, AWM and CCB) that are collateralized through assets maintained in the clients' brokerage accounts, as such no allowance is held against these receivables. These receivables are reported within accrued interest and accounts receivable on the Firm's Consolidated balance sheets.
(b)
The industry rankings presented in the table as of December 31, 2016, are based on the industry rankings of the corresponding exposures at December 31, 2017,
not actual rankings of such exposures at December 31, 2016.
(c)
In addition to the credit risk exposure to states and municipal governments (both U.S. and non-U.S.) at December 31, 2017 and 2016, noted above, the Firm held: $9.8 billion and $9.1 billion, respectively, of trading securities; $32.3 billion and $31.6
billion, respectively, of AFS securities; and $14.4 billion and $14.5 billion, respectively, of HTM securities, issued by U.S. state and municipal governments. For further information, see Note 2 and Note 10.
(d)
All other includes: individuals; SPEs; and private education and civic organizations. For more information on exposures to SPEs, see Note 14.
(e)
Excludes
cash placed with banks of $421.0 billion and $380.2 billion, at December 31, 2017 and 2016, respectively, which is predominantly placed with various central banks, primarily Federal Reserve Banks.
(f)
Credit exposure is net of risk participations and excludes the benefit of credit derivatives used in credit portfolio management activities held against derivative receivables or loans and liquid securities and other cash collateral held against derivative
receivables.
(g)
Represents lending-related financial instruments.
(h)
The prior period amounts have been revised to conform with the current period presentation.
178
JPMorgan
Chase & Co./2017 Annual Report
Note 5 – Derivative instruments
Derivative contracts derive their value from underlying asset prices, indices, reference rates, other inputs or a combination of these factors and may expose counterparties to risks and rewards of an underlying asset or liability without having to initially invest in, own or exchange the asset or liability. JPMorgan Chase makes markets in derivatives for clients and also uses derivatives to hedge or manage its own risk exposures. Predominantly all
of the Firm’s derivatives are entered into for market-making or risk management purposes.
Market-making derivatives
The majority of the Firm’s derivatives are entered into for market-making purposes. Clients use derivatives to mitigate or modify interest rate, credit, foreign exchange, equity and commodity risks. The Firm actively manages the risks from its exposure to these derivatives by entering into other derivative transactions or by purchasing or selling other financial instruments that partially or fully offset the exposure from client derivatives.
Risk management derivatives
The
Firm manages certain market and credit risk exposures using derivative instruments, including derivatives in hedge accounting relationships and other derivatives that are used to manage risks associated with specified assets and liabilities.
Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in interest rates. Fixed-rate assets and liabilities appreciate or depreciate in market value as interest rates change. Similarly, interest income and expense increases or decreases as a result of variable-rate assets and liabilities resetting to current market rates, and as a result of the repayment and subsequent origination or issuance of fixed-rate assets and liabilities at current market rates. Gains or losses on the derivative instruments that are
related to such assets and liabilities are expected to substantially offset this variability in earnings. The Firm generally uses interest rate swaps, forwards and futures to manage the impact of interest rate fluctuations on earnings.
Foreign currency forward contracts are used to manage the foreign exchange risk associated with certain foreign currency–denominated (i.e., non-U.S. dollar) assets and liabilities and forecasted transactions, as well as the Firm’s net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. As a result of fluctuations in foreign currencies, the
U.S. dollar–equivalent values of the foreign currency–denominated assets and liabilities or the forecasted revenues or expenses increase or decrease. Gains or losses on the derivative instruments related to these foreign currency–denominated assets or liabilities, or forecasted transactions, are expected to substantially offset this variability.
Commodities contracts are used to manage the price risk of certain commodities inventories. Gains or losses on these derivative instruments are expected to substantially offset the depreciation or appreciation of the related inventory.
Credit derivatives are used to manage the counterparty credit risk associated with loans and lending-related commitments.
Credit derivatives compensate the purchaser when the entity referenced in the contract experiences a credit event, such as bankruptcy or a failure to pay an obligation when due. Credit derivatives primarily consist of CDS. For a further discussion of credit derivatives, see the discussion in the Credit derivatives section on pages 189–191 of this Note.
For more information about risk management derivatives, see the risk management derivatives gains and losses table on page 189 of this Note, and the hedge accounting gains and losses tables on pages 187–189
of this Note.
Derivative counterparties and settlement types
The Firm enters into OTC derivatives, which are negotiated and settled bilaterally with the derivative counterparty. The Firm also enters into, as principal, certain ETD such as futures and options, and OTC-cleared derivative contracts with CCPs. ETD contracts are generally standardized contracts
traded on an exchange and cleared by the CCP, which is the Firm’s counterparty from the inception of the transactions. OTC-cleared derivatives are traded on a bilateral basis and then novated to the CCP for clearing.
Derivative clearing services
The Firm provides clearing services for clients in which the Firm acts as a clearing member at certain derivative exchanges and clearing houses. The Firm does not reflect the clients’ derivative contracts in its Consolidated Financial Statements. For further information on the Firm’s clearing
services, see Note 27.
Accounting for derivatives
All free-standing derivatives that the Firm executes for its own account are required to be recorded on the Consolidated balance sheets at fair value.
As permitted under U.S. GAAP, the Firm nets derivative assets and liabilities, and the related cash collateral receivables and payables, when a legally enforceable master netting agreement exists between the Firm and the derivative counterparty. For further discussion of the offsetting of assets and liabilities, see Note 1.
The accounting for changes in value of a derivative depends on whether or not the transaction has been designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are reported and measured at fair value through earnings. The tabular disclosures on pages 183–189 of this Note provide additional information on the amount of, and reporting for, derivative assets, liabilities, gains and losses. For further discussion of derivatives embedded in structured notes, see Notes 2 and 3.
JPMorgan
Chase & Co./2017 Annual Report
179
Notes to consolidated financial statements
Derivatives designated as hedges
The Firm applies hedge accounting to certain derivatives executed for risk management purposes – generally interest rate, foreign exchange and commodity derivatives. However, JPMorgan Chase does not seek to apply hedge accounting to all of the derivatives involved in the Firm’s risk management activities. For example, the Firm
does not apply hedge accounting to purchased CDS used to manage the credit risk of loans and lending-related commitments, because of the difficulties in qualifying such contracts as hedges. For the same reason, the Firm does not apply hedge accounting to certain interest rate, foreign exchange, and commodity derivatives used for risk management purposes.
To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a derivative to be designated as a hedge, the risk management objective and strategy must be documented. Hedge documentation must identify the
derivative hedging instrument, the asset or liability or forecasted transaction and type of risk to be hedged, and how the effectiveness of the derivative is assessed prospectively and retrospectively. To assess effectiveness, the Firm uses statistical methods such as regression analysis, as well as nonstatistical methods including dollar-value comparisons of the change in the fair value of the derivative to the change in the fair value or cash flows of the hedged item. The extent to which a derivative has been, and is expected to continue to be, effective at offsetting changes in the fair value or cash flows of the hedged item must be assessed and documented at least quarterly. Any hedge ineffectiveness (i.e., the amount by which the gain or loss on the designated derivative instrument does not exactly offset the change in the hedged item attributable to the hedged risk) must be reported in current-period earnings. If
it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued.
There are three types of hedge accounting designations: fair value hedges, cash flow hedges and net investment hedges. JPMorgan Chase uses fair value hedges primarily to hedge fixed-rate long-term debt, AFS securities and certain commodities inventories. For qualifying fair value hedges, the changes in the fair value of the derivative, and in the value of the hedged item for the risk being hedged, are recognized in earnings. If the hedge relationship is terminated, then the adjustment to the hedged item continues to be reported as part of the basis of the hedged item, and for benchmark interest rate hedges, is amortized to earnings as a yield adjustment. Derivative amounts affecting
earnings are recognized consistent with the classification of the hedged item – primarily net interest income and principal transactions revenue.
JPMorgan Chase uses cash flow hedges primarily to hedge the exposure to variability in forecasted cash flows from floating-rate assets and liabilities and foreign currency–denominated revenue and expense. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in OCI and recognized in the Consolidated statements of income when the hedged cash flows affect earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item – primarily interest income, interest expense, noninterest revenue and compensation expense. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is
terminated, then the value of the derivative recorded in AOCI is recognized in earnings when the cash flows that were hedged affect earnings. For hedge relationships that are discontinued because a forecasted transaction is not expected to occur according to the original hedge forecast, any related derivative values recorded in AOCI are immediately recognized in earnings.
JPMorgan Chase uses net investment hedges to protect the value of the Firm’s net investments in certain non-U.S. subsidiaries or branches whose functional currencies are not the U.S. dollar. For foreign currency qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the translation adjustments
account within AOCI.
180
JPMorgan Chase & Co./2017 Annual Report
The following table outlines the Firm’s primary uses of derivatives and the related hedge accounting designation or disclosure category.
Type
of Derivative
Use of Derivative
Designation and disclosure
Affected segment or unit
Page reference
Manage specifically identified risk exposures in qualifying hedge accounting relationships:
•
Interest rate
Hedge fixed rate assets and liabilities
Fair
value hedge
Corporate
187
•
Interest rate
Hedge floating-rate assets and liabilities
Cash flow hedge
Corporate
188
•
Foreign exchange
Hedge foreign currency-denominated assets and liabilities
Fair value hedge
Corporate
187
•
Foreign
exchange
Hedge foreign currency-denominated forecasted revenue and expense
Cash flow hedge
Corporate
188
•
Foreign exchange
Hedge the value of the Firm’s investments in non-U.S. dollar functional currency entities
Net investment hedge
Corporate
189
•
Commodity
Hedge commodity inventory
Fair value hedge
CIB
187
Manage specifically identified risk exposures not designated in qualifying hedge accounting relationships:
•
Interest rate
Manage the risk of the mortgage pipeline, warehouse loans and MSRs
Specified
risk management
CCB
189
•
Credit
Manage the credit risk of wholesale lending exposures
Specified risk management
CIB
189
•
Commodity
Manage the risk of certain commodities-related contracts and investments
Specified
risk management
CIB
189
•
Interest rate and
foreign exchange
Manage the risk of certain other specified assets and liabilities
For more information on volumes and types of credit derivative contracts, see the Credit derivatives discussion on pages
189–191.
(b)
Represents the sum of gross long and gross short third-party notional derivative contracts.
While the notional amounts disclosed above give an indication of the volume of the Firm’s derivatives activity, the notional amounts significantly exceed, in the Firm’s view, the possible losses that could arise from such transactions. For most derivative transactions, the notional amount is not exchanged; it is used simply
as a reference to calculate payments.
182
JPMorgan Chase & Co./2017 Annual Report
Impact of derivatives on the Consolidated balance sheets
The following table summarizes information on derivative
receivables and payables (before and after netting adjustments) that are reflected on the Firm’s Consolidated balance sheets as of December 31, 2017 and 2016, by accounting designation (e.g., whether the derivatives were designated in qualifying hedge accounting relationships or not) and contract type.
Gross derivative balances as of December 31, 2017, reflect the Firm’s adoption of rulebook changes made by two CCPs, that require or allow
the Firm to treat certain OTC-cleared derivative transactions with that CCP as settled each day. If such rulebook changes had been in effect as of December 31, 2016, the impact would have been a reduction in gross derivative receivables and payables of $227.1 billion and $224.7 billion, respectively, and a corresponding decrease in amounts netted, with no impact to the Consolidated balance sheets.
Free-standing
derivative receivables and payables(a)
Total
fair value of trading assets and liabilities
$
916,784
$
5,832
$
922,616
$
64,078
$
889,028
$
4,211
$
893,239
$
49,231
(a)
Balances
exclude structured notes for which the fair value option has been elected. See Note 3 for further information.
(b)
As permitted under U.S. GAAP, the Firm has elected to net derivative receivables and derivative payables and the related cash collateral receivables and payables when a legally enforceable master netting agreement exists.
JPMorgan
Chase & Co./2017 Annual Report
183
Notes to consolidated financial statements
Derivatives netting
The following tables present, as of December 31, 2017 and 2016, gross and net derivative receivables and payables by contract and settlement type. Derivative
receivables and payables, as well as the related cash collateral from the same counterparty, have been netted on the Consolidated balance sheets where the Firm has obtained an appropriate legal opinion with respect to the master netting agreement. Where such a legal opinion has not been either sought or obtained, amounts are not eligible for netting on the Consolidated balance sheets, and those derivative receivables and payables are shown separately in the tables below.
In addition to the cash collateral received and transferred that is presented on a net basis with derivative receivables and payables, the Firm receives and transfers additional collateral (financial instruments and cash). These amounts mitigate counterparty credit risk associated with the Firm’s derivative
instruments, but are not eligible for net presentation:
•
collateral that consists of non-cash financial instruments (generally U.S. government and agency securities and other G7 government securities) and cash collateral held at third party custodians, which are shown separately as “Collateral not nettable on the Consolidated balance sheets” in the tables below, up to the fair value exposure amount.
•
the amount of collateral held or transferred that exceeds the fair value exposure
at the individual counterparty level, as of the date presented, which is excluded from the tables below; and
•
collateral held or transferred that relates to derivative receivables or payables where an appropriate legal opinion has not been either sought or obtained with respect to the master netting agreement, which is excluded from the tables below.
Derivative
payables with appropriate legal opinion
521,133
(493,029
)
(b)
28,104
881,631
(844,008
)
(b)
37,623
Derivative
payables where an appropriate legal opinion has not been either sought or obtained
9,673
9,673
11,608
11,608
Total
derivative payables recognized on the Consolidated balance sheets
$
530,806
$
37,777
$
893,239
$
49,231
Collateral
not nettable on the Consolidated balance sheets(c)(d)
(4,180
)
(8,925
)
Net
amounts
$
33,597
$
40,306
(a)
Exchange-traded
derivative balances that relate to futures contracts are settled daily.
(b)
Net derivatives receivable included cash collateral netted of $55.5 billion and $71.9 billion at December 31, 2017 and 2016, respectively. Net derivatives payable included cash collateral netted of $45.5 billion and $57.3
billion related to OTC and OTC-cleared derivatives at December 31, 2017 and 2016, respectively.
(c)
Represents liquid security collateral as well as cash collateral held at third-party custodians related to derivative instruments where an appropriate legal opinion has been obtained. For some counterparties, the collateral amounts of financial instruments may exceed the derivative receivables and derivative payables balances. Where this is the case, the total amount reported is limited to the net derivative receivables and net
derivative payables balances with that counterparty.
(d)
Derivative collateral relates only to OTC and OTC-cleared derivative instruments.
JPMorgan Chase & Co./2017 Annual Report
185
Notes
to consolidated financial statements
Liquidity risk and credit-related contingent features
In addition to the specific market risks introduced by each derivative contract type, derivatives expose JPMorgan Chase to credit risk — the risk that derivative counterparties may fail to meet their payment obligations under the derivative contracts and the collateral, if any, held by the Firm proves to be of insufficient value to cover the payment obligation. It is the policy of JPMorgan Chase to
actively pursue, where possible, the use of legally enforceable master netting arrangements and collateral agreements to mitigate derivative counterparty credit risk. The amount of derivative receivables reported on the Consolidated balance sheets is the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements and cash collateral held by the Firm.
While derivative receivables expose the Firm to credit risk, derivative payables expose the Firm to liquidity risk, as the derivative contracts typically require the Firm to post cash or
securities collateral with counterparties as the fair value
of the contracts moves in the counterparties’ favor or upon specified downgrades in the Firm’s and its subsidiaries’ respective credit ratings. Certain derivative contracts also provide for termination of the contract, generally upon a downgrade of either the Firm or the counterparty, at the fair value of the derivative contracts.
The following table shows the aggregate fair value of net derivative payables related to OTC and OTC-cleared derivatives that contain contingent collateral or termination features that may be triggered upon a ratings downgrade, and the associated collateral the Firm has posted in the normal course of business, at December 31, 2017 and 2016.
OTC and OTC-cleared derivative payables containing
downgrade triggers
December 31, (in millions)
2017
2016
Aggregate fair value of net derivative payables
$
11,916
$
21,550
Collateral posted
9,973
19,383
The
following table shows the impact of a single-notch and two-notch downgrade of the long-term issuer ratings of JPMorgan Chase & Co. and its subsidiaries, predominantly JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”), at December 31, 2017 and 2016, related to OTC and OTC-cleared derivative contracts with contingent collateral or termination features that may be triggered upon a ratings downgrade. Derivatives contracts
generally require additional collateral to be posted or terminations to be triggered when the predefined threshold rating is breached. A downgrade by a single rating agency that does not result in a rating lower than a preexisting corresponding rating provided by another major rating agency will generally not result in additional collateral (except in certain instances in which additional initial margin may be required upon a ratings downgrade), nor in termination payments requirements. The liquidity impact in the table is calculated based upon a downgrade below the lowest current rating of the rating agencies referred to in the derivative contract.
Liquidity
impact of downgrade triggers on OTC and OTC-cleared derivatives
2017
2016
December 31, (in millions)
Single-notch downgrade
Two-notch downgrade
Single-notch downgrade
Two-notch downgrade
Amount
of additional collateral to be posted upon downgrade(a)
$
79
$
1,989
$
560
$
2,497
Amount
required to settle contracts with termination triggers upon downgrade(b)
320
650
606
1,049
(a)
Includes
the additional collateral to be posted for initial margin.
(b)
Amounts represent fair values of derivative payables, and do not reflect collateral posted.
Derivatives executed in contemplation of a sale of the underlying financial asset
In certain instances the Firm enters into transactions in which it transfers financial assets but maintains the economic exposure to the transferred assets by entering into a derivative with the same counterparty in contemplation of
the initial transfer. The Firm generally accounts for such transfers as collateralized financing transactions as described in Note 11, but in limited circumstances they may qualify to be accounted for as a sale and a derivative under U.S. GAAP. There were no such transfers accounted for as a sale where the associated derivative was outstanding at December 31, 2017, and such transfers at December 31, 2016 were not material.
186
JPMorgan
Chase & Co./2017 Annual Report
Impact of derivatives on the Consolidated statements of income
The following tables provide information related to gains and losses recorded on derivatives based on their hedge accounting
designation or purpose.
Fair value hedge gains and losses
The following tables present derivative instruments, by contract type, used in fair value hedge accounting relationships, as well as pre-tax gains/(losses) recorded on such derivatives
and the related hedged items for the years ended December 31, 2017, 2016 and 2015, respectively. The Firm includes gains/(losses) on the hedging derivative and the related hedged item in the same line item in the Consolidated statements of income.
Primarily
consists of hedges of the benchmark (e.g., London Interbank Offered Rate (“LIBOR”)) interest rate risk of fixed-rate long-term debt and AFS securities. Gains and losses were recorded in net interest income.
(b)
Excludes the amortization expense associated with the inception hedge accounting adjustment applied to the hedged item. This expense is recorded in net interest income and substantially offsets the income statement impact of the excluded components.
(c)
Primarily consists of hedges of the foreign currency
risk of long-term debt and AFS securities for changes in spot foreign currency rates. Gains and losses related to the derivatives and the hedged items, due to changes in foreign currency rates, were recorded primarily in principal transactions revenue and net interest income.
(d)
Consists of overall fair value hedges of physical commodities inventories that are generally carried at the lower of cost or net realizable value (net realizable value approximates fair value). Gains and losses were recorded in principal transactions revenue.
(e)
Hedge
ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk.
(f)
The assessment of hedge effectiveness excludes certain components of the changes in fair values of the derivatives and hedged items such as forward points on foreign exchange forward contracts and time values.
JPMorgan
Chase & Co./2017 Annual Report
187
Notes to consolidated financial statements
Cash flow hedge gains and losses
The following tables present derivative instruments, by contract type, used in cash flow hedge accounting relationships, and the pre-tax gains/(losses) recorded on such derivatives, for the years ended December 31, 2017, 2016 and 2015,
respectively. The Firm includes the gain/(loss) on the hedging derivative and the change in cash flows on the hedged item in the same line item in the Consolidated statements of income.
Gains/(losses)
recorded in income and other comprehensive income/(loss)
Primarily
consists of benchmark interest rate hedges of LIBOR-indexed floating-rate assets and floating-rate liabilities. Gains and losses were recorded in net interest income.
(b)
Primarily consists of hedges of the foreign currency risk of non-U.S. dollar-denominated revenue and expense. The income statement classification of gains and losses follows the hedged item – primarily noninterest revenue and compensation expense.
(c)
Hedge ineffectiveness is the amount by which the cumulative gain or loss on the designated derivative
instrument exceeds the present value of the cumulative expected change in cash flows on the hedged item attributable to the hedged risk.
The Firm did not experience any forecasted transactions that failed to occur for the years ended 2017 and 2016. In 2015, the Firm reclassified approximately $150 million of net losses from AOCI to other income because the Firm determined that it was probable that the forecasted interest payment cash flows would not occur as a result of the planned reduction in wholesale non-operating deposits.
Over
the next 12 months, the Firm expects that approximately $96 million (after-tax) of net gains recorded in AOCI at December 31, 2017, related to cash flow hedges will be recognized in income. For terminated cash flow hedges, the maximum length of time over which forecasted transactions are remaining is approximately five years. For open cash flow hedges, the maximum length of time over which forecasted transactions are hedged is approximately seven years. The Firm’s longer-dated forecasted transactions
relate to core lending and borrowing activities.
188
JPMorgan Chase & Co./2017 Annual Report
Net investment hedge gains and losses
The following table presents hedging instruments, by contract type, that were used in net investment hedge accounting
relationships, and the pre-tax gains/(losses) recorded on such instruments for the years ended December 31, 2017, 2016 and 2015.
Gains/(losses) recorded in income and other comprehensive income/(loss)
2017
2016
2015
Year
ended December 31,
(in millions)
Excluded components recorded directly in income(a)
Effective portion recorded in OCI
Excluded components recorded directly in income(a)
Effective portion recorded in OCI
Excluded components recorded directly in income(a)
Effective portion recorded in
OCI
Foreign exchange derivatives
$(172)
$(1,294)
$(282)
$262
$(379)
$1,885
(a)
Certain components of hedging derivatives are permitted to be excluded from
the assessment of hedge effectiveness, such as forward points on foreign exchange forward contracts. Amounts related to excluded components are recorded in other income. The Firm measures the ineffectiveness of net investment hedge accounting relationships based on changes in spot foreign currency rates and, therefore, there was no significant ineffectiveness for net investment hedge accounting relationships during 2017, 2016 and 2015.
Gains and losses on derivatives used for specified risk management purposes
The
following table presents pre-tax gains/(losses) recorded on a limited number of derivatives, not designated in hedge accounting relationships, that are used to manage risks associated with certain specified assets and liabilities, including certain risks arising from the mortgage pipeline, warehouse loans, MSRs, wholesale lending exposures, foreign currency denominated assets and liabilities, and commodities-related contracts and investments.
Primarily
represents interest rate derivatives used to hedge the interest rate risk inherent in the mortgage pipeline, warehouse loans and MSRs, as well as written commitments to originate warehouse loans. Gains and losses were recorded predominantly in mortgage fees and related income.
(b)
Relates to credit derivatives used to mitigate credit risk associated with lending exposures in the Firm’s wholesale businesses. These derivatives do not include credit derivatives used to mitigate counterparty credit risk arising from derivative receivables, which is included in gains and losses on derivatives related to market-making activities and other derivatives. Gains and losses were recorded in principal transactions revenue.
(c)
Primarily
relates to derivatives used to mitigate foreign exchange risk of specified foreign currency-denominated assets and liabilities. Gains and losses were recorded in principal transactions revenue.
(d)
Primarily relates to commodity derivatives used to mitigate energy
price risk associated with energy-related contracts and investments.
Gains and losses were recorded in principal transactions revenue.
Gains
and losses on derivatives related to market-making activities and other derivatives
The Firm makes markets in derivatives in order to meet the needs of customers and uses derivatives to manage certain risks associated with net open risk positions from its market-making activities, including the counterparty credit risk arising from derivative receivables. All derivatives not included in the hedge accounting or specified risk management categories above are included in this category. Gains and losses on these derivatives are primarily recorded in principal transactions revenue. See Note 6 for information on principal transactions revenue.
Credit
derivatives
Credit derivatives are financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) and which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Credit derivatives expose the protection purchaser to the creditworthiness of the protection seller, as the protection seller is required to make payments under the contract when the reference entity experiences a credit event, such as a bankruptcy, a failure to pay its obligation or a restructuring. The seller of credit protection receives a premium for providing protection but has the risk that the underlying instrument referenced in the contract
will be subject to a credit event.
The Firm is both a purchaser and seller of protection in the credit derivatives market and uses these derivatives for two primary purposes. First, in its capacity as a market-maker, the Firm actively manages a portfolio of credit derivatives by purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the needs of customers. Second, as an end-user, the Firm uses credit derivatives to manage credit risk associated with lending exposures (loans and unfunded commitments) and derivatives counterparty exposures in the Firm’s wholesale businesses, and to manage the credit risk arising from certain financial instruments in the Firm’s market-making
businesses. Following is a summary of various types of credit derivatives.
JPMorgan Chase & Co./2017 Annual Report
189
Notes to consolidated financial statements
Credit default swaps
Credit derivatives may reference the credit of either a single reference entity (“single-name”) or
a broad-based index. The Firm purchases and sells protection on both single- name and index-reference obligations. Single-name CDS and index CDS contracts are either OTC or OTC-cleared derivative contracts. Single-name CDS are used to manage the default risk of a single reference entity, while index CDS contracts are used to manage the credit risk associated with the broader credit markets or credit market segments. Like the S&P 500 and other market indices, a CDS index consists of a portfolio of CDS across many reference entities. New series of CDS indices are periodically established with a new underlying portfolio of reference entities to reflect changes
in the credit markets. If one of the reference entities in the index experiences a credit event, then the reference entity that defaulted is removed from the index. CDS can also be referenced against specific portfolios of reference names or against customized exposure levels based on specific client demands: for example, to provide protection against the first $1 million of realized credit losses in a $10 million portfolio of exposure. Such structures are commonly known as tranche CDS.
For both single-name CDS contracts and index CDS contracts,
upon the occurrence of a credit event, under the terms of a CDS contract neither party to the CDS contract has recourse to the reference entity. The protection purchaser has recourse to the protection seller for the difference between the face value of the CDS contract and the fair value of the reference obligation at settlement of the credit derivative contract, also known as the recovery value. The protection purchaser does not need to hold the debt instrument of the underlying reference entity in order to receive amounts due under the CDS contract
when a credit event occurs.
Credit-related notes
A credit-related note is a funded credit derivative where the issuer of the credit-related note purchases from the note investor credit protection on a reference entity or an index. Under the contract, the investor pays the issuer the par value of the note at the inception of the transaction, and in return, the issuer pays periodic payments to the investor, based on the credit risk of the referenced entity. The issuer also repays the investor the par value of the note at maturity unless the reference entity (or one of the entities that makes up a reference index) experiences a specified credit event. If a credit event occurs, the issuer is not obligated
to repay the par value of the note, but rather, the issuer pays the investor the difference between the par value of the note and the fair value of the defaulted reference obligation at the time of settlement. Neither party to the credit-related note has recourse to the defaulting reference entity.
The following tables present a summary of the notional amounts of credit derivatives and credit-related notes the Firm sold and purchased as of December 31, 2017 and 2016. Upon a credit event, the Firm as a seller of protection would typically pay out only a percentage of the full notional amount
of net protection sold, as the amount actually required to be paid on the contracts takes into account the recovery value of the reference obligation at the time of settlement. The Firm manages the credit risk on contracts to sell protection by purchasing protection with identical or similar underlying reference entities. Other purchased protection referenced in the following tables includes credit derivatives bought on related, but not identical, reference positions (including indices, portfolio coverage and other reference points) as well as protection purchased through credit-related notes.
190
JPMorgan
Chase & Co./2017 Annual Report
The Firm does not use notional amounts of credit derivatives as the primary measure of risk management for such derivatives, because the notional amount does not take into account the probability of the occurrence of a credit event, the recovery value of the reference obligation, or related cash instruments and economic hedges, each of which reduces, in the Firm’s view, the risks associated with such derivatives.
Total credit derivatives and credit-related notes
Maximum
payout/Notional amount
Protection sold
Protection purchased with identical underlyings(b)
Other credit derivatives largely consists of credit swap options.
(b)
Represents the total notional amount of protection purchased where the underlying reference instrument is identical to the reference instrument on protection sold; the notional amount of protection purchased for each individual identical underlying reference instrument may be greater or lower than the notional amount of protection sold.
(c)
Does
not take into account the fair value of the reference obligation at the time of settlement, which would generally reduce the amount the seller of protection pays to the buyer of protection in determining settlement value.
(d)
Represents protection purchased by the Firm on referenced instruments (single-name, portfolio or index) where the Firm has not sold any protection on the identical reference instrument.
The following tables summarize the notional amounts by the ratings, maturity profile, and total fair value, of credit derivatives and credit-related notes as of December 31,
2017 and 2016, where JPMorgan Chase is the seller of protection. The maturity profile is based on the remaining contractual maturity of the credit derivative contracts. The ratings profile is based on the rating of the reference entity on which the credit derivative contract is based. The ratings and maturity profile of credit derivatives and credit-related notes where JPMorgan Chase is the purchaser of protection are comparable to the profile reflected below.
Protection
sold – credit derivatives and credit-related notes ratings(a)/maturity profile
The
ratings scale is primarily based on external credit ratings defined by S&P and Moody’s.
(b)
Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral received by the Firm.
JPMorgan Chase & Co./2017 Annual Report
191
Notes
to consolidated financial statements
Note 6 – Noninterest revenue and noninterest expense
Investment banking fees
This revenue category includes debt and equity underwriting and advisory fees. As an underwriter, the Firm helps clients raise capital via public offering and private placement of various types of debt instruments and equity securities. Underwriting fees are primarily based on the issuance price and quantity of the underlying instruments, and are recognized as revenue typically upon execution of the client’s transaction. The Firm also manages and syndicates loan arrangements. Credit arrangement and syndication fees, included within debt underwriting fees,
are recorded as revenue after satisfying certain retention, timing and yield criteria.
The Firm also provides advisory services, assisting its clients with mergers and acquisitions, divestitures, restructuring and other complex transactions. Advisory fees are recognized as revenue typically upon execution of the client’s transaction.
Year ended December 31, (in millions)
2017
2016
2015
Underwriting
Equity
$
1,394
$
1,146
$
1,408
Debt
3,710
3,207
3,232
Total
underwriting
5,104
4,353
4,640
Advisory
2,144
2,095
2,111
Total
investment banking fees
$
7,248
$
6,448
$
6,751
Investment banking fees are earned primarily by CIB. See Note 31 for segment results.
Principal
transactions
Principal transactions revenue is driven by many factors, including the bid-offer spread, which is the difference between the price at which the Firm is willing to buy a financial or other instrument and the price at which the Firm is willing to sell that instrument. It also consists of the realized (as a result of the sale of instruments, closing out or termination of transactions, or interim cash payments) and unrealized (as a result of changes in valuation) gains and losses on financial and other instruments (including those accounted for under the fair value option) primarily used in client-driven market-making activities and on private equity investments. In connection with its client-driven market-making activities, the Firm transacts in
debt and equity instruments, derivatives and commodities (including physical commodities inventories and financial instruments that reference commodities).
Principal transactions revenue also includes certain realized and unrealized gains and losses related to hedge accounting and specified risk-management activities, including: (a) certain derivatives designated in qualifying hedge accounting relationships (primarily fair value hedges of commodity and foreign exchange risk), (b) certain derivatives used for specific risk management purposes, primarily to mitigate credit risk, foreign exchange risk and commodity risk, and (c) other derivatives. For further information on the income statement classification of gains and losses from derivatives activities, see Note 5.
In
the financial commodity markets, the Firm transacts in OTC derivatives (e.g., swaps, forwards, options) and ETD that reference a wide range of underlying commodities. In the physical commodity markets, the Firm primarily purchases and sells precious and base metals and may hold other commodities inventories under financing and other arrangements with clients.
The following table presents all realized and unrealized gains and losses recorded in principal transactions revenue. This table excludes interest income and interest expense on trading assets and liabilities, which are an integral part of the overall performance of the Firm’s client-driven market-making activities. See Note 7 for
further information on interest income and interest expense. Trading revenue is presented primarily by instrument type. The Firm’s client-driven market-making businesses generally utilize a variety of instrument types in connection with their market-making and related risk-management activities; accordingly, the trading revenue presented in the table below is not representative of the total revenue of any individual line of business.
Year ended December 31, (in millions)
2017
2016
2015
Trading
revenue by instrument type
Interest rate
$
2,479
$
2,325
$
1,933
Credit
1,329
2,096
1,735
Foreign
exchange
2,746
2,827
2,557
Equity
3,873
2,994
2,990
Commodity
661
1,067
842
Total
trading revenue
11,088
11,309
10,057
Private equity gains
259
257
351
Principal
transactions
$
11,347
$
11,566
$
10,408
Principal transactions revenue is earned primarily by CIB. See Note 31 for segment results.
Lending-
and deposit-related fees
Lending-related fees include fees earned from loan commitments, standby letters of credit, financial guarantees, and other loan-servicing activities. Deposit-related fees include fees earned in lieu of compensating balances, and fees earned from performing cash management activities and other deposit account services. Lending- and deposit-related fees in this revenue category are recognized over the period in which the related service is provided.
Year ended December
31, (in millions)
2017
2016
2015
Lending-related fees
$
1,110
$
1,114
$
1,148
Deposit-related
fees
4,823
4,660
4,546
Total lending- and deposit-related fees
$
5,933
$
5,774
$
5,694
Lending-
and deposit-related fees are earned by CCB, CIB, CB, and AWM. See Note 31 for segment results.
192
JPMorgan Chase & Co./2017 Annual Report
Asset management, administration and commissions
This revenue category includes fees from investment management and related services, custody, brokerage
services and other products. The Firm manages assets on behalf of its clients, including investors in Firm-sponsored funds and owners of separately managed investment accounts. Management fees are typically based on the value of assets under management and are collected and recognized at the end of each period over which the management services are provided and the value of the managed assets is known. The Firm also receives performance-based management fees, which are earned based on exceeding certain benchmarks or other performance targets and are accrued and recognized when the probability of reversal is remote, typically at the end of the related billing period. The Firm has contractual arrangements with third parties to provide distribution and other services in connection
with its asset management activities. Amounts paid to third-party service providers are recorded in professional and outside services expense.
Year ended December 31,
(in millions)
2017
2016
2015
Asset
management fees
Investment management fees
$
9,526
$
8,865
$
9,403
All
other asset management fees(a)
294
336
352
Total asset management fees
9,820
9,201
9,755
Total
administration fees(b)
2,029
1,915
2,015
Commissions
and other fees
Brokerage commissions(c)
2,239
2,151
2,304
All
other commissions and fees
1,289
1,324
1,435
Total commissions and fees
3,528
3,475
3,739
Total
asset management, administration and commissions
$
15,377
$
14,591
$
15,509
(a)
The
Firm receives other asset management fees for services that are ancillary to investment management services, including commissions earned on sales or distribution of mutual funds to clients. These fees are recorded as revenue at the time the service is rendered or, in the case of certain distribution fees based on the underlying fund’s asset value and/or investor redemption, recorded over time as the investor remains in the fund or upon investor redemption.
(b)
The Firm receives administrative fees predominantly from custody, securities lending, fund services and securities clearance fees. These fees are recorded as revenue over the period in which the related service is provided.
(c)
The
Firm acts as a broker, facilitating its clients’ purchase and sale of securities and other financial instruments. It collects and recognizes brokerage commissions as revenue upon occurrence of the client transaction. The Firm reports certain costs paid to third-party clearing houses and exchanges net against commission revenue.
Asset management, administration and commissions are earned primarily by AWM, CIB, CCB, and CB. See Note 31 for segment results.
Mortgage fees and related income
This revenue category primarily reflects CCB’s Home Lending production and servicing revenue, including fees and income derived from mortgages originated with the intent to sell; mortgage sales and
servicing including losses related to the repurchase of previously sold loans; the impact of risk-management activities associated with the mortgage pipeline, warehouse loans and MSRs; and revenue related to any residual interests held from mortgage securitizations. This revenue category also includes gains and losses on sales and lower of cost or fair value adjustments for mortgage loans held-for-sale, as well as changes in fair value for mortgage loans originated with the intent to sell and measured at fair value under the fair value option. Changes in the fair value of MSRs are reported in mortgage fees and related income. For a further discussion of MSRs, see Note 15. Net interest income from mortgage loans is recorded in interest income.
Card income
This
revenue category includes interchange income from credit and debit cards and fees earned from processing card transactions for merchants, both of which are recognized when purchases are made by a cardholder. Card income also includes annual and other lending fees and costs, which are deferred and recognized on a straight-line basis over a 12-month period.
Certain Chase credit card products offer the cardholder the ability to earn points based on account activity, which the cardholder can choose to redeem for cash and non-cash rewards. The cost to the Firm related to these proprietary rewards programs varies based on multiple factors including the terms and conditions of the rewards programs, cardholder activity, cardholder reward redemption rates and cardholder reward selections. The
Firm maintains a liability for its obligations under its rewards programs and reports the current-period cost as a reduction of card income.
Credit card revenue sharing agreements
The Firm has contractual agreements with numerous co-brand partners that grant the Firm exclusive rights to issue co-branded credit card products and market them to the customers of such partners. These partners endorse the co-brand credit card programs and provide their customer or member lists to the Firm. The partners may also conduct marketing activities and provide rewards redeemable under their own loyalty programs that the Firm will grant to co-brand credit cardholders based on account activity. The terms of these agreements generally range from five to
ten years.
JPMorgan Chase & Co./2017 Annual Report
193
Notes to consolidated financial statements
The Firm typically makes payments to the co-brand credit card partners based on the cost of partners' marketing activities and loyalty program rewards provided to credit cardholders, new account originations and sales volumes. Payments to
partners based on marketing efforts undertaken by the partners are expensed by the Firm as incurred and reported as noninterest expense. Payments for partner rewards are reported as a reduction of card income when incurred. Payments to partners based on new credit card account originations are accounted for as direct loan origination costs and are deferred and recognized as a reduction of card income on a straight-line basis over a 12-month period. Payments to partners based on sales volumes are reported as a reduction of card income when the related interchange income is earned.
Card income is earned primarily by CCB and CB. See Note 31 for segment results.
Other income
Other income on the Firm’s
Consolidated statements of income included the following:
Year ended December 31, (in millions)
2017
2016
2015
Operating lease income
$
3,613
$
2,724
$
2,081
Operating
lease income is recognized on a straight–line basis over the lease term.
Noninterest expense
Other expense
Other expense on the Firm’s Consolidated statements of income included the following:
Year ended December 31, (in millions)
2017
2016
2015
Legal
expense/(benefit)
$
(35
)
$
(317
)
$
2,969
FDIC-related expense
1,492
1,296
1,227
194
JPMorgan
Chase & Co./2017 Annual Report
Note 7 – Interest income and Interest expense
Interest income and interest expense are recorded in the Consolidated statements of income and classified based on the nature of the underlying asset or liability.
The following table presents the components of interest income and interest expense:
Year
ended December 31,
(in millions)
2017
2016
2015
Interest Income
Loans
$
41,008
$
36,634
$
33,134
Taxable
securities
5,535
5,538
6,550
Non-taxable securities(a)
1,847
1,766
1,706
Total
securities
7,382
7,304
8,256
Trading assets
7,610
7,292
6,621
Federal
funds sold and securities purchased under resale agreements
2,327
2,265
1,592
Securities borrowed(b)
(37
)
(332
)
(532
)
Deposits
with banks
4,219
1,863
1,250
All other interest-earning assets(c)
1,863
875
652
Total
interest income
$
64,372
$
55,901
$
50,973
Interest expense
Interest
bearing deposits
$
2,857
$
1,356
$
1,252
Federal funds purchased and securities loaned or sold under repurchase agreements
1,611
1,089
609
Short-term
borrowings(d)
481
203
175
Trading liabilities - debt and all other interest-bearing liabilities(e)
2,070
1,102
557
Long-term
debt
6,753
5,564
4,435
Beneficial interest issued by consolidated VIEs
503
504
435
Total
interest expense
$
14,275
$
9,818
$
7,463
Net interest income
$
50,097
$
46,083
$
43,510
Provision
for credit losses
5,290
5,361
3,827
Net interest income after provision for credit losses
$
44,807
$
40,722
$
39,683
(a)
Represents
securities that are tax-exempt for U.S. federal income tax purposes.
(b)
Negative interest income is related to client-driven demand for certain securities combined with the impact of low interest rates. This is matched book activity and the negative interest expense on the corresponding securities loaned is recognized in interest expense.
(c)
Includes held-for-investment margin loans, which are classified in accrued interest and accounts receivable, and all other interest-earning assets included in other assets.
(d)
Includes
commercial paper.
(e)
Other interest-bearing liabilities include brokerage customer payables.
Interest income and interest expense includes the current-period interest accruals for financial instruments measured at fair value, except for derivatives and financial instruments containing embedded derivatives that would be separately accounted for in accordance with U.S. GAAP, absent the fair value option election; for those instruments, all changes in fair value including any interest elements, are reported in principal transactions revenue. For financial instruments that are not measured at fair value, the related interest is included
within interest income or interest expense, as applicable. For further information on
accounting for interest income and interest expense related to loans, securities, securities financing (i.e. securities purchased or sold under resale or repurchase agreements; securities borrowed; and securities loaned) and long-term debt, see Notes 12, 10, 11 and 19, respectively.
Note 8 – Pension and other postretirement employee benefit plans
The Firm has various defined benefit pension plans and OPEB plans that provide benefits to its employees. The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits to substantially all U.S. employees. The Firm also has defined benefit pension plans that are offered in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service. It is the Firm’s policy to fund the pension plans in amounts sufficient to meet the requirements under applicable laws. The Firm does not anticipate at this time any contribution to the U.S. defined benefit pension plan in 2018. The 2018 contributions to the non-U.S. defined benefit pension plans are expected to be $46 million of which $30 million are contractually required.
The
Firm also has a number of nonqualified noncontributory defined benefit pension plans that are unfunded. These plans provide supplemental defined pension benefits to certain employees.
The Firm currently provides two qualified defined contribution plans in the U.S. and maintains other similar arrangements in certain non-U.S. locations.
The Firm offers postretirement medical and life insurance benefits to certain U.S. retirees and postretirement medical benefits to qualifying U.S. and U.K. employees.
The Firm defrays the cost of its U.S. OPEB obligation through corporate-owned life insurance (“COLI”) purchased on the lives of eligible employees and retirees. While the Firm owns the COLI policies, COLI proceeds (death benefits, withdrawals and other distributions) may be used only
to reimburse the Firm for its net postretirement benefit claim payments and related administrative expense. The Firm has generally funded its postretirement benefit obligations through contributions to the relevant trust on a pay-as-you go basis. On December 21, 2017, the Firm contributed $600 million of cash to the trust as a prefunding of a portion of its postretirement benefit obligations. The U.K. OPEB plan is unfunded.
Pension and OPEB accounting generally requires that the difference between plan assets at fair value and the benefit obligation be measured and recorded on the balance sheet. Plans that are overfunded (excess of plan assets over benefit obligation) are recorded in other assets and plans that are underfunded (excess benefit obligation over plan assets) are recorded within other liabilities. Gains or losses
resulting from changes in the benefit obligation and the value of plan assets are recorded in other comprehensive income (“OCI”) and recognized as part of the net periodic
JPMorgan Chase & Co./2017 Annual Report
195
Notes to consolidated financial statements
benefit cost over subsequent periods as discussed in the Gains and losses section of this Note. Additionally, service
cost, interest cost, and investment returns that would
otherwise be classified separately are aggregated and reported net within compensation expense.
The following table presents the changes in benefit obligations, plan assets, the net funded status, and the pretax pension and OPEB amounts recorded in AOCI on the Consolidated balance sheets for the Firm’s defined benefit pension and OPEB plans, and the weighted-average actuarial annualized assumptions for the projected and accumulated postretirement benefit obligations.
As
of or for the year ended December 31,
Defined benefit pension plans
OPEB plans(f)
(in millions)
2017
2016
2017
2016
Change in benefit obligation
Benefit
obligation, beginning of year
$
(15,594
)
$
(15,259
)
$
(708
)
$
(744
)
Benefits
earned during the year
(330
)
(332
)
—
—
Interest cost on benefit obligations
(598
)
(629
)
(28
)
(31
)
Employee
contributions
(7
)
(7
)
(16
)
(19
)
Net gain/(loss)
(721
)
(743
)
(4
)
4
Benefits
paid
841
851
76
76
Plan settlements
30
21
—
—
Expected
Medicare Part D subsidy receipts
NA
NA
(1
)
—
Foreign exchange impact and other
(321
)
504
(3
)
6
Benefit
obligation, end of year(a)
$
(16,700
)
$
(15,594
)
$
(684
)
$
(708
)
Change
in plan assets
Fair value of plan assets, beginning of year
$
17,703
$
17,636
$
1,956
$
1,855
Actual
return on plan assets
2,356
1,375
233
131
Firm contributions
78
86
602
2
Employee
contributions
7
7
—
—
Benefits paid
(841
)
(851
)
(34
)
(32
)
Plan
settlements
(30
)
(21
)
—
—
Foreign exchange impact and other
330
(529
)
—
—
Fair
value of plan assets, end of year (a)(b)(c)
$
19,603
$
17,703
$
2,757
$
1,956
Net
funded status (d)
$
2,903
$
2,109
$
2,073
$
1,248
Accumulated
benefit obligation, end of year
$
(16,530
)
$
(15,421
)
NA
NA
Pretax
pension and OPEB amounts recorded in AOCI
Net gain/(loss)
$
(2,800
)
$
(3,667
)
$
271
$
138
Prior
service credit/(loss)
6
42
—
—
Accumulated other comprehensive income/(loss), pretax, end of year
$
(2,794
)
$
(3,625
)
$
271
$
138
Weighted-average
actuarial assumptions used to determine benefit obligations
Discount Rate (e)
0.60 - 3.70%
0.60 - 4.30%
3.70
%
4.20
%
Rate
of compensation increase (e)
2.25 – 3.00
2.25 – 3.00
NA
NA
Health care cost trend rate:
Assumed
for next year
NA
NA
5.00
5.00
Ultimate
NA
NA
5.00
5.00
Year
when rate will reach ultimate
NA
NA
2018
2017
(a)
At December
31, 2017 and 2016, included non-U.S. benefit obligations of $(3.8) billion and $(3.4) billion, and plan assets of $3.9 billion and $3.4 billion, respectively, predominantly in the U.K.
(b)
At December 31, 2017 and 2016, approximately $302 million and $390 million, respectively, of U.S. defined benefit pension plan assets
included participation rights under participating annuity contracts.
(c)
At December 31, 2017 and 2016, defined benefit pension plan amounts that were not measured at fair value included $377 million and $130 million, respectively, of accrued receivables, and $587 million and $224 million, respectively, of accrued liabilities, for U.S. plans.
(d)
Represents
plans with an aggregate overfunded balance of $5.6 billion and $4.0 billion at December 31, 2017 and 2016, respectively, and plans with an aggregate underfunded balance of $612 million and $639 million at December 31, 2017 and 2016, respectively.
(e)
For the U.S. defined benefit pension plans, the discount rate assumption is 3.70%
and 4.30%, and the rate of compensation increase is 2.30% and 2.30%, for 2017 and 2016 respectively.
(f)
Includes an unfunded postretirement benefit obligation of $32 million and $35 million at December 31, 2017 and 2016, respectively, for the U.K. plan.
196
JPMorgan
Chase & Co./2017 Annual Report
Gains and losses
For the Firm’s defined benefit pension plans, fair value is used to determine the expected return on plan assets. Amortization of net gains and losses is included in annual net periodic benefit cost if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the PBO or the fair value of the plan assets. Any excess is amortized over the average future service period of defined benefit pension plan participants, which for the U.S. defined benefit pension plan is currently eight years
and for the non-U.S. defined benefit pension plans is the period appropriate for the affected plan. In addition, prior service costs are amortized over the average remaining service period of active employees expected to receive benefits under the plan when the prior service cost is first recognized. The average remaining amortization period for the U.S. defined benefit pension plan for current prior service costs is three years.
For the Firm’s OPEB plans, a calculated value that recognizes changes in fair value over a five-year period is used to determine the expected return on plan assets. This value is referred to as the market-related value of assets. Amortization of net gains and losses, adjusted for gains and losses not yet recognized, is included in annual net periodic benefit
cost if, as of the beginning of the year, the net gain or loss exceeds 10% of the greater of the accumulated postretirement benefit obligation or the market-related value of assets. Any excess net gain or loss is amortized over the average expected lifetime of retired participants, which is currently eleven years; however, prior service costs resulting from plan changes are amortized over the average years of service remaining to full eligibility age, which is currently two years.
The following table presents the components of net periodic benefit costs reported in the Consolidated statements of income for the Firm’s defined benefit pension, defined contribution and OPEB plans, and in other comprehensive income for the defined benefit pension and OPEB plans, and the weighted-average
annualized actuarial assumptions for the net periodic benefit cost.
Pension plans
OPEB plans
Year ended December
31, (in millions)
2017
2016
2015
2017
2016
2015
Components
of net periodic benefit cost
Benefits earned during the year
$
330
$
332
$
377
$
—
$
—
$
1
Interest
cost on benefit obligations
598
629
610
28
31
31
Expected
return on plan assets
(968
)
(1,030
)
(1,079
)
(97
)
(105
)
(106
)
Amortization:
Net
(gain)/loss
250
257
282
—
—
—
Prior
service cost/(credit)
(36
)
(36
)
(36
)
—
—
—
Special
termination benefits
—
—
1
—
—
—
Settlement
loss
2
4
—
—
Net periodic defined benefit cost
$
176
$
156
$
155
$
(69
)
$
(74
)
$
(74
)
Other
defined benefit pension plans(a)
24
25
24
NA
NA
NA
Total
defined benefit plans
$
200
$
181
$
179
$
(69
)
$
(74
)
$
(74
)
Total
defined contribution plans
814
789
769
NA
NA
NA
Total
pension and OPEB cost included in compensation expense
$
1,014
$
970
$
948
$
(69
)
$
(74
)
$
(74
)
Changes
in plan assets and benefit obligations recognized in other comprehensive income
Net (gain)/loss arising during the year
$
(669
)
$
395
$
(50
)
$
(133
)
$
(29
)
$
21
Amortization
of net loss
(250
)
(257
)
(282
)
—
—
—
Amortization
of prior service (cost)/credit
36
36
36
—
—
—
Settlement
loss
(2
)
(4
)
—
—
—
—
Foreign
exchange impact and other
54
(77
)
(33
)
—
—
—
Total
recognized in other comprehensive income
$
(831
)
$
93
$
(329
)
$
(133
)
$
(29
)
$
21
Total
recognized in net periodic benefit cost and other comprehensive income
$
(655
)
$
249
$
(174
)
$
(202
)
$
(103
)
$
(53
)
Weighted-average
assumptions used to determine net periodic benefit costs
Discount rate(b)
0.60 - 4.30 %
0.90 – 4.50%
1.00 – 4.00%
4.20
%
4.40
%
4.10
%
Expected
long-term rate of return on plan assets (b)
0.70 - 6.00
0.80 – 6.50
0.90 – 6.50
5.00
5.75
6.00
Rate of compensation increase (b)
2.25
- 3.00
2.25 – 4.30
2.75 – 4.20
NA
NA
NA
Health care cost trend rate
Assumed
for next year
NA
NA
NA
5.00
5.50
6.00
Ultimate
NA
NA
NA
5.00
5.00
5.00
Year
when rate will reach ultimate
NA
NA
NA
2017
2017
2017
(a)
Includes
various defined benefit pension plans which are individually immaterial.
(b)
The rate assumptions for the U.S. defined benefit pension plans are at the upper end of the range, except for the rate of compensation increase, which is 2.30% for 2017 and 3.50% for 2016 and 2015, respectively.
JPMorgan Chase & Co./2017 Annual Report
197
Notes
to consolidated financial statements
The estimated pretax amounts that will be amortized from AOCI into net periodic benefit cost in 2018 are as follows.
(in millions)
Defined benefit pension plans
Net loss/(gain)
$
106
Prior
service cost/(credit)
$
(25
)
Total
$
81
Plan assumptions
JPMorgan
Chase’s expected long-term rate of return for defined benefit pension and OPEB plan assets is a blended weighted average, by asset allocation of the projected long-term returns for the various asset classes, taking into consideration local market conditions and the specific allocation of plan assets. Returns on asset classes are developed using a forward-looking approach and are not strictly based on historical returns. Consideration is also given to current market conditions and the short-term portfolio mix of each plan.
The discount rate used in determining the benefit obligation under the U.S. defined benefit pension and OPEB plans was provided by the Firm’s actuaries. This rate was selected by reference to the yields on portfolios of bonds with maturity dates and coupons that closely match each of the plan’s projected cash flows. The discount rate for the U.K. defined benefit pension plan represents a rate of appropriate
duration from the analysis of yield curves provided by the Firm’s actuaries.
At December 31, 2017, the Firm decreased the discount rates used to determine its benefit obligations for the U.S. defined benefit pension and OPEB plans in light of current market interest rates, which will increase expense by approximately $66 million in 2018. The 2018 expected long-term rate of return on U.S. defined benefit pension plan assets and U.S. OPEB plan assets are 5.50% and 4.00%, respectively. As of December 31, 2017, the interest crediting rate assumption remained at 5.00%.
As of December
31, 2017, the effect of a one-percentage-point increase or decrease in the assumed health care cost trend rate is not material to the accumulated postretirement benefit obligation or total service and interest cost.
The following table represents the effect of a 25-basis point decline in the three listed rates below on estimated 2018 defined benefit pension and OPEB plan expense, as well as the effect on the postretirement benefit obligations.
(in millions)
Defined benefit pension and OPEB
plan expense
Benefit obligation
Expected long-term rate of return
$
54
NA
Discount rate
$
59
$
583
Interest
crediting rate for U.S. plans
$
(41
)
$
(193
)
Investment strategy and asset allocation
The assets of the Firm’s defined benefit pension plans are held in various trusts and are invested
in well-diversified portfolios of equity and fixed income securities, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity, real estate and real assets). The trust-owned assets of the Firm's U.S. OPEB plan are invested in cash and cash equivalents. COLI policies used to defray the cost of the Firm's U.S. OPEB plan are invested in separate accounts of an insurance company and are allocated to investments intended to replicate equity and fixed income indices.
The investment policies for the assets of the Firm’s defined benefit pension plans are to optimize the risk-return relationship as appropriate to the needs and goals of each plan using a global portfolio of various asset classes diversified by market segment, economic sector, and issuer. Assets are managed by a combination of internal and external investment managers. The Firm regularly
reviews the asset allocations and asset managers, as well as other factors that impact the portfolios, which are rebalanced when deemed necessary.
Investments held by the plans include financial instruments which are exposed to various risks such as interest rate, market and credit risks. Exposure to a concentration of credit risk is mitigated by the broad diversification of both U.S. and non-U.S. investment instruments. Additionally, the investments in each of the common/collective trust funds and/or registered investment companies are further diversified into various financial instruments. As of December 31, 2017, assets held by the Firm's defined benefit pension and OPEB plans do not include JPMorgan Chase common stock, except through indirect exposures through investments in third-party stock-index funds. The plans hold investments in funds that are sponsored or managed
by affiliates of JPMorgan Chase in the amount of $6.0 billion and $4.6 billion, as of December 31, 2017 and 2016, respectively.
198
JPMorgan Chase & Co./2017 Annual Report
The following table presents the weighted-average
asset allocation of the fair values of total plan assets at December 31 for the years indicated, as well as the respective approved asset allocation ranges by asset class.
Debt
securities primarily include cash, corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities.
(b)
Alternatives primarily include limited partnerships.
(c)
Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded.
(d)
Change in percentage of
plan assets due to the contribution to the U.S. OPEB plan.
Fair value measurement of the plans’ assets and liabilities
For information on fair value measurements, including descriptions of level 1, 2, and 3 of the fair value hierarchy and the valuation methods employed by the Firm, see Note 2.
Pension and OPEB plan assets and liabilities measured at fair value
Defined
benefit pension plans
2017
2016
December 31,
(in millions)
Level 1
Level 2
Level 3
Total
fair value
Level 1
Level 2
Level 3
Total fair value
Cash and cash equivalents
$
173
$
1
$
—
$
174
$
196
$
2
$
—
$
198
Equity
securities
6,407
194
2
6,603
6,158
166
2
6,326
Mutual
funds
325
—
—
325
—
—
—
—
Common/collective
trust funds(a)
778
—
—
778
384
—
—
384
Limited
partnerships(b)
60
—
—
60
62
—
—
62
Corporate
debt securities(c)
—
2,644
4
2,648
—
2,506
4
2,510
U.S.
federal, state, local and non-U.S. government debt securities
1,096
784
—
1,880
1,139
804
—
1,943
Mortgage-backed
securities
92
100
2
194
42
75
—
117
Derivative
receivables
—
203
—
203
—
243
—
243
Other(d)
2,353
60
302
2,715
1,497
53
390
1,940
Total
assets measured at fair value(e)
$
11,284
$
3,986
$
310
$
15,580
$
9,478
$
3,849
$
396
$
13,723
Derivative
payables
$
—
$
(141
)
$
—
$
(141
)
$
—
$
(208
)
$
—
$
(208
)
Total
liabilities measured at fair value(e)
$
—
$
(141
)
$
—
$
(141
)
$
—
$
(208
)
$
—
$
(208
)
(a)
At
December 31, 2017 and 2016, common/collective trust funds primarily included a mix of short-term investment funds, domestic and international equity investments (including index) and real estate funds.
(b)
Unfunded commitments to purchase limited partnership investments for the plans were $605 million and $735 million for 2017 and 2016, respectively.
(c)
Corporate
debt securities include debt securities of U.S. and non-U.S. corporations.
(d)
Other consists primarily of money market funds and participating and non-participating annuity contracts. Money market funds are primarily classified within level 1 of the fair value hierarchy given they are valued using market observable prices. Participating and non-participating annuity contracts are classified within level 3 of the fair value hierarchy due to a lack of market mechanisms for transferring each policy and surrender restrictions.
(e)
At
December 31, 2017 and 2016, excludes $4.4 billion and $4.2 billion of certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient, which are not required to be classified in the fair value hierarchy, $377 million and $130 million of defined benefit pension plan receivables for investments sold and dividends and interest receivables, $561 million and $203 million of defined benefit pension plan payables for investments purchased, and $26 million and $21
million of other liabilities, respectively.
The assets of the U.S. OPEB plan consisted of $600 million and $0 million in cash and cash equivalents classified in level 1 of the valuation hierarchy and $2.2 billion and $2.0 billion of COLI policies classified in level 3 of the valuation hierarchy at December 31, 2017 and 2016, respectively.
JPMorgan
Chase & Co./2017 Annual Report
199
Notes to consolidated financial statements
Changes
in level 3 fair value measurements using significant unobservable inputs
Substantially
all are participating and non-participating annuity contracts.
Estimated future benefit payments
The following table presents benefit payments expected to be paid, which include the effect of expected future service, for the years indicated. The OPEB medical and life insurance payments are net of expected retiree contributions.
Year
ended December 31,
(in millions)
Defined benefit pension plans
OPEB before Medicare Part D subsidy
Medicare Part D subsidy
2018
$
926
$
65
$
1
2019
922
63
1
2020
927
60
1
2021
944
57
—
2022
960
55
—
Years
2023–2027
4,925
235
2
200
JPMorgan
Chase & Co./2017 Annual Report
Note 9 – Employee share-based incentives
Employee share-based awards
In 2017, 2016 and 2015, JPMorgan Chase granted long-term share-based awards to certain employees under its LTIP, as amended and restated effective May 19, 2015. Under the terms of the LTIP, as of December 31,
2017, 67 million shares of common stock were available for issuance through May 2019. The LTIP is the only active plan under which the Firm is currently granting share-based incentive awards. In the following discussion, the LTIP, plus prior Firm plans and plans assumed as the result of acquisitions, are referred to collectively as the “LTI Plans,” and such plans constitute the Firm’s share-based incentive plans.
RSUs are awarded at no cost to the recipient upon their grant. Generally, RSUs are granted annually and vest at a rate of 50% after
two years and 50% after three years and are converted into shares of common stock as of the vesting date. In addition, RSUs typically include full-career eligibility provisions, which allow employees to continue to vest upon voluntary termination based on age or service-related requirements, subject to post-employment and other restrictions. All RSU awards are subject to forfeiture until vested and contain clawback provisions that may result in cancellation under certain specified circumstances. Generally, RSUs entitle the recipient to receive cash payments equivalent to any dividends paid on the underlying common stock during the period the RSUs are outstanding and, as such, are considered participating securities as discussed in Note 22.
In January 2017 and 2016, the Firm’s Board of Directors approved the grant of performance share units (“PSUs”) to members of the Firm’s Operating Committee under the variable compensation program for performance years 2016 and 2015. PSUs are subject to the Firm’s achievement of specified performance criteria over a three-year period. The number of awards that vest can range from zero to 150% of the grant amount. The awards vest and are converted into shares of common stock in the quarter after the end of the performance period, which is generally three years. In addition, dividends are notionally reinvested in the Firm’s common stock and will be delivered only in respect of any earned shares.
Once
the PSUs have vested, the shares of common stock that are delivered, after applicable tax withholding, must be held for an additional two-year period, typically for a total combined vesting and holding period of five years from the grant date.
Under the LTI Plans, stock options and stock appreciation rights (“SARs”) have generally been granted with an exercise price equal to the fair value of JPMorgan Chase’s common stock on the grant date. The Firm periodically grants employee stock options to individual employees. There were no material grants of stock options or SARs
in 2017, 2016 and 2015. SARs generally expire ten years after the grant date.
The
Firm separately recognizes compensation expense for each tranche of each award, net of estimated forfeitures, as if it were a separate award with its own vesting date. Generally, for each tranche granted, compensation expense is recognized on a straight-line basis from the grant date until the vesting date of the respective tranche, provided that the employees will not become full-career eligible during the vesting period. For awards with full-career eligibility provisions and awards granted with no future substantive service requirement, the Firm accrues the estimated value of awards expected to be awarded to employees as of the grant date without giving consideration to the impact of post-employment restrictions. For each tranche granted to employees who will become full-career eligible during the vesting period, compensation expense is recognized on a straight-line basis from the grant date until
the earlier of the employee’s full-career eligibility date or the vesting date of the respective tranche.
The Firm’s policy for issuing shares upon settlement of employee share-based incentive awards is to issue either new shares of common stock or treasury shares. During 2017, 2016 and 2015, the Firm settled all of its employee share-based awards by issuing treasury shares.
In January 2008, the Firm awarded to its Chairman and Chief Executive Officer up to 2 million SARs. The terms of this award are distinct from, and more restrictive than, other equity grants regularly awarded by the Firm. On July
15, 2014, the Compensation & Management Development Committee and Board of Directors determined that all requirements for the vesting of the 2 million SAR awards had been met and thus, the awards became exercisable. The SARs, which had an expiration date of January 2018, were exercised by Mr. Dimon in October 2017 at the exercise price of $39.83 per share (the price of JPMorgan Chase common stock on the date of grant).
JPMorgan Chase & Co./2017 Annual Report
201
Notes
to consolidated financial statements
RSUs, PSUs, employee stock options and SARs activity
Generally, compensation expense for RSUs and PSUs is measured based on the number of units granted multiplied by the stock price at the grant date, and for employee stock options and SARs, is measured at the grant date using the Black-Scholes valuation model. Compensation expense for these awards is recognized in net income as described previously. The following table summarizes JPMorgan Chase’s RSUs, PSUs, employee stock options and SARs activity for 2017.
(in thousands, except weighted-average data, and where otherwise stated)
Outstanding, January 1
81,707
$
57.15
30,267
$
40.65
Granted
26,017
84.30
109
90.94
Exercised
or vested
(32,961
)
57.80
(12,816
)
40.50
Forfeited
(2,030
)
63.34
(54
)
55.82
Canceled
NA
NA
(13
)
405.47
Outstanding,
December 31
72,733
$
66.36
17,493
$
40.76
3.4
$
1,169,470
Exercisable,
December 31
NA
NA
15,828
40.00
3.3
1,070,212
The
total fair value of RSUs that vested during the years ended December 31, 2017, 2016 and 2015, was $2.9 billion, $2.2 billion and $2.8 billion, respectively. The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015, was $651 million, $338 million
and $335 million, respectively.
Compensation expense
The Firm recognized the following noncash compensation expense related to its various employee share-based incentive plans in its Consolidated statements of income.
Year
ended December 31, (in millions)
2017
2016
2015
Cost of prior grants of RSUs, PSUs and SARs that are amortized over their applicable vesting periods
$
1,125
$
1,046
$
1,109
Accrual
of estimated costs of share-based awards to be granted in future periods including those to full-career eligible employees
945
894
878
Total noncash compensation expense related to employee share-based incentive plans
$
2,070
$
1,940
$
1,987
At
December 31, 2017, approximately $704 million (pretax) of compensation expense related to unvested awards had not yet been charged to net income. That cost is expected to be amortized into compensation expense over a weighted-average period of 1 year. The Firm does not capitalize any compensation expense related to share-based compensation awards to employees.
Cash flows and
tax benefits
Effective January 1, 2016, the Firm adopted new accounting guidance related to employee share-based payments. As a result of the adoption of this new guidance, all excess tax benefits (including tax benefits from dividends or dividend equivalents) on share-based payment awards are recognized within income tax expense in the Consolidated statements of income. In prior years these tax benefits were recorded as increases to additional paid-in capital. Income tax benefits related to share-based incentive arrangements recognized in the Firm’s Consolidated statements of income for the years ended December 31,
2017, 2016 and 2015, were $1.0 billion, $916 million and $746 million, respectively.
The following table sets forth the cash received from the exercise of stock options under all share-based incentive arrangements, and the actual income tax benefit related to tax deductions from the exercise of the stock options.
Year
ended December 31, (in millions)
2017
2016
2015
Cash received for options exercised
$
18
$
26
$
20
Tax
benefit
190
70
64
202
JPMorgan
Chase & Co./2017 Annual Report
Note 10 – Securities
Securities are classified as trading, AFS or HTM. Securities classified as trading assets are discussed in Note 2. Predominantly all of the Firm’s AFS and HTM securities are held by Treasury and CIO in connection with its asset-liability management activities. At December 31, 2017, the
investment securities portfolio consisted of debt securities with an average credit rating of AA+ (based upon external ratings where available, and where not available, based primarily upon internal ratings which correspond to ratings as defined by S&P and Moody’s). AFS securities are carried at fair value on the Consolidated balance sheets. Unrealized
gains and losses, after any applicable hedge accounting adjustments, are reported as net increases or decreases to AOCI. The specific identification method is used to determine realized gains and losses on AFS securities, which are included in securities gains/(losses) on the Consolidated statements of income. HTM debt securities, which management has the intent and ability to hold until maturity, are carried at amortized cost on the
Consolidated balance sheets. For both AFS and HTM debt securities, purchase discounts or premiums are generally amortized into interest income over the contractual life of the security.
The amortized cost and estimated fair value of the investment securities portfolio were as follows for the dates indicated.
2017
2016
December
31, (in millions)
Amortized cost
Gross unrealized gains
Gross unrealized losses
Fair
value
Amortized cost
Gross unrealized gains
Gross unrealized losses
Fair
value
Available-for-sale
debt securities
Mortgage-backed securities:
U.S.
government agencies(a)
$
69,879
$
736
$
335
$
70,280
$
63,367
$
1,112
$
474
$
64,005
Residential:
U.S(b)
8,193
185
14
8,364
8,171
100
28
8,243
Non-U.S.
2,882
122
1
3,003
6,049
158
7
6,200
Commercial
4,932
98
5
5,025
9,002
122
20
9,104
Total
mortgage-backed securities
85,886
1,141
355
86,672
86,589
1,492
529
87,552
U.S.
Treasury and government agencies(a)
22,510
266
31
22,745
44,822
75
796
44,101
Obligations
of U.S. states and municipalities
30,490
1,881
33
32,338
30,284
1,492
184
31,592
Certificates
of deposit
59
—
—
59
106
—
—
106
Non-U.S.
government debt securities
26,900
426
32
27,294
34,497
836
45
35,288
Corporate
debt securities
2,657
101
1
2,757
4,916
64
22
4,958
Asset-backed
securities:
Collateralized loan obligations
20,928
69
1
20,996
27,352
75
26
27,401
Other
8,764
77
24
8,817
6,950
62
45
6,967
Total
available-for-sale debt securities
198,194
3,961
477
201,678
235,516
4,096
1,647
237,965
Available-for-sale
equity securities
547
—
—
547
914
12
—
926
Total
available-for-sale securities
198,741
3,961
477
202,225
236,430
4,108
1,647
238,891
Held-to-maturity
debt securities
Mortgage-backed securities
U.S.
government agencies(c)
27,577
558
40
28,095
29,910
638
37
30,511
Commercial
5,783
1
74
5,710
5,783
—
129
5,654
Total
mortgage-backed securities
33,360
559
114
33,805
35,693
638
166
36,165
Obligations
of U.S. states and municipalities
14,373
554
80
14,847
14,475
374
125
14,724
Total
held-to-maturity debt securities
47,733
1,113
194
48,652
50,168
1,012
291
50,889
Total
securities
$
246,474
$
5,074
$
671
$
250,877
$
286,598
$
5,120
$
1,938
$
289,780
(a)
Includes
total U.S. government-sponsored enterprise obligations with a fair value of $45.8 billion for the years ended December 31, 2017 and 2016, which were predominantly mortgage-related.
(b)
Prior period amounts have been revised to conform with the current period presentation.
(c)
Included
total U.S. government-sponsored enterprise obligations with amortized cost of $22.0 billion and $25.6 billion at December 31, 2017 and 2016, respectively, which were mortgage-related.
JPMorgan Chase & Co./2017 Annual Report
203
Notes
to consolidated financial statements
Securities impairment
The following tables present the fair value and gross unrealized losses for the investment securities portfolio by aging category at December 31, 2017 and 2016.
Prior
period amounts have been revised to conform with the current period presentation.
Gross unrealized losses
The Firm has recognized unrealized losses on securities that it intends to sell as OTTI. The Firm does not intend to sell any of the remaining securities with an unrealized loss in AOCI as of December 31, 2017, and it is not likely that the Firm will be required to sell these securities before recovery of their amortized cost basis. Except for the securities for which credit losses have been recognized in income, the Firm believes that the securities with an unrealized loss in AOCI are not
other-than-temporarily impaired as of December 31, 2017.
Other-than-temporary impairment
AFS debt and equity securities and HTM debt securities in unrealized loss positions are analyzed as part of the Firm’s ongoing assessment of OTTI. For most types of debt securities, the Firm considers a decline in fair value to be other-than-temporary when the Firm does not expect to recover the entire amortized cost basis of the security. For beneficial interests in securitizations that are rated below “AA” at their acquisition, or that can be contractually prepaid or otherwise settled in such a way
that the Firm would not recover substantially all of its recorded investment, the Firm considers an impairment to be other-
than-temporary when there is an adverse change in expected cash flows. For AFS equity securities, the Firm considers a decline in fair value to be other-than-temporary if it is probable that the Firm will not recover its cost basis.
Potential OTTI is considered using a variety of factors, including the length of time and extent to which the market value has been less than cost; adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying
collateral of a security; payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and the Firm’s intent and ability to hold the security until recovery.
For AFS debt securities, the Firm recognizes OTTI losses in earnings if the Firm has the intent to sell the debt security, or if it is more likely than not that the Firm will be required to sell the debt security before recovery of its amortized cost basis. In these circumstances the impairment loss is equal to the full difference between the amortized cost basis and the fair value of the securities. For debt securities in an unrealized loss position that the
Firm has the intent and ability to hold, the expected cash flows to be received
JPMorgan Chase & Co./2017 Annual Report
205
Notes to consolidated financial statements
from the securities are evaluated to determine if a credit loss exists. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in income. Amounts
relating to factors other than credit losses are recorded in OCI.
The Firm’s cash flow evaluations take into account the factors noted above and expectations of relevant market and economic data as of the end of the reporting period. For securities issued in a securitization, the Firm estimates cash flows considering underlying loan-level data and structural features of the securitization, such as subordination, excess spread, overcollateralization or other forms of credit enhancement, and compares the losses projected for the underlying collateral (“pool losses”) against the level of credit enhancement in the securitization structure to determine whether these features are sufficient to absorb the pool losses, or whether a credit loss exists. The Firm also performs other analyses
to support its cash flow projections, such as first-loss analyses or stress scenarios.
For equity securities, OTTI losses are recognized in earnings if the Firm intends to sell the security. In other cases the Firm considers the relevant factors noted above, as well as the Firm’s intent and ability to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the cost basis. Any impairment loss on an equity security is equal to the full difference between the cost basis and the fair value of the security.
Securities
gains and losses
The following table presents realized gains and losses and OTTI from AFS securities that were recognized in income.
Year ended December 31, (in millions)
2017
2016
2015
Realized
gains
$
1,013
$
401
$
351
Realized losses
(1,072
)
(232
)
(127
)
OTTI
losses(a)
(7
)
(28
)
(22
)
Net securities gains/(losses)
(66
)
141
202
OTTI
losses
Credit losses recognized in income
—
(1
)
(1
)
Securities
the Firm intends to sell(a)
(7
)
(27
)
(21
)
Total OTTI losses recognized in income
$
(7
)
$
(28
)
$
(22
)
(a)
Excludes
realized losses on securities sold of $6 million, $24 million and $5 million for the years ended December 31, 2017, 2016 and 2015, respectively that had been previously reported as an OTTI loss due to the intention to sell the securities.
Changes in the credit loss component of credit-impaired debt securities
The cumulative credit loss component, including any changes therein, of OTTI losses that have been recognized in income related to AFS debt securities was not material as of and
during the years ended December 31, 2017, 2016 and 2015.
206
JPMorgan Chase & Co./2017 Annual Report
Contractual maturities and yields
The following
table presents the amortized cost and estimated fair value at December 31, 2017, of JPMorgan Chase’s investment securities portfolio by contractual maturity.
As
of December 31, 2017, mortgage-backed securities issued by Fannie Mae exceeded 10% of JPMorgan Chase’s total stockholders’ equity; the amortized cost and fair value of such securities was $55.1 billion and $56.0 billion, respectively.
(b)
Average yield is computed using the effective yield of each security owned at the end of the period, weighted based on the amortized cost of each security. The effective yield considers the contractual coupon, amortization of premiums and accretion
of discounts, and the effect of related hedging derivatives. Taxable-equivalent amounts are used
JPMorgan Chase & Co./2017 Annual Report
207
Notes to consolidated financial statements
where applicable and reflect the estimated impact of the enactment of the Tax Cuts and Jobs Act (“TCJA”). The effective yield excludes unscheduled principal prepayments; and accordingly, actual maturities of securities
may differ from their contractual or expected maturities as certain securities may be prepaid.
(c)
Includes securities with no stated maturity. Substantially all of the Firm’s U.S. residential MBS and collateralized mortgage obligations are due in 10 years or more, based on contractual maturity. The estimated weighted-average life, which reflects anticipated future prepayments, is approximately six years for agency residential MBS, three years for agency residential collateralized mortgage obligations and three years for nonagency residential collateralized mortgage obligations.
Note 11 – Securities financing activities
JPMorgan Chase enters into resale agreements, repurchase agreements, securities borrowed transactions and securities loaned transactions (collectively, “securities financing agreements”) primarily to finance the Firm’s inventory positions, acquire securities to cover short positions, accommodate customers’ financing needs, and settle other securities obligations.
Securities financing agreements are treated as collateralized financings on the Firm’s Consolidated balance sheets.
Resale and repurchase agreements are generally carried at the amounts at which the securities will be subsequently sold or repurchased. Securities borrowed and securities loaned transactions are generally carried at the amount of cash collateral advanced or received. Where appropriate under applicable accounting guidance, resale and repurchase agreements with the same counterparty are reported on a net basis. For further discussion of the offsetting of assets and liabilities, see Note 1. Fees received and paid in connection with securities financing agreements are recorded in interest income and interest expense on the Consolidated statements of income.
The Firm has elected the fair value option for certain securities financing agreements. For further information regarding the fair
value option, see Note 3. The securities financing agreements for which the fair value option has been elected are reported within securities purchased under resale agreements, securities loaned or sold under repurchase agreements, and securities borrowed on the Consolidated balance sheets. Generally, for agreements carried at fair value, current-period interest accruals are recorded within interest income and interest expense, with changes in fair value reported in principal transactions revenue. However, for financial instruments containing embedded derivatives that would be separately accounted for in accordance with accounting guidance for hybrid instruments, all changes in fair value, including any interest elements, are reported in principal transactions revenue.
Securities
financing transactions expose the Firm primarily to credit and liquidity risk. To manage these risks, the Firm monitors the value of the underlying securities (predominantly high-quality securities collateral, including government-issued debt and agency MBS) that it has received from or provided to its counterparties compared to the value of cash proceeds and exchanged collateral, and either requests additional collateral or returns securities or collateral when appropriate. Margin levels are initially established based upon the counterparty, the type of underlying securities, and the permissible collateral, and are monitored on an ongoing basis.
In resale agreements and securities borrowed transactions, the Firm is exposed to credit risk to the extent that
the value of the securities received is less than initial cash principal advanced and any collateral amounts exchanged. In repurchase agreements and securities loaned transactions, credit risk exposure arises to the extent that the value of underlying securities exceeds the value of the initial cash principal advanced, and any collateral amounts exchanged.
Additionally, the Firm typically enters into master netting agreements and other similar arrangements with its counterparties, which provide for the right to liquidate the underlying securities and any collateral amounts exchanged in the event of a counterparty default. It is also the Firm’s policy to take possession, where possible, of the securities underlying resale agreements and securities borrowed transactions.
For further information regarding assets pledged and collateral received in securities financing agreements, see Note 28.
As a result of the Firm’s credit risk mitigation practices with respect to resale and securities borrowed agreements as described above, the Firm did not hold any reserves for credit impairment with respect to these agreements as of December 31, 2017 and 2016.
208
JPMorgan
Chase & Co./2017 Annual Report
The table below summarizes the gross and net amounts of the Firm’s securities financing agreements, as of December 31, 2017, and 2016. When the Firm has obtained an appropriate legal opinion with respect to the master netting agreement with a counterparty and where other relevant netting criteria under U.S. GAAP are met, the Firm nets, on the Consolidated balance sheets, the balances outstanding under its securities financing agreements with the same counterparty. In addition, the Firm exchanges
securities and/or cash collateral with its counterparties; this collateral also reduces the economic exposure with the counterparty. Such collateral, along with securities financing balances that do not meet all these relevant netting criteria under U.S. GAAP, is presented as “Amounts not nettable on the Consolidated balance sheets,” and reduces the “Net amounts” presented below, if the Firm has an appropriate legal opinion with respect to the master netting agreement with the counterparty. Where a legal opinion has not been either sought or obtained, the securities financing balances are presented gross in the “Net amounts” below, and related collateral does not reduce the amounts presented.
2017
December
31, (in millions)
Gross amounts
Amounts netted on the Consolidated balance sheets
Amounts presented on the Consolidated balance sheets(b)
Amounts not nettable on the Consolidated balance sheets(c)
Net amounts(d)
Assets
Securities
purchased under resale agreements
$
448,608
$
(250,505
)
$
198,103
$
(188,502
)
$
9,601
Securities
borrowed
113,926
(8,814
)
105,112
(76,805
)
28,307
Liabilities
Securities
sold under repurchase agreements
$
398,218
$
(250,505
)
$
147,713
$
(129,178
)
$
18,535
Securities
loaned and other(a)
27,228
(8,814
)
18,414
(18,151
)
263
2016
December
31, (in millions)
Gross amounts
Amounts netted on the Consolidated balance sheets
Amounts presented on the Consolidated balance sheets(b)
Amounts not nettable on the Consolidated balance sheets(c)
Net amounts(d)
Assets
Securities
purchased under resale agreements
$
480,735
$
(250,832
)
$
229,903
$
(222,413
)
$
7,490
Securities
borrowed
96,409
—
96,409
(66,822
)
29,587
Liabilities
Securities
sold under repurchase agreements
$
402,465
$
(250,832
)
$
151,633
$
(133,300
)
$
18,333
Securities
loaned and other(a)
22,451
—
22,451
(22,177
)
274
(a)
Includes
securities-for-securities lending transactions of $9.2 billion and $9.1 billion at December 31, 2017 and 2016, respectively, accounted for at fair value, where the Firm is acting as lender. These amounts are presented within accounts payable and other liabilities in the Consolidated balance sheets.
(b)
Includes securities financing agreements accounted for at fair value. At December 31,
2017 and 2016, included securities purchased under resale agreements of $14.7 billion and $21.5 billion, respectively, and securities sold under agreements to repurchase of $697 million and $687 million, respectively. There were $3.0 billion of securities borrowed at December 31, 2017 and there were no securities borrowed at December 31, 2016. There were no
securities loaned accounted for at fair value in either period.
(c)
In some cases, collateral exchanged with a counterparty exceeds the net asset or liability balance with that counterparty. In such cases, the amounts reported in this column are limited to the related asset or liability with that counterparty.
(d)
Includes securities financing agreements that provide collateral rights, but where an appropriate legal opinion with respect to the master netting agreement has not been either sought or obtained. At December 31,
2017 and 2016, included $7.5 billion and $4.8 billion, respectively, of securities purchased under resale agreements; $25.5 billion and $27.1 billion, respectively, of securities borrowed; $16.5 billion and $15.9 billion, respectively, of securities sold under agreements to repurchase; and $29 million and $90 million, respectively, of securities loaned and other.
JPMorgan
Chase & Co./2017 Annual Report
209
Notes to consolidated financial statements
The tables below present as of December 31, 2017 and 2016 the types of financial assets pledged in securities financing agreements and the remaining contractual maturity of the securities financing agreements.
Gross
liability balance
2017
2016
December 31, (in millions)
Securities sold under repurchase agreements
Securities loaned and other(b)
Securities sold under repurchase agreements
Securities loaned and other(b)
Mortgage-backed
securities:
U.S. government agencies(a)
$
13,100
$
—
$
14,034
$
—
Residential
- nonagency
2,972
—
6,224
—
Commercial - nonagency
1,594
—
4,173
—
U.S.
Treasury and government agencies(a)
177,581
14
185,145
—
Obligations of U.S. states and municipalities
1,557
—
2,491
—
Non-U.S.
government debt
170,196
2,485
149,008
1,279
Corporate debt securities
14,231
287
18,140
108
Asset-backed
securities
3,508
—
7,721
—
Equity securities
13,479
24,442
15,529
21,064
Total
$
398,218
$
27,228
$
402,465
$
22,451
Remaining
contractual maturity of the agreements
Overnight and continuous
Greater than
90 days
2017 (in millions)
Up to 30 days
30 – 90 days
Total
Total
securities sold under repurchase agreements
$
166,425
$
156,434
$
41,611
$
33,748
$
398,218
Total
securities loaned and other(b)
22,876
375
2,328
1,649
27,228
Remaining
contractual maturity of the agreements
Overnight and continuous
Greater than
90 days
2016 (in millions)
Up to 30 days
30 – 90 days
Total
Total
securities sold under repurchase agreements
$
140,318
$
157,860
$
55,621
$
48,666
$
402,465
Total
securities loaned and other(b)
13,586
1,371
2,877
4,617
22,451
(a)
Prior
period amounts were revised to conform with the current period presentation.
(b)
Includes securities-for-securities lending transactions of $9.2 billion and $9.1 billion at December 31, 2017 and 2016, respectively, accounted for at fair value, where the Firm is acting as lender. These amounts are presented within accounts payable and other liabilities on the Consolidated balance sheets.
Transfers
not qualifying for sale accounting
At December 31, 2017 and 2016, the Firm held $1.5 billion and $5.9 billion, respectively, of financial assets for which the rights have been transferred to third parties; however, the transfers did not qualify as a sale in accordance with U.S. GAAP. These transfers have been recognized as collateralized financing transactions. The transferred assets are recorded in trading assets and loans, and the corresponding liabilities are recorded predominantly in short-term borrowings on the Consolidated balance sheets.
210
JPMorgan
Chase & Co./2017 Annual Report
Note 12 – Loans
Loan accounting framework
The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. The Firm accounts for loans based on the following categories:
•
Originated or purchased loans held-for-investment (i.e., “retained”),
other than PCI loans
•
Loans held-for-sale
•
Loans at fair value
•
PCI loans held-for-investment
The following provides a detailed accounting discussion of these loan categories:
Loans
held-for-investment (other than PCI loans)
Originated or purchased loans held-for-investment, other than PCI loans, are recorded at the principal amount outstanding, net of the following: charge-offs; interest applied to principal (for loans accounted for on the cost recovery method); unamortized discounts and premiums; and net deferred loan fees or costs. Credit card loans also include billed finance charges and fees net of an allowance for uncollectible amounts.
Interest income
Interest income on performing loans held-for-investment, other than PCI loans, is accrued and recognized as interest income at the contractual rate of interest. Purchase price discounts or premiums, as well as net deferred loan fees or costs, are amortized into interest income over the contractual life of the loan to produce a level rate of return.
Nonaccrual loans
Nonaccrual loans are those on which the accrual of interest has been suspended. Loans (other than credit card loans and certain consumer loans insured by U.S. government agencies) are placed on nonaccrual status and considered nonperforming when full payment of principal and interest is not expected, regardless of delinquency status, or when principal and interest has been in default for a period of 90 days or more, unless the loan is both well-secured and in the process of collection. A loan is determined to be past due when the minimum payment is not received from the borrower by the contractually specified due date or for certain loans (e.g., residential real estate loans), when a monthly payment is due and unpaid for
30 days or more. Finally, collateral-dependent loans are typically maintained on nonaccrual status.
On the date a loan is placed on nonaccrual status, all interest accrued but not collected is reversed against interest income. In addition, the amortization of deferred amounts is suspended. Interest income on nonaccrual loans may be recognized as cash interest payments are received (i.e., on a cash basis) if the recorded loan balance is deemed fully collectible; however, if there is doubt regarding the ultimate collectibility of the recorded loan balance, all interest cash receipts are applied to reduce the
carrying value of the loan (the cost recovery method). For consumer loans, application of this policy typically results in
the Firm recognizing interest income on nonaccrual consumer loans on a cash basis.
A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan.
As permitted by regulatory guidance, credit card loans are generally exempt from being placed on nonaccrual status; accordingly, interest and fees related to credit card loans continue to accrue until the loan is charged off or paid in full. However, the Firm separately establishes an allowance, which is offset against loans and charged to interest income, for the estimated uncollectible portion of accrued and billed interest and fee income on credit card loans. The allowance
is established with a charge to interest income and is reported as an offset to loans.
Allowance for loan losses
The allowance for loan losses represents the estimated probable credit losses inherent in the held-for-investment loan portfolio at the balance sheet date and is recognized on the balance sheet as a contra asset, which brings the recorded investment to the net carrying value. Changes in the allowance for loan losses are recorded in the provision for credit losses on the Firm’s Consolidated statements of income. See Note 13 for further information on the Firm’s accounting policies for the allowance for loan losses.
Charge-offs
Consumer loans, other than risk-rated business banking and auto loans, and PCI loans, are generally charged off or charged down to the net realizable value of the underlying collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, upon reaching specified stages of delinquency in accordance with standards established by the FFIEC. Residential real estate loans and non-modified credit card loans are generally charged off no later than 180 days past due. Scored auto, student and modified credit card loans are charged off no later than 120 days past due.
Certain
consumer loans will be charged off or charged down to their net realizable value earlier than the FFIEC charge-off standards in certain circumstances as follows:
•
Loans modified in a TDR that are determined to be collateral-dependent.
•
Loans to borrowers who have experienced an event that suggests a loss is either known or highly certain are subject to accelerated charge-off standards (e.g., residential real estate and auto loans are
charged off within 60 days of receiving notification of a bankruptcy filing).
•
Auto loans upon repossession of the automobile.
JPMorgan Chase & Co./2017 Annual Report
211
Notes to consolidated financial statements
Other
than in certain limited circumstances, the Firm typically does not recognize charge-offs on government-guaranteed loans.
Wholesale loans, risk-rated business banking loans and risk-rated auto loans are charged off when it is highly certain that a loss has been realized, including situations where a loan is determined to be both impaired and collateral-dependent. The determination of whether to recognize a charge-off includes many factors, including the prioritization of the Firm’s claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity or the loan collateral.
When a loan is charged down to the estimated net realizable value, the determination of the fair value of the collateral
depends on the type of collateral (e.g., securities, real estate). In cases where the collateral is in the form of liquid securities, the fair value is based on quoted market prices or broker quotes. For illiquid securities or other financial assets, the fair value of the collateral is estimated using a discounted cash flow model.
For residential real estate loans, collateral values are based upon external valuation sources. When it becomes likely that a borrower is either unable or unwilling to pay, the Firm obtains a broker’s price opinion of the home based on an exterior-only valuation (“exterior opinions”), which is then updated at least every six months thereafter. As soon as practicable after the Firm receives
the property in satisfaction of a debt (e.g., by taking legal title or physical possession), the Firm generally obtains an appraisal based on an inspection that includes the interior of the home (“interior appraisals”). Exterior opinions and interior appraisals are discounted based upon the Firm’s experience with actual liquidation values as compared with the estimated values provided by exterior opinions and interior appraisals, considering state-specific factors.
For commercial real estate loans, collateral values are generally based on appraisals from internal and external valuation sources. Collateral values are typically updated every six to twelve months,
either by obtaining a new appraisal or by performing an internal analysis, in accordance with the Firm’s policies. The Firm also considers both borrower- and market-specific factors, which may result in obtaining appraisal updates or broker price opinions at more frequent intervals.
Loans held-for-sale
Held-for-sale loans are measured at the lower of cost or fair value, with valuation changes recorded in noninterest revenue. For consumer loans, the valuation is performed on a portfolio basis. For wholesale loans, the valuation is performed on an individual loan basis.
Interest income on loans held-for-sale
is accrued and recognized based on the contractual rate of interest.
Loan origination fees or costs and purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred fees or costs and discounts or premiums are an adjustment to the basis of the loan and therefore are included in the periodic determination of the lower of cost or fair value adjustments and/or the gain or loss recognized at the time of sale.
Held-for-sale loans are subject to the nonaccrual policies described above.
Because held-for-sale loans are recognized at the lower of cost or fair value, the Firm’s allowance for loan losses and charge-off policies do not apply to these loans.
Loans at fair value
Loans used in a market-making strategy or risk managed on a fair value basis are measured at fair value, with changes in fair value recorded in noninterest revenue.
Interest income on these loans is accrued and recognized based on the contractual rate of interest. Changes in fair value are recognized in noninterest revenue. Loan origination fees are recognized upfront in noninterest revenue. Loan origination costs are recognized in the associated expense category as incurred.
Because these loans are recognized at fair value, the Firm’s allowance for loan losses and charge-off policies do not apply to these loans.
See
Note 3 for further information on the Firm’s elections of fair value accounting under the fair value option. See Note 2 and Note 3 for further information on loans carried at fair value and classified as trading assets.
PCI loans
PCI loans held-for-investment are initially measured at fair value. PCI loans have evidence of credit deterioration since the loan’s origination date and therefore it is probable, at acquisition, that all contractually required payments will not be collected. Because PCI loans
are initially measured at fair value, which includes an estimate of future credit losses, no allowance for loan losses related to PCI loans is recorded at the acquisition date. See page 223 of this Note for information on accounting for PCI loans subsequent to their acquisition.
212
JPMorgan Chase & Co./2017 Annual Report
Loan
classification changes
Loans in the held-for-investment portfolio that management decides to sell are transferred to the held-for-sale portfolio at the lower of cost or fair value on the date of transfer. Credit-related losses are charged against the allowance for loan losses; non-credit related losses such as those due to changes in interest rates or foreign currency exchange rates are recognized in noninterest revenue.
In the event that management decides to retain a loan in the held-for-sale portfolio, the loan is transferred to the held-for-investment portfolio at the lower of cost or fair value on the date of transfer. These loans are subsequently assessed for impairment based on the Firm’s allowance methodology. For a further discussion of the methodologies used in establishing
the Firm’s allowance for loan losses, see Note 13.
Loan modifications
The Firm seeks to modify certain loans in conjunction with its loss-mitigation activities. Through the modification, JPMorgan Chase grants one or more concessions to a borrower who is experiencing financial difficulty in order to minimize the Firm’s economic loss and avoid foreclosure or repossession of the collateral, and to ultimately maximize payments received by the Firm from the borrower. The concessions granted vary by program and by borrower-specific characteristics, and may
include interest rate reductions, term extensions, payment deferrals, principal forgiveness, or the acceptance of equity or other assets in lieu of payments.
Such modifications are accounted for and reported as TDRs. A loan that has been modified in a TDR is generally considered to be impaired until it matures, is repaid, or is otherwise liquidated, regardless of whether the borrower performs under the modified terms. In certain limited cases, the effective interest rate applicable to the modified loan is at or above the current market rate at the time of the restructuring. In such circumstances, and assuming that the loan subsequently performs under its modified terms and the Firm expects to collect all contractual principal and interest cash flows, the loan is disclosed as impaired and as a TDR only during the year of the modification; in subsequent
years, the loan is not disclosed as an impaired loan or as a TDR so long as repayment of the restructured loan under its modified terms is reasonably assured.
Loans, except for credit card loans, modified in a TDR are generally placed on nonaccrual status, although in many cases such loans were already on nonaccrual status prior to modification. These loans may be returned to performing status (the accrual of interest is resumed) if the following criteria are met: (i) the borrower has performed under the modified terms for a minimum of six months and/or six payments, and (ii) the Firm has an expectation that repayment of the modified loan is reasonably
assured based on, for example, the borrower’s debt capacity and level of future earnings, collateral values, LTV ratios, and other current market considerations. In certain limited and well-defined circumstances in which the loan is current at the modification date, such loans are not placed on nonaccrual status at the time of modification.
Because loans modified in TDRs are considered to be impaired, these loans are measured for impairment using the Firm’s established asset-specific allowance methodology, which considers the expected re-default rates for the modified loans. A loan modified in a TDR generally remains subject to the asset-specific allowance methodology throughout its remaining life, regardless of whether the loan is performing and has been returned to accrual status and/or the loan has been removed from the impaired loans disclosures (i.e.,
loans restructured at market rates). For further discussion of the methodology used to estimate the Firm’s asset-specific allowance, see Note 13.
Foreclosed property
The Firm acquires property from borrowers through loan restructurings, workouts, and foreclosures. Property acquired may include real property (e.g., residential real estate, land, and buildings) and commercial and personal property (e.g., automobiles, aircraft, railcars, and ships).
The Firm recognizes foreclosed property upon receiving assets in satisfaction of a loan (e.g., by taking legal title or physical possession). For loans collateralized by real property,
the Firm generally recognizes the asset received at foreclosure sale or upon the execution of a deed in lieu of foreclosure transaction with the borrower. Foreclosed assets are reported in other assets on the Consolidated balance sheets and initially recognized at fair value less costs to sell. Each quarter the fair value of the acquired property is reviewed and adjusted, if necessary, to the lower of cost or fair value. Subsequent adjustments to fair value are charged/credited to noninterest revenue. Operating expense, such as real estate taxes and maintenance, are charged to other expense.
JPMorgan Chase & Co./2017 Annual Report
213
Notes
to consolidated financial statements
Loan portfolio
The Firm’s loan portfolio is divided into three portfolio segments, which are the same segments used by the Firm to determine the allowance for loan losses: Consumer, excluding credit card; Credit card; and Wholesale. Within each portfolio segment the Firm monitors and assesses the credit risk in the following classes of loans, based on the risk characteristics of each loan class.
Consumer,
excluding
credit card(a)
Credit card
Wholesale(f)
Residential real estate – excluding PCI
• Residential mortgage(b)
• Home equity(c)
Other consumer loans
• Auto(d)
•
Consumer & Business Banking(d)(e)
• Student
Residential real estate – PCI
• Home equity
• Prime mortgage
• Subprime mortgage
• Option ARMs
• Credit card loans
• Commercial and industrial
• Real estate
• Financial institutions
• Government agencies
•
Other(g)
(a)
Includes loans held in CCB, prime mortgage and home equity loans held in AWM and prime mortgage loans held in Corporate.
(b)
Predominantly includes prime (including option ARMs) and subprime loans.
(c)
Includes
senior and junior lien home equity loans.
(d)
Includes certain business banking and auto dealer risk-rated loans that apply the wholesale methodology for determining the allowance for loan losses; these loans are managed by CCB, and therefore, for consistency in presentation, are included with the other consumer loan classes.
(e)
Predominantly includes Business Banking loans.
(f)
Includes
loans held in CIB, CB, AWM and Corporate. Excludes prime mortgage and home equity loans held in AWM and prime mortgage loans held in Corporate. Classes are internally defined and may not align with regulatory definitions.
(g)
Includes loans to: individuals; SPEs; and private education and civic organizations. For more information on SPEs, see Note 14.
The following tables summarize the Firm’s loan balances by portfolio segment.
Includes
accrued interest and fees net of an allowance for the uncollectible portion of accrued interest and fee income.
(b)
Loans (other than PCI loans and those for which the fair value option has been elected) are presented net of unamortized discounts and premiums and net deferred loan fees or costs. These amounts were not material as of December 31, 2017 and 2016.
214
JPMorgan
Chase & Co./2017 Annual Report
The following table provides information about the carrying value of retained loans purchased, sold and reclassified to held-for-sale during the periods indicated. This table excludes loans recorded at fair value. The Firm manages its exposure to credit risk on an ongoing basis. Selling loans is one way that the Firm reduces its credit exposures.
2017
Year
ended December 31, (in millions)
Consumer, excluding
credit card
Credit card
Wholesale
Total
Purchases
$
3,461
(a)(b)
$
—
$
1,799
$
5,260
Sales
3,405
—
11,063
14,468
Retained
loans reclassified to held-for-sale
6,340
(c)
—
1,229
7,569
2016
Year
ended December 31, (in millions)
Consumer, excluding
credit card
Credit card
Wholesale
Total
Purchases
$
4,116
(a)(b)
$
—
$
1,448
$
5,564
Sales
6,368
—
8,739
15,107
Retained
loans reclassified to held-for-sale
321
—
2,381
2,702
2015
Year
ended December 31, (in millions)
Consumer, excluding
credit card
Credit card
Wholesale
Total
Purchases
$
5,279
(a)(b)
$
—
$
2,154
$
7,433
Sales
5,099
—
9,188
14,287
Retained
loans reclassified to held-for-sale
1,514
79
642
2,235
(a)
Purchases
predominantly represent the Firm’s voluntary repurchase of certain delinquent loans from loan pools as permitted by Government National Mortgage Association (“Ginnie Mae”) guidelines. The Firm typically elects to repurchase these delinquent loans as it continues to service them and/or manage the foreclosure process in accordance with applicable requirements of Ginnie Mae, FHA, RHS, and/or VA.
(b)
Excludes purchases of retained loans sourced through the correspondent origination channel and underwritten in accordance with the Firm’s standards. Such purchases were $23.5 billion, $30.4 billion and $50.3 billion
for the years ended December 31, 2017, 2016 and 2015, respectively.
(c)
Includes the Firm’s student loan portfolio which was sold in 2017.
The following table provides information about gains and losses on loan sales, including lower of cost or fair value adjustments, on loan sales by portfolio segment.
Year
ended December 31, (in millions)
2017
2016
2015
Net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)(a)
Consumer,
excluding credit card(b)
$
(126
)
$
231
$
305
Credit card
(8
)
(12
)
1
Wholesale
41
26
34
Total
net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)
$
(93
)
$
245
$
340
(a)
Excludes
sales related to loans accounted for at fair value.
(b)
Includes amounts related to the Firm’s student loan portfolio which was sold in 2017.
JPMorgan Chase & Co./2017 Annual Report
215
Notes
to consolidated financial statements
Consumer, excluding credit card, loan portfolio
Consumer loans, excluding credit card loans, consist primarily of residential mortgages, home equity loans and lines of credit, auto loans, consumer and business banking loans and student loans, with a focus on serving the prime consumer credit market. The portfolio also includes home equity loans secured by junior liens, prime mortgage loans with an interest-only payment period, and certain payment-option loans that may result in negative amortization.
The table below provides information about retained consumer loans, excluding credit card, by class. In 2017, the Firm sold its student loan portfolio.
December
31, (in millions)
2017
2016
Residential real estate – excluding PCI
Residential mortgage(a)
$
216,496
$
192,486
Home
equity
33,450
39,063
Other consumer loans
Auto
66,242
65,814
Consumer
& Business Banking(a)
25,789
24,307
Student(a)
—
7,057
Residential real estate – PCI
Home
equity
10,799
12,902
Prime mortgage
6,479
7,602
Subprime mortgage
2,609
2,941
Option
ARMs
10,689
12,234
Total retained loans
$
372,553
$
364,406
(a) Certain loan portfolios have been reclassified. The prior period amounts have been revised
to conform with the current period presentation.
Delinquency rates are a primary credit quality indicator for consumer loans. Loans that are more than 30 days past due provide an early warning of borrowers who may be experiencing financial difficulties and/or who may be unable or unwilling to repay the loan. As the loan continues to age, it becomes more clear whether the borrower is likely either unable or unwilling to pay. In the case of residential real estate loans, late-stage delinquencies (greater than 150 days past due) are a strong indicator of loans that will ultimately result in a foreclosure or similar liquidation transaction. In addition to delinquency rates, other credit quality
indicators for consumer loans vary based on the class of loan, as follows:
•
For residential real estate loans, including both non-PCI and PCI portfolios, the current estimated LTV ratio, or the combined LTV ratio in the case of junior lien loans, is an indicator of the potential loss severity in the event of default. Additionally, LTV or combined LTV ratios can provide insight into a borrower’s continued willingness to pay, as the delinquency rate of high-LTV loans tends to be greater than that for loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific
events such as natural disasters, will affect credit quality. The borrower’s current or “refreshed” FICO score is a secondary credit-quality indicator for certain loans, as FICO scores are an indication of the borrower’s credit payment history. Thus, a loan to a borrower with a low FICO score (less than 660 ) is considered to be of higher risk than a loan to a borrower with a higher FICO score. Further, a loan to a borrower with a high LTV ratio and a low FICO score is at greater risk of default than a loan to a borrower that has both a high LTV ratio and a high FICO score.
•
For scored auto and scored business banking loans, geographic distribution
is an indicator of the credit performance of the portfolio. Similar to residential real estate loans, geographic distribution provides insights into the portfolio performance based on regional economic activity and events.
•
Risk-rated business banking and auto loans are similar to wholesale loans in that the primary credit quality indicators are the risk rating that is assigned to the loan and whether the loans are considered to be criticized and/or nonaccrual. Risk ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information about borrowers’ ability to fulfill their obligations. For further information about risk-rated wholesale loan credit quality indicators, see
page 228 of this Note.
216
JPMorgan Chase & Co./2017 Annual Report
Residential real estate — excluding PCI loans
The following table provides information by class for residential real estate — excluding retained PCI loans.
Residential real estate – excluding PCI loans
December
31,
(in millions, except ratios)
Residential mortgage(g)
Home equity
Total residential real estate – excluding PCI
2017
2016
2017
2016
2017
2016
Loan
delinquency(a)
Current
$
208,713
$
184,133
$
32,391
$
37,941
$
241,104
$
222,074
30–149
days past due
4,234
3,828
671
646
4,905
4,474
150
or more days past due
3,549
4,525
388
476
3,937
5,001
Total
retained loans
$
216,496
$
192,486
$
33,450
$
39,063
$
249,946
$
231,549
%
of 30+ days past due to total retained loans(b)
0.77
%
0.75
%
3.17
%
2.87
%
1.09
%
1.11
%
90
or more days past due and government guaranteed(c)
$
4,172
$
4,858
—
—
$
4,172
$
4,858
Nonaccrual
loans
2,175
2,256
1,610
1,845
3,785
4,101
Current
estimated LTV ratios(d)(e)
Greater than 125% and refreshed FICO scores:
Equal
to or greater than 660
$
37
$
30
$
10
$
70
$
47
$
100
Less
than 660
19
48
3
15
22
63
101%
to 125% and refreshed FICO scores:
Equal to or greater than 660
36
135
296
668
332
803
Less
than 660
88
177
95
221
183
398
80%
to 100% and refreshed FICO scores:
Equal to or greater than 660
4,369
4,026
1,676
2,961
6,045
6,987
Less
than 660
483
718
569
945
1,052
1,663
Less
than 80% and refreshed FICO scores:
Equal to or greater than 660
194,758
169,579
25,262
27,317
220,020
196,896
Less
than 660
6,952
6,759
3,850
4,380
10,802
11,139
No
FICO/LTV available
1,259
1,650
1,689
2,486
2,948
4,136
U.S.
government-guaranteed
8,495
9,364
—
—
8,495
9,364
Total
retained loans
$
216,496
$
192,486
$
33,450
$
39,063
$
249,946
$
231,549
Geographic
region
California
$
68,855
$
59,802
$
6,582
$
7,644
$
75,437
$
67,446
New
York
27,473
24,916
6,866
7,978
34,339
32,894
Illinois
14,501
13,126
2,521
2,947
17,022
16,073
Texas
12,508
10,772
2,021
2,225
14,529
12,997
Florida
9,598
8,395
1,847
2,133
11,445
10,528
New
Jersey
7,142
6,374
1,957
2,253
9,099
8,627
Washington
6,962
5,451
1,026
1,229
7,988
6,680
Colorado
7,335
6,306
632
677
7,967
6,983
Massachusetts
6,323
5,834
295
371
6,618
6,205
Arizona
4,109
3,595
1,439
1,772
5,548
5,367
All
other(f)
51,690
47,915
8,264
9,834
59,954
57,749
Total
retained loans
$
216,496
$
192,486
$
33,450
$
39,063
$
249,946
$
231,549
(a)
Individual
delinquency classifications include mortgage loans insured by U.S. government agencies as follows: current included $2.4 billion and $2.5 billion; 30–149 days past due included $3.2 billion and $3.1 billion; and 150 or more days past due included $2.9 billion and $3.8 billion at December 31, 2017 and 2016, respectively.
(b)
At
December 31, 2017 and 2016, residential mortgage loans excluded mortgage loans insured by U.S. government agencies of $6.1 billion and $6.9 billion, respectively, that are 30 or more days past due. These amounts have been excluded based upon the government guarantee.
(c)
These balances, which are 90 days or more past due, were excluded from nonaccrual loans as the loans are guaranteed by U.S government agencies. Typically
the principal balance of the loans is insured and interest is guaranteed at a specified reimbursement rate subject to meeting agreed-upon servicing guidelines. At December 31, 2017 and 2016, these balances included $1.5 billion and $2.2 billion, respectively, of loans that are no longer accruing interest based on the agreed-upon servicing guidelines. For the remaining balance, interest is being accrued at the guaranteed reimbursement rate. There were no loans that were not guaranteed by U.S. government agencies that are 90 or more days past due and still accruing interest at December 31,
2017 and 2016.
(d)
Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated, at a minimum, quarterly, based on home valuation models using nationally recognized home price index valuation estimates incorporating actual data to the extent available and forecasted data where actual data is not available. These property values do not represent actual appraised loan level collateral values; as such, the resulting ratios are necessarily imprecise and should be viewed as estimates. Current estimated combined LTV for junior lien home equity
loans considers all available lien positions, as well as unused lines, related to the property.
(e)
Refreshed FICO scores represent each borrower’s most recent credit score, which is obtained by the Firm on at least a quarterly basis.
(f)
At December 31, 2017 and 2016, included mortgage loans insured by U.S. government agencies
of $8.5 billion and $9.4 billion, respectively.
(g)
Certain loan portfolios have been reclassified. The prior period amounts have been revised to conform with the current period presentation.
JPMorgan Chase & Co./2017 Annual Report
217
Notes
to consolidated financial statements
The following table represents the Firm’s delinquency statistics for junior lien home equity loans and lines as of December 31, 2017 and 2016.
Total
loans
Total 30+ day delinquency rate
December 31, (in millions except ratios)
2017
2016
2017
2016
HELOCs:(a)
Within
the revolving period(b)
$
6,363
$
10,304
0.50
%
1.27
%
Beyond the revolving period
13,532
13,272
3.56
3.05
HELOANs
1,371
1,861
3.50
2.85
Total
$
21,266
$
25,437
2.64
%
2.32
%
(a)
These HELOCs are predominantly revolving loans for a 10-year period, after which time the HELOC converts to a loan with a 20-year amortization period, but also include HELOCs that allow interest-only payments beyond the revolving period.
(b) The Firm manages the risk of HELOCs during their revolving period by closing or reducing the undrawn line to the extent permitted by law when borrowers are experiencing financial difficulty.
HELOCs beyond the revolving period and HELOANs have higher delinquency rates than HELOCs within the revolving period. That is primarily because the fully-amortizing payment that is generally required for those products is higher than the minimum payment options available
for HELOCs within the revolving period. The higher delinquency rates associated with amortizing HELOCs and HELOANs are factored into the Firm’s allowance for loan losses.
Impaired loans
The table below sets forth information about the Firm’s residential real estate impaired loans, excluding PCI loans. These loans are considered to be impaired as they have been modified in a TDR. All impaired loans are evaluated for an asset-specific allowance as described in Note 13.
December
31,
(in millions)
Residential mortgage
Home equity
Total residential real estate
– excluding PCI
2017
2016
2017
2016
2017
2016
Impaired
loans
With an allowance
$
4,407
$
4,689
$
1,236
$
1,266
$
5,643
$
5,955
Without
an allowance(a)
1,213
1,343
882
998
2,095
2,341
Total
impaired loans(b)(c)
$
5,620
$
6,032
$
2,118
$
2,264
$
7,738
$
8,296
Allowance
for loan losses related to impaired loans
$
62
$
68
$
111
$
121
$
173
$
189
Unpaid
principal balance of impaired loans(d)
7,741
8,285
3,701
3,847
11,442
12,132
Impaired
loans on nonaccrual status(e)
1,743
1,755
1,032
1,116
2,775
2,871
(a)
Represents
collateral-dependent residential real estate loans that are charged off to the fair value of the underlying collateral less costs to sell. The Firm reports, in accordance with regulatory guidance, residential real estate loans that have been discharged under Chapter 7 bankruptcy and not reaffirmed by the borrower (“Chapter 7 loans”) as collateral-dependent nonaccrual TDRs, regardless of their delinquency status. At December 31, 2017, Chapter 7 residential real estate loans included approximately 12% of home equity and 15% of residential mortgages that were 30 days or more past due.
(b)
At
December 31, 2017 and 2016, $3.8 billion and $3.4 billion, respectively, of loans modified subsequent to repurchase from Ginnie Mae in accordance with the standards of the appropriate government agency (i.e., FHA, VA, RHS) are not included in the table above. When such loans perform subsequent to modification in accordance with Ginnie Mae guidelines, they are generally sold back into Ginnie Mae loan pools. Modified loans that do not re-perform become subject to foreclosure.
(c)
Predominantly
all residential real estate impaired loans, excluding PCI loans, are in the U.S.
(d)
Represents the contractual amount of principal owed at December 31, 2017 and 2016. The unpaid principal balance differs from the impaired loan balances due to various factors including charge-offs, net deferred loan fees or costs, and unamortized discounts or premiums on purchased loans.
(e)
As
of December 31, 2017 and 2016, nonaccrual loans included $2.2 billion and $2.3 billion, respectively, of TDRs for which the borrowers were less than 90 days past due. For additional information about loans modified in a TDR that are on nonaccrual status refer to the Loan accounting framework on pages 211–213 of this Note.
218
JPMorgan
Chase & Co./2017 Annual Report
The following table presents average impaired loans and the related interest income reported by the Firm.
Year
ended December 31,
(in millions)
Average impaired loans
Interest income on
impaired loans(a)
Interest income on impaired
loans on a cash basis(a)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Residential
mortgage
$
5,797
$
6,376
$
7,697
$
287
$
305
$
348
$
75
$
77
$
87
Home
equity
2,189
2,311
2,369
127
125
128
80
80
85
Total
residential real estate – excluding PCI
$
7,986
$
8,687
$
10,066
$
414
$
430
$
476
$
155
$
157
$
172
(a)
Generally,
interest income on loans modified in TDRs is recognized on a cash basis until such time as the borrower has made a minimum of six payments under the new terms, unless the loan is deemed to be collateral-dependent.
Loan modifications
Modifications of residential real estate loans, excluding PCI loans, are generally accounted for and reported as TDRs. There were no additional commitments to lend to borrowers whose residential real estate loans, excluding PCI loans, have been modified in TDRs.
The following table presents new TDRs reported by the Firm.
Year
ended December 31, (in millions)
2017
2016
2015
Residential mortgage
$
373
$
254
$
267
Home
equity
321
385
401
Total residential real estate – excluding PCI
$
694
$
639
$
668
Nature
and extent of modifications
The U.S. Treasury’s Making Home Affordable programs, as well as the Firm’s proprietary modification programs, generally provide various concessions to financially troubled borrowers including, but not limited to, interest rate reductions, term or payment extensions and deferral of principal and/or interest payments that would otherwise have been required under the terms of the original agreement.
The following table provides information about how residential real estate loans, excluding PCI loans, were modified under the Firm’s loss mitigation programs described above during the periods presented. This table excludes Chapter 7 loans where the sole concession granted is the discharge of debt.
Year
ended December 31,
Residential mortgage
Home equity
Total residential real estate
– excluding PCI
2017
2016
2015
2017
2016
2015
2017
2016
2015
Number
of loans approved for a trial modification
1,283
1,945
2,711
2,321
3,760
3,933
3,604
5,705
6,644
Number
of loans permanently modified
2,628
3,338
3,145
5,624
4,824
4,296
8,252
8,162
7,441
Concession
granted:(a)
Interest rate reduction
63
%
76
%
71
%
59
%
75
%
66
%
60
%
76
%
68
%
Term
or payment extension
72
90
81
69
83
89
70
86
86
Principal
and/or interest deferred
15
16
27
10
19
23
12
18
24
Principal
forgiveness
16
26
28
13
9
7
14
16
16
Other(b)
33
25
11
31
6
—
32
14
5
(a)
Represents
concessions granted in permanent modifications as a percentage of the number of loans permanently modified. The sum of the percentages exceeds 100% because predominantly all of the modifications include more than one type of concession. A significant portion of trial modifications include interest rate reductions and/or term or payment extensions.
(b)
Predominantly represents variable interest rate to fixed interest rate modifications.
JPMorgan
Chase & Co./2017 Annual Report
219
Notes to consolidated financial statements
Financial effects of modifications and redefaults
The following table provides information about the financial effects of the various concessions granted in modifications of residential real estate loans, excluding PCI, under the loss mitigation programs described above and about redefaults of certain loans modified in TDRs for the periods presented. The following table presents only the final financial effects of permanent modifications and does not include temporary concessions offered through trial modifications. This table also excludes Chapter 7 loans
where the sole concession granted is the discharge of debt.
Year ended December 31, (in millions, except weighted-average data and number of loans)
Residential
mortgage
Home equity
Total residential real estate – excluding PCI
2017
2016
2015
2017
2016
2015
2017
2016
2015
Weighted-average
interest rate of loans with interest rate reductions – before TDR
5.15
%
5.59
%
5.67
%
4.94
%
4.99
%
5.20
%
5.06
%
5.36
%
5.51
%
Weighted-average
interest rate of loans with interest rate reductions – after TDR
2.99
2.93
2.79
2.64
2.34
2.35
2.83
2.70
2.64
Weighted-average
remaining contractual term (in years) of loans with term or payment extensions – before TDR
24
24
25
21
18
18
23
22
22
Weighted-average
remaining contractual term (in years) of loans with term or payment extensions – after TDR
38
38
37
39
38
35
38
38
36
Charge-offs
recognized upon permanent modification
$
2
$
4
$
11
$
1
$
1
$
4
$
3
$
5
$
15
Principal
deferred
12
30
58
10
23
27
22
53
85
Principal
forgiven
20
44
66
13
7
6
33
51
72
Balance
of loans that redefaulted within one year of permanent modification(a)
$
124
$
98
$
133
$
56
$
40
$
21
$
180
$
138
$
154
(a)
Represents
loans permanently modified in TDRs that experienced a payment default in the periods presented, and for which the payment default occurred within one year of the modification. The dollar amounts presented represent the balance of such loans at the end of the reporting period in which such loans defaulted. For residential real estate loans modified in TDRs, payment default is deemed to occur when the loan becomes two contractual payments past due. In the event that a modified loan redefaults, it is probable that the loan will ultimately be liquidated through foreclosure or another similar type of liquidation transaction. Redefaults of loans modified within the last 12 months may not be representative of ultimate redefault levels.
At
December 31, 2017, the weighted-average estimated remaining lives of residential real estate loans, excluding PCI loans, permanently modified in TDRs were 14 years for residential mortgage and 10 years for home equity. The estimated remaining lives of these loans reflect estimated prepayments, both voluntary and involuntary (i.e., foreclosures and other forced liquidations).
Active and suspended foreclosure
At December 31,
2017 and 2016, the Firm had non-PCI residential real estate loans, excluding those insured by U.S. government agencies, with a carrying value of $787 million and $932 million, respectively, that were not included in REO, but were in the process of active or suspended foreclosure.
220
JPMorgan
Chase & Co./2017 Annual Report
Other consumer loans
The table below provides information for other consumer retained loan classes, including auto and business banking loans. This table excludes student loans that were sold in 2017.
For risk-rated business banking and auto loans, the primary credit quality indicator is the risk rating of the loan, including whether the loans are considered to be criticized and/or nonaccrual.
(c)
Certain
loan portfolios have been reclassified. The prior period amounts have been revised to conform with the current period presentation.
JPMorgan Chase & Co./2017 Annual Report
221
Notes to consolidated financial statements
Other consumer impaired loans and loan modifications
The following table sets forth information about
the Firm’s other consumer impaired loans, including risk-rated business banking and auto loans that have been placed on nonaccrual status, and loans that have been modified in TDRs.
December 31, (in millions)
2017
2016
Impaired
loans
With an allowance
$
272
$
614
Without an allowance(a)
26
30
Total
impaired loans(b)(c)
$
298
$
644
Allowance for loan losses related to impaired loans
$
73
$
119
Unpaid
principal balance of impaired loans(d)
402
753
Impaired loans on nonaccrual status
268
508
(a)
When
discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, the loan does not require an allowance. This typically occurs when the impaired loans have been partially charged off and/or there have been interest payments received and applied to the loan balance.
(b)
Predominantly all other consumer impaired loans are in the U.S.
(c)
Other consumer average impaired loans were $427 million, $635 million
and $566 million for the years ended December 31, 2017, 2016 and 2015, respectively. The related interest income on impaired loans, including those on a cash basis, was not material for the years ended December 31, 2017, 2016 and 2015.
(d)
Represents the contractual amount of principal owed at December 31,
2017 and 2016. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs, interest payments received and applied to the principal balance, net deferred loan fees or costs and unamortized discounts or premiums on purchased loans.
Loan modifications
Certain other consumer loan modifications are considered to be TDRs as they provide various concessions to borrowers who are experiencing financial difficulty. All of these TDRs are reported as impaired loans. The following table provides information about the Firm’s other consumer
loans modified in TDRs. New TDRs were not material for the years ended December 31, 2017 and 2016.
December 31, (in millions)
2017
2016
Loans modified in TDRs(a)(b)
$
102
$
362
TDRs
on nonaccrual status
72
226
(a)
The impact of these modifications was not material to the Firm for the years ended December 31, 2017 and 2016.
(b)
Additional
commitments to lend to borrowers whose loans have been modified in TDRs as of December 31, 2017 and 2016 were immaterial.
222
JPMorgan Chase & Co./2017 Annual Report
Purchased credit-impaired loans
PCI
loans are initially recorded at fair value at acquisition. PCI loans acquired in the same fiscal quarter may be aggregated into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. With respect to the Washington Mutual transaction, all of the consumer PCI loans were aggregated into pools of loans with common risk characteristics.
On a quarterly basis, the Firm estimates the total cash flows (both principal and interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that reflect then-current market conditions. Probable decreases in expected cash flows (i.e., increased credit
losses) trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related forgone interest cash flows, discounted at the pool’s effective interest rate. Impairments are recognized through the provision for credit losses and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows (e.g., decreased credit losses, the net benefit of modifications) would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment over the remaining estimated lives of the underlying loans. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are generally recognized prospectively as adjustments to interest income.
The Firm continues to modify certain
PCI loans. The impact of these modifications is incorporated into the Firm’s quarterly assessment of whether a probable and significant change in expected cash flows has occurred, and the loans continue to be accounted for and reported as PCI loans. In evaluating the effect of modifications on expected cash flows, the Firm incorporates the effect of any forgone interest and also considers the potential for redefault. The Firm develops product-specific probability of default estimates, which are used to compute expected credit losses. In developing these probabilities of default, the Firm considers the relationship between the credit quality characteristics of the underlying loans and certain assumptions about home prices and unemployment based upon industry-wide data.
The Firm also considers its own historical loss experience to-date based on actual redefaulted modified PCI loans.
The excess of cash flows expected to be collected over the carrying value of the underlying loans is referred to as the accretable yield. This amount is not reported on the Firm’s Consolidated balance sheets but is accreted into interest income at a level rate of return over the remaining estimated lives of the underlying pools of loans.
If the timing and/or amounts of expected cash flows on PCI loan pools were determined not to be reasonably estimable, no interest would be accreted and the loan pools would be reported as nonaccrual loans; however, since the timing and amounts of expected cash flows for the Firm’s PCI
consumer loan pools are reasonably estimable, interest is being accreted and the loan pools are being reported as performing loans.
The liquidation of PCI loans, which may include sales of loans, receipt of payment in full from the borrower, or foreclosure, results in removal of the loans from the underlying PCI pool. When the amount of the liquidation proceeds (e.g., cash, real estate), if any, is less than the unpaid principal balance of the loan, the difference is first applied against the PCI pool’s nonaccretable difference for principal losses (i.e., the lifetime credit loss estimate established as a purchase accounting adjustment at the acquisition date). When the nonaccretable difference for a particular loan pool has been fully depleted, any excess of the unpaid principal balance of the loan over the liquidation proceeds is written off against the PCI pool’s allowance for loan losses. Write-offs of PCI loans also include
other adjustments, primarily related to interest forgiveness modifications. Because the Firm’s PCI loans are accounted for at a pool level, the Firm does not recognize charge-offs of PCI loans when they reach specified stages of delinquency (i.e., unlike non-PCI consumer loans, these loans are not charged off based on FFIEC standards).
The PCI portfolio affects the Firm’s results of operations primarily through: (i) contribution to net interest margin; (ii) expense related to defaults and servicing resulting from the liquidation of the loans; and (iii) any provision for loan losses. The PCI loans acquired in the Washington Mutual transaction were funded based on the interest rate characteristics of the loans. For example, variable-rate loans were funded with variable-rate liabilities
and fixed-rate loans were funded with fixed-rate liabilities with a similar maturity profile. A net spread will be earned on the declining balance of the portfolio, which is estimated as of December 31, 2017, to have a remaining weighted-average life of 9 years.
JPMorgan Chase & Co./2017 Annual Report
223
Notes
to consolidated financial statements
Residential real estate – PCI loans
The table below sets forth information about the Firm’s consumer, excluding credit card, PCI loans.
December
31,
(in millions, except ratios)
Home equity
Prime mortgage
Subprime mortgage
Option ARMs
Total PCI
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Carrying
value(a)
$
10,799
$
12,902
$
6,479
$
7,602
$
2,609
$
2,941
$
10,689
$
12,234
$
30,576
$
35,679
Related
allowance for loan losses(b)
1,133
1,433
863
829
150
—
79
49
2,225
2,311
Loan
delinquency (based on unpaid principal balance)
Current
$
10,272
$
12,423
$
5,839
$
6,840
$
2,640
$
3,005
$
9,662
$
11,074
$
28,413
$
33,342
30–149
days past due
356
291
336
336
381
361
547
555
1,620
1,543
150
or more days past due
392
478
327
451
176
240
689
917
1,584
2,086
Total
loans
$
11,020
$
13,192
$
6,502
$
7,627
$
3,197
$
3,606
$
10,898
$
12,546
$
31,617
$
36,971
%
of 30+ days past due to total loans
6.79
%
5.83
%
10.20
%
10.32
%
17.42
%
16.67
%
11.34
%
11.73
%
10.13
%
9.82
%
Current
estimated LTV ratios (based on unpaid principal balance)(c)(d)
Greater
than 125% and refreshed FICO scores:
Equal
to or greater than 660
$
33
$
69
$
4
$
6
$
2
$
7
$
6
$
12
$
45
$
94
Less
than 660
21
39
16
17
20
31
9
18
66
105
101%
to 125% and refreshed FICO scores:
Equal
to or greater than 660
274
555
16
52
20
39
43
83
353
729
Less
than 660
132
256
42
84
75
135
71
144
320
619
80%
to 100% and refreshed FICO scores:
Equal
to or greater than 660
1,195
1,860
221
442
119
214
316
558
1,851
3,074
Less
than 660
559
804
230
381
309
439
371
609
1,469
2,233
Lower
than 80% and refreshed FICO scores:
Equal
to or greater than 660
6,134
6,676
3,551
3,967
895
919
6,113
6,754
16,693
18,316
Less
than 660
2,095
2,183
2,103
2,287
1,608
1,645
3,499
3,783
9,305
9,898
No
FICO/LTV available
577
750
319
391
149
177
470
585
1,515
1,903
Total
unpaid principal balance
$
11,020
$
13,192
$
6,502
$
7,627
$
3,197
$
3,606
$
10,898
$
12,546
$
31,617
$
36,971
Geographic
region (based on unpaid principal balance)
California
$
6,555
$
7,899
$
3,716
$
4,396
$
797
$
899
$
6,225
$
7,128
$
17,293
$
20,322
Florida
1,137
1,306
428
501
296
332
878
1,026
2,739
3,165
New
York
607
697
457
515
330
363
628
711
2,022
2,286
Washington
532
673
135
167
61
68
238
290
966
1,198
Illinois
273
314
200
226
161
178
249
282
883
1,000
New
Jersey
242
280
178
210
110
125
336
401
866
1,016
Massachusetts
79
94
149
173
98
110
307
346
633
723
Maryland
57
64
129
144
132
145
232
267
550
620
Arizona
203
241
106
124
60
68
156
181
525
614
Virginia
66
77
123
142
51
56
280
314
520
589
All
other
1,269
1,547
881
1,029
1,101
1,262
1,369
1,600
4,620
5,438
Total
unpaid principal balance
$
11,020
$
13,192
$
6,502
$
7,627
$
3,197
$
3,606
$
10,898
$
12,546
$
31,617
$
36,971
(a)
Carrying
value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition.
(b)
Management concluded, as part of the Firm’s regular assessment of the PCI loan pools, that it was probable that higher expected credit losses would result in a decrease in expected cash flows. As a result, an allowance for loan losses for impairment of these pools has been recognized.
(c)
Represents the aggregate unpaid principal balance of loans divided by the estimated current property
value. Current property values are estimated, at a minimum, quarterly, based on home valuation models using nationally recognized home price index valuation estimates incorporating actual data to the extent available and forecasted data where actual data is not available. These property values do not represent actual appraised loan level collateral values; as such, the resulting ratios are necessarily imprecise and should be viewed as estimates. Current estimated combined LTV for junior lien home equity loans considers all available lien positions, as well as unused lines, related to the property.
(d)
Refreshed FICO scores represent each borrower’s most recent credit score, which is obtained by the Firm on at least a quarterly basis.
224
JPMorgan
Chase & Co./2017 Annual Report
Approximately 25% of the PCI home equity portfolio are senior lien loans; the remaining balance are junior lien HELOANs or HELOCs. The following table sets forth delinquency statistics for PCI junior lien home equity loans and lines of credit based on the unpaid principal balance as of December 31, 2017 and 2016.
In
general, these HELOCs are revolving loans for a 10-year period, after which time the HELOC converts to an interest-only loan with a balloon payment at the end of the loan’s term.
(b)
Substantially all undrawn HELOCs within the revolving period have been closed.
(c)
Includes loans modified into fixed rate amortizing loans.
The table below sets forth the accretable yield activity for
the Firm’s PCI consumer loans for the years ended December 31, 2017, 2016 and 2015, and represents the Firm’s estimate of gross interest income expected to be earned over the remaining life of the PCI loan portfolios. The table excludes the cost to fund the PCI portfolios, and therefore the accretable yield does not represent net interest income expected to be earned on these portfolios.
Year
ended December 31, (in millions, except ratios)
Total PCI
2017
2016
2015
Beginning balance
$
11,768
$
13,491
$
14,592
Accretion
into interest income
(1,396
)
(1,555
)
(1,700
)
Changes in interest rates on variable-rate loans
503
260
279
Other
changes in expected cash flows(a)
284
(428
)
230
Reclassification from nonaccretable difference(b)
—
—
90
Balance
at December 31
$
11,159
$
11,768
$
13,491
Accretable yield percentage
4.53
%
4.35
%
4.20
%
(a)
Other
changes in expected cash flows may vary from period to period as the Firm continues to refine its cash flow model, for example cash flows expected to be collected due to the impact of modifications and changes in prepayment assumptions.
(b)
Reclassifications from the nonaccretable difference in the year ended December 31, 2015 were driven by continued improvement in home prices and delinquencies, as well as increased granularity in the impairment estimates.
Active and suspended foreclosure
At December 31,
2017 and 2016, the Firm had PCI residential real estate loans with an unpaid principal balance of $1.3 billion and $1.7 billion, respectively, that were not included in REO, but were in the process of active or suspended foreclosure.
JPMorgan Chase & Co./2017 Annual Report
225
Notes
to consolidated financial statements
Credit card loan portfolio
The credit card portfolio segment includes credit card loans originated and purchased by the Firm. Delinquency rates are the primary credit quality indicator for credit card loans as they provide an early warning that borrowers may be experiencing difficulties (30 days past due); information on those borrowers that have been delinquent for a longer period of time (90 days past due) is also considered. In addition to delinquency rates, the geographic distribution of the loans provides insight as to the credit quality of the portfolio
based on the regional economy.
While the borrower’s credit score is another general indicator of credit quality, the Firm does not view credit scores as a primary indicator of credit quality because the borrower’s credit score tends to be a lagging indicator. The distribution of such scores provides a general indicator of credit quality trends within the portfolio; however, the score does not capture all factors that would be predictive of future credit performance. Refreshed FICO score information, which is obtained at least quarterly, for a statistically significant random sample of the credit card portfolio is indicated in the following table. FICO is considered to be the industry benchmark for credit scores.
The Firm generally originates new card accounts to prime consumer borrowers. However, certain cardholders’
FICO scores may decrease over time, depending on the performance of the cardholder and changes in credit score calculation.
The table below sets forth information about the Firm’s credit card loans.
As of or for the year ended December 31,
(in millions, except ratios)
2017
2016
Net
charge-offs
$
4,123
$
3,442
% of net charge-offs to retained loans
2.95
%
2.63
%
Loan delinquency
Current
and less than 30 days past due and still accruing
$
146,704
$
139,434
30–89 days past due and still accruing
1,305
1,134
90 or more days past due
and still accruing
1,378
1,143
Total retained credit card loans
$
149,387
$
141,711
Loan delinquency ratios
%
of 30+ days past due to total retained loans
1.80
%
1.61
%
% of 90+ days past due to total retained loans
0.92
0.81
Credit card loans by geographic region
California
$
22,245
$
20,571
Texas
14,200
13,220
New
York
13,021
12,249
Florida
9,138
8,585
Illinois
8,585
8,189
New
Jersey
6,506
6,271
Ohio
4,997
4,906
Pennsylvania
4,883
4,787
Colorado
4,006
3,699
Michigan
3,826
3,741
All
other
57,980
55,493
Total retained credit card loans
$
149,387
$
141,711
Percentage of portfolio based on carrying value with estimated refreshed FICO
scores
Equal to or greater than 660
84.0
%
84.4
%
Less than 660
14.6
14.2
No
FICO available
1.4
1.4
226
JPMorgan Chase & Co./2017 Annual Report
Credit
card impaired loans and loan modifications
The table below sets forth information about the Firm’s impaired credit card loans. All of these loans are considered to be impaired as they have been modified in TDRs.
December 31, (in millions)
2017
2016
Impaired
credit card loans with an allowance(a)(b)
Credit card loans with modified payment terms(c)
$
1,135
$
1,098
Modified credit card loans that have reverted to pre-modification payment terms(d)
80
142
Total
impaired credit card loans(e)
$
1,215
$
1,240
Allowance for loan losses related to impaired credit card loans
$
383
$
358
(a)
The
carrying value and the unpaid principal balance are the same for credit card impaired loans.
(b)
There were no impaired loans without an allowance.
(c)
Represents credit card loans outstanding to borrowers enrolled in a credit card modification program as of the date presented.
(d)
Represents
credit card loans that were modified in TDRs but that have subsequently reverted back to the loans’ pre-modification payment terms. At December 31, 2017 and 2016, $43 million and $94 million, respectively, of loans have reverted back to the pre-modification payment terms of the loans due to noncompliance with the terms of the modified loans. The remaining $37 million and $48 million at December 31, 2017 and 2016,
respectively, of these loans are to borrowers who have successfully completed a short-term modification program. The Firm continues to report these loans as TDRs since the borrowers’ credit lines remain closed.
(e)
Predominantly all impaired credit card loans are in the U.S.
The following table presents average balances of impaired credit card loans and interest income recognized on those loans.
Year
ended December 31,
(in millions)
2017
2016
2015
Average impaired credit card loans
$
1,214
$
1,325
$
1,710
Interest
income on
impaired credit card loans
59
63
82
Loan modifications
JPMorgan Chase may offer one of a number of loan modification programs to credit card borrowers who are experiencing financial difficulty. Most of the credit card loans have been modified under long-term programs for borrowers who
are experiencing financial difficulties. Modifications under long-term programs involve placing the customer on a fixed payment plan, generally for 60 months. The Firm may also offer short-term programs for borrowers who may be in need of temporary relief; however, none are currently being offered. Modifications under all short- and long-term programs typically include reducing the interest rate on the credit card. Substantially all modifications are considered to be TDRs.
If the cardholder does not comply with the modified payment terms, then the credit card loan continues to age and will ultimately be charged-off in accordance with the Firm’s standard charge-off policy. In most cases, the
Firm does not reinstate the borrower’s line of credit.
New enrollments in these loan modification programs for the years ended December 31, 2017, 2016 and 2015, were $756 million, $636 million and $638 million, respectively.
Financial effects of modifications and redefaults
The following table provides information about the financial effects
of the concessions granted on credit card loans modified in TDRs and redefaults for the periods presented.
Year ended December 31,
(in millions, except
weighted-average data)
2017
2016
2015
Weighted-average
interest rate of loans – before TDR
16.58
%
15.56
%
15.08
%
Weighted-average interest rate of loans – after TDR
4.88
4.76
4.40
Loans
that redefaulted within one year of modification(a)
$
75
$
79
$
85
(a)
Represents
loans modified in TDRs that experienced a payment default in the periods presented, and for which the payment default occurred within one year of the modification. The amounts presented represent the balance of such loans as of the end of the quarter in which they defaulted.
For credit card loans modified in TDRs, a substantial portion of these loans are expected to be charged-off in accordance with the Firm’s standard charge-off policy. Based on historical experience, the estimated weighted-average default rate for modified credit card loans was expected to be 31.54%, 28.87% and 25.61% as of December 31,
2017, 2016 and 2015, respectively.
JPMorgan Chase & Co./2017 Annual Report
227
Notes to consolidated financial statements
Wholesale loan portfolio
Wholesale
loans include loans made to a variety of clients, ranging from large corporate and institutional clients to high-net-worth individuals.
The primary credit quality indicator for wholesale loans is the risk rating assigned to each loan. Risk ratings are used to identify the credit quality of loans and differentiate risk within the portfolio. Risk ratings on loans consider the PD and the LGD. The PD is the likelihood that a loan will default. The LGD is the estimated loss on the loan that would be realized upon the default of the borrower and takes into consideration collateral and structural support for each credit facility.
Management considers several factors to determine an appropriate risk rating, including the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount
and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. The Firm’s definition of criticized aligns with the banking regulatory definition of criticized exposures, which consist of special mention, substandard and doubtful categories. Risk ratings generally represent ratings profiles similar to those defined by S&P and Moody’s. Investment-grade ratings range from “AAA/Aaa” to “BBB-/Baa3.” Noninvestment-grade ratings are classified as noncriticized (“BB+/Ba1 and B-/B3”) and criticized (“CCC+”/“Caa1 and below”), and the criticized portion is further subdivided into performing and nonaccrual loans, representing management’s assessment of the collectibility of principal and interest. Criticized loans have a higher probability of default than noncriticized loans.
Risk
ratings are reviewed on a regular and ongoing basis by Credit Risk Management and are adjusted as necessary for updated information affecting the obligor’s ability to fulfill its obligations.
As noted above, the risk rating of a loan considers the industry in which the obligor conducts its operations. As part of the overall credit risk management framework, the Firm focuses on the management and diversification of its industry and client exposures, with particular attention paid to industries with actual or potential credit concern. See Note 4 for further detail on industry concentrations.
228
JPMorgan
Chase & Co./2017 Annual Report
The table below provides information by class of receivable for the retained loans in the Wholesale portfolio segment.
In 2017 the Firm revised its methodology for the assignment of industry classifications, to better monitor and manage concentrations. This largely resulted in the re-assignment of holding companies from Other to the industry of risk category based on the primary business activity of the holding company's underlying entities. In the tables and industry discussions below, the prior period amounts have been revised to conform with the current period presentation.
Below are summaries of
the Firm’s exposures as of December 31, 2017 and 2016. For additional information on industry concentrations, see Note 4.
As
of or for the year ended December 31,
(in millions, except ratios)
Commercial
and industrial
Real estate
Financial
institutions
Government agencies
Other(d)
Total retained loans
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Loans
by risk ratings
Investment-grade
$
68,071
$
65,687
$
98,467
$
88,649
$
26,791
$
24,294
$
15,140
$
15,935
$
103,212
$
95,358
$
311,681
$
289,923
Noninvestment-
grade:
Noncriticized
46,558
47,531
14,335
16,155
13,071
11,075
369
439
9,988
9,360
84,321
84,560
Criticized
performing
3,983
6,186
710
798
210
200
—
6
259
163
5,162
7,353
Criticized
nonaccrual
1,357
1,491
136
200
2
9
—
—
239
254
1,734
1,954
Total
noninvestment- grade
51,898
55,208
15,181
17,153
13,283
11,284
369
445
10,486
9,777
91,217
93,867
Total
retained loans
$
119,969
$
120,895
$
113,648
$
105,802
$
40,074
$
35,578
$
15,509
$
16,380
$
113,698
$
105,135
$
402,898
$
383,790
%
of total criticized to total retained loans
4.45
%
6.35
%
0.74
%
0.94
%
0.53
%
0.59
%
—
0.04
%
0.44
%
0.40
%
1.71
%
2.43
%
%
of nonaccrual loans to total retained loans
1.13
1.23
0.12
0.19
—
0.03
—
—
0.21
0.24
0.43
0.51
Loans
by geographic distribution(a)
Total
non-U.S.
$
28,470
$
30,563
$
3,101
$
3,302
$
16,790
$
15,147
$
2,906
$
3,726
$
44,112
$
38,776
$
95,379
$
91,514
Total
U.S.
91,499
90,332
110,547
102,500
23,284
20,431
12,603
12,654
69,586
66,359
307,519
292,276
Total
retained loans
$
119,969
$
120,895
$
113,648
$
105,802
$
40,074
$
35,578
$
15,509
$
16,380
$
113,698
$
105,135
$
402,898
$
383,790
Net
charge-offs/(recoveries)
$
117
$
345
$
(4
)
$
(7
)
$
6
$
(1
)
$
5
$
(1
)
$
(5
)
$
5
$
119
$
341
%
of net
charge-offs/(recoveries) to end-of-period retained loans
0.10
%
0.28
%
—
%
(0.01
)%
0.01
%
(0.01
)%
0.03
%
(0.01
)%
—
%
0.01
%
0.03
%
0.09
%
Loan
delinquency(b)
Current
and less than 30 days past due and still accruing
$
118,288
$
119,050
$
113,258
$
105,396
$
40,042
$
35,523
$
15,493
$
16,269
$
112,559
$
104,280
$
399,640
$
380,518
30–89
days past due and still accruing
216
268
242
204
15
25
12
107
898
582
1,383
1,186
90
or more days past due and still accruing(c)
108
86
12
2
15
21
4
4
2
19
141
132
Criticized
nonaccrual
1,357
1,491
136
200
2
9
—
—
239
254
1,734
1,954
Total
retained loans
$
119,969
$
120,895
$
113,648
$
105,802
$
40,074
$
35,578
$
15,509
$
16,380
$
113,698
$
105,135
$
402,898
$
383,790
(a)
The
U.S. and non-U.S. distribution is determined based predominantly on the domicile of the borrower.
(b)
The credit quality of wholesale loans is assessed primarily through ongoing review and monitoring of an obligor’s ability to meet contractual obligations rather than relying on the past due status, which is generally a lagging indicator of credit quality.
(c)
Represents loans that are considered well-collateralized and therefore still accruing interest.
(d)
Other
includes individuals, SPEs, holding companies, and private education and civic organizations. For more information on exposures to SPEs, see Note 14.
JPMorgan Chase & Co./2017 Annual Report
229
Notes to consolidated financial statements
The following table presents additional information on the real estate class of
loans within the Wholesale portfolio for the periods indicated. Exposure consists primarily of secured commercial loans, of which multifamily is the largest segment. Multifamily lending finances acquisition, leasing and construction of apartment buildings, and includes exposure to real estate investment trusts (“REITs”). Other commercial lending largely includes financing for acquisition, leasing and construction, largely for office, retail and industrial real estate, and includes exposure to REITs. Included in real estate loans is $10.8 billion and $9.2 billion as of December 31, 2017 and 2016, respectively,
of construction and development exposure consisting of loans originally purposed for construction and development, general purpose loans for builders, as well as loans for land subdivision and pre-development.
December 31,
(in millions, except ratios)
Multifamily
Other
Commercial
Total real estate loans
2017
2016
2017
2016
2017
2016
Real estate retained loans
$
77,597
$
72,143
$
36,051
$
33,659
$
113,648
$
105,802
Criticized
491
539
355
459
846
998
%
of criticized to total real estate retained loans
0.63
%
0.75
%
0.98
%
1.36
%
0.74
%
0.94
%
Criticized
nonaccrual
$
44
$
57
$
92
$
143
$
136
$
200
%
of criticized nonaccrual to total real estate retained loans
0.06
%
0.08
%
0.26
%
0.42
%
0.12
%
0.19
%
Wholesale
impaired loans and loan modifications
Wholesale impaired loans consist of loans that have been placed on nonaccrual status and/or that have been modified in a TDR. All impaired loans are evaluated for an asset-specific allowance as described in Note 13.
The table below sets forth information about the Firm’s wholesale impaired loans.
December
31,
(in millions)
Commercial
and industrial
Real estate
Financial
institutions
Government
agencies
Other
Total
retained loans
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Impaired
loans
With
an allowance
$
1,170
$
1,127
$
78
$
124
$
93
$
9
$
—
$
—
$
168
$
180
$
1,509
$
1,440
Without
an allowance(a)
228
414
60
87
—
—
—
—
70
76
358
577
Total impaired
loans
$
1,398
$
1,541
$
138
$
211
$
93
$
9
$
—
$
—
$
238
$
256
$
1,867
(c)
$
2,017
(c)
Allowance
for loan losses related to impaired loans
$
404
$
258
$
11
$
18
$
4
$
3
$
—
$
—
$
42
$
63
$
461
$
342
Unpaid
principal balance of impaired loans(b)
1,604
1,754
201
295
94
12
—
—
255
284
2,154
2,345
(a)
When
the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, the loan does not require an allowance. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the loan balance.
(b)
Represents the contractual amount of principal owed at December 31, 2017 and 2016. The unpaid principal balance differs from the impaired loan balances due to various factors, including charge-offs; interest payments received and applied to
the carrying value; net deferred loan fees or costs; and unamortized discount or premiums on purchased loans.
(c)
Based upon the domicile of the borrower, largely consists of loans in the U.S.
The following table presents the Firm’s average impaired loans for the years ended 2017, 2016 and 2015.
Year
ended December 31, (in millions)
2017
2016
2015
Commercial and industrial
$
1,145
$
1,480
$
453
Real
estate
164
217
250
Financial institutions
20
13
13
Government
agencies
—
—
—
Other
231
213
129
Total(a)
$
1,560
$
1,923
$
845
(a)
The
related interest income on accruing impaired loans and interest income recognized on a cash basis were not material for the years ended December 31, 2017, 2016 and 2015.
Certain loan modifications are considered to be TDRs as they provide various concessions to borrowers who are experiencing financial difficulty. All TDRs are reported as impaired loans in the tables above. TDRs were $614 million and $733 million as of December 31, 2017 and 2016.
230
JPMorgan
Chase & Co./2017 Annual Report
Note 13 – Allowance for credit losses
JPMorgan Chase’s allowance for loan losses represents management’s estimate of probable credit losses inherent in the Firm’s retained loan portfolio, which consists of the two consumer portfolio segments (primarily scored) and the wholesale portfolio segment (risk-rated). The allowance for loan losses includes a formula-based component, an asset-specific component, and a component related to PCI loans, as described below. Management also estimates an allowance
for wholesale and certain consumer lending-related commitments using methodologies similar to those used to estimate the allowance on the underlying loans.
During the second quarter of 2017, the Firm refined its credit loss estimates relating to the wholesale portfolio by incorporating the use of internal historical data versus external credit rating agency default statistics to estimate PD. In addition, an adjustment to the statistical calculation for wholesale lending-related commitments was incorporated similar to the adjustment applied for wholesale loans. The impacts of these refinements were not material to the allowance for credit losses.
The Firm’s policies used to determine its allowance for credit losses
are described in the following paragraphs.
Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowances for loan losses and lending-related commitments in future periods. At least quarterly, the allowance for credit losses is reviewed by the CRO, the CFO and the Controller of the Firm and discussed with the DRPC and the Audit Committee. As of December 31, 2017, JPMorgan Chase deemed the allowance for credit losses to be appropriate
(i.e., sufficient to absorb probable credit losses inherent in the portfolio).
Formula-based component
The formula-based component is based on a statistical calculation to provide for incurred credit losses in all consumer loans and performing risk-rated loans. All loans restructured in TDRs as well as any impaired risk-rated loans have an allowance assessed as part of the asset-specific component, while PCI loans have an allowance assessed as part of the PCI component. See Note 12 for more information on TDRs, Impaired loans and PCI loans.
Formula-based component - Consumer loans and certain lending-related commitments
The
formula-based allowance for credit losses for the consumer portfolio segments is calculated by applying statistical credit loss factors (estimated PD and loss severities) to the recorded investment balances or loan-equivalent amounts of pools of loan exposures with similar risk characteristics over a loss emergence period to arrive at an estimate of incurred credit losses. Estimated loss emergence periods may vary by product and may change
over time; management applies judgment in estimating loss emergence periods, using available credit information and trends. In addition, management applies judgment to the statistical loss estimates for each loan portfolio category, using delinquency trends and other risk characteristics to estimate the total incurred credit losses in the portfolio. Management uses additional statistical methods and considers actual portfolio performance, including
actual losses recognized on defaulted loans and collateral valuation trends, to review the appropriateness of the primary statistical loss estimate. The economic impact of potential modifications of residential real estate loans is not included in the statistical calculation because of the uncertainty regarding the type and results of such modifications.
The statistical calculation is then adjusted to take into consideration model imprecision, external factors and current economic events that have occurred but that are not yet reflected in the factors used to derive the statistical calculation; these adjustments are accomplished in part by analyzing the historical loss experience for each major product segment. However, it is difficult to predict whether historical loss experience is indicative of future loss levels. Management applies judgment in making this adjustment, taking into account uncertainties associated with current
macroeconomic and political conditions, quality of underwriting standards, borrower behavior, and other relevant internal and external factors affecting the credit quality of the portfolio. In certain instances, the interrelationships between these factors create further uncertainties. The application of different inputs into the statistical calculation, and the assumptions used by management to adjust the statistical calculation, are subject to management judgment, and emphasizing one input or assumption over another, or considering other inputs or assumptions, could affect the estimate of the allowance for credit losses for the consumer credit portfolio.
Overall, the allowance for credit losses for consumer portfolios is sensitive to changes in the economic environment (e.g., unemployment rates), delinquency rates, the realizable value of collateral (e.g., housing prices), FICO scores, borrower behavior
and other risk factors. While all of these factors are important determinants of overall allowance levels, changes in the various factors may not occur at the same time or at the same rate, or changes may be directionally inconsistent such that improvement in one factor may offset deterioration in another. In addition, changes in these factors would not necessarily be consistent across all geographies or product types. Finally, it is difficult to predict the extent to which changes in these factors would ultimately affect the frequency of losses, the severity of losses or both.
JPMorgan Chase & Co./2017 Annual Report
231
Notes
to consolidated financial statements
Formula-based component - Wholesale loans and lending-related commitments
The Firm’s methodology for determining the allowance for loan losses and the allowance for lending-related commitments involves the early identification of credits that are deteriorating. The formula-based component of the allowance for wholesale loans and lending-related commitments is calculated by applying statistical credit loss factors (estimated PD and LGD) to the recorded investment balances or loan-equivalent over a loss emergence period to arrive at an estimate of incurred credit losses in the portfolio. Estimated loss emergence periods may vary by funded versus unfunded status of the instrument and may change over time.
The
Firm assesses the credit quality of its borrower or counterparty and assigns a risk rating. Risk ratings are assigned at origination or acquisition, and if necessary, adjusted for changes in credit quality over the life of the exposure. In assessing the risk rating of a particular loan or lending-related commitment, among the factors considered are the obligor’s debt capacity and financial flexibility, the level of the obligor’s earnings, the amount and sources for repayment, the level and nature of contingencies, management strength, and the industry and geography in which the obligor operates. These factors are based on an evaluation of historical and current information and involve subjective assessment and interpretation. Determining risk ratings involves significant judgment; emphasizing one factor over another or considering additional factors could affect the risk rating assigned by the Firm.
A
PD estimate is determined based on the Firm’s history of defaults over more than one credit cycle.
LGD estimate is a judgment-based estimate assigned to each loan or lending-related commitment. The estimate represents the amount of economic loss if the obligor were to default. The type of obligor, quality of collateral, and the seniority of the Firm’s lending exposure in the obligor’s capital structure affect LGD.
The Firm applies judgment in estimating PD, LGD, loss emergence period and loan-equivalent used in calculating the allowance for credit losses. Estimates of PD, LGD, loss emergence period and loan-equivalent used are subject to periodic refinement based
on any changes to underlying external or Firm-specific historical data. Changes to the time period used for PD and LGD estimates could also affect the allowance for credit losses. The use of different inputs, estimates or methodologies could change the amount of the allowance for credit losses determined appropriate by the Firm.
In addition to the statistical credit loss estimates applied to the wholesale portfolio, management applies its judgment to adjust the statistical estimates for wholesale loans and lending-related commitments, taking into consideration model imprecision, external factors and economic events that have occurred but are not yet reflected in the loss factors. Historical experience of both LGD and PD are
considered when estimating these adjustments.
Factors related to concentrated and deteriorating industries also are incorporated where relevant. These estimates are based on management’s view of uncertainties that relate to current macroeconomic conditions, quality of underwriting standards and other relevant internal and external factors affecting the credit quality of the current portfolio.
Asset-specific component
The asset-specific component of the allowance relates to loans considered to be impaired, which includes loans that have been modified in TDRs as well as risk-rated loans that have been placed on nonaccrual status. To determine the asset-specific component of the allowance, larger risk-rated loans (primarily loans in the wholesale portfolio segment) are evaluated individually, while smaller loans (both risk-rated and scored) are evaluated as pools using historical
loss experience for the respective class of assets.
The Firm generally measures the asset-specific allowance as the difference between the recorded investment in the loan and the present value of the cash flows expected to be collected, discounted at the loan’s original effective interest rate. Subsequent changes in impairment are reported as an adjustment to the allowance for loan losses. In certain cases, the asset-specific allowance is determined using an observable market price, and the allowance is measured as the difference between the recorded investment in the loan and the loan’s fair value. Collateral-dependent loans are charged down to the fair value of collateral less costs to sell. For any of these impaired loans, the amount of the asset-specific allowance required to be recorded, if any, is dependent upon the recorded investment in the loan (including prior charge-offs), and either the
expected cash flows or fair value of collateral. See Note 12 for more information about charge-offs and collateral-dependent loans.
The asset-specific component of the allowance for impaired loans that have been modified in TDRs (including forgone interest, principal forgiveness, as well as other concessions) incorporates the effect of the modification on the loan’s expected cash flows, which considers the potential for redefault. For residential real estate loans modified in TDRs, the Firm develops product-specific probability of default estimates, which are applied at a loan level to compute expected losses. In developing these probabilities of default, the Firm considers the relationship between the credit quality characteristics
of the underlying loans and certain assumptions about home prices and unemployment, based upon industry-wide data. The Firm also considers its own historical loss experience to-date based on actual redefaulted modified loans. For credit card loans modified in TDRs, expected losses incorporate projected redefaults based on the Firm’s historical experience by type of modification program. For wholesale loans modified in TDRs, expected losses incorporate management’s expectation of the borrower’s ability to repay under the modified terms.
232
JPMorgan
Chase & Co./2017 Annual Report
Estimating the timing and amounts of future cash flows is highly judgmental as these cash flow projections rely upon estimates such as loss severities, asset valuations, default rates (including redefault rates on modified loans), the amounts and timing of interest or principal payments (including any expected prepayments) or other factors that are reflective of current and expected market conditions. These estimates are, in turn, dependent on factors such as the duration of current overall economic conditions, industry-, portfolio-, or borrower-specific factors, the expected outcome of insolvency proceedings as well as, in certain circumstances, other economic factors, including the level of future home prices. All of these estimates
and assumptions require significant management judgment and certain assumptions are highly subjective.
PCI loans
In connection with the acquisition of certain PCI loans, which are accounted for as described in Note 12, the allowance for loan losses for the PCI portfolio is based on quarterly estimates of the amount of principal and interest cash flows expected to be collected over the estimated remaining lives of the loans.
These cash flow projections are based on estimates regarding default rates (including redefault rates on modified loans), loss severities, the amounts and timing of prepayments and other factors that are reflective of current
and expected future market conditions. These estimates are dependent on assumptions regarding the level of future home prices, and the duration of current overall economic conditions, among other factors. These estimates and assumptions require significant management judgment and certain assumptions are highly subjective.
JPMorgan Chase & Co./2017 Annual Report
233
Notes to consolidated financial statements
Allowance
for credit losses and related information
The table below summarizes information about the allowances for loan losses and lending-relating commitments, and includes a breakdown of loans and lending-related commitments by impairment methodology.
2017
Year
ended December 31,
(in millions)
Consumer,
excluding
credit card
Credit card
Wholesale
Total
Allowance for loan losses
Beginning
balance at January 1,
$
5,198
$
4,034
$
4,544
$
13,776
Gross
charge-offs
1,779
4,521
212
6,512
Gross recoveries
(634
)
(398
)
(93
)
(1,125
)
Net
charge-offs
1,145
4,123
119
5,387
Write-offs of PCI loans(a)
86
—
—
86
Provision
for loan losses
613
4,973
(286
)
5,300
Other
(1
)
—
2
1
Ending
balance at December 31,
$
4,579
$
4,884
$
4,141
$
13,604
Allowance
for loan losses by impairment methodology
Asset-specific(b)
$
246
$
383
(c)
$
461
$
1,090
Formula-based
2,108
4,501
3,680
10,289
PCI
2,225
—
—
2,225
Total
allowance for loan losses
$
4,579
$
4,884
$
4,141
$
13,604
Loans
by impairment methodology
Asset-specific
$
8,036
$
1,215
$
1,867
$
11,118
Formula-based
333,941
148,172
401,028
883,141
PCI
30,576
—
3
30,579
Total
retained loans
$
372,553
$
149,387
$
402,898
$
924,838
Impaired
collateral-dependent loans
Net charge-offs
$
64
$
—
$
31
$
95
Loans
measured at fair value of collateral less cost to sell
2,133
—
233
2,366
Allowance
for lending-related commitments
Beginning balance at January 1,
$
26
$
—
$
1,052
$
1,078
Provision
for lending-related commitments
7
—
(17
)
(10
)
Other
—
—
—
—
Ending
balance at December 31,
$
33
$
—
$
1,035
$
1,068
Allowance
for lending-related commitments by impairment methodology
Asset-specific
$
—
$
—
$
187
$
187
Formula-based
33
—
848
881
Total
allowance for lending-related commitments
$
33
$
—
$
1,035
$
1,068
Lending-related
commitments by impairment methodology
Asset-specific
$
—
$
—
$
731
$
731
Formula-based
48,553
572,831
369,367
990,751
Total
lending-related commitments
$
48,553
$
572,831
$
370,098
$
991,482
(a)
Write-offs
of PCI loans are recorded against the allowance for loan losses when actual losses for a pool exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. A write-off of a PCI loan is recognized when the underlying loan is removed from a pool.
(b)
Includes risk-rated loans that have been placed on nonaccrual status and all loans that have been modified in a TDR.
(c)
The asset-specific credit card allowance for loan losses is related to loans that have been modified in a TDR;
such allowance is calculated based on the loans’ original contractual interest rates and does not consider any incremental penalty rates.
(d)
The prior period amounts have been revised to conform with the current period presentation.
234
JPMorgan Chase & Co./2017 Annual Report
(table
continued from previous page)
2016
2015
Consumer,
excluding
credit card
Credit card
Wholesale
Total
Consumer,
excluding
credit card
Credit card
Wholesale
Total
$
5,806
$
3,434
$
4,315
$
13,555
$
7,050
$
3,439
$
3,696
$
14,185
1,500
3,799
398
5,697
1,658
3,488
95
5,241
(591
)
(357
)
(57
)
(1,005
)
(704
)
(366
)
(85
)
(1,155
)
909
3,442
341
4,692
954
3,122
10
4,086
156
—
—
156
208
—
—
208
467
4,042
571
5,080
(82
)
3,122
623
3,663
(10
)
—
(1
)
(11
)
—
(5
)
6
1
$
5,198
$
4,034
$
4,544
$
13,776
$
5,806
$
3,434
$
4,315
$
13,555
$
308
$
358
(c)
$
342
$
1,008
$
364
$
460
(c)
$
274
$
1,098
2,579
3,676
4,202
10,457
2,700
2,974
4,041
9,715
2,311
—
—
2,311
2,742
—
—
2,742
$
5,198
$
4,034
$
4,544
$
13,776
$
5,806
$
3,434
$
4,315
$
13,555
$
8,940
$
1,240
$
2,017
$
12,197
$
9,606
$
1,465
$
1,024
$
12,095
319,787
140,471
381,770
842,028
293,751
129,922
356,022
779,695
35,679
—
3
35,682
40,998
—
4
41,002
$
364,406
$
141,711
$
383,790
$
889,907
$
344,355
$
131,387
$
357,050
$
832,792
$
98
$
—
$
7
$
105
$
104
$
—
$
16
$
120
2,391
—
300
2,691
2,566
—
283
2,849
$
14
$
—
$
772
$
786
$
13
$
—
$
609
$
622
—
—
281
281
1
—
163
164
12
—
(1
)
11
—
—
—
—
$
26
$
—
$
1,052
$
1,078
$
14
$
—
$
772
$
786
$
—
$
—
$
169
$
169
$
—
$
—
$
73
$
73
26
—
883
909
14
—
699
713
$
26
$
—
$
1,052
$
1,078
$
14
$
—
$
772
$
786
$
—
$
—
$
506
$
506
$
—
$
—
$
193
$
193
53,247
(d)
553,891
367,508
974,646
(d)
56,865
(d)
515,518
366,206
938,589
(d)
$
53,247
(d)
$
553,891
$
368,014
$
975,152
(d)
$
56,865
(d)
$
515,518
$
366,399
$
938,782
(d)
JPMorgan
Chase & Co./2017 Annual Report
235
Notes to consolidated financial statements
Note 14 – Variable interest entities
For a further description of JPMorgan Chase’s accounting policies regarding consolidation of VIEs, see Note 1.
The following table summarizes the most significant types of Firm-sponsored VIEs by business segment.
The Firm considers a “sponsored” VIE to include any entity where: (1) JPMorgan Chase is the primary beneficiary of the structure; (2) the VIE is used by JPMorgan Chase to securitize Firm assets; (3) the VIE issues financial instruments with the JPMorgan Chase name; or (4) the entity is a JPMorgan Chase–administered asset-backed commercial paper conduit.
Line of Business
Transaction Type
Activity
Annual
Report
page references
CCB
Credit card securitization trusts
Securitization of originated credit card receivables
236-237
Mortgage securitization trusts
Servicing and securitization of both originated and purchased residential mortgages
237-239
CIB
Mortgage and other securitization trusts
Securitization
of both originated and purchased residential and commercial mortgages and other consumer loans
237-239
Multi-seller conduits
Assist clients in accessing the financial markets in a cost-efficient manner and structures transactions to meet investor needs
239
Municipal bond vehicles
Financing of municipal bond investments
239-240
The Firm’s other business segments are also involved with VIEs (both third-party and
Firm-sponsored), but to a lesser extent, as follows:
•
Asset & Wealth Management: AWM sponsors and manages certain funds that are deemed VIEs. As asset manager of the funds, AWM earns a fee based on assets managed; the fee varies with each fund’s investment objective and is competitively priced. For fund entities that qualify as VIEs, AWM’s interests are, in certain cases, considered to be significant variable interests that result in consolidation of the financial results of these entities.
•
Commercial
Banking: CB provides financing and lending-related services to a wide spectrum of clients, including certain third party-sponsored entities that may meet the definition of a VIE. CB does not control the activities of these entities and does not consolidate these entities. CB’s maximum loss exposure, regardless of whether the entity is a VIE, is generally limited to loans and lending-related commitments which are reported and disclosed in the same manner as any other third-party transaction.
•
Corporate: Corporate is involved with entities that may meet
the definition of VIEs; however these entities are generally subject to specialized investment company accounting, which does not require the consolidation of investments, including VIEs. In addition, Treasury and CIO invest in securities generally issued by third parties which may meet the definition of VIEs (e.g., issuers of asset-backed securities). In general, the Firm does not have the power to direct the significant activities of these entities and therefore does not consolidate these entities. See Note 10 for further information on the Firm’s investment securities portfolio.
In addition, CIB also invests in and provides financing and other services to VIEs sponsored by third parties. See pages 241-242 of this
Note for more information on the VIEs sponsored by third parties.
CCB’s Card business securitizes originated credit card loans, primarily through the Chase Issuance Trust (the “Trust”). The Firm’s continuing involvement in credit card securitizations includes servicing the receivables, retaining an undivided seller’s interest in the receivables, retaining certain senior and subordinated securities and maintaining escrow accounts.
The Firm is considered to be the primary beneficiary of these Firm-sponsored credit card securitization trusts based on the Firm’s ability to direct the activities of these
VIEs through its servicing responsibilities and other duties, including making decisions as to the receivables that are transferred into those trusts and as to any related modifications and workouts. Additionally, the nature and extent of the Firm’s other continuing involvement with the trusts, as indicated above, obligates the Firm to absorb
losses and gives the Firm the right to receive certain benefits from these VIEs that could potentially be significant.
The underlying securitized credit card receivables and other assets of the securitization trusts are available only for payment of the beneficial interests issued by the securitization trusts; they are not available to pay the Firm’s other obligations or the claims of the Firm’s creditors.
The agreements with the credit card securitization
trusts require the Firm to maintain a minimum undivided interest in the credit card trusts (generally 5%). As of December 31, 2017 and 2016, the Firm held undivided interests in Firm-sponsored credit card securitization trusts of $15.8 billion and $8.9 billion, respectively. The Firm maintained an average undivided interest in principal receivables owned by those trusts of approximately 26% and 16% for the years ended December 31, 2017 and 2016.
As of both
236
JPMorgan Chase & Co./2017 Annual Report
December 31, 2017 and 2016, the Firm did not retain any senior securities and retained $4.5 billion and $5.3
billion of subordinated securities in certain of its credit card securitization trusts as of December 31, 2017 and 2016, respectively. The Firm’s undivided interests in the credit card trusts and securities retained are eliminated in consolidation.
Firm-sponsored mortgage and other securitization trusts
The Firm securitizes (or has securitized) originated and purchased residential mortgages, commercial mortgages and other consumer loans primarily in its CCB and CIB businesses. Depending on the particular transaction, as well as
the respective business involved, the Firm may act as the servicer of the loans and/or retain certain beneficial interests in the securitization trusts.
The following table presents the total unpaid principal amount of assets held in Firm-sponsored private-label securitization entities, including those in which the Firm has continuing involvement, and those that are consolidated by the Firm. Continuing involvement includes servicing the loans, holding senior interests or subordinated interests (including amounts required to be held pursuant to credit risk retention rules), recourse or guarantee arrangements, and derivative transactions. In certain instances,
the Firm’s only continuing involvement is servicing the loans. See Securitization activity on page 242 of this Note for further information regarding the Firm’s cash flows with and interests retained in nonconsolidated VIEs, and page 243 of this Note for information on the Firm’s loan sales to U.S. government agencies.
Principal
amount outstanding
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(c)(d)(e)
Assets held in nonconsolidated securitization VIEs with continuing involvement
Trading
assets
Securities
Other financial assets
Total interests held by JPMorgan Chase
Securitization-related(a)
Residential
mortgage:
Prime/Alt-A and option ARMs
$
76,789
$
4,209
$
57,543
$
226
$
1,334
$
—
$
1,560
Subprime
21,542
—
19,903
76
—
—
76
Commercial
and other(b)
101,265
107
71,464
509
2,064
—
2,573
Total
$
199,596
$
4,316
$
148,910
$
811
$
3,398
$
—
$
4,209
(a)
Excludes
U.S. government agency securitizations and re-securitizations, which are not Firm-sponsored. See page 243 of this Note for information on the Firm’s loan sales to U.S. government agencies.
(b)
Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from third parties.
(c)
Excludes the following: retained servicing (see Note 15 for a discussion
of MSRs); securities retained from loan sales to U.S. government agencies; interest rate and foreign exchange derivatives primarily used to manage interest rate and foreign exchange risks of securitization entities (See Note 5 for further information on derivatives); senior and subordinated securities of $88 million and $48 million, respectively, at December 31, 2017, and $180 million and $49 million, respectively, at December 31, 2016, which the Firm purchased in connection with CIB’s secondary market-making activities.
(d)
Includes
interests held in re-securitization transactions.
(e)
As of December 31, 2017 and 2016, 61% and 61%, respectively, of the Firm’s retained securitization interests, which are predominantly carried at fair value and include amounts required to be held pursuant to credit risk retention rules, were risk-rated “A” or better, on an S&P-equivalent basis. The retained interests in prime residential mortgages consisted of $1.3 billion
and $1.5 billion of investment-grade and $48 million and $77 million of noninvestment-grade retained interests at December 31, 2017 and 2016, respectively. The retained interests in commercial and other securitizations trusts consisted of $1.6 billion and $2.4 billion of investment-grade and $412 million and $210 million of noninvestment-grade retained interests at December 31,
2017 and 2016, respectively.
JPMorgan Chase & Co./2017 Annual Report
237
Notes to consolidated financial statements
Residential mortgage
The Firm securitizes residential mortgage
loans originated by CCB, as well as residential mortgage loans purchased from third parties by either CCB or CIB. CCB generally retains servicing for all residential mortgage loans it originated or purchased, and for certain mortgage loans purchased by CIB. For securitizations of loans serviced by CCB, the Firm has the power to direct the significant activities of the VIE because it is responsible for decisions related to loan modifications and workouts. CCB may also retain an interest upon securitization.
In addition, CIB engages in underwriting
and trading activities involving securities issued by Firm-sponsored securitization trusts. As a result, CIB at times retains senior and/or subordinated interests (including residual interests and amounts required to be held pursuant to credit risk retention rules) in residential mortgage securitizations at the time of securitization, and/or reacquires positions in the secondary market in the normal course of business. In certain instances, as a result of the positions retained or reacquired by CIB or held by CCB, when considered together with the servicing arrangements entered into by CCB, the Firm is deemed to be the primary beneficiary of certain securitization trusts. See the table on page
241 of this Note for more information on consolidated residential mortgage securitizations.
The Firm does not consolidate a residential mortgage securitization (Firm-sponsored or third-party-sponsored) when it is not the servicer (and therefore does not have the power to direct the most significant activities of the trust) or does not hold a beneficial interest in the trust that could potentially be significant to the trust. See the table on page 241 of this Note for more information on the consolidated residential mortgage securitizations, and the table on the previous page of this Note for further information on interests held in nonconsolidated residential mortgage
securitizations.
Commercial mortgages and other consumer securitizations
CIB originates and securitizes commercial mortgage loans, and engages in underwriting and trading activities involving the securities issued by securitization trusts. CIB may retain unsold senior and/or subordinated interests (including amounts required to be held pursuant to credit risk retention rules) in commercial mortgage securitizations at the time of securitization but, generally, the Firm does not service commercial loan securitizations. For commercial mortgage securitizations the power to direct the significant activities of the VIE generally is held by the servicer or investors in a specified class of securities (“controlling class”). The Firm generally
does not retain an interest in the controlling class in its sponsored commercial mortgage securitization transactions. See the table on page 241 of this Note for more information on the consolidated commercial mortgage securitizations, and the table on the previous page of this Note for further information on interests held in nonconsolidated securitizations.
Re-securitizations
The Firm engages in certain re-securitization transactions in which debt securities are transferred to a VIE in exchange for new beneficial interests. These transfers occur in connection with both agency (Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”)
and Government National Mortgage Association (“Ginnie Mae”)) and nonagency (private-label) sponsored VIEs, which may be backed by either residential or commercial mortgages. The Firm’s consolidation analysis is largely dependent on the Firm’s role and interest in the re-securitization trusts.
The following table presents the principal amount of securities transferred to re-securitization VIEs.
Year ended December 31, (in millions)
2017
2016
2015
Transfers
of securities to VIEs
Firm-sponsored private-label
$
—
$
647
$
777
Agency
$
12,617
$
11,241
$
21,908
Most
re-securitizations with which the Firm is involved are client-driven transactions in which a specific client or group of clients is seeking a specific return or risk profile. For these transactions, the Firm has concluded that the decision-making power of the entity is shared between the Firm and its clients, considering the joint effort and decisions in establishing the re-securitization trust and its assets, as well as the significant economic interest the client holds in the re-securitization trust; therefore the Firm does not consolidate the re-securitization VIE.
In more limited circumstances, the Firm creates a nonagency re-securitization trust independently and not in conjunction with specific clients. In these circumstances, the Firm is deemed to have the unilateral ability to direct the most significant activities of the re-securitization trust because of the decisions made during the establishment and design of the
trust; therefore, the Firm consolidates the re-securitization VIE if the Firm holds an interest that could potentially be significant.
Additionally, the Firm may invest in beneficial interests of third-party re-securitizations and generally purchases these interests in the secondary market. In these circumstances, the Firm does not have the unilateral ability to direct the most significant activities of the re-securitization trust, either because it was not involved in the initial design of the trust, or the Firm is involved with an independent third-party sponsor and demonstrates shared power over the creation of the trust; therefore, the Firm does not consolidate the re-securitization VIE.
238
JPMorgan
Chase & Co./2017 Annual Report
The following table presents information on nonconsolidated re-securitization VIEs.
Year ended December 31,
(in millions)
2017
2016
Firm-sponsored
private-label
Assets held in VIEs with continuing involvement(a)
783
875
Interest in VIEs
29
43
Agency
Interest
in VIEs
2,250
1,986
(a)
Represents the principal amount and includes the notional amount of interest-only securities.
As of December 31, 2017 and 2016,
the Firm did not consolidate any agency re-securitizations or any Firm-sponsored private-label re-securitizations.
Multi-seller conduits
Multi-seller conduit entities are separate bankruptcy remote entities that provide secured financing, collateralized by pools of receivables and other financial assets, to customers of the Firm. The conduits fund their financing facilities through the issuance of highly rated commercial paper. The primary source of repayment of the commercial paper is the cash flows from the pools of assets. In most instances, the assets are structured with deal-specific credit enhancements provided to the conduits by the customers (i.e., sellers) or other third parties. Deal-specific credit enhancements are generally structured to cover a multiple of historical losses expected on the pool of assets, and are typically
in the form of overcollateralization provided by the seller. The deal-specific credit enhancements mitigate the Firm’s potential losses on its agreements with the conduits.
To ensure timely repayment of the commercial paper, and to provide the conduits with funding to provide financing to customers in the event that the conduits do not obtain funding in the commercial paper market, each asset pool financed by the conduits has a minimum 100% deal-specific liquidity facility associated with it provided by JPMorgan Chase Bank, N.A. JPMorgan Chase Bank, N.A. also provides the multi-seller conduit vehicles with uncommitted program-wide liquidity facilities and program-wide credit enhancement in the form of standby letters of credit. The amount of program-wide credit enhancement required is based upon commercial paper issuance and approximates 10%
of the outstanding balance of commercial paper.
The Firm consolidates its Firm-administered multi-seller conduits, as the Firm has both the power to direct the significant activities of the conduits and a potentially significant economic interest in the conduits. As administrative agent and in its role in structuring transactions, the Firm makes decisions regarding asset types and credit quality, and manages the commercial paper funding needs of the conduits. The Firm’s interests that could potentially be significant to the VIEs include the fees received as administrative agent and liquidity and program-wide credit enhancement provider, as well as the potential exposure created by the liquidity
and credit
enhancement facilities provided to the conduits. See page 241 of this Note for further information on consolidated VIE assets and liabilities.
In the normal course of business, JPMorgan Chase makes markets in and invests in commercial paper issued by the Firm-administered multi-seller conduits. The Firm held $20.4 billion and $21.2 billion of the commercial paper issued by the Firm-administered multi-seller
conduits at December 31, 2017 and 2016, respectively, which have been eliminated in consolidation. The Firm’s investments reflect the Firm’s funding needs and capacity and were not driven by market illiquidity. Other than the amounts required to be held pursuant to credit risk retention rules, the Firm is not obligated under any agreement to purchase the commercial paper issued by the Firm-administered multi-seller conduits.
Deal-specific liquidity
facilities, program-wide liquidity and credit enhancement provided by the Firm have been eliminated in consolidation. The Firm or the Firm-administered multi-seller conduits provide lending-related commitments to certain clients of the Firm-administered multi-seller conduits. The unfunded commitments were $8.8 billion and $7.4 billion at December 31, 2017 and 2016, respectively, and are reported as off-balance sheet lending-related commitments. For more information on off-balance sheet lending-related commitments, see Note 27.
Municipal
bond vehicles
Municipal bond vehicles or tender option bond (“TOB”) trusts allow institutions to finance their municipal bond investments at short-term rates. In a typical TOB transaction, the trust purchases highly rated municipal bond(s) of a single issuer and funds the purchase by issuing two types of securities: (1) puttable floating-rate certificates (“Floaters”) and (2) inverse floating-rate residual interests (“Residuals”). The Floaters are typically purchased by money market funds or other short-term investors and may be tendered, with requisite notice, to the TOB trust. The Residuals are retained by the investor seeking to finance its municipal bond investment. TOB transactions where the Residual is held by a third party investor are typically known as Customer TOB trusts, and Non-Customer TOB trusts are transactions where the Residual is retained
by the Firm. Customer TOB trusts are sponsored by a third party; see page 242 on this Note for further information. The Firm serves as sponsor for all Non-Customer TOB transactions. The Firm may provide various services to a TOB trust, including remarketing agent, liquidity or tender option provider, and/or sponsor.
J.P. Morgan Securities LLC may serve as a remarketing agent on the Floaters for TOB trusts. The remarketing agent is responsible for establishing the periodic variable rate on the Floaters, conducting the initial placement and remarketing tendered Floaters. The remarketing agent may, but is not obligated to, make markets in Floaters. The Firm held an insignificant amount of Floaters
during 2017 and 2016.
JPMorgan Chase & Co./2017 Annual Report
239
Notes to consolidated financial statements
JPMorgan Chase Bank, N.A. or J.P. Morgan Securities LLC often serves as the sole liquidity or tender option
provider for the TOB trusts. The liquidity provider’s obligation to perform is conditional and is limited by certain events (“Termination Events”), which include bankruptcy or failure to pay by the municipal bond issuer or credit enhancement provider, an event of taxability on the municipal bonds or the immediate downgrade of the municipal bond to below investment grade. In addition, the liquidity provider’s exposure is typically further limited by the high credit quality of the underlying municipal bonds, the excess collateralization in the vehicle, or, in certain transactions, the reimbursement agreements with the Residual holders.
Holders of the Floaters may “put,” or tender, their Floaters to the TOB trust. If the remarketing agent cannot successfully remarket the Floaters to another investor, the liquidity provider either provides a loan to the TOB trust for the TOB trust’s purchase of the Floaters, or it
directly purchases the tendered Floaters.
TOB trusts are considered to be variable interest entities. The Firm consolidates Non-Customer TOB trusts because as the Residual holder, the Firm has the right to make decisions that significantly impact the economic performance of the municipal bond vehicle, and it has the right to receive benefits and bear losses that could potentially be significant to the municipal bond vehicle. See page 241 of this Note for further information on consolidated municipal bond vehicles.
240
JPMorgan
Chase & Co./2017 Annual Report
Consolidated VIE assets and liabilities
The following table presents information on assets and liabilities related to VIEs consolidated by the Firm as of December 31, 2017 and 2016.
Excludes
intercompany transactions, which are eliminated in consolidation.
(b)
Includes residential and commercial mortgage securitizations.
(c)
The Firm deconsolidated the student loan securitization entities in the second quarter of 2017 as it no longer had a controlling financial interest in these entities as a result of the sale of the student loan portfolio.
(d)
Includes
assets classified as cash and other assets on the Consolidated balance sheets.
(e)
The assets of the consolidated VIEs included in the program types above are used to settle the liabilities of those entities. The difference between total assets and total liabilities recognized for consolidated VIEs represents the Firm’s interest in the consolidated VIEs for each program type.
(f)
The interest-bearing beneficial interest liabilities issued by consolidated VIEs are classified in the line item on the Consolidated balance
sheets titled, “Beneficial interests issued by consolidated variable interest entities.” The holders of these beneficial interests do not have recourse to the general credit of JPMorgan Chase. Included in beneficial interests in VIE assets are long-term beneficial interests of $21.8 billion and $33.4 billion at December 31, 2017 and 2016, respectively. For additional information on interest bearing long-term beneficial interest, see Note 19.
(g)
Includes
liabilities classified as accounts payable and other liabilities on the Consolidated balance sheets.
VIEs sponsored by third parties
The Firm enters into transactions with VIEs structured by other parties. These include, for example, acting as a derivative counterparty, liquidity provider, investor, underwriter, placement agent, remarketing agent, trustee or custodian. These transactions are conducted at arm’s-length, and individual credit decisions are based on the analysis of the specific VIE, taking into consideration the quality of the underlying assets. Where the Firm does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, or a variable interest that could potentially
be significant, the Firm generally does not consolidate the VIE, but it records and reports these positions on its Consolidated balance sheets in the same manner it would record and report positions in respect of any other third-party transaction.
Tax credit vehicles
The Firm holds investments in unconsolidated tax credit vehicles, which are limited partnerships and similar entities that construct, own and operate affordable housing, wind, solar and other alternative energy projects. These entities are primarily considered VIEs. A third party is typically the general partner or managing member and has control over the significant
activities of the tax credit vehicles, and accordingly the Firm does not consolidate tax credit vehicles. The Firm generally invests in these partnerships as a limited partner and earns a return primarily through the receipt of tax credits allocated to the projects. The maximum loss exposure, represented by equity investments and funding commitments, was $13.4 billion and $14.8 billion, of which $3.2 billion and $3.8 billion was unfunded at December 31, 2017 and 2016
respectively. In order to reduce the risk of loss, the Firm assesses each project and withholds varying amounts of its capital investment until qualification of the project for tax credits. See Note 24 for
JPMorgan Chase & Co./2017 Annual Report
241
Notes to consolidated financial statements
further
information on affordable housing tax credits. For more information on off-balance sheet lending-related commitments, see Note 27.
Customer municipal bond vehicles (TOB trusts)
The Firm may provide various services to Customer TOB trusts, including remarketing agent, liquidity or tender option provider. In certain Customer TOB transactions, the Firm, as liquidity provider, has entered into a reimbursement agreement with the Residual holder. In those transactions, upon the termination of the vehicle, the Firm has recourse to the third party Residual holders for any shortfall. The Firm does not have any intent to protect
Residual holders from potential losses on any of the underlying municipal bonds. The Firm does not consolidate Customer TOB trusts, since the Firm does not have the power to make decisions that significantly impact the economic performance of the municipal bond vehicle. The Firm’s maximum exposure as a liquidity provider to Customer TOB trusts at December 31, 2017 and 2016, was $5.3 billion and $5.0 billion, respectively. The fair value of assets held by such VIEs at December 31,
2017 and 2016 was $9.2 billion and $8.9 billion, respectively. For more information on off-balance sheet lending-related commitments, see Note 27.
Loan securitizations
The Firm has securitized and sold a variety of loans, including residential mortgage, credit card, student and commercial (primarily related to real estate) loans, as well as debt securities. The purposes of these securitization transactions were to satisfy investor demand and to generate liquidity for the Firm.
For
loan securitizations in which the Firm is not required to consolidate the trust, the Firm records the transfer of the loan receivable to the trust as a sale when all of the following accounting criteria for a sale are met: (1) the transferred financial assets are legally isolated from the Firm’s creditors; (2) the transferee or beneficial interest holder can pledge or exchange the transferred financial assets; and (3) the Firm does not maintain effective control over the transferred financial assets (e.g., the Firm cannot repurchase the transferred assets before their maturity and it does not have the ability to unilaterally cause the holder to return the transferred assets).
For loan securitizations
accounted for as a sale, the Firm recognizes a gain or loss based on the difference between the value of proceeds received (including cash, beneficial interests, or servicing assets received) and the carrying value of the assets sold. Gains and losses on securitizations are reported in noninterest revenue.
Securitization activity
The following table provides information related to the Firm’s securitization activities for the years ended December 31, 2017, 2016 and 2015, related to assets held in Firm-sponsored
securitization entities that were not consolidated by the Firm, and where sale accounting was achieved at the time of the securitization.
2017
2016
2015
Year
ended December 31,
(in millions, except rates)
Residential mortgage(d)
Commercial and other(e)
Residential mortgage(d)
Commercial and other(e)
Residential mortgage(d)
Commercial
and other(e)
Principal securitized
$
5,532
$
10,252
$
1,817
$
8,964
$
3,008
$
11,933
All
cash flows during the period:(a)
Proceeds received from loan sales as financial instruments(b)
$
5,661
$
10,340
$
1,831
$
9,094
$
3,022
$
12,011
Servicing
fees collected
525
3
477
3
528
3
Purchases
of previously transferred financial assets (or the underlying collateral)(c)
1
—
37
—
3
—
Cash
flows received on interests
463
918
482
1,441
407
597
(a)
Excludes
re-securitization transactions.
(b)
Predominantly includes Level 2 assets.
(c)
Includes cash paid by the Firm to reacquire assets from off–balance sheet, nonconsolidated entities – for example, loan repurchases due to representation and warranties and servicer “clean-up” calls.
(d)
Includes
prime/Alt-A, subprime, and option ARMs. Excludes certain loan securitization transactions entered into with Ginnie Mae, Fannie Mae and Freddie Mac.
(e)
Includes commercial mortgage and other consumer loans.
Key assumptions used to value retained interests originated during the year are shown in the table below.
Loans and excess MSRs sold to U.S. government-sponsored enterprises, loans in securitization transactions pursuant to Ginnie Mae guidelines, and other third-party-sponsored securitization entities
In addition to the amounts reported in the securitization activity tables above, the Firm, in the normal course of business, sells originated and purchased mortgage loans and certain originated excess MSRs on a nonrecourse basis, predominantly to U.S. government sponsored enterprises (“U.S. GSEs”). These loans and excess MSRs are sold primarily for the purpose of securitization by the U.S. GSEs, who provide certain guarantee provisions (e.g.,
credit enhancement of the loans). The Firm also sells loans into securitization transactions pursuant to Ginnie Mae guidelines; these loans are typically insured or guaranteed by another U.S. government agency. The Firm does not consolidate the securitization vehicles underlying these transactions as it is not the primary beneficiary. For a limited number of loan sales, the Firm is obligated to share a portion of the credit risk associated with the sold loans with the purchaser. See Note 27 for additional information about the Firm’s loan sales- and securitization-related indemnifications.
See Note 15
for additional information about the impact of the Firm’s sale of certain excess MSRs.
The following table summarizes the activities related to loans sold to the U.S. GSEs, loans in securitization transactions pursuant to Ginnie Mae guidelines, and other third-party-sponsored securitization entities.
Year ended December 31, (in millions)
2017
2016
2015
Carrying
value of loans sold
$
64,542
$
52,869
$
42,161
Proceeds received from loan sales as cash
$
117
$
592
$
313
Proceeds
from loans sales as securities(a)
63,542
51,852
41,615
Total proceeds received from loan sales(b)
$
63,659
$
52,444
$
41,928
Gains
on loan sales(c)(d)
$
163
$
222
$
299
(a)
Predominantly includes securities from U.S. GSEs and Ginnie
Mae that are generally sold shortly after receipt.
(b)
Excludes the value of MSRs retained upon the sale of loans.
(c)
Gains on loan sales include the value of MSRs.
(d)
The carrying value of the loans accounted for at fair value approximated
the proceeds received upon loan sale.
Options to repurchase delinquent loans
In addition to the Firm’s obligation to repurchase certain loans due to material breaches of representations and warranties as discussed in Note 27, the Firm also has the option to repurchase delinquent loans that it services for Ginnie Mae loan pools, as well as for other U.S. government agencies under certain arrangements. The Firm typically elects to repurchase delinquent loans from Ginnie Mae loan pools as it continues to service them and/or manage the foreclosure process in accordance with the applicable requirements, and such loans continue to be insured or guaranteed. When
the Firm’s repurchase option becomes exercisable, such loans must be reported on the Consolidated balance sheets as a loan with a corresponding liability.
The following table presents loans the Firm repurchased or had an option to repurchase, real estate owned, and foreclosed government-guaranteed residential mortgage loans recognized on the Firm’s Consolidated balance sheets as of December 31, 2017 and 2016. Substantially all of these loans and real estate are insured or guaranteed by U.S. government agencies. For additional information, refer to Note 12.
Predominantly
all of these amounts relate to loans that have been repurchased from Ginnie Mae loan pools.
(b)
Relates to voluntary repurchases of loans, which are included in accrued interest and accounts receivable.
Loan delinquencies and liquidation losses
The table below includes information about components of nonconsolidated securitized financial assets held in
Firm-sponsored private-label securitization entities, in which the Firm has continuing involvement, and delinquencies as of December 31, 2017 and 2016.
Securitized
assets
90 days past due
Liquidation losses
As of or for the year ended December 31, (in millions)
2017
2016
2017
2016
2017
2016
Securitized
loans
Residential mortgage:
Prime/
Alt-A & option ARMs
$
52,280
$
57,543
$
4,870
$
6,169
$
790
$
1,160
Subprime
17,612
19,903
3,276
4,186
719
1,087
Commercial
and other
63,411
71,464
957
1,755
114
643
Total
loans securitized
$
133,303
$
148,910
$
9,103
$
12,110
$
1,623
$
2,890
JPMorgan
Chase & Co./2017 Annual Report
243
Notes to consolidated financial statements
Note 15 – Goodwill and Mortgage servicing rights
Goodwill
Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of the net assets acquired. Subsequent to initial recognition, goodwill is not amortized but is tested for impairment during the fourth quarter of each fiscal year, or more often if events or circumstances, such as adverse
changes in the business climate, indicate there may be impairment.
The goodwill associated with each business combination is allocated to the related reporting units, which are determined based on how the Firm’s businesses are managed and how they are reviewed by the Firm’s Operating Committee. The following table presents goodwill attributed to the business segments.
December 31, (in millions)
2017
2016
2015
Consumer
& Community Banking
$
31,013
$
30,797
$
30,769
Corporate & Investment Bank
6,776
6,772
6,772
Commercial
Banking
2,860
2,861
2,861
Asset & Wealth Management
6,858
6,858
6,923
Total
goodwill
$
47,507
$
47,288
$
47,325
The following table presents changes in the carrying amount of goodwill.
Year
ended December 31, (in millions)
2017
2016
2015
Balance at beginning of period
$
47,288
$
47,325
$
47,647
Changes
during the period from:
Business combinations(a)
199
—
28
Dispositions(b)
—
(72
)
(160
)
Other(c)
20
35
(190
)
Balance
at December 31,
$
47,507
$
47,288
$
47,325
(a)
For
2017, represents CCB goodwill in connection with an acquisition.
(b)
For 2016, represents AWM goodwill, which was disposed of as part of an AWM sales transaction. For 2015 includes $101 million of Private Equity goodwill, which was disposed of as part of the Private Equity sale.
(c)
Includes foreign currency translation adjustments and other tax-related adjustments.
Impairment
testing
The Firm’s goodwill was not impaired at December 31, 2017, 2016, and 2015.
The goodwill impairment test is performed in two steps. In the first step, the current fair value of each reporting unit is compared with its carrying value, including goodwill and other intangible assets. If the fair value is in excess of the carrying value, then the reporting unit’s goodwill is considered to be not impaired. If the fair value is less than the carrying value, then a second step is performed. In the second step, the implied current fair value of the reporting unit’s goodwill
is determined by comparing the fair value of the reporting unit (as determined in step one) to the fair value of the net assets of the reporting unit, as if the reporting unit were being acquired in a business combination. The resulting implied current fair value of goodwill is then compared with the carrying value of the reporting unit’s goodwill. If the carrying value of the goodwill exceeds its implied current fair value, then an impairment charge is recognized for the excess. If the carrying value of goodwill is less than its implied current fair value, then no goodwill impairment is recognized.
The Firm uses the reporting units’ allocated capital plus goodwill
and other intangible assets capital as a proxy for the carrying values of equity for the reporting units in the goodwill impairment testing. Reporting unit equity is determined on a similar basis as the allocation of capital to the Firm’s lines of business, which takes into consideration the capital the business segment would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III) and capital levels for similarly rated peers. Proposed line of business equity levels are incorporated into the Firm’s annual budget process, which is reviewed by the Firm’s Board of Directors. Allocated capital is further reviewed on a periodic basis and updated as needed.
244
JPMorgan
Chase & Co./2017 Annual Report
The primary method the Firm uses to estimate the fair value of its reporting units is the income approach. This approach projects cash flows for the forecast period and uses the perpetuity growth method to calculate terminal values. These cash flows and terminal values are then discounted using an appropriate discount rate. Projections of cash flows are based on the reporting units’ earnings forecasts which are reviewed with senior management of the Firm. The discount rate used for each reporting unit represents an estimate of the cost of equity for that reporting unit and is determined considering the Firm’s overall estimated cost of equity (estimated using the Capital Asset Pricing Model), as adjusted for the risk characteristics specific
to each reporting unit (for example, for higher levels of risk or uncertainty associated with the business or management’s forecasts and assumptions). To assess the reasonableness of the discount rates used for each reporting unit management compares the discount rate to the estimated cost of equity for publicly traded institutions with similar businesses and risk characteristics. In addition, the weighted average cost of equity (aggregating the various reporting units) is compared with the Firms’ overall estimated cost of equity to ensure reasonableness.
The valuations derived from the discounted cash flow analysis are then compared with market-based trading and transaction multiples for relevant competitors. Trading and transaction comparables are used as general indicators to assess the general reasonableness of the estimated fair values, although precise conclusions generally cannot be drawn due to the differences that
naturally exist between the Firm’s businesses and competitor institutions. Management also takes into consideration a comparison between the aggregate fair values of the Firm’s reporting units and JPMorgan Chase’s market capitalization. In evaluating this comparison, management considers several factors, including (i) a control premium that would exist in a market transaction, (ii) factors related to the level of execution risk that would exist at the firmwide level that do not exist at the reporting unit level and (iii) short-term market volatility and other factors that do not directly affect the value of individual reporting units.
Declines in business performance, increases in credit losses, increases in capital requirements, as well as deterioration in economic or market conditions, estimates of adverse regulatory or legislative changes or increases in the estimated market cost of equity, could cause the estimated fair
values of the Firm’s reporting units or their associated goodwill to decline in the future, which could result in a material impairment charge to earnings in a future period related to some portion of the associated goodwill.
Mortgage servicing rights
MSRs represent the fair value of expected future cash flows for performing servicing activities for others. The fair value considers estimated future servicing fees and ancillary revenue, offset by estimated costs to service the loans, and generally declines over time as net servicing cash flows are received, effectively amortizing the MSR asset against contractual servicing and ancillary fee income. MSRs are either purchased from third parties or recognized upon sale or securitization of mortgage loans if servicing
is retained.
As permitted by U.S. GAAP, the Firm has elected to account for its MSRs at fair value. The Firm treats its MSRs as a single class of servicing assets based on the availability of market inputs used to measure the fair value of its MSR asset and its treatment of MSRs as one aggregate pool for risk management purposes. The Firm estimates the fair value of MSRs using an option-adjusted spread (“OAS”) model, which projects MSR cash flows over multiple interest rate scenarios in conjunction with the Firm’s prepayment model, and then discounts these cash flows at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, costs to
service, late charges and other ancillary revenue, and other economic factors. The Firm compares fair value estimates and assumptions to observable market data where available, and also considers recent market activity and actual portfolio experience.
JPMorgan Chase & Co./2017 Annual Report
245
Notes to consolidated financial statements
The
fair value of MSRs is sensitive to changes in interest rates, including their effect on prepayment speeds. MSRs typically decrease in value when interest rates decline because declining interest rates tend to increase prepayments and therefore reduce the expected life of the net servicing cash flows that comprise the MSR asset. Conversely, securities (e.g., mortgage-backed securities), principal-only certificates and certain derivatives (i.e.,
those for which the Firm receives fixed-rate interest payments) increase in value when interest rates decline. JPMorgan Chase uses combinations of derivatives and securities to manage the risk of changes in the fair value of MSRs. The intent is to offset any interest-rate related changes in the fair value of MSRs with changes in the fair value
of the related risk management instruments.
The following table summarizes MSR activity for the years ended December 31, 2017, 2016 and 2015.
As of or for the year ended December 31, (in millions, except where otherwise noted)
2017
2016
2015
Fair
value at beginning of period
$
6,096
$
6,608
$
7,436
MSR activity:
Originations
of MSRs
1,103
679
550
Purchase of MSRs
—
—
435
Disposition
of MSRs(a)
(140
)
(109
)
(486
)
Net additions
963
570
499
Changes
due to collection/realization of expected cash flows
(797
)
(919
)
(922
)
Changes
in valuation due to inputs and assumptions:
Changes due to market interest rates and other(b)
(202
)
(72
)
(160
)
Changes
in valuation due to other inputs and assumptions:
Projected cash flows (e.g., cost to service)
(102
)
(35
)
(112
)
Discount
rates
(19
)
7
(10
)
Prepayment model changes and other(c)
91
(63
)
(123
)
Total
changes in valuation due to other inputs and assumptions
(30
)
(91
)
(245
)
Total changes in valuation due to inputs and assumptions
(232
)
(163
)
(405
)
Fair
value at December 31,
$
6,030
$
6,096
$
6,608
Change in unrealized gains/(losses) included in income related to MSRs held
at December 31,
$
(232
)
$
(163
)
$
(405
)
Contractual service fees, late fees and other ancillary fees included in income
1,886
2,124
2,533
Third-party
mortgage loans serviced at December 31, (in billions)
555.0
593.3
677.0
Servicer advances, net of an allowance for uncollectible amounts, at December 31, (in billions)(d)
4.0
4.7
6.5
(a)
Includes
excess MSRs transferred to agency-sponsored trusts in exchange for stripped mortgage backed securities (“SMBS”). In each transaction, a portion of the SMBS was acquired by third parties at the transaction date; the Firm acquired the remaining balance of those SMBS as trading securities.
(b)
Represents both the impact of changes in estimated future prepayments due to changes in market interest rates, and the difference between actual and expected prepayments.
(c)
Represents changes in prepayments other than
those attributable to changes in market interest rates.
(d)
Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest, taxes and insurance), which will generally be reimbursed within a short period of time after the advance from future cash flows from the trust or the underlying loans. The Firm’s credit risk associated with these servicer advances is minimal because reimbursement of the advances is typically senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment to investors if the collateral is insufficient to cover the advance. However, certain of these servicer advances may not be recoverable if they were not made in accordance with applicable rules and agreements.
246
JPMorgan
Chase & Co./2017 Annual Report
The following table presents the components of mortgage fees and related income (including the impact of MSR risk management activities) for the years ended December 31, 2017, 2016 and 2015.
Year
ended December 31, (in millions)
2017
2016
2015
CCB mortgage fees and related income
Net production revenue
$
636
$
853
$
769
Net
mortgage servicing revenue:
Operating revenue:
Loan
servicing revenue
2,014
2,336
2,776
Changes in MSR asset fair value due to collection/realization of expected cash flows
(795
)
(916
)
(917
)
Total
operating revenue
1,219
1,420
1,859
Risk management:
Changes
in MSR asset fair value due to market interest rates and other(a)
(202
)
(72
)
(160
)
Other changes in MSR asset fair value due to other inputs and assumptions in model(b)
(30
)
(91
)
(245
)
Change
in derivative fair value and other
(10
)
380
288
Total risk management
(242
)
217
(117
)
Total
net mortgage servicing revenue
977
1,637
1,742
Total
CCB mortgage fees and related income
1,613
2,490
2,511
All
other
3
1
2
Mortgage fees and related income
$
1,616
$
2,491
$
2,513
(a)
Represents
both the impact of changes in estimated future prepayments due to changes in market interest rates, and the difference between actual and expected prepayments.
(b)
Represents the aggregate impact of changes in model inputs and assumptions such as projected cash flows (e.g., cost to service), discount rates and changes in prepayments other than those attributable to changes in market interest rates (e.g., changes in prepayments due to changes in home prices).
The table below outlines the key economic assumptions used to determine the fair value of the Firm’s MSRs at
December 31, 2017 and 2016, and outlines the sensitivities of those fair values to immediate adverse changes in those assumptions, as defined below.
Impact on fair value of 100 basis points adverse
change
$
(250
)
$
(248
)
Impact on fair value of 200 basis points adverse change
(481
)
(477
)
CPR:
Constant prepayment rate.
Changes in fair value based on variation in assumptions generally cannot be easily extrapolated, because the relationship of the change in the assumptions to the change in fair value are often highly interrelated and may not be linear. In this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which would either magnify or counteract the impact of the initial change.
JPMorgan Chase & Co./2017 Annual Report
247
Notes
to consolidated financial statements
Note 16 – Premises and equipment
Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. JPMorgan Chase computes depreciation using the straight-line method over the estimated useful life of an asset. For leasehold improvements, the Firm uses the straight-line method computed over the lesser of the remaining term of the leased facility or the estimated useful life of the leased asset.
JPMorgan Chase capitalizes certain costs associated with the acquisition or development
of internal-use software. Once the software is ready for its intended use, these costs are amortized on a straight-line basis over the software’s expected useful life and reviewed for impairment on an ongoing basis.
Note 17 – Deposits
At December 31, 2017 and 2016, noninterest-bearing and interest-bearing deposits were as follows.
December
31, (in millions)
2017
2016
U.S. offices
Noninterest-bearing
$
393,645
$
400,831
Interest-bearing
(included $14,947, and $12,245 at fair value)(a)
793,618
737,949
Total deposits in U.S. offices
1,187,263
1,138,780
Non-U.S.
offices
Noninterest-bearing
15,576
14,764
Interest-bearing (included $6,374 and $1,667 at fair value)(a)
241,143
221,635
Total
deposits in non-U.S. offices
256,719
236,399
Total deposits
$
1,443,982
$
1,375,179
(a)
Includes
structured notes classified as deposits for which the fair value option has been elected. For further discussion, see Note 3.
At December 31, 2017 and 2016, time deposits in denominations of $250,000 or more were as follows.
December 31, (in millions)
2017
2016
U.S.
offices
$
30,671
$
26,180
Non-U.S. offices(a)
29,049
29,652
Total(a)
$
59,720
$
55,832
(a) The
prior period amounts have been revised to conform with the current period presentation.
At December 31, 2017, the maturities of interest-bearing time deposits were as follows.
Accounts payable and other liabilities consist of brokerage payables, which includes payables to customers, dealers and clearing organizations, and payables from security purchases that did not settle; accrued expenses, including income tax payables and credit card rewards liability; and all other liabilities, including obligations to return securities received as collateral and litigation reserves.
The following table details the components of accounts payable and other liabilities.
December
31, (in millions)
2017
2016
Brokerage payables
$
102,727
$
109,842
Other
payables and liabilities(a)
86,656
80,701
Total accounts payable and other liabilities
$
189,383
$
190,543
(a)
Includes
credit card rewards liability of $4.9 billion and $3.8 billion at December 31, 2017 and 2016, respectively.
248
JPMorgan Chase & Co./2017 Annual Report
Note
19 – Long-term debt
JPMorgan Chase issues long-term debt denominated in various currencies, predominantly U.S. dollars, with both fixed and variable interest rates. Included in senior and subordinated debt below are various equity-linked or other indexed instruments, which the Firm has elected to measure at fair value. Changes in fair value are recorded in principal transactions revenue in the Consolidated statements of income, except for unrealized gains/(losses) due to DVA which are recorded in OCI. The following table is a summary of long-term debt carrying values (including unamortized premiums and discounts, issuance costs, valuation adjustments and fair value adjustments, where applicable) by remaining contractual maturity as of December 31,
2017.
The
interest rates shown are the range of contractual rates in effect at December 31, 2017 and 2016, respectively, including non-U.S. dollar fixed- and variable-rate issuances, which excludes the effects of the associated derivative instruments used in hedge accounting relationships, if applicable. The use of these derivative instruments modifies the Firm’s exposure to the contractual interest rates disclosed in the table above. Including the effects of the hedge accounting derivatives, the range of modified rates in effect at December 31, 2017, for total long-term debt was (0.19)% to 8.88%, versus the contractual range of 0.16% to 8.75%
presented in the table above. The interest rate ranges shown exclude structured notes accounted for at fair value.
(b)
As of December 31, 2017, includes $0.7 billion of fixed rate junior subordinated debentures issued to an issuer trust and $1.6 billion of variable rate junior subordinated debentures distributed pro rata to the holders of the $1.6 billion of trust preferred securities which were cancelled on December 18, 2017.
(c)
Included
long-term debt of $63.5 billion and $82.2 billion secured by assets totaling $208.4 billion and $205.6 billion at December 31, 2017 and 2016, respectively. The amount of long-term debt secured by assets does not include amounts related to hybrid instruments.
(d)
Included $47.5 billion and $37.7 billion
of long-term debt accounted for at fair value at December 31, 2017 and 2016, respectively.
(e)
Included $10.3 billion and $7.5 billion of outstanding zero-coupon notes at December 31, 2017 and 2016, respectively. The aggregate principal amount of these notes at their respective
maturities is $33.5 billion and $25.1 billion, respectively. The aggregate principal amount reflects the contractual principal payment at maturity, which may exceed the contractual principal payment at the Firm’s next call date, if applicable.
(f)
Included on the Consolidated balance sheets in beneficial interests issued by consolidated VIEs. Also included $45 million and $120 million accounted for at fair value at December 31, 2017 and 2016,
respectively. Excluded short-term commercial paper and other short-term beneficial interests of $4.3 billion and $5.7 billion at December 31, 2017 and 2016, respectively.
(g)
At December 31, 2017, long-term debt in the aggregate of $111.2 billion was redeemable at the option of JPMorgan Chase, in whole or in part, prior to
maturity, based on the terms specified in the respective instruments.
(h)
The aggregate carrying values of debt that matures in each of the five years subsequent to 2017 is $43.2 billion in 2018, $34.7 billion in 2019, $39.3 billion in 2020, $33.8 billion in 2021 and $13.4 billion in 2022.
JPMorgan
Chase & Co./2017 Annual Report
249
Notes to consolidated financial statements
The weighted-average contractual interest rates for total long-term debt excluding structured notes accounted for at fair value were 2.87% and 2.49% as of December 31, 2017 and 2016, respectively.
In order to modify exposure to interest rate and currency exchange rate movements, JPMorgan Chase utilizes derivative instruments, primarily interest rate and cross-currency interest rate swaps, in conjunction with some of its debt issuances. The use of these instruments modifies the Firm’s interest expense on the associated debt. The modified weighted-average interest rates for total long-term debt, including the effects of related derivative instruments, were 2.56% and 2.01% as of December 31, 2017 and 2016,
respectively.
JPMorgan Chase & Co. has guaranteed certain long-term debt of its subsidiaries, including both long-term debt and structured notes. These guarantees rank on parity with the Firm’s other unsecured and unsubordinated indebtedness. The amount of such guaranteed long-term debt and structured notes was $7.9 billion and $3.9 billion at December 31, 2017
and 2016, respectively.
The Firm’s unsecured debt does not contain requirements that would call for an acceleration of payments, maturities or changes in the structure of the existing debt, provide any limitations on future borrowings or require additional collateral, based on unfavorable changes in the Firm’s credit ratings, financial ratios, earnings or stock price.
At
December 31, 2016, the Firm had outstanding eight wholly-owned Delaware statutory business trusts (“issuer trusts”) that had issued trust preferred securities. On December 18, 2017, seven of the eight issuer trusts were liquidated, $1.6 billion of trust preferred and $56 million of common securities originally issued by those trusts were cancelled, and the junior subordinated debentures previously held by each trust issuer were distributed pro rata to the holders of the corresponding series of trust preferred and common securities.
Beginning in 2014, the junior subordinated debentures
issued to the issuer trusts by the Firm, less the common capital securities of the issuer trusts, began being phased out from inclusion as Tier 1 capital under Basel III and they were fully phased out as of December 31, 2016. As of December 31, 2017 and 2016, $300 million and $1.4 billion, respectively, qualified as Tier 2 capital.
The Firm redeemed $1.6 billion of trust preferred securities in the year ended December 31, 2016.
250
JPMorgan
Chase & Co./2017 Annual Report
Note 20 – Preferred stock
At December 31, 2017 and 2016, JPMorgan Chase was authorized to issue 200 million shares of preferred stock, in one or more series, with a par value of $1 per share.
In
the event of a liquidation or dissolution of the Firm, JPMorgan Chase’s preferred stock then outstanding takes precedence over the Firm’s common stock with respect to the payment of dividends and the distribution of assets.
The following is a summary of JPMorgan Chase’s non-cumulative preferred stock outstanding as of December 31, 2017 and 2016.
Each series of preferred stock has a liquidation value and redemption price per share of $10,000, plus accrued but unpaid dividends.
Dividends on fixed-rate preferred stock are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are payable semiannually while at a fixed rate, and become payable quarterly after converting to a floating rate.
On October 20, 2017, the Firm issued $1.3 billion of fixed to-floating rate non-cumulative preferred stock, Series CC, with an initial dividend rate of 4.625%. On December
1, 2017, The Firm redeemed all $1.3 billion of its outstanding 5.50% non-cumulative preferred stock, Series O.
Redemption rights
Each series of the Firm’s preferred stock may be redeemed on any dividend payment date on or after the earliest redemption date for that series. All outstanding preferred stock series except Series I may also be redeemed following a “capital treatment event,” as described in the terms of each series. Any redemption of the Firm’s preferred stock is subject to non-objection from the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
JPMorgan
Chase & Co./2017 Annual Report
251
Notes to consolidated financial statements
Note 21 – Common stock
At December 31, 2017 and 2016, JPMorgan Chase was authorized to issue 9.0 billion shares of common stock with a par value of $1
per share.
Common shares issued (newly issued or reissuance from treasury) by JPMorgan Chase during the years ended December 31, 2017, 2016 and 2015 were as follows.
Year ended December 31,
(in millions)
2017
2016
2015
Total
issued – balance at January 1
4,104.9
4,104.9
4,104.9
Treasury – balance at January 1
(543.7
)
(441.4
)
(390.1
)
Repurchase
(166.6
)
(140.4
)
(89.8
)
Reissuance:
Employee
benefits and compensation plans
24.5
26.0
32.8
Warrant exercise
5.4
11.1
4.7
Employee
stock purchase plans
0.8
1.0
1.0
Total reissuance
30.7
38.1
38.5
Total
treasury – balance at December 31
(679.6
)
(543.7
)
(441.4
)
Outstanding at December 31
3,425.3
3,561.2
3,663.5
At
December 31, 2017, 2016, and 2015, respectively, the Firm had 15.0 million, 24.9 million and 47.4 million warrants outstanding to purchase shares of common stock (the “Warrants”). The Warrants are currently traded on the New York Stock Exchange, and they are exercisable, in whole or in part, at any time and from time to time until October 28, 2018. The original warrant exercise price was $42.42 per share. The number of shares issuable upon the exercise of each warrant and the warrant exercise
price is subject to adjustment upon the occurrence of certain events, including, but not limited to, the extent to which regular quarterly cash dividends exceed $0.38 per share. As of December 31, 2017 the exercise price was $41.834 and the Warrant share number was 1.01.
On June 28, 2017, in conjunction with the Federal Reserve’s release of its 2017 CCAR results, the Firm’s Board of Directors authorized a $19.4 billion common equity (i.e., common stock and warrants) repurchase program. As of December 31,
2017, $9.8 billion of authorized repurchase capacity remained under the program. This authorization includes shares repurchased to offset issuances under the Firm’s share-based compensation plans.
The following table sets forth the Firm’s repurchases of common equity for the years ended December 31, 2017, 2016 and 2015. There were no warrants repurchased during the years ended December 31, 2017, 2016
and 2015.
Year ended December 31, (in millions)
2017
2016
2015
Total
number of shares of common stock repurchased
166.6
140.4
89.8
Aggregate purchase price of common stock repurchases
$
15,410
$
9,082
$
5,616
The
Firm may, from time to time, enter into written trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate repurchases in accordance with the common equity repurchase program. A Rule 10b5-1 repurchase plan allows the Firm to repurchase its equity during periods when it would not otherwise be repurchasing common equity — for example, during internal trading “blackout periods.” All purchases under a Rule 10b5-1 plan must be made according to a predefined plan established when the Firm is not aware of material nonpublic information. For additional information regarding repurchases of the Firm’s equity securities, see Part II,
Item 5: Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities, on page 28.
As of December 31,
2017, approximately 120 million shares of common stock were reserved for issuance under various employee incentive, compensation, option and stock purchase plans, director compensation plans, and the Warrants.
252
JPMorgan Chase & Co./2017 Annual Report
Note
22 – Earnings per share
Earnings per share (“EPS”) is calculated under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. JPMorgan Chase grants RSUs to certain employees under its share-based compensation programs, which entitle recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock; these unvested awards meet the definition of participating securities.
The following table presents the calculation of basic and diluted EPS for the years ended December 31, 2017, 2016
and 2015.
Year ended December 31,
(in millions,
except per share amounts)
2017
2016
2015
Basic earnings per share
Net
income
$
24,441
$
24,733
$
24,442
Less: Preferred stock dividends
1,663
1,647
1,515
Net
income applicable to common equity
22,778
23,086
22,927
Less: Dividends and undistributed earnings allocated to participating securities(a)
211
252
276
Net
income applicable to common stockholders(a)
$
22,567
$
22,834
$
22,651
Total
weighted-average basic shares outstanding(a)
3,551.6
3,658.8
3,741.2
Net income per share
$
6.35
$
6.24
$
6.05
Diluted
earnings per share
Net income applicable to common stockholders(a)
$
22,567
$
22,834
$
22,651
Total
weighted-average basic shares outstanding(a)
3,551.6
3,658.8
3,741.2
Add: Employee stock options, SARs, warrants and PSUs(a)
25.2
31.2
32.4
Total
weighted-average diluted shares outstanding(a)(b)
3,576.8
3,690.0
3,773.6
Net income per share
$
6.31
$
6.19
$
6.00
(a)
The
prior period amounts have been revised to conform with the current period presentation. The revision had no impact on the Firm’s reported earnings per share.
(b)
Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the calculation using the treasury stock method.
JPMorgan
Chase & Co./2017 Annual Report
253
Notes to consolidated financial statements
Note 23 – Accumulated other comprehensive income/(loss)
AOCI includes the after-tax change in unrealized gains and losses on investment securities, foreign currency translation adjustments (including the impact of related derivatives), cash flow hedging activities, and net loss and prior service costs/(credit) related to the Firm’s defined benefit pension and OPEB plans.
Effective
January 1, 2016, the Firm adopted new accounting guidance related to the recognition and measurement of financial liabilities where the fair value option has been elected. This guidance requires the portion of the total change in fair value caused by changes in the Firm’s own credit risk (DVA) to be presented separately in OCI; previously these amounts were recognized in net income.
(b)
Represents the after-tax difference between the fair value and amortized cost of securities accounted for as AFS, including net unamortized unrealized gains and losses related to AFS securities transferred to HTM.
The
following table presents the pre-tax and after-tax changes in the components of OCI.
2017
2016
2015
Year
ended December 31, (in millions)
Pre-tax
Tax effect
After-tax
Pre-tax
Tax effect
After-tax
Pre-tax
Tax
effect
After-tax
Unrealized gains/(losses) on investment securities:
Net
unrealized gains/(losses) arising during the period
$
944
$
(346
)
$
598
$
(1,628
)
$
611
$
(1,017
)
$
(3,315
)
$
1,297
$
(2,018
)
Reclassification
adjustment for realized (gains)/losses included in net income(a)
66
(24
)
42
(141
)
53
(88
)
(202
)
76
(126
)
Net
change
1,010
(370
)
640
(1,769
)
664
(1,105
)
(3,517
)
1,373
(2,144
)
Translation
adjustments(b):
Translation
1,313
(801
)
512
(261
)
99
(162
)
(1,876
)
682
(1,194
)
Hedges
(1,294
)
476
(818
)
262
(102
)
160
1,885
(706
)
1,179
Net
change
19
(325
)
(306
)
1
(3
)
(2
)
9
(24
)
(15
)
Cash
flow hedges:
Net
unrealized gains/(losses) arising during the period
147
(55
)
92
(450
)
168
(282
)
(97
)
35
(62
)
Reclassification
adjustment for realized (gains)/losses included in net income(c)(d)
134
(50
)
84
360
(134
)
226
180
(67
)
113
Net
change
281
(105
)
176
(90
)
34
(56
)
83
(32
)
51
Defined
benefit pension and OPEB plans:
Net
gains/(losses) arising during the period
802
(160
)
642
(366
)
145
(221
)
29
(47
)
(18
)
Reclassification
adjustments included in net income(e):
Amortization
of net loss
250
(90
)
160
257
(97
)
160
282
(106
)
176
Prior
service costs/(credits)
(36
)
13
(23
)
(36
)
14
(22
)
(36
)
14
(22
)
Settlement
loss/(gain)
2
(1
)
1
4
(1
)
3
—
—
—
Foreign
exchange and other
(54
)
12
(42
)
77
(25
)
52
33
(58
)
(25
)
Net
change
964
(226
)
738
(64
)
36
(28
)
308
(197
)
111
DVA
on fair value option elected liabilities, net change:
$
(303
)
$
111
$
(192
)
$
(529
)
$
199
$
(330
)
$
—
$
—
$
—
Total
other comprehensive income/(loss)
$
1,971
$
(915
)
$
1,056
$
(2,451
)
$
930
$
(1,521
)
$
(3,117
)
$
1,120
$
(1,997
)
(a)
The
pre-tax amount is reported in securities gains/(losses) in the Consolidated statements of income.
(b)
Reclassifications of pre-tax realized gains/(losses) on translation adjustments and related hedges are reported in other income/expense in the Consolidated statements of income. The amounts were not material for the periods presented.
(c)
The pre-tax amounts are primarily recorded in noninterest revenue, net interest income and compensation expense in the Consolidated statements of income.
(d)
In
2015, the Firm reclassified approximately $150 million of net losses from AOCI to other income because the Firm determined that it is probable that the forecasted interest payment cash flows would not occur. For additional information, see Note 5.
(e)
The pre-tax amount is reported in compensation expense in the Consolidated statements of income.
254
JPMorgan
Chase & Co./2017 Annual Report
Note 24 – Income taxes
JPMorgan Chase and its eligible subsidiaries file a consolidated U.S. federal income tax return. JPMorgan Chase uses the asset and liability method to provide income taxes on all transactions recorded in the Consolidated Financial Statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference
is determined based on the tax rates that the Firm expects to be in effect when the underlying items of income and expense are realized. JPMorgan Chase’s expense for income taxes includes the current and deferred portions of that expense. A valuation allowance is established to reduce deferred tax assets to the amount the Firm expects to realize.
Due to the inherent complexities arising from the nature of the Firm’s businesses, and from conducting business and being taxed in a substantial number of jurisdictions, significant judgments and estimates are required to be made. Agreement of tax liabilities between JPMorgan Chase and the many tax jurisdictions in which the Firm files tax returns may not be finalized for several years. Thus, the Firm’s final
tax-related assets and liabilities may ultimately be different from those currently reported.
Effective tax rate and expense
A reconciliation of the applicable statutory U.S. federal income tax rate to the effective tax rate for each of the years ended December 31, 2017, 2016 and 2015, is presented in the following table.
U.S.
state and local income taxes, net of U.S. federal income tax benefit
2.2
2.4
1.5
Tax-exempt income
(3.3
)
(3.1
)
(3.3
)
Non-U.S.
subsidiary earnings(a)
(3.1
)
(1.7
)
(3.9
)
Business tax credits
(4.2
)
(3.9
)
(3.7
)
Nondeductible
legal expense
—
0.3
0.8
Tax audit resolutions
—
—
(5.7
)
Impact
of the TCJA
5.4
—
—
Other, net
(0.1
)
(0.6
)
(0.3
)
Effective
tax rate
31.9
%
28.4
%
20.4
%
(a)
Predominantly includes earnings of U.K. subsidiaries
that were deemed to be reinvested indefinitely through December 31, 2017.
Impact of the TCJA
On December 22, 2017, the TCJA was signed into law. The Firm’s effective tax rate increased in 2017 driven by a $1.9 billion income tax expense representing the estimated impact of the enactment of the TCJA. The $1.9 billion tax expense was predominantly driven by a deemed repatriation of the Firm’s
unremitted non-U.S. earnings and adjustments to the value of certain tax-oriented investments partially offset by a benefit from the revaluation of the Firm’s net deferred tax liability.
The deemed repatriation of the Firm’s unremitted non-U.S. earnings is based on the post-1986 earnings and profits of each controlled foreign corporation. The calculation resulted in an estimated income tax expense of $3.7 billion. Furthermore, accounting for income taxes requires the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The Firm remeasured its deferred tax asset
and liability balances in the fourth quarter of 2017 to the new statutory U.S. federal income tax rate of 21% as well as any federal benefit associated with state and local deferred income taxes. The remeasurement resulted in an estimated income tax benefit of $2.1 billion.
The deemed repatriation and remeasurement of deferred taxes were calculated based on all available information and published legislative guidance. These amounts are considered to be estimates under SEC Staff Accounting Bulletin No. 118 as the Firm anticipates refinements to both calculations. Anticipated refinements will result from the issuance of future legislative and accounting guidance as
well as those in the normal course of business, including true-ups to the tax liability on the tax return as filed and the resolution of tax audits.
Adjustments were also recorded to income tax expense for certain tax-oriented investments. These adjustments were driven by changes to affordable housing proportional amortization resulting from the reduction of the federal income tax rate under the TCJA. SEC Staff Accounting Bulletin No. 118 does not apply to these adjustments.
JPMorgan Chase & Co./2017 Annual Report
255
The
components of income tax expense/(benefit) included in the Consolidated statements of income were as follows for each of the years ended December 31, 2017, 2016, and 2015.
Income tax expense/(benefit)
Year ended December 31, (in millions)
2017
2016
2015
Current
income tax expense/(benefit)
U.S. federal
$
5,718
$
2,488
$
3,160
Non-U.S.
2,400
1,760
1,220
U.S.
state and local
1,029
904
547
Total current income tax expense/(benefit)
9,147
5,152
4,927
Deferred
income tax expense/(benefit)
U.S. federal
2,174
4,364
1,213
Non-U.S.
(144
)
(73
)
(95
)
U.S.
state and local
282
360
215
Total deferred income tax expense/(benefit)
2,312
4,651
1,333
Total
income tax expense
$
11,459
$
9,803
$
6,260
Total income tax expense includes $252
million, $55 million and $2.4 billion of tax benefits recorded in 2017, 2016, and 2015, respectively, as a result of tax audit resolutions.
Tax effect of items recorded in stockholders’ equity
The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders’ equity. The tax effect of all items recorded directly to stockholders’ equity resulted in a decrease of $915 million in 2017,
an increase of $925 million in 2016, and an increase of $1.5 billion in 2015. Effective January 1, 2016, the Firm adopted new accounting guidance related to employee share-based payments. As a result of the adoption of this new guidance, all excess tax benefits (including tax benefits from dividends or dividend equivalents) on share-based payment awards are recognized within income tax expense in the Consolidated statements of income. In prior years these tax benefits were recorded as increases to additional paid-in capital.
Results from Non-U.S. earnings
The following
table presents the U.S. and non-U.S. components of income before income tax expense for the years ended December 31, 2017, 2016 and 2015.
Year ended December 31, (in millions)
2017
2016
2015
U.S.
$
27,103
$
26,651
$
23,191
Non-U.S.(a)
8,797
7,885
7,511
Income
before income tax expense
$
35,900
$
34,536
$
30,702
(a)
For
purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.
Prior to December 31, 2017, U.S. federal income taxes had not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings had been reinvested abroad for an indefinite period of time. The Firm will no longer maintain the indefinite reinvestment assertion on the undistributed earnings of those non-U.S. subsidiaries in light of the enactment of the TCJA. The U.S. federal and state and local income taxes associated with the undistributed
and previously untaxed earnings of those non-U.S. subsidiaries was included in the deemed repatriation charge recorded as of December 31, 2017.
JPMC will treat any tax it may incur on global intangible low tax income as a period cost to tax expense when the tax is incurred.
Affordable housing tax credits
The Firm recognized $1.7 billion, $1.7 billion and $1.6 billion
of tax credits and other tax benefits associated with investments in affordable housing projects within income tax expense for the years 2017, 2016 and 2015, respectively. The amount of amortization of such investments reported in income tax expense under the current period presentation during these years was $1.7 billion, $1.2 billion and $1.1 billion, respectively. The carrying value of these investments, which are reported in other assets on the Firm’s Consolidated balance sheets, was $7.8
billion and $8.8 billion at December 31, 2017 and 2016, respectively. The amount of commitments related to these investments, which are reported in accounts payable and other liabilities on the Firm’s Consolidated balance sheets, was $2.4 billion and $2.8 billion at December 31, 2017 and 2016, respectively. The results are
inclusive of any impacts from the TCJA.
256
JPMorgan Chase & Co./2017 Annual Report
Deferred taxes
Deferred income tax expense/(benefit) results from differences between assets and liabilities
measured for financial reporting purposes versus income tax return purposes. Deferred tax assets are recognized if, in management’s judgment, their realizability is determined to be more likely than not. If a deferred tax asset is determined to be unrealizable, a valuation allowance is established. The significant components of deferred tax assets and liabilities are reflected in the following table as of December 31, 2017 and 2016.
December
31, (in millions)
2017
2016
Deferred tax assets
Allowance for loan losses
$
3,395
$
5,534
Employee
benefits
688
2,911
Accrued expenses and other
3,528
6,831
Non-U.S.
operations
327
5,368
Tax attribute carryforwards
219
2,155
Gross
deferred tax assets
8,157
22,799
Valuation allowance
(46
)
(785
)
Deferred
tax assets, net of valuation allowance
$
8,111
$
22,014
Deferred tax liabilities
Depreciation
and amortization
$
2,299
$
3,294
Mortgage servicing rights, net of hedges
2,757
4,807
Leasing
transactions
3,483
4,053
Non-U.S. operations
200
4,572
Other,
net
3,502
5,493
Gross deferred tax liabilities
12,241
22,219
Net
deferred tax (liabilities)/assets
$
(4,130
)
$
(205
)
JPMorgan Chase has recorded deferred tax assets of $219 million at December 31, 2017, in connection with U.S. federal and non-U.S. net operating loss (“NOL”) carryforwards and state and local capital loss carryforwards. At December
31, 2017, total U.S. federal NOL carryforwards were approximately $769 million, non-U.S. NOL carryforwards were approximately $142 million and state and local capital loss carryforwards were $660 million. If not utilized, the U.S. federal NOL carryforwards will expire between 2025 and 2036 and the state and local capital loss carryforwards will expire between 2020 and 2021. Certain non-U.S. NOL carryforwards will expire between 2028 and 2034 whereas others have an unlimited carryforward period.
The valuation allowance at December 31, 2017, was due to the state and local capital loss carryforwards and certain non-U.S. NOL carryforwards.
Unrecognized
tax benefits
At December 31, 2017, 2016 and 2015, JPMorgan Chase’s unrecognized tax benefits, excluding related interest expense and penalties, were $4.7 billion, $3.5 billion and $3.5 billion, respectively, of which $3.5 billion, $2.6 billion and $2.1 billion, respectively, if recognized,
would reduce the annual effective tax rate. Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in the Consolidated statements of income. These unrecognized items include the tax effect of certain temporary differences, the portion of gross state and local unrecognized tax benefits that would be offset by the benefit from associated U.S. federal income tax deductions, and the portion of gross non-U.S. unrecognized tax benefits that would have offsets in other jurisdictions. JPMorgan Chase is presently under audit by a number of taxing authorities, most notably by the Internal Revenue Service as summarized in the Tax examination status table below. As JPMorgan Chase is presently under audit by
a number of taxing authorities, it is reasonably possible that over the next 12 months the resolution of these examinations may increase or decrease the gross balance of unrecognized tax benefits by as much as $1.3 billion. Upon settlement of an audit, the change in the unrecognized tax benefit would result from payment or income statement recognition.
The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015.
Year
ended December 31, (in millions)
2017
2016
2015
Balance at January 1,
$
3,450
$
3,497
$
4,911
Increases
based on tax positions related to the current period
1,355
262
408
Increases based on tax positions related to prior periods
626
583
1,028
Decreases
based on tax positions related to prior periods
(350
)
(785
)
(2,646
)
Decreases related to cash settlements with taxing authorities
(334
)
(56
)
(204
)
Decreases
related to a lapse of applicable statute of limitations
—
(51
)
—
Balance at December 31,
$
4,747
$
3,450
$
3,497
After-tax
interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $102 million, $86 million and $(156) million in 2017, 2016 and 2015, respectively.
At December 31, 2017 and 2016, in addition to the liability for unrecognized tax benefits, the Firm had accrued $639
million and $687 million, respectively, for income tax-related interest and penalties.
JPMorgan Chase & Co./2017 Annual Report
257
Tax
examination status
JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many state and local jurisdictions throughout the U.S. The following table summarizes the status of significant income tax examinations of JPMorgan Chase and its consolidated subsidiaries as of December 31, 2017.
Field
examination of amended returns; certain matters at Appellate level
JPMorgan Chase – U.S.
2011 – 2013
Field Examination
JPMorgan Chase – California
2011 – 2012
Field Examination
JPMorgan Chase – U.K.
2006
– 2015
Field examination of certain select entities
Note 25 – Restrictions on cash and
intercompany funds transfers
The business of JPMorgan Chase Bank, National Association (“JPMorgan Chase Bank, N.A.”) is subject to examination and regulation by the OCC. The Bank is a member of the U.S. Federal Reserve System, and its deposits in the U.S. are insured by the FDIC, subject to applicable limits.
The Federal Reserve requires
depository institutions to maintain cash reserves with a Federal Reserve Bank. The average required amount of reserve balances deposited by the Firm’s bank subsidiaries with various Federal Reserve Banks was approximately $24.9 billion and $19.3 billion in 2017 and 2016, respectively.
Restrictions imposed by U.S. federal law prohibit JPMorgan Chase & Co. (“Parent Company”) and certain of its affiliates from borrowing from banking subsidiaries
unless the loans are secured in specified amounts. Such secured loans provided by any banking subsidiary to the Parent Company or to any particular affiliate, together with certain other transactions with such affiliate (collectively referred to as “covered transactions”), are generally limited to 10% of the banking subsidiary’s total capital, as determined by the risk-based capital guidelines; the aggregate amount of covered transactions between any banking subsidiary and all of its affiliates is limited to 20% of the banking subsidiary’s total capital.
The Parent Company’s two principal subsidiaries
are JPMorgan Chase Bank, N.A. and JPMorgan Chase Holdings LLC, an intermediate holding company (the “IHC”). The IHC holds the stock of substantially all of JPMorgan Chase’s subsidiaries other than JPMorgan Chase Bank, N.A. and its subsidiaries. The IHC also owns other assets and intercompany indebtedness owing to the holding company. The Parent Company is obligated to contribute to the IHC substantially all the net proceeds received from securities issuances (including issuances of senior and subordinated debt securities and of preferred and common stock).
The principal sources of income and funding for the Parent Company are dividends from JPMorgan Chase Bank, N.A. and dividends and extensions of credit from the IHC.
In
addition to dividend restrictions set forth in statutes and regulations, the Federal Reserve, the OCC and the FDIC have authority under the Financial Institutions Supervisory Act to prohibit or to limit the payment of dividends by the banking organizations they supervise, including JPMorgan Chase and its subsidiaries that are banks or bank holding companies, if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. The IHC is prohibited from paying dividends or extending credit to the Parent Company if certain capital or liquidity “thresholds” are breached or if limits are otherwise imposed by
JPMorgan Chase’s management or Board of Directors.
At January 1, 2018, JPMorgan Chase’s banking subsidiaries could pay, in the aggregate, approximately $17 billion in dividends to their respective bank holding companies without the prior approval of their relevant banking regulators. The capacity to pay dividends in 2018 will be supplemented by
the banking subsidiaries’ earnings during the year.
In compliance with rules and regulations established by U.S. and non-U.S. regulators, as of December 31, 2017 and 2016, cash in the amount of $16.8 billion and $13.4 billion, respectively, were segregated in special bank accounts for the benefit of securities and futures brokerage customers. Also, as of December 31, 2017 and 2016, the Firm had:
•
Receivables
and securities of $18.0 billion and $18.2 billion, respectively, consisting of cash and securities pledged with clearing organizations for the benefit of customers.
•
Securities with a fair value of $3.5 billion and $19.3 billion, respectively, were also restricted in relation to customer activity.
In addition, as of December 31,
2017 and 2016, the Firm had other restricted cash of $3.3 billion and $3.6 billion, respectively, primarily representing cash reserves held at non-U.S. central banks and held for other general purposes.
258
JPMorgan Chase & Co./2017 Annual Report
Note
26 – Regulatory capital
The Federal Reserve establishes capital requirements, including well-capitalized standards, for the consolidated financial holding company. The OCC establishes similar minimum capital requirements and standards for the Firm’s IDI, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A.
Capital rules under Basel III establish minimum capital ratios and overall capital adequacy standards for large and internationally active U.S. bank holding companies and banks, including the Firm and its IDI subsidiaries. Basel III set forth two comprehensive approaches for calculating RWA: a standardized approach (“Basel III Standardized”) and an advanced approach (“Basel
III Advanced”). Certain of the requirements of Basel III are subject to phase-in periods that began on January 1, 2014 and continue through the end of 2018 (“transitional period”).
The three categories of risk-based capital and their predominant components under the Basel III Transitional rules are illustrated below:
The following tables present the regulatory capital, assets and risk-based capital ratios for JPMorgan Chase and its significant IDI subsidiaries under both Basel III Standardized
Transitional and Basel III Advanced Transitional at December 31, 2017 and 2016.
JPMorgan Chase & Co.
Basel
III Standardized Transitional
Basel III Advanced Transitional
(in millions,
except ratios)
Dec 31, 2017
Dec 31, 2016
Dec 31, 2017
Dec 31, 2016
Regulatory
capital
CET1 capital
$
183,300
$
182,967
$
183,300
$
182,967
Tier
1 capital(a)
208,644
208,112
208,644
208,112
Total capital
238,395
239,553
227,933
228,592
Assets
Risk-weighted
1,499,506
1,483,132
(e)
1,435,825
1,476,915
Adjusted average(b)
2,514,270
2,484,631
2,514,270
2,484,631
Capital
ratios(c)
CET1
12.2
%
12.3
%
(e)
12.8
%
12.4
%
Tier
1(a)
13.9
14.0
(e)
14.5
14.1
Total
15.9
16.2
(e)
15.9
15.5
Tier
1 leverage(d)
8.3
8.4
8.3
8.4
JPMorgan
Chase Bank, N.A.
Basel III Standardized Transitional
Basel III Advanced Transitional
(in millions,
except ratios)
Dec 31, 2017
Dec 31, 2016
Dec 31,
2017
Dec 31, 2016
Regulatory capital
CET1 capital
$
184,375
$
179,319
$
184,375
$
179,319
Tier
1 capital(a)
184,375
179,341
184,375
179,341
Total capital
195,839
191,662
189,419
184,637
Assets
Risk-weighted
1,335,809
1,311,240
(e)
1,226,534
1,262,613
Adjusted average(b)
2,116,031
2,088,851
2,116,031
2,088,851
Capital
ratios(c)
CET1
13.8
%
13.7
%
(e)
15.0
%
14.2
%
Tier
1(a)
13.8
13.7
(e)
15.0
14.2
Total
14.7
14.6
(e)
15.4
14.6
Tier
1 leverage(d)
8.7
8.6
8.7
8.6
JPMorgan
Chase & Co./2017 Annual Report
259
Notes to consolidated financial statements
Chase Bank USA, N.A.
Basel
III Standardized Transitional
Basel III Advanced Transitional
(in millions,
except ratios)
Dec 31, 2017
Dec 31, 2016
Dec 31, 2017
Dec 31,
2016
Regulatory capital
CET1 capital
$
21,600
$
16,784
$
21,600
$
16,784
Tier
1 capital
21,600
16,784
21,600
16,784
Total capital
27,691
22,862
26,250
21,434
Assets
Risk-weighted
113,108
112,297
190,523
186,378
Adjusted average(b)
126,517
120,304
126,517
120,304
Capital
ratios(c)
CET1
19.1
%
14.9
%
11.3
%
9.0
%
Tier
1
19.1
14.9
11.3
9.0
Total
24.5
20.4
13.8
11.5
Tier
1 leverage(d)
17.1
14.0
17.1
14.0
(a)
Includes
the deduction associated with the permissible holdings of covered funds (as defined by the Volcker Rule). The deduction was not material as of December 31, 2017 and 2016.
(b)
Adjusted average assets, for purposes of calculating the Tier 1 leverage ratio, includes total quarterly average assets adjusted for unrealized gains/(losses) on AFS securities, less deductions for goodwill and other intangible assets, defined benefit pension plan assets, and deferred tax assets related to tax attributes, including NOLs.
(c)
For
each of the risk-based capital ratios, the capital adequacy of the Firm and its IDI subsidiaries is evaluated against the lower of the two ratios as calculated under Basel III approaches (Standardized or Advanced) as required by the Collins Amendment of the Dodd-Frank Act (the “Collins Floor”)
(d)
The Tier 1 leverage ratio is not a risk-based measure of capital. This ratio is calculated by dividing Tier 1 capital by adjusted average assets.
(e)
The
prior period amounts have been revised to conform with the current period presentation.
Under the risk-based capital guidelines of the Federal Reserve, JPMorgan Chase is required to maintain minimum ratios of CET1, Tier 1 and Total capital to RWA, as well as a minimum leverage ratio (which is defined as Tier 1 capital divided by adjusted quarterly average assets). Failure to meet these minimum requirements could cause the Federal Reserve to take action. IDI subsidiaries also are subject to these capital requirements by their respective primary regulators.
The following table presents the minimum ratios to which the Firm and its IDI subsidiaries
are subject as of December 31, 2017.
Minimum capital ratios
Well-capitalized ratios
BHC(a)(e)
IDI(b)(e)
BHC(c)
IDI(d)
Capital ratios
CET1
7.50
%
5.75
%
—
%
6.50
%
Tier
1
9.00
7.25
6.00
8.00
Total
11.00
9.25
10.00
10.00
Tier
1 leverage
4.00
4.00
—
5.00
Note: The table above is as defined by the regulations issued by the Federal Reserve, OCC and FDIC and to which the Firm and its IDI subsidiaries are subject.
(a)
Represents
the Transitional minimum capital ratios applicable to the Firm under Basel III at December 31, 2017. At December 31, 2017, the CET1 minimum capital ratio includes 1.25% resulting from the phase-in of the Firm’s 2.5% capital conservation buffer, and 1.75% resulting from the phase-in of the Firm’s 3.5% GSIB surcharge.
(b)
Represents requirements for JPMorgan Chase’s
IDI subsidiaries. The CET1 minimum capital ratio includes 1.25% resulting from the phase-in of the 2.5% capital conservation buffer that is applicable to the IDI subsidiaries. The IDI subsidiaries are not subject to the GSIB surcharge.
(c)
Represents requirements for bank holding companies pursuant to regulations issued by the Federal Reserve.
(d)
Represents
requirements for IDI subsidiaries pursuant to regulations issued under the FDIC Improvement Act.
(e)
For the period ended December 31, 2016 the CET1, Tier 1, Total and Tier 1 leverage minimum capital ratios applicable to the Firm were 6.25%, 7.75%, 9.75% and 4.0% and the CET1, Tier 1, Total and Tier 1 leverage minimum capital ratios applicable to the Firm’s IDI subsidiaries
were 5.125%, 6.625%, 8.625% and 4.0% respectively.
As of December 31, 2017 and 2016, JPMorgan Chase and all of its IDI subsidiaries were well-capitalized and met all capital requirements to which each was subject.
260
JPMorgan
Chase & Co./2017 Annual Report
Note 27 – 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 clients or 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 are refinanced, extended, cancelled, or 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 expected future credit exposure or funding requirements.
To provide for probable credit losses inherent in wholesale and certain consumer lending-commitments, an allowance for credit losses on lending-related commitments is maintained. See Note 13 for further information
regarding the allowance for credit losses on lending-related commitments. The following table summarizes the contractual amounts and carrying values of off-balance sheet lending-related financial instruments, guarantees and other commitments at December 31, 2017 and 2016. The amounts in the table below for credit card and home equity lending-related commitments represent the total available credit for these products. The Firm has not experienced, and does not anticipate, that all available lines of credit for these products will be utilized at the same time. The Firm can reduce or cancel credit card lines of credit by providing the borrower
notice or, in some cases as permitted by law, without notice. In addition, the Firm typically closes credit card lines when the borrower is 60 days or more past due. The Firm may reduce or close HELOCs when there are significant decreases in the value of the underlying property, or when there has been a demonstrable decline in the creditworthiness of the borrower.
JPMorgan Chase & Co./2017 Annual
Report
261
Notes to consolidated financial statements
Off–balance
sheet lending-related financial instruments, guarantees and other commitments
Contractual amount
Carrying value(i)
2017
2016
2017
2016
By
remaining maturity at December 31, (in millions)
Expires in 1 year or less
Expires after 1 year through 3 years
Expires after 3 years through 5 years
Expires after 5 years
Total
Total
Lending-related
Consumer,
excluding credit card:
Home equity
$
2,165
$
1,370
$
1,379
$
15,446
$
20,360
$
21,714
$
12
$
12
Residential
mortgage(a)(b)
5,723
—
—
13
5,736
10,332
—
—
Auto
8,007
872
292
84
9,255
8,468
2
2
Consumer
& Business Banking(b)
11,642
926
112
522
13,202
12,733
19
12
Total
consumer, excluding credit card
27,537
3,168
1,783
16,065
48,553
53,247
(h)
33
26
Credit
card
572,831
—
—
—
572,831
553,891
—
—
Total
consumer(c)
600,368
3,168
1,783
16,065
621,384
607,138
(h)
33
26
Wholesale:
Other
unfunded commitments to extend credit(d)
61,536
118,907
138,289
12,428
331,160
328,497
840
905
Standby
letters of credit and other financial guarantees(d)
15,278
9,905
7,963
2,080
35,226
35,947
636
586
Other
letters of credit(d)
3,459
114
139
—
3,712
3,570
3
2
Total
wholesale(e)
80,273
128,926
146,391
14,508
370,098
368,014
1,479
1,493
Total
lending-related
$
680,641
$
132,094
$
148,174
$
30,573
$
991,482
$
975,152
(h)
$
1,512
$
1,519
Other
guarantees and commitments
Securities lending indemnification agreements and guarantees(f)
$
179,490
$
—
$
—
$
—
$
179,490
$
137,209
$
—
$
—
Derivatives
qualifying as guarantees
4,529
101
12,479
40,065
57,174
51,966
304
80
Unsettled
reverse repurchase and securities borrowing agreements
76,859
—
—
—
76,859
50,722
—
—
Unsettled
repurchase and securities lending agreements
44,205
—
—
—
44,205
26,948
—
—
Loan
sale and securitization-related indemnifications:
Mortgage repurchase liability
NA
NA
NA
NA
NA
NA
111
133
Loans
sold with recourse
NA
NA
NA
NA
1,169
2,730
38
64
Other
guarantees and commitments(g)
7,668
1,084
434
2,681
11,867
5,715
(76
)
(118
)
(a)
Includes
certain commitments to purchase loans from correspondents.
(b)
Certain loan portfolios have been reclassified. The prior period amounts have been revised to conform with the current period presentation.
(c)
Predominantly all consumer lending-related commitments are in the U.S.
(d)
At December 31,
2017 and 2016, reflected the contractual amount net of risk participations totaling $334 million and $328 million, respectively, for other unfunded commitments to extend credit; $10.4 billion and $11.1 billion, respectively, for standby letters of credit and other financial guarantees; and $405 million and $265 million, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations.
(e)
At
December 31, 2017 and 2016, the U.S. portion of the contractual amount of total wholesale lending-related commitments was 77% and 79%, respectively.
(f)
At December 31, 2017 and 2016, collateral held by the Firm in support of securities lending indemnification agreements
was $188.7 billion and $143.2 billion, respectively. Securities lending collateral consist of primarily cash and securities issued by governments that are members of G7 and U.S. government agencies.
(g)
At December 31, 2017, primarily includes letters of credit hedged by derivative transactions and managed on a market risk basis, unfunded commitments related to institutional lending and commitments associated with the Firm’s membership in certain clearing houses. Additionally, includes unfunded commitments predominantly related to certain tax-oriented equity investments.
(h)
The
prior period amounts have been revised to conform with the current period presentation.
(i)
For lending-related products, the carrying value represents the allowance for lending-related commitments and the guarantee liability; for derivative-related products, the carrying value represents the fair value.
262
JPMorgan
Chase & Co./2017 Annual Report
Other unfunded commitments to extend credit
Other unfunded commitments to extend credit generally consist of commitments for working capital and general corporate purposes, extensions of credit to support commercial paper facilities and bond financings in the event that those obligations cannot be remarketed to new investors, as well as committed liquidity facilities to clearing organizations. The Firm also issues commitments under multipurpose facilities which could be drawn upon in several forms, including the issuance of a standby letter of credit.
The
Firm acts as a settlement and custody bank in the U.S. tri-party repurchase transaction market. In its role as settlement and custody bank, the Firm is exposed to the intra-day credit risk of its cash borrower clients, usually broker-dealers. This exposure arises under secured clearance advance facilities that the Firm extends to its clients (i.e. cash borrowers); these facilities contractually limit the Firm’s intra-day credit risk to the facility amount and must be repaid by the end of the day. As of December 31, 2017 and 2016,
the secured clearance advance facility maximum outstanding commitment amount was $1.5 billion and $2.4 billion, respectively.
Guarantees
U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. U.S. GAAP defines a guarantee as a contract that contingently requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a third party’s failure to perform under a specified agreement.
The Firm considers the following off–balance sheet lending-related arrangements to be guarantees under U.S. GAAP: standby letters of credit and other financial guarantees, securities lending indemnifications, certain indemnification agreements included within third-party contractual arrangements and certain derivative contracts.
As required by U.S. GAAP, the Firm initially records guarantees at the inception date fair value of the obligation assumed (e.g., the amount of consideration received or the
net present value of the premium receivable). For certain types of guarantees, the Firm records this fair
value amount in other liabilities with an offsetting entry recorded in cash (for premiums received), or other assets (for premiums receivable). Any premium receivable recorded in other assets is reduced as cash is received under the contract, and the fair value of the liability recorded at inception is amortized into income as lending and deposit-related fees over the life of the guarantee contract. For indemnifications provided in sales agreements, a portion of the sale proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise result from the transaction. For these indemnifications, the initial liability is amortized to income as the Firm’s risk is reduced (i.e., over time or when the indemnification expires).
Any contingent liability that exists as a result of issuing the guarantee or indemnification is recognized when it becomes probable and reasonably estimable. The contingent portion of the liability is not recognized if the estimated amount is less than the carrying amount of the liability recognized at inception (adjusted for any amortization). The recorded amounts of the liabilities related to guarantees and indemnifications at December 31, 2017 and 2016, excluding the allowance for credit losses on lending-related commitments, are discussed below.
Standby letters of credit and other financial guarantees
Standby
letters of credit and other financial guarantees are conditional lending commitments issued by the Firm to guarantee the performance of a client or customer to a third party under certain arrangements, such as commercial paper facilities, bond financings, acquisition financings, trade and similar transactions. The carrying values of standby and other letters of credit were $639 million and $588 million at December 31, 2017 and 2016, respectively, which were classified in accounts payable and other liabilities on the Consolidated balance sheets; these carrying values included
$195 million and $147 million, respectively, for the allowance for lending-related commitments, and $444 million and $441 million, respectively, for the guarantee liability and corresponding asset.
The following table summarizes the types of facilities under which standby letters of credit and other letters of credit arrangements are outstanding by the ratings profiles of the Firm’s clients, as of December 31, 2017 and 2016.
Standby
letters of credit, other financial guarantees and other letters of credit
2017
2016
December 31,
(in
millions)
Standby letters of credit and
other financial guarantees
Other letters
of credit
Standby letters of credit and other financial guarantees
Other letters of credit
Investment-grade(a)
$
28,492
$
2,646
$
28,245
$
2,781
Noninvestment-grade(a)
6,734
1,066
7,702
789
Total
contractual amount
$
35,226
$
3,712
$
35,947
$
3,570
Allowance
for lending-related commitments
$
192
$
3
$
145
$
2
Guarantee
liability
444
—
441
—
Total
carrying value
$
636
$
3
$
586
$
2
Commitments
with collateral
$
17,421
$
878
$
19,346
$
940
(a)
The
ratings scale is based on the Firm’s internal ratings, which generally correspond to ratings as defined by S&P and Moody’s.
JPMorgan Chase & Co./2017 Annual Report
263
Notes to consolidated financial statements
Securities lending indemnifications
Through the Firm’s securities
lending program, counterparties’ securities, via custodial and non-custodial arrangements, may be lent to third parties. As part of this program, the Firm provides an indemnification in the lending agreements which protects the lender against the failure of the borrower to return the lent securities. To minimize its liability under these indemnification agreements, the Firm obtains cash or other highly liquid collateral with a market value exceeding 100% of the value of the securities on loan from the borrower. Collateral is marked to market daily to help assure that collateralization is adequate. Additional collateral is called from the borrower if a shortfall exists, or collateral may be released to the borrower in the event of overcollateralization. If a borrower defaults,
the Firm would use the collateral held to purchase replacement securities in the market or to credit the lending client or counterparty with the cash equivalent thereof.
Derivatives qualifying as guarantees
The Firm transacts certain derivative contracts that have the characteristics of a guarantee under U.S. GAAP. These contracts include written put options that require the Firm to purchase assets upon exercise by the option holder at a specified price by a specified date in the future. The Firm may enter into
written put option contracts in order to meet client needs, or for other trading purposes. The terms of written put options are typically five years or less.
Derivatives deemed to be guarantees also includes stable value contracts, commonly referred to as “stable value products”, that require the Firm to make a payment of the difference between the market value and the book value of a counterparty’s reference portfolio of assets in the event that market value is less than book value and certain other conditions have been met. Stable value products are transacted in order to allow investors to realize investment returns with less volatility than an unprotected portfolio.
These contracts are typically longer-term or may have no stated maturity, but allow the Firm to elect to terminate the contract under certain conditions.
The notional value of derivatives guarantees generally represents the Firm’s maximum exposure. However, exposure to certain stable value products is contractually limited to a substantially lower percentage of the notional amount.
The fair value of derivative guarantees reflects the probability, in the Firm’s view, of whether the Firm will
be required to perform under the contract. The Firm reduces exposures to these contracts by entering into offsetting transactions, or by entering into contracts that hedge the market risk related to the derivative guarantees.
The following table summarizes the derivatives qualifying as guarantees as of December 31, 2017, and 2016.
Stable
value contracts with contractually limited exposure
29,104
28,665
Maximum exposure of stable value contracts with contractually limited exposure
3,053
3,012
Fair
value
Derivative payables
304
96
Derivative receivables
—
16
In
addition to derivative contracts that meet the characteristics of a guarantee, the Firm is both a purchaser and seller of credit protection in the credit derivatives market. For a further discussion of credit derivatives, see Note 5.
Unsettled reverse repurchase and securities borrowing agreements, and unsettled repurchase and securities lending agreements
In the normal course of business, the Firm enters into reverse repurchase agreements and securities borrowing agreements, which are secured financing agreements. Such agreements settle at a future date. At settlement, these commitments result in
the Firm advancing cash to and receiving securities collateral from the counterparty. The Firm also enters into repurchase agreements and securities lending agreements. At settlement, these commitments result in the Firm receiving cash from and providing securities collateral to the counterparty. These agreements generally do not meet the definition of a derivative, and therefore, are not recorded on the Consolidated balance sheets until settlement date. These agreements predominantly consist of agreements with regular-way settlement periods. For a further discussion of securities purchased under resale agreements and securities borrowed, and securities sold under repurchase agreements and securities loaned, see Note 11.
264
JPMorgan
Chase & Co./2017 Annual Report
Loan sales- and securitization-related indemnifications
Mortgage repurchase liability
In connection with the Firm’s mortgage loan sale and securitization activities with GSEs, as described in Note 14, the Firm has made representations and warranties that the loans sold meet certain requirements that may require the Firm to repurchase mortgage loans and/or indemnify the loan purchaser. Further, although the Firm’s securitizations
are predominantly nonrecourse, the Firm does provide recourse servicing in certain limited cases where it agrees to share credit risk with the owner of the mortgage loans. To the extent that repurchase demands that are received relate to loans that the Firm purchased from third parties that remain viable, the Firm typically will have the right to seek a recovery of related repurchase losses from the third party. Generally, the maximum amount of future payments the Firm would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers (including securitization-related SPEs) plus, in certain circumstances, accrued interest on such loans and certain
expenses.
Private label securitizations
The liability related to repurchase demands associated with private label securitizations is separately evaluated by the Firm in establishing its litigation reserves.
For additional information regarding litigation, see Note 29.
Loans sold with recourse
The Firm provides servicing for mortgages and certain commercial lending products on both a recourse and nonrecourse basis. In nonrecourse servicing, the principal credit risk to the Firm is the
cost of temporary servicing advances of funds (i.e., normal servicing advances). In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans, such as Fannie Mae or Freddie Mac or a private investor, insurer or guarantor. Losses on recourse servicing predominantly occur when foreclosure sales proceeds of the property underlying a defaulted loan are less than the sum of the outstanding principal balance, plus accrued interest on the loan and the cost of holding and disposing of the underlying property. The Firm’s securitizations are predominantly nonrecourse, thereby effectively transferring the risk of future credit losses to the purchaser of the mortgage-backed securities issued by the trust. At December 31, 2017 and 2016,
the unpaid principal balance of loans sold with recourse totaled $1.2 billion and $2.7 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firm’s view of the likelihood it will have to perform under its recourse obligations, was $38 million and $64 million at December 31, 2017 and 2016, respectively.
Other off-balance sheet arrangements
Indemnification agreements – general
In connection with issuing securities to investors outside the U.S., the Firm may agree to pay additional amounts to the holders of the securities in the event that, due to a change in tax law, certain types of withholding taxes are imposed
on payments on the securities. The terms of the securities may also give the Firm the right to redeem the securities if such additional amounts are payable. The enactment of the TCJA will not cause the Firm to become obligated to pay any such additional
amounts. The Firm may also enter into indemnification clauses in connection with the licensing of software to clients (“software licensees”) or when it sells a business or assets to a third party (“third-party purchasers”), pursuant to which it indemnifies software licensees for claims of liability or damages that may occur subsequent to the licensing of the software, or third-party purchasers for losses they may incur due to actions taken by the Firm prior to the sale of the business or assets. It is difficult to estimate the Firm’s maximum exposure under these indemnification arrangements, since this would require an assessment of future changes in tax law and future claims that may be made against the Firm that have not yet occurred. However, based on historical
experience, management expects the risk of loss to be remote.
Card charge-backs .
Under the rules of Visa USA, Inc., and MasterCard International, JPMorgan Chase Bank, N.A., is primarily liable for the amount of each processed card sales transaction that is the subject of a dispute between a cardmember and a merchant. If a dispute is resolved in the cardmember’s favor, Merchant Services will (through the cardmember’s issuing bank) credit or refund the amount to the cardmember and will charge back the transaction to the merchant. If Merchant Services is unable to collect the amount from the merchant, Merchant Services will bear the loss for
the amount credited or refunded to the cardmember. Merchant Services mitigates this risk by withholding future settlements, retaining cash reserve accounts or by obtaining other security. However, in the unlikely event that: (1) a merchant ceases operations and is unable to deliver products, services or a refund; (2) Merchant Services does not have sufficient collateral from the merchant to provide cardmember refunds; and (3) Merchant Services does not have sufficient financial resources to provide cardmember refunds, JPMorgan Chase Bank, N.A., would recognize the loss.
Merchant Services incurred aggregate losses of $28 million, $85 million,
and $12 million on $1,191.7 billion, $1,063.4 billion, and $949.3 billion of aggregate volume processed for the years ended December 31, 2017, 2016 and 2015, respectively. Incurred losses from merchant charge-backs are charged to other expense, with the offset recorded in a valuation allowance against accrued interest and accounts receivable on the Consolidated balance sheets. The carrying value of the valuation allowance was $7 million and $45
million at December 31, 2017 and 2016, respectively, which the Firm believes, based on historical experience and the collateral held by Merchant Services of $141 million and $125 million at December 31, 2017 and 2016, respectively, is representative of the payment or performance risk to the Firm related
to charge-backs.
JPMorgan Chase & Co./2017 Annual Report
265
Notes to consolidated financial statements
Clearing Services – Client Credit Risk
The Firm provides clearing services for clients by entering into securities purchases and sales and derivative transactions
with CCPs, including ETDs such as futures and options, as well as OTC-cleared derivative contracts. As a clearing member, the Firm stands behind the performance of its clients, collects cash and securities collateral (margin) as well as any settlement amounts due from or to clients, and remits them to the relevant CCP or client in whole or part. There are two types of margin: variation margin is posted on a daily basis based on the value of clients’ derivative contracts and initial margin is posted at inception of a derivative contract, generally on the basis of the potential changes in the variation margin requirement for the contract.
As a clearing member, the Firm is exposed to the risk of nonperformance by its clients, but is not liable to clients for the performance of the CCPs. Where possible, the Firm seeks to mitigate its risk to the client through the collection of appropriate amounts of margin at inception and throughout the life of the transactions. The Firm can also cease providing clearing services if clients do not adhere to their obligations under the clearing agreement. In the event of nonperformance by a client, the Firm would close out the client’s positions and access available margin. The CCP would utilize any margin it holds to make itself whole, with any remaining shortfalls required to be paid by the Firm as
a clearing member.
The Firm reflects its exposure to nonperformance risk of the client through the recognition of margin receivables from clients and margin payables to CCPs; the clients’ underlying securities or derivative contracts are not reflected in the Firm’s Consolidated Financial Statements.
It is difficult to estimate the Firm’s maximum possible exposure through its role as a clearing member, as this would require an assessment of transactions that clients may execute in the future. However, based upon historical experience, and the credit risk mitigants available to the Firm, management
believes it is unlikely that the Firm will have to make any material payments under these arrangements and the risk of loss is expected to be remote.
For information on the derivatives that the Firm executes for its own account and records in its Consolidated Financial Statements, see Note 5.
Exchange & Clearing House Memberships
The Firm is a member of several securities and derivative exchanges and clearing houses, both in the U.S. and other countries, and it provides clearing services. Membership in some of these organizations requires the Firm to
pay a pro rata share of the losses incurred by the organization as a result of the default of another member. Such obligations vary with different organizations. These obligations may be limited to members who dealt with the defaulting member or to the amount (or a multiple of the amount) of the Firm’s contribution to the guarantee fund maintained by a clearing house or exchange as part of the resources available to cover any losses in the event of a member default. Alternatively, these obligations may include a pro rata share
of the residual losses after applying the guarantee fund. Additionally, certain clearing houses require the Firm as a member to pay a pro rata share of losses that may result from the clearing house’s investment of guarantee fund contributions and initial margin,
unrelated to and independent of the default of another member. Generally a payment would only be required should such losses exceed the resources of the clearing house or exchange that are contractually required to absorb the losses in the first instance. It is difficult to estimate the Firm’s maximum possible exposure under these membership agreements, since this would require an assessment of future claims that may be made against the Firm that have not yet occurred. However, based on historical experience, management expects the risk of loss to be remote.
In the normal course of business, the Parent
Company may provide counterparties with guarantees of certain of the trading and other obligations of its subsidiaries on a contract-by-contract basis, as negotiated with the Firm’s counterparties. The obligations of the subsidiaries are included on the Firm’s Consolidated balance sheets or are reflected as off-balance sheet commitments; therefore, the Parent Company has not recognized
a separate liability for these guarantees. The Firm believes that the occurrence of any event that would trigger payments by the Parent Company under these guarantees is remote.
The Parent Company has guaranteed certain long-term debt and structured notes of its subsidiaries, including JPMorgan Chase Financial Company LLC (“JPMFC”), a 100%-owned finance subsidiary. All securities issued by JPMFC are fully and unconditionally guaranteed by the Parent Company. These guarantees, which rank on a parity with the Firm’s unsecured and unsubordinated indebtedness, are not included in the table on page 262 of this Note. For
additional information, see Note 19.
266
JPMorgan Chase & Co./2017 Annual Report
Note 28 – Commitments, pledged assets and
collateral
Lease commitments
At December 31, 2017, JPMorgan Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes. Certain leases contain renewal options or escalation clauses providing for increased rental payments based on maintenance, utility and tax increases, or they require the Firm to perform restoration work on leased premises. No lease agreement imposes restrictions on the Firm’s ability to pay dividends, engage in debt or equity financing transactions or enter into further
lease agreements.
The following table presents required future minimum rental payments under operating leases with noncancelable lease terms that expire after December 31, 2017.
Year ended December 31, (in millions)
2018
1,526
2019
1,450
2020
1,300
2021
1,029
2022
815
After
2022
3,757
Total minimum payments required
9,877
Less: Sublease rentals under noncancelable subleases
(1,034
)
Net minimum payment required
$
8,843
Total
rental expense was as follows.
Year ended December 31,
(in millions)
2017
2016
2015
Gross
rental expense
$
1,853
$
1,860
$
2,015
Sublease rental income
(251
)
(241
)
(411
)
Net
rental expense
$
1,602
$
1,619
$
1,604
Pledged assets
The Firm may pledge financial assets that it owns to maintain potential borrowing capacity with central banks and for other purposes, including to secure borrowings and public deposits, collateralize repurchase and other securities financing agreements, and cover customer short sales. Certain of these pledged assets may be sold or repledged or otherwise used by the secured parties and are identified as financial instruments owned (pledged to various parties) on the Consolidated balance sheets.
The following table presents the Firm’s pledged assets.
December
31, (in billions)
2017
2016
Assets that may be sold or repledged or otherwise used by secured parties
$
129.6
$
133.6
Assets
that may not be sold or repledged or otherwise used by secured parties
67.9
53.5
Assets pledged at Federal Reserve banks and FHLBs
493.7
441.9
Total
assets pledged
$
691.2
$
629.0
Total assets pledged do not include assets of consolidated VIEs; these assets are used to settle the liabilities of those entities. See Note 14 for additional information on assets and liabilities of consolidated VIEs. For additional information on
the Firm’s securities financing activities, see Note 11. For additional information on the Firm’s long-term debt, see Note 19. The significant components of the Firm’s pledged assets were as follows.
December 31, (in billions)
2017
2016
Securities
$
86.2
$
101.1
Loans
437.7
374.9
Trading
assets and other
167.3
153.0
Total assets pledged
$
691.2
$
629.0
Collateral
The Firm accepts financial assets as collateral that it is permitted to sell or repledge, deliver or otherwise use. This collateral is generally obtained under resale agreements, securities borrowing agreements, customer margin loans and derivative agreements. Collateral is generally used under repurchase agreements, securities lending agreements or to cover customer short sales and to collateralize deposits and derivative agreements.
The following table presents the fair value of collateral accepted.
December
31, (in billions)
2017
2016
Collateral permitted to be sold or repledged, delivered, or otherwise used
$
968.8
$
914.1
Collateral
sold, repledged, delivered or otherwise used
775.3
746.6
JPMorgan Chase & Co./2017 Annual Report
267
Notes
to consolidated financial statements
Note 29 – Litigation
Contingencies
As of December 31, 2017, the Firm and its subsidiaries and affiliates are defendants or putative defendants in numerous legal proceedings, including private, civil litigations and regulatory/government investigations. The litigations range from individual actions involving a single plaintiff to class action lawsuits with potentially millions of class members. Investigations involve both formal and informal proceedings, by both governmental agencies and self-regulatory organizations. These legal proceedings are at varying stages
of adjudication, arbitration or investigation, and involve each of the Firm’s lines of business and geographies and a wide variety of claims (including common law tort and contract claims and statutory antitrust, securities and consumer protection claims), some of which present novel legal theories.
The Firm believes the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for its legal proceedings is from $0 to approximately $1.7 billion at December 31, 2017. This estimated aggregate range of reasonably possible losses was based upon currently available information for those proceedings in which the
Firm believes that an estimate of reasonably possible loss can be made. For certain matters, the Firm does not believe that such an estimate can be made, as of that date. The Firm’s estimate of the aggregate range of reasonably possible losses involves significant judgment, given the number, variety and varying stages of the proceedings (including the fact that many are in preliminary stages), the existence in many such proceedings of multiple defendants (including the Firm) whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims) and the attendant uncertainty of the various potential outcomes of such proceedings, including where the Firm has made assumptions concerning future rulings by the court or other adjudicator, or about the behavior or incentives of adverse parties or regulatory authorities, and those assumptions prove to
be incorrect. In addition, the outcome of a particular proceeding may be a result which the Firm did not take into account in its estimate because the Firm had deemed the likelihood of that outcome to be remote. Accordingly, the Firm’s estimate of the aggregate range of reasonably possible losses will change from time to time, and actual losses may vary significantly.
Set forth below are descriptions of the Firm’s material legal proceedings.
Foreign Exchange Investigations and Litigation. The Firm previously reported settlements with certain government authorities relating to its foreign exchange (“FX”) sales and trading activities and controls related to those activities. FX-related investigations and inquiries by government authorities, including competition authorities, are ongoing,
and
the Firm is cooperating with and working to resolve those matters. In May 2015, the Firm pleaded guilty to a single violation of federal antitrust law. In January 2017, the Firm was sentenced, with judgment entered thereafter. The Department of Labor has granted the Firm a five-year exemption of disqualification, effective upon expiration of a temporary one-year exemption previously granted, that allows the Firm and its affiliates to continue to rely on the Qualified Professional Asset Manager exemption under the Employee Retirement Income Security Act (“ERISA”). The Firm will need to reapply in due course for a further exemption to cover the remainder of the ten-year disqualification period. Separately, in February 2017 the South Africa Competition Commission referred its FX investigation of the Firm and other banks to
the South Africa Competition Tribunal, which is conducting civil proceedings concerning that matter.
The Firm is also one of a number of foreign exchange dealers defending a class action filed in the United States District Court for the Southern District of New York by U.S.-based plaintiffs, principally alleging violations of federal antitrust laws based on an alleged conspiracy to manipulate foreign exchange rates (the “U.S. class action”). In January 2015, the Firm entered into a settlement agreement in the U.S. class action. Following this settlement, a number of additional putative class actions were filed seeking damages for persons who transacted FX futures and options on futures (the “exchanged-based actions”), consumers who purchased foreign currencies at allegedly inflated rates (the “consumer action”), participants or beneficiaries of qualified
ERISA plans (the “ERISA actions”), and purported indirect purchasers of FX instruments (the “indirect purchaser action”). Since then, the Firm has entered into a revised settlement agreement to resolve the consolidated U.S. class action, including the exchange-based actions, and that agreement has been preliminarily approved by the Court. The District Court has dismissed one of the ERISA actions, and the plaintiffs have filed an appeal. The consumer action, a second ERISA action and the indirect purchaser action remain pending in the District Court.
General Motors Litigation. JPMorgan Chase Bank, N.A. participated in, and was the Administrative Agent on behalf of a syndicate of lenders on, a $1.5 billion syndicated Term Loan facility (“Term Loan”) for General Motors Corporation (“GM”). In
July 2009, in connection with the GM bankruptcy proceedings, the Official Committee of Unsecured Creditors of Motors Liquidation Company (“Creditors Committee”) filed a lawsuit against JPMorgan Chase Bank, N.A., in its individual capacity and as Administrative Agent for other lenders on the Term Loan, seeking to hold the underlying lien invalid based on the filing of a UCC-3 termination statement relating to the Term Loan. In January 2015, following several court proceedings, the United States Court of Appeals for the Second Circuit reversed the Bankruptcy Court’s dismissal of the Creditors Committee’s claim and
268
JPMorgan
Chase & Co./2017 Annual Report
remanded the case to the Bankruptcy Court with instructions to enter partial summary judgment for the Creditors Committee as to the termination statement. The proceedings in the Bankruptcy Court continue with respect to, among other things, additional defenses asserted by JPMorgan Chase Bank, N.A. and the value of additional collateral on the Term Loan that was unaffected by the filing of the termination statement at issue. In connection with that additional collateral, a trial in the Bankruptcy Court regarding the value of certain representative assets concluded in May 2017, and a ruling was issued in September 2017. The Bankruptcy Court found that 33 of the 40
representative assets are fixtures and that these fixtures generally should be valued on a “going concern” basis. The Creditors Committee is seeking leave to appeal the Bankruptcy Court’s ruling that the fixtures should be valued on a “going concern” basis rather than on a liquidation basis. In addition, certain Term Loan lenders filed cross-claims in the Bankruptcy Court against JPMorgan Chase Bank, N.A. seeking indemnification and asserting various claims. The parties are engaged in mediation concerning, among other things, the characterization and value of the remaining additional collateral, in light of the Bankruptcy Court’s ruling regarding the representative assets, as well as other issues, including the cross-claims.
Hopper Estate Litigation. The Firm is a defendant in an action in connection with its role as an independent administrator of an estate.
The plaintiffs sought in excess of $7 million in compensatory damages, primarily relating to attorneys’ fees incurred by the plaintiffs. After a trial in probate court in Dallas, Texas that ended in September 2017, the jury returned a verdict against the Firm, awarding plaintiffs their full compensatory damages and multiple billions in punitive damages. Notwithstanding the jury verdict, in light of legal limitations on the availability of damages, certain of the plaintiffs moved for entry of judgment in the total amount of approximately $71 million, including punitive damages, while another plaintiff has not yet moved for judgment. The court has not yet entered a judgment in this matter. The parties are engaged in post-trial briefing.
Interchange Litigation. A group of merchants and retail associations filed
a series of class action complaints alleging that Visa and MasterCard, as well as certain banks, conspired to set the price of credit and debit card interchange fees and enacted respective rules in violation of antitrust laws. The parties settled the cases for a cash payment of $6.1 billion to the class plaintiffs (of which the Firm’s share is approximately 20%) and an amount equal to ten basis points of credit card interchange for a period of 8 months to be measured from a date within 60 days of the end of the opt-out period. The settlement also provided for modifications to each credit card network’s rules, including those that prohibit surcharging credit card transactions. In December 2013, the District Court granted final approval
of the settlement.
A number of merchants appealed to the United States Court of Appeals for the Second Circuit, which, in June 2016, vacated the District Court’s certification of the class action and reversed the approval of the class settlement. In March 2017, the U.S. Supreme Court declined petitions seeking review of the decision of the Court of Appeals. The case has been remanded to the District Court for further proceedings consistent with the appellate decision.
In addition, certain merchants have filed individual actions raising similar allegations against Visa and MasterCard, as well as against the Firm and other banks, and those actions are proceeding.
LIBOR and Other Benchmark Rate Investigations and Litigation. JPMorgan Chase has received subpoenas and requests
for documents and, in some cases, interviews, from federal and state agencies and entities, including the U.S. Commodity Futures Trading Commission (“CFTC”) and various state attorneys general, as well as the European Commission (“EC”), the Swiss Competition Commission (“ComCo”) and other regulatory authorities and banking associations around the world relating primarily to the process by which interest rates were submitted to the British Bankers Association (“BBA”) in connection with the setting of the BBA’s London Interbank Offered Rate (“LIBOR”) for various currencies, principally in 2007 and 2008. Some of the inquiries also relate to similar processes by which information on rates was submitted to the European Banking Federation (“EBF”) in connection with the setting of the EBF’s Euro Interbank Offered Rates (“EURIBOR”) and to the Japanese Bankers’ Association for the setting of Tokyo Interbank Offered Rates (“TIBOR”)
during similar time periods, as well as processes for the setting of U.S. dollar ISDAFIX rates and other reference rates in various parts of the world during similar time periods, including through 2012. The Firm continues to cooperate with these ongoing investigations, and is currently engaged in discussions with the CFTC about resolving its U.S. dollar ISDAFIX-related investigation with respect to the Firm. There is no assurance that such discussions will result in a settlement. As previously reported, the Firm has resolved EC inquiries relating to Yen LIBOR and Swiss Franc LIBOR. In December 2016, the Firm resolved ComCo inquiries relating to these same rates. ComCo’s investigation relating to EURIBOR, to which the Firm and other banks are subject, continues. In December 2016, the EC issued a decision against the Firm and other banks finding an infringement of European antitrust rules relating to EURIBOR. The Firm has filed an appeal with the European General Court.
In
addition, the Firm has been named as a defendant along with other banks in a series of individual and putative class actions filed in various United States District Courts. These actions have been filed, or consolidated for pre-trial purposes, in the United States District Court for the Southern District of New York. In these actions, plaintiffs make varying allegations that in various periods, starting in 2000 or later, defendants either individually or collectively
JPMorgan Chase & Co./2017 Annual Report
269
Notes
to consolidated financial statements
manipulated various benchmark rates by submitting rates that were artificially low or high. Plaintiffs allege that they transacted in loans, derivatives or other financial instruments whose values are affected by changes in these rates and assert a variety of claims including antitrust claims seeking treble damages. These matters are in various stages of litigation.
The Firm has agreed to settle a putative class action related to Swiss franc LIBOR, and that settlement remains subject to final court approval.
In an action related to EURIBOR, the District Court dismissed all claims except a single antitrust claim and two common law claims, and dismissed all defendants except the Firm and Citibank.
In
actions related to U.S. dollar LIBOR, the District Court dismissed certain claims, including antitrust claims brought by some plaintiffs whom the District Court found did not have standing to assert such claims, and permitted antitrust claims, claims under the Commodity Exchange Act and common law claims to proceed. The plaintiffs whose antitrust claims were dismissed for lack of standing have filed an appeal. In May 2017, plaintiffs in three putative class actions moved in the District Court for class certification, and the Firm and other defendants have opposed that motion. In January 2018, the District Court heard oral arguments on the class certification motions and reserved decision.
In an action related to the Singapore Interbank Offered Rate and the Singapore Swap Offer Rate, the District Court dismissed without prejudice all claims except a single antitrust claim, and
dismissed without prejudice all defendants except the Firm, Bank of America and Citibank. The plaintiffs filed an amended complaint in September 2017, which the Firm and other defendants have moved to dismiss.
The Firm is one of the defendants in a number of putative class actions alleging that defendant banks and ICAP conspired to manipulate the U.S. dollar ISDAFIX rates. In April 2016, the Firm settled this litigation, along with certain other banks. Those settlements have been preliminarily approved by the Court.
Mortgage-Backed Securities and Repurchase Litigation and Related Regulatory Investigations. The Firm and affiliates (together, “JPMC”), Bear Stearns and affiliates (together, “Bear Stearns”) and certain Washington Mutual affiliates (together, “Washington Mutual”) have been named
as defendants in a number of cases in their various roles in offerings of MBS. The remaining civil cases include one investor action and actions for repurchase of mortgage loans. The Firm and certain of its current and former officers and Board members have also been sued in a shareholder derivative action relating to the Firm’s MBS activities, which remains pending.
Issuer Litigation – Individual Purchaser Actions. With the exception of one remaining action, the Firm has resolved all of the individual actions brought against JPMC, Bear Stearns and Washington Mutual as MBS issuers (and, in some cases, also as underwriters of their own MBS offerings).
Repurchase Litigation. The Firm is defending
a few actions brought by trustees and/or securities administrators of various MBS trusts on behalf of purchasers of securities issued by those trusts. These cases generally allege breaches of various representations and warranties regarding securitized loans and seek repurchase of those loans or equivalent monetary relief, as well as indemnification of attorneys’ fees and costs and other remedies. The trustees and/or securities administrators have accepted settlement offers on these MBS transactions, and these settlements are subject to court approval.
In addition, the Firm and a group of 21institutional MBS investors made a binding offer to the trustees of MBS issued by JPMC and Bear Stearns providing for the payment of $4.5 billion and the implementation of certain servicing changes by JPMC, to resolve all repurchase and servicing
claims that have been asserted or could have been asserted with respect to 330 MBS trusts created between 2005 and 2008. The offer does not resolve claims relating to Washington Mutual MBS. The trustees (or separate and successor trustees) for this group of 330 trusts have accepted the settlement for 319 trusts in whole or in part and excluded from the settlement 16 trusts in whole or in part. The trustees’ acceptance received final approval from the court and the Firm paid the settlement in December 2017.
Additional actions have been filed against third-party trustees that relate to loan repurchase and servicing claims involving trusts sponsored by JPMC, Bear Stearns and Washington Mutual.
In
actions against the Firm involving offerings of MBS issued by the Firm, the Firm has contractual rights to indemnification from sellers of mortgage loans that were securitized in such offerings. However, certain of those indemnity rights may prove effectively unenforceable in various situations, such as where the loan sellers are now defunct.
The Firm has entered into agreements with a number of MBS trustees or entities that purchased MBS that toll applicable statute of limitations periods with respect to their claims, and has settled, and in the future may settle, tolled claims. There is no assurance that the Firm will not be named as a defendant in additional MBS-related litigation.
Derivative Action. A shareholder derivative action against the Firm, as nominal defendant, and certain of its current and former officers and members of its Board of Directors
relating to the Firm’s MBS activities was filed in California federal court in 2013. In June 2017, the court granted defendants’ motion to dismiss the cause of action that alleged material misrepresentations and omissions in the
270
JPMorgan Chase & Co./2017 Annual Report
Firm’s proxy statement, found that the court did not have personal jurisdiction over the individual defendants
with respect to the remaining causes of action, and transferred that remaining portion of the case to the United States District Court for the Southern District of New York without ruling on the merits. The motion by the defendants to dismiss is pending.
Municipal Derivatives Litigation. Several civil actions were commenced in New York and Alabama courts against the Firm relating to certain Jefferson County, Alabama (the “County”) warrant underwritings and swap transactions. The claims in the civil actions generally alleged that the Firm made payments to certain third parties in exchange for being chosen to underwrite more than $3.0 billion in warrants issued by the County and to act as the counterparty for certain swaps executed by the County. The County filed for bankruptcy in November 2011. In June 2013, the County filed a Chapter 9 Plan of Adjustment,
as amended (the “Plan of Adjustment”), which provided that all the above-described actions against the Firm would be released and dismissed with prejudice. In November 2013, the Bankruptcy Court confirmed the Plan of Adjustment, and in December 2013, certain sewer rate payers filed an appeal challenging the confirmation of the Plan of Adjustment. All conditions to the Plan of Adjustment’s effectiveness, including the dismissal of the actions against the Firm, were satisfied or waived and the transactions contemplated by the Plan of Adjustment occurred in December 2013. Accordingly, all the above-described actions against the Firm have been dismissed pursuant to the terms of the Plan of Adjustment. The appeal of the Bankruptcy Court’s order confirming the Plan of Adjustment remains pending.
Petters Bankruptcy and Related Matters. JPMorgan Chase and certain of its affiliates, including One Equity
Partners (“OEP”), were named as defendants in several actions filed in connection with the receivership and bankruptcy proceedings pertaining to Thomas J. Petters and certain affiliated entities (collectively, “Petters”) and the Polaroid Corporation. The principal actions against JPMorgan Chase and its affiliates were brought by a court-appointed receiver for Petters and the trustees in bankruptcy proceedings for three Petters entities. These actions generally sought to avoid certain putative transfers in connection with (i) the 2005 acquisition by Petters of Polaroid, which at the time was majority-owned by OEP; (ii) two credit facilities that JPMorgan Chase and other financial institutions entered into with Polaroid; and (iii) a credit line and investment accounts held by Petters. In January 2017, the Court substantially denied the defendants’ motion to dismiss
an amended complaint filed by the plaintiffs. In October 2017, JPMorgan Chase and its affiliates reached an agreement in principle to settle the litigation brought by the Petters bankruptcy trustees, or their successors, and the receiver for Thomas J. Petters. The settlement is subject to final documentation and Court approval.
Wendel. Since 2012, the French criminal authorities have been investigating a series of transactions entered into by senior managers of Wendel Investissement (“Wendel”) during the period from 2004 through 2007 to restructure their shareholdings in Wendel. JPMorgan Chase Bank, N.A., Paris branch provided financing for the transactions to a number of managers of Wendel in 2007. JPMorgan Chase has cooperated with the investigation. The investigating judges issued an ordonnance de renvoi
in November 2016, referring JPMorgan Chase Bank, N.A. to the French tribunal correctionnel for alleged complicity in tax fraud. No date for trial has been set by the court. The Firm has been successful in legal challenges made to the Court of Cassation, France’s highest court, with respect to the criminal proceedings. In January 2018, the Paris Court of Appeal issued a decision cancelling the mise en examen of JPMorgan Chase Bank, N.A. The Firm is requesting clarification from the Court of Cassation concerning the Court of Appeal’s decision before seeking direction on next steps in the criminal proceedings. In addition, a number of the managers have commenced civil proceedings against JPMorgan Chase Bank, N.A. The claims are separate, involve different allegations and are at various stages of proceedings.
* * *
In
addition to the various legal proceedings discussed above, JPMorgan Chase and its subsidiaries are named as defendants or are otherwise involved in a substantial number of other legal proceedings. The Firm believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and it intends to defend itself vigorously. Additional legal proceedings may be initiated from time to time in the future.
The Firm has established reserves for several hundred of its currently outstanding legal proceedings. In accordance with the provisions of U.S. GAAP for contingencies, the Firm accrues for a litigation-related liability when it is probable that such a liability has been incurred and the amount of the loss can be reasonably estimated. The Firm evaluates its outstanding legal proceedings each quarter
to assess its litigation reserves, and makes adjustments in such reserves, upwards or downward, as appropriate, based on management’s best judgment after consultation with counsel. During the years ended December 31, 2017, 2016 and 2015, the Firm’s legal expense was a benefit of $(35) million, a benefit of $(317) million, and an expense of $3.0 billion, respectively. There is no assurance that the Firm’s litigation reserves will not need to be adjusted in the future.
In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly where the claimants seek very
large or indeterminate damages, or where the matters present novel legal theories, involve a large number of parties or are in early stages of discovery, the Firm cannot state with confidence what will be the eventual outcomes of the currently pending matters, the timing of their ultimate resolution or the eventual losses, fines, penalties or
JPMorgan Chase & Co./2017 Annual Report
271
Notes to consolidated financial statements
consequences
related to those matters. JPMorgan Chase believes, based upon its current knowledge, after consultation with counsel and after taking into account its current litigation reserves, that the legal proceedings currently pending against it should not have a material adverse effect on the Firm’s consolidated financial condition. The Firm notes, however, that in light of the uncertainties involved in such proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves it has currently accrued or that a matter will not have material reputational consequences. As a result, the outcome of a particular matter may be material to JPMorgan Chase’s operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of JPMorgan Chase’s income for that period.
272
JPMorgan
Chase & Co./2017 Annual Report
Note 30 – International operations
The following table presents income statement- and balance sheet-related information for JPMorgan Chase by major international geographic area. The Firm defines international activities for purposes of this footnote presentation as business transactions that involve clients residing outside of the U.S., and the information presented below is based predominantly on the domicile of the client, the location from which the client relationship is managed, or the location of the trading desk. However, many of the Firm’s U.S. operations serve international businesses.
As
the Firm’s operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expense between U.S. and international operations. These estimates and assumptions are consistent with the allocations used for the Firm’s segment reporting as set forth in Note 31.
The Firm’s long-lived assets for the periods presented are not considered by management to be significant in relation to total assets. The majority of the Firm’s long-lived assets are located in the U.S.
As
of or for the year ended December 31, (in millions)
Revenue(b)
Expense(c)
Income before income tax expense
Net income
Total assets
2017
Europe/Middle
East/Africa
$
14,426
$
8,653
$
5,773
$
4,007
$
407,145
(d)
Asia/Pacific
5,805
4,277
1,528
852
163,718
Latin
America/Caribbean
1,994
1,523
471
299
44,569
Total
international
22,225
14,453
7,772
5,158
615,432
North
America(a)
77,399
49,271
28,128
19,283
1,918,168
Total
$
99,624
$
63,724
$
35,900
$
24,441
$
2,533,600
2016
Europe/Middle
East/Africa
$
13,842
$
8,550
$
5,292
$
3,783
$
394,134
(d)
Asia/Pacific
6,112
4,213
1,899
1,212
156,946
Latin
America/Caribbean
1,959
1,632
327
208
42,971
Total
international
21,913
14,395
7,518
5,203
594,051
North
America(a)
73,755
46,737
27,018
19,530
1,896,921
Total
$
95,668
$
61,132
$
34,536
$
24,733
$
2,490,972
2015
Europe/Middle
East/Africa
$
14,206
$
8,871
$
5,335
$
4,158
$
347,647
(d)
Asia/Pacific
6,151
4,241
1,910
1,285
138,747
Latin
America/Caribbean
1,923
1,508
415
253
48,185
Total
international
22,280
14,620
7,660
5,696
534,579
North
America(a)
71,263
48,221
23,042
18,746
1,817,119
Total
$
93,543
$
62,841
$
30,702
$
24,442
$
2,351,698
(a)
Substantially
reflects the U.S.
(b)
Revenue is composed of net interest income and noninterest revenue.
(c)
Expense is composed of noninterest expense and the provision for credit losses.
(d)
Total assets for the U.K. were approximately $310 billion, $310
billion, and $306 billion at December 31, 2017, 2016 and 2015, respectively.
JPMorgan Chase & Co./2017 Annual Report
273
Notes to consolidated
financial statements
Note 31 – Business segments
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 & Wealth Management. In addition, there is a Corporate 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 further discussion concerning JPMorgan Chase’s business segments, see Segment results of this footnote.
The
following is a description of each of the Firm’s business segments, and the products and services they provide to their respective client bases.
Consumer & Community Banking
CCB offers services to consumers and businesses through bank branches, ATMs, online, mobile and telephone banking. CCB is organized into Consumer & Business Banking (including Consumer Banking/Chase Wealth Management and Business Banking), Home Lending (including Home Lending Production, Home Lending Servicing and Real Estate Portfolios) and Card, Merchant Services & Auto. Consumer & Business Banking offers deposit and investment products and services to consumers, and lending, deposit, and cash management and payment solutions to small businesses. Home Lending includes mortgage origination and servicing activities, as well as portfolios consisting of residential mortgages and home equity loans.
Card, Merchant Services & Auto issues credit cards to consumers and small businesses, offers payment processing services to merchants, and originates and services auto loans and leases.
Corporate & Investment Bank
The CIB, which consists of Banking and Markets & Investor Services, offers a broad suite of investment banking, market-making, prime brokerage, and treasury and securities products and services to a global client base of corporations, investors, financial institutions, government and municipal entities. Banking offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, as well as loan origination and syndication. Banking also includes Treasury Services, which provides transaction services, consisting of cash management and liquidity
solutions. Markets & Investor Services is a global market-
maker in cash securities and derivative instruments, and also offers sophisticated risk management solutions, prime brokerage, and research. Markets & Investor Services also includes Securities Services, a leading global custodian which provides custody, fund accounting and administration, and securities lending products principally for asset managers, insurance companies and public and private investment funds.
Commercial Banking
CB delivers extensive industry knowledge, local expertise and dedicated service to U.S. and U.S. multinational clients, including corporations, municipalities, financial institutions and nonprofit entities with annual revenue generally ranging from $20 million
to $2 billion. In addition, CB provides financing to real estate investors and owners. Partnering with the Firm’s other businesses, CB provides comprehensive financial solutions, including lending, treasury services, investment banking and asset management to meet its clients’ domestic and international financial needs.
Asset & Wealth Management
AWM, with client assets of $2.8 trillion, is a global leader in investment and wealth management. AWM clients include institutions, high-net-worth individuals and retail investors in many major markets throughout the world. AWM offers investment management across most major asset classes including equities, fixed income, alternatives and money market funds. AWM also offers multi-asset investment management, providing solutions for a broad
range of clients’ investment needs. For Wealth Management clients, AWM also provides retirement products and services, brokerage and banking services including trusts and estates, loans, mortgages and deposits. The majority of AWM’s client assets are in actively managed portfolios.
Corporate
The Corporate segment consists of Treasury and CIO and Other Corporate, which includes corporate staff units and expense that is centrally managed. Treasury and CIO are predominantly responsible for measuring, monitoring, reporting and managing the Firm’s liquidity, funding and structural interest rate and foreign exchange risks, as well as executing the Firm’s capital plan. The major Other Corporate units include Real Estate, Enterprise Technology, Legal, Compliance, Finance, Human Resources, Internal Audit, Risk Management, Oversight & Control, Corporate Responsibility and various Other
Corporate groups.
274
JPMorgan Chase & Co./2017 Annual Report
Segment results
The following tables provide a summary of the Firm’s segment results as of or for the years ended December 31, 2017,
2016 and 2015 on a managed basis. The Firm’s definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue (noninterest revenue and net interest income) for each of the reportable business segments on a FTE basis. Accordingly, revenue from investments receiving tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable investments and securities. This allows management to assess the comparability of revenue from year-to-year arising from both taxable and tax-exempt
sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense/(benefit).
Effective
January 1, 2017, the Firm’s methodology used to allocate capital to the Firm’s business segments was updated. The new methodology incorporates Basel III Standardized Fully Phased-In RWA (as well as Basel III Advanced Fully Phased-In RWA), leverage, the GSIB surcharge, and a simulation of capital in a severe stress environment. The methodology will continue to be weighted towards Basel III Advanced Fully Phased-In RWA because the Firm believes it to be the best proxy for economic risk.
Segment results and reconciliation
As
of or for the year ended
December 31,
(in millions, except ratios)
Consumer & Community Banking
Corporate & Investment Bank
Commercial Banking
Asset & Wealth Management
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
Noninterest
revenue
$
14,710
$
15,255
$
15,592
$
24,375
$
24,325
$
23,693
$
2,522
$
2,320
$
2,365
$
9,539
$
9,012
$
9,563
Net
interest income
31,775
29,660
28,228
10,118
10,891
9,849
6,083
5,133
4,520
3,379
3,033
2,556
Total
net revenue
46,485
44,915
43,820
34,493
35,216
33,542
8,605
7,453
6,885
12,918
12,045
12,119
Provision
for credit losses
5,572
4,494
3,059
(45
)
563
332
(276
)
282
442
39
26
4
Noninterest
expense
26,062
24,905
24,909
19,243
18,992
21,361
3,327
2,934
2,881
9,301
8,478
8,886
Income/(loss)
before income tax expense/(benefit)
14,851
15,516
15,852
15,295
15,661
11,849
5,554
4,237
3,562
3,578
3,541
3,229
Income
tax expense/(benefit)
5,456
5,802
6,063
4,482
4,846
3,759
2,015
1,580
1,371
1,241
1,290
1,294
Net
income/(loss)
$
9,395
$
9,714
$
9,789
$
10,813
$
10,815
$
8,090
$
3,539
$
2,657
$
2,191
$
2,337
$
2,251
$
1,935
Average
equity
$
51,000
$
51,000
$
51,000
$
70,000
$
64,000
$
62,000
$
20,000
$
16,000
$
14,000
$
9,000
$
9,000
$
9,000
Total
assets
552,601
535,310
502,652
826,384
803,511
748,691
221,228
214,341
200,700
151,909
138,384
131,451
Return
on equity
17
%
18
%
18
%
14
%
16
%
12
%
17
%
16
%
15
%
25
%
24
%
21
%
Overhead
ratio
56
55
57
56
54
64
39
39
42
72
70
73
(table
continued from above)
As of or for the year ended
December 31,
(in millions, except ratios)
Corporate
Reconciling
Items(a)
Total
2017
2016
2015
2017
2016
2015
2017
2016
2015
Noninterest
revenue
$
1,085
$
938
$
800
$
(2,704
)
(b)
$
(2,265
)
$
(1,980
)
$
49,527
$
49,585
$
50,033
Net
interest income
55
(1,425
)
(533
)
(1,313
)
(1,209
)
(1,110
)
50,097
46,083
43,510
Total
net revenue
1,140
(487
)
267
(4,017
)
(3,474
)
(3,090
)
99,624
95,668
93,543
Provision
for credit losses
—
(4
)
(10
)
—
—
—
5,290
5,361
3,827
Noninterest
expense
501
462
977
—
—
—
58,434
55,771
59,014
Income/(loss)
before income
tax expense/(benefit)
639
(945
)
(700
)
(4,017
)
(3,474
)
(3,090
)
35,900
34,536
30,702
Income
tax expense/(benefit)
2,282
(241
)
(3,137
)
(4,017
)
(b)
(3,474
)
(3,090
)
11,459
9,803
6,260
Net
income/(loss)
$
(1,643
)
$
(704
)
$
2,437
$
—
$
—
$
—
$
24,441
$
24,733
$
24,442
Average
equity
$
80,350
$
84,631
$
79,690
$
—
$
—
$
—
$
230,350
$
224,631
$
215,690
Total
assets
781,478
799,426
768,204
NA
NA
NA
2,533,600
2,490,972
2,351,698
Return
on equity
NM
NM
NM
NM
NM
NM
10
%
10
%
11
%
Overhead
ratio
NM
NM
NM
NM
NM
NM
59
58
63
(a)
Segment
results on a managed basis reflect revenue on a FTE basis with the corresponding income tax impact recorded within income tax expense/(benefit). These adjustments are eliminated in reconciling items to arrive at the Firm’s reported U.S. GAAP results.
(b)
Included $375 million related to tax-oriented investments as a result of the enactment of the TCJA.
JPMorgan Chase & Co./2017 Annual Report
275
Note
32 – Parent Company
The following tables present Parent Company-only financial statements.
Net
increase/(decrease) in cash and due from banks
50
39
(137
)
Cash and due from banks at the beginning of the year
113
74
211
Cash
and due from banks at the end of the year
$
163
$
113
$
74
Cash interest paid
$
5,426
$
4,550
$
3,873
Cash
income taxes paid, net
1,775
1,053
8,251
(a)
In 2016, in connection with the Firm’s 2016 Resolution Submission, the
Parent Company established the IHC, and contributed substantially all of its direct subsidiaries (totaling $55.4 billion) other than JPMorgan Chase Bank, N.A., as well as most of its other assets (totaling $160.5 billion) and intercompany indebtedness to the IHC. Total noncash assets contributed were $62.3 billion. In 2017, the Parent Company transferred $16.2 billion of noncash assets to the IHC to complete the contributions to the IHC.
(b)
Affiliates include trusts that
issued guaranteed capital debt securities (“issuer trusts”). For further discussion on these issuer trusts, see Note 19.
(c)
At December 31, 2017, long-term debt that contractually matures in 2018 through 2022 totaled $20.6 billion, $13.3 billion, $22.4 billion, $20.6 billion and $10.5 billion, respectively.
(d)
For
information regarding the Parent Company’s guarantees of its subsidiaries’ obligations, see Notes 19 and 27.
276
JPMorgan Chase & Co./2017 Annual Report
Supplementary information
Selected
quarterly financial data (unaudited)
As of or for the period ended
2017
2016
(in
millions, except per share, ratio, headcount data and where otherwise noted)
4th quarter
3rd quarter
2nd quarter
1st quarter
4th quarter
3rd quarter
2nd
quarter
1st quarter
Selected income statement data
Total
net revenue
$
24,153
$
25,326
$
25,470
$
24,675
$
23,376
$
24,673
$
24,380
$
23,239
Total
noninterest expense
14,591
14,318
14,506
15,019
13,833
14,463
13,638
13,837
Pre-provision
profit
9,562
11,008
10,964
9,656
9,543
10,210
10,742
9,402
Provision
for credit losses
1,308
1,452
1,215
1,315
864
1,271
1,402
1,824
Income
before income tax expense
8,254
9,556
9,749
8,341
8,679
8,939
9,340
7,578
Income
tax expense
4,022
2,824
2,720
1,893
1,952
2,653
3,140
2,058
Net
income(a)
$
4,232
$
6,732
$
7,029
$
6,448
$
6,727
$
6,286
$
6,200
$
5,520
Per
common share data
Net
income: Basic
$
1.08
$
1.77
$
1.83
$
1.66
$
1.73
$
1.60
$
1.56
$
1.36
Diluted
1.07
1.76
1.82
1.65
1.71
1.58
1.55
1.35
Average
shares: Basic
3,489.7
3,534.7
3,574.1
3,601.7
3,611.3
3,637.7
3,675.5
3,710.6
Diluted
3,512.2
3,559.6
3,599.0
3,630.4
3,646.6
3,669.8
3,706.2
3,737.6
Market
and per common share data
Market
capitalization
$
366,301
$
331,393
$
321,633
$
312,078
$
307,295
$
238,277
$
224,449
$
216,547
Common
shares at period-end
3,425.3
3,469.7
3,519.0
3,552.8
3,561.2
3,578.3
3,612.0
3,656.7
Share
price:(b)
High
$
108.46
$
95.88
$
92.65
$
93.98
$
87.39
$
67.90
$
66.20
$
64.13
Low
94.96
88.08
81.64
83.03
66.10
58.76
57.05
52.50
Close
106.94
95.51
91.40
87.84
86.29
66.59
62.14
59.22
Book
value per share
67.04
66.95
66.05
64.68
64.06
63.79
62.67
61.28
TBVPS(c)
53.56
54.03
53.29
52.04
51.44
51.23
50.21
48.96
Cash
dividends declared per share
0.56
0.56
0.50
0.50
0.48
0.48
0.48
0.44
Selected
ratios and metrics
ROE
7
%
11
%
12
%
11
%
11
%
10
%
10
%
9
%
ROTCE(c)
8
13
14
13
14
13
13
12
ROA
0.66
1.04
1.10
1.03
1.06
1.01
1.02
0.93
Overhead
ratio
60
57
57
61
59
59
56
60
Loans-to-deposits
ratio
64
63
63
63
65
65
66
64
HQLA
(in billions)(d)
$
560
$
568
$
541
$
528
$
524
$
539
$
516
$
505
LCR
(average)
119
%
120
%
115
%
NA%
NA%
NA%
NA%
NA%
CET1
capital ratio(e)
12.2
12.5
(i)
12.5
(i)
12.4
(i)
12.3
(i)
12.0
12.0
11.9
Tier
1 capital ratio(e)
13.9
14.1
(i)
14.2
(i)
14.1
(i)
14.0
(i)
13.6
13.6
13.5
Total
capital ratio(e)
15.9
16.1
16.0
15.6
15.5
15.1
15.2
15.1
Tier
1 leverage ratio(e)
8.3
8.4
8.5
8.4
8.4
8.5
8.5
8.6
Selected
balance sheet data (period-end)
Trading assets
$
381,844
$
420,418
$
407,064
$
402,513
$
372,130
$
374,837
$
380,793
$
366,153
Securities
249,958
263,288
263,458
281,850
$
289,059
272,401
278,610
285,323
Loans
930,697
913,761
908,767
895,974
$
894,765
888,054
872,804
847,313
Core
loans
863,683
843,432
834,935
812,119
806,152
795,077
775,813
746,196
Average
core loans
850,166
837,522
824,583
805,382
799,698
779,383
760,721
737,297
Total
assets
2,533,600
2,563,074
2,563,174
2,546,290
2,490,972
2,521,029
2,466,096
2,423,808
Deposits
1,443,982
1,439,027
1,439,473
1,422,999
1,375,179
1,376,138
1,330,958
1,321,816
Long-term
debt(f)
284,080
288,582
292,973
289,492
295,245
309,418
295,627
290,754
Common
stockholders’ equity
229,625
232,314
232,415
229,795
228,122
228,263
226,355
224,089
Total
stockholders’ equity
255,693
258,382
258,483
255,863
254,190
254,331
252,423
250,157
Headcount
252,539
251,503
249,257
246,345
243,355
242,315
240,046
237,420
Credit
quality metrics
Allowance
for credit losses
$
14,672
$
14,648
$
14,480
$
14,490
$
14,854
$
15,304
$
15,187
$
15,008
Allowance
for loan losses to total retained loans
1.47
%
1.49
%
1.49
%
1.52
%
1.55
%
1.61
%
1.64
%
1.66
%
Allowance
for loan losses to retained loans excluding purchased credit-impaired loans(g)
1.27
1.29
1.28
1.31
1.34
1.37
1.40
1.40
Nonperforming
assets
$
6,426
$
6,154
$
6,432
$
6,826
$
7,535
$
7,779
$
7,757
$
8,023
Net
charge-offs(h)
1,264
1,265
1,204
1,654
1,280
1,121
1,181
1,110
Net
charge-off rate(h)
0.55
%
0.56
%
0.54
%
0.76
%
0.58
%
0.51
%
0.56
%
0.53
%
(a)
The
Firm’s results for the three months ended December 31, 2017, included a $2.4 billion decrease to net income as a result of the enactment of the TCJA. For additional information related to the impact of the TCJA, see Note 24.
(b)
Based on daily prices reported by the New York Stock Exchange.
(c)
TBVPS and ROTCE are non-GAAP financial measures. For further discussion of these measures, see Explanation and Reconciliation
of the Firm’s Use of Non-GAAP Financial Measures and Key Financial Performance Measures on pages 52–54.
(d)
HQLA represents the amount of assets that qualify for inclusion in the liquidity coverage ratio. For December 31, 2017, September 30,2017 and June 30, 2017 the balance represents the average of quarterly reported results per the U.S. LCR public disclosure requirements effective April 1, 2017 and period-end balances for the remaining periods. For additional information, see HQLA on page 93.
(e)
Ratios
presented are calculated under the Basel III Transitional rules and for the capital ratios represent the Collins Floor. See Capital Risk Management on pages 82–91 for additional information on Basel III.
(f)
Included unsecured long-term debt of $218.8 billion, $221.7 billion, $221.0 billion, $212.0 billion, $212.6 billion, $226.8 billion, $220.6 billion, $216.1 billion respectively, for the periods presented.
(g)
Excludes the impact of residential real estate PCI loans,
a non-GAAP financial measure. For further discussion of these measures, see Explanation and Reconciliation of the Firm’s Use of Non-GAAP Financial Measures and Key Performance Measures on pages 52–54, and the Allowance for credit losses on pages 117–119.
(h)
Excluding net charge-offs of $467 million related to the student loan portfolio sale, the net charge-off rates for the three months ended March 31, 2017 would have been 0.54%.
(i)
The
prior period ratios have been revised to conform with the current period presentation.
277
JPMorgan Chase & Co./2017 Annual Report
Distribution of assets, liabilities and stockholders’ equity; interest rates and interest differentials
Consolidated average balance sheet, interest and rates
Provided
below is a summary of JPMorgan Chase’s consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 2015 through 2017. Income computed on a taxable-equivalent basis is the income reported in the Consolidated
statements of income, adjusted to present interest income and average rates earned on assets exempt from income taxes (i.e. federal taxes) on a basis comparable with other taxable investments. The incremental tax rate used for calculating the taxable-equivalent adjustment was approximately 37% in 2017, and 38% in 2016 and 2015.
(Table
continued on next page)
2017
Year ended December 31, (Taxable-equivalent interest and rates; in millions, except rates)
Average balance
Interest(g)
Average rate
Assets
Deposits
with banks
$
438,240
$
4,219
0.96
%
Federal funds sold and securities purchased under resale agreements
191,819
2,327
1.21
Securities
borrowed
95,324
(37
)
(h)
(0.04
)
Trading assets – debt instruments
237,206
7,714
3.25
Taxable
securities
223,592
5,534
2.48
Non-taxable securities(a)
45,086
2,769
6.14
Total
securities
268,678
8,303
3.09
(j)
Loans
906,397
41,296
(i)
4.56
All
other interest-earning assets(b)
42,928
1,863
4.34
Total interest-earning assets
2,180,592
65,685
3.01
Allowance
for loan losses
(13,453
)
Cash and due from banks
20,364
Trading
assets – equity instruments
115,913
Trading assets – derivative receivables
59,588
Goodwill,
MSRs and other intangible assets
53,999
Other assets
139,059
Total
assets
$
2,556,062
Liabilities
Interest-bearing
deposits
$
1,013,221
$
2,857
0.28
%
Federal funds purchased and securities loaned or sold under repurchase agreements
187,386
1,611
0.86
Short-term
borrowings(c)
46,532
481
1.03
Trading liabilities – debt and other interest-bearing liabilities(d)(e)
171,814
2,070
1.21
Beneficial
interests issued by consolidated VIEs
32,457
503
1.55
Long-term debt
291,489
6,753
2.32
Total
interest-bearing liabilities
1,742,899
14,275
0.82
Noninterest-bearing deposits
404,165
Trading
liabilities – equity instruments(e)
21,022
Trading liabilities – derivative payables
44,122
All
other liabilities, including the allowance for lending-related commitments
87,292
Total liabilities
2,299,500
Stockholders’
equity
Preferred stock
26,212
Common
stockholders’ equity
230,350
Total stockholders’ equity
256,562
(f)
Total
liabilities and stockholders’ equity
$
2,556,062
Interest rate spread
2.19
%
Net
interest income and net yield on interest-earning assets
$
51,410
2.36
(a)
Represents securities that are tax-exempt for U.S. federal income
tax purposes.
(b)
Includes held-for-investment margin loans, which are classified in accrued interest and accounts receivable, and all other interest-earning assets included in other assets.
(c)
Includes commercial paper.
(d)
Other interest-bearing liabilities include brokerage customer payables.
(e)
Included
trading liabilities – debt and equity instruments of $90.7 billion, $92.8 billion and $81.4 billion for the twelve months ended December 31, 2017, 2016 and 2015, respectively.
(f)
The ratio of average stockholders’ equity to average assets was 10.0% for 2017, 10.2% for 2016, and 9.7% for 2015. The return on average stockholders’ equity, based on net income, was 9.5%
for 2017, 9.9% for 2016, and 10.2% for 2015.
(g)
Interest includes the effect of related hedging derivatives. Taxable-equivalent amounts are used where applicable.
(h)
Negative interest income and yield is related to client-driven demand for certain securities combined with the impact of low interest rates; this is matched book activity
and the negative interest expense on the corresponding securities loaned is recognized in interest expense and reported within trading liabilities – debt, short-term and other liabilities.
(i)
Fees and commissions on loans included in loan interest amounted to $1.0 billion in 2017, $808 million in 2016, and $936 million in 2015.
(j)
The
annualized rate for securities based on amortized cost was 3.13% in 2017, 2.99% in 2016, and 2.94% in 2015, and does not give effect to changes in fair value that are reflected in AOCI.
278
JPMorgan Chase & Co./2017 Annual Report
Within
the Consolidated average balance sheets, interest and rates summary, the principal amounts of nonaccrual loans have been included in the average loan balances used to determine the average interest rate earned on loans. For additional information on nonaccrual loans, including interest accrued, see Note 12.
(Table
continued from previous page)
2016
2015
Average
balance
Interest(g)
Average
rate
Average
balance
Interest(g)
Average
rate
$
392,160
$
1,863
0.48
%
$
427,963
$
1,250
0.29
%
205,368
2,265
1.10
206,637
1,592
0.77
102,964
(332
)
(h)
(0.32
)
105,273
(532
)
(h)
(0.50
)
215,565
7,373
3.42
206,385
6,694
3.24
235,211
5,538
2.35
273,730
6,550
2.39
44,176
2,662
6.03
42,125
2,556
6.07
279,387
8,200
2.94
(j)
315,855
9,106
2.88
(j)
866,378
36,866
(i)
4.26
787,318
33,321
(i)
4.23
39,782
875
2.20
38,811
652
1.68
2,101,604
57,110
2.72
2,088,242
52,083
2.49
(13,965
)
(13,885
)
18,660
22,042
95,528
105,489
70,897
73,290
53,752
55,439
135,143
138,792
$
2,461,619
$
2,469,409
$
925,270
$
1,356
0.15
%
$
876,840
$
1,252
0.14
%
178,720
1,089
0.61
192,510
609
0.32
36,140
203
0.56
66,956
175
0.26
177,765
1,102
0.62
178,994
557
0.31
40,180
504
1.25
49,200
435
0.88
295,573
5,564
1.88
284,940
4,435
1.56
1,653,648
9,818
0.59
1,649,440
7,463
0.45
402,698
418,948
20,737
17,282
55,927
64,716
77,910
79,293
2,210,920
2,229,679
26,068
24,040
224,631
215,690
250,699
(f)
239,730
(f)
$
2,461,619
$
2,469,409
2.13
%
2.04
%
$
47,292
2.25
$
44,620
2.14
JPMorgan
Chase & Co./2017 Annual Report
279
Interest rates and interest differential analysis of net interest income – U.S. and non-U.S.
Presented below is a summary of interest rates and interest differentials segregated between U.S. and non-U.S. operations for the years 2015 through 2017. The segregation of U.S. and non-U.S. components is based on
the
location of the office recording the transaction. Intercompany funding generally consists of dollar-denominated deposits originated in various locations that are centrally managed by Treasury and CIO.
(Table continued on next page)
2017
Year
ended December 31, (Taxable-equivalent interest and rates; in millions, except rates)
Average balance
Interest
Average rate
Interest-earning assets
Deposits with banks:
U.S.
$
366,177
$
4,091
1.12
%
Non-U.S.
72,063
128
0.18
Federal
funds sold and securities purchased under resale agreements:
U.S.
90,878
1,360
1.50
Non-U.S.
100,941
967
0.96
Securities
borrowed:
U.S.
68,110
(66
)
(c)
(0.10
)
Non-U.S.
27,214
29
0.11
Trading
assets – debt instruments:
U.S.
128,293
4,186
3.26
Non-U.S.
108,913
3,528
3.24
Securities:
U.S.
223,140
7,490
3.36
Non-U.S.
45,538
813
1.79
Loans:
U.S.
832,608
39,439
4.74
Non-U.S.
73,789
1,857
2.52
All
other interest-earning assets, predominantly U.S.
42,928
1,863
4.34
Total interest-earning assets
2,180,592
65,685
3.01
Interest-bearing
liabilities
Interest-bearing deposits:
U.S.
776,049
2,223
0.29
Non-U.S.
237,172
634
0.27
Federal
funds purchased and securities loaned or sold under repurchase agreements:
U.S.
115,574
1,349
1.17
Non-U.S.
71,812
262
0.37
Trading
liabilities – debt, short-term and all other interest-bearing liabilities:(a)
U.S.
138,470
1,271
0.92
Non-U.S.
79,876
1,280
1.60
Beneficial
interests issued by consolidated VIEs, predominantly U.S.
32,457
503
1.55
Long-term debt:
U.S.
276,750
6,745
2.44
Non-U.S.
14,739
8
0.05
Intercompany
funding:
U.S.
(2,874
)
(25
)
—
Non-U.S.
2,874
25
—
Total
interest-bearing liabilities
1,742,899
14,275
0.82
Noninterest-bearing liabilities(b)
437,693
Total
investable funds
$
2,180,592
$
14,275
0.65
%
Net interest income and net yield:
$
51,410
2.36
%
U.S.
46,059
2.68
Non-U.S.
5,351
1.15
Percentage
of total assets and liabilities attributable to non-U.S. operations:
Assets
22.5
Liabilities
21.1
(a)
Includes
commercial paper.
(b)
Represents the amount of noninterest-bearing liabilities funding interest-earning assets.
(c)
Negative interest income and yield is related to client-driven demand for certain securities combined with the impact of low interest rates; this is matched book activity and the negative interest expense on the corresponding securities loaned is recognized in interest expense and reported within trading liabilities – debt, short-term and other liabilities.
280
JPMorgan
Chase & Co./2017 Annual Report
For further information, see the “Net interest income” discussion in Consolidated Results of Operations on pages 44–46.
(Table
continued from previous page)
2016
2015
Average balance
Interest
Average
rate
Average balance
Interest
Average rate
$
328,831
$
1,708
0.52
%
$
388,833
$
1,021
0.26
%
63,329
155
0.25
39,130
229
0.59
112,902
1,166
1.03
118,945
900
0.76
92,466
1,099
1.19
87,692
692
0.79
73,297
(341
)
(c)
(0.46
)
78,815
(562
)
(c)
(0.71
)
29,667
9
0.03
26,458
30
0.11
116,211
3,825
3.29
106,465
3,572
3.35
99,354
3,548
3.57
99,920
3,122
3.12
216,726
6,971
3.22
200,240
6,676
3.33
62,661
1,229
1.97
115,615
2,430
2.10
788,213
35,110
4.45
699,664
31,468
4.50
78,165
1,756
2.25
87,654
1,853
2.11
39,782
875
2.20
38,811
652
1.68
2,101,604
57,110
2.72
2,088,242
52,083
2.49
703,738
1,029
0.15
638,756
761
0.12
221,532
327
0.15
238,084
491
0.21
121,945
773
0.63
140,609
366
0.26
56,775
316
0.56
51,901
243
0.47
133,788
86
0.06
166,838
(394
)
(c)
(0.24
)
80,117
1,219
1.52
79,112
1,126
1.42
40,180
504
1.25
49,200
435
0.88
283,169
5,533
1.95
273,033
4,386
1.61
12,404
31
0.25
11,907
49
0.41
(20,405
)
10
—
(50,517
)
7
—
20,405
(10
)
—
50,517
(7
)
—
1,653,648
9,818
0.59
1,649,440
7,463
0.45
447,956
438,802
$
2,101,604
$
9,818
0.47
%
$
2,088,242
$
7,463
0.36
%
$
47,292
2.25
%
$
44,620
2.14
%
40,705
2.49
38,033
2.34
6,587
1.42
6,587
1.42
23.1
24.7
20.7
21.1
JPMorgan
Chase & Co./2017 Annual Report
281
Changes in net interest income, volume and rate analysis
The table below presents an attribution of net interest income between volume and rate. The attribution between volume and rate is calculated using annual average balances for each category of assets and liabilities shown in the table and the corresponding annual average rates (see pages 278-282 for more information on average balances and rates). In this analysis, when the change cannot be isolated to either volume
or rate, it has been allocated to volume. The average annual rates include the impact of changes in market rates as well as the impact of any change in composition of the various products within each category of asset or liability. This analysis is calculated separately for each category without consideration of the relationship between categories (for example, the net spread between the rates earned on assets and the rates paid on liabilities that fund those assets). As a result, changes in the granularity or groupings considered in this analysis would produce a different attribution result, and due to the complexities involved, precise allocation of changes in interest rates between volume and rates is inherently complex and judgmental.
2017
versus 2016
2016 versus 2015
Increase/(decrease) due to change in:
Increase/(decrease) due to change in:
Year ended December 31, (On a taxable-equivalent basis; in millions)
Volume
Rate
Net change
Volume
Rate
Net change
Interest-earning
assets
Deposits with banks:
U.S.
$
410
$
1,973
$
2,383
$
(324
)
$
1,011
$
687
Non-U.S.
17
(44
)
(27
)
59
(133
)
(74
)
Federal
funds sold and securities purchased under resale agreements:
U.S.
(337
)
531
194
(55
)
321
266
Non-U.S.
81
(213
)
(132
)
56
351
407
Securities
borrowed:
U.S.
11
264
275
24
197
221
Non-U.S.
(4
)
24
20
—
(21
)
(21
)
Trading
assets – debt instruments:
U.S.
396
(35
)
361
317
(64
)
253
Non-U.S.
308
(328
)
(20
)
(24
)
450
426
Securities:
U.S.
216
303
519
515
(220
)
295
Non-U.S.
(303
)
(113
)
(416
)
(1,051
)
(150
)
(1,201
)
Loans:
U.S.
2,043
2,286
4,329
3,992
(350
)
3,642
Non-U.S.
(110
)
211
101
(220
)
123
(97
)
All
other interest-earning assets, predominantly U.S.
137
851
988
21
202
223
Change
in interest income
2,865
5,710
8,575
3,310
1,717
5,027
Interest-bearing
liabilities
Interest-bearing deposits:
U.S.
209
985
1,194
76
192
268
Non-U.S.
41
266
307
(21
)
(143
)
(164
)
Federal
funds purchased and securities loaned or sold under repurchase agreements:
U.S.
(83
)
659
576
(113
)
520
407
Non-U.S.
54
(108
)
(54
)
26
47
73
Trading
liabilities – debt, short-term and other interest-bearing liabilities: (a)
U.S.
45
1,140
1,185
(24
)
504
480
Non-U.S.
(3
)
64
61
14
79
93
Beneficial
interests issued by consolidated VIEs, predominantly U.S.
(122
)
121
(1
)
(113
)
182
69
Long-term
debt:
U.S.
(176
)
1,388
1,212
219
928
1,147
Non-U.S.
2
(25
)
(23
)
1
(19
)
(18
)
Intercompany
funding:
U.S.
151
(186
)
(35
)
(17
)
20
3
Non-U.S.
(151
)
186
35
17
(20
)
(3
)
Change
in interest expense
(33
)
4,490
4,457
65
2,290
2,355
Change
in net interest income
$
2,898
$
1,220
$
4,118
$
3,245
$
(573
)
$
2,672
(a)
Includes
commercial paper.
282
JPMorgan Chase & Co./2017 Annual Report
Glossary of Terms and Acronyms
2017 Annual Report or 2017 Form 10-K: Annual report on Form 10-K for year ended December
31, 2017, filed with the U.S. Securities and Exchange Commission.
ABS: Asset-backed securities
Active foreclosures: Loans referred to foreclosure where formal foreclosure proceedings are ongoing. Includes both judicial and non-judicial states.
AFS: Available-for-sale
ALCO: Asset Liability Committee
Allowance for loan losses to total loans: Represents period-end allowance for loan losses divided by retained loans.
Alternative assets: The following types of assets
constitute alternative investments – hedge funds, currency, real estate, private equity and other investment funds designed to focus on nontraditional strategies.
AWM: Asset & Wealth Management
AOCI: Accumulated other comprehensive income/(loss)
ARM: Adjustable rate mortgage(s)
AUC: Assets under custody
AUM: “Assets under management”: Represent assets managed by AWM on behalf of its Private Banking, Institutional and Retail clients. Includes “Committed capital not Called.”
Auto loan and lease origination volume: Dollar
amount of auto loans and leases originated.
Beneficial interests issued by consolidated VIEs: Represents the interest of third-party holders of debt, equity securities, or other obligations, issued by VIEs that JPMorgan Chase consolidates.
Benefit obligation: Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
BHC: Bank holding company
Card Services includes the Credit Card and Merchant Services businesses.
CB: Commercial Banking
CBB:
Consumer & Business Banking
CCAR: Comprehensive Capital Analysis and Review
CCB: Consumer & Community Banking
CCO: Chief Compliance Officer
CCP: “Central counterparty” is a clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A CCP becomes counterparty to trades with market participants
through
novation, an open offer system, or another legally binding arrangement.
CDS: Credit default swaps
CEO: Chief Executive Officer
CET1 Capital: Common equity Tier 1 Capital
CFTC: Commodity Futures Trading Commission
CFO: Chief Financial Officer
Chase Bank USA, N.A.: Chase Bank USA, National Association
CIB: Corporate & Investment Bank
CIO:
Chief Investment Office
Client assets: Represent assets under management as well as custody, brokerage, administration and deposit accounts.
Client deposits and other third-party liabilities: Deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased and securities loaned or sold under repurchase agreements) as part of client cash management programs.
CLO: Collateralized loan obligations
CLTV: Combined loan-to-value
Collateral-dependent: A loan is considered to be
collateral-dependent when repayment of the loan is expected to be provided solely by the underlying collateral, rather than by cash flows from the borrower’s operations, income or other resources.
Merchant Services: is a business that primarily processes transactions for merchants.
Commercial Card: provides a wide range of payment services to corporate and public sector clients worldwide through the commercial card products. Services include procurement, corporate travel and entertainment, expense management services, and business-to-business payment solutions.
COO: Chief Operating Officer
Core loans: Represents loans considered
central to the Firm’s ongoing businesses; core loans exclude loans classified as trading assets, runoff portfolios, discontinued portfolios and portfolios the Firm has an intent to exit.
Credit cycle: A period of time over which credit quality improves, deteriorates and then improves again (or vice versa). The duration of a credit cycle can vary from a couple of years to several years.
Credit derivatives: Financial instruments whose value is derived from the credit risk associated with the debt of a third-party issuer (the reference entity) which allow one party (the protection purchaser) to transfer that risk to another party (the protection seller). Upon the occurrence of a credit event by the reference entity, which may include, among other events, the bankruptcy or failure to pay
its
JPMorgan Chase & Co./2017 Annual Report
283
Glossary of Terms and Acronyms
obligations, or certain restructurings of the debt of the reference entity, neither party has recourse to the reference entity. The protection purchaser has recourse to the protection seller for the difference between the face value of the CDS contract
and the fair value at the time of settling the credit derivative contract. The determination as to whether a credit event has occurred is generally made by the relevant International Swaps and Derivatives Association (“ISDA”) Determinations Committee.
Criticized: Criticized loans, lending-related commitments and derivative receivables that are classified as special mention, substandard and doubtful categories for regulatory purposes and are generally consistent with a rating of CCC+/Caa1 and below, as defined by S&P and Moody’s.
CRO: Chief Risk Officer
CTC: CIO, Treasury and Corporate
CVA:
Credit valuation adjustments
Debit and credit card sales volume: Dollar amount of card member purchases, net of returns.
Deposit margin/deposit spread: Represents net interest income expressed as a percentage of average deposits.
Distributed denial-of-service attack: The use of a large number of remote computer systems to electronically send a high volume of traffic to a target website to create a service outage at the target. This is a form of cyberattack.
DFAST: Dodd-Frank Act Stress Test
Dodd-Frank
Act: Wall Street Reform and Consumer Protection Act
DOJ: U.S. Department of Justice
DOL: U.S. Department of Labor
DRPC: Board of Directors’ Risk Policy Committee
DVA: Debit valuation adjustment
E&P: Exploration & Production
EC: European Commission
Eligible LTD: Long-term
debt satisfying certain eligibility criteria
Embedded derivatives: are implicit or explicit terms or features of a financial instrument that affect some or all of the cash flows or the value of the instrument in a manner similar to a derivative. An instrument containing such terms or features is referred to as a “hybrid.” The component of the hybrid that is the non-derivative instrument is referred to as the “host.” For example, callable debt is a hybrid instrument that contains a plain vanilla debt instrument (i.e., the host) and an embedded option that allows the issuer to redeem the debt issue at a specified date for a specified amount (i.e., the embedded derivative). However, a floating rate instrument is not a hybrid composed of a fixed-rate instrument and an interest rate swap.
ERISA:
Employee Retirement Income Security Act of 1974
EPS: Earnings per share
ETD: “Exchange-traded derivatives”: Derivative contracts that are executed on an exchange and settled via a central clearing house.
EU: European Union
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FCA: Financial Conduct Authority
FCC: Firmwide Control Committee
FDIA: Federal Depository Insurance Act
FDIC: Federal Deposit Insurance Corporation
Federal Reserve: The Board of the Governors of the Federal Reserve System
Fee share: Proportion of fee revenue based on estimates of investment banking fees generated across the industry from investment banking transactions in M&A, equity and debt underwriting, and loan syndications. Source: Dealogic, a third-party provider of investment banking fee competitive analysis and volume-based league tables for the above noted industry products.
FFELP:
Federal Family Education Loan Program
FFIEC: Federal Financial Institutions Examination Council
FHA: Federal Housing Administration
FHLB: Federal Home Loan Bank
FICO score: A measure of consumer credit risk provided by credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus.
Firm: JPMorgan Chase & Co.
Forward points: Represents the interest rate differential between
two currencies, which is either added to or subtracted from the current exchange rate (i.e., “spot rate”) to determine the forward exchange rate.
FRC: Firmwide Risk Committee
Freddie Mac: Federal Home Loan Mortgage Corporation
Free standing derivatives: a derivative contract entered into either separate and apart from any of the Firm’s other financial instruments or equity transactions. Or, in conjunction with some other transaction and is legally detachable and separately exercisable.
FSB: Financial Stability Board
FTE: Fully taxable
equivalent
FVA: Funding valuation adjustment
FX: Foreign exchange
284
JPMorgan Chase & Co./2017 Annual Report
Glossary of Terms and Acronyms
G7: Group
of Seven nations: Countries in the G7 are Canada, France, Germany, Italy, Japan, the U.K. and the U.S.
G7 government bonds: Bonds issued by the government of one of the G7 nations.
Ginnie Mae: Government National Mortgage Association
GSE: Fannie Mae and Freddie Mac
GSIB: Global systemically important banks
HAMP: Home affordable modification program
Headcount-related expense: Includes salary
and benefits (excluding performance-based incentives), and other noncompensation costs related to employees.
HELOAN: Home equity loan
HELOC: Home equity line of credit
Home equity – senior lien: Represents loans and commitments where JPMorgan Chase holds the first security interest on the property.
Home equity – junior lien: Represents loans and commitments where JPMorgan Chase holds a security interest that is subordinate in rank to other liens.
Households: A
household is a collection of individuals or entities aggregated together by name, address, tax identifier and phone. Reported on a one-month lag.
HQLA: High quality liquid assets
HTM: Held-to-maturity
ICAAP: Internal capital adequacy assessment process
IDI: Insured depository institutions
IHC: JPMorgan Chase Holdings LLC, an intermediate holding company
Impaired loan: Impaired loans are loans measured at amortized cost, for which it is probable that the Firm will be
unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Impaired loans include the following:
•
All wholesale nonaccrual loans
•
All TDRs (both wholesale and consumer), including ones that have returned to accrual status
Interchange income: A fee paid to a credit card issuer in the clearing and settlement of
a sales or cash advance transaction.
Investment-grade: An indication of credit quality based on JPMorgan Chase’s internal risk assessment system. “Investment grade” generally represents a risk profile similar to a rating of a “BBB-”/“Baa3” or better, as defined by independent rating agencies.
ISDA: International Swaps and Derivatives Association
JPMorgan Chase: JPMorgan Chase & Co.
JPMorgan Chase Bank, N.A.: JPMorgan Chase Bank, National Association
JPMorgan
Clearing: J.P. Morgan Clearing Corp.
JPMorgan Securities: J.P. Morgan Securities LLC
Loan-equivalent: Represents the portion of the unused commitment or other contingent exposure that is expected, based on historical portfolio experience, to become drawn prior to an event of a default by an obligor.
LCR: Liquidity coverage ratio
LDA: Loss Distribution Approach
LGD: Loss given default
LIBOR: London Interbank Offered Rate
LLC:
Limited Liability Company
LOB: Line of business
Loss emergence period: Represents the time period between the date at which the loss is estimated to have been incurred and the ultimate realization of that loss.
LTIP: Long-term incentive plan
LTV: “Loan-to-value”: For residential real estate loans, the relationship, expressed as a percentage, between the principal amount of a loan and the appraised value of the collateral (i.e., residential real estate) securing the loan.
Origination date LTV ratio
The
LTV ratio at the origination date of the loan. Origination date LTV ratios are calculated based on the actual appraised values of collateral (i.e., loan-level data) at the origination date.
Current estimated LTV ratio
An estimate of the LTV as of a certain date. The current estimated LTV ratios are calculated using estimated collateral values derived from a nationally recognized home price index measured at the metropolitan statistical area (“MSA”) level. These MSA-level home price indices consist of actual data to the extent available and forecasted data where actual data is not available. As a result, the estimated collateral values used to calculate these ratios do not represent actual appraised loan-level collateral values; as such, the resulting LTV ratios are necessarily imprecise and should therefore be viewed as estimates.
Combined LTV ratio
The LTV ratio considering all available lien positions, as well as unused lines, related to the property. Combined LTV ratios are used for junior lien home equity products.
Managed basis: A non-GAAP presentation of financial results that includes reclassifications to present revenue on a fully taxable-equivalent basis. Management uses this non- GAAP financial measure at the segment level, because it believes this provides information to enable investors to understand the underlying operational performance and
JPMorgan
Chase & Co./2017 Annual Report
285
Glossary of Terms and Acronyms
trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors.
Master netting agreement: A single agreement with a counterparty that permits multiple transactions governed by that agreement to be terminated or accelerated and settled through a single payment in a single currency in the event of a default (e.g., bankruptcy, failure to make a required payment or securities transfer or deliver collateral
or margin when due).
MBS: Mortgage-backed securities
MD&A: Management’s discussion and analysis
MMDA: Money Market Deposit Accounts
Moody’s: Moody’s Investor Services
Mortgage origination channels:
Retail – Borrowers who buy or refinance a home through direct contact with a mortgage banker employed by the Firm using a branch office, the Internet or by phone. Borrowers are frequently referred to a mortgage banker by a banker in a Chase branch, real estate brokers, home builders or other third parties.
Correspondent
– Banks, thrifts, other mortgage banks and other financial institutions that sell closed loans to the Firm.
Mortgage product types:
Alt-A
Alt-A loans are generally higher in credit quality than subprime loans but have characteristics that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may include one or more of the following: (i) limited documentation; (ii) a high CLTV ratio; (iii) loans secured by non-owner occupied properties; or (iv) a debt-to-income ratio above normal limits. A substantial proportion of the Firm’s Alt-A loans are those where a borrower does not provide complete documentation of his or her assets or the amount or source of his or
her income.
Option ARMs
The option ARM real estate loan product is an adjustable-rate mortgage loan that provides the borrower with the option each month to make a fully amortizing, interest-only or minimum payment. The minimum payment on an option ARM loan is based on the interest rate charged during the introductory period. This introductory rate is usually significantly below the fully indexed rate. The fully indexed rate is calculated using an index rate plus a margin. Once the introductory period ends, the contractual interest rate charged on the loan increases to the fully indexed rate and adjusts monthly to reflect movements in the index. The minimum payment is typically insufficient to cover interest accrued in the prior month, and any unpaid interest is deferred and added to the principal balance of the loan. Option ARM
loans are subject to payment recast, which converts the loan to a variable-rate fully amortizing loan
upon meeting specified loan balance and anniversary date triggers.
Prime
Prime mortgage loans are made to borrowers with good credit records who meet specific underwriting requirements, including prescriptive requirements related to income and overall debt levels. New prime mortgage borrowers provide full documentation and generally have reliable payment histories.
Subprime
Subprime loans are loans that, prior to mid-2008, were offered to certain customers with one or more high risk characteristics, including
but not limited to: (i) unreliable or poor payment histories; (ii) a high LTV ratio of greater than 80% (without borrower-paid mortgage insurance); (iii) a high debt-to-income ratio; (iv) an occupancy type for the loan is other than the borrower’s primary residence; or (v) a history of delinquencies or late payments on the loan.
MSA: Metropolitan statistical areas
MSR: Mortgage servicing rights
Multi-asset: Any fund or account that allocates assets under management to more than one asset class.
NA: Data is not applicable or available for the period presented.
NAV:
Net Asset Value
Net Capital Rule: Rule 15c3-1 under the Securities Exchange Act of 1934.
Net charge-off/(recovery) rate: Represents net charge-offs/(recoveries) (annualized) divided by average retained loans for the reporting period.
Net mortgage servicing revenue includes the following components:
Operating revenue predominantly represents the return on Home Lending Servicing’s MSR asset and includes:
– Actual gross income earned from servicing third-party mortgage loans, such as contractually specified servicing fees and ancillary income; and
– The change in the fair value of the MSR asset due to the collection
or realization of expected cash flows.
Risk management represents the components of
Home Lending Servicing’s MSR asset that are subject to ongoing risk management activities, together with derivatives and other instruments used in those risk management activities.
Net production revenue: Includes net gains or losses on originations and sales of mortgage loans, other production-related fees and losses related to the repurchase of previously sold loans.
286
JPMorgan
Chase & Co./2017 Annual Report
Glossary of Terms and Acronyms
Net revenue rate: Represents Card Services net revenue (annualized) expressed as a percentage of average loans for the period.
Net yield on interest-earning assets: The average rate for interest-earning assets less the average rate paid for all sources of funds.
NM: Not meaningful
NOL: Net operating loss
Nonaccrual loans: Loans for which interest
income is not recognized on an accrual basis. Loans (other than credit card loans and certain consumer loans insured by U.S. government agencies) are placed on nonaccrual status when full payment of principal and interest is not expected, regardless of delinquency status, or when principal and interest have been in default for a period of 90 days or more unless the loan is both well-secured and in the process of collection. Collateral-dependent loans are typically maintained on nonaccrual status.
Nonperforming assets: Nonperforming assets include nonaccrual loans, nonperforming derivatives and certain assets acquired in loan satisfaction, predominantly real estate owned and other commercial and personal property.
NOW: Negotiable Order of Withdrawal
NSFR: Net
stable funding ratio
OAS: Option-adjusted spread
OCC: Office of the Comptroller of the Currency
OCI: Other comprehensive income/(loss)
OEP: One Equity Partners
OIS: Overnight index swap
OPEB: Other postretirement employee benefit
ORMF: Operational Risk Management Framework
OTTI: Other-than-temporary impairment
Over-the-counter (“OTC”) derivatives: Derivative contracts that are negotiated, executed and settled bilaterally between two derivative counterparties, where one or both counterparties is a derivatives dealer.
Over-the-counter cleared (“OTC-cleared”) derivatives: Derivative contracts that are negotiated and executed bilaterally, but subsequently settled via a central clearing house, such that each derivative counterparty is only exposed to the default of that clearing house.
Overhead ratio: Noninterest expense as a percentage
of total net revenue.
Parent Company: JPMorgan Chase & Co.
Participating securities: Represents unvested share-based compensation awards containing nonforfeitable rights to dividends or dividend equivalents (collectively, “dividends”), which are included in the earnings per share calculation
using the two-class method. JPMorgan Chase grants RSUs to certain employees under its share-based compensation programs, which entitle the recipients to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of common stock. These unvested awards meet the definition of participating securities. Under the two-class method, all earnings (distributed and undistributed) are allocated to each
class of common stock and participating securities, based on their respective rights to receive dividends.
PCA: Prompt corrective action
PCI: “Purchased credit-impaired” loans represents certain loans that were acquired and deemed to be credit-impaired on the acquisition date in accordance with the guidance of the FASB. The guidance allows purchasers to aggregate credit-impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics(e.g., product type, LTV ratios, FICO scores, past due status, geographic location). A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.
PD: Probability of default
PRA: Prudential Regulatory Authority
Pre-provision profit/(loss): Represents total net revenue less noninterest expense. The Firm believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
Pretax margin: Represents income before income tax expense divided by total net revenue, which is, in management’s view, a comprehensive measure of pretax performance derived by measuring earnings after all costs are taken into consideration. It is one basis upon which management evaluates the performance of AWM against the performance of their respective competitors.
Principal transactions revenue: Principal
transactions revenue is driven by many factors, including the bid-offer spread, which is the difference between the price at which the Firm is willing to buy a financial or other instrument and the price at which the Firm is willing to sell that instrument. It also consists of realized (as a result of closing out or termination of transactions, or interim cash payments) and unrealized (as a result of changes in valuation) gains and losses on financial and other instruments (including those accounted for under the fair value option) primarily used in client-driven market-making activities and on private equity investments. In connection with its client-driven market-making activities, the Firm transacts in debt and equity instruments, derivatives and commodities (including physical commodities inventories and financial instruments
that reference commodities).
Principal transactions revenue also includes certain realized and unrealized gains and losses related to hedge accounting and specified risk-management activities, including: (a)
JPMorgan Chase & Co./2017 Annual Report
287
Glossary of Terms and Acronyms
certain
derivatives designated in qualifying hedge accounting relationships (primarily fair value hedges of commodity and foreign exchange risk), (b) certain derivatives used for specific risk management purposes, primarily to mitigate credit risk, foreign exchange risk and commodity risk, and (c) other derivatives.
PSU(s): Performance share units
RCSA: Risk and Control Self-Assessment
Real assets: Real assets include investments in productive assets such as agriculture, energy rights, mining and timber properties and exclude raw land to be developed for real estate purposes.
REIT: “Real
estate investment trust”: A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage income property (i.e., equity REIT) and/or mortgage loans (i.e., mortgage REIT). REITs can be publicly or privately held and they also qualify for certain favorable tax considerations.
Receivables from customers: Primarily represents margin loans to brokerage customers that are collateralized through assets maintained in the clients’ brokerage accounts, as such no allowance is held against these receivables. These receivables are reported within accrued interest and accounts receivable on the Firm’s Consolidated balance sheets.
Regulatory VaR: Daily aggregated VaR calculated in accordance with regulatory rules.
REO: Real estate owned
Reported basis: Financial statements prepared under U.S. GAAP, which excludes the impact of taxable-equivalent adjustments.
Retained loans: Loans that are held-for-investment (i.e., excludes loans held-for-sale and loans at fair value).
Revenue wallet: Proportion of fee revenue based on estimates of investment banking fees generated across the industry (i.e., the revenue wallet) from investment banking transactions in M&A, equity and debt underwriting, and loan syndications.
Source: Dealogic, a third-party provider of investment banking competitive analysis and volume-based league tables for the above noted industry products.
RHS: Rural Housing Service of the U.S. Department of Agriculture
Risk-rated portfolio: Credit loss estimates are based on estimates of the probability of default (“PD”) and loss severity given a default. The probability of default is the likelihood that a borrower will default on its obligation; the loss given default (“LGD”) is the estimated loss on the loan that would be realized upon the default and takes into consideration collateral and structural support for each credit facility.
ROA:
Return on assets
ROE: Return on equity
ROTCE: Return on tangible common equity
RSU(s): Restricted stock units
RWA: “Risk-weighted assets”: Basel III establishes two comprehensive methodologies for calculating RWA (a Standardized approach and an Advanced approach) which include capital requirements for credit risk, market risk, and in the case of Basel III Advanced, also operational risk. Key differences in the calculation of credit risk RWA between the Standardized and Advanced approaches are that for Basel III Advanced, credit risk RWA is based on risk-sensitive approaches which largely rely on the use of internal credit
models and parameters, whereas for Basel III Standardized, credit risk RWA is generally based on supervisory risk-weightings which vary primarily by counterparty type and asset class. Market risk RWA is calculated on a generally consistent basis between Basel III Standardized and Basel III Advanced.
S&P: Standard and Poor’s 500 Index
SAR(s): Stock appreciation rights
SCCL: single-counterparty credit limits
Scored portfolio: The scored portfolio predominantly includes residential real estate loans, credit card loans and certain auto and business banking loans where credit loss estimates are based on statistical analysis
of credit losses over discrete periods of time. The statistical analysis uses portfolio modeling, credit scoring and decision-support tools.
SEC: Securities and Exchange Commission
Seed capital: Initial JPMorgan capital invested in products, such as mutual funds, with the intention of ensuring the fund is of sufficient size to represent a viable offering to clients, enabling pricing of its shares, and allowing the manager to develop a track record. After these goals are achieved, the intent is to remove the Firm’s capital from the investment.
Short sale: A short sale is a sale of real estate in which proceeds from selling the underlying property are less than the amount owed the Firm under the terms of the related
mortgage, and the related lien is released upon receipt of such proceeds.
Single-name: Single reference-entities
SLR: Supplementary leverage ratio
SMBS: Stripped mortgage-backed securities
SOA: Society of Actuaries
SPEs: Special purpose entities
Structural interest rate risk: Represents interest rate risk of the non-trading assets and liabilities of the Firm.
Suspended foreclosures: Loans referred to foreclosure where formal foreclosure proceedings have started but are currently on hold, which could be due to bankruptcy or loss mitigation. Includes both judicial and non-judicial states.
Taxable-equivalent basis: In presenting results on a managed basis, the total net revenue for each of the business segments and the Firm is presented
on a tax-equivalent basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in managed basis results on a level comparable to taxable investments and securities; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense.
TBVPS: Tangible book value per share
TCE: Tangible common equity
TDR: “Troubled debt restructuring” is deemed to occur when the Firm modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
TLAC: Total
Loss Absorbing Capacity
U.K.: United Kingdom
Unaudited: Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
U.S.: United States of America
U.S. GAAP: Accounting principles generally accepted in the U.S.
U.S. government-sponsored enterprises (“U.S. GSEs”) and U.S. GSE obligations: In the U.S., GSEs are quasi-governmental, privately held entities established by Congress to improve
the flow of credit to specific sectors of the economy and provide certain essential services to the public. U.S. GSEs include Fannie Mae and Freddie Mac, but do not include Ginnie Mae, which is directly owned by the U.S. Department of Housing and Urban Development. U.S. GSE obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
U.S. LCR: Liquidity coverage ratio under the final U.S. rule.
U.S. Treasury: U.S. Department of the Treasury
VA: U.S. Department of Veterans Affairs
VaR: “Value-at-risk” is a measure
of the dollar amount of potential loss from adverse market moves in an ordinary market environment.
VCG: Valuation Control Group
VGF: Valuation Governance Forum
VIEs: Variable interest entities
Warehouse loans: Consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets.
Washington Mutual transaction: On September 25, 2008, JPMorgan Chase acquired certain of the assets of the banking operations
of Washington Mutual Bank (“Washington Mutual”) from the FDIC.
Mortgage-backed securities: U.S Government agencies
$
53,689
$
55,066
U.S.
Treasury and government agencies
11,202
11,036
All other AFS securities
172,567
175,652
Total available-for-sale debt securities
$
237,458
$
241,754
Held-to-maturity
securities
Mortgage-backed securities: U.S Government agencies
36,271
37,081
All other HTM securities
12,802
13,506
Total
held-to-maturity debt securities
$
49,073
$
50,587
Total securities
$
286,531
$
292,341
290
Loan
portfolio
The table below presents loans by portfolio segment and loan class that are presented in Credit and Investment Risk Management on page 101, pages 102-107 and page 108, and in Note 12, at the periods indicated.
December 31, (in
millions)
2017
2016(b)
2015
2014
2013
U.S. consumer, excluding credit card loans
Residential
mortgage
$
236,157
$
215,178
$
192,714
$
139,973
$
129,008
Home
equity
44,249
51,965
60,548
69,837
76,790
Auto
66,242
65,814
60,255
54,536
52,757
Other
26,033
31,687
31,304
31,028
30,508
Total
U.S. consumer, excluding credit card loans
372,681
364,644
344,821
295,374
289,063
Credit card Loans
U.S.
credit card loans
149,107
141,447
131,132
129,067
125,308
Non-U.S. credit card loans
404
369
331
1,981
2,483
Total
credit card loans
149,511
141,816
131,463
131,048
127,791
Total consumer loans
522,192
506,460
476,284
426,422
416,854
U.S.
wholesale loans
Commercial and industrial
93,522
91,393
83,739
78,664
79,436
Real
estate
112,562
104,268
90,836
77,022
67,815
Financial institutions
23,819
20,499
12,708
13,743
11,087
Government
agencies
12,603
12,655
9,838
7,574
8,316
Other
69,602
66,363
67,925
49,838
48,158
Total
U.S. wholesale loans
312,108
295,178
265,046
226,841
214,812
Non-U.S. wholesale loans
Commercial
and industrial
29,233
31,340
30,385
34,782
36,447
Real estate
3,302
3,975
4,577
2,224
1,621
Financial
institutions
16,845
15,196
17,188
21,099
22,813
Government agencies
2,906
3,726
1,788
1,122
2,146
Other
44,111
38,890
42,031
44,846
43,725
Total
non-U.S. wholesale loans
96,397
93,127
95,969
104,073
106,752
Total wholesale loans
Commercial
and industrial
122,755
122,733
114,124
113,446
115,883
Real estate
115,864
108,243
95,413
79,246
69,436
Financial
institutions
40,664
35,695
29,896
34,842
33,900
Government agencies
15,509
16,381
11,626
8,696
10,462
Other
113,713
105,253
109,956
94,684
91,883
Total
wholesale loans
408,505
388,305
361,015
330,914
321,564
Total loans(a)
$
930,697
$
894,765
$
837,299
$
757,336
$
738,418
Memo:
Loans
held-for-sale
$
3,351
$
2,628
$
1,646
$
7,217
$
12,230
Loans
at fair value
2,508
2,230
2,861
2,611
2,011
Total loans held-for-sale and loans at fair value
$
5,859
$
4,858
$
4,507
$
9,828
$
14,241
(a)
Loans
(other than purchased credit-impaired loans and those for which the fair value option have been elected) are presented net of unamortized discounts and premiums and net deferred loan fees or costs. These amounts were not material as of December 31, 2017, 2016, 2015, 2014 and 2013.
(b)
Certain prior period amounts have been revised to conform with the current period presentation.
291
Maturities
and sensitivity to changes in interest rates
The table below sets forth, at December 31, 2017, wholesale loan maturity and distribution between fixed and floating interest rates based on the stated terms of the loan agreements. The table below also presents loans by loan class that are presented in Wholesale credit portfolio on pages 108–116 and Note 12. The table does not include the impact of derivative instruments.
The following tables set forth nonperforming assets, contractually past-due assets, and accruing restructured loans by portfolio segment and loan class that are presented in Credit and Investment Risk Management on page 101, page 103 and page 108, at the periods indicated.
December
31, (in millions)
2017
2016
2015
2014
2013
Nonperforming assets
U.S.
nonaccrual loans:
Consumer, excluding credit card loans
$
4,209
$
4,820
$
5,413
$
6,509
$
7,496
Credit
card loans
—
—
—
—
—
Total
U.S. nonaccrual consumer loans
4,209
4,820
5,413
6,509
7,496
Wholesale:
Commercial
and industrial
703
1,145
315
184
317
Real
estate
95
148
175
237
338
Financial
institutions
2
4
4
12
19
Government
agencies
—
—
—
—
1
Other
137
198
86
59
97
Total
U.S. wholesale nonaccrual loans
937
1,495
580
492
772
Total
U.S. nonaccrual loans
5,146
6,315
5,993
7,001
8,268
Non-U.S.
nonaccrual loans:
Consumer, excluding credit card loans
—
—
—
—
—
Credit
card loans
—
—
—
—
—
Total
non-U.S. nonaccrual consumer loans
—
—
—
—
—
Wholesale:
Commercial
and industrial
654
454
314
21
116
Real
estate
41
52
63
23
88
Financial
institutions
—
5
6
7
8
Government
agencies
—
—
—
—
—
Other
102
57
53
81
60
Total
non-U.S. wholesale nonaccrual loans
797
568
436
132
272
Total
non-U.S. nonaccrual loans
797
568
436
132
272
Total
nonaccrual loans
5,943
6,883
6,429
7,133
8,540
Derivative
receivables
130
223
204
275
415
Assets
acquired in loan satisfactions
353
429
401
559
751
Nonperforming
assets
$
6,426
$
7,535
$
7,034
$
7,967
$
9,706
Memo:
Loans
held-for-sale
$
—
$
162
$
101
$
95
$
26
Loans
at fair value
—
—
25
21
197
Total
loans held-for-sale and loans at fair value
$
—
$
162
$
126
$
116
$
223
292
December
31, (in millions)
2017
2016
2015
2014
2013
Contractually past-due loans(a)
U.S.
loans:
Consumer, excluding credit card loans(b)
$
—
$
—
$
—
$
—
$
—
Credit
card loans
1,378
1,143
944
893
997
Total
U.S. consumer loans
1,378
1,143
944
893
997
Wholesale:
Commercial
and industrial
107
86
6
14
14
Real
estate
12
2
15
33
14
Financial
institutions
14
12
1
—
—
Government
agencies
4
4
6
—
—
Other
2
19
28
26
16
Total
U.S. wholesale loans
139
123
56
73
44
Total
U.S. loans
1,517
1,266
1,000
966
1,041
Non-U.S.
loans:
Consumer, excluding credit card loans
—
—
—
—
—
Credit
card loans
1
2
—
2
25
Total
non-U.S. consumer loans
1
2
—
2
25
Wholesale:
Commercial
and industrial
1
—
1
—
—
Real
estate
—
—
—
—
—
Financial
institutions
1
9
10
—
6
Government
agencies
—
—
—
—
—
Other
—
—
—
3
—
Total
non-U.S. wholesale loans
2
9
11
3
6
Total
non-U.S. loans
3
11
11
5
31
Total
contractually past due loans
$
1,520
$
1,277
$
1,011
$
971
$
1,072
(a)
Represents
accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonaccrual loans. Excludes PCI loans which are accounted for on a pool basis. Since each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, the past-due status of the pools, or that of individual loans within the pools, is not meaningful. The Firm is recognizing interest income on each pool of loans as each of the pools is performing.
(b)
At December 31, 2017, 2016, 2015, 2014
and 2013, excluded loans 90 or more days past due and still accruing as follows: (1) mortgage loans insured by U.S. government agencies of $2.7 billion, $2.7 billion, $2.8 billion, $3.4 billion and $3.2 billion, respectively; and (2) student loans insured by U.S. government agencies under the FFELP of zero, $263 million, $290 million, $367 million and $428 million, respectively. These amounts have been excluded from the nonaccrual loans based upon the government guarantee. Prior period amounts have been revised to conform with current period presentation.
December
31, (in millions)
2017
2016
2015
2014
2013
Accruing restructured loans(a)
U.S.:
Consumer,
excluding credit card loans
$
4,993
$
5,561
$
5,980
$
7,814
$
9,173
Credit
card loans(b)
1,215
1,240
1,465
2,029
3,115
Total
U.S. consumer loans
6,208
6,801
7,445
9,843
12,288
Wholesale:
Commercial
and industrial
32
34
12
10
—
Real
estate
5
11
28
31
27
Financial
institutions
79
—
—
—
—
Other
—
4
—
1
3
Total
U.S. wholesale loans
116
49
40
42
30
Total
U.S.
6,324
6,850
7,485
9,885
12,318
Non-U.S.:
Consumer,
excluding credit card loans
—
—
—
—
—
Credit
card loans(b)
—
—
—
—
—
Total
non-U.S. consumer loans
—
—
—
—
—
Wholesale:
Commercial
and industrial
10
17
—
—
—
Real
estate
—
—
—
—
—
Financial
institutions
11
—
—
—
—
Other
—
—
—
—
—
Total
non-U.S. wholesale loans
21
17
—
—
—
Total
non-U.S.
21
17
—
—
—
Total
accruing restructured notes
$
6,345
$
6,867
$
7,485
$
9,885
$
12,318
(a)
Represents
performing loans modified in TDRs in which an economic concession was granted by the Firm and the borrower has demonstrated its ability to repay the loans according to the terms of the restructuring. As defined in U.S. GAAP, concessions include the reduction of interest rates or the deferral of interest or principal payments, resulting from deterioration in the borrowers’ financial condition. Excludes nonaccrual assets and contractually past-due assets, which are included in the sections above.
(b)
Includes credit card loans that have been modified in a TDR.
For a discussion of nonaccrual loans, past-due loan accounting policies, and accruing restructured loans see Credit and Investment
Risk Management on pages 99–120, and Note 12.
293
Impact of nonaccrual loans and accruing restructured loans on interest income
The negative impact on interest income from nonaccrual loans represents the difference between the amount of interest income that would have been recorded on such nonaccrual loans according to their original contractual
terms had they been performing and the amount of interest that actually was recognized on a cash basis. The negative impact on interest income from accruing restructured loans represents the difference between the amount of interest income that would have been recorded on such loans according to their original contractual terms and the amount of interest that actually was recognized under the modified terms. The following table sets forth this data for the years specified. The change in forgone interest income from 2015 through 2017 was primarily driven by the change in the levels of nonaccrual loans.
Year
ended December 31, (in millions)
2017
2016
2015
Nonaccrual loans
U.S.:
Consumer, excluding credit
card:
Gross amount of interest that would have been recorded at the original terms
$
367
$
464
$
513
Interest
that was recognized in income
(175
)
(207
)
(225
)
Total U.S. consumer, excluding credit card
192
257
288
Credit
card:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest that was recognized in income
—
—
—
Total
U.S. credit card
—
—
—
Total U.S. consumer
192
257
288
Wholesale:
Gross
amount of interest that would have been recorded at the original terms
46
56
24
Interest that was recognized in income
(30
)
(5
)
(10
)
Total
U.S. wholesale
16
51
14
Negative impact — U.S.
208
308
302
Non-U.S.:
Consumer,
excluding credit card:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest that was recognized in income
—
—
—
Total
non-U.S. consumer, excluding credit card
—
—
—
Credit card:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest
that was recognized in income
—
—
—
Total non-U.S. credit card
—
—
—
Total
non-U.S. consumer
—
—
—
Wholesale:
Gross amount of interest that would have been recorded at the original terms
24
25
13
Interest
that was recognized in income
(12
)
(2
)
(6
)
Total non-U.S. wholesale
12
23
7
Negative
impact — non-U.S.
12
23
7
Total negative impact on interest income
$
220
$
331
$
309
294
Year
ended December 31, (in millions)
2017
2016
2015
Accruing restructured loans
U.S.:
Consumer, excluding
credit card:
Gross amount of interest that would have been recorded at the original terms
$
401
$
451
$
485
Interest
that was recognized in income
(245
)
(256
)
(286
)
Total U.S. consumer, excluding credit card
156
195
199
Credit
card:
Gross amount of interest that would have been recorded at the original terms
202
207
260
Interest that was recognized in income
(59
)
(63
)
(82
)
Total
U.S. credit card
143
144
178
Total U.S. consumer
299
339
377
Wholesale:
Gross
amount of interest that would have been recorded at the original terms
13
2
2
Interest that was recognized in income
(13
)
(2
)
(2
)
Total
U.S. wholesale
—
—
—
Negative impact — U.S.
299
339
377
Non-U.S.:
Consumer,
excluding credit card:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest that was recognized in income
—
—
—
Total
non-U.S. consumer, excluding credit card
—
—
—
Credit card:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest
that was recognized in income
—
—
—
Total non-U.S. credit card
—
—
—
Total
non-U.S. consumer
—
—
—
Wholesale:
Gross amount of interest that would have been recorded at the original terms
—
—
—
Interest
that was recognized in income
—
—
—
Total non-U.S. wholesale
—
—
—
Negative
impact — non-U.S.
—
—
—
Total negative impact on interest income
$
299
$
339
$
377
295
Cross-border
outstandings
Cross-border disclosure is based on the FFIEC guidelines governing the determination of cross-border risk.
The reporting of country exposure under the FFIEC bank regulatory requirements provides information on the distribution, by country and sector, of claims on, and liabilities to, foreign residents held by U.S. banks and bank holding companies and is used by the regulatory agencies to determine the presence of credit and related risks,
including transfer and country risk. Country location under the FFIEC bank regulatory reporting is based on where the entity or counterparty is legally established.
JPMorgan Chase’s total cross-border exposure tends to fluctuate greatly, and the amount of exposure at year-end
tends to be a function of timing rather than representing a consistent trend. For a further discussion of JPMorgan Chase’s country risk exposure, see Country Risk Management on pages 129–130.
The following table lists all countries in which JPMorgan Chase’s cross-border outstandings exceed 0.75% of consolidated assets as of the dates specified.
Cross-border
outstandings exceeding 0.75% of total assets
(in millions)
December 31,
Governments
Banks
Other(a)
Net local
country
assets
Total
cross-border outstandings(b)
Commitments(c)
Total
exposure
Germany
2017
$
17,166
$
5,357
$
19,504
$
20,117
$
62,144
$
65,333
$
127,477
2016
22,332
2,118
14,310
25,269
64,029
71,981
136,010
2015
19,817
2,028
8,455
—
30,300
106,104
136,404
Cayman
Islands
2017
$
5
$
462
$
61,302
$
58
$
61,827
$
12,361
$
74,188
2016
18
107
74,810
84
75,019
10,708
85,727
2015
—
153
76,160
35
76,348
12,708
89,056
Japan
2017
$
606
$
17,617
$
12,256
$
25,229
$
55,708
$
52,928
$
108,636
2016
865
16,522
5,209
48,505
71,101
52,448
123,549
2015
367
12,556
3,972
29,348
46,243
47,069
93,312
France
2017
$
11,982
$
6,828
$
15,399
$
2,471
$
36,680
$
83,572
$
120,252
2016
10,871
4,076
26,195
3,723
44,865
88,256
133,121
2015
9,139
5,780
21,199
2,890
39,008
127,159
166,167
Italy
2017
$
11,376
$
4,628
$
4,526
$
611
$
21,141
$
61,005
$
82,146
2016
12,290
4,760
4,487
848
22,385
62,382
84,767
2015
12,313
3,618
6,331
732
22,994
89,712
112,706
Ireland
2017
$
630
$
318
$
19,669
$
—
$
20,617
$
5,728
$
26,345
2016
148
664
18,916
—
19,728
5,469
25,197
2015
67
952
12,436
—
13,455
8,024
21,479
(a)
Consists
primarily of commercial and industrial.
(b)
Outstandings include loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, resale agreements, other monetary assets, cross-border trading debt and equity instruments, fair value of foreign exchange and derivative contracts, and local country assets, net of local country liabilities. The amounts associated with foreign exchange and derivative contracts are presented after taking into account the impact of legally enforceable master netting agreements.
(c)
Commitments
include outstanding letters of credit, undrawn commitments to extend credit, and the gross notional value of credit derivatives where JPMorgan Chase is a protection seller.
296
The tables below summarize the changes in the allowance for loan losses and the allowance for lending-related commitments during the periods indicated. For a further discussion,
see Allowance for credit losses on pages 117–119, and Note 13.
Allowance for loan losses
Year
ended December 31, (in millions)
2017
2016
2015
2014
2013
Balance at beginning of year
$
13,776
$
13,555
$
14,185
$
16,264
$
21,936
U.S.
charge-offs
U.S. consumer, excluding credit card
1,779
1,500
1,658
2,132
2,754
U.S.
credit card
4,521
3,799
3,475
3,682
4,358
Total U.S. consumer charge-offs
6,300
5,299
5,133
5,814
7,112
U.S.
wholesale:
Commercial and industrial
87
240
63
44
150
Real
estate
3
7
6
14
51
Financial institutions
—
—
5
14
1
Government
agencies
5
—
—
25
1
Other
19
13
6
22
9
Total
U.S. wholesale charge-offs
114
260
80
119
212
Total U.S. charge-offs
6,414
5,559
5,213
5,933
7,324
Non-U.S.
charge-offs
Non-U.S. consumer, excluding credit card
—
—
—
—
Non-U.S.
credit card
—
—
13
149
114
Total non-U.S. consumer charge-offs
—
—
13
149
114
Non-U.S.
wholesale:
Commercial and industrial
89
134
5
27
5
Real
estate
—
1
—
4
11
Financial institutions
7
1
—
—
—
Government
agencies
—
—
—
—
—
Other
2
2
10
1
13
Total
non-U.S. wholesale charge-offs
98
138
15
32
29
Total non-U.S. charge-offs
98
138
28
181
143
Total
charge-offs
6,512
5,697
5,241
6,114
7,467
U.S. recoveries
U.S.
consumer, excluding credit card
(634
)
(591
)
(704
)
(814
)
(847
)
U.S. credit card
(398
)
(357
)
(364
)
(383
)
(568
)
Total
U.S. consumer recoveries
(1,032
)
(948
)
(1,068
)
(1,197
)
(1,415
)
U.S. wholesale:
Commercial
and industrial
(55
)
(10
)
(32
)
(49
)
(27
)
Real estate
(6
)
(15
)
(20
)
(27
)
(56
)
Financial
institutions
—
(3
)
(8
)
(12
)
(90
)
Government agencies
—
(1
)
(8
)
—
—
Other
(15
)
(3
)
(3
)
(36
)
(6
)
Total
U.S. wholesale recoveries
(76
)
(32
)
(71
)
(124
)
(179
)
Total U.S. recoveries
(1,108
)
(980
)
(1,139
)
(1,321
)
(1,594
)
Non-U.S.
recoveries
Non-U.S. consumer, excluding credit card
—
—
—
—
—
Non-U.S.
credit card
—
—
(2
)
(19
)
(25
)
Total non-U.S. consumer recoveries
—
—
(2
)
(19
)
(25
)
Non-U.S.
wholesale:
Commercial and industrial
(4
)
(18
)
(10
)
—
(29
)
Real
estate
(1
)
—
—
—
—
Financial institutions
(1
)
—
(2
)
(14
)
(10
)
Government
agencies
—
—
—
—
—
Other
(11
)
(7
)
(2
)
(1
)
(7
)
Total
non-U.S. wholesale recoveries
(17
)
(25
)
(14
)
(15
)
(46
)
Total non-U.S. recoveries
(17
)
(25
)
(16
)
(34
)
(71
)
Total
recoveries
(1,125
)
(1,005
)
(1,155
)
(1,355
)
(1,665
)
Net charge-offs
5,387
4,692
4,086
4,759
5,802
Write-offs
of PCI loans(a)
86
156
208
533
53
Provision for loan losses
5,300
5,080
3,663
3,224
188
Other
1
(11
)
1
(11
)
(5
)
Balance
at year-end
$
13,604
$
13,776
$
13,555
$
14,185
$
16,264
(a)
Write-offs
of PCI loans are recorded against the allowance for loan losses when actual losses for a pool exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. A write-off of a PCI loan is recognized when the underlying loan is removed from a pool (e.g., upon liquidation). During 2014 the Firm recorded a $291 million adjustment to reduce the PCI allowance and the recorded investment in the Firm’s PCI loan portfolio, primarily reflecting the cumulative effect of interest forgiveness modifications. This adjustment had no impact to the Firm’s Consolidated statements of income.
297
Summary
of loan and lending-related commitments loss experience
Allowance for lending-related commitments
Year ended December 31, (in millions)
2017
2016
2015
2014
2013
Balance
at beginning of year
$
1,078
$
786
$
622
$
705
$
668
Provision
for lending-related commitments
(10
)
281
164
(85
)
37
Net charge-offs
—
—
—
—
—
Other
—
11
—
2
—
Balance
at year-end
$
1,068
$
1,078
$
786
$
622
$
705
Loan
loss analysis
As of or for the year ended December 31,
(in millions, except ratios)
2017
2016
2015
2014
2013
Balances
Loans
– average
$
906,397
$
866,378
$
787,318
$
739,175
$
726,450
Loans
– year-end
930,697
894,765
837,299
757,336
738,418
Net charge-offs(a)
5,387
4,692
4,086
4,759
5,802
Allowance
for loan losses:
U.S.
$
12,552
$
12,738
$
12,704
$
13,472
$
15,382
Non-U.S.
1,052
1,038
851
713
882
Total
allowance for loan losses
$
13,604
$
13,776
$
13,555
$
14,185
$
16,264
Nonaccrual
loans
$
5,943
$
6,883
$
6,429
$
7,133
$
8,540
Ratios
Net
charge-offs to:
Loans retained – average
0.60
%
0.54
%
0.52
%
0.65
%
0.81
%
Allowance
for loan losses
39.60
34.06
30.14
33.55
35.67
Allowance for loan losses to:
Loans
retained – year-end(b)
1.47
1.55
1.63
1.90
2.25
Nonaccrual loans retained
229
205
215
202
196
(a)
There
were no net charge-offs/(recoveries) on lending-related commitments in 2017, 2016, 2015, 2014 or 2013.
(b)
The allowance for loan losses as a percentage of retained loans declined from 2013 to 2017, due to improvement in credit quality of the consumer and wholesale credit portfolios. For a more detailed discussion of the 2015 through 2017
provision for credit losses, see Provision for credit losses on page 119.
298
Deposits
The following table provides a summary of the average balances and average interest rates of JPMorgan Chase’s various deposits for the years indicated.
Year
ended December 31,
Average balances
Average interest rates
(in millions, except interest rates)
2017
2016
2015
2017
2016
2015
U.S.
offices
Noninterest-bearing
$
387,424
$
386,528
$
403,143
—
%
—
%
—
%
Interest-bearing
Demand(a)(c)
162,985
128,046
78,516
0.50
0.18
0.11
Savings(b)
559,654
515,982
475,142
0.15
0.09
0.07
Time
53,410
59,710
85,098
1.02
0.59
0.38
Total
interest-bearing deposits(c)
776,049
703,738
638,756
0.29
0.15
0.12
Total
deposits in U.S. offices(c)
1,163,473
1,090,266
1,041,899
0.19
0.09
0.07
Non-U.S.
offices
Noninterest-bearing
16,741
16,170
15,805
—
—
—
Interest-bearing
Demand(c)
213,733
198,919
197,572
0.18
0.10
0.12
Savings
—
—
—
NM
NM
NM
Time(c)
23,439
22,613
40,512
1.08
0.56
0.60
Total
interest-bearing deposits(c)
237,172
221,532
238,084
0.27
0.15
0.21
Total
deposits in non-U.S. offices(c)
253,913
237,702
253,889
0.25
0.14
0.19
Total
deposits
$
1,417,386
$
1,327,968
$
1,295,788
0.20
%
0.10
%
0.10
%
(a)
Includes
Negotiable Order of Withdrawal (“NOW”) accounts, and certain trust accounts.
(b)
Includes Money Market Deposit Accounts (“MMDAs”).
(c)
Prior periods have been revised to conform with the current period presentation.
At December 31, 2017, other U.S. time deposits in denominations of $100,000 or more totaled $23.1 billion,
substantially all of which mature in three months or less. In addition, the table below presents the maturities for U.S. time certificates of deposit in denominations of $100,000 or more.
U.S. time certificates of deposit ($100,000 or more)
$
6,425
$
2,174
$
2,095
$
6,207
$
16,901
299
Short-term
and other borrowed funds
The following table provides a summary of JPMorgan Chase’s short-term and other borrowed funds for the years indicated.
As of or for the year ended December 31, (in millions, except rates)
2017
2016
2015
Federal
funds purchased and securities loaned or sold under repurchase agreements:
Balance at year-end
$
158,916
$
165,666
$
152,678
Average
daily balance during the year
187,386
178,720
192,510
Maximum month-end balance
205,286
207,211
212,112
Weighted-average
rate at December 31
1.03
%
0.50
%
0.39
%
Weighted-average rate during the year
0.86
0.61
0.32
Commercial
paper:
Balance at year-end
$
24,186
$
11,738
$
15,562
Average
daily balance during the year
19,920
15,001
38,140
Maximum month-end balance
24,934
19,083
64,012
Weighted-average
rate at December 31
1.59
%
1.13
%
0.55
%
Weighted-average rate during the year
1.39
0.90
0.29
Other
borrowed funds:(a)
Balance at year-end
$
87,652
$
89,154
$
80,126
Average
daily balance during the year
96,331
93,252
93,001
Maximum month-end balance
107,157
102,310
99,226
Weighted-average
rate at December 31
2.09
%
1.79
%
1.89
%
Weighted-average rate during the year
1.98
1.93
1.84
Short-term
beneficial interests:(b)
Commercial paper and other borrowed funds:
Balance
at year-end
$
4,310
$
5,688
$
11,322
Average daily balance during the year
5,327
8,296
15,608
Maximum
month-end balance
7,573
10,494
17,137
Weighted-average rate at December 31
1.50
%
0.83
%
0.41
%
Weighted-average
rate during the year
1.07
0.67
0.32
(a)
Includes interest-bearing securities sold but not yet purchased.
(b)
Included
on the Consolidated balance sheets in beneficial interests issued by consolidated VIEs.
Federal funds purchased represent overnight funds. Securities loaned or sold under repurchase agreements generally mature between one and ninety days. Commercial paper generally is issued in amounts not less than $100,000, and with maturities of 270 days or less. Other borrowed funds consist of demand notes, term federal funds purchased, and various other borrowings that generally have maturities of one year or less.
300
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the date indicated. JPMorgan Chase & Co. does not exercise the power of attorney to sign on behalf of any Director.
