JP Morgan Chase 2014 Annual Report Download - page 232

Notes to consolidated financial statements
230 JPMorgan Chase & Co./2014 Annual Report
Note 11 – Noninterest expense
The following table presents the components of noninterest
expense.
Year ended December 31,
(in millions) 2014 2013 2012
Compensation expense $ 30,160 $ 30,810 $ 30,585
Noncompensation expense:
Occupancy 3,909 3,693 3,925
Technology, communications
and equipment 5,804 5,425 5,224
Professional and outside
services 7,705 7,641 7,429
Marketing 2,550 2,500 2,577
Other(a)(b) 11,146 20,398 14,989
Total noncompensation
expense 31,114 39,657 34,144
Total noninterest expense $ 61,274 $ 70,467 $ 64,729
(a) Included firmwide legal expense of $2.9 billion, $11.1 billion and $5.0
billion and for the years ended December 31, 2014, 2013 and 2012,
respectively.
(b) Included FDIC-related expense of $1.0 billion, $1.5 billion and $1.7 billion
for the years ended December 31, 2014, 2013 and 2012, respectively.
Note 12 – Securities
Securities are classified as trading, AFS or held-to-maturity
(“HTM”). Securities classified as trading assets are
discussed in Note 3. Predominantly all of the Firm’s AFS and
HTM investment securities (the “investment securities
portfolio”) are held by CIO in connection with its asset-
liability management objectives. At December 31, 2014,
the average credit rating of the debt securities comprising
the investment securities portfolio was 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 accumulated other comprehensive income/
(loss). 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.
During the first quarter of 2014, the Firm transferred U.S.
government agency mortgage-backed securities and
obligations of U.S. states and municipalities with a fair value
of $19.3 billion from AFS to HTM. These securities were
transferred at fair value, and the transfer was a non-cash
transaction. AOCI included net pretax unrealized losses of
$9 million on the securities at the date of transfer. The
transfer reflected the Firm’s intent to hold the securities to
maturity in order to reduce the impact of price volatility on
AOCI and certain capital measures under Basel III.
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 other-than-temporary impairment
(“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 OTTI to have occurred 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
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.