2 0 1 1 AN N UA L REPORT

T H E WA Y F O R W A R D

Financial Highlights
As of or for the year ended December 31, 2011 2010 (in millions, except per share, ratio data and headcount)

Reported basis (a) Total net revenue $ Total noninterest expense Pre-provision prot Provision for credit losses Net income $ Per common share data Net income per share: Basic $ Diluted Cash dividends declared Book value

97,234 $ 102,694 62,911 61,196 34,323 41,498 7,574 16,639 18,976 $ 17,370

4.50 $ 3.98 4.48 3.96 1.00 0.20 46.59 43.04

Selected ratios Return on common equity 11% 10 % 15 15 Return on tangible common equity (b) Tier 1 capital ratio 12.3 12.1 Total capital ratio 15.4 15.5 10.1 9.8 Tier 1 common capital ratio(b) Selected balance sheet data (period-end) Total assets $ 2,265,792 $ 2,117,605 692,927 Loans 723,720 Deposits 1,127,806 930,369 Total stockholders equity 183,573 176,106 Headcount 260,157 239,831
(a) Results are presented in accordance with accounting principles generally accepted in the United States of America, except where otherwise noted. (b) Non-GAAP nancial measure. For further discussion, see Explanation and reconciliation of the rms use of non-GAAP nancial measures and Regulatory capital in this Annual Report.

JPMorgan Chase & Co. (NYSE: JPM) is a leading global nancial services rm and one of the largest banking institutions in the United States, with operations worldwide; the rm has $2.3 trillion in assets and $183.6 billion in stockholders equity. The rm is a leader in investment banking, nancial services for consumers and small businesses, commercial banking, nancial transaction processing, asset management and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the worlds most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about J.P. Morgan capabilities can be found at jpmorgan.com and about Chase capabilities at chase.com. Information about the rm is available at jpmorganchase.com.

The banker is a member of a profession practiced since the Middle Ages. There has grown up a code of professional ethics and customs, on the observance of which depend his reputation, his fortune and his usefulness to the community in which he works.
J.P. Morgan, Jr., 1933

J.P. Morgan, Jr., spoke these words in 1933 during the heart of the Great Depression. It was those values that guided us through that tremendous challenge. Today, those values continue to guide us through challenges and help us maintain a standing of vitality and strength. And, as always, our commitment to our clients remains rst and foremost. We raised $1.8 trillion for businesses and consumers. For small business, we approved more than $17 billion in credit and maintained our position as the nations #1 Small Business Administration lender. We also continued our support of communities. We raised $68 billion for not-for-prots and public services. And we hired more than 3,000 military veterans as a proud founding member of the 100,000 Jobs Mission. We began to see some encouraging signs this past year, and our rm helped put more than 17,000 Americans back to work. We saw more businesses and individuals turning to us for loans. We saw credit quality strengthen and condence return. We are optimistic about the future. Throughout our 200-year history, our belief in responsible leadership, our dedication to our clients and our fortress balance sheet have carried us through the toughest challenges. These are the core values we maintain day after day and the values that will sustain us into the future.

Dear Fellow Shareholders,

Your company earned a record $19.0 billion in 2011, up 9% from the record earnings of $17.4 billion in 2010. Our return on tangible equity for 2011 was 15% the same as last year. Relative to our competitors and given the prevailing economic environment, this is a good result. On an absolute and static basis, we believe that our earnings should be $23 billion $24 billion. The main reason for the difference between what we are earning and what we should be earning continues to be high costs and losses in mortgage and mortgage-related issues. While these losses are increasingly less severe, they will still persist at elevated levels for a while longer. Looking ahead, we believe our earnings power should grow over time, though we always expect volatility in our earnings it is the nature of the various businesses we operate. 2011 was another year of challenges for JPMorgan Chase, the nancial services industry and the economies of many countries around the world. In addition to the ongoing global economic uncertainty, other traumatic events such as the earthquake and tsunami in Japan, the debt ceiling asco in the United States, revolutions in the Middle East and the European debt crisis have impeded recovery. In the face of these tragic events and unfortunate setbacks, the frustration with and hostility toward our industry continues. We acknowledge it and respect peoples right to express themselves. However, we all have an interest in getting the economy and job creation growing again. In the face of many difficult challenges, JPMorgan Chase is trying to do its part. We have not retrenched. Just the opposite we have stepped up. Over the past year, our people demonstrated once again that the work we do matters. We positively impact the lives of millions of people and the communities in which they live. Our duty is to serve them by stepping into the arena each day and putting our resources and our voices to work on their behalf. For us, standing on the sidelines simply is not an option.

Jamie Dimon, Chairman and Chief Executive Officer

During 2011, the rm raised capital and provided credit of over $1.8 trillion for our commercial and consumer clients, up 18% from the prior year. We provided more than $17 billion of credit to U.S. small businesses, up 52% over last year. We raised capital or provided credit of $68 billion for more than 1,200 not-for-prot and government entities, including states, municipalities, hospitals and universities. We also issued new credit cards to 8.5 million people and originated more than 765,000 mortgages. To help struggling homeowners, we have offered over 1.2 million mortgage modications since 2009 and completed more than 450,000. We also bought back $9 billion of stock and recently received permission to buy back an additional $15 billion of stock during the remainder of 2012 and the rst quarter of 2013. We reinstated our annual dividend to $1.00 a share in April 2011 and recently announced that we are increasing it to $1.20 a share in April 2012. And we continued to build our business by heavily investing in infrastructure, systems, technology and new products and by adding bankers and branches around the world.
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New Credit for Our Clients New and and Renewed Renewed Capital Capital and for our Clients
Corporate Clients ($ in trillions) Consumer and Commercial Banking ($ in billions)
Year-over-year change

13% 20% 4% $1.2 $1.1 $83.2 $67.2 $56.3 $76.0 $93.3 $1.4 11% $419.3 $379.1
$7.3 $11.2

$474.2
$17.1

'09 to '10 '10 to '11

Small Business Card & Auto

55% 0%

52% 10%

$91.1

$83.0 $99.6

Asset Management

19%

48%

$110.1

Commercial/ Middle Market

23%

18%

$156.3

$164.6

$156.3

Mortgage/ Home Equity

5%

(5%)

2009

2010

2011

2009

2010

2011

The best way to build shareholder value is to build a great company, with exemplary products and services, excellent systems, quality accounting and reporting, effective controls and outstanding people. If you continually build a great company, the stock price will follow. Normally, we dont comment on the stock price. However, we make an exception in Section VIII of this letter because we are buying back a substantial amount of stock and because there are many concerns about investing in bank stocks. We believe you own an exceptional company. Each of our businesses is among the best in the world, and record earnings were matched by increased market share in most of our businesses. Most importantly, we have outstanding people working at every level in every business across the economic spectrum and around the world. This is no accident we work hard to bring people with character, integrity and intelligence into this company. There is always room for improvement, but the strengths that are embedded in this company our people, client relationships, product capabilities, technology, global presence and fortress balance sheet provide us with a foundation that is rock solid and an ability to thrive regardless of what the future brings.

In this letter, I will focus my comments on the important issues affecting your company, including some of the regulatory and political issues facing us. The main sections of the letter are as follows: I. II. III. Our mission and how we operate to fulll our role in society A brief update on our major initiatives The new One Chase strengthening the customer experience

IV.  An intense focus in 2012 on adapting our businesses successfully to the new regulatory framework V. VI. Comments on global nancial reform The mortgage business the good, the bad and the ugly

VII. Comments on the future of investment banking and the critical role of market making VIII. Why would you want to own the stock? IX. Closing

 I . OU R MISSIO N A N D H OW W E OPE R AT E TO FULF I LL OUR RO L E IN SOC I E T Y

We are constantly asked the question of what comes rst in your company customers, employees, shareholder value or being a good corporate citizen which implies a need to favor one over the other. We disagree with this view. We must serve them all well. If we fail at any one, the whole enterprise suffers.

How we view our employees they do it all

Doing a great job starts with great employees. We look for high-quality people with the capability to do a great job and grow with the rm. Then we train and empower them to do the right thing as best they can; to understand and anticipate their customers needs; and, in effect, to be their advocate. To do this, each employee needs help from the rest of the company. There are many employees who work behind the scenes that the customers do not see such as programmers, assistants, network engineers, operations clerks and others. But these are the professionals we depend upon to help us seamlessly deliver integrated and complex products. And all of our employees drive innovation. They have the knowledge and the deep understanding to nd ways large and small to improve a system, streamline a process, and save time and money by making things work better for everybody.

Our customers, employees, shareholder value and communities all come rst
Many people seem to think that shareholder value means prot and that a company earns more prot by giving customers or employees less. This has not been our experience. Our job is to build a healthy and vibrant company that satises clients, invests in its people through training, opportunity and compensation and rewards its shareholders. When this is done well, everyone benets. At the same time, a company needs to be successful nancially because if it isnt, it ultimately will fail. And when a company fails, everyone loses.

How we view our customers we wouldnt be here without them

There would be no company but for our customers. Without our consumer or corporate clients and satised ones at that there would be no prots, no bankers, no staff and no CEO. At JPMorgan Chase, we believe that customers should be treated like we would want to be treated ourselves. Customers usually dont mind paying a fair price for a product or service they need, particularly if it is delivered well and accompanied with a smile. We are constantly looking for better ways to provide, combine and deliver products that meet or exceed our customers expectations. And we try to listen closely to our customers even when they complain because they are doing us a service by telling us how we could do better. It means a lot to a customer when we respond not only by listening but also by actually changing.
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How we view our communities they are our hosts, our customers and our future
Doing the right thing for shareholders also means being a good corporate citizen. If you owned a small business (e.g., the corner grocery store in a small town), more likely than not, you would be a good citizen by keeping the snow and ice off the sidewalk in front of your store or by contributing to a local Little League team, school or community center. You would participate in the community, and everyone would be better off because of your contributions. As a large company that operates in 2,000 communities around the world, we should act no differently. We participate at the local level by providing corporate support and by asking our associates to get involved in the towns where they live. We also participate in largescale, country-wide and sometimes global projects, but the intent is the same to improve the world in which we live.

In 2011, JPMorgan Chase contributed more than $200 million directly to community organizations and local not-for-prots. Our employees also provided nearly 375,000 hours of volunteer service through our Good Works program in local communities. However, our efforts go well beyond philanthropic works. We nance and advise cities, states, municipalities, hospitals and universities not just about nancial affairs but also in related areas of governance, growth and sustainability. In 2011, we launched The Brookings JPMorgan Chase Global Cities Initiative with a $10 million commitment to help the 100 largest U.S. metropolitan areas become more competitive in the global economy. Our business also provides dedicated expertise and nancing for economically challenged areas of the world. For example, we partner with multiple global institutions, such as the U.S. Agency for International Development and the Bill & Melinda Gates Foundation, to help launch and support businesses that directly benet small and rural farmers in Africa. Additionally, we are able to bring private capital to bear on scale solutions to global health problems such as tuberculosis and malaria. And we have just launched a philanthropic program focusing on entrepreneurship in South Africa. I would like to mention one initiative of which we are particularly proud. After making some embarrassing mistakes with active military personnel, we redoubled our efforts to help military personnel and veterans men and women to whom we owe a tremendous debt of gratitude for the sacrices they have made get jobs and transition out of active service to civilian life. Our efforts are working over the past 12 months we have hired more than 3,000 veterans. In short, we are part of our communities in every way possible from the largest countries to the smallest towns.

ties and countries we serve around the world. Every day, our customers need us to deliver cash of $600 million and to reliably and quickly move $10 trillion around the world, where and when it is needed. Our customers trust us to safeguard $17 trillion of their assets under custody, manage $1.9 trillion of assets under supervision and protect $1.1 trillion of their deposits. We provide our consumer and business customers with more than $700 billion outstanding of loans. We also are prepared to lend them an additional $975 billion, under committed lines, if they need it. Customers count on us to be there for them. And if we fail to do our job, they may fail as well. Money and credit are like oxygen for the economy. And like the oxygen you breathe, you really notice it when it is not there. Unfortunately, sometimes we have to decline a customer request. Extending credit is important, but avoiding making bad loans as we all learned again in this crisis also is important. It is hard to turn down a customers request and then try to explain why: We may think the loan represents too much risk, not only for us but also for the customer. We dont always make friends doing this but it is the right thing to do. Conversely, we cannot be a fair-weather friend. Clients, communities and countries want to know that we are going to be there particularly when times are tough. And when times are tough, we focus more on helping clients survive than on generating prots. That is in their and our long-term interest. Europe is one ongoing example where we currently are applying this philosophy. When Greece, Ireland, Italy, Portugal and Spain got into trouble, we decided to stay the course. Our exposures, as reported last year, to those countries (primarily Italy and Spain) were maintained at approximately $15 billion. And we estimated that, in a bad outcome, we could lose $3 billion, after-tax. (Under really terrible circumstances; i.e., large countries exiting the euro where the currency at settlement is uncertain for the assets, liabilities and contracts at issue those losses could be even larger.) These exposures are primarily loans to businesses and sovereign nations,
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Its a big responsibility to be a bank and communities are better off if we do it well
If the nancial crisis has taught us anything, it has taught us that being a strong bank in good times and, more important, in bad times is critical to the customers, communi-

as well as some market making. Even if the worst outcome occurs, we believe that we still made the right decision by being there for our clients. We hope to be doing business in these countries for decades to come.

We focus on quality prots not quarterly prots

If we wanted to increase this quarters or next quarters prots, we could and we could do it easily. How? By cutting marketing expenses by $500 million or eliminating another $500 million of investments in technology, training or systems upgrades. We also could add another $1 billion to our prots by increasing our interest rate exposure or credit risk. But this is not the way to build a healthy and vibrant company for the future or to produce what we would call quality prots. In actuality, our prots reect decisions made over many years. The breadth and depth of our client relationships today have been built over decades. Our people have been hired and trained over decades. Our branches whether retail or wholesale have been serving our clients for decades. Our investments in technology and product innovation typically are multiyear in nature. Our institutional knowledge and experience have been passed along generationally for more than 200 years. And the JPMorgan Chase reputation that we, and our predecessors, have worked hard to earn every day has endured for more than two centuries.

would focus on properly maintaining that airplane. In the same way, you want to see your company continuing to invest in innovation and technology, marketing new products, hiring employees and opening branches. Our ability to distinguish between good and bad expenses should lead to higher prots in the future. The reason we generally have been able to avoid major expense-cutting initiatives is because we continuously try to avoid wasteful spending. And much of our efficient cost structure comes from ongoing investment in technology and operations and from rigorous attention to detail. We strive to become an increasingly efficient company. Efficiency is a virtuous cycle we can continuously invest more, save more, give our clients more and still have healthy margins.

We build our operating company at a detailed level

While JPMorgan Chase has six lines of business that we report publicly, we essentially operate 60-70 businesses within and across the six lines of business. Each of these businesses is expected to attract great management, deliver best-in-class products and services, and earn a good margin while making proper investments in its future. We want each of these businesses to build quality assets (i.e., well-underwritten loans and books that are properly marked) and to account properly for all liabilities. We believe appropriately conservative accounting at a granular level leads to quality earnings and helps prepare each of our businesses to withstand tough challenges and to be there in tough times for our clients. JPMorgan Chase builds its business on the credo rst-class business in a rst-class way, and we stick to that credo even when it means forgoing fees or declining a deal that we do not think is in the best interest of our client. And rigorous client selection ensuring a high-quality clientele is the foundation of a strong bank. If we keep doing what I have described above, you will not only be proud of this company, but, we hope, happy with your investment.

All revenue isnt good; all expenses arent bad

It always surprises me when people assume that all revenue is good and that all expenses are bad. Low-quality revenue is easy to produce, particularly in nancial services. Poorly underwritten loans represent income today and losses tomorrow. And an efficiently run company is not the result of indiscriminate cost cutting. All expenses are not equal, which is why I always refer to waste cutting and not expense cutting. Many expenses actually are good expenses. If you are reading this letter on an airplane, you easily can understand my meaning a good expense

Its not small Business vS. BiG Business they are symBiotic and the enGine of Americas Growth

In our vibrant, extremely powerful and complex economic ecosystem, there are 27 million U.S. businesses. Some facts: All but 17,000 of the 27 million are small businesses; i.e., they have under 500 employees. Twenty-one million have only one employee they are sole proprietorships. Five million have fewer than 20 employees. Over half a million have between 20 and 500 employees. These small businesses account for 56 million jobs, or 49% of U.S. payroll employment. The remaining 17,000 firms with more than 500 employees account for the other 51% of private sector jobs and the largest 1,000 companies alone employ over 31 million people. (Outside the private sector, another 21 million work for the government, 85% for state and municipal governments jobs that include our teachers, postal workers, police officers and firefighters.) There are huge misunderstandings about job creation in the United States and these misunderstandings frequently lead to misguided policy. We often talk about the net change in employment (clearly an important number); that is, the number of net new jobs created. But it masks the fact that the numbers change enormously underneath. On average, over 20 million jobs are lost every year as companies adjust payroll or people quit or move. Fortunately, more jobs than that are created most years. In our economy, businesses continuously morph and change; they outsource or insource jobs; some grow, some shrink and some merge. New companies big and small are created, and, unfortunately, some of those companies big and small fail.

Even Fortune 500 companies fail or are bought out or merged with another. Small companies sometimes morph into big ones just think of Apple, Google and Facebook. This is part of a healthy, constantly changing economic dynamic. Failures are caused by recessions, lack of innovation and bad management, among other things. The alternative to this creative destruction would be a stultifying lack of change, inability to adopt new technologies, inexibility and, ultimately, lower growth. We often read that small business is the primary driver of new jobs this is both incorrect and overly simplistic. Sometimes those net new jobs appear in small businesses, and sometimes they appear in large businesses. In fact, recent studies show that large companies generally are more stable over time and that their employment goes down less during recessions. One thing we know for sure is that capital expenditures and R&D spending drive productivity and innovation, which, ultimately, drive job creation across the entire economy. In the United States, the 17,000 large firms account for 80% of the $280 billion business R&D spending and the top 1,000 firms alone account for 50% of this amount. U.S. companies also spend more than $1.4 trillion annually on capital expenditures, and the top 1,000 firms account for 50% of that amount. Big businesses are capable of making huge investments. A typical semiconductor plant costs $1 billion, and a typical heavy manufacturing plant costs $1 billion. These types of investments create lots of jobs. Many studies have shown that for every 1,000 workers employed by a big business new plant, 5,000 jobs are generated outside the plant from high-tech to low-tech positions (all to support the plant and its employees); most of these jobs appear in small businesses.

It is worth noting that both large and small businesses often have benefited from strong collaboration with the government in making certain types of investments. The American people started and paid for the Hoover Dam, the interstate highway system and the landing on the moon. But the Hoover Dam was built by a consortium of six American businesses, the interstate highway system was built by American construction companies spanning the nation and the Apollo spacecraft was built by American aerospace companies and all of these projects were supported by small business. So when you read that small business and big business are pitted against each other or are not good for each other, dont believe it. They are huge customers of each other, they help drive each others growth and they are completely symbiotic. Business, taken as a whole, is where almost all of the job creation will come from. And without the huge capital investments made by big business, job creation would be a lot less. Small businesses of all types are essential, dynamic and innovative, and they are a uniquely entrepreneurial part of our U.S. economy. We wouldnt be the same without them. But that does not diminish what big businesses do. Large companies are very stable, and they make huge investments for the future. On average, they pay their people more, and they provide health insurance and benefits for their employees and their families. Big businesses are an essential part of a countrys success. Many American big businesses are the envy of the rest of the world. Show me a successful country, and I will show you its successful big businesses. Like small businesses, big businesses are philanthropic, patriotic and community minded. We are lucky to have them both.

 I I . A B RIEF U PDAT E ON O UR M A J OR I N I TI AT I V E S

The opportunities for JPMorgan Chase over the next 20 years will equal or maybe even surpass those of the last 20 years. In last years letter, we discussed several specic initiatives were undertaking in addition to the normal growth opportunities that we pursue every day. Each one of these initiatives involves a sustained, full-edged effort of investment in people, branches and systems over a long period of time. And while we know that these efforts may not turn a prot in the rst year, we expect each one to add $500 million or more in prots annually by the fth to seventh year. The following segments provide an update on how each of these initiatives is progressing.
International presence

The expansion of our international wholesale businesses, including progress in our Global Corporate Bank
Last year, we described our international expansion plan in detail. It involves building out our global presence across our wholesale businesses (Asset Management, the Investment Bank and Treasury & Securities Services) in the rapidly expanding markets of Asia, Latin America, Africa and the Middle East, as well as in emerging and even frontier markets. As our clients multinational corporations, sovereign wealth funds, public or quasipublic entities expand globally, we intend to follow them around the world.

We Are Expanding Our Global Platform

Copenhagen

Guernsey Geneva and Zug Ottawa Hamilton Monterrey Panama City Bogot Lima Recife Rio de Janeiro Santiago Curitiba So Paulo Accra Riyadh Beijing

Harbin Fukuoka

Suzhou Shanghai Doha Dhaka Kwun Tong

Nagoya

Abu Dhabi Nairobi Colombo

New and additional offices opened in 2010-2011 New offices opening in 2012-2013

Melbourne

Cities with JPMorgan Chase presence

Largely sufficient capabilities

complete by the end of 2013)
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based on client requirements

Ongoing investments (largely

We have made good progress: Five years ago, we served approximately 200 clients in Brazil, China and India combined. Today, that number has grown to approximately 800 clients. Five years from now, we expect to serve 2,000 clients including locally headquartered companies (about 50%) and foreign subsidiaries of international companies (about 50%). In 2011, we opened offices in the following new locations: Harbin, China; Panama City, Panama; and Doha, Qatar. Thats in addition to the offices we opened in 2010 in Bangladesh, Bermuda, Guernsey, Saudi Arabia and the United Arab Emirates. A quick glance at the map on the previous page shows the offices opened over the past two years in new and existing locations and the cities around the world where we plan to add locations in 2012-2013. When we started the Global Corporate Bank (GCB), we had 98 bankers. By the end of 2011, we had more than 250 bankers in 35 countries. We plan to have approximately 320 bankers in 40 countries by the end of 2013, who will provide approximately 3,500 multinational corporations with cash management, global custody, foreign exchange, trade nance and other services. This strategy has led to a 73% rise in our trade nance loans, a total of $37 billion in 2011. We also increased other business with these same multinational corporations, including rates, foreign exchange and commodities, by 30%.

600 employees and 10 main office locations around the world. Over the course of last year, we grew our client franchise by more than 10% to serve over 2,200 active clients. And we increased the selling of commodities products to already existing clients so that hundreds of clients now come to us for multiple products across different commodity asset classes.

Small business growth

In 2011, we provided more than $17 billion of new credit to U.S. small businesses in 2011, up 52% from 2010. We are the #1 Small Business Administration (SBA) lender nationwide for the second year in a row. In 2011, we also became the #1 SBA lender to women-owned and minority-owned businesses. Since 2009, we have added 1,200 new relationship managers and business bankers, and that includes adding 600 business bankers in the heritage Washington Mutual (WaMu) states of California and Florida. And we plan to continue aggressively hiring bankers who are meeting the needs of small businesses.

Commercial Banking expansion particularly in WaMu states

Our Commercial Banking business has performed well in the recession, earning returns of more than 20% during the past two years and over 15% in the most difficult years. We continue to invest in additional bankers and offices to support growth. In 2011, Commercial Banking added 60 new bankers, placing 21 of them in states where WaMu had a presence. Our expansion efforts have made great progress in California and Florida alone, deposits increased to $1.8 billion and loans to $2.0 billion by the end of 2011. Since the WaMu acquisition, our Commercial Banking business has continued to add 200+ new clients a year in the WaMu states. Commercial Bankings International Banking business unit also has experienced signicant growth. In the six years since the unit was

Commodities
In 2011, we completed the integration of assets acquired from Sempra. We now are one of the top three rms in commodities i.e., global sales and trading, as well as advisory services and market making in metals, oil, natural gas, power and others. Our global franchise includes approximately

Small Business Growth

Year-over-year change
2009 2010 2011 '09 to '10 '10 to '11

New small business loans

($ in millions)

$ 7,251

$ 11,219

$ 17,060

55% 52% 24% 19%

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Total small business bankers 1,953 2,420 2,886

Our branch network provides continued opportunity to grow

Our Branch Network Provides Continued Opportunity to Grow

209 branches 19 new builds 113 branches 8 new builds 22 branches 0 new builds 47 branches 10 new builds 933 branches 228 new builds 196 branches 3 new builds 82 branches 0 new builds 419 branches 32 new builds 307 branches 7 new builds 785 branches 21 new builds 50 branches 5 new builds 292 branches 8 new builds 233 branches 26 new builds 31 branches 0 new builds 68 branches 0 new builds 298 branches 22 new builds 32 branches 0 new builds 74 branches 20 new builds

69 branches 8 new builds

123 branches 14 new builds

676 branches 45 new builds

Deposit market share Greater than 10% Between 5% and 10% Less than 5% Branches as of December 31, 2011 New builds added from 2009 to 2011
156 branches 1 new build

292 branches 54 new builds

launched, International Banking has increased the number of U.S. Commercial Banking clients using our international treasury and foreign exchange products to 2,500 clients at a rate of approximately 20% per year, and we expect this trend to continue. As we strive to better and more fully meet the needs of our Commercial Banking clients, we are increasing their access to a broader range of products. Today, our average Commercial Banking client uses more than eight of our products and services, and this number continues to increase.

advice, customers often prefer to meet face to face with a banker. These activities will take place in physical branch locations for the foreseeable future. Our small business and middle market customers also are more comfortable discussing business needs such as cash management in person rather than online. In fact, our middle market business wouldnt exist without the branch network. Our branch presence also is a competitive advantage for many of our other businesses: For example, when we open a Chase branch, it provides our Card Services and Mortgage Banking businesses with the opportunity to offer more credit cards and retail mortgages. Today, about 45% of our Chase-branded credit cards and about 50% of our retail mortgages are sold through our branches. Today, our consumer banking household uses, on average, seven Chase products and services. Increasingly, our customers require and appreciate having the option to transact their business with us virtually and personally. Our network of branches gives consumers that choice.

The growth of our branch network

For years, some have predicted the demise of the physical branch as more customers choose to transact banking business online and on their mobile devices. However, our experience shows that instead of choosing between a branch and a website, customers actively use both. More than 17 million of our customers are paying bills online. But when its time to take out a mortgage, apply for a credit card or seek personal nancial
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The map on the preceding page shows our current branch footprint. Since 2009, we have built more than 525 new branches. In 2011, we opened 260 new branches and added more than 3,800 salespeople in the branches. We expect we will add approximately 150-200 branches a year for the next ve years, which is fewer than we previously had planned. We are taking a more measured approach because regulatory changes have affected our ability to protably operate some of our branches. That said, and despite slight reductions in prot due to an abnormal interest rate environment, our average retail branch still earns approximately $1 million a year. And the right type of branch in the proper location is protable not only on its own but is enormously benecial to the rest of the company. We believe interest rates and spreads will return to normal levels, and we are building our branches accordingly. The map shows we are building branches where we already currently reside. It always has been more valuable to increase your market share in an existing market than it is to go to a new market.

Chase Private Client business continued growth

In 2011, we opened approximately 250 Chase Private Client (CPC) locations branches dedicated to serving our affluent clients investment needs and we plan to open another 750 CPC locations in 2012. Chase Private Client is quickly making an impact in deepening our relationships with the 2 million affluent clients that already bank with Chase. Today, more than 500 Chase Private Client bankers and advisors serve private clients, and we plan to add more than 1,200 private client bankers and advisors in 2012. Since we launched the rst phase of CPC expansion in July of 2011, the number of CPC households we serve has nearly quadrupled, and each of those households has grown deposit and investment balances by $80,000 on average.

WHEN YOU HIRE JPMORGAN CHASE, YOU GET ALL OF US ONE GREAT EXAMPLE OF OUR BROAD, ORCHESTRATED EFFORTS WITH ONE GREAT CLIENT
At JPMorgan Chase, we are privileged to work with Caterpillar across our markets and services from community banking in Caterpillars hometown in central Illinois to strategic advice on Caterpillars largest-ever acquisition. The relationship spans decades and multiple continents, with constant dialogue at many levels of our respective companies. We helped Caterpillar: E  fficiently manage its cash through our Treasury Services team. S  erve its current and future retirees by investing more than $2 billion of the companys 401(k) and defined benefit plan assets. E  valuate and execute strategic acquisitions by working closely with the companys strategic investments team. P  rovide interest rate, foreign currency and commodity risk management services through Caterpillars work with our exposure management teams. F  und the manufacturing and finance company operations by underwriting some of their bonds and other forms of financing. S  upport the sale of Caterpillars products into developed and emerging markets by providing critical trade finance around the world. F  und a portion of Caterpillars global supply chains working capital requirements in more than 10 countries. F  inance several of Caterpillars independently owned dealers who sell and service its products around the world. More than 100 JPMorgan Chase banking professionals around the world touch Caterpillar directly at many levels. This is a great relationship for all parties involved.

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 I i I . The new O ne C hase strenGtheninG the customer experience

The Chase consumer businesses Retail Banking, Credit Card, Auto Finance and Mortgage historically ran as independent companies. Now we are coming together to run all of these companies as one consumer business and one brand to focus, rst and foremost, on serving our customers in the ways they want and with the products they choose. This includes developing common strategies, delivering a consistent customer experience, designing a seamlessly integrated product offering and continually innovating for our customers. We call this effort One Chase.

When we speak, email or send a letter to a customer, we aim to foster condence, not confusion. So we have undertaken a number of initiatives designed to simplify the way we communicate with our customers. At the end of last year, we unveiled a revised summary guide for Chase Total Checking that makes its terms and conditions easier to understand. We developed a simple disclosure form that uses everyday words in a consumer-friendly format. Instead of saying transaction posting order, our new disclosure now says how deposits and withdrawals work, using words that customers understand. Consumers now can more plainly see a description of fees and services and learn how to avoid certain fees, determine when deposits are available, and track when withdrawals and deposits are processed on three pages (instead of 40). In addition to streamlining and clarifying our written disclosures, we also are proactively reaching out to customers with an email or a phone call when we think they should know something about their account. For example, if there are suddenly several unusual transactions in a customers account that could indicate fraud, we immediately send an email alert or make a phone call to let them know.
Focusing more on customer complaints

Doing a better job serving our consumer and small business customers
What does One Chase mean for our customers? It means being known and appreciated for all the business they do with us across all product lines and feeling as if they are dealing with one company. It means customers will be treated with consistently great service every time, any way and anywhere they connect with us. It means when customers call Chase, they will get an answer from the Chase representative answering the phone whether the question is about their mortgage, credit card fees or banking account. It means customers can have more needs met at the Chase branch including not only being able to get a credit card, mortgage or checking account but also being able to talk with branch professionals about any problems they may be having with any of our products. Here are some of the things were doing to serve our consumer and small business customers better:
Making our communications clear and simple

Every week, and sometimes every morning, the senior managers in our consumer businesses listen to or read customer complaints to get to the root of problems and to identify options to solve them. These issues are discussed, and the follow-up and feedback are shared with the broader customer support teams. We know every company makes mistakes. But if you dont acknowledge mistakes, its unlikely you can x them. No one should be afraid to make a change because it might imply that something we did in the past was wrong. Instead, every employee at the rm

Our customers have told us that the ne print on our disclosures was confusing and wordy. Of course, that was not our intent.

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including me should take responsibility for mistakes and take the initiative to x them and prevent them from occurring in the future. We must continually make changes that make us better.
Empowering our employees to own customer issues

When customers contact Chase, they expect and deserve to have us understand and assist them with their entire relationship, regardless of which line of business is involved. To ensure this happens, we increasingly have empowered our frontline employees to better handle customer requests and issues. For example, we have authorized branch managers to use their judgment in waiving fees for customers they know personally in order to get them a quicker response or expedite a transaction. We are providing realtime information to our bankers and advisors, eliminating the need to transfer many customer calls. These initiatives have helped drive customer complaints down 25% over the last six months. One Chase means one customer. So when making decisions, we consider the entire relationship our customers have with us. For example, when making a decision about a credit card application, we now more fully consider what type of customer the applicant has been and how long that person has been a customer.
Learning from our bus trips and other feedback

It was an incredible trip that gave us the opportunity to see rsthand how vibrant our business in Florida is: We have become the #1 SBA lender, and our branch count, which was 261 when we bought the WaMu business in 2008, is nearly 300 today we expect it to grow to 500 in three to ve years. Five years ago, we had 6,700 employees in Florida, and, including the 4,500 people we hired last year, we now have 17,550. One of the most rewarding parts of the trip for us was riding the bus with some of our front-line employees tellers, branch managers, personal bankers and others. Their perspective and advice on how we could do a better job were invaluable. And, boy, did we get a lot of advice 160 specic recommendations, which we are in the process of implementing as we speak. We want to make this drive toward continuous improvement a part of the ber of every person at our rm. A new internal tool called What Do You Think? is giving our employees throughout the rm a chance to evaluate the products we offer customers, as well as the services we provide internally, from accounts payable to our online benet enrollment and internal travel services. Some of us predicted these internal services were going to receive the worst ratings we werent wrong. But we know that while we wont always like what we learn in fact, sometimes it is embarrassing it will help us become better. Providing best-in-class services internally is just as important as providing them to our customers because better services make our colleagues lives easier so they can spend more time with customers in helping to solve their problems.

Following a terric bus trip last summer along the West Coast, we hopped on a bus again in February 2012 and took a week-long, 550-mile journey through the Sunshine State. We visited branches and operations centers throughout Florida, many of which are in off-the-beaten-path locations, like our credit card operations center in Lake Mary. We met face to face with approximately 5,000 employees and hundreds of clients across all our lines of business from consumer customers to Fortune 500 CEOs. We also met with elected officials and community leaders to talk about how much were expanding, lending and adding jobs in Florida.

Continually innovating for our customers

A culture of speed and innovation is imperative. Sometimes people come up with great ideas on their own, but, more often, it happens through informal networking and brainstorming. Also, small improvements, over time, cumulatively may lead to major breakthroughs.

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The nancial services industry has been highly innovative over the past 20 years, from ATMs to online bill payment and a variety of mobile banking applications. Chase mobile customers increased 57% over the past year to more than 8 million active users at the end of 2011. These customers transact online by paying their bills, checking their balances and transferring money between accounts. Some of our new consumer innovations include: Chase QuickDepositSM, part of the Chase Mobile applications that allow customers to make deposits from their smartphones (by taking a picture of the check). Our customers have deposited 10 million checks in 2011. Over the past year, our total deposit volume increased to $2.6 billion with $481 million deposited by QuickDeposit in January 2012 alone. We added pay with points functionality to our Amazon.com Rewards Visa card, allowing customers to use their rewards instantly as cash. We pioneered JotSM, a new mobile application for organizing and tracking expenses, which currently ranks in the top 5% of all nancial applications (Apple App StoreSM ranking) and works exclusively for our InkSM from Chase small business cards. We continued to partner with some of the worlds best brands, launching new cards with The Ritz-Carlton Hotel Company and United Airlines. Chase QuickPaySM, our person-to-person payment service that allows our checking customers to use a phone or computer to send or receive money using an email address (money is either taken out or deposited into checking or savings accounts), increased by more than 200% to 2.6 million users in 2011.

We introduced Chase SapphireSM for the affluent market in late 2009 and generated more than 1.8 million accounts in about two years. In 2011, we launched Chase Sapphire PreferredSM, an enhanced affluentoriented product that rewards customers with two points for every dollar spent on dining and travel. We continue to roll out new products. Soon after this letter goes to press, we will be launching an exciting new banking product that will have innovative features and broad appeal. I believe this could be a breakthrough product for consumers in terms of pricing transparency, convenience and simplicity and we hope you agree when you see it. The management team doesnt want me to get too excited in case it doesnt work. I told them that even if its a op, I will be proud of their innovative spirit. You cant succeed if you dont try.

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 I V.   A N I N T E N S E FOC US I N 2 012 ON A DA PT I NG OUR BUS I N ESS E S S UCC E SS F ULLY TO T HE N E W R EG ULATO RY FR A ME WOR K

The extensive requirements of regulatory reform which we must meet demand enormous resources. While we are going to continue the initiatives in all of our businesses in 2012, it is unlikely that we will undertake signicant acquisitions due to these regulatory demands and other regulatory constraints. We need to meet these regulatory demands properly while ensuring that our clients are not adversely affected and that we are not creating excessive, stiing bureaucracy. We are totally focused on what is in front of us. It is a new world, and we are going to adjust to it very quickly whether or not we like it or think it is all needed.

nology and control functions (nance, risk, legal, audit and compliance) to get it done right. Over the next few years, we estimate that tens of thousands of our people will work on these changes, of whom 3,000 will be devoted full time to the effort, at a cost of close to $3 billion.

We must not let regulatory reform and requirements create excessive bureaucracy and unnecessary permanent costs
There are so many new rules that they inevitably create more opportunities to build unnecessary bureaucracy within the company. It is incumbent upon us to make sure that we do it right for the regulators, our clients and our own efficient internal functioning. So we are trying to build streamlined systems to meet the needs of all the regulators in an efficient way. For example, different regulators have asked for different reports on some very complex issues such as global liquidity. We are going to try to build one report that meets all their needs and ours, too as opposed to preparing three completely different liquidity reports every day or every month. Three reports lead to more mistakes, less understanding and more work.

Meeting new regulatory requirements will be a large, costly and complex endeavor and we must get it right. Therefore, we need to devote enormous attention and resources to it
It has been estimated that there are 14,000 new regulatory requirements that will be implemented over the next few years. Three hundred out of the 400 Dodd-Frank rules still need to be completed. We need to meet the new Basel II, Basel 2.5 and Basel III requirements. We need to meet the new liquidity requirements, the new global systemically important banks (G-SIB) rules, the new requirements due to Resolution Authority and living wills, and any new requirements from two new regulators, the Consumer Financial Protection Bureau and the Office of Financial Research. We need to meet the new derivatives, clearinghouse and Volcker trading rules. We also must complete periodic Comprehensive Capital Analysis and Review (CCAR) stress testing for the Federal Reserve. And, nally, we have major new rules and requirements from Brussels, London and other global jurisdictions. These new rules will affect virtually every legal entity, system (we have 8,000 of these), banker and client around the world. It will take an enormous amount of resources across all of our disciplines people, systems, tech-

We must do this in a way that minimizes cost and disruption to our clients
Most clients hope they will not see much change as a result of these new regulations. But for certain clients and certain products, the change will be signicant. For example, the cost of credit, in general, will go up modestly, essentially due to the banks higher capital and liquidity requirements. The cost of credit for some likely will go up substantially for example, we expect larger increases in trade nance; consumer credit (particularly for consumers with FICO scores below 660); and backup lines of credit

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that support commercial paper issuance. Because of the Durbin Amendment, the cost of banking services will go up modestly, but this will likely affect certain clients far more than others e.g., customers with low account balances. We also are trying to get ahead of the change and be proactive. We have canceled products and services and will continue to do so when we believe we no longer can adequately provide them, given the new regulatory requirements. We also are exiting products that we think create too much reputational risk for the rm. For example, we no longer bank certain types of clients, we no longer offer tax refund anticipation loans, we essentially have exited the subprime lending business and we no longer offer certain types of complex derivatives. We also have modied our overdraft procedures to be more consumer friendly and are trying to be very responsive to complaints about product disclosures, as we have mentioned previously. We will adjust to all of the new rules very quickly.

New Product Committees vet all new products to make sure that we can handle them operationally and, more important, that they meet our ethical standards for conducting business. The Capital and Credit Committees review all extensions of credit and uses of capital in the company to make sure we have the right limits, the right structures, the right clients and adequate returns. The Commitment Committees review underwritings of stocks, bonds, loans, etc., to ensure that each is properly structured, that we want to do business with the client, that we can meet our commitments and that due diligence is properly done, etc. The Operational Risk Committees review the potential errors in processing, legal agreements and others that can lead to any form of operational risk to the company from settlement to clearance, including litigation and processing errors. The Reputational Risk Committees review new types of business and out-of-the-ordinary transactions that entail risks relating to the environment, taxes, accounting, disclosures and know-your-customer rules to try to ensure that business is being done appropriately. We operate in a complex business with high and increasing regulatory demands and risk. Whether or not we agree with all the new rules and business processes, we want you to know that we will strive to meet or exceed every regulatory requirement around the world. This simply is the way we run our business.

We have extensive processes in place to try to do business the right way

We have extensive processes to protect the company and conduct business the right way. We have strong audit, compliance and legal staffs (these groups total more than 3,600 employees). Some of these employees sit in specialized units that cut across the company focusing on the requirements of the Anti-Money Laundering, Bank Secrecy and Privacy acts, and other requirements (these units, which also include dedicated line of business employees, total approximately 1,400 employees). We know we wont always be perfect, but it wont be for lack of trying. Listed below are examples of how each business tries to properly conduct its affairs: Our Risk Committees provide general oversight into any and all risk in the business and set overall risk limits from credit extensions to any market-making activities. Risk limits are set by product, by counterparty and by type of specic risk (for example, liquidity risk, interest rate risk, credit risk, country risk, market risk, private equity risk, and legal and duciary risk, etc.).
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V. COM M E N TS ON GLOBA L FI N A N C I A L R E FOR M

We have written extensively about the crisis and the need for nancial reform in previous letters. Many of the issues we have discussed have not changed. It is very important, however, that we get this right so I will comment in this section on some of the more critical and recent developments.

We always have acknowledged the need for reform and we agree with most, but not all, of it. And we all have a huge vested interest in having a strong nancial system
Most banks and bankers have acknowledged the need for strong reform. JPMorgan Chase has consistently supported higher capital standards, more liquidity in the system, a Resolution Authority to better manage and unwind large nancial rms, better regulation of the mortgage business, the clearing of standardized derivatives through wellstructured clearinghouses and even stronger consumer protection (however, we thought this should have been a strengthened department inside the bank regulator). We also supported most of the principles of compensation reform though you should know that our company, for the most part, had already practiced them. In addition, we supported the ideas behind the creation of the Financial Stability Oversight Council (FSOC), recognizing that one of the aws of our nancial system was that we did not have strong oversight of the whole system or adequate coordination among many different regulators. We actually believe the FSOC should have even more authority than it has been given so that it can force coordination among the 11 regulatory authorities of the FSOC, adjudicate where necessary, and properly assign responsibility and authority. While we agree with much of the reform that has been put in place, we do not agree with all of it. Specically, we disagree with the Durbin Amendment which had nothing to do with the crisis and was the adjudication of a dispute between retailers and banks

when the banks were unable to effectively respond. (It essentially is price xing by the government that will have the unfortunate consequence of leaving millions of Americans unbanked.) Three other specic rules with which we do not completely agree include the G-SIB restrictions and surcharge, the Volcker Rule and some of the derivatives rules. You may be surprised to know that we dont actually disagree with the stated intent of these rules. We, however, do disagree with some of the proposed specics because we think they could have huge negative unintended consequences for American competitiveness and economic growth. As Albert Einstein said, In theory, theory and practice are the same. In practice, they are not. The United States has the best nancial system on the planet. We have the deepest, widest, most transparent and most innovative capital markets. These markets have helped fuel the great American economic machine from small businesses to large. And while we need reform, we must be very careful not to throw the baby out with the bathwater. Clear, fair and consistent rules need to be put in place as soon as possible so that our economy, once again, can grow and meet its potential.

But the result of nancial reform has not been intelligent design simplicity, clarity and speed would be better for the system and better for the economy
A robust nancial system needs coordinated and consistent regulation that is strong, simple and transparent. The regulators should have clear authority and responsibility. Just one look at the chart on the next page shows that this is not what we now have. Complexity and confusion should have been alleviated, not compounded. As a result of Dodd-Frank, we now have multiple regulatory agencies with overlapping rules and oversight responsibilities. Although the FSOC was created, it is proving to be too
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New agency or new powers and authority Old agency Authority to request information but no examination authority

Financial Stability Oversight Council Identify risks to the nancial stability of the United States from activities of large, interconnected nancial companies. Authority to gather information from nancial institutions.1 Make recommendations to the Fed and other primary nancial regulatory agencies regarding heightened prudential standards.

State Regulatory Authorities and AGs Power to enforce rules promulgated by Consumer Financial Protection Bureau

OFAC/FinCEN Federal Reserve Focus on safety and soundness. Supervisor for bank holding companies; monetary policy; payment systems. Supervisor for systemically important nancial institutions and their subsidiaries. Establish heightened prudential standards on its own and based on Council recommendations. Examination authority.

SEC Regulates securities exchanges; mutual funds and investment advisors. Examination authority for broker-dealers. Authority over security-based swaps, security-based swap dealers and major security-based swap participants.

CFTC Market oversight and enforcement functions. Authority over swaps, swap dealers and major swap participants. Regulates trading markets, clearing organizations and intermediaries.

Office of the Comptroller of the Currency Focus on safety and soundness. Primary regulator of national banks and federal savings associations. Examination authority. Examines loan portfolio, liquidity, internal controls, risk management, audit, compliance, foreign branches.

Office of Financial Research Office within Treasury, which may collect data from nancial institutions on behalf of Council. No examination authority.

FDIC Focus on protecting deposits through insurance fund; safety and soundness; manage bank receiverships. Examination authority.2 Orderly liquidation of systemically important nancial institutions.3

FINRA Regulates brokerage rms and registered securities representatives. Writes and enforces rules. Examination authority over securities rms.

Consumer Financial Protection Bureau Focus on protecting consumers in the nancial products and services markets. Authority to write rules, examine institutions and enforcement. No prudential mandate.

Investment Advisory Mutual and money market funds; wealth management; trust services

Derivatives Futures, commodities and derivatives

Consumer Lending Credit cards; student and auto loans

Commercial Lending Commercial and industrial lending

Broker-Dealer Institutional and retail brokerage; securities lending; prime broker services

Retail Banking Deposit products; mortgages and home equity

Alternative Investments Hedge funds; private equity

Investment Banking Securities underwriting; M&A nancial advisory services

Payment and Clearing Systems Payments processing; custody and clearing

Note: Green lines from SEC and CFTC represent enhanced authority over existing relationships This chart assumes these activities are conducted in a systemically important bank holding company (BHC) 1 The Council, through Office of Financial Research, may request reports from systemically important BHCs 2 FDIC may conduct exams of systemically important BHCs for purposes of implementing its authority for orderly liquidations, but may not examine those in generally sound condition 3 The Dodd-Frank Act expanded the FDICs authority when liquidating a nancial institution to include the bank holding company, not just entities that house FDIC-insured deposits

weak to effectively manage the overlap and complexity. We have hundreds of rules, many of which are uncoordinated and inconsistent with each other. While legislation obviously is political, we now have allowed regulation to become politicized, which we believe will likely lead to some bad outcomes.

And we have been very slow in nishing rules that are critical to the health of the system. The rules under which mortgages can be underwritten and securitized still have not been completed three and a half years after the crisis began. This is unnecessarily keeping the cost of mortgages higher than they otherwise would be, slowing down the recovery. Basel III created additional capital confusion as banks did not know what the specic capital rules would be going forward the banks still dont know exactly how much capital they will be required to hold, when the regulators would like the banks to get there and how they will be able to use their excess capital when they do get there. The Commodity Futures Trading Commis20

sion (CFTC) and the U.S. Securities and Exchange Commission (SEC), responsible for different parts of the swaps business, have not yet come up with common rules. And the several agencies claiming jurisdiction over the Volcker Rule have proposed regulations of mind-numbing complexity. Even senior regulators now recognize that the current proposed rules are unworkable and will be impossible to implement. The rules also will create unintended consequences. Nearly 40% of all Americans have FICO scores below 660. Many of the new capital rules make it prohibitively more expensive to lend to this segment (if you are a bank). And the Federal Deposit Insurance Corporation (FDIC) now charges us approximately 10 basis points on all assets (not just the deposits it insures we now are paying the FDIC approximately $1.5 billion a year), making all lending more expensive and, in particular, distorting the short-term money markets that lend large sums of money over short periods of time at low interest rates.

The chart above assumes these activities are conducted in a systemically important bank holding company (BHC) 1 The Council, through the Office of Financial Research, may request reports from systemically important BHCs 2 The FDIC may conduct exams of systemically important BHCs for purposes of implementing its authority for orderly liquidations but may not examine those in generally sound condition 3 The Dodd-Frank Act expanded the FDICs authority when liquidating a financial institution to include the bank holding company, not just entities that house FDIC-insured deposits

No one has considered the cumulative effect of all these changes taking place all at once. And there is little question in my mind that credit contracted globally (particularly in Europe) as a response. Some analysts estimate that even after the European Central Banks special three-year lending facility to banks, European banks will need to shed another $3 trillion in assets in the next few years, and thats assuming that banks dont try to meet their new Basel III guidelines ahead of time. This cant possibly help the recovery of an already weakened Europe. With all the new rules, it is unlikely that credit availability will be replaced by new lenders. Even small banks that are exempt from many of the new rules are complaining that these rules will have a substantially negative effect on their businesses again, not the intended but the

unintended consequence. And certainly the new regulatory burdens for large and small banks have become enormous, but it will be a disproportionate burden on smaller banks. Recently, we have begun to achieve modest economic growth around the globe, somewhat held back by certain natural disasters such as the tsunami in Japan. But I have no doubt that our own actions from the debt ceiling asco to bad and uncoordinated policy, including the somewhat dramatic restraining of bank leverage in the United States and Europe at precisely the wrong time made the recovery worse than it otherwise would have been. You cannot prove this in real time, but when economists 20 years from now write the book on the recovery, it may well be entitled, It Could Have Been Much Better.

Civic EnGaGement AND LoBByinG

You read constantly that banks are lobbying regulators and elected officials as if this is inappropriate. We dont look at it that way. We view it as our responsibility to stay actively engaged in policy debates that will affect our company, our communities and the global economy. Not only is petitioning the government a constitutional right, we have a responsibility as part of our firms mission to be actively engaged in the political process in the communities and countries where we operate. Governments are debating issues critical to the financial markets, our company, our shareholders and our customers. It is vital for officials and regulators to have input from people within our businesses who understand the intricacies of how financial markets operate and the consequences of certain policy decisions. Contrary to what you might hear, our input, as often as not, is at the request of government officials who want to draw upon the expertise of our executives who work in the markets every day. Engagement with government officials and regulators is not only the responsibility of our Government Relations and Regulatory Policy teams, it also has become an important part of the fabric of our entire company. Employees across our company spend time meeting with and briefing government officials and regulators from Washington to Brussels to Beijing to Sacramento to Albany about what they are seeing in their local markets, as well as global markets, and how policymaking affects the financial and economic issues of the day. Our engagement with public officials includes:

Executives and employees from around the world

who visit federal, state and local capitals to provide lawmakers with perspectives on economic conditions in their communities and countries. Market participants who respond to requests from policymakers to provide our views on how new regulations or legislation will affect businesses, markets and consumers. Small business lenders who offer perspectives on the lending needs of small businesses across the country. Analysts and economists who share information on specific industries and economic performance around the world. Our Military and Veterans team, which provides policymakers with real-world information on practices that work to employ more veterans and support their financial needs. Finally, we should recognize that thousands of groups including unions, veterans, teachers, municipal workers and others are reasonably engaged in exercising their constitutional rights. We will continue to do so as well.

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The United States needs more conversation, collaboration, coordination and condence
More collaboration would be a good thing. Why should anyone be surprised that nancial reform, which is so important to our country, is being rethought and refought (through the courts and otherwise) since it was passed in a partisan way without sufficient collaboration and without adequate input from experts in the eld? Even with many of the rules and reforms that we support, the details (which are critical) are far from perfect. Were left with hundreds of rules and thousands of pages, that even the regulators are now struggling to make sense of. These are very complex systems that need to be carefully thought through and analyzed, particularly by people who know the subjects best both academics and practitioners. These issues are not Democratic or Republican, and the solution is not political. Many bankers would have loved to support proper reform. But it is hard to support something when you were not involved in the process in a meaningful way. In fact, at a bankers meeting with 100 bank CEOs in the room, 70%-80% said they were afraid to speak up because of potential retribution from the regulators and examiners. This is not a healthy process for policymaking.

I am struck that so many of our leaders in the United States forget how strong our country can be. The United States of America has the worlds best military, and it will have for decades. It has the worlds best universities and the best rule of law. We are known for having some of the hardest working, most entrepreneurial and innovative workforces anywhere. The United States has the widest, deepest and most transparent capital markets in the world and the best businesses on the planet small to large. These businesses are an essential part of Americas strength they are the engine of the economy. They create the wealth that we have today to enable all of the things we do as a nation. If it werent for the capital investment, innovation and productivity of American business, we all still would be living in tents and hunting buffalo. The need for honest dialogue and collaboration goes way beyond the nancial system. We need it in scal reform, health policy, energy policy, immigration, education and infrastructure. If we dont start working together, we wont get it right. It is critical that we get it right to ensure America has the best possible future. As Benjamin Franklin said, We must, indeed, all hang together, or assuredly we shall all hang separately.

JPMorgan Chase Capital Levels (Basel I Tier 1 Common Ratio)

March 16, 2008: Bear Stearns Acquisition Sept. 15, 2008: Lehman Failure Sept. 25, 2008: WaMu Acquisition Feb. 10, 2009: First Stress Test Announced (SCAP) Nov. 17, 2010: Second Stress Test Announced (CCAR1) Nov. 22, 2011: Third Stress Test Announced (CCAR2)

12.2% 11.1% 9.8% 8.8% 10.1%

7.0%

CCAR Tier 1 Common Guidelines: 5% SCAP Tier 1 Common Guidelines: 4%

* Assumes analyst estimates for net income and dividends; share repurchases are assumed at the same level as employee issuance to neutralize capital impact

4Q 2008

4Q 2009

4Q 2010

4Q 2011

2012*

2013*

Analyst estimates

Reported

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We rmly believe in strong capital requirements, but the G-SIB surcharge goes too far as proved by the recently completed Federal Reserve stress test
The Federal Reserve recently completed its CCAR stress test. The stress case makes some pretty severe assumptions for the next two years: Unemployment goes to 13%. Gross domestic product drops 8% (in the real recent recession it dropped only 5%). Home prices drop 20% from todays levels (they already are reduced 34% from peak 2006 levels). Trading, capital and credit markets perform even worse than they did in the last crisis. The Federal Reserve requires all banks to show that throughout this high-stress environment, they can maintain Basel I capital of over 5% (at all times), while it also assumes banks should continue their capital, dividend and repurchase plans as if there were no crisis (there virtually is no way we would continue to buy back a substantial amount of stock if this stress scenario began to unfold). The chart on the previous page shows what our capital ratios were over the last several years and what analysts are forecasting they will be over the next two years. Recent stress test results conclude that we can increase the dividend, buy back $12 billion of stock and still have capital in the worst quarter (the Feds stress test assumes that a huge amount of losses all happen in the same quarter) of no less than 5%. We believe that even if the Feds severe stress scenario actually happens, our capital ratios will drop only modestly since we will very actively manage our risk exposures, expenses and capital. Keep in mind that during the real stress test after the collapse of Lehman Brothers, our capital levels never went down, even after buying $500 billion of assets through the acquisitions of Bear Stearns and WaMu. We deeply believe in stress testing, and we even think that a severe stress test like this, properly calibrated, is appropriate. But we also know as the real stress test after

Lehmans collapse and the recent severe Fed stress test make eminently clear we have plenty of capital. There also should be recognition that the whole system is stronger. Accounting and disclosure are better, most off-balance sheet vehicles are gone, underwriting standards are higher, there is much less leverage in the system, many of the bad actors are gone and, last but not least, each remaining bank is individually stronger.

The G-SIB is contrived, articial and duplicative and doesnt recognize that while some companies were too big to fail during the nancial crisis, some also were ports in the storm
Once again, very complex regulations are being overlaid on already complex regulations. Under the new Basel III rules, all banks will be required to have 7% Basel III common equity (this translates to approximately 10% Basel I). The new G-SIB requirements mandate for a company our size approximately 2.5% more capital, totaling 9.5% Tier 1 common equity (this equates to approximately 13% Basel I). This is capital that we simply dont need. The G-SIB calculations focus only on the negatives of size and dont recognize the positives of size diversication of earnings and capital strength which kept several large companies safe during the storm. In fact, diversication of earnings and even high market shares, which often is a sign of a companys strength, are treated as negatives in these calculations. The G-SIB rule has 12 metrics to determine how much extra capital a bank needs. I wont bore you with all 12, but I will describe a few to show how arbitrary and contrived the rule is: Many of the measures simply look at gross numbers assets, gross derivatives exposure, cross-border lending, etc. without any regard for the risk of the credit, whether the risk is collateralized or whatever the tenor of the loan.

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 One category is substitutability an assessment of how easily clients can replace the important services provided by the bank. One of these measures looks at market share in debt and equity underwriting. We believe this is a awed measure since any given debt or equity transaction usually involves multiple underwriters so replacement usually isnt even necessary. And if it were, it could be done easily. Another measure looks at risky wholesale funding. This clearly is a legitimate risk measure for banks, but the G-SIB calculation treats any funding other than retail deposits as equally risky. Your company, which effectively has no wholesale money market funding, is viewed to be just as risky as a company that mostly is wholesale funded in the notoriously ckle money markets. And no credit is given for deposits from companies (most of which are rather sticky), secure funding sources or long-term funding. Another factor in the G-SIB calculation is whether a bank holds assets under custody. This is a business where the assets are completely separated from the rest of the company; i.e., already fully safeguarded. We do not understand why the custody business is in the calculation at all. We could go on and on the rule penalizes diversication, it treats liquid securities as being worse than loans, it gives no credit to the newly established Resolution Authority to dismantle a big bank and it is inconsistent with parts of Basel III, particularly around the value of operational deposits. We dont disagree with all of the intent of the G-SIB it includes some logical approaches to reducing the complexity of the nancial markets and the interconnectedness between nancial companies. But the way some of these measures are calculated is contrived and articial. They are duplicative and completely violate the principles of riskweighting assets. We believe that while the G-SIB rule will cause bigger banks to hold more capital and give them some incentive to shrink, it will not end up working the way regulators envisioned.

We believe banks will be forced to increase their capital levels in order to cluster around their major competitors. Even if a bank could run at 7% capital, it probably will have to run at the higher number to be perceived as strong competitively. Additionally, the rule will create unintended, anticompetitive market-distorting arbitrage. Big banks that have a lot of capital will more easily win certain types of business, such as processing, from smaller competitors. Big banks that need to hold 9.5% capital against mortgages simply will syndicate them out to smaller banks that need to hold only 7% capital against the same specic assets. Regardless of how we feel about the G-SIB surcharge, we, of course, will meet all the requirements and currently believe we can do so and still earn adequate returns for our shareholders. We just dont think it is the right way to regulate banks or operate a nancial system.

Resolution Authority essentially bankruptcy needs to be made real. We must eliminate too big to fail
One of the most important provisions of the Dodd-Frank legislative reforms is the creation of a robust Resolution Authority, which empowers the FDIC to take over a failing systemically important nancial institution, including us, and resolve its operations and businesses in an orderly manner, without causing systemic risks to the nancial system or excessive risks to the economy as a whole. Shareholders and creditors would bear all the losses (in a predictable and consistent way), with no exposure to taxpayers or damage to innocent bystanders. The management responsible for the failure would be replaced, and prior compensation to directors and senior officers would be clawed back. Ideally, the name of the failed institution also would be buried, memorialized only in the hall of shame of failed institutions. The FDIC would manage this process, including providing operational liquidity if necessary, so that resolution would occur without a lengthy period of government intervention. Properly executed, there would be minimum value destruction and contagion effects inherent in re sales or disorderly liquidations (this also would preserve as much

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value as possible for unsecured debt holders just as in an ordinary bankruptcy proceeding). Those responsible for causing the problem would bear the losses. If losses exceeded the amount of shareholder equity and debt, the banking industry, as a whole, would pay for the losses. This essentially is the way the FDIC has operated since its creation in 1933. There would be no cost to taxpayers, and there would be no bailout by the government. As a result, critical operations that are important to the economy and the functioning of the nancial markets would continue uninterrupted. Credit card processing, ATM networks, checking accounts and debit cards would continue to function, but under the control of new owners and management. Similarly, custody services of client assets, payments processing, asset management, and securities and derivatives clearing would continue without economy-damaging interruption. Although Dodd-Frank calls this process orderly liquidation, it really is comparable with a bankruptcy. Implementing this process for nancial institutions operating in many jurisdictions around the world brings added complexity. We are working closely with regulators to clearly identify how critical operations in local jurisdictions would continue under a resolution process. Close cooperation is required by multiple regulators. We believe this can best be achieved by actively working together well before any such event occurs and carefully (perhaps legislatively) agreeing on how such an orderly liquidation would be pursued across international borders. We certainly hope that a large systemically important nancial institution never has to go through this process. Certainly, higher capital and liquidity standards, better loan quality and more disciplined underwriting make such a failure signicantly less likely. However, the availability of this controlled bankruptcy process is critically important for forcing managements and creditors of such institutions to understand that they are NOT too big to fail and to understand that they are NOT so important that the taxpayers will bail them out and that they are NOT immune to the consequences of excessive risk taking. This type of bankruptcy for failed nancial institutions is essential for management to maintain market discipline and for risk taking of nancial rms.

We need to ensure that Americas large global banks can effectively compete
Many of the new rules potentially affect U.S. global banks more signicantly than they affect non-U.S. banks. This is not to say that other countries (for example, the United Kingdom and Switzerland) arent doing things to make it harder for their banks to compete. But we need to ensure that the rules, which affect only American banks, dont hurt in their cumulative effect American banks ability to compete. Following is a list of regulations that are unique to American banks. (Many of these rules did not emanate from Basel but from the U.S. legislative and regulatory process.) The Volcker Rule and we dont know its nal effect yet will affect only U.S. companies, including, possibly, American banks activities outside the United States. The derivatives rules still not complete may require American banks to follow U.S. regulations outside the United States and effectively could eliminate our ability to offer derivatives to our corporate clients. The Collins Amendment eliminates taxefficient Tier 1 capital, effectively increasing the cost of capital. Concentration limits restrict the ability of U.S. banks to acquire institutions outside the United States with no similar limitations on our foreign competitors. High Mortgage Servicing Rights capital charges (a uniquely U.S. asset) increase our cost of doing business. Proposed accounting changes are more punitive for U.S. banks when they hold marketable debt securities. Foreign banks will be able to hold many of these securities at cost, but American banks will have to deduct any unrealized losses from capital. U.S.-specific liquid asset classes are given less credit or excluded. Amazingly, covered bonds in Europe count as 100% liquid assets, but U.S. government-guaranteed mortgagebacked securities count only as 85%. The G-SIB capital charge gives no credit for U.S. Resolution Authority in Dodd-Frank.

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 U.S. companies that have earned high market shares over time in the investment banking and custody businesses (usually a sign of having a strong business) are specifically penalized with higher capital charges. Ironically, while the U.S. banking system is far less consolidated than all other developed nations (currently only six of the 50 largest nancial rms in the world, by market capitalization, are American they were 44 of the 50 in 1989 this should give U.S. policymakers pause), the G-SIB charges and some of the other rules penalize American banks more than non-U.S. banks. Suffice it to say, the negatives are adding up and bear close watching. While we strongly prefer to have common global rules for everyone, it may not be turning out that way. It is incumbent upon American policymakers to make sure that the nal outcome is fair to American banks and that they are fully free to compete in the face of increasingly tough global competition.

just mentioned could be looked at as one large crowded trade. If things ever start to go wrong, everyone could head to the exit door at the same time. Your company has positioned itself to be protected against rapidly rising rates in fact, the company would benet if either short-term or longterm rates went up. Markets already are naturally procyclical, and Basel III makes it worse. In a crisis, Basel III demands that even more capital be held against risky assets. We estimate that the swing in Tier 1 common capital from benign times to crisis times could be as much as a 20% difference in the capital ratio. We should try to make Basel III countercyclical but certainly not more procyclical. Finally, the ultimate goal, with which we mostly agree, is to have Basel III applied fairly and evenly around the world. But this leads to another potential set of issues. Everyone will start to have an increasingly more common view of the risk of a certain type of asset. This is what happened in the United States when everyone thought mortgages were completely safe. Models eventually will replace judgment and this is a terrible idea. Models always are backward looking and dont capture true underlying shifts and changes that affect credit or markets; e.g., increasing or reducing liquidity, structural changes in industries that dramatically change the riskiness of an industry (think of what the Internet did to newspapers) or real quality underwriting vs. lax underwriting. And models have a hard time capturing concentration and correlation of risks (think of oil and real estate in oil regions). Many years ago in the United States, there were approximately eight large banks in Texas. Within ve years after the oil crisis, only one survived as an independent bank. The others were either sold under duress or went bankrupt not because of their oil exposure but because of their real estate exposure. Models cannot replace judgment, and judgment helps to balance and diversify the global nancial system.

Basel III, procyclicality, group think and the role of judgment

Quantitative easing may be good policy to help the economy recover, but it does articially increase the value of government and government-guaranteed securities. The new Liquidity Coverage Ratio gives government and government-guaranteed securities credit only for being liquid no other assets, including gold, equities or corporate bonds have any liquidity value. This also creates higher demand and, therefore, a higher articial value for government securities. The Volcker Rule, as it currently is written, also allows unimpeded trading and liquidity for government securities and a lot less liquidity for everything else. Pension accounting is forcing pensions to hedge their liabilities by buying xed-rate securities at precisely the wrong time. Banks hold large availablefor-sale securities portfolios to manage their assets and liability risk management. And if rates ever go up (and they will) and there are losses in these portfolios, the losses will have to be deducted in capital even though the liabilities that they are hedging are not being marked-to-market. All the items we

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 V I . T H E M O RTG AGE BUS I N E SS THE GOOD, THE BA D A N D T H E U GLY

Many of the nancial crises of the past hundred years around the world were related to real estate. Real estate was not the only culprit in the recent crisis, but it certainly was at the eye of the storm. I suspect that the mortgage crisis will be the worst nancial catastrophe of our lifetime. What the world experienced was almost a collective brain freeze traditional mortgage underwriting loosened over time (actively supported by the U.S. government) such that we got Alt-A mortgages, subprime mortgages and option-adjustable rate mortgages (option-ARM). These mortgages were packaged into securities (sometimes guaranteed by government entities and insurance companies), and home ownership was going up it all seemed to be working. But as the process unfolded, unscrupulous mortgage officers were mis-selling mortgages, some borrowers were lying on mortgage documents and speculation was rampant. It was a disaster hidden by rising home prices and false expectations, and once that price bubble burst, we all were in trouble. We need to write a letter to the next generation that says, Never forget: 80% loan to value and verify appropriate income.

But we did participate in this disaster by originating mortgages that wouldnt have been given a decade earlier (and wont be given a decade later). And when delinquencies and foreclosures grew dramatically, we were ill-prepared operationally to deal with the extraordinary volume of troubled mortgages and upset borrowers. Our servicing operations left a lot to be desired: There were too many paperwork errors, including affidavits that were improperly signed because the signers did not have personal knowledge about what was in the affidavits but, instead, relied on the companys processes. However, the information in the affidavits was largely accurate i.e., the borrower, in fact, was in default, we did have the mortgage and so on. Gearing up to deal with this problem meant overcoming the multiple and poor systems we inherited from our acquisitions of Bear Stearns and WaMu. In addition, there were numerous government modication and renancing programs and multiple changes to these programs to contend with, some of which involved extensive and hard-to-complete paperwork. We now have 23,000 people servicing delinquent loans or dealing with foreclosures up from 6,800 people in 2008. These problems, as one might expect, led to a myriad of lawsuits from various U.S. government agencies, attorneys general from the 50 states and private investors. We have settled with the U.S. government and state attorneys general and implemented strong new policies for the good of all. In February 2012, JPMorgan Chase and four other top mortgage servicers agreed to a global settlement with the U.S. Department of Justice, the U.S. Department of Housing and Urban Development, the Consumer Financial Protection Bureau and the state attorneys general. The settlement relates to the servicing and origination problems mentioned above.
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Clearly, it was not our nest hour

We were one of the better actors in this situation but not good enough; we made too many mistakes. We generally were a better underwriter. We did not originate option-ARMs. Many of our problems were inherited from Bear Stearns and WaMu. Even our subprime mortgages outperformed most other subprime mortgages. Early in the crisis, we also stopped dealing with mortgage brokers, some of whom underwrote the worst of the mortgages and probably missold mortgages more than most.

For us, the settlement will consist of the following: Making cash payments of approximately $1.1 billion (a portion of which will be set aside for payments to borrowers) to 50 states. Offering approximately $500 million of renancing relief to certain underwater borrowers whose loans are owned by the rm. Providing approximately $3.7 billion of additional relief for certain borrowers, including reductions of principal on rst and second liens, payments to assist with short sales, deciency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. Agreeing, along with the other banks, to a new set of enhanced nationwide standards for mortgage servicing, including requirements around single point of contact, staffing levels and training, communication with borrowers and document execution in foreclosure cases. The standards also will require banks to offer modications and other foreclosure alternatives for borrowers before pursuing foreclosure a practice in which we have and will continue to be actively engaged. We support these new standards they will help establish a higher level of transparency and clarity for servicer activities and, ultimately, will strengthen the stability of the industry as a whole. (I will talk later in more detail about all the things we are doing, in addition to the things mentioned above, to help homeowners.) The global settlement releases JPMorgan Chase from further claims related to servicing activities, including foreclosures and loss mitigation activities, certain origination activities and certain bankruptcy activities. Not included in the settlement are claims from investors in private label securities who are making claims both on representations and warranties (i.e., that the underwriting wasnt done according to the standards in the securities contracts), as well as lawsuits claiming there were misstatements in the underwriting of the securities.

We have substantial reserves for mortgage litigation. One of the challenges our rm continues to face following the economic crisis is litigation relating to mortgage-backed securities issued by JPMorgan Chase, Bear Stearns and WaMu. Investors have brought securities litigation, trustees have demanded loan repurchases and regulators continue to scrutinize these transactions. As I always have said, we will honor our obligations. However, we also will defend against demands that are not reasonable. Securities claims brought by sophisticated investors who understood and accepted the risks associated with their investments which, in some cases, are current and still paying face substantial legal hurdles. Likewise, we are going to ght repurchase claims that pretend the steep decline in home prices and unprecedented market conditions had no impact on loan performance or that seek to impose liabilities on us that we believe reside with third-party originators (or, in the case of WaMu securitizations, with the FDIC). These plaintiffs face a long and difficult road, and, as a result, litigation over these issues could take many years. Nonetheless, we have set aside signicant reserves to handle these exposures.

How we are trying to properly and fairly deal with delinquencies, modications and foreclosures
First, some facts: Of 76 million owned homes in America, 24 million do not have a mortgage. Of the remaining 52 million homes with mortgages, approximately 4.7 million have a delinquent mortgage. And approximately half of those that are delinquent are on homes where the value of the home is worth less than the mortgage. Another 10+ million homeowners are current on their mortgages, but their houses are worth less than their mortgages. (We estimate that approximately 25% of these mortgages ultimately will go into default homeowners for the rest will continue to pay and, it is hoped, will recover the value of their homes.)

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Here is where we stand and how we are trying to deal with the situation: If we treated a homeowner improperly, we should make it right. Anyone who was mis-sold a loan or was foreclosed on improperly deserves redress. Mis-selling a loan is where the borrower was misled about signicant loan terms or fees or interest rates that were higher than they should have been. An improper foreclosure is one in which the homeowner did not owe the money or was not in default. If it comes to our attention that we participated in any of these situations, we will x them immediately. That said, however, many loans were taken out by unscrupulous borrowers, individuals who either lied about their income or lied about their intention to live in the home they clearly were speculating that they could ip the real estate for a prot on rising home prices. These individuals should not receive help for any reason. If a homeowner can afford to pay the mortgage whether or not the home is underwater the mortgage should be paid. A mortgage is a loan collateralized by the house. It is not a loan that one should feel free to walk away from if the house goes down in value. Most of the people in this situation can, and do, pay their mortgages. Some attempt a strategic default even if they can afford to pay, they just walk away. Even though they still owe the difference, it is hard for the lender to collect. It is hoped, as the housing market recovers, these underwater homeowners will get equity back in their homes. If a homeowner cannot afford the mortgage but can afford a reduced payment, we try to modify the loan. When a mortgage becomes delinquent, we make a very concerted effort to contact the person. We start reaching out as early as 15 days after a loan becomes delinquent and, for some homeowners, make a hundred or more attempts before foreclosure. We are sympathetic with these borrowers because most of them are unable to make their payments for legitimate reasons someone lost a job, someone got sick or a persons income level dropped precipitously. In these cases,

we try to modify the mortgage both under a government initiative called Home Affordable Modication Program (HAMP), which has strict requirements, and through our Chase Home Affordable Modication Program (CHAMP), where we can be more exible. We often can reduce the interest rate to as low as 2% and, in some cases, reduce the principal. Since 2009, we have offered over 1.2 million modications and completed more than 450,000. We have reduced payments to borrowers by a current run rate of $1 billion annually. Ultimately, we expect to reduce payments over the years by more than $10 billion. For loans owned by JPMorgan Chase, we already have deferred principal of $1.5 billion, forgiven over $2.1 billion in principal and reduced interest payments by $1.2 billion. And by the end of the process, we expect to have forgiven principal of approximately $4.5 billion and reduced interest payments by a total of $3.5 billion. We treat loans to investors (i.e., loans in private label securities) the same way we treat loans that we own. It is important to note that all modications are done according to specic contracts. These contracts stipulate that you can modify a mortgage only when it is better for the lender than foreclosing, all things considered (i.e., the net present value of a modied loan is worth more than going through a foreclosure process, with all its expense, and ultimately selling the home at a very distressed price). If a homeowner cannot afford the home, even with the modication, we still try to avoid foreclosure. If someone cant afford a mortgage at 2%, even using a reduced valuation on the house, foreclosure is the last option. Since 2009, we have prevented approximately 750,000 foreclosures through our various programs, including modications twice as many as have been foreclosed.

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 Programs designed to prevent foreclosures include short sales or deeds-in-lieu situations in which the homeowner agrees to sell the house or lets us sell the house. In some cases, we pay homeowners to sell their homes, and we waive decient loan balances (waiving decient loan balances represents debt forgiveness to these borrowers). These foreclosure programs have cost us $6 billion so far, including direct payments of $150 million and balance waivers of $5.8 billion. When these programs conclude, we expect to have paid a total of $650 million in direct payments and more than $12 billion in balance waivers. Foreclosure. While foreclosure is a terrible option, it sometimes is the only option. While it is awful for the homeowner, it does allow an individual to get a fresh start and more affordable housing and relief from a crushing debt burden. Foreclosure is the worst option for the bank, too, because the house usually is left in poor condition and sold for substantially less than the outstanding balance on the loan, resulting in a loss. (We even, from time to time, make payments to people to help them leave the home in good condition and be able to afford to relocate.) By the time we actually foreclose on someone, we generally have not received a payment for 17+ months; and in 54% of the cases, the house was either vacant or occupied by someone other than the owner. The loss to the bank, in effect, becomes loan forgiveness to the individual but this forgiveness, it is hoped, is going only to people who really need it: people who truly are unable to pay and really need the debt relief. Since 2007, JPMorgan Chase has recognized losses on rst mortgages of more than $21 billion due to foreclosures and charge-offs. Ultimately, we will have recognized more than $27 billion in foreclosures and charge-offs. Home equity loans generally are modied if we modify the mortgage loan and almost always are written off if there is a short sale or foreclosure. We treat home equity loans that we own exactly the same whether we own the rst mortgage or service it for someone else. When the rst mortgage is modied, the home equity loan generally is modied, and the modication
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terms typically are at least as generous to the borrower as the terms of the rst mortgage. The home equity loan essentially will pay off only if the rst mortgage ultimately pays off. Importantly, if the rst mortgage is ever foreclosed on or written down due to a short sale, the second mortgage almost always is written off. Since 2007, we have recognized losses of more than $16 billion in home equity loans and expect as much as another $5 billion over the next few years. This is a miserable situation all around, but we want our shareholders to know that we are trying to treat every borrower fairly and properly based on the individuals situation and circumstances.

But it also will be the best of JPMorgan Chase

We have brought enormous resources to bear on xing our mortgage business. Many of our top executives volunteered to help and we now have some of our best people from nance, risk, technology and operations devoted to this effort. As a result, we are responding rapidly and are improving across the board. For example: In early 2009, Chase opened the rst Chase Homeownership Center to help customers under nancial stress stay in their homes. We now have 82 brick-andmortar centers located in 28 states and the District of Columbia, regions hardest hit by the housing crisis. Six of the 82 are near military bases, and the mortgage counselors at these centers receive special training to understand general military issues, special military programs and the Servicemembers Civil Relief Act. Over the past two years, our Borrower Assistance employees have met with more than 273,000 customers who are behind in their payments or are likely to be, and Chase has held 1,800 outreach events for homeowners who need assistance. On October 4, 2011, our mortgage servicing platform, which, in fact, was three legacy technology systems from Chase, Bear Stearns and WaMu, was consolidated. This was a huge 13-month effort that resulted in one Chase system, one way to serve customers, and a better and more consistent customer experience.

 Our customer satisfaction scores in both external and internal surveys have improved considerably. In the 2011 J.D. Power Mortgage Origination survey, Chase jumped to #5 from #12 in customer satisfaction among lenders nationwide the largest improvement of any company. (Were still not satised with being #5.) At the same time, customer complaints have declined more than 60% from a high point in May 2011.

will continue for a long time. New home construction still is very depressed so, to most, the future looks bleak. However, if one looks at the leading indicators, all signs are ashing green the turn is coming if it is not here already. We dont want to be blindly optimistic, but the facts are the facts: America has never stopped growing. The United States has added 3 million people a year since the crisis began four years ago. We will add 30 million people in the next 10 years. This population growth normally would create a need for 1.2 million additional housing units each year. Household formation has been half of that for the past four years. Our economists believe that there is huge pent-up demand and that household formation will return to 1.2 million a year as job conditions improve. Job conditions have been improving, albeit slowly. In the last 24 months, 3.45 million jobs have been created. On average, only 845,000 new U.S. housing units were built annually over the last four years and the destruction of homes from demolition, disaster and dilapidation has averaged 250,000 a year. The growth of new households, even at a reduced rate, has been able to absorb all of this new supply, and more. The total inventory of single-family homes and condos for sale currently is 2.7 million units, down from a peak of 4.4 million units in May 2007. It now would take only six months to sell all of the houses for sale at existing sales rates, down from 12 months two years ago. (This low of an inventory number normally would be considered a positive sign for future housing prices.) While the shadow inventory mentioned above still is signicant, it has shown a visible declining trend since peaking at the end of 2009, when the number of loans delinquent 90+ days or in foreclosure was 5.1 million homes. It now totals 3.9 million, and we estimate it could be 3 million in 12 months. The shadow inventory also may

The mortgage business is important thats why we are going to stay in it

Providing a mortgage helping our customers own and stay in their homes is one of the most important and emotional connections we have with our customers. It also is a product that has the potential to deepen our relationship with customers. Our Retail branch franchise and brand give us an enormous competitive advantage in the mortgage business. There are 5.7 million customers who have an existing Chase mortgage. But with a base of 50 million customers, we think we could double the number of mortgage customers. Once we nish xing it, the mortgage business will be a great one for JPMorgan Chase. The winners in the business will be those who have good customer relationships and are good at large-scale servicing and processing right up our alley. Normalized earnings for this business should be about $2 billion, with a through-the-cycle return on equity (ROE) of about 15%. We continue to invest in this business by growing our sales force and introducing technology applications to improve the customer experience. Over the past year, we added 700 loan officers bringing our total to 3,800 and we are serving more customers as a result. Plus we plan to hire an additional 1,000 loan officers in 2012.

Housing is getting better there, I said it

There has been a tremendous focus on the fact that housing prices remain depressed and, in fact, are still going down some. The large shadow inventory of homes in delinquency or foreclosure that has not yet hit the sale market adds to the fears that this

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move more quickly as mortgage servicers get better at packaged sales and short sales and as real money investors start to buy foreclosed homes and rent them out for a good prot. Home prices still are going down a little bit, and they will stay depressed for a while. Distressed sales (short sales, foreclosure sales, real estate-owned sales) still are 25% of all sales, and these sales typically are priced 30% lower than non-distressed sales. As the percentage of distressed sales comes down over the next 12-24 months, their negative effect on housing prices will start to diminish. Housing is at an all-time high level of affordability due to both low home prices and low mortgage rates. It now is cheaper to buy than to rent in half of the markets in America this has not been true for more than 15 years. Relatively high rental prices can be a precursor to increasing home prices. At the same time, American consumers are nding more solid nancial footing relative to their debt. The household debt service ratio, which is the ratio of mortgage plus consumer debt payments to disposable personal income, stands at its lowest level since 1994. This is a result of rapid consumer deleveraging household mortgage debt now is down $1 trillion from its 2008 peak. (Reported U.S. mortgage data do not remove mortgage debt from an individuals debt obligations until there is an actual foreclosure. It is estimated that $600 billion of the $9 trillion in currently outstanding mortgage debt is not paying interest today and effectively could be removed now from these numbers.) Recent senior loan officer surveys by the Federal Reserve show that, while there are not yet clear signs of credit loosening for new mortgages, at least the rush to tighten mortgage lending standards has abated.

Over the last two years, $2 trillion of mortgages have been renanced, substantially aiding homeowner burdens. We expect another $2 trillion to renance over the next two years, with approximately 10% coming from recently announced government programs, and, at that point, we estimate that only 15%-20% of Americans will be paying interest rates over 6%. More jobs, more households, more Americans, good value its just a matter of time.

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 V I I .  C OMMENTS ON THE FUTURE OF INVESTMENT BANKING AND THE CRITICAL ROLE OF MARKET MAKING

We believe that investment banks provide a critical role in facilitating the ow of capital to meet client needs and that those needs will grow dramatically in the next 10 years
It is important to look at any business from the point of view of the client. Our 5,000 issuer clients and 16,000 investor clients will have large and growing needs in the future. Corporate clients need for equity and debt issuance, M&A and other advice, and balance sheet management is projected to almost double over the next 10 years. Global infrastructure investment will more than double over a two-decade period it is projected to reach $3.7 trillion by 2030.(a) Total global nancial assets of consumers and businesses, which now total $198 trillion, are projected to nearly double to $371 trillion by 2020.(b) Clearly, these huge capital and investing needs of clients will drive real underlying growth of the investment banking business. And JPMorgan Chase is in the sweet spot because much of the growth will be with our clients large, often multinational companies, government-related entities and large global investors. And our role as an issuer of securities and as a market maker places us right in the center of key money ows. Of course, these business volumes, while they will grow over time, frequently have volatile swings within months, quarters and years. Not only can volumes easily move 50% by quarter or year, but spreads and fees also can move dramatically, affecting our revenue. The facts above convince us that the large slowdown we saw in the second half of last year was cyclical, not secular. And volatility does not make the business bad it simply means you have to manage the business, knowing that it can happen at any time. In 2011, a tough time for many investment banks, your J.P. Morgan Investment Bank earned a 17% ROE.

Demystifying market making (trading) why it is so important

While most people understand corporate nance fees are earned for stock or bond issuance or advice, market making is a mystery to most people it remains a black box. We need to do a better job of describing the important role of market making and explaining how it can be done safely. Before I talk about our market-making business, it is important to recognize that market making is a normal function of any economy. While we make markets in general in nancial instruments, others make markets in just about everything, everywhere farmers markets, all types of food and commodities markets, lumber, paper, ink, advertising, steel, etc. Markets are simply where buyers and sellers meet to exchange products and services, and market makers facilitate the process. Sixteen thousand investor clients use our market-making services. These clients include mutual funds, corporations, pension plans, states, municipalities, hospitals, universities, etc. The services we provide are research, advice and execution. Clients come to us when they want to buy or sell securities (in this section, when I refer to securities, I mean stocks, bonds and loans of companies, bonds of government entities, mortgage securities of all types, commodities of all types, currencies of all types and derivatives on all of the aforementioned securities, including swaps, options, etc.). It takes substantial resources to provide these services properly. We have more than 800 professionals carrying out research on 4,300 companies, 1,000 government entities (states, municipalities, etc.) and 80 countries at a cost of approximately $600 million a year. We analyze securities, markets and economies around the world. Our job is to educate our investors and issuers and help them accomplish their global nancial objectives.

(a) According to McKinsey Global Institute Study, Farewell to cheap capital? The implications of longterm shifts in global investment and saving, December 2010 (b) According to McKinsey Global Institute Study, The emerging equity gap: Growth and stability in the new investor landscape, December 2011

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To execute trades, J.P. Morgan has more than 110 trading desks around the world 2,000 traders making markets and executing trades in securities, broadly dened. And 2,500 salespeople call on our 16,000 investor clients, offering ideas and advice. Supporting our research, sales and trading are approximately 13,000 technology and operations specialists and 4,000 control, nance and risk management professionals across the Investment Bank. In addition, we hold an average of $400 billion in inventory (securities, broadly dened), which we turn over constantly, and we provide, on average, more than $250 billion of securities nancing for clients. Our market-making operations also help our issuer clients sell or raise approximately $430 billion of capital a year. We trade over a trillion dollars of securities, broadly dened, every day for example, approximately 90,000 separate trades a day in our xed income business alone. While we do business with 16,000 clients, the top 1,000 clients account for a large portion of the business. These investors are smart and sophisticated we want their repeat business, but we have to earn it. Presumably, they keep coming back to us because they value the services we provide; but if we did not give them great value and great prices, we probably would not get their business they have lots of other options and there is a lot of competition for their business. Our aim is simple to provide our clients with sound investment ideas and valueadded, world-class execution at increasingly lower cost. The cost of these services to clients has been coming down dramatically over time beneting both investors and corporate issuers. Thirty years ago, it cost, on average, 15 cents to trade a share of stock, 1% (100 basis points) to buy or sell a corporate singleA bond and $100,000 to do a $100,000,000 interest rate swap. Today, it costs, on average, 1.5 cents to trade a share of stock, 10 basis points to buy a corporate single-A bond and $4,000 to do a $100,000,000 interest rate swap. Market making creates great liquidity in the market, giving investors condence that they can buy and sell securities often at a moments notice. Market making also
34

is being done at an increasingly lower cost of execution, which is a benet to investors and issuers, buyers and sellers. Reducing spreads, or the cost to do a trade, means that the buyer gets to buy at a better price, and the seller gets to sell at a better price. This is no different from Wal-Mart Stores, Inc. offering you great products at lower prices. Innovation in products, systems and markets has driven down these costs, and the investor and issuer are the beneciaries. Protability is driven by serving many clients well at a low cost to them we take on risk, which we manage carefully, to serve our clients. A few examples will suffice. We have huge volumes of business, allowing us to offer good prices. For example, in North America Cash Equities, we buy and sell approximately 160 million shares a day at 1.5 cents per share. In foreign exchange trading, we do approximately 80,000 spot/ forward trades a day, netting only $70 a trade (75% is done electronically). In credit trading, we do 4,000 trades a day (mostly bonds), making $1,500 per trade. We also trade, on average, approximately 500 interest rate swaps a day. Certain products have higher fees associated with them, but fees generally are consistent with the risk and cost we need to take to execute the trade. In all of these examples, revenue obviously is offset by the cost of operating the business, including the cost of hedging. And when volumes drop or spreads tighten, the business clearly becomes less protable. The revenue on 98% of our trades averages $50,000 or less per trade. But on a handful of trades, we do make much larger fees because we serve our clients by taking on substantially more risk. Two examples will help explain. In one instance, we executed a multibillion dollar interest rate swap for a leading real estate company. In another trade, we executed a multiyear, half-billion dollar oil hedging program for a leading transportation rm. On some of these large trades, we can make revenue of millions of dollars, but to do so, we take on large risks, which we prudently try to hedge an undertaking that frequently cannot be completed immediately. On occasion, after all is said and done, we may not make any revenue at all. However, our clients are happy they have paid us to take on risks that they dont

want. And when we assume the risk, it is our job to manage it so that we are paid fairly, on average, for the risk we took. In the market-making business, we actively try to hedge our positions to protect the rm from violent price swings. But all hedges are not perfect, and some things simply cannot be hedged. So we do take risk by holding inventory, but that is the cost of doing business a cost not much different from the inventory a retailer or wholesaler holds in stores to serve their customers. (When they lose money on their inventory, its called markdowns or sales.) Holding inventory at appropriate levels is a cost of doing business it is not speculating. Many clients have a large need for derivatives to manage their exposures. Even more misunderstood than market making in stocks and bonds is derivatives. Ninety percent of the global Fortune 500 companies actively use derivatives. They dont use them because we want them to do so. They use them to manage their own exposures. Ninety percent of what they do, and what we do, is pretty basic they use interest rate or foreign exchange (FX) derivatives to manage interest rate or FX exposures. In addition, clients use derivatives to manage commodity exposures, credit exposures and other risk exposures. Many companies have huge exposures that they need to hedge so that they are not badly hurt or even bankrupted by violent moves in prices. Farmers have been doing hedging for a long time, and, in the modern world, it also applies to airlines, banks, investors and others who have exposures to oil, interest rates, foreign exchange rates, etc. We tightly manage our risk in derivatives by limiting our risk to each counterparty, by limiting the type of risk we take within each counterparty and by taking substantial collateral against existing credit exposures. Today, our net credit exposure to all counterparties, net of collateral in essence, what we are owed by our various counterparties is approximately $70 billion. Most of our unsecured exposure is to government entities or corporate clients where we deliberately dont ask for collateral, which essentially is a way to extend credit to them. With all of our major global market counterparties think

of all the other major nancial institutions we dont leave any material unsecured derivatives exposure at all we post collateral to each other every day. One other great fear about derivatives is their lack of transparency. If by transparency people mean transparent prices, derivatives actually are very transparent. Computer screens provide immediate pricing and very accurate spread information on the majority of derivatives, and many dealers can respond with actual bids, in size and with very tight spreads, to anyone who calls. If by lack of transparency people mean that the regulators cannot access the information they need to evaluate the risks, then that is incorrect they can and do see everything we can see. Finally, if by transparency they mean that investors (our shareholders and debtholders) cant see or understand the risks thats kind of true even though we make extensive disclosures. But you can look at any large companys public disclosures, and there will be some, not deliberate, lack of transparency. For example, its not transparent what newspaper companies pay for print or paper or how various companies have their inventory marked or what insurance companies true exposures are. We try to be as transparent as we can meaningfully be, without overwhelming our investors. We welcome any suggestions on how we can get even better at this. A liquid secondary market is critical to the primary market where corporate and government-related entities issue securities. Because America has such deep secondary markets, corporate and government-related entities can issue large quantities of securities quickly and at a low cost. When a corporate bond issuer comes to market with a multibillion dollar issue, the world already has been educated on the company, the bonds usually are traded actively and the issue usually can be placed fairly quickly at low cost to the issuer. This would not be possible if we did not have a high level of efficiency, activity and liquidity in the secondary markets where existing issues constantly are bought and sold. If secondary markets were traded with less frequency, then spreads or costs

35

would increase, thereby making it far more expensive for entities public and private to raise capital by issuing new securities. America has the widest, deepest and most transparent capital markets in the world at the lowest prices for both issuer and investor. While we clearly had some issues with parts of these markets and believe reform is needed lets not destroy the worlds best capital markets. We do not disagree with the intent of the Volcker Rule. If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that wont jeopardize a nancial institution, we agree. And we believe there are many ways to accomplish this: by holding proper capital, by insisting on proper liquidity, by proper marking of positions, by proper reporting of risk, by constantly turning over the risk in inventory positions as appropriate for the type of security trading in illiquid securities will have less turnover than trading in government securities and by making sure that most trading is customer driven much of the trading the Street does with itself is effectively to syndicate out unwanted risk, which is no different from loan syndication. But by its nature, market making requires that traders, in order to facilitate client business, take positions in inventory that they hope to sell later. The reader should understand that loans, a traditional bank function, are proprietary, illiquid and risky by their nature but that doesnt make them bad. And most banks that have gone bankrupt did so by making bad loans not by trading. Loans and market making both serve a critical function: nancing the American business machine.

The Volcker Rule and derivatives rules need to be formulated in such a way as not to severely inhibit American banks ability to compete and serve clients. If the Volcker Rule or the derivatives rules are written in a way that constrains our ability to actively make markets or to competitively provide derivatives to our clients, our future will not be as bright as it could be. For both rules, one of the key questions is how they will apply to business conducted outside the United States. We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition. Not only would we be unable to compete effectively in Europe, Asia and Latin America, but much of the business that we currently do in America (with investors or corporations) likely will move to foreign jurisdictions because our competitors will be able to offer a better deal. No matter how much our clients may like us, they will (and should) move their business if they get better pricing elsewhere. In any case, we are well-positioned to be a winner in the investment banking business. While we do believe that there will be some large-scale changes affecting the business driven by both regulation and innovation J.P. Morgan has the breadth we are one of the top players in almost all of the markets that we deal in and necessary economies of scale to emerge as a winner.

36

 V I I I . W H Y WOULD YOU WA N T TO OWN T HE STOC K ?

With record earnings, top three positions in each of our major businesses and clear paths to growth, why hasnt the stock done better? There are many issues that are causing investors concern, creating legitimate reasons for why bank values are depressed. Our stock closed the year at $33.25, lower than it was ve years earlier. Over that time period, we underperformed the Standard & Poors Index by 22% although we outperformed the Bank Index* by 41%. (As of March 15, 2012, at the time I am writing this letter, the stock has recovered to $45 a share, and these two numbers would be a 7% underperformance and a 60% outperformance, respectively). In the beginning of this letter, I mentioned that we are buying back a substantial amount of stock despite all the issues facing our company. Given these issues, we feel we owe you an explanation about why we are doing this and how we view the stock.

Ongoing anger at banks, which can lead to even more regulation and litigation Increasing global competition from large banks and from less regulated shadow banks These issues are real and substantial. Regarding the rst three issues, we have an abiding faith that the United States will recover, interest rates will normalize and housing will get better. Were already starting to see some hopeful signs. We also believe we are reserved substantially for mortgage litigation (as weve already described). Much of the uncertainty around regulation will be resolved over the next 12-24 months. In my opinion, only two regulations materially can hurt our competitive ability (the Volcker Rule and the derivatives rules, which I spoke about in the last section). We believe they both will be properly resolved in a way that will allow us to compete fairly. We also believe there will be a lot of unintended consequences as a result of the complexity and interplay of all the regulations. And while I have expressed my concerns on behalf of the consumer, the industry and the country my sense is that JPMorgan Chase could benet from as many unintended consequences as we will be hurt by them. This, however, may not be true for some of our competitors. Finally, it is possible that we may be required to hold more capital than our main competitors, but we still believe we will nd ways to manage both our capital and our businesses such that we earn adequate returns. As all of these issues are resolved, we will be left with a stronger and more competitive company, our earnings will be higher, our industry will be growing and our future will be bright.

There are signicant issues affecting the stock valuation but they will resolve over time
Banks do face a plethora of difficult and potentially damaging issues. Since the crisis, we have met with many bank investors who have said, Bank stocks are uninvestible, and they cite the following reasons: High economic uncertainty, a weak recovery in the United States and large potential problems in Europe A low interest rate environment causing reduced margins The continued poor housing market in the United States Ongoing litigation around mortgage securities The large amount of regulation, including much higher capital and liquidity standards and the fear that given so much capital and regulatory constraints, we wont be able to earn an adequate return on our capital

* Excluding JPMorgan Chase

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Why we bought back the stock and how we look at stock value
Our tangible book value per share is a good, very conservative measure of shareholder value. If your assets and liabilities are properly valued, if your accounting is appropriately conservative, if you have real earnings without taking excessive risk and if you have strong franchises with defensible margins, tangible book value should be a very conservative measure of value. And we have substantial, valuable intangibles. Our brand, our clients, our people, our systems and our capabilities are not replicable even if I gave you hundreds of billions of dollars to do it. We have many businesses that earn extraordinary returns on equity because there is very little equity involved; e.g., much of our asset management business, our advisory business, parts of our payments businesses and others. Many of our assets would sell at a substantial premium to what currently is on the books; e.g., credit card loans, consumer branches and others. To be honest, some also would sell at a discount vs. what theyre on the books for though many of these assets or loans will give us the cash ow return we expect and which normally are attached to a client where we earn a lot of non-loanrelated, highly protable revenue (i.e., cash management, etc.). The loan itself might sell at a discount, but the whole relationship would not. And, certainly, most of our businesses, if we sold them whole, would sell at a substantial premium to tangible book value. Our best and highest use of capital (after the dividend) is always to build our business organically particularly where we have signicant competitive advantages and good returns. We already have described many of those opportunities in this letter, and I wont repeat them here. The second-highest use would be great acquisitions, but, as I also have indicated, it is unlikely that we will do one that requires substantial amounts of capital.

We have huge capital generation. When you look out many years into the future, JPMorgan Chase should generate huge amounts of capital, and much of it will be hard to deploy. Unfortunately, the CCAR test restricts our ability to buy back stock because it looks at just two years of capital generation. So while we have less capital than the 9.5% that we currently believe we will need under Basel III, once we get there, we will be generating extreme amounts of excess capital. And our organic growth and acquisitions unlikely will be able to use it all. So buying back stock is a great option you can do the math yourself. Haircut our earnings numbers that analysts project and forecast buying back, say, $10 billion a year for three years at tangible book value. With these assumptions, after four years, not only would earnings per share be 20% higher than they otherwise would have been, but tangible book value per share would be 15% higher than it otherwise would have been. If you like our businesses, buying back stock at tangible book value is a very good deal. So you can assume that we are a buyer in size around tangible book value. Unfortunately, we were restricted from buying back more stock when it was cheap below tangible book value and we did not get permission to buy back stock until it was selling at $45 a share. Our appetite for buying back stock is not as great (of course) at higher prices. If you run the same numbers as above, but at $45 per share, buybacks would be accretive to earnings and approximately break even to tangible book value still attractive but far less so. Currently, above $45 a share, we plan to continue to buy back the amount of stock that we issue every year for employee compensation we think this is just good discipline. As for the excess capital, we will either nd good investments to make or simply use it to more quickly achieve our new Basel III targets. Rest assured, the Board will continuously reevaluate our capital plans and make changes as appropriate but will authorize a buyback of stock only when we think it is a great deal for you, our shareholders.

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Earnings and Diluted Earnings per Share 2006-2011

($ in millions, except diluted EPS)
$18,976 $17,370 $14,444 $15,365

Tangible Book Value per Share 2006-2011

$33.69 $30.18 $27.09

$11,728 $18.88 $4.00 $4.48 $4.33 $3.96 $5,605 $2.26 $1.35 2006 2007 2008 2009 2010 2011 2006

$21.96

$22.52

2007

2008

2009

2010

2011

Net income Diluted EPS

The tables above show our earnings per share and tangible book value per share over the last six years. Id like to make one last comment about our stock and your company. I view it as a great sign of strength that, in the worst nancial markets

since the Great Depression, your company could earn money, grow tangible book value, buy Bear Stearns and WaMu and expand our franchise.

C lOS I N G

Let me close by thanking our 260,000 employees. Day in and day out, they are the people who serve our clients, communities and shareholders with distinction and dedication. They make me very proud, and I am honored to be their partner.

Jamie Dimon Chairman and Chief Executive Officer March 30, 2012

39

One Chase
Working together as One Chase to serve our 50 million customers

From left to right: Gordon Smith, CEO, Card Services & Auto Todd Maclin, CEO, Consumer & Business Banking Frank Bisignano, Chief Administrative Officer and CEO, Mortgage Banking

We will remember 2011 as a turning point. Its the year we united across the Chase businesses to work toward becoming an industry leader in customer service. Shifting the focus of an entire business, let alone three, isnt easy. But we must do this because we know good products alone arent enough. We believe that outstanding service is the key to organic growth and long-term success for our franchise.

40

Why now? Chase has always offered a broad range of nancial products and services. In fact, 50 million customers rely on us for their banking needs. There are more than 23 million households with consumer and business banking relationships, and we have 65 million credit card accounts and 8 million mortgage and home equity loans. But historically, while consumers saw one sign out front Chase inside we sometimes operated like three separate businesses. We offer what we believe are the best products in the industry, but we werent always getting the service part right. Our customer service scores were in the middle of the pack, and thats not nearly good enough. So in 2011, we began the hard work of moving from a company organized around products to a company focused on our customers rst. We are on a journey to create an outstanding customer experience in everything we do, and we are calling this effort One Chase. What that means is always running Chase as one business for our customers, providing consistently great customer service at every contact. We are 100% certain that exceptional customer service is the key to growing revenue. We have a tremen-

We know were only at the beginning of a large-scale effort to improve customer service. It will be a challenge, but we think its ours to win.
dous opportunity to earn more business from our current customers. Chase customers who live within our branch network have more than $10 trillion in deposits and investments with our competitors. And they spend more than $300 billion annually on non-Chase-issued credit cards. Customers who say they are completely satised are 60% more likely to increase the number of Chase products they use, 26% less likely to switch banks and 61% more likely to recommend us to a friend. Affluent customers who are completely satised give us 52% more deposits and investments than those who arent. Were proud to say weve already made signicant progress. Heres how we have gone about it. First, we spent more time listening to customers comments and complaints. Leaders, including our market, district and region managers, gathered for a two-day meeting in May during which they pored over complaint letters and listened to calls. We also launched Begin Your Day with Our Customer, where the Executive Leadership team starts every day listening to customer calls. We learned a lot. We found that customers want to interact with people who genuinely care about helping them and are empowered to do so. When customers have issues that need to be resolved, they want to do so quickly and easily. Also, it builds lasting customer loyalty when an employee goes above and beyond what is needed. We sought out other companies renowned for service and asked them how they do it. We visited some of the best service providers we know, like The Container Store, The Home Depot, Southwest Airlines, Zappos, and Enterprise Holdings, the parent company of Enterprise Rent-A-Car, many of which are great clients of the rm. Even though their industries and regulatory frameworks are different from ours, we saw a commonality in their approach to customer service that was eye opening.

Every day, our 160,000 Chase employees are working to provide exceptional service to make sure our customers have the products and advice they need.

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Estimated Growth Opportunity

The business that customers are not doing with Chase represents a huge opportunity
($ in billions)

Satisfaction Rating for Chase Businesses Increased across the Board

(score in percentage)
80

($ in billions)

Deposit & Investment Balances*

Credit Card Spending*

Card1 Consumer banking 2 Mortgage originations2
75

70

> $10,000

> $300

65

60

With Chase With competitors

55 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11
1 Satisfaction represents a top ranking of a 4 or 5 on a ve-point scale 2 Satisfaction represents a top ranking of a 9 or 10 on a 10-point scale Source: Based on internal survey process

* Numbers are for 23 states with Chase branches Source: Internal JPMorgan Chase data

We learned that great customer service starts with great employees. You have to hire people who have a heart for service and truly care about helping people. Then you have to give them the power to do what they know is right for the customer. We also learned that common policies and processes, while important, arent the only things that create consistency in large organizations. Having a set of clear values and behaviors lets employees know where they stand and customers know what quality of service they will receive. From that, we dened a consistent set of behaviors across our businesses that will help every employee interacting with customers, no matter the situation. We are calling these Chases Five Keys to a Great Customer Experience. The Five Keys include

things like exceed expectations and own customer issues from start to nish. For the rst time, all 160,000 Chase employees understand whats expected of them and how they can provide the best possible experience for all our customers. Next we hit the road to hear from employees in person. No one knows better what customers are thinking than the people who see and speak with them every day. So we went on bus tours and road shows, holding town halls, barbecues and even rallies to meet as many people as possible across all of Chase. Everywhere we went, we asked employees to tell us what we can do to make the place better. And they did. We kept a log of everything we heard from employees the good, the bad and the ugly. That kicked off the most important phase of our work, taking all the suggestions and using them to transform our customer service. Were tracking 160

suggestions that weve gotten from the road. Thats in addition to the more than 400 changes weve made to improve the customer experience based on feedback from customers and employees. While we were on the road, we were inspired by our employees dedication and integrity and by their heartfelt desire to make their customers lives better. Were also working to make sure we continue to get the right people in the door by integrating customer service into our hiring process. In 2011, we created a net 18,000 jobs across Chase. Everyone understands the important role service plays in our business. Weve also changed the way we reward people to better align our incentives around customer service.

42

Chase customers can use more than 5,500 bank branches and more than 17,200 ATMs in 23 states, as well as online and mobile banking services.

And its not just the three of us who are engaged in this effort. All our senior managers are excited about the changes were making and are pitching in to get the work done. Weve created a combined Chase Executive Committee that meets regularly and two cross-Chase councils to solve problems quickly and put more senior focus on two critical areas: Customer Experience and Brand & Marketing. These two councils aim to take the best practices of each of our businesses and apply them to all. For example, were working to make sure experiences in our telephone Customer Service Centers are consistent. In 2011, we simplied our automatic voice menus and the process to reach an agent. We have implemented new training on cultural awareness and communication skills and are hiring people who genuinely want to help others. Were also simplifying how we talk with customers. Building on work started in Card Services, we adopted an industry-leading standard to create simple, easy-to-understand product disclosures. It sounds simple, and we

should have done it earlier. But were doing it now, leading the industry and creating happy customers. Customers are also beneting from new technology. Our mobile applications are making it easier for our customers to do business with us across channels. Our ATMs now speak 14 languages and accept deposits of multiple checks and cash without an envelope or deposit slip. Weve also set up a Twitter feed to help solve customer issues in real time. We are even more enthusiastic about whats ahead with technology. We are piloting self-serve teller machines with bigger screens and greater functionality. Theyll be able to dispense cash in multiple denominations for customers who simply want to get in and out of a branch quickly. We also plan to upgrade chase.com, incorporating feedback from customers on what they want to see. Were only at the beginning of this journey, but weve already made remarkable progress. Overall, customer satisfaction scores are up, in some cases signicantly, across Chase. Turnover is down, and the number of customer letters we receive commending our employees has increased dramatically.

The next great frontier in our industry is creating an outstanding customer experience, and no bank has really conquered it. We plan to do so. And we will. As a rm, when we set our minds to doing something, we do it. Were all consumers. We know what a great customer experience feels like and the loyalty it inspires in us. If we think like customers and focus on delivering the kind of experience we would like to have ourselves, we will build lifelong relationships. And stronger relationships will lead to more revenue and future earnings. So stop by a branch, give us a call or log on to chase.com. We think youll be excited by the changes you see and the outstanding service youll receive.

Gordon

Todd

Frank

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Retail Financial Services

Consumer & Business Banking

Its an exciting time to be a part of Chase. I became CEO of Consumer & Business Banking (CBB) this past July after almost 10 years as CEO of Commercial Banking. There we worked closely with the consumer side of the business and relied on our outstanding branch network and terric consumer bankers to serve our commercial clients. After more than eight months in this new role learning about the operations and products and meeting the dedicated people in this business, I more fully appreciate the power of our network. Our talented, caring and hard-working people, together with great products and channels, make Consumer & Business Banking a truly special part of the rm. 2011 Results: Solid Results in a Challenging Year Even in a difficult year for the industry, Consumer & Business Banking produced a strong return on equity of 40% in 2011. We had net income of $3.8 billion, a 4% increase from 2010 on revenue of $18.0 billion, up 2% from 2010. Our total average deposits increased 6% to $360.7 billion. Last year brought many changes to our business. One of the biggest was the implementation of the Durbin Amendment in the fourth quarter. This legislation, part of the broader Dodd-Frank nancial reform bill, caps the amount of money banks can collect from merchants who accept debit cards. We expect these changes to lower net income by $600 million on an annualized basis. While thats a big hit to our bottom line, I am not worried. I know we have a strong plan to grow the business by
44

focusing on serving our customers exceptionally well and providing great products that meet all of their nancial needs. Over the long term, well gain a larger share of their business by serving them better than our competitors, becoming the most trusted advisor to many. We will capture an increased share of our customers banking activities and continue to grow our business. A key to our progress has been our continued investment in branches, people, products and technology. And we never stopped investing, even during the darkest days of the nancial crisis. For this reason, we are well-positioned today. CBBs strong results in 2011 allow us to commit more resources to serve our customers. We hired more than 6,500 people in 2011, bringing our total number of employees to 88,540. We also promoted nearly 14,000 of our colleagues, giving them new skills and long-term career opportunities. We added 260 Chase branches, mostly in California and Florida. These new locations allow us to increase our lending to small businesses, offer more mortgages and renancings, and help more people manage their money through savings and investments. We also do our part to create economic growth by hiring local architects, contractors, builders and staff to assist us. Our Business Banking expansion is another way were supporting our communities with more loans and banking services. In 2011, the rm made $17 billion in new loans to small businesses, 52% more than the previous year. We were the #1 Small Business Administration lender for the second year in a row. Our average business deposits grew 12%, to $63

billion. Since the start of 2009, we have hired more than 1,200 Business Bankers to serve our more than 2.2 million small business customers. 2012 Priorities: Improve Service, Work to Become One Chase We set ourselves apart from the competition with strong leadership, careful risk management and continuous investment in our businesses. Our plan in 2012 is to excel at customer service, putting us further ahead of our competitors. We intend to be the rst national bank to be known for exceptional customer service. Our 160,000 Chase employees are fully committed to this goal and are already working hard to get us there. In my experience, good service always leads to more customers and revenue growth. If you are happy with the service you receive, it stands to reason that you will do more business with that company. In fact, the most protable hotels, airlines and retail stores are usually those that have a higher standard of service integrated into their culture, creating both satised employees and loyal customers who seek them out again and again. In a short time, weve made dramatic progress on providing customers with a great experience. Across CBB, customer satisfaction is up, complaints are down and our customers are moving more money to Chase. This is all great news, but it is a journey, and we still have a long road to travel. In addition to providing better service, we are developing more customized products that meet the different needs of our customers.

Some people are looking for a lowercost product for basic banking, while others are looking for complex investment advice or help with their businesses. Delivering an experience that wows, no matter what type of product or service, means getting to know each of our customers individually and learning whats important to them. For some people, it means making it easy to do transactions through technology and mobile devices. For others, it means offering experienced and proven investment advice to help grow savings. Well do this across a broad spectrum of products and channels. One example is our accelerated expansion of Chase Private Client (CPC), our banking and investment platform for affluent customers. Since we launched the rst phase of CPC expansion in July of 2011, the number of CPC households we serve has nearly quadrupled, and those households have grown their deposit and investment balances by $80,000 on average. In 2012, we will introduce a more affordable banking alternative designed for low- and middle-income

customers. We see a great opportunity to provide a low-cost banking solution with tangible benets, such as lower fees compared with the industry. We remain committed to expanding our branch network thoughtfully and strategically. We will continue to open locations in our key expansion markets, mainly California and Florida. The average Chase household visits a branch more than 15 times a year. And branches are good investments. Most break even within three years and contribute $1 million in pretax earnings after 10 years. They also expand our distribution for nearly all of JPMorgan Chases lines of business. For example:  About 50% of retail mortgages are originated in branches  45% of Chase-branded credit cards are sold through branches  In Treasury & Securities Services, about 30% of commercial dollars are deposited in branches Branches bring in about 20% of U.S. retail assets under management

 Commercial Banking clients account for 16 million branch transactions each year While the banking industry faces many short-term challenges, at Chase we feel strongly that no other bank is as well positioned to have the successes we will have in the long term. We have a strong brand, more than 5,500 community branches, industry-leading online and mobile offerings, and exceptional people. This solid foundation will allow us to create a great experience, invest in our business, become more efficient and develop customized products. Thank you for your investment in our company and for your condence in us all.

Todd Maclin CEO, Consumer & Business Banking

2011 Highlights and Accomplishments

More than 5,500 branches and more than 17,200 ATMs across 23 states serving 23 million households: #2 ATM network #3 in deposit market share #3 in branches Chase Private Client: Opened 246 Chase Private Client locations for a total of 262 nationwide More than 500 CPC bankers and advisors now serve nearly 22,000 clients More than 17 million active online customers; active mobile users increased 57% from last year to more than 8 million Overall customer satisfaction improved to 67% from 57% during 2011 Firmwide, we made $17 billion in new loans to small businesses in 2011, up 52% from the previous year. We were the #1 Small Business Administration lender for the second year in a row

Overall Satisfaction with Chase Customers who rate Chase a 9 or 10 on a 10-point scale
(score in percentage)
75 70 65 60 55

67%

57%
Jan 2011 Feb 2011 Mar 2011 Apr 2011 May 2011 Jun 2011 Jul 2011 Aug 2011 Sep 2011 Oct 2011 Nov 2011 Dec 2011

Source: Chase Relationship Survey

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Retail Financial Services

Mortgage Banking
We view 2011 as a dening year for the mortgage business. There is no question that the past several years have been extremely challenging for the industry and Chase, but I couldnt be more proud of the progress were making. In Mortgage Banking, we remind ourselves every day that every mortgage represents a customer and a home. 2011 Results: Improving Performance despite Continued Challenges While market conditions remained challenging for the mortgage industry, we made progress in several areas of our businesses and continued to tackle regulatory issues. Although credit losses and higher expenses continue to weigh on earnings, our new Production business made money for the year on strong renancing activity and lower repurchase losses. We also increased market share, becoming the #2 originator at the end of 2011, up from #3. Core Servicing (excluding legacy portfolio) was rmly protable. Real Estate Portfolio performance was better than the past two years as credit improved. This countered lower revenue from portfolio run-off. Our rst priority for 2011 was getting the best team we could on the eld. We recruited top talent from across the rm and the industry to make sure we had the right controls, processes, systems and technology. To help manage our portfolios, we tapped experts in risk management and capital markets from the Investment Bank. We also hired nance industry veterans with deep mortgage experience to ensure we meet all new regulations to the full letter of the law. With the right team in place, we made improving the customer experience a priority for all areas of Mortgage Banking. Customer complaints declined more than 60% from their May 2011 peak, and overall satisfaction improved to 67% from 58%. Chase was the top-ranked large bank in overall satisfaction in the J.D. Power and Associates 2011 U.S. Primary Mortgage Origination Satisfaction Study. But 2011 wasnt without its challenges. In April, banking regulators issued Consent Orders to large mortgage servicers, including Chase, requiring changes to how residential mortgage loans and foreclosures are handled. These changes include dedicated borrower assistance when customers are facing foreclosure. In February 2012, Chase and four other large mortgage servicers entered into a settlement with federal agencies and state regulators, including the Department of Justice and state attorneys general from the 50 states. The agreement provides money directly to states, as well as to borrowers struggling to stay in their homes, and addresses issues related to mortgage servicing and originations. Because of the regulatory actions and continued stress in the housing market, we spent more on operations, people and legal expenses. Getting these issues behind us is good for the housing market recovery and good for Chase. We can now redirect the focus and resources consumed by the settlement toward growing our business and serving customers. The changes we are making this year, which we believe go above and beyond any government requirements, will make us more customer oriented and a better place for employees to work. 2012 Priorities: Homeowner Assistance, Expense Controls and Shareholder Returns The entire Mortgage Banking team is committed to improving our operations, processes, technology, management and controls. Three principles will continue to guide us in this business: helping people stay in their homes, delivering a sustainable profitability model, and managing our business responsibly. We will continue our work to help people buy and afford homes. Weve already made huge strides in our borrower assistance efforts and in preventing foreclosures, which we view as a last resort. Weve reduced payments for struggling homeowners by about $1 billion annually. Since 2009, Chase has prevented about 750,000 foreclosures, which is twice the number of foreclosures that weve acted upon. During the past two years, we opened 82 Chase Homeownership

46

Centers across the country, where we meet with customers one-on-one to discuss their options and foreclosure alternatives, including loan modications. Six of those centers are near military bases, staffed by loan counselors trained in military issues. Commitment to the Business We are committed to the mortgage business and committed to returning the business to protability over the long term for the rm and our shareholders. We believe normalized earnings should be about $2 billion, and we have the team and a plan to get us there.

Were continuing to hire loan officers and introduce technology that will allow us to more closely monitor the application process, making it easier for our customers to purchase and renance homes. This year, we expect a modest recovery in the purchase market and continued strong renancing activity, and Im condent well be able to earn more business. A mortgage is more than a loan; its a lasting connection to a customer. Helping customers achieve and maintain homeownership is a responsibility and a great privilege. I am proud of the work we are doing to rebuild this business and I am honored to have this oppor-

tunity to help Americans affected by the crisis. While we are far from nished, our employees are on a mission to help customers purchase and remain in their homes. Its a mission I know we will accomplish.

Frank Bisignano, Mortgage Banking CEO, Chief Administrative Officer, JPMorgan Chase

2011 Highlights and Accomplishments

Ranked #2 in originations at year-end, #4 in home equity originations and #3 in servicing: Increased retail market share to 12.6%, up 28% from 2010 and the largest increase among the top 10 lenders Ranked #5 in the J.D. Power and Associates 2011 U.S. Primary Mortgage Origination Study, the highest rating for a large bank and the biggest improvement of any lender Increased loan officers by 23% in 2011 Funded approximately 670,000 mortgages for home purchases since 2009 Reduced customer complaints by more than 60% from their peak in May 2011 Serviced 8 million mortgages and $1.2 trillion in volume
75 75 70 70 65 65 60 60 55 55 50 50 45 45 65% 62% 57% 71% 68% 65% 62%

Prevented twice as many foreclosures as were acted upon: Met with more than 273,000 struggling homeowners and held 1,800 borrower outreach events Increased foreclosure alternatives 22% year-over-year Completed 452,000 mortgage modications since 2009

Completed more than 1 million mortgage renancings since 2010 Increased modications by 38% per month and short sales by 43% per month Consolidated three servicing platforms, providing one Chase system and one way to service customers

Received approval from the Office of the Comptroller of the Currency on our plan to address Consent Order requirements

Overall Satisfaction with Mortgage Banking Percentage of top 2 box customer satisfaction has Customers who rate Chase a 9 or 10 on a 10-point scale trended positively throughout Mortgage Banking
(score in percentage)

48% 2Q11 2Q11 3Q11 3Q11 4Q11 4Q11

Source: Based on internal survey process

Default Borrower Assistance Originations Servicing

47

Card Services & Auto

After a difficult few years following the nancial crisis, Card Services & Auto is now in an exciting time of growth. We made investments in new products, services and technologies that are paying off in higher market share and an improving customer experience. The challenging economic environment makes what we do, helping customers manage their nancial lives, more important than ever. Since 2009, we increased new accounts by 25%(a) across our cobrand and Chase-branded products by offering the right products and services to people at the right stage of their lives. Sales from these new accounts were up an impressive 98%(a) over the same two-year period. We continued to see encouraging trends in increased consumer spending in 2011, a sign of what we hope is a more sustained economic recovery. Across all merchant categories, fourth quarter 2011 spending was up 14%(b) from the prior year, with higher-than-average increases in dining (20%)(b) and travel (15%).(b) We also added new features to our products across segments: We improved our rewards products, including Chase FreedomSM and Chase SapphireSM, providing even more value. We launched Chase Sapphire PreferredSM, giving customers two points for every dollar they spend on dining and travel, along with other new features and benets. Our co-brand partnerships focused on some of the worlds top brands, like Hyatt Hotels Corporation and The Ritz-Carlton Hotel Company. We also added pay with points functionality to our Amazon.com Rewards Visa card so customers can use their rewards instantly. We extended our long-standing relationship with United Airlines as the sole issuer of the United MileagePlus co-brand card. Together, we introduced the United MileagePlus Explorer card, which targets rewards-oriented consumers with new travel benets such as priority boarding, airport lounge passes and a free checked bag. As the first U.S. bank to offer credit cards with embedded microchips, we made it easier for our customers who travel internationally to use our J.P. Morgan Select, J.P. Morgan Palladium, British Airways and Hyatt cards. Along with a magnetic stripe, the cards feature EMV chip-with-signature technology, making them extremely difficult to copy. The technology is widely used in Europe, Canada, and regions of Africa and Asia, among other locations. Chase BlueprintSM, our program that allows cardholders to manage how they pay down balances, continues to attract customers who want more control over their personal nances. With more than 2 million Blueprint plans in place, customers are paying down their balances twice as fast as average consumers. We launched JotSM, a new mobile application created exclusively for InkSM from Chase, to help cardholders organize and track business expenses. 2011 Results: Strong Earnings, Lower Risk Card Services & Auto ended 2011 with improvements across all consumer segments. Total outstanding loan balances are lower than a year ago, but the portfolio has shifted toward customers with a lower risk prole. This is consistent with our strategy to focus on lifelong, quality relationships with engaged customers. Across our business, net income was $4.5 billion, up 58% from $2.9 billion in 2010. Pretax income was $7.5 billion, also up 58% from $4.7 billion in 2010.(c) The improvement was driven by a lower provision for credit losses. We opened 8.8 million(d) new credit cards for consumers and businesses in 2011. Card Services sales volume for the year was 13%(e) higher than 2010, and our market share continues to grow. General purpose credit card (GPCC) share increased 151 basis points(f) from 2009 to 2011. The higher sales are beginning to translate into higher Card Services loans outstanding: Loans grew 1% quarter-over-quarter in the third quarter of 2011 and 4% in the fourth quarter of 2011.

48

Chase Paymentech and Auto continued to perform well in 2011. At Paymentech, bank card volume continued to outperform the industry. The number of transactions increased 19% from 20.5 billion to 24.4 billion. Chase branches are acquiring new Paymentech merchants, with more than 34% of new signings coming through branch referrals. Auto, which joined our business in July, had its best year ever. 2012 Priorities: Innovation, Superior Service as Part of One Chase For 2012, we are once again targeting 20% return on equity. We will continue our focus on customers, rewards, brand and execution in 2012 with an emphasis

on mobile and online innovation and the One Chase customer experience. First, innovation continues to be a top priority for everyone, especially in mobile and online. Im pleased to report that chase.com is the #1 most-visited banking website. Our customers spent more than $85 billion online during 2011, making Chase one of the largest e-commerce players in the United States. Online is already our most important channel by far. Second, we are condent that we have the best products in the market. We need to ensure that we also provide the best service in the industry. Delivering a consistently outstanding experience for customers across Chase is the best way to sustain growth. We are making excellent progress, but we still have room to improve. In Card

Services, our overall customer satisfaction increased by 10 percentage points in 2011. I am extremely encouraged by the success weve had and am even more enthusiastic about the future of this business. As we continue to execute on our strategy, we can deliver strong performance and value for our shareholders over the long term by focusing on the needs of our customers.

Gordon Smith CEO, Card Services & Auto

2011 Highlights and Accomplishments

Credit card loans climbed in the second half of 2011 and rose 4% in the fourth quarter from the previous quarter Card Services sales growth of 13%(e) year-over-year in 2011 on top of a strong 2010 indicates sustained and robust growth Chase Paymentech is the thirdlargest merchant acquirer in the United States and processed 24.4 billion transactions with 18% yearover-year growth in sales volume Credit card net charge-off rate declined from 9.73% in 2010 to 5.44% in 2011. Similarly, delinquency rates also came down United MileagePlus and Southwest Rapid Rewards were added as Ultimate RewardsSM point transfer partners. Chase Sapphire PreferredSM, Ink PlusSM and Ink BoldSM are the only cards in the marketplace that allow instant point transfers to MileagePlus and Southwest Rapid Rewards, as well as other frequent traveler programs Opened 8.8 million(d) new credit card accounts for consumers and businesses $21 billion in auto originations in 2011

Sales Volume
($ in billions) 350
(a) Excludes terminated partners (b) Based on internal Chase data; excludes WaMu, International and private label portfolios

325

$344

300

$313 $294

(c) Excluding the reduction in the allowance for loan losses, pretax income increased from a loss of $1.4 billion to income of $3.6 billion with an upward trajectory each quarter in 2011 (d) Excludes Commercial Card portfolio

275

(e) Excludes Kohls and Commercial Card portfolios (f) GPCC includes consumer, small business and charge card but excludes commercial and private label cards; Chase data excluding WaMu

250

2009

2010

2011

49

Commercial Banking
while delivering very strong nancial results despite persistent economic challenges and historically low interest rates. 2011 Results: Another Record Year In 2011, we delivered record revenue of $6.4 billion and record net income of $2.4 billion, up 6% and 14%, respectively. Deposits grew by 26% over 2010, and loans were up 13% with all business units generating loan growth. Our credit performance continued to improve with nonperforming loans and net charge-offs now trending to pre-crisis levels. We are proud to have extended $111 billion in new and renewed nancing to our clients in 2011, up from $92 billion in 2010. In 2011, Corporate Client Banking, which serves Commercial Bankings larger corporate clients, grew loans by 43%, and Middle Market Banking increased loans by 17%. These loans helped our clients, including more than 700 government, not-for-prot, healthcare and educational institutions, achieve their business goals such as purchasing equipment and owner-occupied real estate, renancing existing debt and funding capital expenditures. Our Community Development Banking efforts brought over $900 million in capital to underserved communities through New Markets Tax Credit investments and helped create and retain more than 9,500 units of affordable housing in the United States. We also made signicant investments in our business to differentiate our capabilities, deliver exceptional service to our clients, and support our foundation for growth. We hired employees, opened offices both domestically and abroad, and invested in our technology and infrastructure, all while reducing our overhead ratio to 35% and increasing our return on equity to 30%. In short, 2011 was a terric year. 2012 Priorities: Organic Growth We enjoyed growth across Commercial Banking in 2011, but our four key growth areas remain an important focus for 2012. U.S. Market Expansion In May 2011, only two years after we began our Middle Market expansion in regions where WaMu had a presence, we achieved positive operating margin in those markets and we have signicantly more revenue potential. California and Florida remain our biggest opportunities, and we continue to gain share in those states. We also are expanding in areas outside our retail branch network with an aim to be a leading commercial bank in 40 of the top 50 metropolitan areas. I am proud of the way we are expanding we are building strategically, with patience and discipline, while maintaining our culture and credit acumen. Investment Banking Our partnership with the Investment Bank remains a tremendous differentiator, generating a record $1.4 billion in revenue in 2011. With additional dedicated resources in place and a partnership that now is stronger than ever, we are nding new ways to scale the rms capital markets, risk management and advisory solutions to more of our Commercial Banking clients. I am condent that we are on track to meet our goal of $2 billion in gross investment banking revenue within the next ve years.

When I joined the Commercial Banking team a year and a half ago, I had the good fortune to join an organization with an outstanding track record; a tremendous culture; and a focused, long-term strategy a legacy of Todd Maclins nine years of leadership. Above and beyond Commercial Bankings bestin-class franchise, I am continually impressed by the depth of so many of our long-standing client relationships and the difference we make in our communities. As a business, we are guided by our objectives to expand and deepen client relationships, invest consistently in our franchise, and maintain our risk and expense discipline. As bankers, we operate according to the fundamental principles of the rm, which include putting our clients rst and adhering to the highest standards of integrity. This combination helped us add clients and expand geographically in 2011
50

International Banking We are observing a powerful trend in overseas activity among U.S.-based small and medium-sized enterprises. We now have more than 2,500 U.S. clients using our international treasury and foreign exchange solutions. This number has grown approximately 20% each year since we launched this business six years ago, and I believe it will continue to grow. With our rms resources and capabilities, we are one of the few banks able to meet the needs of these companies as they expand overseas. Commercial Real Estate Our real estate businesses reported sharp increases in loan production in 2011 with Commercial Term Lending up to $8 billion from $2 billion in

2010 and Real Estate Banking up to $6 billion from $1 billion in 2010. Market fundamentals are favorable, and our portfolio is in excellent shape. While we expect our Commercial Real Estate businesses to continue performing well, we, as always, are monitoring market conditions carefully to manage the cyclical risks inherent in real estate lending. We have strong momentum in each of these four areas, and we are condent of our ability to meet our growth targets. Nevertheless, growth should not come at the expense of discipline. We will continue to operate our business responsibly and transparently while relentlessly managing our controls and operational and reputational risks. These are central tenets of our operating philosophy.

As was the case in 2011, the market environment likely will remain challenging in 2012, and competition for the best clients again will be erce. However, our strong national leadership team, skilled and professional employees, and the scale of the JPMorgan Chase platform paired with our local delivery capabilities give me condence that Commercial Banking will sustain its outstanding track record. I am proud to be on this team and believe that our best days are ahead.

Douglas Petno CEO, Commercial Banking

2011 Highlights and Accomplishments

Produced record net income of $2.4 billion, grew deposits 26% year-over-year to a record balance of $175 billion and increased loans 13% yearover-year with six consecutive quarters of loan growth Extended more than $1.7 billion of new loan and lease commitments to clients through the Lending Our Strength program Increased Commercial Banking M&A fees by 57% over 2010 Won more than 110 bookrunner roles on syndicated lending transactions Added more than 1,200 Middle Market clients Increased International Banking revenue by 41% over 2010 Integrated the Citi portfolio acquisition into the Commercial Term Lending business unit Achieved the highest return on equity in our peer group(a) at 30% Achieved the lowest overhead ratio in our peer group(b) at 35% and continued to outperform peers in credit quality with the lowest net charge-off ratio and nonperforming loan ratio Maintained our ranking as the nations #1 multifamily lender(c) and within the top three middle market syndicated lenders(d) Recognized for our leadership in Middle Market Banking by earning Greenwich Excellence Awards in nancial stability, investment banking and international banking(e) Steady Growth in Revenue and Protability Driven by Increase in Loans and Deposits
($ in billions)

Loan Balances (end of period)

Deposit Balances (average)

% +13
$98.9
$3.8

$112.0
$4.0

6% +2
$138.9

$174.7
$2.8 $12.2 $24.1

$38.6 $37.9 $8.2 $7.6 $11.7 $16.7

$2.2 $11.5 $16.4

$135.6 $108.8

$44.4 $37.9

(a) Return on equity peer average reects Commercial Banking equivalent segments at BAC, KEY, PNC, USB (b) Peer averages include CB-equivalent segments or wholesale portfolios at BAC, CMA, FITB, KEY, PNC, USB, WFC (c) Federal Deposit Insurance Corporation, 12/31/11 (d) Thomson Reuters, 2011 (e) Greenwich Associates, 2011

2010

2011

2010

2011

Middle Market Banking Commercial Term Lending

Corporate Client Banking Other

Real Estate Banking

51

J.P. Morgan
Seamless Delivery

From left to right: Jes Staley, CEO, Investment Bank Mary Callahan Erdoes, CEO, Asset Management Mike Cavanagh, CEO, Treasury & Securities Services

J.P. Morgan is one of the nancial industrys outstanding global wholesale franchises. As leaders in each of our businesses the Investment Bank, Asset Management and Treasury & Securities Services we serve many of the worlds most successful corporations and individuals. Large multinationals and emerging companies, institutional investors and individuals all turn to J.P. Morgan for capital, insights and solutions to address the opportunities and challenges that arise in todays rapidly evolving global economy.

52

Over the past decade, despite global crises, world commerce has evolved at a remarkable pace. Today, multinational corporations operate in many large, new markets that, in aggregate, dwarf the revenue potential of the mature economies in Western Europe and the United States; developing market nancial assets account for 20% of the global total after years of double-digit increases. Through sustained investment and strong execution, J.P. Morgan has developed unparalleled scale and capabilities to partner globally with clients to enable them to realize diverse nancial and strategic goals. Last year, while serving more than 25,000 institutional clients headquartered in 170 countries and over 5 million individuals, we cleared 20% of the worlds dollar transactions, raised more debt and equity capital than any other rm ($430 billion), provided custody for nearly $17 trillion of assets and supervised nearly $2 trillion of investment assets. J.P. Morgans aggregate revenue totaled $43.5 billion,* roughly half from international sources, mirroring worldwide trends.

Although we already are well positioned for the future, we are adding new dimensions to our capabilities. For example, more Investment Banking clients are using the expertise weve developed in Treasury & Securities Services to streamline their own treasury activities to achieve greater efficiency in diverse operating and regulatory environments around the world. We are taking bold steps to improve coordination of complementary activities across our lines of business that will grow revenue and strengthen customer relationships. The Global Corporate Bank, a partnership between Treasury & Securities Services and the Investment Bank that began in 2010, targets approximately 3,500 corporate, nancial and public sector clients for intensive coverage by a dedicated team of banking and treasury professionals. The Global Corporate Bank is on track to deliver more than $1 billion in annual pretax earnings by 2015. Similar ventures are under way involving Asset Management, Commercial Banking and other lines of business. In 2011, revenue synergies attributed to these activities were approximately $3 billion in the Investment Bank, $1 billion in

Asset Management and $3 billion in Treasury & Securities Services, and, in our opinion, weve just scratched the surface of whats achievable. In addition, we launched another strategically important initiative across our businesses Value for Scale to eliminate unnecessary complexity, improve communication, and optimize shared and shareable resources. This promises substantial cost savings, further focuses attention and resources where they are most productive, and greatly enhances the quality of our work and client effectiveness. Although weve really just begun, its our belief that were on a path to transform the way global wholesale banking business is conducted, delivering better results for our clients and ultimately more prots for our shareholders. This ambition wouldnt be possible without the efforts and shared vision of the 72,000 extraordinary employees throughout our organization whom we are privileged to lead.

Jes

Mary

Mike

J.P. Morgan Revenue*)

9% growth EMEA 29% Jointly cover 1,800 clients with Commercial Banking (CB) Robust client referral to and from Asset Management $3 billion

Revenue Synergy Examples Investment Bank Asset Management Treasury & Securities Services

year-over-year

North America 53%

Manage $120 billion of assets for CB clients Manage $90 billion of assets for Treasury & Securities Services clients

Asia 13%

78% of top clients shared with Investment Bank 75% of CB clients use Treasury Services products

Latin America 5%

2011 total: $43.5 billion

* Includes Investment Bank, Asset Management and Treasury & Securities Services

$1 billion

$3 billion

53

Investment Bank
In 2011, J.P. Morgan enabled approximately 21,000 issuer and investor clients in over 130 countries to raise capital, invest and implement each clients unique nancial and corporate strategies. Successful execution, risk management and expense discipline produced near record net income for shareholders. We also maintained or improved our leadership position in most major markets and regions. We achieved these strong results even while market sentiment gradually deteriorated from cautious optimism in the rst half of 2011 to pronounced anxiety by year-end, affecting transaction volumes and backlogs. The U.S. debt ceiling impasse, sovereign downgrades, Eurozone instability, a developing markets slowdown and Mideast turmoil are a few examples from the growing list of major issues facing governments and investors that undermine condence in the world recovery. Frenetic nancial rulemaking by authorities in diverse venues around the globe also added a special dose of uncertainty to markets. 2011 Results: Strength in a Challenging Year The Investment Bank (IB) once again made a signicant contribution to rmwide results, delivering revenue of $26 billion with net income of $6.8 billion our second best year ever. This 17% annual return on equity (15% excluding Debit Valuation Adjustment (DVA) the effect of wider JPMorgan Chase credit spreads) is in line with multiyear targets that were set some time ago.
54

Our client ow business, relative to risk, has never been better. Equities, Fixed Income and Commodities contributed more than 75% of IB total revenue. At $20 billion, aggregate revenue in these businesses is nearly double pre-crisis levels. Equities, Commodities and Electronic Equities all achieved near or record revenues. In addition, our Fixed Income franchise retained its #1 revenue ranking for the second year in a row. The acquired Sempra assets were fully integrated into our Commodities platform; were now one of the top three rms in this protable and highly competitive global industry. In addition to strong nancial results, we made progress on several strategic objectives. We eliminated regional silos and appointed a global head of Investment Banking to manage industry coverage, capital markets origination, and mergers and acquisitions worldwide. This move accelerates collaboration, streamlines reporting, and greatly improves resource allocation, client service and talent development. Internationally, wholesale activities across lines of business Asset Management, Treasury & Securities Services (TSS) and Investment Banking now are supervised through an International Steering Committee chaired by Mary Erdoes, Mike Cavanagh and myself. The Global Corporate Bank (GCB), less than two years old, at year-end achieved incremental international revenue exceeding $600 million. The GCB targets a subset of multinational clients for enhanced coordina-

tion and cross selling of TSS and IB products by a dedicated cadre of 250 bankers in offices around the world. To better serve the needs of clients in Europe and the Middle East, we opened branches in Poland and Qatar, expanded banking capabilities in Saudi Arabia and launched an EMEA Prime Brokerage platform that created a solid pipeline of new clients. In Asia, our joint venture with China Securities yielded impressive results in its rst year. The joint venture launched its business operations, completed its rst sole underwriting and was awarded Foreign Bank of the Year by China Business News. The IBs technology Strategic Reengineering Program generated signicant efficiencies and savings. Since 2008, weve decommissioned 28 overlapping systems, realizing direct run rate savings of roughly $175 million. Weve retained 98% of our top talent while managing through industrywide adjustments in the structure and level of compensation. Our scale, sustained investments in career development and franchise strength are strong advantages in the war for talent. The Investment Banks compensation to revenue ratio is one of the best in our industry. 2012 Priorities: Clients, Value for Scale, Regulatory Leadership A vigilant focus on clients longterm interests always has been our top priority. We are nding new ways to harness the resources at JPMorgan Chase for Investment Bank customers.

We recently launched a Value for Scale initiative that will centralize areas of expertise that support TSS and the Investment Bank. By merging teams and streamlining systems, we improve efficiency and enhance employee specialization. Most important, our clients strategic objectives gain greater visibility across the rm, allowing professionals to share their knowledge and experience more effectively and to create additional value. Our partnership with Asset Managements Private Bank improves coverage of private and closely held rms and their owners. This opportunity, similar in concept to the GCB, will lead to

increased activity with thousands of clients worldwide. Close cooperation between the IB and the Private Bank also will strengthen the rms presence in growth markets where family-owned rms predominate. As rulemaking moves toward implementation in the United States and Europe, we will add more resources to expand our already considerable engagement with regulators to help them achieve the best outcome for clients and markets. Our industry will adapt to new rules and capital costs. Markets will recalibrate the pricing of risk, and, together with clients, we will nd the most efficient path toward recovery through the thicket of

global challenges. We are fortunate to be able to serve during such an exciting and transformative era. Few, if any, other global rms have commensurate nancial strength, talent and tools. In this environment, our resources will be particularly useful to clients and being a part of J.P. Morgan will be especially satisfying for all who work here.

Jes Staley CEO, Investment Bank

2011 Highlights and Accomplishments

2,500 sales professionals, 2,000 traders, 2,000 bankers and 800 research analysts serve clients around the world Executed 271 equity transactions,(a) including lead bookrunner on Mosaics $7.5 billion equity offering largest ever U.S. natural resources equity offering Advised clients on 332 announced mergers and acquisitions globally, including six of the years 10 largest transactions, and achieved 18% market share(a) 110 trading desks around the world execute, in an average quarter(b): 5 million foreign exchange spot/forward transactions 30,000 interest rate swaps 10 billion North American equity shares Global Corporate Bank increasing revenue with multinational corporations(b): IB Markets: +29% year-over-year Treasury Services: +22% yearover-year Market leadership in Banking, Equities and Fixed Income: Raised or provided $68 billion in capital for U.S. state and local governments, Top three rm in 13 of 16 major not-for-prots, healthcare (b) business segments organizations and educational Retained #1 global IB fee ranking, institutions(b) with 8% market share(a) For second consecutive Helped clients raise $430 billion year, won U.S. Equity of capital globally(a): and Fixed Income polls in Institutional Investors More than $390 billion in debt All-America Research survey Around $43 billion in equity Led the market in arranging or lending approximately $440 billion in 1,204 transactions(a)

Over the last 12 quarters, J.P. Morgans average markets revenue has been 30% greater than its peers, with 40% less volatility over the same period Average Revenue(c)
($ in billions)

Revenue Volatility(c) (d)

30% greater
$5.2 $3.9 40%

40% less

(a) Dealogic (b) Internal reporting

25%

(c) Revenue excludes DVA; includes eight IB peers (d) Volatility equals standard deviation as a percentage of the period average

Peers

J.P. Morgan

Peers

J.P. Morgan

55

Treasury & Securities Services

In 2011, Treasury & Securities Services (TSS) made solid progress toward a long-term performance target that is unchanged a 25% return on equity (ROE), which equates to a 35% pretax margin. Although the operating environment continues to be a serious challenge for our protability, I am proud of what we accomplished in 2011, and I could not be more condent about where the business is headed. J.P. Morgan is a leading global provider of both treasury and securities services and we have the capacity to continue investing to advance that market leadership as demand for these services grows. From any angle, this is a great business to be in. We provide essential nancial functions like trade nance and securities servicing that keep global commerce and nancial markets running. The business generates steady earnings, good margins and high return on capital. These are businesses that are built over decades and require huge scale making for high barriers to entry. TSS delivers services that are integral to the development of strong, long-term client relationships across the rms institutional businesses. In fact, nearly 80% of TSS top clients are shared with the Investment Bank underscoring this unique attribute of the J.P. Morgan franchise. Our expanding partnership with the Investment Bank already is yielding good results, and theres a great deal more potential to be realized. From a rmwide perspective, TSS is a signicant source of liquidity, providing an average of roughly $320 billion in deposit(a) balances in 2011. 2011 Results: Revenue and Net Income Up, with Meaningful Increase in International Revenue In 2011, TSS reported net income of $1.2 billion, up 12% from 2010, and a return on equity of 17%. Net revenue was nearly evenly divided between each business: $3.9 billion in Worldwide Securities Services (WSS) and $3.8 billion in Treasury Services (TS). Our investment in global expansion yielded positive results: International revenue rose 17% and comprised 55% of total revenue, up from 49% in 2010. In WSS, 62% of revenue was generated outside North America, and 47% of TS revenue came from outside North America. These increases resulted from expanded capabilities in more than 20 countries and the efforts of our 250-strong (and growing) team of Global Corporate Bankers who drive coordinated client planning with the Investment Bank and Asset Management. I feel good about this performance, especially given our continued investment in capabilities and the low interest rates that compress the spreads we earn on client balances. But these results are still below our potential to earn, given the inherent strengths of the business. Im condent that we can and will do better as we pursue our growth and efficiency priorities. 2012 Priorities: Continued Investment and Collaboration to Propel Global Growth Our franchises are strong and well-positioned to capture the opportunities presented by macroeconomic trends. In TS, continued growth in crossborder commerce and trade is driving demand for global cash management and trade nance capabilities. In WSS, continued development of international capital markets and growth in cross-border investment will increase investor client needs for global custody and other securities services. Our collaboration with the rms other wholesale businesses distinctively positions J.P. Morgan to support our clients global objectives. For example, our partnership with the Investment Bank enables us to provide custody for its prime brokerage clients and trade nance

(a) Deposit balances for TSS are shown on an average basis and include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs

56

for its commodities clients. And while capital and other regulatory requirements are forcing some competitors to rethink their business strategies, our balance sheet and capital strength allow us to focus on our clients, providing credit where needed while we invest in our own business to better serve theirs. Our continued investment in international expansion which is aligned with the aggressive global growth agendas of our clients presents an opportunity for signicant growth over the long term. TSS has relationships

with 84% of global Fortune 500 companies, yet we have plenty of room to deepen our partnerships with them. Our disciplined efforts begun in 2011 to eliminate non-core, non-strategic businesses, manage expenses better and be more deliberate about client selection will allow us to continue to invest in our business and to improve clients experiences with us. We believe the combination of these factors plus interest rate normalization will enable us to reach our stated pretax margin target of 35% and 25% ROE. As markets and regulatory

environments continue to change radically and rapidly, TSS remains committed to providing the strength, stability and resources of our rm to enable our clients to succeed.

Mike Cavanagh CEO, Treasury & Securities Services

2011 Highlights and Accomplishments

Exceptional Client Franchise Treasury Services does business35 with 84% of Fortune 500 30 companies 25 Worldwide Securities Services does business with 86% of top 50 global asset managers
20 15 10 5 0 40

Treasury Services Highlights #1 global clearer of U.S. dollars Best Trade Bank in the World, Trade & Forfaiting Review, 2011 Best Transaction Banking Business in Asia Pacific, The Asian Banker, 2011 Global Bank of the Year for Risk Management, Treasury Management International, 2011 Worldwide Securities Services Highlights $25

Global Presence Treasury & Securities Services has roughly 28,000 employees in more than 50 countries 55% of TSS revenue was generated outside North America in 2011, up from 49% in 2010 Treasury Services conducts business in 66 countries; in 2011, international revenue grew 22% Worldwide Securities Services conducts business in 100 markets; in 2011, 62% of revenue was generated outside North America

International Growth TSS expanded its capabilities in more than 20 countries in 2011, including Japan, Russia, Saudi Arabia, the Nordic countries, South Africa, Mexico and Brazil TSS opened three new offices in 2011: Panama, Qatar and our sixth branch in China (Harbin) and received permission for another one in Suzhou Built trade finance capabilities in nine countries, including Brazil, Mexico and Japan Launched Direct Custody and Clearing in Brazil Trade finance loans rose 73% in 2011; 96% of trade assets are international

Trade Loans Up $16 Billion

($ in billions)

$40 30 20 10 0

73%

$37

Record $16.9 trillion assets 20 under custody $21.2 Ranked #1 of the five largest 10 providers, Global Custodian $10.2 Best 5 Global Custodian, Asian Investor, 2011
15

$21

2010

2011

Worldwide Securities Services 2009 2010 ranks #1 in Luxembourg and #3 in Dublin offshore fund centers
$80 60

57
40

Asset Management
For more than 175 years, J.P. Morgan Asset Management has been managing assets for institutions and individuals around the world. While 2011 presented many new challenges for investors, our approach remained the same: Rely on research, incorporate our collective years of experience in developed and emerging markets, and rigorously manage risks. As global markets and economies continue to become interconnected and clients increasingly require global solutions combined with local expertise, J.P. Morgan is uniquely positioned to be the rst call. Our teams in more than 30 countries bring together global macro and region-specic insights to help our clients for the near and long term. Our Investment Management and Private Banking franchises are built on a duciary-minded foundation that puts a relentless focus on highly disciplined investing and generation of long-term investment outperformance. Our time-tested portfolio management skills, combined with our companys capital markets expertise, fortress balance sheet and risk management culture, led clients to invest more with us this year than ever before, resulting in a record 2011. 2011 Results: Continued Momentum in a Challenging Environment On the whole, 2011 was a very strong year, but our results were even more gratifying in the context of a challenging geopolitical backdrop and volatile market environment. Some of the highlights include: Strong and Steady Financial Performance Asset Management produced record revenue of $9.5 billion, up 6%. While revenue growth came from almost every region and major asset class, it was particularly strong in our international and alternatives businesses, which were up 12% and 17%, respectively. Net income of $1.6 billion was down due in large part to continued investments in front office talent and new technology initiatives. Clients continued to put their condence in J.P. Morgan Asset Management, entrusting us with $53 billion in net new long-term assets for the year. We marked our 11th consecutive quarter of positive inows. We also experienced record loan growth, up 31% to $58 billion; deposit balances, up 38% to $127 billion; and mortgage production, up 40% to $15 billion. We ended the year with record assets under supervision of $1.9 trillion. Robust Investment Performance The foundation of any asset management business is its ability to consistently outperform the benchmark and the competition. Im proud to report that 78% of our mutual funds are in the rst or second performance quartiles over the past ve years. This track record has translated into positive ows into virtually every asset class and resulted in industry-leading growth rates in long-term assets under management ows. Leading Provider of Alternative Solutions J.P. Morgan has long been a pioneer in providing alternative solutions to clients who want to invest in private equity, real assets and hedge funds. In 2011, our Alternatives revenue grew by 17% as the business achieved several successes, including being ranked as the secondlargest hedge fund manager by Absolute Return magazine. Together with our partners at Gvea Investimentos, we completed the largest-ever private equity fundraising in Brazil with the Gvea Investment Fund IV, making us the largest private equity manager in that country. We also launched the J.P. Morgan Digital Growth Fund; continued building out our Global Real Assets, Private Equity and Highbridge franchises; and maintained our leadership in advising clients on accessing other alternative asset managers. Invested in Our Future Our laserfocus on managing expenses and uncovering operating efficiencies enables us to reinvest in our business, create new investment capabilities (we increased our investment professionals by 4%), enter new markets (we opened ve new offices) and exploit untapped distribution channels (we increased our client-facing professionals by 8%). Over the past year, we have invested more than $400 million in new people, systems, technologies and platforms to grow our marketleading positions for years to come. Improved Market Share Through the growth of our distribution network, we gained market share in a number of areas, including becoming the rst bank-owned asset manager to be among the top 10 (#7 to be exact) in U.S. mutual fund assets under management and ranking #2 in U.S. mutual fund ows. We also generated a compound annual growth rate of 16% for international revenue across our division over the past two years.

58

Strategic Priorities for 2012: Innovate, Invest and Protect We remain committed to providing superior investment returns for our clients through active asset management, as we have for decades. We recently celebrated the 25th anniversary of one of our leading equity products, our Research Enhanced Index portfolio (REI 250). This unique accomplishment is the result of a long-standing dedication to fundamental company research. REI 250 has outperformed the S&P 500 over the 3-, 5-, 10-, 15-, 20- and 25-year periods. Our dedication to local research combined with continuous innovation enables us to constantly adapt our approach and navigate portfolios through time.

We will continue to invest in providing global and local solutions to our clients around the globe. We have the worlds leading Private Banking franchise, and we are committed to gaining market share by adding front-line bankers and client advisors in the locations where clients need us most and by developing solutions that give clients around the world the exposure they seek. As we have expanded our business internationally, so have our partners in the Investment Bank and Treasury & Securities Services. Working together, we have a tremendous opportunity to provide clients across J.P. Morgan with a complete array of solutions that spans both their corporate and personal balance sheets. All the energy we direct at searching for opportunities to invest results in an equal amount of energy being focused

on managing risks and protecting clients interests. Although new regulations will result in many changes in the industry, we anticipate managing through the issues presented while maintaining our client-rst approach. I know I speak for all of my partners in Asset Management when I say we are excited about the opportunities ahead for our business, and we look forward to delivering the returns JPMorgan Chase shareholders expect from us while always doing rstclass business in a rst-class way.

Mary Callahan Erdoes CeO, Asset Management

2011 Highlights and Accomplishments

#1 Ultra-High-Net-Worth Global Private Bank, Euromoney Second-largest recipient of U.S. total net mutual fund flows, Strategic Insight Leading Pan-European Fund Man- agement Firm, Thomson Reuters #1 U.S. Real Estate Equity and Infrastructure Money Manager, Pensions & Investments Best Global Brand in Private Banking, Financial Times % 10 (b) : Asset ManagementGCompany of R CA 1and 1 the Year in Asia Hong Kong, 3The Asset 0 Gold Standard Award for Funds Management in the United Kingdom for nine years in a row, 16.8% 14.1% Incisive Media
10.4% 9.6%

7.5 x

1.3%

-0.3% Since Inception

Global Wealth Management Revenue(a)

Alternatives Assets under Management(c)

U.S. REI 250

3-year

5-year

'03 '04 '05 06 '07 '08 '09 '10 '11

(b) : 1

0%

03 20

7.5 x

03 20

20

C 11

R AG

2001

2011 16.8%

20

C 11

R AG

:1 (b)14.1%

0%

11 (a) 2003-2004 Pro-forma for 20 Bank One acquisition 30 (b) Compound annual growth rate20
16.8% 14.1%

GR CA

Annualized performance results 0 (b) : 1

REI 250 250 REI

are as of December 31, 2011 and gross of fees S&P 500 Total Total Return Index S&P 500 Return Index

10.4% 9.6%

10.4% 9.6%
1.3% -0.3% Since inception
12/31/85

3-year

5-year

'03 '04 '05 '06 '07 '08 '09 '10 '11

'03 '04 '05 '06 '07 '08 '09 '10 '11 Bank One (a) 2003-2004 proacquisition forma for Bank One acquisition
(b) Compound annual growth rate (CAGR)

(a) 2003-2004 Pro-forma for (b) Compound annual growth rate

Annualized 2001 performance results 2011 are as of December 31, 2011 and gross of fees
(c) Differs from public definition. Excludes currency and includes 130/30 S&P 500 funds Total Return Index

1.3% (a) 2003-2004 Pro-forma for -0.3% Bank One acquisition (b) Compound annual 3-year 5-year growth Since rate inception
12/31/85
Annualized performance results are as of December 31, 2011, and gross of fees

7.5 x

REI 250

'03 '04 '05 '06 '07 '08 '09 '10 '11 (a) 2003-2004 Pro-forma for Bank One acquisition (b) Compound annual growth rate

Annualized performance results are as of December 31, 2011 and gross of fees

REI 250 S&P 500 Total Return Index

2001

2011

59

Corporate Responsibility

From left to right: Kimberly Davis, President, JPMorgan Chase Foundation Mel Martinez, Chairman, JPMorgan Chase Foundation Peter Scher, Head of Corporate Responsibility

2011 Highlights and Accomplishments

Growing Our Economy Earned the position as #1 Small Business Administration lender by volume in the country. We lent more than $17 billion to small businesses in 2011, up more than 52% from 2010 and 135% from 2009. We made nearly 400,000 new small business loans in 2011, up 45% from 2010. Demonstrated our commitment to investing in the future of the communities where we operate. In the United States, we hired more than 17,000 people in 2011. Launched The Brookings JPMorgan Chase Global Cities Initiative with a $10 million commitment to The Brookings Institution to help the 100 largest U.S. metropolitan areas become more competitive in the global economy. Giving Consumers New Tools Became the first large bank to adopt The Pew Charitable Trusts model disclosure form that uses everyday words in a consumerfriendly format. Strengthening Communities Invested $1.4 billion in loans and nearly $1 billion in equity to build or preserve more than 19,500 units of affordable housing for low- and moderate-income families in over 80 U.S. cities. We also provided more than $350 million in loans and $46 million in donations to top-tier Community Development Financial Institutions and other intermediaries to support affordable housing, schools, healthcare clinics and small businesses. Donated more than $200 million in philanthropic support to notfor-prots in our communities, and our employees provided nearly 375,000 hours of volunteer service through our Good Works program in local communities. Contributed our time and expertise to digitize the most signicant papers of Martin Luther King, Jr., through our Technology for Social Good program. The new website and archive make some of Dr. Kings most famous speeches and correspondence available to Internet users for the rst time. Led the financing of the California Honoring Military and Veterans FreshWorks Fund, an innovative, Expanded our commitment to help $200 million public-private partnertransitioning servicemembers and ship loan fund created to increase other veterans lead successful access to healthy, affordable food lives after their military service. in underserved communities, spur Implemented a rmwide, compreeconomic development and inspire hensive strategy focused on jobs, innovation in healthy food retailing. homeownership and education. Created a partnership between Launched the 100,000 Jobs Mission our Global Commodities business along with other major employand the World Bank Group to offer ers with a goal to collectively a new product that will provide up hire 100,000 veterans by 2020. to an initial $4 billion in protection In 2011, coalition members hired from volatile food prices for farmover 6,600 transitioning military ers, food producers and consumservicemembers and veterans. ers in developing countries. JPMorgan Chase alone hired more than 3,000. Invested $8 million through our Social Finance business Awarded 85 mortgage-free homes in a $25 million initiative with to deserving veterans and their the U.S. Agency for Internafamilies and will award 915 more tional Development and the Bill over the next four years. & Melinda Gates Foundation to provide private capital to small Promoting Environmental and medium-sized enterprises in Sustainability Africas agriculture sector. Renovated our 1.3 million-square Donated more than $10 million to foot global headquarters building 200 charities in 2011 through the in New York City to earn LEED Chase Community Giving crowdPlatinum certification from the sourcing program on Facebook, U.S. Green Building Council, for a total of over $20 million to making it the worlds largest 500 charities since 2009. The renovation project to achieve program has more than 3.3 million Platinum certification. fans worldwide.

60

Table of contents

Financial:
62 63 Five-Year Summary of Consolidated Financial Highlights Five-Year Stock Performance Audited financial statements: 176 177 178 182 Managements Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to Consolidated Financial Statements

Managements discussion and analysis: 64 66 71 76 79 109 110 113 119 125 127 132 158 163 166 166 167 168 173 174 175 Introduction Executive Overview Consolidated Results of Operations Explanation and Reconciliation of the Firms Use of Non-GAAP Financial Measures Business Segment Results International Operations Balance Sheet Analysis OffBalance Sheet Arrangements and Contractual Cash Obligations Capital Management Risk Management Liquidity Risk Management Credit Risk Management Market Risk Management Country Risk Management Private Equity Risk Management Operational Risk Management Reputation and Fiduciary Risk Management Critical Accounting Estimates Used by the Firm Accounting and Reporting Developments Nonexchange-Traded Commodity Derivative Contracts at Fair Value Forward-Looking Statements

Supplementary information: 305 307 308 Selected Quarterly Financial Data Short-term and other borrowed funds Glossary of Terms

JPMorgan Chase & Co./2011 Annual Report

61

Financial
FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited) (in millions, except per share, headcount and ratio data) As of or for the year ended December 31, Selected income statement data Noninterest revenue Net interest income Total net revenue Total noninterest expense Pre-provision profit(a) Provision for credit losses Provision for credit losses - accounting conformity(b) Income before income tax expense/(benefit) and extraordinary gain Income tax expense/(benefit) Income before extraordinary gain Extraordinary gain(c) Net income Per common share data Basic earnings Income before extraordinary gain Net income Diluted earnings(d) Income before extraordinary gain Net income Cash dividends declared per share Book value per share Common shares outstanding Average: Basic Diluted Common shares at period-end Share price(e) High Low Close Market capitalization Selected ratios Return on common equity (ROE)(d) Income before extraordinary gain Net income Return on tangible common equity (ROTCE)(d) Income before extraordinary gain Net income Return on assets (ROA) Income before extraordinary gain Net income Overhead ratio Deposits-to-loans ratio Tier 1 capital ratio(f) Total capital ratio Tier 1 leverage ratio Tier 1 common capital ratio(g) Selected balance sheet data (period-end)(f) Trading assets Securities Loans Total assets Deposits Long-term debt(h) Common stockholders equity Total stockholders equity Headcount Credit quality metrics Allowance for credit losses Allowance for loan losses to total retained loans Allowance for loan losses to retained loans excluding purchased credit-impaired loans(i) Nonperforming assets Net charge-offs Net charge-off rate 2011 $ 49,545 47,689 97,234 62,911 34,323 7,574 26,749 7,773 18,976 18,976 $ 2010 51,693 51,001 102,694 61,196 41,498 16,639 24,859 7,489 17,370 $ 17,370 $ 2009 49,282 51,152 100,434 52,352 48,082 32,015 16,067 4,415 11,652 76 $ 11,728 $ 2008(c) 28,473 38,779 67,252 43,500 23,752 19,445 1,534 2,773 (926) 3,699 1,906 5,605 $ 2007 44,966 26,406 71,372 41,703 29,669 6,864 22,805 7,440 15,365 15,365

4.50 4.50 4.48 4.48 1.00 46.59 3,900.4 3,920.3 3,772.7

3.98 3.98 3.96 3.96 0.20 43.04 3,956.3 3,976.9 3,910.3

2.25 2.27 2.24 2.26 0.20 39.88 3,862.8 3,879.7 3,942.0

0.81 1.35 0.81 1.35 1.52 36.15 3,501.1 3,521.8 3,732.8

4.38 4.38 4.33 4.33 1.48 36.59 3,403.6 3,445.3 3,367.4

48.36 27.85 33.25 125,442

48.20 35.16 42.42 165,875

47.47 14.96 41.67 164,261

50.63 19.69 31.53 117,695

53.25 40.15 43.65 146,986

11% 11 15 15 0.86 0.86 65 156 12.3 15.4 6.8 10.1 $ 443,963 364,793 723,720 2,265,792 1,127,806 256,775 175,773 183,573 260,157

10% 10 15 15 0.85 0.85 60 134 12.1 15.5 7.0 9.8 $ 489,892 316,336 692,927 2,117,605 930,369 270,653 168,306 176,106 239,831

6% 6 10 10 0.58 0.58 52 148 11.1 14.8 6.9 8.8 $ 411,128 360,390 633,458 2,031,989 938,367 289,165 157,213 165,365 222,316

2% 4 4 6 0.21 0.31 65 135 10.9 14.8 6.9 7.0 $ 509,983 205,943 744,898 2,175,052 1,009,277 302,959 134,945 166,884 224,961

13% 13 22 22 1.06 1.06 58 143 8.4 12.6 6.0 7.0 $ 491,409 85,450 519,374 1,562,147 740,728 199,010 123,221 123,221 180,667 10,084 1.88% 1.88 3,933 4,538 1.00%

28,282 $ 3.84% 3.35 11,036 $ 12,237 1.78%

32,983 $ 4.71% 4.46 16,557 $ 23,673 3.39%

32,541 $ 5.04% 5.51 19,741 $ 22,965 3.42%

23,823 $ 3.18% 3.62 12,714 $ 9,835 1.73%

(a) Pre-provision profit is 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.

62

JPMorgan Chase & Co./2011 Annual Report

(b) Results for 2008 included an accounting conformity loan loss reserve provision related to the acquisition of Washington Mutual Banks (Washington Mutual) banking operations. (c) On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual. The acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. (d) The calculation of 2009 earnings per share (EPS) and net income applicable to common equity includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of U.S. Troubled Asset Relief Program (TARP) preferred capital in the second quarter of 2009. Excluding this reduction, the adjusted ROE and ROTCE were 7% and 11%, respectively, for 2009. The Firm views the adjusted ROE and ROTCE, both non-GAAP financial measures, as meaningful because they enable the comparability to prior periods. (e) Share prices shown for JPMorgan Chases common stock are from the New York Stock Exchange. JPMorgan Chases common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange. (f) Effective January 1, 2010, the Firm adopted accounting guidance that amended the accounting for the transfer of financial assets and the consolidation of variable interest entities (VIEs). Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related, adding $87.7 billion and $92.2 billion of assets and liabilities, respectively, and decreasing stockholders equity and the Tier 1 capital ratio by $4.5 billion and 34 basis points, respectively. The reduction to stockholders equity was driven by the establishment of an allowance for loan losses of $7.5 billion (pretax) primarily related to receivables held in credit card securitization trusts that were consolidated at the adoption date. (g) Tier 1 common capital ratio (Tier 1 common ratio) is Tier 1 common capital (Tier 1 common) divided by risk-weighted assets. The Firm uses Tier 1 common capital along with the other capital measures to assess and monitor its capital position. For further discussion of Tier 1 common capital ratio, see Regulatory capital on pages 119122 of this Annual Report. (h) Effective January 1, 2011, the long-term portion of advances from Federal Home Loan Banks (FHLBs) was reclassified from other borrowed funds to long-term debt. Prior periods have been revised to conform with the current presentation. (i) Excludes the impact of residential real estate purchased credit-impaired (PCI) loans. For further discussion, see Allowance for credit losses on pages 155157 of this 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 and the S&P Financial Index. The S&P 500 Index is a commonly referenced U.S. equity benchmark consisting of leading
December 31, (in dollars) JPMorgan Chase S&P Financial Index S&P 500 Index $

companies from different economic sectors. The S&P Financial Index is an index of 81 financial companies, all of which are components of the S&P 500. The Firm is a component of both industry indices. The following table and graph assume simultaneous investments of $100 on December 31, 2006, in JPMorgan Chase common stock and in each of the above S&P indices. The comparison assumes that all dividends are reinvested.
2008 2009 69.58 36.36 66.46 $ 93.39 42.62 84.05 $ 2010 95.50 47.79 96.71 $ 2011 76.29 39.64 98.75

2006 100.00 100.00 100.00 $

2007 93.07 81.37 105.49 $

This section of JPMorgan Chases Annual Report for the year ended December 31, 2011 (Annual Report), provides managements discussion and analysis (MD&A) of the financial condition and results of operations of JPMorgan Chase. See the Glossary of Terms on pages 308311 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 & Co./2011 Annual Report

JPMorgan Chases management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firms actual results to differ materially from those set forth in such forward-looking statements. Certain of such risks and uncertainties are described herein (see Forwardlooking Statements on page 175 of this Annual Report) and in JPMorgan Chases Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K), in Part I, Item 1A: Risk factors; reference is hereby made to both.

63

Management's discussion and analysis

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 has $2.3 trillion in assets and $183.6 billion in stockholders equity as of December 31, 2011. The Firm is a leader in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. Under the J.P. Morgan and Chase brands, the Firm serves millions of customers in the U.S. and many of the worlds most prominent corporate, institutional and government clients. JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), a national bank with U.S. branches in 23 states, and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national bank that is the Firms credit cardissuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities LLC (JPMorgan Securities), the Firms U.S. investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. One of the Firms principal operating subsidiaries in the United Kingdom (U.K.) is J.P. Morgan Securities Ltd., a subsidiary of JPMorgan Chase Bank, N.A. JPMorgan Chases activities are organized, for management reporting purposes, into six business segments, as well as Corporate/Private Equity. The Firms wholesale businesses comprise the Investment Bank, Commercial Banking, Treasury & Securities Services and Asset Management segments. The Firms consumer businesses comprise the Retail Financial Services and Card Services & Auto segments. A description of the Firms business segments, and the products and services they provide to their respective client bases, follows. Investment Bank J.P. Morgan is one of the worlds leading investment banks, with deep client relationships and broad product capabilities. The clients of the Investment Bank (IB) are corporations, financial institutions, governments and institutional investors. The Firm 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, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research. Retail Financial Services Retail Financial Services (RFS) serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking. RFS is organized into Consumer & Business Banking and Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios). Consumer & Business Banking includes branch banking and business banking activities. Mortgage Production and Servicing includes mortgage origination and servicing activities. Real Estate Portfolios comprises residential mortgages and home equity loans, including the PCI portfolio acquired in the Washington Mutual transaction. Customers can use more than 5,500 bank branches (third largest nationally) and more than 17,200 ATMs (second largest nationally), as well as online and mobile banking around the clock. More than 33,500 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. As one of the largest mortgage originators in the U.S., Chase helps customers buy or refinance homes resulting in approximately $150 billion of mortgage originations annually. Chase also services more than 8 million mortgages and home equity loans. Card Services & Auto Card Services & Auto (Card) is one of the nations largest credit card issuers, with over $132 billion in credit card loans. Customers have over 65 million open credit card accounts (excluding the commercial card portfolio), and used Chase credit cards to meet over $343 billion of their spending needs in 2011. Through its Merchant Services business, Chase Paymentech Solutions, Card is a global leader in payment processing and merchant acquiring. Consumers also can obtain loans through more than 17,200 auto dealerships and 2,000 schools and universities nationwide. Commercial Banking Commercial Banking (CB) delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 35,000 real estate investors/owners. CB partners with the Firms other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management, to meet its clients domestic and international financial needs.

64

JPMorgan Chase & Co./2011 Annual Report

Treasury & Securities Services Treasury & Securities Services (TSS) is a global leader in transaction, investment and information services. TSS is one of the worlds largest cash management providers and a leading global custodian. Treasury Services (TS) provides cash management, trade, wholesale card and liquidity products and services to small- and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with IB, CB, RFS and Asset Management businesses to serve clients firmwide. Certain TS revenue is included in other segments results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally.

Asset Management Asset Management (AM), with assets under supervision of $1.9 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AMs client assets are in actively managed portfolios.

JPMorgan Chase & Co./2011 Annual Report

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Management's discussion and analysis 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 events, trends and uncertainties, as well as the capital, liquidity, credit and market risks, and the critical accounting estimates affecting the Firm and its various lines of business, this Annual Report should be read in its entirety. Economic environment The global economy lost some momentum during 2011 in the face of several new threats, some transitory and some more deeply entrenched. In the first half of the year, the earthquake and tsunami in Japan represented a significant setback to that country's important economy and probably disrupted activity elsewhere in the world as well, particularly in the global motor vehicle sector. Later in the year, severe floods in Thailand also disrupted motor vehicle supply chains. Furthermore, a sharp rise in oil prices in the spring in the wake of political unrest in the Middle East slowed consumer demand. Although many of these shocks eased later in the year, Europes financial crisis posed a new threat. Concerns about sovereign debt in Greece and other Eurozone countries, which raised doubts in the investor community about the viability of the European monetary union, as well as the sovereign debt exposures of the European banking system, were a source of stress in the global financial markets during the second half of 2011. In December 2011, the European Central Bank (ECB) announced measures to support bank lending and money market activity, offering 36-month, 1 percent loans through two longer-term refinancing operations, known as LTROs. These programs replaced a 12-month lending facility established by the ECB in October 2011 and also allowed banks to use a wider variety of assets as collateral for the loans. The ECBs actions were expected to ease near-term concerns about European bank funding and liquidity. Despite these headwinds, there were a number of promising developments in the U.S. during 2011. The credit environment improved as consumer and wholesale delinquencies decreased and lending for a broad range of purposes accelerated. Housing prices continued to be largely unchanged and rose in the non-distressed sector, while home builders continued to make good progress working off the excess housing inventory that was built in the last decade. Despite the turmoil in the summer months associated with the debt ceiling crisis and a worsening of the crisis in Europe, the U.S. job market continued to improve, with layoffs easing, employment expanding steadily, and unemployment falling. At the same time the financial health of the business sector, which was already strong, continued to improve. Reflecting these favorable trends, the equity market recovered from the late summer drop. The Board of Governors of the Federal Reserve System (the Federal Reserve) took several actions during 2011 to support a stronger economic recovery and to help support conditions in mortgage markets. These actions included extending the average maturity of its holdings of securities, reinvesting principal payments from its holdings of agency debt and U.S. government agency mortgage-backed securities into other agency mortgage-backed securities and maintaining its existing policy of rolling over maturing U.S. Department of the Treasury (U.S. Treasury) securities at auction. The Federal Reserve maintained the target range for the federal funds rate at zero to one-quarter percent and, in January 2012, provided specific guidance regarding its prediction about policy rates, stating that economic conditions were likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. Also, the Federal Reserve reactivated currency swap lines with the ECB in response to pressures in interbank term funding markets. Financial performance of JPMorgan Chase
Year ended December 31, (in millions, except per share data and ratios) 2011 2010 Change (5)% 3 (17) (54) 9 13

Selected income statement data Total net revenue $ 97,234 $ 102,694 Total noninterest expense 62,911 61,196 Pre-provision profit 34,323 41,498 Provision for credit losses 7,574 16,639 Net income 18,976 17,370 Diluted earnings per share 4.48 3.96 Return on common equity 11% 10% Capital ratios Tier 1 capital 12.3 12.1 Tier 1 common 10.1 9.8

Business overview JPMorgan Chase reported full-year 2011 record net income of $19.0 billion, or $4.48 per share, on net revenue of $97.2 billion. Net income increased by $1.6 billion, or 9%, compared with net income of $17.4 billion, or $3.96 per share, in 2010. ROE for the year was 11%, compared with 10% for the prior year. The increase in net income in 2011 was driven by a lower provision for credit losses, predominantly offset by lower net revenue and higher noninterest expense. The reduction in the provision for credit losses reflected continued improvement in the consumer portfolios. The decline in net revenue from 2010 was driven by lower net interest income, securities gains, mortgage fees and related income, and principal transactions revenue, partially offset by higher asset management, administration and commissions revenue and higher other income. The increase in noninterest expense was driven largely by higher compensation expense, reflecting increased headcount.

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During 2011, the credit quality of the Firms wholesale credit portfolio improved. The delinquency trends in the consumer business modestly improved, though the rate of improvement seen earlier in 2011 slowed somewhat in the latter half of the year. Mortgage net charge-offs and delinquencies modestly improved, but both remained at elevated levels. These positive consumer credit trends resulted in reductions in the allowance for loan losses in Card Services & Auto and in Retail Financial Services (excluding purchased credit-impaired loans). The allowance for loan losses associated with the Washington Mutual purchased credit-impaired loan portfolio in Retail Financial Services increased, reflecting higher than expected loss frequency relative to modeled lifetime loss estimates. Firmwide, net charge-offs were $12.2 billion for the year, down $11.4 billion, or 48%, from 2010, and nonperforming assets at year-end were $11.0 billion, down $5.5 billion, or 33%. Total firmwide credit reserves were $28.3 billion, resulting in a loan loss coverage ratio of 3.35% of total loans, excluding the purchased creditimpaired portfolio. Net income performance varied among JPMorgan Chases lines of business, but underlying metrics in each business showed positive trends. The second half of 2011 reflected a challenging investment banking and capital markets environment which contributed to lower revenue for the year in the Investment Bank (excluding debit valuation adjustment (DVA) gains). However, the Investment Bank maintained its #1 ranking in Global Investment Banking Fees for the year. Consumer & Business Banking within Retail Financial Services opened 260 new branches and increased deposits by 8% in 2011. In the Card business, credit card sales volume (excluding Commercial Card) was up 10% for the year. Treasury & Securities Services reported record average liability balances, up 28% for 2011, and a 73% increase in trade loans. Commercial Banking also reported record average liability balances, up 26% for the year, and record revenue and net income for the year. The fourth quarter of 2011 also marked CBs sixth consecutive quarter of loan growth, including a 17% increase in middle-market loans over the prior year end. Asset Management reported record revenue for the year and achieved eleven consecutive quarters of positive longterm flows into assets under management. JPMorgan Chase ended the year with a Basel I Tier 1 common ratio of 10.1%, compared with 9.8% at year-end 2010. This strong capital position enabled the Firm to repurchase $8.95 billion of common stock and warrants during 2011. The Firm estimated that its Basel III Tier 1 common ratio was approximately 7.9% at December 31, 2011. Total deposits increased to $1.1 trillion, up 21% from the prior year. Total stockholders equity at December 31, 2011, was $183.6 billion. The Basel I and III Tier 1 common ratios are non-GAAP financial measures, which the Firm uses along with the other capital measures, to assess and monitor its capital position. For further

discussion of the Tier 1 common capital ratios, see Regulatory capital on pages 119123 of this Annual Report. During 2011, the Firm worked to help its individual customers, corporate clients and the communities in which it does business. The Firm provided credit to and raised capital of more than $1.8 trillion for its clients during 2011, up 18% from 2010; this included $17 billion lent to small businesses, up 52%, and $68 billion to more than 1,200 not-for-profit and government entities, including states, municipalities, hospitals and universities. The Firm also originated more than 765,000 mortgages, and provided credit cards to approximately 8.5 million people. The Firm remains committed to helping homeowners and preventing foreclosures. Since the beginning of 2009, the Firm has offered more than 1.2 million mortgage modifications, of which approximately 452,000 have achieved permanent modification as of December 31, 2011. The discussion that follows highlights the performance of each business segment compared with the prior year and presents results on a managed basis. Managed basis starts with the reported results under the accounting principles generally accepted in the United States of America (U.S. GAAP) and, for each line of business and the Firm as a whole, includes certain reclassifications to present total net revenue on a tax-equivalent basis. Prior to January 1, 2010, the Firms managed-basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by Card remained on the Consolidated Balance Sheets. For more information about managed basis, as well as other non-GAAP financial measures used by management to evaluate the performance of each line of business, see pages 7678 of this Annual Report. Investment Bank net income increased modestly from the prior year as lower noninterest expense was predominantly offset by a lower benefit from the provision for credit losses. Net revenue for the year was approximately flat compared with 2010 and included a $1.4 billion gain from DVA on certain structured and derivative liabilities, compared with a DVA gain of $509 million in 2010. In 2011, this was partially offset by a $769 million loss, net of hedges, from credit valuation adjustments (CVA) on derivative assets within Credit Portfolio, due to the widening of credit spreads for the Firms counterparties. In 2010, net revenue was partially offset by a $403 million loss, net of hedges, from CVA. Fixed Income and Equity Markets revenue increased compared with the prior year partially due to the DVA gain. In addition, results in Fixed Income and Equity Markets reflected solid client revenue across most products. Investment banking fees decreased for the year as the impact of lower volumes in the second half of 2011 more than offset the strong level of fees reported in the first half of the year. The decrease in noninterest expense from the prior-year level was largely driven by lower compensation expense and the absence of
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Management's discussion and analysis

the U.K. Bank Payroll Tax. Return on equity for the year was 17% on $40.0 billion of average allocated capital. Retail Financial Services net income decreased modestly compared with the prior year driven by higher noninterest expense and lower net revenue, predominantly offset by a lower provision for credit losses. The decline in net revenue was driven by lower mortgage fees and related income and lower net interest income, which reflected the impact of lower loan balances due to portfolio runoff, and narrower loan spreads. Higher investment sales revenue and depositrelated fees partially offset the decline in revenue. A modest improvement in delinquency trends and a decline in net charge-offs compared with 2010 resulted in the lower provision for credit losses; however, the provision continued to reflect elevated losses in the mortgage and home equity portfolios. Additionally, the provision for credit losses in 2011 reflected a lower addition to the allowance for loan losses for the purchased credit-impaired portfolio compared with the prior year. The increase in noninterest expense from the prior year was driven by investment in sales force and new branch builds as well as elevated foreclosure- and default-related costs, including $1.7 billion of expense for fees and assessments, as well as other costs of foreclosurerelated matters. Return on equity for the year was 7% on $25.0 billion of average allocated capital. Card Services & Auto net income increased in 2011 compared with the prior year driven by a lower provision for credit losses partially offset by lower net revenue and higher noninterest expense. The decrease in net revenue was driven by a decline in net interest income, reflecting lower average loan balances, the impact of legislative changes and a decreased level of fees. These decreases were largely offset by lower revenue reversals associated with lower net charge-offs. Credit card sales volume, excluding the Commercial Card portfolio, was up 10% from 2010. The lower provision for credit losses reflected lower net charge-offs partially offset by a lower reduction in the allowance for loan losses. The increase in noninterest expense was due to higher marketing expense and the inclusion of the Commercial Card business. Return on equity for the year was 28% on $16.0 billion of average allocated capital. Commercial Banking reported record net revenue and net income for the second consecutive year. The increase in revenue was driven by higher net interest income resulting from growth in liability and loan balances, partially offset by spread compression on liability products. Average liability balances reached a record level in 2011, up 26% from 2010. End-of-period loan balances increased in each quarter of 2011 and were up 13% from year-end 2010. The provision for credit losses declined compared with the prior year. Noninterest expense increased from the level in 2010, primarily reflecting higher headcount-related expense. Return on equity for the year was 30% on $8.0 billion of average allocated capital. Treasury & Securities Services net income increased from the prior year, driven by higher net revenue reflecting record deposit balances and a benefit from the Global Corporate Bank (GCB) credit allocation, predominantly offset by higher noninterest expense. Worldwide Securities Services net revenue increased compared to 2010, driven by higher net interest income due to higher deposit balances and net inflows of assets under custody. Assets under custody of $16.9 trillion were up 5% from 2010. Treasury Services net revenue increased, driven by higher deposit balances and higher trade loan volumes, partially offset by the transfer of the Commercial Card business to Card in the first quarter of 2011. Higher noninterest expense was mainly driven by continued expansion into new markets and expenses related to exiting unprofitable business, partially offset by the transfer of the Commercial Card business to Card. Return on equity for the year was 17% on $7.0 billion of average allocated capital. Asset Management net income decreased, reflecting higher noninterest expense, largely offset by record net revenue. The growth in net revenue was due to net inflows to products with higher margins, higher deposit and loan balances, and the effect of higher average market levels. This growth was partially offset by lower performance fees, narrower deposit spreads and lower loan-related revenue. Assets under supervision of $1.9 trillion increased 4% from the prior year, and assets under management of $1.3 trillion were up 3%. Both increases were due to net inflows to long-term and liquidity products, partially offset by the effect of lower market levels. In addition, deposit and custody inflows contributed to the increase in assets under supervision. The increase in noninterest expense was due to higher headcount-related expense and non-client-related litigation, partially offset by lower performance-based compensation. Return on equity for the year was 25% on $6.5 billion of average allocated capital. Corporate/Private Equity net income decreased in 2011 as income in both Private Equity and Corporate declined. Lower private equity gains were primarily the result of net write-downs on privately-held investments and the absence of prior-year gains from sales in the Private Equity portfolio. In Corporate, lower net interest income was primarily driven by repositioning of the investment securities portfolio and lower funding benefits from financing portfolio positions. Lower securities gains also drove the decline in net income. In 2011, noninterest expense included $3.2 billion of litigation expense, predominantly for mortgage-related matters, compared with $5.7 billion of litigation expense in 2010. 2012 Business outlook The following forward-looking statements are based on the current beliefs and expectations of JPMorgan Chases management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Firms actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking
JPMorgan Chase & Co./2011 Annual Report

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Statements on page 175 and Risk Factors section of the 2011 Form 10-K. JPMorgan Chases outlook for the full-year 2012 should be viewed against the backdrop of the global and U.S. economies, financial markets activity, the geopolitical environment, the competitive environment, client activity levels, and regulatory and legislative developments in the U.S. and other countries where the Firm does business. Each of these linked factors will affect the performance of the Firm and its lines of business. In the Consumer & Business Banking business within RFS, the Firm estimates that, given the current low interest rate environment, spread compression will likely negatively affect 2012 net income by approximately $400 million. In addition, the effect of the Durbin Amendment will likely reduce annualized net income by approximately $600 million. In the Mortgage Production and Servicing business within RFS, revenue in 2012 could be negatively affected by continued elevated levels of repurchases of mortgages previously sold, predominantly to U.S. governmentsponsored entities (GSEs). Management estimates that realized mortgage repurchase losses could be approximately $350 million per quarter in 2012. Also for Mortgage Production and Servicing, management expects the business to continue to incur elevated default management and foreclosure-related costs including additional costs associated with the Firms mortgage servicing processes, particularly its loan modification and foreclosure procedures. (See Enhancements to Mortgage Servicing on pages 152-153 and Note 17 on pages 267 271 of this Annual Report.) For the Real Estate Portfolios within RFS, management believes that quarterly net charge-offs could be approximately $900 million. Given managements current estimate of portfolio runoff levels, the existing residential real estate portfolio is expected to decline by approximately 10% to 15% in 2012 from year-end 2011 levels. This reduction in the residential real estate portfolio is expected to reduce net interest income by approximately $500 million in 2012. However, over time, the reduction in net interest income is expected to be more than offset by an improvement in credit costs and lower expenses. In addition, as the portfolio continues to run off, management anticipates that approximately $1 billion of capital may become available for redeployment each year, subject to the capital requirements associated with the remaining portfolio. In Card, the net charge-off rate for the combined Chase and Washington Mutual credit card portfolios (excluding Commercial Card) could increase in the first quarter of 2012 to approximately 4.50% from the 4.33% reported in the fourth quarter, reflecting normal seasonality. The currently anticipated results of RFS and Card described above could be adversely affected by further declines in
JPMorgan Chase & Co./2011 Annual Report

U.S. housing prices or increases in the unemployment rate. Given ongoing weak economic conditions, combined with a high level of uncertainty concerning the residential real estate markets, management continues to closely monitor the portfolios in these businesses. In IB, TSS, CB and AM, revenue will be affected by market levels, volumes and volatility, which will influence client flows and assets under management, supervision and custody. CB and TSS will continue to experience low net interest margins as long as market interest rates remain low. In addition, the wholesale credit environment will influence levels of charge-offs, repayments and provision for credit losses for IB, CB, TSS and AM. In Private Equity, within the Corporate/Private Equity segment, earnings will likely continue to be volatile and be influenced by capital markets activity, market levels, the performance of the broader economy and investmentspecific issues. Corporates net interest income levels will generally trend with the size and duration of the investment securities portfolio. Corporate quarterly net income (excluding Private Equity results, significant nonrecurring items and litigation expense) could be approximately $200 million, though these results will depend on the decisions that the Firm makes over the course of the year with respect to repositioning of the investment securities portfolio. The Firm faces a variety of litigation, including in its various roles as issuer and/or underwriter in mortgage-backed securities (MBS) offerings, primarily related to offerings involving third parties other than the GSEs. It is possible that these matters will take a number of years to resolve; their ultimate resolution is inherently uncertain and reserves for such litigation matters may need to be increased in the future. Management and the Firms Board of Directors continually evaluate ways to deploy the Firms strong capital base in order to enhance shareholder value. Such alternatives could include the repurchase of common stock and warrants, increasing the common stock dividend and pursuing alternative investment opportunities. Certain of such capital actions, such as increasing dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments, are subject to the Federal Reserves Comprehensive Capital Analysis and Review (CCAR) process. The Federal Reserve requires the Firm to submit a capital plan on an annual basis. The Firm submitted its 2012 capital plan on January 9, 2012. The Federal Reserve has indicated that it expects to provide notification of either its objection or non-objection to the Firms capital plan by March 15, 2012. Regulatory developments JPMorgan Chase is subject to regulation under state and federal laws in the U.S., as well as the applicable laws of each of the various other jurisdictions outside the U.S. in which the Firm does business. The Firm is currently
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Management's discussion and analysis

experiencing a period of unprecedented change in regulation and such changes could have a significant impact on how the Firm conducts business. The Firm continues to work diligently in assessing and understanding the implications of the regulatory changes it is facing, and is devoting substantial resources to implementing all the new rules and regulations while meeting the needs and expectations of its clients. While the Firm has made a preliminary assessment of the likely impact of certain of the anticipated changes, the Firm cannot, given the current status of the regulatory developments, quantify the possible effects on its business and operations of all of the significant changes that are currently underway. For further discussion of regulatory developments, see Supervision and regulation on pages 1-7 and Risk factors on pages 7-17 of the 2011 Form 10-K. Subsequent events Global settlement on servicing and origination of mortgages On February 9, 2012, the Firm announced that it agreed to a settlement in principle (the global settlement) with a number of federal and state government agencies, relating to the servicing and origination of mortgages. The global settlement, which is subject to the execution of a definitive agreement and court approval, calls for the Firm to, among other things: (i) make cash payments of approximately $1.1 billion; (ii) provide approximately $500 million of refinancing relief to certain underwater borrowers whose loans are owned by the Firm; and (iii) provide approximately $3.7 billion of additional relief for certain borrowers, including reductions of principal, payments to assist with short sales, deficiency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. While the Firm expects to incur additional operating costs to comply with portions of the global settlement, the Firms prior period results of operations have reflected the estimated costs of the global settlement. Accordingly, the Firm expects that the financial impact of the global settlement on the Firms financial condition and results of operations for the first quarter of 2012 and future periods will not be material. For further information on this settlement, see Subsequent events in Note 2, and Mortgage Foreclosure Investigations and Litigation in Note 31 on pages 183184 and 295296, respectively, of this Annual Report. Washington Mutual, Inc. bankruptcy plan confirmation On February 17, 2012, a bankruptcy court confirmed the joint plan containing the global settlement agreement resolving numerous disputes among Washington Mutual, Inc. (WMI), JPMorgan Chase and the Federal Deposit Insurance Corporation (FDIC) as well as significant creditor groups (the WaMu Global Settlement). Pursuant to this agreement, the Firm expects to recognize additional assets, including certain pension-related assets, as well as tax refunds, in future periods as the settlement is executed and various state and federal tax matters are resolved. For additional information related to the WaMu Global Settlement, see Subsequent events in Note 2, and Washington Mutual Litigations in Note 31 on page 183-184 and 298, respectively, of this Annual Report.

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JPMorgan Chase & Co./2011 Annual Report

CONSOLIDATED RESULTS OF OPERATIONS

The following section provides a comparative discussion of JPMorgan Chases Consolidated Results of Operations on a reported basis for the three-year period ended December 31, 2011. 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 168172 of this Annual Report. offset by a $769 million loss, net of hedges, from CVA on derivative assets within Credit Portfolio in IB, due to the widening of credit spreads of the Firm's counterparties. The prior year included a $509 million gain from DVA, partially offset by a $403 million loss, net of hedges, from CVA. Excluding DVA and CVA, lower trading revenue reflected the impact of the second half of 2011's challenging market conditions on Corporate and IB. Lower private equity gains were primarily due to net write-downs on privately-held investments and the absence of prior-year gains from sales in the Private Equity portfolio. For additional information on principal transactions revenue, see IB and Corporate/ Private Equity segment results on pages 8184 and 107 108, respectively, and Note 7 on pages 211212 of this Annual Report. Lending- and deposit-related fees increased modestly in 2011 compared with the prior year. The increase was primarily driven by the introduction in the first quarter of 2011 of a new checking account product offering in RFS, and the subsequent conversion of certain existing accounts into the new product. The increase was offset partly by the impact of regulatory and policy changes affecting nonsufficient fund/overdraft fees in RFS. For additional information on lending- and deposit-related fees, which are mostly recorded in RFS, CB, TSS and IB, see RFS on pages 8593, CB on pages 98100, TSS on pages 101103 and IB on pages 8184 of this Annual Report. Asset management, administration and commissions revenue increased from 2010, reflecting higher asset management fees in AM and RFS, driven by net inflows to products with higher margins and the effect of higher market levels; and higher administration fees in TSS, reflecting net inflows of assets under custody. For additional information on these fees and commissions, see the segment discussions for AM on pages 104106, RFS on pages 8593 and TSS on pages 101103, and Note 7 on pages 211212 of this Annual Report. Securities gains decreased compared with the 2010 level, primarily due to the repositioning of the investment securities portfolio in response to changes in the current market environment and to rebalancing exposures. For additional information on securities gains, which are mostly recorded in the Firm's Corporate/Private Equity segment, see the Corporate/Private Equity segment discussion on pages 107108, and Note 12 on pages 225230 of this Annual Report. Mortgage fees and related income decreased in 2011 compared with 2010, reflecting a MSR risk management loss of $1.6 billion for 2011, compared with income of $1.1 billion for 2010, largely offset by lower repurchase losses in 2011. The $1.6 billion loss was driven by a $7.1 billion loss due to a decrease in the fair value of the mortgage servicing rights (MSRs) asset, which was predominantly offset by a $5.6 billion gain on the derivatives used to hedge the MSR asset. For additional information on
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Revenue
Year ended December 31, (in millions) Investment banking fees Principal transactions Lending- and deposit-related fees Asset management, administration and commissions Securities gains Mortgage fees and related income Credit card income Other income Noninterest revenue Net interest income Total net revenue $ 2011 5,911 10,005 6,458 14,094 1,593 2,721 6,158 2,605 49,545 47,689 $ 97,234 $ 2010 6,190 10,894 6,340 13,499 2,965 3,870 5,891 2,044 51,693 51,001 $ 102,694 $ 2009 7,087 9,796 7,045 12,540 1,110 3,678 7,110 916 49,282 51,152 $ 100,434

2011 compared with 2010 Total net revenue for 2011 was $97.2 billion, a decrease of $5.5 billion, or 5%, from 2010. Results for 2011 were driven by lower net interest income in several businesses, lower securities gains in Corporate/Private Equity, lower mortgage fees and related income in RFS, and lower principal transactions revenue in Corporate/Private Equity. These declines were partially offset by higher asset management fees, largely in AM. Investment banking fees decreased from 2010, predominantly due to declines in equity and debt underwriting fees. The impact from lower industry-wide volumes in the second half of 2011 more than offset the Firm's record level of debt underwriting fees in the first six months of the year. Advisory fees increased for the year, reflecting higher industry-wide completed M&A volumes relative to the 2010 level. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 8184, and Note 7 on pages 211212 of this Annual Report. Principal transactions revenue, which consists of revenue from the Firm's market-making and private equity investing activities, decreased compared with 2010. This was driven by lower trading revenue and lower private equity gains. Trading revenue included a $1.4 billion gain from DVA on certain structured notes and derivative liabilities, resulting from the widening of the Firm's credit spreads, partially

JPMorgan Chase & Co./2011 Annual Report

Management's discussion and analysis

mortgage fees and related income, which is recorded primarily in RFS, see RFS's Mortgage Production and Servicing discussion on pages 8991, and Note 17 on pages 267271 of this Annual Report. For additional information on repurchase losses, see the Mortgage repurchase liability discussion on pages 115118 and Note 29 on pages 283 289 of this Annual Report. Credit card income increased during 2011, largely reflecting higher net interchange income associated with higher customer transaction volume on credit and debit cards, as well as lower partner revenue-sharing due to the impact of the Kohl's portfolio sale. These increases were partially offset by lower revenue from fee-based products, as well as the impact of the Durbin Amendment. For additional information on credit card income, see the Card and RFS segment results on pages 9497, and pages 85 93, respectively, of this Annual Report. Other income increased in 2011, driven by valuation adjustments on certain assets and incremental revenue from recent acquisitions in IB, and higher auto operating lease income in Card, resulting from growth in lease volume. Also contributing to the increase was a gain on the sale of an investment in AM. Net interest income decreased in 2011 compared with the prior year, driven by lower average loan balances and yields in Card and RFS, reflecting the expected runoff of credit card balances and residential real estate loans; lower fees on credit card receivables, reflecting the impact of legislative changes; higher average interest-bearing deposit balances and related yields; and lower yields on securities, reflecting portfolio repositioning in anticipation of an increasing interest rate environment. The decrease was offset partially by lower revenue reversals associated with lower credit card charge-offs, and higher trading asset balances. The Firm's average interest-earning assets were $1.8 trillion for the 2011 full year, and the net yield on those assets, on a fully taxable-equivalent (FTE) basis, was 2.74%, a decrease of 32 basis points from 2010. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see Card discussion on credit card legislation on page 94 of this Annual Report. 2010 compared with 2009 Total net revenue for 2010 was $102.7 billion, up by $2.3 billion, or 2%, from 2009. Results for 2010 were driven by a higher level of securities gains and private equity gains in Corporate/Private Equity, higher asset management fees in AM and administration fees in TSS, and higher other income in several businesses, partially offset by lower credit card income. Investment banking fees decreased from 2009 due to lower equity underwriting and advisory fees, partially offset by higher debt underwriting fees. Competitive markets combined with flat industry-wide equity underwriting and completed M&A volumes, resulted in lower equity underwriting and advisory fees; while strong industry-wide
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loan syndication and high-yield bond volumes drove record debt underwriting fees in IB. For additional information on investment banking fees, which are primarily recorded in IB, see IB segment results on pages 8184, and Note 7 on pages 211212 of this Annual Report. Principal transactions revenue increased compared with 2009. This was driven by the Private Equity business, which had significant private equity gains in 2010, compared with a small loss in 2009, reflecting improvements in market conditions. Trading revenue decreased, reflecting lower results in Corporate, offset by higher revenue in IB primarily reflecting DVA gains. For additional information on principal transactions revenue, see IB and Corporate/Private Equity segment results on pages 8184 and 107108, respectively, and Note 7 on pages 211212 of this Annual Report. Lending- and deposit-related fees decreased in 2010 from 2009 levels, reflecting lower deposit-related fees in RFS associated, in part, with newly-enacted legislation related to non-sufficient funds and overdraft fees; this was partially offset by higher lending-related service fees in IB, primarily from growth in business volume, and in CB, primarily from higher commitment and letter-of-credit fees. For additional information on lending- and deposit-related fees, which are mostly recorded in IB, RFS, CB and TSS, see segment results for IB on pages 8184, RFS on pages 8593, CB on pages 98100 and TSS on pages 101103 of this Annual Report. Asset management, administration and commissions revenue increased from 2009. The increase largely reflected higher asset management fees in AM, driven by the effect of higher market levels, net inflows to products with higher margins and higher performance fees; and higher administration fees in TSS, reflecting the effects of higher market levels and net inflows of assets under custody. This increase was partially offset by lower brokerage commissions in IB, as a result of lower market volumes. For additional information on these fees and commissions, see the segment discussions for AM on pages 104106 and TSS on pages 101103, and Note 7 on pages 211212 of this Annual Report. Securities gains were significantly higher in 2010 compared with 2009, resulting primarily from the repositioning of the portfolio in response to changes in the interest rate environment and to rebalance exposure. For additional information on securities gains, which are mostly recorded in the Firm's Corporate segment, see the Corporate/Private Equity segment discussion on pages 107108, and Note 12 on pages 225230 of this Annual Report. Mortgage fees and related income increased in 2010 compared with 2009, driven by higher mortgage production revenue, reflecting increased mortgage origination volumes in RFS and AM, and wider margins, particularly in RFS. This increase was largely offset by higher repurchase losses in RFS (recorded as contrarevenue), which were attributable to higher estimated losses related to repurchase demands, predominantly from
JPMorgan Chase & Co./2011 Annual Report

GSEs. For additional information on mortgage fees and related income, which is recorded primarily in RFS, see RFS's Mortgage Production and Servicing discussion on pages 8991, and Note 17 on pages 267271 of this Annual Report. For additional information on repurchase losses, see the mortgage repurchase liability discussion on pages 115118 and Note 30 on page 289 of this Annual Report. Credit card income decreased during 2010, predominantly due to the impact of the accounting guidance related to VIEs, effective January 1, 2010, that required the Firm to consolidate the assets and liabilities of its Firm-sponsored credit card securitization trusts. Adoption of this guidance resulted in the elimination of all servicing fees received from Firm-sponsored credit card securitization trusts, which was offset by related increases in net interest income and provision for credit losses. Lower income from other feebased products also contributed to the decrease in credit card income. Excluding the impact of the adoption of the accounting guidance, credit card income increased in 2010, reflecting higher customer charge volume on credit and debit cards. For a more detailed discussion of the impact of the adoption of the accounting guidance on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm's Use of Non-GAAP Financial Measures on pages 7678 of this Annual Report. For additional information on credit card income, see the Card and RFS segment results on pages 9497, and pages 85 93, respectively, of this Annual Report. Other income increased in 2010, largely due to the writedown of securitization interests during 2009 and higher auto operating lease income in Card. Net interest income was relatively flat in 2010 compared with 2009. The effect of lower loan balances was predominantly offset by the effect of the adoption of the new accounting guidance related to VIEs (which increased net interest income by approximately $5.8 billion in 2010). Excluding the impact of the adoption of the new accounting guidance, net interest income decreased, driven by lower average loan balances, primarily in Card, RFS and IB, reflecting the continued runoff of the credit card balances and residential real estate loans, and net repayments and loan sales; lower yields and fees on credit card receivables, reflecting the impact of legislative changes; and lower yields on securities in Corporate resulting from investment portfolio repositioning. The Firm's average interest-earning assets were $1.7 trillion in 2010, and the net yield on those assets, on a FTE basis, was 3.06%, a decrease of 6 basis points from 2009. For a more detailed discussion of the impact of the adoption of the new accounting guidance related to VIEs on the Consolidated Statements of Income, see Explanation and Reconciliation of the Firm's Use of NonGAAP Financial Measures on pages 7678 of this Annual Report. For further information on the impact of the legislative changes on the Consolidated Statements of Income, see Card discussion on credit card legislation on page 94 of this Annual Report.
JPMorgan Chase & Co./2011 Annual Report

Provision for credit losses

Year ended December 31, (in millions) Wholesale Consumer, excluding credit card Credit card Total consumer Total provision for credit losses $ 2011 (23) $ 4,672 2,925 7,597 $ 7,574 2010 (850) $ 9,452 8,037 17,489 $ 16,639 2009 3,974 16,022 12,019 28,041 $ 32,015

2011 compared with 2010 The provision for credit losses declined by $9.1 billion compared with 2010. The consumer, excluding credit card, provision was down, reflecting improved delinquency and charge-off trends across most portfolios, partially offset by an increase of $770 million, reflecting additional impairment of the Washington Mutual PCI loans portfolio. The credit card provision was down, driven primarily by improved delinquency trends and net credit losses. The benefit from the wholesale provision was lower in 2011 than in 2010, primarily reflecting loan growth and other portfolio activity. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 8593, Card on pages 9497, IB on pages 8184 and CB on pages 98100, and the Allowance for credit losses section on pages 155 157 of this Annual Report. 2010 compared with 2009 The provision for credit losses declined by $15.4 billion compared with 2009, due to decreases in both the consumer and wholesale provisions. The decreases in the consumer provisions reflected reductions in the allowance for credit losses for mortgages and credit cards as a result of improved delinquency trends and lower estimated losses. This was partially offset by an increase in the allowance for credit losses associated with the Washington Mutual PCI loans portfolio, resulting from increased estimated future credit losses. The decrease in the wholesale provision in 2010 reflected a reduction in the allowance for credit losses, predominantly as a result of continued improvement in the credit quality of the commercial and industrial loan portfolio, reduced net charge-offs, and net repayments and loan sales. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see the segment discussions for RFS on pages 8593, Card on pages 9497, IB on pages 8184 and CB on pages 98100, and the Allowance for Credit Losses section on pages 155 157 of this Annual Report.

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Management's discussion and analysis

2010 compared with 2009 Total noninterest expense for 2010 was $61.2 billion, up by $8.8 billion, or 17%, from 2009. The increase was driven by higher noncompensation expense, largely due to higher litigation expense, and the effect of investments in the businesses. Compensation expense increased from the prior year, predominantly due to higher salary expense related to investments in the businesses, including additional sales staff in RFS and client advisors in AM, and the impact of the U.K. Bank Payroll Tax. In addition to the aforementioned higher litigation expense, which was largely for mortgage-related matters in Corporate and IB, the increase in noncompensation expense was driven by higher marketing expense in Card; higher professional services expense, due to continued investments in new product platforms in the businesses, including those related to international expansion; higher default-related expense, including costs associated with foreclosure affidavit-related suspensions (recorded in other expense), for the serviced portfolio in RFS; and higher brokerage, clearing and exchange transaction processing expense in IB. Partially offsetting these increases was the absence of a $675 million FDIC special assessment recognized in 2009. For a further discussion of litigation expense, see Note 31 pages 290299 of this Annual Report. For a discussion of amortization of intangibles, refer to Note 17 on pages 267271 of this Annual Report. There were no merger costs recorded in 2010, compared with merger costs of $481 million in 2009. For additional information on merger costs, refer to Note 11 on page 224 of this Annual Report.

Noninterest expense
Year ended December 31, (in millions) Compensation expense Noncompensation expense: Occupancy Technology, communications and equipment Professional and outside services Marketing Other(a)(b) Amortization of intangibles Total noncompensation expense Merger costs Total noninterest expense 3,895 4,947 7,482 3,143 13,559 848 33,874 $ 62,911 3,681 4,684 6,767 2,446 14,558 936 33,072 $ 61,196 3,666 4,624 6,232 1,777 7,594 1,050 24,943 481 $ 52,352 2011 $ 29,037 2010 $ 28,124 2009 $ 26,928

(a) Included litigation expense of $4.9 billion, $7.4 billion and $161 million for the years ended December 31, 2011, 2010 and 2009, respectively. (b) Included foreclosed property expense of $718 million, $1.0 billion and $1.4 billion for the years ended December 31, 2011, 2010 and 2009, respectively.

2011 compared with 2010 Total noninterest expense for 2011 was $62.9 billion, up by $1.7 billion, or 3%, from 2010. The increase was driven by higher compensation expense and noncompensation expense. Compensation expense increased from the prior year, due to investments in branch and mortgage production sales and support staff in RFS and increased headcount in AM, largely offset by lower performance-based compensation expense and the absence of the 2010 U.K. Bank Payroll Tax in IB. The increase in noncompensation expense in 2011 was due to elevated foreclosure- and default-related costs in RFS, including $1.7 billion of expense for fees and assessments, as well as other costs of foreclosure-related matters, higher marketing expense in Card, higher FDIC assessments across businesses, non-client-related litigation expense in AM, and the impact of continued investments in the businesses, including new branches in RFS. These were offset partially by lower litigation expense in 2011 in Corporate and IB. Effective April 1, 2011, the FDIC changed its methodology for calculating the deposit insurance assessment rate for large banks. The new rule changed the assessment base from insured deposits to average consolidated total assets less average tangible equity, and changed the assessment rate calculation. For a further discussion of litigation expense, see Note 31 on pages 290299 of this Annual Report. For a discussion of amortization of intangibles, refer to the Balance Sheet Analysis on pages 110112, and Note 17 on pages 267271 of this Annual Report.

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Income tax expense

Year ended December 31, (in millions, except rate) Income before income tax expense and extraordinary gain Income tax expense Effective tax rate 2011 $ 26,749 7,773 29.1% 2010 $ 24,859 7,489 30.1% 2009 $ 16,067 4,415 27.5%

2011 compared with 2010 The decrease in the effective tax rate compared with the prior year was predominantly the result of tax benefits associated with state and local income taxes. This was partially offset by higher reported pretax income and changes in the proportion of income subject to U.S. federal tax. In addition, the current year included tax benefits associated with the disposition of certain investments; the prior year included tax benefits associated with the resolution of tax audits. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 168172 and Note 26 on pages 279281 of this Annual Report.

2010 compared with 2009 The increase in the effective tax rate compared with the prior year was predominantly the result of higher reported pretax book income, as well as changes in the proportion of income subject to U.S. federal and state and local taxes. These increases were partially offset by increased benefits associated with the undistributed earnings of certain nonU.S. subsidiaries that were deemed to be reinvested indefinitely, as well as tax benefits recognized upon the resolution of tax audits in 2010. For additional information on income taxes, see Critical Accounting Estimates Used by the Firm on pages 168172 and Note 26 on pages 279 281 of this Annual Report.

JPMorgan Chase & Co./2011 Annual Report

75

Management's discussion and analysis

EXPLANATION AND RECONCILIATION OF THE FIRMS USE OF NON-GAAP FINANCIAL MEASURES

The Firm prepares its consolidated financial statements using U.S. GAAP; these financial statements appear on pages 178181 of this Annual Report. That presentation, which is referred to as reported basis, provides the reader with an understanding of the Firms results that can be tracked consistently from year to year and enables a comparison of the Firms performance with other companies U.S. GAAP financial statements. In addition to analyzing the Firms results on a reported basis, management reviews the Firms results and the results of the lines of business on a managed basis, which is a non-GAAP financial measure. The Firms definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications to present total net revenue for the Firm (and each of the business segments) on a FTE basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. These adjustments have no impact on net income as reported by the Firm as a whole or by the lines of business. Prior to January 1, 2010, the Firms managed-basis presentation also included certain reclassification adjustments that assumed credit card loans securitized by Card remained on the Consolidated Balance Sheets. Effective January 1, 2010, the Firm adopted accounting guidance that required the Firm to consolidate its Firmsponsored credit card securitization trusts. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. The income, expense and credit costs associated with these securitization activities were recorded in the 2011 and 2010 Consolidated Statements of Income in the same classifications that were previously used to report such items on a managed basis. For additional information on the accounting guidance, see Note 16 on pages 256267 of this Annual Report. The presentation in 2009 of Card's results on a managed basis assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance Sheets, and that the earnings on the securitized loans were classified in the same manner as earnings on retained loans recorded on the Consolidated Balance Sheets. JPMorgan Chase had used this managedbasis information to evaluate the credit performance and overall financial performance of the entire managed credit card portfolio. JPMorgan Chase believed that this managedbasis information was useful to investors, as it enabled them to understand both the credit risks associated with the loans reported on the Consolidated Balance Sheets and the Firms retained interests in securitized loans. For a reconciliation of 2009 reported to managed basis results for Card, see Card's segment results on pages 9497 of this Annual Report. For information regarding the securitization process, and loans and residual interests sold and securitized, see Note 16 on pages 256267 of this Annual Report. Tangible common equity (TCE), a non-GAAP financial measure, represents 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, a non-GAAP financial ratio, measures the Firms earnings as a percentage of TCE. Tier 1 common under Basel I and III rules, a non-GAAP financial measure, is used by management to assess the Firm's capital position in conjunction with its capital ratios under Basel I and III requirements. For additional information on Tier 1 common under Basel I and III, see Regulatory capital on pages 119124 of this Annual Report. In managements view, these measures are meaningful to the Firm, as well as analysts and investors, in assessing the Firms use of equity and in facilitating comparisons with competitors. Management also uses certain non-GAAP financial measures at the business-segment level, because it believes these other non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the particular business segment and, therefore, facilitate a comparison of the business segment with the performance of its competitors. NonGAAP financial measures used by the Firm may not be comparable to similarly named non-GAAP financial measures used by other companies.

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The following summary table provides a reconciliation from the Firms reported U.S. GAAP results to managed basis.
2011 Year ended December 31, (in millions, except per share and ratios) Revenue Investment banking fees Principal transactions Lending- and depositrelated fees Asset management, administration and commissions Securities gains Mortgage fees and related income Credit card income Other income Noninterest revenue Net interest income Total net revenue Noninterest expense Pre-provision profit Provision for credit losses Income before income tax expense and extraordinary gain Income tax expense Income before extraordinary gain Extraordinary gain Net income Diluted earnings per share(a) Return on assets(a) Overhead ratio Loans period-end Total assets average (a) (b) $ $ $ 5,911 10,005 6,458 14,094 1,593 2,721 6,158 2,605 49,545 47,689 97,234 62,911 34,323 7,574 $ 2,003 2,003 530 2,533 2,533 $ 5,911 10,005 6,458 14,094 1,593 2,721 6,158 4,608 51,548 48,219 99,767 62,911 36,856 7,574 $ 6,190 10,894 6,340 13,499 2,965 3,870 5,891 2,044 51,693 51,001 102,694 61,196 41,498 16,639 $ 1,745 1,745 403 2,148 2,148 $ 6,190 10,894 6,340 13,499 2,965 3,870 5,891 3,789 53,438 51,404 104,842 61,196 43,646 16,639 $ 7,087 9,796 7,045 12,540 1,110 3,678 7,110 916 49,282 51,152 100,434 52,352 48,082 32,015 $ (1,494) (1,494) 7,937 6,443 6,443 6,443 $ 1,440 1,440 330 1,770 1,770 $ 7,087 9,796 7,045 12,540 1,110 3,678 5,616 2,356 49,228 59,419 108,647 52,352 56,295 38,458 Reported Results Fully taxequivalent adjustments Managed basis Reported Results 2010 Fully taxequivalent adjustments Managed basis Reported Results 2009 Fully taxequivalent adjustments Managed basis

Credit card(b)

26,749 7,773 18,976 18,976 4.48 0.86% 65 $ 723,720 2,198,198 $ $ $

2,533 2,533 NM NM $ $

29,282 10,306 18,976 18,976 4.48 0.86% 63 $ 723,720 2,198,198 $ $

24,859 7,489 17,370 17,370 3.96 0.85% 60 $ 692,927 2,053,251 $ $ $

2,148 2,148 NM NM $ $

27,007 9,637 17,370 17,370 3.96 0.85% 58 $ 692,927 2,053,251 $ $

16,067 4,415 11,652 76 11,728 2.24 0.58% 52 $ 633,458 2,024,201 $ $

NM NM $ 84,626 82,233 $ $ $

1,770 1,770 NM NM $ $

17,837 6,185 11,652 76 11,728 2.24 0.55% 48 $ 718,084 2,106,434

Based on income before extraordinary gain. See pages 9497 of this Annual Report for a discussion of the effect of credit card securitizations on Card's results.

Calculation of certain U.S. GAAP and non-GAAP metrics The table below reflects the formulas used to calculate both the following U.S. GAAP and non-GAAP measures. Return on common equity Net income* / Average common stockholders equity Return on tangible common equity(c) Net income* / Average tangible common equity Return on assets Reported net income / Total average assets Managed net income / Total average managed assets(d) Overhead ratio Total noninterest expense / Total net revenue
* Represents net income applicable to common equity (c) The Firm uses ROTCE, a non-GAAP financial measure, to evaluate its use of equity and to facilitate comparisons with competitors. Refer to the following table for the calculation of average tangible common equity. (d) The Firm uses return on managed assets, a non-GAAP financial measure, to evaluate the overall performance of the managed credit card portfolio, including securitized credit card loans.

Average tangible common equity Year ended December 31, (in millions) Common stockholders equity Less: Goodwill Less: Certain identifiable intangible assets Add: Deferred tax liabilities(a) Tangible common equity (a) 2011 $ 173,266 48,632 3,632 2,635 $ 123,637 2010 $ 161,520 48,618 4,178 2,587 $ 111,311 $ 2009 $ 145,903 48,254 5,095 2,547 95,101

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.

JPMorgan Chase & Co./2011 Annual Report

77

Management's discussion and analysis

Core net interest income In addition to reviewing JPMorgan Chase's net interest income on a managed basis, management also reviews core net interest income to assess the performance of its core lending, investing (including asset/liability management) and deposit-raising activities, excluding the impact of IB's market-based activities. The table below presents an analysis of core net interest income, core average interestearning assets, and the core net interest yield on core average interest-earning assets, on a managed basis. Each of these amounts is a non-GAAP financial measure due to the exclusion of IB's market-based net interest income and the related assets. Management believes the exclusion of IB's market-based activities provides investors and analysts a more meaningful measure to analyze non-market related business trends of the Firm and can be used as a comparable measure to other financial institutions primarily focused on core lending, investing and deposit-raising activities.
Core net interest income data(a)
Year ended December 31, (in millions, except rates) Net interest income - managed basis $ Impact of market-based net interest income Core net interest income Average interest-earning assets - managed basis Impact of market-based earning assets Core average interestearning assets Net interest yield on interestearning assets - managed basis Net interest yield on marketbased activity Core net interest yield on interest-earning assets $ 2011 48,219 7,329 40,890 $ $ 2010 51,404 7,112 44,292 $ $ 2009 59,419 8,238 51,181

2009 levels. Core average interest-earning assets decreased by $100.8 billion in 2010 to $1,206.6 billion. The decrease was primarily driven by lower loan balances and deposits with banks due to a decline in wholesale and retail deposits. The core net interest yield decreased by 24 basis points in 2010 driven by lower yields on loans and investment securities. Impact of redemption of TARP preferred stock issued to the U.S. Treasury The calculation of 2009 net income applicable to common equity included a one-time, noncash reduction of $1.1 billion resulting from the redemption of TARP preferred capital. Excluding this reduction, ROE would have been 7% for 2009. The Firm views adjusted ROE, a non-GAAP financial measure, as meaningful because it enables the comparability to the other periods reported.
Year ended December 31, 2009 (in millions, except ratios) Return on equity Net income Less: Preferred stock dividends Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury Net income applicable to common equity Average common stockholders equity ROE $ $ $ 11,728 1,327 $ 11,728 1,327 As reported Excluding the TARP redemption

1,112 9,289 145,903 6% $ $

10,401 145,903 7%

$ 1,761,355 519,655 $ 1,241,700

$ 1,677,521 470,927 $ 1,206,594

$ 1,735,866 428,471 $ 1,307,395

In addition, the calculation of diluted earnings per share (EPS) for the year ended December 31, 2009, was also affected by the TARP repayment, as presented below.
Year ended December 31, 2009 (in millions, except per share) Diluted earnings per share Net income Less: Preferred stock dividends Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury Net income applicable to common equity Less: Dividends and undistributed earnings allocated to participating securities Net income applicable to common stockholders Total weighted average diluted shares outstanding Net income per share $ $ 11,728 1,327 $ As reported Effect of TARP redemption

2.74% 1.41 3.29%

3.06% 1.51 3.67%

3.42% 1.92 3.91%

(a) Includes core lending activities, investing and deposit-raising activities on a managed basis, across RFS, Card, CB, TSS, AM and Corporate/ Private Equity, as well as IB credit portfolio loans.

1,112 9,289 515 8,774 3,879.7 2.26 $

1,112 (1,112) (62) (1,050) 3,879.7 (0.27)

2011 compared with 2010 Core net interest income decreased by $3.4 billion to $40.9 billion for 2011. The decrease was primarily driven by lower loan levels and yields in RFS and Card compared with 2010 levels. Core average interest-earning assets increased by $35.1 billion in 2011 to $1,241.7 billion. The increase was driven by higher levels of deposits with banks and securities borrowed due to wholesale and retail client deposit growth. The core net interest yield decreased by 38 basis points in 2011 driven by lower loan yields and higher deposit balances, and lower yields on investment securities due to portfolio mix and lower long-term interest rates. 2010 compared with 2009 Core net interest income decreased by $6.9 billion to $44.3 billion in 2010. The decrease was primarily driven by lower loan levels and yields in RFS, Card and IB compared with
78

Other financial measures The Firm also discloses the allowance for loan losses to total retained loans, excluding residential real estate purchased credit-impaired loans. For a further discussion of this credit metric, see Allowance for Credit Losses on pages 155157 of this Annual Report.

JPMorgan Chase & Co./2011 Annual Report

BUSINESS SEGMENT RESULTS

The Firm is managed on a line-of-business basis. The business segment financial results presented reflect the current organization of JPMorgan Chase. There are six major reportable business segments: the Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The business segments are determined based on the products and services provided, or the type of customer served, and reflect the manner in which financial information is currently evaluated by management. Results of the 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 7678 of this Annual Report. Business segment changes Commencing July 1, 2011, the Firms business segments were reorganized as follows: Auto and Student Lending transferred from the RFS segment and are reported with Card in a single segment. Retail Financial Services continues as a segment, organized in two components: Consumer & Business Banking (formerly Retail Banking) and Mortgage Banking (which includes Mortgage Production and Servicing, and Real Estate Portfolios). The business segment information associated with RFS and Card have been revised to reflect the business reorganization retroactive to January 1, 2009.

JPMorgan Chase

Investment Bank Businesses:

Investment Banking Advisory Debt and equity underwriting Market-making Fixed income Commodities Equities Prime Services Research Corporate Lending Credit Portfolio Management

Retail Financial Services Businesses:

Consumer & Business Banking Mortgage Production and Servicing Real Estate Portfolios Residential mortgage loans Home equity loans and originations

Card Services & Auto Businesses:

Card Services Credit Card Merchant Services Auto Student

Commercial Banking Businesses:

Middle Market Banking Commercial Term Lending Corporate Client Banking Real Estate Banking

Treasury & Securities Services Businesses:

Treasury Services Worldwide Securities Services

Asset Management Businesses:

Private Banking Investment Management: Institutional Retail Highbridge

Description of business segment reporting methodology Results of the business segments are intended to reflect each segment as if it were essentially a stand-alone business. The management reporting process that derives business segment results allocates income and expense using market-based methodologies. The Firm continues to assess the assumptions, methodologies and reporting classifications used for segment reporting, and further refinements may be implemented in future periods. Revenue sharing When business segments join efforts to sell products and services to the Firms 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 allocate interest income and expense to each business and transfer the primary interest rate risk exposures to the Treasury group within the Corporate/Private Equity business segment. The allocation process is unique to each business segment and considers the interest rate risk, liquidity risk and regulatory requirements of that segment as if it were operating independently, and as compared with its stand-alone peers. This process is overseen by senior management and reviewed by the Firms Asset-Liability Committee (ALCO). Business segments may be permitted to retain certain interest rate exposures subject to management approval. Capital allocation Each line of business is allocated an amount of capital the Firm believes the business would require if it were operating independently, incorporating sufficient capital to
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JPMorgan Chase & Co./2011 Annual Report

Management's discussion and analysis

address regulatory capital requirements (including Basel III Tier 1 common capital requirements), economic risk measures and capital levels for similarly rated peers. For a further discussion on capital allocation, see Capital Management Line of business equity on page 123 of this Annual Report. Expense allocation Where business segments use services provided by support units within the Firm, the costs of those support units are allocated to the business segments. The expense is allocated based on their actual cost or the lower of actual cost or market, as well as upon usage of the services provided. In contrast, certain other expense related to certain corporate functions, or to certain technology and operations, are not allocated to the business segments and are retained in Corporate. Retained expense includes: parent company costs that would not be incurred if the segments were stand-alone businesses; adjustments to align certain corporate staff, technology and operations allocations with market prices; and other one-time items not aligned with a particular business segment.

Segment Results Managed Basis The following table summarizes the business segment results for the periods indicated.
Year ended December 31, (in millions) Investment Bank(a) Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total
(a)

Total net revenue 2011 $ 26,274 $ 26,538 19,141 6,418 7,702 9,543 4,151 2010 26,217 $ 28,447 20,472 6,040 7,381 8,984 7,301 2009 28,109 29,797 23,199 5,720 7,344 7,965 6,513

Noninterest expense 2011 $ 16,116 $ 19,458 8,045 2,278 5,863 7,002 4,149 $ 62,911 $ 2010 16,483 7,178 2,199 5,604 6,112 6,355 2009 15,512 6,617 2,176 5,278 5,473 1,895 17,265 $ 15,401

Pre-provision profit(b) 2011 $ 10,158 $ 7,080 11,096 4,140 1,839 2,541 2 2010 11,964 13,294 3,841 1,777 2,872 946 2009 14,285 16,582 3,544 2,066 2,492 4,618 8,952 $ 12,708

$ 99,767 $ 104,842 $ 108,647

61,196 $ 52,352

$ 36,856 $ 43,646 $ 56,295

Year ended December 31, (in millions, except ratios) Investment Bank(a) Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity(a) Total (a) (b) $ $

Provision for credit losses 2011 (286) $ 3,999 3,621 208 1 67 (36) 7,574 $ 2010 (1,200) $ 8,919 8,570 297 (47) 86 14 16,639 $ 2009 2,279 14,754 19,648 1,454 55 188 80 38,458 $

Net income/(loss) 2011 6,789 $ 1,678 4,544 2,367 1,204 1,592 802 2010 6,639 $ 1,728 2,872 2,084 1,079 1,710 1,258 2009 6,899 (335) (1,793) 1,271 1,226 1,430 3,030

Return on equity 2011 17% 7 28 30 17 25 NM 11% 2010 17% 7 16 26 17 26 NM 10% 2009 21% (1) (10) 16 25 20 NM 6%

$ 18,976 $ 17,370 $ 11,728

Corporate/Private Equity includes an adjustment to offset IBs inclusion of a credit allocation income/(expense) to TSS in total net revenue; TSS reports the credit allocation as a separate line item on its income statement (not within total net revenue). Pre-provision profit is 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.

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JPMorgan Chase & Co./2011 Annual Report

INVESTMENT BANK
J.P. Morgan is one of the worlds leading investment banks, with deep client relationships and broad product capabilities. The clients of IB are corporations, financial institutions, governments and institutional investors. The Firm 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, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research. Selected income statement data
Year ended December 31, (in millions, except ratios) Revenue Investment banking fees Principal transactions(a) Lending- and deposit-related fees Asset management, administration and commissions All other income(b) Noninterest revenue Net interest income Total net revenue(c) Provision for credit losses Noninterest expense Compensation expense Noncompensation expense Total noninterest expense Income before income tax expense Income tax expense Net income Financial ratios Return on common equity Return on assets Overhead ratio Compensation expense as a percentage of total net revenue(d) 17% 0.84 61 34 17% 0.91 66 37 21% 0.99 55 33 8,880 7,236 16,116 10,444 3,655 $ 6,789 9,727 7,538 17,265 10,152 3,513 $ 6,639 9,334 6,067 15,401 10,429 3,530 $ 6,899 $ 5,859 8,324 858 2,207 723 17,971 8,303 26,274 (286) $ 6,186 8,454 819 2,413 381 18,253 7,964 26,217 (1,200) $ 7,169 8,154 664 2,650 (115) 18,522 9,587 28,109 2,279 2011 2010 2009

The following table provides IB's total net revenue by business.

Year ended December 31, (in millions) Revenue by business Investment banking fees: Advisory Equity underwriting Debt underwriting Total investment banking fees Fixed income markets Equity markets(b) Credit portfolio(c)(d) Total net revenue
(a)

2011

2010

2009

1,792 1,181 2,886 5,859 15,337 4,832 246

1,469 1,589 3,128 6,186 15,025 4,763 243

1,867 2,641 2,661 7,169 17,564 4,393 (1,017)

$ 26,274

$ 26,217

$ 28,109

(a) Fixed income markets primarily include revenue related to marketmaking across global fixed income markets, including foreign exchange, interest rate, credit and commodities markets. (b) Equity markets primarily include revenue related to market-making across global equity products, including cash instruments, derivatives, convertibles and Prime Services. (c) Credit portfolio revenue includes net interest income, fees and loan sale activity, as well as gains or losses on securities received as part of a loan restructuring, for IBs credit portfolio. Credit portfolio revenue also includes the results of risk management related to the Firm's lending and derivative activities. See pages 143144 of the Credit Risk Management section of this Annual Report for further discussion. (d) IB manages traditional credit exposures related to GCB on behalf of IB and TSS. Effective January 1, 2011, IB and TSS share the economics related to the Firms GCB clients. IB recognizes this sharing agreement within all other income. The prior-year periods reflected the reimbursement from TSS for a portion of the total costs of managing the credit portfolio on behalf of TSS.

(a) Principal transactions included DVA related to derivatives and structured liabilities measured at fair value. DVA gains/(losses) were $1.4 billion, $509 million, and ($2.3) billion for the years ended December 31, 2011, 2010, and 2009, respectively. (b) IB manages traditional credit exposures related to GCB on behalf of IB and TSS. Effective January 1, 2011, IB and TSS share the economics related to the Firms GCB clients. IB recognizes this sharing agreement within all other income. The prior-year periods reflected the reimbursement from TSS for a portion of the total costs of managing the credit portfolio on behalf of TSS. (c) Total net revenue included tax-equivalent adjustments, predominantly due to income tax credits related to affordable housing and alternative energy investments as well as tax-exempt income from municipal bond investments of $1.9 billion, $1.7 billion and $1.4 billion for the years ended December 31, 2011, 2010 and 2009, respectively. (d) The compensation expense as a percentage of total net revenue ratio for the year ended December 31, 2010, excluding the payroll tax expense related to the U.K. Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees, which is a non-GAAP financial measure, was 35%. IB excluded this tax from the ratio because it enables comparability between periods.

2011 compared with 2010 Net income was $6.8 billion, up 2% compared with the prior year. These results primarily reflected similar net revenue compared with 2010, while lower noninterest expense was largely offset by a reduced benefit from the provision for credit losses. Net revenue included a $1.4 billion gain from DVA on certain structured and derivative liabilities resulting from the widening of the Firm's credit spreads. Excluding the impact of DVA, net revenue was $24.8 billion and net income was $5.9 billion. Net revenue was $26.3 billion, compared with $26.2 billion in the prior year. Investment banking fees were $5.9 billion, down 5% from the prior year; these consisted of debt underwriting fees of $2.9 billion (down 8%), advisory fees of $1.8 billion (up 22%) and equity underwriting fees of $1.2 billion (down 26%). Fixed Income Markets revenue was $15.3 billion, compared with $15.0 billion in the prior year, with continued solid client revenue. The increase also reflects DVA gains of $553 million, compared with DVA gains of $287 million in the prior year. Equity Markets revenue was $4.8 billion, approximately flat compared with the prior year, as slightly lower performance was more than offset by DVA gains of $356 million, compared with DVA

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Management's discussion and analysis

gains of $181 million in the prior year. Credit Portfolio revenue was $246 million as net interest income and fees on retained loans, as well as DVA gains of $528 million were predominantly offset by a $769 million loss, net of hedges, from CVA on derivative assets. Results were approximately flat to the prior year, which included net CVA losses of $403 million. The provision for credit losses was a benefit of $286 million, compared with a benefit of $1.2 billion in the prior year. The current-year provision reflected a net reduction in the allowance for loan losses largely driven by portfolio activity, partially offset by new loan growth. Net charge-offs were $161 million, compared with $735 million in the prior year. Noninterest expense was $16.1 billion, down 7% driven primarily by lower compensation expense compared with the prior period which included the impact of the U.K. Bank Payroll Tax. Noncompensation expense was also lower compared with the prior year, which included higher litigation reserves. This decrease was partially offset by additional operating expense related to growth in business activities in 2011. Return on Equity was 17% on $40.0 billion of average allocated capital. 2010 compared with 2009 Net income was $6.6 billion, down 4% compared with the prior year. These results primarily reflected lower net revenue as well as higher noninterest expense, largely offset by a benefit from the provision for credit losses, compared with an expense in the prior year. Net revenue was $26.2 billion, compared with $28.1 billion in the prior year. Investment banking fees were $6.2 billion, down 14% from the prior year; these consisted of record debt underwriting fees of $3.1 billion (up 18%), equity underwriting fees of $1.6 billion (down 40%), and advisory fees of $1.5 billion (down 21%). Fixed Income Markets revenue was $15.0 billion, compared with $17.6 billion in the prior year. The decrease from the prior year largely reflected lower results in rates and credit markets, partially offset by DVA gains of $287 million from the widening of the Firms credit spread on certain structured liabilities, compared with DVA losses of $1.1 billion in the prior year. Equity Markets revenue was $4.8 billion, compared with $4.4 billion in the prior year, reflecting solid client revenue, as well as DVA gains of $181 million, compared with DVA losses of $596 million in the prior year. Credit Portfolio revenue was $243 million, primarily reflecting net interest income and fees on loans, partially offset by net CVA losses on derivative assets and mark-to-market losses on hedges of retained loans. The provision for credit losses was a benefit of $1.2 billion, compared with an expense of $2.3 billion in the prior year. The current-year provision reflected a reduction in the allowance for loan losses, largely related to net repayments and loan sales. Net charge-offs were $735 million, compared with $1.9 billion in the prior year. Noninterest expense was $17.3 billion, up $1.9 billion from the prior year, driven by higher noncompensation expense, which included increased litigation reserves, and higher compensation expense which included the impact of the U.K. Bank Payroll Tax. Return on Equity was 17% on $40.0 billion of average allocated capital. Selected metrics
As of or for the year ended December 31, (in millions, except headcount) Selected balance sheet data (period-end) Total assets Loans: Loans retained(a) Loans held-for-sale and loans at fair value Total loans Equity Selected balance sheet data (average) Total assets Trading assets-debt and equity instruments Trading assets-derivative receivables Loans: Loans retained(a) Loans held-for-sale and loans at fair value Total loans Adjusted assets(b) Equity Headcount (a) (b) 57,007 3,119 60,126 600,160 40,000 25,999 54,402 3,215 57,617 540,449 40,000 26,314 62,722 7,589 70,311 538,724 33,000 24,654 $ 812,779 346,461 73,201 $ 731,801 307,061 70,289 $ 699,039 273,624 96,042 68,208 2,915 71,123 40,000 53,145 3,746 56,891 40,000 45,544 3,567 49,111 33,000 $ 776,430 $ 825,150 $ 706,944 2011 2010 2009

Loans retained included credit portfolio loans, leveraged leases and other held-for-investment loans, and excluded loans held-for-sale and loans at fair value. Adjusted assets, a non-GAAP financial measure, equals total assets minus: (1) securities purchased under resale agreements and securities borrowed less securities sold, not yet purchased; (2) assets of consolidated VIEs; (3) cash and securities segregated and on deposit for regulatory and other purposes; (4) goodwill and intangibles; and (5) securities received as collateral. The amount of adjusted assets is presented to assist the reader in comparing IBs asset and capital levels to other investment banks in the securities industry. Asset-to-equity leverage ratios are commonly used as one measure to assess a company's capital adequacy. IB believes an adjusted asset amount that excludes the assets discussed above, which were considered to have a low risk profile, provides a more meaningful measure of balance sheet leverage in the securities industry.

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Selected metrics
As of or for the year ended December 31, (in millions, except ratios) Credit data and quality statistics Net charge-offs Nonperforming assets: Nonaccrual loans: Nonaccrual loans retained(a)(b) Nonaccrual loans held-for-sale and loans at fair value Total nonaccrual loans Derivative receivables Assets acquired in loan satisfactions Total nonperforming assets Allowance for credit losses: Allowance for loan losses Allowance for lending-related commitments Total allowance for credit losses Net charge-off rate
(a)(c)

2011 $ 161 $

2010 735

2009 $ 1,904

(f)

quality of the Firm. See VaR discussion on pages 158160 and the DVA sensitivity table on page 161 of this Annual Report for further details. Credit portfolio VaR includes the derivative CVA, hedges of the CVA and mark-to-market (MTM) hedges of the retained loan portfolio, which are all reported in principal transactions revenue. This VaR does not include the retained loan portfolio, which is not MTM.

Market shares and rankings(a)

1,035 166 1,201 14 79 1,294 1,436 418 1,854 0.28% 2.11 139 1.69 3,159 460 3,619 34 117 3,770 1,863 447 2,310 1.35% 3.51 59 6.36 3,196 308 3,504 529 203 4,236 3,756 485 4,241 3.04% 8.25 118 7.13
Year ended December 31, Global investment banking fees(b) Debt, equity and equityrelated Global U.S. Syndicated loans Global U.S. Long-term debt(c) Global U.S. Equity and equity-related Global(d) U.S. Announced M&A(e) 6.8 12.5 3 1 7.3 13.1 3 2 11.6 15.5 1 2 6.7 11.2 1 1 7.2 10.9 2 2 8.4 14.2 1 1 11.0 21.4 1 1 8.5 19.1 2 2 8.1 21.8 1 1 6.8 11.1 1 1 7.2 11.1 1 1 8.8 14.8 1 1 2011 Market Share Rankings 2010 Market Share Rankings 2009 Market Share Rankings

8.1%

#1

7.6%

#1

9.0%

#1

Allowance for loan losses to periodend loans retained(a)(c) Allowance for loan losses to nonaccrual loans retained(a)(b)(c) Nonaccrual loans to period-end loans Market risk-average trading and credit portfolio VaR 95% confidence level Trading activities: Fixed income Foreign exchange Equities Commodities and other Diversification(d) Total trading VaR(e) Credit portfolio VaR Diversification(d) Total trading and credit portfolio VaR (a) (b) (c) (d) $
(f)

50 11 23 16 (42) 58 33 (15) 76

65 11 22 16 (43) 71 26 (10)

160 18 47 20 (91) 154 52 (42)

Global U.S.

18.6 27.5

2 2

15.9 21.9

4 3

23.7 35.6

3 2

(a) Source: Dealogic. Global Investment Banking fees reflects ranking of fees and market share. Remainder of rankings reflects transaction volume rank and market share. Global announced M&A is based on transaction value at announcement; because of joint M&A assignments, M&A market share of all participants will add up to more than 100%. All other transaction volume-based rankings are based on proceeds, with full credit to each book manager/equal if joint. (b) Global Investment Banking fees rankings exclude money market, short-term debt and shelf deals. (c) Long-term debt rankings include investment-grade, high-yield, supranationals, sovereigns, agencies, covered bonds, asset-backed securities (ABS) and mortgage-backed securities; and exclude money market, short-term debt, and U.S. municipal securities. (d) Global Equity and equity-related ranking includes rights offerings and Chinese A-Shares. (e) Announced M&A reflects the removal of any withdrawn transactions. U.S. announced M&A represents any U.S. involvement ranking.

87

164

(e)

Loans retained included credit portfolio loans, leveraged leases and other held-for-investment loans, and excluded loans held-for-sale and loans at fair value. Allowance for loan losses of $263 million, $1.1 billion and $1.3 billion were held against these nonaccrual loans at December 31, 2011, 2010 and 2009, respectively. Loans held-for-sale and loans at fair value were excluded when calculating the allowance coverage ratio and net charge-off rate. Average value-at-risk (VaR) was less than the sum of the VaR of the components described above, due to portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. Trading VaR includes substantially all market-making and clientdriven activities as well as certain risk management activities in IB, including the credit spread sensitivities of certain mortgage products and syndicated lending facilities that the Firm intends to distribute; however, particular risk parameters of certain products are not fully captured, for example, correlation risk. Trading VaR does not include the DVA on derivative and structured liabilities to reflect the credit

According to Dealogic, the Firm was ranked #1 in Global Investment Banking Fees generated during 2011, based on revenue; #1 in Global Debt, Equity and Equityrelated; #1 in Global Syndicated Loans; #1 in Global Long-Term Debt; #3 in Global Equity and Equity-related; and #2 in Global Announced M&A, based on volume.

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Management's discussion and analysis

International metrics
Year ended December 31, (in millions) Total net revenue(a) Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean North America Total net revenue Loans retained (period-end) Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean North America Total loans (a) (b)
(b)

2011 $ 8,418 3,334 1,079 13,443 $ 26,274 $ 15,905 7,889 3,148 41,266 $ 68,208 $

2010 7,380 3,809 897 14,131 $ 26,217 $ 13,961 5,924 2,200 31,060 $ 53,145 $

2009 9,164 3,470 1,157 14,318 $ 28,109 $ 13,079 4,542 2,523 25,400 $ 45,544

Regional revenue is based primarily on the domicile of the client and/ or location of the trading desk. Includes retained loans based on the domicile of the customer. Excludes loans held-for-sale and loans at fair value.

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RETAIL FINANCIAL SERVICES

Retail Financial Services serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking. RFS is organized into Consumer & Business Banking and Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios). Consumer & Business Banking includes branch banking and business banking activities. Mortgage Production and Servicing includes mortgage origination and servicing activities. Real Estate Portfolios comprises residential mortgages and home equity loans, including the PCI portfolio acquired in the Washington Mutual transaction. Customers can use more than 5,500 bank branches (third largest nationally) and more than 17,200 ATMs (second largest nationally), as well as online and mobile banking around the clock. More than 33,500 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. As one of the largest mortgage originators in the U.S., Chase helps customers buy or refinance homes resulting in approximately $150 billion of mortgage originations annually. Chase also services more than 8 million mortgages and home equity loans. Effective July 1, 2011, RFS was organized into two components: (1) Consumer & Business Banking (formerly Retail Banking) and (2) Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios). For a further discussion of the business segment reorganization, see Business segment changes on page 79, and Note 33 on pages 300303 of this Annual Report.
Selected income statement data
Year ended December 31, (in millions, except ratios) Revenue Lending- and deposit-related fees Asset management, administration and commissions Mortgage fees and related income Credit card income Other income Noninterest revenue Net interest income Total net revenue(a) Provision for credit losses Noninterest expense Compensation expense Noncompensation expense Amortization of intangibles Total noninterest expense Income/(loss) before income tax expense/(benefit) Income tax expense/(benefit) Net income/(loss) Financial ratios Return on common equity Overhead ratio Overhead ratio excluding core deposit intangibles(b) 7% 73 72 7% 58 57 (1)% 52 51 $ 8,044 11,176 238 19,458 3,081 1,403 1,678 $ 7,072 9,135 276 16,483 3,045 1,317 1,728 $ 6,349 8,834 329 15,512 (469) (134) (335) 2011 $ 3,190 1,991 2,714 2,025 485 10,405 16,133 26,538 3,999 $ 2010 3,061 1,776 3,855 1,955 580 11,227 17,220 28,447 8,919 $ 2009 3,897 1,665 3,794 1,634 424 11,414 18,383 29,797 14,754

(a)

(b)

Total net revenue included tax-equivalent adjustments associated with tax-exempt loans to municipalities and other qualified entities of $7 million, $8 million and $9 million for the years ended December 31, 2011, 2010 and 2009, respectively. RFS uses the overhead ratio (excluding the amortization of core deposit intangibles (CDI)), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Consumer & Business Banking's CDI amortization expense related to prior business combination transactions of $238 million, $276 million and $328 million for the years ended December 31, 2011, 2010 and 2009, respectively.

2011 compared with 2010 Retail Financial Services reported net income of $1.7 billion, down 3% when compared with the prior year. Net revenue was $26.5 billion, a decrease of $1.9 billion, or 7%, compared with the prior year. Net interest income was $16.1 billion, down by $1.1 billion, or 6%, reflecting the impact of lower loan balances, due to portfolio runoff, and narrower loan spreads. Noninterest revenue was $10.4 billion, down by $822 million, or 7%, driven by lower mortgage fees and related income partially offset by higher investment sales revenue and higher deposit-related fees. The provision for credit losses was $4.0 billion, a decrease of $4.9 billion from the prior year. While delinquency trends and net charge-offs improved compared with the prior year, the current-year provision continued to reflect elevated losses in the mortgage and home equity portfolios. The current year provision also included a $230 million net reduction in the allowance for loan losses which reflects a reduction of $1.0 billion in the allowance related to the non-credit-impaired portfolio, as estimated losses in the portfolio have declined, predominantly offset by an increase of $770 million reflecting additional impairment of the Washington Mutual PCI portfolio due to higher-thanexpected default frequency relative to modeled lifetime loss estimates. The prior-year provision reflected a higher impairment on the PCI portfolio and higher net charge-offs. See Consumer Credit Portfolio on pages 145154 of this Annual Report for the net charge-off amounts and rates. Noninterest expense was $19.5 billion, an increase of $3.0 billion, or 18%, from the prior year driven by elevated foreclosure- and default-related costs, including $1.7 billion for fees and assessments, as well as other costs of foreclosure-related matters during 2011, compared with $350 million in 2010. 2010 compared with 2009 Net income was $1.7 billion, compared with a net loss of $335 million in the prior year. Net revenue was $28.4 billion, a decrease of $1.4 billion, or 5%, compared with the prior year. Net interest income was $17.2 billion, down by $1.2 billion, or 6%, reflecting the impact of lower loan and deposit balances and narrower
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Management's discussion and analysis

loan spreads, partially offset by a shift to wider-spread deposit products. Noninterest revenue was $11.2 billion, a decrease of $187 million, or 2%, compared with the prior year, as lower deposit-related fees were partially offset by higher debit card income. The provision for credit losses was $8.9 billion, compared with $14.8 billion in the prior year. The current-year provision reflected an addition to the allowance for loan losses of $3.4 billion for the PCI portfolio and a reduction in the allowance for loan losses of $1.7 billion, predominantly for the mortgage loan portfolios. In comparison, the prioryear provision reflected an addition to the allowance for loan losses of $5.5 billion, predominantly for the home equity and mortgage portfolios, and also included an addition of $1.6 billion for the PCI portfolio. While delinquency trends and net charge-offs improved compared with the prior year, the provision continued to reflect elevated losses for the mortgage and home equity portfolios. See Consumer Credit Portfolio on page 145154 of this Annual Report for the net charge-off amounts and rates. Noninterest expense was $16.5 billion, an increase of $971 million, or 6%, from the prior year, reflecting higher default-related expense. Selected metrics
As of or for the year ended December 31, (in millions, except headcount and ratios) Selected balance sheet data (period-end) Total assets Loans: Loans retained Loans held-for-sale and loans at fair value(a) Total loans Deposits Equity Selected balance sheet data (average) Total assets Loans: Loans retained Loans held-for-sale and loans at fair value(a) Total loans Deposits Equity Headcount 241,621 16,354 257,975 380,663 25,000 133,075 268,902 15,395 284,297 361,525 24,600 116,882 296,959 16,236 313,195 366,996 22,457 103,733 $ 286,716 $ 314,046 $ 344,727 (e) (f) 232,555 12,694 245,249 395,797 25,000 253,904 14,863 268,767 369,925 24,600 280,246 12,920 293,166 356,614 22,457 $ 274,795 $ 299,950 $ 322,185 (c) (d) 2011 2010 2009

As of or for the year ended December 31, (in millions, except ratios) Credit data and quality statistics Net charge-offs Nonaccrual loans: Nonaccrual loans retained Nonaccrual loans held-for-sale and loans at fair value Total nonaccrual loans(b)(c)(d) Nonperforming assets(b)(c)(d) Allowance for loan losses Net charge-off rate(e) Net charge-off rate excluding PCI loans(e)(f) Allowance for loan losses to ending loans retained Allowance for loan losses to ending loans retained excluding PCI loans(f) Allowance for loan losses to nonaccrual loans retained(b)(f) Nonaccrual loans to total loans Nonaccrual loans to total loans excluding PCI loans(b) (a) (b) 7,170 103 7,273 8,064 15,247 1.78% 2.49 6.56 5.71 133 2.97 4.05 8,568 145 8,713 9,999 15,554 2.69% 3.76 6.13 5.86 124 3.24 4.45 10,373 234 10,607 11,761 13,734 3.11% 4.36 4.90 6.11 117 3.62 5.01 $ 4,304 $ 7,221 $ 9,233 2011 2010 2009

Predominantly consists of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. Excludes PCI loans that were acquired as part of the Washington Mutual transaction, 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 pastdue status of the pools, or that of the individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. Certain of these loans are classified as trading assets on the Consolidated Balance Sheets. At December 31, 2011, 2010 and 2009, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $11.5 billion, $9.4 billion and $9.0 billion, respectively, that are 90 or more days past due; and (2) real estate owned insured by U.S. government agencies of $954 million, $1.9 billion and $579 million, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on pages 231252 of this Annual Report which summarizes loan delinquency information. Loans held-for-sale and loans accounted for at fair value were excluded when calculating the net charge-off rate. Excludes the impact of PCI loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management's estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $5.7 billion, $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2011, 2010 and 2009, respectively; these amounts were also excluded from the applicable ratios. To date, no charge-offs have been recorded for these loans.

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Consumer & Business Banking

Selected income statement data
Year ended December 31, (in millions, except ratios) Noninterest revenue Net interest income Total net revenue Provision for credit losses Noninterest expense Income before income tax expense Net income Overhead ratio Overhead ratio excluding core deposit intangibles(a) $ $ 2011 7,201 10,809 18,010 419 11,202 6,389 3,816 62% 61 $ $ 2010 6,844 10,884 17,728 630 10,717 6,381 3,652 60% 59 $ $ 2009 7,204 10,864 18,068 1,176 10,421 6,471 3,915 58% 56

2011 compared with 2010 Consumer & Business Banking reported net income of $3.8 billion, an increase of $164 million, or 4%, compared with the prior year. Net revenue was $18.0 billion, up 2%, from the prior year. Net interest income was $10.8 billion, relatively flat compared with the prior year, as the impact from higher deposit balances was offset predominantly by the effect of lower deposit spreads. Noninterest revenue was $7.2 billion, an increase of 5%, driven by higher investment sales revenue and higher deposit-related fees. The provision for credit losses was $419 million, compared with $630 million in the prior year. Net charge-offs were $494 million, compared with $730 million in the prior year. Noninterest expense was $11.2 billion, up 5%, from the prior year resulting from investment in sales force and new branch builds. 2010 compared with 2009 Consumer & Business Banking reported net income of $3.7 billion, a decrease of $263 million, or 7%, compared with the prior year. Total net revenue was $17.7 billion, down 2% compared with the prior year. The decrease was driven by lower deposit-related fees, largely offset by higher debit card income and a shift to wider-spread deposit products. The provision for credit losses was $630 million, down $546 million compared with the prior year. The current-year provision reflected lower net charge-offs and a reduction of $100 million to the allowance for loan losses due to lower estimated losses, compared with a $300 million addition to the allowance for loan losses in the prior year. Net chargeoffs were $730 million, compared with $876 million in the prior year. Noninterest expense was $10.7 billion, up 3% compared with the prior year, resulting from sales force increases in Business Banking and bank branches.

(a) Consumer & Business Banking uses the overhead ratio (excluding the amortization of CDI), a non-GAAP financial measure, to evaluate the underlying expense trends of the business. Including CDI amortization expense in the overhead ratio calculation would result in a higher overhead ratio in the earlier years and a lower overhead ratio in later years; this method would therefore result in an improving overhead ratio over time, all things remaining equal. This non-GAAP ratio excluded Consumer & Business Banking's CDI amortization expense related to prior business combination transactions of $238 million and $276 million and $328 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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Management's discussion and analysis

Selected metrics
As of or for the year ended December 31, (in millions, except ratios) Business metrics Business banking origination volume End-of-period loans End-of-period deposits: Checking Savings Time and other Total end-of-period deposits Average loans Average deposits: Checking Savings Time and other Total average deposits Deposit margin Average assets $ 136,579 182,587 41,574 360,740 2.82% 29,729 $ 123,490 166,112 51,149 340,751 3.00% 29,307 $ 116,568 151,909 76,550 345,027 2.92% 29,791 147,779 191,891 36,743 376,413 17,121 131,702 170,604 45,967 348,273 16,863 123,220 156,140 58,185 337,545 17,991 $ 5,827 17,652 $ 4,688 16,812 $ 2,299 16,974 2011 2010 2009

Selected metrics
As of or for the year ended December 31, (in millions, except ratios and where otherwise noted) Credit data and quality statistics Net charge-offs Net charge-off rate Allowance for loan losses Nonperforming assets Retail branch business metrics Investment sales volume Client investment assets % managed accounts Number of: Branches Chase Private Client branch locations ATMs Personal bankers(a) Sales specialists Client advisors Active online customers (in thousands)(a) Active mobile customers (in thousands)(a) Chase Private Clients Checking accounts (in thousands)
(a)

2011 $ $ 494 2.89% 798 710 $ 22,716 137,853 24% 5,508 262 17,235 24,308 6,017 3,201 17,334 8,391 21,723 26,626 $ $

2010 730 4.32% 875 846 $ 23,579 133,114 20% 5,268 16 16,145 21,735 4,876 3,066 16,855 5,337 4,242 27,252 $ $

2009 876 4.87% 977 839 $ 21,784 120,507 13% 5,154 16 15,406 18,009 3,915 2,731 14,627 1,249 2,933 25,712

(a) In 2011, the classification of personal bankers, sales specialists, and active online and mobile customers was refined; as such, prior periods have been revised to conform with the current presentation.

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Mortgage Production and Servicing

Selected income statement data
Year ended December 31, (in millions, except ratios) Mortgage fees and related income Other noninterest revenue Net interest income Total net revenue Provision for credit losses Noninterest expense Income/(loss) before income tax expense/(benefit) Net income/(loss) Overhead ratio Functional results Production Production revenue Production-related net interest & other income Production-related revenue, excluding repurchase losses Production expense Income, excluding repurchase losses Repurchase losses Income/(loss) before income tax expense/ (benefit) Servicing Loan servicing revenue Servicing-related net interest & other income Servicing-related revenue MSR asset modeled amortization Default servicing expense Core servicing expense Income/(loss), excluding MSR risk management MSR risk management, including related net interest income/(expense)(b) Income/(loss) before income tax expense/ (benefit) Net income/(loss)
(a)

Selected income statement data

Year ended December 31, 2010 $ 3,855 413 904 5,172 58 4,139 975 $ 569 80% 2009 $ 3,794 442 973 5,209 15 3,244 1,950 $ 1,199 62% (in millions) Supplemental mortgage fees and related income details Net production revenue: Production revenue Repurchase losses Net production revenue Net mortgage servicing revenue: Operating revenue: Loan servicing revenue Changes in MSR asset fair value due to modeled amortization Total operating revenue Risk management: 4,134 (1,904) 2,230 4,575 (2,384) 2,191 4,942 (3,279) 1,663 $ 3,395 (1,347) 2,048 $ 3,440 (2,912) 528 $ 2,115 (1,612) 503 2011 2010 2009

2011 $ 2,714 452 770 3,936 5 6,735 (2,804) $ (1,832) 171%

$ 3,395 840 4,235 1,895 2,340 (1,347) 993 4,134 390 4,524 (1,904) 3,814 1,031 (2,225) (1,572) (3,797) $ (1,832)

$ 3,440 869 4,309 1,613 2,696 (2,912) (216) 4,575 433 5,008 (2,384) 1,747 837 40 1,151 1,191 $ 569

$ 2,115 1,079 3,194 1,575 1,619 (1,612) 7 4,942 240 5,182 (3,279) 1,002 682 219 1,724 1,943 $ 1,199

Changes in MSR asset fair value due to inputs or assumptions in model Derivative valuation adjustments and other Total risk management(b) Total net mortgage servicing revenue Mortgage fees and related income $

(7,117) 5,553 (1,564) 666 2,714 $

(2,268) 3,404 1,136 3,327 3,855 $

5,804 (4,176) 1,628 3,291 3,794

(a) Includes $1.7 billion of fees and assessments, as well as other costs of foreclosure-related matters for the year ended December 31, 2011, and $350 million for foreclosure-related matters for the year ended December 31, 2010. (b) Predominantly includes: (1) changes in the MSR asset fair value due to changes in market interest rates and other modeled inputs and assumptions, and (2) changes in the value of the derivatives used to hedge the MSR asset. See Note 17 on pages 267271 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges.

2011 compared with 2010 Mortgage Production and Servicing reported a net loss of $1.8 billion, compared with net income of $569 million in the prior year. Mortgage production pretax income was $993 million, compared with a pretax loss of $216 million in the prior year. Production-related revenue, excluding repurchase losses, was $4.2 billion, a decrease of 2% from the prior year reflecting lower volumes and narrower margins when compared with the prior year. Production expense was $1.9 billion, an increase of $282 million, or 17%, reflecting a strategic shift to higher-cost retail originations both through the branch network and direct to the consumer. Repurchase losses were $1.3 billion, compared with prioryear repurchase losses of $2.9 billion, which included a $1.6 billion increase in the repurchase reserve.

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Management's discussion and analysis

Mortgage servicing, including MSR risk management, resulted in a pretax loss of $3.8 billion, compared with pretax income of $1.2 billion in the prior year. Servicingrelated revenue was $4.5 billion, a decline of 10% from the prior year, as a result of the decline in third-party loans serviced. MSR asset amortization was $1.9 billion, compared with $2.4 billion in the prior year; this reflected reduced amortization as a result of a lower MSR asset value. Servicing expense was $4.8 billion, an increase of $2.3 billion, driven by $1.7 billion recorded for fees and assessments, and other costs of foreclosures-related matters, as well as higher core and default servicing costs. MSR risk management was a loss of $1.6 billion, compared with income of $1.2 billion in the prior year, driven by refinements to the valuation model and related inputs. See Note 17 on pages 267-271 of this Annual Report for further information regarding changes in value of the MSR asset and related hedges. 2010 compared with 2009 Mortgage Production and Servicing reported net income of $569 million, a decrease of $630 million, or 53%, from the prior year. Mortgage production pretax loss was $216 million, compared with pretax income of $7 million in the prior year. Production-related revenue, excluding repurchase losses, was $4.3 billion, an increase of 35% from the prior year reflecting wider mortgage margins and higher origination volumes when compared with the prior year. Production expense was $1.6 billion, an increase of $38 million, due to increased volumes. Repurchase losses were $2.9 billion, compared with prior-year repurchase losses of $1.6 billion. The current year losses included a $1.6 billion increase in the repurchase reserve, reflecting higher estimated future repurchase demands. Mortgage servicing, including MSR risk management, resulted in pretax income of $1.2 billion, compared with pretax income of $1.9 billion in the prior year. Servicingrelated revenue was $5.0 billion, a decline of 3% from the prior year, as a result of the decline in third-party loans serviced. MSR asset amortization was $2.4 billion compared with $3.3 billion in the prior year, reflecting reduced amortization as a result of a lower MSR asset value. Servicing expense was $2.6 billion, an increase of $900 million, driven by higher core and default servicing costs, including $350 million for foreclosure-related matters. MSR risk management income was $1.2 billion, compared with income of $1.7 billion in the prior year.

Selected metrics
As of or for the year ended December 31, (in millions, except ratios and where otherwise noted) Selected balance sheet data End-of-period loans: Prime mortgage, including option ARMs(a) Loans held-for-sale and loans at fair value(b) Average loans: Prime mortgage, including option ARMs(a) Loans held-for-sale and loans at fair value(b) Average assets Repurchase reserve (ending) Credit data and quality statistics Net charge-offs: Prime mortgage, including option ARMs Net charge-off rate: Prime mortgage, including option ARMs 30+ day delinquency rate Nonperforming assets(d) Business metrics (in billions) Origination volume by channel Retail Wholesale(e) Correspondent(e) CNT (negotiated transactions) Total origination volume Application volume by channel Retail Wholesale(e) Correspondent
(e) (c)

2011

2010

2009

$16,891 12,694

$14,186 14,863

$ 11,964 12,920

14,580 16,354 59,891 3,213

13,422 15,395 57,778 3,000

8,894 16,236 51,317 1,448

41

14

0.03% 3.15 $ 716 $

0.31% 3.44 729 $

0.17% 2.89 575

87.2 0.5 52.1 5.8

68.8 1.3 75.3 10.2

53.9 3.6 81.0 12.2

$ 145.6 $ 137.2 1.0 66.5 $ 204.7 $ 902.2 937.6 7.2

$ 155.6 $ 115.1 2.4 97.3 $ 214.8 $ 967.5 1,037.6 13.6

$ 150.7 $ 90.9 4.9 110.8 $ 206.6 $1,082.1 1,119.1 15.5

Total application volume Third-party mortgage loans serviced (ending) Third-party mortgage loans serviced (average) MSR net carrying value (ending) Ratio of MSR net carrying value (ending) to third-party mortgage loans serviced (ending) Ratio of loan servicing revenue to third-party mortgage loans serviced (average) MSR revenue multiple(f)

0.80%

1.41%

1.43%

0.44 1.82x

0.44 3.20x

0.44 3.25x

(a) Predominantly represents prime loans repurchased from Government National Mortgage Association (Ginnie Mae) pools, which are insured by U.S. government agencies. See further discussion of loans repurchased from Ginnie Mae pools in Mortgage repurchase liability on pages 115118 of this Annual Report. (b) Loans at fair value consist of prime mortgages originated with the intent to sell that are accounted for at fair value and classified as trading assets on the Consolidated Balance Sheets. These loans

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JPMorgan Chase & Co./2011 Annual Report

(c)

(d)

(e)

(f)

totaled $12.7 billion, $14.7 billion and $12.5 billion at December 31, 2011, 2010 and 2009, respectively. Average balances of these loans totaled $16.3 billion, $15.2 billion and $15.8 billion for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, 2010 and 2009, excluded mortgage loans insured by U.S. government agencies of $12.6 billion, $10.3 billion and $9.7 billion, respectively, that are 30 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on pages 231252 of this Annual Report which summarizes loan delinquency information. At December 31, 2011, 2010 and 2009, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $11.5 billion, $9.4 billion and $9.0 billion, respectively, that are 90 or more days past due; and (2) real estate owned insured by U.S. government agencies of $954 million, $1.9 billion and $579 million, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally. For further discussion, see Note 14 on pages 231252 of this Annual Report which summarizes loan delinquency information. Includes rural housing loans sourced through brokers and correspondents, which are underwritten and closed in conjunction with the U.S. Department of Agriculture Rural Development, who acts as the guarantor in the transaction. Represents the ratio of MSR net carrying value (ending) to thirdparty mortgage loans serviced (ending) divided by the ratio of loan servicing revenue to third-party mortgage loans serviced (average).

Mortgage Production and Servicing revenue comprises the following: Net production revenue Includes net gains or losses on originations and sales of prime and subprime mortgage loans, other production-related fees and losses related to the repurchase of previously-sold loans. Net mortgage servicing revenue includes the following components: (a) Operating revenue comprises: all gross income earned from servicing third-party mortgage loans including stated service fees, excess service fees, late fees and other ancillary fees; and modeled MSR asset amortization (or time decay). (b) Risk management comprises: changes in MSR asset fair value due to market-based inputs such as interest rates, as well as updates to assumptions used in the MSR valuation model; and derivative valuation adjustments and other, which represents changes in the fair value of derivative instruments used to offset the impact of changes in interest rates to the MSR valuation model. Mortgage origination channels comprise the following: Retail Borrowers 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. Wholesale Third-party mortgage brokers refer loan application packages to the Firm. The Firm then underwrites and funds the loan. Brokers are independent loan originators that specialize in counseling applicants on available home financing options, but do not provide funding for loans. Chase materially eliminated broker-originated loans in 2008, with the exception of a small number of loans guaranteed by the U.S. Department of Agriculture under its Section 502 Guaranteed Loan program that serves low-and-moderate income families in small rural communities. Correspondent Banks, thrifts, other mortgage banks and other financial institutions sell closed loans to the Firm. Correspondent negotiated transactions (CNTs) Mid-tolarge-sized mortgage lenders, banks and bank-owned mortgage companies sell servicing to the Firm on an as-originated basis (excluding sales of bulk servicing). These transactions supplement traditional production channels and provide growth opportunities in the servicing portfolio in periods of stable and rising interest rates.

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91

Management's discussion and analysis Real Estate Portfolios

Selected income statement data
Year ended December 31, (in millions, except ratios) Noninterest revenue Net interest income Total net revenue Provision for credit losses Noninterest expense Income/(loss) before income tax expense/(benefit) Net income/(loss) Overhead ratio $ $ 2011 38 4,554 4,592 3,575 1,521 (504) (306) 33% $ 2010 115 5,432 5,547 8,231 1,627 (4,311) $ (2,493) 29% $ 2009 (26) 6,546 6,520 13,563 1,847 (8,890) $ (5,449) 28%

2011 compared with 2010 Real Estate Portfolios reported a net loss of $306 million, compared with a net loss of $2.5 billion in the prior year. The improvement was driven by a lower provision for credit losses, partially offset by lower net revenue. Net revenue was $4.6 billion, down by $955 million, or 17%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances due to portfolio runoff and narrower loan spreads. The provision for credit losses was $3.6 billion, compared with $8.2 billion in the prior year, reflecting an improvement in charge-off trends and a net reduction of the allowance for loan losses of $230 million. The net change in the allowance reflected a $1.0 billion reduction related to the non-credit-impaired portfolios as estimated losses declined, predominately offset by an increase of $770 million reflecting additional impairment of the Washington Mutual PCI portfolio due to higher-than-expected default frequency relative to modeled lifetime loss estimates. The prior-year provision reflected a higher impairment of the PCI portfolio and higher net charge-offs. See Consumer Credit Portfolio on pages 145154 of this Annual Report for the net charge-off amounts and rates. Noninterest expense was $1.5 billion, down by $106 million, or 7%, from the prior year, reflecting a decrease in foreclosed asset expense due to temporary delays in foreclosure activity. 2010 compared with 2009 Real Estate Portfolios reported a net loss of $2.5 billion, compared with a net loss of $5.4 billion in the prior year. The improvement was driven by a lower provision for credit losses, partially offset by lower net interest income. Net revenue was $5.5 billion, down by $973 million, or 15%, from the prior year. The decrease was driven by a decline in net interest income as a result of lower loan balances, reflecting net portfolio runoff. The provision for credit losses was $8.2 billion, compared with $13.6 billion in the prior year. The current-year provision reflected a $1.9 billion reduction in net charge92

offs and a $1.6 billion reduction in the allowance for the mortgage loan portfolios. This reduction in the allowance for loan losses included the effect of $632 million of charge-offs related to an adjustment of the estimated net realizable value of the collateral underlying delinquent residential home loans. The remaining reduction of the allowance of approximately $950 million was a result of an improvement in delinquencies and lower estimated losses, compared with prior year additions of $3.6 billion for the home equity and mortgage portfolios. Additionally, the current-year provision reflected an addition to the allowance for loan losses of $3.4 billion for the PCI portfolio, compared with a prior year addition of $1.6 billion for this portfolio. See Consumer Credit Portfolio on pages 145154 of this Annual Report for the net charge-off amounts and rates. Noninterest expense was $1.6 billion, down by $220 million, or 12%, from the prior year, reflecting lower default-related expense. PCI Loans Included within Real Estate Portfolios are PCI loans that the Firm acquired in the Washington Mutual transaction. For PCI loans, the excess of the undiscounted gross cash flows expected to be collected over the carrying value of the loans (the accretable yield) is accreted into interest income at a level rate of return over the expected life of the loans. The net spread between the PCI loans and the related liabilities are expected to be relatively constant over time, except for any basis risk or other residual interest rate risk that remains and for certain changes in the accretable yield percentage (e.g., from extended loan liquidation periods and from prepayments). As of December 31, 2011, the remaining weighted-average life of the PCI loan portfolio is expected to be 7.5 years. The loan balances are expected to decline more rapidly in the earlier years as the most troubled loans are liquidated, and more slowly thereafter as the remaining troubled borrowers have limited refinancing opportunities. Similarly, default and servicing expense are expected to be higher in the earlier years and decline over time as liquidations slow down. To date the impact of the PCI loans on Real Estate Portfolios net income has been negative. This is due to the current net spread of the portfolio, the provision for loan losses recognized subsequent to its acquisition, and the higher level of default and servicing expense associated with the portfolio. Over time, the Firm expects that this portfolio will contribute positively to net income. For further information, see Note 14, PCI loans, on pages 248249 of this Annual Report.

JPMorgan Chase & Co./2011 Annual Report

Selected metrics
As of or for the year ended December 31, (in millions) Loans excluding PCI(a) End-of-period loans owned: Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total end-of-period loans owned Average loans owned: Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total average loans owned PCI loans(a) End-of-period loans owned: Home equity Prime mortgage Subprime mortgage Option ARMs Total end-of-period loans owned Average loans owned: Home equity Prime mortgage Subprime mortgage Option ARMs Total average loans owned Total Real Estate Portfolios End-of-period loans owned: Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total end-of-period loans owned Average loans owned: Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total average loans owned Average assets Home equity origination volume (a) $ 106,400 87,197 15,641 773 $ 210,011 $ 197,096 1,127 $ 120,290 99,177 18,400 954 $ 238,821 $ 226,961 1,203 $ 135,960 113,410 20,251 841 $ 270,462 $ 263,619 2,479 (b) (c) $ 100,497 82,157 14,640 718 $ 198,012 $ 112,844 92,674 16,685 857 $ 223,060 $ 127,945 104,623 18,519 671 $ 251,758 $ $ 23,514 16,181 5,170 24,045 68,910 $ $ 25,455 18,526 5,671 27,220 76,872 $ $ 27,627 20,791 6,350 30,464 85,232 $ $ 22,697 15,180 4,976 22,693 65,546 $ $ 24,459 17,322 5,398 25,584 72,763 $ $ 26,520 19,693 5,993 29,039 81,245 $ 82,886 46,971 10,471 773 $ 141,101 $ 94,835 53,431 12,729 954 $ 161,949 $ 108,333 62,155 13,901 841 $ 185,230 $ 77,800 44,284 9,664 718 $ 132,466 $ 88,385 49,768 11,287 857 $ 150,297 $ 101,425 55,891 12,526 671 $ 170,513 2011 2010 2009

These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the underlying loans are contractually past due.

Credit data and quality statistics

As of or for the year ended December 31, (in millions, except ratios) Net charge-offs excluding PCI loans:(a) Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total net charge-offs Net charge-off rate excluding PCI loans:(a) Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total net charge-off rate excluding PCI loans Net charge-off rate reported: Home equity Prime mortgage, including option ARMs Subprime mortgage Other Total net charge-off rate reported 30+ day delinquency rate excluding PCI loans(b) Allowance for loan losses Nonperforming assets(c) Allowance for loan losses to ending loans retained Allowance for loan losses to ending loans retained excluding PCI loans(a) (a) 2.32% 0.78 4.00 3.23 1.81 5.69% $ 14,429 6,638 7.29% 6.58 2.86% 1.59 7.47 5.90 2.70 6.45% $ 14,659 8,424 6.57% 6.47 3.45% 1.70 8.16 9.75 3.08 7.73% $ 12,752 10,347 5.06% 6.55 2.98% 1.45 5.98 3.23 2.70 3.63% 2.95 10.82 5.90 3.98 4.32% 3.11 11.86 9.75 4.50 $ $ 2011 2010 2009

2,472 682 626 25 3,805

3,444 1,573 1,374 59

4,682 1,935 1,648 78

6,450

8,343

PCI loans represent loans acquired in the Washington Mutual transaction for which a deterioration in credit quality occurred between the origination date and JPMorgan Chase's acquisition date.

Excludes the impact of PCI loans that were acquired as part of the Washington Mutual transaction. These loans were accounted for at fair value on the acquisition date, which incorporated management's estimate, as of that date, of credit losses over the remaining life of the portfolio. An allowance for loan losses of $5.7 billion, $4.9 billion and $1.6 billion was recorded for these loans at December 31, 2011, 2010 and 2009, respectively; these amounts were also excluded from the applicable ratios. To date, no charge-offs have been recorded for these loans. The delinquency rate for PCI loans was 23.30%, 28.20% and 27.62% at December 31, 2011, 2010 and 2009, respectively. Excludes PCI loans that were acquired as part of the Washington Mutual transaction, 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 pastdue status of the pools, or that of the individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing.

JPMorgan Chase & Co./2011 Annual Report

93

Management's discussion and analysis

CARD SERVICES & AUTO

Card Services & Auto is one of the nations largest credit card issuers, with over $132 billion in credit card loans. Customers have over 65 million open credit card accounts (excluding the commercial card portfolio), and used Chase credit cards to meet over $343 billion of their spending needs in 2011. Through its Merchant Services business, Chase Paymentech Solutions, Card is a global leader in payment processing and merchant acquiring. Consumers also can obtain loans through more than 17,200 auto dealerships and 2,000 schools and universities nationwide. Effective July 1, 2011, Card includes Auto and Student Lending. For a further discussion of the business segment reorganization, see Business segment changes on page 79, and Note 33 on pages 300303 of this Annual Report. Selected income statement data managed basis(a)(b)
Year ended December 31, (in millions, except ratios) Revenue Credit card income All other income Noninterest revenue Net interest income Total net revenue(d) Provision for credit losses Noninterest expense Compensation expense Noncompensation expense Amortization of intangibles Total noninterest expense Income/(loss) before income tax expense/ (benefit) Income tax expense/ (benefit) Net income/(loss) Memo: Net securitization income/(loss) Financial ratios(a) Return on common equity Overhead ratio (a) (b) 28% 42 16% 35 (10)% 29
(e) (c)

2010 and 2009, respectively. Included Commercial Card noninterest expense of $298 million for the year ended December 31, 2011. NA: Not applicable (e)

2011 compared with 2010 Net income was $4.5 billion, compared with $2.9 billion in the prior year. The increase was driven primarily by lower net charge-offs, partially offset by a lower reduction in the allowance for loan losses compared with the prior year. Net revenue was $19.1 billion, a decrease of $1.3 billion, or 7%, from the prior year. Net interest income was $14.2 billion, down by $1.9 billion, or 12%. The decrease was driven by lower average loan balances, the impact of legislative changes, and a decreased level of fees. These decreases were largely offset by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $4.9 billion, an increase of $614 million, or 14%, from the prior year. The increase was driven by the transfer of the Commercial Card business to Card from Treasury & Securities Services in the first quarter of 2011, higher net interchange income, and lower partner revenue-sharing due to the impact of the Kohl's portfolio sale. These increases were partially offset by lower revenue from feebased products. Excluding the impact of the Commercial Card business, noninterest revenue increased 8%. The provision for credit losses was $3.6 billion, compared with $8.6 billion in the prior year. The current-year provision reflected lower net charge-offs and an improvement in delinquency rates, as well as a reduction of $3.9 billion to the allowance for loan losses due to lower estimated losses. The prior-year provision included a reduction of $6.2 billion to the allowance for loan losses. The net charge-off rate was 3.99%, down from 7.12% in the prior year; the 30+ day delinquency rate was 2.32%, down from 3.23% in the prior year. Excluding the Washington Mutual and Commercial Card portfolios, the Credit Card net charge-off rate1 was 4.93%, down from 8.72% in the prior year; and the 30+ day delinquency rate1 was 2.54%, down from 3.66% in the prior year. The Auto net charge-off rate was 0.32%, down from 0.63% in the prior year. The Student net charge-off rate was 3.10%, up from 2.61% in the prior year. Noninterest expense was $8.0 billion, an increase of $867 million, or 12%, from the prior year, due to higher marketing expense and the inclusion of the Commercial Card business. Excluding the impact of the Commercial Card business, noninterest expense increased 8%. In May 2009, the CARD Act was enacted. The changes required by the CARD Act were fully implemented by the end of the fourth quarter of 2010. The total estimated reduction in net income resulting from the CARD Act was approximately $750 million and $300 million in 2011 and 2010, respectively.

2011 $ 4,127 765 4,892 14,249 19,141 3,621

2010 $ 3,514 764 4,278 16,194 20,472 8,570 $

2009 3,613 93 3,706 19,493 23,199 19,648

1,826 5,818 401 8,045 7,475 2,931 $ 4,544 NA

1,651 5,060 467 7,178 4,724 1,852 $ 2,872 NA $

1,739 4,362 516 6,617 (3,066) (1,273) (1,793) (474)

(c) (d)

Effective January 1, 2011, the commercial card business that was previously in TSS was transferred to Card. There is no material impact on the financial data; prior-year periods were not revised. Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the securitization trusts, reported and managed basis are equivalent for periods beginning after January 1, 2010. See Explanation and Reconciliation of the Firms Use of Non-GAAP Financial Measures on pages 7678 of this Annual Report for additional information. Also, for further details regarding the Firms application and impact of the VIE guidance, see Note 16 on pages 256267 of this Annual Report. Included Commercial Card noninterest revenue of $290 million for the year ended December 31, 2011. Total net revenue included tax-equivalent adjustments associated with tax-exempt loans to certain qualified entities of $2 million, $7 million and $13 million for the years ended December 31, 2011,

94

JPMorgan Chase & Co./2011 Annual Report

2010 compared with 2009 Net income was $2.9 billion, compared with a net loss of $1.8 billion in the prior year. The improved results were driven by a lower provision for credit losses, partially offset by lower net revenue. End-of-period loans were $200.5 billion, a decrease of $24.7 billion, or 11%, from the prior year. Average loans were $207.9 billion, a decrease of $24.2 billion, or 10%, from the prior year. The declines in both end-of-period and average loans were predominantly due to a decline in Credit Card in lower-yielding promotional balances and the Washington Mutual portfolio runoff. Net revenue was $20.5 billion, a decrease of $2.7 billion, or 12%, from the prior year. Net interest income was $16.2 billion, down by $3.3 billion, or 17%. The decrease in net interest income was driven by lower average loan balances, the impact of legislative changes, and a decreased level of fees. These decreases were offset partially by lower revenue reversals associated with lower charge-offs. Noninterest revenue was $4.3 billion, an increase of $572 million, or 15%, driven by the prior-year write-down of securitization interests and higher auto operating lease income, offset partially by lower revenue from fee-based products. The provision for credit losses was $8.6 billion, compared with $19.6 billion in the prior year. The current-year provision reflected lower net charge-offs and a reduction of $6.2 billion to the allowance for loan losses due to lower estimated losses. The prior-year provision included an addition of $2.7 billion to the allowance for loan losses. The net charge-off rate was 7.12%, down from 7.37% in the prior year; and the 30+ day delinquency rate was 3.23%, down from 5.02% in the prior year. Card Services, excluding the Washington Mutual portfolio, net charge-off rate1 was 8.72%, up from 8.45% in the prior year; and the 30+ day delinquency rate1 was 3.66%, down from 5.52% in the prior year. The auto loan net charge-off rate was 0.63%, down from 1.44% in the prior year. The student loan net charge-off rate was 2.61%, up from 1.77% in the prior year. Noninterest expense was $7.2 billion, an increase of $561 million, or 8%, due to higher marketing expense and higher auto operating lease depreciation expense.
For Credit Card, includes loans held-for-sale, which are non-GAAP financial measures, to provide more meaningful measures that enable comparability with prior periods.
1

Selected metrics
As of or for the year ended December 31, (in millions, except headcount and ratios) Selected balance sheet data (period-end)(a) Managed assets Loans: Credit Card Auto Student Total loans on balance sheets Securitized credit card loans(b) Total loans(c) Equity Selected balance sheet data (average)(a) Managed assets Loans: Credit Card Auto Student Total average loans on balance sheets Securitized credit card loans(b) Total average loans Equity Headcount(a) Credit data and quality statistics(a)(b) Net charge-offs: Credit Card Auto Student Total net charge-offs Net charge-off rate: Credit Card(e) Auto Student
(f) (d)

2011

2010

2009

$ 208,467 132,277 47,426 13,425 193,128 NA $ 193,128 16,000

$ 208,793 137,676 48,367 14,454 200,497 NA $ 200,497 18,400

$ 255,029 78,786 46,031 15,747 140,564 84,626 $ 225,190 17,543

$ 201,162 128,167 47,034 13,986 189,187 NA $ 189,187 $ 16,000 27,585

$ 213,041 144,367 47,603 15,945 207,915 NA $ 207,915 $ 18,400 25,733

$ 255,519 87,029 43,558 16,108 146,695 85,378 $ 232,073 $ 17,543 27,914

6,925 152 434

$ 14,037 298 387 $ 14,722 9.73% 0.63 2.61 7.12

$ 16,077 627 253 $ 16,957 9.33% 1.44 1.77 7.37

7,511 5.44% 0.32 3.10 3.99

Total net charge-off rate

JPMorgan Chase & Co./2011 Annual Report

95

Management's discussion and analysis

Selected metrics
As of or for the year ended December 31, (in millions, except ratios and where otherwise noted) Delinquency rates 30+ day delinquency rate: Credit Card Auto Student(h)(i) Total 30+ day delinquency rate 90+ day delinquency rate Credit Card(g) Nonperforming assets(j) Allowance for loan losses: Credit Card(k) Auto and Student Total allowance for loan losses Allowance for loan losses to period-end loans: Credit Card(g)(k) Auto and Student(h) Total allowance for loan losses to period-end loans Business metrics Credit Card, excluding Commercial Card(a) Sales volume (in billions) New accounts opened Open accounts
(l) (g)

As of or for the year ended December 31, (in millions, except ratios) Supplemental information(a)(m) 2011 2010 2009 Card Services, excluding Washington Mutual portfolio Loans (period-end) 2.81% 1.13 1.78 2.32 1.44 $ 228 $ 4.14% 1.22 1.53 3.23 2.25 269 $ $ 6.28% 1.63 1.50 5.02 3.59 340 9,672 1,042 $ 10,714 Average loans Net interest income(n) Net revenue
(n)

2011

2010

2009

$121,224 116,186 8.70% 11.74 9.39 $

(g)

$123,943 128,312 8.86% 11.22 5.81 $ 11,191 8.72% 3.66 1.98

$143,759 148,765 8.97% 10.63 1.39 $ 12,574 8.45% 5.52 3.13

Risk adjusted margin(n)(o) Net charge-offs Net charge-off rate(e) 30+ day delinquency rate 90+ day delinquency rate(g) Card Services, excluding Washington Mutual and Commercial Card portfolios Loans (period-end) Average loans Net interest income
(n)

5,668 4.88% 2.53 1.29

$ 6,999 1,010 $ 8,009

$ 11,034 899 $ 11,933

$119,966 114,828 8.87% 11.69 9.32 $ 5,666 4.93% 2.54 1.30

$123,943 128,312 8.86% 11.22 5.81 $ 11,191 8.72% 3.66 1.98

$143,759 148,765 8.97% 10.63 1.39 $ 12,574 8.45% 5.52 3.13

5.30% 1.66 4.15

8.14% 1.43 6.02

12.28% 1.73 7.72

Net revenue(n) Risk adjusted margin(n)(o) Net charge-offs Net charge-off rate(e) 30+ day delinquency rate(g)(p) 90+ day delinquency rate(g)(q)

$ 343.7 8.8 65.2

313.0 11.3 90.7

294.1 10.2 93.3

Merchant Services Bank card volume (in billions) Total transactions (in billions) Auto and Student Origination volume (in billions) Auto Student $ 21.0 0.3 $ 23.0 1.9 $ 23.7 4.2 $ 553.7 24.4 $ 469.3 20.5 $ 409.7 18.0

The following are brief descriptions of selected business metrics within Card Services & Auto. Sales volume Dollar amount of cardmember purchases, net of returns. Open accounts Cardmember accounts with charging privileges. Merchant Services business A business that processes bank card transactions for merchants. Bank card volume Dollar amount of transactions processed for merchants. Total transactions Number of transactions and authorizations processed for merchants. Auto origination volume - Dollar amount of loans and leases originated. 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.

(a) Effective January 1, 2011, the Commercial Card business that was previously in TSS was transferred to Card. There is no material impact on the financial data; prior-year periods were not revised. The commercial card portfolio is excluded from business metrics and supplemental information where noted. Headcount included 1,274 employees related to the transfer of this business. (b) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further details regarding the Firms application and impact of the guidance, see Note 16 on pages 256267 of this Annual Report. (c) Total period-end loans included loans held-for-sale of $102 million, $2.2 billion and $1.7 billion at December 31, 2011, 2010 and 2009, respectively. (d) Total average loans included loans held-for-sale of $833 million, $1.3 billion and $1.8 billion for the years ended December 31, 2011, 2010 and 2009, respectively. (e) Average credit card loans included loans held-for-sale of $833 million and $148 million for the years ended December 31, 2011 and 2010, respectively. These amounts are excluded when calculating the net charge-off rate. For Card Services, excluding the Washington Mutual portfolio, and Card Services, excluding the Washington Mutual and Commercial Card portfolios, these amounts are included when calculating the net charge-off rate. (f) Average student loans included loans held-for-sale of $1.1 billion and $1.8 billion for the years ended December 31, 2010 and 2009, respectively. These amounts are excluded when calculating the net charge-off rate. (g) Period-end credit card loans included loans held-for-sale of $102 million and $2.2 billion at December 31, 2011 and 2010, respectively. No allowance for loan losses was recorded for these loans. These amounts are excluded when calculating the allowance for loan losses to period-end loans and delinquency rates. For Card Services, excluding the Washington Mutual portfolio, and Card Services, excluding the Washington Mutual and Commercial Card portfolios, these amounts are included when calculating the delinquency rates. JPMorgan Chase & Co./2011 Annual Report

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(h) Period-end student loans included loans held-for-sale of $1.7 billion at December 31, 2009. This amount is excluded when calculating the allowance for loan losses to period-end loans and the 30+ day delinquency rate. (i) Excluded student loans insured by U.S. government agencies under the Federal Family Education Loan Program (FFELP) of $989 million, $1.1 billion and $942 million at December 31, 2011, 2010 and 2009, respectively, that are 30 or more days past due. These amounts are excluded as reimbursement of insured amounts is proceeding normally. (j) Nonperforming assets excluded student loans insured by U.S. government agencies under the FFELP of $551 million, $625 million and $542 million at December 31, 2011, 2010 and 2009, respectively, that are 90 or more days past due. These amounts are excluded as reimbursement of insured amounts is proceeding normally. (k) Based on loans on the Consolidated Balance Sheets. (l) Reflected the impact of portfolio sales in the second quarter of 2011. (m) Supplemental information is provided for Card Services, excluding Washington Mutual and Commercial Card portfolios and including loans held-for-sale, which are non-GAAP financial measures, to provide more meaningful measures that enable comparability with prior periods. (n) As a percentage of average managed loans. (o) Represents total net revenue less provision for credit losses. (p) At December 31, 2011, 2010 and 2009, the 30+ day delinquent loans for Card Services, excluding Washington Mutual and Commercial Card portfolios, were $3,047 million, $4,541 million and $7,930 million, respectively. (q) At December 31, 2011, 2010 and 2009, the 90+ day delinquent loans for Card Services, excluding Washington Mutual and Commercial Card portfolios, were $1,557 million, $2,449 million and $4,503 million, respectively. NA: Not applicable

Year ended December 31, (in millions, except ratios) Income statement data Credit card income Reported Securitization adjustments Managed credit card income Net interest income Reported Securitization adjustments Fully tax-equivalent adjustments Managed net interest income Total net revenue Reported Securitization adjustments Fully tax-equivalent adjustments Managed total net revenue Provision for credit losses Reported Securitization adjustments Managed provision for credit losses Income tax expense/ (benefit) Reported Fully tax-equivalent adjustments Managed income tax expense/(benefit) $ $ $ $ $ $

2011

2010

2009

4,127 NA 4,127

3,514 NA

5,107 (1,494)

3,514

3,613

$ 14,247 NA 2 $ 14,249 $ 19,139 NA 2 $ 19,141 3,621 NA 3,621

$ 16,187 NA 7 $ 16,194 $ 20,465 NA 7 $ 20,472 $ 8,570 NA $ 8,570

$ 11,543 7,937 13 $ 19,493 $ 16,743 6,443 13 $ 23,199 $ 13,205 6,443 $ 19,648

Reconciliation from reported basis to managed basis The financial information presented in the following table reconciles reported basis and managed basis to disclose the effect of securitizations reported by Card Services & Auto in 2009. Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further details regarding the Firms application and impact of the guidance, see Note 16 on pages 256267 of this Annual Report.

2,929 2 2,931

1,845 7

$ (1,286) 13 $ (1,273)

1,852

Balance sheet average balances Total average assets Reported Securitization adjustments Managed average assets $ 201,162 NA $ 201,162 $ 213,041 NA $ 213,041 $ 173,286 82,233 $ 255,519

Credit data and quality statistics Net charge-offs Reported Securitization adjustments Managed net charge-offs Net charge-off rates Reported Securitized Managed net charge-off rate NA: Not applicable 3.99% NA 3.99 7.12% NA 7.12 7.26% 7.55 7.37 $ $ 7,511 NA 7,511 $ 14,722 NA $ 14,722 $ 10,514 6,443 $ 16,957

JPMorgan Chase & Co./2011 Annual Report

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Management's discussion and analysis

COMMERCIAL BANKING
Commercial Banking delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 35,000 real estate investors/owners. CB partners with the Firms other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management to meet its clients domestic and international financial needs. Commercial Banking is divided into four primary client segments: Middle Market Banking, Commercial Term Lending, Corporate Client Banking, and Real Estate Banking. Middle Market Banking covers corporate, municipal, financial institution and not-for-profit clients, with annual revenue generally ranging between $10 million and $500 million. Commercial Term Lending primarily provides term financing to real estate investors/owners for multifamily properties as well as financing office, retail and industrial properties. Corporate Client Banking, known as MidCorporate Banking prior to 2011, covers clients with annual revenue generally ranging between $500 million and $2 billion and focuses on clients that have broader investment banking needs. Real Estate Banking provides full-service banking to investors and developers of institutional-grade real estate properties. Lending and investment activity within the Community Development Banking and Chase Capital segments are included in other. Selected income statement data
Year ended December 31, (in millions, except ratios) Revenue Lending- and deposit-related fees Asset management, administration and commissions All other income(a) Noninterest revenue Net interest income Total net revenue(b) Provision for credit losses Noninterest expense Compensation expense Noncompensation expense Amortization of intangibles Total noninterest expense Income before income tax expense Income tax expense Net income Revenue by product Lending(c) Treasury services(c) Investment banking Other Total Commercial Banking revenue IB revenue, gross(d) Revenue by client segment Middle Market Banking Commercial Term Lending Corporate Client Banking(e) Real Estate Banking Other Total Commercial Banking revenue Financial ratios Return on common equity Overhead ratio (a) (b) 30% 35 26% 36 16% 38 $ 3,145 1,168 1,261 416 428 $ 6,418 $ 3,060 1,023 1,154 460 343 $ 6,040 $ 3,055 875 1,102 461 227 $ 5,720 $ 3,455 2,270 498 195 $ 6,418 $ 1,421 $ 2,749 2,632 466 193 $ 6,040 $ 1,335 $ 2,663 2,642 394 21 $ 5,720 $ 1,163 886 1,361 31 2,278 3,932 1,565 $ 2,367 820 1,344 35 2,199 3,544 1,460 $ 2,084 776 1,359 41 2,176 2,090 819 $ 1,271 $ 1,081 136 978 2,195 4,223 6,418 208 $ 1,099 144 957 2,200 3,840 6,040 297 $ 1,081 140 596 1,817 3,903 5,720 1,454 2011 2010 2009

(c)

(d) (e)

CB client revenue from investment banking products and commercial card transactions is included in all other income. 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 from municipal bond activity, totaling $345 million, $238 million, and $170 million for the years ended December 31, 2011, 2010 and 2009, respectively. Effective January 1, 2011, product revenue from commercial card and standby letters of credit transactions was included in lending. For the year ended December 31, 2011, the impact of the change was $438 million. In prior-year periods, it was reported in treasury services. Represents the total revenue related to investment banking products sold to CB clients. Corporate Client Banking was known as Mid-Corporate Banking prior to January 1, 2011.

98

JPMorgan Chase & Co./2011 Annual Report

2011 compared with 2010 Record net income was $2.4 billion, an increase of $283 million, or 14%, from the prior year. The improvement was driven by higher net revenue and a reduction in the provision for credit losses, partially offset by an increase in noninterest expense. Net revenue was a record $6.4 billion, up by $378 million, or 6%, compared with the prior year. Net interest income was $4.2 billion, up by $383 million, or 10%, driven by growth in liability and loan balances partially offset by spread compression on liability products. Noninterest revenue was $2.2 billion, flat compared with the prior year. On a client segment basis, revenue from Middle Market Banking was $3.1 billion, an increase of $85 million, or 3%, from the prior year due to higher liability and loan balances offset by spread compression on liability products and lower lending- and deposit-related fees. Revenue from Commercial Term Lending was $1.2 billion, an increase of $145 million, or 14%, and includes the full year impact of the purchase of a $3.5 billion loan portfolio during the third quarter of 2010. Revenue from Corporate Client Banking was $1.3 billion, an increase of $107 million, or 9% due to growth in liability and loan balances and higher lendingand deposit-related fees, partially offset by spread compression on liability products. Revenue from Real Estate Banking was $416 million, a decrease of $44 million, or 10%, driven by a reduction in loan balances and lower gains on sales of loans and other real estate owned, partially offset by wider loan spreads. The provision for credit losses was $208 million, compared with $297 million in the prior year. Net charge-offs were $187 million (0.18% net charge-off rate) compared with $909 million (0.94% net charge-off rate) in the prior year. The reduction was largely related to commercial real estate. The allowance for loan losses to period-end loans retained was 2.34%, down from 2.61% in the prior year. Nonaccrual loans were $1.1 billion, down by $947 million, or 47% from the prior year, largely as a result of commercial real estate repayments and loans sales. Noninterest expense was $2.3 billion, an increase of $79 million, or 4% from the prior year, reflecting higher headcount-related expense.

2010 compared with 2009 Record net income was $2.1 billion, an increase of $813 million, or 64%, from the prior year. The increase was driven by a reduction in the provision for credit losses and higher net revenue. Net revenue was a record $6.0 billion, up by $320 million, or 6%, compared with the prior year. Net interest income was $3.8 billion, down by $63 million, or 2%, driven by spread compression on liability products and lower loan balances, predominantly offset by growth in liability balances and wider loan spreads. Noninterest revenue was $2.2 billion, an increase of $383 million, or 21%, from the prior year, reflecting higher net gains from asset sales, higher lending- and deposit-related fees, an improvement in the market conditions impacting the value of investments held at fair value, higher investment banking fees and increased community development investment-related revenue. On a client segment basis, revenue from Middle Market Banking was $3.1 billion, flat compared with the prior year. Revenue from Commercial Term Lending was $1.0 billion, an increase of $148 million, or 17%, and included the impact of the purchase of a $3.5 billion loan portfolio during the third quarter of 2010 and higher net gains from asset sales. Corporate Client Banking revenue was $1.2 billion, an increase of $52 million, or 5%, compared with the prior year due to wider loan spreads, higher lendingand deposit-related fees and higher investment banking fees offset partially by reduced loan balances. Real Estate Banking revenue was $460 million, flat compared with the prior year. The provision for credit losses was $297 million, compared with $1.5 billion in the prior year. The decline was mainly due to stabilization in the credit quality of the loan portfolio and refinements to credit loss estimates. Net charge-offs were $909 million (0.94% net charge-off rate), compared with $1.1 billion (1.02% net charge-off rate) in the prior year. The allowance for loan losses to period-end loans retained was 2.61%, down from 3.12% in the prior year. Nonaccrual loans were $2.0 billion, a decrease of $801 million, or 29%, from the prior year. Noninterest expense was $2.2 billion, an increase of $23 million, or 1%, compared with the prior year reflecting higher headcount-related expense partially offset by lower volume-related expense.

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Management's discussion and analysis

Selected metrics
Year ended December 31, (in millions, except headcount and ratios) Selected balance sheet data (period-end) Total assets Loans: Loans retained Loans held-for-sale and loans at fair value Total loans Equity Period-end loans by client segment Middle Market Banking Commercial Term Lending Corporate Client Banking(a) Real Estate Banking Other Total Commercial Banking loans Selected balance sheet data (average) Total assets Loans: Loans retained Loans held-for-sale and loans at fair value Total loans Liability balances(b) Equity Average loans by client segment Middle Market Banking Commercial Term Lending Corporate Client Banking(a) Real Estate Banking Other Total Commercial Banking loans Headcount $ 40,759 38,107 13,993 7,619 3,729 $ 104,207 5,520 $ $ 35,059 36,978 11,926 9,344 3,699 97,006 4,881 $ 37,459 36,806 15,951 12,066 4,456 $ 106,738 4,151 $ 146,230 103,462 745 $ 104,207 174,729 8,000 $ $ 133,654 96,584 422 97,006 138,862 8,000 $ 135,408 106,421 317 $ 106,738 113,152 8,000 $ 44,437 38,583 16,747 8,211 4,024 $ 112,002 $ $ 37,942 37,928 11,678 7,591 3,779 98,918 $ $ 34,170 36,201 12,500 10,619 3,942 97,432 111,162 840 $ 112,002 8,000 $ 97,900 1,018 98,918 8,000 $ 97,108 324 97,432 8,000 $ 158,040 $ 142,646 $ 130,280 2011 2010 2009

Year ended December 31, (in millions, except headcount and ratios) Credit data and quality statistics Net charge-offs Nonperforming assets Nonaccrual loans: Nonaccrual loans retained(c) Nonaccrual loans held-for-sale and loans held at fair value Total nonaccrual loans Assets acquired in loan satisfactions Total nonperforming assets Allowance for credit losses: Allowance for loan losses Allowance for lending-related commitments Total allowance for credit losses Net charge-off rate(d) Allowance for loan losses to period-end loans retained Allowance for loan losses to nonaccrual loans retained(c) Nonaccrual loans to total periodend loans (a) (b) $

2011

2010

2009

187

909

$ 1,089

1,036 17 1,053 85 1,138 2,603 189 2,792 0.18% 2.34 251 0.94

1,964 36 2,000 197 2,197 2,552 209 2,761 0.94% 2.61 130 2.02

2,764 37 2,801 188 2,989 3,025 349 3,374 1.02% 3.12 109 2.87

(c) (d)

Corporate Client Banking was known as Mid-Corporate Banking prior to January 1, 2011. Liability balances include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs. Allowance for loan losses of $176 million, $340 million and $581 million was held against nonaccrual loans retained at December 31, 2011, 2010 and 2009, respectively. Loans held-for-sale and loans at fair value were excluded when calculating the net charge-off rate.

100

JPMorgan Chase & Co./2011 Annual Report

TREASURY & SECURITIES SERVICES

Treasury & Securities Services is a global leader in transaction, investment and information services. TSS is one of the worlds largest cash management providers and a leading global custodian. Treasury Services provides cash management, trade, wholesale card and liquidity products and services to small- and mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with IB, CB, RFS and AM businesses to serve clients firmwide. Certain TS revenue is included in other segments results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally. Selected income statement data
Year ended December 31, (in millions, except ratio data) Revenue Lending- and deposit-related fees Asset management, administration and commissions All other income Noninterest revenue Net interest income Total net revenue Provision for credit losses Credit allocation income/ (expense)(a) Noninterest expense Compensation expense Noncompensation expense Amortization of intangibles Total noninterest expense Income before income tax expense Income tax expense Net income Financial ratios Return on common equity Pretax margin ratio Overhead ratio Pre-provision profit ratio(b) 17% 24 76 24 17% 23 76 24 25% 26 72 28 2,824 2,971 68 5,863 1,846 642 $ 1,204 2,734 2,790 80 5,604 1,703 624 $ 1,079 2,544 2,658 76 5,278 1,890 664 $ 1,226 $ 1,240 2,748 556 4,544 3,158 7,702 1 8 $ 1,256 2,697 804 4,757 2,624 7,381 (47) (121) $ 1,285 2,631 831 4,747 2,597 7,344 55 (121) 2011 2010 2009 Year ended December 31, (in millions) Revenue by business Worldwide Securities Services (WSS) Investor Services Clearance, Collateral Management and Depositary Receipts Total WSS revenue Treasury Services (TS) Transaction Services Trade Finance Total TS revenue $ 3,240 601 $ 3,841 $ 3,233 465 $ 3,698 $ 3,312 390 $ 3,702 $ 3,019 842 $ 3,861 $ 2,869 814 $ 3,683 $ 2,836 806 $ 3,642 2011 2010 2009

2011 compared with 2010 Net income was $1.2 billion, an increase of $125 million, or 12%, from the prior year. Net revenue was $7.7 billion, an increase of $321 million, or 4%, from the prior year. Excluding the impact of the Commercial Card business, net revenue was up 7%. Worldwide Securities Services net revenue was $3.9 billion, an increase of $178 million, or 5%. The increase was driven mainly by higher net interest income due to higher deposit balances and net inflows of assets under custody. Treasury Services net revenue was $3.8 billion, an increase of $143 million, or 4%. The increase was driven by higher deposit balances as well as higher trade loan volumes, partially offset by the transfer of the Commercial Card business to Card in the first quarter of 2011. Excluding the impact of the Commercial Card business, TS net revenue increased 10%. TSS generated firmwide net revenue of $10.2 billion, including $6.4 billion by Treasury Services; of that amount, $3.8 billion was recorded in Treasury Services, $2.3 billion in Commercial Banking and $265 million in other lines of business. The remaining $3.9 billion of firmwide net revenue was recorded in Worldwide Securities Services. The provision for credit losses was an expense of $1 million, compared with a benefit of $47 million in the prior year. Noninterest expense was $5.9 billion, an increase of $259 million, or 5%, from the prior year. The increase was mainly driven by continued expansion into new markets and expenses related to exiting unprofitable business, partially offset by the transfer of the Commercial Card business to Card. Excluding the impact of the Commercial Card business, TSS noninterest expense increased 10%. Results for 2011 included an $8 million pretax benefit related to the traditional credit portfolio for GCB clients that are managed jointly by IB and TSS.

(a) IB manages traditional credit exposures related to GCB on behalf of IB and TSS. Effective January 1, 2011, IB and TSS share the economics related to the Firms GCB clients. Included within this allocation are net revenue, provision for credit losses and expenses. The prior years reflected a reimbursement to IB for a portion of the total costs of managing the credit portfolio. IB recognizes this credit allocation as a component of all other income. (b) Pre-provision profit ratio represents total net revenue less total noninterest expense divided by total net revenue. This reflects the operating performance before the impact of credit, and is another measure of performance for TSS against the performance of competitors.

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Management's discussion and analysis

2010 compared with 2009 Net income was $1.1 billion, a decrease of $147 million, or 12%, from the prior year. These results reflected higher noninterest expense partially offset by the benefit from the provision for credit losses and higher net revenue. Net revenue was $7.4 billion, an increase of $37 million, or 1%, from the prior year. Treasury Services net revenue was $3.7 billion, relatively flat compared with the prior year as lower spreads on liability products were offset by higher trade loan and card product volumes. Worldwide Securities Services net revenue was $3.7 billion, relatively flat compared with the prior year as higher market levels and net inflows of assets under custody were offset by lower spreads in securities lending, lower volatility on foreign exchange, and lower balances on liability products. TSS generated firmwide net revenue of $10.3 billion, including $6.6 billion by Treasury Services; of that amount, $3.7 billion was recorded in Treasury Services, $2.6 billion in Commercial Banking and $247 million in other lines of business. The remaining $3.7 billion of firmwide net revenue was recorded in Worldwide Securities Services. The provision for credit losses was a benefit of $47 million, compared with an expense of $55 million in the prior year. The decrease in the provision expense was primarily due to an improvement in credit quality. Noninterest expense was $5.6 billion, up $326 million, or 6%, from the prior year. The increase was driven by continued investment in new product platforms, primarily related to international expansion and higher performancebased compensation. Selected metrics
Year ended December 31, (in millions, except headcount data) Selected balance sheet data (period-end) Total assets Loans
(a)

Year ended December 31, (in millions, except ratio data, and where otherwise noted) Credit data and quality statistics Net charge-offs Nonaccrual loans Allowance for credit losses: Allowance for loan losses Allowance for lendingrelated commitments Total allowance for credit losses Net charge-off rate Allowance for loan losses to period-end loans Allowance for loan losses to nonaccrual loans Nonaccrual loans to periodend loans WSS business metrics Assets under custody (AUC) by assets class (period-end) (in billions) Fixed income Equity Other(b) Total AUC Liability balances (average) TS business metrics TS liability balances (average) Trade finance loans (periodend) $

2011

2010

2009

4 65 49 114 % 0.15 NM 0.01

1 12 65 51 116 % 0.24 NM 0.04

19 14 88 84 172 0.10% 0.46 NM 0.07

$ 10,926 4,878 1,066 $ 16,870 100,660

$ 10,364 4,850 906 $ 16,120 79,457

$ 10,073 4,090 722 $ 14,885 86,936

218,142 36,696

168,994 21,156

161,159 10,227

2011

2010

2009

$ 68,665 42,992 7,000

$ 45,481 27,168 6,500

$ 38,054 18,972 5,000

(a) Loan balances include trade finance loans, wholesale overdrafts and commercial card. Effective January 1, 2011, the commercial card loan business (of approximately $1.2 billion) that was previously in TSS was transferred to Card. There is no material impact on the financial data; the prior years were not revised. (b) Consists of mutual funds, unit investment trusts, currencies, annuities, insurance contracts, options and nonsecurities contracts.

Equity Selected balance sheet data (average) Total assets Loans

(a)

$ 56,151 34,268 318,802 7,000 27,825

$ 42,494 23,271 248,451 6,500 29,073

$ 35,963 18,397 248,095 5,000 26,609

Liability balances Equity Headcount

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JPMorgan Chase & Co./2011 Annual Report

Selected metrics
Year ended December 31, (in millions, except where otherwise noted) International metrics Net revenue by geographic region(a) Asia/Pacific Latin America/Caribbean Europe/Middle East/Africa North America Total net revenue Average liability balances(a) Asia/Pacific Latin America/Caribbean Europe/Middle East/Africa North America Total average liability balances Trade finance loans (period-end)(a) Asia/Pacific Latin America/Caribbean Europe/Middle East/Africa North America Total trade finance loans AUC (period-end)(in billions)(a) North America All other regions Total AUC TSS firmwide disclosures(b) TS revenue reported TS revenue reported in CB(c) TS revenue reported in other lines of business TS firmwide revenue(d) WSS revenue TSS firmwide revenue(d) TSS total foreign exchange (FX) revenue(d) TS firmwide liability balances (average)(e) TSS firmwide liability balances (average)(e) Number of: U.S.$ ACH transactions originated Total U.S.$ clearing volume (in thousands) International electronic funds transfer volume (in thousands)(f) Wholesale check volume Wholesale cards issued (in thousands)(g) 3,906 129,417 250,537 2,333 25,187 3,892 122,123 232,453 2,060 29,785 3,896 113,476 193,348 2,184 27,138 $ 3,841 2,270 265 6,376 3,861 $ 10,237 658 393,022 493,531 $ 3,698 2,632 247 6,577 3,683 $ 10,260 636 308,028 387,313 $ 3,702 2,642 245 6,589 3,642 $ 10,231 661 274,472 361,247 $ 9,735 7,135 $ 16,870 $ 9,836 6,284 $ 16,120 $ 9,391 5,494 $ 14,885 $ 19,280 6,254 9,726 1,436 $ 36,696 $ 11,834 3,628 4,874 820 $ 21,156 $ 4,519 2,458 2,171 1,079 $ 10,227 $ 43,524 12,625 123,920 138,733 $ 318,802 $ 32,862 11,558 102,014 102,017 $ 248,451 $ 28,501 8,231 101,683 109,680 $ 248,095 $ $ 1,235 329 2,658 3,480 7,702 $ $ 978 257 2,389 3,757 7,381 $ $ 845 221 2,462 3,816 7,344 (e) (f) (g) (d) (c) 2011 2010 2009

Firmwide metrics are necessary in order to understand the aggregate TSS business. Effective January 1, 2011, certain CB revenues were excluded in the TS firmwide metrics; they are instead directly captured within CBs lending revenue by product. The impact of this change was $438 million for the year ended December 31, 2011. In previous years, these revenues were included in CBs treasury services revenue by product. IB executes FX transactions on behalf of TSS customers under revenue sharing agreements. FX revenue generated by TSS customers is recorded in TSS and IB. TSS Total FX revenue reported above is the gross (pre-split) FX revenue generated by TSS customers. However, TSS firmwide revenue includes only the FX revenue booked in TSS, i.e., it does not include the portion of TSS FX revenue recorded in IB. Firmwide liability balances include liability balances recorded in CB. International electronic funds transfer includes non-U.S. dollar Automated Clearing House (ACH) and clearing volume. Wholesale cards issued and outstanding include commercial, stored value, prepaid and government electronic benefit card products. Effective January 1, 2011, the commercial card portfolio was transferred from TSS to Card.

Description of a business metric within TSS: Liability balances include deposits, as well as deposits that are swept to on-balance sheet liabilities (e.g., commercial paper, federal funds purchased, time deposits and securities loaned or sold under repurchase agreements) as part of customer cash management programs. Description of selected products and services within TSS: Investor Services includes primarily custody, fund accounting and administration, and securities lending products sold principally to asset managers, insurance companies and public and private investment funds. Clearance, Collateral Management & Depositary Receipts primarily includes broker-dealer clearing and custody services, including tri-party repo transactions, collateral management products, and depositary bank services for American and global depositary receipt programs. Transaction Services includes a broad range of products that enable clients to manage payments and receipts, as well as invest and manage funds. Products include U.S. dollar and multicurrency clearing, ACH, lockbox, disbursement and reconciliation services, check deposits, and currency related services. Trade Finance enables the management of cross-border trade for bank and corporate clients. Products include loans directly tied to goods crossing borders, export/import loans, commercial letters of credit, standby letters of credit, and supply chain finance.

(a) Total net revenue, average liability balances, trade finance loans and AUC are based on the domicile of the client. (b) TSS firmwide metrics include revenue recorded in CB, Consumer & Business Banking and AM lines of business and net TSS FX revenue (it excludes TSS FX revenue recorded in IB). In order to capture the firmwide impact of TS and TSS products and revenue, management reviews firmwide metrics in assessing financial performance of TSS. JPMorgan Chase & Co./2011 Annual Report 103

Management's discussion and analysis

ASSET MANAGEMENT
Asset Management, with assets under supervision of $1.9 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-net-worth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AMs client assets are in actively managed portfolios. Selected income statement data
Year ended December 31, (in millions, except ratios) Revenue Asset management, administration and commissions $ 6,748 All other income Noninterest revenue Net interest income Total net revenue Provision for credit losses Noninterest expense Compensation expense Noncompensation expense Amortization of intangibles Total noninterest expense Income before income tax expense Income tax expense Net income Revenue by client segment Private Banking Institutional Retail Total net revenue Financial ratios Return on common equity Overhead ratio Pretax margin ratio 25% 73 26 26% 68 31 20% 69 29 $ 5,116 2,273 2,154 $ 9,543 $ 4,860 2,180 1,944 $ 8,984 $ 4,320 2,065 1,580 $ 7,965 4,152 2,752 98 7,002 2,474 882 $ 1,592 3,763 2,277 72 6,112 2,786 1,076 $ 1,710 3,375 2,021 77 5,473 2,304 874 $ 1,430 1,147 7,895 1,648 9,543 67 $ 6,374 1,111 7,485 1,499 8,984 86 $ 5,621 751 6,372 1,593 7,965 188 2011 2010 2009

and lower loan-related revenue. Net interest income was $1.6 billion, up by $149 million, or 10%, due to higher deposit and loan balances, partially offset by narrower deposit spreads. Revenue from Private Banking was $5.1 billion, up 5% from the prior year due to higher deposit and loan balances and higher brokerage revenue, partially offset by narrower deposit spreads and lower loan-related revenue. Revenue from Institutional was $2.3 billion, up 4% due to net inflows to products with higher margins and the effect of higher market levels. Revenue from Retail was $2.2 billion, up 11% due to net inflows to products with higher margins and the effect of higher market levels. The provision for credit losses was $67 million, compared with $86 million in the prior year. Noninterest expense was $7.0 billion, an increase of $890 million, or 15%, from the prior year, due to higher headcount-related expense and non-client-related litigation, partially offset by lower performance-based compensation. 2010 compared with 2009 Net income was $1.7 billion, an increase of $280 million, or 20%, from the prior year, due to higher net revenue and a lower provision for credit losses, largely offset by higher noninterest expense. Net revenue was a record $9.0 billion, an increase of $1.0 billion, or 13%, from the prior year. Noninterest revenue was $7.5 billion, an increase of $1.1 billion, or 17%, due to the effect of higher market levels, net inflows to products with higher margins, higher loan originations, and higher performance fees. Net interest income was $1.5 billion, down by $94 million, or 6%, from the prior year, due to narrower deposit spreads, largely offset by higher deposit and loan balances. Revenue from Private Banking was $4.9 billion, up 13% from the prior year due to higher loan originations, higher deposit and loan balances, the effect of higher market levels and net inflows to products with higher margins, partially offset by narrower deposit spreads. Revenue from Institutional was $2.2 billion, up 6% due to the effect of higher market levels, partially offset by liquidity outflows. Revenue from Retail was $1.9 billion, up 23% due to the effect of higher market levels and net inflows to products with higher margins, partially offset by lower valuations of seed capital investments. The provision for credit losses was $86 million, compared with $188 million in the prior year, reflecting an improving credit environment. Noninterest expense was $6.1 billion, an increase of $639 million, or 12%, from the prior year, resulting from increased headcount and higher performance-based compensation.

2011 compared with 2010 Net income was $1.6 billion, a decrease of $118 million, or 7%, from the prior year. These results reflected higher noninterest expense, largely offset by higher net revenue and a lower provision for credit losses. Net revenue was $9.5 billion, an increase of $559 million, or 6%, from the prior year. Noninterest revenue was $7.9 billion, up by $410 million, or 5%, due to net inflows to products with higher margins and the effect of higher market levels, partially offset by lower performance fees
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Selected metrics
Business metrics
As of or for the year ended December 31, (in millions, except headcount, ranking data and where otherwise noted) Number of: Client advisors(a) Retirement planning services participants (in thousands) JPMorgan Securities brokers % of customer assets in 4 & 5 Star Funds(b) % of AUM in 1st and 2nd quartiles:(c) 1 year 3 years 5 years Selected balance sheet data (period-end) Total assets Loans Equity Selected balance sheet data (average) Total assets Loans Deposits Equity Headcount Credit data and quality statistics Net charge-offs Nonaccrual loans Allowance for credit losses: Allowance for loan losses Allowance for lending-related commitments Total allowance for credit losses Net charge-off rate Allowance for loan losses to period-end loans Allowance for loan losses to nonaccrual loans Nonaccrual loans to period-end loans (a) (b) (c) 209 10 219 0.18% 0.36 66 0.55 267 4 271 0.20% 0.61 71 0.85 269 9 278 0.33% 0.71 46 1.54 $ 92 317 $ 76 375 $ 117 580 $ 76,141 50,315 106,421 6,500 18,036 $ 65,056 38,948 86,096 6,500 16,918 $ 60,249 34,963 77,005 7,000 15,136 $ 86,242 57,573 6,500 $ 68,997 44,084 6,500 $ 64,502 37,755 7,000 48 72 78 67 72 80 57 62 74

2011 2,444 1,798 439 43%

2010 2,281 1,580 415 49%

2009 1,936 1,628 376 42%

AMs client segments comprise the following: Private Banking offers investment advice and wealth management services to high- and ultra-high-net-worth individuals, families, money managers, business owners and small corporations worldwide, including investment management, capital markets and risk management, tax and estate planning, banking, capital raising and specialty-wealth advisory services. Institutional brings comprehensive global investment services including asset management, pension analytics, asset-liability management and active risk-budgeting strategies to corporate and public institutions, endowments, foundations, not-for-profit organizations and governments worldwide. Retail provides worldwide investment management services and retirement planning and administration, through third-party and direct distribution of a full range of investment vehicles. J.P. Morgan Asset Management has two high-level measures of its overall fund performance. Percentage of assets under management in funds rated 4- and 5-stars (three years). Mutual fund rating services rank funds based on their risk-adjusted performance over various periods. A 5-star rating is the best and represents the top 10% of industry wide ranked funds. A 4-star rating represents the next 22% of industry wide ranked funds. The worst rating is a 1-star rating. Percentage of assets under management in first- or second- quartile funds (one, three and five years). Mutual fund rating services rank funds according to a peer-based performance system, which measures returns according to specific time and fund classification (small-, mid-, multi- and large-cap).

Assets under supervision

2011 compared with 2010 Assets under supervision were $1.9 trillion at December 31, 2011, an increase of $81 billion, or 4%, from the prior year. Assets under management were $1.3 trillion, an increase of $38 billion, or 3%. Both increases were due to net inflows to long-term and liquidity products, partially offset by the impact of lower market levels. Custody, brokerage, administration and deposit balances were $585 billion, up by $43 billion, or 8%, due to deposit and custody inflows. 2010 compared with 2009 Assets under supervision were $1.8 trillion at December 31, 2010, an increase of $139 billion, or 8%, from the prior year. Assets under management were $1.3 trillion, an increase of $49 billion, or 4%, due to the effect of higher market levels and net inflows in long-term products, largely offset by net outflows in liquidity products. Custody, brokerage, administration and deposit balances were $542 billion, up by $90 billion, or 20%, due to custody and brokerage inflows and the effect of higher market levels.

Effective January 1, 2011, the methodology used to determine client advisors was revised. Prior periods have been revised. Derived from Morningstar for the U.S., the U.K., Luxembourg, France, Hong Kong and Taiwan; and Nomura for Japan. Quartile ranking sourced from: Lipper for the U.S. and Taiwan; Morningstar for the U.K., Luxembourg, France and Hong Kong; and Nomura for Japan.

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Management's discussion and analysis

Assets under supervision(a)

As of or the year ended December 31, (in billions) Assets by asset class Liquidity Fixed income Equity and multi-asset Alternatives Total assets under management Custody/brokerage/ administration/deposits Total assets under supervision Assets by client segment Private Banking Institutional Retail(b) Total assets under management Private Banking Institutional Retail(b) Total assets under supervision Mutual fund assets by asset class Liquidity Fixed income Equity and multi-asset Alternatives Total mutual fund assets $ $ 458 107 147 8 720 $ $ 446 92 169 7 714 $ $ 539 67 143 9 758 $
(b) (b)

Year ended December 31, (in billions) 2011 $ 515 336 372 113 1,336 585 $ $ 1,921 291 722 323 $ $ 1,336 781 723 417 1,921 $ $ $ $ $ $ 2010 497 289 404 108 1,298 542 1,840 284 703 311 1,298 731 703 406 1,840 $ $ $ $ $ $ 2009 591 226 339 93 1,249 452 1,701 270 731 248 1,249 636 731 334 1,701 Assets under management rollforward Beginning balance Net asset flows: Liquidity Fixed income Equity, multi-asset and alternatives Market/performance/other impacts Ending balance, December 31 Assets under supervision rollforward Beginning balance Net asset flows Market/performance/other impacts Ending balance, December 31 $ $ $ $

2011

2010

2009

1,298 18 40 13 (33) 1,336

1,249 (89) 50 19 69

1,133 (23) 34 17 88

1,298

1,249

1,840 123 (42) 1,921

1,701 28 111

1,496 50 155

1,840

1,701

International metrics
Year ended December 31, (in billions, except where otherwise noted) Total net revenue (in millions)(a) Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean North America Total net revenue Assets under management Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean North America Total assets under management Assets under supervision Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean North America Total assets under supervision $ 329 139 89 1,364 $ 1,921 $ $ 331 147 84 1,278 1,840 $ $ 338 125 55 1,183 1,701 $ 278 105 34 919 $ 1,336 $ $ 282 111 35 870 1,298 $ $ 293 99 19 838 1,249 2011 $ 1,704 971 808 6,060 $ 9,543 $ $ 2010 1,642 925 541 5,876 8,984 $ $ 2009 1,380 752 426 5,407 7,965

(a) Excludes assets under management of American Century Companies, Inc., in which the Firm sold its ownership interest on August 31, 2011. The Firm previously had an ownership interest of 41% and 42% in American Century Companies, Inc., whose AUM is not included in the table above, at December 31, 2010 and 2009, respectively. (b) In 2011, the client hierarchy used to determine asset classification was revised, and the prior-year periods have been revised.

(a) Regional revenue is based on the domicile of the client.

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CORPORATE/PRIVATE EQUITY
The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment Office (CIO), corporate staff units and expense that is centrally managed. Treasury and CIO manage capital, liquidity and structural risks of the Firm. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes the Firms occupancy and pensionrelated expense, net of allocations to the business. Selected income statement data
Year ended December 31, (in millions, except headcount) Revenue Principal transactions Securities gains All other income Noninterest revenue Net interest income Total net revenue(a) Provision for credit losses Noninterest expense Compensation expense Noncompensation expense(b) Merger costs Subtotal Net expense allocated to other businesses Total noninterest expense Income before income tax expense/(benefit) and extraordinary gain Income tax expense/(benefit) (c) Income before extraordinary gain Extraordinary gain(d) Net income Total net revenue Private equity Corporate Total net revenue Net income Private equity Corporate(e) Total net income Total assets (period-end) Headcount (a) $ $ 391 411 802 $ $693,153 22,117 $ 588 670 1,258 $ $ 526,588 20,030 $ (78) 3,108 3,030 $ 595,877 20,119 $ $ 836 3,307 4,143 $ $ 1,239 6,183 7,422 $ $ 18 6,616 6,634 $ 2,425 6,884 9,309 (5,160) 4,149 30 (772) 802 802 $ 2,357 8,788 11,145 (4,790) 6,355 1,053 (205) 1,258 1,258 $ 2,811 3,597 481 6,889 (4,994) 1,895 4,659 1,705 2,954 76 3,030 $ 1,434 1,600 604 3,638 505 4,143 (36) $ 2,208 2,898 253 5,359 2,063 7,422 14 $ 1,574 1,139 58 2,771 3,863 6,634 80 2011 2010 2009 (b) Included litigation expense of $3.2 billion and $5.7 billion for the years ended December 31, 2011 and 2010, respectively, compared with net benefits of $0.3 billion for the year ended December 31, 2009. Includes tax benefits recognized upon the resolution of tax audits. On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the FDIC for $1.9 billion. The acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. As a result of the final refinement of the purchase price allocation in 2009, the Firm recognized a $76 million increase in the extraordinary gain. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. 2009 included merger costs and the extraordinary gain related to the Washington Mutual transaction, as well as items related to the Bear Stearns merger, including merger costs, asset management liquidation costs and JPMorgan Securities broker retention expense.

(c) (d)

(e)

2011 compared with 2010 Net income was $802 million, compared with $1.3 billion in the prior year. Private Equity net income was $391 million, compared with $588 million in the prior year. Net revenue was $836 million, a decrease of $403 million, primarily related to net write-downs on privately-held investments and the absence of prior-year gains from sales. Noninterest expense was $238 million, a decrease of $85 million from the prior year. Corporate reported net income of $411 million, compared with net income of $670 million in the prior year. Net revenue was $3.3 billion, including $1.6 billion of securities gains. Net interest income in 2011 was lower compared with 2010, primarily driven by repositioning of the investment securities portfolio and lower funding benefits from financing the portfolio. Noninterest expense was $4.1 billion which included $3.2 billion of litigation expense, predominantly for mortgagerelated matters. Noninterest expense in the prior year was $6.4 billion, which included $5.7 billion of litigation expense. 2010 compared with 2009 Net income was $1.3 billion compared with $3.0 billion in the prior year. The decrease was driven by higher litigation expense, partially offset by higher net revenue. Net income for Private Equity was $588 million, compared with a net loss of $78 million in the prior year, reflecting the impact of improved market conditions on certain investments in the portfolio. Net revenue was $1.2 billion compared with $18 million in the prior year, reflecting private equity gains of $1.3 billion compared with losses of $54 million in 2009. Noninterest expense was $323 million, an increase of $182 million, driven by higher compensation expense. Net income for Corporate was $670 million, compared with $3.1 billion in the prior year. Results for 2010 reflect aftertax litigation expense of $3.5 billion, lower net interest
107

Total net revenue included tax-equivalent adjustments, predominantly due to tax-exempt income from municipal bond investments of $298 million, $226 million and $151 million for the years ended December 31, 2011, 2010 and 2009, respectively.

JPMorgan Chase & Co./2011 Annual Report

Management's discussion and analysis

income and trading gains, partially offset by a higher level of securities gains, primarily driven by repositioning of the investment securities portfolio in response to changes in the interest rate environment and to rebalance exposure. The prior year included merger-related net loss of $635 million and a $419 million FDIC assessment.

Private equity portfolio information(c)

Direct investments
December 31, (in millions) Publicly held securities Carrying value Cost Quoted public value Privately held direct securities Carrying value 4,597 6,793 2,283 2,452 $ $ 7,685 9,818 $ 5,882 6,887 1,980 2,404 8,737 $ $ 5,104 5,959 1,459 2,079 7,325 8,781 $ 805 573 896 $ 875 732 935 $ 762 743 791 2011 2010 2009

Treasury and CIO

Selected income statement and balance sheet data
Year ended December 31, (in millions) Securities gains
(a)

2011 $ 1,385 330,885 355,605 13,006 13,375 $

2010 2,897 323,673 310,801 9,004 10,739 $

2009 1,147 324,037 340,163 7,427 8,023

Cost Third-party fund investments(d) Carrying value Cost Total private equity portfolio Carrying value Cost (a) (b) (c) (d)

Investment securities portfolio (average) Investment securities portfolio (ending) Mortgage loans (average) Mortgage loans (ending) (a)

$ 10,023

Reflects repositioning of the Corporate investment securities portfolio.

For further information on the investment securities portfolio, see Note 3 and Note 12 on pages 184198 and 225230, respectively, of this Annual Report. For further information on CIO VaR and the Firms nontrading interest rate-sensitive revenue at risk, see the Market Risk Management section on pages 158163 of this Annual Report.

Unrealized gains/(losses) contain reversals of unrealized gains and losses that were recognized in prior periods and have now been realized. Included in principal transactions revenue in the Consolidated Statements of Income. For more information on the Firm's policies regarding the valuation of the private equity portfolio, see Note 3 on pages 184198 of this Annual Report. Unfunded commitments to third-party private equity funds were $789 million, $1.0 billion and $1.5 billion at December 31, 2011, 2010 and 2009, respectively.

Private Equity Portfolio

Selected income statement and balance sheet data
Year ended December 31, (in millions) Private equity gains/(losses) Realized gains Unrealized gains/(losses) Total direct investments Third-party fund investments Total private equity gains/ (losses)(b) $
(a)

2011 $ 1,842 (1,305) 537 417 954

2010 $ 1,409 (302) 1,107 241 $ 1,348 $ $

2009 109 (81) 28 (82) (54)

2011 compared with 2010 The carrying value of the private equity portfolio at December 31, 2011, was $7.7 billion, down from $8.7 billion at December 31, 2010. The decrease in the portfolio is predominantly driven by sales of investments, partially offset by new investments. The portfolio represented 5.7% of the Firms stockholders equity less goodwill at December 31, 2011, down from 6.9% at December 31, 2010. 2010 compared with 2009 The carrying value of the private equity portfolio at December 31, 2010, was $8.7 billion, up from $7.3 billion at December 31, 2009. The portfolio increase was primarily due to incremental follow-on investments. The portfolio represented 6.9% of the Firms stockholders equity less goodwill at December 31, 2010, up from 6.3% at December 31, 2009.

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INTERNATIONAL OPERATIONS
During the years ended December 31, 2011 and 2010, the Firm recorded approximately $24.5 billion and $22.0 billion, respectively, of managed revenue derived from clients, customers and counterparties domiciled outside of North America. Of those amounts, approximately 66% and 64%, respectively, were derived from Europe/Middle East/ Africa (EMEA); approximately 25% and 28%, respectively, from Asia/Pacific; and approximately 9% and 8%, respectively, from Latin America/Caribbean. For additional information regarding international operations, see Note 32 on pages 299300 of this Annual Report. International Wholesale Activities The Firm is committed to further expanding its wholesale business activities outside of the United States, and it
As of or for the year ended December 31, (in millions, except headcount and where otherwise noted) Revenue
(a)

continues to add additional client-serving bankers, as well as product and sales support personnel, to address the needs of the Firm's clients located in these regions. With a comprehensive and coordinated international business strategy and growth plan, efforts and investments for growth outside of the United States will continue to be accelerated and prioritized. Set forth below are certain key metrics related to the Firms wholesale international operations, including, for each of EMEA, Asia/Pacific and Latin America/Caribbean, the number of countries in each such region in which they operate, front-office headcount, number of clients, revenue and selected balance-sheet data.

EMEA 2011 33 3 16,178 5,993 920 36,637 278 329 5,430 2010 $ 33 6 16,122 5,872 881 27,934 282 331 4,810

Asia/Pacific 2011 5,971 $ 16 2 20,172 4,253 480 31,119 105 139 1,426 2010 6,082 16 7 19,153 4,168 448 $ 20,552 111 147 1,321 $

Latin America/ Caribbean 2011 2,232 $ 9 4 1,378 569 154 5,318 $ 25,141 34 89 279 2010 1,697 8 2 1,201 486 139 6,263 16,480 35 84 153

$ 16,141 $ 14,149

Countries of operation New offices Total headcount(b) Front-office headcount Significant clients(c) Deposits (average)(d) Loans (period-end)(e) Assets under management (in billions) Assets under supervision (in billions) Assets under custody (in billions)

$168,882 $142,859

$ 57,684 $ 53,268

Note: Wholesale international operations is comprised of IB, AM, TSS, CB and CIO/Treasury, and prior period amounts have been revised to conform with current allocation methodologies. (a) (b) (c) (d) (e) Revenue 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. Total headcount includes all employees, including those in service centers, located in the region. Significant clients are defined as companies with over $1 million in revenue over a trailing 12-month period in the region (excludes private banking clients). Deposits are based on the location from which the client relationship is managed. Loans outstanding are based predominantly on the domicile of the borrower and exclude loans held-for-sale and loans carried at fair value.

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Management's discussion and analysis

BALANCE SHEET ANALYSIS

Selected Consolidated Balance Sheets data
December 31, (in millions) Assets Cash and due from banks Deposits with banks Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets: Debt and equity instruments Derivative receivables Securities Loans Allowance for loan losses Loans, net of allowance for loan losses Accrued interest and accounts receivable Premises and equipment Goodwill Mortgage servicing rights Other intangible assets Other assets Total assets Liabilities Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Commercial paper Other borrowed funds(a) Trading liabilities: Debt and equity instruments Derivative payables Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt
(a)

2011 $ 59,602 85,279 235,314 142,462 351,486 92,477 364,793 723,720 (27,609) 696,111 61,478 14,041 48,188 7,223 3,207 104,131 $2,265,792 $1,127,806 213,532 51,631 21,908 66,718 74,977 202,895 65,977 256,775 2,082,219 183,573 $2,265,792 $

2010 27,567 21,673 222,554 123,587 409,411 80,481 316,336 692,927 (32,266) 660,661 70,147 13,355 48,854 13,649 4,039 105,291 $2,117,605 $ 930,369 276,644 35,363 34,325 76,947 69,219 170,330 77,649 270,653 1,941,499 176,106 $2,117,605

Consolidated Balance Sheets overview JPMorgan Chases assets and liabilities increased from December 31, 2010, largely due to a significant level of deposit inflows from wholesale clients and, to a lesser extent, consumer clients. The higher level of inflows since the beginning of the year, which accelerated after the first quarter, contributed to increases in both cash and due from banks, and deposits with banks, particularly balances due from Federal Reserve Banks and other banks. In addition, the increase in total assets was driven by a higher level of securities and loans. These increases were offset partially by lower trading assets, specifically debt and equity instruments. The increase in total liabilities was driven by the significant increase in deposits and, to a lesser extent, higher accounts payable, partially offset by a lower level of securities sold under repurchase agreements. The increase in stockholders' equity primarily reflected 2011 net income, net of repurchases of common equity. The following paragraphs provide a description of each of the specific line captions on the Consolidated Balance Sheets. For the line captions that had significant changes from December 31, 2010, a discussion of the changes is also included. Cash and due from banks and deposits with banks The Firm uses these instruments as part of its liquidity management activities. Cash and due from banks and deposits with banks increased significantly, reflecting the placement of funds with various central banks, including Federal Reserve Banks; the increase in these funds predominantly resulted from the overall growth in wholesale client deposits. For additional information, see the deposits discussion below. Federal funds sold and securities purchased under resale agreements; and securities borrowed The Firm uses these instruments to support its client-driven market-making and risk management activities and to manage its cash positions. In particular, securities purchased under resale agreements and securities borrowed are used to provide funding or liquidity to clients through short-term purchases and borrowings of their securities by the Firm. Securities purchased under resale agreements and securities borrowed increased, predominantly in Corporate due to higher excess cash positions at year end. Trading assets and liabilities debt and equity instruments Debt and equity trading instruments are used primarily for client-driven market-making activities. These instruments consist predominantly of fixed-income securities, including government and corporate debt; equity securities, including convertible securities; loans, including prime mortgages and other loans warehoused by RFS and IB for sale or securitization purposes and accounted for at fair value; and

Total liabilities Stockholders equity Total liabilities and stockholders equity (a)

Effective January 1, 2011, $23.0 billion of long-term advances from FHLBs were reclassified from other borrowed funds to long-term debt. The prior-year period has been revised to conform with the current presentation. For additional information, see Notes 3 and 21 on pages 184198 and 273275, respectively, of this Annual Report.

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physical commodities inventories generally carried at the lower of cost or fair value. Trading assets debt and equity instruments decreased, driven by client market-making activity in IB; this resulted in lower levels of equity securities, U.S. government and agency mortgage-backed securities, and non-U.S. government securities. For additional information, refer to Note 3 on pages 184198 of this Annual Report. Trading assets and liabilities derivative receivables and payables The Firm uses derivative instruments predominantly for market-making activities. Derivatives enable customers and the Firm to manage their exposure to fluctuations in interest rates, currencies and other markets. The Firm also uses derivative instruments to manage its market and credit exposure. Derivative receivables and payables increased, predominantly due to increases in interest rate derivative balances driven by declining interest rates, and higher commodity derivative balances driven by price movements in base metals and energy. For additional information, refer to Derivative contracts on pages 141144, and Note 3 and Note 6 on pages 184198 and 202210, respectively, of this Annual Report. Securities Substantially all of the securities portfolio is classified as available-for-sale (AFS) and used primarily to manage the Firms exposure to interest rate movements and to invest cash resulting from excess liquidity. Securities increased, largely due to repositioning of the portfolio in Corporate in response to changes in the market environment. This repositioning increased the levels of non-U.S. government debt and residential mortgage-backed securities, as well as collateralized loan obligations and commercial mortgagebacked securities, and reduced the levels of U.S. government agency securities. For additional information related to securities, refer to the discussion in the Corporate/Private Equity segment on pages 107108, and Note 3 and Note 12 on pages 184198 and 225230, respectively, of this Annual Report. Loans and allowance for loan losses The Firm provides loans to a variety of customers, from large corporate and institutional clients to individual consumers and small businesses. Loans increased, reflecting continued growth in client activity across all of the Firms wholesale businesses and regions. This increase was offset by a decline in consumer, excluding credit card loan balances, due to paydowns, portfolio run-off and charge-offs, and in credit card loans, due to higher repayment rates, run-off of the Washington Mutual portfolio and the Firm's sale of the Kohl's portfolio. The allowance for loan losses decreased predominantly due to lower estimated losses in the credit card loan portfolio, reflecting improved delinquency trends and lower levels of credit card outstandings, and the impact of loan sales in the wholesale portfolio. For a more detailed discussion of the loan portfolio and the allowance for loan losses, refer to
JPMorgan Chase & Co./2011 Annual Report

Credit Risk Management on pages 132157, and Notes 3, 4, 14 and 15 on pages 184198, 198200, 231252 and 252255, respectively, of this Annual Report. Accrued interest and accounts receivable This caption consists of accrued interest receivables from interest-earning assets; receivables from customers; receivables from brokers, dealers and clearing organizations; and receivables from failed securities sales. Accrued interest and accounts receivable decreased, primarily in IB, driven by a large reduction in customer margin receivables due to changes in client activity. Premises and Equipment The Firm's premises and equipment consist of land, buildings, leasehold improvements, furniture and fixtures, hardware and software, and other equipment. The increase in premises and equipment was predominantly due to renovation of JPMorgan Chase's headquarters in New York City; the purchase of a building in London; retail branch expansion in the U.S.; and investments in technology hardware and software, as well as other equipment. The increase was partially offset by depreciation and amortization. Goodwill Goodwill arises from business combinations and represents the excess of the purchase price of an acquired entity or business over the fair values assigned to the assets acquired and liabilities assumed. The decrease in goodwill was predominantly due to AMs sale of its investment in an asset manager. For additional information on goodwill, see Note 17 on pages 267271 of this Annual Report. Mortgage servicing rights MSRs represent the fair value of net cash flows expected to be received for performing specified mortgage-servicing activities for others. MSRs decreased, predominantly as a result of a decline in market interest rates, amortization and other changes in valuation inputs and assumptions, including increased cost to service assumptions, partially offset by new MSR originations. For additional information on MSRs, see Note 17 on pages 267271 of this Annual Report. Other intangible assets Other intangible assets consist of purchased credit card relationships, other credit card-related intangibles, core deposit intangibles and other intangibles. The decrease in other intangible assets was due to amortization. For additional information on other intangible assets, see Note 17 on pages 267271 of this Annual Report. Other assets Other assets consist of private equity and other instruments, cash collateral pledged, corporate- and bankowned life insurance policies, assets acquired in loan satisfactions (including real estate owned), and all other assets. Other assets remained relatively flat in 2011.

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Management's discussion and analysis

Deposits Deposits represent a liability to customers, both retail and wholesale, related to non-brokerage funds held on their behalf. Deposits provide a stable and consistent source of funding for the Firm. Deposits increased significantly, predominantly due to an overall growth in wholesale client balances and, to a lesser extent, growth in consumer deposit balances. The increase in wholesale client balances, particularly in TSS and CB, was primarily driven by lower returns on other available alternative investments and low interest rates during 2011, and in AM, driven by growth in the number of clients and level of deposits. For more information on deposits, refer to the RFS and AM segment discussions on pages 8593 and 104106, respectively; the Liquidity Risk Management discussion on pages 127132; and Notes 3 and 19 on pages 184198 and 272, respectively, of this Annual Report. For more information on wholesale liability balances, which includes deposits, refer to the CB and TSS segment discussions on pages 98100 and 101103, respectively, of this Annual Report. Federal funds purchased and securities loaned or sold under repurchase agreements The Firm uses these instruments as part of its liquidity management activities and to support its client-driven market-making activities. In particular, federal funds purchased and securities loaned or sold under repurchase agreements are used by the Firm as short-term funding sources and to provide securities to clients for their shortterm liquidity purposes. Securities sold under repurchase agreements decreased, predominantly in IB, reflecting the lower funding requirements of the Firm based on lower trading inventory levels, and change in the mix of funding sources. For additional information on the Firms Liquidity Risk Management, see pages 127132 of this Annual Report. Commercial paper and other borrowed funds The Firm uses commercial paper and other borrowed funds in its liquidity management activities to meet short-term funding needs, and in connection with a TSS liquidity management product, whereby excess client funds are transferred into commercial paper overnight sweep accounts. Commercial paper increased due to growth in the volume of liability balances in sweep accounts related to TSSs cash management product. Other borrowed funds, which includes short-term advances from FHLBs decreased, predominantly driven by maturities of short-term secured borrowings, unsecured bank notes and short-term FHLB advances. For additional information on the Firms Liquidity Risk Management and other borrowed funds, see pages 127132 of this Annual Report. Accounts payable and other liabilities Accounts payable and other liabilities consist of payables to customers; payables to brokers, dealers and clearing organizations; payables from failed securities purchases; accrued expense, including interest-bearing liabilities; and all other liabilities, including litigation reserves and obligations to return securities received as collateral. Accounts payable and other liabilities increased predominantly due to higher IB customer balances. For additional information on the Firms accounts payable and other liabilities, see Note 20 on page 272 of this Annual Report. Beneficial interests issued by consolidated VIEs Beneficial interests issued by consolidated VIEs represent interest-bearing beneficial-interest liabilities, which decreased, predominantly due to maturities of Firmsponsored credit card securitization transactions. For additional information on Firm-sponsored VIEs and loan securitization trusts, see OffBalance Sheet Arrangements, and Note 16 on pages 256267 of this Annual Report. Long-term debt The Firm uses long-term debt (including trust-preferred capital debt securities and long-term FHLB advances) to provide cost-effective and diversified sources of funds and as critical components of the Firm's liquidity and capital management activities. Long-term debt decreased, predominantly due to net redemptions and maturities of long-term borrowings. For additional information on the Firms long-term debt activities, see the Liquidity Risk Management discussion on pages 127132 of this Annual Report. Stockholders equity Total stockholders equity increased, predominantly due to net income, as well as net issuances and commitments to issue under the Firms employee stock-based compensation plans. The increase was partially offset by repurchases of common equity; and the declaration of cash dividends on common and preferred stock.

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JPMorgan Chase & Co./2011 Annual Report

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS

JPMorgan Chase is involved with several types of off balance sheet arrangements, including through unconsolidated special-purpose entities (SPEs), which are a type of VIE, and through lending-related financial instruments (e.g., commitments and guarantees). both Firm-administered consolidated and third party sponsored nonconsolidated SPEs. In the event of a shortterm credit rating downgrade, JPMorgan Chase Bank, N.A., absent other solutions, would be required to provide funding to the SPE, if the commercial paper could not be reissued as it matured. The aggregate amounts of commercial paper outstanding, issued by both Firmadministered and third-party-sponsored SPEs, that are held by third parties as of December 31, 2011 and 2010, was $19.7 billion and $23.1 billion, respectively. In addition, the aggregate amounts of commercial paper outstanding could increase in future periods should clients of the Firmadministered consolidated or third party sponsored nonconsolidated SPEs draw down on certain unfunded lending-related commitments. JPMorgan Chase Bank, N.A. had unfunded lending-related commitments to clients to fund an incremental $11.0 billion and $10.5 billion at December 31, 2011 and 2010, respectively. The Firm could facilitate the refinancing of some of the clients' assets in order to reduce the funding obligation. For further information, see the discussion of Firm-administered multiseller conduits in Note 16 on page 260 of this Annual Report. The Firm also acts as liquidity provider for certain municipal bond vehicles. The liquidity provider's obligation to perform is conditional and is limited by certain 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. See Note 16 on pages 260261 of this Annual Report for additional information.

Special-purpose entities

The most common type of VIE is a special purpose entity (SPE). SPEs are commonly used in securitization transactions in order to isolate certain assets and distribute the cash flows from those assets to investors. SPEs are an important part of the financial markets, including the mortgage- and asset-backed securities and commercial paper markets, as they provide market liquidity by facilitating investors access to specific portfolios of assets and risks. SPEs may be organized as trusts, partnerships or corporations and are typically established for a single, discrete purpose. SPEs are not typically operating entities and usually have a limited life and no employees. 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. JPMorgan Chase uses SPEs as a source of liquidity for itself and its clients by securitizing financial assets, and by creating investment products for clients. The Firm is involved with SPEs through multi-seller conduits, investor intermediation activities, and loan securitizations. As a result of changes in the accounting guidance, certain VIEs were consolidated on the Firms Consolidated Balance Sheets effective January 1, 2010. For further information on the types of SPEs and the impact of the change in the accounting guidance, see Note 16 on pages 256267 for further information on these types of SPEs. 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 arms 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 Firms Code of Conduct. These rules prohibit employees from self-dealing and acting on behalf of the Firm in transactions with which they or their family have any significant financial interest. Implications of a credit rating downgrade to JPMorgan Chase Bank, N.A. For certain liquidity commitments to SPEs, JPMorgan Chase Bank, N.A., could be required to provide funding if its shortterm credit rating were downgraded below specific levels, primarily P-1, A-1 and F1 for Moodys, Standard & Poors and Fitch, respectively. These liquidity commitments support the issuance of asset-backed commercial paper by
JPMorgan Chase & Co./2011 Annual Report

Offbalance sheet lending-related financial instruments, guarantees, and other commitments

JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. For further discussion of lending-related commitments and guarantees and the Firms accounting for them, see Lending-related commitments on page 144, and Note 29 (including a table that presents, as of December 31, 2011, the amounts, by contractual maturity, of offbalance sheet lending-related financial instruments, guarantees and other commitments) on pages 283289, of this Annual Report. For a discussion of loan repurchase liabilities, see Mortgage repurchase liability on pages 115118 and Note 29 on pages 283289, respectively, of this Annual Report.

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Management's discussion and analysis Contractual cash obligations

with terms that are both fixed and determinable. 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 loan repurchase liabilities, see Mortgage repurchase liability on pages 115118 of this Annual Report. For further discussion of other obligations, see the Notes to Consolidated Financial Statements in this Annual Report.

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 U.S. GAAP. The accompanying table summarizes, by remaining maturity, JPMorgan Chases significant contractual cash obligations at December 31, 2011. The contractual cash obligations included in the table below reflect the minimum contractual obligation under legally enforceable contracts Contractual cash obligations

2011 By remaining maturity at December 31, (in millions) On-balance sheet obligations Deposits(a) Federal funds purchased and securities loaned or sold under repurchase agreements Commercial paper Other borrowed funds Long-term debt(a) Other(b) Total on-balance sheet obligations Off-balance sheet obligations Unsettled reverse repurchase and securities borrowing agreements(c) Contractual interest payments(d) Operating leases
(e) (a)

2010 After 2016 $ 2,065 1,337 8,467 83,615 2,617 98,101 $ Total 1,125,470 213,532 51,631 12,450 65,977 236,905 6,032 1,711,997 $ Total 927,682 276,644 35,363 24,611 77,649 249,434 7,329 1,598,712

2012 $ 1,108,154 200,049 51,631 12,450 39,729 50,077 1,355 1,463,445 $

2013-2014 9,681 11,271 14,317 59,749 1,136 96,154 $

2015-2016 5,570 875 3,464 43,464 924 54,297

Beneficial interests issued by consolidated VIEs

39,939 9,551 1,753 933 1,244 1,197 115 54,732 $ 1,518,177 $

13,006 3,335 4 713 1,996 108 19,162 115,316 $

9,669 2,738 7 288 1,875 48 14,625 68,922 $

44,192 7,188 1,346 415 325 13 53,479 151,580 $

39,939 76,418 15,014 2,290 2,660 5,393 284 141,998 1,853,995 $

39,927 78,454 16,000 2,468 2,822 5,801 567 146,039 1,744,751

Equity investment commitments(f) Contractual purchases and capital expenditures Obligations under affinity and co-brand programs Other Total off-balance sheet obligations Total contractual cash obligations

(a) Excludes structured notes where 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 deferred annuity contracts, pension and postretirement obligations and insurance liabilities. (c) For further information, refer to unsettled reverse repurchase and securities borrowing agreements in Note 29 on page 286 of this Annual Report. (d) Includes accrued interest and future contractual interest obligations. Excludes interest related to structured notes where the Firms payment obligation is based on the performance of certain benchmarks. (e) Includes noncancelable operating leases for premises and equipment used primarily for banking purposes and for energy-related tolling service agreements. Excludes the benefit of noncancelable sublease rentals of $1.5 billion and $1.8 billion at December 31, 2011 and 2010, respectively. (f) At December 31, 2011 and 2010, included unfunded commitments of $789 million and $1.0 billion, respectively, to third-party private equity funds that are generally valued as discussed in Note 3 on pages 184198 of this Annual Report; and $1.5 billion and $1.4 billion of unfunded commitments, respectively, to other equity investments.

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JPMorgan Chase & Co./2011 Annual Report

Mortgage repurchase liability In connection with the Firms mortgage loan sale and securitization activities with Fannie Mae and Freddie Mac (the GSEs) and other mortgage loan sale and private-label securitization transactions, the Firm has made representations and warranties that the loans sold meet certain requirements. For transactions with the GSEs, these representations relate to type of collateral, underwriting standards, validity of certain borrower representations made in connection with the loan, primary mortgage insurance being in force for any mortgage loan with a loanto-value (LTV) ratio greater than 80% at the loan's origination date, and the use of the GSEs' standard legal documentation. The Firm may be, and has been, required to repurchase loans and/or indemnify the GSEs and other investors for losses due to material breaches of these representations and warranties. 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 related third party. To date, the repurchase demands the Firm has received from the GSEs primarily relate to loans originated from 2005 to 2008. Demands against pre-2005 and post-2008 vintages have not been significant; the Firm attributes this to the comparatively favorable credit performance of these vintages and to the enhanced underwriting and loan qualification standards implemented progressively during 2007 and 2008. From 2005 to 2008, excluding Washington Mutual, the principal amount of loans sold to the GSEs subject to certain representations and warranties for which the Firm may be liable was approximately $380 billion; this amount has not been adjusted for subsequent activity, such as borrower repayments of principal or repurchases completed to date. See the discussion below for information concerning the process the Firm uses to evaluate repurchase demands for breaches of representations and warranties, and the Firms estimate of probable losses related to such exposure. From 2005 to 2008, Washington Mutual sold approximately $150 billion principal amount of loans to the GSEs subject to certain representations and warranties. Subsequent to the Firms acquisition of certain assets and liabilities of Washington Mutual from the FDIC in September 2008, the Firm resolved and/or limited certain current and future repurchase demands for loans sold to the GSEs by Washington Mutual, although it remains the Firms position that such obligations remain with the FDIC receivership. The Firm will continue to evaluate and may pay (subject to reserving its rights for indemnification by the FDIC) certain future repurchase demands related to individual loans, subject to certain limitations, and has considered such potential repurchase demands in its repurchase liability. The Firm believes that the remaining GSE repurchase exposure related to Washington Mutual presents minimal future risk to the Firms financial results.

The Firm also sells loans in securitization transactions with Ginnie Mae; these loans are typically insured or guaranteed by another government agency. The Firm, in its role as servicer, may elect, but is not required, to repurchase delinquent loans securitized by Ginnie Mae, including those that have been sold back to Ginnie Mae subsequent to modification. Principal amounts due under the terms of these repurchased loans continue to be insured and the reimbursement of insured amounts is proceeding normally. Accordingly, the Firm has not recorded any mortgage repurchase liability related to these loans. From 2005 to 2008, the Firm and certain acquired entities made certain loan level representations and warranties in connection with approximately $450 billion of residential mortgage loans that were sold or deposited into privatelabel securitizations. While the terms of the securitization transactions vary, they generally differ from loan sales to the GSEs in that, among other things: (i) in order to direct the trustee to investigate potential claims, the security holders must make a formal request for the trustee to do so, and typically, this requires agreement of the holders of a specified percentage of the outstanding securities; (ii) generally, the mortgage loans are not required to meet all GSE eligibility criteria; and (iii) in many cases, the party demanding repurchase is required to demonstrate that a loan-level breach of a representation or warranty has materially and adversely affected the value of the loan. Of the $450 billion originally sold or deposited (including $165 billion by Washington Mutual, as to which the Firm maintains that certain of the repurchase obligations remain with the FDIC receivership), approximately $191 billion of principal has been repaid (including $71 billion related to Washington Mutual). In addition, approximately $97 billion of the principal amount of loans has been liquidated (including $35 billion related to Washington Mutual), with an average loss severity of 58%. Accordingly, the remaining outstanding principal balance of these loans (including Washington Mutual) was, as of December 31, 2011, approximately $162 billion, of which $55 billion was 60 days or more past due. The remaining outstanding principal balance of loans related to Washington Mutual was approximately $59 billion, of which $20 billion were 60 days or more past due. Although there have been generalized allegations, as well as specific demands, that the Firm should repurchase loans sold or deposited into private-label securitizations, these claims for repurchases of loans sold or deposited into private-label securitizations (including claims from insurers that have guaranteed certain obligations of the securitization trusts) have, thus far, generally manifested themselves through threatened or pending litigation. Accordingly, the Firm does not consider these claims in estimating its mortgage repurchase liability; rather, the Firm separately evaluates such exposures in establishing its litigation reserves. For additional information regarding litigation, see Note 31 on pages 290299 of this Annual Report.
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Management's discussion and analysis

With respect to repurchase claims from private-label securitizations other than those considered in the Firm's litigation reserves, the Firm experienced an increase in the number of requests for loan files (file requests) in the latter part of 2011; however, loan-level repurchase demands and repurchases from private-label securitizations have been limited to date. While it is possible that the volume of repurchases may increase in the future, the Firm cannot at the current time offer a reasonable estimate of probable future repurchases from such private-label securitizations. As a result, the Firms mortgage repurchase liability primarily relates to loan sales to the GSEs and is calculated predominantly based on the Firms repurchase activity experience with the GSEs. Repurchase demand process The Firm first becomes aware that a GSE is evaluating a particular loan for repurchase when the Firm receives a file request from the GSE. Upon completing its review, the GSE may submit a repurchase demand to the Firm; historically, most file requests have not resulted in repurchase demands. The primary reasons for repurchase demands from the GSEs relate to alleged misrepresentations primarily arising from: (i) credit quality and/or undisclosed debt of the borrower; (ii) income level and/or employment status of the borrower; and (iii) appraised value of collateral. Ineligibility of the borrower for the particular product, mortgage insurance rescissions and missing documentation are other reasons for repurchase demands. The successful rescission of mortgage insurance typically results in a violation of representations and warranties made to the GSEs and, therefore, has been a significant cause of repurchase demands from the GSEs. The Firm actively reviews all rescission notices from mortgage insurers and contests them when appropriate. As soon as practicable after receiving a repurchase demand from a GSE, the Firm evaluates the request and takes appropriate actions based on the nature of the repurchase demand. Loan-level appeals with the GSEs are typical and the Firm seeks to resolve the repurchase demand (i.e., either repurchase the loan or have the repurchase demand rescinded) within three to four months of the date of receipt. In many cases, the Firm ultimately is not required to repurchase a loan because it is able to resolve the purported defect. Although repurchase demands may be made until the loan is paid in full, most repurchase demands from the GSEs historically have related to loans that became delinquent in the first 24 months following origination. When the Firm accepts a repurchase demand from one of the GSEs, the Firm may either (i) repurchase the loan or the underlying collateral from the GSE at the unpaid principal balance of the loan plus accrued interest, or (ii) reimburse the GSE for its realized loss on a liquidated property (a make-whole payment). Estimated mortgage repurchase liability To estimate the Firms mortgage repurchase liability arising from breaches of representations and warranties, the Firm considers the following factors, which are predominantly based on the Firm's historical repurchase activity with the GSEs: (i) the level of outstanding unresolved repurchase demands, (ii) estimated probable future repurchase demands, considering information about file requests, delinquent and liquidated loans, resolved and unresolved mortgage insurance rescission notices and the Firms historical experience, (iii) the potential ability of the Firm to cure the defects identified in the repurchase demands (cure rate), (iv) the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement, or indemnification, (v) the Firms potential ability to recover its losses from third-party originators, and (vi) the terms of agreements with certain mortgage insurers and other parties. Based on these factors, the Firm has recognized a mortgage repurchase liability of $3.6 billion and $3.3 billion as of December 31, 2011 and 2010, respectively.

The following table provides information about outstanding repurchase demands and unresolved mortgage insurance rescission notices, excluding those related to Washington Mutual, at each of the past five quarter-end dates.
Outstanding repurchase demands and unresolved mortgage insurance rescission notices by counterparty type(a)
(in millions) GSEs and other(b) Mortgage insurers Overlapping population(c) Total $ $ December 31, 2011 2,345 1,034 (113) 3,266 $ $ September 30, 2011 2,133 1,112 (155) 3,090 $ $ June 30, 2011 1,826 1,093 (145) 2,774 $ $ March 31, 2011 1,321 1,240 (127) 2,434 $ $ December 31, 2010 1,251 1,121 (104) 2,268

(a) Mortgage repurchase demands associated with pending or threatened litigation are not reported in this table because the Firm separately evaluates its exposure to such repurchase demands in establishing its litigation reserves. (b) The Firms outstanding repurchase demands are predominantly from the GSEs. Other represents repurchase demands received from parties other than the GSEs that have been presented in accordance with the terms of the underlying sale or securitization agreement. (c) Because the GSEs may make repurchase demands based on mortgage insurance rescission notices that remain unresolved, certain loans may be subject to both an unresolved mortgage insurance rescission notice and an outstanding repurchase demand. 116 JPMorgan Chase & Co./2011 Annual Report

The following tables show the trend in repurchase demands and mortgage insurance rescission notices received by loan origination vintage, excluding those related to Washington Mutual, for the past five quarters. The Firm expects repurchase demands to remain at elevated levels or to increase if there is a significant increase in private label repurchase demands outside of litigation. Quarterly mortgage repurchase demands received by loan origination vintage(a)
(in millions) Pre-2005 2005 2006 2007 2008 Post-2008 Total repurchase demands received $ December 31, 2011 $ 39 55 315 804 291 81 1,585 $ September 30, 2011 $ 34 200 232 602 323 153 1,544 $ $ June 30, 2011 32 57 363 510 301 89 1,352 $ $ March 31, 2011 15 45 158 381 249 94 942 $ $ December 31, 2010 39 73 198 539 254 65 1,168

(a) Mortgage repurchase demands associated with pending or threatened litigation are not reported in this table because the Firm separately evaluates its exposure to such repurchase demands in establishing its litigation reserves.

Quarterly mortgage insurance rescission notices received by loan origination vintage(a)

(in millions) Pre-2005 2005 2006 2007 2008 Post-2008 Total mortgage insurance rescissions received(a) $ December 31, 2011 $ 4 12 19 48 26 2 111 $ $ September 30, 2011 3 15 31 63 30 1 143 $ $ June 30, 2011 3 24 39 72 31 1 170 $ $ March 31, 2011 5 32 65 144 49 1 296 $ December 31, 2010 $ 3 9 53 142 50 1 258

(a) Mortgage insurance rescissions typically result in a repurchase demand from the GSEs. This table includes mortgage insurance rescission notices for which the GSEs also have issued a repurchase demand.

Since the beginning of 2010, the Firms overall cure rate, excluding Washington Mutual, has been approximately 50%. Repurchases that have resulted from mortgage insurance rescissions are reflected in the Firms overall cure rate. While the actual cure rate may vary from quarter to quarter, the Firm expects that the overall cure rate will remain in the 40-50% range for the foreseeable future. The Firm has not observed a direct relationship between the type of defect that causes the breach of representations and warranties and the severity of the realized loss. Therefore, the loss severity assumption is estimated using the Firms historical experience and projections regarding changes in home prices. Actual principal loss severities on finalized repurchases and make-whole settlements to date, excluding Washington Mutual, currently average approximately 50%, but may vary from quarter to quarter based on the characteristics of the underlying loans and changes in home prices. When a loan was originated by a third-party originator, the Firm typically has the right to seek a recovery of related repurchase losses from the third-party originator. Estimated and actual third-party recovery rates may vary from quarter to quarter based upon the underlying mix of correspondents (e.g., active, inactive, out-of-business originators) from which recoveries are being sought.

The Firm has entered into agreements with two mortgage insurers to resolve their claims on certain portfolios for which the Firm is a servicer. These two agreements cover and have resolved approximately one-third of the Firms total mortgage insurance rescission risk exposure, both in terms of the unpaid principal balance of serviced loans covered by mortgage insurance and the amount of mortgage insurance coverage. The impact of these agreements is reflected in the mortgage repurchase liability and the outstanding mortgage insurance rescission notices as of December 31, 2011 disclosed above. The Firm has considered its remaining unresolved mortgage insurance rescission risk exposure in estimating the mortgage repurchase liability as of December 31, 2011. Substantially all of the estimates and assumptions underlying the Firms established methodology for computing its recorded mortgage repurchase liability including the amount of probable future demands from purchasers, trustees or investors (which is in part based on historical experience), the ability of the Firm to cure identified defects, the severity of loss upon repurchase or foreclosure and recoveries from third parties require application of a significant level of management judgment. Estimating the mortgage repurchase liability is further complicated by historical data that is not necessarily indicative of future expectations and uncertainty
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Management's discussion and analysis

surrounding numerous external factors, including: (i) economic factors (for example, further declines in home prices and changes in borrower behavior may lead to increases in the number of defaults, the severity of losses, or both), and (ii) the level of future demands, which is dependent, in part, on actions taken by third parties, such as the GSEs, mortgage insurers, trustees and investors. While the Firm uses the best information available to it in estimating its mortgage repurchase liability, the estimation process is inherently uncertain, imprecise and potentially volatile as additional information is obtained and external factors continue to evolve. The following table summarizes the change in the mortgage repurchase liability for each of the periods presented. Summary of changes in mortgage repurchase liability(a)
Year ended December 31, (in millions) Repurchase liability at beginning of period Realized losses(b) Provision for repurchase losses 2011 $ 3,285 (1,263) 1,535
(c)

Unpaid principal balance of mortgage loan repurchases(a)

Year ended December 31, (in millions) Ginnie Mae(b) GSEs and other(c)(d) Total 2011 $ 5,981 1,334 $ 7,315 2010 $ 8,717 1,773 $ 10,490 2009 $ 6,966 1,019 $ 7,985

2010 $ 1,705 (1,423) 3,003 $ 3,285

2009 $ 1,093 (1,253) 1,865 1,705

(d)

Repurchase liability at end of period $ 3,557

(a) Mortgage repurchase liabilities associated with pending or threatened litigation are not reported in this table because the Firm separately evaluates its exposure to such repurchases in establishing its litigation reserves. (b) Includes principal losses and accrued interest on repurchased loans, make-whole settlements, settlements with claimants, and certain related expense. For the years ended 2011, 2010 and 2009, makewhole settlements were $640 million, $632 million and $277 million, respectively. (c) Includes $173 million at December 31, 2011, related to future demands on loans sold by Washington Mutual to the GSEs. (d) Includes the Firms resolution with the GSEs of certain current and future repurchase demands for certain loans sold by Washington Mutual. The unpaid principal balance of loans related to this resolution is not included in the table below, which summarizes the unpaid principal balance of repurchased loans.

(a) This table includes (i) repurchases of mortgage loans due to breaches of representations and warranties, and (ii) loans repurchased from Ginnie Mae loan pools as described in (b) below. This table does not include mortgage insurance rescissions; while the rescission of mortgage insurance typically results in a repurchase demand from the GSEs, the mortgage insurers themselves do not present repurchase demands to the Firm. This table also excludes mortgage loan repurchases associated with pending or threatened litigation because the Firm separately evaluates its exposure to such repurchases in establishing its litigation reserves. (b) In substantially all cases, these repurchases represent the Firms voluntary repurchase of certain delinquent loans from loan pools as permitted by Ginnie Mae guidelines (i.e., they do not result from repurchase demands due to breaches of representations and warranties). 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, the Federal Housing Administration (FHA), Rural Housing Services (RHS) and/or the U.S. Department of Veterans Affairs (VA). (c) Predominantly all of the repurchases related to demands by GSEs. (d) Nonaccrual loans held-for-investment included $477 million, $354 million and $218 million at December 31, 2011, 2010 and 2009, respectively, of loans repurchased as a result of breaches of representations and warranties.

For additional information regarding the mortgage repurchase liability, see Note 29 on pages 283-289 of this Annual Report.

The following table summarizes the total unpaid principal balance of repurchases during the periods indicated.

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CAPITAL MANAGEMENT
A strong capital position is essential to the Firms business strategy and competitive position. The Firms capital strategy focuses on long-term stability, which enables the Firm to build and invest in market-leading businesses, even in a highly stressed environment. Senior management considers the implications on the Firms capital strength prior to making any decision on future business activities. Capital and earnings are inextricably linked, as earnings directly affect capital generation for the Firm. In addition to considering the Firms earnings outlook, senior management evaluates all sources and uses of capital and makes decisions to vary sources or uses to preserve the Firms capital strength. The Firms capital management objectives are to hold capital sufficient to: Cover all material risks underlying the Firms business activities; Maintain well-capitalized status under regulatory requirements; Maintain debt ratings, which will enable the Firm to optimize its funding mix and liquidity sources while minimizing costs; Retain flexibility to take advantage of future investment opportunities; and Build and invest in businesses, even in a highly stressed environment. To meet these objectives, the Firm maintains a robust and disciplined capital adequacy assessment process, which is performed regularly, and is intended to enable the Firm to remain well-capitalized and fund ongoing operations under adverse conditions. The process assesses the potential impact of alternative economic and business scenarios on earnings and capital for the Firms businesses individually and in the aggregate over a rolling three-year period. 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 operational risk events, which generate significant losses. However, when defining a broad range of scenarios, realized events can always be worse. Accordingly, management considers additional stresses outside these scenarios as necessary. The Firm utilized this capital adequacy process in completing the Federal Reserve Comprehensive Capital Analysis and Review (CCAR). The Federal Reserve requires the Firm to submit a capital plan on an annual basis. The Firm submitted its 2012 capital plan on January 9, 2012. The Federal Reserve has indicated that it expects to provide notification of either its objection or nonobjection to the Firm's capital plan by March 15, 2012. Capital adequacy is also evaluated with the Firms liquidity
JPMorgan Chase & Co./2011 Annual Report

risk management processes. For further information on the Firms Liquidity Risk Management, see pages 127132 of this Annual Report. The quality and composition of capital are key factors in senior managements evaluation of the Firms capital adequacy. Accordingly, the Firm holds a significant amount of its capital in the form of common equity. The Firm uses three capital measurements in assessing its levels of capital: Regulatory capital The capital required according to standards stipulated by U.S. bank regulatory agencies. Economic risk capital The capital required as a result of a bottom-up assessment of the underlying risks of the Firms business activities, utilizing internal riskassessment methodologies. Line of business equity The amount of equity the Firm believes each business segment would require if it were operating independently, which incorporates sufficient capital to address economic risk measures, regulatory capital requirements and capital levels for similarly rated peers. Regulatory capital The Federal Reserve establishes capital requirements, including well-capitalized standards, for the consolidated financial holding company. The Office of the Comptroller of the Currency (OCC) establishes similar capital requirements and standards for the Firms national banks, including JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A. As of December 31, 2011 and 2010, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and each met all capital requirements to which it was subject. In connection with the U.S. Governments Supervisory Capital Assessment Program in 2009, U.S. banking regulators developed a new measure of capital, Tier 1 common, which is defined as Tier 1 capital less elements of Tier 1 capital not in the form of common equity such as perpetual preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt securities. Tier 1 common, a non-GAAP financial measure, is used by banking regulators, investors and analysts to assess and compare the quality and composition of the Firms capital with the capital of other financial services companies. The Firm uses Tier 1 common along with the other capital measures to assess and monitor its capital position. At December 31, 2011 and 2010, JPMorgan Chase maintained Tier 1 and Total capital ratios in excess of the well-capitalized standards established by the Federal Reserve, as indicated in the tables below. In addition, the Firms Tier 1 common ratio was significantly above the 4% well-capitalized standard established at the time of the Supervisory Capital Assessment Program. For more information, see Note 28 on pages 281283 of this Annual Report.
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Management's discussion and analysis

The following table presents the regulatory capital, assets and risk-based capital ratios for JPMorgan Chase at December 31, 2011 and 2010. These amounts are determined in accordance with regulations issued by the Federal Reserve and OCC. Risk-based capital ratios
December 31, Capital ratios Tier 1 capital Total capital Tier 1 leverage Tier 1 common(a) 2011 12.3% 15.4 6.8 10.1 2010 12.1% 15.5 7.0 9.8

compensation plans of $2.1 billion. The increase was partially offset by $8.95 billion (on a trade-date basis) of repurchases of common stock and warrants and $4.7 billion of dividends on common and preferred stock. The Firms Tier 1 capital was $150.4 billion at December 31, 2011, an increase of $7.9 billion from December 31, 2010. The increase in Tier 1 capital reflected the increase in Tier 1 common. Additional information regarding the Firms capital ratios and the federal regulatory capital standards to which it is subject is presented in Supervision and regulation and Part I, Item 1A, Risk Factors, on pages 17 and 717, respectively, of the 2011 Form 10-K, and Note 28 on pages 281283 of this Annual Report. Basel II The minimum risk-based capital requirements adopted by the U.S. federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision (Basel I). In 2004, the Basel Committee published a revision to the Accord (Basel II). The goal of the Basel II Framework is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. U.S. banking regulators published a final Basel II rule in December 2007, which requires JPMorgan Chase to implement Basel II at the holding company level, as well as at certain of its key U.S. bank subsidiaries. Prior to full implementation of the new Basel II Framework, JPMorgan Chase is required to complete a qualification period of four consecutive quarters during which it needs to demonstrate that it meets the requirements of the rule to the satisfaction of its U.S. banking regulators. JPMorgan Chase is currently in the qualification period and expects to be in compliance with all relevant Basel II rules within the established timelines. In addition, the Firm has adopted, and will continue to adopt, based on various established timelines, Basel II rules in certain non-U.S. jurisdictions, as required. Basel 2.5 During 2011, the U.S. federal banking agencies issued proposals for industry comment to revise the market risk capital rules of Basel II that would result in additional capital requirements for trading positions and securitizations. The Firm anticipates these rules will be finalized and implemented in 2012. It is currently estimated that implementation of these rules could result in approximately a 100 basis point decrease in the Firms Basel I Tier 1 common ratio, but the actual impact upon implementation on the Firms capital ratios could differ depending on the outcome of the final U.S. rules and regulatory approval of the Firms internal models.

(a) The Tier 1 common ratio is Tier 1 common capital divided by RWA.

A reconciliation of total stockholders equity to Tier 1 common, Tier 1 capital and Total qualifying capital is presented in the table below. Risk-based capital components and assets
December 31, (in millions) Total stockholders equity Less: Preferred stock Common stockholders equity Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 common Less: Goodwill(a) Fair value DVA on derivative and structured note liabilities related to the Firms credit quality Investments in certain subsidiaries and other Other intangible assets(a) Tier 1 common Preferred stock Qualifying hybrid securities and noncontrolling interests(b) Total Tier 1 capital Long-term debt and other instruments qualifying as Tier 2 Qualifying allowance for credit losses Adjustment for investments in certain subsidiaries and other Total Tier 2 capital Total qualifying capital Risk-weighted assets Total adjusted average assets $ $ 2011 183,573 7,800 175,773 (970) 45,873 $ 2010 176,106 7,800 168,306 (748) 46,915

2,150 993 2,871 122,916 7,800 19,668 150,384 22,275 15,504 (75) 37,704 188,088 $ $ 1,221,198 $ 2,202,087

1,261 1,032 3,587 114,763 7,800 19,887 142,450 25,018 14,959 (211) 39,766 182,216 $ 1,174,978 $ 2,024,515

(a) Goodwill and other intangible assets are net of any associated deferred tax liabilities. (b) Primarily includes trust preferred capital debt securities of certain business trusts.

The Firms Tier 1 common was $122.9 billion at December 31, 2011, an increase of $8.2 billion from December 31, 2010. The increase was predominantly due to net income (adjusted for DVA) of $18.1 billion, lower deductions related to goodwill and other intangibles of $1.8 billion, and net issuances and commitments to issue common stock under the Firms employee stock-based
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Basel III In addition to the Basel II Framework, on December 16, 2010, the Basel Committee issued the final version of the Capital Accord, commonly referred to as Basel III, which revised Basel II by, among other things, narrowing the definition of capital, increasing capital requirements for specific exposures, introducing minimum standards for short-term liquidity coverage the liquidity coverage ratio (the LCR) and term funding the net stable funding ratio (the NSFR), and establishing an international leverage ratio. The LCR is a short-term liquidity measure which identifies a firm's unencumbered, high-quality liquid assets that can be converted into cash to meet net cash outflows during a 30-day severe stress scenario. The NSFR measures the amount of longer-term, stable sources of funding available to support the portion of all assets (onand off-balance sheet) that cannot be monetized over a one-year period of extended stress. The Basel Committee also announced higher capital ratio requirements under Basel III, which provide that the common equity requirement will be increased to 7%, comprised of a minimum ratio of 4.5% plus a 2.5% capital conservation buffer. On June 25, 2011, the Basel Committee announced an agreement to require global systemically important banks (GSIBs) to maintain Tier 1 common requirements above the 7% minimum in amounts ranging from an additional 1% to an additional 2.5%. The Basel Committee also stated it intended to require certain GSIBs to maintain a further Tier 1 common requirement of an additional 1% under certain circumstances, to act as a disincentive for the GSIB from taking actions that would further increase its systemic importance. On July 19, 2011, the Basel Committee published a proposal on the GSIB assessment methodology, which reflects an approach based on five broad categories: size; interconnectedness; lack of substitutability; crossjurisdictional activity; and complexity. In late September, the Basel Committee finalized the GSIB assessment methodology and Tier 1 common requirements. In addition, the U.S. federal banking agencies have published proposed risk-based capital floors pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) to establish a permanent Basel I floor under Basel II and Basel III capital calculations. Estimated Tier 1 common under Basel III rules The following table presents a comparison of the Firm's Tier 1 common under Basel I rules to its estimated Tier 1 common under Basel III rules, along with the Firm's estimated risk-weighted assets and the Tier 1 common ratio under Basel III rules, all of which are non-GAAP financial measures. Tier 1 common under Basel III includes additional adjustments and deductions not included in Basel I Tier 1 common, such as the inclusion of accumulated other comprehensive income (AOCI) related to AFS securities and defined benefit pension and other postretirement employee benefit plans, and the deduction of the Firm's
JPMorgan Chase & Co./2011 Annual Report

defined benefit pension fund assets. The Firm estimates that its Tier 1 common ratio under Basel III rules would be 7.9% as of December 31, 2011. Management considers this estimate as a key measure to assess the Firms capital position in conjunction with its capital ratios under Basel I requirements, in order to enable management, investors and analysts to compare the Firms capital under the Basel III capital standards with similar estimates provided by other financial services companies.
December 31, 2011 (in millions, except ratios) Tier 1 common under Basel I rules Adjustments related to AOCI for AFS securities and defined benefit pension and other postretirement employee benefit plans Deduction for net defined benefit pension asset All other adjustments Estimated Tier 1 common under Basel III rules Estimated Tier 1 common ratio under Basel III rules(b) $ $ 122,916

919 (1,430) (534) 121,871 7.9%

Estimated risk-weighted assets under Basel III rules(a) $ 1,545,801 (a) Key differences in the calculation of risk-weighted assets between Basel I and Basel III include: (a) Basel III credit risk risk-weighted assets (RWA) is based on risk-sensitive approaches which largely rely on the use of internal credit models and parameters, whereas Basel I RWA is based on fixed supervisory risk weightings which vary only by counterparty type and asset class; (b) Basel III market risk RWA reflects the new capital requirements related to trading assets and securitizations, which include incremental capital requirements for stress VaR, correlation trading, and re-securitization positions; and (c) Basel III includes RWA for operational risk, whereas Basel I does not. (b) The Tier 1 common ratio is Tier 1 common divided by RWA.

The Firms estimate of its Tier 1 common ratio under Basel III reflects its current understanding of the Basel III rules and the application of such rules to its businesses as currently conducted, and therefore excludes the impact of any changes the Firm may make in the future to its businesses as a result of implementing the Basel III rules. The Firm's understanding of the Basel III rules is based on information currently published by the Basel Committee and U.S. federal banking agencies. The Firm intends to maintain its strong liquidity position in the future as the short-term liquidity coverage (LCR) and term funding (NSFR) standards of the Basel III rules are implemented, in 2015 and 2018, respectively. In order to do so the Firm believes it may need to modify the liquidity profile of certain of its assets and liabilities. Implementation of the Basel III rules may also cause the Firm to increase prices on, or alter the types of, products it offers to its customers and clients. The Basel III revisions governing liquidity and capital requirements are subject to prolonged observation and transition periods. The observation periods for both the LCR and NSFR began in 2011, with implementation in 2015 and 2018, respectively. The transition period for banks to meet the revised Tier 1 common requirement will begin in 2013, with implementation on January 1, 2019. The Firm fully expects to be in compliance with the higher Basel III capital

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standards, as well as any additional Dodd-Frank Act capital requirements, as they become effective. The additional capital requirements for GSIBs will be phased-in starting January 1, 2016, with full implementation on January 1, 2019. The Firm will continue to monitor the ongoing rule-making process to assess both the timing and the impact of Basel III on its businesses and financial condition. Broker-dealer regulatory capital JPMorgan Chases principal U.S. broker-dealer subsidiaries are J.P. Morgan Securities LLC (JPMorgan Securities) and J.P. Morgan Clearing Corp. (JPMorgan Clearing). JPMorgan Clearing is a subsidiary of JPMorgan Securities and provides clearing and settlement services. JPMorgan Securities and JPMorgan Clearing are each subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Net Capital Rule). JPMorgan Securities and JPMorgan Clearing are also each registered as futures commission merchants and subject to Rule 1.17 of the Commodity Futures Trading Commission (CFTC). Effective June 1, 2011, J.P. Morgan Futures Inc., a registered Futures Commission Merchant and a wholly owned subsidiary of JPMorgan Chase, merged with and into JPMorgan Securities. The merger created a combined Broker-Dealer/Futures Commission Merchant entity that provides capital and operational efficiencies. JPMorgan Securities and JPMorgan Clearing have elected to compute their minimum net capital requirements in accordance with the Alternative Net Capital Requirements of the Net Capital Rule. At December 31, 2011, JPMorgan Securities net capital, as defined by the Net Capital Rule, was $11.1 billion, exceeding the minimum requirement by $9.5 billion, and JPMorgan Clearings net capital was $7.4 billion, exceeding the minimum requirement by $5.5 billion. In addition to its minimum net capital requirement, JPMorgan Securities is required to hold tentative net capital in excess of $1.0 billion and is also required to notify the SEC in the event that tentative net capital is less than $5.0 billion, in accordance with the market and credit risk standards of Appendix E of the Net Capital Rule. As of December 31, 2011, JPMorgan Securities had tentative net capital in excess of the minimum and notification requirements. Economic risk capital JPMorgan Chase assesses its capital adequacy relative to the risks underlying its business activities using internal risk-assessment methodologies. The Firm measures economic capital primarily based on four risk factors: credit, market, operational and private equity risk.

Yearly Average Year ended December 31, (in billions) Credit risk Market risk Operational risk Private equity risk Economic risk capital Goodwill Other (a)
(a)

2011 $ 48.2 14.5 8.5 6.9 78.1 48.6 46.6 $ 173.3 $

2010 49.7 15.1 7.4 6.2 78.4 48.6 34.5 $ 161.5 $

2009 51.3 15.4 8.5 4.7 79.9 48.3 17.7 $ 145.9

Total common stockholders equity

Reflects additional capital required, in the Firms view, to meet its regulatory and debt rating objectives.

Credit risk capital Credit risk capital is estimated separately for the wholesale businesses (IB, CB, TSS and AM) and consumer businesses (RFS and Card). Credit risk capital for the overall wholesale credit portfolio is defined in terms of unexpected credit losses, both from defaults and from declines in the portfolio value due to credit deterioration, measured over a one-year period at a confidence level consistent with an AA credit rating standard. Unexpected losses are losses in excess of those for which allowances for credit losses are maintained. The capital methodology is based on several principal drivers of credit risk: exposure at default (or loan-equivalent amount), default likelihood, credit spreads, loss severity and portfolio correlation. Credit risk capital for the consumer portfolio is based on product and other relevant risk segmentation. Actual segment-level default and severity experience are used to estimate unexpected losses for a one-year horizon at a confidence level consistent with an AA credit rating standard. See Credit Risk Management on pages 132157 of this Annual Report for more information about these credit risk measures. Market risk capital The Firm calculates market risk capital guided by the principle that capital should reflect the risk of loss in the value of portfolios and financial instruments caused by adverse movements in market variables, such as interest and foreign exchange rates, credit spreads, and securities and commodities prices, taking into account the liquidity of the financial instruments. Results from daily VaR, biweekly stress-tests, issuer credit spreads and default risk calculations, as well as other factors, are used to determine appropriate capital levels. Market risk capital is allocated to each business segment based on its risk assessment. See Market Risk Management on pages 158163 of this Annual Report for more information about these market risk measures.

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Operational risk capital Capital is allocated to the lines of business for operational risk using a risk-based capital allocation methodology which estimates operational risk on a bottom-up basis. The operational risk capital model is based on actual losses and potential scenario-based stress losses, with adjustments to the capital calculation to reflect changes in the quality of the control environment or the use of risk-transfer products. The Firm believes its model is consistent with the Basel II Framework. See Operational Risk Management on pages 166167 of this Annual Report for more information about operational risk. Private equity risk capital Capital is allocated to privately- and publicly-held securities, third-party fund investments, and commitments in the private equity portfolio to cover the potential loss associated with a decline in equity markets and related asset devaluations. In addition to negative market fluctuations, potential losses in private equity investment portfolios can be magnified by liquidity risk. Capital allocation for the private equity portfolio is based on measurement of the loss experience suffered by the Firm and other market participants over a prolonged period of adverse equity market conditions. Line of business equity The Firms framework for allocating capital is based on the following objectives: Integrate firmwide and line of business capital management activities; Measure performance consistently across all lines of business; and Provide comparability with peer firms for each of the lines of business Equity for a line of business represents the amount the Firm believes the business would require if it were operating independently, incorporating sufficient capital to address regulatory capital requirements (including Basel III Tier 1 common capital requirements), economic risk measures and capital levels for similarly rated peers. Capital is also allocated to each line of business 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 segments performance.

Line of business equity

December 31, (in billions) Investment Bank Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total common stockholders equity $ $ 2011 40.0 25.0 16.0 8.0 7.0 6.5 73.3 175.8 $ $ 2010 40.0 24.6 18.4 8.0 6.5 6.5 64.3 168.3

Line of business equity

Year ended December 31, (in billions) Investment Bank Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total common stockholders equity $ 2011 40.0 25.0 16.0 8.0 7.0 6.5 70.8 $ 173.3

Yearly Average 2010 $ 40.0 24.6 18.4 8.0 6.5 6.5 57.5 $ 161.5 $ 2009 33.0 22.5 17.5 8.0 5.0 7.0 52.9 $ 145.9

Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align equity assigned to the lines of business with changes anticipated to occur in each line of business, and to reflect the competitive and regulatory landscape. The lines of business are now capitalized based on the Tier 1 common standard, rather than the Tier 1 capital standard. Effective January 1, 2011, capital allocated to Card was reduced by $2.4 billion to $16.0 billion, largely reflecting portfolio runoff and the improving risk profile of the business; capital allocated to TSS was increased by $500 million, to $7.0 billion, reflecting growth in the underlying business. Effective January 1, 2012, the Firm further revised the capital allocated to certain businesses, reflecting additional refinement of each segments Basel III Tier 1 common capital requirements. The Firm continues to assess the level of capital required for each line of business, as well as the assumptions and methodologies used to allocate capital to the business segments, and further refinements may be implemented in future periods.

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Management's discussion and analysis Capital actions

Dividends On February 23, 2009, the Board of Directors reduced the Firms quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009. The action enabled the Firm to retain approximately $5.5 billion in common equity in each of 2010 and 2009, and was taken to ensure the Firm had sufficient capital strength in the event the very weak economic conditions that existed at the beginning of 2009 deteriorated further. JPMorgan Chase declared quarterly cash dividends on its common stock in the amount of $0.05 per share for each quarter of 2010 and 2009. On March 18, 2011, the Board of Directors increased the Firms quarterly common stock dividend from $0.05 to $0.25 per share, effective with the dividend paid on April 30, 2011, to shareholders of record on April 6, 2011. The Firms common stock dividend policy reflects JPMorgan Chases earnings outlook; desired dividend payout ratio; capital objectives; and alternative investment opportunities. The Firms current expectation is to return to a payout ratio of approximately 30% of normalized earnings over time. For information regarding dividend restrictions, see Note 22 and Note 27 on page 276 and 281, respectively, of this Annual Report. The following table shows the common dividend payout ratio based on reported net income.
Year ended December 31, Common dividend payout ratio 2011 22% 2010 5% 2009 9%

The authorization to repurchase common equity will be utilized at managements 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 considerations affecting the amount and timing of repurchase activity; the Firms 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 programs; and may be suspended at any time. For additional information regarding repurchases of the Firms equity securities, see Part II, Item 5: Market for registrants common equity, related stockholder matters and issuer purchases of equity securities, on pages 1820 of JPMorgan Chases 2011 Form 10-K. Issuance Common stock On June 5, 2009, the Firm issued $5.8 billion, or 163 million shares, of common stock at $35.25 per share. The proceeds from these issuances were used for general corporate purposes. For additional information regarding common stock, see Note 23 on pages 276-277 of this Annual Report. Capital Purchase Program Pursuant to the U.S. Treasurys Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury a Warrant to purchase up to 88,401,697 shares of the Firms common stock, at an exercise price of $42.42 per share, subject to certain antidilution and other adjustments. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which was a warrant to purchase a share of the Firms common stock at an exercise price of $42.42 per share and, on December 11, 2009, the U.S. Treasury sold the warrants to the public in a secondary public offering for $950 million. In 2011, the Firm repurchased 10,167,698 of these warrants as part of the common equity repurchase program discussed above. The warrants are exercisable, in whole or in part, at any time and from time to time until October 28, 2018.

Common equity repurchases On March 18, 2011, the Board of Directors approved a $15.0 billion common equity (i.e., common stock and warrants) repurchase program, of which $8.95 billion was authorized for repurchase in 2011. The $15.0 billion repurchase program superseded a $10.0 billion repurchase program approved in 2007. During 2011 and 2010, the Firm repurchased (on a trade-date basis) an aggregate of 240 million and 78 million shares of common stock and warrants, for $8.95 billion and $3.0 billion, at an average price per unit of $37.35 and $38.49, respectively. The Firm did not repurchase any of the warrants during 2010, and did not repurchase any shares of its common stock or warrants during 2009. 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 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 black-out 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.
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RISK MANAGEMENT
Risk is an inherent part of JPMorgan Chases business activities. The Firms risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of the major risks inherent in its business activities. The Firm employs a holistic approach to risk management to ensure the broad spectrum of risk types are considered in managing its business activities. The Firms risk management framework is intended to create a culture of risk awareness and personal responsibility throughout the Firm where collaboration, discussion, escalation and sharing of information is encouraged. The Firms overall risk appetite is established in the context of the Firms capital, earnings power, and diversified business model. The Firm employs a formalized risk appetite framework to clearly link risk appetite and return targets, controls and capital management. The Firms CEO is responsible for setting the overall risk appetite of the Firm and the LOB CEOs are responsible for setting the risk appetite for their respective lines of business. The Risk Policy Committee of the Firms Board of Directors approves the risk appetite policy on behalf of the entire Board of Directors. Risk governance The Firms risk governance structure is based on the principle that each line of business is responsible for managing the risk inherent in its business, albeit with appropriate Corporate oversight. Each line of business risk committee is responsible for decisions regarding the business risk strategy, policies and controls. There are nine major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, country risk, private equity risk, operational risk, legal and fiduciary risk, and reputation risk. Overlaying line of business risk management are four corporate functions with risk managementrelated responsibilities: Risk Management, the Chief Investment Office, Corporate Treasury, and Legal and Compliance. Risk Management operates independently of the lines of businesses to provide oversight of firmwide risk management and controls, and is viewed as a partner in achieving appropriate business objectives. Risk Management coordinates and communicates with each line of business through the line of business risk committees and chief risk officers to manage risk. The Risk Management function is headed by the Firms Chief Risk Officer, who is a member of the Firms Operating Committee and who reports to the Chief Executive Officer and is accountable to the Board of Directors, primarily through the Boards Risk Policy Committee. The Chief Risk Officer is also a member of the line of business risk committees. Within the Firms Risk Management function are units responsible for credit risk, market risk, country risk, private equity risk and operational risk, as well as risk reporting, risk policy and risk technology and operations. Risk technology and operations is responsible for building the information technology infrastructure used to monitor and manage risk. The Chief Investment Office and Corporate Treasury are responsible for measuring, monitoring, reporting and managing the Firms liquidity, interest rate and foreign exchange risk, and other structural risks. Legal and Compliance has oversight for legal risk. In addition to the risk committees of the lines of business and the above-referenced risk management functions, the Firm also has an Investment Committee, an Asset-Liability Committee and three other risk-related committees the Risk Working Group, the Global Counterparty Committee and the Markets Committee. All of these committees are accountable to the Operating Committee. The membership of these committees are composed of senior management of the Firm, including representatives of the lines of business, Risk Management, Finance and other senior executives. The committees meet frequently to discuss a broad range of topics including, for example, current market conditions and other external events, risk exposures, and risk concentrations to ensure that the impact of risk factors are considered broadly across the Firms businesses.

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Management's discussion and analysis

Operating Committee (Chief Risk Officer)

Asset-Liability Committee

Investment Committee

Risk Working Group

Markets Committee

Global Counterparty Committee

Investment Bank Risk Committee

Retail Financial Services Risk Committee

Card Services & Auto Risk Committee

Commercial Banking Risk Committee

Treasury & Securities Services Risk Committee

Asset Management Risk Committee

CIO Risk Committee

Treasury and Chief Investment Office Risk Management Legal and Compliance

The Asset-Liability Committee (ALCO), chaired by the Corporate Treasurer, monitors the Firms overall interest rate risk and liquidity risk. ALCO is responsible for reviewing and approving the Firms liquidity policy and contingency funding plan. ALCO also reviews the Firms funds transfer pricing policy (through which lines of business transfer interest rate and foreign exchange risk to Corporate Treasury in the Corporate/Private Equity segment), nontrading interest rate-sensitive revenue-at-risk, overall interest rate position, funding requirements and strategy, and the Firms securitization programs (and any required liquidity support by the Firm of such programs). The Investment Committee, chaired by the Firms Chief Financial Officer, oversees global merger and acquisition activities undertaken by JPMorgan Chase for its own account that fall outside the scope of the Firms private equity and other principal finance activities. The Risk Working Group, chaired by the Firms Chief Risk Officer, meets monthly to review issues that cross lines of business such as risk policy, risk methodology, risk concentrations, regulatory capital and other regulatory issues, and such other topics referred to it by line of business risk committees. The Markets Committee, chaired by the Firms Chief Risk Officer, meets weekly to review, monitor and discuss significant risk matters, which may include credit, market and operational risk issues; market moving events; large transactions; hedging strategies; transactions that may give rise to reputation risk or conflicts of interest; and other issues. The Global Counterparty Committee, chaired by the Firms Chief Risk Officer, reviews exposures to counterparties when such exposure levels are above portfolio-established thresholds. The Committee meets quarterly to review total exposures with these counterparties, with particular focus

on counterparty trading exposures to ensure that such exposures are deemed appropriate and to direct changes in exposure levels as needed. The Board of Directors exercises its oversight of risk management, principally through the Boards Risk Policy Committee and Audit Committee. The Risk Policy Committee oversees senior management risk-related responsibilities, including reviewing management policies and performance against these policies and related benchmarks. The Audit Committee is responsible for oversight of guidelines and policies that govern the process by which risk assessment and management is undertaken. In addition, the Audit Committee reviews with management the system of internal controls that is relied upon to provide reasonable assurance of compliance with the Firms operational risk management processes. Risk monitoring and control The Firms ability to properly identify, measure, monitor and report risk is critical to both its soundness and profitability. Risk identification: The Firms exposure to risk through its daily business dealings, including lending and capital markets activities, is identified and aggregated through the Firms risk management infrastructure. In addition, individuals who manage risk positions, particularly those that are complex, are responsible for identifying and estimating potential losses that could arise from specific or unusual events that may not be captured in other models, and for communicating those risks to senior management. Risk measurement: The Firm measures risk using a variety of methodologies, including calculating probable loss, unexpected loss and value-at-risk, and by conducting stress tests and making comparisons to external benchmarks. Measurement models and related assumptions are routinely subject to internal model

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review, empirical validation and benchmarking with the goal of ensuring that the Firms risk estimates are reasonable and reflective of the risk of the underlying positions. Risk monitoring/control: The Firms risk management policies and procedures incorporate risk mitigation strategies and include approval limits by customer, product, industry, country and business. These limits are monitored on a daily, weekly and monthly basis, as appropriate.

Risk reporting: The Firm reports risk exposures on both a line of business and a consolidated basis. This information is reported to management on a daily, weekly and monthly basis, as appropriate. There are nine major risk types identified in the business activities of the Firm: liquidity risk, credit risk, market risk, interest rate risk, country risk, private equity risk, operational risk, legal and fiduciary risk, and reputation risk.

LIQUIDITY RISK MANAGEMENT

Liquidity is essential to the ability to operate financial services businesses and, therefore, the ability to maintain surplus levels of liquidity through economic cycles is crucial to financial services companies, particularly during periods of adverse conditions. The Firm relies on external sources to finance a significant portion of its operations, and the Firms funding strategy is intended to ensure that it will have sufficient liquidity and a diversity of funding sources necessary to enable it to meet actual and contingent liabilities during both normal and stress periods. JPMorgan Chases primary sources of liquidity include a diversified deposit base, which was $1,127.8 billion at December 31, 2011, and access to the equity capital markets and to long-term unsecured and secured funding sources, including through asset securitizations and borrowings from FHLBs. Additionally, JPMorgan Chase maintains significant amounts of highly-liquid unencumbered assets. The Firm actively monitors the availability of funding in the wholesale markets across various geographic regions and in various currencies. The Firms ability to generate funding from a broad range of sources in a variety of geographic locations and in a range of tenors is intended to enhance financial flexibility and limit funding concentration risk. Management considers the Firms liquidity position to be strong, based on its liquidity metrics as of December 31, 2011, and believes that the Firms unsecured and secured funding capacity is sufficient to meet its on- and off-balance sheet obligations. The Firm was able to access the funding markets as needed during the year ended December 31, 2011, despite increased market volatility. Governance The Firms liquidity risk governance process is designed to ensure that its liquidity position remains strong. The AssetLiability Committee reviews and approves the Firms liquidity policy and contingency funding plan. Corporate Treasury is responsible for executing the Firms liquidity policy and contingency funding plan as well as measuring, monitoring, reporting and managing the Firms liquidity risk profile. JPMorgan Chase centralizes the management of global funding and liquidity risk within Corporate Treasury. This centralized approach maximizes liquidity access, minimizes funding costs and enhances global identification and coordination of liquidity risk and involves frequent communication with the business segments, disciplined management of liquidity at the parent holding company, comprehensive market-based pricing of all financial assets and liabilities, continuous balance sheet monitoring, frequent stress testing of liquidity sources, and frequent reporting and communication provided to senior management and the Board of Directors regarding the Firms liquidity position. Liquidity monitoring The Firm employs a variety of metrics to monitor and manage liquidity. One set of analyses used by the Firm relates to the timing of liquidity sources versus liquidity uses (e.g., funding gap analysis and parent holding company funding, as discussed below). A second set of analyses focuses on measurements of the Firms reliance on short-term unsecured funding as a percentage of total liabilities, as well as the relationship of short-term unsecured funding to highly-liquid assets, the deposits-toloans ratio and other balance sheet measures. The Firm performs regular liquidity stress tests as part of its liquidity monitoring activities. The purpose of the liquidity stress tests is intended to ensure sufficient liquidity for the Firm under both idiosyncratic and systemic market stress conditions. These scenarios measure the Firms liquidity position across a full-year horizon by analyzing the net funding gaps resulting from contractual and contingent cash and collateral outflows versus the Firms ability to generate additional liquidity by pledging or selling excess collateral and issuing unsecured debt. The scenarios are produced for the parent holding company and major bank subsidiaries as well as the Firms principal U.S. brokerdealer subsidiary. The Firm currently has liquidity in excess of its projected full-year liquidity needs under both its idiosyncratic stress scenario (which evaluates the Firms net funding gap after a short-term ratings downgrade to A-2/P-2), as well as under its systemic market stress scenario (which evaluates the Firms net funding gap during a period of severe market stress similar to market conditions in 2008 and assumes that the Firm is not uniquely stressed versus its peers). Parent holding company Liquidity monitoring of the parent holding company takes
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Management's discussion and analysis

into consideration regulatory restrictions that limit the extent to which bank subsidiaries may extend credit to the parent holding company and other nonbank subsidiaries. Excess cash generated by parent holding company issuance activity is used to purchase liquid collateral through reverse repurchase agreements or is placed with both bank and nonbank subsidiaries in the form of deposits and advances to satisfy a portion of subsidiary funding requirements. The Firms liquidity management takes into consideration its subsidiaries' ability to generate replacement funding in the event the parent holding company requires repayment of the aforementioned deposits and advances. The Firm closely monitors the ability of the parent holding company to meet all of its obligations with liquid sources of cash or cash equivalents for an extended period of time without access to the unsecured funding markets. The Firm targets pre-funding of parent holding company obligations for at least 12 months; however, due to conservative liquidity management actions taken by the Firm in the current environment, the current pre-funding of such obligations is significantly greater than target. Global Liquidity Reserve In addition to the parent holding company, the Firm maintains a significant amount of liquidity primarily at its bank subsidiaries, but also at its nonbank subsidiaries. The Global Liquidity Reserve represents consolidated sources of available liquidity to the Firm, including cash on deposit at central banks, and cash proceeds reasonably expected to be received in secured financings of highly liquid, unencumbered securities, such as government-issued debt, government- and FDIC-guaranteed corporate debt, U.S. government agency debt, and agency MBS. The liquidity amount estimated to be realized from secured financings is based on managements current judgment and assessment of the Firms ability to quickly raise funds from secured financings. The Global Liquidity Reserve also includes the Firms borrowing capacity at various FHLBs, the Federal Reserve Bank discount window and various other central banks as a result of collateral pledged by the Firm to such banks. Although considered as a source of available liquidity, the Firm does not view borrowing capacity at the Federal Reserve Bank discount window and various other central banks as a primary source of funding. As of December 31, 2011, the Global Liquidity Reserve was estimated to be approximately $379 billion, compared with approximately $262 billion at December 31, 2010. The increase in the Global Liquidity Reserve reflected the placement of funds with various central banks, including Federal Reserve Banks, which was driven by an increase in deposits during the second half of 2011. For further discussion see Sources of funds below. In addition to the Global Liquidity Reserve, the Firm has significant amounts of other high-quality, marketable securities available to raise liquidity, such as corporate debt and equity securities. Basel III On December 16, 2010, the Basel Committee published the final Basel III rules pertaining to capital and liquidity requirements, including minimum standards for short-term liquidity coverage the liquidity coverage ratio (the LCR) and term funding the net stable funding ratio (the NSFR). For more information, see the discussion on Basel III on pages 121122 of this Annual Report.

Funding
Sources of funds A key strength of the Firm is its diversified deposit franchise, through the RFS, CB, TSS and AM lines of business, which provides a stable source of funding and decreases reliance on the wholesale markets. As of December 31, 2011, total deposits for the Firm were $1,127.8 billion, compared with $930.4 billion at December 31, 2010. The significant increase in deposits was predominantly due to an overall growth in wholesale client balances and, to a lesser extent, consumer deposit balances. The increase in wholesale client balances, particularly in TSS and CB, was primarily driven by lower returns on other available alternative investments and low interest rates during 2011. Also contributing to the increase in deposits was growth in the number of clients and level of deposits in AM and RFS (the RFS deposits were net of attrition related to the conversion of Washington Mutual Free Checking accounts). Average total deposits for the Firm were $1,012.0 billion and $881.1 billion for the years ended December 31, 2011 and 2010, respectively. The Firm typically experiences higher customer deposit inflows at period-ends. A significant portion of the Firms deposits are retail deposits (35% and 40% at December 31, 2011 and 2010, respectively), which are considered particularly stable as they are less sensitive to interest rate changes or market volatility. A significant portion of the Firms wholesale deposits are also considered to be stable sources of funding due to the nature of the relationships from which they are generated, particularly customers operating service relationships with the Firm. As of December 31, 2011, the Firms deposits-to-loans ratio was 156%, compared with 134% at December 31, 2010. For further discussions of deposit and liability balance trends, see the discussion of the results for the Firms business segments and the Balance Sheet Analysis on pages 7980 and 110112, respectively, of this Annual Report. Additional sources of funding include a variety of unsecured and secured short-term and long-term instruments. Shortterm unsecured funding sources include federal funds and Eurodollars purchased, certificates of deposit, time deposits, commercial paper and other borrowed funds. Long-term unsecured funding sources include long-term debt, preferred stock and common stock. The Firms short-term secured sources of funding consist of securities loaned or sold under agreements to repurchase and other short-term secured other borrowed funds. Secured long-term funding sources include asset-backed
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securitizations, and borrowings from the Chicago, Pittsburgh and San Francisco FHLBs. Funding markets are evaluated on an ongoing basis to achieve an appropriate global balance of unsecured and secured funding at favorable rates. Short-term funding The Firms reliance on short-term unsecured funding sources is limited. Short-term unsecured funding sources include federal funds and Eurodollars purchased, which represent overnight funds; certificates of deposit; time deposits; commercial paper, which is generally issued in amounts not less than $100,000 and with maturities of 270 days or less; and other borrowed funds, which consist of demand notes, term federal funds purchased, and various other borrowings that generally have maturities of one year or less. Total commercial paper liabilities were $51.6 billion as of December 31, 2011, compared with $35.4 billion as of December 31, 2010. However, of those totals, $47.4 billion and $29.2 billion as of December 31, 2011 and 2010, respectively, originated from deposits that customers chose to sweep into commercial paper liabilities as a cash management product offered by the Firm. Therefore, commercial paper liabilities sourced from wholesale funding markets were $4.2 billion as of December 31, 2011, compared with $6.2 billion as of December 31, 2010; the average balance of commercial paper liabilities sourced from wholesale funding markets were $6.1 billion and $9.5 billion for the years ended December 31, 2011 and 2010, respectively. Securities loaned or sold under agreements to repurchase, which generally mature between one day and three months, are secured predominantly by high-quality securities collateral, including government-issued debt, agency debt and agency MBS. The balances of securities loaned or sold under agreements to repurchase, which constitute a significant portion of the federal funds purchased and securities loaned or sold under repurchase agreements, was $212.0 billion as of December 31, 2011, compared with $273.3 billion as of December 31, 2010; the average balance was $252.6 billion and $271.5 billion for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, the decline in the balance, compared with the balance at December 31, 2010, and the average balance for the year ended December 31, 2011, was driven largely by lower financing of the Firms trading assets and change in the mix of funding sources. The balances associated with securities loaned or sold under agreements to repurchase fluctuate over time due to customers investment and financing activities; the Firms demand for financing; the Firms matched book activity; the ongoing management of the mix of the Firms liabilities, including its secured and unsecured financing (for both the investment and market-making portfolios); and other market and portfolio factors.

Total other borrowed funds was $21.9 billion as of December 31, 2011, compared with $34.3 billion as of December 31, 2010; the average balance of other borrowed funds was $30.9 billion and $33.0 billion for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, the decline in the balance, compared with the balance at December 31, 2010, and the average balances for the year ended December 31, 2011, was predominantly driven by maturities of short-term unsecured bank notes, short-term FHLB advances, and other secured short-term borrowings. For additional information, see the Balance Sheet Analysis on pages 110112, Note 13 on page 231 and the table of Short-term and other borrowed funds on page 307 of this Annual Report. Long-term funding and issuance During the year ended December 31, 2011, the Firm issued $49.0 billion of long-term debt, including $29.0 billion of senior notes issued in the U.S. market, $5.2 billion of senior notes issued in non-U.S. markets, and $14.8 billion of IB structured notes. In addition, in January 2012, the Firm issued $3.3 billion of senior notes in the U.S. market and $2.1 billion of senior notes in non-U.S. markets. During the year ended December 31, 2010, the Firm issued $36.1 billion of long-term debt, including $17.1 billion of senior notes issued in U.S. markets, $2.9 billion of senior notes issued in non-U.S. markets, $1.5 billion of trust preferred capital debt securities and $14.6 billion of IB structured notes. During the year ended December 31, 2011, $58.5 billion of long-term debt matured or was redeemed, including $18.7 billion of IB structured notes. During the year ended December 31, 2010, $53.4 billion of long-term debt matured or was redeemed, including $907 million of trust preferred capital debt securities and $22.8 billion of IB structured notes. In addition to the unsecured long-term funding and issuances discussed above, the Firm securitizes consumer credit card loans, residential mortgages, auto loans and student loans for funding purposes. During the year ended December 31, 2011, the Firm securitized $1.8 billion of credit card loans; $14.0 billion of loan securitizations matured or were redeemed, including $13.6 billion of credit card loan securitizations, $156 million of residential mortgage loan securitizations and $322 million of student loan securitizations. During the year ended December 31, 2010, the Firm did not securitize any loans for funding purposes; $25.8 billion of loan securitizations matured or were redeemed, including $24.9 billion of credit card loan securitizations, $294 million of residential mortgage loan securitizations, $326 million of student loan securitizations, and $210 million of auto loan securitizations. In addition, the Firms wholesale businesses securitize loans for client-driven transactions; those client-driven loan securitizations are not considered to be a source of funding for the Firm.

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Management's discussion and analysis

During the year ended December 31, 2011, the Firm borrowed $4.0 billion in long-term advances from the FHLBs and there were $9.2 billion of maturities. For the year ended December 31, 2010, the Firm borrowed $18.7 billion in long-term advances from the FHLBs, which was offset by $18.6 billion of maturities. Cash flows For the years ended December 31, 2011, 2010 and 2009, cash and due from banks increased $32.0 billion and $1.4 billion, and decreased $689 million, respectively. The following discussion highlights the major activities and transactions that affected JPMorgan Chase's cash flows during 2011, 2010 and 2009, respectively. Cash flows from operating activities JPMorgan Chases operating assets and liabilities support the Firms capital markets and lending activities, including the origination or purchase of loans initially designated as held-for-sale. Operating assets and liabilities can vary significantly in the normal course of business due to the amount and timing of cash flows, which are affected by client-driven and risk management activities, and market conditions. Management believes cash flows from operations, available cash balances and the Firms ability to generate cash through short- and long-term borrowings are sufficient to fund the Firms operating liquidity needs. For the year ended December 31, 2011, net cash provided by operating activities was $95.9 billion. This resulted from a net decrease in trading assets and liabilitiesdebt and equity instruments, driven by client market-making activity in IB; an increase in accounts payable and other liabilities predominantly due to higher IB customer balances; and a decrease in accrued interest and accounts receivables, primarily in IB, driven by a large reduction in customer margin receivables due to changes in client activity. Partially offsetting these cash proceeds was an increase in securities borrowed, predominantly in Corporate due to higher excess cash positions at year-end. Net cash generated from operating activities was higher than net income largely as a result of adjustments for noncash items such as the provision for credit losses, depreciation and amortization, and stock-based compensation. Additionally, cash provided by proceeds from sales and paydowns of loans originated or purchased with an initial intent to sell was higher than cash used to acquire such loans, and also reflected a higher level of activity over the prior-year period. For the year ended December 31, 2010, net cash used by operating activities was $3.8 billion, mainly driven by an increase primarily in trading assetsdebt and equity instruments; principally due to improved market activity primarily in equity securities, foreign debt and physical commodities, partially offset by an increase in trading liabilities due to higher levels of positions taken to facilitate customer-driven activity. Net cash was provided by net income and from adjustments for non-cash items such as the provision for credit losses, depreciation and amortization and stock-based compensation. Additionally, proceeds from sales and paydowns of loans originated or purchased with an initial intent to sell were higher than cash used to acquire such loans. For the year ended December 31, 2009, net cash provided by operating activities was $122.8 billion, reflecting the net decline in trading assets and liabilities affected by the impact of the challenging capital markets environment that existed in 2008, and continued into the first half of 2009. Net cash generated from operating activities was higher than net income, largely as a result of adjustments for noncash items such as the provision for credit losses. In addition, proceeds from sales, securitizations and paydowns of loans originated or purchased with an initial intent to sell were higher than cash used to acquire such loans, but the cash flows from these loan activities remained at reduced levels as a result of the lower activity in these markets. Cash flows from investing activities The Firms investing activities predominantly include loans originated to be held for investment, the AFS securities portfolio and other short-term interest-earning assets. For the year ended December 31, 2011, net cash of $170.8 billion was used in investing activities. This resulted from a significant increase in deposits with banks reflecting the placement of funds with various central banks, including Federal Reserve Banks, predominantly resulting from the overall growth in wholesale client deposits; an increase in loans reflecting continued growth in client activity across all of the Firm's wholesale businesses and regions; net purchases of AFS securities, largely due to repositioning of the portfolio in Corporate in response to changes in the market environment; and an increase in securities purchased under resale agreements, predominantly in Corporate due to higher excess cash positions at year-end. Partially offsetting these cash outflows were a decline in consumer, excluding credit card, loan balances due to paydowns and portfolio run-off, and in credit card loans, due to higher repayment rates, run-off of the Washington Mutual portfolio and the Firm's sale of the Kohl's portfolio. For the year ended December 31, 2010, net cash of $54.0 billion was provided by investing activities. This resulted from a decrease in deposits with banks largely due to a decline in deposits placed with the Federal Reserve Bank and lower interbank lending as market stress eased since the end of 2009; net proceeds from sales and maturities of AFS securities used in the Firms interest rate risk management activities in Corporate; and a net decrease in the credit card loan portfolio, driven by the expected runoff of the Washington Mutual portfolio, a decline in lower-yielding promotional credit card balances, continued runoff of loan balances in the consumer, excluding credit card portfolio, primarily related to residential real estate, and repayments and loan sales in the wholesale portfolio, primarily in IB and CB; the decrease was partially offset by higher originations across the wholesale and consumer businesses. Partially offsetting these cash proceeds was an increase in securities purchased under resale agreements,
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predominantly due to higher financing volume in IB; and cash used for business acquisitions, primarily RBS Sempra. For the year ended December 31, 2009, net cash of $29.4 billion was provided by investing activities, primarily from a decrease in deposits with banks reflecting lower demand for inter-bank lending and lower deposits with the Federal Reserve Bank relative to the elevated levels at the end of 2008; a net decrease in the loan portfolio across most businesses, driven by continued lower customer demand and loan sales in the wholesale portfolio, lower charge volume on credit cards, slightly higher credit card securitizations, and paydowns; and the maturity of all assetbacked commercial paper issued by money market mutual funds in connection with the Federal Reserve Bank of Bostons Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AML facility). Largely offsetting these cash proceeds were net purchases of AFS securities associated with the Firms management of interest rate risk and investment of cash resulting from an excess funding position. Cash flows from financing activities The Firms financing activities primarily reflect cash flows related to taking customer deposits, and issuing long-term debt as well as preferred and common stock. For the year ended December 31, 2011, net cash provided by financing activities was $107.7 billion. This was largely driven by a significant increase in deposits, predominantly due to an overall growth in wholesale client balances and, to a lesser extent, consumer deposit balances. The increase in wholesale client balances, particularly in TSS and CB, was primarily driven by lower returns on other available alternative investments and low interest rates during 2011, and in AM, driven by growth in the number of clients and level of deposits. In addition, there was an increase in commercial paper due to growth in the volume of liability balances in sweep accounts related to TSS's cash management product. Cash was used to reduce securities sold under repurchase agreements, predominantly in IB, reflecting the lower funding requirements of the Firm based on lower trading inventory levels, and change in the mix of funding sources; for net repayments of long-term borrowings, including a decrease in long-term debt, predominantly due to net redemptions and maturities, as well as a decline in long-term beneficial interests issued by consolidated VIEs due to maturities of Firm-sponsored credit card securitization transactions; to reduce other borrowed funds, predominantly driven by maturities of short-term secured borrowings, unsecured bank notes and short-term FHLB advances; and for repurchases of common stock and warrants, and payments of cash dividends on common and preferred stock. In 2010, net cash used in financing activities was $49.2 billion. This resulted from net repayments of longterm borrowings as new issuances were more than offset by payments primarily reflecting a decline in beneficial interests issued by consolidated VIEs due to maturities related to Firm-sponsored credit card securitization trusts;
JPMorgan Chase & Co./2011 Annual Report

a decline in deposits associated with wholesale funding activities due to the Firms lower funding needs; lower deposit levels in TSS, offset partially by net inflows from existing customers and new business in AM, CB and RFS; a decline in commercial paper and other borrowed funds due to lower funding requirements; payments of cash dividends; and repurchases of common stock. Cash was generated as a result of an increase in securities sold under repurchase agreements largely as a result of an increase in activity levels in IB partially offset by a decrease in CIO reflecting repositioning activities. In 2009, net cash used in financing activities was $153.1 billion; this reflected a decline in wholesale deposits, predominantly in TSS, driven by the continued normalization of wholesale deposit levels resulting from the mitigation of credit concerns, compared with the heightened market volatility and credit concerns in the latter part of 2008; a decline in other borrowings, due to the absence of borrowings from the Federal Reserve under the Term Auction Facility program; net repayments of shortterm advances from FHLBs and the maturity of the nonrecourse advances under the Federal Reserve Bank of Boston AML Facility; the June 17, 2009, repayment in full of the $25.0 billion principal amount of Series K Preferred Stock issued to the U.S. Treasury; and the payment of cash dividends on common and preferred stock. Cash was also used for the net repayment of long-term borrowings as issuances of FDIC-guaranteed debt and non-FDIC guaranteed debt in both the U.S. and European markets were more than offset by repayments including long-term advances from FHLBs. Cash proceeds resulted from an increase in securities loaned or sold under repurchase agreements, partly attributable to favorable pricing and to financing the increased size of the Firms AFS securities portfolio; and the issuance of $5.8 billion of common stock. There were no repurchases of common stock or the warrants during 2009. Credit ratings The cost and availability of financing are influenced by credit ratings. Reductions in these ratings could have an adverse effect on the Firms 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 Firms funding requirements for VIEs and other thirdparty 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 Special-purpose entities on page 113, and Note 6 on pages 202210, respectively, of this Annual Report. 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.
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Management's discussion and analysis

The credit ratings of the parent holding company and each of the Firms significant banking subsidiaries as of December 31, 2011, were as follows.
Short-term debt Moodys JPMorgan Chase & Co. JPMorgan Chase Bank, N.A. Chase Bank USA, N.A. P-1 P-1 P-1 S&P A-1 A-1 A-1 Fitch F1+ F1+ F1+ Moodys Aa3 Aa1 Aa1 Senior long-term debt S&P A A+ A+ Fitch AAAAAA-

On July 18, 2011, Moodys placed the long-term debt ratings of the Firm and its subsidiaries under review for possible downgrade. The Firms current long-term debt ratings by Moodys reflect support uplift above the Firms stand-alone financial strength due to Moodys assessment of the likelihood of U.S. government support. Moodys action was directly related to Moodys placing the U.S. governments Aaa rating on review for possible downgrade on July 13, 2011. Moodys indicated that the action did not reflect a change to Moodys opinion of the Firms standalone financial strength. The short-term debt ratings of the Firm and its subsidiaries were affirmed and were not affected by the action. Subsequently, on August 3, 2011, Moodys confirmed the long-term debt ratings of the Firm and its subsidiaries at their current levels and assigned a negative outlook on the ratings. The rating confirmation was directly related to Moodys confirmation on August 2, 2011, of the Aaa rating assigned to the U.S. government. On November 29, 2011, S&P lowered the long-term debt rating of the parent holding company from A+ to A, and the long-term and short-term debt ratings of the Firm's significant banking subsidiaries from AA- to A+ and from A-1+ to A-1, respectively. The action resulted from a review of the Firm along with all other banks rated by S&P under S&P's revised bank rating criteria. The downgrade had no adverse impact on the Firm's ability to fund itself. The senior unsecured ratings from Moodys and Fitch on JPMorgan Chase and its principal bank subsidiaries remained unchanged at December 31, 2011, from

December 31, 2010. At December 31, 2011, Moodys outlook was negative, while S&Ps and Fitchs outlooks were stable. On February 15, 2012, Moody's announced that it had placed 17 banks and securities firms with global capital markets operations on review for possible downgrade, including JPMorgan Chase. As part of this announcement, the long-term ratings of the Firm and its major operating entities were placed on review for possible downgrade, while all of the Firm's short-term ratings were affirmed. If the Firms senior long-term debt ratings were downgraded by one notch or two notches, the Firm believes its cost of funds would increase; however, the Firms ability to fund itself would not be materially adversely impacted. JPMorgan Chases 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 Firms credit ratings, financial ratios, earnings, or stock price. Rating agencies continue to evaluate various ratings factors, such as regulatory reforms, economic uncertainty and sovereign creditworthiness, and their potential impact on ratings of financial institutions. Although the Firm closely monitors and endeavors to manage factors influencing its credit ratings, there is no assurance that its credit ratings will not be changed in the future.

CREDIT RISK MANAGEMENT

Credit risk is the risk of loss from obligor or counterparty default. The Firm provides credit (for example, through loans, lending-related commitments, guarantees and derivatives) to a variety of customers, from large corporate and institutional clients to the individual consumers and small businesses. Loans originated or acquired by the Firms wholesale businesses are generally retained on the balance sheet. Credit risk management actively monitors the wholesale portfolio to ensure that it is well diversified across industry, geography, risk rating, maturity and individual client categories. Portfolio management for wholesale loans includes, for the Firms syndicated loan business, distributing originations into the market place and
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targeting exposure held in the retained wholesale portfolio at less than 10% of the customer facility. With regard to the consumer credit market, the Firm focuses on creating a portfolio that is diversified from a product, industry and geographic perspective. Loss mitigation strategies are being employed for all residential real estate portfolios. These strategies include interest rate reductions, term or payment extensions, principal and interest deferral and other actions intended to minimize economic loss and avoid foreclosure. In the mortgage business, originated loans are either retained in the mortgage portfolio or securitized and sold to U.S. government agencies and U.S. government-sponsored enterprises.
JPMorgan Chase & Co./2011 Annual Report

Credit risk organization Credit risk management is overseen by the Chief Risk Officer and implemented within the lines of business. The Firms credit risk management governance consists of the following functions: Establishing a comprehensive credit risk policy framework Monitoring and managing credit risk across all portfolio segments, including transaction and line approval Assigning and managing credit authorities in connection with the approval of all credit exposure Managing criticized exposures and delinquent loans Determining the allowance for credit losses and ensuring appropriate credit risk-based capital management

billion of certain business banking loans in RFS and certain auto loans in Card that are risk-rated because they have characteristics similar to commercial loans. Probability of default is the likelihood that a loan will default and will not be repaid. Probability of default is calculated for each client who has a risk-rated loan. Loss given default is an estimate of losses given a default event and takes into consideration collateral and structural support for each credit facility. Calculations and assumptions are based on management information systems and methodologies which are under continual review. Credit-scored exposure For credit-scored portfolios (generally held in RFS and Card), probable loss is based on a statistical analysis of inherent losses expected to emerge over discrete periods of time for each portfolio. The credit-scored portfolio includes residential real estate loans, credit card loans, certain auto and business banking loans, and student loans. Probable credit losses inherent in the portfolio are estimated using sophisticated portfolio modeling, credit scoring and decision-support tools, which take into account factors such as delinquency, LTV ratios, credit scores and geography. These analyses are applied to the Firms current portfolios in order to estimate the severity of losses, which determines the amount of probable losses. Other risk characteristics utilized to evaluate probable losses include recent loss experience in the portfolios, changes in origination sources, portfolio seasoning, potential borrower behavior and the macroeconomic environment. These factors and analyses are updated on a quarterly basis or more frequently as market conditions dictate. Risk monitoring and control 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 and 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. For consumer credit risk, delinquency and other trends, including any concentrations at the portfolio level, are monitored for potential problems, as certain of these trends can be ameliorated through changes in underwriting policies and portfolio guidelines. Consumer Credit Risk Management evaluates delinquency and other trends against business expectations, current and forecasted economic conditions, and industry benchmarks. Historical and forecasted 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. In the Firms consumer credit portfolio, the Internal Audit
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Risk identification and measurement The Firm is exposed to credit risk through lending and capital markets activities. Credit Risk Management works in partnership with the business segments in identifying and aggregating exposures across all lines of business. 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 borrowers 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 amount of exposure should the obligor or the counterparty default, the probability of default and the loss severity given a default event. Based on these factors and related market-based inputs, the Firm estimates both probable losses and unexpected losses for the wholesale and consumer portfolios as follows: Probable credit losses are based primarily upon statistical estimates of credit losses as a result of obligor or counterparty default. However, probable losses are not the sole indicators of risk. Unexpected losses, reflected in the allocation of credit risk capital, represent the potential volatility of actual losses relative to the probable level of incurred losses.

Risk measurement for the wholesale portfolio is assessed primarily on a risk-rated basis; for the consumer portfolio, it is assessed primarily on a credit-scored basis. Risk-rated exposure Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis by Credit Risk Management and revised, if needed, to reflect the borrowers current financial positions, risk profiles and the related collateral. For portfolios that are risk-rated, probable and unexpected loss calculations are based on estimates of probability of default and loss severity given a default. These risk-rated portfolios are generally held in IB, CB, TSS and AM; they also include approximately $20.0

JPMorgan Chase & Co./2011 Annual Report

Management's discussion and analysis

department periodically tests the internal controls around the modeling process including the integrity of the data utilized. For further discussion of consumer loans, see Note 14 on pages 231252 of this Annual Report. Wholesale credit risk is monitored regularly at an aggregate portfolio, industry and individual counterparty basis 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 credit risk capital, are subject to stress-based loss constraints. Management of the Firms wholesale exposure is accomplished through a number of means including: Loan syndications and participations Loan sales and securitizations Credit derivatives Use of master netting agreements Collateral and other risk-reduction techniques For risk-rated portfolios, a credit review group within the Internal Audit department is responsible for: Independently assessing and validating the changing risk grades assigned to exposures; and Evaluating the effectiveness of business units risk ratings, including the accuracy and consistency of risk grades, the timeliness of risk grade changes and the justification of risk grades in credit memoranda

In addition to Risk Management, the Firms Internal Audit department performs periodic exams, as well as continuous review, where appropriate, of the Firms consumer and wholesale portfolios.

Risk reporting To enable monitoring of credit risk and decision-making, aggregate credit exposure, credit quality forecasts, concentration levels and risk profile changes are reported regularly to senior Credit Risk Management. Detailed portfolio reporting of industry, customer, 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, senior management. For further discussion of Risk monitoring and control, see pages 126127 of this Annual Report.

CREDIT PORTFOLIO
2011 Credit Risk Overview In the first half of 2011, the credit environment showed signs of improvement compared with 2010. During the second half of the year, macroeconomic conditions became more challenging, with increased market volatility and heightened concerns around the European financial crisis. Over the course of the year, the Firm continued to actively manage its underperforming and nonaccrual loans and reduce such exposures through repayments, loan sales and workouts. The Firm also saw decreased downgrade, default and charge-off activity and improved consumer delinquency trends. At the same time, the Firm increased its overall lending activity driven by the wholesale businesses. The combination of these factors resulted in an improvement in the credit quality of the portfolio compared with 2010 and contributed to the Firms reduction in the allowance for credit losses, particularly in Card. The credit quality of the Firm's wholesale portfolio improved in 2011. The rise in commercial client activity resulted in an increase in credit exposure across all businesses, regions and products. Underwriting guidelines across all areas of lending continue to remain in focus, consistent with evolving market conditions and the Firms risk management activities. The wholesale portfolio continues to be actively managed, in part by conducting ongoing, in-depth reviews of credit quality and of industry, product and client concentrations. During the year, criticized assets, nonperforming assets and charge-offs
134

decreased from higher levels experienced in 2010, including a reduction in nonaccrual loans by over one half. As a result, the ratio of nonaccrual loans to total loans, the net charge-off rate and the allowance for loan loss coverage ratio all declined. For further discussion of wholesale loans, see Note 14 on pages 231252 of this Annual Report. The credit performance of the consumer portfolio across the entire product spectrum has improved, particularly in credit card, with lower levels of delinquent loans and charge-offs. Weak overall economic conditions continued to have a negative impact on the number of real estate loans charged off, while continued weak housing prices have resulted in an elevated severity of loss recognized on these defaulted loans. The Firm has taken proactive steps to assist homeowners most in need of financial assistance throughout the economic downturn. In addition, the Firm has taken actions since the onset of the economic downturn in 2007 to tighten underwriting and loan qualification standards and to eliminate certain products and loan origination channels, which have resulted in the reduction of credit risk and improved credit performance for recent loan vintages. For further discussion of the consumer credit environment and consumer loans, see Consumer Credit Portfolio on pages 145154 and Note 14 on pages 231 252 of this Annual Report. The following table presents JPMorgan Chases credit portfolio as of December 31, 2011 and 2010. Total credit exposure was $1.8 trillion at December 31, 2011, an
JPMorgan Chase & Co./2011 Annual Report

increase of $44.4 billion from December 31, 2010, reflecting increases in loans of $30.8 billion, lending related commitments of $17.0 billion and derivative receivables of $12.0 billion. These increases were partially offset by a decrease in receivables from customers and interests in purchased receivables of $15.4 billion. The $44.4 billion net increase during 2011 in total credit exposure reflected an increase in the wholesale portfolio of $88.6 billion partially offset by a decrease in the consumer portfolio of $44.2 billion. The Firm provided credit to and raised capital of more than $1.8 trillion for its clients during 2011, up 18% from

2010; this included $17 billion lent to small businesses, up 52%, and $68 billion to more than 1,200 not-for-profit and government entities, including states, municipalities, hospitals and universities. The Firm also originated more than 765,000 mortgages, and provided credit cards to approximately 8.5 million consumers. The Firm remains committed to helping homeowners and preventing foreclosures. Since the beginning of 2009, the Firm has offered more than 1.2 million mortgage modifications of which approximately 452,000 have achieved permanent modification as of December 31, 2011.

In the table below, reported loans include loans retained (i.e., held-for-investment); loans held-for-sale (which are carried at the lower of cost or fair value, with changes in value recorded in noninterest revenue); and loans accounted for at fair value. For additional information on the Firms loans and derivative receivables, including the Firms accounting policies, see Note 14 and Note 6 on pages 231252 and 202210, respectively, of this Annual Report. Average retained loan balances are used for net charge-off rate calculations. Total credit portfolio
As of or for the year ended December 31, (in millions, except ratios) Loans retained Loans held-for-sale Loans at fair value Total loans reported Derivative receivables Receivables from customers and interests in purchased receivables Total credit-related assets Lending-related commitments(a) Assets acquired in loan satisfactions Real estate owned Other Total assets acquired in loan satisfactions Total credit portfolio Net credit derivative hedges notional(b) Liquid securities and other cash collateral held against derivatives (a) (b) (c) $ NA NA NA (26,240) $ (21,807) NA NA NA $ $ (23,108) (16,486) 975 50 1,025 11,901 $ (38) $ NA 1,610 72 1,682 17,562 (55) NA $ NA NA NA 12,237 $ NA NA NA NA NA 23,673 NA NA NA NA NA 1.78% NA NA NA NA NA 3.39% NA NA $ Credit exposure 2011 718,997 $ 2,626 2,097 723,720 92,477 17,561 833,758 975,662 2010 685,498 5,453 1,976 692,927 80,481 32,932 806,340 958,709 $ Nonperforming(c)(d)(e) 2011 9,810 $ 110 73 9,993 18 10,011 865 2010 14,345 341 155 14,841 34 14,875 1,005 $ Net charge-offs 2011 12,237 $ 12,237 NA 12,237 NA 2010 23,673 23,673 NA 23,673 NA Average annual net charge-off rate(f) 2011 1.78% 1.78 NA 1.78 NA 2010 3.39% 3.39 NA 3.39 NA

$ 1,809,420 $ 1,765,049

(d) (e) (f)

The amounts in nonperforming represent commitments that are risk rated as nonaccrual. Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 143144 and Note 6 on pages 202210 of this Annual Report. At December 31, 2011 and 2010, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $11.5 billion and $9.4 billion, respectively, that are 90 or more days past due; (2) real estate owned insured by U.S. government agencies of $954 million and $1.9 billion, respectively; and (3) student loans insured by U.S. government agencies under the FFELP of $551 million and $625 million, respectively, that are 90 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally. In addition, the Firms 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). Credit card loans are charged-off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Excludes PCI loans acquired as part of the Washington Mutual transaction, 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. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. At December 31, 2011 and 2010, total nonaccrual loans represented 1.38% and 2.14% of total loans . For the years ended December 31, 2011 and 2010, net charge-off rates were calculated using average retained loans of $688.2 billion and $698.2 billion, respectively. These average retained loans include average PCI loans of $69.0 billion and $77.0 billion, respectively. Excluding these PCI loans, the Firms total charge-off rates would have been 1.98% and 3.81%, respectively.

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Management's discussion and analysis

WHOLESALE CREDIT PORTFOLIO

As of December 31, 2011, wholesale exposure (IB, CB, TSS and AM) increased by $88.6 billion from December 31, 2010. The overall increase was primarily driven by increases of $55.4 billion in loans, $36.7 billion in lendingrelated commitments and $12.0 billion in derivative receivables. These increases were partially offset by a decrease in receivables from customers and interests in purchased receivables of $15.5 billion. The growth in wholesale loans and lending related commitments represented increased client activity across all businesses and all regions. The increase in derivative receivables was Wholesale credit portfolio
December 31, (in millions) Loans retained Loans held-for-sale Loans at fair value Loans reported Derivative receivables Receivables from customers and interests in purchased receivables(a) Total wholesale credit-related assets Lending-related commitments(b) Total wholesale credit exposure Net credit derivative hedges notional(c) Liquid securities and other cash collateral held against derivatives (a) $ $ $ Credit exposure 2011 278,395 $ 2,524 2,097 283,016 92,477 17,461 392,954 382,739 775,693 $ (26,240) $ (21,807) 2010 222,510 3,147 1,976 227,633 80,481 32,932 341,046 346,079 687,125 (16,486) (23,108) $ Nonperforming(d) 2011 110 73 2,581 18 2,599 865 (38) $ NA 2010 341 155 6,006 34 6,040 1,005 (55) NA $ 2,398 $ 5,510

predominantly due to increases in interest rate derivatives driven by declining interest rates, and higher commodity derivatives driven by price movements in base metals and energy. The decrease in receivables from customers and interests in purchased receivables was due to changes in client activity, primarily in IB. Effective January 1, 2011, the commercial card credit portfolio (composed of approximately $5.3 billion of lending-related commitments and $1.2 billion of loans) that was previously in TSS was transferred to Card.

$ 3,464 $ 7,045

(b) (c) (d)

Receivables from customers primarily represent margin loans to prime and retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. Interests in purchased receivables represents ownership interests in cash flows of a pool of receivables transferred by third-party sellers into bankruptcy-remote entities, generally trusts, which are included in other assets on the Consolidated Balance Sheets. The amounts in nonperforming represent commitments that are risk-rated as nonaccrual. Represents the net notional amount of protection purchased and sold of single-name and portfolio credit derivatives used to manage both performing and nonperforming credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. For additional information, see Credit derivatives on pages 143144, and Note 6 on pages 202210 of this Annual Report. Excludes assets acquired in loan satisfactions.

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The following table presents summaries of the maturity and ratings profiles of the wholesale portfolio as of December 31, 2011 and 2010. The increase in loans retained was predominately in loans to investment-grade (IG) counterparties and was largely loans having a shorter maturity profile. The ratings scale is based on the Firms internal risk ratings, which generally correspond to the ratings as defined by S&P and Moodys. Also included in this table is the notional value of net credit derivative hedges; the counterparties to these hedges are predominantly investment-grade banks and finance companies. Wholesale credit exposure maturity and ratings profile
Maturity profile(c) December 31, 2011 (in millions, except ratios) Loans retained Derivative receivables Less: Liquid securities and other cash collateral held against derivatives Total derivative receivables, net of all collateral Lending-related commitments Subtotal Loans held-for-sale and loans at fair value(a) Receivables from customers and interests in purchased receivables Total exposure net of liquid securities and other cash collateral held against derivatives Net credit derivative hedges notional(b) 8,243 139,978 261,443 29,910 233,396 32,517 9,365 Due after Due in Due 1 year 1 year after through or less 5 years Total 5 years $ 113,222 $ 101,959 $ 63,214 $ 278,395 92,477 (21,807) 70,670 382,739 731,804 4,621 17,461 $ 753,886 $ (2,034) $ (16,450) $ (7,756) $ (26,240) $ (26,300) $ 57,637 310,107 564,814 13,033 72,632 166,990 Investment-grade AAA/Aaa to BBB-/Baa3 $ 197,070 $ Ratings profile Noninvestmentgrade BB+/Ba1 & below Total 92,477 (21,807) 70,670 382,739 731,804 4,621 17,461 $ 753,886 60 $ (26,240) 100% 82 81 77 81,325 $ 278,395 Total % of IG 71%

365,265 105,096

Maturity profile(c) December 31, 2010 (in millions, except ratios) Loans retained Derivative receivables Less: Liquid securities and other cash collateral held against derivatives Total derivative receivables, net of all collateral Lending-related commitments Subtotal Loans held-for-sale and loans at fair value(a) Receivables from customers and interests in purchased receivables Total exposure net of liquid securities and other cash collateral held against derivatives Net credit derivative hedges notional(b) (a) (b) (c) 11,499 126,389 215,905 24,415 209,299 319,701 28,081 10,391 96,978 Due after Due in Due 1 year 1 year after through or less 5 years Total 5 years $ 78,017 $ 85,987 $ 58,506 $ 222,510 80,481 (16,486) 63,995 346,079 632,584 5,123 32,932 $ 670,639 $ (1,228) $ (16,415) $ (5,465) $ (23,108) $ (23,159) 47,557 276,298 469,902 Investment-grade AAA/Aaa to BBB-/Baa3 $ 146,047

Ratings profile Noninvestmentgrade BB+/Ba1 & below $ Total 80,481 (16,486) 16,438 69,781 162,682 63,995 346,079 632,584 5,123 32,932 $ 670,639 $ 51 $ (23,108) 100% 74 80 74 76,463 $ 222,510 Total % of IG 66%

Represents loans held-for-sale primarily related to syndicated loans and loans transferred from the retained portfolio, and loans at fair value. Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP. The maturity profiles of retained loans and lending-related commitments are based on the remaining contractual maturity. The maturity profiles of derivative receivables are based on the maturity profile of average exposure. For further discussion of average exposure, see Derivative receivables on pages 141144 of this Annual Report.

Receivables from customers primarily represent margin loans to prime and retail brokerage clients and are collateralized through a pledge of assets maintained in clients brokerage accounts that are subject to daily minimum collateral requirements. In the event that the collateral value decreases, a maintenance margin call is made to the client to provide additional collateral into the account. If additional collateral is not provided by the client, the clients position may be liquidated by the Firm to meet the minimum collateral requirements.

Wholesale credit exposure selected industry exposures The Firm focuses on the management and diversification of its industry exposures, with particular attention paid to industries with actual or potential credit concerns. Exposures deemed criticized generally represent a ratings profile similar to a rating of CCC+/Caa1 and lower, as defined by S&P and Moodys, respectively. The total criticized component of the portfolio, excluding loans heldfor-sale and loans at fair value, decreased 29% to $15.9 billion at December 31, 2011, from $22.4 billion at December 31, 2010. The decrease was primarily related to net repayments and loan sales.

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Management's discussion and analysis

Below are summaries of the top 25 industry exposures as of December 31, 2011 and 2010. For additional information on industry concentrations, see Note 5 on page 201 of this Annual Report.
Liquid securities and other cash collateral held against derivative receivables (9,585) (359) (320) (147) (88) (4,807) (50) (359) (1) (813) (454) (2) (3,738) (20) (26) (1,038) (21,807)

As of or for the year ended December 31, 2011 (in millions) Top 25 industries(a) Banks and finance companies Real estate Healthcare State and municipal governments(b) Oil and gas Asset managers Consumer products Utilities Retail and consumer services Technology Central government Machinery and equipment manufacturing Transportation Metals/mining Insurance Business services Securities firms and exchanges Media Building materials/construction Chemicals/plastics Telecom services Automotive Aerospace Agriculture/paper manufacturing Leisure All other(c) Subtotal Loans held-for-sale and loans at fair value Receivables from customers and interests in purchased receivables Total $ $ $ 71,440 $ 67,594 42,247 41,930 35,437 33,465 29,637 28,650 22,891 17,898 17,138 16,498 16,305 15,254 13,092 12,408 12,394 11,909 11,770 11,728 11,552 9,910 8,560 7,594 5,650 180,660 753,611 $ 4,621 17,461 775,693 59,115 $ 40,921 35,147 40,565 25,004 28,835 19,728 23,557 14,568 12,494 16,524 9,014 12,061 8,716 9,425 7,093 10,799 6,853 5,175 7,867 8,502 5,699 7,646 4,888 3,051 161,568 584,815 $ Credit exposure(d) Investmentgrade

Noninvestment-grade Noncriticized Criticized performing Criticized nonperforming 23 $ 886 36 16 1 23 56 63 6 25 12 34 1 415 4 1 1 218 595 2,416 $

30 days or more past due and accruing loans

Full year net charge-offs/ (recoveries)

Credit derivative hedges(e)

11,742 $ 21,541 6,817 1,124 10,337 4,530 9,439 4,423 7,796 5,085 488 7,375 4,070 6,388 3,064 5,168 1,564 3,921 5,674 3,720 2,235 4,188 848 2,586 1,752 17,011 152,886 $

560 $ 4,246 247 225 96 99 447 614 464 319 126 103 149 150 591 113 30 720 917 140 814 23 66 120 629 1,486 13,494 $

20 $ 411 166 23 3 24 3 15 1 6 6 17 10 1 6 2 9 7 9 1 1,099 1,839 $

(211) $ 256 13 76 1 4 (1) 17 (19) 22 73 18 (4) 5 (11) 1 200

(3,053) $ (97) (304) (185) (119) (272) (105) (96) (191) (9,796) (19) (178) (423) (552) (20) (395) (188) (213) (95) (390) (819) (208) (81) (8,441)

440 $ (26,240) $

Presented below is a discussion of several industries to which the Firm has significant exposure, as well as industries the Firm continues to monitor because of actual or potential credit concerns. For additional information, refer to the tables above and on the next page. Banks and finance companies: Exposure to this industry increased by $5.6 billion or 8%, and criticized exposure decreased 3%, compared with 2010. The portfolio increased from 2010 and the investment grade portion remained high in proportion to the overall industry increase. At December 31, 2011, 83% of the portfolio continued to be rated investment-grade, unchanged from 2010.

Real estate: Exposure to this sector increased by $3.2 billion or 5%, in 2011 to $67.6 billion. The increase was primarily driven by CB, partially offset by decreases in credit exposure in IB. The credit quality of this industry improved as the investment-grade portion of this industry increased by 19% from 2010, while the criticized portion declined by 45% from 2010, primarily as a result of repayments and loans sales. The ratio of nonaccrual loans to total loans decreased to 2% from 5% in line with the decrease in real estate criticized exposure. For further information on commercial real estate loans, see Note 14 on pages 231252 of this Annual Report.

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As of or for the year ended December 31, 2010 (in millions) Top 25 industries(a) Banks and finance companies Real estate Healthcare State and municipal governments(b) Oil and gas Asset managers Consumer products Utilities Retail and consumer services Technology Central government Machinery and equipment manufacturing Transportation Metals/mining Insurance Business services Securities firms and exchanges Media Building materials/construction Chemicals/plastics Telecom services Automotive Aerospace Agriculture/paper manufacturing Leisure All other(c) Subtotal Loans held-for-sale and loans at fair value Receivables from customers and interests in purchased receivables Total $ 65,867 $ 64,351 41,093 35,808 26,459 29,364 27,508 25,911 20,882 14,348 11,173 13,311 9,652 11,426 10,918 11,247 9,415 10,967 12,808 12,312 10,709 9,011 5,732 7,368 5,405 146,025 $ 649,070 $ 5,123 32,932 $ 687,125 54,839 $ 34,440 33,752 34,641 18,465 25,533 16,747 20,951 12,021 9,355 10,677 7,690 6,630 5,260 7,908 6,351 7,678 5,808 6,557 8,375 7,582 3,915 4,903 4,510 2,895 128,074 485,557 $ Credit exposure(d) Investmentgrade Noncriticized

Noninvestment-grade Criticized performing Criticized nonperforming 133 $ 2,938 31 24 1 3 11 361 207 60 5 38 56 46 542 57 7 11 5 2 202 804 5,544 $

30 days or more past due and accruing loans

Full year net charge-offs/ (recoveries)

Credit derivative hedges(e)

Liquid securities and other cash collateral held against derivative receivables (9,216) (57) (161) (233) (50) (2,948) (2) (230) (3) (42) (2) (567) (2,358) (3) (2) (21) (591) (16,486)

10,428 $ 20,569 7,019 912 7,850 3,401 10,379 4,101 8,316 4,534 496 5,372 2,739 5,748 2,690 4,735 1,700 3,945 5,065 3,656 2,295 4,822 732 2,614 1,367 15,648 141,133 $

467 $ 6,404 291 231 143 427 371 498 338 399 244 245 362 320 115 37 672 1,129 274 821 269 97 242 941 1,499 16,836 $

26 $ 399 85 34 24 7 217 3 8 47 8 7 11 2 9 3 8 954 1,852 $

69 $ 862 4 3 1 49 23 50 2 (16) 35 (1) 15 5 92 6 2 (8) 52 7 90 385

(3,456) $ (76) (768) (186) (87) (752) (355) (623) (158) (6,897) (74) (132) (296) (805) (5) (38) (212) (308) (70) (820) (758) (321) (44) (253) (5,614)

1,727 $ (23,108) $

(a) (b) (c) (d) (e)

All industry rankings are based on exposure at December 31, 2011. The industry rankings presented in the table as of December 31, 2010, are based on the industry rankings of the corresponding exposures at December 31, 2011, not actual rankings of such exposures at December 31, 2010. In addition to the credit risk exposure to states and municipal governments at December 31, 2011 and 2010, noted above, the Firm held $16.7 billion and $14.0 billion, respectively, of trading securities and $16.5 billion and $11.6 billion, respectively, of AFS securities issued by U.S. state and municipal governments. For further information, see Note 3 and Note 12 on pages 184198 and 225230, respectively, of this Annual Report. For further information on the All other category refer to the discussion in the following section on page 140 of this Annual Report. All other for credit derivative hedges includes credit default swap (CDS) index hedges of CVA. Credit exposure is net of risk participations and excludes the benefit of credit derivative hedges and collateral held against derivative receivables or loans. Represents the net notional amounts of protection purchased and sold of single-name and portfolio credit derivatives used to manage the credit exposures; these derivatives do not qualify for hedge accounting under U.S. GAAP.

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Management's discussion and analysis

State and municipal governments: Exposure to this segment increased by $6.1 billion or 17% in 2011 to $41.9 billion. Lending-related commitments comprise approximately 67% of exposure to this sector, generally in the form of bond and commercial paper liquidity and standby letter of credit commitments. Credit quality of the portfolio remains high as 97% of the portfolio was rated investment-grade, unchanged from 2010. Criticized exposure was less than 1% of this industrys exposure. The non-U.S. portion of this industry was less than 5% of the total. The Firm continues to actively monitor and manage this exposure in light of the challenging environment faced by state and municipal governments. For further discussion of commitments for bond liquidity and standby letters of credit, see Note 29 on pages 283289 of this Annual Report. Media: Exposure to this industry increased by 9% to $11.9 billion in 2011. Criticized exposure of $1.1 billion decreased by 7% in 2011 from $1.2 billion, but remains elevated relative to total industry exposure due to

continued pressure on the traditional media business model from expanding digital and online technology. All other: All other at December 31, 2011 (excluding loans held-for-sale and loans at fair value), included $180.7 billion of credit exposure. Concentrations of exposures include: (1) Individuals, Private Education & Civic Organizations, which were 54% of this category and (2) SPEs which were 35% of this category. Each of these categories has high credit quality, and over 90% of each of these categories were rated investmentgrade. SPEs provide secured financing (generally backed by receivables, loans or bonds with a diverse group of obligors); the lending in this category was all secured and well-structured. For further discussion of SPEs, see Note 1 on pages 182183 and Note 16 on pages 256 267 of this Annual Report. The remaining exposure within this category is well-diversified, with no category being more than 6% of its total.

The following table presents the geographic distribution of wholesale credit exposure including nonperforming assets and past due loans as of December 31, 2011 and 2010. The geographic distribution of the wholesale portfolio is determined based predominantly on the domicile of the borrower.
Credit exposure December 31, 2011 (in millions) Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean Other North America Total non-U.S. Total U.S. Loans held-for-sale and loans at fair value Receivables from customers and interests in purchased receivables Total $ Lendingrelated commitments 17,194 20,859 6,680 105,414 277,325 382,739 $ Derivative receivables 10,943 5,316 1,488 60,951 31,526 Total credit exposure 59,256 51,316 10,435 261,529 492,082 4,621 17,461 $ Nonaccrual loans(a) $ 1 386 3 434 1,964 183 2,581 $ Nonperforming Lendingrelated commitments 15 1 41 824 NA 865 $ Total nonperforming credit exposure 14 401 4 488 2,793 183 3,464 $ Assets acquired in loan satisfactions 3 3 176 NA NA 179 $ 30 days or more past due and accruing loans 68 6 222 296 1,543 1,839

Loans 31,119 25,141 2,267 95,164 183,231 4,621

Derivatives 13 13 5 NA NA

36,637 $

60,681 $

43,204 $ 140,522

44 $

25 $

69 $

$ 283,016 $

92,477 $ 775,693

18 $ Nonperforming

Credit exposure December 31, 2010 (in millions) Europe/Middle East/Africa Asia/Pacific Latin America/Caribbean Other North America Total non-U.S. Total U.S. Loans held-for-sale and loans at fair value Receivables from customers and interests in purchased receivables Total $ Lendingrelated commitments 15,002 12,170 6,149 91,739 254,340 346,079 $ Derivative receivables 10,991 5,634 2,039 53,860 26,621 Total credit exposure 46,545 34,284 9,373 211,750 437,320 5,123 32,932 $ Nonaccrual loans(a) $ 579 649 6 1,387 4,123 496 6,006 $

Loans 20,552 16,480 1,185 66,151 156,359 5,123

Lendingrelated Derivatives commitments 1 $ 21 22 12 NA NA 34 $ 13 5 41 964 NA

Total nonperforming credit exposure 600 662 11 1,450 5,099 496

Assets acquired in loan satisfactions 1 1 320 NA NA

30 days or more past due and Accruing loans 127 74 131 332 1,520 1,852

27,934 $

58,418 $

35,196 $ 121,548

153 $

23 $

177 $

$ 227,633 $

80,481 $ 687,125

1,005 $

7,045 $

321 $

(a) At December 31, 2011 and 2010, the Firm held an allowance for loan losses of $496 million and $1.6 billion, respectively, related to nonaccrual retained loans resulting in allowance coverage ratios of 21% and 29%, respectively. Wholesale nonaccrual loans represented 0.91% and 2.64% of total wholesale loans at December 31, 2011 and 2010, respectively.

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Loans In the normal course of business, the Firm provides loans to a variety of wholesale customers, from large corporate and institutional clients to high-net-worth individuals. For further discussion on loans, including information on credit quality indicators, see Note 14 on pages 231252 of this Annual Report. The Firm actively manages wholesale credit exposure. One way of managing credit risk is through sales of loans and lending-related commitments. During 2011, the Firm sold $5.2 billion of loans and commitments, recognizing net gains of $22 million. During 2010, the Firm sold $8.3 billion of loans and commitments, recognizing net gains of $99 million. These results included gains or losses on sales of nonaccrual loans, if any, as discussed below. These sale activities are not related to the Firms securitization activities. For further discussion of securitization activity, see Liquidity Risk Management and Note 16 on pages 127 132 and 256267 respectively, of this Annual Report. The following table presents the change in the nonaccrual loan portfolio for the years ended December 31, 2011 and 2010. Nonaccrual wholesale loans decreased by $3.4 billion from December 31, 2010, primarily reflecting net repayments and loan sales. Wholesale nonaccrual loan activity
Year ended December 31, (in millions) Beginning balance Additions Reductions: Paydowns and other Gross charge-offs Returned to performing status Sales Total reductions Net additions/(reductions) Ending balance $ 2,841 907 807 1,389 5,944 (3,425) 2,581 $ 5,540 1,854 364 2,389 10,147 (898) 6,006 $ 2011 6,006 $ 2,519 2010 6,904 9,249

Derivative contracts In the normal course of business, the Firm uses derivative instruments predominantly for market-making activity. Derivatives enable customers and the Firm to manage exposures to fluctuations in interest rates, currencies and other markets. The Firm also uses derivative instruments to manage its credit exposure. For further discussion of derivative contracts, see Note 5 and Note 6 on page 201 and 202210, respectively, of this Annual Report. The following tables summarize the net derivative receivables for the periods presented Derivative receivables
Derivative receivables December 31, (in millions) Interest rate Credit derivatives Foreign exchange Equity Commodity Total, net of cash collateral Liquid securities and other cash collateral held against derivative receivables Total, net of all collateral $ $ 2011 46,369 $ 6,684 17,890 6,793 14,741 92,477 (21,807) 70,670 $ 2010 32,555 7,725 25,858 4,204 10,139 80,481 (16,486) 63,995

The following table presents net charge-offs, which are defined as gross charge-offs less recoveries, for the years ended December 31, 2011 and 2010. The amounts in the table below do not include gains or losses from sales of nonaccrual loans. Wholesale net charge-offs
Year ended December 31, (in millions, except ratios) Loans reported Average loans retained Net charge-offs/(recoveries) Net charge-off/(recovery) rate $ 245,111 440 0.18% $ 213,609 1,727 0.81% 2011 2010

Derivative receivables reported on the Consolidated Balance Sheets were $92.5 billion and $80.5 billion at December 31, 2011 and 2010, respectively. These represent the fair value of the derivative contracts after giving effect to legally enforceable master netting agreements, cash collateral held by the Firm and the CVA. However, in managements view, the appropriate measure of current credit risk should take into consideration additional liquid securities (primarily U.S. government and agency securities and other G7 government bonds) and other cash collateral held by the Firm of $21.8 billion and $16.5 billion at December 31, 2011 and 2010, respectively that may be used as security when the fair value of the clients exposure is in the Firms favor, as shown in the table above. In addition to the collateral described in the preceding paragraph the Firm also holds additional collateral (including cash, U.S. government and agency securities, and other G7 government bonds) 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. Though 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 clients derivative transactions move in the Firms favor. As of December 31, 2011 and 2010, the Firm held $17.6 billion and $18.0 billion, respectively, of this additional collateral. The derivative receivables fair value, net of all collateral, also do not include other credit enhancements, such as letters of credit. For additional information on the Firms use of
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Management's discussion and analysis

collateral agreements, see Note 6 on pages 202210 of this Annual Report. 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 exposure to a counterparty is an extreme measure of exposure calculated at a 97.5% confidence level. 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. The measurement is done by equating the unexpected loss in a derivative counterparty exposure (which takes into consideration both the loss volatility and the credit rating of the counterparty) with the unexpected loss in a loan exposure (which takes into consideration only the credit rating of the counterparty). DRE is a less extreme measure of potential credit loss than Peak and is the primary measure used by the Firm for credit approval of derivative transactions. Finally, AVG is a measure of the expected fair value of the Firms 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 capital and the CVA, as further described below. AVG exposure was $53.6 billion and $45.3 billion at December 31, 2011 and 2010, respectively, compared with derivative receivables, net of all collateral, of $70.7 billion and $64.0 billion at December 31, 2011 and 2010, respectively. The fair value of the Firms derivative receivables incorporates an adjustment, the CVA, to reflect the credit The following table summarizes the ratings profile of the Firms derivative receivables, net of other liquid securities collateral, for the dates indicated.
Ratings profile of derivative receivables Rating equivalent
December 31, (in millions, except ratios) AAA/Aaa to AA-/Aa3 A+/A1 to A-/A3 BBB+/Baa1 to BBB-/Baa3 BB+/Ba1 to B-/B3 CCC+/Caa1 and below Total $ 2011 Exposure net of all collateral $ 25,100 22,942 9,595 10,545 2,488 70,670 % of exposure net of all collateral 32 14 15 4 100% $ 2010 Exposure net of all collateral 23,342 15,812 8,403 13,716 2,722 63,995 % of exposure net of all collateral 36% 25 13 22 4 100%

quality of counterparties. The CVA is based on the Firms AVG to a counterparty and the counterpartys credit spread in the credit derivatives market. The primary components of changes in CVA are credit spreads, new deal activity or unwinds, and changes in the underlying market environment. The Firm believes that active risk management is essential to controlling the dynamic credit risk in the derivatives portfolio. In addition, the Firms risk management process takes into consideration the potential impact of wrong-way risk, which is broadly defined as the potential for increased correlation between the Firms exposure to a counterparty (AVG) and the counterpartys 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 counterpartys 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 derivatives over the next 10 years as calculated by the DRE and AVG metrics. The two measures generally show declining exposure after the first year, if no new trades were added to the portfolio.

35% $

As noted above, the Firm uses collateral agreements to mitigate counterparty credit risk. The percentage of the
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Firms derivatives transactions subject to collateral agreements excluding foreign exchange spot trades, which
JPMorgan Chase & Co./2011 Annual Report

are not typically covered by collateral agreements due to their short maturity was 88% as of December 31, 2011, unchanged compared with December 31, 2010. The Firm posted $82.1 billion and $58.3 billion of collateral at December 31, 2011 and 2010, respectively. 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) when the reference entity suffers a credit event. If no credit event has occurred, the protection seller makes no payments to the protection purchaser. As a purchaser of credit protection, the Firm has risk that the counterparty providing the credit protection will default. As a seller of credit protection, the Firm has risk that the underlying entity referenced in the contract will be subject to a credit event. Upon the occurrence of a credit event, which may include, among other events, the bankruptcy or failure to pay by, 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 credit derivative contract and the fair value of the reference obligation at the time of settling the

credit derivative contract. The determination as to whether a credit event has occurred is made by the relevant ISDA Determination Committee, comprised of 10 sell-side and five buy-side ISDA member firms. One type of credit derivatives the Firm enters into with counterparties are CDS. The large majority of CDS are subject to collateral arrangements to protect the Firm from counterparty credit risk. The use of collateral to settle against defaulting counterparties has generally performed as designed and has significantly mitigated the Firms exposure to these counterparties. In 2011 the frequency and size of defaults related to the underlying debt referenced in credit derivatives was lower than 2010. For a more detailed description of credit derivatives, including other types of credit derivatives, see Credit derivatives in Note 6 on pages 202210 of this Annual Report. The Firm uses credit derivatives for two primary purposes: first, in its capacity as a market-maker in the dealer/client business to meet the needs of customers; and second, in order to mitigate the Firms own credit risk associated with its overall derivative receivables and traditional commercial credit lending exposures (loans and unfunded commitments). For further information on the Firms dealer/client business, see Credit derivatives in Note 6, on pages 202210 of this Annual Report.

The following table presents the Firms notional amounts of credit derivatives protection purchased and sold as of December 31, 2011 and 2010, distinguishing between dealer/client activity and credit portfolio activity. Credit derivative notional amounts
2011 Dealer/client December 31, (in millions) Credit default swaps Other credit derivatives(a) Total Protection purchased(b) 27,246 Protection sold 79,711 $ Credit portfolio Protection purchased $ 26,371 $ Protection sold Total 106,957 Dealer/client Protection purchased(b) 34,250 Protection sold 93,776 $ 2010 Credit portfolio Protection purchased $ 23,523 $ Protection sold Total 128,026

$ 2,800,975 $ 2,839,361 $ 2,828,221 $ 2,919,072

26,371 $

131 $ 5,666,838 131 $ 5,773,795

$ 2,661,657 $ 2,658,825 $ 2,695,907 $ 2,752,601

23,523 $

415 $ 5,344,420 415 $ 5,472,446

(a) Primarily consists of total return swaps and credit default swap options. (b) At December 31, 2011 and 2010, included $2,803 billion and $2,662 billion, respectively, of notional exposure where the Firm has sold protection on the identical underlying reference instruments.

Dealer/client business Within the dealer/client business, the Firm actively manages credit derivatives by buying and selling credit protection, predominantly on corporate debt obligations, according to client demand. For further information, see Note 6 on pages 202210 of this Annual Report. At December 31, 2011, the total notional amount of protection purchased and sold increased by $298.8 billion from year-end 2010, primarily due to increased activity, particularly in the EMEA region. Credit portfolio activities Management of the Firms wholesale exposure is accomplished through a number of means including loan syndication and participations, loan sales, securitizations, credit derivatives, use of master netting agreements, and
JPMorgan Chase & Co./2011 Annual Report

collateral and other risk-reduction techniques. The Firm also manages its wholesale credit exposure by purchasing protection through single-name and portfolio credit derivatives to manage the credit risk associated with loans, lending-related commitments and derivative receivables. Changes in credit risk on the credit derivatives are expected to offset changes in credit risk on the loans, lending-related commitments or derivative receivables. This activity does not reduce the reported level of assets on the Consolidated Balance Sheets or the level of reported offbalance sheet commitments, although it does provide the Firm with credit risk protection.

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Management's discussion and analysis

Use of single-name and portfolio credit derivatives

Notional amount of protection purchased and sold December 31, (in millions) Credit derivatives used to manage: Loans and lending-related commitments Derivative receivables Total protection purchased Total protection sold Credit derivatives hedges notional, net $ $ 3,488 22,883 26,371 131 26,240 $ $ 6,698 16,825 23,523 415 23,108 2011 2010

Net gains and losses on credit portfolio hedges

Year ended December 31, (in millions) Hedges of loans and lendingrelated commitments CVA and hedges of CVA Net gains/(losses) $ $ 2011 (32) $ (769) (801) $ 2010 2009

(279) $ (3,258) (403) 1,920 (682) $ (1,338)

The credit derivatives used by JPMorgan Chase for 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 lendingrelated 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 Firms view, of the true changes in value of the Firms overall credit exposure. In addition, the effectiveness of the Firms CDS protection as a hedge of the Firms exposures may vary depending upon a number of factors, including the contractual terms of the CDS. The fair value related to the Firms credit derivatives used for managing credit exposure, as well as the fair value related to the CVA (which reflects the credit quality of derivatives counterparty exposure), are included in the gains and losses realized on credit derivatives disclosed in the table below. These results can vary from period to period due to market conditions that affect specific positions in the portfolio. For further information on credit derivative protection purchased in the context of country risk, see Country Risk Management on pages 163165 of this Annual Report.

Lending-related commitments JPMorgan Chase uses lending-related financial instruments, such as commitments and guarantees, to meet the financing needs of its customers. The contractual amounts of these financial instruments represent the maximum possible credit risk should the counterparties draw down on these commitments or the Firm fulfills its obligations under these guarantees, and the counterparties subsequently fails to perform according to the terms of these contracts. In the Firms view, the total contractual amount of these wholesale lending-related commitments is not representative of the Firms actual credit risk exposure or funding requirements. In determining the amount of credit risk exposure the Firm has to wholesale lending-related commitments, which is used as the basis for allocating credit risk capital to these commitments, the Firm has established a loan-equivalent amount for each commitment; this amount represents the portion of the unused commitment or other contingent exposure that is expected, based on average portfolio historical experience, to become drawn upon in an event of a default by an obligor. The loan-equivalent amount of the Firms lendingrelated commitments was $206.5 billion and $178.9 billion as of December 31, 2011 and 2010, respectively.

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CONSUMER CREDIT PORTFOLIO

JPMorgan Chases consumer portfolio consists primarily of residential real estate loans, credit cards, auto loans, business banking loans, and student loans. The Firms primary focus is on serving the prime segment of the consumer credit market. For further information on consumer loans, see Note 14 on pages 231252 of this Annual Report. A substantial portion of the consumer loans acquired in the Washington Mutual transaction were identified as PCI based on an analysis of high-risk characteristics, including product type, LTV ratios, FICO scores and delinquency status. These PCI loans are accounted for on a pool basis, and the pools are considered to be performing. For further information on PCI loans see Note 14 on pages 231252 of this Annual Report. The credit performance of the consumer portfolio across the entire product spectrum has improved, particularly in credit card, but high unemployment and weak overall economic conditions continued to result in an elevated number of residential real estate loans that were charged-off, and weak housing prices continued to negatively affect the severity of loss recognized on residential real estate loans that defaulted. Early-stage residential real estate delinquencies (3089 days delinquent) declined during the first half of the year, but flattened during the second half of the year, while late-stage delinquencies (150+ days delinquent), excluding government guaranteed loans, have steadily declined in 2011. In spite of the declines, residential real estate loan delinquencies remained elevated. The elevated level of the late-stage delinquent loans is due, in part, to loss-mitigation activities currently being undertaken and to elongated foreclosure processing timelines. Losses related to these loans continued to be recognized in accordance with the Firms standard charge-off practices, but some delinquent loans that would otherwise have been foreclosed upon remain in the mortgage and home equity loan portfolios. In addition to these elevated levels of delinquencies, ongoing weak economic conditions and housing prices, the estimated effects of the mortgage foreclosure-related settlement with federal and state officials, uncertainties regarding the ultimate success of loan modifications, and the risk attributes of certain loans within the portfolio (e.g., loans with high LTV ratios, junior lien loans behind a delinquent or modified senior lien) have resulted in a high level of uncertainty regarding credit risk in the residential real estate portfolio and have been considered in estimating the allowance for loan losses. Since the global economic crisis began in mid-2007, the Firm has taken actions to reduce risk exposure to consumer loans by tightening both underwriting and loan qualification standards, as well as eliminating certain products and loan origination channels for residential real estate lending. To manage the risk associated with lending-related commitments, the Firm has reduced or canceled certain lines of credit as permitted by law. For example, the Firm may reduce or close home equity lines of credit 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. Also, the Firm typically closes credit card lines when the borrower is 60 days or more past due. The tightening of underwriting criteria for auto loans has resulted in the reduction of both extendedterm and high LTV financing. In addition, new originations of private student loans are limited to school-certified loans, the majority of which include a qualified co-borrower.

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Management's discussion and analysis

The following table presents managed consumer credit-related information (including RFS, Card Services & Auto, and residential real estate loans reported in Asset Management and the Corporate/Private Equity segment) for the dates indicated. For further information about the Firms nonaccrual and charge-off accounting policies, see Note 14 on pages 231252 of this Annual Report. Consumer credit portfolio
As of or for the year ended December 31, (in millions, except ratios) Consumer, excluding credit card Loans, excluding PCI loans and loans held-for-sale Home equity senior lien Home equity junior lien Prime mortgage, including option ARMs Subprime mortgage Auto(a) Business banking Student and other Total loans, excluding PCI loans and loans held-for-sale Loans PCI(b) Home equity Prime mortgage Subprime mortgage Option ARMs Total loans PCI Total loans retained Loans held-for-sale(c) Total consumer, excluding credit card loans Lending-related commitments Home equity senior lien(d) Home equity junior lien(d) Prime mortgage Subprime mortgage Auto Business banking Student and other Total lending-related commitments Receivables from customers(e) Total consumer exposure, excluding credit card Credit Card Loans retained(f) Loans held-for-sale Total credit card loans Lending-related commitments(d) Total credit card exposure Total consumer credit portfolio Memo: Total consumer credit portfolio, excluding PCI $ $ 132,175 102 132,277 530,616 662,893 1,033,727 $ 968,181 $ 135,524 2,152 137,676 547,227 684,903 1,077,924 1,005,161 $ $ 7,412 $ 7,412 $ 8,835 8,835 $ 11,797 $ 21,946 $ 11,797 $ 21,946 2.66% 3.15% 4.53% 5.38% 1 1 2 2 6,925 6,925 14,037 14,037 5.44 5.44 9.73 9.73 16,542 26,408 1,500 6,694 10,299 864 62,307 100 370,834 17,662 30,948 1,266 5,246 9,702 579 65,403 393,021 22,697 15,180 4,976 22,693 65,546 308,427 308,427 24,459 17,322 5,398 25,584 72,763 327,464 154 327,618 NA NA NA NA NA 7,411 7,411 NA NA NA NA NA 8,833 8,833 NA NA NA NA NA 4,872 4,872 NA NA NA NA NA 7,909 7,909 NA NA NA NA NA 1.54 1.54 NA NA NA NA NA 2.32 2.32 $ 21,765 $ 56,035 76,196 9,664 47,426 17,652 14,143 242,881 24,376 64,009 74,539 11,287 48,367 16,812 15,311 254,701 $ 495 $ 792 3,462 1,781 118 694 69 7,411 479 784 4,320 2,210 141 832 67 8,833 $ 284 $ 2,188 708 626 152 494 420 4,872 262 3,182 1,627 1,374 298 707 459 7,909 1.20% 3.69 0.95 5.98 0.32 2.89 2.85 1.97 1.00% 4.63 2.15 10.82 0.63 4.23 2.85 3.00 Credit exposure 2011 2010 Nonaccrual loans 2011
(g)(h)

Net charge-offs 2011 2010

Average annual net charge-off rate(i)(j) 2011 2010

2010

(a) (b) (c) (d)

(e) (f) (g)

At December 31, 2011 and 2010, excluded operating leaserelated assets of $4.4 billion and $3.7 billion, respectively. Charge-offs are not recorded on PCI loans until actual losses exceed estimated losses that were recorded as purchase accounting adjustments at the time of acquisition. To date, no charge-offs have been recorded for these loans. Represents prime mortgage loans held-for-sale. Credit card and home equity lendingrelated 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, without notice as permitted by law. Receivables from customers primarily represent margin loans to retail brokerage customers, which are included in accrued interest and accounts receivable on the Consolidated Balance Sheets. Includes billed finance charges and fees net of an allowance for uncollectible amounts. At December 31, 2011 and 2010, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $11.5 billion and $9.4 billion,

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(h) (i) (j)

respectively, that are 90 or more days past due; and (2) student loans insured by U.S. government agencies under the FFELP of $551 million and $625 million, respectively, that are 90 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally. In addition, the Firms policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under guidance issued by the FFIEC, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Excludes PCI loans that were acquired as part of the Washington Mutual transaction, 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. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. Average consumer loans held-for-sale were $924 million and $1.5 billion, respectively, for the years ended December 31, 2011 and 2010. These amounts were excluded when calculating net charge-off rates. Net charge-off rates for 2010 reflect the impact of an aggregate $632 million adjustment related to the Firms estimate of the net realizable value of the collateral underlying the loans at the charge-off date. Absent this adjustment, net charge-off rates would have been 0.92%, 4.57%, 1.73% and 8.87% for home equity senior lien; home equity junior lien; prime mortgage, including option ARMs; and subprime mortgage, respectively. Total consumer, excluding credit card and PCI loans, and total consumer, excluding credit card, net charge-off rates would have been 2.76% and 2.14%, respectively, excluding this adjustment.

Consumer, excluding credit card

Portfolio analysis Consumer loan balances declined during the year ended December 31, 2011, due to paydowns, portfolio run-off and charge-offs. Credit performance has improved across most portfolios but remains under stress. The following discussion relates to the specific loan and lending-related categories. PCI loans are generally excluded from individual loan product discussions and are addressed separately below. For further information about the Firms consumer portfolio, including information about delinquencies, loan modifications and other credit quality indicators, see Note 14 on pages 231252 of this Annual Report. Home equity: Home equity loans at December 31, 2011, were $77.8 billion, compared with $88.4 billion at December 31, 2010. The decrease in this portfolio primarily reflected loan paydowns and charge-offs. Both senior lien and junior lien nonaccrual loans increased slightly from 2010. Senior lien early-stage delinquencies were relatively flat to 2010 and charge-offs increased slightly, but junior lien early-stage delinquencies and charge-offs showed improvement. Approximately 20% of the Firms home equity portfolio consists of home equity loans (HELOANs) and the remainder consists of home equity lines of credit (HELOCs). HELOANs are generally fixed-rate, closed-end, amortizing loans, with terms ranging from 330 years. Approximately half of the HELOANs are senior liens and the remainder are junior liens. In general, HELOCs are openended, revolving loans for a 10-year period, after which time the HELOC converts to a loan with a 20-year amortization period. At the time of origination, the borrower typically selects one of two minimum payment options that will generally remain in effect during the revolving period: a monthly payment of 1% of the outstanding balance, or interest-only payments based on a variable index (typically Prime). 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 or when the collateral does not support the loan amount. Because the majority of the HELOCs were funded in

2005 or later, a fully-amortizing payment is not required until 2015 or later for the most significant portion of the HELOC portfolio. The Firm regularly evaluates both the near-term and longer-term repricing risks inherent in its HELOC portfolio to ensure that the allowance for credit losses and its account management practices are appropriate given the portfolio risk profile. At December 31, 2011, the Firm estimates that its home equity portfolio contained approximately $3.7 billion of junior lien loans where the borrower has a first mortgage loan that is either delinquent or has been modified (highrisk seconds). Such loans are considered to pose a higher risk of default than that of junior lien loans for which the senior lien is neither delinquent nor modified. Of this estimated $3.7 billion balance, the Firm owns approximately 5% and services approximately 30% of the related senior lien loans to these same borrowers. The Firm estimates the balance of its total exposure to high-risk seconds on a quarterly basis using summary-level output from a database of information about senior and junior lien mortgage and home equity loans maintained by one of the bank regulatory agencies. This database comprises loanlevel data provided by a number of servicers across the industry (including JPMorgan Chase). The performance of the Firms junior lien loans is generally consistent regardless of whether the Firm owns, services or does not own or service the senior lien. The increased probability of default associated with these higher-risk junior lien loans was considered in estimating the allowance for loan losses. Mortgage: Mortgage loans at December 31, 2011, including prime, subprime and loans held-for-sale, were $85.9 billion, compared with $86.0 billion at December 31, 2010. Balances remained relatively flat as declines resulting from paydowns, portfolio run-off and the chargeoff or liquidation of delinquent loans were offset by new prime mortgage originations and Ginnie Mae loans that the Firm elected to repurchase. Net charge-offs decreased from 2010 as a result of improvement in delinquencies, but remained elevated. Prime mortgages, including option adjustable-rate mortgages (ARMs) and loans held-for-sale, were $76.2 billion at December 31, 2011, compared with $74.7 billion at December 31, 2010. The increase was due primarily to
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Management's discussion and analysis

prime mortgage originations and Ginnie Mae loans that the Firm elected to repurchase, partially offset by the chargeoff or liquidation of delinquent loans, paydowns, and portfolio run-off of option ARM loans. Excluding loans insured by U.S. government agencies, both early-stage and late-stage delinquencies showed modest improvement during the year but remained elevated. Nonaccrual loans showed improvement, but also remained elevated as a result of ongoing foreclosure processing delays. Net chargeoffs declined year-over-year but remained high. Option ARM loans, which are included in the prime mortgage portfolio, were $7.4 billion and $8.1 billion and represented 10% and 11% of the prime mortgage portfolio at December 31, 2011 and 2010, respectively. The decrease in option ARM loans resulted from portfolio runoff partially offset by the purchase of loans previously securitized as the securitization entities were terminated. The Firms option ARM loans, other than those held in the PCI portfolio, are primarily loans with lower LTV ratios and higher borrower FICO scores. Accordingly, the Firm expects substantially lower losses on this portfolio when compared with the PCI option ARM pool. As of December 31, 2011, approximately 6% of option ARM borrowers were delinquent, 3% were making interest-only or negatively amortizing payments, and 91% were making amortizing payments (such payments are not necessarily fully amortizing). Approximately 85% of borrowers within the portfolio are subject to risk of payment shock due to future payment recast, as only a limited number of these loans have been modified. The cumulative amount of unpaid interest added to the unpaid principal balance due to negative amortization of option ARMs was not material at either December 31, 2011 or 2010. The Firm estimates the following balances of option ARM loans will experience a recast that results in a payment increase: $160 million in 2012, $528 million in 2013 and $636 million in 2014. The Firm did not originate option ARMs and new originations of option ARMs were discontinued by Washington Mutual prior to the date of JPMorgan Chases acquisition of its banking operations. Subprime mortgages at December 31, 2011, were $9.7 billion, compared with $11.3 billion at December 31, 2010. The decrease was due to portfolio run-off and the chargeoff or liquidation of delinquent loans. Both early-stage and late-stage delinquencies improved from December 31, 2010. However, delinquencies and nonaccrual loans remained at elevated levels. Net charge-offs improved from the prior year. Auto: Auto loans at December 31, 2011, were $47.4 billion, compared with $48.4 billion at December 31, 2010. Loan balances declined due to paydowns and payoffs, which were only partially offset by new originations reflecting the impact of increased competition. Delinquent and nonaccrual loans have decreased from December 31, 2010. Net charge-offs declined from the prior year as a result of a decline in loss severity due to a strong used-car market nationwide. The auto loan portfolio reflected a high
148

concentration of prime-quality credits. Business banking: Business banking loans at December 31, 2011, were $17.7 billion, compared with $16.8 billion at December 31, 2010. The increase was due to growth in new loan origination volumes. These loans primarily include loans that are collateralized, often with personal loan guarantees, and may also include Small Business Administration guarantees. Delinquent loans and nonaccrual loans showed some improvement from December 31, 2010, but remain elevated. Net charge-offs declined from the prior year. Student and other: Student and other loans at December 31, 2011, were $14.1 billion, compared with $15.3 billion at December 31, 2010. The decrease was primarily due to paydowns and charge-offs of student loans. Other loans primarily include other secured and unsecured consumer loans. Delinquencies and nonaccrual loans remained elevated, but charge-offs decreased from 2010. Purchased credit-impaired loans: PCI loans at December 31, 2011, were $65.5 billion, compared with $72.8 billion at December 31, 2010. This portfolio represents loans acquired in the Washington Mutual transaction, which were recorded at fair value at the time of acquisition. During 2011, in connection with the Firms quarterly review of the PCI portfolios expected cash flows, management concluded that it was probable that higher expected credit losses would result in a decrease to the expected cash flows in certain portfolios. As a result, the Firm recognized an additional $770 million of impairment related to the home equity, prime mortgage and subprime mortgage PCI portfolios. As a result of this impairment, the Firm increased the allowance for loan losses for this portfolio. At December 31, 2011, the allowance for loan losses for the home equity, prime mortgage, option ARM and subprime mortgage PCI portfolios was $1.9 billion, $1.9 billion, $1.5 billion and $380 million, respectively, compared with an allowance for loan losses at December 31, 2010, of $1.6 billion, $1.8 billion, $1.5 billion and $98 million. As of December 31, 2011, approximately 31% of the option ARM PCI loans were delinquent and 42% have been modified into fixed-rate, fully amortizing loans. Substantially all of the remaining loans are making amortizing payments, although such payments are not necessarily fully amortizing; in addition, substantially all of these loans are subject to the risk of payment shock due to future payment recast. The cumulative amount of unpaid interest added to the unpaid principal balance of the option ARM PCI pool was $1.1 billion and $1.4 billion at December 31, 2011 and 2010, respectively. The Firm estimates the following balances of option ARM PCI loans will experience a recast that results in a payment increase: $2.1 billion in 2012 and $361 million in 2013 and $410 million in 2014.

JPMorgan Chase & Co./2011 Annual Report

The following table provides a summary of lifetime principal loss estimates included in both the nonaccretable difference and the allowance for loan losses. Lifetime principal loss estimates, which exclude the effect of foregone interest as a result of loan modifications, were relatively unchanged from December 31, 2010 to December 31, 2011. Although the credit quality of the non-modified PCI loans generally deteriorated during 2011, this was offset by a decrease in estimated principal losses on the modified portion of the PCI portfolio. The impairment recognized in the fourth quarter of 2011 was driven by an increase in estimated principal losses on non-modified PCI loans, as the improvement in estimated principal losses on modified PCI loans was predominately offset by contractual interest cash flows foregone as a result of the modification. Principal charge-offs will not be recorded on these pools until the nonaccretable difference has been fully depleted. Summary of lifetime principal loss estimates
December 31, (in billions) Home equity Prime mortgage Subprime mortgage Option ARMs Total (a) (b) $ $ Lifetime loss estimates(a) 2011 14.9 4.6 3.8 11.5 34.8 $ $ 2010 14.7 4.9 3.7 11.6 34.9 $ $ LTD liquidation losses(b) 2011 10.4 2.3 1.7 6.6 21.0 $ $ 2010 8.8 1.5 1.2 4.9 16.4

Includes the original nonaccretable difference established in purchase accounting of $30.5 billion for principal losses only plus additional principal losses recognized subsequent to acquisition through the provision and allowance for loan losses. The remaining nonaccretable difference for principal losses only was $9.4 billion and $14.1 billion at December 31, 2011 and 2010, respectively. Life-to-date (LTD) liquidation losses represent realization of loss upon loan resolution.

Geographic composition and current estimated LTVs of residential real estate loans

The consumer, excluding credit card, loan portfolio is geographically diverse. At both December 31, 2011 and 2010, California had the greatest concentration of residential real estate loans with 24% of the total retained residential real estate loan portfolio, excluding mortgage loans insured by U.S. government agencies and PCI loans. Of the total retained residential real estate loan portfolio, excluding mortgage loans insured by U.S. government agencies and PCI loans, $79.5 billion, or 54%, were concentrated in California, New York, Arizona, Florida and Michigan at December 31, 2011, compared with $86.4 billion, or 54%, at December 31, 2010. The unpaid principal balance of PCI loans concentrated in these five states represented 72% of total PCI loans at both December 31, 2011 and 2010.

The current estimated average LTV ratio for residential real estate loans retained, excluding mortgage loans insured by U.S. government agencies and PCI loans, was 83% at both December 31, 2011 and 2010. Excluding mortgage loans insured by U.S. government agencies and PCI loans, 24% of the retained portfolio had a current estimated LTV ratio greater than 100%, and 10% of the retained portfolio had a current estimated LTV ratio greater than 125% at both December 31, 2011 and 2010. The decline in home prices since 2007 has had a significant impact on the collateral values underlying the Firms residential real estate loan portfolio. In general, the delinquency rate for loans with high LTV ratios is greater than the delinquency rate for loans in which the borrower has equity in the collateral. While a large portion of the loans with current estimated LTV ratios greater than 100% continue to pay and are current, the continued willingness and ability of these borrowers to pay remains uncertain.
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Management's discussion and analysis

The following table for PCI loans presents the current estimated LTV ratio, as well as the ratio of the carrying value of the underlying loans to the current estimated collateral value. Because such loans were initially measured at fair value, the ratio of the carrying value to the current estimated collateral value will be lower than the current estimated LTV ratio, which is based on the unpaid principal balance. The estimated collateral values used to calculate these ratios do not represent actual appraised loan-level collateral values; as such, the resulting ratios are necessarily imprecise and should therefore be viewed as estimates.

LTV ratios and ratios of carrying values to current estimated collateral values PCI loans
2011 Ratio of net carrying value to current estimated collateral value(c) 97% 91 73 89 $ 2010 Ratio of net carrying value to current estimated collateral value(c) 95% 90 74 87

December 31, (in millions, except ratios) Home equity Prime mortgage Subprime mortgage Option ARMs (a) (b) (c) $

Unpaid principal balance 25,064 16,060 7,229 26,139

Current estimated LTV ratio(a) 117% 110 115 109

(b)

Net carrying value(c) $ 20,789 13,251 4,596 21,199

Unpaid principal balance 28,312 18,928 8,042 30,791

Current estimated LTV ratio(c) 117% 109 113 111

(b)

Net carrying value(c) $ 22,876 15,556 5,300 24,090

Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated at least quarterly based on home valuation models that utilize nationally recognized home price index valuation estimates; such models incorporate actual data to the extent available and forecasted data where actual data is not available. Represents current estimated combined LTV for junior home equity liens, which considers all available lien positions related to the property. All other products are presented without consideration of subordinate liens on the property. Net carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition and is also net of the allowance for loan losses at December 31, 2011 and 2010, of $1.9 billion and $1.6 billion for home equity, respectively, $1.9 billion and $1.8 billion for prime mortgage, respectively, $1.5 billion and $1.5 billion for option ARMs, respectively, and $380 million and $98 million for subprime mortgage, respectively. Prior-period amounts have been revised to conform to the current-period presentation.

The current estimated average LTV ratios were 117% and 140% for California and Florida PCI loans, respectively, at December 31, 2011, compared with 118% and 135%, respectively, at December 31, 2010. Continued pressure on housing prices in California and Florida have contributed negatively to both the current estimated average LTV ratio and the ratio of net carrying value to current estimated collateral value for loans in the PCI portfolio. Of the PCI portfolio, 62% had a current estimated LTV ratio greater than 100%, and 31% had a current estimated LTV ratio greater than 125% at December 31, 2011, compared with 63% and 31%, respectively, at December 31, 2010. While the current estimated collateral value is greater than the net carrying value of PCI loans, the ultimate performance of this portfolio is highly dependent on borrowers behavior and ongoing ability and willingness to continue to make payments on homes with negative equity, as well as on the cost of alternative housing. For further information on the geographic composition and current estimated LTVs of residential real estate non-PCI and PCI loans, see Note 14 on pages 231252 of this Annual Report. Loan modification activities - residential real estate loans For both the Firms onbalance sheet loans and loans serviced for others, more than 1.2 million mortgage modifications have been offered to borrowers and approximately 461,000 have been approved since the beginning of 2009. Of these, approximately 452,000 have achieved permanent modification as of December 31,

2011. Of the remaining modifications offered, 23% are in a trial period or still being reviewed for a modification, while 77% have dropped out of the modification program or otherwise were not eligible for final modification. The Firm is participating in the U.S. Treasurys Making Home Affordable (MHA) programs and is continuing to expand its other loss-mitigation efforts for financially distressed borrowers who do not qualify for the U.S. Treasurys programs. The MHA programs include the Home Affordable Modification Program (HAMP) and the Second Lien Modification Program (2MP). The Firms other lossmitigation programs for troubled borrowers who do not qualify for HAMP include the traditional modification programs offered by the GSEs and Ginnie Mae, as well as the Firms proprietary modification programs, which include concessions similar to those offered under HAMP and 2MP but with expanded eligibility criteria. In addition, the Firm has offered specific targeted modification programs to higher risk borrowers, many of whom were current on their mortgages prior to modification. Loan modifications under HAMP and under one of the Firms proprietary modification programs, which is largely modeled after HAMP, require at least three payments to be made under the new terms during a trial modification period, and must be successfully re-underwritten with income verification before the loan can be permanently modified. In the case of specific targeted modification programs, re-underwriting the loan or a trial modification period is generally not required. When the Firm modifies

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home equity lines of credit, future lending commitments related to the modified loans are canceled as part of the terms of the modification. The primary indicator used by management to monitor the success of the modification programs is the rate at which the modified loans redefault. Modification redefault rates are affected by a number of factors, including the type of loan modified, the borrowers overall ability and willingness to repay the modified loan and macroeconomic factors. Reduction in payment size for a borrower has shown to be the most significant driver in improving redefault rates. The performance of modified loans generally differs by product type and also based on whether the underlying loan is in the PCI portfolio, due both to differences in credit quality and in 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 21% for senior lien home equity, 14% for junior lien home equity, 13% for prime mortgages including option ARMs, and 28% for subprime mortgages. The cumulative performance metrics for modifications to the PCI residential real estate portfolio seasoned more than six months show weighted average redefault rates of 19% for home equity, 22% for prime mortgages, 9% for option ARMs and 31% for subprime mortgages. The favorable performance of the option ARM modifications is the result of a targeted proactive program which fixed the borrowers payment at the current level. The cumulative redefault rates reflect the performance of modifications completed under both HAMP and the Firms proprietary modification programs from October 1, 2009, through December 31, 2011. However, given the limited experience, ultimate performance of the modifications remain uncertain.

The following table presents information as of December 31, 2011 and 2010, relating to modified onbalance sheet residential real estate loans for which concessions have been granted to borrowers experiencing financial difficulty. Modifications of PCI loans continue to be accounted for and reported as PCI loans, and the impact of the modification is incorporated into the Firms quarterly assessment of estimated future cash flows. Modifications of consumer loans other than PCI loans are generally accounted for and reported as troubled debt restructurings (TDRs). For further information on TDRs for the year ended December 31, 2011, see Note 14 on pages 231252 on this Annual Report. Modified residential real estate loans
December 31, (in millions) Modified residential real estate loans excluding PCI loans(a)(b) Home equity senior lien Home equity junior lien Prime mortgage, including option ARMs Subprime mortgage Total modified residential real estate loans excluding PCI loans Modified PCI loans(c) Home equity Prime mortgage Subprime mortgage Option ARMs Total modified PCI loans (a) (b) $ 2011 Onbalance sheet loans Nonaccrual onbalance sheet loans(d) 77 159 922 832 1,990 NA NA NA NA NA 2010 Onbalance sheet loans $ Nonaccrual onbalance sheet loans(d) 38 63 534 632 1,267 NA NA NA NA NA

$ $

335 $ 657 4,877 3,219 9,088 $ 1,044 5,418 3,982 13,568 24,012

$ $

226 $ 283 2,084 2,751 5,344 $ 492 3,018 3,329 9,396 16,235

(c) (d)

Amounts represent the carrying value of modified residential real estate loans. At December 31, 2011 and 2010, $4.3 billion and $3.0 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) were excluded from loans accounted for as TDRs. 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 16 on pages 256267 of this Annual Report. Amounts represent the unpaid principal balance of modified PCI loans. Loans modified in a TDR that are on nonaccrual status may be returned to accrual status when repayment is reasonably assured and the borrower has made a minimum of six payments under the new terms. As of December 31, 2011 and 2010, nonaccrual loans included $886 million and $580 million, respectively, of TDRs for which the borrowers had not yet made six payments under the modified terms.

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Management's discussion and analysis

Foreclosure prevention: Foreclosure is a last resort, and the Firm makes significant efforts to help borrowers stay in their homes. Since the third quarter of 2009, the Firm has prevented two foreclosures (through loan modification, short sales, and other foreclosure prevention means) for every foreclosure completed. The Firm has a well-defined foreclosure prevention process when a borrower fails to pay on his or her loan. Customer contacts are attempted multiple times in various ways to pursue options other than foreclosure. In addition, if the Firm is unable to contact a customer, various reviews are completed of a borrowers facts and circumstances before a foreclosure sale is completed. By the time of a foreclosure sale, borrowers have not made a payment on average for more than 17 months. Nonperforming assets The following table presents information as of December 31, 2011 and 2010, about consumer, excluding credit card, nonperforming assets.
Nonperforming assets(a) December 31, (in millions) Nonaccrual loans(b)(c) Home equity senior lien Home equity junior lien Prime mortgage, including option ARMs Subprime mortgage Auto Business banking Student and other Total nonaccrual loans Assets acquired in loan satisfactions Real estate owned Other Total assets acquired in loan satisfactions Total nonperforming assets (a) 802 44 846 $ 8,257 1,294 67 1,361 $ 10,194 $ 495 792 3,462 1,781 118 694 69 7,411 $ 479 784 4,320 2,210 141 832 67 8,833 2011 2010

Nonaccrual loans: Total consumer, excluding credit card, nonaccrual loans were $7.4 billion at December 31, 2011, compared with $8.8 billion at December 31, 2010. Nonaccrual loans have declined, but remain at elevated levels. The elongated foreclosure processing timelines is expected to continue to result in elevated levels of nonaccrual loans in the residential real estate portfolios. In addition, modified loans have also contributed to the elevated level of nonaccrual loans, since the Firm's policy requires modified loans that are on nonaccrual to remain on nonaccrual status until payment is reasonably assured and the borrower has made a minimum of six payments under the modified terms. Nonaccrual loans in the residential real estate portfolio totaled $6.5 billion at December 31, 2011, of which 69% were greater than 150 days past due; this compared with nonaccrual residential real estate loans of $7.8 billion at December 31, 2010, of which 71% were greater than 150 days past due. At December 31, 2011 and 2010, modified residential real estate loans of $2.0 billion and $1.3 billion, respectively, were classified as nonaccrual loans, of which $886 million and $580 million, respectively, had yet to make six payments under their modified terms; the remaining nonaccrual modified loans have redefaulted. In the aggregate, the unpaid principal balance of residential real estate loans greater than 150 days past due was charged down by approximately 50% and 46% to estimated collateral value at December 31, 2011 and 2010, respectively. Real estate owned (REO): REO assets are managed for prompt sale and disposition at the best possible economic value. REO assets are those individual properties where the Firm gains ownership and possession at the completion of the foreclosure process. REO assets, excluding those insured by U.S. government agencies, decreased by $492 million from $1.3 billion at December 31, 2010, to $802 million at December 31, 2011. Enhancements to mortgage servicing During the second quarter of 2011, the Firm entered into Consent Orders with banking regulators relating to its residential mortgage servicing, foreclosure and lossmitigation activities. In their Orders, the regulators have mandated significant changes to the Firms servicing and default business and outlined requirements to implement these changes. In accordance with the requirements of the Consent Orders, the Firm submitted comprehensive action plans, the plans have been approved, and the Firm has commenced implementation. The plans sets forth the steps necessary to ensure the Firms residential mortgage servicing, foreclosure and loss-mitigation activities are conducted in accordance with the requirements of the Orders.

(b)

(c)

At December 31, 2011 and 2010, nonperforming assets excluded: (1) mortgage loans insured by U.S. government agencies of $11.5 billion and $9.4 billion, respectively, that are 90 or more days past due; (2) real estate owned insured by U.S. government agencies of $954 million and $1.9 billion, respectively; and (3) student loans insured by U.S. government agencies under the FFELP of $551 million and $625 million, respectively, that are 90 or more days past due. These amounts were excluded as reimbursement of insured amounts is proceeding normally. Excludes PCI loans that were acquired as part of the Washington Mutual transaction, 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 pastdue status of the pools, or that of individual loans within the pools, is not meaningful. Because the Firm is recognizing interest income on each pool of loans, they are all considered to be performing. At December 31, 2011 and 2010, consumer, excluding credit card nonaccrual loans represented 2.40% and 2.70%, respectively, of total consumer, excluding credit card loans.

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To date, the Firm has implemented a number of corrective actions including the following: Established an independent Compliance Committee which meets regularly and monitors progress against the Consent Orders. Launched a new Customer Assistance Specialist organization for borrowers to facilitate the single point of contact initiative and ensure effective coordination and communication related to foreclosure, loss-mitigation and loan modification. Enhanced its approach to oversight over third-party vendors for foreclosure or other related functions. Standardized the processes for maintaining appropriate controls and oversight of the Firms activities with respect to the Mortgage Electronic Registration system (MERS) and compliance with MERSCORPs membership rules, terms and conditions. Strengthened its compliance program so as to ensure mortgage-servicing and foreclosure operations, including loss-mitigation and loan modification, comply with all applicable legal requirements. Enhanced management information systems for loan modification, loss-mitigation and foreclosure activities. Developed a comprehensive assessment of risks in servicing operations including, but not limited to, operational, transaction, legal and reputational risks. Made technological enhancements to automate and streamline processes for the Firms document management, training, skills assessment and payment processing initiatives. Deployed an internal validation process to monitor progress under the comprehensive action plans. In addition, pursuant to the Consent Orders, the Firm is required to enhance oversight of its mortgage servicing activities, including oversight by compliance, management and audit personnel and, accordingly, has made and continues to make changes in its organization structure, control oversight and customer service practices.

Pursuant to the Consent Orders, the Firm has retained an independent consultant to conduct a review of its residential foreclosure actions during the period from January 1, 2009, through December 31, 2010 (including foreclosure actions brought in respect of loans being serviced), and to remediate any errors or deficiencies identified by the independent consultant, including, if required, by reimbursing borrowers for any identified financial injury they may have incurred. The borrower outreach process was launched in the fourth quarter of 2011, and the independent consultant has begun its review. For additional information, see Mortgage Foreclosure Investigations and Litigation in Note 31 on pages 290299 of this Annual Report. In connection with the Firm's February 2012 settlement with the U.S. Department of Justice, other federal agencies, and the State Attorneys General relating to the Firm's residential mortgage servicing, foreclosure, loss mitigation and origination activities, the Firm will make significant further changes to its servicing and default business pursuant to servicing standards agreed upon in the settlement. The servicing standards include, among other items, the following enhancements to the Firm's servicing of loans: a pre-foreclosure notice to all borrowers, which will include account information, holder status, and loss mitigation steps taken; enhancements to payment application and collections processes; strengthening procedures for filings in bankruptcy proceedings; deploying specific restrictions on dual track of foreclosure and loss mitigation; standardizing the process for appeal of loss mitigation denials; and implementing certain restrictions on fees, including the waiver of certain fees while a borrower's loss mitigation application is being evaluated.

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Management's discussion and analysis Credit Card

Illinois consisted of $53.6 billion in receivables, or 40% of the retained loan portfolio, at December 31, 2011, compared with $54.4 billion, or 40%, at December 31, 2010. Total retained credit card loans, excluding the Washington Mutual portfolio, were $121.1 billion at December 31, 2011, compared with $121.8 billion at December 31, 2010. The 30+ day delinquency rate was 2.53% at December 31, 2011, down from 3.73% at December 31, 2010. For the years ended December 31, 2011 and 2010, the net charge-off rates were 4.91% and 8.73% respectively. Retained credit card loans in the Washington Mutual portfolio were $11.1 billion at December 31, 2011, compared with $13.7 billion at December 31, 2010. The Washington Mutual portfolios 30+ day delinquency rate was 5.82% at December 31, 2011, down from 7.74% at December 31, 2010. For the years ended December 31, 2011 and 2010, the net charge-off rates were 10.49% and 17.73% respectively.

Total credit card loans were $132.3 billion at December 31, 2011, a decrease of $5.4 billion from December 31, 2010, due to higher repayment rates, runoff of the Washington Mutual portfolio and the Firms sale of the $3.7 billion Kohls portfolio on April 1, 2011. For the retained credit card portfolio, the 30+ day delinquency rate decreased to 2.81% at December 31, 2011, from 4.14% at December 31, 2010. For the years ended December 31, 2011 and 2010, the net charge-off rates were 5.44% and 9.73% respectively. The delinquency trend showed improvement in the first half of the year, but delinquencies flattened during the second half of the year. Charge-offs have improved as a result of lower delinquent loans. The credit card portfolio continues to reflect a wellseasoned, largely rewards-based portfolio that has good U.S. geographic diversification. The greatest geographic concentration of credit card retained loans is in California, which represented 13% of total retained loans at both December 31, 2011 and 2010. Loan concentration for the top five states of California, New York, Texas, Florida and

Modifications of credit card loans At December 31, 2011 and 2010, the Firm had $7.2 billion and $10.0 billion, respectively, of onbalance sheet 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. The decrease in modified credit card loans outstanding from December 31, 2010, was attributable to a reduction in new modifications as well as ongoing payments and charge-offs on previously modified credit card loans.

Consistent with the Firms policy, all credit card loans typically remain on accrual status. However, the Firm establishes an allowance, which is reflected as a charge to interest income, for the estimated uncollectible portion of billed and accrued interest and fee income on credit card loans. For additional information about loan modification programs to borrowers, see Note 14 on pages 231252 of this Annual Report.

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COMMUNITY REINVESTMENT ACT EXPOSURE

The Community Reinvestment Act (CRA) encourages banks to meet the credit needs of borrowers in all segments of their communities, including neighborhoods with low or moderate incomes. JPMorgan Chase is a national leader in community development by providing loans, investments and community development services in communities across the United States. At December 31, 2011 and 2010, the Firms CRA loan portfolio was approximately $15 billion and $16 billion, respectively. At December 31, 2011 and 2010, 63% and 65%, respectively, of the CRA portfolio were residential mortgage loans; 17% and 15%, respectively, were business banking loans; 14%, for both periods, were commercial real estate loans; and 6%, for both periods, were other loans. CRA nonaccrual loans were 6% of the Firms total nonaccrual loans at both December 31, 2011 and 2010, respectively. For the years ended December 31, 2011 and 2010, net charge-offs in the CRA portfolio were 3% for both periods, of the Firms net charge-offs.

ALLOWANCE FOR CREDIT LOSSES

JPMorgan Chases allowance for loan losses covers the wholesale (risk-rated), and consumer, excluding credit card and credit card portfolios (primarily scored). The allowance represents managements estimate of probable credit losses inherent in the Firms loan portfolio. Management also determines an allowance for wholesale and certain consumer, excluding credit card, lending-related commitments. For a further discussion of the components of the allowance for credit losses, see Critical Accounting Estimates Used by the Firm on pages 168169 and Note 15 on pages 252 255 of this Annual Report. At least quarterly, the allowance for credit losses is reviewed by the Chief Risk Officer, the Chief Financial Officer and the Controller of the Firm, and discussed with the Risk Policy and Audit Committees of the Board of Directors of the Firm. As of December 31, 2011, JPMorgan Chase deemed the allowance for credit losses to be appropriate (i.e., sufficient to absorb probable credit losses inherent in the portfolio). The allowance for credit losses was $28.3 billion at December 31, 2011, a decrease of $4.7 billion from $33.0 billion at December 31, 2010. The credit card allowance for loan losses decreased by $4.0 billion from December 31, 2010, primarily as a result of lower estimated losses primarily related to improved delinquency trends as well as lower levels of outstandings. The wholesale allowance for loan losses decreased by $445 million from December 31, 2010, primarily related to the impact of loan sales. The consumer, excluding credit card, allowance for loan losses decreased $177 million largely due to a reduction of $1.0 billion in the allowance related to the non-credit-impaired residential real estate portfolio, as estimated losses in that portfolio declined, predominantly offset by a $770 million increase related to an increase in estimated lifetime losses in the PCI portfolio. The allowance for lending-related commitments for both the wholesale and consumer, excluding credit card portfolios, which is reported in other liabilities, totaled $673 million and $717 million at December 31, 2011 and 2010, respectively. The credit ratios in the table below are based on retained loan balances, which exclude loans held-for-sale and loans accounted for at fair value.

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Management's discussion and analysis

Summary of changes in the allowance for credit losses

2011 Year ended December 31, (in millions, except ratios) Allowance for loan losses Beginning balance at January 1, Cumulative effect of change in accounting principles(a) Gross charge-offs Gross recoveries Net charge-offs Provision for loan losses Other Ending balance at December 31, Impairment methodology Asset-specific(b) Formula-based PCI Total allowance for loan losses Allowance for lending-related commitments Beginning balance at January 1, Cumulative effect of change in accounting principles(a) Provision for lending-related commitments Other Ending balance at December 31, Impairment methodology Asset-specific Formula-based Total allowance for lending-related commitments Total allowance for credit losses Memo: Retained loans, end of period Retained loans, average PCI loans, end of period Credit ratios Allowance for loan losses to retained loans Allowance for loan losses to retained nonaccrual loans(c) Allowance for loan losses to retained nonaccrual loans excluding credit card Net charge-off rates(d) Credit ratios, excluding residential real estate PCI loans Allowance for loan losses to retained loans (e) Allowance for loan losses to retained nonaccrual loans(c)(e) Allowance for loan losses to retained nonaccrual loans excluding credit card(c)(e) Net charge-off rates
(d)

2010 Total $ 32,266 14,503 (2,266) 12,237 7,612 (32) $ 27,609 $ 4,071 17,827 5,711 $ 27,609 $ $ $ Wholesale $ 7,145 14 1,989 (262) 1,727 (673) 2 4,761 1,574 3,187 4,761 Consumer, excluding credit card $ 14,785 127 8,383 (474) 7,909 9,458 10 $ 16,471 $ 1,075 10,455 4,941 $ 16,471 Credit card $ 9,672 7,353 15,410 (1,373) 14,037 8,037 9 $ 11,034 $ 4,069 6,965 $ 11,034 Total $ 31,602 7,494 25,782 (2,109) 23,673 16,822 21 $ 32,266 $ 6,718 20,607 4,941 $ 32,266

Wholesale $ 4,761 916 (476) 440 17 (22) $ $ 4,316 516 3,800 $ 4,316

Consumer, excluding credit card $ 16,471 5,419 (547) 4,872 4,670 25 $ 16,294 $ 828 9,755 5,711 $ 16,294

Credit card $ 11,034 8,168 (1,243) 6,925 2,925 (35) $ $ 6,999 2,727 4,272 $ 6,999

711 (40) (5)

6 2 (1)

717 (38) (6)

927 (18) (177) (21)

12 (6)

939 (18) (183) (21)

$ $

666 150 516

$ $

7 7

$ $

$ $

673 150 523

$ $

711 180 531

$ $

6 6

$ $

$ $

717 180 537

$ $

666 4,982

$ $

6,999

673

$ $

711 5,472

717

$ 16,301 $ 308,427 315,736 65,546

$ 28,282 $ 718,997 688,181 65,567

$ 16,477 $ 327,464 340,334 72,763

$ 11,034 $ 135,524 144,219

$ 32,983 $ 685,498 698,162 72,807

$ 278,395 245,111 21

$ 132,175 127,334

$ 222,510 213,609 44

1.55% 180 180 0.18

5.28% 220 220 1.54

5.30% NM NM 5.44

3.84% 281 210 1.78

2.14% 86 86 0.81

5.03% 186 186 2.32

8.14% NM NM 9.73

4.71% 225 148 3.39

1.55 180

4.36 143

5.30 NM

3.35 223

2.14 86

4.53 131

8.14 NM

4.46 190

180 0.18%

143 1.97%

NM 5.44%

152 1.98%

86 0.81%

131 3.00%

NM 9.73%

114 3.81%

(a) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result, $7.4 billion,

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(b) (c) (d) (e)

$14 million and $127 million, respectively, of allowance for loan losses were recorded on-balance sheet with the consolidation of these entities. For further discussion, see Note 16 on pages 256267 of this Annual Report. Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR. The Firms policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance. Under the guidance issued by the FFIEC, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Charge-offs are not recorded on PCI loans until actual losses exceed estimated losses recorded as purchase accounting adjustments at the time of acquisition. Excludes the impact of PCI loans acquired as part of the Washington Mutual transaction.

Provision for credit losses For the year ended December 31, 2011, the provision for credit losses was $7.6 billion down 54% from 2010. For the year ended December 31, 2011, the consumer, excluding credit card, provision for credit losses was $4.7 billion, down 51% from 2010, reflecting improved delinquency and net charge-off trends in 2011 across most portfolios, partially offset by an increase of $770 million reflecting additional impairment of the Washington Mutual PCI loans portfolio. The credit card provision for credit losses was $2.9 billion, down 64% from the prior year
Year ended December 31, (in millions) Wholesale Consumer, excluding credit card Credit card reported(a) Total provision for credit losses reported Credit card securitized(a)(b) Total provision for credit losses managed (a) $ $ Provision for loan losses 2011 17 $ 4,670 2,925 7,612 NA 2010 9,458 8,037 16,822 NA 2009 $ 16,032 12,019 31,735 6,443 $ (673) $ 3,684

period, driven primarily by improved delinquency and net charge-offs which led to a reduction in the allowance for loan losses for both the prior and current year periods. For the year ended December 31, 2011, the wholesale provision for credit losses was a benefit of $23 million, compared with a benefit of $850 million in the prior-year period. The change in the wholesale provision when compared with the prior year period primarily reflects loan growth and other portfolio activity including the effect of lower net-charge offs on the provision.
Provision for lending-related commitments 2011 (40) $ 2 (38) NA (38) $ 2010 (177) $ (6) (183) NA (183) $ 2009 290 (10) 280 280 $

Total provision for credit losses 2011 (23) $ 4,672 2,925 7,574 NA 2010 9,452 8,037 16,639 NA 2009 16,022 12,019 32,015 6,443 (850) $ 3,974

7,612 $ 16,822 $ 38,178

$ 7,574 $ 16,639 $ 38,458

(b)

Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. As a result of the consolidation of the credit card securitization trusts, reported and managed basis relating to credit card securitizations are equivalent for periods beginning after January 1, 2010. For further discussion regarding the Firms application and the impact of the new guidance, see Explanation and Reconciliation of the Firms Use of Non-GAAP Financial Measures on pages 7678 of this Annual Report. Loans securitized are defined as loans that were sold to unconsolidated securitization trusts and were not included in reported loans. For further discussion of credit card securitizations, see Note 16 on pages 256267 of this Annual Report.

JPMorgan Chase & Co./2011 Annual Report

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Management's discussion and analysis

MARKET RISK MANAGEMENT

Market risk is the exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates. Market risk management Market Risk is an independent risk management function that works in close partnership with the business segments to identify and monitor market risks throughout the Firm and to define market risk policies and procedures. The risk management function is headed by the Firms Chief Risk Officer. Market Risk seeks to facilitate efficient risk/return decisions, reduce volatility in operating performance and provide transparency into the Firms market risk profile for senior management, the Board of Directors and regulators. Market Risk is responsible for the following functions: Establishing a market risk policy framework Independent measurement, monitoring and control of line-of-business market risk Definition, approval and monitoring of limits Performance of stress testing and qualitative risk assessments Risk identification and classification Each line of business is responsible for the comprehensive identification and verification of market risks within its units. The Firms market risks arise primarily from the activities in IB, Mortgage Production and Servicing, and CIO in Corporate/Private Equity. IB makes markets in products across the fixed income, foreign exchange, equities and commodities markets. This trading activity may lead to a potential decline in net income due to adverse changes in market rates. In addition to these risks, there are risks in IBs credit portfolio from retained loans and commitments, derivative credit valuation adjustments, hedges of the credit valuation adjustments and the fair value of hedges of the retained loan portfolio. Additional risk positions result from the debit valuation adjustments taken on certain structured liabilities and derivatives to reflect the credit quality of the Firm. The Firms Mortgage Production and Servicing business includes the Firms mortgage pipeline and warehouse loans, MSRs and all related hedges. These activities give rise to complex interest rate risks, as well as option and basis risk. Option 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. CIO is primarily concerned with managing structural risks which arise out of the various business activities of the Firm. Market Risk measures and monitors the gross structural exposures as well as the net exposures related to these activities.

Risk measurement
Tools used to measure risk Because no single measure can reflect all aspects of market risk, the Firm uses various metrics, both statistical and nonstatistical, including: Value-at-risk Economic-value stress testing Nonstatistical risk measures Loss advisories Revenue drawdowns Risk identification for large exposures (RIFLEs) Nontrading interest rate-sensitive revenue-at-risk stress testing Value-at-risk JPMorgan Chase utilizes VaR, a statistical risk measure, to estimate the potential loss from adverse market moves. Each business day, as part of its risk management activities, the Firm undertakes a comprehensive VaR calculation that includes the majority of its material market risks. VaR provides a consistent cross-business measure of risk profiles and levels of diversification and is used for comparing risks across businesses and monitoring limits. These VaR results are reported to senior management and regulators, and they are utilized in regulatory capital calculations. The Firm calculates VaR to estimate possible economic outcomes for its current positions using historical simulation, which measures risk across instruments and portfolios in a consistent, comparable way. The simulation is based on data for the previous 12 months. This approach assumes that historical changes in market values are representative of the distribution of potential outcomes in the immediate future. VaR is calculated using a one day time horizon and an expected tail-loss methodology, and approximates a 95% confidence level. This means that, assuming current changes in market values are consistent with the historical changes used in the simulation, the Firm would expect to incur losses greater than that predicted by VaR estimates five times in every 100 trading days, or about 12 to 13 times a year. However, differences between current and historical market price volatility may result in fewer or greater VaR exceptions than the number indicated by the historical simulation. The Firms VaR calculation is highly granular and incorporates numerous risk factors, which are selected based on the risk profile of each portfolio.

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JPMorgan Chase & Co./2011 Annual Report

The table below shows the results of the Firms VaR measure using a 95% confidence level. Total IB trading VaR by risk type, Credit portfolio VaR and other VaR
As of or for the year ended December 31, (in millions) IB VaR by risk type Fixed income Foreign exchange Equities Commodities and other Diversification benefit to IB trading VaR IB trading VaR Credit portfolio VaR Diversification benefit to IB trading and credit portfolio VaR Total IB trading and credit portfolio VaR Other VaR Mortgage Production and Servicing VaR Chief Investment Office (CIO) VaR Diversification benefit to total other VaR Total other VaR Diversification benefit to total IB and other VaR Total IB and other VaR (a) (b) Avg. $ 50 11 23 16 (42) 58 33 (15) 76 30 57 (17) 70 (45) $ 101 2011 Min $ 31 6 15 8 NM 34 19 NM 42 6 30 NM 46 NM $ 67 $ Max 68 19 42 24 NM 80 55 NM 102 98 80 NM 110 NM $ 147 $ Avg. 65 11 22 16 (43) 71 26 (10) 87 23 61 (13) 71 (59) $ 99 2010 Min $ 33 6 10 11 NM 40 15 NM 50 8 44 NM 48 NM $ 66 $ Max 95 20 52 32 NM 107 40 NM 128 47 80 NM 100 NM 142 $ At December 31, 2011 2010 49 19 19 22 (55) 54 42 (20) 76 16 77 (10) 83 (46) $ 113 $ 52 16 30 13 (34) 77 27 (5) 99 9 56 (10) 55 (65) $ 89

(a)

(b)

(b)

(a)

(b)

(b)

(a)

(a)

(a)

(b)

(b)

(a)

(b)

(b)

(a)

(a)

(a)

(b)

(b)

(a)

(b)

(b)

(a)

(a)

(a)

(b)

(b)

(a)

(b)

(b)

(a)

(a)

Average VaR and period-end VaR were less than the sum of the VaR of the components described above, which is due to portfolio diversification. The diversification effect reflects the fact that the risks were not perfectly correlated. The risk of a portfolio of positions is therefore usually less than the sum of the risks of the positions themselves. Designated as not meaningful (NM), because the minimum and maximum may occur on different days for different risk components, and hence it is not meaningful to compute a portfolio-diversification effect.

VaR Measurement IB trading VaR includes substantially all market-making and client-driven activities as well as certain risk management activities in IB. This includes the credit spread sensitivities of certain mortgage products and syndicated lending facilities that the Firm intends to distribute. 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. In addition, for certain products included in IB trading and credit portfolio VaR, certain risk parameters that do not have daily observable values are not captured, such as correlation risk. Credit portfolio VaR includes the derivative CVA, hedges of the CVA and the fair value of hedges of the retained loan portfolio, which are reported in principal transactions revenue. However, Credit portfolio VaR does not include the retained portfolio, which is not reported at fair value. Other VaR includes certain positions employed as part of the Firms risk management function within the Chief Investment Office (CIO) and in the Mortgage Production and Servicing business. CIO VaR includes positions, primarily in debt securities and credit products, used to manage structural and other risks including interest rate, credit and mortgage risks arising from the Firms ongoing business activities. Mortgage Production and Servicing VaR includes the Firms mortgage pipeline and warehouse loans, MSRs and all related hedges.
JPMorgan Chase & Co./2011 Annual Report

As noted above, IB, Credit portfolio and other VaR does not include the retained Credit portfolio, which is not marked to market; however, it does include hedges of those positions. It also does not include DVA on derivative and structured liabilities to reflect the credit quality of the Firm; principal investments (mezzanine financing, tax-oriented investments, etc.); and certain securities and investments held by the Corporate/Private Equity line of business, including private equity investments, capital management positions and longer-term investments managed by CIO. These longer-term positions are managed through the Firms nontrading interest rate-sensitive revenue-at-risk and other cash flow-monitoring processes, rather than by using a VaR measure. Principal investing activities and Private Equity positions are managed using stress and scenario analyses. See the DVA sensitivity table on page 161 of this Annual Report for further details. For a discussion of Corporate/Private Equity, see pages 107108 of this Annual Report. 2011 and 2010 VaR results As presented in the table above, average total IB and other VaR was $101 million for 2011, compared with $99 million for 2010. The increase in average VaR was driven by a decrease in diversification benefit across the Firm. Average total IB trading and credit portfolio VaR for 2011 was $76 million compared with $87 million for 2010. The decrease in IB trading VaR was driven by a decline in market volatility in the first half of 2011, a reduction in average credit spreads, and a reduction in exposure mainly
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Management's discussion and analysis

in the fixed income risk component. CIO VaR averaged $57 million in 2011, compared with $61 million for 2010. The decrease was also driven by a decline in market volatility in the first half of 2011, as well as position changes. Mortgage Production and Servicing VaR averaged $30 million for 2011, compared with $23 million for 2010. The increase was driven by position changes in the MSR Portfolio. The Firms average IB and other VaR diversification benefit was $45 million or 31% of the sum for 2011, compared with $59 million or 37% of the sum for 2010. In general, over the course of the year, VaR exposure can vary significantly as positions change, market volatility fluctuates and diversification benefits change. VaR back-testing The Firm conducts daily back-testing of VaR against its market risk related revenue. In the year ended December 31, 2011, losses were sustained on 27 days, of which three days exceeded the VaR measure.

The following histogram illustrates the daily market risk related gains and losses for IB, CIO and Mortgage Production and Servicing positions for 2011. This market risk related revenue is defined as the change in value of: principal transactions revenue for IB and CIO (less Private Equity gains/losses and revenue from longer-term CIO investments); trading-related net interest income for IB, CIO and Mortgage Production and Servicing; IB brokerage commissions, underwriting fees or other revenue; revenue from syndicated lending facilities that the Firm intends to distribute; and mortgage fees and related income for the Firms mortgage pipeline and warehouse loans, MSRs, and all related hedges. Daily firmwide market risk related revenue excludes gains and losses from DVA. The chart shows that the Firm posted market risk related gains on 233 of the 260 days in this period, with seven days exceeding $200 million. The inset graph looks at those days on which the Firm experienced losses and depicts the amount by which the VaR exceeded the actual loss on each of those days.

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The following table provides information about the gross sensitivity of DVA to a one-basis-point increase in JPMorgan Chases credit spreads. This sensitivity represents the impact from a one-basis-point parallel shift in JPMorgan Chases entire credit curve. As credit curves do not typically move in a parallel fashion, the sensitivity multiplied by the change in spreads at a single maturity point may not be representative of the actual revenue recognized. Debit valuation adjustment sensitivity
December 31, (in millions) 2011 2010 One basis-point increase in JPMorgan Chases credit spread $ 35 35

Economic-value stress testing 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 captures the Firms exposure to unlikely but plausible events in abnormal markets using multiple scenarios that assume significant changes in credit spreads, equity prices, interest rates, currency rates or commodity prices. Scenarios are updated dynamically and may be redefined on an ongoing basis to reflect current market conditions. Along with VaR, stress testing is important in measuring and controlling risk; it enhances understanding of the Firms risk profile and loss potential, as stress losses are monitored against limits. Stress testing is also employed in cross-business risk management. Stress-test results, trends and explanations based on current market risk positions are reported to the Firms senior management and to the lines of business to allow them to better understand event risk-sensitive positions and manage risks with more transparency. Nonstatistical risk measures Nonstatistical risk measures as well as stress testing 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 Firms market risk exposure. They are aggregated by line-of-business and by risk type, and are used for tactical control and monitoring limits. Loss advisories and revenue drawdowns Loss advisories and net revenue drawdowns are tools used to highlight trading losses above certain levels of risk tolerance. Net revenue drawdown is defined as the decline in net revenue since the year-to-date peak revenue level. Risk identification for large exposures Individuals who manage risk positions in IB are responsible for identifying potential losses that could arise from specific, unusual events, such as a potential change in tax legislation, or a particular combination of unusual market moves. This information allows the Firm to monitor further earnings vulnerability not adequately covered by standard risk measures.

Nontrading interest rate-sensitive revenue-at-risk (i.e., earnings-at-risk) The VaR and stress-test measures described above illustrate the total economic sensitivity of the Firms Consolidated Balance Sheets to changes in market variables. The effect of interest rate exposure on reported net income is also important. Interest rate risk represents one of the Firms significant market risk exposures. This risk arises not only from trading activities but also from the Firms traditional banking activities which include extension of loans and credit facilities, taking deposits and issuing debt (i.e., asset/ liability management positions including accrual loans within IB and CIO, and offbalance sheet positions). ALCO establishes the Firms interest rate risk policies, sets risk guidelines and limits and reviews the risk profile of the Firm. Treasury, working in partnership with the lines of business, calculates the Firms interest rate risk profile weekly and reviews it with senior management. Interest rate risk for nontrading activities can occur due to a variety of factors, including: Differences in the timing among the maturity or repricing of assets, liabilities and offbalance sheet instruments. For example, if liabilities reprice more quickly than assets and funding interest rates are declining, earnings will increase initially. Differences in the amounts of assets, liabilities and offbalance sheet instruments that are repricing at the same time. For example, if more deposit liabilities are repricing than assets when general interest rates are declining, earnings will increase initially. 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) because the Firm has the ability to lend at long-term fixed rates and borrow at variable or short-term fixed rates. Based on these scenarios, the Firms earnings would be affected negatively by a sudden and unanticipated increase in short-term rates paid on its liabilities (e.g., deposits) without a corresponding increase in long-term rates received on its assets (e.g., loans). Conversely, higher long-term rates received on assets generally are beneficial to earnings, particularly when the increase is not accompanied by rising short-term rates paid on liabilities. The impact of changes in the maturity of various assets, liabilities or off-balance sheet instruments as interest rates change. For example, if more borrowers than forecasted pay down higher-rate loan balances when general interest rates are declining, earnings may decrease initially.

The Firm manages interest rate exposure related to its assets and liabilities on a consolidated, corporate-wide basis. Business units transfer their interest rate risk to Treasury through a transfer-pricing system, which takes into account the elements of interest rate exposure that can be risk-managed in financial markets. These elements
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JPMorgan Chase & Co./2011 Annual Report

Management's discussion and analysis

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 manages this interest rate risk generally through its investment securities portfolio and related derivatives. The Firm evaluates its nontrading interest rate risk exposure through the stress testing of earnings-at-risk, which measures the extent to which changes in interest rates will affect the Firms Core net interest income (see page 78 of this Annual Report for further discussion on Core net interest income) and interest rate-sensitive fees (nontrading interest rate-sensitive revenue). Earnings-atrisk excludes the impact of trading activities and MSRs as these sensitivities are captured under VaR. The Firm conducts simulations of changes in nontrading interest rate-sensitive revenue under a variety of interest rate scenarios. Earnings-at-risk tests measure the potential change in this revenue, and the corresponding impact to the Firms pretax earnings, over the following 12 months. These tests highlight exposures to various interest rate-sensitive factors, such as the rates themselves (e.g., the prime lending rate), pricing strategies on deposits, optionality and changes in product mix. The tests include forecasted balance sheet changes, such as asset sales and securitizations, as well as prepayment and reinvestment behavior. Mortgage prepayment assumptions are based on current interest rates compared with underlying contractual rates, the time since origination, and other factors which are updated periodically based on historical experience and forward market expectations. The amount and pricing assumptions of deposits that have no stated maturity are based on historical performance, the competitive environment, customer behavior, and product mix. Immediate changes in interest rates present a limited view of risk, and so a number of alternative scenarios are also reviewed. These scenarios include the implied forward curve, nonparallel rate shifts and severe interest rate shocks on selected key rates. These scenarios are intended to provide a comprehensive view of JPMorgan Chases earnings-at-risk over a wide range of outcomes.
JPMorgan Chases 12-month pretax earnings sensitivity profiles. (Excludes the impact of trading activities and MSRs)
Immediate change in rates December 31, (in millions) 2011 2010 +200bp $ 4,046 2,465 +100bp $ 2,326 1,483 -100bp NM NM
(a) (a)

assumed higher level of deposit balances. The Firms risk to rising rates was largely the result of widening deposit margins, which are currently compressed due to very low short-term interest rates. Additionally, another 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 pretax earnings benefit of $669 million. The increase in earnings under this scenario is due to reinvestment of maturing assets at the higher long-term rates, with funding costs remaining unchanged.

Risk monitoring and control

Limits Market risk is controlled primarily through a series of limits. Limits reflect the Firms risk appetite in the context of the market environment and business strategy. In setting limits, the Firm takes into consideration factors such as senior management risk appetite, market volatility, product liquidity, accommodation of client business and management experience. Market risk management regularly reviews and updates risk limits. Senior management, including the Firms Chief Executive Officer and Chief Risk Officer, is responsible for reviewing and approving certain risk limits on an ongoing basis. The Firm maintains different levels of limits. Corporate-level limits include VaR and stress limits. Similarly, line-ofbusiness limits include VaR and stress limits and may be supplemented by loss advisories, nonstatistical measurements and profit and loss drawdowns. Businesses are responsible for adhering to established limits, against which exposures are monitored and reported. Limit breaches are reported in a timely manner to senior management, and the affected line-of-business is required to reduce trading positions or consult with senior management on the appropriate action. Model review Some of the Firms financial instruments cannot be valued based on quoted market prices but are instead valued using pricing models. These pricing models and VaR models are used for management of risk positions, such as reporting against limits, as well as for valuation. The Model Risk Group, which is independent of the businesses and market risk management, reviews the models the Firm uses and assesses model appropriateness and consistency. The model reviews consider a number of factors about the models suitability for valuation and risk management of a particular product. These factors include whether the model accurately reflects the characteristics of the transaction and its significant risks, the suitability and convergence properties of numerical algorithms, reliability of data sources, consistency of the treatment with models for similar products, and sensitivity to input parameters and assumptions that cannot be priced from the market. Reviews are conducted of new or changed models, as well
JPMorgan Chase & Co./2011 Annual Report

-200bp NM NM
(a) (a)

(a) Downward 100- and 200-basis-point parallel shocks result in a Federal Funds target rate of zero and negative three- and six-month treasury rates. The earnings-at-risk results of such a low-probability scenario are not meaningful.

The change in earnings at risk from December 31, 2010, resulted from investment portfolio repositioning and an
162

as previously accepted models, to assess whether there have been any changes in the product or market that may affect the models validity and whether there are theoretical or competitive developments that may require reassessment of the models adequacy. For a summary of valuations based on models, see Critical Accounting Estimates Used by the Firm on pages 168172 and Note 3 on pages 184198 of this Annual Report.

Risk reporting

Nonstatistical risk measures, VaR, loss advisories and limit excesses are reported daily to the lines of business and to senior management. Market risk exposure trends, VaR trends, profit-and-loss changes and portfolio concentrations are reported weekly. Stress-test results are also reported weekly to the lines of business and to senior management.

COUNTRY RISK MANAGEMENT

Country risk is the risk that a sovereign event or action alters the value or terms of contractual obligations of counterparties and issuers related to a country. The Firm has a comprehensive country risk management framework for assessing country risks, determining risk tolerance, and measuring and monitoring direct country exposures in the Firms wholesale lines of business, including CIO. The Country Risk Management group is responsible for developing guidelines and policy for managing country risk in both emerging and developed countries. The Country Risk Management group actively monitors the wholesale portfolio to ensure the Firms country risk exposures are diversified and that exposure levels are appropriate given the Firms strategy and risk tolerance relative to a country. Country risk organization The Country Risk Management group is an independent risk management function which works in close partnership with other risk functions and across wholesale lines of business, including CIO. The Country Risk Management governance consists of the following functions: Developing guidelines and policies consistent with a comprehensive country risk framework Assigning sovereign ratings and assessing country risks Measuring and monitoring country risk exposure across the Firm Managing country limits and reporting utilization to senior management Developing surveillance tools for early identification of potential country risk concerns Providing country risk scenario analysis Country risk identification and measurement The Firm is exposed to country risk through its wholesale lending, 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 Firms internal 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) of the obligor, counterparty, issuer or guarantor. Exposures are generally measured by considering the Firms risk to an immediate
JPMorgan Chase & Co./2011 Annual Report

default of the counterparty or obligor, with zero recovery. For example: 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 AFS securities are measured at par value Securities financing exposures are measured at their receivable balance, net of collateral received Debt and equity securities in market-making and investing activities are measured at the fair value of all positions, both long and short positions Counterparty exposure on derivative receivables, including credit derivative receivables, is measured at the derivatives fair value, net of the fair value of the related collateral Credit derivatives protection purchased and sold are 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 are presented on a net basis, as such activities often result in selling and purchasing protection related to the same underlying reference entity, and which reflects the manner in which the Firm manages these exposures In addition, the Firm also has indirect exposures to country risk (for example, related to the collateral received on securities financing receivables or related to client clearing activities). These indirect exposures are managed in the normal course of business through the Firms credit, market, and operational risk governance, rather than through the country risk governance. The Firms internal risk management approach differs from the reporting provided under FFIEC bank regulatory requirements. There are significant reporting differences in reporting methodology, including with respect to the treatment of collateral received and the benefit of credit derivative protection. For further information on the FFIECs reporting methodology, see Cross-border outstandings on page 322 of the 2011 Form 10-K.

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Management's discussion and analysis

Country risk monitoring and control The Country Risk Policy Group establishes guidelines for sovereign ratings reviews and limit management. In addition, the Country Risk Management group uses surveillance tools for early identification of potential country risk concerns, such as signaling models and ratings indicators. The limit framework includes a risk-tier approach and stress testing procedures for assessing the potential risk of loss associated with a significant sovereign crisis. Country ratings and limits activity are actively monitored and reported on a regular basis. Country limit requirements are reviewed and approved by senior management as often as necessary, but at least annually. For further information on market-risk stress testing the Firm performs in the normal course of business, see Market Risk Management on pages 161162 of this Annual Report. For further information on credit loss estimates, see Critical Accounting Estimates Allowance for credit losses on pages 168169 of this Annual Report. Country risk reporting The following table presents the Firms top 20 country exposures (excluding U.S.) based on its internal measurements of exposure. The selection of countries is based solely on the Firms largest total exposures by country and does not represent its view of any actual or potentially adverse credit conditions. Top 20 country exposures
December 31, 2011 (in billions) Lending(a) Trading and investing(b) Other(c) Total exposure United Kingdom $ 23.6 $ 58.4 $ 12.1 $ 94.1 Switzerland 41.4 1.1 0.5 43.0 Netherlands 4.7 34.5 2.9 42.1 France 16.8 13.9 30.7 Germany 13.6 16.0 29.6 Australia 7.6 20.4 28.0 Brazil 5.3 14.1 19.4 Canada 9.1 5.9 0.2 15.2 India 7.8 7.1 14.9 Korea 7.7 5.7 13.4 China 7.0 4.4 0.2 11.6 Japan 3.5 5.4 8.9 Hong Kong 3.5 4.2 7.7 Mexico 3.2 4.5 7.7 Belgium 2.1 5.2 0.1 7.4 Spain 3.3 3.8 0.1 7.2 Italy 3.1 3.4 0.1 6.6 Singapore 3.0 2.2 1.0 6.2 Sweden 1.6 3.6 0.5 5.7 Taiwan 2.8 2.5 5.3 (a) Lending includes loans and accrued interest receivable, net of the allowance for loan losses, deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and undrawn commitments to extend credit. (b) Includes market-making inventory, securities held in AFS accounts and hedging. (c) Includes capital invested in local entities and physical commodity storage.

Selected European exposure Several European countries, including Spain, Italy, Ireland, Portugal and Greece, have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The Firm believes its exposure to these five countries is modest relative to the Firms overall risk exposures and is manageable given the size and types of exposures to each of the countries and the diversification of the aggregate exposure. The Firm continues to conduct business and support client activity in these countries and, therefore, the Firms aggregate net exposures and sector distribution may vary over time. In addition, the net exposures may be affected by changes in market conditions, including the effects of interest rates and credit spreads on market valuations. The Firm is closely monitoring its exposures in these countries. The following table presents the Firms direct exposure to these five countries at December 31, 2011, as measured under the Firms internal risk management approach.

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December 31, 2011 (in billions) Spain Sovereign Non-sovereign Total Spain exposure Italy Sovereign Non-sovereign Total Italy exposure Other (Ireland, Portugal and Greece) Sovereign Non-sovereign Total other exposure Total exposure

AFS Lending(a) securities(b) Trading(c) $ $ $ $ $ $ $ $ 3.3 3.3 $ $ 3.1 3.1 $ $ 1.4 1.4 $ 7.8 $ 2.0 $ 0.2 2.2 $ $ 0.1 0.1 $ 1.0 $ 1.0 $ 3.3 $

Derivative collateral(d)

Portfolio hedging(e)

Total exposure 1.9 5.3 7.2 2.5 4.1 6.6 0.2 2.0 2.2 16.0

$ 4.4 4.4 $ 6.4 $ 2.9 9.3 $ 0.1 $ 2.1 2.2 $ 15.9 $

$ (2.3) (2.3) $ (1.1) $ (1.5) (2.6) $ $ (1.4) (1.4) $ (6.3) $

(0.1) $ (0.3) (0.4) $ (2.8) $ (0.5) (3.3) $ (0.9) $ (0.1) (1.0) $ (4.7) $

(a) Lending includes loans and accrued interest receivable, net of the allowance for loan losses, deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and undrawn commitments to extend credit. Includes $2.2 billion of unfunded lending exposure at December 31, 2011. These exposures consist typically of committed, but unused corporate credit agreements, with market-based lending terms and covenants. (b) The fair value of AFS securities was $3.1 billion at December 31, 2011. (c) Includes: (1) $1.2 billion of issuer exposure on debt and equity securities held in trading, as well as market-making CDS exposure and (2) $14.5 billion of derivative and securities financing counterparty exposure. As of December 31, 2011, there were approximately $18.4 billion of securities financing receivables, which were collateralized with approximately $21.5 billion of marketable securities. (d) Includes cash and marketable securities pledged to the Firm, of which approximately 98% of the collateral was cash as of December 31, 2011, (e) Reflects net CDS protection purchased through the Firms credit portfolio management activities, which are managed separately from its market-making activities.

Corporate clients represent approximately 77% of the Firms non-sovereign net exposure in these five countries, and substantially all of the remaining 23% of the nonsovereign exposure is to the banking sector. The table above includes single-name CDS protection sold and purchased, as well as portfolio and tranche CDS for which one or more of the underlying reference entities is in one of the named European countries. As of December 31, 2011, the notional amount of single-name CDS protection sold and purchased related to these countries was $142.4 billion and $147.3 billion, respectively, on a gross basis, before consideration of counterparty master netting agreements or collateral arrangements. In each of the five countries, the aggregate gross notional amount of singlename protection sold was more than 97% offset by the aggregate gross notional amount of single-name protection purchased on the same reference entities on which the Firm sold protection. The notional amount of single-name CDS protection sold and purchased related to these countries, after consideration of counterparty master netting agreements (which is a measure used by certain market peers and therefore presented for comparative purposes), was $13.7 billion and $18.5 billion, respectively. The fair value of the single-name CDS protection sold and purchased in the five named European countries as of December 31, 2011 was $22.9 billion and $24.1 billion, respectively, prior to consideration of collateral and master netting agreements, and was $2.7 billion and $3.9 billion, respectively, after consideration of counterparty master netting agreements for single-name credit derivatives within the selected European countries.
JPMorgan Chase & Co./2011 Annual Report

The Firms credit derivative activity is presented on a net basis, as market-making activities often result in selling and purchasing protection related to the same underlying reference entity. This presentation reflects the manner in which this exposure is managed, and reflects, in the Firms view, the substantial mitigation of counterparty credit and market risk in its credit derivative activities. The Firm believes that the counterparty credit risk on credit derivative purchased protection has been substantially mitigated based on the following characteristics, by notional amount, as of December 31, 2011: 99% is purchased under contracts that require posting of cash collateral; 83% is purchased from investment-grade counterparties domiciled outside of the select European countries; 75% of the protection purchased offsets protection sold on the identical reference entity, with the identical counterparty subject to master netting agreements. The Firm generally seeks to purchase credit protection with the same or similar maturity date on its exposures for which the protection was purchased. However, there are instances where the purchased protection has a shorter maturity date than the maturity date on the exposure for which the protection was purchased. These exposures are actively monitored and managed by the Firm. The effectiveness of the Firms CDS protection as a hedge of the Firms exposures may vary depending upon a number of factors, including the contractual terms of the CDS. For further information about credit derivatives see Credit derivatives on pages 143144 of this Annual report.
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Management's discussion and analysis PRIVATE EQUITY RISK MANAGEMENT

The Firm makes principal investments in private equity. The illiquid nature and long-term holding periods associated with these investments differentiates private equity risk from the risk of positions held in the trading portfolios. The Firms approach to managing private equity risk is consistent with the Firms general risk governance structure. Targeted levels for total and annual investments are established in order to manage the overall size of the portfolios. Industry and geographic concentration limits are in place and intended to ensure diversification of the portfolios. All investments are approved by investment committees that include executives who are not part of the investing businesses. An independent valuation function is responsible for reviewing the appropriateness of the carrying values of private equity investments in accordance with relevant accounting policies. At December 31, 2011 and 2010, the carrying value of the Private Equity portfolio was $7.7 billion and $8.7 billion, respectively, of which $805 million and $875 million, respectively, represented securities with publicly available market quotations. For further information on the Private Equity portfolio, see page 108 of this Annual Report.

OPERATIONAL RISK MANAGEMENT

Operational risk is the risk of loss resulting from inadequate or failed processes or systems, human factors or external events. Overview Operational risk is inherent in each of the Firms businesses and support activities. Operational risk can manifest itself in various ways, including errors, fraudulent acts, business interruptions, inappropriate behavior of employees, or vendors that do not perform in accordance with their arrangements. These events could result in financial losses and other damage to the Firm, including reputational harm. To monitor and control operational risk, the Firm maintains a system of comprehensive policies and a control framework designed to provide a sound and well-controlled operational environment. The goal is to keep operational risk at appropriate levels, in light of the Firms financial strength, the characteristics of its businesses, the markets in which it operates, and the competitive and regulatory environment to which it is subject. Notwithstanding these control measures, the Firm incurs operational losses. The Firms approach to operational risk management is intended to mitigate such losses by supplementing traditional control-based approaches to operational risk with risk measures, tools and disciplines that are riskspecific, consistently applied and utilized firmwide. Key themes are transparency of information, escalation of key issues and accountability for issue resolution. One of the ways operational loss is mitigated is through insurance maintained by the Firm. The Firm purchases insurance to be in compliance with local laws and regulations, as well as to serve other needs of the Firm. Insurance may also be required by third parties with whom the Firm does business. The insurance purchased is reviewed and approved by senior management. The Firms operational risk framework is supported by Phoenix, an internally designed operational risk software tool. Phoenix integrates the individual components of the operational risk management framework into a unified, web-based tool. Phoenix enhances the capture, reporting and analysis of operational risk data by enabling risk identification, measurement, monitoring, reporting and analysis to be done in an integrated manner, thereby enabling efficiencies in the Firms monitoring and management of its operational risk. For purposes of identification, monitoring, reporting and analysis, the Firm categorizes operational risk events as follows: Client service and selection Business practices Fraud, theft and malice Execution, delivery and process management Employee disputes Disasters and public safety Technology and infrastructure failures, including cybersecurity breaches Control assessment In order to evaluate the effectiveness of the control environment in mitigating operational risk, the businesses utilize the Firms standard self-assessment process and supporting architecture. The goal of the self-assessment process is for each business to identify the key operational risks specific to its environment and assess the degree to which it maintains appropriate controls. Action plans are developed for control issues that are identified, and businesses are held accountable for tracking and resolving these issues on a timely basis. Risk measurement Operational risk is measured for each business on the basis of historical loss experience using a statistically based lossdistribution approach. The current business environment, potential scenarios and measures of the control environment are then factored into determining firmwide operational risk capital. This methodology is designed to comply with the advanced measurement rules under the Basel II Framework. Risk monitoring The Firm has a process for monitoring operational riskevent data, permitting analysis of errors and losses as well
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as trends. Such analysis, performed both at a line-ofbusiness level and by risk-event type, enables identification of the causes associated with risk events faced by the businesses. Where available, the internal data can be supplemented with external data for comparative analysis with industry patterns. Risk reporting and analysis Operational risk management reports provide information, including actual operational loss levels, self-assessment results and the status of issue resolution to the lines of business and senior management. The purpose of these reports is to enable management to maintain operational

risk at appropriate levels within each line of business, to escalate issues and to provide consistent data aggregation across the Firms businesses and support areas. Audit alignment Internal Audit utilizes a risk-based program of audit coverage to provide an independent assessment of the design and effectiveness of key controls over the Firms operations, regulatory compliance and reporting. This includes reviewing the operational risk framework, the effectiveness of the business self-assessment process, and the loss data-collection and reporting activities.

REPUTATION AND FIDUCIARY RISK MANAGEMENT

The Firms success depends not only on its prudent management of the liquidity, credit, market and operational risks that are part of its business risk, but equally on the maintenance among its many constituentscustomers and clients, investors, regulators, as well as the general public of a reputation for business practices of the highest quality. Attention to reputation has always been a key aspect of the Firms practices, and maintenance of the Firms reputation is the responsibility of each individual employee at the Firm. JPMorgan Chase bolsters this individual responsibility in many ways, including through the Firms Code of Conduct (the Code), which is based on the Firms fundamental belief that no one should ever sacrifice integrity or give the impression that he or she has even if one thinks it would help the Firms business. The Code requires prompt reporting of any known or suspected violation of the Code, any internal Firm policy, or any law or regulation applicable to the Firms business. It also requires the reporting of any illegal conduct, or conduct that violates the underlying principles of the Code, by any of the Firms customers, suppliers, contract workers, business partners or agents. Concerns may be reported anonymously and the Firm prohibits retaliation against employees for the good faith reporting of any actual or suspected violations of the Code. In addition to training of employees with regard to the principles and requirements of the Code, and requiring annual affirmation by each employee of compliance with the Code, the Firm has established policies and procedures, and has in place various oversight functions, intended to promote the Firms culture of doing the right thing. These include a Conflicts Office which examines wholesale transactions with the potential to create conflicts of interest for the Firm. In addition, each line of business has a risk committee which includes in its mandate oversight of the reputational risks in its business that may produce significant losses or reputational damage; some lines of business, including the IB, have separate risk committees comprised of senior representatives of business and control functions. In addition, in IB, there are several regional reputation risk committees. The Firm has also established a Consumer Reputational Risk Committee, comprised of senior management from the Firms Operating Committee, including the heads of its primary consumer facing businesses, RFS and Card, that helps to ensure that the Firm has a consistent, disciplined focus on the review of the impact on consumers of Chase products and practices, including any that could raise reputational issues. Fiduciary Risk Management Fiduciary Risk Management is part of the relevant line of business risk committees. Senior business, legal and compliance management, who have particular responsibility for fiduciary issues, work with the relevant businesses' risk committees with the goal of ensuring that the businesses providing investment or risk management products or services that give rise to fiduciary duties to clients perform at the appropriate standard relative to their fiduciary relationship with a client. Of particular focus are the policies and practices that address a business responsibilities to a client, including performance and service requirements and expectations; client suitability determinations; and disclosure obligations and communications. In this way, the relevant line of business risk committees provide oversight of the Firms efforts to monitor, measure and control the performance and risks that may arise in the delivery of products or services to clients that give rise to such fiduciary duties, as well as those stemming from any of the Firms fiduciary responsibilities under the Firms various employee benefit plans.

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Management's discussion and analysis

CRITICAL ACCOUNTING ESTIMATES USED BY THE FIRM

JPMorgan Chases accounting policies and use of estimates are integral to understanding its reported results. The Firms most complex accounting estimates require managements judgment to ascertain the value of assets and liabilities. The Firm has established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well-controlled, independently reviewed and applied consistently from period to period. 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 value of its assets and liabilities are appropriate. The following is a brief description of the Firms critical accounting estimates involving significant valuation judgments. Allowance for credit losses JPMorgan Chases allowance for credit losses covers the retained wholesale and consumer loan portfolios, as well as the Firms wholesale and consumer lending-related commitments. The allowance for loan losses is intended to adjust the value of the Firms 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. For further discussion of the methodologies used in establishing the Firms allowance for credit losses, see Allowance for Credit Losses on pages 155 157 and Note 15 on pages 252255 of this Annual Report. The determination of the allowance for credit losses involves significant judgment on a number of matters, as discussed below. Wholesale loans and lending-related commitments The Firms methodology for determining the allowance for loan losses and the allowance for lending-related commitments requires the early identification of credits that are deteriorating. The Firm uses a risk-rating system to determine the credit quality of its wholesale loans. Wholesale loans are reviewed for information affecting the obligors ability to fulfill its obligations. In assessing the risk rating of a particular loan, among the factors considered are the obligors debt capacity and financial flexibility, the level of the obligors 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. Emphasizing one factor over another or considering additional factors could affect the risk rating assigned by the Firm to that loan. The Firm applies its judgment to establish loss factors used in calculating the allowances. Wherever possible, the Firm uses independent, verifiable data or the Firms own
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historical loss experience in its models for estimating the allowances. Many factors can affect estimates of loss, including volatility of loss given default, probability of default and rating migrations. Consideration is given as to whether the loss estimates should be calculated as an average over the entire credit cycle or at a particular point in the credit cycle, as well as to which external data should be used and when they should be used. Choosing data that are not reflective of the Firms specific loan portfolio characteristics could also affect loss estimates. The application of different inputs would change the amount of the allowance for credit losses determined appropriate by the Firm. Management also applies its judgment to adjust the loss factors derived, 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 loss given default and probability of default are considered when estimating these adjustments. Factors related to concentrated and deteriorating industries also are incorporated where relevant. These estimates are based on managements view of uncertainties that relate to current macroeconomic and political conditions, quality of underwriting standards and other relevant internal and external factors affecting the credit quality of the current portfolio. Consumer loans and lending-related commitments, excluding PCI loans The allowance for credit losses for the consumer portfolio, including credit card, is calculated by applying statistical expected loss factors to outstanding principal balances over an estimated loss emergence period to arrive at an estimate of losses in the portfolio. The 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 (through a charge-off). 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 probable credit losses inherent in the portfolio. Management uses additional statistical methods and considers portfolio and collateral valuation trends to review the appropriateness of the primary statistical loss estimate. 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. In the current economic environment, it is difficult to predict whether historical loss experience is
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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, the estimated effects of the mortgage foreclosure-related settlement with federal and state officials, uncertainties regarding the ultimate success of loan modifications, and other relevant internal and external factors affecting the credit quality of the portfolio. For junior lien products, management considers the delinquency and/or modification status of any senior liens in determining the adjustment. 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 loan losses for the consumer credit portfolio. The allowance for credit losses for the consumer portfolio, including credit card, is sensitive to changes in the economic environment, delinquency status, the realizable value of collateral, FICO scores, borrower behavior and other risk factors. Significant judgment is required to estimate the duration of current weak overall economic conditions, as well as the impact on housing prices and the labor market. The allowance for credit losses is highly sensitive to both home prices and unemployment rates, and in the current market it is difficult to estimate how potential changes in one or both of these factors might affect the allowance for credit losses. For example, while both factors are important determinants of overall allowance levels, changes in one factor or the other may not occur at the same rate, or changes may be directionally inconsistent such that improvement in one factor may offset deterioration in the other. 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 both or either of these factors would ultimately affect the frequency of losses, the severity of losses or both. PCI loans In connection with the Washington Mutual transaction, JPMorgan Chase acquired certain PCI loans, which are accounted for as described in Note 14 on pages 231252 of this Annual Report. 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, 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 price declines, and the duration of current weak overall economic conditions, among other factors. These estimates and assumptions require

significant management judgment and certain assumptions are highly subjective. Allowance for credit losses sensitivity As noted above, the Firms allowance for credit losses is sensitive to numerous factors, depending on the portfolio. Changes in economic conditions or in the Firms assumptions could affect the Firms estimate of probable credit losses inherent in the portfolio at the balance sheet date. For example, deterioration in the following inputs would have the following effects on the Firms modeled loss estimates as of December 31, 2011, without consideration of any offsetting or correlated effects of other inputs in the Firms allowance for loan losses: A one-notch downgrade in the Firms internal risk ratings for its entire wholesale loan portfolio could imply an increase in the Firms modeled loss estimates of approximately $1.9 billion. An adverse national home price scenario (reflecting an additional 8% decline in housing prices when geographically weighted for the PCI portfolio), could result in an increase in credit loss estimates for PCI loans of approximately $1.5 billion. The same adverse scenario, weighted for the residential real estate portfolio, excluding PCI loans, could result in an increase to modeled annual loss estimates of approximately $600 million. A 50 basis point deterioration in forecasted credit card loss rates could imply an increase to modeled annualized credit card loan loss estimates of approximately $800 million.

The purpose of these sensitivity analyses is to provide an indication of the isolated impacts of hypothetical alternative assumptions on credit loss estimates. The changes in the inputs presented above are not intended to imply managements expectation of future deterioration of those risk factors. It is difficult to estimate how potential changes in specific factors might affect the 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 in evaluating the risk factors related to its loans, including risk ratings, home price assumptions, and credit card loss estimates, management believes that its current estimate of the allowance for credit loss is appropriate.

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Management's discussion and analysis

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 loans accounted for at the lower of cost or fair value that are only subject to fair value adjustments under certain circumstances. Under U.S. GAAP there is a three-level valuation hierarchy for disclosure of fair value measurements. An instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Therefore, for instruments classified in levels 1 and 2 of the hierarchy, where inputs are principally based on observable market data, there is less judgment applied in arriving at a fair value measurement. For instruments classified within level 3 of the hierarchy, judgments are more significant. The Firm reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification between hierarchy levels. Assets measured at fair value The following table includes the Firms 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 3 on pages 184198 of this Annual Report.
2011 December 31, Total assets at Total level 3 (in billions, except ratio data) fair value assets Trading debt and equity instruments $ 351.5 $ 33.0 Derivative receivables gross 1,884.5 35.0 Netting adjustment (1,792.0) Derivative receivables net 92.5 35.0 AFS securities 364.8 25.5 Loans 2.1 1.6 MSRs 7.2 7.2 Private equity investments 7.6 6.8 Other 49.1 4.4 Total assets measured at fair value on 874.8 113.5 a recurring basis Total assets measured at fair value on a nonrecurring basis 5.3 4.9 Total assets measured at fair value Total Firm assets Level 3 assets as a percentage of total Firm assets Level 3 assets as a percentage of total Firm assets at fair value $ 880.1 $ 2,265.8 $ 118.4 5.2% 13.5%
(a)

sourced market parameters. For further information on the Firm's valuation process, see Note 3 on pages 184198 of this Annual Report. For instruments classified within level 3 of the hierarchy, judgments used to estimate fair value may be significant. In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate model to use. Second, due to the lack of observability of significant inputs, management must assess all relevant empirical data in deriving valuation inputs including, but not limited to, transaction details, yield curves, interest rates, volatilities, equity or debt prices, valuations of comparable instruments, foreign exchange rates and credit curves. Finally, management judgment must be applied to assess the appropriate level of valuation adjustments to reflect counterparty credit quality, the Firms creditworthiness, constraints on liquidity and unobservable parameters, where relevant. 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. The Firm has numerous controls in place to ensure that its valuations are appropriate. An independent model review group reviews the Firms valuation models and approves them for use for specific products. All valuation models of the Firm are subject to this review process. A price verification group, independent from the risk-taking functions, ensures observable market prices and marketbased parameters are used for valuation whenever possible. For those products with material parameter risk for which observable market levels do not exist, an independent review of the assumptions made on pricing is performed. Additional review includes deconstruction of the model valuations for certain structured instruments into their components; benchmarking valuations, where possible, to similar products; validating valuation estimates through actual cash settlement; and detailed review and explanation of recorded gains and losses, which are analyzed daily and over time. Valuation adjustments, which are also determined by the independent price verification group, are based on established policies and applied consistently over time. Any changes to the valuation methodology are reviewed by management to confirm the changes are justified. As markets and products develop and the pricing for certain products becomes more transparent, the Firm continues to refine its valuation methodologies. Imprecision in estimating unobservable market inputs can affect the amount of revenue 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 use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For a detailed discussion of the determination of fair value for individual financial instruments, see Note 3 on pages 184198 of this Annual Report.
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(a) At December 31, 2011, included $63.0 billion of level 3 assets, consisting of recurring and nonrecurring assets carried by IB.

Valuation The Firm has an established and well-documented process for determining fair value. Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is based on internally developed models that consider relevant transaction data such as maturity and use as inputs market-based or independently
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Goodwill impairment Under U.S. GAAP, goodwill must be allocated to reporting units and tested for impairment at least annually. The Firms process and methodology used to conduct goodwill impairment testing is described in Note 17 on pages 267 271 of this Annual Report. Management applies significant judgment when estimating the fair value of its reporting units. Estimates of fair value are dependent upon estimates of (a) the future earnings potential of the Firm's reporting units, including the estimated effects of regulatory and legislative changes, such as the Dodd-Frank Act, the CARD Act, and limitations on non-sufficient funds and overdraft fees and (b) the relevant cost of equity and long-term growth rates. 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 goodwill allocated to its reporting units was not impaired at December 31, 2011 nor was any goodwill written off during 2011. The fair values of a significant majority of the Firm's reporting units exceeded their carrying values by substantial amounts (excess fair value as a percent of carrying value ranged from approximately 20% to 200%) and did not indicate a significant risk of goodwill impairment based on current projections and valuations. However, the fair value of the Firm's consumer lending businesses in RFS and Card each exceeded their carrying values by less than 15% and the associated goodwill remains at an elevated risk for goodwill impairment due to their exposure to U.S. consumer credit risk and the effects of regulatory and legislative changes. The assumptions used in the valuation of these businesses include (a) estimates of future cash flows for the business (which are dependent on portfolio outstanding balances, net interest margin, operating expense, credit losses and the amount of capital necessary given the risk of business activities), and (b) the cost of equity used to discount those cash flows to a present value. Each of these factors requires significant judgment and the assumptions used are based on managements best estimate and most current projections, derived from the Firms business forecasting process reviewed with senior management. These projections are consistent with the short-term assumptions discussed in the Business Outlook on pages 6869 of this Annual Report, and, in the longer term, incorporate a set of macroeconomic assumptions and the Firms best estimates of long-term growth and returns of its businesses. Where possible, the Firm uses third-party and peer data to benchmark its assumptions and estimates. Deterioration in economic market conditions, increased estimates of the effects of recent regulatory or legislative changes, or additional regulatory or legislative changes may result in declines in projected business performance beyond managements current expectations. For example, in RFS, such declines could result from increases in costs to resolve foreclosure-related matters or from deterioration in

economic conditions that result in increased credit losses, including decreases in home prices beyond managements current expectations. In Card, declines in business performance could result from deterioration in economic conditions such as increased unemployment claims or bankruptcy filings that result in increased credit losses or changes in customer behavior that cause decreased account activity or receivable balances. In addition, the earnings or estimated cost of equity of the Firm's capital markets businesses could also be affected by regulatory or legislative changes. Declines in business performance, increases in equity capital requirements, or increases in the estimated cost of equity, could cause the estimated fair values of the Firms reporting units or their associated goodwill to decline, 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 17 on pages 267271 of this Annual Report. 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 Chases 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 tax planning strategies. It is possible that revisions in the Firms estimate of income taxes may materially affect the Firms results of operations in any reporting period. The Firms 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 managements judgment, their realizability is determined to be more likely
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Management's discussion and analysis

than not. The Firm has also recognized deferred tax assets in connection with certain net operating losses. The Firm performs regular reviews to ascertain whether deferred tax assets are realizable. These reviews include managements estimates and assumptions regarding future taxable income, which also incorporates various tax planning strategies, including strategies that may be available to utilize net operating losses 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, 2011, management has determined it is more likely than not that the Firm will realize its deferred tax assets, net of the existing valuation allowance. JPMorgan Chase does not provide U.S. federal income taxes on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. Changes to the income tax rates applicable to these non-U.S. subsidiaries may have a material impact on the effective tax rate in a future period if such changes were to occur. 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 Chases unrecognized tax benefits may have a material impact on its effective tax rate in the period in which the reassessment occurs. For additional information on income taxes, see Note 26 on pages 279281 of this Annual Report. Litigation reserves For a description of the significant estimates and judgments associated with establishing litigation reserves, see Note 31 on pages 290299 of this Annual Report.

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ACCOUNTING AND REPORTING DEVELOPMENTS

Fair value measurement and disclosures In January 2010, the FASB issued guidance that requires new disclosures, and clarifies existing disclosure requirements, about fair value measurements. The clarifications and the requirement to separately disclose transfers of instruments between level 1 and level 2 of the fair value hierarchy was effective for interim reporting periods beginning after December 15, 2009; the Firm adopted this guidance in the first quarter of 2010. In addition, a new requirement to provide purchases, sales, issuances and settlements in the level 3 rollforward on a gross basis was effective for fiscal years beginning after December 15, 2010. The Firm adopted the new guidance, effective January 1, 2011. For information about fair value measurements, see Note 3 on pages 184198 of this Annual Report. In May 2011, the FASB issued guidance that amends the requirements for fair value measurement and disclosure. The guidance changes and clarifies certain existing requirements related to portfolios of financial instruments and valuation adjustments, requires additional disclosures for fair value measurements categorized in level 3 of the fair value hierarchy (including disclosure of the range of inputs used in certain valuations), and requires additional disclosures for certain financial instruments that are not carried at fair value. The guidance is effective in the first quarter of 2012. The application of this guidance is not expected to have a material effect on the Firm's Consolidated Balance Sheets or results of operations. Determining whether a restructuring is a troubled debt restructuring In April 2011, the FASB issued guidance to clarify existing standards for determining whether a modification represents a TDR from the perspective of the creditor. In addition, the guidance established an effective date for enhanced disclosures related to TDRs. The guidance and new disclosures became effective in the third quarter of 2011 and were applied retrospectively to January 1, 2011. For information regarding the Firm's TDRs, see Note 14 on pages 231252 of this Annual Report. The application of this guidance did not have a material effect on the Firms Consolidated Balance Sheets or results of operations. Accounting for repurchase and similar agreements In April 2011, the FASB issued guidance that amends the criteria used to assess whether repurchase and similar agreements should be accounted for as financings or sales (purchases) with forward agreements to repurchase (resell). Specifically, the guidance eliminates circumstances in which the lack of adequate collateral maintenance requirements could result in a repurchase agreement being accounted for as a sale. The guidance is effective for new transactions or existing transactions that are modified beginning January 1, 2012. The Firm has accounted for its repurchase and similar agreements as secured financings, and therefore, the Firm does not expect the application of this guidance will have an impact on the Firms Consolidated Balance Sheets or results of operations. Presentation of other comprehensive income In June 2011, the FASB issued guidance that modifies the presentation of other comprehensive income in the Consolidated Financial Statements. The guidance requires that items of net income, items of other comprehensive income, and total comprehensive income be presented in one continuous statement or in two separate but consecutive statements. For public companies the guidance is effective for interim and annual reporting periods beginning after December 15, 2011. However, in December 2011, the FASB issued guidance that deferred the presentation requirements relating to reclassifications of items out of accumulated other comprehensive income and into the income statement. The application of this guidance will only affect the presentation of the Consolidated Financial Statements and will have no impact on the Firms Consolidated Balance Sheets or results of operations. Balance sheet netting In December 2011, the FASB issued guidance that requires enhanced disclosures about derivatives and securities financing agreements that are subject to legally enforceable master netting or similar agreements, or that have otherwise been offset on the balance sheet under certain specific conditions that permit net presentation. The guidance is effective in the first quarter of 2013. The application of this guidance will only affect the disclosure of these instruments and will have no impact on the Firms Consolidated Balance Sheets or results of operations.

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Management's discussion and analysis

NONEXCHANGE TRADED COMMODITY DERIVATIVE CONTRACTS AT FAIR VALUE

In the normal course of business, JPMorgan Chase trades nonexchange-traded commodity derivative contracts. To determine the fair value of these contracts, the Firm uses various fair value estimation techniques, primarily based on internal models with significant observable market parameters. The Firms nonexchange-traded commodity derivative contracts are primarily energy-related. The following table summarizes the changes in fair value for nonexchange-traded commodity derivative contracts for the year ended December 31, 2011.
Year ended December 31, 2011 (in millions) Net fair value of contracts outstanding at January 1, 2011 $ Effect of legally enforceable master netting agreements Gross fair value of contracts outstanding at January 1, 2011 Contracts realized or otherwise settled Fair value of new contracts Changes in fair values attributable to changes in valuation techniques and assumptions Other changes in fair value Gross fair value of contracts outstanding at December 31, 2011 Effect of legally enforceable master netting agreements Net fair value of contracts outstanding at December 31, 2011 $ Asset position 8,166 41,284 49,450 (22,855) 21,517 (1,495) 46,617 (33,495) 13,122 $ $ Liability position 7,184 41,919 49,103 (20,826) 23,195 (2,260) 49,212 (35,695) 13,517

The following table indicates the maturities of nonexchange-traded commodity derivative contracts at December 31, 2011.
December 31, 2011 (in millions) Maturity less than 1 year Maturity 13 years Maturity 45 years Maturity in excess of 5 years Gross fair value of contracts outstanding at December 31, 2011 Effect of legally enforceable master netting agreements Net fair value of contracts outstanding at December 31, 2011 $ $ Asset position 20,876 16,564 7,745 1,432 46,617 (33,495) 13,122 $ $ Liability position 18,993 16,949 7,593 5,677 49,212 (35,695) 13,517

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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 Chases current expectations or forecasts of future events, circumstances, results or aspirations. JPMorgan Chases 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 Securities and Exchange Commission. In addition, the Firms senior management may make forward-looking statements orally to analysts, investors, 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 Firms control. JPMorgan Chases 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 international business, economic and political conditions and geopolitical events; Changes in laws and regulatory requirements, including as a result of recent financial services legislation; Changes in trade, monetary and fiscal policies and laws; 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 liquidity; Changes in credit ratings assigned to the Firm or its subsidiaries; Damage to the Firms 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; Mergers and acquisitions, including the Firms ability to integrate acquisitions; 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; Ability of the Firm to address enhanced regulatory requirements affecting its mortgage business; Acceptance of the Firms new and existing products and services by the marketplace and the ability of the Firm to increase market share; Ability of the Firm to attract and retain employees; Ability of the Firm to control expense; Competitive pressures; Changes in the credit quality of the Firms customers and counterparties; Adequacy of the Firms risk management framework; Adverse judicial or regulatory proceedings; Changes in applicable accounting policies; Ability of the Firm to determine accurate values of certain assets and liabilities; Occurrence of natural or man-made disasters or calamities or conflicts, including any effect of any such disasters, calamities or conflicts on the Firms power generation facilities and the Firms other commodityrelated activities; Ability of the Firm to maintain the security of its financial, accounting, technology, data processing and other operating systems and facilities; The other risks and uncertainties detailed in Part I, Item 1A: Risk Factors in the Firms Annual Report on Form 10K for the year ended December 31, 2011. 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 forwardlooking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. 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.

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Managements 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 Firms principal executive and principal financial officers, or persons performing similar functions, and effected by JPMorgan Chases 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 Chases 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 Firms 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 Chases management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Firms 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 Firms internal control over financial reporting as of December 31, 2011. In making the assessment, management used the framework in Internal Control Integrated Framework promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the COSO criteria. Based upon the assessment performed, management concluded that as of December 31, 2011, JPMorgan Chases internal control over financial reporting was effective based upon the COSO criteria. Additionally, based upon managements assessment, the Firm determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2011. The effectiveness of the Firms internal control over financial reporting as of December 31, 2011, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

James Dimon Chairman and Chief Executive Officer

Douglas L. Braunstein Executive Vice President and Chief Financial Officer

February 29, 2012

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Report of independent registered public accounting firm

To the Board of Directors and Stockholders of JPMorgan Chase & Co.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in stockholders' equity and comprehensive income and cash flows present fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its subsidiaries (the Firm) at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, 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, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Firm's management is responsible for these 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 these financial statements and on the Firm's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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. 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.

February 29, 2012

PricewaterhouseCoopers LLP 300 Madison Avenue New York, NY 10017

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Consolidated statements of income

Year ended December 31, (in millions, except per share data) Revenue Investment banking fees Principal transactions Lending- and deposit-related fees Asset management, administration and commissions Securities gains(a) Mortgage fees and related income Credit card income Other income Noninterest revenue Interest income Interest expense Net interest income Total net revenue Provision for credit losses Noninterest expense Compensation expense Occupancy expense Technology, communications and equipment expense Professional and outside services Marketing Other expense Amortization of intangibles Merger costs Total noninterest expense Income before income tax expense and extraordinary gain Income tax expense Income before extraordinary gain Extraordinary gain Net income Net income applicable to common stockholders Per common share data Basic earnings per share Income before extraordinary gain Net income Diluted earnings per share Income before extraordinary gain Net income Weighted-average basic shares Weighted-average diluted shares Cash dividends declared per common share $ $ $ $ $

2011 5,911 10,005 6,458 14,094 1,593 2,721 6,158 2,605 49,545 61,293 13,604 47,689 97,234 7,574 $

2010 6,190 10,894 6,340 13,499 2,965 3,870 5,891 2,044 51,693 63,782 12,781 51,001 102,694 16,639 $

2009 7,087 9,796 7,045 12,540 1,110 3,678 7,110 916 49,282 66,350 15,198 51,152 100,434 32,015

29,037 3,895 4,947 7,482 3,143 13,559 848 62,911 26,749 7,773 18,976 18,976 17,568 $ $

28,124 3,681 4,684 6,767 2,446 14,558 936 61,196 24,859 7,489 17,370 17,370 15,764 $ $

26,928 3,666 4,624 6,232 1,777 7,594 1,050 481 52,352 16,067 4,415 11,652 76 11,728 8,774

4.50 4.50

3.98 3.98

2.25 2.27

4.48 4.48 3,900.4 3,920.3 1.00 $

3.96 3.96 3,956.3 3,976.9 0.20 $

2.24 2.26 3,862.8 3,879.7 0.20

(a) The following other-than-temporary impairment losses are included in securities gains for the periods presented. Year ended December 31, (in millions) Total other-than-temporary impairment losses Losses recorded in/(reclassified from) other comprehensive income Total credit losses recognized in income $ $ 2011 (27) $ (49) (76) $ 2010 (94) $ (6) (100) $ 2009 (946) 368 (578)

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Consolidated balance sheets

December 31, (in millions, except share data) Assets Cash and due from banks Deposits with banks Federal funds sold and securities purchased under resale agreements (included $24,891 and $20,299 at fair value) Securities borrowed (included $15,308 and $13,961 at fair value) Trading assets (included assets pledged of $89,856 and $73,056) Securities (included $364,781 and $316,318 at fair value and assets pledged of $94,691 and $86,891) Loans (included $2,097 and $1,976 at fair value) Allowance for loan losses Loans, net of allowance for loan losses Accrued interest and accounts receivable Premises and equipment Goodwill Mortgage servicing rights Other intangible assets Other assets (included $16,499 and $18,201 at fair value and assets pledged of $1,316 and $1,485) Total assets(a) Liabilities Deposits (included $4,933 and $4,369 at fair value) Federal funds purchased and securities loaned or sold under repurchase agreements (included $9,517 and $4,060 at fair value) Commercial paper Other borrowed funds (included $9,576 and $9,931 at fair value) Trading liabilities Accounts payable and other liabilities (included $51 and $236 at fair value) Beneficial interests issued by consolidated variable interest entities (included $1,250 and $1,495 at fair value) Long-term debt (included $34,720 and $38,839 at fair value) Total liabilities(a) Commitments and contingencies (see Notes 29, 30 and 31 of this Annual Report) Stockholders equity Preferred stock ($1 par value; authorized 200,000,000 shares: issued 780,000 shares) Common stock ($1 par value; authorized 9,000,000,000 shares; issued 4,104,933,895 shares) Capital surplus Retained earnings Accumulated other comprehensive income/(loss) Shares held in RSU Trust, at cost (852,906 and 1,192,712 shares) Treasury stock, at cost (332,243,180 and 194,639,785 shares) Total stockholders equity Total liabilities and stockholders equity 2011 $ 59,602 $ 85,279 235,314 142,462 443,963 364,793 723,720 (27,609) 696,111 61,478 14,041 48,188 7,223 3,207 104,131 2,265,792 $ 1,127,806 213,532 51,631 21,908 141,695 202,895 65,977 256,775 2,082,219 $ 2010 27,567 21,673 222,554 123,587 489,892 316,336 692,927 (32,266) 660,661 70,147 13,355 48,854 13,649 4,039 105,291 2,117,605 930,369 276,644 35,363 34,325 146,166 170,330 77,649 270,653 1,941,499

$ $

7,800 4,105 95,602 88,315 944 (38) (13,155) 183,573 2,265,792 $

7,800 4,105 97,415 73,998 1,001 (53) (8,160) 176,106 2,117,605

(a) The following table presents information on assets and liabilities related to VIEs that are consolidated by the Firm at December 31, 2011 and 2010. The difference between total VIE assets and liabilities represents the Firms interests in those entities, which were eliminated in consolidation. December 31, (in millions) Assets Trading assets Loans All other assets Total assets Liabilities Beneficial interests issued by consolidated variable interest entities All other liabilities Total liabilities $ $ 65,977 1,487 67,464 $ $ 77,649 1,922 79,571 $ $ 2011 12,079 86,754 2,638 101,471 $ $ 2010 9,837 95,587 3,494 108,918

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, 2011 and 2010, the Firm provided limited program-wide credit enhancement of $3.1 billion and $2.0 billion, respectively, related to its Firm-administered multi-seller conduits, which are eliminated in consolidation. For further discussion, see Note 16 on pages 256267 of this Annual Report.

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Consolidated statements of changes in stockholders' equity and comprehensive income

Year ended December 31, (in millions, except per share data) Preferred stock Balance at January 1 Accretion of preferred stock discount on issuance to the U.S. Treasury Redemption of preferred stock issued to the U.S. Treasury Redemption of other preferred stock Balance at December 31 Common stock Balance at January 1 Issuance of common stock Balance at December 31 Capital surplus Balance at January 1 Issuance of common stock Shares issued and commitments to issue common stock for employee stock-based compensation awards, and related tax effects Other Balance at December 31 Retained earnings Balance at January 1 Cumulative effect of changes in accounting principles Net income Dividends declared: Preferred stock Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury Common stock ($1.00, $0.20 and $0.20 per share for 2011, 2010 and 2009, respectively) Balance at December 31 Accumulated other comprehensive income/(loss) Balance at January 1 Cumulative effect of changes in accounting principles Other comprehensive (loss)/income Balance at December 31 Shares held in RSU Trust, at cost Balance at January 1 Reissuance from RSU Trust Balance at December 31 Treasury stock, at cost Balance at January 1 Purchase of treasury stock Reissuance from treasury stock Share repurchases related to employee stock-based compensation awards Balance at December 31 Total stockholders equity Comprehensive income Net income Other comprehensive (loss)/income Comprehensive income $ $ 18,976 (57) 18,919 $ $ 17,370 1,236 18,606 $ $ 11,728 5,596 17,324 (8,160) (8,741) 3,750 (4) (13,155) $ 183,573 (7,196) (2,999) 2,040 (5) (8,160) $ 176,106 (9,249) 2,079 (26) (7,196) $ 165,365 (53) 15 (38) (68) 15 (53) (217) 149 (68) 1,001 (57) 944 (91) (144) 1,236 1,001 (5,687) 5,596 (91) (629) (4,030) 88,315 (642) (835) 73,998 (1,328) (1,112) (820) 62,481 73,998 18,976 62,481 (4,376) 17,370 54,013 11,728 97,415 (1,688) (125) 95,602 97,982 706 (1,273) 97,415 92,143 5,593 474 (228) 97,982 4,105 4,105 4,105 4,105 3,942 163 4,105 $ 7,800 7,800 $ 8,152 (352) 7,800 $ 31,939 1,213 (25,000) 8,152 2011 2010 2009

The Notes to Consolidated Financial Statements are an integral part of these statements.

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Consolidated statements of cash flows

Year ended December 31, (in millions) Operating activities Net income Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Provision for credit losses Depreciation and amortization Amortization of intangibles Deferred tax expense/(benefit) Investment securities gains Stock-based compensation Originations and purchases of loans held-for-sale Proceeds from sales, securitizations and paydowns of loans held-for-sale Net change in: Trading assets Securities borrowed Accrued interest and accounts receivable Other assets Trading liabilities Accounts payable and other liabilities Other operating adjustments Net cash provided by/(used in) operating activities Investing activities Net change in: Deposits with banks Federal funds sold and securities purchased under resale agreements Held-to-maturity securities: Proceeds Available-for-sale securities: Proceeds from maturities Proceeds from sales Purchases Proceeds from sales and securitizations of loans held-for-investment Other changes in loans, net Net cash received from/(used in) business acquisitions or dispositions Net maturities of asset-backed commercial paper guaranteed by the FRBB All other investing activities, net Net cash (used in)/provided by investing activities Financing activities Net change in: Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Commercial paper and other borrowed funds Beneficial interests issued by consolidated variable interest entities Proceeds from long-term borrowings and trust preferred capital debt securities Payments of long-term borrowings and trust preferred capital debt securities Excess tax benefits related to stock-based compensation Redemption of preferred stock issued to the U.S. Treasury Redemption of other preferred stock Proceeds from issuance of common stock Treasury stock and warrants repurchased Dividends paid All other financing activities, net Net cash provided by/(used in) financing activities Effect of exchange rate changes on cash and due from banks Net increase/(decrease) in cash and due from banks Cash and due from banks at the beginning of the period Cash and due from banks at the end of the period Cash interest paid Cash income taxes paid, net 2011 $ 18,976 7,574 4,257 848 1,693 (1,593) 2,675 (52,561) 54,092 36,443 (18,936) 8,655 (15,456) 7,905 35,203 6,157 95,932 $ 2010 17,370 16,639 4,029 936 (968) (2,965) 3,251 (37,085) 40,155 (72,082) (3,926) 443 (12,452) 19,344 17,325 6,234 (3,752) $ 2009 11,728 32,015 3,308 1,050 (3,622) (1,110) 3,355 (22,417) 33,902 133,488 4,452 (6,312) 32,557 (79,314) (26,450) 6,167 122,797

(63,592) (12,490) 6 86,850 68,631 (202,309) 10,478 (58,365) 102 (63) (170,752)

41,625 (26,957) 7 92,740 118,600 (179,487) 9,476 3,022 (4,910) (114) 54,002

74,829 7,082 9 87,712 114,041 (346,372) 31,034 50,651 (97) 11,228 (762) 29,355

203,420 (63,116) 7,230 1,165 54,844 (82,078) 867 (8,863) (3,895) (1,868) 107,706 (851) 32,035 27,567 $ 59,602 $ 13,725 8,153

(9,637) 15,202 (6,869) 2,426 55,181 (99,043) 26 (352) (2,999) (1,486) (1,666) (49,217) 328 1,361 26,206 $ 27,567 $ 12,404 9,747

(107,700) 67,785 (67,198) (4,076) 51,324 (68,441) 17 (25,000) 5,756 (3,422) (2,124) (153,079) 238 (689) 26,895 $ 26,206 $ 16,875 5,434

Note: Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated noncash assets and liabilities of $87.7 billion and $92.2 billion, respectively.

The Notes to Consolidated Financial Statements are an integral part of these statements.

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181

Notes to consolidated financial statements Note 1 Basis of presentation

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 funds. In the limited cases where the non-affiliated partners or members do not have substantive kick-out or participating rights, the Firm consolidates the funds. The Firms investment companies make 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. 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 entitys 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 a special purpose entity (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 SPEs investors and other parties that have rights to those cash flows. SPEs are generally structured to insulate investors from claims on the SPEs 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 an entity 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.

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 is a leader in investment banking, financial services for consumers and small business, commercial banking, financial transaction processing, asset management and private equity. For a discussion of the Firms business segments, see Note 33 on pages 300303 of this Annual Report. The accounting and financial reporting policies of JPMorgan Chase and its subsidiaries conform to accounting principles generally accepted in the U.S. (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 to 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. 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 (VIE). 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 entitys operations. For these types of entities, the Firms 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 entitys net earnings), or (ii) at fair value if the fair value option was elected at the inception of the Firms investment. 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 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

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To assess whether the Firm has the power to direct the activities of a VIE that most significantly impact the VIEs 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 VIEs economic performance; and 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 VIEs 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 derivative 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 VIEs 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 votinginterest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Firms involvement with a VIE cause the Firms consolidation conclusion to change. In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment which deferred the requirements of the accounting guidance for VIEs for certain investment funds, including mutual funds, private equity funds and hedge funds. For the funds to which the deferral applies, the Firm continues to apply other existing authoritative accounting guidance to determine whether such funds should be consolidated. Assets held for clients in an agency or fiduciary capacity by the Firm are not assets of JPMorgan Chase and are not included in the Consolidated Balance Sheets. 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 other comprehensive income/(loss) (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. Statements of cash flows For JPMorgan Chases Consolidated Statements of Cash Flows, cash is defined as those amounts included in cash and due from banks. Significant accounting policies The following table identifies JPMorgan Chases other significant accounting policies and the Note and page where a detailed description of each policy can be found.
Business changes and developments Fair value measurement Fair value option Derivative instruments Noninterest revenue Interest income and interest expense Pension and other postretirement employee benefit plans Employee stock-based incentives Securities Securities financing activities Loans Allowance for credit losses Variable interest entities Goodwill and other intangible assets Premises and equipment Long-term debt Income taxes Note 2 Note 3 Note 4 Note 6 Note 7 Note 8 Note 9 Note 10 Note 12 Note 13 Note 14 Note 15 Note 16 Note 17 Note 18 Note 21 Note 26 Page 183 Page 184 Page 198 Page 202 Page 211 Page 212 Page 213 Page 222 Page 225 Page 231 Page 231 Page 252 Page 256 Page 267 Page 272 Page 273 Page 279 Page 283 Page 290

Offbalance sheet lending-related financial instruments, guarantees and other commitments Note 29 Litigation Note 31

Note 2 Business changes and developments

Changes in common stock dividend On February 23, 2009, the Board of Directors reduced the Firm's quarterly common stock dividend from $0.38 to $0.05 per share, effective with the dividend paid on April 30, 2009, to shareholders of record on April 6, 2009. On March 18, 2011, the Board of Directors raised the Firms quarterly common stock dividend from $0.05 to $0.25 per share, effective with the dividend paid on April 30, 2011, to shareholders of record on April 6, 2011.

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Notes to consolidated financial statements Other business events

RBS Sempra transaction On July 1, 2010, JPMorgan Chase completed the acquisition of RBS Sempra Commodities global oil, global metals and European power and gas businesses. The Firm acquired approximately $1.7 billion of net assets which included $3.3 billion of debt which was immediately repaid. This acquisition almost doubled the number of clients the Firms commodities business can serve and has enabled the Firm to offer clients more products in more regions of the world. Purchase of remaining interest in J.P. Morgan Cazenove On January 4, 2010, JPMorgan Chase purchased the remaining interest in J.P. Morgan Cazenove, an investment banking business partnership formed in 2005, which resulted in an adjustment to the Firms capital surplus of approximately $1.3 billion. Purchase of remaining interest in Highbridge Capital Management In July 2009, JPMorgan Chase completed its purchase of the remaining interest in Highbridge, which resulted in a $228 million adjustment to capital surplus. claims; and repurchase demands from the GSEs, among other items. Also on February 9, 2012, the Firm entered into agreements in principle with the Federal Reserve and the Office of the Comptroller of the Currency for the payment of civil money penalties related to conduct that was the subject of consent orders entered into with the banking regulators in April 2011. The Firm's payment obligations under those agreements will be deemed satisfied by the Firm's payments and provisions of relief under the global settlement. While the Firm expects to incur additional operating costs to comply with portions of the global settlement, including the enhanced servicing standards, the Firm's prior period results of operations have reflected the estimated costs of the global settlement. Accordingly, the Firm expects that the financial impact of the global settlement on the Firm's financial condition and results of operations for the first quarter of 2012 and future periods will not be material. For further information on this settlement, see Mortgage Foreclosure Investigations and Litigation in Note 31 on pages 290299 of this Annual Report. Washington Mutual, Inc. bankruptcy plan confirmation On February 17, 2012, a bankruptcy court confirmed the joint plan containing the global settlement agreement resolving numerous disputes among Washington Mutual, Inc. (WMI), JPMorgan Chase and the Federal Deposit Insurance Corporation (FDIC) as well as significant creditor groups (the WaMu Global Settlement). Pursuant to this agreement, the Firm expects to recognize additional assets, including certain pension-related assets, as well as tax refunds, in future periods as the settlement is executed and various state and federal tax matters are resolved. For additional information related to the WaMu Global Settlement, see Washington Mutual Litigations in Note 31 on pages 290299 of this Annual Report.

Subsequent events
Global settlement on servicing and origination of mortgages On February 9, 2012, the Firm announced that it agreed to a settlement in principle (the global settlement) with a number of federal and state government agencies, including the U.S. Department of Justice, the U.S. Department of Housing and Urban Development, the Consumer Financial Protection Bureau and the State Attorneys General, relating to the servicing and origination of mortgages. The global settlement, which is subject to the execution of a definitive agreement and court approval, calls for the Firm to, among other things: (i) make cash payments of approximately $1.1 billion (a portion of which will be set aside for payments to borrowers); (ii) provide approximately $500 million of refinancing relief to certain underwater borrowers whose loans are owned by the Firm; and (iii) provide approximately $3.7 billion of additional relief for certain borrowers, including reductions of principal on first and second liens, payments to assist with short sales, deficiency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. (If the Firm does not meet certain targets for provision of the refinancing or other borrower relief within certain prescribed time periods, the Firm will instead make cash payments.) In addition, under the global settlement the Firm will be required to adhere to certain enhanced mortgage servicing standards. The global settlement releases the Firm from further claims related to servicing activities, including foreclosures and loss mitigation activities; certain origination activities; and certain bankruptcy-related activities. Not included in the global settlement are any claims arising out of securitization activities, including representations made to investors respecting mortgage-backed securities; criminal
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Note 3 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. Certain assets and liabilities are carried at fair value on a nonrecurring basis, including mortgage, home equity and other loans, where the carrying value is based on the fair value of the underlying collateral. The Firm has an established and well-documented process for determining fair values. 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, where available. If listed prices or quotes are not available, fair value is based on internally developed models that consider relevant transaction data such as maturity and use as inputs, market-based or independently sourced market parameters, including but

JPMorgan Chase & Co./2011 Annual Report

not limited to 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. These adjustments include amounts to reflect counterparty credit quality, the Firms creditworthiness, constraints on liquidity and unobservable parameters. Valuation adjustments are applied consistently over time. Credit valuation adjustments (CVA) are necessary when the market price (or parameter) is not indicative of the credit quality of the counterparty. As few classes of derivative contracts are listed on an exchange, derivative positions are predominantly valued using internally developed models that use as their basis observable market parameters. An adjustment is necessary to reflect the credit quality of each derivative counterparty to arrive at fair value. The adjustment also takes into account contractual factors designed to reduce the Firms credit exposure to each counterparty, such as collateral and legal rights of offset. Debit valuation adjustments (DVA) are taken to reflect the credit quality of the Firm in the valuation of liabilities measured at fair value. The methodology to determine the adjustment is consistent with CVA and incorporates JPMorgan Chases credit spread as observed through the credit default swap market. Liquidity valuation adjustments are necessary when the Firm may not be able to observe a recent market price for a financial instrument that trades in inactive (or less active) markets or to reflect the cost of exiting largerthan-normal market-size risk positions (liquidity adjustments are not taken for positions classified within level 1 of the fair value hierarchy; see below). The Firm estimates the amount of uncertainty in the initial valuation based on the degree of liquidity in the market in which the financial instrument trades and makes liquidity adjustments to the carrying value of the financial instrument. The Firm measures the liquidity adjustment based on the following factors: (1) the amount of time since the last relevant pricing point; (2) whether there was an actual trade or relevant external quote; and (3) the volatility of the principal risk component of the financial instrument. Costs to exit larger-than-normal market-size risk positions are determined based on the size of the adverse market move that is likely to occur during the period required to bring a position down to a nonconcentrated level. Unobservable parameter valuation adjustments are necessary when positions are valued using internally developed models that use as their basis unobservable parameters that is, parameters that must be estimated and are, therefore, subject to management judgment. Unobservable parameter valuation adjustments are applied to mitigate the possibility of error and revision in the estimate of the market price provided by the model.

The Firm has numerous controls in place intended to ensure that its fair values are appropriate. An independent model review group reviews the Firms valuation models and approves them for use for specific products. All valuation models within the Firm are subject to this review process. A price verification group, independent from the risk-taking function, ensures observable market prices and marketbased parameters are used for valuation wherever possible. For those products with material parameter risk for which observable market levels do not exist, an independent review of the assumptions made on pricing is performed. Additional review includes deconstruction of the model valuations for certain structured instruments into their components and benchmarking valuations, where possible, to similar products; validating valuation estimates through actual cash settlement; and detailed review and explanation of recorded gains and losses, which are analyzed daily and over time. Valuation adjustments, which are also determined by the independent price verification group, are based on established policies and applied consistently over time. Any changes to the valuation methodology are reviewed by management to confirm that the changes are justified. As markets and products develop and the pricing for certain products becomes more or less transparent, the Firm continues to refine its valuation methodologies. The methods described above to estimate fair value may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Firm believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. 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 instruments categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

JPMorgan Chase & Co./2011 Annual Report

185

Notes to consolidated financial statements

The following table is a description of the valuation methodologies used by the Firm to measure it's more significant products/ instruments at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Product/instrument Securities financing agreements Valuation methodology, inputs and assumptions Classifications in the valuation hierarchy Instruments carried at fair value are generally classified in level 2

Valuations are based on discounted cash flows, which consider: Derivative features Market rates for respective maturity Collateral Loans and lending-related commitments - wholesale Trading portfolio Where observable market data is available, valuations are based on: Observed market prices (circumstances are limited) 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: Discount rate Expected credit losses Loss severity rates Prepayment rates Servicing costs Loans held for investment and Valuations are based on discounted cash flows, which consider: associated lending related Credit spreads, derived from the cost of credit default swaps commitments (CDS); or benchmark credit curves developed by the Firm by industry and credit rating, and which take into account the difference in loss severity rates between bonds and loans Prepayment rates Lending related commitments are valued similar 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 pages 231-252 of Note 14 of this Annual Report. Loans - consumer Held for investment consumer loans, excluding credit card Valuations are based on discounted cash flows, which consider: Discount rates (derived from primary origination rates and market activity) Expected lifetime credit losses (considering expected and current default rates for existing portfolios, collateral prices, and economic environment expectations (i.e., unemployment rates)) Estimated prepayments Servicing costs Market liquidity For information regarding the valuation of loans measured at collateral value, see pages 231-252 of Note 14 of this Annual Report. Valuations are based on discounted cash flows, which consider: Projected interest income and late fee revenue, funding, servicing and credit costs, and loan repayment rates Estimated life of receivables (based on projected loan payment rates) Discount rate - based on expected return on receivables Credit costs - allowance for loan losses is considered a reasonable proxy for the credit cost based on the short- term nature of credit card receivables

Level 2 or 3

Loans held for investment and associated lending-related commitments that are not carried at fair value are not classified within the fair value hierarchy

Consumer loans in this category are not carried at fair value and are not classified within the fair value hierarchy

Credit card receivables

Credit card loans are not carried at fair value and are not classified within the fair value hierarchy

Conforming residential Fair value is based upon observable pricing of mortgage-backed mortgage loans expected to be securities with similar collateral and incorporates adjustments to sold these prices to account for differences between the security and the value of the underlying loans, which include credit characteristics, portfolio composition, and liquidity.

Predominantly classified within level 2

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JPMorgan Chase & Co./2011 Annual Report

Product/instrument Securities

Valuation methodology, inputs and assumptions Quoted market prices are used where available. In the absence of quoted market prices, securities are valued based on: Observed market prices for similar securities Relevant broker quotes Discounted cash flows (see specific product discussion below) Mortgage- and asset-backed securities specific inputs: Collateral characteristics Deal-specific payment and loss allocations Current market assumptions related to discount rate, prepayments, defaults and recoveries Collateralized debt obligations (CDOs), including collateralized loan obligations (CLOs), specific inputs:

Classifications in the valuation hierarchy Level 1 Level 2 or 3

Physical commodities Derivatives

Collateral characteristics Deal-specific payment and loss allocations Expected prepayment, default, recovery, default correlation and liquidity spread assumptions Credit spreads Credit rating data Valued using observable market prices or data Level 1 or 2 Exchange-traded derivatives are valued using market observable Level 1 prices. Derivatives that are not exchange-traded, which include plain vanilla Level 2 or 3 options and interest rate and credit default swaps, are valued using internally developed models and/or a series of techniques such as the Black-Scholes option pricing model, simulation models, or a combination of models, which are consistently applied. Inputs include: Contractual terms including period to maturity Readily observable parameters including interest rates and volatility Credit quality of the counterparty and of the Firm Correlation levels Derivatives that are valued based on models with significant unobservable inputs include: Structured credit derivatives specific inputs: CDS spreads and recovery rates Correlation between the underlying debt instruments (levels are modeled on a transaction basis and calibrated to liquid benchmark tranche indices) Actual transactions, where available, are used to regularly recalibrate unobservable parameters Certain long-dated equity option specific inputs: Long-dated equity volatilities Callable interest rate FX exotic options specific inputs: Correlation between interest rates and FX rates Parameters describing the evolution of underlying interest rates See Mortgage servicing rights on pages 268270 of Note 17 of this Annual Report.

Mortgage servicing rights (MSRs)

Level 3

JPMorgan Chase & Co./2011 Annual Report

187

Notes to consolidated financial statements

Product/instrument Private equity investments Valuation methodology, inputs and assumptions Classification in the valuation hierarchy

Private equity investments held in the Private Equity portfolio Level 3 Fair value is estimated using all available information and considering the range of potential inputs, including: Transaction prices Trading multiples of comparable public companies Operating performance of the underlying portfolio company Additional available inputs relevant to the investment Adjustments are required since comparable public companies are not identical to the company being valued, and for companyspecific issues and lack of liquidity Public investments held in the Private Equity portfolio Valued using observable market prices less adjustments for relevant restrictions, where applicable Level 1 or 2

Fund investments (i.e., mutual/ collective investment funds, private equity funds, hedge funds, and real estate funds)

Net Asset Value (NAV) NAV is validated by sufficient level of observable activity (i.e., purchases and sales) Adjustments to the NAV are required for restrictions on redemption (e.g., lock up periods or withdrawal limitations) or where observable activity is limited Valued using observable market information, where available In the absence of observable market information, valuations are based on the fair value of the underlying assets held by the VIE Valuations are based on discounted cash flows, which consider: Market rates for respective maturity Credit quality of the Firm (DVA) Valuations are based on discounted cash flows, which consider: Credit quality of the Firm (DVA) Consideration of derivative features

Level 1 Level 2 or 3 Level 2 or 3

Beneficial interests issued by consolidated VIE Long-term debt, not carried at fair value Structured notes (included in Deposits, Other borrowed funds and Long-term debt)

Long-term debt, excluding structured notes, is not carried at fair value and is not classified within the fair value hierarchy Level 2 or 3

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The following table presents the asset and liabilities measured at fair value as of December 31, 2011 and 2010 by major product category and fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis
December 31, 2011 (in millions) Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies(a) Residential nonagency Commercial nonagency Total mortgage-backed securities U.S. Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit, bankers acceptances and commercial paper Non-U.S. government debt securities Corporate debt securities Loans(b) Asset-backed securities Total debt instruments Equity securities Physical commodities(c) Other Total debt and equity instruments(d) Derivative receivables: Interest rate Credit Foreign exchange Equity Commodity Total derivative receivables(e) Total trading assets Available-for-sale securities: Mortgage-backed securities: U.S. government agencies(a) Residential nonagency Commercial nonagency Total mortgage-backed securities U.S. Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized loan obligations Other Equity securities Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments(f) All other Total other assets Total assets measured at fair value on a recurring basis(g) Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds Trading liabilities: Debt and equity instruments(d) Derivative payables: Interest rate Credit Foreign exchange Equity Commodity Total derivative payables(e) Total trading liabilities Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt Total liabilities measured at fair value on a recurring basis Level 1(h) $ Fair value hierarchy Level 2(h) $ 24,891 $ 15,308 Level 3(h) Netting adjustments Total fair value $ $ 24,891 15,308

27,082 27,082 11,508 18,618 57,208 93,799 21,066 172,073 1,324 833 4,561 6,718 178,791

7,801 2,956 870 11,627 8,391 15,117 2,615 40,080 33,938 21,589 2,406 135,763 3,502 4,898 2,283 146,446 1,433,469 152,569 162,689 43,604 50,409 1,842,740 1,989,186

86 796 1,758 2,640 1,619 104 6,373 12,209 7,965 30,910 1,177 880 32,967 6,728 17,081 4,641 4,132 2,459 35,041 68,008

(1,395,152) (162,966) (150,273) (40,943) (42,688) (1,792,022) (1,792,022)

34,969 3,752 2,628 41,349 19,899 16,736 2,615 58,802 40,311 33,798 10,371 223,881 98,478 25,964 3,163 351,486 46,369 6,684 17,890 6,793 14,741 92,477 443,963

92,426 92,426 3,837 36 25,381 2,667 124,347 99 4,336 4,435 307,573 $ $ 50,830 1,537 846 3,114 5,497 56,327 56,327 $

14,681 67,554 10,962 93,197 4,514 16,246 3,017 19,884 62,176 4,655 116 11,105 38 214,948 450 706 233 939 2,245,722 $ 3,515 $ 9,517 8,069 15,677 1,395,113 155,772 159,258 39,129 53,684 1,802,956 1,818,633 459 24,410 1,864,603 $

3 267 270 258 24,745 213 25,486 1,647 7,223 6,751 4,374 11,125 113,489 $ 1,418 $ 1,507 211 3,167 9,349 5,904 7,237 3,146 28,803 29,014 51 791 10,310 43,091 $

(1,792,022) $ $ (1,371,807) (159,511) (148,573) (36,711) (45,677) (1,762,279) (1,762,279) (1,762,279) $

107,107 67,557 11,229 185,893 8,351 16,540 3,017 45,265 62,176 4,655 24,861 11,318 2,705 364,781 2,097 7,223 7,556 8,943 16,499 874,762 4,933 9,517 9,576 66,718 28,010 5,610 17,435 9,655 14,267 74,977 141,695 51 1,250 34,720 201,742

$ $

JPMorgan Chase & Co./2011 Annual Report

189

Notes to consolidated financial statements

December 31, 2010 (in millions) Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies(a) Residential nonagency Commercial nonagency Total mortgage-backed securities U.S. Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit, bankers acceptances and commercial paper Non-U.S. government debt securities Corporate debt securities Loans(b) Asset-backed securities Total debt instruments Equity securities Physical commodities(c) Other Total debt and equity instruments(d) Derivative receivables: Interest rate Credit Foreign exchange Equity Commodity Total derivative receivables(e) Total trading assets Available-for-sale securities: Mortgage-backed securities: U.S. government agencies(a) Residential nonagency Commercial nonagency Total mortgage-backed securities U.S. Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized loan obligations Other Equity securities Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments(f) All other Total other assets Total assets measured at fair value on a recurring basis(g) Deposits Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds Trading liabilities: Debt and equity instruments(d) Derivative payables: Interest rate Credit Foreign exchange Equity Commodity Total derivative payables(e) Total trading liabilities Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt Total liabilities measured at fair value on a recurring basis Level 1(h) $ Fair value hierarchy Level 2(h) $ 20,299 $ 13,961 Level 3(h) Netting adjustments Total fair value $ $ 20,299 13,961

36,813 36,813 12,863 31,127 80,803 124,400 18,327 223,530 2,278 1,121 30 1,324 4,753 228,283

10,738 2,807 1,093 14,638 9,026 11,715 3,248 38,482 42,280 21,736 2,743 143,868 3,153 2,708 1,598 151,327 1,120,282 111,827 163,114 38,718 56,076 1,490,017 1,641,344

174 687 2,069 2,930 2,257 202 4,946 13,144 8,460 31,939 1,685 930 34,554 5,422 17,902 4,236 4,885 2,197 34,642 69,196

(1,095,427) (122,004) (142,613) (39,429) (49,458) (1,448,931) (1,448,931)

47,725 3,494 3,162 54,381 21,889 13,972 3,248 69,811 47,226 34,880 11,203 256,610 129,238 21,035 2,528 409,411 32,555 7,725 25,858 4,204 10,139 80,481 489,892

104,736 1 104,737 522 31 6 13,107 1,998 120,401 49 5,093 5,142 353,826 $ $ 58,468 2,625 972 22 862 4,481 62,949 62,949 $

15,490 48,969 5,403 69,862 10,826 11,272 3,641 7,670 61,793 7,608 128 8,777 53 181,630 510 826 192 1,018 1,858,762 $ 3,596 $ 4,060 8,547 18,425 1,085,233 112,545 158,908 39,046 54,611 1,450,343 1,468,768 622 25,795 1,511,388 $

5 251 256 256 13,470 305 14,287 1,466 13,649 7,862 4,179 12,041 110,639 $ 773 $ 1,384 54 2,586 12,516 4,850 7,331 3,002 30,285 30,339 236 873 13,044 46,649 $

(1,448,931) $ $ (1,070,057) (119,923) (139,715) (35,949) (50,246) (1,415,890) (1,415,890) (1,415,890) $

120,226 48,975 5,654 174,855 11,348 11,559 3,647 20,777 61,793 7,608 13,598 9,082 2,051 316,318 1,976 13,649 8,737 9,464 18,201 874,296 4,369 4,060 9,931 76,947 20,387 5,138 25,015 10,450 8,229 69,219 146,166 236 1,495 38,839 205,096

$ $

(a) At December 31, 2011 and 2010, included total U.S. government-sponsored enterprise obligations of $122.4 billion and $137.3 billion respectively, which were predominantly mortgage-related. (b) At December 31, 2011 and 2010, included within trading loans were $20.1 billion and $22.7 billion, respectively, of residential first-lien mortgages, and $2.0 billion and $2.6 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 $11.0 billion and $13.1 billion, respectively, and reverse mortgages of $4.0 billion and $4.0 billion, respectively. (c) Physical commodities inventories are generally accounted for at the lower of cost or fair value.

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(d) Balances reflect the reduction of securities owned (long positions) by the amount of securities sold but not yet purchased (short positions) when the long and short positions have identical Committee on Uniform Security Identification Procedures numbers (CUSIPs). (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. Therefore, the balances reported in the fair value hierarchy table are gross of any counterparty netting adjustments. However, if the Firm were to net such balances within level 3, the reduction in the level 3 derivative receivable and payable balances would be $11.7 billion and $12.7 billion at December 31, 2011 and 2010, respectively; this is exclusive of the netting benefit associated with cash collateral, which would further reduce the level 3 balances. (f) Private equity instruments represent investments within the Corporate/Private Equity line of business. The cost basis of the private equity investment portfolio totaled $9.5 billion and $10.0 billion at December 31, 2011 and 2010, respectively. (g) At December 31, 2011 and 2010, balances included investments valued at net asset values of $10.8 billion and $12.1 billion, respectively, of which $5.3 billion and $5.9 billion, respectively, were classified in level 1, $1.2 billion and $2.0 billion, respectively, in level 2, and $4.3 billion and $4.2 billion, respectively, in level 3. (h) For the years ended December 31, 2011 and 2010, there were no significant transfers between levels 1 and 2. For the year ended December 31, 2011, transfers from level 3 into level 2 included $2.6 billion of long-term debt due to a decrease in valuation uncertainty of certain structured notes. For the year ended December 31, 2010, transfers from level 3 into level 2 included $1.2 billion of trading loans due to increased price transparency. There were no significant transfers into level 3 for the years ended December 31, 2011 and 2010. All transfers are assumed to occur at the beginning of the reporting period.

Changes in level 3 recurring fair value measurements The following tables include a rollforward of the Consolidated Balance Sheet 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, 2011, 2010 and 2009. 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 Firms risk management activities related to such level 3 instruments.

JPMorgan Chase & Co./2011 Annual Report

191

Notes to consolidated financial statements

Fair value measurements using significant unobservable inputs Change in unrealized gains/ (losses) related to financial instruments held at Dec. 31, 2011

Year ended December 31, 2011 (in millions) Assets: Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies Residential nonagency Commercial nonagency Total mortgage-backed securities Obligations of U.S. states and municipalities Non-U.S. government debt securities Corporate debt securities Loans Asset-backed securities Total debt instruments Equity securities Other Total trading assets debt and equity instruments Net derivative receivables: Interest rate Credit Foreign exchange Equity Commodity Total net derivative receivables Available-for-sale securities: Asset-backed securities Other Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments All other

Fair value at Total realized/ January 1, unrealized 2011 gains/(losses)

Purchases(f)

Sales

Issuances

Settlements

Transfers into and/ or out of level 3(g)

Fair value at Dec. 31, 2011

174 $ 687 2,069 2,930 2,257 202 4,946 13,144 8,460 31,939 1,685 930 34,554 2,836 5,386 (614) (2,446) (805) 4,357 13,775 512 14,287 1,466 13,649 7,862 4,179

24 109 37 170 9 35 32 329 90 665 267 48 980 5,205 2,240 (1,913) (60) 596 6,068 (95) (95) 504 (7,119) 943 (54)
(c) (b) (d) (b) (b)

28 $ 708 796 1,532 807 552 8,080 5,532 4,185 20,688 180 36 20,904 511 22 191 715 328 1,767 15,268 57 15,325 326 2,603 1,452 938

(39) $ (432) (973) (1,444) (1,465) (531) (5,939) (3,873) (4,368)

(43) $ (221) (171) (435) (1) (80) (1,005) (2,691) (424) (4,636) (352) (95) (5,083) (4,534) 116 886 37 (294) (3,789) (2,529) (26) (2,555) (639) (1,910) (594) (521)

(58) (55) (113) 12 (74) 259 (232) 22 (126) (62) (188) (238) (19) 207 98 (162) (114) (1) (166) (29)

86 796 1,758 2,640 1,619 104 6,373 12,209 7,965 30,910 1,177 880 32,967 3,561 7,732 (1,263) (3,105) (687) 6,238 24,958 528 25,486 1,647 7,223 6,751 4,374

(51) (9) 33 (27) (11) 38 26 142 (217) (49) 278 79 308 1,497 2,744 (1,878) (132) 208 2,439 (106) 8 (98) 484 (7,119) (242) (83)
(c) (b) (d) (b) (b)

(17,620) (541) (39) (18,200) (219) (13) (20) (1,449) (350) (2,051) (1,461) (15) (1,476) (9) (2,746) (139)

(b) (e)

(b) (e)

Fair value measurements using significant unobservable inputs Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2011 $ 4 (85) (7) 5 (15) 288
(b) (b)

Year ended December 31, 2011 (in millions) Liabilities:(a) Deposits Other borrowed funds Trading liabilities debt and equity instruments Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt

Fair value at Total realized/ January 1, unrealized 2011 (gains)/losses $ 773 $ 1,384 54 236 873 13,044 15 (244) 17 (61) 17 60
(b) (b)

Purchases(f) $ $ (533)

Sales

Issuances $

Settlements

Transfers into and/ or out of level 3(g) 583 (396) 4 (2,140)

Fair value at Dec. 31, 2011 $ 1,418 1,507 211 51 791 10,310

433 $ 1,597 580 2,564

(386) $ (834) (109) (124) (679) (3,218)

(b) (e)

778

(b) (e)

(b) (b)

(b) (b)

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JPMorgan Chase & Co./2011 Annual Report

Fair value measurements using significant unobservable inputs Change in unrealized gains/ (losses) related to financial instruments held at Dec. 31, 2010

Year ended December 31, 2010 (in millions) Assets: Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies Residential nonagency Commercial nonagency Total mortgage-backed securities Obligations of U.S. states and municipalities Non-U.S. government debt securities Corporate debt securities Loans Asset-backed securities Total debt instruments Equity securities Other Total trading assets debt and equity instruments Net derivative receivables: Interest rate Credit Foreign exchange Equity Commodity Total net derivative receivables Available-for-sale securities: Asset-backed securities Other Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments All other

Fair value at January 1, 2010

Total realized/ unrealized gains/ (losses)

Purchases, issuances, settlements, net

Transfers into and/or out of level 3(g)

Fair value at Dec. 31, 2010

260 $ 1,115 1,770 3,145 1,971 89 5,241 13,218 8,620 32,284 1,956 1,441 35,681 2,040 10,350 1,082 (2,306) (329) 10,837 12,732 461 13,193 990 15,531 6,563 9,521

24 178 230 432 2 (36) (325) (40) 237 270 133 211 614 3,057 (1,757) (913) (194) (700) (507) (146) (49) (195) 145 (2,268) 1,038 (113)
(c) (b) (d) (b) (b)

(107) $ (564) (33) (704) 142 194 115 1,296 (408) 635 (351) (801) (517) (2,520) (3,102) (434) (82) 134 (6,004) 1,189 37 1,226 323 386 715 (5,132)

(3) $ (42) 102 57 142 (45) (85) (1,330) 11 (1,250) (53) 79 (1,224) 259 (105) (349) 136 90 31 63 63 8 (454) (97)

174 $ 687 2,069 2,930 2,257 202 4,946 13,144 8,460 31,939 1,685 930 34,554 2,836 5,386 (614) (2,446) (805) 4,357 13,775 512 14,287 1,466 13,649 7,862 4,179

(31) 110 130 209 (30) (8) 28 (385) 195 9 199 299 507 487 (1,048) (464) (212) (76) (1,313) (129) 18 (111) 37 (2,268) 688 37
(c) (b) (d) (b) (b)

(b) (e)

(b) (e)

Fair value measurements using significant unobservable inputs Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2010 (77) 445 37 (76) 662
(e) (b) (b) (b) (b)

Year ended December 31, 2010 (in millions) Liabilities:(a) Deposits Other borrowed funds Trading liabilities debt and equity instruments Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt

Fair value at January 1, 2010 $ 476 $ 542 10 355 625 18,287

Total realized/ unrealized (gains)/losses 54 (242) 2 (138) (7) (532)

(b) (b) (b) (e) (b) (b)

Purchases, issuances, settlements, net $

Transfers into and/or out of level 3(g)

Fair value at Dec. 31, 2010

(86) $ 1,326 19 19 87 (4,796)

329 $ (242) 23 168 85

773 $ 1,384 54 236 873 13,044

JPMorgan Chase & Co./2011 Annual Report

193

Notes to consolidated financial statements

Fair value measurements using significant unobservable inputs Change in unrealized gains/ (losses) related to financial instruments held at Dec. 31, 2009

Year ended December 31, 2009 (in millions) Assets: Trading assets: Debt instruments: Mortgage-backed securities: U.S. government agencies Residential nonagency Commercial nonagency Total mortgage-backed securities Obligations of U.S. states and municipalities Non-U.S. government debt securities Corporate debt securities Loans Asset-backed securities Total debt instruments Equity securities Other Total trading assets debt and equity instruments Total net derivative receivables Available-for-sale securities: Asset-backed securities Other Total available-for-sale securities Loans Mortgage servicing rights Other assets: Private equity investments All other

Fair Value at January 1, 2009

Total realized/ unrealized gains/ (losses)

Purchases, issuances settlements, net

Transfers into and/or out of level 3(g)

Fair value at Dec. 31,2009

163 $ 3,339 2,487 5,989 2,641 11 5,280 17,091 7,802 38,814 1,380 1,694 41,888 9,039 11,447 944 12,391 2,667 9,403 6,369 8,114

(38) (782) (242) (1,062) (22) 36 38 (871) 1,438 (443) (149) (12) (604) (11,473) (2) (269) (271) (448) 5,807 (407) (676)
(c) (b) (d) (b) (b)

62 $ (245) (325) (508) (648) (22) (3,416) (3,497) (431) (8,522) (512) (273) (9,307) (3,428) 1,112 302 1,414 (1,906) 321 582 2,439

73 $ (1,197) (150) (1,274) 64 3,339 495 (189) 2,435 1,237 32 3,704 16,699 175 (516) (341) 677 19 (356)

260 $ 1,115 1,770 3,145 1,971 89 5,241 13,218 8,620 32,284 1,956 1,441 35,681 10,837 12,732 461 13,193 990 15,531 6,563 9,521

(38) (871) (313) (1,222) (123) 32 (72) (1,167) 736 (1,816) (51) (52) (1,919) (10,902) (48) 43 (5) (488) 5,807 (369) (612)
(c) (b) (d) (b) (b)

(b) (e)

(b) (e)

Fair value measurements using significant unobservable inputs Change in unrealized (gains)/losses related to financial instruments held at Dec. 31, 2009 (36) 9 12 (29) 327 1,728
(b) (b)

Year ended December 31, 2009 (in millions) Liabilities:(a) Deposits Other borrowed funds Trading liabilities: Debt and equity instruments Accounts payable and other liabilities Beneficial interests issued by consolidated VIEs Long-term debt

Fair value at January 1, 2009 $ 1,235 $ 101 288 16,548

Total realized/ unrealized (gains)/losses 47 (73) 64 (55) 344 1,367

(b) (b)

Purchases, issuances settlements, net $

Transfers into and/or out of level 3(e)

Fair value at Dec.31, 2009

(870) $ 621 (339) 410 (598) (2,738)

64 $ (107) (3) 879 3,110

476 $ 542 10 355 625 18,287

(b) (b) (b) (b)

(b) (b) (b) (b)

(a) 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 21%, 23% and 29% at December 31, 2011, 2010 and 2009, respectively. (b) Predominantly reported in principal transactions revenue, except for changes in fair value for Retail Financial Services (RFS) mortgage loans and lending-related commitments originated with the intent to sell, which are reported in mortgage fees and related income. (c) Realized gains/(losses) on available-for-sale (AFS) securities, as well as other-than-temporary impairment losses that are recorded in earnings, are reported in securities gains. Unrealized gains/(losses) are reported in OCI. Realized gains/(losses) and foreign exchange remeasurement adjustments recorded in income on AFS securities were $(240) million, $(66) million, and $(345) million for the years ended December 31, 2011, 2010 and 2009, respectively. Unrealized gains/(losses) recorded on AFS securities in OCI were $145 million, $(129) million and $74 million for the years ended December 31, 2011, 2010 and 2009, respectively. (d) Changes in fair value for RFS mortgage servicing rights are reported in mortgage fees and related income. (e) Largely reported in other income. (f) Loan originations are included in purchases. (g) All transfers into and/or out of level 3 are assumed to occur at the beginning of the reporting period.

194

JPMorgan Chase & Co./2011 Annual Report

Assets and liabilities measured at fair value on a nonrecurring basis Certain assets, 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). At December 31, 2011 and 2010, assets measured at fair value on a nonrecurring basis were $5.3 billion and $9.9 billion, respectively, comprised predominantly of loans. At December 31, 2011, $369 million and $4.9 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. At December 31, 2010, $312 million and $9.6 billion of these assets were classified in levels 2 and 3 of the fair value hierarchy, respectively. Liabilities measured at fair value on a nonrecurring basis were not significant at December 31, 2011 and 2010. For the years ended December 31, 2011 and 2010, there were no significant transfers between levels 1, 2, and 3. The total change in the value of assets and liabilities for which a fair value adjustment has been included in the Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009, related to financial instruments held at those dates were losses of $2.2 billion, $3.6 billion and $4.7 billion, respectively; these losses were predominantly associated with loans. 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 14 on pages 231252 of this Annual Report. Level 3 analysis Level 3 assets at December 31, 2011, predominantly included derivative receivables, MSRs, CLOs held within the available-for-sale and trading portfolios, loans within the trading portfolio and private equity investments. Derivative receivables included $35.0 billion related to interest rate, credit, foreign exchange, equity and commodity contracts. Credit derivative receivables of $17.1 billion included $12.1 billion of structured credit derivatives with corporate debt underlying and $3.4 billion of CDS largely on commercial mortgages where the risks are partially mitigated by similar and offsetting derivative payables. Interest rate derivative receivables of $6.7 billion include long-dated structured interest rate derivatives which are dependent on the correlation between different interest rate curves. Foreign exchange derivative receivables of $4.6 billion included long-dated foreign exchange derivatives which are dependent on the correlation between foreign exchange and interest rates. Equity derivative receivables of $4.1 billion principally included long-dated contracts where the volatility levels are unobservable. Commodity derivative receivables of $2.5 billion largely included long-dated oil contracts. CLOs totaling $30.9 billion are securities backed by

corporate loans. At December 31, 2011, $24.7 billion of CLOs were held in the AFS securities portfolio and $6.2 billion were included in asset-backed securities held in the trading portfolio. Substantially all of the securities are rated AAA, AA and A and had an average credit enhancement of 30%. Credit enhancement in CLOs is primarily in the form of subordination, which is a form of structural credit enhancement where realized losses associated with assets held by the issuing vehicle are allocated to the various tranches of securities issued by the vehicle considering their relative seniority. For a further discussion of CLOs held in the AFS securities portfolio, see Note 12 on pages 225230 of this Annual Report. Trading loans totaling $12.2 billion included $6.0 billion of residential mortgage whole loans and commercial mortgage loans for which there is limited price transparency; and $4.0 billion of reverse mortgages for which the principal risk sensitivities are mortality risk and home prices. The fair value of the commercial and residential mortgage loans is estimated by projecting expected cash flows, considering relevant borrowerspecific and market factors, and discounting those cash flows at a rate reflecting current market liquidity. Loans are partially hedged by level 2 instruments, including credit default swaps and interest rate derivatives, for which valuation inputs are observable and liquid. MSRs represent the fair value of future cash flows for performing specified mortgage servicing activities for others (predominantly with respect to residential mortgage loans). For a further discussion of the MSR asset, the interest rate risk management and valuation methodology used for MSRs, including valuation assumptions and sensitivities, and a summary of the changes in the MSR asset, see Note 17 on pages 267 271 of this Annual Report. Consolidated Balance Sheets changes Level 3 assets (including assets measured at fair value on a nonrecurring basis) were 5.2% of total Firm assets at December 31, 2011. The following describes significant changes to level 3 assets since December 31, 2010. For the year ended December 31, 2011 Level 3 assets decreased by $1.8 billion during 2011, due to the following: $11.2 billion increase in asset-backed AFS securities, predominantly driven by purchases of CLOs; $6.4 billion decrease in MSRs. For further discussion of the change, refer to Note 17 on pages 267271 of this Annual Report; $2.3 billion decrease in nonrecurring loans held-for-sale, predominantly driven by sales in the loan portfolios; $2.2 billion decrease in nonrecurring retained loans predominantly due to portfolio runoff; $1.6 billion decrease in trading assets debt and equity instruments, largely driven by sales and settlements of certain securities, partially offset by purchases of corporate debt; and
195

JPMorgan Chase & Co./2011 Annual Report

Notes to consolidated financial statements

$1.1 billion decrease in private equity investments, predominantly driven by sales of investments, partially offset by new investments. Gains and Losses Gains and losses included in the tables for 2011, 2010 and 2009 included: 2011 Included in the tables for the year ended December 31, 2011 $7.1 billion of losses on MSRs. For further discussion of the change, refer to Note 17 on pages 267271 of this Annual Report; and $6.1 billion of net gains on derivatives, related to declining interest rates and tightening of credit spreads, partially offset by losses due to fluctuation in foreign exchange rates. 2010 Included in the tables for the year ended December 31, 2010 $2.3 billion of losses on MSRs; and $1.0 billion gain in private equity largely driven by gains on investments in the portfolio. 2009 Included in the tables for the year ended December 31, 2009 $11.5 billion of net losses on derivatives, primarily related to the tightening of credit spreads; Net losses on trading debt and equity instruments of $604 million, consisting of $2.1 billion of losses, primarily related to residential and commercial loans and mortgage-backed securities (MBS), principally driven by markdowns and sales, partially offset by gains of $1.4 billion, reflecting increases in the fair value of other asset-backed securities (ABS); $5.8 billion of gains on MSRs; and $1.4 billion of losses related to structured note liabilities, predominantly due to volatility in the equity markets. Credit adjustments When determining the fair value of an instrument, it may be necessary to record a valuation adjustment to arrive at an exit price under U.S. GAAP. Valuation adjustments include, but are not limited to, amounts to reflect counterparty credit quality and the Firms own creditworthiness. The markets view of the Firms credit quality is reflected in credit spreads observed in the credit default swap market. For a detailed discussion of the valuation adjustments the Firm considers, see the valuation discussion at the beginning of this Note. The following table provides the credit adjustments, excluding the effect of any hedging activity, reflected within the Consolidated Balance Sheets as of the dates indicated.
December 31, (in millions) Derivative receivables balance (net of derivatives CVA) Derivatives CVA
(a)

2011 $ 92,477 $ (6,936) 74,977 (1,420) 49,229 (2,052)

2010 80,481 (4,362) 69,219 (882) 53,139 (1,153)

Derivative payables balance (net of derivatives DVA) Derivatives DVA Structured notes balance (net of structured notes DVA)(b)(c) Structured notes DVA

(a) Derivatives CVA, gross of hedges, includes results managed by the Credit Portfolio and other lines of business within the Investment Bank (IB). (b) Structured notes are recorded within long-term debt, other borrowed funds or deposits on the Consolidated Balance Sheets, depending upon the tenor and legal form of the note. (c) Structured notes are measured at fair value based on the Firms election under the fair value option. For further information on these elections, see Note 4 on pages 198200 of this Annual Report.

The following table provides the impact of credit adjustments on earnings in the respective periods, excluding the effect of any hedging activity.
Year ended December 31, (in millions) Credit adjustments: Derivative CVA(a) Derivative DVA Structured note DVA(b) $ (2,574) $ (665) $ 5,869 538 899 41 468 (548) (1,748) 2011 2010 2009

(a) Derivatives CVA, gross of hedges, includes results managed by the Credit Portfolio and other lines of business within IB. (b) Structured notes are measured at fair value based on the Firms election under the fair value option. For further information on these elections, see Note 4 on pages 198200 of this Annual Report.

Additional disclosures about the fair value of financial instruments (including financial instruments not carried 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 Chases 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.

196

JPMorgan Chase & Co./2011 Annual Report

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 shortterm 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 with short-dated maturities; short-term receivables and accrued interest receivable; commercial paper; federal funds purchased;

securities loaned and sold under repurchase agreements with short-dated maturities; other borrowed funds (excluding advances from the Federal Home Loan Banks (FHLBs)); accounts payable; and accrued liabilities. In addition, U.S. GAAP requires that the fair value for 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.

The following table presents the carrying values and estimated fair values of financial assets and liabilities.
2011 December 31, (in billions) Financial assets Assets for which fair value approximates carrying value Accrued interest and accounts receivable Federal funds sold and securities purchased under resale agreements (included $24.9 and $20.3 at fair value) Securities borrowed (included $15.3 and $14.0 at fair value) Trading assets Securities (included $364.8 and $316.3 at fair value) Loans (included $2.1 and $2.0 at fair value)(a) Mortgage servicing rights at fair value Other (included $16.5 and $18.2 at fair value) Financial liabilities Deposits (included $4.9 and $4.4 at fair value) Federal funds purchased and securities loaned or sold under repurchase agreements (included $9.5 and $4.1 at fair value) Commercial paper Other borrowed funds (included $9.6 and $9.9 at fair value)(b) Trading liabilities Accounts payable and other liabilities (included $0.1 and $0.2 at fair value) Beneficial interests issued by consolidated VIEs (included $1.3 and $1.5 at fair value) Long-term debt and junior subordinated deferrable interest debentures (included $34.7 and $38.8 at fair value)(b) $ 1,127.8 $ 213.5 51.6 21.9 141.7 167.0 66.0 256.8 1,128.3 213.5 51.6 21.9 141.7 166.9 66.2 254.2 $ 930.4 $ 276.6 35.4 34.3 146.2 138.2 77.6 270.7 931.5 276.6 35.4 34.3 146.2 138.2 77.9 271.9 $ 144.9 $ 61.5 235.3 142.5 444.0 364.8 696.1 7.2 66.3 144.9 61.5 235.3 142.5 444.0 364.8 695.8 7.2 66.8 $ 49.2 $ 70.1 222.6 123.6 489.9 316.3 660.7 13.6 64.9 49.2 70.1 222.6 123.6 489.9 316.3 663.5 13.6 65.0 Carrying value Estimated fair value Carrying value 2010 Estimated fair value

(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 assets remaining life in a fair value calculation but are estimated for a loss emergence period in a loan loss reserve calculation; future loan income (interest and fees) is incorporated in a fair value calculation but is generally not considered in a loan loss reserve calculation. For a further discussion of the Firms methodologies for estimating the fair value of loans and lending-related commitments, see pages 186188 of this Note. (b) Effective January 1, 2011, $23.0 billion of long-term advances from FHLBs were reclassified from other borrowed funds to long-term debt. The prior-year period has been revised to conform with the current presentation.

JPMorgan Chase & Co./2011 Annual Report

197

Notes to consolidated financial statements

The majority of the Firms lending-related commitments are not carried at fair value on a recurring basis on the Consolidated Balance Sheets, nor are they actively traded. The carrying value and estimated fair value of the Firms wholesale lendingrelated commitments were as follows for the periods indicated.
2011 December 31, (in billions) Wholesale lending-related commitments Carrying value(a) $ Estimated fair value 3.4 2010 Carrying value(a) $ Estimated fair value 0.9

0.7 $

0.7 $

(a) Represents the allowance for wholesale lending-related commitments. Excludes the current carrying values of the guarantee liability and the offsetting asset, each of which are recognized at fair value at the inception of 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, without notice as permitted by law. For a further discussion of lending-related commitments, see Note 29 on pages 283289 of this Annual Report; for further information on the valuation of lending-related commitments, see pages 186188 of this Note. Trading assets and liabilities Trading assets include debt and equity instruments owned by JPMorgan Chase (long positions) that are held for client market-making and client-driven activities, as well as for certain risk management activities, certain loans managed on a fair value basis and for which the Firm has elected the fair value option, and physical commodities inventories that are generally accounted for at the lower of cost or fair value. Trading liabilities include debt and equity instruments that the Firm has sold to other parties but does not own (short positions). The Firm is obligated to purchase instruments at a future date to cover the short positions. Included in trading assets and trading liabilities are the reported receivables (unrealized gains) and payables (unrealized losses) related to derivatives. Trading assets and liabilities are carried at fair value on the Consolidated Balance Sheets. Balances reflect the reduction of securities owned (long positions) by the amount of securities sold but not yet purchased (short positions) when the long and short positions have identical Committee on Uniform Security Identification Procedures numbers (CUSIPs).

Trading assets and liabilities average balances Average trading assets and liabilities were as follows for the periods indicated.
Year ended December 31, (in millions) Trading assets debt and equity instruments(a) Trading assets derivative receivables Trading liabilities debt and equity instruments(a)(b) Trading liabilities derivative payables $ 2011 393,890 90,003 81,916 71,539 $ 2010 354,441 84,676 78,159 65,714 $ 2009 318,063 110,457 60,224 77,901

(a) Balances reflect the reduction of securities owned (long positions) by the amount of securities sold, but not yet purchased (short positions) when the long and short positions have identical CUSIP numbers. (b) Primarily represent securities sold, not yet purchased.

Note 4 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 not previously carried at fair value. Elections Elections were made by the Firm to: Mitigate income statement volatility caused by the differences in the measurement basis of elected instruments (for example, certain instruments elected were previously accounted for on an accrual basis) while the associated risk management arrangements are accounted for on a fair value basis; Eliminate the complexities of applying certain accounting models (e.g., hedge accounting or bifurcation accounting for hybrid instruments); and/or Better reflect those instruments that are managed on a fair value basis.
198

Elections include the following: Loans purchased or originated as part of securitization warehousing activity, subject to bifurcation accounting, or managed on a fair value basis. 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. Certain investments that receive tax credits and other equity investments acquired as part of the Washington Mutual transaction. Structured notes issued as part of IBs client-driven activities. (Structured notes are financial instruments that contain embedded derivatives.) Long-term beneficial interests issued by IBs consolidated securitization trusts where the underlying assets are carried at fair value.
JPMorgan Chase & Co./2011 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, 2011, 2010 and 2009, 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.
2011 Total changes in fair value recorded $ 270 (61) 2010 Total changes in fair value recorded $ 173 31 2009 Total changes in fair value recorded $ (553) 82

December 31, (in millions) Federal funds sold and securities purchased under resale agreements Securities borrowed Trading assets: Debt and equity instruments, excluding loans Loans reported as trading assets: Changes in instrumentspecific credit risk Other changes in fair value Loans: Changes in instrument-specific credit risk Other changes in fair value Other assets Deposits
(a)

Principal transactions $ 270 $ (61)

Other income

Principal transactions $ 173 $ 31

Other income

Principal transactions $ (553) $ 82

Other income

53

(6)

(c)

47

556

(2)

(c)

554

619

25

(c)

644

934 127

(174) 5,263

(c) (c)

760 5,390

1,279

(6)

(c) (c)

1,273 4,137

(300) 1,132

(177) 3,119

(c) (c)

(477) 4,251

(312) 4,449

2 535 (49) (237) (4) 2,986 (57) (83) (3)

(19) (5)
(d) (d)

2 535 (68) (237) (4) 2,986 (57) (83) (8)

95 90 (564) (29) 123 (23) (12) (9)

(263) 8
(d) (d)

95 90 (263) (564) (29) 123 (23) (12) (1)

(78) (343) (770) 116 (1,287) (3) (351) 64

(731)
(d)

(78) (343) (731) (770) 116 (1,287) (3) (351) 64

Federal funds purchased and securities loaned or sold under repurchase agreements Other borrowed funds(a) Trading liabilities Beneficial interests issued by consolidated VIEs Other liabilities Long-term debt: Changes in instrument-specific credit risk(a) Other changes in fair value(b)

927 322

927 322

400 1,297

400 1,297

(1,704) (2,393)

(1,704) (2,393)

(a) Total changes in instrument-specific credit risk related to structured notes were $899 million, $468 million, and $(1.7) billion for the years ended December 31, 2011, 2010 and 2009, respectively. These totals include adjustments for structured notes classified within deposits and other borrowed funds, as well as long-term debt. (b) Structured notes are debt instruments with embedded derivatives that are tailored to meet a clients need. The embedded derivative is the primary driver of risk. Although the risk associated with the structured notes is actively managed, the gains reported in this table do not include the income statement impact of such risk management instruments. (c) Reported in mortgage fees and related income. (d) Reported in other income.

JPMorgan Chase & Co./2011 Annual Report

199

Notes to consolidated financial statements

Determination of instrument-specific credit risk for items for which a fair value election was made The following describes how the gains and losses included in earnings during 2011, 2010 and 2009, which were attributable to changes in instrument-specific credit risk, were determined. Loans and lending-related commitments: For floatingrate 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 Firms 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.

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, 2011 and 2010, for loans, long-term debt and long-term beneficial interests for which the fair value option has been elected.
2011 Fair value over/ (under) contractual principal outstanding 2010 Fair value over/ (under) contractual principal outstanding

December 31, (in millions) Loans(a) Nonaccrual loans Loans reported as trading assets Loans Subtotal All other performing loans Loans reported as trading assets Loans Total loans Long-term debt Principal-protected debt Nonprincipal-protected debt Total long-term debt Long-term beneficial interests Principal-protected debt Nonprincipal-protected debt(b) Total long-term beneficial interests
(b)

Contractual principal outstanding

Fair value

Contractual principal outstanding

Fair value

4,875 820 5,695 37,481 2,136

1,141 $ 56 1,197 32,657 1,601

(3,734) $ (764) (4,498) (4,824) (535) (9,857) $ 473 NA NA NA NA $ $

5,246 927 6,173 39,490 2,496 48,159 20,761 NA NA 49 NA NA

(c)

1,239 $ 132 1,371 33,641 1,434

(4,007) (795) (4,802) (5,849) (1,062)

$ $

45,312 19,417 NA NA
(c)

$ $ $ $ $

35,455 $ 19,890 $ 14,830 34,720 $ 1,250 1,250

$ $ $ $ $

36,446 $ (11,713) 21,315 $ 17,524 38,839 49 $ 1,446 1,495 554 NA NA NA NA

NA NA

(a) There were no performing loans which were ninety days or more past due as of December 31, 2011 and 2010, respectively. (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. (c) Where the Firm issues principal-protected zero-coupon or discount notes, the balance reflected as the remaining contractual principal is the final principal payment at maturity.

At December 31, 2011 and 2010, the contractual amount of letters of credit for which the fair value option was elected was $3.9 billion and $3.8 billion, respectively, with a corresponding fair value of $(5) million and $(6) million, respectively. For further information regarding off-balance sheet lending-related financial instruments, see Note 29 on pages 283289 of this Annual Report.

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Note 5 Credit risk concentrations

Concentrations of credit risk arise when a number of 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 portfolio to assess potential concentration risks and to obtain collateral when deemed necessary. Senior management is significantly involved in the credit approval and review process, and risk levels are adjusted as needed to reflect the Firms risk appetite. In the Firms wholesale portfolio, risk concentrations are evaluated primarily by industry and monitored regularly on both an aggregate portfolio level and on an individual customer basis. Management of the Firms wholesale exposure is accomplished through loan syndication and participation, loan sales, securitizations, credit derivatives, use of master netting agreements, and collateral and other risk-reduction techniques. In the 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 risk concentrations can be remedied through changes in underwriting policies and portfolio guidelines. The Firm does not believe that its exposure to any particular loan product (e.g., option adjustable rate mortgages (ARMs)), industry segment (e.g., commercial

real estate) or its exposure to residential real estate loans with high loan-to-value ratios results in a significant concentration of credit risk. Terms of loan products and collateral coverage are included in the Firms assessment when extending credit and establishing its allowance for loan losses. For further information regarding onbalance sheet credit concentrations by major product and/or geography, see Notes 6, 14 and 15 on pages 202210, 231252 and 252 255, respectively, of this Annual Report. For information regarding concentrations of offbalance sheet lendingrelated financial instruments by major product, see Note 29 on pages 283289 of this Annual Report. Customer receivables representing primarily margin loans to prime and retail brokerage clients of $17.6 billion and $32.5 billion at December 31, 2011 and 2010, respectively, are included in the table below. These margin loans are generally over-collateralized through a pledge of assets maintained in clients brokerage accounts and are subject to daily minimum collateral requirements. In the event that the collateral value decreases, a maintenance margin call is made to the client to provide additional collateral into the account. If additional collateral is not provided by the client, the clients positions may be liquidated by the Firm to meet the minimum collateral requirements. As a result of the Firms credit risk mitigation practices, the Firm does not hold any reserves for credit impairment on these agreements as of December 31, 2011 and 2010.

The table below presents both onbalance sheet and offbalance sheet wholesale- and consumer-related credit exposure by the Firms three credit portfolio segments as of December 31, 2011 and 2010.
Credit exposure $ 71,440 67,594 42,247 41,930 35,437 33,465 29,637 28,650 22,891 17,898 17,138 16,498 16,305 15,254 13,092 284,135 753,611 4,621 17,461 775,693 370,834 662,893 $1,809,420 $ 2011 On-balance sheet Loans Derivatives 29,392 54,684 8,908 7,144 10,780 6,182 9,187 5,191 6,353 4,394 623 5,111 10,000 6,073 1,109 113,264 278,395 4,621 283,016 308,427 132,277 $ 723,720 $ 20,372 1,155 3,021 6,575 3,521 9,458 1,079 3,602 565 1,310 10,813 417 947 690 2,061 26,891 92,477 92,477 92,477 Off-balance sheet(c) $ 21,676 11,755 30,318 28,211 21,136 17,825 19,371 19,857 15,973 12,194 5,702 10,970 5,358 8,491 9,922 143,980 382,739 382,739 62,307 530,616 $ 975,662 $ Credit exposure 65,867 64,351 41,093 35,808 26,459 29,364 27,508 25,911 20,882 14,348 11,173 13,311 9,652 11,426 10,918 240,999 649,070 5,123 32,932 687,125 393,021 684,903 $1,765,049 $ 2010 On-balance sheet Loans Derivatives 21,562 53,635 6,047 6,095 5,701 7,070 7,921 4,220 5,876 2,752 1,146 3,601 3,754 3,301 1,103 88,726 222,510 5,123 227,633 327,618 137,676 $ 692,927 $ 20,935 868 2,121 5,148 3,866 7,124 1,039 3,104 796 1,554 6,052 445 822 1,018 1,660 23,929 80,481 80,481 80,481 Off-balance sheet(c) $ 23,370 9,848 32,925 24,565 16,892 15,170 18,548 18,587 14,210 10,042 3,975 9,265 5,076 7,107 8,155 128,344 346,079 346,079 65,403 547,227 $ 958,709

December 31, (in millions) Wholesale Banks and finance companies Real estate Healthcare State and municipal governments Oil and gas Asset managers Consumer products Utilities Retail and consumer services Technology Central government Machinery and equipment manufacturing Transportation Metals/mining Insurance All other(a) Subtotal Loans held-for-sale and loans at fair value Receivables from customers and interests in purchased receivables Total wholesale Total consumer, excluding credit card(b) Total credit card Total exposure

(a) For more information on exposures to SPEs included within All other see Note 16 on pages 256267 of this Annual Report. (b) As of December 31, 2011, credit exposure for total consumer, excluding credit card, includes receivables from customers of $100 million. (c) Represents lending-related financial instruments.

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Notes to consolidated financial statements Note 6 Derivative instruments

Derivative instruments enable end-users to modify or mitigate exposure to credit or market risks. Counterparties to a derivative contract seek to obtain risks and rewards similar to those that could be obtained from purchasing or selling a related cash instrument without having to exchange upfront the full purchase or sales price. JPMorgan Chase makes markets in derivatives for customers and also uses derivatives to hedge or manage its own market risk exposures. The majority of the Firms derivatives are entered into for market-making purposes. Trading derivatives The Firm makes markets in a variety of derivatives to meet the needs of customers (both dealers and clients) and to generate revenue through this trading activity (client derivatives). Customers 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. The Firm also seeks to earn a spread between the client derivatives and offsetting positions, and from the remaining open risk positions. Risk management derivatives The Firm manages its market risk exposures using various derivative instruments. Interest rate contracts are used to minimize fluctuations in earnings that are caused by changes in interest rates. Fixedrate assets and liabilities appreciate or depreciate in market value as interest rates change. Similarly, interest income and expense increase or decrease as a result of variablerate 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 currencydenominated (i.e., non-U.S. dollar) assets and liabilities and forecasted transactions, as well as the Firms 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 currencydenominated assets and liabilities or forecasted revenue or expense increase or decrease. Gains or losses on the derivative instruments related to these foreign currencydenominated 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. Also in the commodities portfolio, electricity and natural gas futures and forwards contracts are used to manage price risk associated with energy-related tolling and loadserving contracts and investments. The Firm uses credit derivatives to manage the counterparty credit risk associated with loans and lendingrelated 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 credit default swaps. For a further discussion of credit derivatives, see the discussion in the Credit derivatives section on pages 209210 of this Note. For more information about risk management derivatives, see the risk management derivatives gains and losses table on page 207 of this Note, and the hedge accounting gains and losses tables on pages 205207 of this Note. Accounting for derivatives All free-standing derivatives 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 received and paid, when a legally enforceable master netting agreement exists between the Firm and the derivative counterparty. 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 marked to market through earnings. The tabular disclosures on pages 203210 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 3 and 4 on pages 184198 and 198200, respectively, of this Annual Report. 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 Firms risk management activities. For example, the Firm does not apply hedge accounting to purchased credit default swaps used to manage the credit risk of loans and 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 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
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prospectively and retrospectively. To assess effectiveness, the Firm uses statistical methods such as regression analysis, as well as nonstatistical methods including dollarvalue 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 fair value adjustment to the hedged item continues to be reported as part of the basis of the hedged item and for interest-bearing instruments 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 to hedge the exposure to variability in cash flows from floating-rate financial instruments and forecasted transactions, primarily the rollover of short-term assets and liabilities, and foreign currencydenominated 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 accumulated other comprehensive income/(loss) (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 foreign currency hedges to protect the value of the Firms 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. Notional amount of derivative contracts The following table summarizes the notional amount of derivative contracts outstanding as of December 31, 2011 and 2010.
Notional amounts(a) December 31, (in billions) Interest rate contracts Swaps Futures and forwards Written options Purchased options Total interest rate contracts Credit derivatives Foreign exchange contracts Cross-currency swaps Spot, futures and forwards Written options Purchased options Total foreign exchange contracts Equity contracts Swaps Futures and forwards Written options Purchased options Total equity contracts Commodity contracts Swaps Spot, futures and forwards Written options Purchased options Total commodity contracts Total derivative notional amounts $ 341 188 310 274 1,113 71,156 $ 349 170 264 254 1,037 78,905 119 38 460 405 1,022 116 49 430 377 972 2,931 4,512 674 670 8,787 2,568 3,893 674 649 7,784 $ 38,704 $ 7,888 3,842 4,026 54,460 5,774 46,299 9,298 4,075 3,968 63,640 5,472 2011 2010

(a) 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 Firms derivatives activity, the notional amounts significantly exceed, in the Firms 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.

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Notes to consolidated financial statements

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 Firms Consolidated Balance Sheets as of December 31, 2011 and 2010, by accounting designation (e.g., whether the derivatives were designated as hedges or not) and contract type. Free-standing derivative receivables and payables(a)
Gross derivative receivables December 31, 2011 (in millions) Trading assets and liabilities Interest rate Credit Foreign exchange(b) Equity Commodity Total fair value of trading assets and liabilities $ 1,433,900 $ 169,650 163,497 47,736 53,894 7,621 4,666 3,535 $ 1,441,521 169,650 168,163 47,736 57,429 $ 1,884,499 $ $ 46,369 6,684 17,890 6,793 14,741 92,477 $ 1,397,625 $ 2,192 165,121 165,353 46,366 58,836 655 1,108 $ 1,399,817 165,121 166,008 46,366 59,944 $ 1,837,256 $ $ 28,010 5,610 17,435 9,655 14,267 74,977 Not designated as hedges Designated as hedges Total derivative receivables Net derivative receivables Gross derivative payables Not designated as hedges Designated as hedges Total derivative payables Net derivative payables

$ 1,868,677 $ 15,822

$ 1,833,301 $ 3,955

Gross derivative receivables December 31, 2010 (in millions) Trading assets and liabilities Interest rate Credit Foreign exchange(b) Equity Commodity Total fair value of trading assets and liabilities $ 1,121,703 $ 129,729 165,240 43,633 59,573 $ 1,519,878 $ 6,279 3,231 24 9,534 $ 1,127,982 129,729 168,471 43,633 59,597 $ 1,529,412 $ $ 32,555 7,725 25,858 4,204 10,139 80,481 Not designated as hedges Designated as hedges Total derivative receivables Net derivative receivables

Gross derivative payables Not designated as hedges Designated as hedges 840 1,059 2,078
(c)

Total derivative payables $ 1,090,444 125,061 164,730 46,399 58,475 $ 1,485,109

Net derivative payables $ 20,387 5,138 25,015 10,450 8,229 $ 69,219

$ 1,089,604 $ 125,061 163,671 46,399 56,397

$ 1,481,132 $ 3,977

(a) Excludes structured notes for which the fair value option has been elected. See Note 4 on pages 198200 of this Annual Report for further information. (b) Excludes $11 million and $21 million of foreign currency-denominated debt designated as a net investment hedge at December 31, 2011 and 2010, respectively. (c) Excludes $1.0 billion related to commodity derivatives that were embedded in a debt instrument and used as fair value hedging instruments that were recorded in the line item of the host contract (other borrowed funds) at December 31, 2010.

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Impact of derivatives on the Consolidated Statements of Income 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 pretax gains/(losses) recorded on such derivatives and the related hedged items for the years ended December 31, 2011, 2010 and 2009, 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.
Gains/(losses) recorded in income Year ended December 31, 2011 (in millions) Contract type Interest rate(a) Foreign exchange(b) Commodity(c) Total $ $ 558 5,684 1,784 8,026 $
(d)

Income statement impact due to: Hedge ineffectiveness(e) $ 104 $ (10) $ 94 $ Excluded components(f) 460 1,923 (1,086) 1,297

Derivatives

Hedged items $

Total income statement impact 564 1,923 (1,096) 1,391

6 $ (3,761) (2,880) (6,635) $

Gains/(losses) recorded in income Year ended December 31, 2010 (in millions) Contract type Interest rate(a) Foreign exchange(b) Commodity(c) Total $ $ 1,066 1,357 (1,354) 1,069 $
(d)

Income statement impact due to: Hedge ineffectiveness(e) $ 172 $ $ 172 $ Excluded components(f) 440 (455) 528 513

Derivatives $

Hedged items

Total income statement impact 612 (455) 528 685

(454) $ (1,812) 1,882 (384) $

Gains/(losses) recorded in income Year ended December 31, 2009 (in millions) Contract type Interest rate(a) Foreign exchange(b) Commodity(c) Total $ (3,830) (1,421) (430) $ (5,681) $
(d)

Income statement impact due to: Hedge ineffectiveness(e) $ (466) $ $ (466) $ Excluded components(f) 1,274 24 (31) 1,267

Derivatives $

Hedged items

Total income statement impact 808 24 (31) 801

4,638 $ 1,445 399 6,482 $

(a) 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) 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 spot foreign currency rates, were recorded in principal transactions revenue. (c) Consists of overall fair value hedges of certain commodities inventories. Gains and losses were recorded in principal transactions revenue. (d) Included $4.9 billion, $278 million and $(1.6) billion for the years ended December 31, 2011, 2010 and 2009, respectively, of revenue related to certain foreign exchange trading derivatives designated as fair value hedging instruments. (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) 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 current-period income.

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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 pretax gains/(losses) recorded on such derivatives, for the years ended December 31, 2011, 2010 and 2009, respectively. The Firm includes the gain/(loss) on the hedging derivative in the same line item as the offsetting change in cash flows on the hedged item in the Consolidated Statements of Income.
Gains/(losses) recorded in income and other comprehensive income/(loss)(c) Derivatives effective portion reclassified from AOCI to income $
(b)

Year ended December 31, 2011 (in millions) Contract type Interest rate(a) Foreign exchange Total

Hedge ineffectiveness recorded directly in income(d) 19 $ 19 $

Total income statement impact

Derivatives effective portion recorded in OCI 107 $ (57) 50 $

Total change in OCI for period (203) (48) (251)

310 $ (9) 301 $

329 $ (9) 320 $

Gains/(losses) recorded in income and other comprehensive income/(loss)(c) Derivatives effective portion reclassified from AOCI to income $ $ Hedge ineffectiveness recorded directly in income(d) 20 $ (3) 17 $ Total income statement impact Derivatives effective portion recorded in OCI 388 $ (141) 247 $ Total change in OCI for period 100 (59) 41

Year ended December 31, 2010 (in millions) Contract type Interest rate(a) Foreign exchange(b) Total

288 $ (82) 206 $

308 $ (85) 223 $

Gains/(losses) recorded in income and other comprehensive income/(loss)(c) Derivatives effective portion reclassified from AOCI to income $ $ Hedge ineffectiveness recorded directly in income(d) (62) $ (62) $ Total income statement impact Derivatives effective portion recorded in OCI 61 $ 706 767 $ Total change in OCI for period 219 424 643

Year ended December 31, 2009 (in millions) Contract type Interest rate(a) Foreign exchange(b) Total

(158) $ 282 124 $

(220) $ 282 62 $

(a) 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 net interest income, noninterest revenue and compensation expense. (c) The Firm did not experience any forecasted transactions that failed to occur for the years ended December 31, 2011 and 2009. In 2010, the Firm reclassified a $25 million loss from AOCI to earnings because the Firm determined that it was probable that forecasted interest payment cash flows related to certain wholesale deposits would not occur. (d) 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.

Over the next 12 months, the Firm expects that $26 million (after-tax) of net gains recorded in AOCI at December 31, 2011, related to cash flow hedges will be recognized in income. The maximum length of time over which forecasted transactions are hedged is 10 years, and such transactions primarily relate to core lending and borrowing activities.

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Net investment hedge gains and losses The following tables present hedging instruments, by contract type, that were used in net investment hedge accounting relationships, and the pretax gains/(losses) recorded on such instruments for the years ended December 31, 2011, 2010 and 2009.
Gains/(losses) recorded in income and other comprehensive income/(loss) 2011 2010 2009 Excluded Excluded Excluded components components components recorded Effective recorded Effective recorded Effective directly in portion directly in portion directly in portion (a) (a) (a) income recorded in OCI income recorded in OCI income recorded in OCI $ $ (251) $ (251) $ 225 1 226 $ $ (139) $ (139) $ (30) $ 41 11 $ (112) $ NA (112) $ (259) NA (259)

Year ended December 31, (in millions) Contract type Foreign exchange derivatives Foreign currency denominated debt Total

(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 current-period 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 ineffectiveness for net investment hedge accounting relationships during 2011, 2010 and 2009.

Risk management derivatives gains and losses (not designated as hedging instruments) The following table presents nontrading derivatives, by contract type, that were not designated in hedge relationships, and the pretax gains/(losses) recorded on such derivatives for the years ended December 31, 2011, 2010 and 2009. These derivatives are risk management instruments used to mitigate or transform market risk exposures arising from banking activities other than trading activities, which are discussed separately below.
Derivatives gains/(losses) recorded in income Year ended December 31, (in millions) Contract type Interest rate(a) Credit(b) Foreign exchange(c) Equity(b) Commodity(b) Total 2011 $ 8,084 $ (52) (157) 41 7,916 $ 2010 4,987 $ (237) (64) (48) 4,638 $ 2009 (3,113) (3,222) (197) (8) (50) (6,590)

Gains/(losses) recorded in principal transactions revenue Year ended December 31, (in millions) Type of instrument Interest rate Credit Foreign exchange Equity Commodity Total $ $ (1,531) $ 3,346 1,216 1,956 3,697 8,684 $ (683) $ 4,636 1,854 1,827 243 7,877 $ 4,375 5,022 2,583 1,475 1,329 14,784 2011 2010 2009

(a) Gains and losses were recorded in principal transactions revenue, mortgage fees and related income, and net interest income. (b) Gains and losses were recorded in principal transactions revenue. (c) Gains and losses were recorded in principal transactions revenue and net interest income.

Trading derivative gains and losses The Firm has elected to present derivative gains and losses related to its trading activities together with the nonderivative instruments with which they are risk managed. All amounts are recorded in principal transactions revenue in the Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009. The amounts below do not represent a comprehensive view of the Firms trading activities because they do not include certain revenue associated with those activities, including net interest income earned on cash instruments used in trading activities and gains and losses on cash instruments that are risk managed without derivative instruments.
JPMorgan Chase & Co./2011 Annual Report

Credit risk, 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 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. These amounts represent the cost to the Firm to replace the contracts at then-current market rates should the counterparty default.

207

Notes to consolidated financial statements

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 mark-tomarket (MTM) of the contracts moves in the counterparties favor, or upon specified downgrades in the Firms 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 Derivative payables containing downgrade triggers
December 31, (in millions) Aggregate fair value of net derivative payables Collateral posted $ 2011 16,937 $ 11,429 2010 19,777 14,629

the counterparty, at the fair value of the derivative contracts. The following table shows the aggregate fair value of net derivative payables that contain contingent collateral or termination features that may be triggered upon a downgrade and the associated collateral the Firm has posted in the normal course of business at December 31, 2011 and 2010.

The following table shows the impact of a single-notch and two-notch ratings downgrade to JPMorgan Chase & Co. and its subsidiaries, primarily JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.) at December 31, 2011 and 2010, related to derivative contracts with contingent collateral or termination features that may be triggered upon a downgrade. Liquidity impact of derivative downgrade triggers
2011 December 31, (in millions) Amount of additional collateral to be posted Amount required to settle contracts with termination triggers Single-notch downgrade $ 1,460 $ 1,054 Two-notch downgrade 2,054 1,923 2010 Single-notch downgrade $ 1,904 $ 430 Two-notch downgrade 3,462 994

The following tables show the carrying value of derivative receivables and payables after netting adjustments and adjustments for collateral held and transferred as of December 31, 2011 and 2010. Impact of netting adjustments on derivative receivables and payables
Derivative receivables December 31, (in millions) Gross derivative fair value Netting adjustment offsetting receivables/payables(a) Netting adjustment cash collateral received/paid(a) Carrying value on Consolidated Balance Sheets $ $ 2011 1,884,499 $ (1,710,525) (81,497) 92,477 $ 2010 1,529,412 (1,376,969) (71,962) 80,481 $ $ Derivative payables 2011 1,837,256 $ (1,710,523) (51,756) 74,977 $ 2010 1,485,109 (1,376,969) (38,921) 69,219

Total derivative collateral

Collateral held December 31, (in millions) Netting adjustment for cash collateral
(a)

Collateral transferred 2010 71,962 16,486 18,048 $ 2011 51,756 $ 19,439 10,824 $ 82,019 $ 2010 38,921 10,899 8,435 58,255

2011 $ 81,497 $ 21,807 17,615 $ 120,919 $

Liquid securities and other cash collateral(b) Additional liquid securities and cash collateral(c) Total collateral for derivative transactions (a) (b) (c)

106,496

As permitted under U.S. GAAP, the Firm has elected to net cash collateral received and paid together with the related derivative receivables and derivative payables when a legally enforceable master netting agreement exists. Represents cash collateral received and paid that is not subject to a legally enforceable master netting agreement, and liquid securities collateral held and transferred. Represents liquid securities and cash collateral held and transferred at the initiation of derivative transactions, which is available as security against potential exposure that could arise should the fair value of the transactions move, as well as collateral held and transferred related to contracts that have non-daily call frequency for collateral to be posted, and collateral that the Firm or a counterparty has agreed to return but has not yet settled as of the reporting date. These amounts were not netted against the derivative receivables and payables in the tables above, because, at an individual counterparty level, the collateral exceeded the fair value exposure at both December 31, 2011 and 2010.

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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 in the dealer/client business, the Firm actively risk manages a portfolio of credit derivatives by purchasing and selling credit protection, predominantly on corporate debt obligations, to meet the needs of customers. As a seller of protection, the Firms exposure to a given reference entity may be offset partially, or entirely, with a contract to purchase protection from another counterparty on the same or similar reference entity. Second, the Firm uses credit derivatives to mitigate credit risk associated with its overall derivative receivables and traditional commercial credit lending exposures (loans and unfunded commitments) as well as to manage its exposure to residential and commercial mortgages. In accomplishing the above, the Firm uses different types of credit derivatives. Following is a summary of various types of credit derivatives. 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 singlename and index-reference obligations. Single-name CDS and index CDS contracts are OTC 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 comprises 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 the time of settling 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 referenced entity. 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 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. For a further discussion of credit-related notes, see Note 16 on pages 256267 of this Annual Report. 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, 2011 and 2010. 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.

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Notes to consolidated financial statements

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 Firms view, the risks associated with such derivatives. Total credit derivatives and credit-related notes
Maximum payout/Notional amount Protection purchased with identical underlyings(b) Net protection (sold)/purchased(c) Other protection purchased(d) 29,139 22,292 51,431 3,944 55,375

December 31, 2011 (in millions) Credit derivatives Credit default swaps Other credit derivatives(a) Total credit derivatives Credit-related notes Total

Protection sold $

(2,839,492) $ (79,711) (2,919,203) (742)

2,798,207 $ 4,954 2,803,161 2,803,161 $

(41,285) $ (74,757) (116,042) (742) (116,784) $

(2,919,945) $

Maximum payout/Notional amount Protection purchased with identical underlyings(b) Net protection (sold)/purchased(c) Other protection purchased(d) 32,867 24,234 57,101 3,327 60,428

December 31, 2010 (in millions) Credit derivatives Credit default swaps Other credit derivatives(a) Total credit derivatives Credit-related notes Total

Protection sold $

(2,659,240) $ (93,776) (2,753,016) (2,008)

2,652,313 $ 10,016 2,662,329 2,662,329 $

(6,927) $ (83,760) (90,687) (2,008) (92,695) $

(2,755,024) $

(a) Primarily consists of total return swaps and credit default 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 through single-name and index credit default swaps or credit-related notes.

The following tables summarize the notional and fair value amounts of credit derivatives and credit-related notes as of December 31, 2011 and 2010, 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
December 31, 2011 (in millions) Risk rating of reference entity Investment-grade Noninvestment-grade Total $ $ (352,215) $ (241,823) (594,038) $ (1,262,143) $ (589,954) (1,852,097) $ (345,996) $ (127,814) (473,810) $ (1,960,354) $ (959,591) (2,919,945) $ Total notional amount (1,706,622) $ (1,048,402) (2,755,024) $ (57,697) (85,304) (143,001) <1 year 15 years >5 years Total notional amount Fair value(b)

December 31, 2010 (in millions) Risk rating of reference entity Investment-grade Noninvestment-grade Total $ $

<1 year (175,618) $ (148,434) (324,052) $

15 years (1,194,695) $ (702,638) (1,897,333) $

>5 years (336,309) $ (197,330) (533,639) $

Fair value(b) (17,261) (59,939) (77,200)

(a) The ratings scale is based on the Firms internal ratings, which generally correspond to ratings as defined by S&P and Moodys. (b) Amounts are shown on a gross basis, before the benefit of legally enforceable master netting agreements and cash collateral received by the Firm.

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Note 7 Noninterest revenue

Investment banking fees This revenue category includes advisory and equity and debt underwriting fees. Underwriting fees are recognized as revenue when the Firm has rendered all services to the issuer and is entitled to collect the fee from the issuer, as long as there are no other contingencies associated with the fee. Underwriting fees are net of syndicate expense; the Firm recognizes credit arrangement and syndication fees as revenue after satisfying certain retention, timing and yield criteria. Advisory fees are recognized as revenue when the related services have been performed and the fee has been earned. The following table presents the components of investment banking fees.
Year ended December 31, (in millions) Underwriting Equity Debt Total underwriting Advisory(a) Total investment banking fees $ 1,181 2,934 4,115 1,796 $ 5,911 $ 1,589 3,172 4,761 1,429 $ 6,190 $ 2,487 2,739 5,226 1,861 $ 7,087 2011 2010 2009

Year ended December 31, (in millions) Trading revenue by risk exposure Interest rate Credit Foreign exchange Equity Commodity(a) Total trading revenue Private equity gains/(losses) Principal transactions(c)
(b)

2011 $ (873) $ 3,393 1,154 2,401 2,823 8,898 1,107 $ 10,005

2010 (199) $ 4,543 1,896 2,275 889 9,404 1,490 $ 10,894 $

2009 3,681 546 2,317 2,056 1,270 9,870 (74) 9,796

(a) Includes realized gains and losses and unrealized losses on physical commodities inventories that are generally carried at the lower of cost or fair value, and gains and losses on commodity derivatives and other financial instruments that are carried at fair value through income. Commodity derivatives are frequently used to manage the Firm's risk exposure to its physical commodities inventories. (b) Includes revenue on private equity investments held in the Private Equity business within Corporate/Private Equity, as well as those held in other business segments. (c) Principal transactions included DVA related to derivatives and structured liabilities measured at fair value in IB. DVA gains/(losses) were $1.4 billion, $509 million, and $(2.3) billion for the years ended December 31, 2011, 2010 and 2009, respectively.

(a) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firm-administered multi-seller conduits. The consolidation of the conduits did not significantly change the Firms net income as a whole; however, certain advisory fees considered inter-company were eliminated while net interest income and lending-and-deposit-related fees increased.

Lending- and deposit-related fees This revenue category includes fees from loan commitments, standby letters of credit, financial guarantees, deposit-related fees in lieu of compensating balances, cash management-related activities or transactions, deposit accounts and other loan-servicing activities. These fees are recognized over the period in which the related service is provided. Asset management, administration and commissions This revenue category includes fees from investment management and related services, custody, brokerage services, insurance premiums and commissions, and other products. These fees are recognized over the period in which the related service is provided. Performance-based fees, which are earned based on exceeding certain benchmarks or other performance targets, are accrued and recognized at the end of the performance period in which the target is met. The following table presents components of asset management, administration and commissions.
Year ended December 31, (in millions) Asset management Investment management fees All other asset management fees Total asset management fees Total administration fees
(a)

Principal transactions Principal transactions revenue consists of trading revenue as well as realized and unrealized gains and losses on private equity investments. Trading revenue is driven by the Firms client market-making and client driven activities as well as certain risk management activities. The spread between the price at which the Firm buys and sells financial instruments and physical commodities inventories to and from its clients and other market-makers is recognized as trading revenue. Trading revenue also includes unrealized gains and losses on financial instruments (including those for which the fair value option was elected) and unrealized losses on physical commodities inventories (generally carried at the lower of cost or fair value) that the Firm holds in inventory as a market-maker to meet client needs, or for risk management purposes. The following table presents principal transactions revenue by major underlying type of risk exposures. This table does not include other types of revenue, such as net interest income on trading assets, which are an integral part of the overall performance of the Firms client-driven trading activities.

2011 $ 6,085 605 6,690 2,171 $

2010 5,632 496 6,128 2,023 $

2009 4,997 356 5,353 1,927

Commission and other fees Brokerage commissions All other commissions and fees Total commissions and fees 2,753 2,480 5,233 2,804 2,544 5,348 $ 13,499 2,904 2,356 5,260 $ 12,540

Total asset management, administration and commissions $ 14,094

(a) Includes fees for custody, securities lending, funds services and securities clearance.

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211

Notes to consolidated financial statements

Mortgage fees and related income This revenue category primarily reflects RFSs mortgage 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 RFS mortgage servicing rights are reported in mortgage fees and related income. Net interest income from mortgage loans, and securities gains and losses on AFS securities used in mortgage-related risk management activities, are recorded in interest income and securities gains/(losses), respectively. For a further discussion of MSRs, see Note 17 on pages 267271 of this Annual Report. Credit card income This revenue category includes interchange income from credit and debit cards and net fees earned from processing credit card transactions for merchants. Prior to 2010, this revenue category included servicing fees earned in connection with securitization activities; such fees have been eliminated in consolidation since January 1, 2010, when the Firm consolidated its Firm-sponsored credit card securitization trusts (see Note 16 on pages 256267 of this Annual Report). Credit card income is recognized as earned. Annual fees and direct loan origination costs are deferred and recognized on a straight-line basis over a 12-month period. Expense related to rewards programs is recorded when the rewards are earned by the customer and netted against interchange income. Credit card revenue sharing agreements The Firm has contractual agreements with numerous affinity organizations and co-brand partners (collectively, partners), which grant the Firm exclusive rights to market to the members or customers of such partners. These partners endorse the credit card programs and provide their mailing lists to the Firm, and they may also conduct marketing activities and provide awards under the various credit card programs. The terms of these agreements generally range from three to 10 years. The Firm typically makes incentive payments to the partners based on: new account originations; charge volumes; and, the cost of the partners marketing activities and awards. Payments based on new account originations are accounted for as direct loan origination costs. Payments to partners based on charge volumes are deducted from interchange income as the related revenue is earned. Payments based on marketing efforts undertaken by the partners are expensed by the Firm as incurred and reported as noninterest expense.

Note 8 Interest income and Interest expense

Interest income and interest expense is recorded in the Consolidated Statements of Income and classified based on the nature of the underlying asset or liability. Interest income and interest expense includes the current-period interest accruals for financial instruments measured at fair value, except for 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. Details of interest income and interest expense were as follows.
Year ended December 31, (in millions) Interest income Loans Securities Trading assets Federal funds sold and securities purchased under resale agreements Securities borrowed Deposits with banks Other assets(a) Total interest income(b) Interest expense Interest-bearing deposits Short-term and other liabilities(c)(d) Long-term debt(d) Beneficial interests issued by consolidated VIEs Total interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses $
(b)

2011 $ 37,098 $ 9,215 11,142 2,523 110 599 606 61,293 3,855 2,873 6,109 767 13,604 47,689 7,574 40,115 $

2010 40,388 $ 9,540 11,007 1,786 175 345 541 63,782 3,424 2,364 5,848 1,145 12,781 51,001 16,639 34,362 $

2009 38,704 12,377 12,098 1,750 4 938 479 66,350 4,826 2,786 7,368 218 15,198 51,152 32,015 19,137

(a) Predominantly margin loans. (b) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon the adoption of the guidance, the Firm consolidated its Firm-sponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. The consolidation of these VIEs did not significantly change the Firms total net income. However, it did affect the classification of items on the Firms Consolidated Statements of Income; as a result of the adoption of the guidance, certain noninterest revenue was eliminated in consolidation, offset by the recognition of interest income, interest expense, and provision for credit losses. (c) Includes brokerage customer payables. (d) Effective January 1, 2011, the long-term portion of advances from FHLBs was reclassified from other borrowed funds to long-term debt. The related interest expense for the prior-year period has also been reclassified to conform with the current presentation.

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Note 9 Pension and other postretirement employee benefit plans

The Firms defined benefit pension plans and its other postretirement employee benefit (OPEB) plans (collectively the Plans) are accounted for in accordance with U.S. GAAP for retirement benefits. Defined benefit pension plans The Firm has a qualified noncontributory U.S. defined benefit pension plan that provides benefits to substantially all U.S. employees. The U.S. plan employs a cash balance formula in the form of pay and interest credits to determine the benefits to be provided at retirement, based on eligible compensation and years of service. Employees begin to accrue plan benefits after completing one year of service, and benefits generally vest after three years of service. In November 2009, the Firm announced certain changes to the pay credit schedule and amount of eligible compensation recognized under the U.S. plan effective February 1, 2010. The Firm also offers benefits through defined benefit pension plans to qualifying employees in certain non-U.S. locations based on factors such as eligible compensation, age and/or years of service. It is the Firms policy to fund the pension plans in amounts sufficient to meet the requirements under applicable laws. On January 15, 2009, and August 28, 2009, the Firm made discretionary cash contributions to its U.S. defined benefit pension plan of $1.3 billion and $1.5 billion, respectively. The Firm does not anticipate any contribution to the U.S. defined benefit pension plan in 2012 at this time. The 2012 contributions to the non-U.S. defined benefit pension plans are expected to be $49 million of which $37 million are contractually required. JPMorgan Chase also has a number of defined benefit pension plans not subject to Title IV of the Employee Retirement Income Security Act. The most significant of these plans is the Excess Retirement Plan, pursuant to which certain employees earn pay and interest credits on compensation amounts above the maximum stipulated by law under a qualified plan. The Firm announced that, effective May 1, 2009, pay credits would no longer be provided on compensation amounts above the maximum stipulated by law. The Excess Retirement Plan had an unfunded projected benefit obligation in the amount of $272 million and $266 million, at December 31, 2011 and 2010, respectively.

Defined contribution plans JPMorgan Chase currently provides two qualified defined contribution plans in the U.S. and other similar arrangements in certain non-U.S. locations, all of which are administered in accordance with applicable local laws and regulations. The most significant of these plans is The JPMorgan Chase 401(k) Savings Plan (the 401(k) Savings Plan), which covers substantially all U.S. employees. The 401(k) Savings Plan allows employees to make pretax and Roth 401(k) contributions to tax-deferred investment portfolios. The JPMorgan Chase Common Stock Fund, which is an investment option under the 401(k) Savings Plan, is a nonleveraged employee stock ownership plan. The Firm matched eligible employee contributions up to 5% of benefits-eligible compensation (e.g., base pay) on a per pay period basis through April 30, 2009; commencing May 1, 2009 matching contributions are made annually. Employees begin to receive matching contributions after completing a one-year-of-service requirement. Employees with total annual cash compensation of $250,000 or more are not eligible for matching contributions. Matching contributions are immediately vested for employees hired before May 1, 2009, and will vest after three years of service for employees hired on or after May 1, 2009. The 401(k) Savings Plan also permits discretionary profitsharing contributions by participating companies for certain employees, subject to a specified vesting schedule. Effective August 10, 2009, JPMorgan Chase Bank, N.A. became the sponsor of the WaMu Savings Plan and that plans assets were merged into the 401(k) Savings Plan effective March 31, 2010. OPEB plans JPMorgan Chase offers postretirement medical and life insurance benefits to certain retirees and postretirement medical benefits to qualifying U.S. employees. These benefits vary with length of service and date of hire and provide for limits on the Firms share of covered medical benefits. The medical and life insurance benefits are both contributory. Postretirement medical benefits also are offered to qualifying U.K. employees. JPMorgan Chases U.S. OPEB obligation is funded with 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 U.K. OPEB plan is unfunded.

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Notes to consolidated financial statements

The following table presents the changes in benefit obligations, plan assets and funded status amounts reported on the Consolidated Balance Sheets for the Firms U.S. and non-U.S. defined benefit pension and OPEB plans.
Defined benefit pension plans As of or for the year ended December 31, (in millions) Change in benefit obligation Benefit obligation, beginning of year Benefits earned during the year Interest cost on benefit obligations Plan amendments Business combinations Employee contributions Net gain/(loss) Benefits paid Expected Medicare Part D subsidy receipts Curtailments Settlements Special termination benefits Foreign exchange impact and other Benefit obligation, end of year Change in plan assets Fair value of plan assets, beginning of year Actual return on plan assets Firm contributions Employee contributions Benefits paid Settlements Foreign exchange impact and other Fair value of plan assets, end of year Funded/(unfunded) status(a) Accumulated benefit obligation, end of year (a) (b) (c) (d) (e) (f) $ 10,828 147 37 (540) $ 10,472 $ 1,429 $ (9,008)
(c)(d) (e)

U.S. 2011 2010 2011

Non-U.S. 2010

OPEB plans(f) 2011 2010

$ (8,320) (249) (451) NA (563) 540 NA $ (9,043)

$ (7,977) (230) (468) NA (249) 604 NA $ (8,320)

$ (2,600) (36) (133) (5) (160) 93 NA 12 $ (2,829)

$ (2,536) (30) (128) 10 (12) (4) (71) 96 NA 5 (1) 71 $ (2,600)

(b)

$ (980) (1) (51) (84) (39) 166 (10) $ (999)

$ (1,025) (2) (55) (70) 13 168 (10) 1 $ (980)

$ 10,218 1,179 35 (604) $ 10,828 $ 2,508 $ (8,271)

(c)(d) (e)

$ 2,647 277 169 5 (93) (16) $ 2,989 $ 160 $ (2,800)

(d)

$ 2,432 228 157 4 (96) (5) (73) $ 2,647 $ 47 $ (2,576)

(d)

$ 1,381 78 2 (26) $ 1,435 $ 436 NA

$ 1,269 137 3 (28) $ 1,381 $ 401 NA

Represents overfunded plans with an aggregate balance of $2.6 billion and $3.5 billion at December 31, 2011 and 2010, respectively, and underfunded plans with an aggregate balance of $621 million and $561 million at December 31, 2011 and 2010, respectively. Represents change resulting from acquisition of RBS Sempra Commodities business in 2010. At December 31, 2011 and 2010, approximately $426 million and $385 million, respectively, of U.S. plan assets included participation rights under participating annuity contracts. At December 31, 2011 and 2010, defined benefit pension plan amounts not measured at fair value included $50 million and $52 million, respectively, of accrued receivables, and $245 million and $187 million, respectively, of accrued liabilities, for U.S. plans; and $56 million and $9 million, respectively, of accrued receivables , and at December 31, 2011, $69 million of accrued liabilities, for non-U.S. plans. Does not include any amounts attributable to the Washington Mutual Qualified Pension plan. The disposition of this plan remained subject to litigation and was not determinable at December 31, 2011 and 2010. Includes an unfunded accumulated postretirement benefit obligation of $33 million and $36 million at December 31, 2011 and 2010, respectively, for the U.K. plan.

Gains and losses For the Firms 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 projected benefit obligation 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 nine years.
214

For the Firms 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 is amortized over the average

JPMorgan Chase & Co./2011 Annual Report

future service period, which is currently five years; however, prior service costs are amortized over the average years of

service remaining to full eligibility age, which is currently three years.

The following table presents pretax pension and OPEB amounts recorded in AOCI.
Defined benefit pension plans December 31, (in millions) Net gain/(loss) Prior service credit/(cost) Accumulated other comprehensive income/(loss), pretax, end of year $ $ 2011 (3,669) $ 278 (3,391) $ U.S. 2010 (2,627) $ 321 (2,306) $ Non-U.S. 2011 (544) $ 12 (532) $ 2010 (566) $ 13 (553) $ OPEB plans 2011 (176) $ 1 (175) $ 2010 (119) 9 (110)

The following table presents the components of net periodic benefit costs reported in the Consolidated Statements of Income and other comprehensive income for the Firms U.S. and non-U.S. defined benefit pension, defined contribution and OPEB plans.
Pension plans U.S. Year ended December 31, (in millions) Components of net periodic benefit cost Benefits earned during the year Interest cost on benefit obligations Expected return on plan assets Amortization: Net (gain)/loss Prior service cost/(credit) Curtailment (gain)/loss Settlement (gain)/loss Special termination benefits Net periodic defined benefit cost Other defined benefit pension plans(a) Total defined benefit plans Total defined contribution plans Total pension and OPEB cost included in compensation expense Changes in plan assets and benefit obligations recognized in other comprehensive income Net (gain)/loss arising during the year Prior service credit arising during the year Amortization of net loss Amortization of prior service (cost)/credit Curtailment (gain)/loss Settlement loss/(gain) Foreign exchange impact and other Total recognized in other comprehensive income Total recognized in net periodic benefit cost and other comprehensive income 1,207 (165) 43 1,085 (187) (225) 43 (369) (168) (384) (304) (6) 18 (844) $ 25 (48) 1 1 (21) 54 $ (21) (10) (56) 1 (1) (23) (110) (20) $ 183 (1) (44) (1) 36 173 254 $ 58 (1) 8 65 22 $ (54) 1 13 1 (39) (176) 15 2 (1) (160) $ 165 (43) 31 19 50 370 420 $ 225 (43) 138 14 152 332 484 $ 304 4 1 551 15 566 359 925 $ 48 (1) 75 12 87 285 372 $ 56 (1) 1 1 90 11 101 251 352 $ 44 1 1 81 12 93 226 319 $ 1 (8) (43) NA (43) NA (43) $ (1) (13) (53) NA (53) NA (53) $ (14) 5 (38) NA (38) NA (38) $ 249 $ 451 (791) 230 $ 468 (742) 313 514 (585) $ 36 $ 133 (141) 31 $ 128 (126) 28 122 (115) $ 1 $ 51 (88) 2 $ 55 (96) 3 65 (97) 2011 2010 2009 2011 Non-U.S. 2010 2009 2011 OPEB plans 2010 2009

$ 1,116 $ (231) $ (293)

(92) $ (198)

(a) Includes various defined benefit pension plans which are individually immaterial.

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Notes to consolidated financial statements

The estimated pretax amounts that will be amortized from AOCI into net periodic benefit cost in 2012 are as follows.
(in millions) Net loss Prior service cost/(credit) Total $ $ Defined benefit pension plans U.S. Non-U.S. 287 (41) 246 $ $ 36 (1) 35 $ $ U.S. OPEB plans Non-U.S. 7 (1) 6 $ $

The following table presents the actual rate of return on plan assets for the U.S. and non-U.S. defined benefit pension and OPEB plans.
Year ended December 31, Actual rate of return: Defined benefit pension plans OPEB plans 0.72% 5.22% 12.23% 11.23% 13.78% 15.93% (4.29)-13.12% NA 0.77-10.65% NA 3.17-22.43% NA 2011 U.S. 2010 2009 2011 Non-U.S. 2010 2009

Plan assumptions JPMorgan Chases expected long-term rate of return for U.S. defined benefit pension and OPEB plan assets is a blended average of the investment advisors projected long-term (10 years or more) returns for the various asset classes, weighted by the asset allocation. Returns on asset classes are developed using a forward-looking approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of inflation, real bond yield and risk spread (as appropriate), adjusted for the expected effect on returns from changing yields. Other asset-class returns are derived from their relationship to the equity and bond markets. Consideration is also given to current market conditions and the shortterm portfolio mix of each plan; as a result, in 2011 the Firm generally maintained the same expected return on assets as in the prior year. For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S. defined benefit pension plans, procedures similar to those in the U.S. are used to develop the expected long-term rate of return on plan

assets, taking into consideration local market conditions and the specific allocation of plan assets. The expected long-term rate of return on U.K. plan assets is an average of projected long-term returns for each asset class. The return on equities has been selected by reference to the yield on long-term U.K. government bonds plus an equity risk premium above the risk-free rate. The expected return on AA rated long-term corporate bonds is based on an implied yield for similar bonds. The discount rate used in determining the benefit obligation under the U.S. defined benefit pension and OPEB plans was selected by reference to the yields on portfolios of bonds with maturity dates and coupons that closely match each of the plans projected cash flows; such portfolios are derived from a broad-based universe of high-quality corporate bonds as of the measurement date. In years in which these hypothetical bond portfolios generate excess cash, such excess is assumed to be reinvested at the one-year forward rates implied by the Citigroup Pension Discount Curve published as of the measurement date. The discount rate for the U.K. defined benefit pension and OPEB plans represents a rate implied from the yield curve of the yearend iBoxx corporate AA 15-year-plus bond index.

The following tables present the weighted-average annualized actuarial assumptions for the projected and accumulated postretirement benefit obligations, and the components of net periodic benefit costs, for the Firms significant U.S. and nonU.S. defined benefit pension and OPEB plans, as of and for the periods indicated. Weighted-average assumptions used to determine benefit obligations
U.S. December 31, Discount rate: Defined benefit pension plans OPEB plans Rate of compensation increase Health care cost trend rate: Assumed for next year Ultimate Year when rate will reach ultimate 7.00 5.00 2017 7.00 5.00 2017 4.60% 4.70 4.00 5.50% 5.50 4.00 1.50-4.80% 2.75-4.20 1.605.50% 3.004.50 2011 2010 Non-U.S. 2011 2010

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Weighted-average assumptions used to determine net periodic benefit costs

U.S. Year ended December 31, Discount rate: Defined benefit pension plans OPEB plans Expected long-term rate of return on plan assets: Defined benefit pension plans OPEB plans Rate of compensation increase Health care cost trend rate: Assumed for next year Ultimate Year when rate will reach ultimate 7.00 5.00 2017 7.75 5.00 2014 8.50 5.00 2014 7.50 6.25 4.00 7.50 7.00 4.00 7.50 7.00 4.00 2.40-5.40 NA 3.00-4.50 2.406.20 NA 3.004.50 2.506.90 NA 3.004.00 5.50% 5.50 6.00% 6.00 6.65% 6.70 1.60-5.50% 2.005.70% 2.006.20% 2011 2010 2009 2011 Non-U.S. 2010 2009

The following table presents the effect of a one-percentagepoint change in the assumed health care cost trend rate on JPMorgan Chases total service and interest cost and accumulated postretirement benefit obligation.
Year ended December 31, 2011(in millions) Effect on accumulated postretirement benefit obligation 1-Percentage point increase 1 27 1-Percentage point decrease $ (1) (24)

benefit pension expense of approximately $19 million and an increase in the related projected benefit obligations of approximately $82 million. A 25-basis point decline in the discount rates for the non-U.S. plans would result in an increase in the 2012 non-U.S. defined benefit pension plan expense of approximately $11 million. Investment strategy and asset allocation The Firms U.S. defined benefit pension plan assets are held in trust and are invested in a well-diversified portfolio of equity and fixed income securities, real estate, cash and cash equivalents, and alternative investments (e.g., hedge funds, private equity, real estate and real assets). Non-U.S. defined benefit pension plan assets are held in various trusts and are also invested in well-diversified portfolios of equity, fixed income and other securities. Assets of the Firms COLI policies, which are used to partially fund the U.S. OPEB plan, are held in separate accounts with an insurance company and are invested in equity and fixed income index funds. The investment policy for the Firms U.S. defined benefit pension plan assets is to optimize the risk-return relationship as appropriate to the needs and goals 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. Periodically the Firm performs a comprehensive analysis on the U.S. defined benefit pension plan asset allocations, incorporating projected asset and liability data, which focuses on the short-and long-term impact of the asset allocation on cumulative pension expense, economic cost, present value of contributions and funded status. Currently, approved asset allocation ranges are: U.S. equity 15% to 35%, international equity 15% to 25%, debt securities 10% to 30%, hedge funds 10% to 30%, and real estate, real assets and private equity 5% to 20%. Asset allocations are not managed to a specific target but seek to shift asset class allocations within these stated ranges. Investment strategies incorporate the economic outlook, anticipated implications of the macroeconomic environment on the various asset classes/managers, and maintaining an appropriate level of liquidity for the plan.

Effect on total service and interest cost $

At December 31, 2011, 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 result in an increase in expense of approximately $47 million for 2012. The 2012 expected long-term rate of return on U.S. defined benefit pension plan assets and U.S. OPEB plan assets are 7.50% and 6.25%, respectively, unchanged from 2011. For 2012, the initial health care benefit obligation trend assumption will be set at 7.00%, and the ultimate health care trend assumption and year to reach ultimate rate will remain at 5.00% and 2017, respectively, unchanged from 2011. As of December 31, 2011, the assumed rate of compensation increase remained at 4.00%. The 2012 interest crediting rate assumption will be set at 5.00%, as compared to 5.25% in 2011. JPMorgan Chases U.S. defined benefit pension and OPEB plan expense is sensitive to the expected long-term rate of return on plan assets and the discount rate. With all other assumptions held constant, a 25-basis point decline in the expected long-term rate of return on U.S. plan assets would result in an increase of approximately an aggregate $29 million in 2012 U.S. defined benefit pension and OPEB plan expense. A 25-basis point decline in the discount rate for the U.S. plans would result in an increase in 2012 U.S. defined benefit pension and OPEB plan expense of approximately an aggregate $17 million and an increase in the related benefit obligations of approximately an aggregate $192 million. A 25-basis point increase in the interest crediting rate for the U.S. defined benefit pension plan would result in an increase in 2012 U.S. defined
JPMorgan Chase & Co./2011 Annual Report

217

Notes to consolidated financial statements

The Firm regularly reviews the asset allocations and all factors that continuously impact the portfolio, which is rebalanced when deemed necessary. For the U.K. defined benefit pension plans, which represent the most significant of the non-U.S. defined benefit pension plans, the assets are invested to maximize returns subject to an appropriate level of risk relative to the plans liabilities. In order to reduce the volatility in returns relative to the plans liability profiles, the U.K. defined benefit pension plans largest asset allocations are to debt securities of appropriate durations. Other assets, mainly equity securities, are then invested for capital appreciation, to provide long-term investment growth. Similar to the U.S. defined benefit pension plan, asset allocations for the U.K. plans are reviewed and rebalanced on a regular basis. 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 registered investment companies are further diversified into various financial instruments. As of December 31, 2011, assets held by the Firms U.S. and non-U.S. defined benefit pension and OPEB plans do not include JPMorgan Chase common stock, except in connection with 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 $1.6 billion and $1.7 billion for U.S. plans and $194 million and $155 million for non-U.S. plans, as of December 31, 2011 and 2010, respectively.

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 range/target allocation by asset category, for the Firms U.S. and nonU.S. defined benefit pension and OPEB plans.
Defined benefit pension plans U.S. Target December 31, Asset category Debt securities(a) Equity securities Real estate Alternatives(b) Total (a) (b) (c) 1030% 2560 520 1550 100% 20% 39 5 36 100% 29% 40 4 27 100% 72% 27 1 100% 74% 25 1 100% 71% 28 1 100% 50% 50 100% 50% 50 100% 50% 50 100% Allocation % of plan assets 2011 2010 Target Allocation Non-U.S. % of plan assets 2011 2010 Target Allocation OPEB plans(c) % of plan assets 2011 2010

Debt securities primarily include corporate debt, U.S. federal, state, local and non-U.S. government, and mortgage-backed securities. Alternatives primarily include limited partnerships. Represents the U.S. OPEB plan only, as the U.K. OPEB plan is unfunded.

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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 3 on pages 184198 of this Annual Report. Pension and OPEB plan assets and liabilities measured at fair value
U.S. defined benefit pension plans December 31, 2011 (in millions) Cash and cash equivalents Equity securities: Capital equipment Consumer goods Banks and finance companies Business services Energy Materials Real Estate Other Total equity securities Common/collective trust funds Limited partnerships:(c) Hedge funds Private equity Real estate Real assets(d) Total limited partnerships Corporate debt securities(e) U.S. federal, state, local and non-U.S. government debt securities Mortgage-backed securities Derivative receivables Other(f) Total assets measured at fair value(g)(h) Derivative payables Total liabilities measured at fair value $ 122 1 102 $ 3,751 $ 933 933 544 328 36 2 60 $ 3,311 (3) (3) $ 1,039 1,367 306 264 2,976 2 427 $ 3,608 $ 1,972 1,367 306 264 3,909 546 328 158 3 589 $ 10,670 (3) (3)
(i) (a)

Non-U.S. defined benefit pension plans Level 1 $ 72 69 64 83 48 52 35 1 160 512 138 17 74 $ $ 813 $ Level 2 $ 12 30 13 10 10 6 5 86 170 958 904 7 65 $ 2,190 (1) (1) $ $ Level 3 $ $ Total fair value $ 72 81 94 96 58 62 41 1 165 598 308 958 904 17 7 139 $ 3,003 (1) (1)

Level 1 $ 117 607 657 301 332 173 161 11 766 3,008 401

Level 2 $ 7 2 274 283 1,125

Level 3 $ 1 1 202

Total fair value $ 117 614 657 303 332 173 162 11 1,040 3,292 1,728

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219

Notes to consolidated financial statements

U.S. defined benefit pension plans December 31, 2010 (in millions) Cash and cash equivalents Equity securities: Capital equipment Consumer goods Banks and finance companies Business services Energy Materials Real estate Other Total equity securities Common/collective trust funds(a)(b) Limited partnerships:(c) Hedge funds Private equity Real estate Real assets(d) Total limited partnerships Corporate debt securities
(e)

Non-U.S. defined benefit pension plans Level 1 $ 81 68 75 113 53 59 50 1 194 613 46 1 18 $

(i)

Level 1 $ 748 712 414 444 195 205 21 857 3,596 436 188 2 218 $ 4,440 $

Level 2 $ 9 1 6 16 1,263 959 959 424 453 55 194 58 $ 3,422 (177) $

Level 3 $ 194 1,160 1,232 304 2,696 1 387 $ 3,278

Total fair value $ 757 712 415 444 195 205 21 863 3,612 1,893 2,119 1,232 304 3,655 425 453 243 196 663 $ 11,140 (177) $ (177)

Level 2 $ 13 21 9 10 6 13 16 88 180 718 864 3 51 $ 1,904 (25) $

Level 3 $ $

Total fair value $ 81 81 96 122 63 65 63 1 210 701 226 718 864 1 3 69 $ 2,663 (25) $ (25)

U.S. federal, state, local and non-U.S. government debt securities Mortgage-backed securities Derivative receivables Other
(f)

Total assets measured at fair value(g)(h) Derivative payables Total liabilities measured at fair value (a) (b) (c) (d) (e) (f) (g) (h) (i)

759

(177) $

(25) $

At December 31, 2011 and 2010, common/collective trust funds generally include commingled funds that primarily included 23% and 22%, respectively, of short-term investment funds; 19% and 21%, respectively, of equity (index) investments; and 19% and 16%, respectively, of international investments. The prior period has been revised to consider redemption notification periods, in determining the classification of investments within the fair value hierarchy. Unfunded commitments to purchase limited partnership investments for the Plans were $1.2 billion and $1.1 billion for 2011 and 2010, respectively. 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. Corporate debt securities include debt securities of U.S. and non-U.S. corporations. Other consists of exchange traded funds and participating and non-participating annuity contracts. Exchange traded 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 lack of market mechanisms for transferring each policy and surrender restrictions. At December 31, 2011 and 2010, the fair value of investments valued at NAV were $3.9 billion and $4.1 billion, respectively, which were classified within the valuation hierarchy as follows: $0.4 billion and $0.5 billion in level 1, $2.1 billion and $2.2 billion in level 2 and $1.4 billion and $1.4 billion in level 3. At December 31, 2011 and 2010, excluded U.S. defined benefit pension plan receivables for investments sold and dividends and interest receivables of $50 million and $52 million, respectively; and excluded non-U.S. defined benefit pension plan receivables for dividends and interest receivables of $56 million and $9 million, respectively. At December 31, 2011 and 2010, excluded $241 million and $149 million, respectively, of U.S. defined benefit pension plan payables for investments purchased; and $4 million and $38 million, respectively, of other liabilities; and excluded non-U.S. defined benefit pension plan payables for investments purchased of $69 million at December 31, 2011.

The Firms OPEB plan was partially funded with COLI policies of $1.4 billion, at December 31, 2011 and 2010, respectively, which were classified in level 3 of the valuation hierarchy.

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JPMorgan Chase & Co./2011 Annual Report

Changes in level 3 fair value measurements using significant unobservable inputs

Year ended December 31, 2011 (in millions) U.S. defined benefit pension plans Equities Common/collective trust funds Limited partnerships: Hedge funds Private equity Real estate Real assets Total limited partnerships Corporate debt securities Other Total U.S. plans Non-U.S. defined benefit pension plans Other Total non-U.S. plans OPEB plans COLI Total OPEB plans $ $ 1,381 1,381 $ $ $ $ 70 70 $ $ (24) $ (24) $ $ $ 1,427 1,427 $ $ $ $ $ $ $ $ $ $ $ $ $ 1,160 1,232 304 2,696 1 387 3,278 $ (16) 56 8 5 53 88 $ 27 2 40 (7) 62 41 104 $ (76) 77 14 150 165 1 (1) 137 $ (56) (60) 116 1 $ 1,039 1,367 306 264 2,976 2 427 3,608 $ 194 $ 35 $ 1 $ (28) $ 1 $ 1 202 Fair value, January 1, 2011 Actual return on plan assets Realized gains/(losses) Unrealized gains/(losses) Purchases, sales and settlements, net Transfers in and/or out of level 3 Fair value, December 31, 2011

Year ended December 31, 2010 (in millions) U.S. defined benefit pension plans Equities Common/collective trust funds(a) Limited partnerships: Hedge funds Private equity Real estate Real assets Total limited partnerships Corporate debt securities Other Total U.S. plans Non-U.S. defined benefit pension plans Other Total non-U.S. plans OPEB plans COLI Total OPEB plans $ $ $ $ $ $

Fair value, January 1, 2010 284 680 874 196 1,750 334 2,368 13 13 1,269 1,269

Actual return on plan assets Realized gains/(losses) $ (1) 3 3 5 $ $ $ $ $ 5 $ $ $ $ $ Unrealized gains/(losses) $ (90) 14 108 16 138 53 101

Purchases, sales and settlements, net $ 388 235 89 712 $ 712

Transfers in and/or out of level 3 $ 79 12 91 1 $ 92

Fair value, December 31, 2010 $ 194 1,160 1,232 304 2,696 1 387 $ $ $ $ $ 3,278 1,381 1,381

(1) $ (1) $ 137 137 $ $

(12) $ (12) $ (25) $ (25) $

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221

Notes to consolidated financial statements

Fair value, January 1, 2009 $ 340 553 810 203 1,566 315 $ $ $ $ $ 2,221 14 14 1,126 1,126 $ $ $ $ $ Actual return on plan assets Realized gains/(losses) $ $ $ $ $ $ Unrealized gains/(losses) $ (56) 136 (1) (107) 28 19 (9) $ (1) $ (1) $ 172 172 $ $ Purchases, sales and settlements, net $ (9) 80 100 171 171 $ $ $ Transfers in and/or out of level 3 $ (15) (15) (15) $ $ $ $ $ Fair value, December 31, 2009 $ 284 680 874 196 1,750 334 2,368 13 13 1,269 1,269

Year ended December 31, 2009 (in millions) U.S. defined benefit pension plans Equities Common/collective trust funds(a) Limited partnerships: Hedge funds Private equity Real estate Real assets Total limited partnerships Corporate debt securities Other Total U.S. plans Non-U.S. defined benefit pension plans Other Total non-U.S. plans OPEB plans COLI Total OPEB plans (a)

(29) $ (29) $

The prior period has been revised to consider redemption notification periods in determining the classification of investments within the fair value hierarchy.

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) 2012 2013 2014 2015 2016 Years 20172021 $ U.S. defined benefit pension plans 1,038 1,035 610 610 613 3,084 Non-U.S. defined benefit pension plans $ 95 99 101 110 116 658 $ OPEB before Medicare Part D subsidy 96 95 94 92 90 404 $ Medicare Part D subsidy 11 12 13 14 14 80

Note 10 Employee stock-based incentives

Employee stock-based awards In 2011, 2010 and 2009, JPMorgan Chase granted longterm stock-based awards to certain key employees under the 2005 Long-Term Incentive Plan (the 2005 Plan). The 2005 Plan became effective on May 17, 2005, and was last amended in May 2011. Under the terms of the amended 2005 plan, as of December 31, 2011, 318 million shares of common stock are available for issuance through May 2015. The amended 2005 Plan is the only active plan under which the Firm is currently granting stock-based incentive awards. In the following discussion, the 2005 Plan, 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 Firms stock-based incentive plans. Restricted stock units (RSUs) are awarded at no cost to the recipient upon their grant. RSUs are generally granted annually and generally vest at a rate of 50% after two
222

years and 50% after three years and convert into shares of common stock at the vesting date. In addition, RSUs typically include full-career eligibility provisions, which allow employees to continue to vest upon voluntary termination, subject to post-employment and other restrictions based on age or service-related requirements. All of these awards are subject to forfeiture until vested and contain clawback provisions that may result in cancellation prior to vesting under certain specified circumstances. 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 24 on page 277 of this Annual Report. 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 Chases common stock on the grant date. The Firm typically awards SARs to certain key employees once per year; the Firm also

JPMorgan Chase & Co./2011 Annual Report

periodically grants employee stock options and SARs to individual employees. The 2011, 2010 and 2009 grants of SARs to key employees vest ratably over five years (i.e., 20% per year) and contain clawback provisions similar to RSUs. The 2011 and 2010 grants of SARs contain fullcareer eligibility provisions; the 2009 grants of SARs do not include any full-career eligibility provisions. SARs generally expire 10 years after the grant date. The Firm separately recognizes compensation expense for each tranche of each award as if it were a separate award with its own vesting date. Generally, for each tranche granted, compensation expense is recognized on a straightline 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 employees fullcareer eligibility date or the vesting date of the respective tranche.

The Firms policy for issuing shares upon settlement of employee stock-based incentive awards is to issue either new shares of common stock or treasury shares. During 2011, 2010 and 2009, the Firm settled all of its employee stock-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. The SARs, which have a 10-year term, will become exercisable no earlier than January 22, 2013, and have an exercise price of $39.83. The number of SARs that will become exercisable (ranging from none to the full 2 million) and their exercise date or dates may be determined by the Board of Directors based on an annual assessment of the performance of both the CEO and JPMorgan Chase. The Firm recognizes this award ratably over an assumed fiveyear service period, subject to a requirement to recognize changes in the fair value of the award through the grant date. The Firm recognized $(4) million, $4 million and $9 million in compensation expense in 2011, 2010 and 2009, respectively, for this award.

RSUs, employee stock options and SARs activity Compensation expense for RSUs is measured based on the number of shares 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 Chases RSUs, employee stock options and SARs activity for 2011.
RSUs Year ended December 31, 2011 (in thousands, except weighted-average data, and where otherwise stated) Outstanding, January 1 Granted Exercised or vested Forfeited Canceled Outstanding, December 31 Exercisable, December 31 Number of shares 59,697 (121,699) (5,488) NA 166,631 $ NA Weightedaverage grant date fair value 30.45 44.05 26.95 37.05 NA 37.65 NA Options/SARs Weightedaverage exercise price 43.33 44.27 32.27 39.56 51.77 40.58 41.89 4.6 $ 3.1 419,887 260,309 Weightedaverage remaining contractual life (in years) Aggregate intrinsic value

Number of awards 15,300 (15,409) (4,168) (74,489)

234,121 $

234,527 $

155,761 $ 106,335

The total fair value of RSUs that vested during the years ended December 31, 2011, 2010 and 2009, was $5.4 billion, $2.3 billion and $1.3 billion, respectively. The weighted-average grant date per share fair value of stock options and SARs granted during the years ended December 31, 2011, 2010 and 2009, was $13.04, $12.27 and $8.24, respectively. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009, was $191 million, $154 million and $154 million, respectively.

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223

Notes to consolidated financial statements

Compensation expense The Firm recognized the following noncash compensation expense related to its various employee stock-based incentive plans in its Consolidated Statements of Income.
Year ended December 31, (in millions) Cost of prior grants of RSUs and SARs that are amortized over their applicable vesting periods Accrual of estimated costs of RSUs and SARs to be granted in future periods including those to full-career eligible employees Total noncash compensation expense related to employee stock-based incentive plans 2011 $ 1,986 2010 $ 2,479 2009 $ 2,510

The expected volatility assumption is derived from the implied volatility of JPMorgan Chases stock options. The expected life assumption is an estimate of the length of time that an employee might hold an option or SAR before it is exercised or canceled, and the assumption is based on the Firms historical experience.

Note 11 Noninterest expense

689 $ 2,675 772 $ 3,251 845 $ 3,355

The following table presents the components of noninterest expense.

Year ended December 31, (in millions) Compensation expense Occupancy expense Technology, communications and equipment expense Professional and outside services Marketing Other expense(b)(c) Amortization of intangibles Total noncompensation expense Merger costs Total noninterest expense
(a)

2011 $ 29,037 3,895 4,947 7,482 3,143 13,559 848 33,874 $ 62,911

2010 $ 28,124 3,681 4,684 6,767 2,446 14,558 936 33,072 $ 61,196

2009 $ 26,928 3,666 4,624 6,232 1,777 7,594 1,050 24,943 481 $ 52,352
(d)

At December 31, 2011, approximately $1.3 billion (pretax) of compensation cost 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 1.0 year. The Firm does not capitalize any compensation cost related to share-based compensation awards to employees. Cash flows and tax benefits Income tax benefits related to stock-based incentive arrangements recognized in the Firms Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009, were $1.0 billion, $1.3 billion and $1.3 billion, respectively. The following table sets forth the cash received from the exercise of stock options under all stock-based incentive arrangements, and the actual income tax benefit realized related to tax deductions from the exercise of the stock options.
Year ended December 31, (in millions) Cash received for options exercised Tax benefit realized(a) 2011 $ 354 31 2010 $ 205 14 2009 $ 437 11

Noncompensation expense:

(a) The tax benefit realized from dividends or dividend equivalents paid on equity-classified share-based payment awards that are charged to retained earnings are recorded as an increase to additional paid-in capital and included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards.

(a) Expense for 2010 includes a payroll tax expense related to the United Kingdom (U.K.) Bank Payroll Tax on certain compensation awarded from December 9, 2009, to April 5, 2010, to relevant banking employees. (b) Included litigation expense of $4.9 billion, $7.4 billion and $161 million for the years ended December 31, 2011, 2010 and 2009, respectively. (c) Included foreclosed property expense of $718 million, $1.0 billion and $1.4 billion for the years ended December 31, 2011, 2010 and 2009, respectively. (d) Total merger-related costs for the year ended December 31, 2009, were comprised of $247 million in compensation costs, $12 million in occupancy costs, and $222 million in technology and communications and other costs.

Valuation assumptions The following table presents the assumptions used to value employee stock options and SARs granted during the years ended December 31, 2011, 2010 and 2009, under the Black-Scholes valuation model.
Year ended December 31, Weighted-average annualized valuation assumptions Risk-free interest rate Expected dividend yield(a) Expected common stock price volatility Expected life (in years) 2011 2010 2009

2.58% 2.20 34 6.5

3.89% 3.13 37 6.4

2.33% 3.40 56 6.6

(a) In 2011, the expected dividend yield was determined using forwardlooking assumptions. In 2010 and 2009 the expected dividend yield was determined using historical dividend yields.

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JPMorgan Chase & Co./2011 Annual Report

Note 12 Securities
Securities are primarily classified as AFS or trading. Trading securities are discussed in Note 3 on pages 184198 of this Annual Report. Securities are classified primarily as AFS when used to manage the Firms exposure to interest rate movements or used for longer-term strategic purposes. 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. Other-than-temporary impairment AFS debt and equity securities in unrealized loss positions are analyzed as part of the Firms 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 amortized 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 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. When the Firm has the intent and ability to hold AFS debt securities in an unrealized loss position, it evaluates the expected cash flows to be received and determines 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 Firms 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 carrying value. Any impairment loss on an equity security is equal to the full difference between the amortized cost basis and the fair value of the security. Realized gains and losses The following table presents realized gains and losses and credit losses that were recognized in income from AFS securities.
Year ended December 31, (in millions) Realized gains Realized losses Net realized gains(a) Credit losses included in securities gains(b) Net securities gains 2011 (142) 1,669 (76) 2010 (317) 3,065 (100) 2009 (580) 1,688 (578)

$ 1,811 $ 3,382 $ 2,268

$ 1,593 $ 2,965 $ 1,110

(a) Proceeds from securities sold were within approximately 4% of amortized cost in 2011, and within approximately 3% of amortized cost in 2010 and 2009. (b) Includes other-than-temporary impairment losses recognized in income on certain prime mortgage-backed securities for the year ended December 31, 2011; certain prime mortgage-backed securities and obligations of U.S. states and municipalities for the year ended December 31, 2010; and certain prime and subprime mortgagebacked securities and obligations of U.S. states and municipalities for the year ended December 31, 2009.

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Notes to consolidated financial statements

The amortized costs and estimated fair values of AFS and held-to-maturity (HTM) securities were as follows for the dates indicated.
2011 December 31, (in millions) Available-for-sale debt securities Mortgage-backed securities: U.S. government agencies(a) Residential: Prime and Alt-A Subprime Non-U.S. Commercial Total mortgage-backed securities U.S. Treasury and government agencies(a) Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities(b) Asset-backed securities: Credit card receivables Collateralized loan obligations Other Total available-for-sale debt securities Available-for-sale equity securities Total available-for-sale securities Total held-to-maturity securities $ 4,506 24,474 11,273 356,247 2,693 $ 358,940 $ 12 $ 149 553 102 8,790 14 1 $ 166 57 2,961 2
(c) (c)

2010 Fair value Amortized cost Gross unrealized gains Gross unrealized losses Fair value

Amortized cost

Gross unrealized gains

Gross unrealized losses

$ 101,968 $ 2,170 1 66,067 10,632 180,838 8,184 15,404 3,017 44,944 63,607

5,141 $ 54 170 650 6,015 169 1,184 402 216

2 218 687 53 960 2 48 81 1,647

(c)

$ 107,107 2,006 1 65,550 11,229 185,893 8,351 16,540 3,017 45,265 62,176 4,655 24,861 11,318 362,076 2,705 $ 364,781 $ 13

$ 117,364 $ 2,173 1 47,089 5,169 171,796 11,258 11,732 3,648 20,614 61,717 7,278 13,336 8,968 310,347 1,894 $ 312,241 $ $ 18 $

3,159 $ 81 290 502 4,032 118 165 1 191 495 335 472 130 5,939 163 2 $

297 250 409 17 973 28 338 2 28 419 5 210 16 2,019 6

(c) (c) (c)

$ 120,226 2,004 1 46,970 5,654 174,855 11,348 11,559 3,647 20,777 61,793 7,608 13,598 9,082 314,267 2,051 $ 316,318 $ 20

8,804 $ 2,963

6,102 $ 2,025

(a) Includes total U.S. government-sponsored enterprise obligations with fair values of $89.3 billion and $94.2 billion at December 31, 2011 and 2010, respectively, which were predominantly mortgage-related. (b) Consists primarily of bank debt including sovereign government-guaranteed bank debt. (c) Includes a total of $91 million and $133 million (pretax) of unrealized losses related to prime mortgage-backed securities for which credit losses have been recognized in income at December 31, 2011 and 2010, respectively. These unrealized losses are not credit-related and remain reported in AOCI.

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Securities impairment The following tables present the fair value and gross unrealized losses for AFS securities by aging category at December 31, 2011 and 2010.
Securities with gross unrealized losses Less than 12 months December 31, 2011 (in millions) Available-for-sale debt securities Mortgage-backed securities: U.S. government agencies Residential: Prime and Alt-A Subprime Non-U.S. Commercial Total mortgage-backed securities U.S. Treasury and government agencies Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized loan obligations Other Total available-for-sale debt securities Available-for-sale equity securities Total securities with gross unrealized losses $ 5,610 4,735 82,702 338 83,040 $ 49 40 1,433 2 1,435 $ 3,913 1,185 42,155 42,155 $ 117 17 1,528 1,528 $ 9,523 5,920 124,857 338 125,195 $ 166 57 2,961 2 2,963 649 30,500 837 34,710 3,369 147 11,901 22,230 12 266 53 333 2 42 66 901 970 25,176 26,146 40 1,286 9,585 206 421 627 6 15 746 1,619 55,676 837 60,856 3,369 187 13,187 31,815 218 687 53 960 2 48 81 1,647 $ 2,724 $ 2 $ $ $ 2,724 $ 2 Fair value Gross unrealized losses 12 months or more Fair value Gross unrealized losses Total fair value Total gross unrealized losses

Securities with gross unrealized losses Less than 12 months December 31, 2010 (in millions) Available-for-sale debt securities Mortgage-backed securities: U.S. government agencies Residential: Prime and Alt-A Subprime Non-U.S. Commercial Total mortgage-backed securities U.S. Treasury and government agencies Obligations of U.S. states and municipalities Certificates of deposit Non-U.S. government debt securities Corporate debt securities Asset-backed securities: Credit card receivables Collateralized loan obligations Other Total available-for-sale debt securities Available-for-sale equity securities Total securities with gross unrealized losses $ 460 2,615 88,153 88,153 $ 10 9 1,515 1,515 $ 345 6,321 32 9,092 2 9,094 $ 5 200 7 504 6 510 $ 345 6,781 2,647 97,245 2 97,247 $ 5 210 16 2,019 6 2,025 35,166 548 49,753 921 6,890 1,771 6,960 18,783 379 14 690 28 330 2 28 418 1,193 1,080 11 2,284 20 90 250 30 3 283 8 1 1,193 36,246 559 52,037 921 6,910 1,771 6,960 18,873 250 409 17 973 28 338 2 28 419 $ 14,039 $ 297 $ $ $ 14,039 $ 297 Fair value Gross unrealized losses 12 months or more Fair value Gross unrealized losses Total fair value Total gross unrealized losses

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Notes to consolidated financial statements

Other-than-temporary impairment The following table presents credit losses that are included in the securities gains and losses table above.
Year ended December 31, (in millions) Debt securities the Firm does not intend to sell that have credit losses Total other-than-temporary impairment losses(a) Losses recorded in/(reclassified from) other comprehensive income Total credit losses recognized in income(b)(c) $ $ (27) $ (49) (94) $ (946) (6) 368 2011 2010 2009

that the securities with an unrealized loss in AOCI are not other-than-temporarily impaired as of December 31, 2011. Following is a description of the Firms principal investment securities with the most significant unrealized losses that have existed for 12 months or more as of December 31, 2011, and the key assumptions used in the Firms estimate of the present value of the cash flows most likely to be collected from these investments. Mortgage-backed securities Prime and Alt-A nonagency As of December 31, 2011, gross unrealized losses related to prime and Alt-A residential mortgage-backed securities issued by private issuers were $218 million, of which $206 million related to securities that have been in an unrealized loss position for 12 months or more. The Firm has previously recognized OTTI on securities that are backed primarily by mortgages with higher credit risk characteristics based on collateral type, vintage and geographic concentration. The remaining securities that have not experienced OTTI generally either do not possess all of these characteristics or have sufficient credit enhancements, primarily in the form of subordination, to protect the investment. The average credit enhancements associated with the below investment-grade positions that have experienced OTTI losses and those that have not are 1% and 18%, respectively. The Firm's cash flow estimates are based on a loan-level analysis that considers housing prices, loan-to-value (LTV) ratio, loan type, geographical location of the underlying property and unemployment rates, among other factors. The weighted-average underlying default rate on the positions was forecasted to be 25%; the related weighted-average loss severity forecast was 52%; and estimated voluntary prepayment rates ranged from 4% to 19%. Based on the results of this analysis, an OTTI loss of $76 million was recognized in 2011 on certain securities due to their higher loss assumptions, and the unrealized loss of $218 million is considered temporary as management believes that the credit enhancement levels for those securities remain sufficient to support the Firms investment. Mortgage-backed securities Non-U.S. As of December 31, 2011, gross unrealized losses related to non-U.S. residential mortgage-backed securities were $687 million, of which $421 million related to securities that have been in an unrealized loss position for 12 months or more. Substantially all of these securities are rated AAA, AA or A and primarily represent mortgage exposures in the United Kingdom and the Netherlands. The key assumptions used in analyzing non-U.S. residential mortgage-backed securities for potential credit losses include credit enhancements, recovery rates, default rates, and constant prepayment rates. Credit enhancement is primarily in the form of subordination, which is a form of structural credit enhancement where realized losses associated with assets held in an issuing vehicle are allocated to the various tranches of securities issued by the vehicle considering their relative seniority. Credit
JPMorgan Chase & Co./2011 Annual Report

(76) $ (100) $ (578)

(a) For initial OTTI, represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, represents additional declines in fair value subsequent to previously recorded OTTI, if applicable. (b) Represents the credit loss component on certain prime mortgagebacked securities for 2011; certain prime mortgage-backed securities and obligations of U.S. states and municipalities for 2010; and certain prime and subprime mortgage-backed securities and obligations of U.S. states and municipalities for 2009 that the Firm does not intend to sell. Subsequent credit losses may be recorded on securities without a corresponding further decline in fair value if there has been a decline in expected cash flows. (c) Excluded from this table are OTTI losses of $7 million that were recognized in income in 2009, related to subprime mortgage-backed debt securities the Firm intended to sell. These securities were sold in 2009, resulting in the recognition of a recovery of $1 million.

Changes in the credit loss component of credit-impaired debt securities The following table presents a rollforward for the years ended December 31, 2011, 2010 and 2009, of the credit loss component of OTTI losses that have been recognized in income, related to debt securities that the Firm does not intend to sell.
Year ended December 31, (in millions) Balance, beginning of period Additions: Newly credit-impaired securities Increase in losses on previously creditimpaired securities Losses reclassified from other comprehensive income on previously credit-impaired securities Reductions: Sales of credit-impaired securities Impact of new accounting guidance related to VIEs Balance, end of period $ 708 $ (31) (15) 4 72 94 6 578 $ 2011 632 $ 2010 578 $ 2009

632 $ 578

Gross unrealized losses Gross unrealized losses have generally increased since December 31, 2010, including those that have been in an unrealized loss position for 12 months or more. As of December 31, 2011, the Firm does not intend to sell the securities with a loss position in AOCI, 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 reported in the table above for which credit losses have been recognized in income, the Firm believes
228

enhancement in the form of subordination was approximately 10% of the outstanding principal balance of securitized mortgage loans, compared with expected lifetime losses of 1% of the outstanding principal. In assessing potential credit losses, assumptions included recovery rates of 60%, default rates of 0.25% to 0.5% and constant prepayment rates of 15% to 20%. The unrealized loss is considered temporary, based on managements assessment that the estimated future cash flows together with the credit enhancement levels for those securities remain sufficient to support the Firms investment. Corporate debt securities As of December 31, 2011, gross unrealized losses related to corporate debt securities were $1.6 billion, of which $746 million related to securities that have been in an unrealized loss position for 12 months or more. Substantially all of the corporate debt securities are rated investment-grade, including those in an unrealized loss position. Various factors were considered in assessing whether the Firm expects to recover the amortized cost of corporate debt securities including, but not limited to, the strength of issuer credit ratings, the financial condition of guarantors and the length of time and the extent to which a securitys fair value has been less than its amortized cost. The fair values of securities in an unrealized loss position were on average within approximately 4% of amortized cost. Based on managements assessment, the Firm expects to recover the entire amortized cost basis of all corporate debt securities that were in an unrealized loss position as of December 31, 2011.

Asset-backed securities Collateralized loan obligations As of December 31, 2011, gross unrealized losses related to CLOs were $166 million, of which $117 million related to securities that were in an unrealized loss position for 12 months or more. Overall, losses have decreased since December 31, 2010, mainly as a result of lower default forecasts and spread tightening across various asset classes. Substantially all of these securities are rated AAA, AA or A and have an average credit enhancement of 30%. The key assumptions considered in analyzing potential credit losses were underlying loan and debt security defaults and loss severity. Based on current default trends for the collateral underlying the securities, the Firm assumed initial collateral default rates of 2% and 4% beginning in 2012 and thereafter. Further, loss severities were assumed to be 48% for loans and 82% for debt securities. Losses on collateral were estimated to occur approximately 18 months after default. The unrealized loss is considered temporary, based on managements assessment that the estimated future cash flows together with the credit enhancement levels for those securities remain sufficient to support the Firm's investment.

JPMorgan Chase & Co./2011 Annual Report

229

Notes to consolidated financial statements

Contractual maturities and yields The following table presents the amortized cost and estimated fair value at December 31, 2011, of JPMorgan Chases AFS and HTM securities by contractual maturity.
By remaining maturity December 31, 2011 (in millions) Available-for-sale debt securities Mortgage-backed securities(a) Amortized cost Fair value Average yield(b) U.S. Treasury and government agencies(a) Amortized cost Fair value Average yield(b) Obligations of U.S. states and municipalities Amortized cost Fair value Average yield(b) Certificates of deposit Amortized cost Fair value Average yield(b) Non-U.S. government debt securities Amortized cost Fair value Average yield(b) Corporate debt securities Amortized cost Fair value Average yield(b) Asset-backed securities Amortized cost Fair value Average yield(b) Total available-for-sale debt securities Amortized cost Fair value Average yield(b) Available-for-sale equity securities Amortized cost Fair value Average yield(b) Total available-for-sale securities Amortized cost Fair value Average yield(b) Total held-to-maturity securities Amortized cost Fair value Average yield(b) Due in one year or less Due after one year through five years Due after five years through 10 years Due after 10 years(c) Total

15 $ 15 5.04% 4,949 $ 4,952 0.58% 61 $ 62 3.10% 3,017 $ 3,017 4.33% 20,863 $ 20,861 1.27% 22,019 $ 22,091 2.05% 2 $ 2 2.28% 50,926 $ 51,000 1.73% $ % 50,926 $ 51,000 1.73% $ %

3,666 $ 3,653 3.20% 2,984 $ 3,099 2.20% 306 $ 326 3.66% $ % 15,967 $ 16,106 2.06% 30,171 $ 29,291 3.09% 5,965 $ 6,102 2.88% 59,059 $ 58,577 2.75% $ % 59,059 $ 58,577 2.75% 8 $ 9 6.90%

3,932 $ 4,073 3.08% $ % 1,132 $ 1,206 3.59% $ % 7,524 $ 7,700 2.86% 11,398 $ 10,776 4.45% 17,951 $ 18,287 2.02% 41,937 $ 42,042 2.97% $ % 41,937 $ 42,042 2.97% 3 $ 3 6.76%

173,225 $ 178,152 3.64% 251 $ 300 3.89% 13,905 $ 14,946 4.84% $ % 590 $ 598 4.94% 19 $ 18 5.42% 16,335 $ 16,443 2.51% 204,325 $ 210,457 3.64% 2,693 $ 2,705 0.38% 207,018 $ 213,162 3.60% 1 $ 1 6.48%

180,838 185,893 3.62% 8,184 8,351 1.27% 15,404 16,540 4.72% 3,017 3,017 4.33% 44,944 45,265 1.87% 63,607 62,176 2.97% 40,253 40,834 2.35% 356,247 362,076 3.14% 2,693 2,705 0.38% 358,940 364,781 3.12% 12 13 6.84%

(a) U.S. government agencies and U.S. government-sponsored enterprises were the only issuers whose securities exceeded 10% of JPMorgan Chases total stockholders equity at December 31, 2011. (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 where applicable. (c) Includes securities with no stated maturity. Substantially all of the Firms residential mortgage-backed securities and collateralized mortgage obligations are due in 10 years or more, based on contractual maturity. The estimated duration, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately three years for agency residential mortgage-backed securities, two years for agency residential collateralized mortgage obligations and four years for nonagency residential collateralized mortgage obligations.

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Note 13 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 Firms 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 Firms Consolidated Balance Sheets. Resale and repurchase agreements are generally carried at the amounts at which the securities will be subsequently sold or repurchased, plus accrued interest. 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. Fees received and paid in connection with securities financing agreements are recorded in interest income and interest expense, respectively. The Firm has elected the fair value option for certain securities financing agreements. For further information regarding the fair value option, see Note 4 on pages 198 200 of this Annual Report. 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. The following table details the Firms securities financing agreements, all of which are accounted for as collateralized financings during the periods presented.
December 31, (in millions) Securities purchased under resale agreements(a) Securities borrowed(b) Securities sold under repurchase agreements(c) Securities loaned 2011 $ 235,000 142,462 $ 197,789 14,214 2010 $ 222,302 123,587 $ 262,722 10,592

The amounts reported in the table above were reduced by $115.7 billion and $112.7 billion at December 31, 2011 and 2010, respectively, as a result of agreements in effect that meet the specified conditions for net presentation under applicable accounting guidance. JPMorgan Chases policy is to take possession, where possible, of securities purchased under resale agreements and of securities borrowed. The Firm monitors the value of the underlying securities (primarily G7 government securities, U.S. agency securities and agency MBS, and equities) that it has received from its counterparties and either requests additional collateral or returns a portion of the collateral when appropriate in light of the market value of the underlying securities. Margin levels are established initially based upon the counterparty and type of collateral and monitored on an ongoing basis to protect against declines in collateral value in the event of default. JPMorgan Chase typically enters into master netting agreements and other collateral arrangements with its resale agreement and securities borrowed counterparties, which provide for the right to liquidate the purchased or borrowed securities in the event of a customer default. As a result of the Firms credit risk mitigation practices described above on resale and securities borrowed agreements, the Firm did not hold any reserves for credit impairment on these agreements as of December 31, 2011 and 2010. For further information regarding assets pledged and collateral received in securities financing agreements, see Note 30 on page 289 of this Annual Report.

Note 14 Loans
Loan accounting framework The accounting for a loan depends on managements strategy for the loan, and on whether the loan was creditimpaired 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 purchased credit-impaired (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 measured at the principal amount outstanding, net of the following: allowance for loan losses; net 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. Interest income Interest income on performing loans held-for-investment, other than PCI loans, is accrued and recognized as interest

(a) At December 31, 2011 and 2010, included resale agreements of $24.9 billion and $20.3 billion, respectively, accounted for at fair value. (b) At December 31, 2011 and 2010, included securities borrowed of $15.3 billion and $14.0 billion, respectively, accounted for at fair value. (c) At December 31, 2011 and 2010, included repurchase agreements of $9.5 billion and $4.1 billion, respectively, accounted for at fair value.

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231

Notes to consolidated financial statements

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 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 in doubt, which for consumer loans, excluding credit card, is generally determined when principal or interest is 90 days or more past due and collateral, if any, is insufficient to cover principal and interest. 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. All interest accrued but not collected is reversed against interest income at the date a loan is placed on nonaccrual status. In addition, the amortization of deferred amounts is suspended. In certain cases, interest income on nonaccrual loans may be recognized to the extent cash is received (i.e., cash basis) when 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). 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 for the estimated uncollectible portion of billed and accrued interest and fee income on credit card loans. Allowance for loan losses The allowance for loan losses represents the estimated probable losses on held-for-investment loans. Changes in the allowance for loan losses are recorded in the provision for credit losses on the Firms Consolidated Statements of Income. See Note 15 on pages 252255 for further information on the Firms accounting polices for the allowance for loan losses. Charge-offs Wholesale loans and risk-rated business banking and auto loans are charged off against the allowance for loan losses when it is highly certain that a loss has been realized. This determination includes many factors, including the prioritization of the Firms claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrowers equity. Credit card loans are charged off by the end of the month in which the account becomes 180 days past due, or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Consumer loans, other than risk-rated business banking and auto loans and PCI loans, are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council (FFIEC) policy. Residential mortgage loans and scored business banking loans are generally charged down to estimated net realizable value (the fair value of collateral less costs to sell) at no later than 180 days past due. Collateral-dependent loans are charged down to estimated net realizable value when deemed impaired (for example, upon modification in a troubled debt restructuring). 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 borrowers operations, income or other resources. 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 brokers 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 taking physical possession of the property through foreclosure, the Firm 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 Firms experience with actual liquidation values as compared to the estimated values provided by exterior opinions and interior appraisals, considering state- and product-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 Firms 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 wholesale loans, the valuation is performed on an individual loan basis. For consumer loans, the valuation is performed on a portfolio basis.
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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 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 losses 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 Firms allowance for loan losses and charge-off policies do not apply to these loans. Loans at fair value Loans used in a trading strategy or risk managed on a fair value basis are measured at fair value, with changes in fair value recorded in noninterest revenue. For these loans, the earned current contractual interest payment is recognized in interest income. 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 Firms nonaccrual, allowance for loan losses, and charge-off policies do not apply to these loans. See Note 4 on pages 198200 of this Annual Report for further information on the Firms elections of fair value accounting under the fair value option. See Note 3 and Note 4 on pages 184198 and 198200 of this Annual Report 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 loans 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 247 of this Note for information on accounting for PCI loans subsequent to their acquisition. Loan classification changes Loans in the held-for-investment portfolio that management decides to sell are transferred to the held-forsale 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; losses 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 Firms allowance methodology. For a further discussion of the methodologies used in establishing the Firms allowance for loan losses, see Note 15 on pages 252255 of this Annual Report. 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 Firms economic loss, 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 borrowerspecific characteristics, and may include interest rate reductions, term extensions, payment deferrals, or the acceptance of equity or other assets in lieu of payments. In certain limited circumstances, loan modifications include principal forgiveness. Such modifications are accounted for and reported as troubled debt restructurings (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 (resuming the accrual of interest) if the following criteria are met: (a) the borrower has performed under the modified terms for a minimum of six months and/or six payments, and (b) the Firm has an expectation that repayment of the modified loan is reasonably assured based on, for example, the borrowers debt capacity and level of future earnings, collateral values, LTV ratios, and other current market considerations. In certain limited and welldefined 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 evaluated for an asset-specific allowance, which considers the expected re-default rates for the modified loans and is determined based on the same methodology used to estimate the Firms asset-specific allowance component. A loan modified in a TDR remains subject to the asset-specific allowance methodology

JPMorgan Chase & Co./2011 Annual Report

233

Notes to consolidated financial statements

throughout its remaining life, regardless of whether the loan is performing and has been returned to accrual status. For further discussion of the methodology used to estimate the Firms asset-specific allowance, see Note 15 on pages 252255 of this Annual Report. 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, buildings, and fixtures) and commercial and personal property (e.g., aircraft, railcars, and ships). At the time JPMorgan Chase takes physical possession, the property is recorded in other assets on the Consolidated Balance Sheets at fair value less estimated costs to sell. Each quarter the fair value of the acquired property is reviewed and adjusted, if necessary. Subsequent changes to fair value are charged/credited to noninterest revenue. Operating expense, such as real estate taxes and maintenance, are charged to other expense.

Loan portfolio The Firms loan portfolio is divided into three portfolio segments, which are the same segments used by the Firm to determine the allowance for loan losses: Wholesale; Consumer, excluding credit card; and Credit card. 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: Wholesale(a) Commercial and industrial Real estate Financial institutions Government agencies Other Consumer, excluding credit card Residential real estate excluding PCI Home equity senior lien Home equity junior lien Prime mortgage, including option ARMs Subprime mortgage Other consumer loans Auto(c) Business banking(c) Student and other Residential real estate PCI Home equity Prime mortgage Subprime mortgage Option ARMs
(b)

Credit card Chase, excluding accounts originated by Washington Mutual Accounts originated by Washington Mutual

(a) Includes loans reported in IB, Commercial Banking (CB), Treasury & Securities Services (TSS), Asset Management (AM), and Corporate/ Private Equity segments. (b) Includes loans reported in RFS, auto and student loans reported in Card Services & Auto (Card), and residential real estate loans reported in the Corporate/Private Equity and AM segment. (c) Includes auto and business banking risk-rated loans that apply the wholesale methodology for determining the allowance for loan losses; these loans are managed by Card and RFS, respectively, and therefore, for consistency in presentation, are included with the other consumer loan classes.

The following table summarizes the Firms loan balances by portfolio segment.
December 31, 2011 (in millions) Retained Held-for-sale At fair value Total December 31, 2010 (in millions) Retained Held-for-sale At fair value Total $ $ $ $ Wholesale 278,395 $ 2,524 2,097 283,016 $ Consumer, excluding credit card 308,427 $ 308,427 $ Consumer, excluding credit card 327,464 $ 154 327,618 $ 3,147 1,976 227,633 $ Credit card 132,175 $ 102 132,277 $ Total 718,997 2,626 2,097 723,720
(a)

Wholesale 222,510 $

Credit card 135,524 $ 2,152 137,676 $

Total 685,498 5,453 1,976 692,927

(a)

(a) Loans (other than PCI loans and those for which the fair value option has been selected) are presented net of unearned income, unamortized discounts and premiums, and net deferred loan costs of $2.7 billion and $1.9 billion at December 31, 2011 and 2010, respectively.

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JPMorgan Chase & Co./2011 Annual Report

The following table provides information about the carrying value of retained loans purchased, retained loans sold and retained loans reclassified to held-for-sale during the periods indicated. These tables exclude loans recorded at fair value. On an ongoing basis, the Firm manages its exposure to credit risk. Selling loans is one way that the Firm reduces its credit exposures.
Year ended December 31, 2011 (in millions) Purchases Sales Retained loans reclassified to held-for-sale $ Wholesale 906 $ 3,289 538 Consumer, excluding credit card 7,525 $ 1,384 Credit card $ 2,006 Total 8,431 4,673 2,544

The following table provides information about gains/(losses) on loan sales by portfolio segment.
Year ended December 31, (in millions) Net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)(a) Wholesale Consumer, excluding credit card Credit card Total net gains/(losses) on sales of loans (including lower of cost or fair value adjustments)(a) $ (a) Excludes sales related to loans accounted for at fair value. $ 121 $ 131 (24) 228 $ 215 $ 265 (16) 464 $ 291 127 21 439 2011 2010 2009

Wholesale loan portfolio

Wholesale loans include loans made to a variety of customers from large corporate and institutional clients to certain high-net worth individuals. The primary credit quality indicator for wholesale loans is the risk rating assigned 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 probability of default (PD) and the loss given default (LGD). PD is the likelihood that a loan will not be repaid at 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 obligors debt capacity and financial flexibility, the level of the obligors 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. Risk ratings generally represent ratings profiles similar to those defined

by S&P and Moodys. 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 managements 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 obligors 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 5 on page 201 in this Annual Report for further detail on industry concentrations.

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235

Notes to consolidated financial statements

The table below provides information by class of receivable for the retained loans in the Wholesale portfolio segment.
Commercial and industrial 2011 $ 52,428 38,644 2,254 889 41,787 $ 94,215 3.34% 0.94 $ $ $ 30,813 63,402 94,215 124 0.13% $ $ $ $ $ 2010 31,697 30,874 2,371 1,634 34,879 66,576 6.02% 2.45 17,731 48,845 66,576 403 0.61% $ $ $ $ $ 2011 33,920 15,972 3,906 886 20,764 54,684 8.76% 1.62 1,497 53,187 54,684 256 0.47% $ $ $ $ $

As of or for the year ended December 31, (in millions, except ratios) Loans by risk ratings Investment grade Noninvestment grade: Noncriticized Criticized performing Criticized nonaccrual Total noninvestment grade Total retained loans % of total criticized to total retained loans % of nonaccrual loans to total retained loans Loans by geographic distribution(a) Total non-U.S. Total U.S. Total retained loans Net charge-offs % of net charge-offs to end-of-period retained loans Loan delinquency(b) Current and less than 30 days past due and still accruing 3089 days past due and still accruing 90 or more days past due and still accruing(c) Criticized nonaccrual Total retained loans $ $

Real estate 2010 28,504 16,425 5,769 2,937 25,131 53,635 16.23% 5.48 1,963 51,672 53,635 862 1.61%

93,060 266 889 94,215

64,501 434 7 1,634

53,387 327 84 886

50,299 290 109 2,937

66,576

54,684

53,635

(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 obligors ability to meet contractual obligations rather than relying on the past due status, which is generally a lagging indicator of credit quality. For a discussion of more significant risk factors, see page 235 of this Note. (c) Represents loans that are considered well-collateralized and therefore still accruing interest. (d) Other primarily includes loans to SPEs and loans to private banking clients. See Note 1 on pages 182183 of this Annual Report for additional information on SPEs.

The following table presents additional information on the real estate class of loans within the Wholesale portfolio segment for the periods indicated. The real estate class primarily consists of secured commercial loans mainly to borrowers for multifamily and commercial lessor properties. Multifamily lending specifically finances apartment buildings. Commercial lessors receive financing specifically for real estate leased to retail, office and industrial tenants. Commercial construction and development loans represent financing for the construction of apartments, office and professional buildings and malls. Other real estate loans include lodging, real estate investment trusts (REITs), single-family, homebuilders and other real estate.
December 31, (in millions, except ratios) Real estate retained loans Criticized exposure % of criticized exposure to total real estate retained loans Criticized nonaccrual % of criticized nonaccrual to total real estate retained loans $ $ Multifamily 2011 32,524 2,451 7.54% 412 1.27% $ $ 2010 30,604 3,798 12.41% 1,016 3.32% $ $ Commercial lessors 2011 14,444 1,662 11.51% 284 1.97% $ $ 2010 15,796 3,593 22.75% 1,549 9.81%

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JPMorgan Chase & Co./2011 Annual Report

(table continued from previous page)

Financial institutions 2011 $ 28,804 9,132 246 37 9,415 $ 38,219 0.74 % 0.10 $ $ $ 29,996 8,223 38,219 (137) (0.36)% $ $ $ $ $ 2010 22,525 8,480 317 136 8,933 31,458 1.44% 0.43 19,756 11,702 31,458 72 0.23% $ $ $ $ $ Total retained loans 2010 $ 56,450 6,012 320 781 7,113 $ 63,563 1.73% 1.23 $ $ $ 25,831 37,732 63,563 388 0.61% $ $ $ $ $ 2011 197,070 71,709 7,218 2,398 81,325 278,395 3.45% 0.86 95,164 183,231 278,395 440 0.16% $ $ $ $ $ 2010 146,047 62,173 8,780 5,510 76,463 222,510 6.42% 2.48 66,151 156,359 222,510 1,727 0.78%

Government agencies 2011 7,421 378 4 16 398 7,819 0.26% 0.20 583 7,236 7,819 % $ $ $ $ $ 2010 6,871 382 3 22 407 7,278 0.34% 0.30 870 6,408 7,278 2 0.03% $ $ $ $ $ 2011

Other(d)

74,497 7,583 808 570 8,961 83,458 1.65% 0.68 32,275 51,183 83,458 197 0.24%

38,129 51 2 37

31,289 31 2 136

7,780 23 16

7,222 34 22

81,802 1,072 14 570

61,837 704 241 781

274,158 1,739 100 2,398

215,148 1,493 359 5,510

38,219

31,458

7,819

7,278

83,458

63,563

278,395

222,510

(table continued from previous page)

Commercial construction and development 2011 $ 3,148 297 9.43% $ 69 2.19% $ $ 2010 3,395 619 18.23% 174 5.13% $ $ 2011 4,568 382 8.36% 121 2.65% $ $ Other 2010 3,840 696 18.13% 198 5.16% $ $ Total real estate loans 2011 54,684 4,792 8.76% 886 1.62% $ $ 2010 53,635 8,706 16.23% 2,937 5.48%

JPMorgan Chase & Co./2011 Annual Report

237

Notes to consolidated financial statements

Wholesale impaired loans and loan modifications Wholesale impaired loans include 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 on pages 233234 of this Note. The table below set forth information about the Firms wholesale impaired loans.
Commercial and industrial 2011 $ $ 828 $ 177 1,005 $ 2010 1,512 157 1,669 $ $ Real estate 2011 621 $ 292 913 $ 2010 2,510 445 2,955 $ $ Financial institutions 2011 21 $ 18 39 $ 2010 127 8 135 $ $ Government agencies 2011 16 $ 16 $ 2010 22 22 $ $ 2011 473 $ 103 576 $ Other 2010 697 8 705 $ $ Total retained loans 2011 1,959 $ 590 2,549 $ 2010 4,868 618 5,486

December 31, (in millions) Impaired loans With an allowance Without an allowance(a) Total impaired loans Allowance for loan losses related to impaired loans $ Unpaid principal balance of impaired loans(b) (a) (b)

276 $ 1,705

435 2,453

148 $ 1,124

825 3,487

5 $ 63

61 244

10 $ 17

14 30

77 $ 1,008

239 1,046

516 $ 3,917

1,574 7,260

When the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then 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. Represents the contractual amount of principal owed at December 31, 2011 and 2010. 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.

The following table presents the Firms average impaired loans for the years ended 2011, 2010 and 2009.
Year ended December 31, (in millions) Commercial and industrial Real estate Financial institutions Government agencies Other Total(a) $ $ 2011 1,309 $ 1,813 84 20 634 3,860 $ 2010 1,655 $ 3,101 304 5 884 5,949 $ 2009 1,767 2,420 685 4 468 5,344

(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, 2011, 2010 and 2009.

Loan modifications 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. The following table provides information about the Firms wholesale loans that have been modified in TDRs as of the dates presented.
December 31, (in millions) Loans modified in troubled debt restructurings TDRs on nonaccrual status Additional commitments to lend to borrowers whose loans have been modified in TDRs $ Commercial and industrial 2011 531 $ 415 2010 212 163 $ Real estate 2011 176 $ 128 2010 907 831 $ Financial institutions 2011 2 $ 2010 1 1 $ Government agencies 2011 16 $ 16 2010 22 22 $ 2011 25 $ 19 Other 2010 1 1 $ Total retained loans 2011 750 $ 578 2010 1,143 1,018

147

147

TDR activity rollforward The following table reconciles the beginning and ending balances of wholesale loans modified in TDRs for the period presented and provides information regarding the nature and extent of modifications during the period.
Year ended December 31, 2011 (in millions) Beginning balance of TDRs New TDRs Increases to existing TDRs Charge-offs post-modification Sales and other(a) Ending balance of TDRs $ $ Commercial and industrial 212 665 96 (30) (412) 531 $ $ Real estate 907 113 16 (146) (714) 176 $ $ Other (b) 24 32 (13) 43 $ $ Total 1,143 810 112 (176) (1,139) 750

(a) Sales and other are predominantly sales and paydowns, but may include performing loans restructured at market rates that are no longer reported as TDRs. (b) Includes loans to Financial institutions, Government agencies and Other.

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JPMorgan Chase & Co./2011 Annual Report

Financial effects of modifications and redefaults Loans modified as TDRs during the year ended December 31, 2011, are predominantly term or payment extensions and, to a lesser extent, deferrals of principal and/or interest on commercial and industrial and real estate loans. The average term extension granted on loans with term or payment extensions was 3.3 years for the year ended December 31, 2011. The weighted-average remaining term for all loans modified during the year ended December 31, 2011 was 4.5 years. Wholesale TDR loans that redefaulted within one year of the modification were $96 million during the year ended December 31, 2011. A payment default is deemed to occur when the borrower has not made a loan payment by its scheduled due date after giving effect to any contractual grace period.

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 short sale or foreclosure. 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 loans with a junior lien, is an indicator of the potential loss severity in the event of default. Additionally, LTV or combined LTV can provide insight into a borrowers 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 hurricanes, earthquakes, etc., will affect credit quality. The borrowers current or refreshed FICO score is a secondary credit-quality indicator for certain loans, as FICO scores are an indication of the borrowers credit payment history. Thus, a loan to a borrower with a low FICO score (660 or below) is considered to be of higher risk than a loan to a borrower with a high 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.

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, business banking loans, and student and other loans, with a primary focus on serving the prime consumer credit market. The portfolio also includes home equity loans secured by junior liens and mortgage loans with interest-only payment options to predominantly prime borrowers, as well as certain payment-option loans originated by Washington Mutual that may result in negative amortization. The table below provides information about consumer retained loans by class, excluding the Credit card loan portfolio segment.
December 31, (in millions) Residential real estate excluding PCI Home equity: Senior lien Junior lien Mortgages: Prime, including option ARMs Subprime Other consumer loans Auto Business banking Student and other Residential real estate PCI Home equity Prime mortgage Subprime mortgage Option ARMs Total retained loans 22,697 15,180 4,976 22,693 24,459 17,322 5,398 25,584 47,426 17,652 14,143 48,367 16,812 15,311 76,196 9,664 74,539 11,287 $ 21,765 $ 56,035 24,376 64,009 2011 2010

For auto, scored business banking and student 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 affecting borrowers ability to fulfill their obligations. Consistent with other classes of consumer loans, the geographic distribution of the portfolio provides insights into portfolio performance based on regional economic activity and events. Residential real estate excluding PCI loans The following tables provide information by class for residential real estate excluding PCI retained loans in the Consumer, excluding credit card, portfolio segment. The following factors should be considered in analyzing certain credit statistics applicable to the Firms residential real estate excluding PCI loans portfolio: (i) junior lien home equity loans may be fully charged off when the loan becomes 180 days past due, the borrower is either unable
239

$ 308,427 $ 327,464

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 that 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 that the borrower is likely

JPMorgan Chase & Co./2011 Annual Report

Notes to consolidated financial statements

or unwilling to repay the loan, and the value of the collateral does not support the repayment of the loan, resulting in relatively high charge-off rates for this product class; and (ii) the lengthening of loss-mitigation timelines
Residential real estate excluding PCI loans
Home equity December 31, (in millions, except ratios) Loan delinquency(a) Current and less than 30 days past due 30149 days past due 150 or more days past due Total retained loans % of 30+ days past due to total retained loans 90 or more days past due and still accruing 90 or more days past due and government guaranteed(b) Nonaccrual loans Current estimated LTV ratios(c)(d)(e)(f) Greater than 125% and refreshed FICO scores: Equal to or greater than 660 Less than 660 101% to 125% and refreshed FICO scores: Equal to or greater than 660 Less than 660 80% to 100% and refreshed FICO scores: Equal to or greater than 660 Less than 660 Less than 80% and refreshed FICO scores: Equal to or greater than 660 Less than 660 U.S. government-guaranteed Total retained loans Geographic region California New York Florida Illinois Texas New Jersey Arizona Washington Ohio Michigan All other(g) Total retained loans $ Senior lien 2011 20,992 $ 405 368 21,765 $ 3.55% $ 495 2010 23,615 414 347 24,376 3.12% 479 $ 2011 54,533 $ 1,272 230 56,035 $ 2.68% $ 792 Junior lien 2010 62,315 1,508 186 64,009 2.65% 784

may result in higher delinquency rates for loans carried at estimated collateral value that remain on the Firms Consolidated Balance Sheets.

$ $

$ $

341 160 663 241 1,850 601 15,350 2,559 21,765 3,066 3,023 992 1,495 3,027 687 1,339 714 1,747 1,044 4,631 21,765

363 196 619 249 1,900 657 17,474 2,918 24,376 3,348 3,272 1,088 1,635 3,594 732 1,481 776 2,010 1,176 5,264 24,376

6,463 2,037 8,775 2,510 11,433 2,616 19,326 2,875 56,035 12,851 10,979 3,006 3,785 1,859 3,238 2,552 1,895 1,328 1,400 13,142 56,035

6,928 2,495 9,403 2,873 13,333 3,155 22,527 3,295 64,009 14,656 12,278 3,470 4,248 2,239 3,617 2,979 2,142 1,568 1,618 15,194 64,009

$ $

$ $

$ $

$ $

(a) Individual delinquency classifications included mortgage loans insured by U.S. government agencies as follows: current and less than 30 days past due includes $3.0 billion and $2.5 billion; 30149 days past due includes $2.3 billion and $2.5 billion; and 150 or more days past due includes $10.3 billion and $7.9 billion at December 31, 2011 and 2010, respectively. (b) These balances, which are 90 days or more past due but insured by U.S. government agencies, are excluded from nonaccrual loans. In predominately all cases, 100% of the principal balance of the loans is insured and interest is guaranteed at a specified reimbursement rate subject to meeting agreed servicing guidelines. These amounts are excluded from nonaccrual loans because reimbursement of insured and guaranteed amounts is proceeding normally. At December 31, 2011 and 2010, these balances included $7.0 billion and $2.8 billion, respectively, of loans that are no longer accruing interest because interest has been curtailed by the U.S. government agencies although, in predominantly all cases, 100% of the principal is still insured. For the remaining balance, interest is being accrued at the guaranteed reimbursement rate. (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. (d) Junior lien represents combined LTV, which considers all available lien positions related to the property. All other products are presented without consideration of subordinate liens on the property. (e) Refreshed FICO scores represent each borrowers most recent credit score, which is obtained by the Firm at least on a quarterly basis. (f) For senior lien home equity loans, prior-period amounts have been revised to conform with the current-period presentation. (g) At December 31, 2011 and 2010, included mortgage loans insured by U.S. government agencies of $15.6 billion and $12.9 billion, respectively. (h) At December 31, 2011 and 2010, excluded mortgage loans insured by U.S. government agencies of $12.6 billion and $10.3 billion, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally.

240

JPMorgan Chase & Co./2011 Annual Report

(table continued from previous page) Mortgages Prime, including option ARMs 2011 2010 $ 59,855 3,475 12,866 76,196 4.96% 11,516 3,462 $ 59,223 4,052 11,264 74,539 6.68% 9,417 4,320 $ Subprime 2011 7,585 $ 820 1,259 9,664 $ 21.51% $ 1,781 2010 8,477 1,184 1,626 11,287 24.90% 2,210 $ Total residential real estate excluding PCI 2011 2010 142,965 5,972 14,723 163,660 4.97% 11,516 6,530 $ 153,630 7,158 13,423 174,211 5.88% 9,417 7,793

$ $

$
(h)

$
(h)

$ $

$
(h)

(h)

3,168 1,416 4,626 1,636 9,343 2,349 33,849 4,225 15,584 76,196 18,029 10,200 4,565 3,922 2,851 2,042 1,194 1,878 441 909 30,165 76,196

3,039 1,595 4,733 1,775 10,720 2,786 32,385 4,557 12,949 74,539 19,278 9,587 4,840 3,765 2,569 2,026 1,320 2,056 462 963 27,673 74,539

367 1,061 506 1,284 817 1,556 1,906 2,167 9,664 1,463 1,217 1,206 391 300 461 199 209 234 246 3,738 9,664

338 1,153 506 1,486 925 1,955 2,252 2,672 11,287 1,730 1,381 1,422 468 345 534 244 247 275 294 4,347 11,287

10,339 4,674 14,570 5,671 23,443 7,122 70,431 11,826 15,584 163,660 35,409 25,419 9,769 9,593 8,037 6,428 5,284 4,696 3,750 3,599 51,676 163,660

10,668 5,439 15,261 6,383 26,878 8,553 74,638 13,442 12,949 174,211 39,012 26,518 10,820 10,116 8,747 6,909 6,024 5,221 4,315 4,051 52,478 174,211

$ $

$ $

$ $

$ $

$ $

$ $

JPMorgan Chase & Co./2011 Annual Report

241

Notes to consolidated financial statements

The following table represents the Firms delinquency statistics for junior lien home equity loans as of December 31, 2011 and 2010.
Delinquencies December 31, 2011 (in millions, except ratios) HELOCs:(a) Within the revolving period(b) Within the required amortization period HELOANs Total $ $ 606 45 188 839 $ $ 314 19 100 433 $ $ 173 15 42 230 $ $ 47,760 1,636 6,639 56,035 2.29% 4.83 4.97 2.68% 3089 days past due 90149 days past due 150+ days past due Total loans Total 30+ day delinquency rate

Delinquencies December 31, 2010 (in millions, except ratios) HELOCs:(a) Within the revolving period(b) Within the required amortization period HELOANs Total $ $ 665 41 250 956 $ $ 384 19 149 552 $ $ 145 10 31 186 $ $ 54,434 1,177 8,398 64,009 2.19% 5.95 5.12 2.65% 3089 days past due 90149 days past due 150+ days past due Total loans Total 30+ day delinquency rate

(a) In general, HELOCs are open-ended, revolving loans for a 10-year period, after which time the HELOC converts to a loan with a 20-year amortization 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 or when the collateral does not support the loan amount.

Home equity lines of credit (HELOCs) within the required amortization period and home equity loans (HELOANs) have higher delinquency rates than do HELOCs within the revolving period. That is primarily because the fully-amortizing payment 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 loss estimates produced by the Firms delinquency roll-rate methodology, which estimates defaults based on the current delinquency status of a portfolio. Impaired loans The table below sets forth information about the Firms residential real estate impaired loans, excluding PCI. 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 15 on pages 252255 of this Annual Report.
Home equity December 31, (in millions) Impaired loans With an allowance Without an allowance(a) Total impaired loans(b) Allowance for loan losses related to impaired loans Unpaid principal balance of impaired loans(c) Impaired loans on nonaccrual status $ $ $ Senior lien 2011 319 $ 16 335 $ 80 $ 433 77 2010 211 15 226 77 265 38 $ $ $ Junior lien 2011 622 $ 35 657 $ 141 $ 994 159 2010 258 25 283 82 402 63 $ $ $ Mortgages Prime, including option ARMs 2011 4,332 $ 545 4,877 $ 4 $ 6,190 922 2010 1,525 559 2,084 97 2,751 534 $ $ $ Total residential real estate excluding PCI 2011 $ $ $ 8,320 $ 768 9,088 $ 591 $ 12,444 1,990 2010 4,557 787 5,344 811 7,195 1,267

Subprime 2010 2,563 188 2,751 555 3,777 632

2011 3,047 $ 172 3,219 $ 366 $ 4,827 832

(a) When discounted cash flows or collateral value equals or exceeds the recorded investment in the loan, the loan does not require an allowance. This typically occurs when an impaired loan has been partially charged off. (b) At December 31, 2011 and 2010, $4.3 billion and $3.0 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 Services (RHS)) were excluded from loans accounted for as TDRs. 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) Represents the contractual amount of principal owed at December 31, 2011 and 2010. 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.

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The following table presents average impaired loans and the related interest income reported by the Firm.
Year ended December 31, (in millions) Home equity Senior lien $ Junior lien Mortgages Prime, including option ARMs Subprime Total residential real estate excluding PCI $ Average impaired loans 2011 287 $ 521 3,859 3,083 7,750 $ 2010 207 $ 266 1,530 2,539 4,542 $ 2009 142 187 496 1,948 2,773 $ Interest income on impaired loans(a) 2011 10 $ 18 147 148 323 $ 2010 15 $ 10 70 121 216 $ 2009 7 9 34 98 148 $ Interest income on impaired loans on a cash basis(a) 2011 1 $ 2 14 16 33 $ 2010 1 $ 1 14 19 35 $ 2009 1 1 8 6 16

(a) Generally, interest income on loans modified in a TDR is recognized on a cash basis until such time as the borrower has made a minimum of six payments under the new terms. As of December 31, 2011 and 2010, $886 million and $580 million, respectively, of loans were TDRs for which the borrowers had not yet made six payments under their modified terms.

Loan modifications The Firm is participating in the U.S. Treasurys Making Home Affordable (MHA) programs and is continuing to expand its other loss-mitigation efforts for financially distressed borrowers who do not qualify for the U.S. Treasurys programs. The MHA programs include the Home Affordable Modification Program (HAMP) and the Second Lien Modification Program (2MP). The Firms other lossmitigation programs for troubled borrowers who do not qualify for HAMP include the traditional modification programs offered by the GSEs and Ginnie Mae, as well as the Firms proprietary modification programs, which include concessions similar to those offered under HAMP and 2MP but with expanded eligibility criteria. In addition, the Firm has offered specific targeted modification programs to higher risk borrowers, many of whom were current on their mortgages prior to modification. In order to be offered a permanent modification under HAMP, a borrower must successfully make three payments under the new terms during a trial modification period. The Firm also offers one proprietary modification program that is similar to HAMP and that includes a comparable trial modification period. Borrowers who do not successfully complete the trial modification period do not qualify to

have their loans permanently modified under that particular program; however, in certain cases, the Firm considers whether the borrower might qualify for a different loan modification program. Permanent modifications of residential real estate loans, excluding PCI loans, are generally accounted for and reported as TDRs. In addition, in the fourth quarter of 2011, the Firm began to characterize as TDRs loans to borrowers who have been approved for a trial modification either under HAMP or under the proprietary program noted above, even though such loans have not yet been permanently modified. Regardless of whether the borrower successfully completes the trial modification, such loans will continue to be reported as TDRs until charged-off, repaid or otherwise liquidated. The Firm previously considered the risk characteristics of loans in a trial modification in determining its formula-based allowance for loan losses. As a result, the recharacterization of trial modifications as TDRs during the fourth quarter of 2011 did not have a significant impact on the Firms allowance for loan losses. There were no additional commitments to lend to borrowers whose residential real estate loans, excluding PCI loans, have been modified in TDRs.

TDR activity rollforward The following tables reconcile the beginning and ending balances of residential real estate loans, excluding PCI loans, modified in TDRs for the periods presented.
Home equity Year ended December 31, 2011 (in millions) Beginning balance of TDRs New TDRs(a) Charge-offs post-modification(b) Foreclosures and other liquidations (e.g., short sales) Principal payments and other Ending balance of TDRs Permanent modifications Trial modifications Senior lien $ 226 138 (15) (14) 335 285 50 $ Mortgages Prime, including Junior lien Subprime option ARMs 283 $ 2,084 $ 2,751 518 3,268 883 (78) (119) (234) (11) (108) (82) (55) (248) (99) 657 $ 4,877 $ 3,219 634 $ 4,601 $ 3,029 23 $ 276 $ 190 Total residential real estate (excluding PCI) $ 5,344 4,807 (446) (201) (416) 9,088 8,549 539

$ $ $

$ $ $

$ $ $

(a) Includes all loans to borrowers who were approved for trial modification on or after January 1, 2011, as well as all loans permanently modified during the year ended December 31, 2011. In the event that a trial modification is reported as a new TDR, any subsequent permanent modification of that same loan is not reported as a new TDR. (b) Includes charge-offs on unsuccessful trial modifications.

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Notes to consolidated financial statements

Nature and extent of modifications MHA, as well as the Firms 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 permanently modified during the period presented.
Home equity Year ended December 31, 2011 Number of loans approved for a trial modification, but not permanently modified Number of loans permanently modified Permanent concession granted:(a)(b) Interest rate reduction Term or payment extension Principal and/or interest deferred Principal forgiveness Other(c) Senior lien 654 1,006 80% 88 10 7 29 Junior lien 778 9,142 95% 81 21 20 7 Mortgages Prime, including option ARMs 898 9,579 53% 71 17 2 68 Subprime 1,730 4,972 80% 72 19 13 26 Total residential real estate (excluding PCI) 4,060 24,699 75% 75 19 11 35

(a) As a percentage of the number of loans permanently modified. The sum of the percentages exceeds 100% because predominantly all of the permanent modifications include more than one type of concession. (b) Except for the "Other" category, the percentages representing the various types of concessions granted are estimated to be materially consistent with those related to loans approved for trial modification. (c) Represents variable interest rate to fixed interest rate modifications. To date, these concessions have solely related to permanent modifications.

Financial effects of modifications and redefaults The following table provides information about the financial effects of the various concessions granted in permanent modifications of residential real estate loans, excluding PCI, and also about redefaults of certain loans modified in TDRs for the period presented.
Year ended December 31, 2011 (in millions, except weighted-average data and number of loans) Weighted-average interest rate of loans with interest rate reductions before TDR(a) Weighted-average interest rate of loans with interest rate reductions after TDR(a) Weighted-average remaining contractual term (in years) of loans with term or payment extensions before TDR(a) Weighted-average remaining contractual term (in years) of loans with term or payment extensions after TDR(a) Charge-offs recognized upon permanent modification Principal deferred(b) Principal forgiven(b) Number of loans that redefaulted within one year of permanent modification(c) Balance of loans that redefaulted within one year of permanent modification(c) Cumulative permanent modification redefault rates(d) $ $ Home equity Senior lien 7.25% 3.51 18 30 1 4 1 222 18 21% $ $ Junior lien 5.46% 1.49 21 34 117 35 62 1,310 52 14% $ $ Mortgages Prime, including option ARMs 5.98% 3.34 25 35 61 167 20 1,142 340 13% $ $ Subprime 8.25% 3.46 23 34 19 61 46 1,989 281 28% $ $ Total residential real estate (excluding PCI) 6.44% 3.09 24 35 198 267 129 4,663 691 18%

(a) Represents information about loans that have been permanently modified. The financial effects of such concessions related to loans approved for trial modification are estimated to be materially consistent with the financial effects presented above. (b) Represents information about loans that have been permanently modified. Principal deferred and principal forgiven related to loans approved for trial modification totaled $125 million for the year ended December 31, 2011. (c) Represents loans permanently modified in TDRs that experienced a payment default in the period 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 they 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. (d) Based upon permanent modifications completed after October 1, 2009, that are seasoned more than six months.

Approximately 85% of the trial modifications approved on or after July 1, 2010 (the approximate date on which substantial revisions were made to the HAMP program), that are seasoned more than six months have been successfully converted to permanent modifications.

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At December 31, 2011, the weighted-average estimated remaining lives of residential real estate loans, excluding PCI loans, permanently modified in TDRs were 7.0 years, 6.9 years, 9.0 years and 6.7 years for senior lien home equity, junior lien home equity, prime mortgage, including option ARMs, and subprime mortgage, respectively. The estimated remaining lives of these loans reflect estimated prepayments, both voluntary and involuntary (i.e., foreclosures and other forced liquidations). Other consumer loans The tables below provide information for other consumer retained loan classes, including auto, business banking and student loans.
December 31, (in millions, except ratios) Loan delinquency(a) Current and less than 30 days past due 30119 days past due 120 or more days past due Total retained loans % of 30+ days past due to total retained loans 90 or more days past due and still accruing (b) Nonaccrual loans Geographic region California New York Florida Illinois Texas New Jersey Arizona Washington Ohio Michigan All other Total retained loans Loans by risk ratings(c) Noncriticized Criticized performing Criticized nonaccrual (a) (b) (c) (d) $ 6,775 166 3 $ 5,803 265 12 $ 11,749 817 524 $ 10,351 982 574 NA NA NA NA NA NA $ 18,524 983 527 $ 16,154 1,247 586 $ 4,413 3,616 1,881 2,496 4,467 1,829 1,495 735 2,633 2,282 21,579 $ 47,426 $ 4,307 3,875 1,923 2,608 4,505 1,842 1,499 716 2,961 2,434 21,697 $ 48,367 $ 1,342 2,792 313 1,364 2,680 376 1,165 160 1,541 1,389 4,530 $ 17,652 $ 851 2,877 220 1,320 2,550 422 1,218 115 1,647 1,401 4,191 $ 16,812 $ 1,261 1,401 658 851 1,053 460 316 249 880 637 6,377 $ 14,143 $ 1,330 1,305 722 940 1,273 502 387 279 1,010 729 6,834 $ 15,311 $ 7,016 7,809 2,852 4,711 8,200 2,665 2,976 1,144 5,054 4,308 32,486 $ 79,221 $ 6,488 8,057 2,865 4,868 8,328 2,766 3,104 1,110 5,618 4,564 32,722 $ 80,490 $ $ 46,891 528 7 $ 47,426 1.13% 118 $ $ 47,778 579 10 $ 48,367 1.22% 141 $ $ 17,173 326 153 $ 17,652 2.71% 694 $ $ 16,240 351 221 $ 16,812 3.40% 832 $ $ 12,905 777 461 $ 14,143 1.76% 551 69
(d)

Auto 2011 2010

Business banking 2011 2010

Student and other 2011 2010

Total other consumer 2011 2010

$ 13,998 795 518 $ 15,311 1.61% $ 625 67

(d)

$ 76,969 1,631 621 $ 79,221 1.59% $ 551 881

(d)

$ 78,016 1,725 749 $ 80,490 1.75% $ 625 1,040

(d)

Loans insured by U.S. government agencies under the Federal Family Education Loan Program (FFELP) are included in the delinquency classifications presented based on their payment status. Prior-period amounts have been revised to conform with the current-period presentation. These amounts represent student loans, which are insured by U.S. government agencies under the FFELP. These amounts were accruing as reimbursement of insured amounts is proceeding normally. 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. December 31, 2011 and 2010, excluded loans 30 days or more past due and still accruing, which are insured by U.S. government agencies under the FFELP, of $989 million and $1.1 billion, respectively. These amounts were excluded as reimbursement of insured amounts is proceeding normally.

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245

Notes to consolidated financial statements

Other consumer impaired loans and loan modifications The tables below set forth information about the Firms 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) Impaired loans With an allowance Without an allowance(a) Total impaired loans Allowance for loan losses related to impaired loans Unpaid principal balance of impaired loans(b) Impaired loans on nonaccrual status $ $ $ 88 $ 3 91 $ 12 $ 126 41 102 102 16 132 50 $ $ $ 713 $ 713 $ 225 $ 822 551 774 774 248 899 647 $ $ $ 801 $ 3 804 $ 237 $ 948 592 876 876 264 1,031 697 Auto 2011 2010 Business banking 2011 2010 Total other consumer(c) 2011 2010

(a) When discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then 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, 2011 and 2010. 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. (c) There were no impaired student and other loans at December 31, 2011 and 2010.

The following table presents average impaired loans for the periods presented.
Year ended December 31, (in millions) Auto Business banking Total other consumer(a) $ $ Average impaired loans(b) 2011 92 $ 760 852 $ 2010 120 $ 682 802 $ 2009 100 396 496

(a) There were no impaired student and other loans for the years ended 2011, 2010 and 2009. (b) The related interest income on impaired loans, including those on a cash basis, was not material for the years ended 2011, 2010 and 2009.

Loan modifications The following table provides information about the Firms other consumer loans modified in TDRs. All of these TDRs are reported as impaired loans in the tables above.
December 31, (in millions) Loans modified in troubled debt restructurings(a)(b) TDRs on nonaccrual status $ Auto 2011 88 $ 38 2010 91 39 $ Business banking 2011 415 $ 253 2010 395 268 $ Total other consumer(c) 2011 503 $ 291 2010 486 307

(a) These modifications generally provided interest rate concessions to the borrower or deferral of principal repayments. (b) Additional commitments to lend to borrowers whose loans have been modified in TDRs as of December 31, 2011 and 2010, were immaterial. (c) There were no student and other loans modified in TDRs at December 31, 2011 and 2010.

TDR activity rollforward The following table reconciles the beginning and ending balances of other consumer loans modified in TDRs for the period presented.
Year ended December 31, 2011 (in millions) Beginning balance of TDRs New TDRs Charge-offs Foreclosures and other liquidations Principal payments and other Ending balance of TDRs $ $ Auto 91 54 (5) (52) 88 $ $ Business banking 395 195 (11) (3) (161) 415 $ $ Total other consumer 486 249 (16) (3) (213) 503

Financial effects of modifications and redefaults For auto loans, TDRs typically occur in connection with the bankruptcy of the borrower. In these cases, the loan is

modified with a revised repayment plan that typically incorporates interest rate reductions and, to a lesser extent, principal forgiveness.
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246

For business banking loans, concessions are dependent on individual borrower circumstances and can be of a shortterm nature for borrowers who need temporary relief or longer term for borrowers experiencing more fundamental financial difficulties. Concessions are predominantly term or payment extensions, but also may include interest rate reductions. For the year ended December 31, 2011, the interest rates on auto loans modified in TDRs were reduced on average from 12.45% to 5.70%, and the interest rates on business banking loans modified in TDRs were reduced on average from 7.55% to 5.52%. For business banking loans, the weighted-average remaining term of all loans modified in TDRs during the year ended December 31, 2011, increased from 1.4 years to 2.6 years. For all periods presented, principal forgiveness related to auto loans was immaterial. The balance of business banking loans modified in TDRs that experienced a payment default during the year ended December 31, 2011, and for which the payment default occurred within one year of the modification, was $80 million; the corresponding balance of redefaulted auto loans modified in TDRs was insignificant. A payment default is deemed to occur as follows: (1) for scored auto and business banking loans, when the loan is two payments past due; and (2) for risk-rated business banking loans and auto loans, when the borrower has not made a loan payment by its scheduled due date after giving effect to the contractual grace period, if any. 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 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 foregone interest cash flows, discounted at the pools 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) pre-payments, (ii)

changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans which may include sales of loans, receipt of payments in full by the borrower, or foreclosure result in removal of the loans from the PCI portfolio. The Firm continues to modify certain PCI loans. The impact of these modifications is incorporated into the Firms 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 foregone 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 PCI modified 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 Firms 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 loans were determined not to be reasonably estimable, no interest would be accreted and the loans would be reported as nonaccrual loans; however, since the timing and amounts of expected cash flows for the Firms PCI consumer loans are reasonably estimable, interest is being accreted and the loans are being reported as performing loans. Charge-offs are not recorded on PCI loans until actual losses exceed the estimated losses that were recorded as purchase accounting adjustments at acquisition date. To date, no charge-offs have been recorded for these consumer loans. The PCI portfolio affects the Firms 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 fixedrate 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, 2011, to have a remaining weighted-average life of 7.5 years.

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Notes to consolidated financial statements

Residential real estate PCI loans The table below sets forth information about the Firms consumer, excluding credit card, PCI loans.
December 31, (in millions, except ratios) Carrying value(a) Related allowance for loan losses(b) Loan delinquency (based on unpaid principal balance) Current and less than 30 days past due 30149 days past due 150 or more days past due Total loans % of 30+ days past due to total loans Current estimated LTV ratios (based on unpaid principal balance)(c)(d)(e) Greater than 125% and refreshed FICO scores: Equal to or greater than 660 Less than 660 101% to 125% and refreshed FICO scores: Equal to or greater than 660 Less than 660 80% to 100% and refreshed FICO scores: Equal to or greater than 660 Less than 660 Lower than 80% and refreshed FICO scores: Equal to or greater than 660 Less than 660 Total unpaid principal balance Geographic region (based on unpaid principal balance) California New York Florida Illinois Texas New Jersey Arizona Washington Ohio Michigan All other Total unpaid principal balance $15,091 1,179 2,307 558 455 471 468 1,368 32 81 3,054 $25,064 $17,012 1,316 2,595 627 525 540 539 1,535 38 95 3,490 $28,312 $ 9,121 1,018 1,265 511 168 445 254 388 79 239 2,572 $16,060 $10,891 1,111 1,519 562 194 486 359 451 91 279 2,985 $18,928 $ 1,661 709 812 411 405 297 126 160 114 187 2,347 $ 7,229 $ 1,971 736 906 438 435 316 165 178 122 214 2,561 $ 8,042 $13,565 1,548 3,201 702 140 969 362 649 111 268 4,624 $26,139 $16,130 1,703 3,916 760 155 1,064 528 745 131 345 5,314 $30,791 $39,438 4,454 7,585 2,182 1,168 2,182 1,210 2,565 336 775 12,597 $74,492 $46,004 4,866 8,936 2,387 1,309 2,406 1,591 2,909 382 933 14,350 $86,073 2,409 998 $25,064 2,641 1,113 $28,312 1,276 1,424 $16,060 1,443 1,688 $18,928 198 1,106 $ 7,229 186 1,357 $ 8,042 2,189 2,215 $26,139 2,281 2,499 $30,791 6,072 5,743 $74,492 6,551 6,657 $86,073 3,482 1,264 3,995 1,482 1,629 1,457 1,970 1,857 372 1,197 374 1,477 3,740 3,035 4,152 3,551 9,223 6,953 10,491 8,367 5,393 2,304 6,053 2,696 3,328 2,314 3,815 3,011 434 1,510 424 1,663 3,959 3,884 4,292 5,005 13,114 10,012 14,584 12,375 $ 5,915 3,299 $ 6,289 4,043 $ 2,313 2,319 $ 2,400 2,744 $ 473 1,939 $ 432 2,129 $ 2,509 4,608 $ 2,681 6,330 $11,210 12,165 $11,802 15,246 $22,682 1,130 1,252 $25,064 9.50% $25,783 1,348 1,181 $28,312 8.93% $12,148 912 3,000 $16,060 24.36% $13,035 1,468 4,425 $18,928 31.13% $ 4,388 782 2,059 $ 7,229 39.30% $ 4,312 1,020 2,710 $ 8,042 46.38% $17,919 1,467 6,753 $26,139 31.45% $18,672 2,215 9,904 $30,791 39.36% $57,137 4,291 13,064 $74,492 23.30% $61,802 6,051 18,220 $86,073 28.20% Home equity Prime mortgage Subprime mortgage Option ARMs Total PCI

2011
$22,697 1,908

2010
$24,459 1,583

2011
$15,180 1,929

2010
$17,322 1,766

2011
$ 4,976 380

2010
$ 5,398 98

2011
$22,693 1,494

2010
$25,584 1,494

2011
$65,546 5,711

2010
$72,763 4,941

(a) (b) (c)

(d) (e)

Carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition. Management concluded as part of the Firms 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. 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 related to the property. Refreshed FICO scores represent each borrowers most recent credit score obtained by the Firm. The Firm obtains refreshed FICO scores at least quarterly. For home equity loans, prior-period amounts have been revised to conform with the current-period presentation.

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JPMorgan Chase & Co./2011 Annual Report

Approximately 20% of the PCI home equity portfolio are senior lien loans; the remaining balance are junior lien HELOANs or HELOCs. The following table represents delinquency statistics for PCI junior lien home equity loans based on unpaid principal balance as of December 31, 2011 and 2010.
Delinquencies December 31, 2011 (in millions, except ratios) HELOCs:(a) Within the revolving period(b) Within the required amortization period(c) HELOANs Total $ $ 500 16 53 569 $ $ 296 11 29 336 $ $ 543 5 44 592 $ $ 18,246 400 1,327 19,973 7.34% 8.00 9.50 7.50% 3089 days past due 90149 days past due 150+ days past due Total loans Total 30+ day delinquency rate

Delinquencies December 31, 2010 (in millions, except ratios) HELOCs:(a) Within the revolving period(b) Within the required amortization period(c) HELOANs Total (a) (b) (c) $ $ 601 1 79 681 $ $ 404 49 453 $ $ 428 1 46 475 $ $ 21,172 37 1,573 22,782 6.77% 5.41 11.06 7.06% 3089 days past due 90149 days past due 150+ days past due Total loans Total 30+ day delinquency rate

In general, HELOCs are open-ended, revolving loans for a 10-year period, after which time the HELOC converts to a loan with a 20-year amortization period. Substantially all undrawn HELOCs within the revolving period have been closed. Predominantly all of these loans have been modified to provide a more affordable payment to the borrower.

The table below sets forth the accretable yield activity for the Firms PCI consumer loans for the years ended December 31, 2011, 2010 and 2009, and represents the Firms estimate of gross interest income expected to be earned over the remaining life of the PCI loan portfolios. This table excludes the cost to fund the PCI portfolios, and therefore does not represent net interest income expected to be earned on these portfolios.
Year ended December 31, (in millions, except ratios) Beginning balance Accretion into interest income Changes in interest rates on variable-rate loans Other changes in expected cash flows(a) Balance at December 31 Accretable yield percentage $ $ Total PCI 2011 19,097 (2,767) (573) 3,315 19,072 4.33% $ $ 2010 25,544 (3,232) (819) (2,396) 19,097 4.35% $ $ 2009 32,619 (4,363) (4,849) 2,137 25,544 5.14%

(a) Other changes in expected cash flows may vary from period to period as the Firm continues to refine its cash flow model and periodically updates model assumptions. For the year ended December 31, 2011, other changes in expected cash flows were largely driven by the impact of modifications, but also related to changes in prepayment assumptions. For the years ended December 31, 2010 and 2009, other changes in expected cash flows were principally driven by changes in prepayment assumptions, as well as reclassification to the nonaccretable difference. Changes to prepayment assumptions change the expected remaining life of the portfolio, which drives changes in expected future interest cash collections. Such changes do not have a significant impact on the accretable yield percentage.

The factors that most significantly affect estimates of gross cash flows expected to be collected, and accordingly the accretable yield balance, include: (i) changes in the benchmark interest rate indices for variable-rate products such as option ARM and home equity loans; and (ii) changes in prepayment assumptions. Since the date of acquisition, the decrease in the accretable yield percentage has been primarily related to a decrease in interest rates on variable-rate loans and, to a lesser extent, extended loan liquidation periods. Certain events, such as extended loan liquidation periods, affect the timing of expected cash flows but not the amount of cash expected to

be received (i.e., the accretable yield balance). Extended loan liquidation periods reduce the accretable yield percentage because the same accretable yield balance is recognized against a higher-than-expected loan balance over a longer-than-expected period of time.

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Notes to consolidated financial statements Credit card loan portfolio

be a lagging indicator of credit quality, the Firm does not use credit scores as a primary indicator of credit quality. However, the distribution of such scores provides a general indicator of credit quality trends within the portfolio. Refreshed FICO score information for a statistically significant random sample of the credit card portfolio is indicated in the table below, as 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 refreshed FICO scores may change over time, depending on the performance of the cardholder and changes in credit score technology.

The Credit card portfolio segment includes credit card loans originated and purchased by the Firm, including those acquired in the Washington Mutual transaction. 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), as well as information on those borrowers that have been delinquent for a longer period of time (90-days past due). 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. The borrowers credit score is another general indicator of credit quality. Because the borrowers credit score tends to

The table below sets forth information about the Firms credit card loans.
Chase, excluding Washington Mutual portfolio(b) 2011 $ 5,668 4.91% $ 118,054 1,509 1,558 1 121,122 2.53% 1.29 $ 15,479 9,755 9,418 6,658 7,108 5,208 4,882 4,434 3,777 3,061 2,737 2,081 46,524 121,122 $ $ $ 2010 11,191 8.73% 117,248 2,092 2,449 2 121,791 3.73% 2.01 15,454 9,540 9,217 6,724 7,077 5,070 5,035 4,521 3,956 3,020 2,834 2,053 47,290 121,791 $ $ $ Washington Mutual portfolio(b) 2011 1,257 10.49% 10,410 299 344 11,053 5.82% 3.11 2,119 839 821 925 440 396 320 345 217 237 315 359 3,720 11,053 $ $ $ 2010 2,846 17.73% 12,670 459 604 13,733 7.74% 4.40 2,650 1,032 1,006 1,165 542 494 401 424 273 295 398 438 4,615 13,733 $ $ Total credit card(b) 2011 6,925 5.44% $ 128,464 1,808 1,902 1 $ 132,175 2.81% 1.44 17,598 10,594 10,239 7,583 7,548 5,604 5,202 4,779 3,994 3,298 3,052 2,440 50,244 $ 132,175 $ $ 2010 14,037 9.73% $ 129,918 2,551 3,053 2 $ 135,524 4.14% 2.25 18,104 10,572 10,223 7,889 7,619 5,564 5,436 4,945 4,229 3,315 3,232 2,491 51,905 $ 135,524

As of or for the year ended December 31, (in millions, except ratios) Net charge-offs % of net charge-offs to retained loans Loan delinquency Current and less than 30 days past due and still accruing 3089 days past due and still accruing 90 or more days past due and still accruing Nonaccrual loans Total retained loans Loan delinquency ratios % of 30+ days past due to total retained loans % of 90+ days past due to total retained loans Credit card loans by geographic region California New York Texas Florida Illinois New Jersey Ohio Pennsylvania Michigan Virginia Georgia Washington All other Total retained loans Percentage of portfolio based on carrying value with estimated refreshed FICO scores(a) Equal to or greater than 660 Less than 660

83.3% 16.7

80.6% 19.4

62.6% 37.4

56.4% 43.6

81.4% 18.6

77.9% 22.1

(a) Refreshed FICO scores are estimated based on a statistically significant random sample of credit card accounts in the credit card portfolio for the period shown. The Firm obtains refreshed FICO scores at least quarterly. (b) Includes billed finance charges and fees net of an allowance for uncollectible amounts.

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Credit card impaired loans and loan modifications The table below sets forth information about the Firms impaired credit card loans. All of these loans are considered to be impaired as they have been modified in TDRs.
Chase, excluding Washington Mutual portfolio December 31, (in millions) Impaired loans with an allowance
(a)(b)

Washington Mutual portfolio 2011 $ 1,116 $ 209 $ $ 1,325 $ 532 $ 2010 1,570 311 1,881 894 $ $ $

Total credit card 2011 6,075 $ 1,139 7,214 $ 2,727 $ 2010 8,255 1,750 10,005 4,069

2011 $ 4,959 $ 930 $ $ 5,889 $ 2,195 $

2010 6,685 1,439 8,124 3,175

Credit card loans with modified payment terms(c) Modified credit card loans that have reverted to premodification payment terms(d) Total impaired loans Allowance for loan losses related to impaired loans (a) (b) (c) (d)

The carrying value and the unpaid principal balance are the same for credit card impaired loans. There were no impaired loans without an allowance. Represents credit card loans outstanding to borrowers enrolled in a credit card modification program as of the date presented. 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, 2011 and 2010, $762 million and $1.2 billion, 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. Based on the Firms historical experience a substantial portion of these loans is expected to be charged-off in accordance with the Firms standard charge-off policy. The remaining $377 million and $590 million at December 31, 2011 and 2010, 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.

The following table presents average balances of impaired credit card loans and interest income recognized on those loans.
Year ended December 31, (in millions) Chase, excluding Washington Mutual portfolio Washington Mutual portfolio Total credit card $ $ 2011 6,914 $ 1,585 8,499 $ Average impaired loans 2010 8,747 $ 1,983 10,730 $ 2009 3,059 991 4,050 $ $ Interest income on impaired loans 2011 360 $ 103 463 $ 2010 479 $ 126 605 $ 2009 181 70 251

Loan modifications JPMorgan Chase may offer one of a number of loan modification programs to credit card borrowers who are experiencing financial difficulty. The Firm has short-term programs for borrowers who may be in need of temporary relief, and long-term programs for borrowers who are experiencing a more fundamental level of financial difficulties. Most of the credit card loans have been modified under long-term programs. Modifications under long-term programs involve placing the customer on a fixed payment plan, generally for 60 months. Modifications under all short- and long-term programs typically include reducing the interest rate on the credit card. Certain borrowers enrolled in a short-term modification program may be given the option to re-enroll in a long-term program. Substantially all modifications are considered to be TDRs.

If the cardholder does not comply with the modified payment terms, then the credit card loan agreement reverts back to its pre-modification payment terms. Assuming that the cardholder does not begin to perform in accordance with those payment terms, the loan continues to age and will ultimately be charged-off in accordance with the Firms standard charge-off policy. In addition, if a borrower successfully completes a short-term modification program, then the loan reverts back to its pre-modification payment terms. However, in most cases, the Firm does not reinstate the borrowers line of credit.

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251

Notes to consolidated financial statements

The following tables provide information regarding the nature and extent of modifications of credit card loans for the period presented.
Chase, excluding Washington Mutual portfolio Year ended December 31, 2011 (in millions) New enrollments $ Short-term programs 141 $ Long-term programs 2,075 $ Washington Mutual portfolio Short-term programs 26 $ Long-term programs 448 $ Total credit card Short-term programs 167 $ Long-term programs 2,523

Financial effects of modifications and redefaults The following tables provide information about the financial effects of the concessions granted on credit card loans modified in TDRs and redefaults for the period presented.
Year ended December 31, 2011 (in millions, except weighted-average data) Weighted-average interest rate of loans before TDR Weighted-average interest rate of loans after TDR Loans that redefaulted within one year of modification(a) (a) $ Chase, excluding Washington Mutual portfolio 14.91% 5.04 559 $ Washington Mutual portfolio 21.38% 6.39 128 $ Total credit card 16.05% 5.28 687

Represents loans modified in TDRs that experienced a payment default in the period 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, payment default is deemed to have occurred when the loans become two payments past due. At the time of default, a loan is removed from the modification program and reverts back to its pre-modification terms. Based on historical experience, a substantial portion of these loans are expected to be charged-off in accordance with the Firms standard chargeoff policy. Also based on historical experience, the estimated weighted-average ultimate default rate for modified credit card loans was 35.47% at December 31, 2011, and 36.45% at December 31, 2010.

consumer loans) are pooled by product type. 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 loans original effective interest rate. Subsequent changes in impairment are reported as an adjustment to the provision 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 loans fair value. Impaired collateral-dependent loans are charged down to the fair value of collateral less costs to sell and therefore may not be subject to an assetspecific reserve as for other impaired loans. See Note 14 on pages 231252 of this Annual Report 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 incorporates the effects of foregone interest, if any, in the present value calculation and also incorporates the effect of the modification on the loans expected cash flows, which considers the potential for redefault. For wholesale loans modified in TDRs, expected losses incorporate redefaults based on managements expectation of the borrowers ability to repay under the modified terms. 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 Firms

Note 15 Allowance for credit losses

JPMorgan Chases allowance for loan losses covers the wholesale and consumer, including credit card, loan portfolios, and represents managements estimate of probable credit losses inherent in the Firms loan portfolio. The allowance for loan losses includes an asset-specific component, a formula-based component and a component related to PCI loans, as described below. Management also estimates an allowance for wholesale and consumer lending-related commitments using methodologies similar to those used to estimate the allowance on the underlying loans. During 2011, the Firm did not make any significant changes to the methodologies or policies used to determine its allowance for credit losses; such policies are described in the following paragraphs. 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 loans are evaluated individually, while smaller loans are evaluated as pools using historical loss experience for the respective class of assets. Risk-rated loans (primarily wholesale loans) are segmented by risk rating, while scored loans (i.e.,

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JPMorgan Chase & Co./2011 Annual Report

historical experience by type of modification program. The formula-based component is based on a statistical calculation to provide for probable principal losses inherent in performing risk-rated loans and all consumer loans, except for any loans restructured in TDRs and PCI loans. See Note 14 on pages 231252 of this Annual Report for more information on PCI loans. For risk-rated loans, the statistical calculation is the product of an estimated probability of default (PD) and an estimated loss given default (LGD). These factors are differentiated by risk rating and expected maturity. In assessing the risk rating of a particular loan, among the factors considered are the obligors debt capacity and financial flexibility, the level of the obligors 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. Emphasizing one factor over another or considering additional factors could impact the risk rating assigned by the Firm to that loan. PD estimates are based on observable external through-the-cycle data, using creditrating agency default statistics. LGD estimates are based on the Firms history of actual credit losses over more than one credit cycle. For scored loans, the statistical calculation is performed on pools of loans with similar risk characteristics (e.g., product type) and generally computed by applying expected loss factors to outstanding principal balances over an estimated loss emergence period. The 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 (through a charge-off). 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. Loss factors are statistically derived and sensitive to changes in delinquency status, credit scores, collateral values and other risk factors. The Firm uses a number of different forecasting models to estimate both the PD and the loss severity, including delinquency roll rate models and credit loss severity models. In developing PD and loss severity assumptions, the Firm also considers known and anticipated changes in the economic environment, including changes in home prices, unemployment rates and other risk indicators. A nationally recognized home price index measure is used to estimate both the PD and the loss severity on residential real estate loans at the metropolitan statistical areas (MSA) level. Loss severity estimates are regularly

validated by comparison to actual losses recognized on defaulted loans, market-specific real estate appraisals and property sales activity. 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. Management applies judgment within an established framework to adjust the results of applying the statistical calculation described above. The determination of the appropriate adjustment is based on managements view of uncertainties that have occurred but that are not yet reflected in the loss factors and that relate to current macroeconomic and political conditions, the quality of underwriting standards and other relevant internal and external factors affecting the credit quality of the portfolio. In addition, for the risk-rated portfolios, any adjustments made to the statistical calculation also consider concentrated and deteriorating industries. For the scored loan portfolios, adjustments to the statistical calculation are accomplished in part by analyzing the historical loss experience for each major product segment. Factors related to unemployment, home prices, borrower behavior and lien position, the estimated effects of the mortgage foreclosurerelated settlement with federal and state officials and uncertainties regarding the ultimate success of loan modifications are incorporated into the calculation, as appropriate. For junior lien products, management considers the delinquency and/or modification status of any senior liens in determining the adjustment. Management establishes an asset-specific allowance for lending-related commitments that are considered impaired and computes a formula-based allowance for performing wholesale and consumer lending-related commitments. These are computed using a methodology similar to that used for the wholesale loan portfolio, modified for expected maturities and probabilities of drawdown. 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 Chief Risk Officer, the Chief Financial Officer and the Controller of the Firm and discussed with the Risk Policy and Audit Committees of the Board of Directors of the Firm. As of December 31, 2011, JPMorgan Chase deemed the allowance for credit losses to be appropriate (i.e., sufficient to absorb probable credit losses that are inherent in the portfolio).

JPMorgan Chase & Co./2011 Annual Report

253

Notes to consolidated financial statements

Allowance for credit losses and loans and lending-related commitments by impairment methodology The table below summarizes information about the allowance for loan losses, loans by impairment methodology, the allowance for lending-related commitments and lending-related commitments by impairment methodology.
2011 Year ended December 31, (in millions) Allowance for loan losses Beginning balance at January 1, Cumulative effect of change in accounting principles(a) Gross charge-offs Gross recoveries Net charge-offs Provision for loan losses Other Ending balance at December 31, Allowance for loan losses by impairment methodology Asset-specific(b) Formula-based PCI Total allowance for loan losses Loans by impairment methodology Asset-specific Formula-based PCI Total retained loans Impaired collateral-dependent loans Net charge-offs(c) Loans measured at fair value of collateral less cost to sell(c) Allowance for lending-related commitments Beginning balance at January 1, Cumulative effect of change in accounting principles(a) Provision for lending-related commitments Other Ending balance at December 31, Allowance for lending-related commitments by impairment methodology Asset-specific Formula-based Total allowance for lending-related commitments Lending-related commitments by impairment methodology Asset-specific Formula-based Total lending-related commitments $ $ 865 $ 381,874 382,739 $ 62,307 62,307 $ $ $ 530,616 530,616 $ 865 974,797 975,662 $ $ 150 $ 516 666 $ 7 7 $ $ $ $ 150 523 673 $ $ 711 $ (40) (5) 666 $ 6 2 (1) 7 $ $ $ $ 717 (38) (6) 673 $ 128 $ 833 110 830
(d)

Wholesale $ 4,761 $ 916 (476) 440 17 (22) $ 4,316 $

Consumer, excluding credit card 16,471 5,419 (547) 4,872 4,670 25 16,294 $ $

Credit card 11,034 $ 8,168 (1,243) 6,925 2,925 (35) 6,999 $

Total 32,266 14,503 (2,266) 12,237 7,612 (32) 27,609

516 $ 3,800

828 9,755 5,711 16,294

2,727 $ 4,272

4,071 17,827 5,711 27,609

4,316 $

6,999 $

2,549 $ 275,825 21

9,892 232,989 65,546 308,427

7,214 $ 124,961

19,655 633,775 65,567 718,997

278,395 $

132,175 $

238 1,663

(a) Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Upon adoption of the guidance, the Firm consolidated its Firmsponsored credit card securitization trusts, its Firm-administered multi-seller conduits and certain other consumer loan securitization entities, primarily mortgage-related. As a result, $7.4 billion, $14 million and $127 million, respectively, of allowance for loan losses were recorded on-balance sheet with the consolidation of these entities. For further discussion, see Note 16 on pages 256267 of this Annual Report. (b) Includes risk-rated loans that have been placed on nonaccrual status and loans that have been modified in a TDR. (c) Prior periods have been revised to conform with the current presentation. (d) Includes collateral-dependent residential mortgage loans that are charged off to the fair value of the underlying collateral less cost to sell. These loans are considered collateral-dependent under regulatory guidance because they involve modifications where an interest-only period is provided or a significant portion of principal is deferred.

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JPMorgan Chase & Co./2011 Annual Report

(table continued from previous page) 2010 Wholesale $ 7,145 $ 14 1,989 (262) 1,727 (673) 2 $ 4,761 $ Consumer, excluding credit card 14,785 127 8,383 (474) 7,909 9,458 10 16,471 $ $ Credit card 9,672 $ 7,353 15,410 (1,373) 14,037 8,037 9 11,034 $ Total 31,602 7,494 25,782 (2,109) 23,673 16,822 21 32,266 $ $ Wholesale 6,545 $ 3,226 (94) 3,132 3,684 48 7,145 $ Consumer, excluding credit card 8,927 10,421 (222) 10,199 16,032 25 14,785 $ $ 2009 Credit card 7,692 $ 10,371 (737) 9,634 12,019 (405) 9,672 $ Total 23,164 24,018 (1,053) 22,965 31,735 (332) 31,602

1,574 $ 3,187

1,075 10,455 4,941 16,471

4,069 $ 6,965

6,718 20,607 4,941 32,266

2,046 $ 5,099

896 12,308 1,581 14,785

3,117 $ 6,555

6,059 23,962 1,581 31,602

4,761 $

11,034 $

7,145 $

9,672 $

5,486 $ 216,980 44

6,220 248,481 72,763 327,464

10,005 $ 125,519

21,711 590,980 72,807 685,498

6,960 $ 192,982 135

3,648 263,462 81,245 348,355

6,245 $ 72,541

16,853 528,985 81,380 627,218

222,510 $

135,524 $

200,077 $

78,786 $

636 $ 1,269

304 890
(d)

940 2,159

1,394 $ 1,744

166 210
(d)

1,560 1,954

927 $ (18) (177) (21)

12 (6) 6

939 (18) (183) (21) 717

634 $ 290 3

25 (10) (3) 12

659 280 939

711 $

927 $

$ $

180 $ 531 711 $

6 6

$ $

$ $

180 537 717

$ $

297 $ 630 927 $

12 12

$ $

$ $

297 642 939

$ $

1,005 $ 345,074 346,079 $

65,403 65,403

$ $

$ 547,227 547,227 $

1,005 957,704 958,709

$ $

1,577 $ 345,578 347,155 $

74,827 74,827

$ $

$ 569,113 569,113 $

1,577 989,518 991,095

JPMorgan Chase & Co./2011 Annual Report

255

Notes to consolidated financial statements Note 16 Variable interest entities

For a further description of JPMorgan Chases accounting policies regarding consolidation of VIEs, see Note 1 on pages 182 183 of this Annual Report. 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 principal 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 Chaseadministered asset-backed commercial paper conduit.
Line-of-Business Transaction Type Card Credit card securitization trusts Other securitization trusts RFS IB Mortgage securitization trusts Mortgage and other securitization trusts Multi-seller conduits Investor intermediation activities: Municipal bond vehicles Credit-related note and asset swap vehicles Activity Securitization of both originated and purchased credit card receivables Securitization of originated automobile and student loans Securitization of originated and purchased residential mortgages Securitization of both originated and purchased residential and commercial mortgages, automobile and student loans Assist clients in accessing the financial markets in a cost-efficient manner and structures transactions to meet investor needs Annual Report page reference 257 257260 257260 257260 260 260261 261263

The Firms other business segments are also involved with VIEs, but to a lesser extent, as follows: Asset Management: Sponsors and manages certain funds that are deemed VIEs. As asset manager of the funds, AM earns a fee based on assets managed; the fee varies with each funds investment objective and is competitively priced. For fund entities that qualify as VIEs, AMs interests are, in certain cases, considered to be significant variable interests that result in consolidation of the financial results of these entities. Treasury & Securities Services: Provides services to a number of VIEs that are similar to those provided to non-VIEs. TSS earns market-based fees for the services it provides. TSSs interests are generally not considered to be potentially significant variable interests and/or TSS does not control these VIEs; therefore, TSS does not consolidate these VIEs. Commercial Banking: CB makes investments in and provides lending to community development entities that may meet the definition of a VIE. In addition, CB provides financing and lending related services to certain client-sponsored VIEs. In general, CB does not control the activities of these entities and does not consolidate these entities. Corporate/Private Equity: Corporate uses VIEs to issue guaranteed capital debt securities. See Note 21 on pages 273275 of this Annual Report for further information. The Private Equity business, within Corporate/Private Equity, may be involved with entities that are deemed VIEs. However, the Firms private equity business is subject to specialized investment company accounting, which does not require the consolidation of investments, including VIEs.

The Firm also invests in and provides financing and other services to VIEs sponsored by third parties, as described on page 263 of this Note.

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JPMorgan Chase & Co./2011 Annual Report

Significant Firm-sponsored variable interest entities Credit card securitizations The Card business securitizes originated and purchased credit card loans, primarily through the Chase Issuance Trust (the Trust). The Firms continuing involvement in credit card securitizations includes servicing the receivables, retaining an undivided sellers 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. Effective January 1, 2010, the Firm consolidated the assets and liabilities of the Firm-sponsored credit card securitization trusts as a result of the implementation of VIE consolidation accounting guidance. See the table on page 264 of this Note for more information on the consolidation of credit card securitizations. The underlying securitized credit card receivables and other assets are available only for payment of the beneficial interests issued by the securitization trusts; they are not available to pay the Firms other obligations or the claims of the Firms other creditors.

The agreements with the credit card securitization trusts require the Firm to maintain a minimum undivided interest in the credit card trusts (which generally ranges from 4% to 12%). As of December 31, 2011 and 2010, the Firm held undivided interests in Firm-sponsored credit card securitization trusts of $13.7 billion and $17.2 billion, respectively. The Firm maintained an average undivided interest in principal receivables owned by those trusts of approximately 22% and 19% for the years ended December 31, 2011 and 2010, respectively. The Firm also retained $541 million and $1.1 billion of senior securities and $3.0 billion and $3.2 billion of subordinated securities in certain of its credit card securitization trusts as of December 31, 2011 and 2010, respectively. The Firms 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 (including automobile and student loans) primarily in its IB and RFS 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.

JPMorgan Chase & Co./2011 Annual Report

257

Notes to consolidated financial statements

The following table presents the total unpaid principal amount of assets held in Firm-sponsored securitization entities in which the Firm has continuing involvement, including those that are consolidated or not consolidated by the Firm. Continuing involvement includes servicing the loans; holding senior interests or subordinated interests; recourse or guarantee arrangements; and derivative transactions. In certain instances, the Firms only continuing involvement is servicing the loans. See Securitization activity on pages 264265 of this Note for further information regarding the Firms cash flows with and interests retained in nonconsolidated VIEs.
Principal amount outstanding Assets held in Assets held nonconsolidated Total assets in securitization held by consolidated VIEs with securitization securitization continuing VIEs VIEs involvement JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f) Total interests held by JPMorgan Chase

December 31, 2011(a) (in billions) Securitization-related Residential mortgage: Prime(b) Subprime Option ARMs Commercial and other Student Total
(c)

Trading assets

AFS securities

129.5 $ 38.3 31.1 139.3 4.1

2.4 $ 0.2 4.1 6.7 $

101.0 35.8 31.1 93.3 261.2

0.6 $ 1.7

$ 2.0 2.0 $

0.6 3.7 4.3

342.3 $

2.3 $

Principal amount outstanding Assets held in Assets held nonconsolidated Total assets in securitization held by consolidated VIEs with securitization securitization continuing VIEs VIEs involvement

JPMorgan Chase interest in securitized assets in nonconsolidated VIEs(d)(e)(f) Total interests held by JPMorgan Chase

December 31, 2010(a) (in billions) Securitization-related Residential mortgage: Prime(b) Subprime Option ARMs Commercial and other(c) Student Total

Trading assets

AFS securities

153.1 $ 44.0 36.1 153.4 4.5

2.2 $ 1.6 0.3 4.5 8.6 $

143.8 40.7 35.8 106.2 326.5

0.7 $ 2.0

$ 0.9 0.9 $

0.7 2.9 3.6

391.1 $

2.7 $

(a) Excludes U.S. government agency securitizations. See page 265 of this Note for information on the Firms loan sales to U.S. government agencies. (b) Includes Alt-A loans. (c) Consists of securities backed by commercial loans (predominantly real estate) and non-mortgage-related consumer receivables purchased from third parties. The Firm generally does not retain a residual interest in its sponsored commercial mortgage securitization transactions. (d) The table above excludes the following: retained servicing (see Note 17 on pages 267271 of this Annual Report for a discussion of MSRs); securities retained from loans 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 6 on pages 202210 of this Annual Report for further information on derivatives); senior and subordinated securities of $110 million and $8 million, respectively, at December 31, 2011, and $182 million and $18 million, respectively, at December 31, 2010, which the Firm purchased in connection with IBs secondary market-making activities. (e) Includes interests held in re-securitization transactions. (f) As of December 31, 2011 and 2010, 68% and 66%, respectively, of the Firms retained securitization interests, which are carried at fair value, were riskrated A or better, on an S&P-equivalent basis. The retained interests in prime residential mortgages consisted of $136 million and $157 million of investment-grade and $427 million and $552 million of noninvestment-grade retained interests at December 31, 2011 and 2010, respectively. The retained interests in commercial and other securitizations trusts consisted of $3.4 billion and $2.6 billion of investment-grade and $283 million and $250 million of noninvestment-grade retained interests at December 31, 2011 and 2010, respectively.

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Residential mortgage The Firm securitizes residential mortgage loans originated by RFS, as well as residential mortgage loans purchased from third parties by either RFS or IB. RFS generally retains servicing for all residential mortgage loans originated or purchased by RFS, and for certain mortgage loans purchased by IB. For securitizations serviced by RFS, 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. RFS may retain an interest upon securitization. In addition, IB engages in underwriting and trading activities involving securities issued by Firm-sponsored securitization trusts. As a result, IB at times retains senior and/or subordinated interests (including residual interests) in residential mortgage securitizations upon 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 IB or held by RFS, when considered together with the servicing arrangements entered into by RFS, the Firm is deemed to be the primary beneficiary of certain securitization trusts. See the table on page 264 of this Note for more information on the consolidated residential mortgage securitizations. The Firm does not consolidate a 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. At December 31, 2011 and 2010, the Firm did not consolidate the assets of certain Firm-sponsored residential mortgage securitization VIEs, in which the Firm had continuing involvement, primarily due to the fact that the Firm did not hold an interest in these trusts that could potentially be significant to the trusts. See the table on page 258 of this Note for further information on interests held in nonconsolidated securitizations. Commercial mortgages and other consumer securitizations IB originates and securitizes commercial mortgage loans, and engages in underwriting and trading activities involving the securities issued by securitization trusts. IB may retain unsold senior and/or subordinated interests 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). See the table on page 264 of this Note for more information on the consolidated commercial mortgage securitizations, and the table on page 258 of this Note for further information on interests held in nonconsolidated securitizations. The Firm also securitizes automobile and student loans. The Firm retains servicing responsibilities for all originated and certain purchased student and automobile loans and has the power to direct the activities of these VIEs through these servicing responsibilities. See the table on page 264

of this Note for more information on the consolidated student loan securitizations, and the table on page 258 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 (Fannie Mae, Freddie Mac and Ginnie Mae) and nonagency (private-label) sponsored VIEs, which may be backed by either residential or commercial mortgages. The Firms consolidation analysis is largely dependent on the Firms role and interest in the resecuritization trusts. During the years ended December 31, 2011, 2010 and 2009, the Firm transferred $24.9 billion, $33.9 billion and $19.1 billion, respectively, of securities to agency VIEs, and $381 million, $1.3 billion and $4.0 billion, respectively, of securities to private-label VIEs. Most re-securitizations with which the Firm is involved are client-driven transactions in which a specific client or group of clients are 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 client(s), 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 resecuritization 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 resecuritization VIE if the Firm holds an interest that could potentially be significant. Additionally, the Firm may invest in beneficial interests of third-party 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 wasnt 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. As of December 31, 2011 and 2010, the Firm did not consolidate any agency re-securitizations. As of December 31, 2011 and 2010, the Firm consolidated $348 million and $477 million, respectively, of assets, and $139 million and $230 million, respectively, of liabilities of private-label re-securitizations. See the table on page 264 of this Note for more information on the consolidated resecuritization transactions.

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Notes to consolidated financial statements

As of December 31, 2011 and 2010, total assets of nonconsolidated Firm-sponsored private-label resecuritization entities were $3.3 billion and $3.6 billion, respectively. At December 31, 2011 and 2010, the Firm held approximately $3.6 billion and $3.5 billion, respectively, of interests in nonconsolidated agency resecuritization entities, and $14 million and $46 million, respectively, of senior and subordinated interests in nonconsolidated private-label re-securitization entities. See the table on page 258 of this Note for further information on interests held in nonconsolidated securitizations. Multi-seller conduits Multi-seller conduit entities are separate bankruptcy remote entities that purchase interests in, and make loans secured by, pools of receivables and other financial assets pursuant to agreements with customers of the Firm. The conduits fund their purchases and loans 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 dealspecific credit enhancements mitigate the Firms potential losses on its agreements with the conduits. To ensure timely repayment of the commercial paper, 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 programwide credit enhancement in the form of standby letters of credit. The amount of program-wide credit enhancement required varies by conduit and ranges between 5% and 10% of the commercial paper that is outstanding. 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 Firms 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 to the liquidity and credit enhancement facilities provided to the conduits. See page 264 of this Note for further information on consolidated VIE assets and liabilities. In the normal course of business, JPMorgan Chase trades and invests in commercial paper, including commercial paper issued by the Firm-administered multi-seller conduits. The Firm held $11.3 billion of the commercial paper issued by the Firm-administered multi-seller conduits at December 31, 2011, which was eliminated in consolidation. The Firm did not hold commercial paper issued by the Firm-administered multi-seller conduits at December 31, 2010. The Firm's investments were not driven by market illiquidity and 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 provides lendingrelated commitments to certain clients of the Firmadministered multi-seller conduits. The unfunded portion of these commitments was $10.8 billion and $10.0 billion at December 31, 2011 and 2010 respectively, which are reported as off-balance sheet lending-related commitments. For more information on off-balance sheet lending-related commitments, see Note 29 on pages 283289 of this Annual Report. VIEs associated with investor intermediation activities As a financial intermediary, the Firm creates certain types of VIEs and also structures transactions with these VIEs, typically using derivatives, to meet investor needs. The Firm may also provide liquidity and other support. The risks inherent in the derivative instruments or liquidity commitments are managed similarly to other credit, market or liquidity risks to which the Firm is exposed. The principal types of VIEs for which the Firm is engaged in on behalf of clients are municipal bond vehicles, credit-related note vehicles and asset swap vehicles. Municipal bond vehicles The Firm has created a series of trusts that provide shortterm investors with qualifying tax-exempt investments, and that allow investors in tax-exempt securities to finance their investments at short-term tax-exempt rates. In a typical transaction, the vehicle purchases fixed-rate longer-term highly rated municipal bonds and funds the purchase by issuing two types of securities: (1) puttable floating-rate certificates and (2) inverse floating-rate residual interests (residual interests). The maturity of each of the puttable floating-rate certificates and the residual interests is equal to the life of the vehicle, while the maturity of the underlying municipal bonds is typically longer. Holders of the puttable floating-rate certificates may put, or tender, the certificates if the remarketing agent cannot successfully remarket the floating-rate certificates to another investor. A liquidity facility conditionally obligates the liquidity provider to fund the purchase of the tendered floating-rate certificates. Upon termination of the vehicle, proceeds from the sale of the underlying municipal bonds would first repay any funded liquidity facility or outstanding floating-rate certificates and the remaining amount, if any, would be paid to the residual interests. If the proceeds from the sale of the underlying municipal bonds are not sufficient to repay the liquidity facility, in certain transactions the liquidity provider has recourse to the residual interest holders for reimbursement. Certain residual interest holders may be required to post collateral with the Firm, as liquidity
JPMorgan Chase & Co./2011 Annual Report

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provider, to support such reimbursement obligations should the market value of the municipal bonds decline. JPMorgan Chase Bank, N.A. often serves as the sole liquidity provider, and J.P. Morgan Securities LLC as remarketing agent, of the puttable floating-rate certificates. The liquidity providers obligation to perform is conditional and is limited by certain 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 Firm's exposure as liquidity provider is 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 interest holders. However, a downgrade of JPMorgan Chase Bank, N.A.'s short-term rating does not affect the Firm's obligation under the liquidity facility. The long-term credit ratings of the puttable floating rate certificates are directly related to the credit ratings of the underlying municipal bonds, to the credit rating of any insurer of the underlying municipal bond, and the Firm's short-term credit rating as liquidity provider. A downgrade in any of these ratings would affect the rating of the puttable floating-rate certificates and could cause demand

for these certificates by investors to decline or disappear. As remarketing agent, the Firm may hold puttable floatingrate certificates of the municipal bond vehicles. At December 31, 2011 and 2010, respectively, the Firm held $637 million and $248 million of these certificates on its Consolidated Balance Sheets. The largest amount held by the Firm at any time during 2011 was $1.1 billion, or 7.6%, of the municipal bond vehicles aggregate outstanding puttable floating-rate certificates. The Firm did not have and continues not to have any intent to protect any residual interest holder from potential losses on any of the municipal bond holdings. The Firm consolidates municipal bond vehicles if it owns the residual interest. The residual interest generally allows the owner to make decisions that significantly impact the economic performance of the municipal bond vehicle, primarily by directing the sale of the municipal bonds owned by the vehicle. In addition, the residual interest owners have the right to receive benefits and bear losses that could potentially be significant to the municipal bond vehicle. The Firm does not consolidate municipal bond vehicles if it does not own the residual interests, since the Firm does not have the power to make decisions that significantly impact the economic performance of the municipal bond vehicle.

The Firms exposure to nonconsolidated municipal bond VIEs at December 31, 2011 and 2010, including the ratings profile of the VIEs assets, was as follows.
December 31, (in billions) Nonconsolidated municipal bond vehicles 2011 2010 $ 13.5 $ 13.7 7.9 $ 8.8 5.6 $ 4.9 7.9 8.8 Fair value of assets held by VIEs Liquidity facilities(a) Excess/(deficit)(b) Maximum exposure

Ratings profile of VIE assets(c) Investment-grade December 31, (in billions, except where otherwise noted) 2011 2010 $ AAA to AAA1.9 AA+ to AA11.2 $ 11.2 A+ to A0.7 $ 0.6 BBB+ to BBB Noninvestmentgrade BB+ and below $ Fair value of assets held by VIEs 13.5 13.7 Wt. avg. expected life of assets (years) 6.6 15.5

1.5 $

0.1 $

(a) The Firm may serve as credit enhancement provider to municipal bond vehicles in which it serves as liquidity provider. The Firm provided insurance on underlying municipal bonds, in the form of letters of credit, of $10 million at December 31, 2010. The Firm did not provide insurance on underlying municipal bonds at December 31, 2011. (b) Represents the excess/(deficit) of the fair values of municipal bond assets available to repay the liquidity facilities, if drawn. (c) The ratings scale is based on the Firms internal risk ratings and is presented on an S&P-equivalent basis.

Credit-related note and asset swap vehicles Credit-related note vehicles The Firm structures transactions with credit-related note vehicles in which the VIE purchases highly rated assets, such as asset-backed securities, and enters into a credit derivative contract with the Firm to obtain exposure to a referenced credit which the VIE otherwise does not hold. The VIE then issues credit-linked notes (CLNs) with maturities predominantly ranging from one to 10 years in order to transfer the risk of the referenced credit to the

VIEs investors. Clients and investors often prefer using a CLN vehicle since the CLNs issued by the VIE generally carry a higher credit rating than such notes would if issued directly by JPMorgan Chase. As a derivative counterparty in a credit-related note structure, the Firm has a senior claim on the collateral of the VIE and reports such derivatives on its Consolidated Balance Sheets at fair value. The collateral purchased by such VIEs is largely investment-grade, with a significant amount being rated AAA. The Firm divides its credit-related note structures broadly into two types: static and managed.
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Notes to consolidated financial statements

In a static credit-related note structure, the CLNs and associated credit derivative contract either reference a single credit (e.g., a multi-national corporation), or all or part of a fixed portfolio of credits. In a managed creditrelated note structure, the CLNs and associated credit derivative generally reference all or part of an actively managed portfolio of credits. An agreement exists between a portfolio manager and the VIE that gives the portfolio manager the ability to substitute each referenced credit in the portfolio for an alternative credit. The Firm does not act as portfolio manager; its involvement with the VIE is generally limited to being a derivative counterparty. As a net buyer of credit protection, in both static and managed credit-related note structures, the Firm pays a premium to the VIE in return for the receipt of a payment (up to the notional of the derivative) if one or more of the credits within the portfolio defaults, or if the losses resulting from the default of reference credits exceed specified levels. The Firm does not provide any additional contractual financial support to the VIE. In addition, the Firm has not historically provided any financial support to the CLN vehicles over and above its contractual obligations. Since each CLN is established to the specifications of the investors, the investors have the power over the activities of that VIE that most significantly affect the performance of the CLN. Accordingly, the Firm does not generally consolidate these credit-related note entities. Furthermore, the Firm does not have a variable interest that could potentially be significant. As a derivative counterparty, the Firm has a senior claim on the collateral of the VIE and reports such derivatives on its Consolidated Balance Sheets at fair value. Substantially all of the assets purchased by such VIEs are investment-grade. Asset swap vehicles The Firm structures and executes transactions with asset swap vehicles on behalf of investors. In such transactions, the VIE purchases a specific asset or assets and then enters into a derivative with the Firm in order to tailor the interest rate or foreign exchange currency risk, or both, according to investors requirements. Generally, the assets are held by the VIE to maturity, and the tenor of the derivatives would match the maturity of the assets. Investors typically invest in the notes issued by such VIEs in order to obtain exposure to the credit risk of the specific assets, as well as exposure to foreign exchange and interest rate risk that is tailored to their specific needs. The derivative transaction between the Firm and the VIE may include currency swaps to hedge assets held by the VIE denominated in foreign currency into the investors local currency or interest rate swaps to hedge the interest rate risk of assets held by the VIE; to add additional interest rate exposure into the VIE in order to increase the return on the issued notes; or to convert an interest-bearing asset into a zero-coupon bond. The Firms exposure to asset swap vehicles is generally limited to its rights and obligations under the interest rate and/or foreign exchange derivative contracts. The Firm historically has not provided any financial support to the asset swap vehicles over and above its contractual obligations. The Firm does not generally consolidate these asset swap vehicles, since the Firm does not have the power to direct the significant activities of these entities and does not have a variable interest that could potentially be significant. As a derivative counterparty, the Firm has a senior claim on the collateral of the VIE and reports such derivatives on its Consolidated Balance Sheets at fair value. Substantially all of the assets purchased by such VIEs are investment-grade.

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Exposure to nonconsolidated credit-related note and asset swap VIEs at December 31, 2011 and 2010, was as follows.
Net derivative receivables $ Par value of collateral held by VIEs(b) 9.1 7.7 16.8 8.6 25.4

December 31, 2011 (in billions) Credit-related notes Static structure Managed structure Total credit-related notes Asset swaps Total

Total exposure(a)

1.0 $ 2.7 3.7 0.6

1.0 $ 2.7 3.7 0.6 4.3 $

4.3 $

December 31, 2010 (in billions) Credit-related notes Static structure Managed structure Total credit-related notes Asset swaps Total

Net derivative receivables $

Total exposure(a)

Par value of collateral held by VIEs(b) 9.5 10.7 20.2 7.6 27.8

1.0 $ 2.8 3.8 0.3

1.0 $ 2.8 3.8 0.3 4.1 $

4.1 $

(a) Onbalance sheet exposure that includes net derivative receivables and trading assets debt and equity instruments. At both December 31, 2011 and 2010, the amount of trading assets issued by nonconsolidated credit-related note and asset swap vehicles that were held by the Firm were immaterial. (b) The Firms maximum exposure arises through the derivatives executed with the VIEs; the exposure varies over time with changes in the fair value of the derivatives. The Firm relies on the collateral held by the VIEs to pay any amounts due under the derivatives; the vehicles are structured at inception so that the par value of the collateral is expected to be sufficient to pay amounts due under the derivative contracts.

The Firm consolidated credit-related note vehicles with collateral fair values of $231 million and $394 million, at December 31, 2011 and 2010, respectively. The Firm consolidated these vehicles, because in its role as secondary market-maker, it held positions in these entities that provided the Firm with control of certain vehicles. The Firm did not consolidate any asset swap vehicles at December 31, 2011 and 2010. VIEs sponsored by third parties Investment in a third-party credit card securitization trust The Firm holds two interests in a third-party-sponsored VIE, which is a credit card securitization trust that owns credit card receivables issued by a national retailer. The Firm is not the primary beneficiary of the trust as the Firm does not have the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. The Firms interests in the VIE include investments classified as AFS securities that had fair values of $2.9 billion and $3.1 billion at December 31, 2011 and 2010, respectively, and other interests which are classified as loans and have a fair value of approximately $1.0 billion and $1.0 billion at December 31, 2011 and 2010, respectively. For more information on AFS securities and loans, see Notes 12 and 14 on pages 225230 and 231252, respectively, of this Annual Report. VIE used in FRBNY transaction In conjunction with the Bear Stearns merger, in June 2008, the Federal Reserve Bank of New York (FRBNY) took control, through an LLC formed for this purpose, of a portfolio of $30.0 billion in assets, based on the value of the portfolio as of March 14, 2008. The assets of the LLC

were funded by a $28.85 billion term loan from the FRBNY and a $1.15 billion subordinated loan from JPMorgan Chase. The JPMorgan Chase loan is subordinated to the FRBNY loan and will bear the first $1.15 billion of any losses of the portfolio. Any remaining assets in the portfolio after repayment of the FRBNY loan, repayment of the JPMorgan Chase loan and the expense of the LLC will be for the account of the FRBNY. The extent to which the FRBNY and JPMorgan Chase loans will be repaid will depend on the value of the assets in the portfolio and the liquidation strategy directed by the FRBNY. The Firm does not consolidate the LLC, as it does not have the power to direct the activities of the VIE that most significantly impact the VIEs economic performance. Other 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, trustee or custodian. These transactions are conducted at arms-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 VIEs economic performance, or a variable interest that could potentially be significant, the Firm records and reports these positions on its Consolidated Balance Sheets similarly to the way it would record and report positions in respect of any other third-party transaction.

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Notes to consolidated financial statements

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, 2011 and 2010.
Assets Trading assets debt and equity instruments $ $ 1.4 10.7 $ 12.1 $ Total assets(d) 51.5 29.9 3.7 16.4 101.5 $ Beneficial interests in VIE assets(e) $ 32.5 $ 18.7 2.3 12.5 66.0 $ Liabilities Total liabilities $ 1.3 0.2 1.5 $ Liabilities Total assets(d) 68.5 21.7 4.7 14.0 108.9 $ Beneficial interests in VIE assets(e) $ 44.3 $ 21.6 2.4 9.3 77.6 $ Total liabilities $ 0.1 1.6 0.3 2.0 $ 44.3 21.7 4.0 9.6 79.6 32.5 18.7 3.6 12.7 67.5

December 31, 2011 (in billions) VIE program type Firm-sponsored credit card trusts Firm-administered multi-seller conduits Mortgage securitization entities(a) Other(b) Total

Loans 50.7 $ 29.7 2.3 4.1 86.8 $ Assets

Other(c) 0.8 $ 0.2 1.6 2.6 $

Other(f)

December 31, 2010 (in billions) VIE program type Firm-sponsored credit card trusts Firm-administered multi-seller conduits Mortgage securitization entities(a) Other Total
(b)

Trading assets debt and equity instruments $ $ 1.8 8.0 $ 9.8 $

Loans 67.2 $ 21.1 2.9 4.4 95.6 $

Other(c) 1.3 $ 0.6 1.6 3.5 $

Other(f)

(a) Includes residential and commercial mortgage securitizations as well as re-securitizations. (b) Primarily comprises student loan securitization entities and municipal bond entities. The Firm consolidated $4.1 billion and $4.5 billion of student loan securitization entities as of December 31, 2011 and 2010, respectively, and $9.3 billion and $4.6 billion of municipal bond vehicles as of December 31, 2011 and 2010, respectively. (c) Includes assets classified as cash, derivative receivables, AFS securities, and other assets within the Consolidated Balance Sheets. (d) 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 Firms interest in the consolidated VIEs for each program type. (e) 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 $39.7 billion and $52.6 billion at December 31, 2011 and 2010, respectively. The maturities of the long-term beneficial interests as of December 31, 2011, were as follows: $13.5 billion under one year, $17.8 billion between one and five years, and $8.4 billion over five years, all respectively. (f) Includes liabilities classified as accounts payable and other liabilities in the Consolidated Balance Sheets.

Supplemental information on loan securitizations The Firm securitizes and sells a variety of loans, including residential mortgage, credit card, automobile, student and commercial (primarily related to real estate) loans, as well as debt securities. The primary purposes of these securitization transactions are 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 the accounting criteria for a sale are met. Those criteria are: (1) the transferred financial assets are legally isolated from the Firms 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 tables provide information related to the Firms securitization activities for the years ended December 31, 2011, 2010 and 2009, related to assets held in JPMorgan Chase-sponsored securitization entities that were not consolidated by the Firm, and sale accounting was achieved based on the accounting rules in effect at the time of the securitization. For the year ended December 31, 2009, there were no mortgage loans that were securitized, except for commercial and other, and there were no cash flows from the Firm to the SPEs related to recourse arrangements.

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JPMorgan Chase & Co./2011 Annual Report

Effective January 1, 2010, all of the Firm-sponsored credit card securitization trusts and predominantly all of the Firmsponsored student loan and auto securitization trusts were consolidated as a result of the accounting guidance related to VIEs and, accordingly, are not included in the securitization activity tables below for the years ended December 31, 2011 and 2010.
2011 Year ended December 31, (in millions, except rates) Principal securitized Pretax gains All cash flows during the period: Proceeds from new securitizations(a) Servicing fees collected Other cash flows received Proceeds from collections reinvested in revolving securitizations Purchases of previously transferred financial assets (or the underlying collateral)(b) Cash flows received on the interests that continue to be held by the Firm Key assumptions used to measure retained interests originated during the year (rates per annum) Prepayment rate(c) Weighted-average life (in years) Expected credit losses Discount rate % CPY 1.7 % 3.5 $ 755 772 235 $ 6,142 4 178 $ Residential mortgage(d)(e) $ Commercial and other(f) $ 5,961
(g)

Prior to January 1, 2010, the Firm did not consolidate its credit card, residential and commercial mortgage, automobile, and certain student loan securitizations based on the accounting guidance in effect at that time. The Firm recorded only its retained interests in the entities on its Consolidated Balance Sheets.

2010 Residential Commercial mortgage(d)(e) and other(f) $ 35 36 968 321 319 $ 2,237 2,369 4 143
(g)

2009 Residential mortgage(d)(e) $ 1,111 11 165 538 Commercial and other(f) $ 500 542 18 249 120
(g)

Credit card $ 26,538 22 $ 26,538 1,251 5,000 161,428 261

100% CPY 7.1 % 7.7

100% CPY 9.0 % 10.7

16.7% PPR 0.5 8.9% 16.0

(a) Proceeds from residential and commercial mortgage securitizations are received in the form of securities. During 2011, $4.0 billion and $2.1 billion of commercial mortgage securitizations were classified in levels 2 and 3 of the fair value hierarchy, respectively. During 2010, $2.2 billion and $172 million of residential and commercial mortgage securitizations were classified in levels 2 and 3 of the fair value hierarchy, respectively. During 2009, $380 million and $162 million of residential and commercial mortgage securitizations were classified in levels 2 and 3 of the fair value hierarchy, respectively; and $12.8 billion of proceeds from credit card securitizations were received as securities and were classified in level 2 of the fair value hierarchy. (b) Includes cash paid by the Firm to reacquire assets from offbalance sheet, nonconsolidated entities for example, loan repurchases due to representation and warranties and servicer clean-up calls. (c) CPY: constant prepayment yield; PPR: principal payment rate. (d) Includes prime, Alt-A, subprime, option ARMS, and re-securitizations. Excludes sales for which the Firm did not securitize the loan (including loans sold to Ginnie Mae, Fannie Mae and Freddie Mac). (e) There were no retained interests held in the residential mortgage securitization completed in 2010. There were no residential mortgage securitizations in 2011 and 2009. (f) Includes commercial, student loan and automobile loan securitizations. (g) The Firm elected the fair value option for loans pending securitization. The carrying value of these loans accounted for at fair value approximated the proceeds received from securitization.

Loans sold to agencies 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 on a nonrecourse basis, predominantly to Ginnie Mae, Fannie Mae and Freddie Mac (the Agencies). These loans are sold primarily for the purpose of securitization by the Agencies, which also provide credit enhancement of the loans through certain guarantee provisions. The Firm does not consolidate these securitization vehicles 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 29 on pages 283289 of this Annual Report for additional

information about the Firms loans sales- and securitizationrelated indemnifications. The following table summarizes the activities related to loans sold to U.S. government-sponsored agencies and third-party-sponsored securitization entities.
Year ended December 31, (in millions) Proceeds received from loan sales as cash Proceeds from loans sales as securities(c) Total proceeds received from loan sales Gains on loan sales 2011 2010 2009

Carrying value of loans sold(a)(b) $ 150,632 $ 156,615 $ 154,571 2,864 145,340 3,887 149,786 1,702 149,343

$ 148,204 $ 153,673 $ 151,045 133 212 89

(a) Predominantly to U.S. government agencies. 265

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Notes to consolidated financial statements

(b) MSRs were excluded from the above table. See Note 17 on pages 267 271 of this Annual Report for further information on originated MSRs. (c) Predominantly includes securities from U.S. government agencies that are generally sold shortly after receipt.

Options to repurchase delinquent loans In addition to the Firms obligation to repurchase certain loans due to material breaches of representations and warranties as discussed in Note 29 on pages 283289 of this Annual Report, the Firm also has the option to repurchase delinquent loans that it services for Ginnie Mae, as well as for other U.S. government agencies in certain arrangements. The Firm typically elects to repurchase delinquent loans from Ginnie Mae 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 Firms repurchase option becomes exercisable, such loans must be reported on the Consolidated Balance Sheets as a loan with a corresponding liability. As of December 31, 2011 and 2010, the Firm had recorded on its Consolidated Balance Sheets $15.7 billion and $13.0 billion, respectively, of loans that either had been repurchased or for which the Firm had an option to repurchase. Predominately all of the amounts presented above relate to loans that have been repurchased from Ginnie Mae. Additionally, real estate owned resulting from voluntary repurchases of loans was $1.0 billion and $1.9 billion as of December 31, 2011 and 2010, respectively. Substantially all of these loans and real estate owned are insured or guaranteed by U.S. government agencies, and where applicable, reimbursement is proceeding normally. For additional information, refer to Note 14 on pages 231252 of this Annual Report.

JPMorgan Chases interest in securitized assets held at fair value The following table outlines the key economic assumptions used to determine the fair value, as of December 31, 2011 and 2010, of certain of the Firms retained interests in nonconsolidated VIEs (other than MSRs), that are valued using modeling techniques. The table also outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in assumptions used to determine fair value. For a discussion of MSRs, see Note 17 on pages 267271 of this Annual Report.
December 31, (in millions, except rates and where otherwise noted) JPMorgan Chase interests in securitized assets(a)(b) Weighted-average life (in years) Weighted-average constant prepayment rate(c) Impact of 10% adverse change Impact of 20% adverse change Weighted-average loss assumption Impact of 10% adverse change Impact of 20% adverse change Weighted-average discount rate Impact of 10% adverse change Impact of 20% adverse change $ Commercial and other 2011 2010 3,663 3.0 % CPR 0.2% (61) (119) 28.2% (75) (136) $ 2,906 3.3 % CPR 2.1% (76) (151) 16.4% (69) (134)

(a) The Firms interests in prime mortgage securitizations were $555 million and $708 million, as of December 31, 2011 and 2010, respectively. These include retained interests in Alt-A loans and re-securitization transactions. The Firm's interests in subprime mortgage securitizations were $31 million and $14 million, as of December 31, 2011 and 2010, respectively. Additionally, the Firm had interests in option ARM mortgage securitizations of $23 million and $29 million at December 31, 2011 and 2010, respectively. (b) Includes certain investments acquired in the secondary market but predominantly held for investment purposes. (c) CPR: constant prepayment rate.

The sensitivity analysis in the preceding table is hypothetical. Changes in fair value based on a 10% or 20% variation in assumptions generally cannot be extrapolated easily, because the relationship of the change in the assumptions to the change in fair value may not be linear. Also, in the 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 might counteract or magnify the sensitivities. The above sensitivities also do not reflect risk management practices the Firm may undertake to mitigate such risks.

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Loan delinquencies and liquidation losses The table below includes information about delinquencies, liquidation losses and components of nonconsolidated securitized financial assets in which the Firm has continuing involvement as of December 31, 2011 and 2010.
As of or for the year ended December 31, (in millions) Securitized loans(a) Residential mortgage: Prime mortgage(b) Subprime mortgage Option ARMs Commercial and other Total loans securitized(c) Securitized assets 2011 2010 90 days past due 2011 2010 Liquidation losses 2011 2010

$ 101,004 $ 143,764 35,755 31,075 93,336 40,721 35,786 106,245

$ 24,285 $ 33,093 14,293 9,999 4,836 15,456 10,788 5,791

5,650 $ 3,086 1,907 1,101

6,257 3,598 2,305 618

$ 261,170 $ 326,516

$ 53,413 $ 65,128

$ 11,744 $ 12,778

(a) Total assets held in securitization-related SPEs were $342.3 billion and $391.1 billion, respectively, at December 31, 2011 and 2010. The $261.2 billion and $326.5 billion, respectively, of loans securitized at December 31, 2011 and 2010, excludes: $74.4 billion and $56.0 billion, respectively, of securitized loans in which the Firm has no continuing involvement, and $6.7 billion and $8.6 billion, respectively, of loan securitizations consolidated on the Firms Consolidated Balance Sheets at December 31, 2011 and 2010. (b) Includes Alt-A loans. (c) Includes securitized loans that were previously recorded at fair value and classified as trading assets.

Implementation of change in consolidation accounting guidance for VIEs

On January 1, 2010, the Firm implemented consolidation accounting guidance related to VIEs. The following table summarizes the incremental impact at adoption of the new guidance.
(in millions, except ratios) As of December 31, 2009 Impact of new accounting guidance for consolidation of VIEs Credit card Multi-seller conduits Mortgage & other Total impact of new guidance Beginning balance as of January 1, 2010 60,901 17,724 9,059 87,684 65,353 17,744 9,107 92,204 (4,452) (20) (48) (4,520) 160,845 (0.30) (0.04) (0.34) 10.76% U.S. GAAP assets U.S. GAAP liabilities Stockholders' equity 165,365 Tier 1 capital 11.10%

$ 2,031,989 $ 1,866,624 $

$ 2,119,673 $ 1,958,828 $

Note 17 Goodwill and other intangible assets

Goodwill and other intangible assets consist of the following.
December 31, (in millions) Goodwill Mortgage servicing rights Other intangible assets: Purchased credit card relationships Other credit card-related intangibles Core deposit intangibles Other intangibles Total other intangible assets 2011 2010 2009 $48,188 $48,854 $48,357 7,223 13,649 15,531 $ 602 $ 897 $ 488 593 594 879 1,523 1,670 $ 3,207 $ 4,039 $ 1,246 691 1,207 1,477 4,621

determined based on how the Firms businesses are managed and how they are reviewed by the Firms Operating Committee. The following table presents goodwill attributed to the business segments.
December 31, (in millions) Investment Bank Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity Total goodwill 2011 2010 2009 $ 5,276 $ 5,278 $ 4,959 16,489 16,496 16,514 14,507 14,522 14,451 2,864 2,866 2,868 1,668 1,680 1,667 7,007 7,635 7,521 377 377 377 $ 48,188 $ 48,854 $ 48,357

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

The following table presents changes in the carrying amount of goodwill.

Year ended December 31, (in millions) Balance at beginning of period(a) Changes during the period from: Business combinations Dispositions Other(b) Balance at December 31,(a) 2011 $ 48,854 2010 $ 48,357 2009 $ 48,027

97 556 271 (685) (19) (78) (40) 59 $ 48,188 $ 48,854 $ 48,357

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267

Notes to consolidated financial statements

(a) Reflects gross goodwill balances as the Firm has not recognized any impairment losses to date. (b) Includes foreign currency translation adjustments and other taxrelated adjustments.

The net reduction in goodwill was predominantly due to AMs sale of its investment in an asset manager. Impairment testing Goodwill was not impaired at December 31, 2011 or 2010, nor was any goodwill written off due to impairment during 2011, 2010 or 2009. 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. If the fair value is in excess of the carrying value (including goodwill), then the reporting units goodwill is considered not to be impaired. If the fair value is less than the carrying value (including goodwill), then a second step is performed. In the second step, the implied current fair value of the reporting units 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 units 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 primary method the Firm uses to estimate the fair value of its reporting units is the income approach. The models project cash flows for the forecast period and use 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 include the estimated effects of regulatory and legislative changes (including, but not limited to the DoddFrank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the CARD Act, and limitations on nonsufficient funds and overdraft fees), and which are reviewed with the Operating Committee 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 Firms 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 managements 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 models 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 value of the Firms reporting units and JPMorgan Chases market capitalization. In evaluating this comparison, management considers several factors, including (a) a control premium that would exist in a market transaction, (b) 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 (c) short-term market volatility and other factors that do not directly affect the value of individual reporting units. While no impairment of goodwill was recognized, the Firms consumer lending businesses in RFS and Card remain at an elevated risk of goodwill impairment due to their exposure to U.S. consumer credit risk and the effects of economic, regulatory and legislative changes. The valuation of these businesses is particularly dependent upon economic conditions (including new unemployment claims and home prices), regulatory and legislative changes (for example, those related to residential mortgage servicing, foreclosure and loss mitigation activities, and those that may affect consumer credit card use), and the amount of equity capital required. In addition, the earnings or estimated cost of equity of the Firm's capital markets businesses could also be affected by regulatory or legislative changes. The assumptions used in the discounted cash flow valuation models were determined using managements best estimates. The cost of equity reflected the related risks and uncertainties, and was evaluated in comparison to relevant market peers. Deterioration in these assumptions could cause the estimated fair values of these reporting units and their associated goodwill to decline, which may result in a material impairment charge to earnings in a future period related to some portion of the associated goodwill. Mortgage servicing rights Mortgage servicing rights 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 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

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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 Firms 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, late charges, other ancillary revenue and costs to service, 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. 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 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, 2011, 2010 and 2009.
Year ended December 31, (in millions, except where otherwise noted) Fair value at beginning of period MSR activity Originations of MSRs Purchase of MSRs Disposition of MSRs Changes due to modeled amortization Net additions and amortization Changes due to market interest rates Other changes in valuation due to inputs and assumptions(a) Total change in fair value of MSRs Fair value at December 31(c) Change in unrealized gains/(losses) included in income related to MSRs held at December 31 Contractual service fees, late fees and other ancillary fees included in income Third-party mortgage loans serviced at December 31 (in billions) Servicer advances at December 31 (in billions)(d)
(b)

$(1) million and $(4) million for the years ended December 31, 2011, 2010 and 2009, respectively. (c) Includes $31 million, $40 million and $41 million related to commercial real estate at December 31, 2011, 2010 and 2009, respectively. (d) Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest to a trust, 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 Firms credit risk associated with these advances is minimal because reimbursement of the advances is senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment if the collateral is insufficient to cover the advance.

2011 $ 13,649 2,570 33 (1,910) 693 (5,392) (1,727) (7,119) $ 7,223

2010 $ 15,531 3,153 26 (407) (2,386) 386 (2,224) (44) (2,268) $ 13,649

2009 $ 9,403 3,615 2 (10) (3,286) 321 5,844 (37) 5,807 $ 15,531

During the year ended December 31, 2011, the fair value of the MSR decreased by $6.4 billion. This decrease was predominately due to a decline in market interest rates, which resulted in a loss of $5.4 billion. These losses were offset by gains of $5.6 billion on derivatives used to hedge the MSR asset; these derivatives are recognized on the Consolidated Balance Sheets separately from the MSR asset. Also contributing to the decline in fair value of the MSR asset was a $1.7 billion decrease related to revised cost to service and ancillary income assumptions incorporated in the MSR valuation. The increased cost to service assumptions reflect the estimated impact of higher servicing costs to enhance servicing processes, particularly loan modification and foreclosure procedures, including costs to comply with Consent Orders entered into with banking regulators. The increase in the cost to service assumption contemplates significant and prolonged increases in staffing levels in the core and default servicing functions. The decreased ancillary income assumption is similarly related to a reassessment of business practices in consideration of the Consent Orders and the existing industry-wide regulatory environment, which is broadly affecting market participants. Also in the fourth quarter of 2011, the Firm revised its OAS assumption and updated its proprietary prepayment model; these changes had generally offsetting effects. The Firm's OAS assumption is based upon capital and return requirements that the Firm believes a market participant would consider, taking into account factors such as the pending Basel III capital rules. Consequently, the OAS assumption for the Firm's portfolio increased by approximately 400 basis points and decreased the fair value of the MSR asset by approximately $1.2 billion. Since 2009, the Firm has continued to refine its proprietary prepayment model based on a number of market-related factors, including a downward trend in home prices, a general tightening of credit underwriting standards and the associated impact on refinancing activity. In the fourth quarter of 2011, the Firm further enhanced its proprietary prepayment model to incorporate: (i) the impact of the Home Affordable Refinance Program (HARP) 2.0), and (ii) assumptions that will limit modeled refinancings due to the combined influences of relatively strict underwriting standards and reduced levels of expected home price appreciation. In the aggregate, these refinements increased the fair value of the MSR asset by approximately $1.2 billion.
269

$ (7,119) $ (2,268) $ 5,807 $ 3,977 $ $ 910 11.1 $ 4,484 $ $ 976 9.9 $ 4,818 $ 1,091 $ 7.7

(a) Represents the aggregate impact of changes in model inputs and assumptions such as costs to service, home prices, mortgage spreads, ancillary income, and assumptions used to derive prepayment speeds, as well as changes to the valuation models themselves. (b) Includes changes related to commercial real estate of $(9) million,

JPMorgan Chase & Co./2011 Annual Report

Notes to consolidated financial statements

The decrease in the fair value of the MSR results in a lower asset value that will amortize in future periods against contractual and ancillary fee income received in future periods. While there is expected to be higher levels of noninterest expense associated with higher servicing costs in those future periods, there will also be less MSR amortization, which will have the effect of increasing mortgage fees and related income. The amortization of the MSR is reflected in the tables above under Changes due to modeled amortization. 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, 2011, 2010 and 2009.
Year ended December 31, (in millions) RFS mortgage fees and related income Net production revenue: Production revenue Repurchase losses Net production revenue Net mortgage servicing revenue Operating revenue: Loan servicing revenue Changes in MSR asset fair value due to modeled amortization Total operating revenue Risk management: Changes in MSR asset fair value due to market interest rates Other changes in MSR asset fair value due to inputs or assumptions in model(a) Derivative valuation adjustments and other Total risk management Total RFS net mortgage servicing revenue All other Mortgage fees and related income (5,390) (1,727) 5,553 (1,564) 666 7 $2,721 (2,224) (44) 3,404 1,136 3,327 15 $ 3,870 5,804 (4,176) 1,628 3,291 (116) $3,678 4,134 (1,904) 2,230 4,575 (2,384) 2,191 4,942 (3,279) 1,663 $3,395 (1,347) 2,048 $ 3,440 (2,912) 528 $2,115 (1,612) 503 2011 2010 2009

The table below outlines the key economic assumptions used to determine the fair value of the Firms MSRs at December 31, 2011 and 2010; and it outlines the sensitivities of those fair values to immediate adverse changes in those assumptions, as defined below.
Year ended December 31, (in millions, except rates) Weighted-average prepayment speed assumption (CPR) Impact on fair value of 10% adverse change Impact on fair value of 20% adverse change Weighted-average option adjusted spread Impact on fair value of 100 basis points adverse change Impact on fair value of 200 basis points adverse change CPR: Constant prepayment rate. $ $ 2011 18.07% (585) (1,118) 7.83% (269) (518) $ $ 2010 11.29% (809) (1,568) 3.94% (578) (1,109)

The sensitivity analysis in the preceding table is hypothetical and should be used with caution. 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 inter-related 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.

(a) Represents the aggregate impact of changes in model inputs and assumptions such as costs to service, home prices, mortgage spreads, ancillary income, and assumptions used to derive prepayment speeds, as well as changes to the valuation models themselves.

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Other intangible assets Other intangible assets are recorded at their fair value upon completion of a business combination or certain other transactions, and generally represent the value of customer relationships or arrangements. Subsequently, the Firms intangible assets with finite lives, including core deposit intangibles, purchased credit card relationships, and other intangible assets, are amortized over their useful lives in a manner that best reflects the economic benefits of the intangible asset. The $832 million decrease in other intangible assets during 2011, was due to $848 million in amortization. The components of credit card relationships, core deposits and other intangible assets were as follows.
December 31, 2011 December 31, (in millions) Purchased credit card relationships Other credit card-related intangibles Core deposit intangibles Other intangibles Gross amount(a) $ Accumulated amortization(a) Net carrying value 602 488 594 1,523 December 31, 2010 Gross amount $ Accumulated amortization Net carrying value 897 593 879 1,670

3,826 $ 844 4,133 2,467

3,224 $ 356 3,539 944

5,789 $ 907 4,280 2,515

4,892 $ 314 3,401 845

(a) The decrease in the gross amount and accumulated amortization from December 31, 2010, was due to the removal of fully amortized assets.

In addition to the finite lived intangible assets in the previous table, the Firm has intangible assets of approximately $600 million consisting primarily of asset management advisory contracts, which were determined to have an indefinite life and are not amortized. Amortization expense The following table presents amortization expense related to credit card relationships, core deposits and other intangible assets.
December 31, (in millions) Purchased credit card relationships Other credit card-related intangibles Core deposit intangibles Other intangibles Total amortization expense 2011 $ 295 106 285 162 848 $ 2010 355 111 328 142 936 $ 2009 421 94 390 145 1,050

Future amortization expense The following table presents estimated future amortization expense related to credit card relationships, core deposits and other intangible assets at December 31, 2011.
For the year ended December 31, (in millions) 2012 2013 2014 2015 2016 $ Purchased credit card relationships Other credit card-related intangibles 106 $ 103 102 94 34 Core deposit intangibles 240 $ 195 103 26 14 Other intangibles 147 $ 140 122 105 98 Total 746 650 436 248 150

253 $ 212 109 23 4

Impairment testing The Firms intangible assets are tested for impairment annually or more often if events or changes in circumstances indicate that the asset might be impaired. The impairment test for a finite-lived intangible asset compares the undiscounted cash flows associated with the use or disposition of the intangible asset to its carrying value. If the sum of the undiscounted cash flows exceeds its carrying value, then no impairment charge is recorded. If the sum of the undiscounted cash flows is less than its carrying value, then an impairment charge is recognized to the extent the carrying amount of the asset exceeds its fair value.

The impairment test for indefinite-lived intangible assets compares the fair value of the intangible asset to its carrying amount. If the carrying value exceeds the fair value, then an impairment charge is recognized for the difference.

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271

Notes to consolidated financial statements Note 18 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 has recorded immaterial asset retirement obligations related to asbestos remediation in those cases where it has sufficient information to estimate the obligations fair value. 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 softwares expected useful life and reviewed for impairment on an ongoing basis. At December 31, 2011 and 2010, time deposits in denominations of $100,000 or more were as follows.
December 31, (in millions) U.S. offices Non-U.S. offices Total 2011 $ 57,802 50,614 $108,416 2010 $ 59,653 44,544 $104,197

At December 31, 2011, the maturities of interest-bearing time deposits were as follows.
December 31, 2011 (in millions) 2012 2013 2014 2015 2016 After 5 years Total U.S. $ 68,345 7,222 1,947 2,051 2,532 641 $ 82,738 Non-U.S. $ 67,107 1,086 219 22 102 57 $ 68,593 Total $ 135,452 8,308 2,166 2,073 2,634 698 $ 151,331

Note 19 Deposits
At December 31, 2011 and 2010, noninterest-bearing and interest-bearing deposits were as follows.
December 31, (in millions) U.S. offices Noninterest-bearing Interest-bearing Demand(a) Savings(b) Time (included $3,861 and $2,733 at fair value)(c) Total interest-bearing deposits Total deposits in U.S. offices Non-U.S. offices Noninterest-bearing Interest-bearing Demand Savings Time (included $1,072 and $1,636 at fair value)(c) Total interest-bearing deposits Total deposits in non-U.S. offices Total deposits 2011 $ 346,670 47,075 375,051 82,738 504,864 851,534 18,790 188,202 687 68,593 257,482 276,272 $ 1,127,806 $ 2010 228,555 33,368 334,632 87,237 455,237 683,792 10,917 174,417 607 60,636 235,660 246,577 930,369

Note 20 Accounts payable and other liabilities

The following table details the components of accounts payable and other liabilities.
December 31, (in millions) Brokerage payables(a) Accounts payable and other liabilities(b) Total 2011 $ 121,353 81,542 $ 202,895 2010 95,359 74,971 $ 170,330 $

(a) Includes payables to customers, brokers, dealers and clearing organizations, and securities fails. (b) Includes $51 million and $236 million accounted for at fair value at December 31, 2011 and 2010, respectively.

(a) Includes Negotiable Order of Withdrawal (NOW) accounts, and certain trust accounts. (b) Includes Money Market Deposit Accounts (MMDAs). (c) Includes structured notes classified as deposits for which the fair value option has been elected. For further discussion, see Note 4 on pages 198200 of this Annual Report.

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Note 21 Long-term debt

JPMorgan Chase issues long-term debt denominated in various currencies, although 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. The following table is a summary of long-term debt carrying values (including unamortized original issue discount, valuation adjustments and fair value adjustments, where applicable) by remaining contractual maturity as of December 31, 2011.
By remaining maturity at December 31, (in millions, except rates) Parent company Senior debt: Fixed rate(a) Variable rate(b) Interest rates(c) Subordinated debt: Fixed rate Variable rate Interest rates(c) Subtotal Subsidiaries FHLB advances:(d) Fixed rate Variable rate Interest rates(c) Senior debt: Fixed rate Variable rate Interest rates(c) Subordinated debt: Fixed rate Variable rate Interest rates(c) Subtotal Junior subordinated debt: Fixed rate Variable rate Interest rates(c) Subtotal Total long-term debt(e)(f)(g) Long-term beneficial interests: Fixed rate Variable rate Interest rates Total long-term beneficial interests(h) (a) (b) (c) $ 2,012 11,474 0.06-11.00% $ 13,486 $ $ 2,474 15,306 0.06-5.63% 17,780 $ $ 1,775 6,693 0.02-9.19% 8,468 $ 6,261 33,473 0.02-11.00% $ 39,734 $ 9,795 42,759 0.05-11.00% $ 52,554 $ $ $ $ $ $ $ 18 5,500 0.32-0.44% 699 6,465 0.33-0.57% % 12,682 % 55,133 $ $ $ $ $ $ $ 4,548 6,822 0.32-2.04% 2,963 17,327 0.13-4.28% 1,672 1,150 0.87-5.88% 34,482 % 110,972 $ $ $ $ $ $ $ 172 763 0.41-0.44% 2,884 4,465 4.00-14.21% 7,083 4.38-8.25% 15,367 15,784 5,082 0.93-8.75% 20,866 90,670 $ $ $ $ $ $ $ 4,738 13,085 0.32-2.04% 6,546 28,257 0.13-14.21% 8,755 1,150 0.87-8.25% 62,531 15,784 5,082 0.93-8.75% 20,866 256,775
(i)(j)

2011 Under 1 year $ 17,142 24,186 0.32-7.00% $ 1,005 118 6.63-6.63% $ 42,451 $ $ $ 1-5 years 40,060 25,684 0.60-7.00% 8,919 1,827 1.09-5.75% 76,490 $ $ $ After 5 years 39,276 5,909 0.41-7.25% 9,243 9 2.16-8.53% 54,437 $ $ $ Total 96,478 55,779 0.32-7.25% 19,167 1,954 1.09-8.53% 173,378 $ $ $ $ 2010 Total 98,787 59,027 0.24-7.25% 22,000 1,996 1.37-8.53% 181,810 7,324 15,660 0.21-4.05% $ 5,228 30,545 0.21-14.21% $ 8,605 1,150 0.63-8.25% $ $ 68,512 15,249 5,082 0.79-8.75% $ $ 20,331 270,653

(d) (e) (f) (g) (h)

Included $8.4 billion and $18.5 billion as of December 31, 2011 and 2010, respectively, guaranteed by the FDIC under the Temporary Liquidity Guarantee (TLG) Program. Included $11.9 billion and $17.9 billion as of December 31, 2011 and 2010, respectively, guaranteed by the FDIC under the TLG Program. The interest rates shown are the range of contractual rates in effect at year-end, 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 Firms 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, 2011, for total long-term debt was (0.37)% to 14.21%, versus the contractual range of 0.13% to 14.21% presented in the table above. The interest rate ranges shown exclude structured notes accounted for at fair value. Effective January 1, 2011, $23.0 billion of long-term advances from FHLBs were reclassified from other borrowed funds to long-term debt. The prioryear period has been revised to conform with the current presentation. Included long-term debt of $23.8 billion and $31.3 billion secured by assets totaling $89.4 billion and $92.0 billion at December 31, 2011 and 2010, respectively. The amount of long-term debt secured by assets does not include amounts related to hybrid instruments. Included $34.7 billion and $38.8 billion of outstanding structured notes accounted for at fair value at December 31, 2011 and 2010, respectively. Included $2.1 billion and $879 million of outstanding zero-coupon notes at December 31, 2011 and 2010, respectively. The aggregate principal amount of these notes at their respective maturities was $5.0 billion and $2.7 billion, respectively. Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated VIEs. Also included $1.3 billion and $1.5 billion of outstanding structured notes accounted for at fair value at December 31, 2011 and 2010, respectively. Excluded short-term commercial paper and other short-term beneficial interests of $26.2 billion and $25.1 billion at December 31, 2011 and 2010, respectively.

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Notes to consolidated financial statements

(i) (j) At December 31, 2011, long-term debt in the aggregate of $28.6 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 notes. The aggregate carrying values of debt that matures in each of the five years subsequent to 2011 is $55.1 billion in 2012, $34.9 billion in 2013, $30.4 billion in 2014, $21.6 billion in 2015 and $24.1 billion in 2016.

The weighted-average contractual interest rates for total long-term debt excluding structured notes accounted for at fair value were 3.57% and 3.50% as of December 31, 2011 and 2010, 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 issues. The use of these instruments modifies the Firms 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 2.67% and 2.36% as of December 31, 2011 and 2010, respectively. The Firm commenced its participation in the TLG Program in December 2008. The TLG Program was available to, among others, all U.S. depository institutions insured by the FDIC and all U.S. bank holding companies, unless they opted out or the FDIC terminated their participation. Under the TLG Program, the FDIC guaranteed through the earlier of maturity or December 31, 2012, certain senior unsecured debt issued though October 31, 2009, in return for a fee to be paid based on the amount and maturity of the debt. Under the TLG Program, the FDIC would pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument. The Parent Company has guaranteed certain long-term debt of its subsidiaries, including both long-term debt and structured notes sold as part of the Firm's market-making

activities. These guarantees rank on parity with all of the Firm's other unsecured and unsubordinated indebtedness. Guaranteed liabilities were $3.0 billion and $3.7 billion at December 31, 2011 and 2010, respectively. The Firms 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 Firms credit ratings, financial ratios, earnings or stock price. Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities At December 31, 2011, the Firm had established 26 whollyowned Delaware statutory business trusts (issuer trusts) that had issued guaranteed capital debt securities. The junior subordinated deferrable interest debentures issued by the Firm to the issuer trusts, totaling $20.9 billion and $20.3 billion at December 31, 2011 and 2010, respectively, were reflected in the Firms Consolidated Balance Sheets in long-term debt, and in the table on the preceding page under the caption Junior subordinated debt (i.e., trust preferred capital debt securities). The Firm also records the common capital securities issued by the issuer trusts in other assets in its Consolidated Balance Sheets at December 31, 2011 and 2010. The debentures issued to the issuer trusts by the Firm, less the common capital securities of the issuer trusts, qualified as Tier 1 capital as of December 31, 2011.

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JPMorgan Chase & Co./2011 Annual Report

The following is a summary of the outstanding trust preferred capital debt securities, including unamortized original issue discount, issued by each trust, and the junior subordinated deferrable interest debenture issued to each trust, as of December 31, 2011.
Amount of trust preferred capital debt securities issued by trust(a) $474 525 482 295 241 249 1,000 1,075 400 465 600 93 500 496 748 563 905 836 911 643 700 1,493 1,815 995 1,500 1,500 $19,504 Stated maturity of trust preferred capital securities and debentures 2030 2031 2027 2027 2028 2027 2032 2033 2033 2034 2034 2035 2035 2035 2036 2036 2036 2037 2037 2047 2047 2037 2048 2039 2039 2040

December 31, 2011 (in millions) Bank One Capital III Bank One Capital VI Chase Capital II Chase Capital III Chase Capital VI First Chicago NBD Capital I J.P. Morgan Chase Capital X J.P. Morgan Chase Capital XI J.P. Morgan Chase Capital XII JPMorgan Chase Capital XIII JPMorgan Chase Capital XIV JPMorgan Chase Capital XV JPMorgan Chase Capital XVI JPMorgan Chase Capital XVII JPMorgan Chase Capital XVIII JPMorgan Chase Capital XIX JPMorgan Chase Capital XX JPMorgan Chase Capital XXI JPMorgan Chase Capital XXII JPMorgan Chase Capital XXIII JPMorgan Chase Capital XXIV JPMorgan Chase Capital XXV JPMorgan Chase Capital XXVI JPMorgan Chase Capital XXVII JPMorgan Chase Capital XXVIII JPMorgan Chase Capital XXIX Total (a) (b)

Principal amount of debenture issued to trust(b) $765 552 497 305 249 256 1,016 1,009 391 480 587 132 493 720 749 564 907 837 912 643 700 2,292 1,815 995 1,500 1,500 $20,866

Issue date 2000 2001 1997 1997 1998 1997 2002 2003 2003 2004 2004 2005 2005 2005 2006 2006 2006 2007 2007 2007 2007 2007 2008 2009 2009 2010

Earliest redemption date Any time Any time Any time Any time Any time Any time Any time Any time Any time 2014 Any time Any time Any time Any time Any time Any time Any time 2012 Any time 2012 2012 2037 2013 2039 2014 2015

Interest rate of trust preferred capital securities and debentures 8.75% 7.20% LIBOR + 0.50% LIBOR + 0.55% LIBOR + 0.625% LIBOR + 0.55% 7.00% 5.88% 6.25% LIBOR + 0.95% 6.20% 5.88% 6.35% 5.85% 6.95% 6.63% 6.55% LIBOR + 0.95% 6.45% LIBOR + 1.00% 6.88% 6.80% 8.00% 7.00% 7.20% 6.70%

Interest payment/ distribution dates Semiannually Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Quarterly Semiannually Quarterly Semiannually Semiannually Quarterly Semiannually Quarterly Semiannually Quarterly Quarterly Semiannually Quarterly Semiannually Quarterly Quarterly

Represents the amount of trust preferred capital debt securities issued to the public by each trust, including unamortized original issue discount. Represents the principal amount of JPMorgan Chase debentures issued to each trust, including unamortized original-issue discount. The principal amount of debentures issued to the trusts includes the impact of hedging and purchase accounting fair value adjustments that were recorded on the Firms Consolidated Financial Statements.

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Notes to consolidated financial statements Note 22 Preferred stock

At December 31, 2011 and 2010, 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 Chases preferred stock then outstanding takes precedence over the Firms common stock for the payment of dividends and the distribution of assets. Dividends on the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I shares are payable semiannually at a fixed annual dividend rate of 7.90% through April 2018, and then become payable quarterly at an annual dividend rate of three-month LIBOR plus 3.47%. Dividends on the 8.625% Non-Cumulative Preferred Stock, Series J are payable quarterly. On August 20, 2010, the Firm redeemed all of the outstanding shares of its 6.15% Cumulative Preferred Stock, Series E; 5.72% Cumulative Preferred Stock, Series F; and 5.49% Cumulative Preferred Stock, Series G at their stated redemption value. On June 17, 2009, the Firm redeemed all outstanding shares of the Fixed Rate Cumulative Perpetual Preferred Stock, Series K (Series K Preferred Stock) and repaid the full $25.0 billion principal amount together with accrued but unpaid dividends. The following is a summary of JPMorgan Chases preferred stock outstanding as of December 31, 2011 and 2010.
Fixed-toFloating Rate NonCumulative Perpetual Preferred Stock, Series I 7.900% 600,000 600,000 $ 6,000 6,000 4/30/2018 $ 10,000 $ 8.625% NonCumulative Perpetual Preferred Stock, Series J 8.625% 180,000 180,000 1,800 1,800 9/1/2013 $ 10,000 $ 780,000 780,000 7,800 7,800

Note 23 Common stock

At December 31, 2011 and 2010, JPMorgan Chase was authorized to issue 9.0 billion shares of common stock with a par value of $1 per share. On June 5, 2009, the Firm issued $5.8 billion, or 163 million new shares, of its common stock at $35.25 per share. Common shares issued (newly issued or distributed from treasury) by JPMorgan Chase during the years ended December 31, 2011, 2010 and 2009 were as follows.
Year ended December 31, (in millions) Issued balance at January 1 New open market issuances Total issued balance at December 31 Treasury balance at January 1 Purchase of treasury stock Share repurchases related to employee stock-based awards(a) Issued from treasury: Employee benefits and compensation plans Employee stock purchase plans Total issued from treasury Total treasury balance at December 31 Outstanding (a) 88.3 1.1 89.4 (332.2) 3,772.7 45.3 1.0 46.3 (194.6) 3,910.3 45.7 1.3 47.0 (162.9) 3,942.0 2011 4,104.9 4,104.9 (194.6) (226.9) (0.1) 2010 4,104.9 4,104.9 (162.9) (77.9) (0.1) 2009 3,941.6 163.3 4,104.9 (208.8) (1.1)

Participants in the Firms stock-based incentive plans may have shares withheld to cover income taxes.

December 31, Contractual rate in effect at December 31, 2011 Shares(a) 2011 2010 Carrying value (in millions) 2011 2010

Total preferred stock

Earliest redemption date Share value and redemption price per share(b)

(a) Represented by depositary shares. (b) The redemption price includes the amount shown in the table plus any accrued but unpaid dividends.

Pursuant to the U.S. Treasurys Capital Purchase Program, the Firm issued to the U.S. Treasury a Warrant to purchase up to 88,401,697 shares of the Firms common stock, at an exercise price of $42.42 per share, subject to certain antidilution and other adjustments. The U.S. Treasury exchanged the Warrant for 88,401,697 warrants, each of which was a warrant to purchase a share of the Firms common stock at an exercise price of $42.42 per share and, on December 11, 2009, sold the warrants in a secondary public offering for $950 million. The warrants are exercisable, in whole or in part, at any time and from time to time until October 28, 2018. As part of its common equity repurchase program discussed below, the Firm repurchased 10,167,698 warrants during 2011, with 78,233,999 warrants remaining outstanding at December 31, 2011. The repurchase of the warrants resulted in a $122 million adjustment to capital surplus. On March 18, 2011, the Board of Directors approved a $15.0 billion common equity (i.e., common stock and warrants) repurchase program, of which $8.95 billion was authorized for repurchase in 2011. The $15.0 billion repurchase program superseded a $10.0 billion repurchase program approved in 2007. During 2011 and 2010, the Firm repurchased (on a trade-date basis) an aggregate of 240 million and 78 million shares of common stock and warrants, for $8.95 billion and $3.0 billion, at an average price per unit of $37.35 and $38.49, respectively. The Firm
JPMorgan Chase & Co./2011 Annual Report

Dividend and stock repurchase restrictions Prior to the redemption of the Series K Preferred Stock on June 17, 2009, the Firm was subject to certain restrictions regarding the declaration of dividends and share repurchases. As a result of the redemption of the Series K Preferred Stock, JPMorgan Chase is no longer subject to any of these restrictions.

276

did not repurchase any of the warrants during 2010, and did not repurchase any shares of its common stock or warrants during 2009. For additional information regarding repurchases of the Firms equity securities, see Part II, Item 5: Market for registrants common equity, related stockholder matters and issuer purchases of equity securities, on pages 1820 of JPMorgan Chases 2011 Form 10-K. 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 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 black-out 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. As of December 31, 2011, approximately 408 million unissued shares of common stock were reserved for issuance under various employee incentive, compensation, option and stock purchase plans, director compensation plans, and the warrants sold by the U.S. Treasury as discussed above.

The following table presents the calculation of basic and diluted EPS for the years ended December 31, 2011, 2010 and 2009.
Year ended December 31, (in millions, except per share amounts) Basic earnings per share Income before extraordinary gain Extraordinary gain Net income Less: Preferred stock dividends Less: Accelerated amortization from redemption of preferred stock issued to the U.S. Treasury Net income applicable to common equity Less: Dividends and undistributed earnings allocated to participating securities Net income applicable to common stockholders Total weighted-average basic shares outstanding Per share Income before extraordinary gain Extraordinary gain Net income Year ended December 31, (in millions, except per share amounts) Diluted earnings per share Net income applicable to common stockholders Total weighted-average basic shares outstanding Add: Employee stock options, SARs and warrants(a) Total weighted-average diluted shares outstanding(b) Per share Income before extraordinary gain Extraordinary gain Net income per share $ $ 4.48 4.48 $ $ 3.96 3.96 $ $ 2.24 0.02 2.26
(c) (c)

2011

2010

2009

$18,976 $18,976 629

$17,370 $17,370 642

$11,652 76 $11,728 1,327

18,347

16,728

1,112 9,289

(c)

(c)

779 $17,568 3,900.4

964 $15,764 3,956.3

515 $ 8,774 3,862.8

Note 24 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 restricted stock and RSUs to certain employees under its stock-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. Options issued under employee benefit plans that have an antidilutive effect are excluded from the computation of diluted EPS.

$ $

4.50 4.50

$ $

3.98 3.98

$ $

2.25 0.02 2.27

(c)

(c)

2011

2010

2009

$17,568 3,900.4 19.9 3,920.3

$15,764 3,956.3 20.6 3,976.9

$ 8,774 3,862.8 16.9 3,879.7

(a) Excluded from the computation of diluted EPS (due to the antidilutive effect) were options issued under employee benefit plans and the warrants originally issued in 2008 under the U.S. Treasurys Capital Purchase Program to purchase shares of the Firms common stock. The aggregate number of shares issuable upon the exercise of such options and warrants was 133 million, 233 million and 266 million for the full years ended December 31, 2011, 2010 and 2009 respectively. (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. (c) The calculation of basic and diluted EPS and net income applicable to common equity for full year 2009 includes a one-time, noncash reduction of $1.1 billion, or $0.27 per share, resulting from repayment of the U.S. Troubled Asset Relief Program (TARP) preferred capital.

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Notes to consolidated financial statements Note 25 Accumulated other comprehensive income/(loss)

AOCI includes the after-tax change in unrealized gains and losses on AFS 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 Firms defined benefit pension and OPEB plans.
As of or for the year ended December 31, (in millions) Balance at December 31, 2008 Net change Balance at December 31, 2009 Cumulative effect of changes in accounting principles(a) Net change Balance at December 31, 2010 Net change Balance at December 31, 2011 $ $ $ Unrealized gains/ (losses) on AFS securities(b) $ (2,101) 4,133 2,032 (144) 610 2,498 1,067 3,565
(e) (d) (f) (d) (c) (d)

Translation adjustments, net of hedges $ $ (598) 582 (16) 269 $ $ 253 (279) (26) $ $ $ $

Cash flow hedges (202) 383 181 25 206 (155) 51

Net loss and prior service costs/(credit) of defined benefit pension and OPEB plans $ $ (2,786) 498 (2,288) 332 $ $ (1,956) (690) (2,646)

Accumulated other comprehensive income/(loss) $ (5,687) 5,596 $ (91) (144) 1,236 $ $ 1,001 (57) 944

(a) Reflects the effect of the adoption of accounting guidance related to the consolidation of VIEs, and to embedded credit derivatives in beneficial interests in securitized financial assets. AOCI decreased by $129 million due to the adoption of the accounting guidance related to VIEs, as a result of the reversal of the fair value adjustments taken on retained AFS securities that were eliminated in consolidation; for further discussion see Note 16 on pages 256267 of this Annual Report. AOCI decreased by $15 million due to the adoption of the new guidance related to credit derivatives embedded in certain of the Firms AFS securities; for further discussion see Note 6 on pages 202210 of this Annual Report. (b) Represents the after-tax difference between the fair value and amortized cost of securities accounted for as AFS. (c) The net change during 2009 was due primarily to overall market spread and market liquidity improvement as well as changes in the composition of investments. (d) Included after-tax unrealized losses not related to credit on debt securities for which credit losses have been recognized in income of $(56) million, $(81) million and $(226) million at December 31, 2011, 2010 and 2009, respectively. (e) The net change during 2010 was due primarily to the narrowing of spreads on commercial and non-agency MBS as well as on collateralized loan obligations; also reflects increased market value on pass-through MBS due to narrowing of spreads and other market factors. (f) The net change for 2011 was due primarily to increased market value on agency MBS and municipal securities, partially offset by the widening of spreads on non-U.S. corporate debt and the realization of gains due to portfolio repositioning.

The following table presents the before- and after-tax changes in the components of other comprehensive income/(loss).
Before tax 2011 Tax effect After tax Before tax 2010 Tax effect After tax Before tax 2009 Tax effect After tax

Year ended December 31, (in millions) Unrealized gains/(losses) on AFS securities: Net unrealized gains/(losses) arising during the period Reclassification adjustment for realized (gains)/ losses included in net income Net change Translation adjustments: Translation Hedges Net change Cash flow hedges: Net unrealized gains/(losses) arising during the period Reclassification adjustment for realized (gains)/ losses included in net income Net change Net loss and prior service cost/(credit) of defined benefit pension and OPEB plans: Net gains/(losses) and prior service credits arising during the period Reclassification adjustment for net loss and prior service credits included in net income Net change Total other comprehensive income/(loss)

$ 3,361 (1,593) 1,768 (672) 226 (446)

$ (1,322) $ 2,039 621 (701) 255 (88) 167 (972) 1,067 (417) 138 (279)

$ 3,982 (2,982) 1,000 402 11 413

$ (1,540) $ 2,442 1,150 (390) (139) (5) (144) (1,832) 610 263 6 269

$ 7,870 (1,152) 6,718 1,139 (259) 880

$ (3,029) $ 4,841 444 (2,585) (398) 100 (298) (708) 4,133 741 (159) 582

50 (301) (251)

(19) 115 96

31 (186) (155)

247 (206) 41

(96) 80 (16)

151 (126) 25

767 (124) 643

(308) 48 (260)

459 (76) 383

(1,291) 162 $ (1,129) (58) $

502 (63) 439 1 $

(789) 99

294 224

(96) (90)

198 134

494 337 831 $ 9,072

(200) (133)

294 204

(690) 518 (57) $ 1,972

(186) 332 $ (736) $ 1,236

(333) 498 $ (3,476) $ 5,596

278

JPMorgan Chase & Co./2011 Annual Report

Note 26 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 Chases 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 Firms 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 Firms final tax-related assets and liabilities may ultimately be different from those currently reported. 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, 2011, 2010, and 2009.
Year ended December 31, (in millions) Current income tax expense U.S. federal Non-U.S. U.S. state and local Total current income tax expense Deferred income tax expense/ (benefit) U.S. federal Non-U.S. U.S. state and local Total deferred income tax expense/(benefit) Total income tax expense 2,109 102 (518) 1,693 $ 7,773 (753) 169 (384) (968) $ 7,489 $ (2,867) (454) (301) (3,622) 4,415 $ 3,719 1,183 1,178 6,080 $ 4,001 2,712 1,744 8,457 $ 4,698 2,368 971 8,037 2011 2010 2009

increase of $1.8 billion in 2010, and a decrease of $3.7 billion in 2009. U.S. federal income taxes have not been provided on the undistributed earnings of certain non-U.S. subsidiaries, to the extent that such earnings have been reinvested abroad for an indefinite period of time. Based on JPMorgan Chase's ongoing review of the business requirements and capital needs of its non-U.S. subsidiaries, combined with the formation of specific strategies and steps taken to fulfill these requirements and needs, the Firm has determined that the undistributed earnings of certain of its subsidiaries would be indefinitely reinvested to fund current and future growth of the related businesses. As management does not intend to use the earnings of these subsidiaries as a source of funding for its U.S. operations, such earnings will not be distributed to the U.S. in the foreseeable future. For 2011, pretax earnings of approximately $2.6 billion were generated and will be indefinitely reinvested in these subsidiaries. At December 31, 2011, the cumulative amount of undistributed pretax earnings in these subsidiaries approximated $21.8 billion. If the Firm were to record a deferred tax liability associated with these undistributed earnings, the amount would be approximately $4.9 billion at December 31, 2011. Tax expense applicable to securities gains and losses for the years 2011, 2010 and 2009 was $617 million, $1.1 billion, and $427 million, respectively. A reconciliation of the applicable statutory U.S. income tax rate to the effective tax rate for each of the years ended December 31, 2011, 2010 and 2009, is presented in the following table.
Year ended December 31, Statutory U.S. federal tax rate Increase/(decrease) in tax rate resulting from: U.S. state and local income taxes, net of U.S. federal income tax benefit Tax-exempt income Non-U.S. subsidiary earnings(a) Business tax credits Other, net Effective tax rate (a) 1.6 (2.1) (2.3) (4.0) 0.9 29.1% 3.6 (2.4) (2.2) (3.7) (0.2) 30.1% 2.7 (3.9) (1.7) (5.5) 0.9 27.5% 2011 35.0% 2010 35.0% 2009 35.0%

Includes earnings deemed to be reinvested indefinitely in non-U.S. subsidiaries.

Total income tax expense includes $76 million, $485 million and $280 million of tax benefits recorded in 2011, 2010, and 2009, respectively, as a result of tax audit resolutions. The preceding table does not reflect the tax effect of certain items that are recorded each period directly in stockholders equity and certain tax benefits associated with the Firms employee stock-based compensation plans. The tax effect of all items recorded directly to stockholders equity resulted in an increase of $927 million in 2011, an
JPMorgan Chase & Co./2011 Annual Report

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 managements 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, 2011 and 2010.

279

Notes to consolidated financial statements

December 31, (in millions) Deferred tax assets Allowance for loan losses Employee benefits Accrued expenses and other Non-U.S. operations Tax attribute carryforwards(a) Gross deferred tax assets Valuation allowance Deferred tax assets, net of valuation allowance Deferred tax liabilities Depreciation and amortization(a) Leasing transactions Non-U.S. operations Other, net(a) Gross deferred tax liabilities Net deferred tax assets $ $ $ 6,358 2,569 2,790 1,139 12,856 14,776 $ $ $ 4,823 2,160 1,136 1,497 9,616 16,320 $ $
(a)

2011 $ 10,689 4,570 9,186 2,943 1,547 28,935 (1,303) 27,632 $ $ $

2010 12,287 4,279 7,850 956 2,348 27,720 (1,784) 25,936

At December 31, 2011, 2010 and 2009, JPMorgan Chases unrecognized tax benefits, excluding related interest expense and penalties, were $7.2 billion, $7.8 billion and $6.6 billion, respectively, of which $4.0 billion, $3.8 billion and $3.5 billion, respectively, if recognized, would reduce the annual effective tax rate. As JPMorgan Chase is presently under audit by a number of taxing authorities, it is reasonably possible that significant changes in the gross balance of unrecognized tax benefits may occur within the next 12 months. JPMorgan Chase does not expect that any changes over the next twelve months in its gross balance of unrecognized tax benefits caused by such audits would result in a significant change in its annual effective tax rate. The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2011, 2010 and 2009.
Unrecognized tax benefits
Year ended December 31, (in millions) Balance at January 1, Increases based on tax positions related to the current period Decreases based on tax positions related to the current period Increases based on tax positions related to prior periods Decreases based on tax positions related to prior periods Decreases related to settlements with taxing authorities Decreases related to a lapse of applicable statute of limitations Balance at December 31, $ $ 2011 7,767 516 (110) 496 (1,433) (16) (31) 7,189 $ $ 2010 6,608 813 (24) 1,681 (1,198) (74) (39) 7,767 2009 $ 5,894 584 (6) 703 (322) (203) (42) $ 6,608

(a) The prior-year period has been revised to conform with the current presentation.

JPMorgan Chase has recorded deferred tax assets of $1.5 billion at December 31, 2011, in connection with U.S. federal, state and local, and non-U.S. subsidiary net operating loss carryforwards. At December 31, 2011, the U.S. federal net operating loss carryforwards were approximately $4.1 billion; the state and local net operating loss carryforward was approximately $642 million; and the non-U.S. subsidiary net operating loss carryforward was $116 million. If not utilized, the U.S. federal net operating loss carryforwards and the state and local net operating loss carryforward will expire between 2027 and 2030. The non-U.S. subsidiary net operating loss carryforward has an unlimited carryforward period. A valuation allowance has been recorded for losses associated with non-U.S. subsidiaries and certain portfolio investments, and certain state and local tax benefits. During 2011, the valuation allowance decreased by $481 million predominantly related to the realization of state and local tax benefits.

After-tax interest expense/(benefit) and penalties related to income tax liabilities recognized in income tax expense were $184 million, $(54) million and $101 million in 2011, 2010 and 2009, respectively. At December 31, 2011 and 2010, in addition to the liability for unrecognized tax benefits, the Firm had accrued $1.7 billion and $1.6 billion, respectively, for income taxrelated interest and penalties. JPMorgan Chase is continually under examination by the Internal Revenue Service, by taxing authorities throughout the world, and by many states 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, 2011.

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December 31, 2011 JPMorgan Chase U.S. JPMorgan Chase U.S. Bank One U.S. Bear Stearns U.S. Bear Stearns U.S. JPMorgan Chase United Kingdom JPMorgan Chase New York State and City JPMorgan Chase California

Periods under examination 1993 2002 2003 2005(a) 2000 2004 2003 2005 2006 2008 2006 2010 2005 2007 2006 2008

Status Refund claims under review Field examination completed, JPMorgan Chase intends to file refund claims Refund claims under review In appeals process Field examination Field examination Field examination Field examination

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 regulators opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. At January 1, 2012, JPMorgan Chases banking subsidiaries could pay, in the aggregate, $7.4 billion in dividends to their respective bank holding companies without the prior approval of their relevant banking regulators. The capacity to pay dividends in 2012 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, 2011 and 2010, cash in the amount of $25.4 billion and $25.0 billion, respectively, and securities with a fair value of $23.4 billion and $9.7 billion, respectively, were segregated in special bank accounts for the benefit of securities and futures brokerage customers. In addition, as of December 31, 2011 and 2010, the Firm had other restricted cash of $4.2 billion and $2.7 billion, respectively, primarily representing cash reserves held at non-U.S. central banks and held for other general purposes.

(a) JPMorgan Chase anticipates that the IRS will commence in 2012 an examination of the years 2006 through 2008.

The following table presents the U.S. and non-U.S. components of income before income tax expense and extraordinary gain for the years ended December 31, 2011, 2010 and 2009.
Year ended December 31, (in millions) U.S. Non-U.S.(a) Income before income tax and extraordinary gain 2011 $ 16,336 10,413 $ 26,749 2010 $ 16,568 8,291 $ 24,859 $ 2009 6,263 9,804 $ 16,067

(a) For purposes of this table, non-U.S. income is defined as income generated from operations located outside the U.S.

Note 28 Regulatory capital

Note 27 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 Office of the Comptroller of the Currency (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. The Board of Governors of the Federal Reserve System (the Federal Reserve) requires depository institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve balances deposited by the Firms bank subsidiaries with various Federal Reserve Banks was approximately $4.4 billion and $803 million in 2011 and 2010, respectively. Restrictions imposed by U.S. federal law prohibit JPMorgan Chase and certain of its affiliates from borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured loans to the Firm or to other affiliates are generally limited to 10% of the banking subsidiarys total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such loans is limited to 20% of the banking subsidiarys total capital. The principal sources of JPMorgan Chases income (on a parent company-only basis) are dividends and interest from JPMorgan Chase Bank, N.A., and the other banking and nonbanking subsidiaries of JPMorgan Chase. In addition to
JPMorgan Chase & Co./2011 Annual Report

The Federal Reserve establishes capital requirements, including well-capitalized standards for the consolidated financial holding company. The OCC establishes similar capital requirements and standards for the Firms national banks, including JPMorgan Chase Bank, N.A., and Chase Bank USA, N.A. There are two categories of risk-based capital: Tier 1 capital and Tier 2 capital. Tier 1 capital consists of common stockholders equity, perpetual preferred stock, noncontrolling interests in subsidiaries and trust preferred capital debt securities, less goodwill and certain other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, subordinated long-term debt and other instruments qualifying as Tier 2 capital, and the aggregate allowance for credit losses up to a certain percentage of risk-weighted assets. Total capital is Tier 1 capital plus Tier 2 capital. Under the risk-based capital guidelines of the Federal Reserve, JPMorgan Chase is required to maintain minimum ratios of Tier 1 and Total capital to risk-weighted assets, as well as minimum leverage ratios (which are 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. Banking subsidiaries also are subject to these capital requirements by their respective primary regulators. As of December 31, 2011 and 2010, JPMorgan Chase and all of its banking subsidiaries were well-capitalized and met all capital requirements to which each was subject.

281

Notes to consolidated financial statements

The following table presents the regulatory capital, assets and risk-based capital ratios for JPMorgan Chase and its significant banking subsidiaries at December 31, 2011 and 2010. These amounts are determined in accordance with regulations issued by the Federal Reserve and/or OCC.
December 31, (in millions, except ratios) Regulatory capital Tier 1(a) Total Assets Risk-weighted(b)(c) Adjusted average(d) Capital ratios Tier 1(a) Total Tier 1 leverage (a) 12.3% 15.4 6.8 12.1% 15.5 7.0 9.4% 13.0 5.5 9.5% 13.5 5.7 11.1% 14.4 11.2 11.1% 14.2 11.0 6.0% 10.0 5.0
(g)

JPMorgan Chase & Co.(e) 2011 $ 150,384 188,088 2010 $ 142,450 182,216

JPMorgan Chase Bank, N.A.(e) 2011 $ 98,426 136,017 $ 2010 91,764 130,444

Chase Bank USA, N.A.(e) 2011 $ 11,903 15,448 2010 $ 12,966 16,659

Wellcapitalized ratios(f)

Minimum capital ratios(f)

$1,221,198 2,202,087

$1,174,978 2,024,515

$1,042,898 1,789,194

$ 965,897 1,611,486

$107,421 106,312

$116,992 117,368

4.0% 8.0 3.0

(h)

At December 31, 2011, for JPMorgan Chase and JPMorgan Chase Bank, N.A., trust preferred capital debt securities were $19.6 billion and $600 million, respectively. If these securities were excluded from the calculation at December 31, 2011, Tier 1 capital would be $130.8 billion and $97.8 billion, respectively, and the Tier 1 capital ratio would be 10.7% and 9.4%, respectively. At December 31, 2011, Chase Bank USA, N.A. had no trust preferred capital debt securities. (b) Risk-weighted assets consist of on and offbalance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. Onbalance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Offbalance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable offbalance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the onbalance sheet credit-equivalent amount, which is then risk-weighted based on the same factors used for onbalance sheet assets. Risk-weighted assets also incorporate a measure for the market risk related to applicable trading assetsdebt and equity instruments, and foreign exchange and commodity derivatives. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets. (c) Includes offbalance sheet risk-weighted assets at December 31, 2011, of $301.1 billion, $291.0 billion and $38 million, and at December 31, 2010, of $282.9 billion, $274.2 billion and $31 million, for JPMorgan Chase, JPMorgan Chase Bank, N.A. and Chase Bank USA, N.A., respectively. (d) Adjusted average assets, for purposes of calculating the leverage ratio, include total quarterly average assets adjusted for unrealized gains/(losses) on securities, less deductions for disallowed goodwill and other intangible assets, investments in certain subsidiaries, and the total adjusted carrying value of nonfinancial equity investments that are subject to deductions from Tier 1 capital. (e) Asset and capital amounts for JPMorgan Chases banking subsidiaries reflect intercompany transactions; whereas the respective amounts for JPMorgan Chase reflect the elimination of intercompany transactions. (f) As defined by the regulations issued by the Federal Reserve, OCC and FDIC. (g) Represents requirements for banking subsidiaries pursuant to regulations issued under the FDIC Improvement Act. There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company. (h) The minimum Tier 1 leverage ratio for bank holding companies and banks is 3% or 4%, depending on factors specified in regulations issued by the Federal Reserve and OCC. Note: Rating agencies allow measures of capital to be adjusted upward for deferred tax liabilities, which have resulted from both nontaxable business combinations and from tax-deductible goodwill. The Firm had deferred tax liabilities resulting from nontaxable business combinations totaling $414 million and $647 million at December 31, 2011 and 2010, respectively; and deferred tax liabilities resulting from tax-deductible goodwill of $2.3 billion and $1.9 billion at December 31, 2011 and 2010, respectively.

282

JPMorgan Chase & Co./2011 Annual Report

A reconciliation of the Firms Total stockholders equity to Tier 1 capital and Total qualifying capital is presented in the table below.
December 31, (in millions) Tier 1 capital Total stockholders equity Effect of certain items in accumulated other comprehensive income/(loss) excluded from Tier 1 capital Qualifying hybrid securities and noncontrolling interests(a) Less: Goodwill(b) Fair value DVA on derivative and structured note liabilities related to the Firms credit quality Investments in certain subsidiaries and other Other intangible assets Total Tier 1 capital Tier 2 capital Long-term debt and other instruments qualifying as Tier 2 Qualifying allowance for credit losses Adjustment for investments in certain subsidiaries and other Total Tier 2 capital Total qualifying capital 22,275 15,504 (75) 37,704 $ 188,088 25,018 14,959 (211) 39,766 $ 182,216
(b)

Note 29 Offbalance sheet lending-related financial instruments, guarantees, and other commitments
JPMorgan Chase provides lending-related financial instruments (e.g., commitments and guarantees) to meet the financing needs of its customers. The contractual amount of these financial instruments represents the maximum possible credit risk to the Firm should the counterparty draw upon the commitment or the Firm be required to fulfill its obligation under the guarantee, and should the counterparty subsequently fail to perform according to the terms of the contract. Most of these commitments and guarantees expire without being drawn or a default occurring. As a result, the total contractual amount of these instruments is not, in the Firms view, representative of its actual future credit exposure or funding requirements. To provide for the risk of loss inherent in wholesale and consumer (excluding credit card) contracts, an allowance for credit losses on lending-related commitments is maintained. See Note 15 on pages 252255 of this Annual Report for further discussion 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, 2011 and 2010. 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, without notice as permitted by law. The Firm may reduce or close home equity lines of credit 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. Also, the Firm typically closes credit card lines when the borrower is 60 days or more past due.

2011 $ 183,573 (970) 19,668 45,873 2,150 993 2,871 150,384

2010 $ 176,106 (748) 19,887 46,915 1,261 1,032 3,587 142,450

(a) Primarily includes trust preferred capital debt securities of certain business trusts. (b) Goodwill and other intangible assets are net of any associated deferred tax liabilities.

JPMorgan Chase & Co./2011 Annual Report

283

Notes to consolidated financial statements

Offbalance sheet lending-related financial instruments, guarantees and other commitments
Contractual amount 2011 Expires after Expires 3 years after 5 through years 5 years 2010 Carrying value(i) 2011 2010

By remaining maturity at December 31, (in millions)

Expires in 1 year or less

Expires after 1 year through 3 years

Total

Total

Lending-related Consumer, excluding credit card: Home equity senior lien $ 933 $ 4,780 $ 4,870 $ 5,959 $ 16,542 Home equity junior lien 2,096 8,964 8,075 7,273 26,408 Prime mortgage 1,500 1,500 Subprime mortgage Auto 6,431 97 149 17 6,694 Business banking 9,480 430 63 326 10,299 Student and other 82 169 127 486 864 Total consumer, excluding credit card 20,522 14,440 13,284 14,061 62,307 Credit card 530,616 530,616 Total consumer 551,138 14,440 13,284 14,061 592,923 Wholesale: Other unfunded commitments to extend credit(a)(b) 61,083 61,628 87,830 4,710 215,251 Standby letters of credit and other financial guarantees(a)(b)(c)(d) Unused advised lines of credit Other letters of credit(a)(d) Total wholesale Total lending-related Other guarantees and commitments Securities lending indemnifications(e) Derivatives qualifying as guarantees(f) Unsettled reverse repurchase and securities borrowing agreements Loan sale and securitization-related indemnifications: Mortgage repurchase liability(g) Loans sold with recourse Other guarantees and commitments(h) 27,982 34,671 36,448 2,798 101,899

$ 17,662 30,948 1,266 5,246 9,702 579 65,403 547,227 612,630 199,859 94,837 44,720 6,663 346,079 $ 958,709 $ 181,717 87,768 39,927

$ 1 6 7 7 347 696

2 4 6 6 364 705

46,695 11,324 327 1,857 60,203 4,218 1,020 148 5,386 139,978 108,643 124,753 9,365 382,739 $ 691,116 $ 123,083 $ 138,037 $ 23,426 $ 975,662 $ 186,077 $ 2,998 39,939 $ $ $ 186,077 5,117 31,097 36,381 75,593 39,939

2 2 1,045 1,071 $ 1,052 $ 1,077 NA 457 $ NA 294

NA NA 1,030

NA NA 279

NA NA 299

NA NA 4,713

NA 10,397 6,321

NA 10,982 6,492

3,557 148 (5)

3,285 153 (6)

(a) At December 31, 2011 and 2010, reflects the contractual amount net of risk participations totaling $1.1 billion and $542 million, respectively, for other unfunded commitments to extend credit; $19.8 billion and $22.4 billion, respectively, for standby letters of credit and other financial guarantees; and $974 million and $1.1 billion, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations. (b) At December 31, 2011 and 2010, included credit enhancements and bond and commercial paper liquidity commitments to U.S. states and municipalities, hospitals and other not-for-profit entities of $48.6 billion and $43.4 billion, respectively. These commitments also include liquidity facilities to nonconsolidated municipal bond VIEs; for further information, see Note 16 on pages 256267 of this Annual Report. (c) At December 31, 2011 and 2010, included unissued standby letters of credit commitments of $44.1 billion and $41.6 billion, respectively. (d) At December 31, 2011 and 2010, JPMorgan Chase held collateral relating to $41.5 billion and $37.8 billion, respectively, of standby letters of credit; and $1.3 billion and $2.1 billion, respectively, of other letters of credit. (e) At December 31, 2011 and 2010, collateral held by the Firm in support of securities lending indemnification agreements was $186.3 billion and $185.0 billion, respectively. Securities lending collateral comprises primarily cash and securities issued by governments that are members of the Organisation for Economic Co-operation and Development (OECD) and U.S. government agencies. (f) Represents notional amounts of derivatives qualifying as guarantees. (g) Represents the estimated mortgage repurchase liability related to indemnifications for breaches of representations and warranties in loan sale and securitization agreements. For additional information, see Loan sale and securitization-related indemnifications on pages 286287 of this Note. (h) At December 31, 2011 and 2010, included unfunded commitments of $789 million and $1.0 billion, respectively, to third-party private equity funds; and $1.5 billion and $1.4 billion, respectively, to other equity investments. These commitments included $820 million and $1.0 billion, respectively, related to investments that are generally fair valued at net asset value as discussed in Note 3 on pages 184198 of this Annual Report. In addition, at December 31, 2011 and 2010, included letters of credit hedged by derivative transactions and managed on a market risk basis of $3.9 billion and $3.8 billion, respectively. (i) For lending-related products, the carrying value represents the allowance for lending-related commitments and the guarantee liability; for derivativerelated products, the carrying value represents the fair value. For all other products the carrying value represents the valuation reserve.

284

JPMorgan Chase & Co./2011 Annual Report

Other unfunded commitments to extend credit Other unfunded commitments to extend credit generally comprise commitments for working capital and general corporate purposes, as well as extensions of credit to support commercial paper facilities and bond financings in the event that those obligations cannot be remarketed to new investors. Also included in other unfunded commitments to extend credit are commitments to noninvestment-grade counterparties in connection with leveraged and acquisition finance activities, which were $6.1 billion and $5.9 billion at December 31, 2011 and 2010, respectively. For further information, see Note 3 and Note 4 on pages 184198 and 198200 respectively, of this Annual Report. 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 partys failure to perform under a specified agreement. The Firm considers the following offbalance sheet lending-related arrangements to be guarantees under U.S. GAAP: standby letters of credit and 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 Firms 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, 2011 and 2010, 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 (SBLC) and other financial guarantees are conditional lending commitments issued by the Firm to guarantee the performance of a 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 $698 million and $707 million at December 31, 2011 and 2010, respectively, which were classified in accounts payable and other liabilities on the Consolidated Balance Sheets; these carrying values included $319 million and $347 million, respectively, for the allowance for lendingrelated commitments, and $379 million and $360 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 Firms customers, as of December 31, 2011 and 2010. Standby letters of credit, other financial guarantees and other letters of credit
2011 December 31, (in millions) Investment-grade(a) Noninvestment-grade(a) Total contractual amount(b) Allowance for lending-related commitments Commitments with collateral (a) (b) (c) $ $ Standby letters of credit and other financial guarantees $ 78,884 23,015 101,899 317 41,529
(c)

2010 Other letters of credit $ $ $ 4,105 1,281 5,386 2 1,264 $ $ Standby letters of credit and other financial guarantees $ 70,236 24,601 94,837 345 37,815
(c)

Other letters of credit $ $ $ 5,289 1,374 6,663 2 2,127

The ratings scale is based on the Firms internal ratings which generally correspond to ratings as defined by S&P and Moodys. At December 31, 2011 and 2010, reflects the contractual amount net of risk participations totaling $19.8 billion and $22.4 billion, respectively, for standby letters of credit and other financial guarantees; and $974 million and $1.1 billion, respectively, for other letters of credit. In regulatory filings with the Federal Reserve these commitments are shown gross of risk participations. At December 31, 2011 and 2010, included unissued standby letters of credit commitments of $44.1 billion and $41.6 billion, respectively.

JPMorgan Chase & Co./2011 Annual Report

285

Notes to consolidated financial statements

Advised lines of credit An advised line of credit is a revolving credit line which specifies the maximum amount the Firm may make available to an obligor, on a nonbinding basis. The borrower receives written or oral advice of this facility. The Firm may cancel this facility at any time by providing the borrower notice or, in some cases, without notice as permitted by law. Securities lending indemnifications Through the Firms securities lending program, customers 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 thirdparty borrower to return the lent securities in the event the Firm did not obtain sufficient collateral. 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 customer with the cash equivalent thereof. Derivatives qualifying as guarantees In addition to the contracts described above, 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. Derivative guarantees also include contracts such as stable value derivatives that require the Firm to make a payment of the difference between the market value and the book value of a counterpartys reference portfolio of assets in the event that market value is less than book value and certain other conditions have been met. Stable value derivatives, commonly referred to as stable value wraps, are transacted in order to allow investors to realize investment returns with less volatility than an unprotected portfolio and are typically longer-term or may have no stated maturity, but allow the Firm to terminate the contract under certain conditions. Derivative guarantees are recorded on the Consolidated Balance Sheets at fair value in trading assets and trading liabilities. The total notional value of the derivatives that the Firm deems to be guarantees was $75.6 billion and $87.8 billion at December 31, 2011 and 2010, respectively. The notional amount generally represents the Firms maximum exposure to derivatives qualifying as guarantees. However, exposure to certain stable value contracts is contractually limited to a substantially lower percentage of the notional amount; the notional amount on
286

these stable value contracts was $26.1 billion and $25.9 billion and the maximum exposure to loss was $2.8 billion and $2.7 billion, at December 31, 2011 and 2010, respectively. The fair values of the contracts reflect the probability of whether the Firm will be required to perform under the contract. The fair value related to derivatives that the Firm deems to be guarantees were derivative payables of $555 million and $390 million and derivative receivables of $98 million and $96 million at December 31, 2011 and 2010, respectively. 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. 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 6 on pages 202210 of this Annual Report. Unsettled reverse repurchase and securities borrowing agreements In the normal course of business, the Firm enters into reverse repurchase agreements and securities borrowing agreements that settle at a future date. At settlement, these commitments require that the Firm advance cash to and accept securities from 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. At December 31, 2011 and 2010, the amount of commitments related to forward starting reverse repurchase agreements and securities borrowing agreements were $14.4 billion and $14.4 billion, respectively. Commitments related to unsettled reverse repurchase agreements and securities borrowing agreements with regular way settlement periods were $25.5 billion and $25.5 billion at December 31, 2011 and 2010, respectively. Loan sales- and securitization-related indemnifications Mortgage repurchase liability In connection with the Firms loan sale and securitization activities with the GSEs and other loan sale and privatelabel securitization transactions, as described in Note 16 on pages 256267 of this Annual Report, the Firm has made representations and warranties that the loans sold meet certain requirements. The Firm may be, and has been, required to repurchase loans and/or indemnify the GSEs and other investors for losses due to material breaches of these representations and warranties. Although there have been both generalized allegations, as well as specific demands that the Firm should repurchase loans sold or deposited into private-label securitizations, and the Firm experienced an increase in the number of requests for loan files (file requests) in the latter part of 2011, loan-level repurchase demands and repurchases from private-label securitizations have been limited to date. 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
JPMorgan Chase & Co./2011 Annual Report

sold to purchasers (including securitization-related SPEs) plus, in certain circumstances, accrued and unpaid interest on such loans and certain expense. Subsequent to the Firms acquisition of certain assets and liabilities of Washington Mutual from the FDIC in September 2008, the Firm resolved and/or limited certain current and future repurchase demands for loans sold to the GSEs by Washington Mutual, although it remains the Firms position that such obligations remain with the FDIC receivership. The Firm will continue to evaluate and may pay (subject to reserving its rights for indemnification by the FDIC) certain future repurchase demands related to individual loans, subject to certain limitations, and has considered such potential repurchase demands in its repurchase liability. To estimate the Firms mortgage repurchase liability arising from breaches of representations and warranties, the Firm considers: (i) the level of outstanding unresolved repurchase demands, (ii) estimated probable future repurchase demands considering information about file requests, delinquent and liquidated loans, resolved and unresolved mortgage insurance rescission notices and the Firms historical experience, (iii) the potential ability of the Firm to cure the defects identified in the repurchase demands (cure rate), (iv) the estimated severity of loss upon repurchase of the loan or collateral, make-whole settlement, or indemnification, (v) the Firms potential ability to recover its losses from third-party originators, and (vi) the terms of agreements with certain mortgage insurers and other parties. Based on these factors, the Firm has recognized a mortgage repurchase liability of $3.6 billion and $3.3 billion, as of December 31, 2011 and 2010, respectively, which is reported in accounts payable and other liabilities net of probable recoveries from third-party correspondents of $577 million and $517 million at December 31, 2011 and 2010, respectively. Substantially all of the estimates and assumptions underlying the Firms established methodology for computing its recorded mortgage repurchase liability including factors such as the amount of probable future demands from purchasers, trustees or investors, the ability of the Firm to cure identified defects, the severity of loss upon repurchase or foreclosure, and recoveries from third parties require application of a significant level of management judgment. Estimating the mortgage repurchase liability is further complicated by historical data and uncertainty surrounding numerous external factors, including: (i) macro-economic factors and (ii) the level of future demands, which is dependent, in part, on actions taken by third parties such as the GSEs, mortgage insurers, trustees and investors.

While the Firm uses the best information available to it in estimating its mortgage repurchase liability, the estimation process is inherently uncertain and imprecise and, accordingly, losses in excess of the amounts accrued as of December 31, 2011, are reasonably possible. The Firm believes the estimate of the range of reasonably possible losses, in excess of its established repurchase liability, is from $0 to approximately $2 billion at December 31, 2011. This estimated range of reasonably possible loss considers the Firm's GSE-related exposure based on an assumed peak to trough decline in home prices of 44%, which is an additional 9 percentage point decline in home prices beyond the Firms current assumptions which were derived from a nationally recognized home price index. Although the Firm does not consider a further decline in home prices of this magnitude likely to occur, such a decline could increase the level of loan delinquencies, thereby potentially increasing the repurchase demand rate from the GSEs and increasing loss severity on repurchased loans, each of which could affect the Firms mortgage repurchase liability. Claims related to private-label securitizations have, thus far, generally manifested themselves through threatened or pending litigation, which the Firm has considered with other litigation matters as discussed in Note 31 on pages 290 299 of this Annual Report. Actual repurchase losses could vary significantly from the Firms recorded mortgage repurchase liability or this estimate of reasonably possible additional losses, depending on the outcome of various factors, including those considered above. The following table summarizes the change in the mortgage repurchase liability for each of the periods presented. Summary of changes in mortgage repurchase liability(a)
Year ended December 31, (in millions) Repurchase liability at beginning of period Realized losses
(b)

2011 $ 3,285 (1,263) 1,535 $ 3,557

(c)

2010 $ 1,705 (1,423) 3,003 $ 3,285 $ $

2009 1,093 (1,253) 1,865 1,705

(d)

Provision for repurchase losses Repurchase liability at end of period

(a) Mortgage repurchase liabilities associated with pending or threatened litigation are not reported in this table because the Firm separately evaluates its exposure to such repurchases in establishing its litigation reserves. (b) Includes principal losses and accrued interest on repurchased loans, make-whole settlements, settlements with claimants, and certain related expense. For the years ended December 31, 2011, 2010 and 2009, make-whole settlements were and $640 million, $632 million and $277 million, respectively. (c) Includes $173 million at December 31, 2011, related to future demands on loans sold by Washington Mutual to the GSEs. (d) Includes the Firms resolution of certain current and future repurchase demands for certain loans sold by Washington Mutual.

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
287

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Notes to consolidated financial statements

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 Firms 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, 2011 and 2010, the unpaid principal balance of loans sold with recourse totaled $10.4 billion and $11.0 billion, respectively. The carrying value of the related liability that the Firm has recorded, which is representative of the Firms view of the likelihood it will have to perform under its recourse obligations, was $148 million and $153 million at December 31, 2011 and 2010, respectively. Other off-balance sheet arrangements Indemnification agreements general In connection with issuing securities to investors, the Firm may enter into contractual arrangements with third parties that require the Firm to make a payment to them in the event of a change in tax law or an adverse interpretation of tax law. In certain cases, the contract also may include a termination clause, which would allow the Firm to settle the contract at its fair value in lieu of making a payment under the indemnification clause. 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 Firms 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. Credit card charge-backs Chase Paymentech Solutions, Cards merchant services business and a subsidiary of JPMorgan Chase Bank, N.A., is a global leader in payment processing and merchant acquiring. Under the rules of Visa USA, Inc., and MasterCard International, JPMorgan Chase Bank, N.A., is liable primarily for the amount of each processed credit card sales transaction that is the subject of a dispute between a cardmember and a merchant. If a dispute is resolved in the cardmembers favor, Chase Paymentech will (through the cardmembers issuing bank) credit or refund the amount to the cardmember and will charge back the transaction to the merchant. If Chase Paymentech is unable to collect the amount from the merchant, Chase Paymentech will bear the loss for the amount credited or refunded to the cardmember. Chase Paymentech 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) Chase Paymentech does not have sufficient collateral from the merchant to provide customer refunds; and (3) Chase Paymentech does not have sufficient financial resources to provide customer refunds, JPMorgan Chase Bank, N.A., would be liable for the amount of the transaction. For the year ended December 31, 2011, Chase Paymentech incurred aggregate credit losses of $13 million on $553.7 billion of aggregate volume processed, and at December 31, 2011, it held $204 million of collateral. For the year ended December 31, 2010, Chase Paymentech incurred aggregate credit losses of $12 million on $469.3 billion of aggregate volume processed, and at December 31, 2010, it held $189 million of collateral. For the year ended December 31, 2009, Chase Paymentech incurred aggregate credit losses of $11 million on $409.7 billion of aggregate volume processed, and at December 31, 2009, it held $213 million of collateral. The Firm believes that, based on historical experience and the collateral held by Chase Paymentech, the fair value of the Firms charge back-related obligations, which are representative of the payment or performance risk to the Firm, is immaterial. Exchange and clearinghouse guarantees The Firm is a member of several securities and futures exchanges and clearinghouses, both in the U.S. and other countries. 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 Firms contribution to a members guarantee fund, or, in a few cases, the obligation may be unlimited. It is difficult to estimate the Firms maximum 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. The Firm clears transactions on behalf of its clients through various clearinghouses, and the Firm stands behind the performance of its clients on such trades. The Firm mitigates its exposure to loss in the event of a client default by requiring that clients provide appropriate amounts of margin at the inception and throughout the life of the transaction, and can cease the provision of clearing services if clients do not adhere to their obligations under the clearing agreement. It is difficult to estimate the Firm's maximum exposure under such transactions, as this would
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require an assessment of transactions that clients may execute in the future. However, based upon historical experience, 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. Guarantees of subsidiaries In the normal course of business, JPMorgan Chase & Co. (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 Firms counterparties. The obligations of the subsidiaries are included on the Firms 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 debt of its subsidiaries, including both long-term debt and structured notes sold as part of the Firms market-making activities. These guarantees are not included in the table on page 284 of this Note. For additional information, see Note 21 on pages 273275 of this Annual Report.

Total rental expense was as follows.

Year ended December 31, (in millions) Gross rental expense Sublease rental income Net rental expense $ $ 2011 2,228 (403) 1,825 $ $ 2010 2,212 (545) 1,667 $ $ 2009 1,884 (172) 1,712

Pledged assets At December 31, 2011, assets were pledged to collateralize repurchase agreements, other securities financing agreements, derivative transactions and for other purposes, including to secure borrowings and public deposits. Certain of these pledged assets may be sold or repledged by the secured parties and are identified as financial instruments owned (pledged to various parties) on the Consolidated Balance Sheets. In addition, at December 31, 2011 and 2010, the Firm had pledged $270.3 billion and $288.7 billion, respectively, of financial instruments it owns that may not be sold or repledged by the secured parties. Total assets pledged do not include assets of consolidated VIEs; these assets are used to settle the liabilities of those entities. The significant components of the Firms pledged assets were as follows.
December 31, (in billions) 2011 2010 Securities Loans Trading assets and other Total assets pledged(a) (a)

Note 30 Commitments, pledged assets and collateral

Lease commitments At December 31, 2011, JPMorgan Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes, and for energy-related tolling service agreements. 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 Firms 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, 2011.
Year ended December 31, (in millions) 2012 2013 2014 2015 2016 After 2016 Total minimum payments required(a) Less: Sublease rentals under noncancelable subleases Net minimum payment required
(a)

134.8 198.6 122.8 456.2

112.1 214.8 123.2 450.1

Total assets pledged do not include assets of consolidated VIEs; these assets are used to settle the liabilities of those entities. See Note 16 on pages 256 267 of this Annual Report for additional information on assets and liabilities of consolidated VIEs.

Collateral At December 31, 2011 and 2010, the Firm had accepted assets as collateral that it could sell or repledge, deliver or otherwise use with a fair value of approximately $742.1 billion and $655.0 billion, respectively. This collateral was generally obtained under resale agreements, securities borrowing agreements, customer margin loans and derivative agreements. Of the collateral received, approximately $515.8 billion and $521.3 billion, respectively, were sold or repledged, generally as collateral under repurchase agreements, securities lending agreements or to cover short sales and to collateralize deposits and derivative agreements.

1,753 1,758 1,577 1,438 1,300 7,188 15,014 (1,542) 13,472

Lease restoration obligations are accrued in accordance with U.S. GAAP, and are not reported as a required minimum lease payment.

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Notes to consolidated financial statements Note 31 Litigation

Contingencies As of December 31, 2011, the Firm and its subsidiaries 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 selfregulatory organizations. These legal proceedings are at varying stages of adjudication, arbitration or investigation, and involve each of the Firms 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 $5.1 billion at December 31, 2011. This estimated aggregate range of reasonably possible losses is based upon currently available information for those proceedings in which the Firm is involved, taking into account the Firms best estimate of such losses for those cases for which such estimate can be made. For certain cases, the Firm does not believe that an estimate can currently be made. The Firms estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many are currently 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. Accordingly, the Firms estimate will change from time to time, and actual losses may be more than the current estimate. Set forth below are descriptions of the Firms material legal proceedings. Auction-Rate Securities Investigations and Litigation. Beginning in March 2008, several regulatory authorities initiated investigations of a number of industry participants, including the Firm, concerning possible state and federal securities law violations in connection with the sale of auction-rate securities. The market for many such securities had frozen and a significant number of auctions for those securities began to fail in February 2008. The Firm, on behalf of itself and affiliates, agreed to a settlement in principle with the New York Attorney Generals Office which provided, among other things, that the Firm would offer to purchase at par certain auction-rate securities purchased from J.P. Morgan Securities LLC, Chase Investment Services Corp. and Bear, Stearns & Co. Inc. by individual investors, charities and small- to medium-sized businesses. The Firm also agreed to a substantively similar
290

settlement in principle with the Office of Financial Regulation for the State of Florida and the North American Securities Administrators Association (NASAA) Task Force, which agreed to recommend approval of the settlement to all remaining states, Puerto Rico and the U.S. Virgin Islands. The Firm has finalized the settlement agreements with the New York Attorney Generals Office and the Office of Financial Regulation for the State of Florida. The settlement agreements provide for the payment of penalties totaling $25 million to all states. The Firm is currently in the process of finalizing consent agreements with NASAAs member states; more than 45 of these consent agreements have been finalized to date. The Firm also faces a number of civil actions relating to the Firms sales of auction-rate securities, including a putative securities class action in the United States District Court for the Southern District of New York that seeks unspecified damages, and individual arbitrations and lawsuits in various forums brought by institutional and individual investors that, together, seek damages totaling approximately $50 million. The actions generally allege that the Firm and other firms manipulated the market for auction-rate securities by placing bids at auctions that affected these securities clearing rates or otherwise supported the auctions without properly disclosing these activities. Some actions also allege that the Firm misrepresented that auction-rate securities were short-term instruments. The lawsuits are being coordinated before the federal District Court in New York. Additionally, the Firm was named in two putative antitrust class actions. The actions allege that the Firm, along with numerous other financial institution defendants, colluded to maintain and stabilize the auction-rate securities market and then to withdraw their support for the auction-rate securities market. In January 2010, the District Court dismissed both actions. An appeal is pending in the United States Court of Appeals for the Second Circuit. Bear Stearns Hedge Fund Matters. The Bear Stearns Companies LLC (formerly The Bear Stearns Companies Inc.) (Bear Stearns), certain current or former subsidiaries of Bear Stearns, including Bear Stearns Asset Management, Inc. (BSAM) and Bear, Stearns & Co. Inc., and certain individuals formerly employed by Bear Stearns are named defendants (collectively the Bear Stearns defendants) in multiple civil actions and arbitrations relating to alleged losses resulting from the failure of the Bear Stearns High Grade Structured Credit Strategies Master Fund, Ltd. (the High Grade Fund) and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (the Enhanced Leverage Fund) (collectively, the Funds). BSAM served as investment manager for both of the Funds, which were organized such that there were U.S. and Cayman Islands feeder funds that invested substantially all their assets, directly or indirectly, in the Funds. The Funds are in liquidation. There are currently three civil actions pending in the United States District Court for the Southern District of New York

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relating to the Funds. One of these actions involves a derivative lawsuit brought on behalf of purchasers of partnership interests in the U.S. feeder fund to the Enhanced Leverage Fund, alleging that the Bear Stearns defendants mismanaged the Funds. This action seeks, among other things, unspecified compensatory damages based on alleged investor losses. The parties have reached an agreement to settle this derivative action, pursuant to which BSAM would pay a maximum of approximately $18 million. BSAM has reserved the right not to proceed with this settlement if plaintiff is unable to secure the participation of investors whose net contributions meet a prescribed percentage of the aggregate net contributions to this feeder fund. The court has preliminarily approved the settlement, which remains subject to final court approval. (A separate derivative action, also alleging that the Bear Stearns defendants mismanaged the Funds, was brought on behalf of purchasers of partnership interests in the U.S. feeder fund to the High Grade Fund, and was dismissed following a Court-approved settlement with similar terms, pursuant to which BSAM paid approximately $19 million). The second pending action, brought by the Joint Voluntary Liquidators of the Cayman Islands feeder funds, makes allegations similar to those asserted in the derivative lawsuits related to the U.S. feeder funds, alleges net losses of approximately $700 million and seeks compensatory and punitive damages. The parties presently are engaged in discovery. The third action was brought by Bank of America and Banc of America Securities LLC (together BofA) alleging breach of contract and fraud in connection with a $4 billion securitization in May 2007 known as a CDO-squared, for which BSAM served as collateral manager. This securitization was composed of certain collateralized debt obligation holdings that were purchased by BofA from the Funds. BofA alleges that it incurred losses in excess of $3 billion and seeks damages in an amount to be determined, although the amount of damages that BofA seeks may be substantially less than its alleged losses. Discovery is ongoing. Bear Stearns Shareholder Litigation and Related Matters. Various shareholders of Bear Stearns have commenced purported class actions against Bear Stearns and certain of its former officers and/or directors on behalf of all persons who purchased or otherwise acquired common stock of Bear Stearns between December 14, 2006, and March 14, 2008 (the Class Period). During the Class Period, Bear Stearns had between 115 million and 120 million common shares outstanding, and the price per share of those securities declined from a high of $172.61 to a low of $30 at the end of the period. The actions, originally commenced in several federal courts, allege that the defendants issued materially false and misleading statements regarding Bear Stearns business and financial results and that, as a result of those false statements, Bear Stearns common stock traded at artificially inflated prices during the Class Period. In addition, several individual shareholders of Bear Stearns have also commenced or threatened to commence their
JPMorgan Chase & Co./2011 Annual Report

own arbitration proceedings and lawsuits asserting claims similar to those in the putative class actions. Certain of these matters have been dismissed or settled. Separately, an agreement in principle has been reached to resolve a class action brought under the Employee Retirement Income Security Act (ERISA) against Bear Stearns and certain of its former officers and/or directors on behalf of participants in the Bear Stearns Employee Stock Ownership Plan for alleged breaches of fiduciary duties in connection with the management of that Plan. Under the settlement, which remains subject to final documentation and court approval, the class will receive $10 million. Bear Stearns, former members of Bear Stearns Board of Directors and certain of Bear Stearns former executive officers have also been named as defendants in a shareholder derivative and class action suit which is pending in the United States District Court for the Southern District of New York. Plaintiffs assert claims for breach of fiduciary duty, violations of federal securities laws, waste of corporate assets and gross mismanagement, unjust enrichment, abuse of control and indemnification and contribution in connection with the losses sustained by Bear Stearns as a result of its purchases of subprime loans and certain repurchases of its own common stock. Certain individual defendants are also alleged to have sold their holdings of Bear Stearns common stock while in possession of material nonpublic information. Plaintiffs seek compensatory damages in an unspecified amount. The District Court dismissed the action, and plaintiffs have appealed. City of Milan Litigation and Criminal Investigation. In January 2009, the City of Milan, Italy (the City) issued civil proceedings against (among others) JPMorgan Chase Bank, N.A. and J.P. Morgan Securities Ltd. (together, JPMorgan Chase) in the District Court of Milan. The proceedings relate to (a) a bond issue by the City in June 2005 (the Bond), and (b) an associated swap transaction, which was subsequently restructured on a number of occasions between 2005 and 2007 (the Swap). The City seeks damages and/or other remedies against JPMorgan Chase (among others) on the grounds of alleged fraudulent and deceitful acts and alleged breach of advisory obligations in connection with the Swap and the Bond, together with related swap transactions with other counterparties. The civil proceedings have been stayed pending the determination of an application by JPMorgan Chase to the Supreme Court in Rome challenging jurisdiction, which was heard in November 2011. In March 2010, a criminal judge directed four current and former JPMorgan Chase personnel and JPMorgan Chase Bank, N.A. (as well as other individuals and three other banks) to go forward to a full trial that started in May 2010. Although the Firm is not charged with any crime and does not face criminal liability, if one or more of its employees were found guilty, the Firm could be subject to administrative sanctions, including restrictions on its ability

291

Notes to consolidated financial statements

to conduct business in Italy and monetary penalties. Hearings have continued on a weekly basis since May 2010. Enron Litigation. JPMorgan Chase and certain of its officers and directors are involved in several lawsuits seeking damages arising out of the Firms banking relationships with Enron Corp. and its subsidiaries (Enron). A number of actions and other proceedings against the Firm previously were resolved, including a class action lawsuit captioned Newby v. Enron Corp. and adversary proceedings brought by Enrons bankruptcy estate. The remaining Enron-related actions include an individual action by an Enron investor, an action by an Enron counterparty and a purported class action filed on behalf of JPMorgan Chase employees who participated in the Firms 401(k) plan asserting claims under ERISA for alleged breaches of fiduciary duties by JPMorgan Chase, its directors and named officers. The class action has been dismissed, and is on appeal to the United States Court of Appeals for the Second Circuit. Motions to dismiss are pending in the other two actions. Interchange Litigation. A group of merchants has filed a series of putative class action complaints in several federal courts. The complaints allege that Visa and MasterCard, as well as certain other banks and their respective bank holding companies, conspired to set the price of credit and debit card interchange fees, enacted respective association rules in violation of antitrust laws, and engaged in tying/ bundling and exclusive dealing. The complaint seeks unspecified damages and injunctive relief based on the theory that interchange fees would be lower or eliminated but for the challenged conduct. Based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2010. All cases have been consolidated in the United States District Court for the Eastern District of New York for pretrial proceedings. The Court has dismissed all claims relating to periods prior to January 2004. The Court has not yet ruled on motions relating to the remainder of the case or plaintiffs class certification motion. Fact and expert discovery have closed. In addition to the consolidated class action complaint, plaintiffs filed supplemental complaints challenging the initial public offerings (IPOs) of MasterCard and Visa (the IPO Complaints). With respect to the MasterCard IPO, plaintiffs allege that the offering violated Section 7 of the Clayton Act and Section 1 of the Sherman Act and that the offering was a fraudulent conveyance. With respect to the Visa IPO, plaintiffs are challenging the Visa IPO on antitrust theories parallel to those articulated in the MasterCard IPO pleading. Defendants have filed motions to dismiss the IPO Complaints. The Court has not yet ruled on those motions. The parties also have filed motions seeking summary judgment as to various claims in the complaints. Oral argument on these summary judgment motions was heard in November 2011. Investment Management Litigation. Four cases have been filed claiming that investment portfolios managed by J.P. Morgan Investment Management Inc. (JPMorgan
292

Investment Management) were inappropriately invested in securities backed by subprime residential real estate collateral. Plaintiffs claim that JPMorgan Investment Management and related defendants are liable for losses of more than $1 billion in market value of these securities. The first case was filed by NM Homes One, Inc. in federal District Court in New York. Following rulings on motions addressed to the pleadings, plaintiffs claims for breach of contract, breach of fiduciary duty, negligence and gross negligence survive, and discovery is proceeding. In the second case, filed by Assured Guaranty (U.K.) in New York state court, discovery is proceeding on plaintiffs claims for breach of contract, breach of fiduciary duty and gross negligence. In the third case, filed by Ambac Assurance UK Limited in New York state court, the lower court granted JPMorgan Investment Managements motion to dismiss. The New York State Appellate Division reversed the lower courts decision and discovery is proceeding. The fourth case, filed by CMMF LLP in New York state court, asserts claims under New York law for breach of fiduciary duty, gross negligence, breach of contract and negligent misrepresentation. The lower court denied in part defendants motion to dismiss and discovery is proceeding. Lehman Brothers Bankruptcy Proceedings. In May 2010, Lehman Brothers Holdings Inc. (LBHI) and its Official Committee of Unsecured Creditors (the Committee) filed a complaint (and later an amended complaint) against JPMorgan Chase Bank, N.A. in the United States Bankruptcy Court for the Southern District of New York that asserts both federal bankruptcy law and state common law claims, and seeks, among other relief, to recover $8.6 billion in collateral that was transferred to JPMorgan Chase Bank, N.A. in the weeks preceding LBHIs bankruptcy. The amended complaint also seeks unspecified damages on the grounds that JPMorgan Chase Bank, N.A.s collateral requests hastened LBHIs demise. The Firm has moved to dismiss plaintiffs amended complaint in its entirety, and has also moved to transfer the litigation from the Bankruptcy Court to the United States District Court for the Southern District of New York. Neither motion has yet been decided, but following argument on the motion to transfer the litigation, the District Court directed the Bankruptcy Court to decide the motion to dismiss while the District Court is considering the transfer motion. The Firm also filed counterclaims against LBHI alleging that LBHI fraudulently induced the Firm to make large clearing advances to Lehman against inappropriate collateral, which left the Firm with more than $25 billion in claims (the Clearing Claims) against the estate of Lehman Brothers Inc. (LBI), LBHIs broker-dealer subsidiary. These claims have been paid in full, subject to the outcome of the litigation. Discovery is underway with a trial scheduled for 2012. In August 2011, LBHI and the Committee filed an objection to the deficiency claims asserted by JPMorgan Chase Bank, N.A. against LBHI with respect to the Clearing Claims, principally on the grounds that the Firm had not conducted the sale of the securities collateral held for such claims in a commercially reasonable manner. The Firm has received and is in various

JPMorgan Chase & Co./2011 Annual Report

stages of responding to regulatory investigations regarding Lehman. LIBOR Investigations and Litigation. JPMorgan Chase has received various subpoenas and requests for documents and, in some cases, interviews, from the United States Department of Justice, United States Commodity Futures Trading Commission, United States Securities and Exchange Commission, European Commission, United Kingdom Financial Services Authority, Canadian Competition Bureau and Swiss Competition Commission. The documents and information sought all relate to the process by which rates were submitted to the British Bankers Association (BBA) in connection with the setting of the BBAs London Interbank Offered Rate (LIBOR), principally in 2007 and 2008. The inquiries from some of the regulators also relate to similar processes by which EURIBOR rates are submitted to the European Banking Federation and TIBOR rates are submitted to the Japanese Bankers Association during similar time periods. The Firm is cooperating with these inquiries. In addition, the Firm has been named as a defendant along with other banks in a series of individual and class actions filed in various U.S. federal courts alleging that since 2006 the defendants either individually suppressed the LIBOR rate artificially or colluded in submitting rates for LIBOR that were artificially low. Plaintiffs allege that they transacted in U.S. dollar LIBOR-based derivatives or other financial instruments whose values are impacted by changes in U.S. dollar LIBOR, and assert a variety of claims including antitrust claims seeking treble damages. All cases have been consolidated for pre-trial purposes in the United States District Court for the Southern District of New York. In November 2011, the District Court entered an Order appointing interim lead counsel for the two proposed classes: (i) plaintiffs who allegedly purchased U.S. dollar LIBOR-based financial instruments directly from the defendants in the over-the-counter market, and (ii) plaintiffs who allegedly purchased U.S. dollar LIBOR-based financial instruments on an exchange. Madoff Litigation. JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, and J.P. Morgan Securities Ltd. have been named as defendants in a lawsuit brought by the trustee (the Trustee) for the liquidation of Bernard L. Madoff Investment Securities LLC (Madoff). The Trustee has served an amended complaint in which he has asserted 28 causes of action against JPMorgan Chase, 20 of which seek to avoid certain transfers (direct or indirect) made to JPMorgan Chase that are alleged to have been preferential or fraudulent under the federal Bankruptcy Code and the New York Debtor and Creditor Law. The remaining causes of action involve claims for, among other things, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conversion, contribution and unjust enrichment. The complaint generally alleges that JPMorgan Chase, as Madoffs long-time bank, facilitated the maintenance of Madoffs Ponzi scheme and overlooked signs of wrongdoing in order to obtain profits and fees. The complaint asserts common law claims that purport to seek
JPMorgan Chase & Co./2011 Annual Report

approximately $19 billion in damages, together with bankruptcy law claims to recover approximately $425 million in transfers that JPMorgan Chase allegedly received directly or indirectly from Bernard Madoffs brokerage firm. By order dated October 31, 2011, the United States District Court for the Southern District of New York granted JPMorgan Chases motion to dismiss the common law claims asserted by the Trustee, and returned the remaining claims to the Bankruptcy Court for further proceedings. The Trustee has appealed this decision. Separately, J.P. Morgan Trust Company (Cayman) Limited, JPMorgan (Suisse) SA, J.P. Morgan Securities Ltd., Bear Stearns Alternative Assets International Ltd. and J.P. Morgan Clearing Corp. have been named as defendants in lawsuits presently pending in Bankruptcy Court in New York arising out of the liquidation proceedings of Fairfield Sentry Limited and Fairfield Sigma Limited (together, Fairfield), so-called Madoff feeder funds. These actions are based on theories of mistake and restitution and seek to recover payments made to defendants by the funds totaling approximately $150 million. Pursuant to an agreement with the Trustee, the liquidators of Fairfield have voluntarily dismissed their action against J.P. Morgan Securities Ltd. without prejudice to refiling. The other actions remain outstanding. The Bankruptcy Court has stayed these actions. In addition, a purported class action was brought against JPMorgan Chase in the United States District Court for the Southern District of New York, as is a motion by separate potential class plaintiffs to add claims against JPMorgan Chase, JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Securities Ltd. to an alreadypending purported class action in the same court. The allegations in these complaints largely track those raised by the Trustee. The Court dismissed these complaints and plaintiffs have appealed. Finally, JPMorgan Chase is a defendant in five actions pending in New York state court and two purported class actions in federal court in New York. The allegations in all of these actions are essentially identical, and involve claims against the Firm for aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conversion and unjust enrichment. In the state court actions, the Firms motion to dismiss is pending. The Firm has moved to dismiss the state court actions and intends to move to dismiss the federal actions. The Firm is also responding to various governmental inquiries concerning the Madoff matter. MF Global. JPMorgan Chase & Co. has been named as one of several defendants in six putative class action lawsuits brought by customers of MF Global in federal district courts in Montana and New York. The actions allege, among other things, that the Firm aided and abetted MF Globals alleged misuse of customer money and breaches of fiduciary duty and was unjustly enriched by the transfer of $200 million in customer segregated funds by MF Global. In addition, J.P. Morgan Securities LLC has been named as one of several defendants in a putative class action filed in
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Notes to consolidated financial statements

federal district court in New York on behalf of purchasers of MF Globals publicly traded securities including the securities issued pursuant to MF Globals February 2011 and August 2011 convertible note offerings. The complaint, which asserts violations of the Securities Act of 1933 against the underwriter defendants, alleges that the offering documents contained materially false and misleading statements and omissions regarding MF Globals financial position, including its exposure to European sovereign debt. The Firm is also responding to various governmental inquiries concerning MF Global. Mortgage-Backed Securities and Repurchase Litigation and Regulatory Investigations. JPMorgan Chase and affiliates, Bear Stearns and affiliates and Washington Mutual affiliates have been named as defendants in a number of cases in their various roles as issuer or underwriter in MBS offerings. These cases include purported class action suits, actions by individual purchasers of securities or by trustees for the benefit of purchasers of securities, and actions by monoline insurance companies that guaranteed payments of principal and interest for particular tranches of securities offerings. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for securities issued by dozens of securitization trusts contained material misrepresentations and omissions, including with regard to the underwriting standards pursuant to which the underlying mortgage loans were issued, or assert that various representations or warranties relating to the loans were breached at the time of origination. There are currently pending and tolled investor and monoline claims involving approximately $120 billion of such securities, a number that decreased significantly in the fourth quarter of 2011 largely due to favorable rulings on standing in the class actions discussed below. In the actions against the Firm as an MBS issuer (and, in some cases, also as an underwriter of its own MBS offerings), three purported class actions are pending against JPMorgan Chase and Bear Stearns, and/or certain of their affiliates and current and former employees, in the United States District Courts for the Eastern and Southern Districts of New York. Defendants moved to dismiss these actions. In the first of these three actions, the court dismissed claims relating to all but one of the offerings. In the second action, the court dismissed claims as to certain offerings and tranches for lack of standing, but allowed claims to proceed relating to some offerings and certificates including ones raised by newly intervening plaintiffs; both parties have sought leave to appeal these rulings. In the third action, the Firms motion to dismiss remains pending. In a fourth purported class action pending in the United States District Court for the Western District of Washington, Washington Mutual affiliates, WaMu Asset Acceptance Corp. and WaMu Capital Corp., along with certain former officers or directors of WaMu Asset Acceptance Corp., have been named as defendants. The court there denied plaintiffs motion for leave to amend their complaint to add JPMorgan Chase Bank, N.A., as a defendant on the theory that it is a successor to Washington Mutual Bank. In October 2011, the
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court certified a class of plaintiff investors to pursue the claims asserted, but limited those claims to the 13 tranches of MBS in which a named plaintiff purchased. Discovery is proceeding. In addition to class actions, the Firm is also a defendant in individual actions brought against certain affiliates of JPMorgan Chase, Bear Stearns and Washington Mutual as issuers (and, in some cases, as underwriters). These actions involve claims by governmental agencies, including the Federal Housing Finance Administration, the National Credit Union Administration and the Federal Home Loan Banks of Pittsburgh, Seattle, San Francisco, Chicago, Indianapolis, Atlanta and Boston, as well as by or to benefit various institutional investors, including Cambridge Place Investment Management, various affiliates of the Allstate Corporation, the Charles Schwab Corporation, Massachusetts Mutual Life Insurance Company, Western & Southern Life Insurance Company, HSH Nordbank, IKB International, S.A., Sealink Funding, Ltd., Landesbank Baden-Wurttemberg, Stichting Pensioenfonds ABP, Bayerische Landesbank, Union Central Life Insurance Company, Capital Ventures International, John Hancock Life Insurance Company and certain affiliates, Dexia SA/NV and certain affiliates, Deutsche Zentral-Genossenschaftsbank and Asset Management Fund and certain affiliates. These actions are pending in federal and state courts across the country and are at various stages of litigation. EMC Mortgage LLC (formerly EMC Mortgage Corporation) (EMC), an indirect subsidiary of JPMorgan Chase & Co., and certain other JPMorgan Chase entities currently are defendants in four pending actions commenced by bond insurers that guaranteed payments of principal and interest on approximately $3.5 billion of certain classes of six different MBS offerings sponsored by EMC. One of those actions, commenced by Syncora Guarantee, Inc., is pending in the United States District Court for the Southern District of New York against EMC only. Syncora has also filed two actions in New York state court: the first, against J.P. Morgan Securities LLC, asserts tort claims arising out of the same transaction as its federal complaint; the second asserts various tort and contract claims relating to a separate transaction against J.P. Morgan Securities LLC, JPMorgan Chase Bank, N.A. and Bear Stearns Asset-Backed Securities I LLC. Ambac has filed a similar complaint in New York state court relating to four MBS offerings, which alleges various contract and tort claims against EMC, J.P. Morgan Securities LLC and JPMorgan Chase Bank, N.A. These Ambac and Syncora actions seek unspecified damages and specific performance. In December 2011, Assured Guaranty Corp. dismissed its case filed against EMC with respect to one MBS offering that was pending in the United States District Court for the Southern District of New York. In actions against the Firm solely as an underwriter of other issuers MBS offerings, the Firm has contractual rights to indemnification from the issuers, but those indemnity rights may prove effectively unenforceable where the issuers are now defunct, such as affiliates of IndyMac Bancorp
JPMorgan Chase & Co./2011 Annual Report

(IndyMac Trusts) and Thornburg Mortgage (Thornburg). The Firm may also be contractually obligated to indemnify underwriters in certain deals it issued. With respect to the IndyMac Trusts, J.P. Morgan Securities LLC, along with numerous other underwriters and individuals, is named as a defendant, both in its own capacity and as successor to Bear Stearns, in a purported class action pending in the United States District Court for the Southern District of New York brought on behalf of purchasers of securities in various IndyMac Trust MBS offerings. The court in that action has dismissed claims as to certain such securitizations, including all offerings in which no named plaintiff purchased securities, and allowed claims as to other offerings to proceed. Plaintiffs motion to certify a class of investors in certain offerings is pending, and discovery is ongoing. In addition, J.P. Morgan Securities LLC and JPMorgan Chase are named as defendants in an individual action filed by the Federal Home Loan Bank of Pittsburgh in connection with a single offering by an affiliate of IndyMac Bancorp. Discovery in that action is ongoing and defendants moved for partial summary judgment in November 2011. Separately, J.P. Morgan Securities LLC, as successor to Bear, Stearns & Co. Inc., along with other underwriters and certain individuals, are defendants in an action pending in state court in California brought by MBIA Insurance Corp. (MBIA). The action relates to certain securities issued by IndyMac trusts in offerings in which Bear Stearns was an underwriter, and as to which MBIA provided guaranty insurance policies. MBIA purports to be subrogated to the rights of the MBS holders, and seeks recovery of sums it has paid and will pay pursuant to those policies. Discovery is ongoing. With respect to Thornburg, a Bear Stearns subsidiary is also a named defendant in a purported class action pending in the United States District Court for the District of New Mexico along with a number of other financial institutions that served as depositors and/or underwriters for three Thornburg MBS offerings. The Court granted in part defendants motion to dismiss but indicated that plaintiffs could replead. Plaintiffs filed another amended complaint in December 2011, while defendants have asked the court to reconsider its ruling denying in part the defendants motion to dismiss. The Firm or its affiliates are defendants in three actions brought by trustees of MBS on behalf of the purchasers of securities. In the first, Wells Fargo, as trustee for a single MBS trust, has filed an action against EMC Mortgage in Delaware state court alleging that EMC breached various representations and warranties and seeking the repurchase of more than 800 mortgage loans by EMC and indemnification for the trustee attorneys fees and costs. In the second, a trustee for a single MBS trust filed a summons with notice in New York state court against EMC, Bear Stearns & Co. Inc. and JPMorgan Chase & Co., seeking damages for breach of contract. The Firm has not yet been served with the complaint. In the third, the Firm is a defendant in an action commenced by Deutsche Bank National Trust Co., acting as trustee for various MBS trusts. That case is described in more detail below with respect to

the Washington Mutual Litigations. There is no assurance that the Firm will not be named as a defendant in additional MBS-related litigation, and the Firm has entered into agreements with a number of entities that purchased such securities which toll the statutes of limitations and repose with respect to their claims. In addition, the Firm has received several demands by securitization trustees that threaten litigation, as well as demands by investors directing or threatening to direct trustees to investigate claims or bring litigation, based on purported obligations to repurchase loans out of securitization trusts and alleged servicing deficiencies. These include but are not limited to a demand from a law firm, as counsel to a group of certificateholders who purport to have 25% or more of the voting rights in as many as 191 different trusts sponsored by the Firm with an original principal balance of more than $174 billion (excluding 52 trusts sponsored by Washington Mutual, with an original principal balance of more than $58 billion), made to various trustees to investigate potential repurchase and servicing claims. A shareholder complaint has been filed in New York state court against the Firm and two affiliates, members of the boards of directors thereof and certain employees, asserting claims based on alleged wrongful actions and inactions relating to residential mortgage originations and securitizations. The action seeks an accounting and damages. The defendants have moved to dismiss the action. In addition to the above-described litigation, the Firm has also received, and responded to, a number of subpoenas and informal requests for information from federal and state authorities concerning mortgage-related matters, including inquiries concerning a number of transactions involving the Firms origination and purchase of whole loans, underwriting and issuance of MBS, treatment of early payment defaults and potential breaches of securitization representations and warranties, and due diligence in connection with securitizations. In January 2012, the Firm was advised by SEC staff that they are considering recommending to the Commission that civil or administrative actions be pursued arising out of two separate investigations they have been conducting. The first involves potential claims against J.P. Morgan Securities LLC relating to due diligence conducted for two mortgagebacked securitizations and corresponding disclosures. The second involves potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations. In both investigations, the SEC staff has invited the Firm to submit responses to the proposed actions. Mortgage Foreclosure Investigations and Litigation. JPMorgan Chase and four other firms have agreed to a settlement in principle (the global settlement) with a number of federal and state government agencies, including the U.S. Department of Justice, the U.S.

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Notes to consolidated financial statements

Department of Housing and Urban Development, the Consumer Financial Protection Bureau and the State Attorneys General, relating to the servicing and origination of mortgages. The global settlement, which is subject to the execution of a definitive agreement and court approval, calls for the Firm to, among other things: (i) make cash payments of approximately $1.1 billion (a portion of which will be set aside for payments to borrowers); (ii) provide approximately $500 million of refinancing relief to certain underwater borrowers whose loans are owned by the Firm; and (iii) provide approximately $3.7 billion of additional relief for certain borrowers, including reductions of principal on first and second liens, payments to assist with short sales, deficiency balance waivers on past foreclosures and short sales, and forbearance assistance for unemployed homeowners. (If the Firm does not meet certain targets for provision of the refinancing or other borrower relief within certain prescribed time periods, the Firm will instead make cash payments.) In addition, under the global settlement the Firm will be required to adhere to certain enhanced mortgage servicing standards. The global settlement releases the Firm from further claims related to servicing activities, including foreclosures and loss mitigation activities; certain origination activities; and certain bankruptcy-related activities. Not included in the global settlement are any claims arising out of securitization activities, including representations made to investors respecting mortgage-backed securities; criminal claims; and repurchase demands from the GSEs, among other items. The Firm also entered into agreements in principle with the Federal Reserve and the OCC for the payment of civil money penalties related to conduct that was the subject of consent orders entered into with the banking regulators in April 2011. The Firms payment obligations under those agreements will be deemed satisfied by the Firms payments and provisions of relief under the global settlement. The Attorneys General of Massachusetts and New York have separately filed lawsuits against the Firm, other servicers and a mortgage recording company asserting claims for various alleged wrongdoings relating to mortgage assignments and use of the industry's electronic mortgage registry. The Firm has moved to dismiss the Massachusetts action, and has yet to respond to the New York action. Five purported class action lawsuits were filed against the Firm relating to its mortgage foreclosure procedures. Two of those suits were dismissed with prejudice. A third suit has been resolved, and its dismissal will be obtained shortly. Additionally, the Firm is defending a purported class action brought against Bank of America involving an EMC loan. A shareholder derivative action has been filed in New York state court against the Firms board of directors alleging that the board failed to exercise adequate oversight as to wrongful conduct by the Firm regarding mortgage servicing. The action seeks a declaratory judgment and damages.
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Municipal Derivatives Investigations and Litigation. Purported class action lawsuits and individual actions (the Municipal Derivatives Actions) have been filed against JPMorgan Chase and Bear Stearns, as well as numerous other providers and brokers, alleging antitrust violations in the reportedly $100 billion to $300 billion annual market for financial instruments related to municipal bond offerings referred to collectively as municipal derivatives. In July 2011, the Firm settled with federal and state governmental agencies to resolve their investigations into similar alleged conduct. The Municipal Derivatives Actions have been consolidated and/or coordinated in the United States District Court for the Southern District of New York. The court denied in part and granted in part defendants motions to dismiss the purported class and individual actions, permitting certain claims to proceed against the Firm and others under federal and California state antitrust laws and under the California false claims act. Subsequently, a number of additional individual actions asserting substantially similar claims, including claims under New York and West Virginia state antitrust statutes, were filed against JPMorgan Chase, Bear Stearns and numerous other defendants. These cases are also being coordinated for pretrial purposes in the United States District Court for the Southern District of New York. Discovery is ongoing. In addition, civil actions have been commenced against the Firm relating to certain Jefferson County, Alabama (the County) warrant underwritings and swap transactions. In November 2009, J.P. Morgan Securities LLC settled with the SEC to resolve its investigation into those transactions. Following that settlement, the County and a putative class of sewer rate payers filed complaints against the Firm and several other defendants in Alabama state court. The suits allege that the Firm made payments to certain third parties in exchange for being chosen to underwrite more than $3 billion in warrants issued by the County and to act as the counterparty for certain swaps executed by the County. The complaints also allege that the Firm concealed these thirdparty payments and that, but for this concealment, the County would not have entered into the transactions. The Court denied the Firms motions to dismiss the complaints in both proceedings. The Firm filed mandamus petitions with the Alabama Supreme Court, seeking immediate appellate review of these decisions. The mandamus petition in the Countys lawsuit was denied in April 2011. In November and December, 2011, the County filed notices of bankruptcy with the trial court in each of the cases and with the Alabama Supreme Court stating that it was a Chapter 9 Debtor in the U.S. Bankruptcy Court for the Northern District of Alabama and providing notice of the automatic stay. Subsequently, the portion of the sewer rate payer action involving claims against the Firm was removed by certain defendants to the United States District Court for the Northern District of Alabama. In its order finding that removal of this action was proper, the District Court referred the action to the Districts Bankruptcy Court, where the action remains pending.

JPMorgan Chase & Co./2011 Annual Report

Two insurance companies that guaranteed the payment of principal and interest on warrants issued by the County have filed separate actions against the Firm in New York state court. Their complaints assert that the Firm fraudulently misled them into issuing insurance based upon substantially the same alleged conduct described above and other alleged non-disclosures. One insurer claims that it insured an aggregate principal amount of nearly $1.2 billion and seeks unspecified damages in excess of $400 million as well as unspecified punitive damages. The other insurer claims that it insured an aggregate principal amount of more than $378 million and seeks recovery of $4 million allegedly paid under the policies to date as well as any future payments and unspecified punitive damages. In December 2010, the court denied the Firms motions to dismiss each of the complaints. The Firm has filed a crossclaim and a third party claim against the County for indemnity and contribution. The County moved to dismiss, which the court denied in August 2011. In consequence of its November 2011 bankruptcy filing, the County has asserted that these actions are stayed. Overdraft Fee/Debit Posting Order Litigation. JPMorgan Chase Bank, N.A. has been named as a defendant in several purported class actions relating to its practices in posting debit card transactions to customers deposit accounts. Plaintiffs allege that the Firm improperly re-ordered debit card transactions from the highest amount to the lowest amount before processing these transactions in order to generate unwarranted overdraft fees. Plaintiffs contend that the Firm should have processed such transactions in the chronological order they were authorized. Plaintiffs seek the disgorgement of all overdraft fees paid to the Firm by plaintiffs since approximately 2003 as a result of the reordering of debit card transactions. The claims against the Firm have been consolidated with numerous complaints against other national banks in multi-District litigation pending in the United States District Court for the Southern District of Florida. The Firms motion to compel arbitration of certain plaintiffs claims was initially denied by the District Court. On appeal, the United States Court of Appeals for the Eleventh Circuit vacated the District Courts order and remanded the case for reconsideration in light of a recent ruling by the United States Supreme Court in an unrelated case addressing the enforcement of an arbitration provision in a consumer product agreement. The Firm has reached an agreement in principle to settle this matter in exchange for the Firm paying $110 million and agreeing to change certain overdraft fee practices. The settlement is subject to documentation and court approval. Petters Bankruptcy and Related Matters. JPMorgan Chase and certain of its affiliates, including One Equity Partners (OEP), have been 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 have been brought by a court-appointed receiver for Petters and the trustees in bankruptcy
JPMorgan Chase & Co./2011 Annual Report

proceedings for three Petters entities. These actions generally seek to avoid, on fraudulent transfer and preference grounds, certain purported 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. The actions collectively seek recovery of approximately $450 million. Defendants have moved to dismiss the complaints in the actions filed by the Petters bankruptcy trustees. Securities Lending Litigation. JPMorgan Chase Bank, N.A. has been named as a defendant in four putative class actions asserting ERISA and other claims pending in the United States District Court for the Southern District of New York brought by participants in the Firms securities lending business. A fifth lawsuit was filed in New York state court by an individual participant in the program. Three of the purported class actions, which have been consolidated, relate to investments of approximately $500 million in medium-term notes of Sigma Finance Inc. (Sigma). In August 2010, the Court certified a plaintiff class consisting of all securities lending participants that held Sigma medium-term notes on September 30, 2008, including those that held the notes by virtue of participation in the investment of cash collateral through a collective fund, as well as those that held the notes by virtue of the investment of cash collateral through individual accounts. The Court granted JPMorgan Chases motion for partial summary judgment as to plaintiffs duty of loyalty claim, finding that the Firm did not have a conflict of interest when it provided repurchase financing to Sigma while also holding Sigma medium-term notes in securities lending accounts. Trial on the remaining duty of prudence claim is scheduled to begin in February 2012. In December 2011, JPMorgan Chase filed third-party claims for indemnification and contribution against the investment fiduciaries for three unnamed class members that maintained individual securities lending accounts. The parties have reached an agreement in principle to settle this action. The settlement is subject to documentation and court approval. The fourth putative class action concerns investments of approximately $500 million in Lehman Brothers mediumterm notes. The Firm has moved to dismiss the amended complaint and is awaiting a decision. Discovery is proceeding while the motion is pending. The New York state court action, which is not a class action, concerns the plaintiffs alleged loss of money in both Sigma and Lehman Brothers medium-term notes. The Firm has answered the complaint. Discovery is proceeding. Service Members Civil Relief Act and Housing and Economic Recovery Act Investigations and Litigation. Multiple government officials have conducted inquiries into the Firms procedures related to the Service Members Civil Relief Act (SCRA) and the Housing and Economic Recovery Act of 2008 (HERA). These inquiries were prompted by the Firms public statements about its SCRA and HERA
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Notes to consolidated financial statements

compliance and actions to remedy certain instances in which the Firm mistakenly charged active or recently-active military personnel mortgage interest and fees in excess of that permitted by SCRA and HERA, and in a number of instances, foreclosed on borrowers protected by SCRA and HERA. The Firm has implemented a number of procedural enhancements and controls to strengthen its SCRA and HERA compliance. In addition, an individual borrower filed a nationwide class action in United States District Court for South Carolina against the Firm alleging violations of the SCRA related to home loans. The Firm agreed to pay $27 million plus attorneys fees, in addition to reimbursements previously paid by the Firm, to settle the class action. Additional borrowers were subsequently added to the class, and the Firm agreed to pay an additional $8 million into the settlement fund. The court entered a final order approving the settlement in January 2012. Washington Mutual Litigations. Subsequent to JPMorgan Chases acquisition from the FDIC of substantially all of the assets and certain specified liabilities of Washington Mutual Bank (Washington Mutual Bank) in September 2008, Washington Mutual Banks parent holding company, Washington Mutual, Inc. (WMI) and its wholly-owned subsidiary, WMI Investment Corp. (together, the Debtors), both commenced voluntary cases under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Case). In the Bankruptcy Case, the Debtors have asserted rights and interests in certain assets. The assets in dispute include principally the following: (a) approximately $4 billion in trust securities contributed by WMI to Washington Mutual Bank (the Trust Securities); (b) the right to tax refunds arising from overpayments attributable to operations of Washington Mutual Bank and its subsidiaries; (c) ownership of and other rights in approximately $4 billion that WMI contends are deposit accounts at Washington Mutual Bank and one of its subsidiaries; and (d) ownership of and rights in various other contracts and other assets (collectively, the Disputed Assets). WMI, JPMorgan Chase and the FDIC have since been involved in litigations over these and other claims pending in the Bankruptcy Court for the District of Delaware (the Bankruptcy Court) and the United States District Court for the District of Columbia. In May 2010, WMI, JPMorgan Chase and the FDIC announced a global settlement agreement among themselves and significant creditor groups (the WaMu Global Settlement). The WaMu Global Settlement is incorporated into WMI's Chapter 11 plan (the Plan) submitted to the Bankruptcy Court. The WaMu Global Settlement resolves numerous disputes among WMI, JPMorgan Chase, the FDIC in its capacity as receiver for Washington Mutual Bank and the FDIC in its corporate capacity, as well as those of significant creditor groups, including disputes relating to the Disputed Assets. After several amendments to the Plan to address deficiencies
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identified by the Bankruptcy Court that were unrelated to the WaMu Global Settlement, in February 2012 the Bankruptcy Court confirmed the Plan, including the WaMu Global Settlement. Other proceedings related to Washington Mutuals failure are also pending before the Bankruptcy Court. Among other actions, in July 2010, certain holders of the Trust Securities commenced an adversary proceeding in the Bankruptcy Court against JPMorgan Chase, WMI, and other entities seeking, among other relief, a declaratory judgment that WMI and JPMorgan Chase do not have any right, title or interest in the Trust Securities. In early January 2011, the Bankruptcy Court granted summary judgment to JPMorgan Chase and denied summary judgment to the plaintiffs in the Trust Securities adversary proceeding. The plaintiffs have appealed that decision to the United States District Court for the District of Delaware. In connection with the current Plan, these plaintiffs filed a motion seeking a stay of further confirmation proceedings pending their appeal from the Bankruptcy Courts determination that they have no interest in the Trust Securities and are instead owners of WMI preferred equity. In January 2012, the Bankruptcy Court denied their motion, and the District Court denied their motions for a stay pending appeal and mandamus relief. Other proceedings related to Washington Mutuals failure are pending before the United States District Court for the District of Columbia and include a lawsuit brought by Deutsche Bank National Trust Company, initially against the FDIC, asserting an estimated $6 billion to $10 billion in damages based upon alleged breach of various mortgage securitization agreements and alleged violation of certain representations and warranties given by certain WMI subsidiaries in connection with those securitization agreements. The case includes assertions that JPMorgan Chase may have assumed liabilities for the alleged breaches of representations and warranties in the mortgage securitization agreements. The District Court denied as premature motions by the Firm and the FDIC that sought a ruling on whether the FDIC retained liability for Deutsche Banks claims. Discovery is underway. In addition, JPMorgan Chase was sued in an action originally filed in state court in Texas (the Texas Action) by certain holders of WMI common stock and debt of WMI and Washington Mutual Bank who seek unspecified damages alleging that JPMorgan Chase acquired substantially all of the assets of Washington Mutual Bank from the FDIC at a price that was allegedly too low. The Texas Action was transferred to the United States District Court for the District of Columbia, which ultimately granted JPMorgan Chases and the FDICs motions to dismiss the complaint, but the United States Court of Appeals for the District of Columbia Circuit reversed the trial courts dismissal and remanded the case for further proceedings. Plaintiffs, which now include only holders of Washington Mutual Bank debt following their voluntary dismissal of claims brought as holders of WMI common stock and debt, have filed an amended complaint alleging that JPMorgan Chase caused
JPMorgan Chase & Co./2011 Annual Report

the closure of Washington Mutual Bank and damaged them by causing their bonds issued by Washington Mutual Bank to lose substantially all of their value. JPMorgan Chase and the FDIC have again moved to dismiss this action. *** 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 in all such matters. 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. The Firm accrues for potential liability arising from such proceedings when it is probable that such 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 downwards, as appropriate, based on managements best judgment after consultation with counsel. During the years ended December 31, 2011, 2010 and 2009, the Firm incurred $4.9 billion, $7.4 billion

and $161 million, respectively, of litigation expense. There is no assurance that the Firms 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 impact 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 Firms consolidated financial condition. The Firm notes, however, that in light of the uncertainties involved in such proceedings, there is no assurance the ultimate resolution of these matters will not significantly exceed the reserves it has currently accrued; as a result, the outcome of a particular matter may be material to JPMorgan Chases operating results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of JPMorgan Chases income for that period.

Note 32 International operations

The following table presents income statement-related 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 Firms U.S. operations serve international businesses. As the Firms 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 Firms segment reporting as set forth in Note 33 on pages 300303 of this Annual Report. The Firms long-lived assets for the periods presented are not considered by management to be significant in relation to total assets. The majority of the Firms long-lived assets are located in the United States.

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Notes to consolidated financial statements

Income before income tax expense and extraordinary gain $ 7,055 2,190 562 9,807 16,942 $ $ 26,749 5,358 2,396 569 8,323 16,536 $ $ 24,859 7,674 1,901 784 10,359 5,708 $ 16,067 $ $ $ $ $ $

As of or for the year ended December 31, (in millions) 2011 Europe/Middle East and Africa Asia and Pacific Latin America and the Caribbean Total international North America(a) Total 2010(b) Europe/Middle East and Africa Asia and Pacific Latin America and the Caribbean Total international North America(a) Total 2009(b) Europe/Middle East and Africa Asia and Pacific Latin America and the Caribbean Total international North America(a) Total (a) (b) (c) (d) $ $ $ $ $ $

Revenue(c) 16,212 5,992 2,273 24,477 72,757 97,234 14,135 6,073 1,750 21,958 80,736 102,694 16,294 5,429 1,867 23,590 76,844 100,434 $ $ $ $ $ $

Expense(d) 9,157 3,802 1,711 14,670 55,815 70,485 8,777 3,677 1,181 13,635 64,200 77,835 8,620 3,528 1,083 13,231 71,136 84,367

Net income 4,844 1,380 340 6,564 12,412 18,976 3,635 1,614 362 5,611 11,759 17,370 5,212 1,286 463 6,961 4,767 11,728 $

Total assets 566,866 156,411 51,481 774,758 1,491,034 $ 2,265,792 $ 446,547 151,379 33,192 631,118 1,486,487 $ 2,117,605 $ 375,406 112,798 23,692 511,896 1,520,093 $ 2,031,989

Substantially reflects the U.S. The regional allocation of revenue, expense and net income for 2010 and 2009 has been modified to conform with current allocation methodologies. Revenue is composed of net interest income and noninterest revenue. Expense is composed of noninterest expense and the provision for credit losses.

Note 33 Business segments

The Firm is managed on a line of business basis. There are six major reportable business segments Investment Bank, Retail Financial Services, Card Services & Auto, Commercial Banking, Treasury & Securities Services and Asset Management, as well as a Corporate/Private Equity segment. The business segments are determined based on the products and services provided, or the type of customer served, and they reflect the manner in which financial information is currently evaluated by management. Results of these lines of business are presented on a managed basis. For a definition of managed basis, see Explanation and Reconciliation of the Firms use of non-GAAP financial measures, on pages 7678 of this Annual Report. For a further discussion concerning JPMorgan Chases business segments, see Business Segment Results on pages 7980 of this Annual Report. The following is a description of each of the Firms business segments: Investment Bank J.P. Morgan is one of the worlds leading investment banks, with deep client relationships and broad product capabilities. The clients of IB are corporations, financial institutions, governments and institutional investors. The Firm offers a full range of investment banking products and services in all major capital markets, including advising on
300

corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, marketmaking in cash securities and derivative instruments, prime brokerage, and research. Retail Financial Services RFS serves consumers and businesses through personal service at bank branches and through ATMs, online banking and telephone banking. RFS is organized into Consumer & Business Banking and Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios). Consumer & Business Banking includes branch banking and business banking activities. Mortgage Production and Servicing includes mortgage origination and servicing activities. Real Estate Portfolios comprises residential mortgages and home equity loans, including the PCI portfolio acquired in the Washington Mutual transaction. Customers can use more than 5,500 bank branches (third largest nationally) and more than 17,200 ATMs (second largest nationally), as well as online and mobile banking around the clock. More than 33,500 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, and investments across the 23-state footprint from New York and Florida to California. As one of the largest mortgage originators in the U.S., Chase helps customers buy or refinance homes resulting in approximately $150 billion of

JPMorgan Chase & Co./2011 Annual Report

mortgage originations annually. Chase also services more than 8 million mortgages and home equity loans. Card Services & Auto Card Services & Auto is one of the nations largest credit card issuers, with over $132 billion in credit card loans. Customers have over 65 million open credit card accounts (excluding the commercial card portfolio), and used Chase credit cards to meet over $343 billion of their spending needs in 2011. Through its Merchant Services business, Chase Paymentech Solutions, Card is a global leader in payment processing and merchant acquiring. Consumers also can obtain loans through more than 17,200 auto dealerships and 2,000 schools and universities nationwide. Commercial Banking CB delivers extensive industry knowledge, local expertise and dedicated service to more than 24,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and nearly 35,000 real estate investors/owners. CB partners with the Firms other businesses to provide comprehensive solutions, including lending, treasury services, investment banking and asset management, to meet its clients domestic and international financial needs. Treasury & Securities Services TSS is a global leader in transaction, investment and information services. TSS is one of the worlds largest cash management providers and a leading global custodian. Treasury Services (TS) provides cash management, trade, wholesale card and liquidity products and services to smalland mid-sized companies, multinational corporations, financial institutions and government entities. TS partners with IB, CB, RFS and Asset Management businesses to serve clients firmwide. Certain TS revenue is included in other segments results. Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers, and manages depositary receipt programs globally. Asset Management AM, with assets under supervision of $1.9 trillion, is a global leader in investment and wealth management. AM clients include institutions, retail investors and high-networth individuals in every major market throughout the world. AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and

liquidity products, including money-market instruments and bank deposits. AM also provides trust and estate, banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AMs client assets are in actively managed portfolios. Corporate/Private Equity The Corporate/Private Equity sector comprises Private Equity, Treasury, the Chief Investment Office, corporate staff units and expense that is centrally managed. Treasury and the Chief Investment Office manage capital, liquidity, and structural risks of the Firm. The corporate staff units include Central Technology and Operations, Internal Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate Real Estate and General Services, Risk Management, Corporate Responsibility and Strategy & Development. Other centrally managed expense includes the Firms occupancy and pension-related expense, net of allocations to the business. Business segment changes Commencing July 1, 2011, the Firms business segments have been reorganized as follows: Auto and Student Lending transferred from the RFS segment and are reported with Card in a single segment. Retail Financial Services continues as a segment, organized in two components: Consumer & Business Banking (formerly Retail Banking) and Mortgage Banking (including Mortgage Production and Servicing, and Real Estate Portfolios). The business segment information associated with RFS and Card have been revised to reflect the business reorganization retroactive to January 1, 2009. Effective January 1, 2010, the Firm enhanced its line of business equity framework to better align equity assigned to the lines of business with changes anticipated to occur in each line of business, and to reflect the competitive and regulatory landscape. The lines of business are now capitalized based on the Tier 1 common standard, rather than the Tier 1 capital standard. In addition, effective January 1, 2011, capital allocated to Card was reduced, largely reflecting portfolio runoff and the improving risk profile of the business; and capital allocated to TSS was increased, reflecting growth in the underlying business.

Segment results The following tables provide a summary of the Firms segment results for 2011, 2010 and 2009 on a managed basis. Prior to the January 1, 2010, adoption of the accounting guidance related to VIEs, the impact of credit card securitization adjustments had been included in reconciling items; as a result, the total Firm results are on a reported basis. Finally, total net revenue (noninterest revenue and net interest income) for each of the segments is presented on a tax-equivalent basis. Accordingly, revenue from investments that receive tax credits and tax-exempt securities is presented in the managed results on a basis comparable to taxable investments and securities. This non-GAAP financial measure allows management to assess the comparability of revenue arising from both taxable and tax-exempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense/(benefit).

JPMorgan Chase & Co./2011 Annual Report

301

Notes to consolidated financial statements

Segment results and reconciliation(a)
As of or the year ended December 31, (in millions, except ratios) Noninterest revenue Net interest income Total net revenue Provision for credit losses Credit allocation income/ (expense)(b) Noninterest expense(c) Income/(loss) before income tax expense/ (benefit) and extraordinary gain Income tax expense/ (benefit) Income/(loss) before extraordinary gain Extraordinary gain(d) Net income/(loss) Average common equity Total assets Return on average common equity(e) Overhead ratio
$

Investment Bank 2011

$ 17,971 8,303 26,274 (286) 16,116

Retail Financial Services 2009 2011

$ 10,405 16,133 26,538 3,999 19,458

Card Services & Auto(f) 2011

$ 4,892 14,249 19,141 3,621 8,045 $

Commercial Banking 2011

$ 2,195 4,223 6,418 208 2,278 $

2010
$ 18,253 7,964 26,217 (1,200) 17,265

2010
$ 11,227 17,220 28,447 8,919 16,483

2009
$ 11,414 18,383 29,797 14,754 15,512

2010
4,278 16,194 20,472 8,570 7,178 $

2009
3,706 19,493 23,199 19,648 6,617

2010
2,200 3,840 6,040 297 2,199 $

2009
1,817 3,903 5,720 1,454 2,176

$ 18,522 9,587 28,109 2,279 15,401

10,444 3,655 6,789 6,789 $

10,152 3,513 6,639 6,639 $

10,429 3,530 6,899 6,899 $

3,081 1,403 1,678 1,678 $

3,045 1,317 1,728 1,728 $

(469) (134) (335) (335) $

7,475 2,931 4,544 4,544 $

4,724 1,852 2,872 2,872 $

(3,066) (1,273) (1,793) (1,793) $ $

3,932 1,565 2,367 2,367 8,000 158,040 30% 35 $ $

3,544 1,460 2,084 2,084 8,000 142,646 26% 36 $ $

2,090 819 1,271 1,271 8,000 130,280 16% 38

$ 40,000 776,430 17% 61

$ 40,000 825,150 17% 66

$ 33,000 706,944 21% 55

$ 25,000 274,795 7% 73

$ 24,600 299,950 7% 58

$ 22,457 322,185 (1)% 52

$ 16,000 208,467 28% 42

$ 18,400 208,793 16% 35

$ 17,543 255,029 (10)% 29

(a) (b)

(c)

In addition to analyzing the Firms results on a reported basis, management reviews the Firms lines of business results on a managed basis, which is a non-GAAP financial measure. The Firms definition of managed basis starts with the reported U.S. GAAP results and includes certain reclassifications as discussed below that do not have any impact on net income as reported by the lines of business or by the Firm as a whole. IB manages traditional credit exposures related to the Global Corporate Bank (GCB) on behalf of IB and TSS. Effective January 1, 2011, IB and TSS share the economics related to the Firms GCB clients. Included within this allocation are net revenue, provision for credit losses and expenses. Prior years reflected a reimbursement to IB for a portion of the total costs of managing the credit portfolio. IB recognizes this credit allocation as a component of all other income. Includes merger costs, which are reported in the Corporate/Private Equity segment. There were no merger costs in 2011 and 2010. Merger costs attributed to the business segments for 2009 was as follows. Year ended December 31, (in millions) Investment Bank Retail Financial Services Card Services & Auto Commercial Banking Treasury & Securities Services Asset Management Corporate/Private Equity $ 2009 27 228 40 6 11 6 163

(d)

(e) (f)

On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual from the FDIC for $1.9 billion. The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with U.S. GAAP for business combinations, nonfinancial assets that are not held-for-sale, such as premises and equipment and other intangibles, acquired in the Washington Mutual transaction were written down against that negative goodwill. The negative goodwill that remained after writing down nonfinancial assets was recognized as an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. As a result of the final refinement of the purchase price allocation in 2009, the Firm recognized a $76 million increase in the extraordinary gain. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion. Ratio is based on income/(loss) before extraordinary gain for 2009. Effective January 1, 2010, the Firm adopted accounting guidance related to VIEs. Prior to the adoption of the new guidance, managed results for credit Card excluded the impact of credit card securitizations on total net revenue, provision for credit losses and average assets, as JPMorgan Chase treated the sold receivables as if they were still on the balance sheet in evaluating the credit performance of the entire managed credit card portfolio, as operations are funded, and decisions are made about allocating resources, such as employees and capital, based on managed information. These adjustments are eliminated in reconciling items to arrive at the Firms reported U.S. GAAP results. The related securitization adjustments were as follows. Year ended December 31, (in millions) Noninterest revenue Net interest income Provision for credit losses Total assets 2009 (1,494) 7,937 6,443 80,882

302

JPMorgan Chase & Co./2011 Annual Report

(table continued from previous page)

Treasury & Securities Services 2011
$ 4,544 3,158 7,702 1 8 5,863

Asset Management 2011

$ 7,895 1,648 9,543 67 7,002

Corporate/Private Equity 2011

$ 3,638 $ 505 4,143 (36) 4,149

Reconciling Items(f)(g) 2011

$ (1,995) $ (530) (2,525) (8)

Total 2011
$ 49,545 47,689 97,234 7,574 62,911 $

2010
$ 4,757 2,624 7,381 (47) (121) 5,604

2009
$ 4,747 2,597 7,344 55 (121) 5,278

2010
$ 7,485 1,499 8,984 86 6,112

2009
$ 6,372 1,593 7,965 188 5,473

2010
5,359 $ 2,063 7,422 14 6,355

2009
2,771 3,863 6,634 80 1,895

2010
(1,866) $ (403) (2,269) 121

2009
(67) (8,267) (8,334) (6,443) 121

2010
51,693 51,001 102,694 16,639 61,196 $

2009
49,282 51,152 100,434 32,015 52,352

1,846 642 1,204 $ 1,204 $ 7,000 68,665 17% 76

1,703 624 1,079 $ 1,079 $ 6,500 45,481 17% 76

1,890 664 1,226 $ 1,226 $ 5,000 38,054 25% 72

2,474 882 1,592 $ 1,592 $ 6,500 86,242 25% 73

2,786 1,076 1,710 $ 1,710 $ 6,500 68,997 26% 68

2,304 874 1,430 $ 1,430 $ 7,000 64,502 20% 69 $

30 (772) 802 802 $

1,053 (205) 1,258 1,258 $

4,659 1,705 2,954 76 3,030 $ $

(2,533) (2,533) $ $ NA NM NM

(2,148) (2,148) $ $ NA NM NM

(1,770) (1,770) (80,882) NM NM $

26,749 7,773 18,976 18,976 $

24,859 7,489 17,370 17,370 $

16,067 4,415 11,652 76 11,728

$ 70,766 $ 57,520 $ 52,903 693,153 NM NM 526,588 NM NM 595,877 NM NM

$ 173,266 2,265,792 11% 65

$ 161,520 2,117,605 10% 60

$ 145,903 2,031,989 6% 52

(g)

Segment managed results reflect revenue on a tax-equivalent basis with the corresponding income tax impact recorded within income tax expense/ (benefit). These adjustments are eliminated in reconciling items to arrive at the Firms reported U.S. GAAP results. Tax-equivalent adjustments for the years ended December 31, 2011, 2010 and 2009 were as follows. Year ended December 31, (in millions) Noninterest revenue Net interest income Income tax expense $ 2011 2,003 $ 530 2,533 2010 1,745 $ 403 2,148 2009 1,440 330 1,770

JPMorgan Chase & Co./2011 Annual Report

303

Notes to consolidated financial statements Note 34 Parent company

Parent company Statements of income Year ended December 31, (in millions) Income Dividends from subsidiaries: Bank and bank holding company Nonbank(a) Interest income from subsidiaries Other interest income Other income from subsidiaries, primarily fees: Bank and bank holding company Nonbank Other income/(loss) Total income Expense Interest expense to subsidiaries(a) Other interest expense Other noninterest expense Total expense Income before income tax benefit and undistributed net income of subsidiaries Income tax benefit Equity in undistributed net income of subsidiaries Net income 2011 2010 2009 Parent company Statements of cash flows Year ended December 31, (in millions) Operating activities Net income Less: Net income of subsidiaries(a) Parent company net loss Cash dividends from subsidiaries(a) Other, net Net cash provided by operating activities Investing activities Net change in: Deposits with banking subsidiaries Available-for-sale securities: Purchases Proceeds from sales and maturities Loans, net Advances to subsidiaries, net Investments (at equity) in subsidiaries, net(a) Net cash (used in)/provided by investing activities Financing activities Net change in borrowings from subsidiaries(a) Net change in other borrowed funds Proceeds from the issuance of longterm debt Proceeds from the assumption of subsidiaries long-term debt(d) Repayments of long-term debt Excess tax benefits related to stockbased compensation Redemption of preferred stock issued to the U.S. Treasury Redemption of other preferred stock Proceeds from issuance of common stock Treasury stock and warrants repurchased Dividends paid All other financing activities, net Net cash used in financing activities Net increase/(decrease) in cash and due from banks Cash and due from banks at the beginning of the year, primarily with bank subsidiaries Cash and due from banks at the end of the year, primarily with bank subsidiaries Cash interest paid Cash income taxes paid, net 2011 $ 18,976 21,805 (2,829) 13,414 889 11,474 2010 $ 17,370 20,016 (2,646) 17,432 1,685 16,471 2009 $ 11,728 13,675 (1,947) 16,054 1,852 15,959

$ 10,852 2,651 1,099 384

$ 16,554 932 985 294

$ 15,235 1,036 1,501 266

809 92 (85) 15,802 1,121 4,447 649 6,217 9,585 1,089 8,302 $ 18,976

680 312 157 19,914 1,263 3,782 540 5,585 14,329 511 2,530 $ 17,370

233 742 844 19,857 1,118 4,696 988 6,802 13,055 1,269 (2,596) $ 11,728

20,866 (1,109) 886 153 (28,105) (1,530) (8,839)

7,692 (1,387) 745 (90) 8,051 (871) 14,140

(27,342) (1,454) 522 209 28,808 (6,582) (5,839)

2,827 16,268 33,566 (41,747) 867 (8,863) (3,895) (1,622) (2,599) 36 96 $ 132 $

(2,039) (11,843) 21,610 (32,893) 26 (352) (2,999) (1,486) (641) (30,617) (6) 102 96 $

(4,935) 1,894 32,304 15,264 (31,964) 17 (25,000) 5,756 (3,422) 33 (10,053) 67 35 102

Parent company Balance sheets December 31, (in millions) Assets Cash and due from banks Deposits with banking subsidiaries Trading assets Available-for-sale securities Loans Advances to, and receivables from, subsidiaries: Bank and bank holding company Nonbank Investments (at equity) in subsidiaries: Bank and bank holding company Nonbank(a) Goodwill and other intangibles Other assets Total assets Liabilities and stockholders equity Borrowings from, and payables to, subsidiaries(a) Other borrowed funds, primarily commercial paper Other liabilities Long-term debt(b)(c) Total liabilities(c) Total stockholders equity Total liabilities and stockholders equity

2011 $ 132 91,622 18,485 3,657 1,880 $

2010 96 80,201 16,038 3,176 1,849

39,888 83,138 157,160 42,231 1,027 15,506 $ 454,726 $ 30,231 59,891 7,653 173,378 271,153 183,573 $ 454,726

54,887 72,080 150,876 38,000 1,050 17,171 $ 435,424 $ 28,332 41,874 7,302 181,810 259,318 176,106 $ 435,424

$ 5,800 5,885

$ 5,090 7,001

$ 5,629 3,124

(a) Subsidiaries include trusts that issued guaranteed capital debt securities (issuer trusts). The Parent received dividends of $13 million, $13 million and $14 million from the issuer trusts in 2011, 2010 and 2009, respectively. For further discussion on these issuer trusts, see Note 21 on pages 273275 of this Annual Report. (b) At December 31, 2011, long-term debt that contractually matures in 2012 through 2016 totaled $42.5 billion, $17.4 billion, $24.9 billion, $16.7 billion and $17.5 billion, respectively. (c) For information regarding the Firm's guarantees of its subsidiaries' obligations, see Note 21 and Note 29 on pages 273275 and 283289, respectively, of this Annual Report. (d) Represents the assumption of Bear Stearns long-term debt by JPMorgan Chase & Co.

304

JPMorgan Chase & Co./2011 Annual Report

Supplementary information

Selected quarterly financial data (unaudited)

(Table continued on next page) As of or for the period ended (in millions, except per share, ratio and headcount data) Selected income statement data Noninterest revenue Net interest income Total net revenue Total noninterest expense Pre-provision profit(a) Provision for credit losses Income before income tax expense Income tax expense Net income Per common share data Average: Basic Diluted Cash dividends declared per share(b) Book value per share Common shares outstanding Average: Basic Diluted Common shares at period-end Share price(c) High Low Close Market capitalization Financial ratios Return on common equity Return on tangible common equity Return on assets Overhead ratio Deposits-to-loans ratio Tier 1 capital ratio Total capital ratio Tier 1 leverage ratio Tier 1 common capital ratio(d) Selected balance sheet data (period-end) Trading assets Securities Loans Total assets Deposits Long-term debt(f) Common stockholders equity Total stockholders equity Headcount $ 443,963 364,793 723,720 2,265,792 1,127,806 256,775 175,773 183,573 260,157 $ 461,531 339,349 696,853 2,289,240 1,092,708 273,688 174,487 182,287 256,663 $ 458,722 324,741 689,736 2,246,764 1,048,685 279,228 175,079 182,879 250,095 $ 501,148 334,800 685,996 2,198,161 995,829 269,616 172,798 180,598 242,929 $ 489,892 316,336 692,927 2,117,605 930,369 270,653 168,306 176,106 239,831 $ 475,515 340,168 690,531 2,141,595 903,138 271,495 166,030 173,830 236,810 $ 397,508 312,013 699,483 2,014,019 887,805 260,442 162,968 171,120 232,939 $ 426,128 344,376 713,799 2,135,796 925,303 278,685 156,569 164,721 226,623 8% 11 0.65 68 156 12.3 15.4 6.8 10.1 9% 13 0.76 65 157 12.1 15.3 6.8 9.9 12% 17 0.99 63 152 12.4 15.7 7.0 10.1 13% 18 1.07 63 145 12.3 15.6 7.2 10.0 11% 16 0.92 61 134 12.1 15.5 7.0 9.8 10% 15 0.86 60 131 11.9 15.4 7.1 9.5 12% 17 0.94 58 127 12.1 15.8 6.9 9.6 8% 12 0.66 58 130 11.5 15.1 6.6 9.1 $ 37.54 27.85 33.25 125,442 $ 42.55 28.53 30.12 114,422 $ 47.80 39.24 40.94 160,083 $ 48.36 42.65 46.10 183,783 $ 43.12 36.21 42.42 165,875 $ 41.70 35.16 38.06 149,418 $ 48.20 36.51 36.61 145,554 $ 46.05 37.03 44.75 177,897 3,801.9 3,811.7 3,772.7 3,859.6 3,872.2 3,798.9 3,958.4 3,983.2 3,910.2 3,981.6 4,014.1 3,986.6 3,917.0 3,935.2 3,910.3 3,954.3 3,971.9 3,925.8 3,983.5 4,005.6 3,975.8 3,970.5 3,994.7 3,975.4 $ 0.90 0.90 0.25 46.59 $ 1.02 1.02 0.25 45.93 $ 1.28 1.27 0.25 44.77 $ 1.29 1.28 0.25 43.34 $ 1.13 1.12 0.05 43.04 $ 1.02 1.01 0.05 42.29 $ 1.10 1.09 0.05 40.99 $ 0.75 0.74 0.05 39.38 $ $ 9,340 12,131 21,471 14,540 6,931 2,184 4,747 1,019 3,728 $ $ 11,946 11,817 23,763 15,534 8,229 2,411 5,818 1,556 4,262 $ $ 14,943 11,836 26,779 16,842 9,937 1,810 8,127 2,696 5,431 $ $ 13,316 11,905 25,221 15,995 9,226 1,169 8,057 2,502 5,555 $ $ 13,996 12,102 26,098 16,043 10,055 3,043 7,012 2,181 4,831 $ $ 11,322 12,502 23,824 14,398 9,426 3,223 6,203 1,785 4,418 $ $ 12,414 12,687 25,101 14,631 10,470 3,363 7,107 2,312 4,795 $ $ 13,961 13,710 27,671 16,124 11,547 7,010 4,537 1,211 3,326 4th quarter 2011 3rd quarter 2nd quarter 1st quarter 4th quarter 2010 3rd quarter 2nd quarter 1st quarter

JPMorgan Chase & Co./2011 Annual Report

305

Supplementary information
(Table continued from previous page) As of or for the period ended (in millions, except ratio data) Credit quality metrics Allowance for credit losses Allowance for loan losses to total retained loans Allowance for loan losses to retained loans excluding purchased credit-impaired loans(g) Nonperforming assets Net charge-offs(h) Net charge-off rate(h) $ $ 28,282 3.84% 3.35 11,036 2,907 1.64% $ $ 29,036 4.09% 3.74 12,194 2,507 1.44% $ $ 29,146 4.16% 3.83 13,240 3,103 1.83% $ $ 30,438 4.40% 4.10 14,986 3,720 2.22% $ $ 32,983 4.71% 4.46 16,557 5,104 2.95% $ $ 35,034 4.97% 5.12 17,656 4,945 2.84% $ $ 36,748 5.15% 5.34 18,156 5,714 3.28% $ $ 39,126 5.40% 5.64 19,019 7,910 4.46% 4th quarter 2011 3rd quarter 2nd quarter 1st quarter 4th quarter 2010 3rd quarter 2nd quarter 1st quarter

(a) (b) (c) (d) (f) (g) (h)

Pre-provision profit is 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. On March 18, 2011, the Board of Directors increased the Firm's quarterly stock dividend from $0.05 to $0.25 per share. Share prices shown for JPMorgan Chases common stock are from the New York Stock Exchange. JPMorgan Chases common stock is also listed and traded on the London Stock Exchange and the Tokyo Stock Exchange. Tier 1 common capital ratio (Tier 1 common ratio) is Tier 1 common capital (Tier 1 common) divided by risk-weighted assets. The Firm uses Tier 1 common capital along with the other capital measures to assess and monitor its capital position. For further discussion of Tier 1 common ratio, see Regulatory capital on pages 119122 of this Annual Report. Effective January 1, 2011, the long-term portion of advances from FHLBs was reclassified from other borrowed funds to long-term debt. Prior periods have been revised to conform with the current presentation. Excludes the impact of residential real estate PCI loans. For further discussion, see Allowance for credit losses on pages 155157 of this Annual Report. Net charge-offs and net charge-off rates for the fourth quarter of 2010 include the effect of $632 million of charge-offs related to the estimated net realizable value of the collateral underlying delinquent residential home loans. Because these losses were previously recognized in the provision and allowance for loan losses, this adjustment had no impact on the Firm's net income.

306

JPMorgan Chase & Co./2011 Annual Report

Short-term and other borrowed funds

The following table provides a summary of JPMorgan Chases short-term and other borrowed funds for the years indicated.
As of or for the year ended December 31, (in millions, except rates) Federal funds purchased and securities loaned or sold under repurchase agreements: Balance at year-end Average daily balance during the year Maximum month-end balance Weighted-average rate at December 31 Weighted-average rate during the year Commercial paper: Balance at year-end Average daily balance during the year Maximum month-end balance Weighted-average rate at December 31 Weighted-average rate during the year Other borrowed funds:(a)(b) Balance at year-end Average daily balance during the year Maximum month-end balance Weighted-average rate at December 31 Weighted-average rate during the year Short-term beneficial interests:(c) Commercial paper and other borrowed funds: Balance at year-end Average daily balance during the year Maximum month-end balance Weighted-average rate at December 31 Weighted-average rate during the year (a) (b) (c) (d) $ 26,243 25,125 26,780 0.18% 0.23 $ 25,095 21,853 25,095 0.25% 0.27 $ 4,787 3,275 7,751 0.17% 0.24 $ 88,626 107,543 127,517 1.60% 2.50 $ 111,272 104,951 120,437 5.71% 2.89 $ 97,838 99,785 155,693 3.92% 2.83 $ 51,631 42,653 51,631 0.12% 0.17 $ 35,363 36,000 50,554 0.21% 0.20 $ 41,794 39,055 53,920 0.18% 0.28 $ 213,532 256,283 289,835 0.16% 0.21 $ 276,644 278,603 314,161 0.18% (0.07)
(d)

2011

2010 $

2009 261,413 275,862 310,802 0.04% 0.21

Includes securities sold but not yet purchased. Effective January 1, 2011, $23.0 billion of long-term advances from FHLBs were reclassified from other borrowed funds to long-term debt. The prior periods have been revised to conform with the current presentation. Included on the Consolidated Balance Sheets in beneficial interests issued by consolidated variable interest entities. Reflects a benefit from the favorable market environments for U.S. dollar-roll financings.

Federal funds purchased represent overnight funds. Securities loaned or sold under repurchase agreements generally mature between one day and three months. 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.

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Glossary of Terms
ACH: Automated Clearing House. Active mobile customers - Retail banking users of all mobile platforms, which include: SMS text, Mobile Browser, iPhone, iPad and Android, who have been active in the past 90 days. Allowance for loan losses to total loans: Represents period-end allowance for loan losses divided by retained loans. Assets under management: Represent assets actively managed by AM on behalf of Private Banking, Institutional and Retail clients. Includes Committed capital not Called, on which AM earns fees. Excludes assets managed by American Century Companies, Inc., in which the Firm sold its ownership interest on August 31, 2011. Assets under supervision: Represent assets under management as well as custody, brokerage, administration and deposit accounts. Average managed assets: Refers to total assets on the Firms Consolidated Balance Sheets plus credit card receivables that have been securitized and removed from the Firms Consolidated Balance Sheets, for periods ended prior to the January 1, 2010, adoption of new accounting guidance requiring the consolidation of the Firm-sponsored credit card securitization trusts. Beneficial interests issued by consolidated VIEs: Represents the third-party interests issued by VIEs that JPMorgan Chase consolidates where the third-party interest holders do not have recourse to the general credit of JPMorgan Chase. The underlying obligations of the VIEs consist of short-term borrowings, commercial paper and long-term debt. Benefit obligation: Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans. Client advisors: Investment product specialists, including Private Client Advisors, Financial Advisors, Financial Advisor Associates, Senior Financial Advisors, Independent Financial Advisors and Financial Advisor Associate trainees, who advise clients on investment options, including annuities, mutual funds, stock trading services, etc., sold by the Firm or by third party vendors through retail branches, Chase Private Client branches and other channels. Client investment managed accounts - Assets actively managed by Chase Wealth Management on behalf of clients. The percentage of managed accounts is calculated by dividing managed account assets by total client investment assets. Contractual credit card charge-off: In accordance with the Federal Financial Institutions Examination Council policy, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specific event (e.g., bankruptcy of the borrower), whichever is earlier. Corporate/Private Equity: Includes Private Equity, Treasury and Chief Investment Office, and Corporate Other, which includes other centrally managed expense and discontinued operations. Credit card securitizations: For periods ended prior to the January 1, 2010, adoption of new guidance relating to the accounting for the transfer of financial assets and the consolidation of VIEs, Cards results were presented on a managed basis that assumed that credit card loans that had been securitized and sold in accordance with U.S. GAAP remained on the Consolidated Balance Sheets and that earnings on the securitized loans were classified in the same manner as the earnings on retained loans recorded on the Consolidated Balance Sheets. Managed results excluded the impact of credit card securitizations on total net revenue, the provision for credit losses, net charge-offs and loans. Securitization did not change reported net income; however, it did affect the classification of items on the Consolidated Statements of Income and Consolidated Balance Sheets. 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, which may include, among other events, the bankruptcy or failure to pay by, 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 credit default swap contract and the fair value of the reference obligation at the time of settling the credit derivative contract. The determination as to whether a credit event has occurred is made by the relevant ISDA Determination Committee, comprised of 10 sell-side and five buy-side ISDA member firms. Credit cycle: A period of time over which credit quality improves, deteriorates and then improves again. The duration of a credit cycle can vary from a couple of years to several years. CUSIP number: A CUSIP (i.e., Committee on Uniform Securities Identification Procedures) number identifies most securities, including: stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. The CUSIP system owned by the American Bankers Association and operated by Standard & Poors facilitates the clearing and settlement process of securities. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. A similar system is used to identify non-U.S. securities (CUSIP International Numbering System). Deposit margin: Represents net interest income expressed as a percentage of average deposits. FASB: Financial Accounting Standards Board. FDIC: Federal Deposit Insurance Corporation. FICO score: A measure of consumer credit risk provided by
JPMorgan Chase & Co./2011 Annual Report

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credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus. 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. G7 government bonds: Bonds issued by the government of one of countries in the Group of Seven (G7) nations. Countries in the G7 are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. Global Corporate Bank: TSS and IB formed a joint venture to create the Firms Global Corporate Bank. With a team of bankers, the Global Corporate Bank serves multinational clients by providing them access to TSS products and services and certain IB products, including derivatives, foreign exchange and debt. The cost of this effort and the credit that the Firm extends to these clients is shared between TSS and IB. Headcount-related expense: Includes salary and benefits (excluding performance-based incentives), and other noncompensation costs related to employees. Home equity - senior lien: Represents loans where JP Morgan Chase holds the first security interest on the property. Home equity - junior lien: Represents loans where JP Morgan Chase holds a security interest that is subordinate in rank to other liens. Interchange income: A fee paid to a credit card issuer in the clearing and settlement of a sales or cash advance transaction. Interests in purchased receivables: Represents an ownership interest in cash flows of an underlying pool of receivables transferred by a third-party seller into a bankruptcy-remote entity, generally a trust. Investment-grade: An indication of credit quality based on JPMorgan Chases 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. LLC: Limited Liability Company. Loan-to-value (LTV) ratio: 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
JPMorgan Chase & Co./2011 Annual Report

collateral values derived from a nationally recognized home price index measured at the metropolitan statistical area (MSA) level. These MSA-level home price indices comprise 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 lien positions 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. For periods ended prior to the January 1, 2010, adoption of accounting guidance requiring the consolidation of the Firm-sponsored credit card securitization trusts, the Firms managed-basis presentation also included certain reclassification adjustments that assumed credit card loans that were securitized remained on the Consolidated Balance Sheets. 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 trends of the particular business segment and facilitates a comparison of the business segment with the performance of competitors. Managed credit card portfolio: Refers to credit card receivables on the Firms Consolidated Balance Sheets plus credit card receivables that have been securitized and removed from the Firms Consolidated Balance Sheets, for periods ended prior to the January 1, 2010, adoption of accounting guidance requiring the consolidation of the Firm-sponsored credit card securitization trusts. Mark-to-market exposure: A measure, at a point in time, of the value of a derivative or foreign exchange contract in the open market. When the fair value is positive, it indicates the counterparty owes JPMorgan Chase and, therefore, creates credit risk for the Firm. When the fair value is negative, JPMorgan Chase owes the counterparty; in this situation, the Firm has liquidity risk. Master netting agreement: An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts, as well as cash collateral, through a single payment, in a single currency, in the event of default on or termination of any one contract. 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 combinedloan-to-value (CLTV) ratio; (iii) loans secured by non309

Glossary of Terms
owner occupied properties; or (iv) a debt-to-income ratio above normal limits. Perhaps the most important characteristic is limited documentation. A substantial proportion of traditional 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 adjustablerate 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 generally have low default risk and are made to borrowers with good credit records and a monthly income at least three to four times greater than their monthly housing expense (mortgage payments plus taxes and other debt payments). These borrowers provide full documentation and generally have reliable payment histories. Subprime Subprime loans are designed for 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 borrowers primary residence; or (v) a history of delinquencies or late payments on the loan. MSR risk management revenue: Includes changes in the fair value of the MSR asset due to market-based inputs, such as interest rates and volatility, as well as updates to assumptions used in the MSR valuation model; and derivative valuation adjustments and other, which represents changes in the fair value of derivative instruments used to offset the impact of changes in the market-based inputs to the MSR valuation model. Multi-asset: Any fund or account that allocates assets under management to more than one asset class (e.g., longterm fixed income, equity, cash, real assets, private equity or hedge funds). NA: Data is not applicable or available for the period presented. Net charge-off rate: Represents net charge-offs (annualized) divided by average retained loans for the reporting 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. OPEB: Other postretirement employee benefits. Overhead ratio: Noninterest expense as a percentage of total net revenue. Participating securities: Represents unvested stock-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. Personal bankers: Retail branch office personnel who acquire, retain and expand new and existing customer relationships by assessing customer needs and recommending and selling appropriate banking products and services. Portfolio activity: Describes changes to the risk profile of existing lending-related exposures and their impact on the allowance for credit losses from changes in customer profiles and inputs used to estimate the allowances. Pre-provision profit: 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 managements view, a comprehensive measure of pretax performance derived by measuring earnings after all costs are taken into consideration. It is, therefore, another basis that management uses to evaluate the performance of TSS and AM against the performance of their respective competitors. Purchased credit-impaired (PCI) loans: Acquired loans deemed to be credit-impaired under the FASB guidance for PCI loans. 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., FICO score, 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. Wholesale loans are determined to be credit-impaired if they meet the definition of an impaired loan under U.S. GAAP at the acquisition date. Consumer loans are determined to be credit-impaired based on specific risk characteristics of the loan, including product type, LTV ratios, FICO scores, and past due status. Real estate investment trust (REIT): A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of realestate related assets by pooling their capital to purchase and manage income property (i.e., equity REIT) and/or
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mortgage loans (i.e., mortgage REIT). REITs can be publiclyor privately-held and they also qualify for certain favorable tax considerations. 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 excluding loans held-for-sale and loans at fair value. Risk-weighted assets (RWA): Risk-weighted assets consist of on and offbalance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. Onbalance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable offbalance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. RWA also incorporate a measure for the market risk related to applicable trading assets-debt and equity instruments, and foreign exchange and commodity derivatives. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total RWA. Sales specialists: Retail branch office and field personnel, including Business Bankers, Relationship Managers and Loan Officers, who specialize in marketing and sales of various business banking products (i.e., business loans, letters of credit, deposit accounts, Chase Paymentech, etc.) and mortgage products to existing and new clients. 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 commercially attractive track record. After these goals are achieved, the intent is to remove the Firms capital from the investment. Stress testing: A scenario that measures market risk under unlikely but plausible events in abnormal markets. TARP: Troubled Asset Relief Program.

Taxable-equivalent basis: For managed results, 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 the managed results on a basis comparable to taxable investments and securities. This nonGAAP financial measure allows management to assess the comparability of revenue arising from both taxable and taxexempt sources. The corresponding income tax impact related to tax-exempt items is recorded within income tax expense. Troubled debt restructuring (TDR): Occurs when the Firm modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty. 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. GAAP: Accounting principles generally accepted in the United States of America. U.S. government-sponsored enterprise obligations: Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these 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. Treasury: U.S. Department of the Treasury. Value-at-risk (VaR): A measure of the dollar amount of potential loss from adverse market moves in an ordinary market environment. Washington Mutual transaction: On September 25, 2008, JPMorgan Chase acquired the banking operations of Washington Mutual Bank (Washington Mutual) from the FDIC. The Washington Mutual acquisition resulted in negative goodwill, and accordingly, the Firm recorded an extraordinary gain. A preliminary gain of $1.9 billion was recognized at December 31, 2008. The final total extraordinary gain that resulted from the Washington Mutual transaction was $2.0 billion.

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J.P. Morgan International Council

Rt. Hon. Tony Blair
Chairman of the Council Quartet Representative and Former Prime Minister of Great Britain and Northern Ireland London, United Kingdom

As of December 31, 2011

Gao Xi-Qing
Vice Chairman, President and Chief Investment Officer China Investment Corporation Beijing, The Peoples Republic of China

Patrice Motsepe
Executive Chairman African Rainbow Minerals Limited Chislehurston, Sandton, South Africa

Ex-Officio Members Jamie Dimon

Chairman and Chief Executive Officer JPMorgan Chase & Co. New York, New York

Michael Pram Rasmussen

Chairman of the Board A.P. Mller-Maersk Group Copenhagen, Denmark

Jrgen Grossmann
Chief Executive Officer RWE AG Essen, Germany

Andrew Crockett
Special Advisor to the Chairman JPMorgan Chase & Co. San Francisco, California

Khalid A. Al-Falih
President and Chief Executive Officer Saudi Aramco Dhahran, Saudi Arabia

Ratan Naval Tata

Chairman Tata Sons Limited Mumbai, India

William B. Harrison, Jr.

Former Chairman and Chief Executive Officer JPMorgan Chase & Co. New York, New York

Arminio Fraga Neto

Founding Partner and Chief Investment Officer, Gvea Investimentos, Ltd. JPMorgan Chase & Co. Rio de Janeiro, Brazil

Ko A. Annan
Former UN Secretary-General Chairman, Ko Annan Foundation Geneva, Switzerland

Hon. Tung Chee Hwa GBM

Vice Chairman National Committee of the Chinese Peoples Political Consultative Conference Hong Kong, The Peoples Republic of China

Hon. Carla A. Hills

Chairman and Chief Executive Officer Hills & Company International Consultants Washington, District of Columbia

Alberto Baillres
Presidente del Consejo de Administracin Grupo Bal Mxico D.F., Mexico

Dr. Jacob A. Frenkel

Chairman, International JPMorgan Chase & Co. New York, New York

Franco Bernab
Chairman and Chief Executive Officer Telecom Italia S.p.A. Rome, Italy

Franz B. Humer
Chairman Roche Holding Ltd. Basel, Switzerland

lvaro Uribe Vlez

Former President of the Republic of Colombia Bogot DC, Colombia

Walter A. Gubert
Vice Chairman JPMorgan Chase & Co. Brussels, Belgium

Michael A. Chaney
Chairman National Australia Bank Limited Perth, Western Australia

Hon. Henry A. Kissinger

Chairman Kissinger Associates, Inc. New York, New York

Cees J.A. van Lede

Former Chairman and Chief Executive Officer, Board of Management Akzo Nobel Arnhem, The Netherlands

David Mayhew, CBE

Former Chairman, J.P. Morgan Cazenove JPMorgan Chase & Co. London, United Kingdom

Anatoly B. Chubais
Director General Russian Corporation of Nanotechnologies RUSNANO Moscow, Russian Federation

Mustafa V. Ko
Chairman of the Board of Directors Ko Holding A.S . Istanbul, Turkey

Douglas A. Warner III

Former Chairman of the Board J.P. Morgan Chase & Co. Inc. New York, New York

Hon. Lee Kuan Yew

Former Minister Mentor, Republic of Singapore and Senior Advisor, Government of Singapore Investment Corporation Singapore, Republic of Singapore

Hon. Richard M. Daley

Former Mayor of Chicago Chicago, Illinois

John S. Watson
Chairman and Chief Executive Officer Chevron Corporation San Ramon, California

Martin Feldstein
President Emeritus National Bureau of Economic Research, Inc. Cambridge, Massachusetts

Jaime Augusto Zobel de Ayala

Chairman and Chief Executive Officer Ayala Corporation Makati City, Philippines

Grard Mestrallet
Chairman and Chief Executive Officer GDF SUEZ Paris la Dfense, France

Akio Mimura
Representative Director and Chairman Nippon Steel Corporation Tokyo, Japan

312

JPMorgan Chase & Co./2011 Annual Report

Regional Advisory Board

Stanley M. Bergman
Chairman and Chief Executive Officer Henry Schein Inc.

Jeffrey S. Flug
President Union Square Hospitality Group

Richard S. LeFrak
Chairman and Chief Executive Officer LeFrak Organization

Samuel I. Newhouse III

General Manager Advance Publications Inc.

Richard A. Bernstein
Chairman and Chief Executive Officer P&E Capital, Inc.

Martin E. Franklin
Chairman and Chief Executive Officer Jarden Corporation

William C. Rudin
Vice Chairman and Chief Executive Officer Rudin Management Company, Inc.

Richard B. Leventhal
Chairman and Chief Executive Officer Fedway Associates, Inc.

Rod Brayman
President and Chief Executive Officer Phoenix Beverages

Neil Golub
Chief Executive Officer and Chairman of the Board The Golub Corporation

Steven M. Safyer, M.D.

President and Chief Executive Officer Monteore Medical Center

John LiDestri
President and Chief Executive Officer LiDestri Foods, Inc.

Christopher B. Combe
Chairman and Chief Executive Officer Combe Incorporated

David R. Jaffe
President and Chief Executive Officer Ascena Retail Group, Inc.

C. David Sammons
President and Chief Executive Officer Subaru Distributors Corporation

Leo Liebowitz
Chairman Getty Realty Corp.

Joseph J. Corasanti
President and Chief Executive Officer CONMED Corporation

Tod Johnson
Chairman and Chief Executive Officer The NPD Group, Inc.

William L. Mack
Founder and Chairman AREA Property Partners

John Shalam
Chairman Audiovox Corporation

Peter Markson
Chairman and Chief Executive Officer Paris Accessories, Inc.

Kenneth L. Wallach
Chairman and Chief Executive Officer Central National-Gottesman Inc.

Roger N. Farah
President and Chief Operating Officer Ralph Lauren Corporation

Richard W. Kunes
Executive Vice President, Chief Financial Officer The Este Lauder Companies

James F. McCann
Chief Executive Officer 1-800-Flowers.com

Fred Wilpon
Chairman Sterling Equities, Inc.

James Fernandez
Executive Vice President and Chief Operating Officer Tiffany & Co.

Stephen J. Large
President and Chief Executive Officer SI Group, Inc.

John Morphy
Former Senior Vice President, Chief Financial Officer and Secretary Paychex, Inc.

Stanley Fleishman
Chief Executive Officer Jetro Cash & Carry Enterprise, LLC

Frank Lourenso
Chairman Regional Advisory Board

JPMorgan Chase & Co./2011 Annual Report

313

Board of Directors
James A. Bell 1
Retired Executive Vice President The Boeing Company (Aerospace)

James S. Crown 5
President Henry Crown and Company (Diversied investments)

Laban P. Jackson, Jr. 1

Chairman and Chief Executive Officer Clear Creek Properties, Inc. (Real estate development)

Member of: 1 Audit Committee 2 Compensation & Management Development Committee 3 Corporate Governance & Nominating Committee 4 Public Responsibility Committee 5 Risk Policy Committee

Crandall C. Bowles 1, 4
Chairman Springs Industries, Inc. (Window fashions)

Jamie Dimon
Chairman and Chief Executive Officer JPMorgan Chase & Co.

David C. Novak 2, 3
Chairman and Chief Executive Officer Yum! Brands, Inc. (Franchised restaurants)

Stephen B. Burke 2, 3
Chief Executive Officer NBCUniversal, LLC Executive Vice President Comcast Corporation (Television and entertainment)

Ellen V. Futter 4, 5
President and Trustee American Museum of Natural History (Museum)

Lee R. Raymond 2, 3
Retired Chairman and Chief Executive Officer Exxon Mobil Corporation (Oil and gas)

William H. Gray, III 1, 4

Chairman Gray Global Strategies, Inc. (Consulting and advisory)

David M. Cote 4, 5
Chairman and Chief Executive Officer Honeywell International Inc. (Diversied technology and manufacturing)

William C. Weldon 2, 3
Chairman and Chief Executive Officer Johnson & Johnson (Health care products)

Operating Committee
Jamie Dimon
Chairman and Chief Executive Officer

Stephen M. Cutler
General Counsel

John J. Hogan
Chief Risk Officer

Jes Staley
Investment Bank CEO

John L. Donnelly Frank J. Bisignano

Chief Administrative Officer and Mortgage Banking CEO Head of Human Resources

Todd Maclin
Consumer & Business Banking CEO

Barry L. Zubrow
Head of Corporate & Regulatory Affairs

Ina R. Drew
Chief Investment Officer

Douglas B. Petno
Commercial Banking CEO

Douglas L. Braunstein
Chief Financial Officer

Mary Callahan Erdoes

Asset Management CEO

Gordon A. Smith
Card, Merchant Services & Auto Finance CEO

Michael J. Cavanagh
Treasury & Securities Services CEO

314

JPMorgan Chase & Co./2011 Annual Report

Executive Committee
Gaby A. Abdelnour
Asia Pacic

Craig M. Delany
Mortgage Banking

Thomas J. Higgins
Chief Administrative Office

Michael OBrien
Asset Management

Jack M. Stephenson
Mobile, E-commerce and Payments

Nicolas Aguzin
Latin America

Klaus Diederichs
Investment Bank

Robert C. Holmes
Commercial Banking

Sandra E. OConnor
Finance

Glenn Tilton
Midwest

Peter K. Barker
California

Phil Di Iorio
Asset Management

Dinkar Jetley
Worldwide Securities Services

Daniel E. Pinto
Investment Bank and EMEA

Irene Tse
Chief Investment Office

Paul T. Bateman
Asset Management

Joseph M. Evangelisti
Corporate Communications

Catherine M. Keating
Asset Management

Louis Rauchenberger
Treasury & Securities Services

Lauren M. Tyler
Audit

Philip F. Bleser
Global Corporate Bank

Dr. Jacob A. Frenkel

JPMorgan Chase International

James B. Lee, Jr.

Investment Bank

Richard Sabo
Chief Investment Office

Jeffrey H. Urwin
Investment Bank

Peter J. Bocian
Corporate Services and Finance

Martha J. Gallo
Chief Compliance Officer

Achilles O. Macris
Chief Investment Office

Emilio Saracho
Investment Bank

William S. Wallace
Card Services

George C. Gatch
Asset Management

Mel R. Martinez
Florida, Mexico, Central America and Caribbean; JPMorgan Chase Foundation

Peter L. Scher
Corporate Responsibility

Phyllis J. Campbell
Pacic Northwest

Shannon S. Warren
Finance

Scott Geller
Business Banking

Eileen M. Serra
Card Services

Richard M. Cashin
One Equity Partners

Kevin P. Watters
Mortgage Banking

Walter A. Gubert
Europe, Middle East and Africa

Blythe S. Masters
Investment Bank

Marc Sheinbaum
Auto Finance and Student Loans

Guy Chiarello
Chief Information Officer

Kevin D. Willsey
Investment Bank

Gregory L. Guyett
Global Corporate Bank

Donald H. McCree, III

Treasury Services

Paul H. Compton
Investment Bank

Larry D. Slaughter
Investment Bank

Douglas Wurth
Asset Management

Carlos M. Hernandez
Investment Bank

Ryan McInerney
Consumer Banking

Kimberly B. Davis
Global Philanthropy

Barry Sommers
Chase Wealth Management

Matthew E. Zames
Investment Bank

Other Corporate Officers

Anthony J. Horan
Secretary

Sarah M. Youngwood
Investor Relations

JPMorgan Chase & Co./2011 Annual Report

315

Regional Chief Executive Officers

Asia Pacic Gaby A. Abdelnour Europe, Middle East, Africa Daniel E. Pinto Latin America Nicolas Aguzin

Senior Country Officers

Asia Pacic Australia/New Zealand Robert C. Priestley China Zili Shao Hong Kong Michael Fung India Kalpana Morparia Indonesia Haryanto Budiman Japan Christopher L. Harvey Korea Steve Lim Malaysia Steve R. Clayton Philippines Roberto L. Panlilio Singapore Philip Lee Taiwan Carl K. Chien Thailand M.L. Chayotid Kridakon Vietnam Dominic Price Europe Benelux/Nordics John S. Gilbert Central & Eastern Europe Walter Schuster France Isabelle Seillier Germany/Austria/Switzerland Karl Altenburg Iberia Enrique Casanueva Italy Francesco Rossi Ferrini Portugal Guillermo Baygual Russia/Ukraine Jeffrey R. Costello Latin America Andean Region Lisandro Miguens Argentina Facundo D. Gomes Minujin Brazil Claudio F. Berquo Chile Vicente Monge Mexico Eduardo F. Cepeda North America Canada David E. Rawlings

Middle East, North Africa Middle East/North Africa Sjoerd Leenart Bahrain Ali Moosa Israel Roy Navon Nigeria Tosin T. Adewuyi Saudi Arabia Abdulaziz Al Helaissi Turkey Emre Derman UAE Ehsun A. Zaidi

Sub-Saharan Africa Sub-Saharan Africa John J. Coulter

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JPMorgan Chase & Co./2011 Annual Report

JPMorgan Chase & Co.

Corporate headquarters 270 Park Avenue New York, NY 10017-2070 Telephone: 212-270-6000 jpmorganchase.com Principal subsidiaries JPMorgan Chase Bank, National Association Chase Bank USA, National Association J.P. Morgan Securities LLC J.P. Morgan Securities Ltd. Annual Report on Form 10-K The Annual Report on Form 10-K of JPMorgan Chase & Co. as led with the U.S. Securities and Exchange Commission will be made available without charge upon request to: Office of the Secretary JPMorgan Chase & Co. 270 Park Avenue New York, NY 10017-2070 Stock listing New York Stock Exchange London Stock Exchange Tokyo Stock Exchange The New York Stock Exchange ticker symbol for the common stock of JPMorgan Chase & Co. is JPM. Financial information about JPMorgan Chase & Co. can be accessed by visiting the Investor Relations website at jpmorganchase.com. Additional questions should be addressed to: Investor Relations JPMorgan Chase & Co. 270 Park Avenue New York, NY 10017-2070 Telephone: 212-270-6000 Directors To contact any of the Board members or committee chairs, the Presiding Director or the non-management directors as a group, please mail correspondence to: JPMorgan Chase & Co. Attention (Board member(s)) Office of the Secretary 270 Park Avenue New York, NY 10017-2070 The Corporate Governance Principles of the Board, the charters of the principal Board committees, the Code of Conduct, the Code of Ethics for Finance Professionals and other governance information can be accessed by visiting our website at jpmorganchase.com and clicking on Governance under the About us tab. Transfer agent and registrar Computershare Shareowner Services LLC 480 Washington Boulevard Jersey City, NJ 07310-2053 Telephone: 800-758-4651 computershare.com Investor Services Program JPMorgan Chase & Co.s Investor Services Program offers a variety of convenient, low-cost services to make it easier to reinvest dividends and buy and sell shares of JPMorgan Chase & Co. common stock. A brochure and enrollment materials may be obtained by contacting the Program Administrator, Computershare Shareowner Services LLC, by calling 800-758-4651, by writing to the address indicated above or by visiting its website at bnymellon.com/shareowner/equityaccess. Direct deposit of dividends For information about direct deposit of dividends, please contact Computershare Shareowner Services LLC. Stockholder inquiries Contact Computershare Shareowner Services LLC:

By telephone:
Within the United States, Canada and Puerto Rico: 800-758-4651 (toll free) From all other locations: 201-680-6578 (collect) TDD service for the hearing impaired within the United States, Canada and Puerto Rico: 800-231-5469 (toll free) All other locations: 201-680-6610 (collect) By mail: Computershare Shareowner Services LLC 480 Washington Boulevard Jersey City, NJ 07310-2053 Duplicate mailings If you receive duplicate mailings because you have more than one account listing and you wish to consolidate your accounts, please write to Computershare Shareowner Services LLC at the address above. Independent registered public accounting rm PricewaterhouseCoopers LLP 300 Madison Avenue New York, NY 10017-6204

JPMorgan Chase, J.P. Morgan, Chase, the Octagon Symbol and other words or symbols in this report that identify JPMorgan Chase services are service marks of JPMorgan Chase & Co. Other words or symbols in this report that identify other parties goods and services may be trademarks or service marks of those other parties.

As of the beginning of 2009, JPMorgan Chase & Co. has distributed shareholder information under the U.S. Securities and Exchange Commission Notice and Access rule. As a result, the rm prints 700,000 fewer Annual Reports and Proxy Statements, which saves on an annual basis approximately 6,400 trees and 800 metric tons of CO2 emissions. This Annual Report is printed on paper made from well-managed forests and other controlled sources. The paper is independently certied by BVQI to the Forest Stewardship Council (FSC) standards. The paper contains a minimum of 20% post-consumer waste recycled bers.

2012 JPMorgan Chase & Co. All rights reserved. Printed in the U.S.A.

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